Damages General
Cases
Hadley v Baxendale
[1854] EWHC J70
Alderson B
Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract…
But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred, and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.”
Victoria Laundry (Windsor) v Newman Industries
[1949] 2 KB 528
Asquith LJ
‘1: It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed: (Sally Wertheim v..Chicoutimi Pulp Company [1911] AC 301. This purpose, if relentlessly pursued, would provide him with a complete indemnity for loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule : hence,
2: In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach,
3: What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.’ and
‘But to this knowledge, which a contract breaker is assumed to possess whether he actually possesses it or not [under the first rule] there may have to be added in a particular case knowledge which he actually possesses of special circumstances outside the ‘ordinary course of things’ of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the ‘second rule’ so as to make additional loss recoverable’.
Transfield Shipping Inc v Mercator Shipping Inc
[2008] UKHL 48 2008] 3 WLR 345, [2008] 4 All ER 159, [2009] AC 61, [2009] 1 AC 61, [2008] 2 All ER (Comm) 753
Lord Hoffmann
The question of principle has been extensively discussed in the literature. Recent articles by Adam Kramer (“An Agreement-Centred Approach to Remoteness and Contract Damages”) in Cohen and McKendrick (ed), Comparative Remedies for Breach of Contract (2004) pp 249-286 Andrew Tettenborn (“Hadley v Baxendale Foreseeability: a Principle Beyond its Sell-by Date”) in (2007) 23 Journal of Contract Law 120-147) and Andrew Robertson (“The basis of the remoteness rule in contract”) (2008) 28 Legal Studies 172-196) are particularly illuminating. They show that there is a good deal of support in the authorities and academic writings for the proposition that the extent of a party’s liability for damages is founded upon the interpretation of the particular contract; not upon the interpretation of any particular language in the contract, but (as in the case of an implied term) upon the interpretation of the contract as a whole, construed in its commercial setting. Professor Robertson considers this approach somewhat artificial, since there is seldom any helpful evidence about the extent of the risks the particular parties would have thought they were accepting. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v Irwin [1977] AC 239, 257-258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract.
It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.
The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price is paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing. And as Willes J said in British Columbia Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499, 508:
“I am disposed to take the narrow view, that one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.”
In their submissions to the House, the owners said that the “starting point” was that damages were designed to put the innocent party, so far as it is possible, in the position as if the contract had been performed: see Robinson v Harman (1848) 1 Exch 850, 855. However, in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191, 211, I said (with the concurrence of the other members of the House):
“I think that this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.”
In other words, one must first decide whether the loss for which compensation is sought is of a “kind” or “type” for which the contract-breaker ought fairly to be taken to have accepted responsibility. In the South Australia case the question was whether a valuer, who had (in breach of an implied term to exercise reasonable care and skill) negligently advised his client bank that property which it proposed to take as security for a loan was worth a good deal more than its actual market value, should be liable not only for losses attributable to the deficient security but also for further losses attributable to a fall in the property market. The House decided that he should not be liable for this kind of loss:
“In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.” (p 212)
What is true of an implied contractual duty (to take reasonable care in the valuation) is equally true of an express contractual duty (to redeliver the ship on the appointed day). In both cases, the consequences for which the contracting party will be liable are those which “the law regards as best giving effect to the express obligations assumed” and “[not] extending them so as to impose on the [contracting party] a liability greater than he could reasonably have thought he was undertaking”.
The effect of the South Australia case was to exclude from liability the damages attributable to a fall in the property market notwithstanding that those losses were foreseeable in the sense of being “not unlikely” (property values go down as well as up) and had been caused by the negligent valuation in the sense that, but for the valuation, the bank would not have lent at all and there was no evidence to show that it would have lost its money in some other way. It was excluded on the ground that it was outside the scope of the liability which the parties would reasonably have considered that the valuer was undertaking.
That seems to me in accordance with the careful way in which Robert Goff J stated the principle in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, 183, where the emphasis is upon what a reasonable person would have considered to be the extent of his responsibility:
“The test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.”
A similar approach was taken by the Court of Appeal in Mulvenna v Royal Bank of Scotland plc [2003] EWCA Civ 1112, mentioned by Professor Robertson in the article to which I have referred. This was an application to strike out a claim for damages for the loss of profits which the claimant said he would have made if the bank had complied with its agreement to provide him with funds for a property development. The Court of Appeal held that even on the assumption that the bank knew of the purpose for which the funds were required and that it was foreseeable that he would suffer loss of profit if he did not receive them, the damages were not recoverable. Sir Anthony Evans said:
“The authorities to which we were referred…demonstrate that the concept of reasonable foreseeability is not a complete guide to the circumstances in which damages are recoverable as a matter of law. Even if the loss was reasonably foreseeable as a consequence of the breach of duty in question (or of contract, for the same principles apply), it may nevertheless be regarded as ‘too remote a consequence’ or as not a consequence at all, and the damages claim is disallowed. In effect, the chain of consequences is cut off as a matter of law, either because it is regarded as unreasonable to impose liability for that consequence of the breach (The Pegase [1981] 1 Lloyd’s Rep 175 Robert Goff J), or because the scope of the duty is limited so as to exclude it (Banque Bruxelles SA v. Eagle Star [1997] AC 191), or because as a matter of commonsense the breach cannot be said to have caused the loss, although it may have provided the opportunity for it to occur…”
By way of explanation for why in such a case liability for lost profits is excluded, Professor Robertson (at p 183) offers what seem to me to be some plausible reasons:
“It may be considered unjust that the bank should be held liable for the loss of profits simply because the bank knew of the proposed development at the time the refinancing agreement was made. The imposition of such a burden on the bank may be considered unjust because it is inconsistent with commercial practice for a bank to accept such a risk in a transaction of this type, or because the quantum of the liability is disproportionate to the scale of the transaction or the benefit the bank stood to receive.”
It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale: see, for example, Staughton J in Transworld Oil Ltd v North Bay Shipping Corpn (The Rio Claro) [1987] Lloyd’s Rep 173, 175 and Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377. That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the South Australia and Mulvenna cases shows that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility.
What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would have reasonable have been regarded by the contracting party as significant for the purposes of the risk he was undertaking. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, where the plaintiffs claimed for loss of the profits from their laundry business because of late delivery of a boiler, the Court of Appeal did not regard “loss of profits from the laundry business” as a single type of loss. They distinguished (at p 543) losses from “particularly lucrative dyeing contracts” as a different type of loss which would only be recoverable if the defendant had sufficient knowledge of them to make it reasonable to attribute to him acceptance of liability for such losses. The vendor of the boilers would have regarded the profits on these contracts as a different and higher form of risk than the general risk of loss of profits by the laundry.
If, therefore, one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision for timely redelivery in the charterparty is to enable the ship to be at the full disposal of the owner from the redelivery date. If the charterer’s orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner’s arrangements for the next charter. That is regarded by the market is being, as the saying goes, res inter alios acta.
The findings of the majority arbitrators shows that they considered their decision to be contrary to what would have been the expectations of the parties, but dictated by the rules in Hadley v Baxendale as explained in The Heron II [1969] 1 AC 350. But in my opinion these rules are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them.
The owners submit that the question of whether the damage is too remote is a question of fact on which the arbitrators have found in their favour. It is true that the question of whether the damage was foreseeable is a question of fact: see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196. But the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law.
The owners say that the parties are entirely at liberty to insert an express term excluding consequential loss if they want to do so. Some standard forms of charter do. I suppose it can be said of many disputes over interpretation, especially over implied terms, that the parties could have used express words or at any rate expressed themselves more clearly than they have done. But, as I have indicated, the implication of a term as a matter of construction of the contract as a whole in its commercial context and the implication of the limits of damages liability seem to me to involve the application of essentially the same techniques of interpretation. In both cases, the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the trouble by using clearer language. In my opinion, the findings of the arbitrators and the commercial background to the agreement are sufficient to make it clear that the charterer cannot reasonably be regarded as having assumed the risk of the owner’s loss of profit on the following charter. I would therefore allow the appeal.
LORD HOPE OF CRAIGHEAD
The plaintiff has relied on two matters for the purpose of aggravating the damages to which he is entitled. In the first place, he said that the bank manager not only refused him the money to which he was entitled, but refused it contemptuously, and with contumely. Indeed, I have no doubt that the plaintiff was very badly treated indeed by the bank. In the second place, he urged that by reason of the first refusal he was subjected to great humiliation in raising money to pay his workmen. He had to pawn some of his personal belongings to raise part of the money, and he had to borrow part of it from a friend. These matters were greatly pressed upon us, and they evoke much sympathy with the plaintiff, but they are not matters which can be considered as elements of damages. It is very clearly settled, both in this country and in England, and affirmed in many cases, that in actions for breach of contract damages may not be given for such matters as disappointment of mind, humiliation, vexation, or the like, nor may exemplary or vindictive damages be awarded. See Breen v. Cooper (1); Hamlin v.Great Northern Railway (2); Addis v. Gramophone Co., Ltd. (3). I am not now, of course, referring to the three recognised anomaliesactions for breaches of promise of marriage, actions for dishonouring traders’ cheques, and a special class of actions for failure by a vendor to make title.
In the case of a breach of a simple contract to pay money, the law in this country, settled by a long line of authorities, is that the measure of damages is a reasonable compensation for non-performance of the contract, and that the amount of such compensation is to be arrived at by allowing interest on the money (which may vary in amount). See Fletcher v. Tayleur (4); British Columbia Sawmill Co. v. Nettleship (5); Prehn v. Royal Bank of Liverpool (6); Wallis v. Smith (7); In re English Bank of the River Plate, ex parte Bank of Brazil (8); South African Territories v. Wallington (9); Parker v. Dickie (10).
C Czarnikow Ltd v Koufos (The Heron II)
[1967] UKHL 4
(17 October 1967)
Lord Reid
my lords
By charter Party of 15th October, 1960 the Respondents chartered the
Appellant’s Vessel, Heron II, to proceed to Constanza, there to load a cargo
of 3,000 tons of sugar; and to carry it to Basrah, or, in the Charterer’s option,
to Jeddah. The vessel left Constanza on 1st November. The option was
not exercised and the vessel arrived at Basrah on 2nd December The Umpire
has found that ” a reasonably accurate prediction of the length of the voyage
” was twenty days “. But the vessel had in breach of contract made deviations
which caused a delay of nine days.
It was the intention of the Respondents to sell the sugar ” promptly after
” arrival at Basrah and after inspection by merchants “. The Appellant did
not know this but he was aware of the fact that there was a market for sugar
at Basrah. The sugar was in fact sold at Basrah in lots between 12th and 22nd
December but shortly before that time the market price had fallen partly by
reason of the arrival of another cargo of sugar. It was found by the Umpire
that if there had not been this delay of nine days the sugar would have fetched
£32 10s. Od. per ton. The actual price realised was only £31 2s. 9d. per ton.
The Respondents claim that they are entitled to recover the difference as
damage for breach of contract. The Appellant admits that he is liable to pay
interest for nine days on the value of the sugar and certain minor expenses but
denies that fall in market value can be taken into account in assessing damages
in this case.
McNair J., following the decision in The Parana L.R. 2 P.D. 118, decided
this question in favour of the Appellant. He said:
” In those circumstances it seems to me almost impossible to say that
” the shipowner must have known that the delay in prosecuting the
” voyage would probably result, or be likely to result, in this kind of loss.”
The Court of Appeal by a majority (Diplock and Salmon L.JJ., Sellers L.J.
dissenting) reversed the decision of the trial judge. The majority held that
The Parana laid down no general rule, and, applying the rule (or rules) in
Hadley and Another v. Baxendale and Others (1854) 9 Ex 341 as explained in
Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B 528,
they held that the loss due to fall in market price was not too remote to be
recoverable as damages.
It may be well first to set out the knowledge and intention of the
parties at the time of making the contract so far as relevant or argued to be
relevant. The Charterers intended to sell the sugar in the market at Basrah
on arrival of the vessel. They could have changed their mind and exercised
their option to have the sugar delivered at Jeddah but they did not do so.
There is no finding that they had in mind any particular date as the likely date
of arrival at Basrah or that they had any knowledge or expectation that in late
November or December there would be a rising or a falling market. The
shipowner was given no information about these matters by the Charterers.
He did not know what the Charterers intended to do with the sugar. But
he knew there was a market in sugar at Basrah, and it appears to me that,
if he had thought about the matter, he must have realised that at least it
was not unlikely that the sugar would be sold in the market at market
price on arrival. And he must be held to have known that in any ordinary
market prices are apt to fluctuate from day to day: but he had no reason
to suppose it more probable that during the relevant period such fluctuation
would be downwards rather than upwards—it was an even chance that the
fluctuation would be downwards.
So the question for decision is whether a plaintiff can recover as damages
for breach of contract a loss of a kind which the defendant, when he made
the contract, ought to have realised was not unlikely to result from a breach
of contract causing delay in delivery. I use the words ” not unlikely ” as
denoting a degree of probability considerably less than an even chance but
nevertheless not very unusual and easily foreseeable.
For over a century everyone has agreed that remoteness of damage in
contract must be determined by applying the rule (or rules) laid down by a
Court including Lord Wensleydale (then Parke B.), Martin B and Alderson B.
in Hadley v. Baxendale. But many different interpretations of that rule
have been adopted by judges at different times. So I think that one ought
first to see just what was decided in that case, because it would seem wrong
to attribute to that rule a meaning which, if it had been adopted in that
case, would have resulted in a contrary decision of that case.
In Hadley v. Baxendale the owners of a flour mill at Gloucester which
was driven by a steam engine delivered to common carriers, Pickford & Co.,
a broken crank shaft to be sent to engineers in Greenwich. A delay of
five days in delivery there was held to be in breach of contract and the
question at issue was the proper measure of damages. In fact the shaft
was sent as a pattern for a new shaft and until it arrived the mill could
not operate. So the owners claimed £300 as loss of profit for the five
days by which resumption of work was delayed by this breach of contract.
But the carriers did not know that delay would cause loss of this kind.
Alderson B. delivering the judgment of the Court said (at page 355) :
” We find that the only circumstances here communicated by the
” plaintiffs to the defendants at the time the contract was made were
” that the article to be carried was the broken shaft of a mill, and that
” the plaintiffs were the millers of that mill. But how do these circum-
” stances show reasonably that the profits of the mill must be stopped
” by an unreasonable delay in the delivery of the broken shaft by the
” carrier to the third person? Suppose the plaintiffs had another shaft
” in their possession put up or putting up at the time, and that they
” only wished to send back the broken shaft to the engineer who made
” it; it is clear that this would be quite consistent with the above
” circumstances, and yet the unreasonable delay in the delivery would
” have no effect upon the intermediate profits of the mill. Or, again,
” suppose that at the time of the delivery to the carrier the machinery
” of the mill had been in other respects defective, then also the same
” results would follow.”
Then, having said that in fact the loss of profit was caused by the delay,
he continued:
” But it is obvious that in the great multitude of cases of millers
” sending off broken shafts to third persons by a carrier’ under ordinary
” circumstances, such consequences would not, in all probability, have
” occurred.”
Alderson B. clearly did not and could not mean that it was not reasonably
foreseeable that delay might stop the resumption of work in the mill. He
merely said that in the great multitude—which I take to mean the great
majority—of cases this would not happen. He was not distinguishing
between results which were foreseeable or unforeseeable, but between
results which were likely because they would happen in the great majority
of cases, and results which were unlikely because they would only happen
in a small minority of cases. He continued:
” It follows, therefore, that the loss of profits here cannot reasonably
” be considered such a consequence of the breach of contract as could
” have been fairly and reasonably contemplated by both the parties
” when they made this contract.”
He clearly meant that a result which will happen in the great majority of
cases should fairly and reasonably be regarded as having been in the
contemplation of the parties, but that a result which, though foreseeable
as a substantial possibility, would only happen in a small minority of cases
should not be regarded as having been in their contemplation. He was
referring to such a result when he continued:
” For such loss would neither have flowed naturally from the breach
” of this contract in the great multitude of such cases occurring under
” ordinary circumstances, nor were the special circumstances, which
” perhaps would have made it a reasonable and natural consequence
” of such breach of contract, communicated to or known by the
” defendants.”
I have dealt with the latter part of the judgment before coming to the
well known rule because the Court were there applying the rule and the
language which was used in the latter part appears to me to throw consider-
able light on the meaning which they must have attached to the rather vague
expressions used in the rule itself. The rule is that the damages ” should
” be such as may fairly and reasonably be considered either arising naturally,
” i.e. according to the usual course of things from such breach of contract
” itself, or such as may reasonably be supposed to have been in the con-
” templation of both parties at the time they made the contract as the
” probable result of the breach of it”.
I do not think that it was intended that there were to be two rules
or that two different standards or tests were to be applied. The last two
passages which I quoted from the end of the judgment applied to the facts
before the Court which did not include any special circumstances communica-
ted to the defendants ; and the line of reasoning there is that because in
the great majority of cases loss of profit would not in all probability have
occurred, it followed that this could not reasonably be considered as having
been fairly and reasonably contemplated by both the parties, for it would
not have flowed naturally from the breach in the great majority of cases.
I am satisfied that the Court did not intend that every type of damage
which was reasonably foreseeable by the parties when the contract was made
should either be considered as arising naturally i.e. in the usual course of
things or be supposed to have been in the contemplation of the parties.
Indeed the decision makes it clear that a type of damage which was plainly
foreseeable as a real possibility but which would only occur in a small minority
of cases cannot be regarded as arising in the usual course of things or be
supposed to have been in the contemplation of the parties: the parties are
not supposed to contemplate as grounds for the recovery of damage any
type of loss or damage which on the knowledge available to the defendant
would appear to him as only likely to occur in a small minority of cases.
In cases like Hadley v. Baxendale or the present case it is not enough that
in fact the plaintiff’s loss was directly caused by the defendant’s breach of
contract. It clearly was so caused in both. The crucial question is whether,
on the information available to the defendant when the contract was made,
he should, or the reasonable man in his position would, have realised that
such loss was sufficiently likely to result from the breach of contract to make
it proper to hold that the loss flowed naturally from the breach or that loss
of that kind should have been within his contemplation.
The modern rule in tort is quite different and it imposes a much wider
liability. The defendant will be liable for any type of damage which is
reasonably foreseeable as liable to happen even in the most unusual case,
unless the risk is so small that a reasonable man would in the whole circum-
stances feel justified in neglecting it. And there is good reason for the
difference. In contract, if one party wishes to protect himself against a
risk which to the other party would appear unusual, he can direct the other
party’s attention to it before the contract is made, and I need not stop to
consider in what circumstances the other party will then be held to have
accepted responsibility in that event. But in tort there is no opportunity
for the injured party to protect himself in that way, and the tortfeasor cannot
reasonably complain if he has to pay for some very unusual but nevertheless
foreseeable damage which results from his wrongdoing. I have no doubt
that to-day a tortfeasor would be held liable for a type of damage as unlikely
as was the stoppage of Hadley’s Mill for lack of a crankshaft: to anyone
with the knowledge the carrier had that may have seemed unlikely but the
chance of it happening would have been seen to be far from negligible. But
it does not at all follow that Hadley v. Baxendale would to-day be differently
decided.
As long ago as 1872 Willes J. said in Home v. Midland Railway Co. L.R.
7 C.P. 583 at page 590:
” The cases as to the measure of damages for a tort do not apply
” to a case of contract. That was suggested in a case in Bulstrode but
” the notion was corrected in Hadley v. Baxendale. The damages are
” to be limited to those that are the natural and ordinary consequences
” which may be supposed to have been in the contemplation of the
” parties at the time of making the contract.”
And in Cory v. Thames Ironworks L.R. 3 Q.B. 181 Blackburn J said (at
page 190):
” I think it all comes to this: the measure of damages when a party
” has not fulfilled his contract is what might be reasonably expected
” in the ordinary course of things to flow from the non-fulfilment of the
” contract, not more than that, but what might be reasonably expected
” to flow from the non-fulfilment of the contract in the ordinary state of
” things, and to be the natural consequences of it. The reason why the
” damages are confined to that is, I think, pretty obvious, viz. that
” if the damage were exceptional and unnatural damage, to be made
” liable for that would be hard upon the seller because if he had known
” what the consequences would be he would probably have stipulated for
” more time or, at all events, have used greater exertions if he knew
” that that extreme mischief would follow from the non-fulfilment of
” his contract.”
It is true that in some later cases opinions were expressed that the measure
of damages is the same in tort as it is in contract, but those were generally
cases where it was sought to limit damages due for a tort and not cases where
it was sought to extend damages due for breach of contract, and I do
not recollect any case in which such opinions were based on a full con-
sideration of the matter. In my view these opinions must now be regarded
as erroneous.
For a considerable time there was a tendency to set narrow limits to
awards of damages. Such phrases were used as that the damage was
not ” the immediate and necessary effect of the breach of contract” (per
Cockburn C.J. in Hobbs v. The London and South Western Railway Com-
pany L.R. 10 Q.B. 111 at page 118). The Parana was decided during that
period. But later a more liberal tendency can be seen. I do not think it
useful to review the authorities in detail but I do attach importance to what
was said in this House in R. & H. Hall, Ltd. v. W. H. Pim (Junior)
& Co. Ltd. (1928) 33 Com. Cas. 324.
In that case Pim sold a cargo of wheat to Hall but failed to deliver it.
Hall had resold the wheat but as a result of Pim’s breach of contract lost
the profit which they would have made on their sub-sale. Three of their
Lordships dealt with the case on the basis that the relevant question was
whether it ought to have been in the contemplation of the parties that a
resale was probable. The finding of the arbitrators was:
” The arbitrators are unable to find that it was in the contemplation
” of the parties or ought to have been in the contemplation of Messrs.
” Pim at that time that the cargo would be resold or was likely to be
” resold before delivery: in fact, the chances of its being resold as a
” cargo and of its being taken delivery of by Messrs. Hall were about
” equal.”
On that finding the Court of Appeal had decided in favour of Pim, saying
that, as the arbitrators had stated as a fact that the chances of the cargo
being resold or not being resold were equal, it was therefore “idle to
” speak of a likelihood or of a probability of a resale “.
Lord Dunedin pointed out that it was for the Court to decide what was
to be supposed to have been in the contemplation of the parties, and then
said:
” I do not think that ‘ probability’ . . . means that the chances
” are all in favour of the event happening. To make a thing probable
” it is enough, in my view, that there is an even chance of its happening.
” That is the criterion I apply; and in view of the facts, as I have said
” above, I think there was here in the contemplation of parties the
” probability of a resale.”
He did not have to consider how much less than a fifty per cent chance would
amount to a probability in this sense.
Lord Shaw went rather farther. He said:
” To what extent in a contract of goods for future delivery the
” extent of damages is in contemplation of parties is always extremely
” doubtful. The main business fact is that they are thinking of the
” contract being performed and not of its being not performed. But
” with regard to the latter if their contract shows that there were
” instances or stages which made ensuing losses or damage a not un-
” likely result of the breach of the contract, then all such results must
” be reckoned to be within not only the scope of the contract, but the
” contemplation of parties as to its breach.”
Lord Phillimore was less definite and perhaps went even farther. He
said that the sellers of the wheat knew that the buyers ” might well sell it
” over again and make a profit on the resale ” ; and that being so they ” must
” be taken to have consented to this state of things and thereby to have
” made themselves liable to pay ” the profit on a resale.
It may be that there was nothing very new in this but I think that Hall’s
case must be taken to have established that damages are not to be regarded
as too remote merely because, on the knowledge available to the defendant
when the contract was made, the chance of the occurrence of the event which
caused the damage would have appeared to him to be rather less than an
even chance. I would agree with Lord Shaw that it is generally sufficient
that that event would have appeared to the defendant as not unlikely to occur.
It is hardly ever possible in this matter to assess probabilities with any
degree of mathematical accuracy. But I do not find in that case or in cases
which preceded it any warrant for regarding as within the contemplation
of the parties any event which would not have appeared to the defendant,
had he thought about it, to have a very substantial degree of probability.
But then it has been said that the liability of defendants has been further
extended by Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd.
[1949] 2 K.B. 528. I do not think so. The plaintiffs bought a large boiler
from the defendants and the defendants were aware of the general nature of
the plaintiffs’ business and of the plaintiffs’ intention to put the boiler into
use as soon as possible. Delivery of the boiler was delayed in breach of
contract and the plaintiffs claimed as damages loss of profit caused by the
delay. A large part of the profits claimed would have resulted from some
specially lucrative contracts which the plaintiffs could have completed if
they had had the boiler: that was rightly disallowed because the defendants
had no knowledge of these contracts. But Asquith L. J. then said:
” It does not however follow that the plaintiffs are precluded from
” recovering some general (and perhaps conjectural) sum for loss of
” business in respect of dyeing contracts to be reasonably expected, any
” more than in respect of laundering contracts to be reasonably
” expected.”
It appears to me that this was well justified on the earlier authorities. It
was certainly not unlikely on the information which the defendants had
when making the contract that delay in delivering the boiler would result
in loss of business: indeed it would seem that that was more than an even
chance. And there was nothing new in holding that damages should be
estimated on a conjectural basis. This House had approved of that as early
as 1813 in Hall v. Ross 1 Dow. 201.
But what is said to create a ” landmark ” is the statement of principles
by Asquith L. J. on pages 539-40. This does to some extent go beyond the
older authorities and in so far as it does so, I do not agree with it. In
paragraph (2) it is said that the plaintiff is entitled to recover ” such part
” of the loss actually resulting as was at the time of the contract reasonably
” foreseeable as liable to result from the breach “. To bring in reasonable
foreseeability appears to me to be confusing measure of damages in contract
with measure of damages in tort. A great many extremely unlikely results
are reasonably foreseeable: it is true that Lord Asquith may have meant
foreseeable as a likely result, and if that is all he meant I would not object
farther than to say that I think that the phrase is liable to be misunder-
stood. For the same reason I would take exception to the phrase ” liable
” to result” in paragraph (5). Liable is a very vague word but I think that
one would usually say that when a person foresees a very improbable result
he foresees that it is liable to happen.
I agree with the first half of paragraph (6). For the best part of a century
it has not been required that the defendant could have foreseen that a breach
of contract must necessarily result in the loss which has occurred. But I cannot
agree with the second half of that paragraph. It has never been held to be
sufficient in contract that the loss was foreseeable as ” a serious possibility “
or ” a real danger ” or as being ” on the cards “. It is on the cards that one can
win £100,000 or more for a stake of a few pence—several people have done
that. And anyone who backs a hundred to one chance regards a win as a
serious possibility—many people have won on such a chance. And the
Wagon Mound No. 2 [1966] 3 WLR 498 could not have been decided as it
was unless the extremely unlikely fire should have been foreseen by the ship’s
officer as a real danger. It appears to me that in the ordinary use of
language there is wide gulf between saying that some event is not unlikely or
quite likely to happen and saying merely that it is a serious possibility, a real
danger, or on the cards. Suppose one takes a well shuffled pack of cards, it
is quite likely or not unlikely that the top card will prove to be a diamond : the
odds are only 3 to 1 against. But most people would not say that it is quite
likely to be the nine of diamonds for the odds are then 51 to 1 against. On
the other hand I think that most people would say that there is a serious
possibility or a real danger of its being turned up first and of course it is on the
cards. If the tests of ” real danger ” or ” serious possibility ” are in future to
be authoritative then the Victoria Laundry case would indeed be a landmark
because it would mean that Hadley v. Baxendale would be differently decided
to-day. I certainly could not understand any Court deciding that, on the
information available to the carrier in that case, the stoppage of the mill was
neither a serious possibility nor a real danger. If those tests are to prevail in
future then let us cease to pay lip service to the rule in Hadley v. Baxendale.
But in my judgment to adopt these tests would extend liability for breach of
contract beyond what is reasonable or desirable. From the limited knowledge
which I have of commercial affairs I would not expect such an extension to be
welcomed by the business community and from the legal point of view I can
find little or nothing to recommend it.
Lord Asquith took the phrases ” real danger ” and ” serious possibility “
from the speech of Lord du Parcq in Monarch Steamship Co., Ltd. v.
Karlshamns Oljefabriken (A/B) [1949] AC 196 so I must examine that case.
The facts were complicated but it is sufficient to say that a voyage was
prolonged by breach of contract so that war broke out before it was completed,
and by reason of an embargo imposed on the outbreak of war the cargo owner
had to incur great expense in transshipping his goods and having them carried
to the contract destination The contract was made in April 1939. The
question was whether he was entitled to recover this expense as damages for
the breach of contract and that depended on whether the outbreak of war and
consequent embargo were or ought to have been within the contemplation of
the contracting parties in April, 1939. By that time war was much more than
merely a serious possibility. Lord Porter said (at page 219): ” Accepting the
” view that the appellants ought to have foreseen the likelihood of war
” occurring …”. Lord Wright said (at page 222) ” There was indeed in 1939
” the general fear that there might be a war . . . . The possibility must have been
” in the minds of both parties “. Lord Uthwatt said (at page 232) that a
reasonable shipowner ” would regard the chance of war, not as a possibility
” of academic interest to the venture, but as furnishing matter which commer-
” daily ought to be taken into account”. And Lord Morton said (at page 235)
that the shipowner ” would feel that there was a grave risk of war breaking out
” in Europe “. On those assessments of the situation holding that the damage
which flowed from the outbreak of war was not too remote to be recoverable
was well within the existing law.
I do not think that Lord du Parcq intended to say that his view was
materially different. Indeed he quoted from Sir Winston Churchill ” No one
” who understood the situation could doubt that it meant in all human proba-
” bility a major war in which we should be involved “. So there was no need
for him to go farther than the existing law and I do not think that he intended
to do so. It is only by taking these two phrases out of their context that any
such intention could be inferred
It appears to me that, without relying in any way on the Victoria Laundry
case, and taking the principle that had already been established, the loss of
profit claimed in this case was not too remote to be recoverable as damages.
So it remains to consider whether the decision in The Parana established a rule
which, though now anomalous, should nevertheless still be followed. In that
case owing to the defective state of the ship’s engines a voyage which ought to
have taken 65 to 70 days took 127 days, and as a result a cargo of hemp fetched
a much smaller price than it would have done if there had been no breach of
contract. But the Court of Appeal held that the plaintiffs could not recover
this loss as damages. The vital part of their judgment is on page 123:
” In order that damages may be recovered, we must come to two
” conclusions—first, that it was reasonably certain that the goods would
” not be sold until they did arrive; and secondly, that it was reasonably
” certain that they would be sold immediately after they arrived, and that
” that was known to the carrier at the time when the bills of lading were
” signed.”
If that was the right test then the decision was right, and I think that that
test was in line with a number of cases decided before or about that time (1877).
But, as I have already said, so strict a test has long been obsolete. And, if one
substitutes for ” reasonably certain ” the words ” not unlikely” or some
similar words denoting a much smaller degree of probability, then the whole
argument in the judgment collapses. I need not consider whether there were
other facts which might be held to justify the decision, but I must say that
I do not see why the mere duration of the voyage should make much difference.
If The Parana had always been regarded as laying down a rule so that
carriage by sea was to be treated as different from carriage by land, one
would have to consider whether it would be proper to alter a rule which
had stood for nearly a century. But in Dunn v. Bucknall Brothers [1902]
2 K.B. 614 it was held that there was no general rule that damages could
not be recovered by loss of market on a voyage by sea, and for special
reasons such damages have been awarded in a number of later cases. So,
whether The Parana is formally overruled or not. it cannot be relied on as
establishing a rule so as to require the present case to be decided in a way
inconsistent with the general law as it exists to-day.
Some importance was attached in argument to Slater v. Hoyle & Smith,
Ltd. [1920] 2 K.B. 11 and the earlier cases there cited. Those cases deal
with sale of goods, and I do not think it necessary or desirable in the present
case to consider what the rule there is, whether it conflicts with the general
principles now established as to measure of damages, or whether, if it does
it ought or ought not to stand. Those are much too important questions
to be decided obiter in the present case, and I refrain from expressing any
opinion about them.
For the reasons which I have given I would dismiss this appeal.
Robinson v Harman
(1848) 1 Ex Rep 850, 154 ER 363
Parke B
“ the rule of the common law is, that where a party sustains 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.
……
The rule must be discharged. The defendant contracted to grant a good and valid lease, and the learned judge was right in rejecting evidence which would go to alter the contract admitted by the plea.
The next question is, what damages is the plaintiff entitled to recover? 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. The case of Flureau v Thornhill qualified that rule of the common law. It was there held, that contracts for the sale of real estate are merely on condition that the vendor has a good title; so that, when a person contracts to sell real property, there is an implied understanding that, if he fail to make a good title, the only damages recoverable are the expenses which the vendee may be put to in investigating the title. The present case comes within the rule of the common law, and I am unable to distinguish it from Hopkins v Grazebrook.
”
Alderson B
“ I am of the same opinion. The damages have been assessed according to the general rule of law, that where a person makes a contract and breaks it, he must pay the whole damage sustained. Upon that general rule an exception was engrafted by the case of Flureau v Thornhill, and upon that exception the case of Hopkins v Grazebrook engrafted another exception. This case comes within the latter, by which the old common-law rule has been restored. Therefore the defendant, having undertaken to grant a valid lease, not having any colour of title, must pay the loss which the plaintiff has sustained by not having that for which he contracted. ”
Hoenig v Isaacs
[1952] EWCA Civ 6, 2 All ER 176
Denning LJ
“This case raises the familiar question: Was entire performance a condition precedent to payment? That depends on the true construction of the contract.
In this case the contract was made over a period of time and was partly oral and partly in writing, but I agree with the Official Referee that the essential terms were set down in the letter of 25th April, 1950. It describes the work which was to be done and concludes with these words:
“The foregoing, complete, for the sum of £750 nett. Terms of payment are nett cash, as the work proceeds; and balance on completion.”
The defendant paid £150 on 12th April, 1950, and another £150 on the 19th April, 1950. On 8th August, 1950, the plaintiffs said that they had carried out the work in absolute compliance with the contract and demanded payment of the balance of £450. On the 30th August, 1950, the defendant paid £100, but said that there were defects and omissions in the work and that he would call in someone else to make them good and deduct the cost from the plaintiffs’ bill. He did not do this but entered into occupation of the flat and used the furniture. The plaintiffs then brought this action for the balance of £350. They denied that there were any defects at all. The Official Referee found that there were defects in three of the items of furniture and that the cost of remedying them was £55.18s.2d. He deducted that sum from the £350 and gave judgment for the plaintiffs for £294.1s.l0d.
The question of law that was debated before us was whether the plaintiffs were entitled in this action to sue for the £350 balance of the contract price as they had done. The defendant said that they were only entitled to sue on a quantum meruit. The defendant was anxious to insist upon a quantum meruit, because he said that the contract price was unreasonably high. He wished therefore to reject that price altogether and to pay simply a reasonable price for all the work that was done. This would obviously mean an inquiry into the value of every item, including all the many items which were in compliance with the contract as well as the three which fell short of it. That is what the defendant wanted. The plaintiffs resisted this course and refused therefore to claim on a quantum meruit. They said that they were entitled to the balance of £350 less a deduction for the defects.
In determining this issue the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment.
When a contract provides for a specific sum to be paid on completion of specified work, the Courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is therefore construed as a term of the contract, but not as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or alternatively set them up in diminution of the price. The measure is the amount which the work is worth less by reason of the defects and omissions, and is usually calculated by the cost of making them good; see Mondel v Steel[1] and the notes to Cutter v Powell in the 13th Edition of Smith’s Leading Cases II., 19-21.
It is, of course, always open to the parties by express words to make entire performance a condition precedent. A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion. Then entire performance is usually a condition precedent to payment of the retention money, but not, of course, to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money: but he is not entitled to the retention money until the work is entirely finished, without defects or omissions.
In this case the contract provided for “nett cash as the work proceeds and balance on completion.” If the balance could be regarded as retention money, then it might well be that the contractor ought to have done all the work correctly, without defects or omissions, in order to be entitled to the balance. But I do not think the balance should be regarded as retention money. Retention money is usually only 10 per cent, or 15 per cent, whereas this balance was more than 50 per cent. I think this contract should be regarded as an ordinary lump sum contract. It was substantially performed. The contractor is entitled therefore to the contract price, less a deduction for the defects.
Even if entire performance was a condition precedent, nevertheless the result would be the same; because I think the condition was waived. It is always open to a party to waive a condition which is inserted for his benefit. What amounts to a waiver depends on the circumstances. If this was an entire contract, then when the plaintiff tendered the work to the defendant as being a fulfilment of the contract, the defendant could have refused to accept it until the defects were made good, in which case he would not have been liable for the balance of the price until they were made good. But he did not refuse to accept the work. On the contrary, he entered into possession of the flat and used the furniture as his own, including the defective items. That was a clear waiver of the condition precedent. Just as in a sale of goods, the buyer, who accepts the goods, can no longer treat a breach of condition as giving a right to reject but only a right to damages: so also in a contract for work and labour, an employer who takes the benefit of the work can no longer treat entire performance as a condition precedent, but only as a term giving rise to damages. The case becomes then an ordinary lump sum contract governed by the principles laid down in Mondel v Steel and Dakin v Lee. The employer must therefore pay the contract price subject to a deduction for defects or omissions.
I would point out that in these cases the question of quantum meruit only arises when there is a breach or failure of performance which goes to the very root of the matter. On any lump sum contract, if the work is not substantially performed and there has been a failure of performance which goes to the root of it, as, for instance, when the work has only been half done, or is entirely different in kind from that contracted for, then no action will lie for the lump sum. The contractor can then only succeed in getting paid for what he has done if it was the employer’s fault that the work was incomplete; or there is something to justify the conclusion that the parties have entered into a fresh contract: or the failure of performance is due to impossibility or frustration, see Appleby v Myers[2] and Sumpter v Hedges (1898) 1 Queen’s Bench 673, and section 1 (3) of the Frustrated Contracts Act 1943. In such cases the contractor can recover in an action for restitution such sum as he deserves, or in the words of the Act, “such sum as the Court considers just.” Those cases do not, however, apply in this case, because in this case the work has been substantially performed.
In my opinion the Official Referee was right and this appeal should be dismissed.”
Peevyhouse v. Garland Coal & Mining Co.
382 P.2d 109 (Okla. 1962), (USA Case)
The Supreme Court of Oklahoma
Justice Jackson.
“ In the trial court, plaintiffs Willie and Lucille Peevyhouse sued the defendant, Garland Coal and Mining Company, for damages for breach of contract. Judgment was for plaintiffs in an amount considerably less than was sued for. Plaintiffs appeal and defendant cross-appeals …
Briefly stated, the facts are as follows: plaintiffs owned a farm containing coal deposits, and in November 1954, leased the premises to defendant for a period of five years for coal mining purposes. A “strip-mining” operation was contemplated in which the coal would be taken from pits on the surface of the ground, instead of from underground mine shafts. In addition to the usual covenants found in a coal mining lease, defendant specifically agreed to perform certain restorative and remedial work at the end of the lease period. It is unnecessary to set out the details of the work to be done, other than to say that it would involve the moving of many thousands of cubic yards of dirt, at a cost estimated by expert witnesses at about $29,000.00. However, plaintiffs sued for only $25,000.00.
During the trial, it was stipulated that all covenants and agreements in the lease contract had been fully carried out by both parties, except the remedial work mentioned above; defendant conceded that this work had not been done.
Plaintiffs introduced expert testimony as to the amount and nature of the work to be done. Over plaintiffs’ objections, defendant thereafter introduced expert testimony as to the “diminution in value” of plaintiffs’ farm resulting from the failure of defendant to render performance as agreed in the contract?that is, the difference between the present value of the farm, and what its value would have been if defendant had done what it agreed to…
[The jury] returned a verdict for plaintiffs for $5,000.00 Only a fraction of the “cost of performance,” but more than the total value of the farm even after the remedial work is done.
On appeal, the issue is sharply drawn. Plaintiffs contend that the true measure of damages in this case is what it will cost plaintiffs to obtain performance of the work that was not done because of defendant’s default. Defendant argues that the measure of damages is the cost of performance “limited, however, to the total difference in the market value before and after the work was performed.”…
[If the remedial work were done said Justice Jackson, Peevyhouse’s farm’s market value increase only $300.]
We therefore hold that where, in a coal mining lease, lessee agrees to perform certain remedial work on the premises concerned at the end of the lease period, and thereafter the contract is fully performed by both parties except that the remedial work is not done, the measure of damages in an action by lessor against lessee for damages for breach of contact is ordinarily the reasonable cost of performance of the work; however, where the contract provision breached was merely incidental to the main purpose in view, and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because of the non-performance.
Under the most liberal view of the evidence herein, the diminution in value resulting to the premises because of non-performance of the remedial work was $300.00… It thus appears that the judgment was clearly excessive, and that the amount for which judgment should have been rendered is definitely and satisfactorily shown by the record.
”
Justices Welch, Davison, Halley and Johnson concurred. Chief Justice Williams, Blackbird VCJ, Berry J and Irwin J dissented. Justice Irwin’s dissent went as follows.
“ … Although the contract speaks for itself, there were several negotiations between the plaintiffs and defendant before the contract was executed. Defendant admitted in the trial of the action, that plaintiffs insisted the [remedial work provisions] be included in the contract and that they would not agree to the coal mining lease unless [those] provisions were included.
The cost for performing the contract in question could have been reasonably approximated when the contract was negotiated and executed, and there are no conditions now existing which could not have been reasonably anticipated by the parties. Therefore, defendant had knowledge, when it prevailed upon the plaintiffs to execute the lease, that the cost of performance might be disproportionate to the value or benefits received by plaintiff for the performance…
In the instant action defendant has made no attempt to even substantially perform. The contract in question is not immoral, is not tainted with fraud, and was not entered into through mistake or accident and is not contrary to public policy. It is clear and unambiguous and the parties understood the terms thereof, and the approximate cost of fulfilling the obligations could have been approximately ascertained. There are no conditions existing now which could not have been reasonably anticipated when the contract was negotiated and executed. The defendant could have performed the contract if it desired. It has accepted and reaped the benefits of its contract and now urges that plaintiffs under the contract be denied [their benefits from performance] …
Therefore, in my opinion, the plaintiffs were entitled to specific performance of the contract and since defendant has failed to perform, the proper measure of damages should be the cost of performance.”
Ruxley Electronics & Construction Ltd v Forsyth
[1995] UKHL 8
Lord Jaucey
My Lords, the respondent entered into a contract with the appellant for the construction by them of a swimming pool at his house in Kent. The contract provided for the pool having a maximum depth of 7 ft 6 in but, as built, its maximum depth was only 6 ft. The respondent sought to recover as damages for breach of contract the cost of demolition of the existing pool and construction of a new one of the required depth. The trial judge made the following findings which are relevant to this appeal: (1) the pool as constructed was perfectly safe to dive into; (2) there was no evidence that the shortfall in depth had decreased the value of the pool; (3) the only practicable method of achieving a pool of the required depth would be to demolish the existing pool and reconstruct a new one at a cost of £21,560; (4) he was not satisfied that the respondent intended to build a new pool at such a cost; (5) in addition such cost would be wholly disproportionate to the disadvantage of having a pool of a depth of only 6ft as opposed to 7 ft 6 in and it would therefore be unreasonable to carry out the works; and (6) that the respondent was entitled to damages for loss of amenity in the sum of £2,500. The Court of Appeal by a majority (Staughton and Mann LJ; Dillon LJ dissenting) ([1994] 3 All ER 801, [1994] 1 WLR 650) allowed the appeal, holding that the only way in which the respondent could achieve his contractual objective was by reconstructing the pool at a cost of £21,560 which was accordingly a reasonable venture.
The general principles applicable to the measure of damages for breach of contract are not in doubt. In a very well-known passage Parke B in Robinson v Harman (1848) 1 Exch 850 at 855, [1843-60] All ER Rep 383 at 385 said:
‘The next question is: What damages is the plaintiff entitled to recover? 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.’
In British Westing house Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 688-689, [1911-13] All ER Rep 63 at 69 Viscount Haldane LC said:
‘The quantum of damage is a question of fact, and the only guidance the law can give is to lay down general principles which afford at times but scanty assistance in dealing with particular cases … Subject to these observations I think that there are certain broad principles which are quite well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach …’
More recently, in what is generally accepted as the leading authority on the measure of damages for defective building work, Lord Cohen in East Ham BC v Bernard Sunley & Sons Ltd [1965] 3 All ER 619 at 630, [1966] AC 406 at 434-435 said:
‘… the learned editors of HUDSON’S BUILDING AND ENGINEERING CONTRACTS (8th edn, 1959) say, at p. 319, that there are in fact three possible bases of assessing damages, namely, (a) the cost of reinstatement; (b) the difference in cost to the builder of the actual work done and work specified; or (c) the diminution in value of the work due to the breach of contract. They go on (ibid.): “There is no doubt that wherever it is reasonable for the employer to insist upon re-in statement the courts will treat the cost of re-instatement as the measure of damage.” In the present case it could not be disputed that it was reasonable for the employers to insist on re-instatement and in these circumstances it necessarily follows that on the question of damage the trial judge arrived at the right conclusion.’
Lord Upjohn likewise stated that in a case of defective building work reinstatement was the normal measure of damages (see [1965] 3 All ER 619 at 637, [1966] AC 406 at 445). Mr McGuire QC for the appellant argued that the cost of reinstatement was only allowable where (1) the employer intended as a matter of probability to rebuild if damages were awarded, and (2) that it was reasonable as between him and the contractor so to do.
Since the judge had found against the respondent on both these matters the appeal should be allowed. Mr Jacob on the other hand maintained that reasonableness only arose at the stage when a real loss had been established to exist and that where that loss could only be met by damages assessed on one basis there was no room for consideration of reasonableness. Such was the case where a particular personal preference was part of the contractual objective—a situation which did not allow damages to be assessed on a diminution of value basis.
I start with the question of reasonableness in the context of reinstatement. There is a considerable body of authority dealing with this matter. Lord Cohen in the passage in East Ham BC v Bernard Sunley & Sons Ltd quoted above referred to the reasonableness of insisting on reinstatement. In Imodco Ltd v Wimpey Major Projects Ltd (1987) 40 BLR 1 at 19 Glidewell LJ stated that the cost of work to put pipes in the position contracted for would be recoverable if there was an intention to carry out the work and if it was reasonable so to do. In Minscombe Properties Ltd v Sir Alfred McAlpine & Sons Ltd (1986) 2 Const LJ 303 at 309 O’Connor LJ applied the test of reasonableness in determining whether the cost of reinstatement of land to its contracted for condition should be recoverable as damages. In Radford v De Froberville [1978] 1 All ER 33 at 54, [1977] 1 WLR 1262 at 1283 Oliver J said:
‘In the instant case, the plaintiff says in evidence that he wishes to carry out the work on his own land and there are, as it seems to me, three questions that I have to answer. First, am I satisfied on the evidence that the plaintiff has a genuine and serious intention of doing the work? Secondly, is the carrying out of the work on his own land a reasonable thing for the plaintiff to do? Thirdly, does it make any difference that the plaintiff is not personally in occupation of the land but desires to do the work for the benefit of his tenants?’
In C R Taylor {Wholesale) Ltd v Hepworths Ltd [1977] 2 All ER 784 at 791, [1977] 1 WLR 659 at 667 May J referred with approval to a statement in McGregor On Damages (13th edn, 1972) paras 1059-1061 that in deciding between diminution in value and cost of reinstatement the appropriate test was the reasonableness of the plaintiffs desire to reinstate the property and remarked that the damages to be awarded were to be reasonable as between plaintiff and defendant. He concluded that in the case before him to award the notional cost of reinstatement would be unreasonable since it would put the plaintiffs in a far better financial position then they would have been before the fire occurred (see [1977] 2 All ER 784 at 794, [1977] 1 WLR 659 at 670). In McGregor (15th edn, 1988) para 1092, after a reference to the cost of reinstatement being the normal measure of damages in a case of defective building, it is stated:
‘If, however, the cost of remedying the defect is disproportionate to the end to be attained, the damages fall to be measured by the value of the building had it been built as required by the contract less its value as it stands.’
In Bellgrove v Eldridge (1954) 90 CLR 613 at 617-618 the High Court of Australia in a judgment of the court, after referring with approval to the rule stated in Hudson on Building Contracts (7th edn, 1946) p 343 that—
The measure of the damages recoverable by the building owner for the breach of a building contract is … the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract
and referring to a number of cases supporting this proposition, continued:
‘In none of these cases is anything more done than that work which is required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part, or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the building owner’s loss. The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.’
A similar approach to reasonableness was adopted by Cardozo J delivering the judgment of the majority of the Court of Appeals of New York in Jacob & Youngs Inc v Kent (1921) 230 NY 239 at 244-245.
Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party, from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate. A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure. This was recognised by the High Court of Australia in the passage in Bellgrove v Eldridge cited above where it was stated that the cost of reinstatement work subject to the qualification of reasonableness was the extent of the loss, thereby treating reasonableness as a factor to be considered in determining what was that loss rather than, as the respondents argued, merely a factor in determining which of two alternative remedies were appropriate for a loss once established. Further support for this view is to be found in the following passage in the judgment of Megarry V-C in Tito v Waddell (No 2) [1977] 3 All ER 129 at 316, [1977] Ch 106 at 332:
‘Per contra, if the plaintiff has suffered little or no monetary loss in the reduction of value of his land, and he has no intention of applying any damages towards carrying out the work contracted for, or its equivalent, I cannot see why he should recover the cost of doing work which will never be done. It would be a mere pretence to say that this cost was a loss and so should be recoverable as damages.’
Megarry V-C was, as I understand it, there saying that it would be unreasonable to treat as a loss the cost of carrying out work which would never in fact be done. I take the example suggested during argument by my noble and learned friend Lord Bridge of Harwich. A man contracts for the building of a house and specifies that one of the lower courses of brick should be blue. The builder uses yellow brick instead. In all other respects the house conforms to the contractual specification. To replace the yellow bricks with blue would involve extensive demolition and reconstruction at a very large cost. It would clearly be unreasonable to award to the owner the cost of reconstructing because his loss was not the necessary cost of reconstruction of his house, which was entirely adequate for its design purpose, but merely the lack of aesthetic pleasure which he might have derived from the sight of blue bricks. Thus in the present appeal the respondent has acquired a perfectly serviceable swimming pool, albeit one lacking the specified depth. His loss is thus not the lack of a usable pool with consequent need to construct a new one. Indeed were he to receive the cost of building a new one and retain the existing one he would have recovered not compensation for loss but a very substantial gratuitous benefit, something which damages are not intended to provide.
What constitutes the aggrieved party’s loss is in every case a question of fact and degree. Where the contract breaker has entirely failed to achieve the contractual objective it may not be difficult to conclude that the loss is the necessary cost of achieving that objective. Thus if a building is constructed so defectively that it is of no use for its designed purpose the owner may have little difficulty in establishing that his loss is the necessary cost of reconstructing. Furthermore, in taking reasonableness into account in determining the extent of loss it is reasonableness in relation to the particular contract and not at large. Accordingly, if I contracted for the erection of a folly in my garden which shortly thereafter suffered a total collapse it would be irrelevant to the determination of my loss to argue that the erection of such a folly which contributed nothing to the value of my house was a crazy thing to do. As Oliver J said in Radford v De Froberville [1978] 1 All ER 33 at 42, [1977] 1 WLR 1262 at 1270:
‘If he contracts for the supply of that which he thinks serves his interests, be they commercial, aesthetic or merely eccentric, then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit.’
However, where the contractual objective has been achieved to a substantial extent the position may be very different.
It was submitted that where the objective of a building contract involved satisfaction of a personal preference the only measure of damages available for a breach involving failure to achieve such satisfaction was the cost of reinstatement. In my view this is not the case. Personal preference may well be a factor in reasonableness and hence in determining what loss has been suffered but it cannot per se be determinative of what that loss is. My Lords, the trial judge found that it would be unreasonable to incur the cost of demolishing the existing pool and building a new and deeper one. In so doing he implicitly recognised that the respondent’s loss did not extend to the cost of reinstatement. He was, in my view, entirely justified in reaching that conclusion. It therefore follows that the appeal must be allowed.
It only remains to mention two further matters. The appellant argued that the cost of reinstatement should only be allowed as damages where there was shown to be an intention on the part of the aggrieved party to carry out the work. Having already decided that the appeal should be allowed I no longer find it necessary to reach a conclusion on this matter. However, I should emphasise that in the normal case the court has no concern with the use to which a plaintiff puts an award of damages for a loss which has been established. Thus, irreparable damage to an article as a result of a breach of contract will entitle the owner to recover the value of the article irrespective of whether he intends to replace it with a similar one or to spend the money on something else. Intention, or lack of it, to reinstate can have relevance only to reasonableness and hence to the extent of the loss which has been sustained. Once that loss has been established intention as to the subsequent use of the damages ceases to be relevant.
The second matter relates to the award of £2,500 for loss of amenity made by the trial judge. The respondent argued that he erred in law in making such award. However, as the appellant did not challenge it, I find it unnecessary to express any opinion on the matter.
Lord LLoyd
Reasonableness
The starting point is Robinson v Harman (1848) 1 Exch 850 at 855 at 855, [1843-60] All ER Rep 383 at 385, where Parke B said:
‘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.’
This does not mean that in every case of breach of contract the plaintiff can obtain the monetary equivalent of specific performance. It is first necessary to ascertain the loss the plaintiff has in fact suffered by reason of the breach. If he has suffered no loss, as sometimes happens, he can recover no more than nominal damages. For the object of damages is always to compensate the plaintiff, not to punish the defendant. This was never more clearly stated than by Viscount Haldane LC in the first of the two broad principles which he formulated in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689, [1911-13] All ER Rep 63 at 69:
‘The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach …’
Note that Lord Haldane does not say that the plaintiff is always to be placed in the same situation physically as if the contract had been performed, but in as good a situation financially, so far as money can do it. This necessarily involves measuring the pecuniary loss which the plaintiff has in fact sustained.
In building cases, the pecuniary loss is almost always measured in one of two ways: either the difference in value of the work done or the cost of reinstatement. Where the cost of reinstatement is less than the difference in value, the measure of damages will invariably be the cost of reinstatement. By claiming the difference in value the plaintiff would be failing to take reasonable steps to mitigate his loss. In many ordinary cases, too, where reinstatement presents no special problem, the cost of reinstatement will be the obvious measure of damages, even where there is little or no difference in value, or where the difference in value is hard to assess. This is why it is often said that the cost of reinstatement is the ordinary measure of damages for defective performance under a building contract.
But it is not the only measure of damages. Sometimes it is the other way round. This was first made clear in the celebrated judgment of Cardozo J giving the majority opinion in the Court of Appeals of New York in Jacob & Youngs Inc v Kent (1921) 230 NY 239. In that case the building owner specified that the plumbing should be carried out with galvanised piping of ‘Reading manufacture’. By an oversight, the builder used piping of a different manufacture. The plaintiff builder sued for the balance of his account. The defendant, as in the instant case, counterclaimed the cost of replacing the pipework even though it would have meant demolishing a substantial part of the completed structure, at great expense. Cardozo J (at 243) pointed out that there is ‘no general license to install whatever, in the builder’s judgment, may be regarded as “just as good”‘. But he went on to consider the measure of damages in the following paragraph (at 244-245):
‘In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing … It is true that in most cases the cost of replacement is the measure … The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. “There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable”.’
Cardozo J’s judgment is important because it establishes two principles which I believe to be correct and which are directly relevant to the present case: first, the cost of reinstatement is not the appropriate measure of damages if the expenditure would be out of all proportion to the good to be obtained, and secondly, the appropriate measure of damages in such a case is the difference in value, even though it would result in a nominal award.
The first of these principles is contrary to Staughton LJ’s view that the plaintiff is entitled to reinstatement, however expensive, if there is no cheaper way of providing what the contract requires. The second principle is contrary to the whole thrust of Mr Jacob’s argument that the judge had no alternative but to award the cost of reinstatement, once it became apparent that the difference in value produced a nil result.
Next, chronologically, is a decision of the High Court of Australia. In Bellgrove v Eld ridge (1954) 90 CLR 613 the builder built a house with defective foundations, as a result of which the house was unstable. The building owner brought an action against the builder claiming the cost of reinstatement. His claim was upheld on the facts. But the statement of principle is instructive. Having said that the building owner is, as a general rule, entitled to have a building which conforms with the contract plans, the High Court continued (at 618-619):
‘The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt. No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks. In such circumstances the work of demolition and re-erection would be quite unreasonable or it would, to use a term current in the United States, constitute “economic waste” … We prefer, however, to think that the building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions “necessary” and “reasonable”, for the expression “economic waste” appears to us to go too far and would deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract. Many examples may, of course, be given of remedial work, which though necessary to produce conformity would not constitute a reasonable method of dealing with the situation and in such cases the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials. As to what remedial work is both “necessary” and “reasonable” in any particular case is a question of fact.’
Once again one finds the court emphasising the central importance of reasonableness in selecting the appropriate measure of damages. If reinstatement is not the reasonable way of dealing with the situation, then diminution in value, if any, is the true measure of the plaintiff’s loss. If there is no diminution in value, the plaintiff has suffered no loss. His damages will be nominal.
These principles are recognised in the leading English authority, East Ham BC v Bernard Sunley & Sons Ltd [1965] 3 All ER 619, [1966] AC 406. In that case stone panels which had been fixed to the external walls of a school fell off, owing to defective fixing by the contractor. It was held by this House that the contractor was liable for the cost of reinstating the stone panels, calculated at the date when the defect was discovered. Lord Cohen quoted with approval a passage in Hudson on Building and Engineering Contracts (8th edn, 1959) p 319:
‘There is no doubt that wherever it is reasonable for the employer to insist upon re-instatement the courts will treat the cost of re-instatement as the measure of damage.’ (See [1965] 3 All ER 619 at 630, [1966] AC 406 at 434.)
Lord Cohen continued:
‘In the present case it could not be disputed that it was reasonable for the employers to insist on reinstatement and in these circumstances it necessarily follows that on the question of damage the trial judge arrived at the right conclusion.’
There seems little doubt that if it had not been reasonable for the employer to insist on reinstatement, Lord Cohen would have chosen, as the alternative measure of damages, the diminution in value.
East Ham BC v Bernard Sunley & Sons Ltd has been followed in a number of subsequent cases. In G W Atkins Ltd v Scott (1980) 7 Const LJ 215 the building owner complained of some defective tiling. He claimed £1,229 as the cost of retiling the whole roof. The county court judge found that the tiling was defective, but that the defects were mostly cosmetic and of a minor character. He refused to give the plaintiff the cost of reinstatement, but awarded instead the sum of £250 as damages for bad workmanship. His reason, according to the Court of Appeal, was because he regarded the defects as not being very serious, and accordingly that it would be unreasonable to go to the expense of completely stripping the tiles. His decision was upheld by the Court of Appeal. Sir David Cairns said that the judge’s finding that it would be unreasonable to award the cost of reinstatement was not open to attack on appeal. He said (at 221):
‘[Counsel for the defendant] accepts that in some cases it would be grossly unreasonable, or capricious, or perverse, to suggest reinstatement and that in such a case some other basis of assessment must be found. I confess that I can see no reason in principle, nor any support in the authorities, for the proposition that the test is other than lack of reasonableness simpliciter …’
Ackner LJ said (at 221-222):
‘I accept that the court must have some regard for the predilections of the building owner, but that is only one of the factors. To take a wholly fanciful example; the half round tiles at the edge of the bath … were white. They did not match the tiles as they should have done. If, for the purpose of this argument, they could only have been removed and replaced by the removal of all the tiles in the bathroom at a cost of several hundred pounds, would it have been reasonable for the plaintiff to have required this to be done? [Counsel for the defendant] contends that his client is entitled to say, “I want what I bargained for. What you have done is unacceptable to me.” Such an approach seems to me to make his client the sole arbiter of what is “reasonable.”‘
Stephenson LJ agreed with both judgments.
Mr Jacob submits that the decision is erroneous, at least in so far as the court upheld the award of £250 general damages. But it seems to me that it is a well-reasoned authority that the cost of reinstatement is recoverable, but only if it is reasonable for the plaintiff to insist on that course. Otherwise the measure of damages will be the diminution in the value of the work.
One other very recent authority may be mentioned, although it is currently subject to appeal to your Lordships’ House. In Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 at 79 Steyn LJ said:
‘… in the case of a building contract, the prima facie rule is cost of cure, i.e., the cost of remedying the defect: East Ham Corporation v. Bernard Sunley & Sons Ltd. ([1965] 3 All ER 619, [1966] AC 406). But where the cost of remedying the defects involves expense out of all proportion to the benefit which could accrue from it, the court is entitled to adopt the alternative measure of difference of the value of the works …’
It seems to me that in the light of these authorities – and many other authorities cited were to the same effect, including CR Taylor (Wholesale) Ltd v Hepworths Ltd [1977] 2 All ER 784, [1977] 1 WLR 659, Minscombe Properties Ltd v Sir Alfred McAlpine & Sons Ltd (1986) 2 Const LJ 303 and leading textbooks both here and in the United States—Mr McGuire QC was right when he submitted, and Dillon LJ was right when he held, that mitigation is not the only area in which the concept of reasonableness has an impact on the law of damages.
If the court takes the view that it would be unreasonable for the plaintiff to insist on reinstatement, as where, for example, the expense of the work involved would be out of all proportion to the benefit to be obtained, then the plaintiff will be confined to the difference in value. If the judge had assessed the difference in value in the present case at, say, £5,000, I have little doubt that the Court of Appeal would have taken that figure rather than £21,560. The difficulty arises because the judge has, in the light of the expert evidence, assessed the difference in value as nil. But that cannot make reasonable what he has found to be unreasonable.
So I cannot accept that reasonableness is confined to the doctrine of mitigation. It has a wider impact, as indeed Mr Jacob himself accepted in the course of his argument and in his written case. I quote from para 15:
‘It is important to realise that when the plaintiff has come to court before taking any steps to rectify the position, the court is acting on the basis of a hypothetical situation. The plaintiff is awarded a sum of money to represent either the cost of cure or diminution whichever course the court considers reasonable in the circumstances of the case.’
How then does Mr Jacob seek to support the majority judgment? It can only be, I think, by attacking the judge’s finding of fact that the cost of rebuilding the pool would have been out of all proportion to the benefit to be obtained. Mr Jacob argues that this was not an ordinary commercial contract but a contract for a personal preference. This was the line taken by Mann LJ in the Court of Appeal. It was the way in which Phillips J distinguished the decision in the present case (by which he was bound) in Channel Island Ferries Ltd v Cenargo Navigation Ltd, The Rozel [1994] 2 Lloyd’s Rep 161 at 166-167, where he said:
‘It is always necessary to exercise the greatest care before applying the reasoning in one case to a different factual situation, and this is particularly true in the field of damages. The majority of the Court in Ruxley Electronics did not hold that a plaintiff can recover in damages the cost of remedial measures which are unreasonable. They held that, in the circumstances of that case it was not unreasonable for the plaintiff to spend the substantial sum necessary to have what he had contracted for. The test of what was reasonable had to have regard to his personal preference, as expressed in the depth of water that he had contractually required. This reasoning can be applied to a requirement which is incorporated in a contract as an end in itself, reflecting a personal preference of the contracting party. It does not apply where the contractual requirement is not an end in itself, but is inserted into a commercial contract because it has financial implications. If, in such a case, the contractual requirement is not met, the costs of remedial measures will not normally be recoverable as damages if they are disproportionate to the financial consequences of the breach. If that is the case it will not be reasonable to incur those costs. The damages recoverable will be those necessary to compensate for the financial consequences of the breach.’
I am far from saying that personal preferences are irrelevant when choosing the appropriate measure of damages (‘predilections’ was the word used by Ackner LJ in G W Atkins Ltd v Scott (1980) 7 Const LJ 215 at 221, adopting the language of Oliver J in Radford v De Froberville [1978] 1 All ER 33, [1977] 1 WLR 1262). But such cases should not be elevated into a separate category with special rules. If, to take an example mentioned in the course of argument, a landowner wishes to build a folly in his grounds, it is no answer to a claim for defective workmanship that many people might regard the presence of a well-built folly as reducing the value of the estate. The eccentric landowner is entitled to his whim, provided the cost of reinstatement is not unreasonable. But the difficulty of that line of argument in the present case is that the judge, as is clear from his judgment, took Mr Forsyth’s personal preferences and predilections into account.
Nevertheless, he found as a fact that the cost of reinstatement was unreasonable in the circumstances. The Court of Appeal ought not to have disturbed that finding.
Staughton LJ was much influenced by the decision in Radford v De Froberville. The defendant in that case was in breach of covenant to build a wall between two properties. The plaintiff claimed as damages the cost of building the wall on his own land. The defendant argued that a prefabricated fence would do just as well. Oliver J rejected that argument. He asked himself whether ‘the carrying out of the work on his own land [was] a reasonable thing for the plaintiff to do?’ He answered that question in favour of the plaintiff, and one can see why. It was a case that fell clearly on the other side of the factual line. It throws no light on the question of fact which the judge had to decide in the present case. Indeed, the question which Oliver J asked himself affords further support for Judge Diamond’s approach.
Finally, under this head, Mr Jacob argued that in order to arrive at a true figure for diminution in value, one should assume that Mr Forsyth had put his house on the market and bought another house identical in all respects save that it had a 7 ft 6 in swimming pool instead of a 6 ft 9 in swimming pool. Even though the value of the two properties might be the same, one should take into account the notional cost of moving from one house to the other, so as to arrive at a true comparison between diminution in value and the cost of reinstatement. On that view, so it was argued, the diminution in value would be greater than the cost of reinstatement, and not less; and by opting for reinstatement Mr Forsyth was mitigating his loss.
This argument seems to lose touch with reality. Nobody in their senses would move house in order to have the pleasure of diving into a deeper swimming pool. The analogy with defective chattels, such as a motor car, for which there is a ready market, is very strained. In any event, as Sir David Cairns pointed out in G WAtkins Ltd v Scott (1980) 7 Const LJ 215 at 220, it is not the diminution in the value of the freehold which provides the correct comparison, but the diminution in the value of the works, in this case a swimming pool.
I have confined my citation of authority to building cases, since that is the subject matter of the present dispute. But the principle that a plaintiff cannot always insist on being placed in the same physical position as if the contract had been performed, where to do so would be unreasonable, is not confined to building cases. In Sealace Shipping Co Ltd v Oceanvoice Ltd, The Alecos M [1991] 1 Lloyd’s Rep 120 there was a contract for the sale of a ship, including a spare propeller. When the ship was delivered there was no spare propeller. It was common ground that there was no market for secondhand propellers. So the only way of providing a spare propeller would have been to commission the manufacture of a new propeller at great expense. The arbitrator held that this would be unreasonable. Instead, he awarded the scrap value of the propeller, since that was all the buyer had actually lost by reason of the seller’s breach. The arbitrator’s decision was upheld in the Court of Appeal. Neill LJ said (at 125):
‘I can only read his award as meaning that he asked the question: what did these buyers really suffer as a result of the non-delivery of this spare propeller with this vessel? And he gave the answer: they lost its scrap value which in the circumstances was the only value which it had for them.’ Intention
I fully accept that the courts are not normally concerned with what a plaintiff does with his damages. But it does not follow that intention is not relevant to reasonableness, at least in those cases where the plaintiff does not intend to reinstate. Suppose in the present case Mr Forsyth had died, and the action had been continued by his executors. Is it to be supposed that they would be able to recover the cost of reinstatement, even though they intended to put the property on the market without delay?
There is, as Staughton LJ observed, a good deal of authority to the effect that intention may be relevant to a claim for damages based on cost of reinstatement. The clearest decisions on the point are those of Megarry V-C in Tito v Waddell (No 2) [1977] 3 All ER 129, [1977] Ch 106 and Oliver J in Radford v De Froberville [1978] 1 All ER 33, [1977] 1 WLR 1262. One of the many questions in the former case was whether the plaintiffs could recover the cost of replanting the plots of land in question, or whether the recovery of damages was limited to the difference in the market value of the land by reason of the work not having been done. Megarry V-C said ([1977] 3 All ER 129 at 316, [1977] Ch 106 at 332):
‘Again, some contracts for alterations to buildings, or for their demolition, might not, if carried out, enhance the market value of the land, and sometimes would reduce it. The tastes and desires of the owner may be wholly out of step with the ideas of those who constitute the market; yet I cannot see why eccentricity of taste should debar him from obtaining substantial damages unless he sues for specific performance. Per contra, if the plaintiff has suffered little or no monetary loss in the reduction of value of his land, and he has no intention of applying any damages towards carrying out the work contracted for, or its equivalent, I cannot see why he should recover the cost of doing work which will never be done. It would be a mere pretence to say that this cost was a loss and so should be recoverable as damages.’
In the present case the judge found as a fact that Mr Forsyth’s stated intention of rebuilding the pool would not persist for long after the litigation had been concluded. In these circumstances it would be ‘mere pretence’ to say that the cost of rebuilding the pool is the loss which he has in fact suffered. This is the critical distinction between the present case and the example given by Staughton LJ of a man who has had his watch stolen. In the latter case, the plaintiff is entitled to recover the value of the watch because that is the true measure of his loss. He can do what he wants with the damages. But if, as the judge found, Mr Forsyth had no intention of rebuilding the pool, he has lost nothing except the difference in value, if any.
The relevance of intention to the issue of reasonableness is expressly recognised by the respondent in his case. In para 37 Mr Jacob says:
‘The Respondent accepts that the genuineness of the parties’ indicated predilections can be a factor which the court must consider when deciding between alternative measures of damage. Where a plaintiff is contending for a high as opposed to a low cost measure of damages the court must decide whether in the circumstances of the particular case such high cost measure is reasonable. One of the factors that may be relevant is the genuineness of the plaintiff’s desire to pursue the course which involves the higher cost. Absence of such a desire (indicated by untruths about intention) may undermine the reasonableness of the higher cost measure.’
I can only say that I find myself in complete agreement with that approach, in contrast to the approach taken by the majority of the Court of Appeal.
Does Mr Forsyth’s undertaking to spend any damages which he may receive on rebuilding the pool make any difference? Clearly not. He cannot be allowed to create a loss which does not exist in order to punish the defendants for their breach of contract. The basic rule of damages, to which exemplary damages are the only exception, is that they are compensatory not punitive.
Loss of amenity
I turn last to the head of damages under which the judge awarded £2,500. I have already quoted the paragraph in which the judge justified his award. In the Court of Appeal Mr Forsyth sought to increase the award under this head.
According to Staughton LJ this led to an interesting argument. But the Court of Appeal did not find it necessary to deal with the point.
Before your Lordships, Mr Jacob abandoned the point altogether, for what Mr McGuire described as forensic reasons. It undermined the main theme of his argument that since difference in value gave Mr Forsyth nothing by way of damages, he must be entitled to the cost of reinstatement. So Mr Jacob was contending that the judge’s award of £2,500 was without precedent in the field of damages, and was fundamentally inconsistent with the decision of this House in Addis v Gramophone Co Ltd [1909] AC 488, [1908-10] All Rep 1. For obvious reasons, Mr McGuire did not press the contrary argument. So your Lordships are placed in something of a difficulty. The House does not have the benefit of the views of the Court of Appeal on the point, and the submissions before your Lordships have been artificially restricted.
Addis v Gramophone Co Ltd established the general rule that in claims for breach of contract, the plaintiff cannot recover damages for his injured feelings. But the rule, like most rules, is subject to exceptions. One of the well-established exceptions is when the object of the contract is to afford pleasure, as, for example, where the plaintiff has booked a holiday with a tour operator. If the tour operator is in breach of contract by failing to provide what the contract called for, the plaintiff may recover damages for his disappointment (see Jarvis v Swans Tours Ltd [1973] 1 All ER 71, [1973] QB 233 and Jackson v Horizon Holidays Ltd [1975] 3 All ER 92, [1975] 1 WLR 1468). This was, as I understand it, the principle which Judge Diamond applied in the present case. He took the view that the contract was one ‘for the provision of a pleasurable amenity’. In the event, Mr Forsyth’s pleasure was not so great as it would have been if the swimming pool had been 7 ft 6 in deep. This was a view which the judge was entitled to take. If it involves a further inroad on the rule in Addis v Gramophone Co Ltd then so be it. But I prefer to regard it as a logical application or adaptation of the existing exception to a new situation. I should, however, add this note of warning. Mr Forsyth was, I think, lucky to have obtained so large an award for his disappointed expectations. But as there was no criticism from any quarter as to the quantum of the award as distinct from the underlying principle, it would not be right for your Lordships to interfere with the judge’s figure. That leaves one last question for consideration. I have expressed agreement with the judge’s approach to damages based on loss of amenity on the facts of the present case. But in most cases such an approach would not be available. What is then to be the position where, in the case of a new house, the building does not conform in some minor respect to the contract, as, for example, where there is a difference in level between two rooms, necessitating a step? Suppose there is no measurable difference in value, and the cost of reinstatement would be prohibitive. Is there any reason why the court should not award by way of damages for breach of contract some modest sum, not based on difference in value, but solely to compensate the buyer for his disappointed expectations? Is the law of damages so inflexible, as I asked earlier, that it cannot find some middle ground in such a case? I do not give a final answer to that question in the present case. But it may be that it would have afforded an alternative ground for justifying the judge’s award of damages. And if the judge had wanted a precedent, he could have found it in Sir David Cairns’ judgment in G W Atkins Ltd v Scott 7 Const LJ 215, where, it will be remembered, the Court of Appeal upheld the judge’s award of £250 for defective tiling. Sir David Cairns said (at 221):
‘There are many circumstances where a judge has nothing but his commonsense to guide him in fixing the quantum of damages, for instance, for pain and suffering, for loss of pleasurable activities or for inconvenience of one kind or another.’
If it is accepted that the award of £2,500 should be upheld, then that at once disposes of Mr Jacob’s argument that Mr Forsyth is entitled to the cost of reinstatement, because he must be entitled to something. But even if he were entitled to nothing for loss of amenity, or for difference in value, it would not follow, as Mr Jacob argued, that he was entitled to the cost of reinstatement. There is no escape from the judge’s finding of fact that to insist on the cost of reinstatement in the circumstances of the present case was unreasonable. I would therefore allow the appeal and restore the judgment of Judge Diamond.
Appeal allowed.
Transfield Shipping Inc v Mercator Shipping Inc
[2008] UKHL 48 [2008] 2 Lloyd’s Rep 275, [2009] 1 AC 61, [2008] 3 WLR 345, [2008] 4 All ER 159, [2008] Bus LR 1395, [2009] AC 61, [2008] UKHL 48, [2008] 2 CLC 1, [2008] 2 All ER (Comm) 753
Lord Hoffman
The arbitrators, by a majority, found for the owners. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale (1854) 9 Exch 341, 354 as arising “naturally, ie according to the usual course of things, from such breach of contract itself”. It fell within that rule because it was damage “of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract [by delay in redelivery]”: see Lord Reid in C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, 382-383. The dissenting arbitrator did not deny that a charterer would have known that the owners would very likely enter into a following fixture during the course of the charter and that late delivery might cause them to lose it. But he said that a reasonable man in the position of the charterers would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period and “any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable.”
The majority arbitrators, in their turn, did not deny that the general understanding in the industry was that liability was so limited. They said (at para 17):
“The charterers submitted that if they had asked their lawyers or their Club what damages they would be liable for if the vessel was redelivered late, the answer would have been that they would be liable for the difference between the market rate and the charter rate for the period of the late delivery. We agree that lawyers would have given such an answer”.
But the majority said that this was irrelevant. A broker “in a commercial situation” would have said that the “not unlikely” results arising from late delivery would include missing dates for a subsequent fixture, a dry docking or the sale of the vessel. Therefore, as a matter of law, damages for loss of these types was recoverable. The understanding of shipping lawyers was wrong.
On appeal from the arbitrators, Christopher Clarke J [2007] 1 Lloyd’s Rep 19 and the Court of Appeal (Ward, Tuckey and Rix LJJ) [2007] 2 Lloyd’s Rep 555 upheld the majority decision. The case therefore raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable (“not unlikely”) an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?
Before I come to this point of principle, I should say something about the authorities upon which the understanding of shipping lawyers was based. There is no case in which the question now in issue has been raised. But that in itself may be significant. This cannot have been the first time that freight rates have been volatile. There must have been previous cases in which late redelivery caused the loss of a profitable following fixture. But there is no reported case in which such a claim has been made. Instead, there has been a uniform series of dicta over many years in which judges have said or assumed that the damages for late delivery are the difference between the charter rate and the market rate: see for examples Lord Denning MR in Alma Shipping Corpn of Monrovia v Mantovani (The Dione) [1975] 1 Lloyd’s Rep 115, 117-118; Lord Denning MR in Arta Shipping Co Ltd v Thai Europe Tapioca Service Ltd (The Johnny) [1977] 2 Lloyd’s Rep 1, 2; Bingham LJ in Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia) [1991] 1 Lloyd’s Rep 100, 118. Textbooks have said the same: see Scrutton on Charterparties 20th ed (1996), pp 348-349; Wilford and others Time Charters 5th ed (2003), at para 4.20. Nowhere is there a suggestion of even a theoretical possibility of damages for the loss of a following fixture.
The question of principle has been extensively discussed in the literature. Recent articles by Adam Kramer (“An Agreement-Centred Approach to Remoteness and Contract Damages”) in Cohen and McKendrick (ed), Comparative Remedies for Breach of Contract (2004) pp 249-286 Andrew Tettenborn (“Hadley v Baxendale Foreseeability: a Principle Beyond its Sell-by Date”) in (2007) 23 Journal of Contract Law 120-147) and Andrew Robertson (“The basis of the remoteness rule in contract”) (2008) 28 Legal Studies 172-196) are particularly illuminating. They show that there is a good deal of support in the authorities and academic writings for the proposition that the extent of a party’s liability for damages is founded upon the interpretation of the particular contract; not upon the interpretation of any particular language in the contract, but (as in the case of an implied term) upon the interpretation of the contract as a whole, construed in its commercial setting. Professor Robertson considers this approach somewhat artificial, since there is seldom any helpful evidence about the extent of the risks the particular parties would have thought they were accepting. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v Irwin [1977] AC 239, 257-258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract.
It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.
The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price is paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing. And as Willes J said in British Columbia Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499, 508:
“I am disposed to take the narrow view, that one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.”
In their submissions to the House, the owners said that the “starting point” was that damages were designed to put the innocent party, so far as it is possible, in the position as if the contract had been performed: see Robinson v Harman (1848) 1 Exch 850, 855. However, in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191, 211, I said (with the concurrence of the other members of the House):
“I think that this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.”
In other words, one must first decide whether the loss for which compensation is sought is of a “kind” or “type” for which the contract-breaker ought fairly to be taken to have accepted responsibility. In the South Australia case the question was whether a valuer, who had (in breach of an implied term to exercise reasonable care and skill) negligently advised his client bank that property which it proposed to take as security for a loan was worth a good deal more than its actual market value, should be liable not only for losses attributable to the deficient security but also for further losses attributable to a fall in the property market. The House decided that he should not be liable for this kind of loss:
“In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.” (p 212)
What is true of an implied contractual duty (to take reasonable care in the valuation) is equally true of an express contractual duty (to redeliver the ship on the appointed day). In both cases, the consequences for which the contracting party will be liable are those which “the law regards as best giving effect to the express obligations assumed” and “[not] extending them so as to impose on the [contracting party] a liability greater than he could reasonably have thought he was undertaking”.
The effect of the South Australia case was to exclude from liability the damages attributable to a fall in the property market notwithstanding that those losses were foreseeable in the sense of being “not unlikely” (property values go down as well as up) and had been caused by the negligent valuation in the sense that, but for the valuation, the bank would not have lent at all and there was no evidence to show that it would have lost its money in some other way. It was excluded on the ground that it was outside the scope of the liability which the parties would reasonably have considered that the valuer was undertaking.
That seems to me in accordance with the careful way in which Robert Goff J stated the principle in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, 183, where the emphasis is upon what a reasonable person would have considered to be the extent of his responsibility:
“The test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.”
A similar approach was taken by the Court of Appeal in Mulvenna v Royal Bank of Scotland plc [2003] EWCA Civ 1112, mentioned by Professor Robertson in the article to which I have referred. This was an application to strike out a claim for damages for the loss of profits which the claimant said he would have made if the bank had complied with its agreement to provide him with funds for a property development. The Court of Appeal held that even on the assumption that the bank knew of the purpose for which the funds were required and that it was foreseeable that he would suffer loss of profit if he did not receive them, the damages were not recoverable. Sir Anthony Evans said:
“The authorities to which we were referred…demonstrate that the concept of reasonable foreseeability is not a complete guide to the circumstances in which damages are recoverable as a matter of law. Even if the loss was reasonably foreseeable as a consequence of the breach of duty in question (or of contract, for the same principles apply), it may nevertheless be regarded as ‘too remote a consequence’ or as not a consequence at all, and the damages claim is disallowed. In effect, the chain of consequences is cut off as a matter of law, either because it is regarded as unreasonable to impose liability for that consequence of the breach (The Pegase [1981] 1 Lloyd’s Rep 175 Robert Goff J), or because the scope of the duty is limited so as to exclude it (Banque Bruxelles SA v. Eagle Star [1997] AC 191), or because as a matter of commonsense the breach cannot be said to have caused the loss, although it may have provided the opportunity for it to occur…”
By way of explanation for why in such a case liability for lost profits is excluded, Professor Robertson (at p 183) offers what seem to me to be some plausible reasons:
“It may be considered unjust that the bank should be held liable for the loss of profits simply because the bank knew of the proposed development at the time the refinancing agreement was made. The imposition of such a burden on the bank may be considered unjust because it is inconsistent with commercial practice for a bank to accept such a risk in a transaction of this type, or because the quantum of the liability is disproportionate to the scale of the transaction or the benefit the bank stood to receive.”
It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale: see, for example, Staughton J in Transworld Oil Ltd v North Bay Shipping Corpn (The Rio Claro) [1987] Lloyd’s Rep 173, 175 and Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377. That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the South Australia and Mulvenna cases shows that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility.
What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would have reasonable have been regarded by the contracting party as significant for the purposes of the risk he was undertaking. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, where the plaintiffs claimed for loss of the profits from their laundry business because of late delivery of a boiler, the Court of Appeal did not regard “loss of profits from the laundry business” as a single type of loss. They distinguished (at p 543) losses from “particularly lucrative dyeing contracts” as a different type of loss which would only be recoverable if the defendant had sufficient knowledge of them to make it reasonable to attribute to him acceptance of liability for such losses. The vendor of the boilers would have regarded the profits on these contracts as a different and higher form of risk than the general risk of loss of profits by the laundry.
If, therefore, one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision for timely redelivery in the charterparty is to enable the ship to be at the full disposal of the owner from the redelivery date. If the charterer’s orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner’s arrangements for the next charter. That is regarded by the market is being, as the saying goes, res inter alios acta.
The findings of the majority arbitrators shows that they considered their decision to be contrary to what would have been the expectations of the parties, but dictated by the rules in Hadley v Baxendale as explained in The Heron II [1969] 1 AC 350. But in my opinion these rules are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them.
The owners submit that the question of whether the damage is too remote is a question of fact on which the arbitrators have found in their favour. It is true that the question of whether the damage was foreseeable is a question of fact: see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196. But the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law.
The owners say that the parties are entirely at liberty to insert an express term excluding consequential loss if they want to do so. Some standard forms of charter do. I suppose it can be said of many disputes over interpretation, especially over implied terms, that the parties could have used express words or at any rate expressed themselves more clearly than they have done. But, as I have indicated, the implication of a term as a matter of construction of the contract as a whole in its commercial context and the implication of the limits of damages liability seem to me to involve the application of essentially the same techniques of interpretation. In both cases, the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the trouble by using clearer language. In my opinion, the findings of the arbitrators and the commercial background to the agreement are sufficient to make it clear that the charterer cannot reasonably be regarded as having assumed the risk of the owner’s loss of profit on the following charter. I would therefore allow the appeal.
Lord Rodger
Today, as for more than 150 years, the starting-point for determining the measure of damages for breach of contract is the judgment of Alderson B in Hadley v Baxendale (1854) 9 Exch 341. The story is well known. The plaintiff owners of a flour mill in Gloucester arranged for the defendant common carriers (the firm of Pickfords) to take their broken mill shaft to a firm in Greenwich which was to use it as a pattern to produce a new shaft. Unknown to the defendants – as the court held – the plaintiffs had no other shaft and so could not operate their mill until they got the new one. In breach of contract, the defendants delayed in transporting the broken shaft. The plaintiffs sued the defendants for the profits which they lost from being unable to operate their mill during the period of delay. The Court of Exchequer held that they could not recover the loss of profits.
Frequently only one sentence from the judgment of Alderson B is quoted as enshrining the principle with which the case is synonymous. But it is preferable to have regard to slightly more of what Alderson B said, at pp 354-355:
“Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i e, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract.”
It was by referring back to the language of the third sentence in this passage that Alderson B went on to hold, at p 356, that, in the circumstances, the defendants were not liable for the loss of profits:
“But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred, and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.”
The entire passage containing the applicable principles was quoted with approval by Viscount Sankey LC in Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, 474-475. In Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196, 221, Lord Wright identified the distinction drawn by Alderson B as being “between damages arising naturally (which means in the normal course of things), and cases where there were special and extraordinary circumstances beyond the reasonable prevision of the parties…” Like Lord Hodson in C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, 411A-C, I find guidance in Alderson B’s use of the expression “in the great multitude of cases”. In the words of Lord Hodson, it indicates
“that the damages recoverable for breach of contract are such as flow naturally in most cases from the breach, whether under ordinary circumstances or from special circumstances due to the knowledge either in the possession of or communicated to the defendants. This expression throws light on the whole field of damages for breach of contract and points to a different approach from that taken in tort cases.”
The same idea is, of course, to be found, more compactly, in other well-known statements by celebrated commercial judges. For example, in Horne v Midland Railway Co (1872) LR 7 CP 583, 590, Willes J said that, in contract, “damages are to be limited to those that are the natural and ordinary consequences” of the breach, while in Cory v Thames Ironworks Co (1868) LR 3 QB 181, 190, Blackburn J said that the measure of damages is “what might be reasonably expected in the ordinary course of things to flow from the non-fulfilment of the contract, not more than that …”
In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539-540, Asquith LJ explained that “Everyone, as a reasonable person, is taken to know the ‘ordinary course of things’ and consequently what loss is liable to result from a breach of contract in that ordinary course.” He went on to say that, for loss to be recoverable, the defendant did not need to foresee that a breach must necessarily result in that loss: “It is in enough if he could foresee it was likely so to result. It is indeed enough, to borrow from the language of Lord du Parcq in the [Monarch Steamship] case, at p 158, if the loss (or some factor without which it would not have occurred) is a ‘serious possibility’ or a ‘real danger.’ For short, we have used the word ‘liable’ to result.”
As Lord Reid pointed out in The Heron II [1969] 1 AC 350, 389E-G, by referring to foreseeability, Asquith LJ cannot have been intending to assimilate the measure of damages in contract and tort. Moreover, there might appear to be a certain tension between the idea that, to be recoverable, a loss must be something which would result from the breach in the ordinary course and the idea that it is enough that the loss is just something which is liable to result. Lord Reid therefore surmised that Asquith LJ might have meant that the loss was foreseeable as a likely result. That appears to be an appropriate way of reconciling the two aspects of Asquith LJ’s opinion. In any event, amidst a cascade of different expressions, it is important not to lose sight of the basic point that, in the absence of special knowledge, a party entering into a contract can only be supposed to contemplate the losses which are likely to result from the breach in question – in other words, those losses which will generally happen in the ordinary course of things if the breach occurs. Those are the losses for which the party in breach is held responsible – the stated rationale being that, other losses not having been in contemplation, the parties had no opportunity to provide for them.
In the present case, the arbitrators found that – as conceded by counsel then acting for the charterers – missing a date for a subsequent fixture was a “not unlikely” result of the late redelivery of a vessel. That concession has been criticised elsewhere, but the House must proceed on the basis that, when they entered into the addendum, the parties could reasonably have contemplated that it was not unlikely that the owners would miss a date for a subsequent fixture if the Achilleas were redelivered late. The majority of the arbitrators also found that, at the time of contracting, the parties, who were both engaged in the business of shipping, would have known that market rates for tonnage go up and down, sometimes quite rapidly. Nevertheless, as Rix LJ himself pointed out [2007] 2 Lloyd’s Rep 555, 577, para 120 – when seeking to combat any criticism that the Court of Appeal’s decision would throw the situation in general into confusion because late redelivery and changing market conditions are common occurrences – “It requires extremely volatile market conditions to create the situation which occurred here.” In other words, the extent of the relevant rise and fall in the market within a short time was actually unusual. The owners’ loss stemmed from that unusual occurrence.
The obligation of the charterers was to redeliver the vessel to the owners by midnight on 2 May. Therefore, the charterers are taken to have had in contemplation, at the time when they entered into the addendum, the loss which would generally happen in the ordinary course of things if the vessel were delivered some nine days late so that the owners missed the cancelling date for a follow-on fixture. Obviously, that would include loss suffered as a result of the owners not having been paid under the contract for the charterers’ use of the vessel for the period after midnight on 2 May. So, as both sides agree, the owners had to be compensated for that loss by the payment of damages. But the parties would also have contemplated that, if the owners lost a fixture, they would then be in a position to enter the market for a substitute fixture. Of course, in some cases, the available market rate would be lower and, in some cases, higher, than the rate under the lost fixture. But the parties would reasonably contemplate that, for the most part, the availability of the market would protect the owners if they lost a fixture. That I understand to be the thinking which lies behind the dicta to the effect that the appropriate measure of damages for late redelivery of a vessel is the difference between the charter rate and the market rate if the market rate is higher than the charter rate for the period between the final terminal date and redelivery: Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia) [1991] 1 Lloyd’s Rep 100, 108. In that passage Bingham LJ was adopting the approach which had been indicated in earlier authorities: Alma Shipping Corpn of Monrovia v Mantovani (The Dione) [1975] 1 Lloyd’s Rep 115, 117-118, per Lord Denning MR, and Arta Shipping Co Ltd v Thai Europe Tapioca Service Ltd (The Johnny) [1977] 2 Lloyd’s Rep 1, 2, per Lord Denning MR.
More particularly, this understanding of the general position lies behind the observations of Lord Mustill in Torvald Klaveness A/S v Arni Maritime Corpn (The Gregos) [1995] 1 Lloyd’s Rep 1. In that case, when the charterers insisted on proceeding with a voyage which had become illegitimate by the time it was due to commence, the owners refused. The owners began to negotiate a replacement fixture with a concern named Navios, involving a higher rate of freight plus a bonus. In the event, the parties to the original charter-party reached a without prejudice agreement under which the owners would perform the voyage and, if in subsequent proceedings it were held that they had been justified in refusing to perform it, they would be entitled to a sum reflecting the difference between the chartered rate of hire and the more advantageous terms of the proposed substitute fixture with Navios. The sum in question was roughly US$300,000.
In these circumstances the House did not need to deal with the measure of damages in a case of late redelivery. Nevertheless, Lord Mustill said that the obligation of the charterers was to redeliver the vessel on or before the final date or to pay damages for breach of contract. He added [1995] 1 Lloyd’s Rep 1, 5, “On damages, see … The Peonia….” – so endorsing, en passant, what Bingham LJ had said in that case.
In the Court of Appeal in The Gregos Hirst LJ had drawn attention to what he described as “the charterers’ windfall damages” under the without prejudice agreement by comparison with the damages which would have been awarded simply in respect of a few days’ late redelivery: [1993] 2 Lloyd’s Rep 335, 348. Lord Mustill said this [1995] 1 Lloyd’s Rep 1, 10:
“At first sight, this apparently anomalous result is a good reason for questioning whether the claim for repudiation was soundly based. On closer examination, however, the anomaly consists, not so much in the size of the damages, but in the fact that damages were awarded at all. Imagine that the without prejudice agreement had not been made, and that the owners, having treated the charter as wrongfully repudiated, had accepted a substitute fixture with Navios. If one then asked what loss had the repudiation caused the owners to suffer, the answer would be – None. On the contrary, the charterers’ wrongful act would have enabled the owners to make a profit. Even if they had not accepted the substitute employment they might very well have suffered no loss, since they would have been in the favourable position of having their ship free in the right place at the right time to take a spot fixture on a rising market. In neither event would the owners ordinarily recover any damages for the wrongful repudiation.”
The implication from this passage is that, ordinarily, the appropriate measure of damages will be that set out by Bingham LJ in The Peonia, since owners will be able to obtain substitute employment for their vessel.
I would enter two caveats. First, it may be that, at least in some cases, when concluding a charter-party, a charterer could reasonably contemplate that late delivery of a vessel of that particular type, in a certain area of the world, at a certain season of the year would mean that the market for its services would be poor. In these circumstances, the owners might have a claim for some general sum for loss of business, somewhat along the line of the damages for the loss of business envisaged by the Court of Appeal in Victoria Laundry (Windsor)Ltd v Newman Industries Ltd [1949] 2 KB 528, 542-543. Because of the agreement on figures, the matter was not explored in this case and I express no view on it. But, even if some such loss of business could have been reasonably contemplated, as Victoria Laundry shows, this would not mean that the owners’ particular loss of profit as a result of the re-negotiation of the Cargill fixture should be recoverable. To hold otherwise would risk undermining the first limb of Hadley v Baxendale, which limits the charterers’ liability to “the amount of injury” that would arise “ordinarily” or “generally”.
Secondly, the position on damages might also be different, if, for example – when a charter-party was entered into – the owners drew the charterers’ attention to the existence of a forward charter of many months’ duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under that charter would be liable to result in the loss of that fixture. Then the second rule or limb in Hadley v Baxendale might well come into play. But the point does not arise in this case.
Returning to the present case, I am satisfied that, when they entered into the addendum in September 2003, neither party would reasonably have contemplated that an overrun of nine days would “in the ordinary course of things” cause the owners the kind of loss for which they claim damages. That loss was not the “ordinary consequence” of a breach of that kind. It occurred in this case only because of the extremely volatile market conditions which produced both the owners’ initial (particularly lucrative) transaction, with a third party, and the subsequent pressure on the owners to accept a lower rate for that fixture. Back in September 2003, this loss could not have been reasonably foreseen as being likely to arise out of the delay in question. It was, accordingly, too remote to give rise to a claim for damages for breach of contract.
Rix LJ objects, [2007] 2 Lloyd’s Rep 555, 577, para 119, that such an approach is uncommercial because to demand that, before the charterers are held liable, they would need to know more than they already do in the ordinary course of events, is to demand something that cannot be provided. But that is simply to criticise the long-standing rule of the English law of contract under which a party is not liable for this kind of loss, precisely because it arises out of unusual circumstances which are not – indeed, cannot be – within the contemplation of the parties when they enter into the contract. In any event, it would not, in my view, make good commercial sense to hold a charterer liable for such a potentially extensive loss which neither party could quantify at the time of contracting.
Rix LJ also describes the charterers as “happily [draining] the last drop and more of profit at a time of raised market rates”: [2007] 2 Lloyd’s Rep 555, 577, para 119. But, in reality, at the outset the sub-contract and the final voyage amounted to nothing more than a legitimate use of the vessel which the charterers had hired until 2 May and for which they were paying the owners the agreed daily rate. The delay which led to the breach of contract was caused by supervening circumstances over which the charterers had no control. The charterers’ legitimate actions under their contract provide no commercial or legal justification for fixing them with liability for the owners’ loss of profit, due to the effects of an “extremely volatile market” in relation to an arrangement with a third party about which the charterers knew nothing.
I have not found it necessary to explore the issues concerning South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 and assumption of responsibility, which my noble and learned friend, Lord Hoffmann, has raised. Nevertheless, I am otherwise in substantial agreement with his reasons as well as with those to be given by Lord Walker of Gestingthorpe. I would allow the appeal.
Co-operative Insurance Society Ltd v. Argyll Stores
[1997] UKHL 17; [1998] AC 1; [1997] All ER 297; [1997] 2 WLR 898 (21 May 1997)
Lord Hoffman
4. The Settled Practice
There is no dispute about the existence of the settled practice to which the judge referred. It sufficient for this purpose to refer to Braddon Towers Ltd. v. International Stores Ltd. [1987] 1 E.G.L.R. 209, 213, where Slade J. said:
“Whether or not this may be properly described as a rule of law, I do not doubt that for many years practitioners have advised their clients that it is the settled and invariable practice of this court never to grant mandatory injunctions requiring persons to carry on business.”
But the practice has never, so far as I know, been examined by this House and it is open to the respondents to say that it rests upon inadequate grounds or that it has been too inflexibly applied.
Specific performance is traditionally regarded in English law as an exceptional remedy, as opposed to the common law damages to which a successful plaintiff is entitled as of right. There may have been some element of later rationalisation of an untidier history, but by the nineteenth century it was orthodox doctrine that the power to decree specific performance was part of the discretionary jurisdiction of the Court of Chancery to do justice in cases in which the remedies available at common law were inadequate. This is the basis of the general principle that specific performance will not be ordered when damages are an adequate remedy. By contrast, in countries with legal systems based on civil law, such as France, Germany and Scotland, the plaintiff is prima facie entitled to specific performance. The cases in which he is confined to a claim for damages are regarded as the exceptions. In practice, however, there is less difference between common law and civilian systems than these general statements might lead one to suppose. The principles upon which English judges exercise the discretion to grant specific performance are reasonably well settled and depend upon a number of considerations, mostly of a practical nature, which are of very general application. I have made no investigation of civilian systems, but a priori I would expect that judges take much the same matters into account in deciding whether specific performance would be inappropriate in a particular case.
The practice of not ordering a defendant to carry on a business is not entirely dependent upon damages being an adequate remedy. In Dowty Boulton Paul Ltd. v. Wolverhampton Corporation [1971] 1 W.L.R. 204, Pennycuick V.-C. refused to order the corporation to maintain an airfield as a going concern because (at p. 211) “It is very well established that the court will not order specific performance of an obligation to carry on a business.” He added (at p. 212): “It is unnecessary in the circumstances to discuss whether damages would be an adequate remedy to the company.” Thus the reasons which underlie the established practice may justify a refusal of specific performance even when damages are not an adequate remedy.
The most frequent reason given in the cases for declining to order someone to carry on a business is that it would require constant supervision by the court. In J. C. Williamson Ltd. v. Lukey and Mulholland (1931) 45 C.L.R. 282, 297-298, Dixon J. said flatly “Specific performance is inapplicable when the continued supervision of the Court is necessary in order to ensure the fulfilment of the contract.”
There has, I think, been some misunderstanding about what is meant by continued superintendence. It may at first sight suggest that the judge (or some other officer of the court) would literally have to supervise the execution of the order. In C. H. Giles & Co. v. Morris [1972] 1 W.L.R. 307, 318 Megarry J. said that “difficulties of constant superintendence” were a “narrow consideration” because:
“there is normally no question of the court having to send its officers to supervise the performance of the order . . . . Performance . . . is normally secured by the realisation of the person enjoined that he is liable to be punished for contempt if evidence of his disobedience to the order is put before the court; . . .”
This is, of course, true but does not really meet the point. The judges who have said that the need for constant supervision was an objection to such orders were no doubt well aware that supervision would in practice take the form of rulings by the court, on application made by the parties, as to whether there had been a breach of the order. It is the possibility of the court having to give an indefinite series of such rulings in order to ensure the execution of the order which has been regarded as undesirable.
Why should this be so? A principal reason is that, as Megarry J. pointed out in the passage to which I have referred, the only means available to the court to enforce its order is the quasi-criminal procedure of punishment for contempt. This is a powerful weapon; so powerful, in fact, as often to be unsuitable as an instrument for adjudicating upon the disputes which may arise over whether a business is being run in accordance with the terms of the court’s order. The heavy-handed nature of the enforcement mechanism is a consideration which may go to the exercise of the court’s discretion in other cases as well, but its use to compel the running of a business is perhaps the paradigm case of its disadvantages and it is in this context that I shall discuss them.
The prospect of committal or even a fine, with the damage to commercial reputation which will be caused by a finding of contempt of court, is likely to have at least two undesirable consequences. First, the defendant, who ex hypothesi did not think that it was in his economic interest to run the business at all, now has to make decisions under a sword of Damocles which may descend if the way the business is run does not conform to the terms of the order. This is, as one might say, no way to run a business. In this case the Court of Appeal made light of the point because it assumed that, once the defendant had been ordered to run the business, self-interest and compliance with the order would thereafter go hand in hand. But, as I shall explain, this is not necessarily true.
Secondly, the seriousness of a finding of contempt for the defendant means that any application to enforce the order is likely to be a heavy and expensive piece of litigation. The possibility of repeated applications over a period of time means that, in comparison with a once-and-for-all inquiry as to damages, the enforcement of the remedy is likely to be expensive in terms of cost to the parties and the resources of the judicial system.
This is a convenient point at which to distinguish between orders which require a defendant to carry on an activity, such as running a business over or more or less extended period of time, and orders which require him to achieve a result. The possibility of repeated applications for rulings on compliance with the order which arises in the former case does not exist to anything like the same extent in the latter. Even if the achievement of the result is a complicated matter which will take some time, the court, if called upon to rule, only has to examine the finished work and say whether it complies with the order. This point was made in the context of relief against forfeiture in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691. If it is a condition of relief that the tenant should have complied with a repairing covenant, difficulty of supervision need not be an objection. As Lord Wilberforce said (at p. 724):
“[W]hat the court has to do is to satisfy itself, ex post facto, that the covenanted work has been done, and it has ample machinery, through certificates, or by inquiry, to do precisely this.”
This distinction between orders to carry on activities and to achieve results explains why the courts have in appropriate circumstances ordered specific performance of building contracts and repairing covenants: see Wolverhampton Corporation v. Emmons [1901] 1 Q.B. 515 (building contract) and Jeune v. Queens Cross Properties Ltd. [1974] Ch. 97 (repairing covenant). It by no means follows, however, that even obligations to achieve a result will always be enforced by specific performance. There may be other objections, to some of which I now turn.
One such objection, which applies to orders to achieve a result and a fortiori to orders to carry on an activity, is imprecision in the terms of the order. If the terms of the court’s order, reflecting the terms of the obligation, cannot be precisely drawn, the possibility of wasteful litigation over compliance is increased. So is the oppression caused by the defendant having to do things under threat of proceedings for contempt. The less precise the order, the fewer the signposts to the forensic minefield which he has to traverse. The fact that the terms of a contractual obligation are sufficiently definite to escape being void for uncertainty, or to found a claim for damages, or to permit compliance to be made a condition of relief against forfeiture, does not necessarily mean that they will be sufficiently precise to be capable of being specifically performed. So in Wolverhampton Corporation v. Emmons [1901] 1 Q.B. 515, Romer L.J. said that the first condition for specific enforcement of a building contract was that “the particulars of the work are so far definitely ascertained that the court can sufficiently see what is the exact nature of the work of which it is asked to order the performance”. Similarly in Redland Bricks Ltd. v. Morris [1970] A.C. 652, 666 Lord Upjohn stated the following general principle for the grant of mandatory injunctions to carry out building works:
“[T]he court must be careful to see that the defendant knows exactly in fact what he has to do and this means not as a matter of law but as a matter of fact, so that in carrying out an order he can give his contractors the proper instructions.”
Precision is of course a question of degree and the courts have shown themselves willing to cope with a certain degree of imprecision in cases of orders requiring the achievement of a result in which the plaintiff’s merits appeared strong; like all the reasons which I have been discussing, it is, taken alone, merely a discretionary matter to be taken into account: see Spry on Equitable Remedies (4th ed.) at p. 112. It is, however, a very important one.
I should at this point draw attention to what seems to me to have been a misreading of certain remarks of Lord Wilberforce in Shiloh Spinners Ltd. v. Harding. [1973] A.C. 691, 724. He pointed out, as I have said, that to grant relief against forfeiture subject to compliance with a repairing covenant involves the court in no more than the possibility of a retrospective assessment of whether the covenanted work has been done. For this reason, he said:
“Where it is necessary, and, in my opinion, right, to move away from some 19th century authorities, is to reject as a reason against granting relief, the impossibility for the courts to supervise the doing of work.”
This is plainly a remark about cases involving the achievement of a result, such as doing repairs, and, within that class, about making compliance a condition of relief against forfeiture. But in Tito v. Waddell (No. 2) [1977] Ch. 106, 322 Sir Robert Megarry V.-C. took it to be a generalisation about specific performance and, in particular, a rejection of difficulty of supervision as an objection, even in cases of orders to carry on an activity. The Vice-Chancellor regarded it as an adoption of his own views (based, as I have said, on incomplete analysis of what was meant by difficulty of supervision) in C. H. Giles & Co. Ltd. v. Morris [1972] 1 W.L.R. 307, 318. In the present case, in the Court of Appeal took this claim at face value. In fact, Lord Wilberforce went on to say that impossibility of supervision “is a reality, no doubt, and explains why specific performance cannot be granted of agreements to this effect.” Lord Wilberforce was in my view drawing attention to the fact that the collection of reasons which the courts have in mind when they speak of difficulty of supervision apply with much greater force to orders for specific performance, giving rise to the possibility of committal for contempt, than they do to conditions for relief against forfeiture. While the paradigm case to which such objections apply is the order to carry on an activity, they can also apply to an order requiring the achievement of a result.
There is a further objection to an order requiring the defendant to carry on a business, which was emphasised by Millett L.J. in the Court of Appeal. This is that it may cause injustice by allowing the plaintiff to enrich himself at the defendant’s expense. The loss which the plaintiff may suffer through having to comply with the order (for example, by running a business at a loss for an indefinite period) may be far greater than the plaintiff would suffer from the contract being broken. As Professor R. J. Sharpe explains (Specific Remedies for Contract Breach in Studies in Contract Law (ed. Reiter and Swan) at p. 129):
“In such circumstances, a specific decree in favour of the plaintiff will put him in a bargaining position vis a vis the defendant whereby the measure of what he will receive will be the value to the defendant of being released from performance. If the plaintiff bargains effectively, the amount he will set will exceed the value to him of performance and will approach the cost to the defendant to complete.”
This was the reason given by Lord Westbury L.C. in Isenberg v. East India House Estate Co. Ltd. (1863) 3 De G.J. & S. 263, 273 for refusing a mandatory injunction to compel the defendant to pull down part of a new building which interfered with the plaintiff’s light and exercising instead the Court of Chancery’s recently-acquired jurisdiction under Lord Cairns’s Act 1858 to order payment of damages:
“. . . I hold it . . . to be the duty of the court in such a case as the present not, by granting a mandatory injunction, to deliver over the defendants to the plaintiff bound hand and foot, in order to be made subject to any extortionate demand that he may by possibility make, but to substitute for such mandatory injunction an inquiry before itself, in order to ascertain the measure of damage that has been actually sustained.”
It is true that the defendant has, by his own breach of contract, put himself in such an unfortunate position. But the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust. From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation. It is not only a waste of resources but yokes the parties together in a continuing hostile relationship. The order for specific performance prolongs the battle. If the defendant is ordered to run a business, its conduct becomes the subject of a flow of complaints, solicitors’ letters and affidavits. This is wasteful for both parties and the legal system. An award of damages, on the other hand, brings the litigation to an end. The defendant pays damages, the forensic link between them is severed, they go their separate ways and the wounds of conflict can heal.
The cumulative effect of these various reasons, none of which would necessarily be sufficient on its own, seems to me to show that the settled practice is based upon sound sense. Of course the grant or refusal of specific performance remains a matter for the judge’s discretion. There are no binding rules, but this does not mean that there cannot be settled principles, founded upon practical considerations of the kind which I have discussed, which do not have to be re-examined in every case, but which the courts will apply in all but exceptional circumstances. As Slade J. said in the passage which I have quoted from Braddon Towers Ltd. v. International Stores Ltd. [1987] 1 E.G.L.R. 209, 213 lawyers have no doubt for many years advised their clients on this basis. In the present case, Leggatt L.J. remarked that there was no evidence that such advice had been given. In my view, if the law or practice on a point is settled, it should be assumed that persons entering into legal transactions will have been advised accordingly. I am sure that the learned Lord Justice would not wish to encourage litigants to adduce evidence of the particular advice which they received. Indeed, I doubt whether such evidence would be admissible.
Carey v. Independent Newspapers (Ireland) Ltd.
[2003] IEHC 67
Gilligan J
Degree of inducement necessary
The next question is the degree of inducement necessary to satisfy the requirement of inducement. There are four possible scenarios. In the first situation, the significance of the truth to the plaintiff of what turns out to be a misrepresentation may be such that, if the plaintiff representee appreciated the true position, they would not have entered the contract at all (see Horry v. Tate and Lyle Refineries Ltd [1982] 2
Lloyd’s Rep 416 at 422, per Peter Pain J). This obviously meets the standard required for a legally effective inducement. The second situation is where, depending on the circumstances, a representation may be material to the decision of the plaintiff representee to enter into the contract without being decisive: if the representee had known the truth, the representee would still have been willing to conclude the contract, but perhaps on different terms. This will also suffice to meet the requirement of inducement: the best example of this in Irish law is Donnellan v. Dungoyne Ltd. [199511 ILRM 388.
The third situation is where, despite the relevance of the misrepresentation to the eventual contract, if the plaintiff representee had known the truth, the plaintiff would still have concluded the contract. This will not meet the standard of an operative inducement. The fourth possibility lies somewhere between the second and third possibilities: it cannot be said for certain whether the misrepresentation induced the plaintiff to enter the contract or not, but it might be said that the misrepresentation might have been material, if not decisive, to the decision to enter the contract.
In an action for negligent misstatement, the law requires that any loss be caused by the misstatement or misrepresentation. In other words, the effect of the misrepresentation (which constituted the inducement) must be causal in the sense of decisive (see Edgington v. Fitzmaurice (1885) 29 Ch.D 459 at 483, per Bowen LJ). The plaintiff who has been misled by the representation must have relied upon the representation in the sense that but for the misrepresentation, the plaintiff would not have made the contract at all, or at least not in the same terms: in short, the first and second situations of inducement outlined above.
Quantum of damages for negligent misrepresentation
The measure of damages applicable in the tort of deceit (i.e. where a fraudulent misrepresentation has been made) is also applicable to negligent misrepresentation. In Forshall v. Walsh (unreported, High Court, Shanley J, 18th June, 1997), Shanley J adopted the following passage from the judgment of Henchy J in Northern Bank Finance v. Charlton [1979] IR 149 at 199 (which occurred in the context of an action for fraudulent misrepresentation) and held that it was an accurate statement of the measure of damages in actions for negligent misrepresentation also:
“As far as the tort of fraud or deceit is concerned, it is well settled that the measure of damages is based on the actual damage directly flowing from the fraudulent inducement, and that the award may include, in an appropriate case… consequential damages representing what was reasonably and necessarily expended as a result of acting on the inducement.”
Basis of Assessing Damages
An action for wrongful dismissal is an action for breach of contract: in essence, the breach complained of in such an action is that the plaintiff’s employment has not been terminated in accordance with his/ her contract or, where no such procedures exist, that the contract has not been terminated in accordance with fair procedures and the common law. The normal measure of damages in a wrongful dismissal action is the amount of salary the employee would have earned had he/ she been allowed to remain working for the balance of his contract, or for the period for which notice of termination should have been given in accordance with the contract. The same principle applies where no notice period as such has been incorporated into the contract: in such cases the common law implies a term into the contract that the employee may only be dismissed on giving reasonable notice and damages will be confined to the measure of the salary the plaintiff would have earned for the period of notice found reasonable in all the circumstances by the court. This has been the rule since Addis v. Gramophone Co. Ltd. [1909] AC 488.
However, the plaintiff has also made separate claims for breach of warranty and/ or negligent misrepresentation/ misstatement. The basis of awarding damages in these two contexts differs considerably from the attenuated scope for awarding damages in wrongful dismissal claims per se and is potentially far more remunerative: accordingly, it is necessary to outline the basis upon which the court will award damages in these contexts in some detail.
The common law courts have drawn a firm distinction between contract and tort in terms of awarding damages upon a finding of liability.
In tort, the plaintiff is entitled to be put in the same position, as far as money can do so, as he would have been in had the tort not been committed. This has been established since Livingstone v. Rawyards Coal Co. (1880) 5 App. Cas. 25 at 39, per Lord Blackburn. This principle is the basis of awarding damages in tort in Irish law: subject to the application of the test of remoteness of damages laid down in Hadley v. Baxendale, the general purpose of an award of damages in a tort claim is to place the plaintiff in the same position as they had been before the commission of the tort in question: damages cannot be awarded for loss of bargain. In Foley v. Thermocement Products Ltd. (1954) 90 ILTR 92 at 98, the Supreme Court referred to restitutio in integrum as “the underlying principle by which courts are guided in awarding damages.”
In contract, however, the compensatable wrong consists not in the making but in the breach of the contract and accordingly the plaintiff is entitled to be placed in the position he would have been had the contract been performed. In other words, the plaintiff is entitled to recover damages for loss of bargain.
Experience has shown that the distinction between the principles upon which contract damages and tort damages are awarded outlined above tends to blur in cases involving misrepresentations of fact inducing entrance into contractual relations, which is the type of case at issue in the present proceedings: in such cases there is inevitable scope for pleading that the representation was a term of the contract entered into and that the misrepresentation leading to the non-observance of contractual obligations is an actionable tort. Where a plaintiff has been induced to enter into a contract by a misrepresentation of fact on the part of a defendant or his agent, if the representation forms part of the concluded contract (whether the representation constitutes a condition or a warranty is immaterial in this context), the plaintiff may sue for breach of contract and loss of bargain, which entitles the plaintiff to be placed in the same position as he/ she would have been had the representation of fact been true and obligations consequent upon the representation been performed by the defendant. However, if the representation is not a term of the contract, there is by definition no breach of contract and the plaintiff’s only remedy will lie in tort: the plaintiff will have a remedy in deceit where the misrepresentation is fraudulently made, and there will be a remedy in negligent misrepresentation where the misrepresentation was made negligently in the context of a duty of care owed by the representor to the plaintiff.
This vital distinction is established in Irish law. O’Hanlon J contrasted the basis upon which damages for misrepresentation in tort are awarded and the basis upon which damages for breach of warranty are awarded in McAnarney v. Hanrahan [1993] 3 I.R. 492 at 498 as follows-
“What now falls for consideration is the correct way in which damages should be assessed in a case of negligent misrepresentation. Damages in such cases are assessed by analogy with claims for damages for deceit. Where damages are claimed for fraudulent misrepresentation then they are assessed so as to put the plaintiff in the position he would have been in if the representation had not been made to him. This is different to the case where damages are being assessed in the case of a claim based on breach of warranty – then damages are assessed on the basis that the warranty was true. So, in the case of a sale of shares induced by fraudulent misrepresentation the normal measure of damages is the purchase price of the shares less their actual value at the time of acquisition (see McGregor, Damages, 15th Ed., paras. 17.18, 17.24 and 19.39) and in a case like the present one, where a plaintiff has been induced to enter into a contract for the purchase of land by a misrepresentation negligently made, the normal measure of damages is the price paid for the land less its actual value at the time of sale.”
O’Hanlon J followed his approach in McAnarney v. Hanrahan in Donnellan v. Dungoyne Ltd. [1995] 1 ILRM 388.
In this case, the plaintiff has made claims for breach of contract (at paragraph 5 of her Statement of Claim) and negligent misrepresentation (at paragraph 6 of her Statement of Claim). Applying the analysis above, if the plaintiff is entitled to succeed in her claim for negligent misrepresentation, the damages she is entitled to will be assessed on the assumption that she would not have left her position as political correspondent with Ireland on Sunday but for the misrepresentation that she would be permitted to work from home from lam until the first edition deadline and thereafter would work from the Dail for the remainder of the working day. In short,the plaintiff will not be entitled to damages based on the remuneration she would have earned had her contractual obligations with the Evening Herald been met.
If it is found that the representation with which the plaintiff takes most significant issue, i.e. that she would be allowed to work from home until the first edition deadline, is a term of the contract entered into by her and the defendant and that such term has been breached, the plaintiff will be entitled to damages awarded on the basis that the defendant would have observed the contract: in other words, the plaintiff will be entitled to damages based on the net pay she would have earned had the defendant allowed her to remain in her position at the Evening Herald.
The factual scenario in this case is but one illustration of the obvious possibility of the existence of a set of facts which conceivably give rise to concurrent liability in contract and tort. Given the differing principles upon which damages for contract and tort are awarded, should the defendant newspaper group be found liable for negligent misrepresentation and breach of warranty, the defendant will in effect be required to pay damages on the basis that the plaintiff both would have stayed in her position at Ireland on Sunday but for the misrepresentation and would still be with the Evening Herald had the defendant honoured its contractual obligation to allow the plaintiff to work from home until the first edition deadline every morning. In view of the possibility of concurrent liability (which in principle amounts to double compensation for the plaintiff), and the fact that the defendant has submitted that it is not open to the plaintiff to maintain an action in both contract and tort, the following appears to be the position in Irish law regarding concurrent liability in contract and tort.
Approaching the matter from first principles, the boundaries of contract and tort actions suggest that there is no conceptual objection to imposing liability in both contract and tort provided the facts as found meet the criteria of liability of the type of tort and contract action taken. Going back to first principles, the obvious condition precedent to an action for breach of contract is the existence of a contractual obligation: an action in tort has never required a contractual relationship between the parties, although the circumstances of a contractual obligation may give rise to a duty of care in tort over and above the normal “duty of care” (so to speak) to observe the terms of the agreement in the contractual context. To take the causes of action in tort and contract at issue in the present proceedings, it is not a requirement of an action for negligent misrepresentation that the parties enter into the contract, even if this is the effect of the representation. Secondly- again going back to first principles- in order to bring an action for negligent misrepresentation, it must be proved that the party making the representation owed a duty of care to the representee (Hedley Byrne v. Heller [1964] AC 465: see the first instance decision of O’Donnell v. Truck and Machinery Sales [1997] 1 ILRM 466 at 473, per Moriarty J. His decision was overturned on the facts by the Supreme Court but the Court did not question Moriarty J’s interpretation of the law). For an action for breach of warranty, the existence of the warranty as a contractual obligation is the only condition precedent to the finding of a compensatable breach: no duty of care of the standard required in tort is required.
The Irish courts have accepted that a defendant may be liable in both contract and tort: the law does not require a plaintiff to elect between the remedies and he may plead either or both. In Kennedy v. Allied Irish Banks plc [1998] 2 IR 48- at p.56 Hamilton CJ stated:
“…where a duty of care exists, whether such duty is tortious or created by contract, the claimant is entitled to take advantage of the remedy which is most advantageous to him subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle the parties must be taken to have agreed that the tortious remedy is to be limited or excluded.”
In O’Donnell & Co. Ltd. v. Truck and Machinery Sales Ltd. [1998] 4 I.R. 191 at 198-99, O’Flaherty J remarked of the effect of the decision in Kennedy as follows:
“In the light of the decision of this Court in Kennedy v. Allied Irish Banks plc. [1998] 2 IR 48, it is clear that the law in this jurisdiction permits concurrent remedies. Indeed, the common law world would appear to be united in this regard: see, e.g., Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145 (The House of Lords); Central Trust Co. v. Rafuse (1986) 31 D.L.R. (4th) 481 (The Supreme Court of Canada); Bryan v. Maloney (1995) 182 C.L.R. 609 (The High Court of Australia); Aluminium Products (Qld.) Pty Ltd v. Hill [1981] Qd.R. 33 (a decision of the full Court of the Supreme Court of Queensland) and Macpherson & Kelley v. Kevin J. Prunty & Associates [1983] 1 V.R. 573 (a decision of the full Court of the Supreme Court of Victoria); Rowlands v.Collow [1992] 1 N.Z.L.R. 178 (The High Court of New Zealand). In relation to the American position, see Fleming, The Law of Torts, 8th ed. (1992) p.187; Prosser and Keeton on the Law of Torts, W. Keeton. Gen. Ed., (1984) page 444.
Thus, where under the general law a person owes a duty to another to exercise reasonable care and skill in some activity, a breach of that duty can give rise to a claim in tort notwithstanding the fact that the activity is the subject matter of a contract between them. There is no general duty of non-cumul des obligations such as is found in civil law systems.”
O’Hanlon J saw no obstacle to awarding damages for breach of warranty and negligent misrepresentation in Donnellan v.Dungoyne [1995] 1 ILRM 385. In that case, a plaintiff was interested in setting up his son in a shoe retailing business in Laois Shopping Centre, Portlaoise and engaged in negotiations from February 1991 with the letting agents of the defendant company, which owned the shopping centre in question, to lease a unit in the centre. In November 1991, the letting agents represented to the plaintiff that virtually all the units of the centre had been leased to tenants and would be occupied and trading by Christmas 1991. The defendant company executed a 35 year lease of a unit in the shopping centre to the plaintiff’s son. In January 1992, the plaintiffs realised that the centre had not been fully let and along with other tenants sought further rent-free periods from the defendants as compensation for the poor performance of the plaintiff’s son’s shoe retailing business: they argued that the centre attracted insufficient numbers of customers and that this caused the failure of the plaintiff’s son’s shoe business. Inter alia, on the facts of the case, O’Hanlon J found that the representation that the units in the shopping centre had been fully let was a contributing factor in the decision of the plaintiff and his son to embark upon the lease, but not decisive. However, the importance of the case in the present context is the tacit suggestion of O’Hanlon J that the remedies of breach of warranty and negligent misrepresentation are not mutually exclusive: at p.397 of the report, he remarked:
“… I am of opinion that a case has not been made out for recission of the lease, as sought in the civil bill, but merely for damages for breach of warranty and negligent misrepresentation, as happened in the case of Esso Petroleum v. Mardon [1976] QB 801, and McAnarney v. Hanrahan [1993] 3 IR 492 to which I have been referred by counsel, and which I propose to follow.”
Golden Strait Corporation v. Nippon Yusen Kubishka Kaisha
[2007] UKHL [2007] 3 All ER 1, [2007] 2 Lloyd’s Rep 164, [2007] 2 WLR 691, [2007] 2 All ER (Comm) 97, [2007] 2 AC 353, [2007] Bus LR 997, [2007] 1 CLC 352
Lord Bingham
Principle
The repudiation of a contract by one party (“the repudiator”), if accepted by the other (“the injured party”), brings the contract to an end and releases both parties from their primary obligations under the contract. The injured party is thereupon entitled to recover damages against the repudiator to compensate him for such financial loss as the repudiator’s breach has caused him to suffer. This is elementary law.
The damages recoverable by the injured party are such sum as will put him in the same financial position as if the contract had been performed. This is the compensatory principle which has long been recognised as the governing principle in contract. Counsel for the charterers cited certain classical authorities to make good this proposition, but it has been enunciated and applied times without number and is not in doubt. It does not, however, resolve the question whether the injured party’s loss is to be assessed as of the date when he suffers the loss, or shortly thereafter, in the light of what is then known, or at a later date when the assessment happens to be made, in the light of such later events as may then be known.
An injured party such as the owners may not, generally speaking, recover damages against a repudiator such as the charterers for loss which he could reasonably have avoided by taking reasonable commercial steps to mitigate his loss. Thus where, as here, there is an available market for the chartering of vessels, the injured party’s loss will be calculated on the assumption that he has, on or within a reasonable time of accepting the repudiation, taken reasonable commercial steps to obtain alternative employment for the vessel for the best consideration reasonably obtainable. This is the ordinary rule whether in fact the injured party acts in that way or, for whatever reason, does not. The actual facts are ordinarily irrelevant. The rationale of the rule is one of simple commercial fairness. The injured party owes no duty to the repudiator, but fairness requires that he should not ordinarily be permitted to rely on his own unreasonable and uncommercial conduct to increase the loss falling on the repudiator. I take this summary to reflect the ruling of Robert Goff J in Koch Marine Inc v D’Amica Società di Navigazione ARL (The “Elena D’Amico”) [1980] 1 Lloyd’s Rep 75. That case concerned the measure of damages recoverable by a charterer for breach of a time charter during its currency by an owner. While taking care to avoid laying down an inflexible or invariable rule, the judge held (p 89, col 2) that if, at the date of breach, there is an available market, the normal measure of damages will be the difference between the contract rate and the market rate for chartering in a substitute ship for the balance of the charter period. An analogy was drawn with section 51(3) of the Sale of Goods Act 1893. Neither party challenged this decision, which has always been regarded as authoritative. It does however assume that the injured party knows, or can ascertain, what the balance of the charter period is.
It is a general, but not an invariable, rule of English law that damages for breach of contract are assessed as at the date of breach. Authority for this familiar proposition may be found in Jamal v Moolla Dawood Sons & Co [1916] AC 175, 179: Miliangos v George Frank (Textiles) Ltd [1976] AC 443, 468; Johnson v Agnew [1980] AC 367, 400-401; Dodd Properties (Kent) Ltd v Canterbury City Council [1980] 1 WLR 433, 450-451, 454-455, 457; County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916, 925-926; Chitty on Contracts, 29th ed (2004), vol 1, para 26-057; Professor S M Waddams, “The Date for the Assessment of Damages”, (1981) 97 LQR 445, 446. The Sale of Goods Acts of 1893 and 1979 both give effect to this prima facie rule in section 51(3) of the respective Acts in the case of refusal or neglect by a seller to deliver goods to a buyer where there is an available market.
The argument
While not, I think, challenging the general correctness of the principles last stated, the charterers dispute their applicability to the present case. Their first ground for doing so is in reliance on what, from the name of the case in which this principle has been most clearly articulated, has sometimes been called “the Bwllfa principle”. It is that where the court making an assessment of damages has knowledge of what actually happened it need not speculate about what might have happened but should base itself on the known facts. In non-judicial discourse the point has been made that you need not gaze into the crystal ball when you can read the book. I have, for my part, no doubt that this is in many contexts a sound approach in law as in life, and it is true that the principle has been judicially invoked in a number of cases. But these cases bear little, if any, resemblance to the present. In Bwllfa and Merthyr Dare Steam Collieries (1891) Limited v Pontypridd Waterworks Company [1903] AC 426 a coalowner claimed statutory compensation against a water undertaking which had, pursuant to statutory authority, prevented him mining his coal over a period during which the price of coal had risen. The question was whether the coal should be valued as at the beginning of the period or at its value during the currency of the period. The coalowner was entitled to “full compensation” and the House upheld the latter measure. In doing so, it was at pains to distinguish the case from one of sale or property transfer: see Lord Halsbury LC, pp 428-429; Lord Macnaghten, p 431; Lord Robertson, p 432. In re Bradberry [1943] Ch 35, where the principle was invoked, concerned the valuation of an annuity in the course of administering an estate. The claim in Carslogie Steamship Co Ltd v Royal Norwegian Government [1952] AC 292 was a claim by shipowners for loss of time during repairs of damage caused by a collision. After the collision the ship had suffered heavy weather damage, which required the ship to be detained for repair of that damage. It was common ground that the ship would have been detained for the same period if the collision had never occurred (p 313). In In Re Thoars Deceased ([2002] EWHC 2416(Ch), unreported, 15 November 2002) the principle was invoked in the course of deciding whether a policy of life insurance had been transferred at an undervalue within the meaning of section 339 of the Insolvency Act 1986. The principle was again invoked in McKinnon v E Survey Ltd ([2003] EWHC 475 (Ch), unreported, 14 January 2003), a claim against negligent surveyors in which the court was asked to assume, for purposes of a preliminary issue, that the property had not been the subject of movement at the date of valuation and had not been subject to movement since, but that it would not have been possible to establish these facts until after the purchase of the property. In Aitchison v Gordon Durham & Company Limited (unreported, 30 June 1995) the Court of Appeal applied the principle where a joint venture agreement to develop land had been broken and the court took account of what actually happened to decide what the claimant’s profit would have been. I do not think it necessary to discuss these cases, since it is clear that in some contexts the court may properly take account of later events. None of these cases involved repudiation of a commercial contract where there was an available market.
The charterers further submit that even if, as a general rule, damages for breach of contract (or tort, often treated as falling within the same rule) are assessed as at the date of the breach or the tort, the court has shown itself willing to depart from this rule where it judges it necessary or just to do so in order to give effect to the compensatory principle. I accept that this is so. But it is necessary to consider the cases in which the court departs from the general rule. Some are personal injury claims, of which Curwen v James [1963] 1 WLR 748 and Murphy v Stone-Wallwork (Charlton) Ltd [1969] 1 WLR 1023 may serve as examples. Dudarec v Andrews [2006] EWCA Civ 256, [2006] 1 WLR 3002 was in form a negligence claim against solicitors, but damages were sought for the loss of a chance of success in a personal injuries action struck out for want of prosecution seven years earlier, and the issue was similar to that in a personal injuries action. It is unnecessary to consider the extent to which, in the light of Baker v Willoughby [1970] AC 467 and Jobling v Associated Dairies Ltd [1982] AC 794, the breach date principle applies to the assessment of personal injury damages in tort. The court has also departed from the general rule in cases where, on particular facts, it was held to be reasonable for the injured party to defer taking steps to mitigate his loss and so reasonable to defer the assessment of damage. Radford v De Froberville [1977] 1 WLR 1262 and Dodd Properties (Kent) Ltd v Canterbury City Council [1980] 1 WLR 433 are examples. In both cases the general rule was acknowledged and reasons given for departing from it. County Personnel (Employment Agency) Ltd v Alan Pulver & Co [1987] 1 WLR 916 was a claim against solicitors whose negligent advice had saddled the plaintiffs with a ruinous underlease, from which the plaintiffs had had to buy themselves out. The ordinary diminution in value measure of damage was held to be wholly inapt on the particular facts. Again, reasons were given for departing from the normal rule. In Miliangos v George Frank (Textiles) Ltd [1976] AC 443 the effect of inflation led the House to sanction a departure from the rule that losses sustained in a foreign currency must be converted into sterling at the date of breach. The plaintiff in Re-Source America International Ltd v Platt Site Services Ltd [2005] EWCA Civ 97, [2005] 2 Lloyd’s Rep 50 was bailee of spools used to carry optic fibre cables which it was to refurbish. The spools were destroyed by fire. It was held to be entitled to recover the cost of replacing the spools, subject to a deduction based on the saved cost of refurbishment. The Court of Appeal took account of what happened after the fire. It was expressly found (para 5) that there was no available market in used spools, so the plaintiff could not have mitigated its loss by replacing them. Sally Wertheim v Chicoutimi Pulp Company [1911] AC 301, cited by the charterers, was not a case of non-delivery or refusal to deliver, but of delayed delivery. The goods, although delivered late, were received and there was no accepted repudiation. The case would not have fallen under section 51(3) of the 1893 Act. The buyer made a claim for damages, based on the difference between the market price at the place of delivery when the goods should have been delivered and the market price there when the goods were in fact delivered. It was apparent on the figures that this claim, if successful, would have yielded the plaintiff a much larger profit than if the contract had not been broken, and he was compensated for his actual loss. None of these cases, as is evident, involves the accepted repudiation of a commercial contract such as a charterparty. It is necessary to consider some cases more similar to the present case to which the House was referred.
Considerable attention has been paid to the decision of the Court of Appeal (Lord Denning MR, Edmund Davies and Megaw LJJ) in Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (“The Mihalis Angelos”) [1971] 1 QB 164. The case concerned a voyage charterparty by which the ship was fixed to sail to Haiphong and there load a cargo for delivery in Europe. In the charterparty dated 25 May 1965 the owners stated that the ship was “expected ready to load under this charter about July 1, 1965”. The charterparty also provided, in the first sentence of the cancelling clause, “Should the vessel not be ready to load (whether in berth or not) on or before July 20, 1965, charterers have the option of cancelling this contract, such option to be declared, if demanded, at least 48 hours before vessel’s expected arrival at port of loading”. On 17 July 1965 the ship was at Hong Kong still discharging cargo from her previous voyage. It was physically impossible for her to finish discharging and reach Haiphong by 20 July. The charterers gave notice cancelling the charter. The owners treated this as a repudiation and claimed damages, which were the subject of arbitration and of an appeal to Mocatta J. On further appeal, there were three issues. The first was whether the “expected readiness” clause was a condition of which the owners were in breach, entitling the charterers to terminate the charter contract. All three members of the court decided this issue in favour of the charterers and against the owners. The second issue was whether (if the answer to the first issue was wrong) the charterers had repudiated the contract by cancelling on 17 July, three days before the specified 20 July deadline. Lord Denning held that they had not, but Edmund Davies and Megaw LJJ held that they had. The third issue was as to the damage suffered by the owners, on the assumption that the charterers’ premature cancellation had been a repudiation. Lord Denning, in agreement with the arbitrators, who were themselves agreed, held that they had suffered no damage (p 197):
“Seeing that the charterers would, beyond doubt, have cancelled, I am clearly of opinion that the shipowners suffered no loss: and would be entitled at most to nominal damages.”
Edmund Davies LJ agreed (p 202):
“One must look at the contract as a whole, and if it is clear that the innocent party has lost nothing, he should recover no more than nominal damages for the loss of his right to have the whole contract completed.”
Megaw LJ (at pp 209-210) stated:
“In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost; subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.”
It is evident that all members of the court were viewing the case as from the date of acceptance of the repudiation (although only Megaw LJ said so in terms). They were not taking account of later events. They were recognising, as was obvious on the facts as found, that the value of the contractual right which the owners had lost, as of the date of acceptance of the repudiation, was nil because the charter was bound to be lawfully cancelled three days later.
If, as I think, the Court of Appeal’s decision on the third issue in the Mihalis Angelos was entirely orthodox, so was the decision of Mustill J in Woodstock Shipping Co v Kyma Compania Naviera SA (“The Wave”) [1981] 1 Lloyd’s Rep 521. This concerned a time charter for 24 months, 3 months more or less at charterers’ option. The owners repudiated the charter and the charterers accepted their repudiation on 2 August 1979. In assessing the charterers’ loss, and allowing for their ability to obtain a substitute fixture in the available market shortly after the date of the accepted repudiation, in accordance with the ruling in the Elena D’Amico, above, the judge compared the charterparty rate with the market rate in the early days of September 1979, declining to speculate whether market rates in September 1981 would induce the charterers to exercise their three month option one way or the other.
SIB International SRL v Metallgesellschaft Corporation (“The Noel Bay”) [1989] 1 Lloyd’s Rep 361 concerned a voyage charterparty. The charterers repudiated the charterparty and the owners accepted the repudiation on 3 June 1987. On appeal to the Court of Appeal, Staughton LJ accepted (p 364, col 2) the submission of counsel that the value of the contract which the owners lost “must be assessed as at June 3, the date when repudiation was accepted”. He went on to quote, with approval, the passage from the judgment of Megaw LJ in the Mihalis Angelos which I have set out in para 14 above.
Kaines (UK) Ltd v Osterreichische Warrenhandelsgesellschaft Austrowaren Gesellschaft m.b.H. [1993] 2 Lloyd’s Rep 1 concerned not a charterparty but a contract for the sale and purchase of crude oil. The sellers repudiated and at 17.28 hours on 18 June 1987 the buyers accepted the repudiation. Steyn J held that the buyers should have replaced the oil in the market by, at latest, 19 June, and their damages were assessed accordingly. It was an anticipatory repudiation. Both the judge and the Court of Appeal in dismissing the appeal cited with approval (pp 7, 10) a passage in Treitel, The Law of Contract, 7th ed (1987), p 742:
“Under this [mitigation] rule, the injured party may, and if there is a market generally will, be required to make a substitute contract; and his damages will be assessed by reference to the time when the contract should have been made. This will usually be the time of acceptance of the breach (or such reasonable time thereafter as may be allowed under the rules stated above) …”
The Court of Appeal observed (p 11) that the judge’s finding on the date when the buyers should have bought in a substitute cargo “fixes the level of the plaintiffs’ damages on the facts of this case irrespective of what the plaintiffs did or failed to do at the time” and (p 13) “crystallises the position so far as the basis of a capital award of damages is concerned”.
The buyers in North Sea Energy Holdings NV v Petroleum Authority of Thailand [1999] 1 Lloyd’s Rep 483 repudiated an oil purchase agreement and the sellers accepted their repudiation. The sellers could not, however, show that they would have been able to obtain the oil to sell, and the Court of Appeal accordingly held that they were not entitled to substantial damages. In reaching this conclusion the court cited and applied part of Megaw LJ’s statement in the Mihalis Angelos which I have quoted in para 14 above.
BS & N Ltd (BVI) v Micado Shipping Ltd (Malta) (“The Seaflower”) [2000] 2 Lloyd’s Rep 37 concerned a time charterparty dated 20 October 1997 for a period of 11 months, maximum 12 months at charterers’ option. The charterparty referred to various major oil company approvals including that of Mobil all on the point of expiring and provided that if during the charter term the owners lost one of these approvals they should reinstate the same within 30 days failing which the charterers would be at liberty to cancel the charterparty. It also contained a guarantee by the owners to obtain an approval from Exxon within 60 days of the charter date. The vessel was duly delivered but the owners had not obtained an Exxon approval from Exxon and did not do so within 60 days from the charter date. On 30 December 1997 the charterers fixed the vessel to load a cargo of Exxon products. On the same date the charterers asked the owners if they had obtained the Exxon approval and gave notice requiring the owners to obtain it by 5 January 1998. The owners replied that the vessel would be ready for Exxon inspection by late January or early February. The charterers responded by terminating the charter and redelivering the vessel. At an initial hearing Aikens J held that the 60-day guarantee was an innominate term, not a condition. Thus the charterers were not entitled to terminate, and had repudiated the charterparty, which the owners had accepted. In proceedings initiated by the charterers, the owners counterclaimed for damages for wrongful termination of the charter, quantified as the difference between the daily hire rates in the charter and the alternative employment found for the vessel for the rest of the charter period. The charterers met this claim by contending that the owners would have lost their Mobil approval on 27 January 1998 and would not have been able to regain it within 30 days, namely 26 February: therefore the charterers would be contractually entitled to cancel, and the owners’ damages should end then. Timothy Walker J discerned a difference between the three judgments in the Mihalis Angelos, discounting Megaw LJ’s formulation as that of a minority, but found on the facts, as established at 30 December 1997, that the owners would have lost the Mobil approval on 27 January 1998. This conclusion he found to be supported by evidence of what actually happened after 30 December. He concluded that it was inevitable that the charter would have come to an end on 26 February, and limited the owners’ damages accordingly. This was, as I read the judgment, a conclusion he regarded as inevitable on 30 December. It does not appear that there was argument about the permissibility of relying on evidence of what happened later, and the judge cannot have supposed that he was deciding any issue of principle. The result of this case was perhaps less obvious than that on the third issue in the Mihalis Angelos, but it was a judgment, on different facts, to very much the same effect. It was quite unlike the present case, because early termination was very clearly predictable on the date when the repudiation was accepted, and the judge only relied on evidence of later events to fortify his conclusion on that point. I do not think he would have reached a different conclusion had he not received that evidence.
Dampskibsselskabet “Norden” A/S v Andre & Cie SA [2003] EWHC 84 (Comm), [2003] 1 Lloyd’s Rep 287 is a recent example of the application of the general rule. A forward freight swap agreement was treated as terminated because of the defendants’ breach of solvency guarantees. It was common ground by the end of the trial that the injured party’s loss was to be measured by the difference between the contract rate and the market rate after the date of termination. Toulson J recorded this agreement, observing (p 292, col 2) that “The availability of a substitute market enables a market valuation to be made of what the innocent party has lost, and a line thereby to be drawn under the transaction”. This is what the general rule is intended to achieve.
In support of their argument that damages should be assessed as of the date of actual assessment, the charterers contend that their claim attributable to loss of profit share would in any event have to be deferred. Neither the arbitrator nor the judge mentioned this point, from which it seems safe to infer that the point was not at that stage relied on. But Lord Mance, giving the leading judgment in the Court of Appeal, did refer to it (para 25), and counsel for the owners accepted in argument that the assessment of the profit share loss would have had to be deferred. I am far from convinced that counsel was right to accept this. It would of course be very difficult to calculate loss of profit prospectively over a four year period, but an injured party can recover damages for the loss of a chance of obtaining a benefit (see Treitel, 11th ed, (2003), pp 955-957) and the difficulty of accurate calculation is not a bar to recovery. Even if counsel is right on this point and I am wrong, this would not in my view be sufficient to displace the general rule in this context.
Conclusion
The thrust of the charterers’ argument was that the owners would be unfairly over-compensated if they were to recover as damages sums which, with the benefit of hindsight, it is now known that they would not have received had there been no accepted repudiation by the charterers. There are, in my opinion, several answers to this. The first is that contracts are made to be performed, not broken. It may prove disadvantageous to break a contract instead of performing it. The second is that if, on their repudiation being accepted, the charterers had promptly honoured their secondary obligation to pay damages, the transaction would have been settled well before the Second Gulf War became a reality. The third is that the owners were, as the arbitrator held (see para 7 above), entitled to be compensated for the value of what they had lost on the date it was lost, and it could not be doubted that what the owners lost at that date was a charterparty with slightly less than four years to run. This was a clear and, in my opinion, crucial finding, but it was not mentioned in either of the judgments below, nor is it mentioned by any of my noble and learned friends in the majority. On the arbitrator’s finding, it was marketable on that basis. I can readily accept that the value of a contract in the market may be reduced if terminable on an event which the market judges to be likely but not certain, but that was not what the arbitrator found to be the fact in this case. There is, with respect to those who think otherwise, nothing artificial in this approach. If a party is compensated for the value of what he has lost at the time when he loses it, and its value is at that time for any reason depressed, he is fairly compensated. That does not cease to be so because adventitious later events reveal that the market at that time was depressed by the apprehension of risks that did not eventuate. A party is not, after all, obliged to accept a repudiation: he can, if he chooses, keep the contract alive, for better or worse. By describing the prospect of war in December 2001 as “merely a possibility”, the expression twice used by the arbitrator in paragraph 59 of his reasons, the arbitrator can only have meant that it was seen as an outside chance, not affecting the marketable value of the charter at that time.
There is, however, a further answer which I, in common with the arbitrator, consider to be of great importance. He acknowledged the force of arguments advanced by the owners based on certainty (“generally important in commercial affairs”), finality (“the alternative being a running assessment of the state of play so far as the likelihood of some interruption to the contract is concerned”), settlement (“otherwise the position will remain fluid”), consistency (“the idea that a party’s accrued rights can be changed by subsequent events is objectionable in principle”) and coherence (“the date of repudiation is the date on which rights and damages are assessed”). The judge was not greatly impressed by the charterers’ argument along these lines, observing (paras 13, 35) that although certainty is a real and beneficial target, it is not easily achieved, and the charterparty contained within it the commercial uncertainty of the war clause. Lord Mance similarly said (para 24):
“Certainty, finality and ease of settlement are all of course important general considerations. But the element of uncertainty, resulting from the war clause, meant that the owners were never entitled to absolute confidence that the charter would run for its full seven-year period. They never had an asset which they could bank or sell on that basis. There is no reason why the transmutation of their claims to performance of the charter into claims for damages for non-performance of the charter should improve their position in this respect.”
I cannot, with respect, accept this reasoning. The importance of certainty and predictability in commercial transactions has been a constant theme of English commercial law at any rate since the judgment of Lord Mansfield CJ in Vallejo v Wheeler (1774) 1 Cowp 143, 153), and has been strongly asserted in recent years in cases such as Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (“The Scaptrade”) [1983] QB 529, 540-541, [1983] 2 AC 694, 703-704; Homburg Houtimport BV v Agrosin Private Ltd [2003] UKHL 12, [2004] 1 AC 715, 738; Jindal Iron and Steel Co Ltd v Islamic Solidarity Shipping Co Jordan Inc (“The Jordan II”) [2004] UKHL 49, [2005] 1 WLR 1363, 1370. Professor Sir Guenter Treitel QC read the Court of Appeal’s judgment as appearing to impair this quality of certainty (“Assessment of Damages for Wrongful Repudiation”, (2007) 123 LQR 9-18) and I respectfully share his concern.
On my reading of The Seaflower (see para 19 above), I do not think the arbitrator was bound by that decision to reach the conclusion he did. If he was, I respectfully think the judge was wrong to analyse the Mihalis Angelos as he did in that case. But on the facts Timothy Walker J was entitled to value the owners’ charter in that case at two months’ purchase as of the repudiation acceptance date. In the present case, by contrast, the arbitrator found four years’ purchase (less a few days) as the true market value of the charterparty on the repudiation acceptance date.
For these reasons and those given by my noble and learned friend Lord Walker of Gestingthorpe, with which I wholly agree, I would, for my part, have allowed the owners’ appeal.
LORD SCOTT OF FOSCOTE
My Lords,
The facts of this case have been fully and clearly set out in the opinions of my noble and learned friends Lord Bingham of Cornhill and Lord Carswell, both of which I have had the advantage of reading in advance. It will suffice for me to state in summary form what I take to be the salient features of the facts that have led to this litigation and to the appeal to your Lordships.
The charterparty of 10 July 1998 whereby the appellants (the Owners) and the respondents (the Charterers) agreed on a charter of the vessel, Golden Victory, for a period ending on 6 December 2005 contained a provision (clause 33) enabling either party to cancel the charter if war or hostilities should break out between any two or more of a number of named countries. The named countries included the USA, the UK and Iraq. The Charterers in breach of contract repudiated the charter on 14 December 2001 when the charter had nearly four years still to run (but subject, of course, to the clause 33 possibilities of cancellation). The Owners accepted the repudiation on 17 December 2001 and claimed damages for the Charterers’ breach of contract. The Owners’ claim went to arbitration and, after various issues had been determined by the arbitrator, all in the Owners’ favour, but before the arbitrator had assessed the quantum of the damages payable by the Charterers, the outbreak, in March 2003, of the Second Gulf War occurred. The Charterers said that if the charterparty had still been on foot when the Second Gulf War began they would have exercized their clause 33 right to bring the charter to an end. They submitted, therefore, that the Owners’ damages for their (the Charterers’) breach of contract should be assessed by reference to the period from 17 December 2001, when the contract came to an end on the Owners’ acceptance of their repudiation, to March 2003, when the contract would have come to an end if it had still been on foot. The Owners disagreed. They said the damages should be assessed by reference to the value of their rights under the charterparty as at 17 December 2001. That assessment could properly take account of the chance, assessed as at 17 December 2001, that a clause 33 event enabling one or other party to terminate the contract might occur, but should not take account of the actual occurrence of any event subsequent to 17 December 2001. The question was put to the arbitrator for decision. As your Lordships know, the arbitrator decided the question in favour of the Charterers. Langley J did likewise and the Court of Appeal agreed. The question is now before your Lordships for a final decision.
Two important matters that have, or may have, a bearing on the answer to the question are now common ground. First, it is common ground that, if the charterparty had still been on foot when, in March 2003, hostilities between the USA and the UK on one side and Iraq on the other side began, the Charterers would have exercised their clause 33 right to terminate the charterparty. Second, it is common ground that as at 17 December 2001 the chance that any hostilities triggering the clause 33 right of termination would break out was no more than a possibility and certainly not a probability.
My Lords, the answer to the question at issue must depend on principles of the law of contract. It is true that the context in this case is a charterparty, a commercial contract. But the contractual principles of the common law relating to the assessment of damages are no different for charterparties, or for commercial contracts in general, than for contracts which do not bear that description. The fundamental principle governing the quantum of damages for breach of contract is long established and not in dispute. The damages should compensate the victim of the breach for the loss of his contractual bargain. The principle was succinctly stated by Parke B in Robinson v. Harman 1 Ex 850 at 855 and remains as valid now as it was then.
“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.”
If the contract is a contract for performance over a period, whether for the performance of personal services, or for supply of goods, or, as here, a time charter, the assessment of damages for breach must proceed on the same principle, namely, the victim of the breach should be placed, so far as damages can do it, in the position he would have been in had the contract been performed.
If a contract for performance over a period has come to an end by reason of a repudiatory breach but might, if it had remained on foot, have terminated early on the occurrence of a particular event, the chance of that event happening must, it is agreed, be taken into account in an assessment of the damages payable for the breach. And if it is certain that the event will happen, the damages must be assessed on that footing. In The Mihalis Angelos [1971] 1 QB 164, Megaw LJ referred to events “predestined to happen”. He said, at p.210, that:
“… if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then … the damages which [the claimant] can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.”
Another way of putting the point being made by Megaw LJ is that the claimant is entitled to the benefit, expressed in money, of the contractual rights he has lost, but not to the benefit of more valuable contractual rights than those he has lost. In Wertheim v. Chicoutimi Pulp Co. [1911] AC 301, Lord Atkinson referred, at 307, to:
“… the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed”
and, in relation to a claim by a purchaser for damages for late delivery of goods where the purchaser had, after the late delivery, sold the goods for a higher price than that prevailing in the market on the date of delivery, observed, at 308, that:
“… the loss he sustains must be measured by that price, unless he is, against all justice, to be permitted to make a profit by the breach of contract, be compensated for a loss he never suffered, and be put, as far as money can do it, not in the same position in which he would have been if the contract had been performed, but in a much better position.”
The result contended for by the appellant in the present case is, to my mind, similar to that contemplated by Lord Atkinson in the passage last cited. If the charterparty had not been repudiated and had remained on foot, it would have been terminated by the Charterers in or shortly after March 2003 when the Second Gulf War triggered the clause 33 termination option. But the Owners are claiming damages up to 6 December 2005 on the footing, now known to be false, that the charterparty would have continued until then. It is contended that because the Charterers’ repudiation and its acceptance by the Owners preceded the March 2003 event, the rule requiring damages for breach of contract to be assessed at the date of breach requires that event to be ignored.
That contention, in my opinion, attributes to the assessment of damages at the date of breach rule an inflexibility which is inconsistent both with principle and with the authorities. The underlying principle is that the victim of a breach of contract is entitled to damages representing the value of the contractual benefit to which he was entitled but of which he has been deprived. He is entitled to be put in the same position, so far as money can do it, as if the contract had been performed. The assessment at the date of breach rule can usually achieve that result. But not always. In Miliangos v Frank (Textiles) Ltd [1976] AC 443 Lord Wilberforce at 468 referred to “the general rule” that damages for breach of contract are assessed as at the date of breach but went on to observe that:
“… It is for the courts, or for arbitrators, to work out a solution in each case best adapted to giving the injured plaintiff that amount in damages which will most fairly compensate him for the wrong which he has suffered…”
and, when considering the date at which a foreign money obligation should be converted into sterling, chose the date that “gets nearest to securing to the creditor exactly what he bargained for”. If a money award of damages for breach of contract provides to the creditor a lesser or a greater benefit than the creditor bargained for, the award fails, in either case, to provide a just result.
In Dodd Properties v Canterbury City Council [1980] 1 WLR 433, Megaw LJ, commenting on the “general rule” to which Lord Wilberforce had referred in the Miliangos case, said, at 451, that it was “clear” that the general rule was “subject to many exceptions and qualifications”. In County Personnel Ltd v. Alan R Pulver & Co. [1987] 1 WLR 916, Bingham LJ, as my noble and learned friend then was, said at 926 that the general rule that damages were assessed at the date of the breach “should not be mechanistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule.” In Lavarack v. Woods of Colchester Ltd [1967] 1 QB 278, the Court of Appeal held that damages for wrongful dismissal could not confer on an employee extra benefits that the contract did not oblige the employer to confer and Diplock LJ (as he then was) said at 294, that:
“… the first task of the assessor of damages is to estimate as best he can what the plaintiff would have gained in money or money’s worth if the defendant had fulfilled his legal obligations and had done no more. Where there is an anticipatory breach by wrongful repudiation, this can at best be an estimate, whatever the date of the hearing. It involves assuming that what has not occurred and never will occur has occurred or will occur, i.e. that the defendant has since the breach performed his legal obligations under the contract and, if the estimate is made before the contract would otherwise have come to an end, that he will continue to perform his legal obligations thereunder until the due date of its termination. But the assumption to be made is that the defendant has performed or will perform his legal obligations under his contract with the plaintiff and nothing more.”
This passage was cited and applied by Waller LJ in giving his judgment, concurred in by Roch and Ward LJJ, in North Sea Energy Holdings NV v. Petroleum Authority of Thailand [1999] 1 Lloyd’s Rep 483 at 494/5.
The assessment at the date of breach rule is particularly apt to cater for cases where a contract for the sale of goods in respect of which there is a market has been repudiated. The loss caused by the breach to the seller or the buyer, as the case may be, can be measured by the difference between the contract price and the market price at the time of the breach. The seller can re-sell his goods in the market. The buyer can buy substitute goods in the market. Thereby the loss caused by the breach can be fixed. But even here some period must usually be allowed to enable the necessary arrangements for the substitute sale or purchase to be made (see e.g. Kaines v. Österreichische [1993] 2 Lloyd’s Rep 1). The relevant market price for the purpose of assessing the quantum of the recoverable loss will be the market price at the expiration of that period.
In cases, however, where the contract for sale of goods is not simply a contract for a one-off sale, but is a contract for the supply of goods over some specified period, the application of the general rule may not be in the least apt. Take the case of a three year contract for the supply of goods and a repudiatory breach of the contract at the end of the first year. The breach is accepted and damages are claimed but before the assessment of the damages an event occurs that, if it had occurred while the contract was still on foot, would have been a frustrating event terminating the contract, e.g. legislation prohibiting any sale of the goods. The contractual benefit of which the victim of the breach of contract had been deprived by the breach would not have extended beyond the date of the frustrating event. So on what principled basis could the victim claim compensation attributable to a loss of contractual benefit after that date? Any rule that required damages attributable to that period to be paid would be inconsistent with the overriding compensatory principle on which awards of contractual damages ought to be based.
The same would, in my opinion, be true of any anticipatory breach the acceptance of which had terminated an executory contract. The contractual benefit for the loss of which the victim of the breach can seek compensation cannot escape the uncertainties of the future. If, at the time the assessment of damages takes place, there were nothing to suggest that the expected benefit of the executory contract would not, if the contract had remained on foot, have duly accrued, then the quantum of damages would be unaffected by uncertainties that would be no more than conceptual. If there were a real possibility that an event would happen terminating the contract, or in some way reducing the contractual benefit to which the damages claimant would, if the contract had remained on foot, have become entitled, then the quantum of damages might need, in order to reflect the extent of the chance that that possibility might materialize, to be reduced proportionately. The lodestar is that the damages should represent the value of the contractual benefits of which the claimant had been deprived by the breach of contract, no less but also no more. But if a terminating event had happened, speculation would not be needed, an estimate of the extent of the chance of such a happening would no longer be necessary and, in relation to the period during which the contract would have remained executory had it not been for the terminating event, it would be apparent that the earlier anticipatory breach of contract had deprived the victim of the breach of nothing. In the Bwllfa case [1903] AC 426, Lord Halsbury at 429 rejected the proposition that “because you could not arrive at the true sum when the notice was given, you should shut your eyes to the true sum now you do know it, because you could not have guessed it then” and Lord Robertson said at 432, that “estimate and conjecture are superseded by facts as the proper media concludendi” and, at 433, that “as in this instance facts are available, they are not to be shut out”. Their Lordships were not dealing with a contractual, or tortious, damages issue but with the quantum of compensation to be paid under the Waterworks Clauses Act 1847. Their approach, however, is to my mind as apt for our purposes on this appeal as to theirs on that appeal.
My noble and learned friend Lord Bingham, in what has been rightly described as a strong dissent, has referred (in para 9) to the overriding compensatory principle that the injured party is entitled to such damages as will put him in the same financial position as if the contract had been performed. On the facts of the present case, however, the contract contained clause 33 and would not have required any performance by the Charterers after March 2003. It should follow that, in principle, the owners, the injured party, are not entitled to any damages in respect of the period thereafter. As at the date of the Owners’ acceptance of the Charterers’ repudiation of the charterparty, the proposition that what at that date the Owners had lost was a charterparty with slightly less than four years to run requires qualification. The charterparty contained clause 33. The Owners had lost a charterparty which contained a provision that would enable the Charterers to terminate the charterparty if a certain event happened. The event did happen. It happened before the damages had been assessed. It was accepted in argument before your Lordships that the Owners’ charterparty rights would not, in practice, have been marketable for a capital sum. The contractual benefit of the charterparty to the Owners, the benefit of which they were deprived by the repudiatory breach, was the right to receive the hire rate during the currency of the charterparty. The termination of the charterparty under clause 33 would necessarily have brought to an end that right.
The arguments of the Owners offend the compensatory principle. They are seeking compensation exceeding the value of the contractual benefits of which they were deprived. Their case requires the assessor to speculate about what might happen over the period 17 December 2001 to 6 December 2005 regarding the occurrence of a clause 33 event and to shut his eyes to the actual happening of a clause 33 event in March 2003. The argued justification for thus offending the compensatory principle is that priority should be given to the so-called principle of certainty. My Lords there is, in my opinion, no such principle. Certainty is a desideratum and a very important one, particularly in commercial contracts. But it is not a principle and must give way to principle. Otherwise incoherence of principle is the likely result. The achievement of certainty in relation to commercial contracts depends, I would suggest, on firm and settled principles of the law of contract rather than on the tailoring of principle in order to frustrate tactics of delay to which many litigants in many areas of litigation are wont to resort. Be that as it may, the compensatory principle that must underlie awards of contractual damages is, in my opinion, clear and requires the appeal in the case to be dismissed. I wish also to express my agreement with the reasons given by my noble and learned friends Lord Carswell and Lord Brown of Eaton-under-Heywood for coming to the same conclusion.
Vavasour v. O’Reilly & Ors
[2005] IEHC 16 (28 January 2005)
Clarke J
THE CALCULATION OF DAMAGES
There was certainly some confusion which was only cleared up in the course of the proceedings as to the precise manner in which the franchise continued in the years after the plaintiff had departed from active involvement. However, it is now clear that at the instigation of Holiday Autos what in substance amounted to a renegotiation of the arrangements between Holiday Autos and the franchisee occurred in the latter part of 1997 and became operative with effect from 1998. In substance the whole manner in which the franchisee was to be paid altered so that instead of the franchise making a gross profit derived from the difference between what it charged its Irish customers and what it had to pay to the relevant Holiday Auto agent in the country concerned all payments were subsequently made directly to Holiday Autos who paid a commission back to the franchisee which appears to have been as to 7% on the first IR£1 million of turnover and 5% thereafter. It seems likely that this change was significantly motivated by the increased use of the internet as a means of booking car hire. Indeed it seems quite probable that once the business began to operate in that fashion it became increasingly likely that Holiday Autos would wish to terminate the franchise in its entirety, which they did in fact do in 2001.
However, for the purposes of this case it is important to recall that at the interlocutory stage Costello J. (as he then was) directed that the defendants should account to the plaintiff on a monthly basis for the turnover of the franchise business. This they continued to do. When the alteration in the nature of the business occurred at the beginning of 1998, a certificate in a slightly different form was furnished which divided the business into “old business” and “new business”. I was informed, and accept, that the new business was the grossed up turnover figure attributable to the commission paid to the franchisee. The old style business was a figure for turnover which had occurred in the traditional manner by direct sales by the franchisee to the public. This old style business continued for some period into 1998. I am also informed by the plaintiff, and accept, that he was entirely unaware as to that change in the nature of the conduct of the franchise operation until the matter was put in evidence in the course of the hearing. He was therefore, not unreasonably, under the apprehension that turnover in the traditional manner (that is to say sales for which the franchisee would have received payment) in the volumes indicated in the certificates was occurring. On that basis the plaintiff’s expert forensic accountant, Mr. Peter Johnson, had prepared figures for the profits of the franchise which were based on that assumption. Overnight (after the variation was clarified) he produced a revised report, dated 12th January, 2005, reflecting the new situation that had emerged in the course of evidence on the previous day. In that report he sets out what he describes as an upper estimate and a lower estimate of the value of 50% of the franchise net profits. The difference between the two stems from the treatment of the expenses attributable to the conduct of franchise business. The lower estimate is taken on the basis of accepting fully all of the expenses which were included in the statutory accounts of Globetrade Marketing Limited in respect of the business. The upper estimate is simply based on taking half of those expenses. The reason given by Mr. Johnson for tendering that figure was his experience that it was possible and not entirely unusual that accounts for companies within a group of companies do not necessarily allocate the expenses attributable to each company in an exact way. In this regard he noted, and I accept, that in most cases there are no revenue consequences resulting from any such distinction in that for practical purposes groups of companies, as defined in the Taxes Acts, are taxed on their collective profits by means of allowing losses occurring in one company to be the subject of an allowance in another profit making company within the same group. Mr. Johnson also accepted that it was entirely appropriate that where, as here, one company within a group provided services to another company within the group an appropriate charge for those services should be made. He did not, therefore, disagree in principle with the making of a charge but simply questioned whether the charge might not have been overstated.
To that end the defendants led evidence from Greg O’Shea, a partner in Burke & Company, who at all material times were auditors to Globetrade. Mr. Burke indicated that in respect of many of the years to which his evidence related he had himself carried out the calculation as to the sums attributable to the franchise business by way of costs and which should, therefore, be at least notionally paid by Globetrade to other companies within the group. While a number of minor matters were not absolutely clear (vis the fact that in some years there may have a round sum and the fact that for the last year the expenses seemed to continue beyond the date when the business ceased – this latter being explained by the need to wind-up the business) I am not satisfied on the evidence that there is anything like a sufficient basis for me to go behind the statutory accounts. In the circumstances it seems to me that the profits attributable to the franchise in respect of which the plaintiff was entitled to a 50% share are those set out in the lower figure given by Mr. Johnson. To those figures I must apply two reductions. For the reasons indicated above I must exclude the losses which appear to derive from the statute barred period. Furthermore I must reduce all losses subsequent to 1995 to 60% of their full value. On that basis the allowable losses appear to me to be the following:-
TABLE
Year Profit/loss 50% Attributable to Plaintiff Reduction Allowable Balance
1992 2,203 1,102 N/A 1,102
1993 (9,036) (4,518) N/A (4,518)
1994* 9,773 4,887 N/A 4,887
Net Share of profit to end 1994 1,471
Estimated net shares of profit to 14th November, 1994 1,000
1995 21,856 10,928 Statute Barred 0
1996 5,051 2,526 Statute Barred 0
1997 (24,824) (12,412) Statute Barred 0
1998* 39,891 19,946 60% and Estimated statute barred to 22nd June 6,000.
1999 31,771 15,886 60% 9,532
2000 65,000 32,500 60% 19,500
2001 (12,000) (6,000) 60% (3,600)
Total allowable losses £32,432
Notes:-
* While no specific evidence was given as to how the profits attributable to 1994 and 1998 should be divided up as and between the periods which I found to be statute barred and those which I found not to be statute barred, I have made an estimate based on the proportion of the years concerned.
Furthermore, it will be noted from the above table that the net profits in the period which I found to be statute barred were in fact extremely small in that the net position for the entirety of the years 1995, 1996 and 1997 showed a profit of just over IR£1,000 while the broken years showed an approximate profit in the statute barred portions thereof of approximately IR£10,000.
INTEREST
I have next to consider whether it is appropriate to allow courts act interest to the plaintiff. In the ordinary way the plaintiff has suffered commercial losses and a loss of his bonus payment and should be entitled to interest. I do have to have some regard to the fact that it has taken a very long period of time indeed for these proceedings to come on for hearing. There was a significant volume of debate at the hearing concerning the blame that might be attached, in particular to the defendants, in respect of delays experienced in the discovery process had otherwise in the proceedings. In particular reliance was placed upon the fact that Morris J. (as he then was) felt at one stage that the actions of the defendants warranted the dismissal of their defence. However, the precise circumstances which led to the making of that order are not a matter of record and furthermore the decision of Morris J. was in part overturned on appeal by the Supreme Court. However, for the purposes of this aspect of the case it seems to me sufficient to note that it is difficult to blame the plaintiff for any of the delays which occurred in the case up to the year 1999. Thereafter, and it would appear through no fault of his own, the plaintiff has had difficulty in obtaining legal representation which ultimately led to the circumstances in which he was required to represent himself. Equally it must be said that there is no basis for suggesting that the defendants were in any way responsible for those difficulties. Were it not for those difficulties it seems to me that it is likely that this case would have come on for hearing no later than 2001 and would have been the subject of a judgment by the end of that year. In the circumstances it seems to me that the justice of the case would be to award Courts Act interest on each of the sums allowed in the above table and the bonus payment at the appropriate courts act rate from the last day of the year to which the sum is attributable to the end of 2001. Hopefully it will be possible for the parties to agree the appropriate calculation together with the calculation of the sum in Euros to which the plaintiff should be entitled on the basis of the above together with interest calculated on the above basis.
Irish Telephone Rentals v. I.C.S. Building Society
[1992] 2 IR 525
Costello J. H.C.
Complaints about the system were made verbally to the plaintiff by Mr. Nolan the defendant’s general manager. He complained about the system at a meeting in December, 1985, and at six meetings in 1986. A letter written in May, 1987, requiring information about the amount payable under clause 11 should the defendant terminate the contract was written because of dissatisfaction with the system. This dissatisfaction deepened and towards the end of 1987 an expert consultant was called in to advise the defendant. As a result, specifications for a new system were prepared and tenders sought. When the plaintiff’s tender was not accepted the letter of the 23rd May, 1988, was written terminating the contract. I am satisfied that this decision did not result from a desire to avoid contractual obligations which the defendant found to be onerous but because of defects in the system which were found to be insupportable.
In reaching the conclusion that the problems which the defendant encountered were caused by the defects which I have outlined I have not lost sight of other possible causes. I have heard the evidence of the telephone operators who were employed by the defendant at the relevant time. They were both experienced telephonists and the delays were not caused by their inadequacies. There are now two operators and a full-time receptionist employed by the defendant. But this is because of the expansion in the defendant’s business which has occurred since 1988. Prior to, and at the time of the termination of the contract the telephonist acted as a receptionist. But there is a record of the level of daily calls received by the defendant at the date of termination and these could have been adequately handled had the system not been defective. The problems the defendant encountered were not the fault of the Telecom Eireann lines or of an inadequate number of lines for incoming calls at that time. I have had evidence that the Mitel System with cradle-tapping internal ‘phones has been installed elsewhere and works well. There are, however, several possible explanations as to why the system worked well elsewhere but not on the defendant’s premises. For example, the calibration on the cradle-tapping system in other premises might have been different or the requirements for transferring internal calls might have been on a lower level, so that the fact of the system working well elsewhere does not vitiate the conclusions which, on the balance of probabilities, I have arrived at on the evidence in this case.
That evidence satisfies me that by 1988 the delays experienced by outside callers were of a serious nature. As a result the installations hired by the defendants did not provide a telephone communications system which would enable persons wishing to communicate by telephone with the defendant to have their calls answered within a time which would be acceptable to a reasonable caller. The system, in my judgment, was by that time not fit for the purpose for which it was being hired.
….Clause 11 provides as follows:
“If the subscriber” (that is, the defendant) “shall repudiate this contract and the company” (that is, the plaintiff) “shall accept such repudiation so as to terminate this contract the company may thereupon remove the installation and the subscriber shall pay to the company all payments then accrued and also a sum equal to the present value on a five per cent basis of the remaining rentals that would have been payable under this contract if not so terminated less an allowance of twenty-five per cent to cover the estimated cost of maintainence and value of recovered material. The said sums shall be payable as liquidated damages it being an agreed estimate of the loss the company would suffer.”
I have the following comments to make on this clause.
(1) The estimate of the plaintiff’s loss arising from premature termination is based on the gross rents outstanding for the unexpired term of the contract. However, the clause accepts, and correctly accepts, that the plaintiff is not entitled to the full amount of these rents. It also accepts that whatever may be the figure for the agreed loss which the plaintiff may suffer that figure should be discounted because instead of receiving the balance of the rents in installments over the years an accelerated payment of the rent will be made to the plaintiff. The discount in clause 11 is 5 per cent. Whilst the defendant readily accepts the principle of discounting it is urged that the sum estimated for the plaintiff’s loss should be discounted at a higher rate.
(2) The figure for the gross rent is to be reduced, according to clause 11, by a further 25 per cent of the discounted rent because (a) the plaintiff will have been saved maintainence costs during the unexpired term and (b) an allowance should be given for the value of the installations recovered. The plaintiff’s evidence is that the 25 per cent deduction was calculated by allowing a figure of 5 per cent of the discounted gross rent as the percentage attributable to maintainence charges and 20 per cent of the discounted gross rent as the percentage attributable to the value of the returned installations.
(3) It will be observed that the formula is based on a deduction from the gross amount of the outstanding rent of a sum equivalent to 28.75% of the gross rent (25% of 5% of the gross rents) in respect of the estimated cost of maintainence and the estimated value of the recovered installations. The clause was attempting to make an estimate of what the plaintiff would lose by the contract’s premature termination. As the correct measure of the plaintiff’s loss on premature termination at any point of time during the life of the contract is the profit it would have earned in the outstanding period of the contract’s life the formula in clause 11 can only be correct if it produces a figure which approximates to that profit. It follows, therefore that this clause can be shown to be a correct estimate of the plaintiff’s loss if in every case of premature termination the profit thereby lost is 71.25% of the gross rental then outstanding.
(4) Clause 11 is a standard clause. All the plaintiff’s hiring contracts contain this estimate of the loss suffered on each of the plaintiff’s contracts should they be prematurely terminated. The defendant has submitted that the sum calculated in accordance with the condition does not represent a genuine pre-estimate of the actual loss which the plaintiff sustained as a result of the wrongful repudiation of the hiring agreement but is a penalty clause which the court should not enforce. The courts have evolved various rules for considering whether a stipulated sum is a penalty or a genuine pre-estimate. That which is relevant to the present case is that stated by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79 at p. 87:
“It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.”
The application of this principle is to be seen in the majority decision of the Court of Appeal in England in Robophone Facilities Ltd. v. Blank [1966] 1 W.L.R. 1428 in which the court considered a contract for the hiring of a telephone-answering machine for a seven year period which was repudiated before the hiring began. The hiring agreement contained a clause which made provision in the event of premature termination for the payment of agreed liquidated damages equal to fifty per cent of the total of the rentals due. In deciding that the sum of fifty per cent was a genuine pre-estimate of loss and not a penalty Lord Diplock examined what would be recoverable by way of damages assessed on common law principles and concluded that because 50 per cent of the gross rent would not produce a figure which was “extravagantly greater”than those damages the clause was enforceable.
Before considering in greater detail the operation in this case of clause 11 I should give some more detail of how the plaintiff’s claim is made up.
The plaintiff has calculated that there were 9 full years of the agreement to run from the date of termination. The annual rent at that time (which had been increased over the years pursuant to the rent revision clause) was then £1,438.16. This annual rent was discounted over a nine year period by 5 per cent giving a discounted figure of £10,222.15. There was added to this one quarter’s rent unpaid in 1988 (that is, £359.51) giving a total of £10,581.69. A figure of 25% of this sum was then calculated, that is a sum of £2,645.42. This was deducted from the sum of £10,581.69 giving a figure of £7,936.27. It is to be noted that the gross rent for the unexpired nine year period of the hiring was £13,043.62 according to these calculations.
I have come to the conclusion that the formula contained in clause 11 does not produce a liquidated sum that can properly be regarded as a genuine pre-estimate made at the date of the contract of the loss which the plaintiff would suffer should the contract be prematurely determined and that it is in reality a penalty and therefore unenforceable. My reasons are as follows:
(a) In estimating the plaintiffs loss clause 11 correctly allows a deduction from the gross rents of the sums saved in maintainence charges. But the evidence establishes that the 5 per cent figure is an estimate not of all the maintainence charges which would have been incurred had the contract run its course but only an estimate of the cost of materials used in maintainence and expenses such as daily allowance, petrol and the travelling expenses of maintainence staff. The wages of the maintainence staff are excluded. Support for this approach is claimed by the plaintiff from an unreported judgment of the High Court in England (the transcript of which was made available) in Telephone Rentals Ltd. (the plaintiff’s English parent company) v. Photophone Ltd. delivered the 8th February, 1957.
I do not think that this approach is correct and, with respect, I cannot follow that judgment to which I was referred. In estimating the loss which the plaintiff would suffer the draftsman of clause 11 should have attempted to estimate the net profit which the plaintiff would have earned had the contract been performed. This net profit should have been calculated by deducting the actual total costs of maintainence and not only a proportion of those costs. It seems to me that this error produces an estimate very much in excess of the plaintiffs actual loss and cannot be regarded as a genuine pre-estimate of that loss.
(b) The clause makes no allowance for other deductions which in my judgment should have been made from the gross rent figure. The evidence establishes that when originally fixing the rent under the contract the plaintiff took into account not only the likely maintainence charges but also finance charges, administrative costs and engineering costs. Any genuine calculation of the actual loss likely to be suffered from premature termination should make an allowance for these charges as otherwise the plaintiff would receive more than the profit it would have made had the contract run its course. As I will show later it would have been a simple enough matter to estimate what that profit would have been. But by only deducting maintainence charges (and only a portion of such charges at that) the clause seriously overestimates the profit which the plaintiff would have made on the hiring.
(c) Part of the twenty-five per cent deduction is based on an estimate of the value of the materials obtained at the date of premature termination. The evidence established that the clause was based on the assumption that this value would be twenty per cent of the discounted gross rents. This, in my view, is an entirely arbitrary figure and cannot be regarded as a genuine pre-estimate of the value of the recovered installations. It is to be borne in mind that the hiring was to last for twelve years and that there was a rent variation clause. Perhaps by a coincidence 20 per cent of the discounted rent might at some point during that period approximate to the depreciated value of the installations. But this would be mere coincidence; there is no real connection between the figures produced by these calculations. The facts of this case illustrate the point. Twenty per cent of the discounted rent at the date of termination of the broadcasting contracts was £2,116. But in fact the installations when returned were valueless. Twenty per cent of the discounted value of the outstanding rents under the telephone contracts was £16,789. In fact their value was only £7,500 (only the switchboard being marketable). It seems to me that the relationship between discounted value of outstanding rents due at any point of time during the contract and the then value of the installations at that point of time is so tenuous that an estimate of the plaintiff’s loss based on this connection cannot be a genuine one.
(d) The result of the operation of the formula is to award a liquidated sum equal to 71.25 per cent of the gross rent, less five per cent for accelerated payment. This predicates a net profit of 71.25 per cent had the contract not been terminated. This is quite an enormous not profit. Whilst the onus is on the party who alleges that a clause in a contract is a penalty and not a genuine pre-estimate of the loss which would be suffered by premature termination I think the onus is discharged once the clause in question is based on the assumption that this is an estimate of the profit the plaintiff lost. The plaintiff is engaged in the business of letting goods on hire. Its turnover in its profit and loss account would therefore (apart from an occasional and small sum received for goods recovered prematurely and sold) represent its annual rents received under all its contracts. Its profit and loss account would show the net profit (after deducting all maintainence charges administrative and financial charges and depreciation). This would indicate the average net profit on each of its hiring contracts. If clause 11 (which is a standard clause in all its contracts) is a correct estimate of the net profit made on each of its hiring contracts this would mean that the net profit figure in its profit and loss account would be about 71.25 per cent of its turnover.
The plaintiff has not produced its profit and loss account and so I do not know what it shows. But I am entitled to apply the knowledge of financial affairs which is available to every reader of the daily press from which companies’ net profits as a percentage of their turnover is shown for an extensive range of different classes of businesses. These, of course, vary widely. In the retail trade a net profit of ten per cent of turnover is an average figure. In some manufacturing companies it may be considerably less or considerably more. A net profit of seventy one per cent of turnover would be a staggeringly large one in any business and in the absence of proof that this is what the plaintiff earned I am driven to the conclusion that the estimate of loss contained in clause 11 is not a genuine pre-estimate but is a penalty.
I cannot therefore allow the plaintiff’s claim based on clause 11 and must assess damages based on the actual loss I think the plaintiff suffered.
The plaintiff recovered back the equipment let under the contracts but was unable to re-let or sell them. The plaintiff’s damages will therefore be an estimate of the profit lost on the transaction, appropriately discounted for accelerated payment. The gross rent which would have been received for the nine year balance of the contract was £13,043.62 (assuming no increase, in the rent, an assumption the plaintiff has made in its calculations). I have been given no information as to what the plaintiff’s average net profit is, but bearing in mind that the evidence establishes that the plaintiff’s business is a competitive one (which would oblige them to keep their hiring charges at a reasonable competitive level) and that the plaintiff is a long established firm (which would give it the benefit of a considerable good-will) I would consider it probable that a net profit of twenty per cent of gross rents is what the plaintiff would have earned on average. There is nothing to suggest that there are any special circumstances which would justify an award for breach of this particular contract on a basis higher than average net profit and so the plaintiff’s loss of profit for the last nine years of this transaction is £2,608.72 (20% of £13,043.62). I have very little evidence to help me on how this sum should be discounted and I will, in the absence of evidence, accept the five per cent figure contained in clause 11. This means that there should be a deduction of £130.47, giving an award for the loss the plaintiff has suffered for this period of £2,478.29. To this is to be added the loss in relation to one quarter of the 198
8 rent, namely, £359.51. Twenty per cent of this sum, discounted by five per cent is £68.04. This gives a total figure for damages of £2,546.69. The plaintiff is entitled to an award of this sum.
I have assessed damages in the light of the facts established in this case. I do not think that I am required to assess them on the different basis which the facts established in In re Ranks (Ireland) Ltd. (In liquidation) [1989] I.R. 1 required.
Kelleher & Anor -v- O’Connor practicing as Don O’Connor & Company
[2010] IEHC 313 (16 July 2010)
JUDGMENT of Mr. Justice Clarke delivered on the 16th July, 2010
1. Introduction
1.1 In 2001 the plaintiffs (“the Kellehers”,“Mr. Kelleher” and “Mrs. Kelleher”) were interested in buying a restaurant premises at No. 1 Parkwest, Mallow in Cork. Their purpose was to buy same as an investment with the intention being to let it to a restaurant operator. In that regard, they retained the defendant (“Mr. O’Connor”) to act as their solicitor.
1.2 There can be little doubt but that the purchase has turned out to be unsuccessful. The Kellehers say that Mr. O’Connor was negligent in the way in which he handled the transaction on their behalf and bring these proceedings for damages arising out of that alleged negligence.
1.3 The problem with the restaurant stemmed from its status under the Food Hygiene Regulations 1950 as amended (“the Food Hygiene Regulations”). There is no doubt that the restaurant encountered significant difficulties with the authorities in relation to that status. It is said that Mr. O’Connor’s handling of the transaction, insofar as it related to dealing with questions under the Food Hygiene Regulations, was negligent. Some further reliance is placed on behalf of the Kellehers on planning issues and the user covenant in the relevant lease.
1.4 Against that general background, it is necessary to turn first to the facts.
2. The Facts
2.1 Mr. Kelleher is involved in the IT business. Mrs. Kelleher, prior to the events which I am about to describe, helped part-time in that business.
2.2 In 2001, the Kellehers saw a restaurant known as “Pat’s Chat” for sale. The restaurant was located in one of a series of shop type units which were built on the same campus as the Tesco Store in Mallow. In that context, the Kellehers approached the auctioneer, Mr. Michael O’Donovan, who had carriage of the sale on behalf of the owner, a Ms. Patricia Piggott. At that time, the evidence establishes that the restaurant being run by Ms. Piggott provided a full, if simple, lunch menu with, for example, Roast Beef, Bacon or the like. The Kellehers went to the restaurant themselves to see how it worked.
2.3 The Kellehers entered into negotiations with Mr. O’Donovan and agreed a purchase price of IR£120,000.00. The Kellehers then instructed Mr. O’Connor to act as their solicitor.
2.4 Mr. Kelleher gave uncontradicted evidence, which I accept, that when initially instructing Mr. O’Connor, he asked Mr. O’Connor to make sure that everything under the Food Hygiene Regulations was in order, and that the restaurant was in compliance.
2.5 A contract, dated the 7th July, 2001, was ultimately signed, which provided for a closing date of the 3rd August, 2001. On the Kellehers case it is said that there was a subsidiary agreement to the effect that the premises would be taken over directly by the Kellehers as a going concern. It will be necessary to return to this issue in due course.
2.6 However, in any event, Mr. Kelleher went to the premises some two weeks or so before the anticipated closing date but found that it had already been closed from a date, apparently, around the 13th July. Thereafter, the sale closed in the ordinary way.
2.7 Prior to that closing a potential tenant who wished to rent the premises for use of a restaurant had been identified. A tenancy agreement was entered into providing for a term of four years and eleven months, and a rent of IR£250.00 per week. The intention of the tenant concerned was to open an Indian Restaurant. However, at or around the time when the restaurant was due to open, problems with the Health Authority emerged, which meant that the restaurant did not, in fact, open. Not surprisingly the tenant concerned ultimately left. The Kellehers had discussions with officials from the Health Authority which resulted in alterations being carried out to the premises, which in turn resulted in the premises being registered with limitations for the purposes of the Food Hygiene Regulations. It will also be necessary to return to the detail of the dealings by officials from the Health Authority in relation to the premises in due course. Thereafter, the restaurant operated for a period through tenants at a lower rent but was ultimately run by Mrs. Kelleher herself, which position continues to this day. As a result of the limited certification of the premises, to which I have referred, the number of covers permitted was reduced to 24 (it would appear that, in practice, prior to the sale, the seating was 40). In addition, significant limitations were imposed as to the type of food which could be served. Initially all that was permitted was cold food. Subsequently a limited entitlement to serve certain types of hot food was permitted.
2.8 Against that general background, two other aspects of the sequence of events need to be commented on.
2.9 First, it is now clear (although it would not have been clear at the time of the sale or the completion of same) that concerns had been expressed to the previous owner, Ms. Piggott, by Health Authority officials, some months prior to the sale which is central to these proceedings. A detailed letter setting out the concerns of the Health Authority had been written. It is clear, therefore, that problems concerning the restaurant had emerged and were already in being, known to Ms. Piggott, but not disclosed to the Kellehers, prior to the events which give rise to these proceedings.
2.10 On the other hand, it would seem that up to the time when Ms. Piggott closed her restaurant (and, therefore, at the time of the contract for sale), the restaurant was properly registered for the purposes of the Food Hygiene Regulations and did not have any limitation on its ability to trade such as came into place in the circumstances which I have already described. Strictly speaking, therefore, the restaurant was, at the time of the contract, registered and does not appear to have been operating outside the terms of its registration in any material respect. It was, however, clear that trouble was coming down the tracks.
2.11 So far as the conduct of the conveyancing process is concerned, a number of facts need to be noted. First, it should be said that Mr. O’Connor did not conduct any pre-contract requisition exercise relating to food hygiene matters. This is an issue to which it will be necessary to return. Second, Mr. O’Connor raised requisitions in the standard form recommended by the Law Society, which included requisitions specific to the Food Hygiene Regulations (Requisition 32). I will refer in more detail to those requisitions and the replies thereto in due course. However, for present purposes it should be noted that the reply to Requisition 32.1.b suggested that there was no evidence available of registration under the provisions of the Food Hygiene Regulations 1950, as amended, while the reply to Requisition 32.2.a suggested that no notice had been served by the Health Authority and that the vendor or her agents had no information of an intention to serve any such notice.
2.12 In general terms it is suggested that those replies ought to have led Mr. O’Connor to conduct further inquiries.
2.13 Against that background, it is next necessary to turn to the issues in the proceedings.
3. The Issues
3.1 The conveyancing issues raised on behalf of the Kellehers suggest that Mr. O’Connor was negligent in four respects:-
A. It is said that he was negligent in failing to raise the food hygiene issues as a pre-contract set of requisitions;
B. It is said that, in the light of the requisition replies to which I have referred, Mr. O’Connor should have engaged in further inquiries;
C. It is said that, because of the specific request made by Mr. Kelleher to Mr. O’Connor concerning the Food Hygiene Regulation regime, at the time when Mr. O’Connor was initially instructed, there was an added obligation on Mr. O’Connor to conduct inquiries (or, perhaps, to advise Mr. Kelleher to conduct inquiries) into the food hygiene situation; and,
D. It is said that Mr. O’Connor was negligent in allowing the premises to shut up for business prior to the closing of the transaction.
3.2 In addition, although these were not central issues in the case, it is said that Mr. O’Connor was also negligent in allowing the sale to go through in circumstances where it is said that use as a restaurant was both in breach of the planning permission in respect of which the unit operated and in respect of a user covenant in the lease under which Ms. Piggott, and through her the Kellehers, held the property.
3.3 The position of Mr. O’Connor in respect of each of those items needs also to be noted.
3.4 While not admitting negligence, I did not understand counsel for Mr. O’Connor to contest the evidence tendered on behalf of the Kellehers to the effect that the recommended and accepted practice for solicitors dealing with the purchase of restaurants was to raise food hygiene matters as a pre-contract matter. Likewise, I did not understand counsel for Mr. O’Connor to contest the expert evidence that Mr. O’Connor should have followed up on the reply to requisitions which asserted that no evidence of registration was available.
3.5 However, under both of those headings, it was suggested on behalf of Mr. O’Connor that there was no causal link between any such inaction and any adverse consequences for the Kellehers.
3.6 So far as the third item is concerned, Mr. O’Connor’s position was that there was no evidence to suggest that the ordinary practice of competent solicitors involved making direct inquiries of the Health Board or its officials concerning food hygiene matters. In those circumstances, it is argued that Mr. O’Connor fulfilled any duty of care which he might have by raising the appropriate requisitions.
3.7 So far as the fourth item is concerned, there was some debate about the precise instructions which Mr. O’Connor was bound by, but of greater relevance is the contention made on behalf of Mr. O’Connor to the effect that there was again no causal link between the fact of the closure of the premises by Ms. Piggott in advance of it being handed over to the Kellehers and any of the difficulties which the Kellehers subsequently encountered.
3.8 So far as the allegation that operating the premises as a restaurant is in breach of planning permission is concerned, it is suggested that, on a proper analysis of the relevant planning regulations, a restaurant is a permitted use. So far as the user covenants in the lease are concerned, attention is drawn on behalf of Mr. O’Connor to the fact that no action has been taken by the landlords, notwithstanding the fact that the premises have been in use as a restaurant of one type or another for a very considerable period of time such that, it is said, there could be no question of any adverse consequences now arising.
3.9 Finally I should record that there were serious issues in relation to damages with significant controversy both as to fact and principle.
3.10 I propose dealing with the issues in the order in which I have addressed them, and in that context it is appropriate to turn, first, to the requisitions including the question of whether same should have been raised pre-contract.
4. The Requisitions
4.1 In relation to the issues concerning requisitions I had the benefit of the evidence of Ms. Áine Hynes. Ms. Hynes is an experienced conveyancing solicitor who has also acted as both a lecturer and a tutor in the Law Society since 2000. She is co-author of the Law Society’s Complex Conveyancing Manual. I have no hesitation in accepting Ms. Hynes’ expertise in these matters.
4.2 I also accept Ms. Hynes evidence that it is standard proper conveyancing practice for a solicitor to raise food hygiene matters as a pre-contract requisition. The logic of this position is clear. The reason for raising certain matters pre-contract is that issues might emerge as a result of such inquiries, which might lead either to a recommendation or advice to the relevant purchaser client not to enter into a contract at all or to only enter into a contract provided that appropriate conditions are included to protect the interests of that purchaser client. While there may be problems which, emerging post-contract and in the course of investigation of title, can be adequately dealt with, it is also the case that a contractually bound purchaser may encounter difficulty in dealing adequately with issues which emerge post-contract and which have not been the subject of appropriate conditions. It is for that reason that queries relating to certain matters are recommended to be raised pre-contract. As indicated, I am satisfied that food hygiene queries come into that category.
4.3 However, it seems to me that counsel for Mr. O’Connor was correct when he argued that there was no reason to believe that the replies which were ultimately given to Requisition 32, would have been any different had they been raised pre-contract as opposed to, as it turned out they were, post-contract. Therefore, nothing seems to me to turn on the specific question of the time when these requisitions were raised. Whether Mr. O’Connor’s response to those replies was appropriate is the next issue to which I will have to turn. However, the conveyancing process in this case, as it happens, was not influenced by the timing of the raising of requisitions. This is not a case where it can be said that the fact that a party had entered into a contract of a particular type placed them at a disadvantage, which disadvantage could have been avoided had pre-contract requisitions been engaged in. In such a case the timing of the raising of requisitions might well be crucial for there would be a causal link between that timing and the consequences. A party stuck with an unfavourable contract because certain matters were not identified pre-contract, will clearly be able to establish a causal link between whatever problems they are stuck with as a result of that unfavourable contract and the fact that requisitions were not raised at the appropriate time. However, that is not the case here. Nothing actually changed because of the timing of the raising of the requisitions in this case. That leads to the question of Mr. O’Connor’s response to the requisitions as were actually raised.
4.4 In this regard I also accept the evidence of Ms. Hynes that the reply to Requisition 32.1.b gives rise to a necessity for further inquiry. Requisition 32 reads as follows:-
“32. FOOD HYGIENE REGULATIONS
1.a. Is the use of the property one which requires to be registered with the Local Health Authority pursuant to the Food Hygiene Regulations 1950 as amended.
b. If so furnish now evidence of such registration.
c. Furnish evidence of compliance with any conditions of undertakings attached to such registration.
2.a. Has any notice been served by the Health Authority or has the Vendor or his gents any information of an intention to serve any such notice.
b. If any such notices have been received furnish now full copies thereof stating whether same have been complied with either in full or in part.
c. With regard to any such notices furnish details of any undertakings given in respect thereof.”
4.5 Requisition 32.1.a. was replied to as follows:-
“Yes. Purchaser must Register with the Local Health Authority.”
However, Requisition 32.1.b. was simply replied to by:-
“None available.”
As pointed out by Ms. Hynes, it is difficult to see how that answer could have been considered to have been correct or adequate. It was correctly accepted by the vendor in response to Requisition 32.1.a. that the premises needed to be registered. However, under 32.1.b., it was suggested that there was no evidence available of registration. That could only mean one of two things. Either the premises had not been registered, in which case it had been operating illegally – a matter that would undoubtedly be of the very greatest concern to any potential purchaser. Alternatively, the premises had been registered but the vendor was declining to make available evidence of that registration. In those circumstances, as Ms. Hynes pointed out, a serious question arises as to why the vendor is not in a position to make evidence of registration available.
4.6 I am, therefore, satisfied that Mr. O’Connor was also negligent under this heading. However, a question of causation also arises here just as it did under the last heading. The question which arises is as to what action Mr. O’Connor should have taken. It seems to me that there were two ways in which Mr. O’Connor could have pursued the matter. He could have insisted that the vendor’s solicitor actually provide the relevant information. Alternatively, he could have sought to check the Register himself. However, the problem with the Kellehers case is that, in either eventuality, nothing untoward would ultimately have shown up. The fact is that the premises were registered. There was no limitation on the Register. The original Register was produced in court. It is a relatively sparse document containing basic details of the proprietor and the premises and also including, where relevant, the fact that there may be a limitation on the certification of the premises concerned. At the material time, that is to say at the time of the sale (whether pre-contract or investigation of title), these premises were registered and had no limitation. Therefore, had Mr. O’Connor insisted on evidence of registration being produced, the vendor’s solicitor could easily have produced such evidence which would not have revealed anything untoward. Likewise, if Mr. O’Connor had sought to investigate the registration himself, he would have come up with the same answer. The premises were registered and no limitation was placed on that registration so far as the Register was concerned.
4.7 Again, I agree with counsel for Mr. O’Connor that there is no causal link, therefore, between the undoubted negligence in failing to pursue evidence of registration and any adverse consequences for the Kellehers, for if Mr. O’Connor had pursued evidence of registration, he would simply have identified that the restaurant had indeed proper and unlimited registration.
4.8 I should now move to the fourth question which is as to whether anything flows from the fact that the premises was closed by Ms. Piggott in mid July and was, thus, not continuing to operate as of the date of sale. I turn to that question and will, thereafter, return to question three.
5. The Closure of the Premises
5.1 In relation to the operation of the Food Hygiene Registration system at the relevant time, I had the benefit of the evidence of Ms. Sarah O’Malley who was the authorised officer relevant to the district in which the restaurant was situate for most of the period with which I am concerned. Ms. O’Malley gave evidence that in circumstances where there was a simple transfer of proprietorship and where the new proprietor intended to carry on more or less the same business as the existing proprietor, then it is possible to effect a change in registration by substituting the name of the new proprietor as she put it “on the proviso that the nature and extent of the business does not change”. However, in this case Ms. Piggott had closed the business and such a “seamless” transition was not practicable. In those circumstances it appears that it would have been necessary for any new proprietor (whether the Kellehers or a tenant operating from them) to have given 28 days notice to enable a new registration to take place.
5.2 However, it does not seem to me on the facts of this case that a seamless direct transfer of proprietorship would have been open. What the Kellehers intended was to let the premises to a tenant who intended to make a significant alteration in the nature of the business. As pointed out by Ms. O’Malley it is only where the existing business continues largely unaltered that a simple transfer of proprietorship can occur. That would not have been open on the facts of this case.
5.3 Likewise, it is clear that the Health Authority had already expressed serious reservations in writing to Ms. Piggott about her business continuing to operate in the way in which it was at the relevant time. It is clear that that was a problem that was not going to go away. Even if it had been possible to effect a seamless change of proprietorship, it is clear that the problem about the existing business would have emerged sooner rather than later in any event. While a simple transfer of proprietorship might have been administratively easier, it would not have gotten over the problem that there was a serious issue coming quickly down the road about this restaurant in any event. In those circumstances, it does not seem to me that any connection exists between the fact that Ms. Piggott was allowed to close her restaurant and the ultimate problems which emerged. A simple change of proprietorship would not have been available in any event. Even if it was, the problems which ultimately caused significant difficulties for the Kellehers were going to happen anyway and would have happened quite soon.
5.4 That leads to the third question which concerns the inquiries which it is said Mr. O’Connor should have carried out on behalf of the Kellehers. I turn to that issue.
6. The Extent of the Inquiries
6.1 While it is normally logical to consider questions of negligence before questions of causation, for reasons which I hope will become apparent, I propose considering the issues under this heading in the reverse order.
6.2 The reason for taking that approach stems from asking the question as to the circumstances in which it might have been possible for the Kellehers to avoid the problems which ultimately beset them. In order to have avoided those problems, it is necessary that the Kellehers would have to have found out about them before the sale closed. That the problems were there in the background is clear from the evidence given by the Health Authority officials to the effect that serious concerns had already been expressed about whether the building was up to being used at the level which Ms. Piggott was employing. It is clear that many of difficulties that had already been identified were not capable of resolution. The site is completely built on. There was no room for extension. One of the most significant complaints was that the kitchen was too small for the kind of business being done. The only way the kitchen could be extended was by eating into the seating area. Likewise, many of the facilities which the Health Authority felt would need to be in place in order to allow for a more elaborate menu to be provided, were just not capable of being provided within the confines of the building. The problems were not soluble. It follows that the only way in which the Kellehers could have been relieved of the difficulties which they ultimately encountered was if the fact that there were problems and the fact that such problems were likely to be insoluble (in the sense that there were no remedial works that could be carried out to allow a more elaborate business than that ultimately permitted to be carried on) was identified prior to closing. In order, therefore, for there to be a causal connection between any negligence on the part of Mr. O’Connor and the undoubted consequences which the Kellehers suffered, it is necessary that that negligence should be such as would lead to the inference that, had it not been for that negligence, the Kellehers would have become aware of the relevant problems in advance of closing and could, therefore, have legitimately pulled out of the contract.
6.3 In substance, it seems to me that that question comes down to one of analysing whether there were any steps which should have been taken by Mr. O’Connor which would have led to direct contact, either by him or by the Kellehers, with relevant officials of the Health Authority. On the evidence of the Health Authority officials it seems clear that those officials would not have disclosed the letter which they had written to Ms. Piggott, for that letter would have been regarded as a confidential matter between the Health Authority and Ms. Piggott. However, it is equally clear on the evidence of the Health Authority officials that, had they been consulted at any material time prior to the Kellehers taking over the premises, the substance of their concerns relating to the restaurant business then being carried on would have been discussed with the Kellehers or Mr. O’Connor. Indeed, it would appear that it is common practice (and a very sensible one at that) for Health Authority officials to discuss, in advance, with proprietors, the requirements which they are likely to impose so that the relevant proprietor can adjust any proposals in a way that meets any concerns of the Health Authority. There can be no doubt, therefore, that had contact been made, prior to closing, with the Health Authority officials concerned, then the problem and its extent, together with the difficulties in solving it in any way other than the partial solution that was ultimately achieved, would have been identified. The question which arises, therefore, is as to whether there was any negligent act on the part of Mr. O’Connor which resulted in contact not taking place but where, had Mr. O’Connor not acted in a negligent fashion, it would be appropriate to infer that contact with its resulting information would have ensued.
6.4 The evidence does not support the view that it is common or recommended practice for solicitors, acting on behalf of purchasers of restaurant premises, to make direct contact with Health Authority officials to discuss the registration status of a restaurant property. That seems to me to be an entirely understandable position. The details of the requirements which the Health Authority might have, the practicality of complying with those requirements, solutions to problems and the like, are matters which, in an ordinary case, are much more likely to be effectively dealt with directly between the relevant proprietor and Health Authority officials. A solicitor’s obligation is to ensure that proper registration is in place and that no adverse notices have been served or are contemplated. Those are the sort of legal matters which are properly within the remit of a solicitor. Practical questions about how the restaurant is actually going to operate are more properly matters to be dealt with between a proprietor and Health Authority officials.
6.5 I am not, therefore, satisfied that there is any basis for suggesting that a solicitor will ordinarily be negligent in not making inquiries himself. The question does, however, arise as to whether, in those circumstances, and in the light of all the other circumstances of this case, it was negligent of Mr. O’Connor not to advise the Kellehers to make contact with the Health Authority officials themselves.
6.6 In this regard, it seems to me that the following facts need to be taken into account.
6.7 First, the Kellehers were, to Mr. O’Connor’s knowledge, not restaurateurs and had no experience in the restaurant business. They were purchasing the property for the purposes of investment and intended to let it out to a tenant. Second, Mr. Kelleher specifically asked Mr. O’Connor to make sure that all was right in relation to the Food Hygiene Regulations. Third, as is pointed out in the Complex Conveyancing Manual to which I have already referred, compliance with the Food Hygiene Regulations is a matter of considerable importance to those purchasing restaurant businesses. For example, para. 10.4 of the Manual makes clear that a solicitor should advise a client acquiring a food business of the implications of owning a food business and as to the consequences of failing to operate the business in compliance with legislation. Given the Kellehers lack of knowledge of the business, given the importance of the matter, and given the specific request made by Mr. Kelleher in relation to the question of compliance, it seems to me that it was incumbent on Mr. O’Connor, in the circumstances of this case, either to make contact with the Health Authority himself, or, perhaps more realistically, to advise Mr. Kelleher so to do. I am satisfied that, in this regard, Mr. O’Connor was negligent in failing to either take the steps himself or advise Mr. Kelleher to take them. For the reasons already analysed, I am satisfied that there is a causal connection between that item of negligence, and that item only, with the adverse consequences for the Kellehers which form the basis of the claim in these proceedings.
6.8 Before turning to the question of damages, I should also deal with the questions arising in relation to planning and the user covenant in the lease.
7. Planning Conditions and Lease Covenants
7.1 So far as planning is concerned, it seems to me that counsel for Mr. O’Connor is correct in the manner in which he has analysed the relevant Planning Regulations. The planning permission itself makes specific reference to the use of retail units being as per class 1 of Part IV of the Third Schedule of the Local Government (Planning and Development) Regulations, 1977. That class is defined as use as a shop for any purpose with certain immaterial exceptions. Shop is defined in the Regulations in s. 9 in the following terms:-
“means a structure used for the carrying on of any retail trade or retail business wherein the primary purpose is the selling of goods by retail and includes a structure used for the purposes of a hairdresser, undertaker or ticket agency or for the reception of goods to be washed, cleaned or repaired, or for any other purpose appropriate to a shopping area, but does not include a structure used as a funfair, garage, petrol filling station, office, or hotel or premises (other than a restaurant) licensed for the sale of intoxicating liquor for consumption on the premises.”
It is clear from that definition that a shop includes a restaurant, for in excluding, ordinarily, licensed premises, the definition makes clear that a restaurant licensed for the sale of intoxicating liquor is included. It seems to me, therefore, that the planning permission in this case expressly allows for use as a restaurant. There is no merit in that point whatsoever.
7.2 I now turn to the user clause. The permitted use is as a shop. There might be some question as to whether the planning definition of a shop applied so that user as a restaurant was included. However, more importantly the premises has operated as a restaurant for a very considerable period of time without any action. It would be difficult to see how a landlord would not now be estopped from accepting that a restaurant was included within the definition of shop. In those circumstances, it does not seem to me that any case can be made on the user clause either.
8. Conclusions on Liability
8.1 For the reasons which I have analysed, it follows that there is only one item of negligence which I am satisfied occurred and which had a causal link with the adverse consequences for the Kellehers. That was a failure to either inquire of the Health Authority or, perhaps more realistically, to advise the Kellehers themselves to inquire of the Health Authority, concerning the food hygiene status of the premises. However, there is one further consequence of that finding. It follows that had it not been for that negligence the Kellehers would have discovered the problem coming down the road in respect of the restaurant. For the reasons which I have already analysed, most of those problems were not soluble. In the light of those problems and the fact that they could only be solved in part and with consequences for the both the scale and type of operation of the restaurant concerned, the Kellehers would have only had two choices. They could have pulled out of the sale. It seems to me clear from the judgment of Costello J. in Geryani v. O’Callaghan (Unreported, High Court, Costello J., 25th January, 1995) that, had the problem been identified, such a course of action could have been adopted. The alternative would have been to try and renegotiate the sale or, alternatively accept the limitations imposed. On the evidence, I am satisfied that the Kellehers would not have gone ahead with the sale in all the circumstances. It follows that this is a “no transaction” case, such as I had to analyse in ACC v. Johnston (Unreported, High Court, Clarke J., 1st June, 2010). Before going on to address the question of the calculation of the amount of damages to which the Kellehers are entitled, it is necessary to say something about the legal position in respect of the calculation of damages in such cases.
9. The Law on Damages
9.1 It is important to start with the fundamental proposition that, in almost all cases, the principal function of the award of damages is to seek to put the party concerned back into the position in which they would have been had the relevant wrongdoing not occurred. The differences which are identified in the authorities concerning the proper approach to the calculation of damages for a tort, on the one hand or, a breach of contract, on the other hand, stem from that fundamental proposition. In the case of a tort, the court has to attempt to put the plaintiff back into the position in which that plaintiff would have been had the tort not occurred at all. It is the pre-incident position that the court must look at as a starting point. On the other hand, the wrongdoing which a party sued successfully for breach of contract is liable for, is the failure of that party to comply with its contractual obligations. The position which the court must look at as a starting point is, therefore, the position that should have obtained post-incident in the sense that the court is looking at what would have been the situation had the contract been complied with in accordance with its terms. The court is not, therefore, concerned directly with the position of the aggrieved party pre-contract, but rather what the position of that party post-contract would and should have been had the contract been complied with.
9.2 However, it is important in making that distinction to note that it is necessary to analyse the contractual obligations which have been breached before going on to ascertain the proper approach to the calculation of damages. As pointed out in ACC v. Johnston, a solicitor does not contract with her client that she will procure for that client a successful conclusion of a conveyancing transaction. Rather, the solicitor contracts with her client that she will carry out a proper professional job on the conveyancing transaction. Depending on the circumstances, that obligation might lead to the solicitor advising the relevant client not to proceed at all, or only to proceed provided certain assurances or terms can be imposed or the like.
9.3 While it is true to say that a solicitor can be sued in breach of contract or in negligence, it does not seem to me that it is likely, at least in the majority of cases, that there will be any practical difference between the approach to damages in either case. If the proper conduct of the conveyancing transaction by the solicitor concerned ought to have led the relevant client not to go ahead with the transaction at all, then the proper approach of the court to the assessment of damages in such a case is to look at what would have happened had there been no completed transaction.
9.4 Counsel for the Kellehers sought to argue that having a restaurant as an investment which could be let at a rent was a foreseeable consequence of the transaction. It was undoubtedly foreseeable, from the point of view of Mr. O’Connor, in that he knew that such was their purpose. However, Mr. O’Connor did not contract to get the Kellehers a restaurant which was suitable to be let. Rather he contracted with them that he would carry out the conveyancing task entrusted to him in a proper fashion. Mr. O’Connor was not, therefore, in breach of contract in failing to deliver an easily lettable restaurant with no problems on the food hygiene front. There was nothing he could have done to procure that. No breach of contract on his part led to that. Rather, for the reasons which I have analysed, Mr. O’Connor was negligent in allowing the transaction to complete at all. This case must, therefore, be approached on the basis of it being a “no transaction” case. If Mr. O’Connor had not been negligent, then this transaction would not have gone ahead, the Kellehers would not have spent any money, and they would not have had the impaired asset which the restaurant ultimately turned out to be.
9.5 In that regard, I should comment on the decision of Vos J. in Joyce v. Bowman Law Ltd. [2010] EWHC 251 (Ch). In that case the defendant was firm of licensed conveyancers. A contract for the purchase of property by the relevant plaintiff was discovered to contain a seller’s option, whose importance had not been appreciated by the firm of licensed conveyancers concerned. The plaintiff’s claim involved an assertion that he had intended to demolish the cottage built on the property and replace it with a new house. He sought to recover the profit that he would have made had he been able to carry out that development. It was, therefore, a loss of bargain case to that extent.
9.6 It is true that, on the facts of the case, the court did approach the calculation of damages on that basis. However, it is clear from a careful analysis of the judgment that counsel for the plaintiff conceded, and the court accepted, that it was necessary to make an appropriate reduction in the damages by reference to the risk that, had the problem with the option been properly identified by the licensed conveyancers concerned, it might not have been possible to remove or suitably ameliorate the option by renegotiating the terms of the contract.
9.7 What Joyce v. Bowman Law makes clear is that there may be intermediate cases in between what I might term a pure “no transaction” case, on the one hand, and a case where it is clear that, in the absence of negligence, a proper and complete conveyance could have taken place. It might perhaps be useful to term such a case as a “completed transaction” case. It is important to note why that is the case. In order to analyse the consequences of negligence on the part of a solicitor (and this analysis applies equally to a breach of contract on the part of the solicitor stemming from the same facts), it is necessary to look at what would have happened had the solicitor not been negligent. In some cases it may be clear that, had the solicitor not been negligent, no transaction would have taken place. At the other end of the spectrum, it may be clear that had the solicitor not been negligent, the solicitor’s client might have obtained good title to the relevant property. For example, if, due to an error in drafting the relevant deed of assurance, the deed does not actually pass title to the solicitor’s purchaser client, then it may well be possible to argue that, had the deed been properly drafted, the client would have obtained proper title. In many such cases it might well, of course, be possible to rectify matters so that title could still be procured with the only damages flowing being whatever costs might be associated with remedying the matter. However, it is possible to envisage circumstances where, for example by virtue of intervening events, it is no longer possible to remedy matters. In those circumstances, the proper approach to the calculation of damages is to look at what would have happened had the conveyancing transaction been properly conducted. On the hypothesis with which I am dealing the purchaser client would have obtained proper title to the property and in such a case it is appropriate to assess damages on that basis.
9.8 However, there may well be intermediate cases where it is not possible to say for certain what would have happened. Joyce v. Bowman Law is one such case. There was an adverse clause in the contract. The licensed conveyancer should have noticed it, advised his client about it, and, almost certainly, raised it with the vendor. What would have happened next was not absolutely clear. The vendor might not have been willing to renegotiate the terms of the contract, in which case there might well have been “no transaction”. On the other hand, the vendor might have been willing to renegotiate the term. In those circumstances there would have been a “completed transaction”. In intermediate cases the court is faced with the situation where there is a hypothetical event which never occurred precisely because the conveyancer concerned was negligent, but where the court has to make some assessment as to the likelihood or otherwise of the conveyancer having been able to successfully deal with the problem had it been identified at the time. In those circumstances the proper approach of the court, for reasons similar to those identified in Phillip v. Ryan [2004] 4 IR 241, is to assess the possibilities, form a view as to the likelihood or otherwise of each of them occurring and award damages, having regard to the proper calculation on a “no transaction” basis, the proper calculation on a “completed transaction” basis and the likelihood or otherwise of either of those eventualities having proved to be the case in the hypothetical circumstances that the problem had been identified and an attempt had been made to negotiate a solution to it.
9.9 Joyce v. Bowman Law was an intermediate case. For those reasons it was entirely appropriate for the court to assess damages on the basis of a completed transaction but reduced appropriately for a weighting derived from the risk that it would not have been possible to secure a successful conclusion even had the problem been identified. In one sense such a case may be viewed as one of a loss of opportunity. The consequence of the solicitor’s negligence was that there was no opportunity to seek to negotiate a solution to the adverse option clause. There was no certainty that, even had the problem been identified, it would have been possible to achieve that end. However, it was possible. The client lost the chance of doing it due to the licensed conveyancer’s negligence. The measure of those damages was properly viewed as being a reduced version of the full loss of bargain for there was no certainty that the bargain could have been gained, but the relevant plaintiff had lost the opportunity of seeking to gain the bargain concerned.
9.10 I am, therefore, satisfied that the overall approach which the court should adopt in cases of solicitors negligence in the conveyancing field is to first identify whether, on the evidence, it is proper to regard the case as a “no transaction” case where in the absence of solicitors negligence the transaction simply would not have gone ahead, a “completed transaction” case, where in the absence of solicitors negligence a successful conclusion to the transaction would have occurred or an intermediate case. Where there is no significant difference in the calculation of the damages under either heading, it may not make much difference. Where, however, as was undoubtedly the case in Joyce v. Bowman Law (or in other such cases where there is a loss of bargain involved or the relevant property is of particular value to the purchaser), there is a significant difference in the proper approach as and between the two cases, the court, in an intermediate case, must take a view on how likely it was that the problem concerned could have been solved and asses damages somewhere between the “no transaction” value and the “completed transaction” value, having regard to the likelihood that a successful conclusion could have been reached in the event that the solicitor concerned had not been negligent.
9.11 However, it seems to me that this case is firmly in the no transaction camp. There was nothing Mr. O’Connor could have done to have solved the Food Hygiene Regulation problems. All he could have done was identify them, and saved the Kellehers the problem of buying into a problematic restaurant.
9.12 It follows that it is necessary to assess damages in this case on the basis that, had Mr. O’Connor not been negligent, no transaction would have taken place, the Kellehers would not have paid out any money but equally would not have been left with the restaurant. I, therefore, proceed to consider the proper calculation of those damages.
10. The Calculation of Damages
10.1 It is fair to say that the basis on which the Kellehers put forward their claim for damages was, at the commencement of the case, somewhat unclear. For logistical reasons the case took place in two parts. At the end of the first three days hearing, I gave directions that further details of the basis on which the Kellehers wished to put forward their claim to damages should be furnished. Ultimately, the Kellehers formulated their claim on the basis of suggesting that there was a capital loss resultant from the reduction in value of the property by virtue of the impaired food hygiene registration status, losses attributable to the alterations which had to be carried out to secure the limited registration which was ultimately obtained, and losses in rent in the intervening period.
10.2 However, on the other hand, counsel for Mr. O’Connor suggested that the proper basis to look at the damages was to look at the value of the asset obtained by the Kellehers and compare it with what they had, in fact, paid for it.
10.3 I am satisfied that the approach suggested by counsel for Mr. O’Connor is an appropriate starting point. For the reasons which I have already sought analyse, what would have happened, had Mr. O’Connor not been negligent, was that the Kellehers would not have paid for the property, but equally, would not have had the property. The simplest way of looking at such a situation is to compare the value of the property actually obtained with the price paid. There was a conflict of evidence concerning that valuation. Two valuers were called on behalf of the Kellehers and one on behalf of Mr. O’Connor. Two of those valuers (including the valuer called on behalf of Mr. O’Connor) came in with relatively modest figures for the difference between the price paid and the then actual value of the property, warts and all. In addition, it was not clear as to what exactly was being valued. In my view, the proper comparator was the value of the property as it stood after purchase and without any additional works carried out. The third valuer, who was assessing the difference at a different time, and, in truth, on something of a different basis, did not seem to me to approach the task on a realistic basis.
10.4 Insofar as there were any differences between the two valuers who placed a modest amount on the difference concerned, their views were not based on a detailed analysis of comparators, but, rather, on an estimate based on their experience. The competing views are not, therefore, capable of detailed analysis. All in all, I have come to the view that the property, as it stood after purchase, was worth IR£15,000 less than the price paid for it.
10.5 The next question concerns whether that is an appropriate basis for assessing damages. A party faced with having acquired an impaired asset as a result of negligence is faced with a number of choices. The relevant party can, obviously, dispose of the asset and sue the negligent party for the difference between the price paid for it and what they can secure for it, given its impairment. There may, of course, in all the circumstances of any particular case, be reasons for not taking that course of action. It may not be easy to dispose of the asset. There will, in any event, be costs associated with its disposal. A party is, however, obliged to act reasonably. If the party decides to keep the impaired asset, for whatever reason, then it seems to me that, unless it can be demonstrated that there was some good reason for keeping it, rather than selling it, then it is difficult to see how the negligent defendant can be fixed with any knock-on consequences that would not have occurred had the asset been disposed of.
10.6 On the facts of this case, if the Kellehers had disposed of the asset, it would have cost them the IR£15,000 loss, which, I estimate, they would have suffered on a sale, together with the costs of sale (auctioneering and legal) which, having regard to a property worth of the order of IR£100,000, might have come to some IR£5,000 inclusive of VAT. If, therefore, the Kellehers had cut their losses at that stage, those total losses would have come to something of the order of IR£20,000. The actions taken by them need to be viewed against that background.
10.7 First, significant sums were spent on altering the premises in order to satisfy the requirements of the Health Authority officials. However, there was no evidence that any proper analysis was carried out prior to incurring that expenditure. Some expenditure related to what might reasonably be called betterment or improvement in the premises. In the course of the hearing, it was agreed that a sum of a little over IR£26,000 was actually expended on items necessarily required to meet the requirements of the Health Authority officials. There does not seem to have been any basis for suggesting that that money was well spent. All of the evidence supported the view that the price paid for the property was the market rate for a restaurant which was permitted to carry on business in the way in which Ms. Piggott had been carrying on business. For the reasons which I have sought to analyse, I am satisfied that the premises, with its impaired position, was worth some IR£15,000 less. The expenditure of a significant sum to meet the Health Authority official’s concerns would not seem to have added that amount to the value of the property. Indeed, it would seem that the net position after that expenditure was a loss. The property, even after that expenditure, was still partially impaired. No evidence was given to suggest that, viewed from the perspective of the time, things looked differently. Rather, the Kellehers just seem to have gone ahead, spent the money, tried initially to let the property, and subsequently ran it themselves. They were, of course, entitled to take that course of action. However, having taken it, without any real analysis as to whether that course of action was going to increase their losses, it does not seem to me that it is open to the Kellehers to now seek to place the much greater losses which have flown from that decision on Mr. O’Connor.
10.8 As identified in many of the cases, not least, County Personnel (Employment Agency Limited) v. Alan R. Pulver & Company (A Firm) [1987] 1 WLR 916, the starting point for the assessment of damages is that same should be considered as of the date of the wrong. However, given the overall requirement to attempt to put the wronged party back in the position in which that party would have been, had the wrong not been committed, it may, in appropriate cases, be necessary to take a different approach. The starting point indicates, therefore, that the proper measure of damages in this case ought to be, as of 2001, IR£20,000. Had the Kellehers simply sold the property, then they would have been IR£20,000 worse off at that time.
10.9 For the reasons which I have sought to analyse, I am not satisfied that there is any legitimate basis for taking a different approach to the date of calculation of damages on the facts of this case. Had it appeared to the Kellehers, on the basis of a proper analysis of their situation in 2001, that persevering with the impaired asset was likely to be a better course of action than selling it (or even that there was not much to choose between the two), then there might well be some justification for taking such an approach. It should be emphasised that parties who have to make judgements as to their actions as a result of being placed in a difficult position due to the wrongdoing of others, cannot be judged unduly harshly if, with the benefit of hindsight, their judgements turn out not to be right. However, no evidential basis was put forward for there being any good reason for persevering with the impaired asset in this case, rather than selling it. Certainly, there was no evidence that it looked to be a more advantageous way of minimising loss, viewed from the perspective of 2001, and without the benefit of hindsight. In those circumstances, I am satisfied that the proper way to assess damages is to look at them in the manner in which counsel for Mr. O’Connor argued, and that the basic loss is to be viewed as IR£20,000, as of 2001.
10.10. That leads to the question of interest. Counsel for Mr. O’Connor argued that, in the light of the way in which the case was presented, interest should not be allowed. In that regard, I do have to comment on the evidence of the Kellehers’ accountant, Mr. Gerard Piggott. In the course of the proceedings, a claim was, as I have pointed out, maintained by the Kellehers in relation to the loss of rent on the property. For the reasons which I have sought to analyse, I am not satisfied that approaching the question of damages on that basis is correct. However, the claim was maintained and evidence was produced in relation to it. The results of running of the business, when it was taken over by Mrs. Kelleher personally, were, of course, relevant to such a claim. Accounts for each of the relevant years, prepared by the Kellehers’ accountant, were supplied. On analysis, in the course of the evidence, it became absolutely clear that those accounts were wrong and misleading. Each of the accounts contained a purported significant sum in relation to rent, in circumstances where no rent was paid. I have to confess that I found the evidence of the Kellehers’ accountant in this regard to be highly unsatisfactory. When pressed on the question of why he had prepared incorrect accounts, his answer was to state that Mrs. Kelleher knew the true position and that the accounts would only be misleading if they were produced to a third party. He also stated that the accounts had been properly adjusted when being submitted as part of the Kellehers’ tax returns. Why, however, a qualified accountant should produce accounts which he knows would be misleading when seen by any third party, I fail to understand. Indeed, I had even more difficulty in comprehending why the relevant accountant did not seem to see that there was a problem.
10.11 Be that as it may, it is also fair to say that the precise formulation of the Kellehers’ claim lacked precision until a very late stage in the case. However, it does not seem to me that it is appropriate to penalise the Kellehers, themselves, for any of the above matters. It does, therefore, seem to me to be appropriate to award interest.
10.12 I should also add that I am not satisfied that this is an appropriate case for general damages. There can be no doubt but that the Kellehers had a difficult time in having to deal with this property. However, if they had taken the sensible course of simply selling it as soon as they discovered the problem, then all of those difficulties could have been avoided. For the reasons which I have already sought to analyse, I am not satisfied that there was any good reason not to sell the property. Indeed, even without the benefit of hindsight, it would seem that it was always likely to be a much more beneficial way of minimising losses.
11. Conclusions
11.1 On the basis of that analysis, I am satisfied that the proper measure of damages in this case is IR£20,000 converted to Euro and with interest at the Courts Act rate from 2001 to date. On the basis of evidence tendered at the hearing, I am satisfied that, as IR£10,000 converted to Euro with the relevant interest comes to the sum of €21,839, it follows that IR£20,000 converts to €43,678.
11.2 There will, therefore, be judgment in favour of the Kellehers in the sum of €43,678 for damages for negligence and for breach of contract.
Murray -v- Budds & ors
[2017] IESC 4
Judgment delivered the 2nd day of February, 2017 by Denham C.J.
1. This is an appeal, upon which leave was granted by the Court, brought by Martin Murray, plaintiff/appellant, who is referred to as “the plaintiff”.
2. Conan P. Budds and Anthony T. Hanahoe, Terence Hanahoe and Michael E. Hanahoe, trading as Michael E. Hanahoe Solicitors, the defendants/respondents, are referred to as “the defendants”.
3. The Court determined that the plaintiff had raised an issue of general public importance, being as to whether a claim framed as a professional negligence action seeking damages for negligence and breach of contract, in which the particulars of loss and damage claimed are worry and stress short of a recognised physical injury, should be treated as a personal injury action, subject to the statutory limitation period applicable to personal injury actions. The Court granted leave to the plaintiff to appeal to this Court on that issue.
Background
4. The plaintiff retained the services of the defendants to represent him in criminal proceedings.
5. I gratefully adopt the background facts as described by Peart J., in the Court of Appeal judgment of the 19th November, 2015.
6. The plaintiff was charged with possession, with intent to supply, of a significant quantity of heroin. He was convicted of that offence on the 11th February, 1999, and received a seven year sentence of imprisonment, from which he was released in September, 2004. The plaintiff was unsuccessful in two separate appeals against his conviction to the Court of Criminal Appeal. In 2000 his first appeal was based on a number of alleged errors on the part of the trial judge. In 2005, his second appeal heard after his release from prison, was based on an alleged failure of his solicitor to adequately and properly prepare for his trial, and the alleged failure of both solicitor and counsel to pay heed to his instructions during the course of his trial. However, neither of his appeals succeeded.
7. The plaintiff issued a plenary summons in February, 2005, claiming damages for negligence and breach of contract by the defendants in their provision of legal services prior to and during his criminal trial.
8. The defendants entered a full defence.
Two Motions
9. The defendants issued a motion seeking to dismiss the plaintiff’s claim as (i) statute barred; (ii) an abuse of process; and (iii) frivolous or vexatious.
10. After a part hearing of the defendants’ motion, the plaintiff issued a motion seeking to amend his statement of claim.
Two appeals to Court of Appeal
11. There were two appeals before the Court of Appeal. The plaintiff appealed to the Court of Appeal against an order of Charleton J. dated the 20th April, 2009 where it was ordered:-
(a) that the proceedings be struck out as an abuse of process because, being an action alleging professional negligence, it was launched without first ascertaining that there were reasonable grounds for so doing by obtaining appropriate expert evidence to support it; and
(b) that the plaintiff pay the defendants’ costs of the motion when taxed and ascertained.
12. The defendants appealed to the Court of Appeal against an order of Clark J. dated the 23rd November, 2010, where she:-
(a) permitted the plaintiff to amend his pleadings in order to introduce a new claim for “loss and damage in the week of the 3rd to 10th February 1999”, the particulars of which loss were that “the plaintiff was exposed to the worry and stress from the uncertain position where he found himself in the criminal justice system facing an imminent trial without knowing who his counsel would be”;
(b) declined the defendants’ application to strike out the proceedings in their entirety on the basis of s. 3(1) of the Statute of Limitations (Amendment) Act, 1991, and
(c) directed that the issue of the application of the Statute of Limitations be determined by the trial judge.
13. The plaintiff had claimed in the statement of claim 4(b) that:-
“They failed to instruct Counsel properly or adequately, and indeed retained Counsel only on the night before the Trial…”
Thus, the plaintiff complained that, despite knowing for approximately a week that counsel would be unavailable, no new counsel was engaged to defend him until the day before the trial was due to take place. The defendants, in their defence, denied that counsel was retained only on the night before the trial.
14. The plaintiff’s claim, pursuant to the order of the High Court (Clark J.), was therefore a claim for loss and damage in the week of the 3rd to the 10th February, 1999, arising from the fact that the plaintiff was exposed to the worry and stress from the uncertain position where he found himself in the criminal justice system facing an imminent trial without knowing who his counsel would be.
15. In the Court of Appeal the defendants submitted that while Clark J. struck out the claims of the plaintiff as originally constituted as an abuse of process, she erred by allowing the plaintiff to amend his proceedings and by not simply striking out the entire proceedings.
16. The Court of Appeal held that the permitted claim was a claim in tort only, and that it could only therefore be a personal injury claim. The fact that contract was pleaded, as part of the claims which were originally made, was not relevant as all those claims had been struck out.
17. The Court of Appeal (Peart J.) concluded:-
“29. There is no doubt in my view that the claim permitted is statute-barred. I appreciate that no amended Statement of Claim has been delivered by the plaintiff, presumably because the order of Clark J. is under appeal, but it can be noted and had regard to that in its Defence to the Statement of Claim originally delivered, the defendants pleaded the statute. There have been cases where a defendant has attempted to have a plaintiff’s claim struck out ahead of the delivery of its defence, and that application has been considered to be premature, since a plea on the statute is a plea by way of defence. But here the position is clear. The plaintiff’s claim has been permitted by way of amendment where the cause of action accrued at latest on the 10th February 1999. That is not in dispute. It is now a new personal injury claim in tort. A two year, or at best from the plaintiff’s point of view a three year, limitation period applies. In my view, Clark J. ought not to have permitted an amendment of the claim in order to introduce a personal injury claim that was clearly statute-barred. She was already in possession of all the facts and circumstances said to give rise to that claim, as is clear from the very precise nature of the amendment permitted by her. On that ground alone I would allow this appeal and vacate that part of the order of Clark J. which permitted an amendment to the plaintiff’s claim.
30. There is, however, another important aspect to the appeal which should be addressed by reference to the judgment of Hogan J. in Walter and another v. Crossan and others [2014] IEHC 377. It is the entirely separate question whether, even if this claim was not statute-barred, damages for the alleged worry and stress during the week of 3rd February 1999 is recoverable at all, given the absence of any pleaded recognizable psychiatric injury. In Walter, Hogan J. examined the relevant case-law in this area both from this and the neighbouring jurisdiction with typical care and exhaustion, and concluded on the facts of that case that even though there was a duty of care owed to the plaintiff purchasers by the firm of solicitors acting for the builder of the house, the only damages claimed were for “mental distress, upset and inconvenience falling short of nervous shock or psychiatric injury” and as such were not recoverable. I appreciate that in Walter there was no contractual relationship between the plaintiffs and the solicitor firm and that the only remedy, if any, was in negligence predicated on a duty of care being owed. But in the present case, the claims based upon a breach of contract have been expressly struck out by Clark J., and cannot subtend the claim that was permitted by way of amendment. It is now solely a claim in negligence, and it seems to me in such circumstances that the damage being claimed are, as in Walter, in respect of a category of claim for which damages are not recoverable, namely mental distress, stress generally and worry, but short of any recognised psychiatric illness.
31. That being my conclusion, I am satisfied that having struck out all the plaintiff’s existing claims in the proceedings, Clark J. erred in permitting the plaintiff to amend his Statement of Claim by inserting the new claim for damages in negligence and breach of duty which are provided for in her order under appeal by the defendants.”
The Court of Appeal then allowed the appeal of the defendants against that part of the order of Clark J.
18. As to the plaintiff’s appeal against the order of the High Court (Charleton J.) of the 20th April, 2009, when the learned trial judge acceded to a motion by the defendants to strike out the plaintiff’s proceedings as an abuse of process on the ground that being an action alleging professional negligence, it was launched without first ascertaining that there were reasonable grounds for so doing by obtaining appropriate expert evidence to support it, the Court of Appeal held, Peart J. stating:-
“In my view it is unnecessary now to dispose of that appeal, save to say that if I was required to reach a determination I would have allowed that appeal because, while there is certainly authority to the effect that in cases alleging medical negligence against a doctor or other professional person, it would be an abuse of process or irresponsible to launch such proceedings in the absence of the plaintiff’s solicitor satisfying himself or herself that there were reasonable grounds for the allegations of negligence being made, I would not exclude the possibility that where the action is being contemplated against a solicitor for professional negligence, the plaintiff’s solicitor may not in every case require to obtain an independent expert opinion from another solicitor or counsel in order to form the relevant opinion that the facts of the case disclose a prima facie case, and that it is not irresponsible to commence the proceedings.
34. Every case will depend on its own facts, and a plaintiff’s solicitor ought to exercise caution in every such case. In any case where he or she has a doubt, prudence suggests that an opinion from another expert be sought in advance of commencement. I believe that such a view is consistent with what was stated by Denham J. (as she then was) when, having considered the views expressed by Barr J. in Reidy v. National Maternity Hospital [1997] IEHC 143, and those of Kelly J. in Connolly v. Casey & Fitzgibbon [2000] 1 IR 345, she expressed agreement as follows:
‘While bearing in mind the important right of access to the Courts I am satisfied that these statements of law are correct. To issue proceedings alleging professional negligence puts an individual in a situation where for professional or practice reasons to have the case proceed in open Court may be perceived and feared by that professional as being unprofessional conduct’.”
19. The Court of Appeal stated that it was unnecessary to reach a concluded view on the appeal from Charleton J., given that the appeal against the order of Clark J. was allowed.
Submissions
20. The parties filed written submissions in this appeal. The Court also heard oral argument by counsel on behalf of each party.
Single appeal
21. As the Court of Appeal made no determination on the appeal from Charleton J., the issue before the Court arises from the decision of the Court of Appeal on the appeal from the decision of Clark J.
Determination
22. In its determination [2016] IESCDET 20, the Court was of the view that the plaintiff had raised an issue of general public importance, whether a claim framed as a professional negligence action seeking damages for negligence and breach of contract in which the particulars of loss and damage claimed are worry and stress short of a recognised physical injury should be treated as a personal injury action subject to the statutory limitation period applicable to personal injury actions.
Issues
23. The plaintiff submitted that two questions arise on the determination of the Court, being:-
1. Whether the plaintiff’s claim, as amended by Clark J., constitutes a claim for personal injuries.
2. If the claim should not be treated as a personal injuries action, is the loss and/or damage claimed by the plaintiff for “worry and stress” recoverable in an action for breach of contract and/or professional negligence.
Personal Injury
24. If this claim were treated as a personal injury claim, it would be statute barred, as the plaintiff’s claim issued over three years after the event, being the statutory limitation period applicable.
25. If this claim were treated as a personal injury claim, the loss and damage claimed, being for worry and stress, does not amount to a recognised psychiatric injury, and thus, is not recoverable in a personal injury claim.
Tort
26. I would affirm the decision of the Court of Appeal (Peart J.) that the claim as amended by Clark J. in the High Court is solely a claim in negligence and so is statute barred. Further, as it is a claim for “worry and stress” without any psychiatric illness, no damages would, at any rate, be recoverable. Consequently, I would dismiss this aspect of the appeal of the plaintiff, on tort.
27. I agree with the decision of Hogan J. in Walter v Crossan [2014] IEHC 377, as he then was a judge of the High Court, where he held that damages for worry and stress not giving rise to psychiatric injury is not recoverable in tort.
28. I note also the decision in Larkin v Dublin City Council [2008] 1 IR 391. There the plaintiff suffered upset and emotional upheaval, but no psychiatric illness, because of a mistaken communication that he had been promoted. Clarke J. accepted that there had been a duty of care, which had been breached, but held that it did not give rise to any injury which entitled the plaintiff to recover damages.
29. Thus, I would dismiss this aspect of the plaintiff’s claim. I am satisfied that the claim as framed in the amendment made by Clark J., seeking damages for negligence, in which the particulars of loss and damage claimed are for worry and stress short of psychiatric illness, should be treated as a personal injury action, and so subject to the statutory limitation period applicable to personal injury actions. Consequently, I would affirm the finding of the Court of Appeal that the claim was statute barred. I would affirm also the decision of the Court of Appeal that damages would not lie for worry and stress in the absence of a psychiatric illness. Consequently, I would dismiss the aspect of the appeal relating to the tort of negligence for personal injuries.
Professional Negligence and Breach of Contract
30. The plaintiff moved the claim, against the solicitor defendants, as a claim for damages for professional negligence and breach of contract.
31. There is rather an unusual matrix of facts in this case. The issue of the claim in professional negligence has been struck out by Charleton J. in the High Court. Given the run of events in the Court of Appeal, the appeal against Charleton J. was not addressed. Thus, the decision of the High Court stands, striking out the claim for professional negligence.
32. However, an issue may be inferred from the determination, and an issue argued by the plaintiff was as to whether the loss and damage claimed by the plaintiff for “worry and stress” may be recoverable in an action for breach of contract and/or professional negligence.
33. In such a situation a question would arise as to whether he would be entitled to recover for loss and damage as sought, short of a psychiatric illness.
Addis v Gramaphone Co. Ltd [1909] AC 488
34. It was established in Addis v Gramaphone Co. Ltd [1909] AC 488, that Courts would not in general permit damages for worry or upset as a consequence of a breach of contract. In Addis a servant was wrongfully dismissed from his employment. The issue of damages arose. In the House of Lords Lord Loreburn L.C. stated:-
“To my mind it signifies nothing in the present case whether the claim is to be treated as for wrongful dismissal or not. In any case there was a breach of contract in not allowing the plaintiff to discharge his duties as manager, and the damages are exactly the same in either view. They are, in my opinion, the salary to which the plaintiff was entitled for the six months between October, 1905, and April, 1906, together with the commission which the jury think he would have earned had he been allowed to manage the business himself. I cannot agree that the manner of dismissal affects these damages. Such considerations have never been allowed to influence damages in this kind of case.
…
If there be a dismissal without notice the employer must pay an indemnity; but that indemnity cannot include compensation either for the injured feelings of the servant, or for the loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment.”
Lord Atkinson stated:-
“I have always understood that damages for breach of contract were in the nature of compensation, not punishment,
…
In Sikes v Wild (1861) 1 B. & S. 587, at p. 594, Lord Blackburn says:
“I do not see how the existence of misconduct can alter the rule of law by which damages for breach of contract are to be assessed. It may render the contract voidable on the ground of fraud or give a cause of action for deceit, but surely it cannot alter the effect of the contract itself.”
There are three well-known exceptions to the general rule applicable to the measure of damages for breach of contract, namely, actions against a banker for refusing to pay a customer’s cheque when he has in his hands funds of the customer’s to meet it, actions for breach of promise of marriage, and actions like that in Flureau v Thornhill (1776) 2 W. BI. 1078, where the vendor of real estate, without any fault on his part, fails to make title. I know of none other.
…
In many other cases of breach of contract there may be circumstances of malice, fraud, defamation, or violence, which would sustain an action of tort as an alternative remedy to an action for breach of contract. If one should select the former mode of redress, he may, no doubt, recover exemplary damages, or what is sometimes styled vindictive damages; but if he should choose to seek redress in the form of an action for breach of contract, he lets in all the consequences of that form of action; Thorpe v Thorpe, (1832) 3 B. & Ad. 580. One of these consequences is, I think, this: that he is to be paid adequate compensation in money for the loss of that which he would have received had his contract been kept, and no more.”
[Emphasis added]
33. This has remained for many years the foundation case setting out the law on such damages in a contract action, with the few exceptions to the general principles as identified by Lord Atkinson.
34. There have been some additional exceptions added in specific cases.
35. In McDermott, Contract Law (Butterworths, 2001) paras 22.57 and 22.58 the theory behind the exclusionary rule was provided:-
“Many factors explain the courts restrictive approach to non-pecuniary losses. The Addis decision reflects the individualist orientation of traditional contract law under which contracts are impersonal relationships, concerned primarily with economic exchange, and do not typically involve other elements of the parties personalities. It also reflects an historical desire not to restrict unduly the ability of employers to dismiss employees and a mistrust of exemplary damages (which appeared to be what the plaintiff was seeking in Addis). In Baltic Shipping v Dixon [1993] 176 CLR 344, Mason C.J. observed that:-
‘The conceptual policy foundations of the general rule are by no means clear. It seems to rest on the view that damages for breach of contract are in essence compensatory and that they are confined to the award of that sum of money which will put the injured party in the financial position the party would have been had the breach of contract not taken place.’”
Mason C.J. held that the policy is based on an apprehension that the recovery of compensation for injured feelings will lead to inflated awards of damages in contract cases. Other reasons put forward include:-
(i) It is too harsh on the defendant to have to pay damages for mental distress.
(ii) Mental distress is incapable of exact proof.
(iii) The risk of mental distress is voluntarily assumed by the plaintiff upon entering into the contract.”
36. The law was further described in Watts v Morrow [1991] 1 WLR 1421 by Bingham LJ:-
“A contract-breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party. This rule is not, I think, founded on the assumption that such reactions are not foreseeable, which they surely are or may be, but on considerations of policy. But the rule is not absolute. Where the very object of a contract is to provide pleasure, relaxation, peace of mind, or freedom from molestation, damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead.”
[Emphasis added]
37. I agree with that statement of Bingham LJ.
38. The key is that one looks to the very object of a contract. Also, I agree with Lord Neuberger in Hamilton Jones v David & Snape [2004] 1 WLR 924. In Hamilton Neuberger J. held that the facts of the case took the solicitor-client relationship into a special categorisation, as the solicitor had been retained in particular to address the anxiety of the wife that her husband would abduct their children. This did happen, her solicitors having taken insufficient measures to prevent such abduction. Lord Neuberger stated:-
“52. Where a claim is founded in contract, the general rule is that the contract breaker cannot be liable for damages for injured feelings or distress: see Addis v Gramaphone Co Ltd [1909] AC 488, which still remains the law, although it is subject to exceptions (as mentioned by Lord Bingham of Cornhill in Johnson v Gore Wood & Co [2002] 2 AC 1, 37 – 38; I would also refer to the discussion in the speech of Lord Cooke of Thorndon in the same case at p 49f – 50h). The question, therefore must be whether a case such as the present falls into one of the established exceptions to the rule in Addis v Gramaphone Co Ltd or whether, indeed, it should represent a new exception to the rule.”
The Court was satisfied in that case that a significant aspect of the instructions was that the wife would retain custody of her children for her own pleasure and peace of mind.
39. Other types of contracts where an exception to the rule in Addis arises include a contract in relation to a holiday, where such a contract is to provide for pleasure and relaxation.
40. Also, it has arisen where there was a failure to secure an injunction to prevent a plaintiff being molested Heywood v Wellers [1976] 2 WLR 101
41. In addition, it has arisen where there was a wrongful adjudication as a bankrupt: Hussey v Dillon [1995] 1 IR 111.
42. The plaintiff relied on McLeish v Amoo-Gottfried & Co. (1993) The Times, 13th October, 1993, (1993) 10 PN 102. This was a solicitor’s negligence action in which liability was admitted and it came before the Queen’s Bench Division for assessment of damage. In McLeish Scott Baker J. stated:-
“Mr. Goodman for the plaintiff contends that, subject to the normal rules of remoteness and mitigation, damages for distress may form part of an award in cases of professional negligence, irrespective of whether the plaintiff chooses to frame his case in contract or tort. Whilst mental distress is not in itself sufficient damages to ground an action in tort, Mr. Doggett for the Defendants accepts that the plaintiff is entitled to damages in contract under this head and refers me to the judgment of Lord Justice Bingham in Watts v. Morrow [1991] 4 All ER 937, 54 Build LR 86 at 959, of the former report where he says…”
Here Scott Baker J. quotes from Bingham L.J., as set out above.
42. I would distinguish McLeish. In that case liability was admitted, it has not been in this case. Further, indeed it was pointed out by Scott Baker J. that, mental distress is not in itself sufficient damages to ground an action in tort, such as claimed in this case. Scott Baker J. relied on Watts v. Morrow where Bingham L.J. stated that a contract breaker is not in general liable for distress etc., but he indicated exceptions based on the object of the contract. The circumstances in McLeish are entirely different to that of the plaintiff. Consequently, I find no persuasive value in McLeish
43. The issue of such damages in contract cases has arisen as an ancillary ground in cases in Ireland. In Kelly v Crowley [ 1985] 1 IR 212, Murphy J. held that a solicitor was professionally negligent. However, a claim for mental distress was not permitted as an additional claim for damages.
44. In Doran v Delaney (No. 2) 1999 1 IR 303, Geoghegan J. did award damages for a high degree of anxiety suffered by the plaintiff arising from the defendants’ negligence. He held that the plaintiffs suffered a high degree of anxiety and that their health had been undermined because of the negligence of their solicitor’s advice in purchasing a site in order to construct a dwelling house. The court held that the plaintiffs would never have engaged in the transaction, which resulted in a lengthy dispute and forced them to resell the property at a loss and left them in considerable debt, if they had been adequately informed by the defendants. However, in Doran v. Delaney (No 2.) the plaintiffs’ action was not only against their own solicitor, but also against the vendor and against the vendor’s solicitors, and they were successful against all the defendants. The award of €10,000 general damages was against all of the defendants.
45. In analysing whether a contract may be an exception to the rule in Addis it is useful to consider the analysis by Brennan J. in Baltic Shipping Co. v Dillon (1993) 111 ALR 289, where he stated:-
“To ascertain whether the obtaining of peace of mind is the object of a contract or, more accurately, an object of a contract, reference is made to its terms, express or implied, construed in the context of facts which the parties know or are taken to have known. Thus, if peaceful and comfortable accommodation is promised to holidaymakers and the accommodation tendered does not answer the description, there is a breach which directly causes the loss of the promised peacefulness and comfort and damages are recoverable accordingly. In cases of this kind, a statement of the promisor commending a service or facility to be provided under the contract is frequently a term of the contract, not a mere representation.”
46. The law in Northern Ireland is similar to that in Australia. Smyth v Huey & Co [1993] NI 236, was a case of solicitor’s negligence in relation to a conveyance. The Court held that the plaintiffs were not entitled to damages for distress. The test as to exceptions to the Addis rule was stated as:-
“a plaintiff is not entitled to general damages for ‘distress and inconvenience’ unless he can bring himself within one of the two exceptions to the general rule: namely (1) mental distress caused by physical discomfort or inconvenience resulting from breach of duty in contract or in tort. (2) A contract whose very object is to provide pleasure, relaxation, peace of mind or freedom from molestation.”
Conclusion
47. In this appeal the plaintiff asked the Court to create new law, that Addis should not be followed. Or, if the Court would not take that step, that the Court would hold that the plaintiff’s claim came within one of the recognised exceptions to Addis. Or, it was suggested, the Court could find a new exception to Addis.
48. In this case the plaintiff had been represented by solicitor and counsel and there was no breach of professional standards as he was competently represented. The plaintiff was, in effect, trying to establish a separate cause of action and seeking damages for worry and stress. This case is further complicated by the fact that there was not a direct contract with the solicitor, the plaintiff had the benefit of the statutory legal aid scheme with a solicitor assigned by the Court. However, the fundamental situation is that the plaintiff had competent legal advisors. The only injury alleged is worry and stress arising because he did not know who his counsel would be the day before his trial.
49. Addis v. Gramaphone Co. Ltd [1909] AC 488, remains the law in Ireland.
50. I am satisfied that the plaintiff’s claim does not come within one of the recognised exceptions to Addis. If one presumed there was a contract, it was for professional services, and there was no breach as he was competently legally represented. This case does not establish a stand alone claim. There is no stand alone right of claim for being upset. Insofar as it is a personal injury, it is statute barred.
51. The nature of the contract was not such that damages for distress would be available.
52. There is no reason, in all the circumstances of the case, to consider any additional exceptions to the law as set out in Addis and subsequent judgments.
53. The appeal before this Court is confined to the determination made on the application for leave. There are many issues in the proceedings which are not before this Court. On the issue before the Court, I would dismiss the appeal.
O’Keefe v. Ryanair Holdings plc
[2002] IEHC 154 (19 June 2002)
JUDGMENT of Mr. Justice Kelly delivered the 19th day of June. 2002.
Introduction
The Plaintiff claims damages for breach of contract. The defendant denies that it ever had any contract with the plaintiff. Rather, it alleges that this litigation is about a gift made to the plaintiff and the claim is therefore unsustainable.
In her statement of claim the plaintiff alleges that on the 20th October, 1988 she entered into a contract with the defendant under which it offered her the opportunity to be selected as its one millionth passenger. In consideration of this the plaintiff agreed to offer her services for publicity to the defendant should she be selected, Furthermore she agreed to forego her constitutional right to privacy. She alleges that it was a term of that contract that if she was successful she would be entitled to free travel for herself and a nominated person on any route operated by the defendant for the rest of her life.
In its defence the defendant admits that on the date in question it made an offer to the plaintiff when she was the one millionth passenger travelling with it but denies that she was contracted to provide publicity services or to give up her constitutional right to privacy. The defendant alleges that the offer was in the nature of a gift but is remarkably unsure of its terms. It puts forward no fewer than five different alternative terms governing the gift. It furthermore contends that if the court concludes that there was a contract as between the plaintiff and the defendant that it was not in breach of such contract.
It is necessary to look at the facts as adduced in evidence in order to make sense of these competing claims.
The Plaintiff
In 1988 the plaintiff was 21 years of age and working as a secretary in London. In October of that year she returned to Ireland to attend her grandmother’s funeral. She planned to go back to London by air on the 20th October, 1988. In order to do so she purchased a ticket from the defendant for a direct flight from Dublin to London on that day.
On the 20th October, 1988 she presented herself at the check-in desk at Dublin airport so as to be able to board the flight. It is the events which took place on that occasion which constitute the genesis of these proceedings.
The Events at Check-in
When the plaintiff presented herself at the check-in desk the defendant’s representative enquired of her as to whether she was aware of the fact that she might be the one millionth passenger flying with the airline. She was told that she might be that passenger and was asked if she would be prepared to participate in publicity in such event. She indicated that she would be so prepared and was given a badge which was placed on her lapel. This badge contained the defendant’s logo and the legend “1 in a million”.
The plaintiff moved on into the duty free area where she was approached some little time later by a representative from the defendant. She was told that the name of the millionth passenger was about to be called.
A short time later the then chief executive of the defendant Mr P.J. McGoldrick announced the plaintiffs name as the one millionth passenger. As such the defendant represented to her that she would have unlimited travel for herself and her nominee for the remainder of her life.
The whole event was designed to and did in fact attract enormous publicity. It was on radio and television news bulletins that evening and night. There was publicity in the national newspapers. The event itself had an accompanying champagne reception; a band was present as was the well known street character known as the “Diceman”. A video of the whole affair was taken and was put in evidence.
As the plaintiff herself said she thought she was getting involved in a publicity stunt whereby the millionth passenger would receive, in return for publicity, unlimited free flights for life. She agreed to and did in fact fully participate and comply with all of the requirements of the defendant in that regard.
Her belief as to what she was involved in is in my view borne out by the evidence of the present chief executive (Mr O’Leary) of the defendant. In October, 1988 he was the chief financial officer of the defendant and was aware of what was going on. In the course of his evidence he made it quite clear that “the purpose of the thing was to generate some publicity for Ryanair”. The whole affair was carefully stage managed by the defendant. It appears to have had little enough to do with whether or not the plaintiff was actually the millionth passenger travelling. In fact it is most unlikely the plaintiff was in reality the one millionth passenger.
As the chief executive said, the defendant knew that at some stage during the particular week in October, 1988 the defendant would carry its millionth passenger. The marketing men were keen to generate publicity for that event. So they picked out a passenger on a day of the week that was quiet i.e. midweek when they could be guaranteed to get photographers to Dublin airport. Furthermore, it is clear from the evidence of Mr O’Leary that if a passenger at check-in had indicated that they would not become involved in publicity they would not have been picked as the supposed millionth passenger at all.
Later Events
Having been chosen by the defendant the plaintiff was given a giant sized replica of an airline ticket which bore the legend “Passenger ticket and baggage check for our millionair passenger. Valid for free air travel for life”. The figure 1,000,000 is contained in the top right hand corner.
Some weeks after the event the plaintiff received a written communication from the defendant. It took the form of a letter from the defendant’s commercial director to which there was attached an agreement. The plaintiff recollects that this agreement set out how the arrangement was to work for herself and her nominee. She read through it and showed it to her father and it seemed quite a straightforward document. She recalled that one of the stipulations was that she was obliged to nominate somebody to be her travelling companion. At that stage she was only 21 and was unmarried. She felt that she could not nominate somebody for the rest of her life so she contacted the marketing manager an Ann O’Callaghan by phone and explained her difficulty to her. She made an arrangement with Ms O’Callaghan who was very understanding of her situation and indicated that the defendant would be prepared to consider allowing her to nominate on a year by year basis. The plaintiff left the written contract with Ms O’Callaghan so as to enable the necessary amendments to be contract was ever furnished.
Notwithstanding that however, it is quite clear that the arrangement as between the plaintiff and the defendant worked smoothly for many years up to 1997.
1988 to 1997
During these years the plaintiff utilised her entitlement with the defendant without difficulty. Her use of the free travel facility was on any view modest. During most years she took three or four flights and certainly never exceeded five. In one year she used the entitlement as little as once. Despite the lack of documents the arrangement worked well.
Typically, the plaintiff would telephone the marketing department of the defendant, identify herself and notify them of the booking that she required. She did this about two weeks before flying. There was usually a designated person whom she would contact. Having phoned through her reservation she would receive either a fax or a telephone call giving her a reservation number. Armed with that she would then attend at Dublin airport on the day of the flight and would be issued with the tickets. She never experienced any hitch in this arrangement save on one occasion in 1994 when she had to deal with a new official who did not know her. That official pointed out that she had no documentation about the plaintiff on file. The plaintiff faxed through the official press clippings concerning the events of October, 1988 and no further problem was encountered.
In October, 1997 events which are at the root of this litigation occurred. There is a serious conflict of testimony in respect of a number of them and it will be necessary for me to resolve that conflict.
15th October 1997
The plaintiff contends that on this date she followed her normal practise and telephoned her contact person in Ryanair who was known to her as Emer. This lady is in fact Emer Purcell who gave evidence in this trial. The plaintiff says that she asked Ms Purcell to reserve two seats to Edinburgh departing on the 31st October, 1997 and returning on the 2nd November. The defendant only flew to Glasgow so the plaintiff and her husband were going to travel on from there to Edinburgh.
The plaintiff says that she had a conversation with Ms Purcell. Ms Purcell checked while she was on the phone for availability of flights. They discussed the various times and flight options that best suited the travel arrangements because the plaintiff was taking time off work to make this trip. Ms Purcell confirmed that seats were available and took the booking. The booking was concluded as normal and Ms Purcell said that she would fax through the reservation and booking number within a couple of days. On the plaintiffs version of events that did not occur and resulted in her telephoning the defendant on the 28th October to ask for the booking number.
The defendants contend that no such reservation was made on the 15th October and that the first that they knew of the plaintiffs desire to make this journey occurred a few days before flight when they were contacted at the end of October.
There is a conflict of evidence between the plaintiff and Ms Purcell concerning this alleged arrangement of the 15th October, 1997.
Insofar as that conflict is concerned I have come to the conclusion that the plaintiffs version of events is correct and Ms Purcell’s is not. I have come to that conclusion for a number of reasons. First, I think it highly unlikely that the plaintiff would have left the making of this booking to the last minute as the defendant suggests. She was at this time six months pregnant and believed it to be the last time that she would be able to fly to see for her and her husband concerning this visit. She was also taking time off work. In such circumstances I think it most unlikely that the attempt to book the flight was left to the last minute as was suggested. Secondly, the plaintiff was quite clear in her recollection and steadfast in her testimony concerning this event. That was not the case with Ms Purcell. Cross-examination of the plaintiff was conducted on the basis that Ms Purcell had no recollection of this event. At one stage in her testimony that was the expression she herself used. At other places in her testimony she denied that the event occurred. There is a world of difference between an event not taking place and a person not having a recollection of it. The plaintiffs testimony was, unlike that of Ms Purcell, unwavering.
Furthermore, having had the opportunity of seeing both the plaintiff and Ms Purcell, observing their demeanour and having an opportunity of assessing them I prefer the evidence of the plaintiff. In addition, when the plaintiff encountered difficulties with the defendant at the end of October she committed her recollection to writing in a contemporaneous note. That clearly records the events of 15th October. No such records were kept or produced by the defendant.
The normal practise for the plaintiff was to make her travel arrangements about a fortnight in advance and I see no reason why she would have departed from that arrangement in the present case. In fact, there was every reason why she should adhere to it given her pregnant condition, and the family arrangements that fell to be made.
I find as a fact that the plaintiff did make the arrangement with Ms Purcell on the 15th October, 1997. For whatever reason that arrangement was not followed through by the defendant and the plaintiff was not notified of her booking or reservation number. This brings me to the next event.
28TH/29TH October, 1997
On the 28th October the plaintiff, in the absence of a reservation or booking number, telephoned Ryanair in order to speak to Ms Purcell. Ms Purcell was not available so the plaintiff left a message. On the following day another member of the defendant’s staff called Sharon telephoned the plaintiff. She said that she had been asked by Ms Purcell to fax through the plaintiffs reference but she was unable to do so. So Sharon telephoned the plaintiff and asked for the flight numbers and the dates and times. These were given. The plaintiff was told that she would be faxed a booking reference. That did not happen. At this stage the plaintiff was getting anxious as there was only a few days to go before travel. She telephoned that afternoon. She spoke once again to Sharon, who told her that there were no seats left on the original flights and that no booking had been made. The plaintiff enquired as the availability of seats on other flights on the chosen dates and was told that there were such seats available. She asked Sharon to book these but was told that that could not be done because Sharon did not have authority to do so. She did however, say that she would try to hold these seats. Sharon said that on the following day namely the 30th October when Emer and her boss Mr Tim Jeans were back in the office they would deal with the matter. This was the first time that the plaintiff had ever heard of Mr Jeans.
30th October. 1997
At 9.30 am on the 30th October, 1997 the plaintiff again telephoned the defendant. She spoke to Ms Purcell (with whom of course, she had been dealing over a number of years). She transferred her to Mr Jeans, the marketing director. Having introduced himself Mr Jeans enquired if she had anything in writing from Ryanair and she told him that she did not. She explained however, that she had been availing of her entitlement for the previous nine years without any problems and without having anything in writing. She did tell him however, that she had the video tape and press clippings of the events of October, 1988. She informed him that the video tape demonstrated the then chief executive telling her that she had won unlimited free flights on any Ryanair flights for the rest of her life.
When making this request of the plaintiff Mr Jeans was fully aware of the fact from Ms Purcell that the plaintiff had indeed for years beforehand availed herself of flights on foot of this entitlement.
Notwithstanding this however, he told her that in the absence of a written contract between her and the defendant limits would be imposed on her entitlement. There is a conflict of evidence between the plaintiff and Mr Jeans as to the extent of that limitation. The plaintiff is clear in her recollection and in her contemporaneous note that she was told that she would be limited to one flight per year. Mr Jeans says that his recollection is that he told her she would be limited to one flight per month. Unfortunately for Mr Jeans his contemporaneous note does not support his testimony. It records that he told her that her limit would be one flight per year. Having had an opportunity to assess both the plaintiff and Mr Jeans in the witness box I have no hesitation in resolving this conflict in favour of the plaintiff. I find as a fact that Mr Jeans informed her that she would be limited to one flight per year in the absence of a written contract.
This information was, as the plaintiff said, “a bolt out of the blue”. She told him that she thought that it was unacceptable and felt that the defendant could not randomly change the details of the contract as it suited it.
Insofar as there is any conflict between the plaintiff and Mr Jeans as to the discussion which took place concerning her flight for the next day, I likewise resolve that conflict in favour of the plaintiff. I find that the conversation between herself and Mr Jeans ended with him indicating to her that somebody would telephone her in that regard. At this stage I am satisfied that Mr Jeans was aware of the fact that there were a number of seats available on the flights which were sought but they were what was known to Ryanair as S-class seats. That is they were the most expensive seats and the airline was not prepared to make them available to the plaintiff.
I accept the plaintiffs evidence that as nobody had telephoned her by 10.30 am she again called the defendant and was assured that Ms Purcell would telephone her back. That did not happen and the plaintiff telephoned again at 11.30 am. Once more, she was told that either Ms Purcell or Mr Jeans would telephone her. That did not happen either.
At 12.30 pm the plaintiff telephoned again. In the meantime she had telephoned Ryanair reservations and was told that there were seats available on the relevant flights.
Again, I accept the plaintiffs version of events as to what occurred when she made this 12.30 pm phone call. She spoke to Mr Jeans who indicated to her that there were no seats available the following day to Prestwick. She told him that that was not so. His response was that the issue had now gone to the managing director of the defendant and that he had dictated that there were to be no more flights to be given until the matter had been clarified. Insofar as there is any conflict between the testimony of the plaintiff and Mr Jeans in this regard I accept the plaintiffs version of events as being the more probably correct and I find as a fact that the conversation which I have just recounted did in fact take place.
The plaintiffs next port of call was to telephone the chief executive of the defendant Mr O’Leary. She spoke to him on the telephone. Again, there is a conflict of testimony between what the plaintiff said occurred on this occasion and the evidence given by Mr O’Leary.
On Mr O’Leary’s own evidence Mr Jeans had spoken to him a number of times on the morning of the 30th October prior to the plaintiff making contact with him. He knew that there were seats available on the flights sought by the plaintiff but they were not in the cheapest class. His version of events is that the plaintiff had had this fact already explained to her and that he told her that in order for her to obtain those flights the company needed to receive reasonable notice in advance and making a call the day before one wanted to travel was not reasonable notice. He said that the plaintiff did not tell him that she had already done so two weeks beforehand. He described the plaintiffs allegation of hostility on his part as “nonsense”. He said the company’s position was quite clear. There was no availability on the cheaper seats on the flights to Prestwick that weekend and consequently Ryanair would not be offering her free seats on the basis that she was simply calling up the day before. He denied that he raised his voice to her. He made it clear that she was not going to get free flights the following day and the phone call he says, concluded on the basis of her undertaking to write in to him the following week.
The plaintiffs version of events is dramatically different. She says that he was extremely hostile to her from the start. He asked her who did she think she was, phoning up demanding flights. He said that flight sought was unavailable and therefore she could not travel. She said that she told him there was an earlier flight available but he said that the seats were at a higher rate and she was not entitled to them. She suggested that she was being very badly treated by the defendant and that it was trying to put the onus on her to prove the legitimacy of her prize whereas the fact that it had nothing on file was its fault. Mr O’Leary responded that it was her problem. She says that he told her not to phone anyone in Ryanair again and to send in the tape and that he would look into it. She asked him not to bully her and found it difficult to make herself heard.
Having had the opportunity of observing the demeanour of the plaintiff and Mr O’Leary throughout their testimony I am quite satisfied that the plaintiffs account of the telephone conversation in question has about it the ring of truth and is an accurate account of what occurred. It is supported by her own contemporaneous note whereas the defendant did not attempt to adduce any note of the conversation in question. I found the plaintiff a more persuasive witness than Mr O’Leary and I therefore find as a fact that the version of events given by the plaintiff is what occurred. I reject Mr O’Leary’s assertion that he was not hostile or aggressive or bullying towards the plaintiff. I find that he was.
The net effect of all of this was that the plaintiff was now left without her entitlement to travel and furthermore, future entitlements were in doubt, certainly insofar as they might exceed one trip per year.
Subsequent Events
On the 6th November, 1997 the plaintiff wrote to Mr O’Leary enclosing the video tape and the press clippings relating to her entitlements. In her letter she pointed out that the then managing director of the defendant stated quite clearly that she was entitled to unlimited travel on any Ryanair flight for life for herself and a friend. The letter went on to point out that she was unable to make the trip to Glasgow Prestwick on the preceding Friday and that this had caused her and her family great inconvenience.
This letter was responded to by Mr Jeans by letter of the 17th December, 1997. His letter set out details of how the defendant proposed to operate the plaintiffs by now admitted entitlement to concessionary free travel on Ryanair services from the 1st January, 1998 onwards. The terms that were proffered were as follows:
“1. Travel on Ryanair services is for Miss Jane O’Keeffe and one other nominated person. Travel will be available to these two named individuals only, and both individuals must be travelling together, (please revert with the name of your nominated companion).
2. Travel is available on Ryanair services only. No travel can be made on other carrier’s flights, including any “code share” flights that
Ryanair may operate in future, in cooperation with other carriers.
3. Travel can be made on Ryanair services up to a maximum of one return flight per annum (i.e. up to twelve flights per annum), (sic) and
entitlement cannot be carried forward.
4. Requests must be made in writing two weeks prior to departure to Ryanair’s sales department at the above address. These are subject to
the availability of ‘H” class seats at the time of booking. Should the designation of ‘H” class alter in future, then travel will be available
where the lowest published fare class is available.
5. Your entitlement to travel is not transferable, and has no alternative cash value.
6. On your death, the entitlement of the other nominated individual will cease also.
7. You agree to be available for PR and promotional activity for Ryanair.
I would appreciate your confirming acceptance of the enclosed conditions by signing both copies of the enclosed letter and return these to me. One will then be countersigned by Ryanair and return (sic) to you for your records. I trust that by having a proper system in place, we can avoid any misunderstanding in future, and we look forward to welcoming you on board our services for many year sin (sic) the future.”
A number of features of this letter caused concern to the plaintiff. First, she read paragraph (1) as meaning that both herself and her nominated companion had to travel together for either to get free travel. She knew that her nominated companion would not be able to travel without her but she thought that she should be able to travel without the companion. Secondly, the proposition in paragraph (3) was clearly a nonsense. On the one hand it was offering one return flight per annum and in the same sentence spoke of up to twelve flights per annum. That was obviously an error. Thirdly, the reference to “H” class seats was a mystery to her. She did not know what that was all about and had never heard of it beforehand. The only other time during her many years of dealing with Ryanair where classes of seats were mentioned was in her dealings with the defendant on the 30th October when she was told by Mr O’Leary of seats at a higher rate being the only ones available on the flights in question.
The plaintiff did not know how many seats were normally available on a flight at the lowest published fare. She had never been told of this situation prior to the letter of the 17th December, 1997.
She contacted the defendant and arranged to meet Mr Jeans. She did so.
They had an amicable conversation concerning these points of worry. He undertook to clarify these matters and said that he would issue her with a new letter. In the course of her conversation he accepted that she would not have to travel with her nominated companion and that point (1) in the letter was incorrect. He also accepted that point (3) was incorrect and that she would be limited to twelve flights per annum. He also undertook that he would clarify the designation of “H” class seats. She was not satisfied with the explanation which he gave her verbally in that regard.
After this meeting she decided to take legal advice on the question and thereafter correspondence took place between solicitors.
In the course of the correspondence it was arranged that she would be able to take a Ryanair flight and she went to Rimini on that single occasion. Apart from that flight she has not availed herself of the facility further and the matter has resulted in the present litigation.
Was there a Contract?
The contention made by the defendant both in its pleadings and submissions is that there was no contract in existence between the plaintiff and the defendant. Rather it is said that the defendant conferred a gift on the plaintiff. Insofar as the terms of that gift are concerned the defendant appears to be in some considerable doubt. Five different alternatives are set forth in the defence and on the closing day of the trial leave was sought and granted even to amend those.
A gift is defined in the Concise Oxford Dictionary (seventh edition) as a “voluntary transference of property without compensation”.
In the present case I am quite satisfied that on any reasonable view of what occurred in this case the entitlement given to the plaintiff to avail herself of free tickets on the defendant’s flights was not gratuitous. The only basis upon which the defendant had any interest in the plaintiff arose from her agreement to participate in the public relations exercise which was undertaken by it. Had she not so consented she would have had no entitlement to participate in the proposal which was put to her. The whole object of the exercise was to generate publicity for the defendant and the plaintiffs active participation was required in that. She gave her consent and it was on that basis that the entitlements in question were made available to her.
I am quite satisfied therefore, that there is no question of a gift being involved here. The defendant had a very clear idea as to what it wanted from the plaintiff and it got it.
It is trite law that in order for there to be a valid contract there must be agreement between the parties, consideration for such agreement and an intention to create legal relations.
In my view there was agreement between the parties that in consideration of the plaintiff consenting to participate in the publicity sought by the defendant she would be eligible for nomination as its millionth passenger. Should she be so nominated she was to cooperate in the publicity being generated for the defendant’s benefit. In return she was to be entitled to unlimited travel on Ryanair routes for herself and a nominated person for the remainder of her natural life.
Under the doctrine of consideration a promise has no contractual force unless some value has been given for it. The court is not concerned with the adequacy of value. (Haigh v Brooks [1839] 10 A & E 309; Wild v Tucker [1914] 3 K.B. 36; Midland Bank v Green [1981] AC 513). The consideration to support a contract must however be real, that is to say capable of estimation in terms of value. It must be of some value in the eye of the law. (Thomas v Thomas [1842] 2 Q.B. 851). Certainly, the participation of the plaintiff in the publicity generated on the day in question was regarded as being of value by the defendant and I see no reason why the law should not regard it as likewise being of value. The surrender by the plaintiff of her anonymity and privacy and her active participation in the generation of the publicity that was created on the day in question in my view amounted to a real consideration and sufficient to support a valid contract.
Insofar as an intention to create legal relations was concerned it was never seriously suggested that such was absent on the defendant’s part. The onus of proving that there was no such intention is on the party who asserts that no legal effect is intended, and the onus is a heavy one (see Edwards -v- Skyways Limited 1964 1 WLR 349). As I have already noted there was no real effort to make such a case here apart from the suggestion that what was involved on the part of the defendant was a gift. Indeed, it would have been difficult to make such a case because it seems to me that there was much about the conduct of the parties here which demonstrated the existence of a contractual animus. The obtaining of the consent of the plaintiff, the furnishing to her of the large ticket setting forth her entitlements, the subsequent furnishing of the written contract reiterating the terms of the arrangement are all indicative of a lack of intention on the part of the defendant to negative the creation of a legal relationship.
I am therefore satisfied that an enforceable contract was made between the plaintiff and the defendant. I am likewise satisfied that the plaintiff carried out her side of the bargain in full and to the complete satisfaction of the defendant. The next question which arises is as to whether or not the defendant breached its obligations to the plaintiff.
Was there a breach?
The evidence satisfies me that until 1997 the arrangement between the plaintiff and the defendant operated smoothly and without a hitch. I have already found as a fact that the plaintiff followed her usual routine and attempted to make a booking approximately two weeks before the date upon which she intended to fly. In the event this was not honoured. The dishonour of those arrangements occurred at a time when there was seating capacity available to take her and her husband to Glasgow Prestwick and back on the days sought. But because those seats were not the cheapest available they were not provided for her. It was never a term of the arrangement made between the plaintiff and the defendant that she should be restricted to seats of a particular class on the aircraft.
In her attempts to have the matter rectified the plaintiffs position disimproved. The defendant refused not merely to honour the arrangement which she had made with it for that particular weekend, but indicated in unequivocal terms that thenceforth, her entitlement would be limited to a single flight per annum. In the letter of the 17th December, 1997 this was altered to twelve flights per annum albeit in a slipshod and not very impressive manner. New terms were also sought to be introduced in that letter such as confining her entitlement to “H” class seats and requiring her to be available for further promotional activity for the defendant.
This refusal to grant to the plaintiff her entitlements continued throughout this litigation and it was not until the third day of the hearing that it was finally acknowledged by Mr O’Leary that this attempt to limit her to twelve flights per annum was wrong, ought not to have been made and that no such restriction was applicable.
I am quite satisfied therefore, that the defendant has been in breach of its contractual obligations to the plaintiff and has persisted in denying her her proper entitlements up to and including the third day of the trial.
I should at this stage mention an event which occurred whilst the plaintiff was in the witness box under cross-examination. Shortly before the trial resumed on its second day she was presented with an open letter from the defendant. It offered to settle the proceedings on the basis that the plaintiff and a nominated companion would have free flights on all Ryanair flights, subject to availability, this dependent upon the notification period given by the plaintiff, but on the understanding that if there were seats on a flight at the date of the plaintiffs booking that she would be entitled to them. It offered compensation for the harm done to date and also agreed to pay her costs.
She rejected this offer which, as I say was put to her a very short time before her cross-examination resumed and which quite clearly caused her even more anxiety than she was already suffering as a result of the ordeal of litigation. She rejected the offer because as she said and I quote
“I don’t trust Ryanair anymore. I feel that if they had lived up to their initial promise to me I wouldn’t be sitting here today. I also feel that I would feel very awkward having to ring up and ask for flights given all that’s taken place, given the fact that everybody will know now who I am now, and know what has happened. And I just feel that still it’s also slightly ambiguous. It doesn’t mention “H” class, for example, or any class. It says ‘dependent on notification’, dependent on whether there are seats on a flight, ‘subject to availability’. All of the same things that have caused me concern and has led to us being here. As I say, it’s an issue of trust with me now. And I, that’s why I feel that I think I’m not sure that Ryanair would live up to the obligation based on what my experience of Ryanair is and how they have treated me to date”.
It appears to me that that reaction on the part of the plaintiff could not be described as unreasonable having regard to all that had taken place up to then.
I am therefore satisfied that the defendants are guilty of a breach of contract and that the plaintiff has a remedy in respect of it.
Damages
The plaintiff is entitled to damages for breach of her contract. She is entitled to damages for her inability to utilise the entitlement from the date of the breach in 1997 to date. She is also entitled to the capital value of her entitlement into the future. I will deal with each of these heads of damage separately.
Loss to Date
The plaintiffs use of her entitlement has on any view of it been modest. Her family circumstances at present with two young children aged four and two respectively mean that she is not in a position to make any more extensive use of the facility than has been the case to date. Accordingly, I conclude that I ought to fix the number of journeys which she is, likely to have made since 1997 to date as four per annum. That would be four round trips for herself and one other person.
I have had substantial evidence argument and debate over the value to be attributed to each of these trips. The plaintiffs actuary went into the defendant’s website, extracted a range of prices which were available for one-way flights and averaged them out as being €112 per flight. The defendants say that is not the appropriate way of approaching the matter and they have put in evidence returns which they have made to the United States regulatory authorities. Those returns demonstrate that the average passenger fare is of an altogether lower figure namely of the order of €55 – €60 per one way trip. But these are averages and do not necessarily reflect the actual loss.
For the purposes of the loss to date I think it reasonable to assume an average fare of €150 per round trip (€75 per flight one way) giving a loss of €600 per annum to the plaintiff for herself and a further €600 in respect of her nominated companion. That amounts to a total loss of €1,200 per annum for the last five years giving a loss of €6,000 to date.
In addition, following Jarvis -v- Swan Tours (1973 1 All ER 71), I think she is also entitled to be compensated for the disappointment, frustration and upset that was suffered by her in respect of the holiday weekend in October of 1997 arising from the unpleasant and shabby treatment which she suffered on that occasion. I will therefore award an additional €1,500 to deal with that. That gives an award of €7,500 for loss to date.
The Future
The first task which I must undertake is to make what I believe to be a reasonable assessment of the number of trips that are likely to be taken by the plaintiff and her nominated companion over the remainder of her life. I think it likely that the plaintiffs use will continue at the rate of four per annum until her children become older. I have little doubt but that at that stage, as she said herself, her use will increase and I think as a matter of probability, substantially. In addition the routes being flown by the defendant are continually increasing and that is likely to be the case in future. Weekend trips to close locations will increase as will holidays to places further afield. If, as she hopes, she purchases a premises abroad then even greater use will be made of the entitlement. As she gets into old age use of it will decrease. Taking one thing with another therefore, I have come to the conclusion that an allowance often trips per annum would not in the circumstances be unreasonable.
I accept the defendant’s evidence that in recent times airline prices have tended to reduce and that that is likely to continue for some time into the future. I do not accept that a stage will be reached where the cost will be zero and the defendant will be making its money solely from ancillary services.
I have already indicated how the plaintiffs actuary acquired his average of €112 per flight (one way). The defendant adduced evidence of returns which it has made to its United States regulatory authorities of the average passenger fare over the years. These figures are on the basis of a one way trip and over the past eleven years demonstrate an average fare of as little as €48.38 to as much as €60.09. Those figures are of course averages and therefore may not necessarily represent the actual loss which the plaintiff would be likely to incur in any one year. In the circumstances it seems to me to be not unreasonable to take a figure of €60 per one way trip as being the appropriate sum on which to make the calculation. The round trip would therefore be €120 and that of course must be doubled to take account of the loss of the trip of the plaintiffs companion. That gives an annual loss of €2,400 which then has to be capitalised.
I have had evidence from actuaries on both sides giving me the benefit of their views of capital value on different figures and having regard to the tax status of the plaintiff. Their evidence does not of course take into account unforeseen possibilities concerning both the plaintiff and the defendant. I must make allowance for them as best I can (Reddy v Bates). I hold that inflation will apply to future ticket prices and whilst therefore there will be a reduction in net cost, inflation will to some extent offset that. In these circumstances I have come to the conclusion having regard to all of the evidence that the appropriate sum to be awarded to the plaintiff in respect of future loss is the sum of €60,000.
To that must be added the €7,500 for loss to date giving a grand total of €67,500.
There will be judgment accordingly.