This paper deals with contract damages, their types and the way they are calculated according to the concept that the damages should be equal to the harm done to the injured party.

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2-2 Purpose of research

• Studying the different kinds of contract damages and how they are calculated.

• Studying which kind is applied in each case, and through which procedure.

• Exceptions in applying restitution and compensatory damages.

3-1 Importance of remedies          

        Due to the increasing business relations in these days, on the termination of contract there should be damages that is recognized as remedies for the injured party. By doing this, the parties joined by the contract won’t or will find it hard to terminate a contract without a valid excuse which gives stability in the economical market.  Thus, using remedies in contracts some how deter the parties from terminating the contract without paying for the harm of the other party. According to Mahoney, damages are present in a contract to give all parties an equal position and no party should have an advantage over the other party if he decided to breach. It was also stated that is one of the reasons why contracting parties should take sufficient precautions for unforeseen conditions for example. Contract damages are calculated using certain rules. These rules do differ according to the situation and the kind of remedy associated with it.  

3-2 How are remedies calculated?

        Contract remedies are of two different types the first is restitution the more common remedy and the latter is compensation. Restitution is based upon the concept that the injured party should be place in the position prier to the contract. This includes benefit conferred on the breaching party in addition to any investment made because of this contract. The second type of remedies is the compensation or some times called compensation for expectation. It can be inferred from the name that it is calculated according to the damages taking in consideration any intervening thing and it includes the damages that happened and any profit that the injured party lost on the condition that it would be a normal result of the damage (Mokos535). In other words, this remedy should include the damages suffered by the injured party altogether with any profits he was expecting. From these definitions it is apparent that restitution provides the least compensation and the easiest to calculate. There are some exceptions to the rule in which the remedies can take other forms as punitive damages and under compensatory. However, for any kind of damages to be recoverable there are some limitations by law.  

3-3 Factors to be satisfied for remedies to be Recoverable:

For these remedies to be recoverable three factors should take place:

• The injured party can recover damages for those losses that he can prove with reasonable certainty. Losses that are purely speculative are not recoverable.(Morkos 522)

• “Damages must be reasonably foreseeable at the time the contract was made, as liable to result from the breach of the contract” (Paul Dobson 187).  

• Plaintiffs injured by a breach of contract have the duty to avoid or minimize) damages. A party cannot recover for losses that he could have avoided without undue risk, burden, or humiliation (Paul Dobson 187).  

3-4 Kinds of remedies:

Restitution:

        As it was previously discussed and according to the Egyptian law 160 restitution is the general case in contract breach while compensatory is used only if the status quo can not be restored in other words if restitution can not be achieved. Although it’s apparent that restitution is the general case but the law gives the right to the injured party to choose whether he wants restitution or compensatory (Mahoney). However, most of the injured parties prefer the restitution because they are not willing to take the risk as the compensation will be based upon the judgment of the court. However, there are some cases in which restitution will not be applicable.

When restitution is impossible

        

According to Morkos there are three cases in which restitution is not applicable. The first case when the return of the injured party to his position will hurt a third party (based on the concept of public policy). The second is if the time is of the essence since the injured party won’t be able to receive what has been lost. The last case is in rental contracts as the rental can not restore back his payments due to the breach of the contract by the other party.

Compensatory damages:

        According to the Egyptian law, there are three main types of compensatory damages: judicial compensation, agreed upon compensation, and interest rate.

Judicial compensation: (Morkos 541)

     

     In this type of compensation the case is left to court to resort it. In this method the wrongdoer should be placed in a beaching situation before that the injured party can not receives any compensation. As stated by El Shawzaly this can be done by sending a written warning to the wrongdoer, and also according to El Shawazaly it is not always required to do so if the contract contains a clause that if anyone of the parties don’t perform according to the terms of the contract he places himself in a breaching situation (El Shawzaly). Also the warning is not required if the breaching party is not willing to perform (sent a written document) or he places himself in a position that makes him unable to perform.        

Agreed upon compensation (El Shawazaly)

       Agreed upon compensation is a clause present in the contract as agreed by both parties before the signing of the contract. Most of the contracts include these clauses as the parties prefer not to leave the judging of the compensation to the court (as it was stated before). According El Shawazaly the agreed upon compensation can be agreed upon prior to the contract or in a successive agreement (Egyptian law 223). The agreed upon compensation also requires that the injured party should have suffered losses or damages due to the breach of the contract. This method follows the same sequence of proving of breach as the previous method (Judicial compensation). Agreed upon compensation can take many forms. It can be as a lump sum value for non performance or as Liquidated damages a value for each day or other unit of time in cases of delay. Some times the liquidated damages are over estimated, and according to the deterrence concept the injured party should be compensated for the damages and it shouldn’t be used as a way to punish the wrongdoer. However, the Egyptian law 225 states that if the harm exceeds the value in the contract the breaching party is not entitled to any extra compensation, which is contradicting with the deterrence concept, which states that the damages should be equal to the harm caused.  

      Since this type of compensation is a part of the contract, it follows that by breaching the contract this kind of damages are not a possibility and the injured should return to the court for compensation. However there are some exceptions to this rule based on some agreements that a certain thing will stand as the compensation in case of breach. If the non-performance resulted in no harm to the non breaching party the breaching one is not entitled for damages.  

Interest rate: (Morkos 540)   

        This kind of damage is used when the performance required, by the breaching party, is paying an amount of money and that performance was delayed. The damages are usually calculated as a percentage of the amount that was delayed (interest). This damage usually ranges from 4-7 percent from the total amount and this percentage should be agreed upon in the contract. This kind of damage has many factors that should be satisfied first in order to be recoverable:

• The amount is fixed and know

• The damages can be recoverable only through court

• An assumption of the harm is needed

In this form only the assumption of the harm is needed (proof is not needed).

4 Special cases of compensatory damages:

Punitive damages (over compensatory):

        According to the concept of deterrence the damages should equal the amount of harm which was the base concept for compensation in the previous methods of damages. In this type the remedy is used to punish the wrongdoer in order to deter others from doing the same acts in future. “The traditional rule is that punitive damages are not recoverable in contracts cases unless a specific legal conditions (such as some consumer protection statutes) allows them or the defendant has committed fraud or some other independent tort”(Jane P. Mallor). This is because it is believed that penalties in contracts may push the promise to induce the promisor to breach. “A few states will permit the use of punitive damages in contracts in certain cases” (Jane P. Mallor)

• If the contracting party is a new entrant in the market (he gives the other contracting parties some confidence that he will do the work)

• If the breaching party has a good chance to escape from the harm he caused. (Jane P. Mallor)

Under compensatory damages: (Posner 162)

        This kind of remedies is contrary to the previous one, over compensatory, and it is based on placing the injured party in non favorable position on breach. By reducing the compensation the promise will be encouraged to provide help to the promisor in order to do the job. For example provide him with all the required information that could help him in doing the job.

        This concept of the under compensatory is based upon one of the factors stated for the losses to be recoverable which is that “Damages must be reasonably foreseeable at the time the contract was made”. This means that any unreasonable damages are not recoverable. For example, if X has a mill and a shaft was broken, X delivered the shaft to Y who was supposed to deliver it to the manufacturer to make a copy of it. Y delayed the delivery of the shaft beyond a reasonable time. X had not informed y that the delay will result in some loses to him. Thus, Y was not entitled to damages for X (Jane P. Mallor). By applying this rule a better communication between parties should develop which will increase the efficiency of applying the contract.

Summary and conclusion:

        The importance of contract remedies for the welfare of the market is increasing with world being as a global village. The most common remedy in Egypt is restitution because it is the easies to compute. If the restitution is not applicable the injured party should resolve to one of the kinds of the compensatory damages discussed. In other certain cases the best compensation can be proven to be the over/under compensatory damages although they a contradicting with the theory of deterrence. These kinds of compensation should be enforceable by law in order to be recoverable.

References:

• Hosny, Abdel Monoem. “A Brief Guide in the General Theory of Obligation.” The Lawyers’ Syndicate. Cairo: 1991
• Morkos, Soliman.” The Theory of Contracts part 2.” 5th edition. Cairo: 1988
• El Shawazaly, Abd EL Hamid. “The theory of obligation in light of judgment” 5th     edition. Cairo: 1996
• Jane P. Mallor, et al., “Business Law and the Regulatory Environment” 11th ed. 2001.