Compensation For Breach of Employment Contract
Compensation For Breach of Employment Contract
A bstr act
A cost of cure award seeks to undo the intangible harm or injustice that the
promisor has caused to the promisee, thereby giving the promisee the perfor-
mance he contracted for, and protecting his primary performance interest. In
contrast, compensation protects the promisee against another kind of harm,
although this time it is tangible: direct and/or consequential loss, which
may flow from the violation of the promisee’s primary right. The promisee’s
secondary compensation right requires the promisor to make good the
promisee’s pecuniary loss to undo the tangible harm that the promisee has
also suffered from the breach. This article aims to illuminate the distinct role
and aim of a cost of cure award as a legal response to breach of contract from
compensatory damages, clarify when such a role should actually be fulfilled,
and show how these two remedies can co-exist in harmony.
I I ntroduction
T
he assumption is often made that in order to be legally enforceable, a promise
must, at least, entail a moral obligation. Samuel Stoljar says that the require-
ment to keep promises arises in the moral sphere before entering the legal
domain.1 When a promise is made, the promisee possesses a moral claim against the
promisor, although the former may not yet have obtained the actual performance.
In the words of Conrad Johnson, ‘[t]o be under a legal obligation is to be under a
requirement that is … a moral obligation’.2 The legal obligation, therefore, represents
the enforceable administration of morality. The moral obligation to perform the
contract exists alongside the legal obligation.3
legal duty is an extension of the moral obligation. These are the basic features of any
legal regime that is in step with the morality of promissory obligations. If common
law is to run parallel to the morality of promises, it must require the breaching seller
to keep their promise, not simply to pay off the buyer.
The rule that expectation damages, not specific performance, is the primary remedy
awarded for breach of contract is often taken to show that contract law does not
recognise, and is not based upon, a moral obligation to perform a contract. This fact
is at odds with the (moral) notion that ‘a contract is first of all a promise’ which,
therefore, ‘must be kept because a promise must be kept’.4 However, a promissory
conception of contract law does not require that specific performance be the
default remedy. In spite of denying the non-breaching party specific performance,
the common law of contract does not deny that the promise-breaker should have
performed the contract and respected their moral obligation in the first place.5 Nor
does it deny that specific performance is the ideal and most suitable moral response
to promise-breaking or anticipatory repudiation. Yet there are convincing reasons
why the courts should not always (through legal means) enforce the morality of
promissory obligation or specific performance.6 Contract law, thus understood, can
be said to run neither against the morality of promise nor parallel to it.
In common law specific performance is available only when damages are inadequate.
A number of theorists have argued that the adequacy test is an unsatisfactory
instrument for explaining why contract law, if it indeed holds that contractual
obligation is based upon the moral obligation to keep one’s word, does not routinely
grant specific performance in the event of a breach.7 This divergence between legal
doctrine and the implication of a moral account of promising is so profound as to be
in need of an explanation. If the traditional view that valid contractual obligations
should be performed is indeed accepted in contract law, then why is specific perfor-
mance not routinely granted in the event of promise-breaking?
specific performance. Once judges compel the defaulting promisor to provide the
promised performance, his moral obligation becomes a legal obligation as well. The
legal norms regulating promises must not diverge from the moral norms that apply
to them; the legal duty must be an extension of the moral obligation. It therefore
represents the enforceable administration of morality.
However, the failure to take seriously the moral force of contracts as promises is an
indication that judges do not recognise a moral obligation to perform a promise, and
thus run against the morality of promissory obligation. The moral obligation will
not be satisfied if the defaulting promisor provides only a compensatory award.
The following questions then arise: Does the common law run against the morality
of promise? The answer to this question is negative. A number of justifications
have been put forward to explain the common law’s reluctance to award specific
performance despite its undoubted acceptance as the appropriate moral response to
promise-breaking.
The justifications upon which we seek to justify the common law’s approach are
not driven by an underlying general normative position that contradicts the value
of promissory norms as utilitarian theories do. For example, embracing any explicit
or implicit recommendation to break a promise or asking the contracting parties to
adopt the view that people who breach their contractual promises are doing a good
thing if this would lead to better social consequences overall and that incentives
should be produced for them to behave in this way.8 Judge Oliver Wendell Holmes
argued that in law a contracting party has the option either to perform the contract
(eg, sell goods, produce goods, render some service, and so on) or to pay damages
for the loss.9 Therefore, if they provide compensation, they commit no wrong; they
have done no more or less than to choose which way to perform their obligation.
Holmes viewed the obligation to perform a contract as corresponding to a choice to
perform or else to provide compensation.10
Holmes’ view predates the so-called efficient breach theory. The idea underlying
the theory is that the promisor should be allowed, or even encouraged, to break their
contract and provide compensation instead if they can pursue a more profitable or
desirable venture than that which they are currently pursuing, notwithstanding they
have agreed to a contract and accepted its terms.11 Lawyer-economists assume that
an efficiently breached contract benefits the welfare of society, on the basis that
the breach will result in a more efficient use of goods and services.12 Therefore,
undoubtedly influenced by Holmes’ understanding of contractual obligation as a
simple option either to perform or to provide compensation, lawyer-economists have
analysed the law of contract as a means of determining and reinforcing efficient
economic behaviour.13
The common law’s reluctance to award specific performance, despite an undoubted
acceptance that it is the appropriate moral response to promise-breaking, can be
justified on many grounds. For example, it raises problems concerning both social
norms and the risk of error,14 it creates a serious potential for opportunism,15 it is
undesirable in a contract requiring personal services (eg, employment contracts)
because this could be tantamount to slavery, and, in some cases, such as Co-
operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd,16 it is undesirable
where performance requires undue judicial supervision.17
The present argument in this article is not intended to alter the common law’s
approach to specific performance, but rather to highlight that there are two distinct
contractual interests constitutive of a contract and two distinct ways in which the
promisor can cause harm to the promisee, each of which is protected by a different
remedy and for a different purpose.
Contract law’s concern appears focused on the legally binding contracts that market
participants make and the rights and duties that occur as a result. A great deal of
research has questioned the exact nature of these rights and duties.18 In particular,
what rights does the buyer acquire by virtue of entering into a contract with the
seller? What is each market participant obliged to do? In Photo Production Ltd v
Securicor Transport Ltd,19 Lord Diplock made it clear that there are two kinds of
rights: primary and secondary.20 The distinction between primary and secondary
rights, as far as English jurisprudence is concerned, was first made by John Austin.21
A secondary right arises from a legal wrong, a breach of a primary duty. A primary
right is a right which exists independently of a wrong.
It can thus be seen that enforcing a primary right directly involves ordering the
defendant, who is under the corresponding duty, to do what they are required to
do, or to forbear from doing what they are required not to do. Nevertheless, such
enforcement will not always be possible. More specifically, it is not typically too
late for the claimant to enforce (or rely on) their primary right when it is infringed.
Nevertheless, it may be so if its subject matter is destroyed.25 For example, a contrac-
tual right to deliver the Mona Lisa can no longer be given effect if the painting is
destroyed. Similarly, a right to bodily integrity cannot be protected if the claimant
19 [1980] AC 827.
20 Ibid 849.
21 Robert Joseph Pothier, A Treatise on the Law of Obligations or Contract (William
David Evans trans, R H Small, 3rd ed, 1853). See also John Austin, Lectures on Juris-
prudence (R Campbell (ed), John Murray, 5th ed, 1885) vol II, lecture XLV, 367.
22 Charlie Webb, ‘Performance and Compensation: An Analysis of Contract Damages
and Contractual Obligation’ (2006) 26 Oxford Journal of Legal Studies 41, 42.
23 Ibid.
24 Pothier, above n 21, 367.
25 Zakrzewski, above n 18, 104.
356 AL-TAWIL — DAMAGES FOR BREACH OF CONTRACT
The same is equally true of a past infringement of a contractual right that correlates
with a negative duty, in that it cannot be given effect to (or protected) by ordering
the defendant not to breach their substantive primary duty.26 So, there are two main
and quite distinct contractual interests constitutive of a contract. First, the interest in
securing the contracted-for performance; secondly, the interest in ensuring, if that
performance is not completely (but substantially) secured or not secured at all, that
one is not left worse off as a result thereof. The claimant can bring a claim to give
effect to their performance interest and/or can bring a claim to give effect to their
compensation interest. The secondary compensation interest is a separate interest, not
merely an alternative or substitute formulation of the primary performance interest.27
It may be argued, however, that in some cases, particularly where the claimant enters
into the contract with a view to making a profit, although they obtain damages rather
than performance, they end up in an identical position, having effectively made their
26 Ibid 105.
27 The well-known English case of Farley v Skinner [2002] 2 AC 732 illustrates the
difference between a primary obligation and a secondary obligation, between a perfor-
mance interest claim and a compensation interest claim. In that case, Farley bought
a house that was situated 15 miles from Gatwick Airport. He hoped the house was a
quiet country retreat and, before the purchase, he appointed the defendant to survey the
property and specifically asked him to investigate and report whether the property was
affected by aircraft noise. The defendant stated that noise was unlikely to be a problem,
‘although some planes will inevitably cross the area, depending on the direction of the
wind and positioning of the flight path’: at [750C]. On the strength of the surveyor’s
negligent assurance that the house was not significantly affected, the claimant decided
to purchase it. However, after spending a considerable sum in refurbishment, the
claimant discovered that aircraft noise was quite often a problem and that it interfered
with his enjoyment of the house. Although the claimant’s enjoyment of the property
was diminished by the noise, the value of the house was nevertheless unaffected. The
claimant decided not to sell the house but sued the surveyor for damages for discomfort
and inconvenience arising out of the breach of contract. The trial judge found that the
defendant was in breach of contract and awarded the claimant £10 000 for physical
inconvenience, discomfort and distress. The House of Lords upheld this award.
Inasmuch as the surveyor’s defective performance was less valuable than the perfor-
mance due, the difference between these two values was paid by the surveyor to Farley
as compensatory damages (£10 000). Surely, the combination of the defective perfor-
mance and the compensatory award places Farley in no worse a position than that
which he would have been in if the contract had been performed properly. However,
he has not received the contracted-for performance — that is, of a surveyor exercising
a reasonable care to investigate — with the consequence that Farley will not be in
the position of having received the performance due to him. This means that Farley’s
performance interest is not given effect. His right to the contracted-for performance
is not being enforced. Here, the court has recognised a separate interest and right
in Farley, namely, his compensation interest in not being left worse off by reason of
the surveyor’s breach of contract. As Webb notes, ‘[t]here is a difference between
recovering the value placed on the stipulated performance and actually receiving that
stipulated performance’: Webb, above n 22, 55. See also Smith, above n 18, 36–7.
(2014) 34 Adelaide Law Review357
profit (ie, the expected increase in their wealth is still fulfilled). Should receiving
compensatory damages for non-performance in such cases be understood to be
the same as receiving performance? This question must be answered negatively.
Consider the following example. Suppose that a seller agrees to sell 200 bicycles to
a buyer for a total price of $1000. But suppose further that, before delivery, a third
party (ie, a second buyer), who values the seller’s bicycles more highly than the
first buyer, offers the seller $2500 to purchase the 200 bicycles. Suppose the seller
cannot meet the third party’s demand without breaching their contract with the first
buyer, as they have only 200 bicycles to sell. If the seller breaches their contract with
the first buyer, they must pay them damages. The market price of the 200 bicycles
at the time of breach is $1200, and the first buyer’s valuation of the bicycles at the
time of breach is $1400. If the contract had been performed, the first buyer would
have enjoyed a surplus of $400. The first buyer will enjoy a surplus of $400 if they
recover market-price damages, because they can purchase an identical 200 bicycles
on the market for $1200, and their market-price damages of $200 will bring their
effective price to $1000.
It is true that the first buyer, after the receipt of the damages ($200), will be able to
make the profit they intended, but careful consideration shows us that before they
are able to recover the $200 which will eventually protect their reason for entering
into the contract (ie, they will be able to make the profit they expected), they have
to go into the market and purchase 200 bicycles that are identical to the contracted-
for bicycles. They must then sue for the difference between the contract price and
the market price. This tells us that the first buyer’s market-price damages of $200
are designed merely to ensure that their financial loss is made good; that they are
not left worse off by reason of the seller’s breach of their substantive primary duty
to perform. The $200 only remedies the losses that flow from the violation of the
buyer’s primary right to performance. The secondary obligation, thus understood,
does not entitle the first buyer to the performance due to them (ie, 200 bicycles).
That Aristotle refers to the gains and losses of corrective justice normatively,
rather than materially or financially, is indisputable. He considers that the equality
between the particular parties is disturbed whenever corrective justice is violated.
In this way, he lays the complete normative weight of his theory on that equality.
The question now to be examined is this: in what regard could the parties possibly
be equal? Aristotle provides no clear answer to this crucial question. He simply
offers corrective justice as a transactional equality, without saying in what respect
the parties are equal. The result is that we cannot, in a dialogue, merely state that the
defendant’s behaviour is an ‘injustice’, because merely to state this does not provide
an argument. We must explain why the word ‘injustice’ arises, or is applied in the
first place, which requires an account of the kind of equality applicable here, and an
account of why it is wrong to disturb it without justification.
The Kantian principle of right ‘is a philosophy of freedom that starts with the
operation of free will conceived as self-determining activity’.32 In Kant’s account,
‘[t]he fundamental principle applicable to the interaction of self-determining beings
is that action should be consistent [or co-exist] with the freedom of whomever the
action might affect’.33 According to Kant, rights — such as contractual performance
— ‘are the juridical manifestations of the freedom inherent in self-determining
activity’.34 Action is thus compatible with the freedom of others so long as it is not
contrary to their legal rights. If the promisee has a right to contractual performance,
the other party is morally bound by a corresponding obligation to perform unless the
promisee has released them from that obligation. The promisee has control over the
choices available to the promisor who bears the corresponding obligation.35 To put
this differently, the promisee is in a moral position to determine, by their freedom
of choice, the way in which the promisor should behave and in this way to limit the
latter’s freedom of choice.36 In the words of Kant, rights are ‘moral capacities for
putting others under obligations’.37
Right and obligation are connected — and so therefore are the promisor and the
promisee — by the fact that the substance of the right is the essence of the obligation.
The right represents the moral position of the promisee, which is to ensure that they
demand and receive just what they have been promised in the contract; the promisee
cannot demand more than that. The obligation represents the moral position of the
promisor, which is to ensure that they perform no less than what they consented
to perform in the contract. If both positions are maintained as stipulated, then the
promisor and promisee are on an equal footing with respect to their rights and
obligations in the contract. The promisor’s freedom of action should be capable of
coexisting with the freedom of the promisee, which manifests itself in the right to
performance, always assuming that the two freedoms must coexist, with the two
sides being equal.38 As Weinrib states:
This statement can be best explained through the following example. Suppose that
an employer enters into a contract with their employee prohibiting them from selling
and disclosing any confidential information during their term of employment and
thereafter. The employee has an obligation, which means that there is something
owed specifically to the employer, so a legal right arises out of this contract. If
the employee breaches their contractual promise to the employer by selling and
disclosing confidential information to a third party, the employer will claim that the
breach represents a wrong against them — that wrong arising from the claim that
they have been unequally, unjustly or harmfully treated in the sense of diminish-
ing their status as a promisee. The employer’s moral status to determine, by their
freedom of choice, how the employee should use the information (and in this way to
limit the latter’s freedom of choice to act) has been diminished. Thus understood,
the absence of coexistence between these two freedoms would simply mean that the
employee will cause normative (or as I call it ‘intangible’) harm to the employer. In
this light, the employee’s breach of contract leaves the employer in a normatively
disadvantaged situation. The two parties are no longer equal in their moral status.
Unless the employee can undo the wrong or injustice they have committed (by
breaching the primary right not to sell and disclose confidential information to a
third party), the employer will never be able to re-establish their condition as
controller of how the information ought to be used by the employee, and, thereby, as
a promisee, with respect to the past infringement of the contractual right. However,
it is a foregone conclusion that the wrong committed by the employee cannot be
undone. The employer cannot require the employee to refrain from doing what they
have already done — ‘the past cannot be undone’.40 As Zakrzewski said, ‘[r]equiring
the person owing the duty to abstain from doing what he or she has already done
would be a fruitless exercise’.41 Therefore, regarding this past infringement, the
employer cannot regain their status as a promisee. The freedom of both parties can in
no way be returned to a state of coexistence. The state of equality, which involves the
employee and the employer being on an equal footing with respect to their rights and
obligations in the contract, can no longer be achieved or restored.
The employer can, it is true, rely on this primary right to regulate future conduct
by obtaining an injunction to prevent the employee from committing any further
infringements, but this primary right will provide no protection with respect to
the infringements already committed. Here, the employer can bring a claim for
compensatory damages to make good their pecuniary loss concerning the past
infringements — the secondary compensation interest.
Clearly, Ernest Weinrib’s work provides some valuable clues in what respect the
parties are equal. His normative approach provides a background to the idea of
equality. In the following section, I attempt to situate the concepts of intangible and
tangible harm within the theoretical framework of corrective justice supplied by
Weinrib.
By compelling the breaching promisor to fulfil their duty to perform, and so the
promisee’s right to performance, the court seeks to undo the intangible harm or
injustice that the promisor has caused to the promisee. The court also restores to the
promisee the privilege of limiting the promisor’s freedom of choice of how to act,
which was undermined by the promisor’s behaviour, thereby giving the promisee
the performance they contracted for, and protecting their performance interest. The
promisee’s interest in having the promise performed is a primary interest, which is
effectuated by the recognition of the promisee’s (primary) right that the promisor
should perform their side of the contract. This brings about a corresponding (primary)
obligation on the promisor to perform. Correctly understood, the performance interest
does not seek to prevent or remedy the financial loss that the promisee may suffer
by reason of the promisor’s breach of the primary duty. After all, there are cases
where, although the promisor’s performance was defective, the promisee suffered
no financial loss.43 The promisee’s claim for compensation could not therefore be
linked with their performance interest claim. The performance interest in such cases
seeks to make the promisor perform what they have promised, no more, no less. This
primary interest is protected if a prohibitory injunction or a specific performance
remedy is available to the promisee. As Charlie Webb has agreed:
Where a claimant asserts his performance interest the notion of loss is super-
fluous. He has a right that the defendant performs and he is seeking to have
this enforced. It may be that a breach of contract will cause him loss … but his
interest in performance is independent of this. A contracting party has a right
to the defendant’s performance regardless of what losses, if any, will be caused
by failure to perform.44
There are, therefore, two distinct ways in which the promisor can cause harm to the
promisee, each of which is protected in a different way and for a different purpose.
The promisee has a secondary compensation interest in not being left worse off
by reason of the promisor’s breach of primary duty. This interest is effectuated
by recognising a right in the promisee that the promisor should compensate the
promisee for any financial losses resulting from failure to perform their primary
duty.45 It protects the promisee against another kind of harm, although this time it is
tangible: direct and/or consequential loss, which may flow from the violation of the
promisee’s primary right (hereafter referred to as ‘tangible harm’).
The promisee’s secondary compensation right requires the promisor to make good
the promisee’s pecuniary loss to undo the tangible harm that the promisee has also
suffered from the breach. For, when the time has passed for the delivery to be made
on time, only the promisor’s breach of the first part of the obligation (viz, for delivery
to be made) and, therefore, the intangible harm suffered by the promisee in the sense
of them being undermined in the first instance, has been undone by specific perfor-
mance. Here, the promisee’s primary performance interest is substantially fulfilled,
but they have still suffered financial loss for services having been delivered late. The
promisor’s breach of the second part of the obligation (viz, that delivery be made
on time) and, as such, the intangible harm suffered by the promisee in the sense of
them being undermined in the second instance, cannot be cured and undone, where
the time has already passed for the delivery to be made on time. This being so, it
follows that the promisor is required to protect the promisee’s secondary compensa-
tion interest, which ensures that the promisee is not left worse off as a result of not
having had their primary performance interest completely addressed. The promisee
will then be entitled to be awarded the amount of their pecuniary loss, let’s say
$15 000 here, as the monetary value calculated to equal the value of timely delivery
to the promisee. The secondary interest, thus understood, does not seek to undo the
intangible harm or injustice that the promisor has caused to the promisee, and so
43 cont’d
specified. This indeed proves that compensatory damages cannot and should not be
said to equate to enforced performance. This example is based on the facts of Jacob &
Youngs, Inc v Kent, 230 NY 239 (1921).
44 Webb, above n 22, 54.
45 See Zakrzewski, above n 18, 102–3, 165–6; Smith, above n 18, 36–7.
(2014) 34 Adelaide Law Review363
does not give the promisee the performance they contracted for. Rather, the remedy
of compensation, unlike specific performance prohibitory injunction, responds to
loss resulting from the breach and not to the breach itself.
One might wonder, then, whether a decree of specific performance could remedy
the intangible harm caused by a breach in any better way. The answer is an unequiv-
ocal ‘no’. According to Smith, to compel the promisor to provide the promised
performance following breach of the contract is ‘self-defeating’ given that the only
way to give effect to the bonds of trust created by the promisor’s voluntary under-
takings is through performance which itself is voluntary.52 Where there is coercion,
trust is necessarily not manifest. The relationship of mutual trust and respect, which
It further follows, from Smith’s view, that a regime of routine specific performance
would deprive performance, and consequently contracting in general, of its potential
to create bonds, thereby ‘making the valuable activity of contracting less valuable’.56
In practical terms, the bond-creating function of contract would be weakened in the
case where specific performance is the normal legal response to a breach of contract.
The exclusion of specific performance as the default rule would conversely make the
promisor’s performance of the contract a stronger confirmation of the special bond
between them and the promisee.57 Thus understood, if contract is to be taken seriously
as a way of creating bonds, then the recognition of specific performance as a general
rule must be rejected. The justification for routinely dealing with breach of contract
by an award of monetary damages in preference to specific performance is that more
scope is thereby left ‘for the operation of good intentions’.58 As Smith says:
There are some wrongs that law cannot undo and some aspects of life into
which law should not intrude. The bond-destruction that results from breach
53 Ibid.
54 Ibid.
55 Ibid 370–1.
56 Ibid 371.
57 Ibid.
58 Ibid.
(2014) 34 Adelaide Law Review365
of contract is a wrong that law cannot cure and the bond-creation that results
from the completion of a contract is an area of life into which law should not
intrude.59
To begin with, the court may award the claimant damages measured on a ‘cost of
cure’ basis. On this basis, the claimant is given the sum of money needed to obtain
the performance for which they contracted from a different source. Consider the
following example. Suppose that farmer Macdonald agrees to allow the Gritty Gravel
Co. to extract gravel from some of his fields. The contract requires Gritty to restore
the fields to their previous condition when extraction is complete. Gritty refuses to do
so. Following this breach, Macdonald asks the court to enforce the contract. Rather
than providing Macdonald with a decree of specific performance, however, the court
may award him damages measured on the cost of cure. Such an award will enable
Macdonald to obtain the stipulated performance (ie, restoring the fields to their
previous condition) from another source.
The gravel extraction example shows that a cost of cure award is not an ordinary
damages award. Typically, compensatory damages merely respond to any direct
and/or consequential loss which may flow from the breach of the claimant’s primary
59 Ibid 377.
366 AL-TAWIL — DAMAGES FOR BREACH OF CONTRACT
right to performance and not to the breach itself. It is clear that compensation must
be compensation for loss. Yet a cost of cure award is intended to allow claimants
such as Macdonald to cure the breach itself. It aims to place him in the actual
position he would have been in had Gritty performed its primary duty; it does not
compensate for any financial losses. Value of loss damages and cost of cure damages
do not share the same objective — they are fundamentally different. For example,
in Radford v de Froberville (‘Radford’),60 the defendant breached his obligation to
build a wall that would separate his land from the claimant’s. The claimant sued
for the cost of building the wall. The court awarded the cost of cure although the
difference between the value of the claimant’s land with or without the wall was
almost nil. The cost of cure is clearly greater than the value of loss, and therefore
cannot be understood as compensatory. It is rather a substitute for ordinary specific
relief. The damages awarded in Radford are a substitute for, and a vindication of, the
right that has been infringed by the defendant. As Smith has argued:
[C]ost of cure awards are best explained as a form of substitute specific relief:
their aim is not to compensate the plaintiff for the value or utility of whatever
was lost, but to eliminate or undo the physical change in the plaintiff’s world
that has been or will be brought about by the defendant’s breach of duty …
Payment of the cost of cure is a substitute for what the defendant should have
done originally. Having failed in his primary substantive duty (to perform a
contract, to not injure), there arises, at the moment of failure, a substitute duty
to achieve the same end by paying for substitute performance.61
However, both the gravel extraction example and Radford show that a cost of cure
award provides the claimant only with the resources to obtain from a different
source the stipulated performance they contracted for. Does this change the fact that
such an award is equivalent to performance of the contract — and that therefore the
claimant’s performance interest is effectively met? The answer is ‘no’. Although the
end product will be obtained from another source, a cost of cure award gives the
claimant a substantial part of the performance, thereby making only a small change
to the nature of their performance interest. After all, as Guenter H Treitel has said:
Specific relief will hardly ever give the aggrieved party exactly the performance
to which he was entitled, if for no other reason than that the enforced perfor-
mance resulting from this form of relief will generally take place at a time other
than that stipulated in the contract.62
In practice, the claimant contracts both for services to be delivered and for those
services to be delivered on time. Should the court enforce only one of these obli-
gations, it is not providing the claimant with all they contracted for. If the court
is, however, content in such circumstances to order a different performance from
that agreed upon between the parties, on the basis that the claimant thereby gains
a substantial part of the performance originally agreed upon, then there appears to
be no objection to the court doing so by making a cost of cure award. The claimant
would thus obtain the end product for which they contracted. In both cases it
is difficult in the end to give the claimant exactly what they contracted for, but
still it cannot be denied that they receive a substantial part of what the stipulated
performance would have given them.63 There is a great similarity between specific
performance and a cost of cure award. Each gives the claimant a substantial part of
the performance they contracted for; they can be an excellent means of protecting
the claimant’s primary performance interest.
One reason why the court might be reluctant to grant the claimant a specific perfor-
mance decree and instead grant them a cost of cure award can be found in the fact
that the defendant’s performance of their original obligation is not possible anymore,
because it is physically impossible for them.64 Furthermore, the court’s reluctance
to compel the defendant specifically to perform can be justified because the threat
of enforcing specific performance could be used oppressively — for example, where
the defendant, in order to circumvent a difficult personal confrontation, might be
required to pay the cost of cure, buying out the claimant’s right to specific perfor-
mance.65 It can also be justified based on the risk that because of the great tension
between the two parties, the defendant who is required to perform specifically
may not fulfil their obligations properly and carefully, but may instead perform
defectively. A cost of cure award is therefore a substitute for specific performance,
awarded in cases where specific performance is not possible or desirable. It is a
vindication of the right that has been infringed by the defendant.
One crucial question remains: are there any conditions that should be satisfied in
order for the claimant to be entitled to the cost of cure award? The answer is an
unequivocal ‘yes’. There are two such conditions. First, the claimant is entitled to
the cost of cure award if they undertake to use it to obtain the end product of perfor-
mance. More specifically, as noted above, the aim of the cost of cure award is not to
compensate the claimant for any financial losses caused by the defendant’s failure
to deliver the stipulated performance — ie, the notion of loss is simply superfluous
— but rather to enable the claimant to obtain that stipulated performance from a
different source, thereby protecting their primary performance interest. Thus, such
an award aims to place the claimant in the actual, not just metaphorical, situation
in which they would have been if the breach had never been committed in the first
place; it is a substitute for what the defendant should have done originally.
Surely, if such an award is not used for this purpose, the claimant will end up with
defective performance and a sum of money which they can spend as they wish,
with the consequence that the cost of cure award cannot be said to be equivalent
to performance of the contract. The claimant must not be allowed to keep such a
windfall. This is because if a cost of cure award is justified on the ground that it is
a substitute for specific performance for the protection of the performance interest,
then it seems as a matter of reasonableness that such an award must be given to the
claimant, if, and only if, they undertake actually to use it to do the relevant work.66
Therefore, clearly, it will be unreasonable to grant the claimant the cost of cure
award, if they have no intention to cure the breach (or to effect reinstatement) — the
rationale for the award disappears. Oliver J concluded in Radford, discussed above,
that ‘the claimant genuinely wants this work done and that he intends to expend any
damages awarded on carrying it out. In my judgment, therefore, the damages ought
to be measured by the cost of the work, unless there are some other considerations
which point to a different measure’.67 The money should not simply go straight into
the claimant’s pocket as a windfall but should instead be spent on curing the breach
and therefore reflects the claimant’s interest in securing the contracted-for perfor-
mance; in seeing the contract they are involved in being performed. Otherwise, such
an award cannot be regarded as giving effect to the claimant’s performance interest,
and therefore cannot be justified on this basis. As Webb has said:
[T]he reason why the claimant should not be entitled to such a windfall is not
because this exceeds any loss that he may have suffered (it may, but this is not
point where the claim is not for compensation), but because this is no way gives
effect to his performance interest. This being so, there is every reason why the
court should be concerned with the use to which the claimant may put a perfor-
mance interest damages award … such an award should be conditional upon the
claimant undertaking to use his damages.68
While one important reason for the existence of a concept of ‘reasonableness’, above,
is to avoid the conferral of a windfall on the claimant, it can also be seen to have a
role beyond this, namely, to avoid undue hardship to the defendant. This is actually
the second condition that should be satisfied in order for the claimant to be entitled
to the cost of cure award, namely, that granting the claimant such an award does not
cause severe hardship to the defendant.69 The example of pipes, discussed earlier,70
will elucidate this. In that example, the house as built conforms to the specifications
except in relation to the brand of pipes to be used in the plumbing work during the
construction. Brand Y pipes rather than Brand X were installed. However, Brand Y
is equal in quality, appearance, market value and cost to Brand X — indeed, the
same thing, though manufactured in another place. The pipe was largely encased
within the walls of the completed house. In light of this, to conform to the require-
ments of the owner would involve knocking down the house and rebuilding. Here,
the claimant should not be entitled to the cost of cure award, for they have already
received substantially what they had contracted for. It would be wholly unreasonable
to grant the claimant such an award ‘in order to enable him to undo what had been
done when what had been done was substantially what he had contracted for’.71 This
is an example where it would clearly be unreasonable to award cost of cure.
The fact that the claimant has already received substantially what they had contracted
for means that granting them such an award would cause undue or severe hardship
to the defendant.72 The defendant has a claim to being treated fairly, although it is
them who breached the contract and the claimant who is the victim.73 However,
the problem in the pipes example is that if the proper measure of damages is the
difference in value and the diminution in value is nil, then should the court not
revert to an award on the cost of cure? The answer is ‘no’. Lord Lloyd, in Ruxley
Electronics and Construction Ltd v Forsyth (‘Ruxley’), considered that an injustice
that arises by way of making an award of too little is not counterbalanced by a court
making an award of too much: ‘that cannot make reasonable what … has been found
69 Similarly, specific performance will not be ordered where this would cause undue
hardship to the defendant (see, eg, Patel v Ali [1984] Ch 283).
70 Above n 43.
71 Ewan McKendrick, ‘Breach of Contract and the Meaning of Loss’ (1999) 52 Current
Legal Problems 37, 48.
72 See Stephen A Smith, ‘The Law of Damages: Rules for Citizens or Rules for Courts?’
in Djakhongir Saidov and Ralph Cunnington (eds), Contract Damages: Domestic and
International Perspectives (Hart Publishing, 2008) 35–6; Edward Yorio, ‘In Defense
of Money Damages for Breach of Contract’ (1982) 82 Columbia Law Review 1365,
1389; Webb, above n 5, 63–4; Guenter H Treitel, The Law of Contract (Sweet and
Maxwell, 11th ed, 2003) 947–8, 1026–7 (discussing how the cost of cure award can
be refused on the ground of severe hardship to the defendant, as where, for example,
the expense of the work involved is wholly out of all proportion to the benefit to be
obtained).
73 See Edward Yorio, Contract Enforcement: Specific Performance and Injunctions
(Little, Brown, 1989) 527; Paul Richards, Law of Contract (Pearson Education, 8th ed,
2007) 399–400.
370 AL-TAWIL — DAMAGES FOR BREACH OF CONTRACT
to be unreasonable’.74 So, compelling the defendant in the pipes example to pay the
cost of cure would cause a hardship amounting to injustice. Where the cost of cure
award is unreasonable, the claimant will be compensated, for example, for ‘loss of
amenity’ or mental distress. This is a middle position between two extremes and it
is fair to both parties. The result might be otherwise if the claimant had not received
substantially that for which they had contracted; for example, where a house is
constructed so defectively that it is of no use for its designed purpose. In such a
case, it would be reasonable to award cost of cure to undo the breach (or to effect
reinstatement). This being so, the question of reasonableness plays an important role
in deciding whether to make the award for the cost of cure or not.
In Ruxley, neither of these two conditions were satisfied. In that case, the claimants
entered into a contract with the defendant to construct a swimming pool in his
garden. It was to be of a maximum depth of seven feet six inches, but in breach of
contract, the finished pool was only six feet nine inches deep. When the defendant
discovered this fact, he refused to pay the contract price. The claimants filed a suit
against him for the contract price. The trial judge found that the claimants had
substantially performed their obligations under the contract. In this light, it was held
that the defendant was liable to pay the claimants the contract price. The defendant
was thus left to his counterclaim for damages for breach of contract.
At trial, three facts were established. The first was that the difference in value
between the swimming pool which was provided and the pool which should
have been provided was found to be nil. The second was that the only way to
increase the depth was to rebuild the pool at a cost of £21 460, which was nearly
a third of the total price of the pool. The third was that the difference in depth
did not impair the defendant’s use of the pool. The trial judge, in light of the
above facts, refused to award the defendant the cost of cure of £21 560. Rather, he
awarded him damages to reflect the loss of amenity which he suffered as a result
of not getting the pool for which he had contracted. The Court of Appeal (by a
majority) allowed an appeal by the defendant, holding that the decision to award
the defendant general damages of £2500 for loss of amenity did not adequately
protect his interest in having the contract performed, because the award would not
enable him to have the swimming pool for which he contracted.
The course followed by the majority of the Court of Appeal was thus to award the
defendant the full cost of carrying out the work. The House of Lords overturned
the decision of the Court of Appeal and refused to award the defendant the cost
of cure of £21 560, as to do so would be unreasonable.75 The cost of cure was
described by Lord Mustill as ‘wholly disproportionate‘76 to the value of the loss
and by Lord Lloyd as ‘out of all proportion’.77 Moreover, their Lordships did not
actually believe that the defendant was as interested in getting his pool rebuilt as
he was in punishing the claimants. Their Lordships were therefore concerned that
the defendant was seeking the cost of cure award in bad faith. However, rather than
awarding the defendant no damages at all for breach of contract the House of Lords
upheld the trial judge’s ruling for loss of amenity (£2500).
In light of the above discussion, it seems that there are two main and quite distinct
contractual interests constitutive of a contract: the performance interest and the
compensation interest. The secondary interest is a separate interest, not merely an
alternative formulation of the primary interest: receiving compensatory damages
for non-performance is not the same as receiving performance. However, some
scholars entirely reject this distinction. For example, in his book From Promise to
Contract, Dori Kimel talks about wrongful losses as the only harm that the promisee
can possibly suffer as a result of the violation of their right to performance.78 He
believes that protection against a wrongful loss (ie, a loss that arises from rights-
infringing behaviour) can be provided in two ways. The first is by preventing the
promisor from causing wrongful (financial) loss by ordering them to do the very
thing they had promised to do under the contract. The second is by redressing (or
repairing) the wrongful loss by ordering the promisor to compensate the promisee
for the financial loss flowing from the violation of their right to performance. In
Kimel’s view, the court gives the promise-breaker the choice to perform the contract
or to pay damages in order to prevent or repair wrongful losses when — and only
when — damages would fully (or effectively) redress those wrongful losses.
According to this view, Kimel seems to perceive both compensatory damages and
specific performance as protecting the promisee against one kind of harm and so
giving effect to one interest, namely, the performance interest. In other words,
he seems to perceive the performance interest as the sole contractual interest and
reimbursement orders as substitutional remedies which protect (or give effect to)
the performance interest, thereby leaving no place for a secondary (compensatory)
interest. Obviously, then, the distinction between the performance interest and the
compensation interest has been neglected by Kimel. For him, thus understood,
receiving compensatory damages for non-performance is the same as receiving
performance. In what follows, this article questions Kimel’s rejection of the distinc-
tion. More precisely, this article suggests that there are at least two reasons why this
view is unsustainable and why Kimel’s view should therefore not be embodied in
contract law.
A Freedom of Contract
to prevent or repair wrongful losses does not reflect what the contracting parties
agree to. Certainly, parties could agree to disjunctive obligations to perform or to
compensate; indeed, some parties clearly do reach such agreements. However, as a
general account of how parties understand their agreements, it is quite unconvinc-
ing to suggest that they have agreed, in the typical case, to disjunctive obligations
to perform or to provide compensation.79 In practice, parties enter into a contract in
the expectation that it will be performed80 — a conclusion supported by empirical
evidence. In 1990, David Baumer and Patricia Marschall surveyed 119 North
Carolina corporations about their attitudes towards wilful breach. One question
was, ‘[i]f a trading partner deliberately breaches a contract because a better deal can
be had elsewhere, is such behaviour unethical?’ One hundred and five respondents
said ‘yes’.81 Contracting parties do not usually accept that performance may depend
on a subsequent choice by the other party to pay damages rather than perform.82
Rather, it seems likely that if this contingency were explicitly considered by the
parties, they would decide to grant a right to terminate the contract upon payment of
damages, or otherwise provide for the eventuality of breach.83 As Lord Lindley said
in South Wales Miners’ Federation v Glamorgan Coal Company Ltd:
If Kimel’s view were applied by judges, they would examine the actual content of
a contractual obligation and determine whether enforcing it would be economically
efficient. To put this differently, instead of requiring judges to look into the procedural
form of the contract, Kimel’s view requires them to look into the actual content of each
contract so as to decide the existence and scope of contractual obligation based on the
concept of economic efficiency.85 If it is possible to breach the contract efficiently,
then such a breach will be allowed and encouraged. The promisee’s right to perfor-
mance will not be recognised and only their right to compensation will be protected.
The promisor will be allowed to revisit the decision they previously made by inten-
tionally placing himself under an obligation to perform — subject, of course, to the
payment of damages. The incorporating of Kimel’s view into the law would mean
that the judges would not adequately respect the intention of the parties involved —
that is, what they have actually said or written in their contract — and their freedom
to determine their rights and obligations.86 The traditional and still orthodox notion
of the nature of contractual obligations is that they are voluntarily assumed.87 Their
content is thus a matter for the parties who have voluntarily and freely entered into the
contract, not the state.88 The principle of freedom of contract rejects the interference
of the state in the terms of contracts. As Sir George Jessel MR said:
[I]f there is one thing which more than another public policy requires, it is that
men of full age and competent understanding shall have the utmost liberty of
contracting, and that their contracts when entered into freely and voluntarily
shall be held sacred and shall be enforced by Courts of Justice.89
It is clear, therefore, that Kimel’s view is inconsistent with the idea of freedom of
contract. It may be argued, however, that the court may often supplement or place
some limitations on the obligations expressly agreed upon between the parties. In
view of this, there are already restrictions upon freedom of contract. That being so,
then the fact that Kimel’s view of contractual obligations consists of another restric-
tion upon — or undermining of — freedom of contract is insignificant. If there was
nothing wrong with other pre-existing restrictions upon freedom of contract or with
its undermining, then what can be wrong in this instance?
The answer is that Kimel’s view introduces intervention despite the fact that the
express terms of the contract leave clear how parties understand their agreement and
how the dispute or problem between them should be resolved. Thus, the intervention
cannot be reasonably justified in this instance. Take the case of Harvela Investments
Ltd v Royal Trust Co of Canada Ltd.90 In that case, the first defendants invited the
claimants and the second defendant to submit a single sealed offer for the shares and
stated that they would accept the highest complying offer. The first defendants were
effectively offering a simple contractual arrangement whereby the shares would be
sold to the highest bidder amongst those who submitted offers. The claimants tendered
a fixed bid of $2 175 000 and the second defendants tendered a referential bid of
$2 100 000 or $101 000 in excess of any other offer, whichever was the higher. The first
defendants accepted the second defendants’ bid, treating it as a bid of $2 276 000, but
the Court held that the first defendants were obliged to accept the claimants’ bid.
The referential nature of the second defendants’ bid rendered it invalid, as it was not
within the terms of the contract to bid (because it was not a single offer). Obviously,
there is no lacuna in the provisions of the contract, because it expressly provides for
the situation which has occurred. In this light, the first defendants were contractually
bound to sell the shares to the claimants. Kimel’s view, however, introduces inter-
vention by allowing the first defendants to breach the contract with the claimants and
enter into a contract with the second defendants (subject, of course, to the payment of
compensatory damages), despite the fact that the terms of the contract are clear and
offer excellent guidance.
It must be realised that the courts do not usually interfere with the obligations expressly
agreed between the parties unless faced with situations not dealt with by the express
terms of the contract. For example, John contracts to sell his car to Mike, who offers
$2500 to purchase it, but for reasons unforeseen by both parties, the car is totally
destroyed an hour after the conclusion of the agreement. What is the legal position in
cases of this type? How should the dispute be resolved? There is clearly a lacuna in the
provisions of the contract, because it does not expressly provide for the situation which
has occurred. In such cases, the courts step in to fill the gaps left by the parties in
sensible and reasonable ways, using a legal rule, the doctrine of frustration of contract,
which dictates that in the event of certain unexpected contingencies the court may
consider the contract as being terminated.91 In this view, the contractual obligations
of both parties are automatically terminated and neither is obliged to perform. Thus,
neither can be held liable for breaching the frustrated contract.92
90 [1986] AC 207.
91 See, for example, Javad v Aqil [1991] 1 WLR 1007.
92 Collins, above n 88, 298–9; Koffman and Macdonald, above n 88, 434–5. See, eg,
National Carriers v Panalpina (Northern) [1981] AC 675; Davis Contractors Ltd v
Farebam UDC [1956] AC 696, 698. The statutory law of sales cancels further perfor-
mance of the contract if the goods perish without fault of either party before ownership
has passed to the buyer (see, eg, Sale of Goods Act 1979 (UK) c 54 s 7; United States
Uniform Commercial Code (‘UCC’) § 2-615. Intervention is also introduced to
protect various types of relatively weak or vulnerable contract parties, for example,
consumers (see, eg, Unfair Contract Terms Act 1977 (UK) c 50), employees (see, eg,
Employment Protection (Consolidation) Act 1978 (UK) c 44; Employment Act 1989
(UK) c 38; Trade Union and Labour Relations (Consolidation) Act 1992 (UK) c 52,
s 37(1)(a)), tenants (see, eg, Rent Act 1977 (UK) c 42; Landlord and Tenant Act 1985
(UK) c 70)). For further examples, see Kimel, above 4, 118–9.
(2014) 34 Adelaide Law Review375
Accepting that parties should enjoy the freedom to choose the terms of their own
contract entails an acceptance that, in all contracts, the duty of the defendant to
perform (which is correlative to the claimant’s right that the defendant perform)
should not be regarded as equivalent to an option to either perform or pay damages.
This in turn requires the recognition of performance and compensation as two
distinct contractual rights and therefore interests.
A further simple explanation of why Kimel’s view should not be embodied in the law
— and therefore why we should accept that there are two distinct contractual rights
and interests — is found in the notion of breach of contract. More specifically, in the
ordinary understanding, a breach of contract is a breach of the duty to perform the
original (primary) obligation (eg, deliver goods, produce goods, perform a service,
and so on). Thus, its premise is that the defendant has a duty to perform. If no duty
exists on the part of the defendant to perform their (primary) original obligation,
then there can be no such thing as a breach of contract.93 Breach, thus understood,
presumes a duty to perform, because in the absence of such a duty there is plainly
nothing that can be breached. That the defendant has an obligation to perform and
that the claimant, correspondingly, has a right to the performance of the defendant
is what establishes the primary interest of the claimant in performance.94 It gives
effect to that interest.
Nevertheless, Kimel’s view gives the contracting parties the choice either to perform
the contract or to pay damages for losses resulting from breach. It is clear that for
Kimel compensatory orders enforce the original (primary) obligation. Both specific
So, in the example of the employee who has breached their contract with the
employer by selling and disclosing confidential information, it would be erroneous
to view the secondary right as a substitute method of protecting or giving effect to
the primary interest. The employer’s right to receive damages for the financial losses
resulting from the breach of primary duty does not protect their interest that the
employee not sell and disclose the confidential information. The same conclusion
applies in respect of the primary right in the sense that it would be erroneous to view
both the primary and secondary rights as protecting a single interest of the employer
— that the employee should ensure that the employer’s financial loss is made good.
In fact, to view them in this way would result in paying ‘insufficient attention to the
existence of the primary right and duty and the fact that causing [such financial loss]
is treated as a breach of duty by the [employee]’.98
One must realise that the employee’s primary duty is not to infringe the employer’s
protected primary interest, and accordingly not to cause them any financial loss.
It should not be understood as a duty simply to pay monetary damages in order to
reimburse the employer if the employee causes them such financial loss. If it were,
then the act of selling and disclosing the confidential information which caused the
financial loss would not be seen or perceived as a breach of duty. A conflation of the
primary and secondary interests in the sense of understanding the employer’s interest
as being in the protection of the confidential information or, should that informa-
tion be disclosed by the employee, in ensuring that the employee’s behaviour causes
the employer no loss, leaves no scope for any notion of breach of contract.99 As a
matter of principle, therefore, accepting that all contracts may be breached entails
an acceptance that all contracts impose a duty to perform. This in turn requires the
recognition of performance as an interest distinct from the compensation interest.
VII C onclusion
To sum up, it can be stated that there are two distinct contractual interests and two
distinct ways in which the promisor can cause harm to the promise, each of which
is protected by a different remedy and for a different purpose. First, the promisee
has an interest in seeing the contract they are involved in being performed. If a
promisor breaches this interest, then they cause intangible harm to the promisee.
The performance interest seeks to restore to the promisee the privilege of limiting
the promisor’s freedom of choice of how to act, which was undermined by their (the
latter’s) behaviour, thereby giving the promisee the performance they contracted
for. It neither prevents nor repairs the financial loss that the promisee has suffered
due to the promisor’s breach. This interest is protected if a prohibitory injunction,
a specific performance remedy, or a cost of cure award is available to the promisee.
Second, the promisee has an interest in not being left worse off by reason of the
promisor’s breach of primary duty to perform. The compensation interest protects
the promisee against another kind of harm, namely, tangible harm: the financial
loss which flows from the violation of the promisee’s primary right to performance.
Understood in this way, the secondary interest is a separate interest, not merely an
alternative formulation of the primary interest: receiving compensatory damages
for non-performance is not the same as receiving the performance itself.
Since there are these two distinct contractual interests and, therefore, two distinct
ways in which the promisor can cause harm to the promisee, Kimel must be taken
to have adopted an artificially narrow concept of harm in order to secure his desired
conclusion. By talking about wrongful losses, as if it is the only harm that the
promisee can possibly suffer as a result of the violation of their right to perfor-
mance, Kimel assumes that there is just one contractual interest. The danger here is
that when the promisee brings a claim to give effect to their primary right to perfor-
mance, it will be understood to be the same as a claim to repair losses caused by the
promisor’s wrongful breach and that it is, therefore, this right to which compensa-
tion for the financial loss flowing from the violation will give effect. However, the
claim is really there to undo the intangible harm that the promisor has caused to
the promisee.