Loss of profits for breach of contract

A recent Scottish case allows a claim for economic loss from a normal breach of contract. It is Scottish and so does not strictly apply to England and Wales but is likely to persuade the courts in this country. Mr and Mrs Strachan owed a property in the north of Scotland which they planned to refurbish and use to run a residential-based cookery and art classes business. vf-research-20091

The Strachans signed a contract with Highlands Joinery Products Ltd for them to install windows and doors at the property, explaining that it would be run as a business. Unfortunately, the work was carried out poorly, the property was not weather-proof and the Strachans were prevented from completing their renovation on time. In the end, all of the windows and doors had to be taken out and replaced.

The Strachans successfully sued Highlands under s.14 (2) of the Sale of Goods Act 1979 for a breach of the implied term of the contract that the goods would be of satisfactory quality. Based on the case of Hadley -v- Baxendale, the Strachans could recover damages for losses that Highlands should have foreseen as likely to result from such a breach at the time that the contract was signed. The question for the court was how could the Strachans' damages be measured?

Highlands felt that they should only pay compensation for the cost of replacing the faulty windows and doors, for redecoration, and for the personal upset caused to the Strachans.

Due to the faulty windows and doors the Strachans were unable to carry out their planned business activities at the Property. The Strachans claimed that Highlands knew that the windows and doors were an essential element to enable the property renovations to be completed, so that the business could start operating. They felt that Highlands should be responsible for the loss of business profits, which they calculated as being a net profit of £17,000 for their first year of operation.

The court ruled in favour of the Strachans, stating that it made no difference whether or not Highlands knew the precise nature of the business activity that the Strachans intended to carry out. The company knew of the Strachans' intention to operate a business from the property and should have known that their breach of contract would render it unfit for business use. Therefore the Strachans could recover damages for their loss of profits, as well as damages for replacement/redecoration etc.

Unusually, this case means that companies or individuals can successfully claim economic loss as a result of a normal breach of contract. When entering into a business contract, the supplier should attempt to quantify the risk associated with a potential loss of profits arising from the defective supply of goods or services.

Elizabeth Fry
Head of Disputes
0117 929 2811
Elizabeth.fry@wards.uk.com