Contract Damages

Domestic and International Perspectives

Djakhongir Saidov, Ralph Cunnington, Djakhongir Saidov, Ralph Cunnington

• Publisher: Hart Publishing
• Year: 2008
• ISBN:
  9781847317117
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

This book is a collection of essays examining the remedy of contract damages in the common law and under the international contract law instruments such as the Vienna Convention on Contracts for the International Sales of Goods and the UNIDROIT Principles of International Commercial Contracts. The essays, written by leading experts in the area, raise important and topical issues relating to the law of contract damages from both theoretical and practical perspectives. The book aims to inform readers of current developments, problems, trends and debates surrounding contract damages and reflects an ongoing dialogue on damages among representatives of common law, civil law, mixed and trans-national legal systems. The general issues addressed in the collection include the purpose and scope of damages, the measures of damages, recoverability of losses, methods of limiting damages and the assessment of damages. A special emphasis is placed on the examination of the role of gain-based damages, the meaning and definition of loss, the recoverability of damages for injury to business reputation, the recoverability of legal fees, the rules of mitigation and foreseeability, the dilemma between the 'abstract' and 'concrete' approaches to the calculation of damagesand the relationship between changes in monetary value and the assessment of damages.

Part I

The Purpose and Scope of Damages

1

The Law of Damages: Rules for Citizens or Rules for Courts?

STEPHEN A SMITH^*

I INTRODUCTION

A complete explanation of any rule or set of rules must address two broad categories of questions. The first category, which is comprised of what I shall call analytic questions, has as its general aim the identification of the rules’ subject matter. In the case of legal rules, analytic questions are usually framed as questions about the kinds of rights that are created or regulated by the rules. Thus, legal scholars examining contract law will ask whether it is concerned with (to give two possibilities) promissory or reliance-based rights. The answers to this and other analytic questions provide the basis for distinguishing (or refusing to distinguish) legal categories such as contract, tort and unjust enrichment, as well as for distinguishing individual rules within these categories. The second category comprises normative questions. Normative questions are concerned with the justification for the relevant rules. Thus, contract scholars interested in normative questions might ask whether contractual obligations are (or should be) based on a principle of maximising social welfare or a principle of respecting individual rights.

Within the core private law fields of contract, tort, unjust enrichment and property, one or the other of these questions has, at different times, attracted more attention, either from individual authors or more generally. But overall, each question has received considerable attention in the scholarly literature.¹ The literature on the law of damages reveals a different picture. Although common law scholars have devoted significant attention to damages law,² the critical scholarship is concerned almost entirely with normative issues.³ Legal scholars have devoted considerable effort to determining what, if any, normative foundations do or should underlie damages rules.⁴ They have also paid considerable attention to the question of whether the damages rules are effective in achieving the desired normative principles.⁵ However, they have spent little time considering what (if anything) is distinctive about the law of damages as a legal subject. Indeed, the question of what kinds of rights are dealt with by damages law is rarely even asked.⁶

This neglect has had significant consequences.⁷ Most obviously, it has impoverished our understanding of damages law. We cannot claim to understand the rules on damages unless we know what kinds of rights they deal with and how these rights are like or unlike the rights dealt with by other parts of the law. Even if one is interested exclusively in normative questions, analytic questions remain important. Perhaps the most fundamental principle of justice is that like cases should be treated alike. We cannot determine if this principle is satisfied in the law on damages without engaging in an analytic inquiry.

This chapter begins—but only begins—to attempt to fill the gap in our comprehension of damages law described above. The chapter’s primary objectives are introductory in nature: to introduce an analytic perspective on the law of damages;⁸ to explain why this perspective is important; and to develop a framework for answering the questions it raises. The chapter also makes three substantive arguments. The first is that the most basic unanswered analytic question about the law of damages is whether damages rules are directed at citizens or at courts. Bluntly put, is the law of damages concerned with private law rights or public law rights? The second argument is that damages law, viewed from an analytic perspective, is complex. In particular, the question of whether damages rules are directed at citizens or courts cannot usefully be asked of damages law as a whole, but must instead be directed at particular categories of damages rules—and even then the answer is not straightforward. The final argument is that the law of damages is almost certainly composed in part of rules directed at citizens and in part of rules directed at courts. The law of damages, as presently conceived, is a mixture of private and public law.

II THE LAW OF DAMAGES: A PRELIMINARY DEFINITION

Analytic inquiries in law are essentially classificatory exercises; their conclusions tell us where the rules in question fit within the law, and why. Not surprisingly, such inquiries often lead to revisions in the conventional view of the inquiry’s subject matter. Thus, the common law’s view of a ‘contract’ or an ‘unjust enrichment’ has evolved as lawyers’ views about the kinds of rights that are the focus of contract law and unjust enrichment law have evolved. But an analytic inquiry must begin with the conventional view of the subject matter. In the case of damages law, the conventional view⁹ is that damages law is the law of ‘damages orders’. More specifically, it is the law that courts apply to determine whether a defendant who has been found to have infringed the plaintiff’s rights¹⁰ should be required to pay ‘damages’ to the plaintiff and, if so, how much.

There is an obvious tautology in defining the law of damages as the law governing damages awards, but this tautology is unavoidable without a better understanding of the kinds of rights that are the focus of damages law. It is precisely because analytic questions about damages law have been neglected that damages law is currently ‘defined’, if that is the appropriate word, in entirely formal terms. At present, the only distinctive feature of all damages orders is that they are labelled damages orders by courts.

III ORDINARY RIGHTS, REMEDIAL RIGHTS, AND COURT-ORDERED RIGHTS

In the Western legal tradition, rights are typically categorised on the basis of three questions:

1. Against whom may the right be asserted (eg a promisor)?

2. What is the ‘event’¹¹ that gives rise to the right (eg a promise)

3. What is the content of the right (eg to the performance of the promise).¹²

The first question is actually two questions:

1(a) Is the right a right against the state or a right against a citizen?

1(b) If the latter, is it a right held against everyone in the jurisdiction (a ‘proprietary’ right) or is it held only against a specific individual or individuals (a ‘personal’ right)?

Which of these questions is emphasised in any particular discussion will depend on the aims of the discussion, but for most purposes the first question to ask, and the focus of the present inquiry, is whether the right is held against the citizen or against the state.¹³ The answer to this question effectively determines whether the right is a matter of private or public law.¹⁴ If the right is held against a citizen, then the correlative duty is a duty imposed on a citizen. Stated differently, if the right is held against a citizen, then the relevant rules are fundamentally directed at citizens: they tell citizens how they should behave. On the other hand, if the right is held against the state, then the correlative duty is a duty imposed on the state. In this case, the relevant rules are fundamentally directed at the state: they tell state actors how they should behave.

The first step when examining damages law from this perspective is to identify the different kinds of rights that courts must think about when they are contemplating damages awards and to classify these rights as private or public. Once this is done, we can begin the task of determining which kinds of rights damages rules deal with. There are three main categories of rights that courts must take into account when they make damages orders:¹⁵ (i) the rights that citizens enjoy against other citizens prior to any action by the court (‘ordinary rights’); (ii) the rights that citizens enjoy against courts (‘remedial rights’); and (iii) the rights that citizens enjoy against other citizens by virtue of orders made by courts (‘court-ordered rights’).

A Ordinary Rights

Ordinary rights are rights that citizens hold against other citizens (or ‘individuals’) that arise from events other than court orders (ie from ‘ordinary’ events). Examples include the right to the performance of a contractual obligation and the right to the return of money paid by mistake. In each case, the right arises because of an ordinary event in the world (making a promise, transferring money by mistake) and is held against another individual (the promisor, the transferor).¹⁶ In each case, the correlative duty (the performance of a contract, the return of money received by mistake) arises at the moment of the event.

Ordinary rights are a sub-category of ‘substantive rights’—the category comprising all the rights that individuals hold against other individuals (the other main sub-category of substantive rights is court-ordered rights). The distinctive feature of ordinary substantive rights is that they exist prior to any order by a court (and are therefore sometimes described as ‘preexisting’ or ‘already-existing’ rights). Ordinary rights are the substantive rights that plaintiffs possess when they come to court.

B Remedial Rights

The second category, remedial rights, comprises rights to court orders (ie to ‘remedies’).¹⁷ Remedial rights arise from events (traditionally labelled ‘causes of action’¹⁸) that typically involve the infringement or, less frequently, the threatened infringement of the right-holders’ ordinary rights.¹⁹ An example is a creditor’s remedial right to a court order compelling a debtor to pay a debt: the creditor obtains such a right on proof that the debtor owes the debt, the debt is not paid and the action is within the limitation period.²⁰ When a creditor argues that she has a right to a court order on proof of these facts, she is asserting a remedial right.

Like ordinary rights, remedial rights arise from ordinary (or ‘nonjudicial’) events. Thus, the creditor’s right in the previous example arose from the non-payment of a valid debt. The contents of remedial rights are also similar, in broad terms, to the contents of ordinary rights. In each case, the duty correlative to the right is to do or not do something (eg perform a contract, make a court order). The difference between ordinary rights and remedial rights lies in their exigibility, that is, against whom the right may be asserted. Ordinary rights are rights against other individuals; the duty correlative to an ordinary right is a duty owed by a citizen or citizens to the right holder.²¹ The rules that govern ordinary rights are thus directed fundamentally at citizens: they tell citizens how they should behave. By contrast, remedial rights are rights against particular organs of the state (ie courts). The duty correlative to a remedial right is the court’s duty to award an appropriate remedy if the cause of action is proven.²² The content of a remedial right is therefore fundamentally an instruction telling courts how they should behave. It follows that remedial rights are essentially public law rights: they are rights held by citizens against state institutions. By contrast, ordinary rights are private law rights: they are rights held against individuals.

C Court-ordered Rights

The third kind of right that courts must take into account when contemplating making an award of damages are ‘court-ordered’ rights. These are rights that arise from court orders. An example is a plaintiff’s right to payment of $1,000 from the defendant that arises when the court orders the defendant to pay the plaintiff $1,000. Like ordinary rights, court-ordered rights are a sub-category of substantive rights; a court order gives the plaintiff a legal right against the defendant to the performance of the order. The distinctive feature of court-ordered substantive rights is that they arise by virtue of a judicial act—making a court order. Of course, the content of court orders often replicate the content of ordinary rights (eg where the order is to perform a contractual obligation), but where this happens the order replaces the ordinary right. This is why a sheriff or bailiff will execute the order (or take other action) solely on proof that the order exists and was not fulfilled. Once the court order has been made, the plaintiff relies upon the existence of that order (rather than on earlier events, such as entering a contract) as the source of her right. Court orders are therefore a distinct source of legal rights.

Court-ordered substantive rights, like ordinary substantive rights, are private law rights. Although court-ordered rights are enforced by different means than ordinary rights, each is identical in terms of content and exigibility: both court-ordered rights and ordinary rights are rights held against individuals to the performance of an action.

IV COURT-ORDERED RIGHTS AS DERIVATIVE RIGHTS

A The Role of Remedial Rights in Explaining Court Orders

The distinction between ordinary, remedial and court-ordered rights naturally leads to the suggestion that the law of damages is the law of court-ordered rights to pay damages. Damages are court orders, and thus it might seem obvious that the law of damages is the law concerning this kind of court order. Understood in this way, court orders appear closely related to contracts and other ‘intentional norm-creating’ events. Viewed as an ‘event’, a court order to pay damages is closely related to a contractual promise. In each case, an intentional²³ norm-creating event (a court making an order, an individual making a contractual promise) is the source of a private law duty and a correlative private law right.²⁴

Upon reflection, this suggestion cannot be right. The analogy just drawn between court-ordered rights and contractual rights makes this clear. The law of contracts is the law governing the validity, meaning and performance of contracts. The analogous law that deals with damages orders would be law that governs the validity, meaning and performance of damages orders. There is a body of law that deals with these issues (though it is not extensive and most of it is not unique to damages orders). In a different world it might legitimately be called the ‘law of damages’, but this law bears no resemblance to the law conventionally understood as the law of damages. More to the point, recognising this body of law, and even renaming it the law of damages, provides little help in classifying the current rules on damages. Indeed, the current damages rules bear an entirely different relation to court orders than the law of contract bears to contracts. Rather than expla...

Table of contents

• Cover
• Title
• Copyright
• Foreword
• Contents
• List of Contributors
• Tables of Cases
• Table of Legislation
• Current Themes in the Law of Contract Damages: Introductory Remarks
• Part I The Purpose and Scope of Damages
• Part II The Measures of Damages
• Part III Methods of Limiting Damages
• Part IV The Assessment of Damages