Breach of Contract – Calculation of Damages where there is Discretion Regarding Performance

LEGAL BRIEFING FROM THE COMMERCIAL DISPUTE RESOLUTION GROUP

25 MAY 2010

Bmibaby Limited's (BMIB) decision to no longer base planes at Durham Tees Valley Airport (Airport) has led to the Court of Appeal[1] finding it in repudiatory breach of contract, and ordering it to pay damages to the Airport owners. However, even with this guidance, assessing damages in these types of cases will continue to be difficult.

BACKGROUND

BMIB is a low cost airline operating to various European destinations. Under an agreement dated 23 April 2003 (Contract) with British Midland Regional Limited (BMRL) (which traded as bmibaby until the subsequent incorporation of BMIB) it was agreed that bmibaby would operate from the Airport for a period of 10 years with a minimum of two aircraft based at the airport. The Contract was novated and varied on 23 December 2005 so that BMIB took over the outstanding obligations of BMRL under the Contract and revised terms were agreed. Despite financial support from the Airport, the proposed arrangement did not run smoothly and, in August 2006, BMIB decided to cease operating from the Airport after calculating that its operations there were incurring substantial losses.

THE ISSUES

Following the termination of BMIB's operations, the Airport's owners brought a claim seeking damages for breach of contract based on the failure to operate two aircraft for the agreed 10-year period. The damages claimed were based on the lost revenue from charges payable by departing passengers and from duty free and other sales, parking and catering.

The principal issue to be decided was whether the Contract imposed a legal obligation to base and fly two aircraft from the Airport for a period of 10 years from Summer 2004, or whether it merely gave a right to do so without obligation.

At first instance, the judge held that the Contract imposed an obligation to establish a two-aircraft operation, and to operate the aircraft in the sense of flying them commercially. However, he went on to dismiss the claim for damages on the ground that there was no objective criteria which would support an implied term relating to the number of required flights, and the assessment of damages would be impossible for the same reason. The Court of Appeal subsequently referred to this as a finding that the Contract was void for uncertainty i.e. the court was unable to identify the contractual obligation which had to be performed.

DECISION

The Court of Appeal agreed with the judge that the Contract imposed on the airline an obligation to establish a two-aircraft based operation, and did not merely give the airline a right to do so. It also agreed that the question of enforceability did need to be addressed before considering damages:

• for the Contract to be enforceable, the court had to be able to say whether any particular standard of performance was or was not a breach of contract
• if a breach existed, the court had to determine the appropriate measure of damages, but could not order an assessment of damages in respect of an unenforceable contract.
• In this case the Court of Appeal did not believe that the Contract was void for uncertainty: the Contract contained sufficient terms to establish whether BMIB's conduct amounted to the required level of performance.

Having established enforceability, the Court of Appeal went on to consider the law on how damages should be assessed in a case such as this where the Contract contained a single obligation with discretion as to performance. Lord Justice Patten reviewed previous Court of Appeal authority and concluded:

• the assessment should not be limited to what was the minimum level of permitted performance, but should extend to a calculation of how the contract would have been performed at the relevant time had it not been repudiated. This will take into account the likely profitability of the contract and any other relevant facts that would have influenced the method of performance
• the judge conducting the assessment must assume that the defendant would not have acted outside the terms of the contract and would have performed it in his own interests having regard to the relevant factors prevailing at the time. The judge is not, however, required to make assumptions that the defendant would have acted uncommercially merely to spite the claimant.

Lord Justice Toulson commented that the question of how to assess damages for repudiatory breach of a contract which allows a measure of choice in performance to the party in breach could be difficult but agreed that "compensation is to be based on the probabilities of the case – on the remuneration which the claimant might reasonably be expected to receive – and not on the bare minimum necessary to have amounted to performance of the contract". He noted that whilst assessment might be difficult this was no reason for the court not to make the best assessment it could.

COMMENT

The decision highlights the issues which can arise when there is a need to assess the damages flowing from breach of a contract which allows discretion as to performance. The Court of Appeal has now clarified that in such cases the damages will not be based on a minimum level of performance, but will have regard to an assessment of what would probably have happened had the breach not occurred. However, as the court recognised, even with this guidance the practical task of assessment is likely to be difficult.

[1] Durham Tees Valley Airport Ltd v Bmibaby Ltd & Anor [2010] EWCA Civ 485