The general rule in approaching the award of compensation for breach of contract is to assess

damages as at the date of the breach. Recent judgments, however, including the controversial
House of Lords decision in ‘The Golden Victory’ (2007), have somewhat obscured the true state of
the law. Australian courts now seem to be willing to eschew the general rule where assessment of
damages at the trial would better reflect the overriding ‘compensatory principle’. In an area of law,
largely untouched by statute, McColl J in McCrohon v Harith recently remarked that the “certainty of
the principle concerning the time as at which damages are assessed has now been eroded. The
hypothesis of this essay: ‘the principles relating to the assessment of damages for breach of k are
indeed settled and the extent to which Australian courts consider the Golden Victory has removed
the certainty of the law, they have been misled’.

The basic compensatory principle is enunciated by Parke B in the 1848 decision of Robinson v
Harman, and has been continually confirmed throughout the Common law world, and is stated as
such,

‘The rule of the common law is, that where a party sustains a loss by reason of a breach of
contract, he is, so far as money can do it, to be placed in the same situation, with respect to
damages, as if the contract had been performed.’

Along with the compensatory principle there has been a correlative principle espoused by the
courts. The later principle holds that the injured party is not entitled to be placed in a superior
position to that they would have been in had the k been performed, these principles secure the
objective of purely compensating for the loss occasioned to the injured party. Thus the basis of
calculating the measure of damages is the expectation loss of the P at the date of the breach, and
the onus is on the P to prove these losses. In contracts for the sale of goods or services, this has
usually been achieved through the ‘market price rule’ (see The Elena D’Amico) whereby damages are
crystallised at the time of breach and are equal to the difference between the contract rate and
market rate. Premised on the concept of mitigation, subsequent steps the injured party takes are
regarded irrelevant, because the injured party is deemed to have assumed the risk of subsequent
market fluctuations. However since the 2007 HL decision, the certainty of this general rule has been
significantly eroded and obscured the proper approach as to the assessment of damages, conflating
it to some extent with the restorative assessment of damages in tort law.

The Golden Victory Case was a deeply divided House of Lords decision (with a 3-2 majority) involving
the repudiatory breach of a seven-year time charter. A clause in the contract gave both parties the
right to cancel the charter-party if war broke out between a number of specified countries, including
the US, the UK and Iraq. On 14 December 2001, the charterers redelivered the ship, thereby
repudiating the contract. The owners accepted the repudiation on December 17 and claimed
damages in respect of the remaining four years of the agreement, less what they could have used by
substituted employment. On the outbreak of the Iraq War in March 2003, however, the charterers
argued that they would have exercised the cancellation clause and as such, the owners were only
entitled to damages up until the cancellation date. Instead of applying the general rule whereby
damages would have crystallised on December 17, a majority of the House of Lords favoured the
charterers’ view and took hindsight into account in the consideration of damages.

The House of Lords strongly affirmed the ‘compensatory principle’ of contractual damages, but
rejected the assertion that mechanistic application of the general rule in circumstances where
assessment at another date may be a more accurate reflection of the principle. By ignoring known
facts that had come to light since the breach (namely the outbreak of war) and relying on false
assumptions, the court felt that it could not properly give effect to the compensatory principle. The
court decided to postpone the assessment of damages to the date of trial because supervening
events now apparent, despite being unanticipated, had reduced the true value of the contract lost.
Considerations of certainty and finality, Lord Scott held, had to yield to the greater importance of
achieving an accurate assessment of damages. In dismissing the ‘market price rule’, the majority
followed Lord Macnaghten’s Bwllfa principle: “with the light before him, why should he shut his eyes
and grope in the dark?” This is despite the principle stemming from a claim for statutory
compensation, its absolute irrelevance to a breach of contract and its lack of authority for the issue
under consideration.

Perhaps the most compelling reasoning in this case can be found in Lord Bingham’s minority
judgement, lamenting that ‘the majority’s decision undermines the quality of certainty which is a
traditional strength of English commercial law and involves an unfortunate departure from
principle’. This vehement opposition was asserted by raising four substantive objections to the
majority’s decision. Firstly, that contracts are made to be performed and not broken, and the effect
of the majority’s judgement was to give the wrongdoing party the benefit of the breach. Secondly if
on the repudiation of the breach being accepted, the charterer’s had promptly honoured their
obligations and payed damages, the whole dispute would have been settled years before the second
Gulf War broke out. Thirdly, ship-owners are entitled to be compensated for what they lost, on the
date they lost it according to its value in the market. And fourthly, Lord Bingham reiterated the
importance of predictability and certainty in commercial law. Certainty is in the interest of
commerciality because the parties under the contract enter into a bargain. Breach in these cases are
often not accidental (as under tort), rather they are undertaken after a risk analysis has held it to be
in their commercial interests to breach the contract. Thus the innocent party needs to know where
they stand when the other party repudiates the contract, and whether it is in their commercial
interest to elect to terminate or carry on with the contract. Under the postponement model, neither
the shipowner nor the charterer would have known their position at the time of breach because the
value of the right to damages would fluctuate according to events outside their control.

The result of the decision in The Golden Victory has created considerable confusion in the area of
contractual damages. A number of Australian judgments seem to have endorsed the new position
(see Gagner Pty Ltd), but if so, at what cost? It seems well-established principles in assessing
damages in the case of contractual breach and its underlying premise of certainty have been waived
in favour of the opportunity of better adapted justice apparently opened up to Australian courts in
the wake of the Golden Victory. However by applying the Robinson v Harman principles and
measuring the loss by the cost of the replacement of the net benefit expected under the contract
under market conditions at the time of the breach, a just outcome is still awarded to the injured
party. Therefore for the sake of justice and certainty in commercial contracts, subsequent events to
the breach of a contract are irrelevant in the exercise of quantifying loss