Damages Limits
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.”
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. ”
British Westinghouse v Underground Electric Railways Co of London Ltd
[1912] AC 673
Viscount Haldane LC
“ 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, and debars him from claiming in respect of any part of the damage which is due to his neglect to take such steps. ”
The duty to mitigate is not to ‘take any step which a reasonable and prudent man would not ordinarily take in the course of his business.’ Only reasonable steps.
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).
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 1988 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.
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.
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.
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.