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Damages for breach of contract

If a person enters into a contract – a legally enforceable agreement – that person is making a promise to the other party. The promise may, for example, be to supply goods of a certain kind in return for payment of an agreed amount.

If a person makes a contractual promise and is unable to fulfil the promise, the person commits a breach of contract. Generally speaking, it is irrelevant whether or not the person was at fault in not fulfilling his promises; liability in the law of contract is based on non-fulfilment of the promise, not on the existence of fault. The fundamental principle of the law of contract is, as the Romans pithily expressed it, pacta sunt servanda – agreements must be honoured.

HOW ARE THE INNOCENT PARTY’S DAMAGES DETERMINED?

If a party is in breach of contract, the law of contract provides that the innocent party is entitled to damages – monetary compensation – in an amount which will put the innocent party in the same financial position as if the contract had been properly performed. Thus, for instance, the innocent party is entitled to be compensated not only for the out-ofpocket expenses that the breach of contract has caused him; he is also entitled to be compensated for the loss of profit that the breach has caused him – in other words, the profit that he would have made if the contract had been properly performed.

In the recent case of Erf 1026 Tygerberg CC t/a Aspen Promotions SA v Pick ’n Pay Retailers (Pty) Ltd 2005 (6) SA 527 the Cape High Court affirmed some important principles regarding the situation where a breach of contract has the domino effect of forcing the innocent party into committing a breach of contract of his own toward a third party.

In this case, a close corporation (“the CC”) had entered into a contract with Pick ’n Pay to supply the latter with certain printed bandanas. Those bandanas were to be manufactured by a third party and the CC had entered into a contract with the third party to purchase them at an agreed price. Pick ’n Pay refused to abide by its contract with the CC. The result was that the CC could not honour its own contract with the third party which had agreed to supply the goods. The third party was threatening to sue the CC for damages for breach of contract.

The CC therefore sued Pick ’n Pay for damages for breach of contract, consisting of:

• its own loss of profit, in other words, the profit that it would have made on the contract (the difference between what it would have outlaid in buying the goods from the third party and the price at which it was going to resell them to Pick ’n Pay); and in addition –
• the monetary claim which the third party was going to make against it (the CC) for damages for breach of contract for failing to buy the bandanas from it.

The Cape High Court affirmed that, in terms of contract law, the CC was entitled to claim from Pick ’n Pay, by way of damages for breach of contract, not only the financial loss that the CC had itself suffered, but also the damages for which the CC was going to be sued by the third party.

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