ebooksclub.org damages and other remedies for breach of commercial contracts thorogood report

A SPECIALLY COMMISSIONED REPORT

DAMAGES AND OTHERREMEDIES FOR BREACHOF COMMERCIALCONTRACTS

Robert Ribeiro Ph.D Barrister

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

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Robert Ribeiro Ph.D Barrister

DAMAGES AND OTHERREMEDIES FOR BREACH OFCOMMERCIAL CONTRACTS

A Thorogood Report

Published by Thorogood

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tel: 020 7749 4748

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© Robert Ribeiro 2002

All rights reserved.No part of this

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A CIP catalogue record for this Report

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ISBN 1 85418 226 9

Printed in Great Britain by printflow.com

Other ThorogoodTitles:

Techniques ofStructuring and DraftingCommercial Contracts

Robert Ribeiro

Successful CompetitiveTendering

Jeff Woodhams

The Legal Protection of Databases

Simon Chalton

The Internet and E-Commerce

Peter Carey

Technical Aspects ofBusiness Leases

Malcolm Dowden

The CommercialExploitation ofIntellectual PropertyRights by Licensing

Charles D. DesForges

The Competition Act –Practical Advice andGuidance

Susan Singleton

The author

Dr Robert Ribeiro,Barrister,has been an independent lawyer,public speaker and

business consultant since 1989.His work includes the drafting and negotiation of

commercial contracts and advising upon legal problems arising in commercial

dealings.Robert’s work also includes the provision of public seminars and in-house

training for commercial clients. He is author of the book Engineering Contracts

– A Management Guide and the Report Techniques of Structuring and Drafting

Commercial Contracts.

Preface

Damages and other Remedies for Breach of Commercial Contracts is a sibling

to Techniques of Structuring and Drafting Commercial Contracts, published

in 2001 by Thorogood.

Both works have several features in common.They aim to develop professional

skills rather than simply to give an exposition of the law.They aim to give guidance

in drafting contracts and in assessing the consequences of different forms of drafting

or choice of terms.They aim to provide an update on the important current issues

for busy practitioners, and in this regard they aim to provide an element of in-

depth analysis.

This new Report takes over where Techniques of Structuring and Drafting

Commercial Contracts stops: those who draft commercial costs will be aiming

to avoid anything that may give rise to litigation, even if they have to be aware

that there is a chance that litigation may result from any commercial transaction.

The Drafting Commercial Contracts report assumes that disputes and litigation

can be avoided, and provides guidelines for helping practitioners and in-house

lawyers to achieve this. On the other hand, this new report assumes from the

start that a dispute or difference that may lead to litigation has occurred,although

it may be that the dispute can still be settled on a mutually acceptable basis.

The aim, therefore, with this new report, is to set out a systematic approach for

assessing the remedies that will be available for various kinds of breach of contract.

The choice between several different remedies is crucial,and the work begins with

this.Once the choice is made,the main theme develops,which is what the remedies

mean in terms of compensation, and how that compensation is calculated.

Recent case law is examined;the issues,and in particular the defences,are explored,

and, critically, in the modern financially conscious world, the mathematical

implications are given a searching analysis.Compensation can no longer be accurately

assessed without being aware of the implications of matters such as subrogation,

double counting, and the ways in which the ‘chance’ element in damages

may be calculated and applied.

Those who find tables and figures and calculations valuable will, it is hoped,find

that this work goes beyond previous publications in its exposition of them.

On the other hand it needs to be said plainly that this work makes no attempt

to deal with damages arising under the law of tort.

Accidents and personal injuries are not dealt with.Such matters will no doubt

be dealt with in other works by practitioners in those fields.Here,it must be said,

the only times that damages arising under the law of tort are dealt with at all, are

when they are used for comparison,either because a claim about particular facts

could be decided in both contract and in tort, or because the law in a particular

area has been developed in such a way that damages in contract and in tort do

not appear to differ greatly.

Discussion of the relationship of contributory negligence to damages for breach

of contract has also made a mention of tort inevitable at that point of this work.

But this is principally to show that problems can arise,on the frontiers of contract

and tort,which can nevertheless be avoided by careful drafting of contract terms.

It is in the end intended to be a work primarily about commercial contracts,intended

for commercial practitioners and in-house commercial lawyers.Every attempt has

been made,however, to make this intricate subject accessible to people involved

in commerce who do not have legal qualifications, with the proviso always, that

in any contentious case, qualified legal advice should be sought.

Contents

1THE STARTING POINT FOR CALCULATIONS 1A comparison of different remedies available for breach of contract ..........2

Selecting the appropriate remedy ................................................................3

The remedy of Quantum Meruit ..................................................................4

Damages versus debt ....................................................................................7

Damages: the basic principle of assessment .................................................9

Heads of damages .......................................................................................12

The rules of remoteness .............................................................................12

Damages for mental distress ......................................................................17

Interest and financing charges ...................................................................19

Consequential loss or damage ....................................................................19

2THE MEASUREMENT OF DAMAGES 22Putting figures to the claim ........................................................................23

Statutory principles affecting the measurement of damages .....................26

The rule against double counting ...............................................................28

The rules about mitigation of loss ..............................................................34

3SPECIAL CASES INVOLVING DAMAGES 39Damages for the loss of a chance ...............................................................40

Contributory negligence and the measurement of damages ......................45

Drafting terms of contract to control damages and other remedies ..........47

Liquidated damages ....................................................................................48

Clauses about currency and interest ..........................................................50

The breach date rule ..................................................................................52

4OTHER REMEDIES FOR BREACH OF CONTRACT 54Retention of a deposit ................................................................................55

Rescission ...................................................................................................58

Specific performance and specific delivery ...............................................58

Injunctions .................................................................................................61

Rectification ...............................................................................................65

Indemnities .................................................................................................66

Conclusion .................................................................................................72

POSTSCRIPT 73Farley v Skinner (2001) The Times, October 15 ..........................................73

APPENDICES 74Appendix 1: The case of the Millennium Dome .......................................75

Appendix 2: List of cases cited .................................................................77

1chapter

The starting point for calculations

A C O M PA R I S O N O F D I F F E R E N T R E M E D I E S A V A I L A B L E F O R B R E A C H O F C O N T R A C T

S E L E C T I N G T H E A P P R O P R I AT E R E M E D Y

T H E R E M E D Y O F Q U A N T U M M E R U I T

D A M A G E S V E R S U S D E B T

D A M A G E S : T H E B A S I C P R I N C I P L E O F A S S E S S M E N T

H E A D S O F D A M A G E S

T H E R U L E S O F R E M O T E N E S S

D A M A G E S F O R M E N TA L D I S T R E S S

I N T E R E S T A N D F I N A N C I N G C H A R G E S

C O N S E Q U E N T I A L L O S S O R D A M A G E

Chapter 1:The starting point for calculations

A comparison of different remedies available for breach of contract

When a contract, or a term of it, is broken and legal action is contemplated, it

may be possible for the breach to be put right by the party in breach, and many

contracts provide for this. But if this cannot be done, a choice of legal remedies

may arise.The question that this part of the report deals with is what the choices

are and how best to make that choice.Among the legal remedies for breach of

contract are:

• an action for damages

• a claim for a debt

• a claim for indemnity

• a claim for a quantum meruit or restitution

• the retention or forfeiture of a deposit

• the remedy of injunction

• a decree of specific performance or order of specific delivery

• an award of damages in addition to,or in substitution for,the two previous

remedies

• the remedy of rectification.

This list is not necessarily exhaustive. It will be noted that although not all of the

remedies necessarily involve money,they do all have potential financial implications.

Sometimes one or more of the remedies are available by means of self-help.This

will depend upon the way in which the contract has been drafted (whether, for

example, it includes any terms about deposits or liquidated damages). Most of

the remedies could form the basis for an out of court settlement.

C H A P T E R 1 : T H E S T A R T I N G P O I N T F O R C A L C U L A T I O N S

2

As an illustration of the problem of selecting the appropriate remedy,we will take

a look at the case of Hyundai Heavy Industries Co.Ltd v Papadopoulos (1980)

2 All.E.R. 29.

Selecting the appropriate remedy

Hyundai Heavy Industries Co. Ltd v Papadopoulos (1980) 2 All.E.R. 29

In this case,South Korean shipbuilders had entered into contracts by which their

customers were required to make stage payments for work in progress. Due to

breaches of contract by the customers,the shipbuilders terminated the contracts,

which they were entitled to do under the terms of the contracts.In these circum-

stances, at least three possibilities arise:

1. a claim for damages for breach of contract

2. an action for the recovery of one or more debts

3. a claim on a quantum meruit.

Damages

These have the advantage that one can obtain damages in respect of expectation

of loss,such as loss of contracts,or in this particular case,loss of profits that would

have been made if the contract had been fulfilled. But damages require

quantification,taking into account the appropriate method of calculation,the rules

of remoteness, and the rules about mitigation of loss.Damages would have been

available to the shipbuilders in this case, but the remedy might only have been

awarded after a lengthy case,depending upon proof,and the balance of the evidence.

This would not, perhaps, have been the most convenient and effective remedy.

Quantum Meruit

This remedy is available where work is partly performed,and the performing party

is prevented by the fault of the other party from proceeding further.Reasonable

remuneration on a quantum meruit may be claimed,if the performing party treats

the contract as being discharged and ended. It is improbable that one would get

any sums in respect of expectation losses in the sense of loss of future profits,

but the award of reasonable remuneration for work actually done would include

a profit element.

But, unless the parties agree upon what is reasonable remuneration, a quantum

meruit claim does require assessment of what actually is reasonable in each case.

This can be a lengthy and expensive process.


3

Debt

What was actually sought and recovered in this case were the stage payments

that were due and unpaid at the date of termination.These were claimed as accrued

debts:definite sums owed,which, in this case could then be recovered from the

guarantor of the buyers, and which were fixed by the contract and not subject

to assessment or to the rules of quantification of damages.

In the Hyundai case, in the House of Lords, it was said that:

“There are sound commercial reasons for holding that a vested and indubitable

right to prompt payment on a specified date of a specified sum, expressly provided

for in the contract, should not be supplanted by or merged in or substituted

by a right to recover at some future date such indefinite sum by way of damages

as might be awarded to the builders.”

From this we can conclude that although a damages claim may co-exist with a

debt claim,and may be wider in scope,with greater potential gains,a debt claim

is often a more efficient form of litigation,and for commercial purposes the cash-

flow advantages may outweigh the gains to be made from a claim in damages.

What is required for such a debt claim is clear and effective terms of contract

which define the stages, dates or events upon which sums become due.

The remedy of Quantum Meruit

The remedy of quantum meruit (reasonable payment for goods delivered or for

services rendered) arises in a variety of situations, which cut across the normal

distinction between having a contract and not having a contract.

1. The parties may have made a contract, but have failed to fix a precise

sum for remuneration under the contract.

2. A contract may have become subject to variation or substitution so that

the original terms of payment are inapplicable.

3. The contract may have had a fixed rate or schedule of payment, but

may have been prematurely ended by the default of the paying party.

4. The parties may have acted as though they intended to make a contract,

but in reality they have not made a contract at all.

In all of these situations,quantum meruit may be claimed.In some cases,particularly

where there is no contract, it is said to arise under the law of restitution.


4

British Steel Corporation v Cleveland Bridge and Engineering Co. Ltd (1984) 1 All.E.R. 504

In this case the parties had been negotiating the terms of a contract for the

manufacture and delivery of specified components, but the negotiations were

unfinished, with the parties not yet in agreement about the price; in particular,

the parties were still in disagreement about terms relating to liability for delay.

A ‘letter of intent’was issued requesting that the goods be supplied ‘pending the

preparation and issuing of the (contract)’.The goods were delivered and accepted

without any form of contract having been issued or agreed. It was held by the

Commercial Court that in these circumstances there was no contract, but the

law imposed upon the party requesting the goods or work an obligation to pay

a reasonable sum for the work done.The obligation arose as a form of quantum

meruit, in ‘quasi contract’ or ‘restitution’.

As a comment on this case,it may be noted that as far as British Steel was concerned,

the remedy of quantum meruit achieved almost the same thing as a claim for the

contract price of the goods (the only difference being that a claim in debt is usually

quicker).

However,the fact that there was no contract meant that a counterclaim by Cleveland

Bridge and Engineering Co.Ltd,in respect of delay in delivery of the goods,failed,

because damages for breach of any term of a contract necessarily require the

existence of a contract in the first place.

Countrywide Communications Ltd v ICL Pathway Ltd (2000) CLC 324

This case gives us further insights into the basis for quantum meruit as compared

with damages.

Countrywide Communications Ltd was claiming damages of £375,000 for a breach

of contract, or in the alternative, a quantum meruit of £55,481. (It will at once

be noted that the quantum meruit claim was far smaller than the damages claim:

this is no doubt because the damages claim would include compensation for the

loss of expected profits). The defendant ICL Pathway Ltd was formed by a

consortium,and had been bidding for a major computerisation project involving

the benefits system. While the bidding process was going on, Countrywide

Communications Ltd had carried out public relations work for the consortium,

which later operated through ICL Pathway Ltd.

All suppliers to the consortium were paid for what they did, and in some cases

expected to be appointed under contracts if the ICL Pathway bid succeeded.But

after the bid made by ICL Pathway was successful,Countrywide was replaced as

the public relations consultant.


5

Countrywide claimed,among other things, that a contract had come into being.

Their argument was that in 1994 a binding agreement had been made at a meeting

between themselves and people with power to act for and on behalf of a number

of companies, including Girobank, De La Rue and ICL (these companies being,

at that time, collectively known as ‘Pathway’), and that under this agreement

Countrywide was to provide public relations and communications advice and

support services in relation to the bid. It was also argued that it had been agreed

that if the bid was successful,Countrywide would be appointed as public relations

and communications advisors to whichever entity or corporate body was to

implement the bid. It should be noted that at this time there were six members

of the tentative consortium and the name ‘Pathway’had not yet been settled upon.

In the High Court,the judge held that he had no hesitation on the facts in finding

that there was no binding agreement to appoint Countrywide if the ICL Pathway

bid succeeded.He held that there was no more than an agreement under which

the parties (including, as from April 1995, ICL Pathway) promised that if certain

conditions were met they would negotiate.The judge stated that it was “trite law

that such an agreement is unenforceable”.

So the claim for damages was unsuccessful. But the claim for quantum meruit

was allowed, since Countrywide had been induced to provide services, and to

spend time, with associated costs, on the basis of an assurance that it would be

appointed.The quantum meruit consisted of reasonable remuneration in respect

of those services.

In the majority of cases,a party that made an unsuccessful bid for a contract would

not receive a reimbursement of its costs.We are not normally paid for expenses

incurred in quoting for services that the other party decides not to purchase,

although there may be exceptional cases.But in this case Countrywide had provided

its services free of charge, and had provided ICL Pathway with a benefit which

it would normally have had to pay fees for, in the expectation that it would be

awarded a contract.ICL Pathway had led Countrywide to form that belief,although

there was nothing that was enforceable as a contract.So this was an appropriate

basis for quantum meruit.


6

Damages versus debt

Jervis v Harris (1996) Ch.195

Much has been read into this important case, and there are those who take it to

have resolved the difficult question of whether the liability under an indemnity

is to be classified as a form of damages or as a debt. Indemnities are in fact too

diverse to be so easily classified.However,what the case does do is to inform us

that a carefully drafted term of a contract can give a useful choice of remedies.

In this case there was a clause in a lease which provided that the tenant was required

to make good all defects or want of repairs for which the landlord had given notice,

and in the event of default, the landlord could carry out the work and recover

the costs and expenses of the work from the tenant on demand.

With regard to the tenant’s liability to reimburse the landlord,the Court of Appeal

stated that the liability was not a liability in damages for breach of a covenant to

repair,but a liability to reimburse sums actually spent by the landlord in carrying

out the repairs himself, that is, it was a liability in debt, not damages.

Lord Justice Millett stated:

“that a debt is a definite sum of money fixed by agreement, and payable

for the performance of a specified obligation or on a specified event.Whereas,

damages may be claimed from a party who has broken his primary

obligations in some way other than by a failure to pay such a debt.”

The plaintiff who claims payment of a debt need not prove anything beyond the

occurrence of the event or conditions upon which the debt becomes due. He

need prove no loss; the rules of remoteness of damage and mitigation of loss are

irrelevant. And unless the event on which the payment is due is a breach of some

other contractual obligation owed by one party to the other,the law on penalties

does not apply to the agreed sum.

Millett L.J. held that the landlord’s monetary claim under the clause in question

did not arise unless and until he carried out the repairs.When it did arise, the

claim was for an account and payment, not damages.

“The landlord’s claim for reimbursement is not triggered by the tenant’s

breach of covenant, but by his own expenditure in carrying out repairs…

the landlord has an alternative remedy in damages for breach of covenant.”


7

Figure 1: Jervis v Harris

Tenant undertakesto keep premises in

good repair

Contract also includesterm permitting the

landlord to enter the premises and to carry

out the repairs.

Landlords claim is in DEBTso rules about remoteness, penalties, mitigation, etc,

do not apply.

Tenant undertakes to reimburse

landlord

Breach

Claim fordamages

Entry forrepairs

Breach

Rules about remoteness, penalties, mitigation,

etc, apply


8

Damages: the basic principle of assessment

The basic principle, and the starting point for assessing any claim for damages

for breach of contract is that stated by Lord Blackburn in Livingstone v

Rawyards Coal Co. (1880) 5 App Cas, 25, at 29:

“You should as nearly as possible get at that sum of money which will put

the party who has been injured, or who has suffered, in the same position

as he would have been in if he had not sustained the wrong for which he

is now getting his compensation or reparation.”

This principle is still quoted with approval in many cases concerning damages,

up to the present day.But the difficulty lies in the application of the principle to

individual cases.

If a contract is broken,or a term of it is broken, it could be argued that the party

not in breach should be placed,by the award of damages,in the position as if the

contract had been successfully carried out without any breach of contract.Thus,

the award of damages will fulfil that party’s expectations.

But there is an alternative argument,which is that in some cases the better approach

may be to look at the position of the party not in breach before there was a contract,

and to use damages to restore that party to the pre-contractual position.

These two different approaches may be described as:

The successful transaction method

and

The no-transaction method.

As we go through some cases and illustrations, it will be evident that in some

cases the two approaches bring about very different results.There will only ever

be a few cases where the choice between the two approaches makes no difference

at all.

It will normally be a matter for the lawyer acting for the claimant to assess the

merits of each approach, and to decide which to argue,or whether to bring the

claim in alternative forms. Alternative forms of stating one’s claim are sometimes

possible,although we will note,from case histories used as examples,that in some

cases this is not possible because of action already taken by the injured party.


9

Examples:

• Recovery of wasted expenses is achieved by the no-transaction method.

• Damages to compensate for the loss made on a loss-making transaction

are calculated on a no-transaction basis.

• Damages to compensate for loss of use or value or amenity are on a

successful transaction basis.

• Damages to compensate for loss of business or profit are achieved by

the successful transaction method.

• ‘Opportunity damages’are only achieved by the successful transaction

method.

Hayes v Dodd (1990) 2 All.E.R. 815

In this case a married couple who used solicitors to act for them in the purchase

of a workshop and a maisonette could not run their business because there was

no right of way to the workshop.The solicitors should have advised them of this,

and failure to do so was a breach of contract.By the ‘successful transaction’method,

they could have had the premises valued in their existing state, and could then

have compared that value with the value that the premises would have had if

the right of way had existed.This option is always available in cases such as this.

But the problem with the successful transaction method, based on comparative

valuations of the property, in this particular case, is that the difference between

the two values might not have been all that great.The right of way was important

to the claimants in this case, but it might not have been important to a future

purchaser,so it might have had very little effect on the objective value of the property.

So the right course for the claimants here was to take the ‘no transaction’ route

to damages.This meant that they were able to obtain £92,447 as damages for wasted

expenditure after the property had been disposed of.Details of this will be given

later in the Report.

Royscot Trust Ltd v Rogerson and Others (1991) 3 All.E.R. 294

This case shows in clear mathematical terms the importance of choosing the right

argument as one’s starting point for calculating damages. A car dealer and a purchaser

misrepresented to a finance company (Royscot Trust Ltd) the purchase price and

cash deposit for a motor car. The deal went ahead, Royscot Trust Ltd having lent

£6,400 towards the purchase price. The purchaser repaid £2774.76, and then

absconded.The main issue was as to how damages should be assessed against the

dealer.


10

The dealer’s argument was one possible version of the successful transaction

method.The argument was that the Court should compare what was actually lent

with what would have been lent if there had been no misrepresentation.Taking

this approach it was argued that the expected position was:

Cash Price: £8,000

Deposit: £1,600

Difference: £6,400

And the true position was:

Cash Price: £7,600

Deposit: £1,200

Difference: £6,400

On this basis it was argued in the County Court that the damages should be NIL,

since in a successful transaction the loan would have been exactly the same sum

that was in fact lent as a result of the misrepresentation.

The judge in the County Court accepted the successful transaction approach,

but found on the evidence that Royscot would not in fact have lent £6,400,had

it known the truth, since it had a rule of only lending four times the amount of

the deposit.So the County Court judge held that in a successful transaction Royscot

would only have lent £4,800, and he awarded Royscot the difference between

£4,800 and £6,400, i.e. £1,600.

In the Court of Appeal a different line of argument was adopted.This was that in

cases of misrepresentation, which straddle the boundaries of contract and tort,

the no transaction basis is appropriate.The claimant is in effect arguing that but

for the misrepresentation there would have been no contract at all, so the slate

must be wiped clear.

On a no transaction basis, the claimant is entitled to have the financial position

restored to the status quo before the contract.In this case this meant that Royscot

would receive as damages all the money it had lent (£6,400) less the sums

actually repaid by the buyer (£2,774.76) So the damages awarded by the

Court of Appeal were £3,625.24.


11

Heads of damages

We will assume that the claimant has made the choice as to whether to take the

‘no transaction’ approach, or the ‘successful transaction’ approach, and is now

about to itemise the claim into ‘heads of damages’. These may, in any given

commercial case, include one or more of the following.

Examples of heads of damages for breach of contract include:

• wasted expenditure

• loss of profits

• loss of contracts, loss of business

• loss of value, or diminished value

• loss of use or amenity

• interest or financing charges

• replacement or reinstatement of damaged property

• the cost of performing the obligations of the party in breach.

These are some examples of standard items.Additionally, there may be cases in

which more unusual heads of damages are claimed, such as damages for loss of

opportunity, or damages for inconvenience or distress, or even damages in

respect of loss sustained by another party.Whether or not a court will allow

damages for these items will depend very much upon the facts of the particular

case.

The rules of remoteness

“This rule (the measurement of compensation) does not come into play

with regard to any claimed head of damage until it has been determined

by the rule as to remoteness whether that head of damage can be brought

into consideration at all.”

Lord Esher, Master of the Rolls, in ‘The Argentino’ (1888) LT PD

From this quotation we understand that there is a rule, called the rule as to

remoteness, which deals with ‘heads of damages’, that is, the question of which

items can be brought into a claim for damages.


12

The general rules regarding remoteness of damages were stated in Hadley v

Baxendale (1854) 9 Exch 341, at p. 354.

“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 be fairly and reasonably considered either

arising naturally, according to the usual course of things from such breach

of contract, 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 a breach of it.”

This case involved a claim for loss of profit by a mill,where a supplier had failed

to deliver a mill shaft on time. In general, claims for loss of use or loss of profit

will be entertained in such circumstances, but only if the supplier is reasonably

aware that such losses may result from the failure to deliver.

Hadley v Baxendale is said to involve two tests:

1. Did the loss arise ‘naturally’? In other words would it have been clear

to any reasonable person that such loss was likely to result from the

breach? If so, damages are payable for that kind of loss. In later cases

this has been called ‘direct’ loss or damages.

2. Alternatively,if some or all of the damage were not direct or natural,but

of a more abnormal kind, did the defendant know about it at the time

that the contract was made? If not, then damages of this kind will not

be payable.The rationale of this rule seems to be based on acceptance

of the risk:the defendant could not very well have accepted an unusual

form of commercial risk if its existence was not known to the defendant

when the contract was made. In later cases damages of this kind have

often been referred to as ‘indirect or consequential’loss or damages.These

expressions will be discussed later.

The claim for loss of profit in the above case failed, on both tests, since it was

not,on the evidence,thought ‘natural’that this delay in delivery would necessarily

cause a loss of profit: the mill might have been operating with a spare shaft.Nor

did the supplier have any special knowledge of the likely loss of profit, so the

second rule could not assist the customer.

In the later case of The Heron (1969) 1 AC 350,The House of Lords reviewed

the authorities and confirmed the status of Hadley v Baxendale as the main

authority on remoteness of damages. In this more recent case, damages were

awarded for loss of profit,where a cargo of sugar was delivered to a sugar merchant

nine days late.The defendant had no special knowledge of the merchant’s position,

but was taken to have known that a sugar merchant could suffer financial loss if

a shipment of sugar arrived late.This is a clear example of the application of the

first rule in Hadley v Baxendale.


13

Seven Seas Properties Ltd v Al-Essa and Another (No 2) (1993) 3 All.E.R.

This is a recent example of orthodox application of Hadley v Baxendale, in this

instance to a property case.The claimant had made a contract to purchase two

properties, intending to resell them,but not disclosing this fact.There is no legal

obligation to make any disclosure of intended sub-sales,but a failure to do so can

have an effect upon damages.

The owners of the properties found out about the intended sub-sales after the

contract had been made,but before completion of the conveyances.The owners

refused to complete.This was a breach of the contract.In the first action brought

by the claimant, specific performance was requested, and granted.

In the second action, damages were sought for loss of £260,000, which was the

difference between the profit on the intended sub-sales and the actual profit on

the resales, which were eventually made several months later.

The Chancery Division held that as the intention to sub-sell was withheld from

the sellers at the time of the original contract,the owners/sellers would not have

expected the loss in question at the time when they made the contract.

It is true that they knew about the sub-sales at the time of the breach (and this

was the whole reason for the breach), but the knowledge that counts is know-

ledge at the time of the contract.

The loss did not arise naturally, so specific knowledge of likely loss was needed,

and as such knowledge was lacking when the contract was made, no damages

were payable.

Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc (1994)

In this case the House of Lords confirmed that the Hadley v Baxendale principles

apply on both sides of the England-Scotland border.The case also provides an

insight into the question of what a person is presumed to know, particularly in

relation to the fields of applied science and technology.

The claim was made by a construction company which had entered into an

agreement for the supply of electricity for the particular purpose of mixing and

supplying liquid concrete which was needed for the construction of an aqueduct

as part of creating the Edinburgh city by-pass. Due to a blow out of fuses, the

power supply was temporarily halted.The effect of this was that the making of

concrete ceased, and it became necessary to demolish the entire aqueduct and

begin again from scratch.

Balfour Beatty was seeking damages for the cost of demolition and reconstruction.


14

The defence was that the power suppliers did not know, and could not

reasonably have been expected to know,without being specifically informed,what

the consequences of a break in the supply of power would be.In particular they

did not know about the need to observe the continuous pour system for this

particular operation.

In the House of Lords it was stated that it was always a matter of circumstances

what one contracting party was presumed to know about the activities of the

other.The fact that the failure of the power supply would result in the need for

demolition and reconstruction of the aqueduct had been found as a matter of

evidence to be a fact that the supply company did not know about. And they

would not reasonably have been expected to know about it, so the claim for

demolition and reconstruction failed.

Hayes v Dodd (1990) 2 All.E.R. 815

This is the paradigm,or classic case,of damages for breach of a commercial contract

in recent years.

The facts briefly recalled: a couple who used the defendants as solicitors for the

purchase of a maisonette and yard in order to run a motor repair business,could

not run the business because a right of way which was thought to exist did not

exist.The assumed right of way was at the rear of the premises, which fronted

onto the high street. Access from the high street was little more than an alleyway,

not big enough for vehicles.

The solicitors who handled the conveyance had received letters before the purchase

took place,showing that the assumed right of way did not exist.After the purchase

was completed, the owners of the land at the rear blocked access.The plaintiffs

gave up trying to run their business,and eventually sold the properties.They claimed

damages for breach of contract against the solicitors.


15

The expenditure incurred by the plaintiffs had been considerable, so the action

for damages was brought on a no transaction basis.There was discussion in the

Court of Appeal as to whether the basis of damages was entirely a matter for the

choice of the plaintiff, but Lord Justice Staughton (who may have coined the

expressions ‘no transaction’ and ‘successful transaction’ in this case), said that he

expressed no concluded view on this. In the Court of Appeal several alterations

and adjustments were made to the damages awarded in the High Court by Mr Justice

Hurst.The re-assessed table of damages and statutory interest is as follows:

ITEM DAMAGES £ INTEREST £

1. Lease of workshop and yard 5,000 3,000

2. Rent 14,875 3,872

3. Rates 2,200 1,100

4. Insurance 1,125 440

5. Bank interest 32,000 –

6. Redundancy 329.81 200

7. Goodwill 5,000 3,000

8. Travel 1,400 750

9. Loss on disposal of plant 7,561 –

10. Conveyancing costs 4,040 2,400

11. Life insurance 500 150

12. Various other items 9,360 4,185

This table raises some points worthy of comment,most notably the blank space

in the interest column beside item number 9.The explanation of this is that a

form of inadvertent ‘double counting’had escaped the notice of the High Court,

but had been picked up in the Court of Appeal.The plant had been financed by

part of the loan;so to award interest in respect of the loss on disposal of the plant

would have duplicated some of the award of interest on the loan.

The claims for interest (in part) and for redundancy payments had been contested

in the High Court, on grounds of remoteness, but the Court of Appeal held that

these heads of damages had rightly been allowed.

There is also an item or ‘head of damages’ which had been included by the High

Court judge,but which was disallowed by the Court of Appeal.This was damages

for anguish and vexation and mental distress. All the items included in the

list are damages naturally arising,or in the contemplation of the defendants.Hurst

J., in the High Court,awarded damages for mental distress,etc,on the same basis.


16

However,the Court of Appeal took the view that damages for mental distress,etc,

do not follow the orthodox Hadley v Baxendale rules.They are awarded,if at all,

on rather different considerations.

Damages for mental distress

Lord Justice Staughton dealt with this subject at length, in Hayes v Dodd.There

was little doubt that the couple had suffered ‘vexation and anguish’over a period

of years until the case was concluded.But Staughton LJ thought that the law was

in some doubt and needed clarification by the House of Lords, in a suitable case,

or by the Law Commission.He considered that the English Courts should be wary

of adopting the “United States practice of huge awards”.

Staughton L.J. stated that the test of what was foreseeable (i.e. the Hadley v

Baxendale test) might not be the correct test to apply to claims for damages under

this head. Instead, he thought, the issue was one of policy: it was for the courts

to decide upon the classes of case in which damages for mental distress might

be awarded.

He took note of the case of Perry v Sidney Phillips & Son (1982) 3 All.E.R. in

which damages had been awarded for distress, inconvenience and trouble due to

defects in a house which had been overlooked by a surveyor.But in this latter case,

there could be said to be physical as well as mental consequences arising from

the breach of contract.He also noted the case of Bliss v South East Thames Regional

Health Authority (1987) ICR 700, in which it was said that damages for mental

distress could arise in a class of cases “where the contract which was broken was

itself a contract to provide peace of mind or freedom from distress”. But

Staughton L.J. added that “it may be that the class is somewhat wider than that”.

Commercial cases

Hayes v Dodd was treated as a commercial case, insofar as the couple intended

to run a business,and the award of £1,500 to each of the couple for mental distress

made by the High Court was disallowed by the Court of Appeal. In subsequent

commercial cases a similar view has been taken.

In McConville and Others v Barclays Bank (1993) The Times, June 30, claims

for damages for the worry and distress caused to customers of banks through

allegedly unauthorised debts from their accounts through automatic telling

machines were disallowed.It was held that the facts as alleged did not come within

any of the exceptions to the rule that damages for worry and distress were not

normally recoverable for breach of contract.


17

In Firsteel Cold Rolled Products Ltd v Anaco Precision Pressings Ltd (1994) TLR

September 21,it was held that there was no head of damages recognised by English

law which enabled a company to claim for inconvenience, stress or difficulty in

the course of its business,caused by the other party.The company could not have

suffered any such stress or inconvenience or difficulty,and it could not make out

any claim by attributing the stress,etc,experienced by the directors and employees

to the company itself.

In contrast,a company can,in some cases,attribute commercial damages or losses

of another connected person to itself (see the case below). It cannot, however,

be done in the case of mental distress.

In the case of George Fisscher (Great Britain) Ltd v Multiconstruction Ltd (1995)

BCC, George Fisscher was the holding company with three wholly owned

subsidiaries.Two of the subsidiaries manufactured goods,which were distributed

by the third.George Fisscher (Great Britain) Ltd entered into a contract with the

defendants for the construction of a warehouse and distribution centre, with

mechanical handling equipment.This equipment turned out to be defective,and

George Fisscher (Great Britain) Ltd claimed damages for breach of contract.

The breach was admitted but damages were contested. George Fisscher (Great

Britain) Ltd was claiming £491,000 as increased operating costs and loss of profits

to the subsidiary companies.The argument was that as the parent company,George

Fisscher had lost dividends and asset value of its shareholdings in the subsidiaries.

The defence was that as a matter of law, a holding company could not recover

damages for breach of one of its own contracts with another party,based on losses

to third parties, i.e. the subsidiaries.

The Court of Appeal held that damages would be based upon ordinary principles,

such as remoteness and the mitigation of loss.In this case George Fisscher (Great

Britain) Ltd had suffered loss,and it was legitimate for the court to conclude that

the loss was the same as the loss suffered by the subsidiaries.

This case,when contrasted with the previous case,shows clearly that commercial

losses fall within the normal rules,whereas damages for mental distress are taken

on a special basis.


18

Interest and financing charges

As has already been noted, interest formed a major head of claim in the case of

Hayes v Dodd.The principles may be summarised as follows:interest and financing

charges can be awarded in accordance with the tests set out in Hadley v Baxendale.

As long as the possibility that the claimant would incur such sums or charges as

a result of the breach of contract was within the contemplation of the parties,

damages may be awarded under this heading.

In Bacon v Cooper (Metals) Ltd (1982) 1 All.E.R.397, the plaintiff had to buy a

new part for a machine which had been damaged due to the breach of contract

of the defendant.This part cost £47,259,and the cost included £2,149 in respect

of financing charges.This sum was disputed by the defendant in the proceedings

before the High Court, but the judge stated:

“What was the plaintiff’s situation? He needed to have some money under

the existing hire-purchase agreement for the fragmentiser…I hold that the

plaintiff acted entirely reasonably in entering into the new hire-purchase

agreement, and that the sum of £2,149 is recoverable as damages.”

It will be noted that the question of whether or not the claimant had acted reasonably

was mentioned in this context.This is sometimes referred to as the rule about

‘mitigation’,which will be discussed later.Mitigation,that is the question of whether

or not the injured party has acted reasonably after the breach,cannot be entirely

separated from the rules of whether or not the damage was within the

contemplation of the parties.The above case is a clear illustration of this.

Consequential loss or damage

What is ‘consequential loss, or damage’ and how does it relate to the principles already set out?

We have already noted that Hadley v Baxendale gave rise to two rules for deciding

which types of damages may be claimed in respect of breach of contract.Neither

of the rules used the terms ‘direct’or ‘indirect’,but in later cases these two terms

came to be used to distinguish between the two ‘limbs’of Hadley v Baxendale.

The expression ‘consequential’,when coupled with the words ‘loss’or ‘damages’

is more problematic. It was not used in Hadley v Baxendale, and seems only to

have been material when used either in the context of insurance,or when used

as part of the wording of an exclusion or limit of liability.


19

In a long line of cases, beginning in the 1930s and continuing into the present

century, the courts have consistently held that the expression can be defined by

the parties, if they so wish, to show what they intend to include or to exclude,

or to limit. But if the parties do not define the expression, then it will normally

be taken to mean liability of a type falling within the second limb of Hadley v

Baxendale.

Failure by those in commerce,or their legal advisers,to understand these principles

can have disastrous consequences: many kinds of loss, such as loss of profits, or

loss of business,can fall into either the category of direct loss,or that of indirect

loss.In each case the Hadley v Baxendale analysis has to be performed to ascertain

which is the correct category.The problem with the use of the word ‘consequential’

in an exclusion clause is that, in the absence of any definition of the word, the

liability that is in fact excluded can be very different from what is intended.One

of the most recent examples of this will help to illustrate the point.

In the case of Hotel Services Ltd v Hilton International Hotels (UK) Ltd (2000)

Court of Appeal, March 13 2000,there was a contract for the supply of equipment

to a well known hotel company.The contract terms contained an exclusion of liability

for ‘consequential loss’. This was presumably intended to exclude liability for

commercial losses such as loss of profit. But the Court of Appeal held that since

the expression was undefined in this case, it bore its usual meaning, which was

that ‘consequential’ was a synonym for ‘indirect’, and loss of profits in this case

was a direct and natural loss arising from defects in the equipment.

The case not only shows that damages in commercial contracts depend upon

the way that the contract is drafted,but also that effective drafting of commercial

contracts can depend upon a good understanding of the law relating to damages.

A further example of the potential linguistic and conceptual trap occurred in the

case of British Sugar plc v NEI Power Projects Ltd (1997) BLR.

In this case there was a contract for the supply and fitting of electrical installations,

and the contract contained a clause which stated that the liability of the supplier

for any ‘consequential loss’ was limited to the value of the contract.

(From a commercial point of view such clauses are perfectly understandable:the

supplier would be willing to repair or replace defective equipment, but would

not be willing to take the risk of a delay or shutdown which might halt production

of the product of the purchaser.)

But the problem, unforeseen by the person(s) who drafted or negotiated this

contract is that loss of production or of profit or similar losses are tested by the

Hadley v Baxendale rules, and in the situation in which British Sugar plc found

themselves, such losses would be considered to be ‘arising naturally’, therefore

‘direct’, and not ‘indirect’, and therefore not ‘consequential’.


20

When a claim was made in respect of such losses due to defects in the equipment,

the claim was for £5 million, although the contract value was only a little over

£100,000.

The High Court and the Court of Appeal held that the clause as drafted was not

intended to place any limits upon damages falling within the first rule of Hadley

v Baxendale, but only upon those damages that would have fallen within the

second rule.Since most of the £5m could be claimed as damages arising naturally,

the clause did not serve the purpose contended for it by the defendants.

In the recent case of Pegler v Wang (2000),these principles were followed,when

it was held that loss of profits can fall within either rule, and to exclude

‘consequential’ losses does not exclude normal losses.

Here the clause drafted for Wang excluded ‘indirect, special or consequential

loss, howsoever arising (including but not limited to loss of anticipated

profits or data’.

This was held not to exclude all liability for loss of profit, but only losses of the

indirect or consequential kind.The clause did not exclude normal loss of profit.

Figure 2:The interpretation of ‘consequential loss or damages’

Loss or Damage

Direct Indirect or Consequential

Hadley v BaxendaleRule 1

(damages arising naturally)

Hadley v BaxendaleRule 2

(unusual or more remote damages)


21

2chapter

The measurement of damages

P U T T I N G F I G U R E S T O T H E C L A I M

S TAT U T O R Y P R I N C I P L E S A F F E C T I N G T H E M E A S U R E M E N T O F D A M A G E S

T H E R U L E A G A I N S T D O U B L E C O U N T I N G

T H E R U L E S A B O U T M I T I G AT I O N O F L O S S

Chapter 2:The measurement of damages

Putting figures to the claim

Here we begin to assess the claim for damages and to arrive at actual sums.We

look at issues such as the ‘new for old’ or ‘old for old’ controversy, which arises

when we consider claims for the cost of replacing lost or destroyed or damaged

property.We also take a further look at the mathematical adjustments that have

to be made to take account of certain economic factors that may be relevant to

the claim.

In the case of Hayes v Dodd (1990) 2 All.E.R., at p.825, Lord Justice Purchas

stated:

“The measure of damages is that figure which, so far as is practical in the

circumstances, achieves the maximum restitutio in integrum.”

What this means is that the courts will try to restore the loss in full, rather than

simply in part.This point is illustrated by the cases that follow.

Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co. Ltd (1970) 1 All.E.R. 225

In this case the factory of the claimant had been destroyed by a fire caused by a

defective heating system installed by the defendant. In the claim for damages for

breach of contract,it was held that since the claimant had no option but to rebuild

the factory, the measure of damages was the cost of rebuilding the factory. It had

been argued that this would have an unjust result since the new factory would

be more modern than the old, so that there would be a gain to the claimant over

and above the loss.However,the court held that there was no alternative method

of making good the loss,and in any case no extra facilities were added,so this was

the appropriate measure of damages. The alternative method suggested, of

awarding the value of the factory that had been destroyed,would not have provided

the claimant with a working factory,and therefore would not have been ‘restitutio

in integrum’.

C H A P T E R 2 : T H E M E A S U R E M E N T O F D A M A G E S

23

Bacon v Cooper (Metals) Ltd (1982) All.E.R.

In this case a buyer relied on a supply of metals of the kind specified in the contract.

A particular delivery of metals included some of the wrong kind,which were too

hard,and which damaged a fragmentiser (a machine used to turn the metals into

shredded scrap).The High Court awarded the full cost of the repairs,which included

the purchase of a new rotor for the fragmentiser.The defendant had argued in

this case that the damaged item was almost halfway through its working life, so

the damages should be reduced to take account of this.The court did not accept

this argument, and held that it was not the fault of the claimant that he was put

into a position in which he had to buy a new machine before he had intended

to do so. It was not likely that a half used item of this kind could be purchased

on the open market, so the only form of restitution was to award the cost of

purchasing a new item.

The principles of the above cases were repeated in the case of Dominian Mosaics

& Tile Co. Ltd v Trafalgar Trucking Co Ltd (1989) The Times, March 3 1989.

In this case the action was in tort rather than in contract, but the court made it

clear that the basic principle was the same.A building and valuable equipment

had been destroyed by a fire.The cost of replacing the equipment as new was

several times the cost of the original equipment,but the court held that this was

the amount payable.

Mathematical adjustments

In the above cases the cost of replacement was payable without deductions:no

credit had to be given for ‘betterment’. In some cases, however, the position is

not so clear cut: there may be a breach of contract which causes loss,but which

also to some extent results in gain to the same person.In such cases the gain will

have to be set against the loss.

This occurred in the case of Hayes v Dodd (1990), which we looked at earlier.

The breach of contract consisted of a failure to carry out the conveyance with

care and skill,and this resulted in the losses tabled in the previous chapter.These

came to the sum of £83,390, together with interest of £19,097.

However, in the Court of Appeal it was accepted that these damages had to be

reduced,because when one of the buildings purchased,a maisonette,was eventually

sold,it made a profit of £13,000 (£38,000 sale price,less £25,000,purchase value).

The argument was that since the table of damages included a large sum to

compensate for interest on a loan to purchase the property,any gain on the property

had to be brought into account.


24

The Court of Appeal accepted this. But there was another complicating factor:

the sum of £32,000 awarded as interest on the bank loan was not the full amount

of interest: it was only 80% of it.The reason for this was that the court took the

view that the plaintiffs in this case had overpaid for the maisonette at the time

that they had bought it. So the judges did not consider that the full amount of

interest was caused by the breach of contract; some of it was caused simply by

paying too much for the property.

When the gain was taken into calculation, therefore, the plaintiffs did not have

to give back the whole sum of £13,000:they only had to give back 80% of it.This

adjustment was the counterpart of the fact that only 80% of the interest was

awarded.

So we get a financial adjustment as follows:

Damages = £83,390

Interest on those damages = £19,057

= £102,447

less credit given for gain = £10,400 (80% of £13,000)

Damages awarded = £92,047

The bringing into account of the gain in this case may be contrasted with the

position in the case of Dominian Mosaics and Tile Co.Ltd v Trafalgar Trucking

Co. Ltd, which we looked at earlier, in which a windfall gain was not taken into

account.What had happened was that the party suffering damage to a building

and other property had purchased another building in which to carry on business.

When this second building was sold,a considerable gain was made,but the Court

of Appeal held that no credit had to be given for this gain,since it was not caused

by the defendants: the choice of whether to buy a new building, and of which

particular building to buy, was a commercial choice made by the claimants, and

nothing to do the defendants, and this is different from the position in Hayes v

Dodd, in which it could be said that (subject to the 80% adjustment) both the

gain and the loss to the claimants had resulted from the performance of the contract

by the solicitors.


25

Statutory principles affecting the measurement of damages

We have little in the way of codified law in our system.However,the Sale of Goods

Act 1979, and its predecessor of 1893,contain sections codifying aspects of the

law of damages and other remedies in relation to the sale of goods.

Three sections of the 1979 Act may be singled out for particular attention;sections

50,51 and 53,which deal respectively with damages for non-acceptance,damages

for non-delivery, and damages for breach of warranty.

In each case the Act states that the measure of damages is ‘the estimated loss directly

and naturally resulting in the ordinary course of events from the breach of contract’.

Section 54 of the Act preserves the law as to special damages by stating that ‘Nothing

in this Act affects the right of the buyer or the seller to recover interest or special

damages in any case where by law interest or special damages may be recoverable’.

Thus, as regards sales of goods, the rules in Hadley v Baxendale are preserved

in statutory form.

Sections 50 and 51 contain a rule for measuring damages for non-acceptance and

for non-delivery respectively, where there is an ‘available market’ for the goods.

The measure is ‘prima facie’ to be ascertained by the difference between the

market or current price at the time when the goods ought to have been accepted,

or ought to have been delivered, and the contract price.

So if goods were sold for £1,000, and if at the time of a seller’s failure to supply

the buyer had to pay £1,200 to get similar goods, the buyer would be awarded

£200 as damages.

But this measure is only prima facie, that is, it is presumed to be the guiding

principle; but in many cases alternative ways of calculating the loss of a party

can be argued.

The prima facie application of the rule

In Thompson v Robinson (1955) 1 All.E.R. 154, a person who had contracted

to buy a car changed his mind, and argued that since the car would sell at the

same price to the next buyer, the damages should be assessed as nil.The seller

argued that although this was the prima facie way of measuring the damages,

the prima facie method should not be applied in this case, since the number of

cars of this make for sale outnumbered the number of potential buyers.So a buyer

lost was a sale lost,and therefore a profit lost.So the measure of damages should

be loss of profit.The seller was successful in this case.


26

The case of Bence Graphics International Ltd v Fasson UK Ltd (1997) 1 All.E.R.

979 is about another prima facie rule, equivalent to the one already discussed,

appearing in Section 53 of the Act.This particular section deals with breach of

warranty (for example, where goods are defective or unfit for their purpose).

In some cases it is possible to reject the goods,but in other cases it is not possible,

or else the buyer prefers to keep the goods and to claim damages.

The general rule for assessing such damages is under section 53(2),which refers

to the estimated loss directly and naturally resulting in the ordinary course of

events from the breach of warranty.

Under section 53(3),the detailed provision for measuring such damages is prima

facie the difference between the value of the goods at the time of delivery to the

buyer, and the value that they would have had if they had fulfilled the warranty.

However, in the above case, the circumstances of the case show clearly that in

modern trading conditions there will be many instances where the rule will be

displaced. In this case the defendants sold cast vinyl film for £564,328 to the

plaintiffs,who used it to manufacture decals.These decals (i.e.pictures transferred

to,or permanently fixed onto other materials) were sold on to customers in the

shipping industry, where they were used to identify bulk containers.

The film degraded prematurely,and this made many of the decals illegible.Damages

were sought for breach of contract, and the trial judge awarded damages equal

to the difference between the purchase price (£564,328) and the value of the

goods delivered (nil).This meant that the damages were in effect a refund of the

purchase price: £564,328.

The Court of Appeal allowed the appeal,and remitted the case for another assessment

of damages. In this case there had been a chain of sales:

The effect of this was to displace the prima facie rule,which normally only applied

in a simple case of two parties.Here,one could not assess the loss to the purchaser

unless one first of all inquired as to what claims had been made against the purchaser

by the sub-buyers.When this was done, those claims would translate into losses

sustained by the purchaser, and this would be the correct measure of damages.

PURCHASERS SUB-BUYERSSELLER


27

The rule against double counting

This rule is in some ways a statement of the obvious:one can only obtain the exact

measure of the loss suffered, and the calculations must not be distorted by any

duplication of items within the claim. But in recent years there have been cases

which have shown that an element of double counting may inadvertently be included

in the claim.Hayes v Dodd was such a case. It is normal practice to ask the court

to add statutory interest to sums awarded.However,in this particular case,if statutory

interest had been added to a claim for a loss on the disposal of plant, this would

have been double counting,since the plant was funded by the bank loan,and interest

on that bank loan had already been awarded under a separate heading.This kind

of interest was really part of the damages in respect of the loss caused to the plaintiffs.

Statutory interest on damages is in theory a separate concept from the damages

themselves, but in this case it would have duplicated the damages instead of

being interest on them. So the Court of Appeal disallowed this part of the award

made by the High Court.

In Ruxley Electronics and Construction Ltd v Forsyth (1995) 3 WLR 318, (1996)

1 AC 344, (the famous swimming pool case) the claim was for payment of the

balance of the price of a newly-built swimming pool.The issue of damages arose

because the defence was by way of counterclaim for damages equivalent to the

balance of the price. What the buyer was arguing was that the pool was

not as specified and therefore the damages should be the cost of complete

reinstatement.

The pool as built was a highly acceptable pool,but it was approximately 12 inches

less deep at the deep end than had been specified by the buyer.

Complete reinstatement would have cost a sum equal to the outstanding balance

of the price,and this was the sum awarded by the Court of Appeal,which applied

orthodox law in stating that the aim was restitutio in integrum. So, as the buyer

had contracted to buy a pool of a certain size and depth, he was entitled to the

cost of reinstatement, to rebuild the pool in this case, because the pool as built

was not according to the measurements specified.

Nevertheless,the House of Lords reversed this decision and substituted a judgement

of a lesser sum, for loss of amenity rather than reinstatement.


28

One of the problems of this case is in finding out exactly what was the principle

applied by the House of Lords.The judgements are clear and consistent in reaching

the desired result,but do not arrive at any clear statement of principle,other than

that to award the full cost of reinstatement would not have been a fair measure

of the loss.However,it can be argued that the decision was to some extent based

upon the rule against double counting. If the buyer had been awarded a sum to

rebuild the pool, but decided not to spend it, then he would have had both the

pool (which despite its measurements added value to the land) and the damages.

Whereas,double counting did not arise if damages were only for loss of amenity.

So Lord Jauncey stated:

“Indeed were he to receive the cost of building a new one, and retain the

existing one, he would have recovered not compensation for the loss, but

a very substantial gratuitous benefit, something which damages were not

intended to provide.”

Can double recovery ever occur?

Strictly speaking the answer to this question is no.If the correct measure of damages

is applied, then items cannot be duplicated in whole or in part. But unusual

circumstances, or special rules, such as the law of subrogation in insurance, can

give rise to something which at first sight seems to contain an element of double

recovery.This gave rise to some recent cases.

In the case of Bristol and West Building Society v May May & Merrimans (1998)

1 WLR 336 the defendants were sued for negligence in advising a building society

about a property which was security for a loan.The borrower had been unable

to repay the loan as required,and when the mortgaged property was sold,during

the recession of the early 1990s, there was a shortfall in the proceeds.

The amount lent on the mortgage was greater than the building society would

normally have lent, so an insurance policy was taken out (the premiums being

paid by the borrower).This was a covenant to pay the shortfall relating to the

part of the loan which was in excess of the value of the security at the time of

the loan.


29

The figures were as follows:

Value of secured property at time of loan: £42,750

Sum lent: £56,773

Excess of loan over basic security: £14,023

Percentage of loan exceeding value of basic security: 25% approximately.

Actual loss made by building society: £52,136

Normal loss: £29,852 *

Balance secured by insurance: £22,284

* The sum of £29,852 above is arrived at by taking 75% of the sum lent, and 75%

of the interest accrued, and deducting 75% of the interest repaid, together with

the proceeds of sale.

In a case such as this,one would expect the building society to recover the ‘normal’

part of the loss from the defendants,and the balance under the insurance policy.

But that is not what actually happened.What happened was that the insurance

company and the building society reached a compromise under which the building

society received less than the strict amount due to it,and in return the insurance

company gave up its rights of recovery against third parties (the right of

subrogation).

In these circumstances, the right to sue for the full amount of its losses, both

relating to the normal part of the loan,and relating to the amount in excess of the

normal limits, remained with the building society.


30

Usually this would not happen:without the compromise reached by the parties,

the loss would have been split into two parts,one being claimed under the normal

laws of damages by the building society, and the other being claimed under the

law of subrogation by the insurance company.So usually the total sums gained by

the building society from its damages claim and its insurance claim would add up

to the exact measure of its loss,and no more.The usual position is set out below:

But in this case the building society made a net gain,because it not only received

all of the loss made (£56,136),but also received an agreed sum from the insurance

company under the compromise of the covenant to pay.

What was at issue before the High Court judge in this case,therefore,was whether

or not this was double recovery.

The answer given by the judge was that this was not a case of double recovery.

What had happened was that there were two separate claims:

1. that of the building society for the advice which resulted in the ‘normal’

advance being fixed at a higher figure than would have been the case,

and

2. the claim which the building society had against the insurance company

under the insurance policy which covered the part of the loan which

exceeded the normal amount.

As regards the second of these claims, the insurance company would normally

have had rights of subrogation which would have meant that it recovered the money

paid out,and this would have prevented any double recovery by the building society.

But the compromise entered into meant that the insurance company gave up its

rights of subrogation,which had the incidental effect that the building society made

a gain.This was not double recovery in the strict sense,and was perfectly legitimate.

Agreed reduced liability under the insuranceclaim

Insurance money at agreed reduced rate

plus damages in respect of loss on the entire loan

Insurers getBuilding Society gets

Damages under the law of subrogation for loss on the part of loan in excess of normal lending limits

Damages in respect of loss on normal part of loan

plus insurance money for loss on excess ofloan over the normal lending limits

Insurers getBuilding Society gets


31

This decision was later applied by the Court of Appeal in Arab Bank Ltd v John

D.Wood Commercial Ltd (2000) 1 WLR 857.

Here damages were awarded against a surveyor because of negligent valuation

advice,and the appeal included an appeal against the amount of damages awarded.

There was a mortgage guarantee indemnity policy, and Arab Bank made a

compromise arrangement with its insurers, as in the previous case. In the Court

of Appeal, Lord Justice Mance said:

“If a bank and its indemnity insurers choose to compromise the former’s

claim on the latter and the latter’s subrogation rights, that is their privilege

and their bargain, which they no doubt enter into (for better or for worse

as between themselves) on terms which they regard as a fair measure of

the value of such claim and of such subrogation rights.There is therefore,

in commercial terms, no undue or double recovery.”

Taxation and ‘double counting’

Long before the rule against double counting was being spoken of as such, the

courts had decided that the effect of taxation could be taken into account when

computing damages.To give a simple example,if a person received compensation

for loss of income,and if,under revenue law,that compensation was not liable to

be taxed,the court making the award could nevertheless make a deduction from

the award so that the person receiving the compensation did not get a higher sum

than he would have received if he had received taxed income.

Later the courts evolved the ‘share of income’ principle which can be stated as

follows:when a person receives income,he has to ‘share’it with the Inland Revenue.

If he receives compensation for loss of that income,he cannot receive compensation

for the share of his income that would have gone to the Inland Revenue.

The principle is similar to the rule against double counting.The claimant cannot

get more than the precise measure of his loss.

There are many cases on this point,most of which were cited and considered in

the case of Deeny and Others v Gooda Walker Ltd and Others (No 4) (1995)

The Times, June 29.

In this case there had been a number of ‘names’at Lloyd’s who had been awarded

damages against the defendants, in respect of matters such as negligent

underwriting, and underwriters’ failure to reinsure. It had already been held

that this particular award of damages would be liable to income tax, when

received by the ‘names’.


32

Awards of damages that are taxed in the hands of the claimants are ‘gross’,

that is, the court does not make deductions for tax, because there is no

risk of overcompensating the claimants.

The issue before the court in this particular case was about the interest on the

damages that had been awarded.Several years had elapsed since the losses were

sustained, and the interest was considerable.The ‘names’ claimed that, because

they had been awarded their damages without any reduction in respect of notional

tax they should be awarded interest on the full amount of the damages,without

any regard being had to tax.

Mr Justice Phillips stated that damages were awarded to compensate for loss of

money. In this case that money would then be ‘shared’with the Inland Revenue,

which would issue a demand for tax under the normal laws of taxation of income.

When it came to the interest on that money,the ‘names’were entitled to interest

on the share of the damages that would have been theirs,but they could not have

the interest on the share of that money which, if it had been paid immediately

after the loss, would have gone to the Inland Revenue.

To award interest on the whole sum, disregarding tax, would have provided the

plaintiffs with a substantial windfall at the expense of the defendants. Accordingly,

interest was awarded on 75% of the damages recovered.

Double counting and the recouping of loss

If a loss is sustained by the claimant but can at some time be recouped either

wholly or partly by the claimant taking remedial measures, then the damages

awarded by a court will be reduced to reflect this fact.This can be analysed either

as a rule of measurement of actual loss,or as an aspect of the rule against double

counting, since in theory it would be possible, but for the rule, for the claimant

to have full damages and recoup the loss at the same time.It can also be analysed

as an aspect of the rules about mitigation of loss.The principle is illustrated by

the difference between the judgments of the High Court and the Court of Appeal

in St Albans City Council v ICL (1996) 4 All.E.R.

In this well known case,the judge in the High Court had awarded the sum of £1.17

million to St Albans City Council,for revenue lost due to defective software supplied

by the defendants.The case is best known for its application of the laws relating

to unfair terms:a term of the contract purporting to limit liability to £100,000 was

held not to be reasonable,and therefore to be ineffective.However, the appeal of

the defendants was not entirely wasted,since they succeeded in getting the damages

reduced to the sum of £685,000.


33

Why was the sum of £484,000 disallowed? The answer lies in the nature of the

loss.What the City Council had lost was the sums that it would have charged to

its charge payers if the software had computed accurately,and had not been faulty,

and sums paid to the County Council as a result of the incorrect computations.

The sum of £685,000 fell into this second category, because it was money

irreversibly paid to the City Council.This could be recovered as damages by St

Albans City Council in its capacity as trustee for the charge payers.

But the £484,000 stood on a different footing.This was merely money not collected

from the charge payers because the software calculating the charges was faulty.

The Court of Appeal took the view that the City Council could and should have

recovered this from the charge payers in the following year:i.e.in 1991-1992 they

should have been made to pay what they should have paid and did not pay in

1990-1991.Lord Justice Nourse stated that otherwise the effect of recovery would

have been to have given the charge payers a bonus to which they were not entitled.

But the City Council was entitled to interest on the sum of £484,000 for

one year, since they had been unable to obtain the use of this money for the

year in which it should have been, and was not, collected.

The rules about mitigation of loss

This part of the law of damages has sometimes been called the ‘duty to mitigate’,

but on reflection, it is perhaps better not to refer to the rules as a ‘duty’. In reality

the position is that the person claiming damages will only obtain the damages caused

by the breach of contract,and which the parties reasonably had in contemplation.

So mitigation is part of the rules of causation and part of the issue of what the

parties might reasonably have had in their contemplation when considering the

nature and extent of the damages.When it is said that the party suffering damage

must mitigate the loss, what this means is no more than that damages caused by

the conduct of the claimant after the breach,which are different from or in excess

of those in the reasonable contemplation of the defendant, will be disallowed.

In Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co. Ltd (1970) 1 All.E.R.,

Lord Justice Widgery stated:

“In my opinion each case depends upon its own facts, it being remembered,

first, that the purpose of the award of damages is to restore the plaintiff to

his position before the loss occurred, and secondly, that the plaintiff must

act reasonably to mitigate his loss.”

This rule is based upon reasonable conduct after the breach of contract,to prevent

the losses from becoming different in kind,or higher in amount than is necessary.


34

In Banco de Portugal v Waterlow & Sons Ltd (1932) AC 452, Lord Macmillan

stated:

“The law is satisfied if the party placed in a difficult situation by reason

of the breach of a duty owed to him has acted reasonably in the adoption

of remedial measures, and he will not be disentitled to recover the cost of

such measures merely because the party in breach can suggest that other

measures less burdensome to him might have been taken.”

The effect of these observations can be seen in some of the cases that we have

already looked at.

In Bacon v Cooper (Metals) Ltd (1982), it was argued by the defendant that there

had been a failure to mitigate, in that the party suffering the loss had purchased a

new part for his machine by hire purchase.Hire purchase charges are usually much

higher than other forms of financing. However, the judge looked at all the

circumstances of the case, including the plaintiff’s existing commitments,and the

need to get the matter dealt with quickly in order to run the business, and held

that it had not been unreasonable in the circumstances to incur hire purchase charges.

The question of financing repairs,and the need to obtain money,has caused much

difficulty, as far as the assessment of damages is concerned. In the past it has

sometimes been held that the defendant should not have to bear any consequences

of the claimant’s own financial position; in other words it has sometimes been

thought that the need of the claimant to borrow or to hire or to hire-purchase

is no concern of the defendant.

In view of the Bacon case,this can no longer be considered to be true.Reasonable

borrowing or financing charges may be claimed.

Later on we will be looking at the new case of Alcoa Minerals of Jamaica INC

v Herbert Broderick (2000) BLR,in which another aspect of the claimant’s financial

position was taken into account.This was the question of whether or not a claimant

whose property has been damaged should have it repaired at once,to save costs,

or wait until the trial is over and until the damages have been awarded,even though

this may result in inflated costs.

In this case the Privy Council thought that there was no failure to mitigate if a

claimant waited until the damages became available before having repairs done.

Details of this important case will be given in the next chapter.

In Hayes v Dodd (1990), the couple who were claiming damages for incorrect

advice in relation to the purchase of a maisonette and workshop had to deal with

the argument that they had increased their loss by not mitigating. In particular

the rent in relation to the lease of the workshop was higher than it might have

been if the properties had been sold separately. In the Court of Appeal this point

was considered, and it was accepted that with hindsight the couple had at first


35

taken the wrong course of action in trying to sell both properties together.Later

they had to change their plan of action,and had to sell the properties separately.

But the court decided that in the circumstances the couple had been faced with

a difficult situation and had not acted unreasonably, so they were entitled to

compensation in full for items such as rent.

An interesting,and rather unusual application of the rules about mitigation arose

in the case of Western Web Offset Printers Ltd v Independent Media Ltd (1995)

The Times, October 10.The facts are fairly simple: the printers had received an

order for work to be done,printing 48 issues of a weekly newspaper.This order

was then cancelled by the defendant and the cancellation was a breach of contract.

The damages were to be assessed as loss of profit,but the question was as to how

to calculate the loss of profit.

Two different ways of arriving at the sum to be awarded for loss of profit were

possible.One was to take the contract price for the printing of the 48 cancelled

issues, and to deduct the costs of paper, ink and carrying out the work.

Thus: Contract price £***,***

less £ **,*** (paper, ink and work)

Profit = £176,903

But the alternative method which was argued for by the defendant was to deduct

not only the costs of paper, ink and printing work, but also a proportion of the

general overheads of the plaintiff’s business.

Thus: Contract price £***,***

less £***,*** (paper, ink, work, and overheads)

Net Profit = £ 38,245

(The actual figures, other than the figures for the two forms of profits have not

been supplied.)

In normal circumstances the argument put by the defendant would probably have

been accepted. A person breaking a contract of this kind would be liable to make

good loss of net profit, after deducting a proportion of overheads, rather than

the gross margin on the particular contract,but leaving out overheads.It would

be argued that the plaintiff should seek other contracts to make up for the work

lost,and to pay the overheads and should not,in effect,charge its overhead expenses

to the defendant as damages, by not deducting them from the contract price.

This argument is partly about the calculation of the actual loss, and partly about

mitigation of loss.


36

But the circumstances of this case were not normal.This case occurred during

the depths of the recession of 1991-1995.When the contract was cancelled, the

plaintiff could not get any further orders to make up for the loss,although attempts

had been made to do so.The Court of Appeal stated that the plaintiff was not

guilty of any failure to mitigate its loss.

So the case had to be assessed according to its own circumstances, which were

that the plaintiff had relied upon this particular contract not merely to make a

net profit,but to make a gross margin which would be used to defray its overheads.

So the correct measure of loss was £176,903.

The ‘swimming pool’ case

The well-known ‘swimming pool’ case has been much discussed, with a view to

extracting a thread of principle from the judgements in the House of Lords.We

looked at the case earlier when we discussed double counting,because the decision

was undoubtedly intended to prevent a case in which a person could add damages

equal to the cost of replacing an item to the benefit of keeping an item of considerable

value.

Can the case also be seen as an example of the application of the rules relating

to mitigation? Perhaps,but it needs to be said that the argument about mitigation

is based in this case upon an assumption which would be diametrically opposite

to the assumption upon which the ‘double’benefit reasoning of the House of Lords

was based.When the House of Lords stated that Mr Forsyth should not be allowed

both to keep the pool as built,and have damages to rebuild it,this point was made

because the trial judge had found as fact that Mr Forsyth did not intend to use

the damages to rebuild the pool.

On the other hand, the ‘mitigation’ argument, to the extent that it is relevant to

this case,must be based upon the assumption that Mr Forsyth did intend to rebuild

the pool; and it would then be argued that the rebuilding of the pool was an

unnecessary or excessive course of action to deal with the breach.The word ‘mitigate’

is not used as such in the passages about to be quoted, but the broad principle

does seem to be made in these statements:

“If it was unreasonable in a particular case to award the cost of reinstatement

it had to be because the loss sustained did not extend to the need to reinstate...”

(Lord Jauncey)

“Mr Forsyth’s undertaking to spend any damages which he might receive

on rebuilding the pool did not make any difference.He could not be allowed

to create a loss which did not exist in order to punish the builders for their

breach of contract.”

(Lord Lloyd)


37

These observations are not entirely without problems.The plaintiff had had the

pool built not only to swim in,but also to dive into.The pool as built was several

inches too shallow for an adult of average or above average height, to be able to

dive into safely. Nevertheless, the evidence was that the pool had added

considerable value to the land.While the argument about double benefit (if the

plaintiff kept the pool and did not spend the damages on a new one) is perfectly

sound, the argument in the above quotations is an entirely different argument

and presupposes that the damages would be spent,so there would be no double

benefit.Yet it is argued that to spend the damages on a new pool would be ‘creating

a loss’,and ‘unreasonable’.This assumes that there would have been an alternative

way in which Mr Forsyth could have spent the damages to put right the loss.But

precisely how was Mr Forsyth to spend the damages? The view that is implicit

in the judgements of their Lordships, that Mr Forsyth could have had the pool

rectified more cheaply, is not one that will necessarily be accepted by people

looking at this case from a commercial point of view.It is difficult to see precisely

what could be done with the pool to make it fit for diving into,other than digging

it up and starting again.

Perhaps the best way to summarise this case is to say that, looking at the general

principles of mitigation of loss,mitigation is not an exact science.But the courts

will be satisfied if a claimant has acted reasonably, even if his course of action

was not the cheapest that could have been taken;but they will not award damages

for an alleged loss,which in their view,has been exaggerated by the unreasonable

conduct of the claimant or by an unreasonable course of action which the claimant

proposes to take.


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3chapter

Special cases involving damages

D A M A G E S F O R T H E L O S S O F A C H A N C E

C O N T R I B U T O R Y N E G L I G E N C E A N D T H E M E A S U R E M E N T O F D A M A G E S

D R A F T I N G T E R M S O F C O N T R A C T T O C O N T R O L D A M A G E S A N D O T H E R R E M E D I E S

L I Q U I D AT E D D A M A G E S

C L A U S E S A B O U T C U R R E N C Y A N D I N T E R E S T

T H E B R E A C H D AT E R U L E

Chapter 3:Special cases involving damages

Damages for the loss of a chance

In claims for damages,both in contract cases and in tort,damages can be awarded

for the loss of a chance.The courts will award such damages by evaluating the

opportunity that has been lost due to the breach of contract or negligence of the

other party,and by then assessing the mathematical chances of a successful venture.

In all such cases the courts are applying the ‘successful transaction’ approach.

One of the earliest of these cases was Chaplin v Hicks (1911) 2 KB, in which

the plaintiff and the defendant had agreed that if the plaintiff attended a meeting,

twelve out of the fifty people attending would be offered employment as actors

in the defendant’s theatre.(Normally,interviews for employment do not have any

contractual status, and there is no remedy in the law of contract if one is not

appointed, although there may be remedies under anti-discrimination laws; but

in this particular case it was accepted that the arrangements amounted to a

contract.)

The contract was broken by the defendant, who failed to give the plaintiff a

reasonable opportunity to be interviewed,after she had attended as agreed.Damages

were awarded on the basis that there was a substantial chance which the court

was able to value. In this case, if the contract had been properly carried out, the

plaintiff would have had a one in four chance of employment in her chosen career.

So the damages were assessed by calculating the money that she would have earned

if she had been successful, and dividing by four.

In many cases the injured party will have a choice as to whether to take the

‘successful transaction’ route and claim for loss of a chance, or to take the ‘no

transaction’route,and to claim for wasted expenditure.If both avenues are open,

the choice will be a tactical one, and may well depend upon the ability of the

claimant and the courts to assess the mathematical element of chance. In some

cases,such as the one discussed above,the mathematics are very simple.In other

cases the chance element will depend upon expert professional opinion.In other

cases the judges will take a ‘broad brush approach’, and assess a chance as 50-

50,or some such ratio.This is something that the judges are well accustomed to

doing in cases of contributory negligence,so there is no reason to think that they

have any great difficulty in applying similar principles to the assessment of a chance.

C H A P T E R 3 : S P E C I A L C A S E S I N V O L V I N G D A M A G E S

40

However, there may be cases where solicitors and counsel for the claimant take

the view that the element of chance is too difficult to assess or to argue successfully

before a court. Anglia Television Ltd v Reed (1972) 1 QB 60 is such a case.

Here, the television company had engaged an actor to appear in a television film

which was being produced.The actor repudiated the contract at the last minute,

and a replacement could not be found, so the project was abandoned. In theory

a claim could have been made for loss of profit. But the profit element, in film

production, is a matter of chance rather than certainty, so this would have had to

be assessed on a chance basis. But it is difficult, if not impossible, to assess the

likelihood of an unmade film making a profit.As every film is different,comparisons

are not necessarily a reliable guide.

So in this particular case,the decision taken was to claim for wasted expenditure:

on locations, actors, the scriptwriter, preparations, and so on.The claim on this

basis was successful.

This of course is a ‘no transaction’approach and the antithesis of a claim for damages

for the loss of a chance.

One of the more recent cases that illustrates the methods that the courts may

use when measuring the element of chance is First Interstate Bank of California

v Cohen Arnold & Co. (1995) The Times, December 11.

In this case a firm of accountants had been asked by a bank to state the net worth

of their client,to whom the bank had lent the sum of £4.8 million.The accountants

stated that the client was worth £45 million,but in fact the client was only worth

£57,000.

The loan was secured by a property in Southwark.When the bank had made the

inquiry, it would, according to expert evidence, have been possible to sell the

property for almost £3 million.When the bank foreclosed,and sold the property,

the property realised 1.4 million.The bank sued for damages, and, in the High

Court, the damages awarded were:

Value of property at time of inquiry £2,700,000

less value of property at time of sale £1,400,000

damages = £1,300,000 + interest

damages = £1,900,000


41

The argument of the bank, which was accepted in the High Court, was that the

damages should simply be the difference between the value of the property at

the time of the inquiry, and the value obtained later, when it had become clear

that the answer to the inquiry was incorrect.The action was brought in tort, for

negligence,but the principles applied do not differ in any material respect from

the principles applicable under the law of contract.

When the case reached the Court of Appeal, it was argued that the damages had

been wrongly assessed,since they assumed that there was a mathematical certainty

that the hypothetical sale, in June 1990,when the inquiry was made,would have

been at a value of just below £3 million.The argument of the appellants was that

sales of property are seldom a certainty, and can only be assessed on a chance

basis.The Court of Appeal accepted this argument.

The steps that should be taken were set out by the Court of Appeal as follows:

1. The court must decide what the bank would have done at the time of

the error made by the defendants (that is,the misstatement in June 1990).

If it came to the conclusion that the property would have been marketed,

if the misstatement had not been made, the court must take the next

step.

2. The next step would be for the court to decide whether there was any

real chance of the property being sold at the asking price of £3 million,

in this case.

3. If the court decided that there was such a chance, then the next step

was to state that chance in mathematical terms, for example, as a

percentage. In this case, on the evidence available to it, the Court of

Appeal decided that that percentage was 66.6%.

4. The Court of Appeal then arrived at the following equation:

Hypothetical value of building in June 1990 x percentage chance

less realisation value in September 1990 + interest = sum to be awarded

This worked out at: £3,000,000 x 66.6

less £1,400,000

= £ 600,000 + interest


42

Allied Maples Group Ltd v Simmons & Simmons (1995) 1 WLR 160

This important case stands for several principles:

Firstly it is an authority on the question of whether or not a legal adviser can be

liable for breach of contract or for negligence in negotiating terms of contract

for a client.

Secondly,it is another recent authority on damages for the loss of a chance.In this

particular case,in which a term of lesser value to the client had been inserted into

a contract in substitution for a term of considerably greater value,the ‘chance’that

was being measured was the chance (which was only hypothetical,but nevertheless

capable of being valued) of being able to negotiate a better term,but for the breach

of contract or negligence.

The facts were as follows:Allied Maples Group wanted to buy properties from

another company.But for various reasons these properties could not be sold directly

to a buyer (the reasons being that they were subject to a planning permission

which was personal to the owner,and there were also provisions against alienation

of the properties). So Allied Maples decided to buy the subsidiary company in

which the properties were vested. This could potentially have involved Allied

Maples Group in unwanted liabilities, so the unwanted liabilities and properties

were to be transferred out of the subsidiary company before the sale.This was

intended to leave the company to be sold ‘clean’.

To this end,a number of warranties were drafted into the draft contract,including

one which stated:

‘The Company has no existing or contingent liabilities in respect of any

properties previously occupied by it or in which it owned or held any interest,

including, without limitation, leasehold premises assigned or otherwise

disposed of.’

The solicitors acting for the sellers of the company returned the draft with a number

of clauses deleted,including this one,for which a different version was substituted:

‘In the event that it is subsequently discovered that there was at the date to

which the completion accounts were made up any liability of the company

which if known at the time should have been provided for in the completion

balance sheet, then subject as provided in the sub-paragraph below the Vendor

shall pay such amount to the Purchaser in accordance with the provisions

of sub-paragraph (10) below.’

It will be noted that the substituted clause is not a true warranty, whereas the

original clause was a genuine warranty.The substituted clause was only a limited

undertaking to pay money in a limited set of circumstances. Not all contingent

liabilities had to be provided for in the completion balance sheet, under

accountancy rules of practice.


43

The solicitors acting for Allied Maples told their clients that the protection offered

by the substituted clause was less than perfect, but did not alert them to the full

extent of the risk that there might be liabilities of which no one was aware,resulting

from leases of the properties which had been assigned by the company being sold.

The sale and purchase of the company went ahead,and in the event it turned out

that there were claims against the company by leasers of the properties.These caused

substantial losses to Allied Maples,and,since there was no remedy under the contract

as finally negotiated and agreed,Allied Maples decided to sue their solicitors.

The claim was brought in negligence, although it could also have been framed

as a claim for breach of contract.The principles applicable, and the cases cited

in the arguments, do not seem to involve any relevant distinctions between the

law of contract and the law of tort.

The claim took the shape of a trial of preliminary issues: what was being asked

for was not an actual award of damages, but an answer to the questions posed,

which included the issue of whether or not the courts were prepared to measure

a chance of negotiating better terms of contract.

The novel aspect of this case was that, whereas in Chaplin v Hicks (1911) the

chance related to a right or benefit or thing of value,such as a career opportunity,

in the present case the chance was not a right or benefit or tangible thing of value,

but an opportunity to negotiate, which is at best a rather speculative matter.

Nevertheless,the Court of Appeal accepted the argument that this could be assessed

and valued on an opportunity basis.This would presumably be done by working

out the protective value of such a clause,and the chances of getting it reinstated,

or the chances of reaching a compromise.The case was remitted to the High Court

for assessment of the damages,but there is no report of subsequent proceedings

available.

The difficulty in this case lies in deciding whether or not there was any chance

at all of persuading the solicitors for the sellers to accept the original clause or

one which was at least more protective than the one offered.However,the Court

of Appeal took the view that Allied Maples had to show (1) that they would have

carried on negotiating,if they had been given the right advice.This they had done,

to the satisfaction of the court.And (2) they had to show that there was a substantial

chance that they would then have been successful in negotiating total or partial

protection against contingent liabilities of the kind that eventually materialised.

Once this had been done, the evaluation of that chance was for the trial judge.


44

Contributory negligence and the measurement of damages

Contributory negligence on the part of the claimant is always relevant if a court

is assessing damages for negligence or for certain other forms of liability in the

law of tort.To give a simple example, if damage to property is caused partly by

the negligence of a contractor, and partly by the negligence of the owner, the

damages awarded will be reduced to the extent that the claimant has contributed

to the loss or damage.As with damages for loss of a chance,the courts will assess

this on a percentage basis.So if the loss is £1,000 and it is held that the claimant’s

contribution to the loss through his own negligence was 40%,the damages awarded

will be £600.

Contributory negligence is sometimes compared with mitigation of loss.What

the two concepts have in common is that the damages claimed may not be awarded

in their entirety,depending upon the conduct of the claimant.But the difference

is this: mitigation is about the steps taken or not taken by the claimant after the

breach of contract has occurred. Contributory negligence is about the conduct

of the claimant before or at the time that the action of the defendant causes

loss to the claimant.

The question that has arisen,when we compare the laws of contract and of tort,

is whether or not the rules of contributory negligence have any relevance at all

to claims made for breach of contract. With a negligence claim, in assessing

contributory negligence,we are comparing like with like:that is,we are comparing

the negligence of the claimant with the negligence of the defendant. But if the

claim is for breach of a term of a contract, and if the defence of contributory

negligence is raised, we are not comparing like with like. Breach of a term of a

contract is not easy to measure on a percentage basis with negligence.Not every

breach of contract necessarily involves negligence:sometimes the breach is simply

a failure to carry out a requirement of the contract.

The defence of contributory negligence is governed by the Law Reform

(Contributory Negligence) Act 1945.This states that the defence is available:

‘where any person suffers damage as a result partly of his own fault, and partly

of the fault of any other person or persons…’.

‘Fault’means ‘negligence, breach of statutory duty or other act or omission which

gives rise to a liability in tort or would, apart from this Act give rise to the

defence of contributory negligence’.

This is hardly a model of clarity, and there have been many cases in which the

issue raised on these pages has been aired in the courts. One of the latest cases

to shed light on the problem is Barclays Bank plc v Fairclough Building Ltd

and Others, (1995) 1 All.E.R. 289.


45

Barclays Bank plc v Fairclough Building Ltd and Others, (1995) 1 All.E.R. 289

In this case the claim was brought by Barclays Bank for breach of contract by its

contractor.The bank had engaged the contractor to carry out work involving

material which contained asbestos.Due to a failure to take precautions as required,

the premises became contaminated,resulting in the need for remedial work costing

£4 million.The defence included the defence of contributory negligence on the

part of the bank.

During the carrying out of the work,the property services department of the bank

was responsible to the bank for seeing that the work was carried out properly.

What was argued by the contractor was that this property services department

should have seen to it that precautions against contamination were taken.

So the argument was that any damages to be awarded to the bank should be reduced

to the extent of the contributory negligence of those acting for the bank.The

trial judge agreed with this argument and reduced the damages awarded by 40%.

On appeal, it was argued for the bank that the claim was not for the tort of

negligence, but a claim for damages for breach of contract.Therefore the law of

contributory negligence was not applicable.This argument was accepted by the

Court of Appeal.The Court of Appeal laid down the following principles:

1. If the claim is for breach of a duty to take care,either in tort,or for the

breach of a term of a contract requiring one of the parties to take care,

then the defence of contributory negligence is available.

2. If the claim is for a breach of one or more terms of a contract which are

not based upon a duty of care, but are instead strict contractual

obligations then there can be no defence of contributory negligence.

In this particular case the contract contained a number of promises made by the

contractor. Some of these were promises about care and skill.But some of them

were strict terms,and these strict terms existed independently of the terms about

care and skill. So the bank was able to base its claim entirely upon breach of the

strict terms, such as the promise to comply with any statutory provisions

applicable to the work, and the promise to execute the work in an

expeditious, efficient and workmanlike manner.

So the appeal was upheld and the bank received its damages in full.

This case shows the importance of careful drafting of terms of contract with a

view to effective remedies if any of the terms are broken by the other party.


46

Drafting terms of contract to control damages and other remedies

In this section we will be looking further at ways in which the parties can write

terms of contract which affect the assessment of damages,or in some cases affect

the availability of other remedies.Before we look at the details,one or two basic

principles need to be considered.One of these is the contra proferentem rule,

meaning that if there is any doubt about the meaning of a term, the courts will

interpret it against the interests of the party relying upon it.The courts do not

always operate this rule in its full force,but they usually do in the case of clauses

excluding remedies, or in the case of clauses imposing liquidated damages.

Another important principle is the presumption against the intention to abandon

remedies provided by the common law and the rules of equity.This does not mean

that the remedies are incapable of being excluded or modified.What it does mean

is that very clear words are required to achieve this effect.

In Stocznia Gdanska S.A.v Latvian Shipping Co.(1998) 1 WLR 574 there were

contracts to design,build and deliver six ships.The contracts contained a clause

which stated:

‘If the purchaser defaults in the payment of any amount due to the seller

under subclause…, for 21 days after the date when such payment has fallen

due, the seller shall be entitled to rescind the contract. In the event of such

rescission by the seller of this contract due to the purchaser’s default, …the

seller shall be entitled to retain and apply the instalments already paid by

the purchaser to the recovery of the seller’s loss and damages and at the

same time the seller shall have the full right and power either to complete

or not complete the vessel and to sell the vessel at a public or private sale

on such terms as the seller deems reasonable provided that the seller is always

obliged to mitigate all losses and damages…’

After the buyer had activated this clause by defaulting, the seller made claims in

damages and debt.The defence was that the remedial regime provided by this

clause excluded claims in debt.The Court of Appeal accepted this argument,but

the House of Lords reversed this decision and held that there was nothing in the

contracts to suggest that the seller had abandoned any of its common law rights.

The clause did not use any words that were inconsistent with the recovery of

accrued sums as debts.Clear words were needed to rebut the presumption against

the abandonment of remedies.

This decision does not make it impossible to draft an exclusive remedies clause

into a commercial contract. But clarity is needed, as well as observance of the

requirements of fairness, where the legislation on unfair terms applies.


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Liquidated damages

The parties to a contract may include, as part of the terms of the contract, one

or more clauses in which the damages to be paid by the defaulting party are agreed

in advance.This is known as liquidated damages.Often such provisions for damages

are used in commercial contracts for delays in delivery,completion,or some other

form of performance of obligations.The reason for this is that the damages are

relatively easy to measure on a time basis (for example,loss of use,loss of production,

loss of revenue, etc).

Liquidated damages are fairly common in commercial contracts, but relatively

uncommon in consumer contracts.

It is quite normal to have a contract in which damages for breaches of certain

terms are liquidated,while damages for breaches of any of the other terms of the

contract are left at large.The important thing in drafting the contract is to be quite

clear about this.

Liquidated damages clauses need not be confined to terms about time.It is perfectly

possible to formulate liquidated damages for breaches of other types of terms,

such as terms about performance, or output, or rates of efficiency, etc.

But for the term to be valid in law, it must always amount to a genuine attempt

to estimate in advance the likely loss to the party relying upon the term. A term

that appears to the courts to be intended to give rise to manifestly excessive damages

will not be a genuine pre-estimate, and will be considered to be a penalty.

The rule against penalties is well known,and will not be given detailed discussion

in this text.If it turns out that what was relied upon as a liquidated damages provision

is in fact a penalty, then the term will be void, and the remainder of the contract

will be read as if the term did not exist.This does not altogether deprive the party

relying upon the clause of a remedy:it is simply that the liquidated damages clause

will not be able to be used; instead, any common law or equitable remedies, or

remedies under statute that are relevant will be available to that party.

The aim of liquidated damages is to prevent unnecessary litigation. If the parties

have reached a genuine and enforceable agreement as to the scale of damages

to be applied in respect of a particular type of breach, then this normally needs

only self-help by the claimant to obtain the exact measure of compensation provided

for by the contract. Legal disputes only arise if one party attempts to charge the

other party with liquidated damages in circumstances that are not applicable,or

if the party being charged is able to argue that the clause as drafted is in fact a

penalty. A recent illustration of this is the case of Duffen v Fra Bo Spa (1998)

The Times, June 15, 1998.


48

In this case the parties had negotiated a contract in which it was provided that if

the principal broke the contract, the agent would be entitled to terminate the

contract. In these circumstances, the agent would get compensation by way of

liquidated damages.The liquidated damages were set as the sum of £100,000,and

the contract clause added the words ‘by way of liquidated damages, which

sum is agreed by the parties to be a reasonable pre-estimate of the loss

and damage which the agent shall suffer on termination of this agreement’.

When the agent sought to enforce this clause, the Court of Appeal took note of

the fact that the sum set was not on any kind of graduated scale.Not all liquidated

damages have to be scaled, but where a breach of contract can give rise to

consequences of differing kinds or of differing magnitude,there is a presumption

that a single sum will be a penalty.

So in this case the single sum was a penalty,because,depending upon the unexpired

term of the agency, the agent would not necessarily suffer a loss equivalent to

£100,000.

The agent of course still had his alternative remedies under legislation and under

common law.

What if sums set are lower than those actually suffered?

The rule against penalties is about excessive sums set as liquidated damages. It

says nothing about sums that are too small to compensate the claimant in full. In

theory the Unfair Contract Terms Act 1977 could be used, in appropriate cases,

to apply the test of reasonableness to a liquidated damages clause which was in

fact a limit of liability in disguise.However,it must be born in mind that the Unfair

Contract Terms Act does not apply in a great many cases – for example in international

supply contracts, or in contracts that are not for the supply of goods, and which

are not on the written standard terms of the party relying upon the clause.

The courts do not normally question commercial arrangements made by the parties

on the grounds that the liquidated damages are inadequate.


49

Clauses about currency and interest

It is possible,as part of the commercial arrangements made between the parties

that the contract may make provision for interest on sums owed,or for debts or

liquidated damages to be payable in a foreign currency.

Interest

Interest may be contractual interest on a sum loaned,or it may be default interest.

Both types of interest are debts rather than damages.Contractual interest on the

sum loaned is interest payable by a party who is observing the terms of the contract.

This cannot be subject to the rule against penalties, since it is not triggered by

any breach of the contract. In some cases it is, however, subject to a measure of

control, for example under the Consumer Credit Act 1974, and under the EC

Directive on Unfair Terms in Consumer Contracts 1993, in contracts to which

these laws are applicable.

Default interest, on the other hand, is subject to the rule against penalties, since

it only applies if the borrower is in breach of a term of the loan contract.

In the case of Lordsvale Finance plc v Bank of Zambia (1996) 3 WLR 688, the

Bank of Zambia had entered into a facility agreement with the plaintiff. The

agreement contained a normal interest provision, and a further provision for

additional interest (an interest uplift) in the event of default by the borrower with

regard to particular terms of the agreement.It was argued in the Commercial Court

that this interest uplift was a penalty.

Mr Justice Colman stated that in some cases interest uplift could be a penalty

(and therefore unenforceable). Relevant factors were the following:

1. Was the uplift at a reasonable rate?

2. Was it commercially justified:for example,because the default increased

the risk to the lender?

3. Was it only for the period following the breach,and not retrospective?

4. Was it being applied in a manner consistent with accepted international

banking practice?

If the answers to these questions were affirmative, then the interest uplift term

would satisfy the tests and not be a penalty. In this particular case the tests were

satisfied and it was not a penalty.


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Currency and the breach date rule

The breach date rule means that damages are normally assessed at the value they

had at the date the term of the contract was broken.There have been exceptions

to this rule,but in general this is the position.So if a contract was broken in 1970,

and if the case came to judgment in 1975,the damages would be assessed as the

sum needed to put right the breach in 1970. In reality, the particular choice of

dates chosen for this example would have caused some hardship,since inflation

at this time devalued the currency seriously, and interest rates at the time in no

way made up for this.

It was for reasons of this kind that in this particular period the courts found

themselves being asked if they were prepared to award sums claimed (firstly debts,

then later, damages,) in foreign currencies.

Foreign currencies

The first major test of the power of the courts to award damages or to order the

payment of a debt in a foreign currency was Miliangos v George Frank (Textiles)

Ltd (1976) AC 443.

In this case the House of Lords held that,where appropriate, judgement could be

given in a foreign currency. In this case a Swiss citizen sold a quantity of polyester

yarn to an English company,and the contract price was stated in Swiss francs.The

contract also provided for payment in Switzerland,and for the contract to be governed

by Swiss law.After delivery, the buyer defaulted as regards payment.An action for

the price of the goods was brought in England.Between the date when the payment

was due,and the date of the hearing,three years later,sterling had devalued against

the Swiss franc, and the seller sought judgment in Swiss francs.

In sterling terms the price of the goods under this contract was £42,000,but by

the time of the hearing in court the sum of £60,000 would have been needed to

give the Swiss franc equivalent of the price.

The House of Lords held that judgement for the plaintiff could be entered in Swiss

francs, or the sterling equivalent at the time of payment.

This case was not about damages as such, but about an action for the price. But

in subsequent cases the courts have been prepared to award damages in a foreign

currency.This has even been done in cases where the law applicable to the contract

has been English law;however,the courts have discretion in this matter,and there

does have to be a good reason for specifying that a particular currency should

be chosen.


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The breach date rule

This chapter concludes with a recent case in which the principle discussed above,

that damages are normally assessed as at the date the contract is broken,has been

reconsidered in full and explained and amplified.

This case is Alcoa Minerals of Jamaica INC v Herbert Broderick (2000) BLR 729.

In this case, which came from Jamaica to the Privy Council, the house of Mr

Broderick was damaged by industrial pollution from the alumina (bauxite) smelting

plant of Alcoa Minerals.The case was brought in tort,but the Privy Council made

it clear that they were setting out the same rules that would have applied if the

claim had been for damages for breach of contract.

Mr Broderick had originally claimed $211,140.Four years later in 1994,while the

case was still waiting to come to trial,he amended his claim to $938,400,on the

grounds of increased costs between the tort occurring and the case reaching court.

Alcoa Minerals appealed on the basis that the general rule that damages should

be assessed at the date of the breach should be applied.

The appeal also raised related questions about mitigation:if a person suffers damage

and delays in carrying out repairs,and if costs meanwhile increase,does this mean

that the claimant has failed to mitigate? It is arguable that if a person is acting

reasonably,and doing all that he can to mitigate his loss,then he should have any

repairs or rebuilding done as soon as possible,so as to avoid the damage becoming

any worse, and so as to avoid any inflationary effect upon the cost.

Against this mitigation argument,the claimant will argue that he should not have

to pay for remedial work with money that he has not got. He will argue that he

is entitled to wait until he has received his damages.

This in turn raises a question that has troubled the laws of contract and tort for

several decades – how far should the wrongdoer have to pay for losses caused by

the innocent party’s lack of funds.Interest and increased costs are very often caused,

not by the original wrong done,so much as by the fact that the innocent party is

short of the necessary funds to put the damage right as quickly and effectively as

possible.

These are not entirely distinct questions: they all come back to the basic issue,

which is how much loss was caused by the tort or breach of contract.

In this particular case,Alcoa contended that the original sum claimed was the

correct measure of damages: this was because of the normal breach date rule as

set out in the Miliangos v George Frank (Textiles) Ltd case.


52

They argued that the fact that Mr Broderick could not afford to pay for the repairs

without the damages should be ignored.In their view damages should have been

awarded independently of any consequences of Mr Broderick’s lack of funds.

The Privy Council held that the ‘breach date’method for assessing damages was

not the invariable method,although it is the principle method,and that there were

many cases where damages would be assessed as the actual cost at the time of

the award of the damages,as long as there were reasonable grounds for the claimant

waiting until then to effect the repairs.

They also held that in this case it was foreseeable that the claimant might not have

the funds to repair his damaged house.There is no hard and fast rule that a claimant’s

lack of funds is to be ignored in assessing damages.Indeed they noted that in some

cases even a person or business with sufficient funds might be entitled to make

a commercial decision not to spend the money until it becomes available through

the award of damages.

In summary,each case depends upon its own facts,according to what is reasonable

and foreseeable.

What is of great value in this case is that it establishes once again that the ‘duty

to mitigate’ is really no more than a test of reasonable conduct after the breach

of contract, or the tort, has occurred.

It also establishes that the financial position of the claimant, in terms of either

financing costs, or the need to wait for funds to become available, is relevant in

many cases.

And it establishes that the ‘breach date rule’ is perhaps no more than the most

common method of assessing damages,and that alternative methods may be argued

successfully before the courts,where they provide a better and truer method of

assessing the loss to the claimant.


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4chapter

Other remedies for breach of contract

R E T E N T I O N O F A D E P O S I T

R E S C I S S I O N

S P E C I F I C P E R F O R M A N C E A N D S P E C I F I C D E L I V E R Y

I N J U N C T I O N S

R E C T I F I C AT I O N

I N D E M N I T I E S

C O N C L U S I O N

Chapter 4:Other remedies for breach of contract

Here we look at a number of alternative remedies for breach of contract which

arise in different situations. Sometimes they can be used instead of damages;

sometimes they can be combined with claims for damages, and sometimes they

can be combined with each other.The aim in this chapter is to re-examine the

uses of these remedies, and their limitations, particularly in the light of some of

the more recent cases.

Retention of a deposit

This remedy has a number of important features. It differs from damages in that

it is not related to the exact measure of the loss of the party to whom the deposit

is given. It is invariably enforced by self-help. If the party who has paid a deposit

fails to fulfil the terms of the contract for which the deposit has been given, the

party to whom the deposit has been paid,or for whose benefit it has been paid,

may keep the entire deposit.

The rationale of this is that this is a term of the contract between the parties.

Parties are entitled to make whatever commercial arrangements they choose,as

long as these arrangements retain the essential characteristic of a contract, and

do not impose terms which are unreasonable according to the Unfair Contract

Terms Act 1977,(which does not have anything to say about deposits),and which

do not offend against the rule against penalties.The rule against penalties would

only apply to a deposit if the deposit was too large to be a genuine deposit. If it

were not a genuine deposit, then a term that the party holding the sum could

keep the whole sum regardless of the loss caused by the breach would be a penalty.

This is because a penalty can be defined as a contractual term, which provides

for a party in breach to pay to the other party sums which are manifestly intended

to over-compensate that other party for the consequences of the breach.But the

rule against penalties can only apply if the sums are intended to be compensation.

Deposits have nothing to do with compensation,so the rule against penalties does

not apply to them.

A deposit is quite different from a part payment of the price or other consideration

under the contract.With a part payment,the payee may only use the part payment

towards any damages that may arise from the payer’s breach of contract. But if,

C H A P T E R 4 : O T H E R R E M E D I E S F O R B R E A C H O F C O N T R A C T

55

for example, the part payment was £1,000, and the damages arising from a

repudiation by the payer amounted to £500,then the payee would have to refund

the other £500 after subtracting his damages.The damages have to be quantified

and any surplus must be repaid to the payer.The leading authority for this is Dies

v British and International Mining and Finance Corporation Ltd (1939) 1

KB 724.

In this case there was a contract for the sale of goods which was brought to an

end due to the buyer’s default.The buyer had paid a sum to the seller,which the

court decided was a part payment.The buyer argued in favour of a partial refund

and was successful in this argument.The court noted that the seller had retained

the goods,and held that it would be unjust to allow the seller to keep any money

beyond the measure of damages actually sustained by the seller.

It follows from this case that it is crucial to know whether a sum paid in advance

is a deposit or a part payment. If the court had classified the advance sum paid

in the above case as a deposit,then the whole of the sum would have been liable

to be forfeited on the default of the buyer, irrespective of whether or not any

goods had been delivered.

Deposit or part payment?

To answer this question,one must first look at the terms of the particular contract.

The description or ‘label’ that is given to such a payment in the contract itself is

very relevant.Generally,what the parties say is what they mean.But as with penalties

and liquidated damages, similarly with deposits and part payments: the ‘label’ is

not always treated as conclusive,and can be challenged as being a misnomer.The

relationship of the payment to the full consideration then becomes a relevant

factor. In sales of land the customary deposit is 10% of the purchase price, and

although it goes towards payment of the land, when completion takes place, it

is invariably treated as a true deposit, not only because that is what it is called,

but also because the sum accords with the criteria for a true deposit.On the other

hand, in Workers Trust Bank Ltd v Dojap Ltd (1993) AC, the Privy Council held

that a payment of a sum equal to 25% of the consideration in a particular contract

was not really a deposit. It was too large a percentage to be reasonably intended

as a deposit, however it was described.

The facts of the well-known case Union Eagle Ltd v Golden Achievement Ltd

(1997) 2 All.E.R. 215 are set out below.The case is important for its survey of

the principles relating to several of the remedies discussed in these pages:retention

and forfeiture of deposits, specific performance, and rescission.

The parties had entered into a contract for the sale and purchase of a flat in Hong

Kong.A deposit (in Hong Kong dollars,equivalent to approximately £50,000) had


56

been paid, which was 10% of the purchase price.The contract set down a date

for completion,which was 5pm on 30th September 1991.The contract also stated

that time was ‘of the essence in every respect of the contract’.

The purchaser was ten minutes late in tendering the purchase money and other

completion documents, and the vendor treated the contract as rescinded, and

told the purchaser that the deposit was forfeited.

The purchaser commenced proceedings for specific performance (for which see

page 58 of this Report). He also asked for the court to grant relief against the

forfeiture of the deposit (the vendor had not suffered financial loss).

These proceedings were unsuccessful in Hong Kong,and so the appeal went to

the Judicial Committee of the Privy Council.The law in England and in Hong Kong

was in all material respects the same.

The appeal was dismissed by the Privy Council.The sum was a deposit, and not

a part payment.Retention of it was not the same as damages,so it did not have to

relate to any actual financial loss of the vendor.The contract had been properly

rescinded by the vendor, since that is what the law permits if an essential term is

broken,and so the remedy of specific performance,to compel the transfer of the

flat, would not be granted.And there was no general rule providing for relief

against the forfeiture of a deposit.The possibility does exist, in theory, in equity,

and has been applied in the past,and more recently in Australia,by giving the party

in breach more time to pay. But the Privy Council made it clear that such relief

from forfeiture will not normally be granted in commercial cases:it is more important

that the parties to a commercial contract should know exactly where they stand.

One of the arguments put by the unsuccessful purchaser in this case was that

the term of the contract providing for forfeiture of the deposit was a penalty.(As

it happened, the contract was badly drafted and referred to the forfeiture as

‘liquidated damages’, which inevitably gave rise to the penalty argument.)

However,the Privy Council disregarded the poor drafting of the term,and chose

to look at the reality, which is that normally a 10% deposit, especially in house

purchases, is a true deposit,and has nothing to do with liquidated damages. And

the rule against penalties does not apply.

Finally,it may be noted in this case,that there was an argument based on waiver,

which was put before the Privy Council. It is perfectly true that if in any given

set of circumstances waiver applies,then whatever remedies might normally exist

are no longer available.Waiver means that the injured party is aware of the breach

of contract, and has acted in such a way as to show a definite intention to give

up or not to enforce any remedies he may have in respect of the breach.


57

What conduct,or which form of words,amount to a waiver,and what is the exact

scope of the waiver, is always a matter of evidence. Sometimes those who draft

contracts include boilerplate clauses controlling waivers, so as to protect their

remedies, or the remedies of their clients, as far as possible.

In the Union Eagle case it was held that a delay of a few moments by the vendors,

before declaring the contract to be rescinded,did not amount to a waiver.So the

remedies available to the vendors applied in full.

Rescission

Rescission is a remedy for breach of contract, and therefore merits discussion in

these pages. However, its scope is too wide to be capable of being treated fully

in a work of this length.Moreover, there are several different types of rescission,

and not all of them necessarily arise in the context of a breach of contract.

For our purposes it can be said that where there is a breach of contract,rescission

means the same thing as ending the contract, or electing to treat it as ended.

It relates to deposits in the sense that once the holder of a deposit has rescinded

the contract, the deposit may be forfeited and retained by the person to whom

it has been given, in its entirety.

It relates to specific performance in the sense that a court will not order specific

performance of a commercial contract that has been properly rescinded. In this

respect,the Union Eagle case (1997) demonstrates the application of the principle.

Specific performance and specific delivery

These are equitable remedies (the latter being also provided for under the Sale

of Goods Act 1979). As can be seen from the previous paragraphs, they are the

counterpart of rescission and forfeiture of deposits,since,if in a suitable case there

is a grant of specific performance to the party that has paid the deposit, then the

contract will not have been rescinded and the deposit will not have been wasted.

A party to a contract who seeks specific performance must not be in breach of

an essential term: Union Eagle Ltd v Golden Achievement Ltd (1997).

Specific performance is a discretionary remedy, and will only be granted where

the court takes the view that damages are not adequate to compensate the claimant.

The most common cases of specific performance therefore occur with regard to


58

sales of land. In the above case there was some discussion as to whether or not

the court should intervene and grant specific performance on the ground that a

trivial breach had caused serious hardship to the appellant.But the Privy Council

decided to take the path of commercial certainty, and Lord Hoffmann stated:

“The present case seems to their Lordships to be one to which the full force

of the general rule applies. The fact is that the purchaser was late. Any

suggestion that relief can be obtained on the grounds that he was only slightly

late is bound to lead to arguments over how late is too late… In cases of

rescission of an ordinary contract of sale of land for failure to comply with

an essential condition as to time, equity will not intervene.”

Specific delivery is a variant of specific performance:in equity a court has the power

to order the delivery of specific chattels.This power is not confined to cases where

there has been a breach of contract.The article in question might be one of rarity

or importance. Damages may not suffice.

In the law of sale of goods a provision for specific delivery was put into the original

Sale of Goods Act (1893), and is section 52 of the current version (1979):

‘In any action for breach of a contract to deliver specific or ascertained goods

the court may, if it thinks fit… direct that the contract shall be performed

specifically, without giving the defendant the option of retaining the goods

on payment of damages.’

The power is discretionary,but requires that the goods be specific or ascertained,

that is to say, not merely generic.The power is seldom used, because in most

commercial cases where a seller fails to deliver, damages will suffice.

On the other hand it may be used if the goods contracted for are rare or unique,

such as antiques or works of art, or where they consist of scarce commodities

or goods or materials where demand suddenly exceeds supply.

In Sky Petroleum Ltd v VIP Petroleum Ltd (1974) 1 All.E.R. an unusual situation

arose. Due to a rapid increase in the price of oil, a seller, who had contracted to

supply the buyer’s requirements of petrol for several years at an agreed price,

refused to deliver to that buyer.

The judge decided that in a context in which prices and availability were changing

rapidly, damages would not suffice: the buyer would not have been fully

compensated for the possible loss of business over what might have been a

considerable time.


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At first sight it might appear that this case is exactly what was contemplated by

Section 52 of the Sale of Goods Act.But there is a technical problem:petroleum

is generic goods rather than specific goods,and as the supply was to be for a future

period as well as the immediate deliveries, it was not ascertained either. So the

case did not fall strictly within the wording of Section 52.

But as this was an obvious case for a remedy compelling delivery,the court decided

that it had to make an order which could achieve the same thing as section 52,

without having to fulfil the technicalities of that section.So the judge granted an

injunction against the seller,ordering it to refrain from breaking its contract.This

had the effect of compelling delivery.

The courts will not grant equitable remedies such as specific performance in cases

where they take the view that the party seeking the remedy has not behaved

reasonably.

In the case of Quadrant Visual Communications Ltd v Hutchison Telephone

(UK) Ltd (1991) The Times 4 December a term of a commercial contract provided

for payment by one party for services by the other.A term of this contract stated

that sums due under this contract were ‘free from any equity,cross-claim,set-off,

or other deduction whatsoever’.

Clauses excluding or restricting rights of set-off or counterclaim are fairly common

in commercial contracts.Their aim is to prevent deductions being made from sums

payable.This is considered to be a legitimate drafting technique in commercial

contracts. But the words ‘free from any equity’ were unusual, and there was

discussion in the courts about what these words were supposed to mean.

It is unlikely that such words would mean that equitable remedies such as specific

performance were excluded? Clear words are needed to exclude such remedies,

(to the extent that it is possible to do so at all),and these words were by no means

clear.

On the other hand it could be argued, and in fact was argued, that these words

were intended to prevent the courts from exercising any powers of discretion

which they possess under the rules of equity.As has already been mentioned, it

is up to a court, in its discretion,depending upon the conduct of the parties and

the circumstances of the case, to decide whether or not to grant a remedy such

as specific performance.

In the event,the Court of Appeal held that the words could not be given any effect.

The discretion of the courts to grant or not to grant equitable remedies cannot

be restricted by words such as these.


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But in Coca Cola Financial Corporation v Finsat International Ltd (1996) the

Court of Appeal held that both legal and equitable rights of set-off can be waived

or restricted or excluded by agreement.The explanation of this is that set-off,

perhaps, is treated on a different basis from the main equitable remedies. It is a

procedural step, and if it is restricted or excluded by the terms of contract, this

does not deprive the party wishing to exercise it of a remedy altogether. Set-off

is really a means to an end,which is to get financial compensation.A party deprived

of set-off may still bring a claim,and if successful may get damages.So the courts

seem to be reasonably tolerant (at least in commercial, non-consumer, cases), of

exclusions of set-off.

In a consumer case an exclusion of rights of set-off would not be automatically

disallowed, but would depend upon whether it was fair and reasonable within

the Unfair Contract Terms Act 1977, and also upon whether or not it created

‘contrary to the requirements of good faith, a significant imbalance in the

respective rights and duties of the parties, to the detriment of the consumer’.

This is the test imposed by the EC Directive on Unfair Terms in Consumer

Contracts 1993,which is implemented in the UK by Regulations,the most recent

of which, at the time of writing, are those enacted in 1999.

Injunctions

Injunctions are remedies that go far beyond the scope of remedies for breach of

contract. Here we will look at them briefly in their contractual context, noting

their special features and especially their scope for damages.

Mandatory injunctions

These are orders from the courts directing a contracting party to take a positive

course of action so as to put right a breach of contract,or so as to make sure that

the contract is properly performed. For example, putting up a structure in the

agreed manner.


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Prohibitory injunctions

These are orders from the courts prohibiting a person from doing something.

When issued against a party to a contract, they restrain that party from breaking

the contract.

Injunctions in either form are discretionary by nature.The court may make an

order, or may decline to make an order in any form at all, or may in certain

circumstances decide that although an injunction would have been available, it

will make an award of damages in lieu of an injunction.

Under the Supreme Court Act 1981, Section 50:

‘Where… the High Court has jurisdiction to entertain an application for

an injunction or specific performance, it may award damages in addition

to or in substitution for an injunction or specific performance.’

This rule is older than the current legislation,and was applied in the case of Wrotham

Park Estate Co.v Parkside Homes Ltd (1974) 2 A.ll.E.R.321.In this case a remedy

by way of injunction was available to prevent a breach of contract at the time that

the writ was issued.The remedy was sought to prevent a property development

in breach of contract.Later,at the trial it was argued that there should be a mandatory

injunction to order the demolition of any work that was built in breach of the

contract, and a prohibitory injunction to restrain any further building.

However, no interim remedy had been sought, so by the time the case came to

trial the work was complete,and a prohibitory injunction was no longer relevant.

As to the application for the mandatory injunction,the judge decided as a matter

of discretion that it would be wasteful to order that the houses be demolished.

He did,however, exercise his statutory jurisdiction to award damages instead of

an injunction.

One of the features of such damages is that they are not necessarily awarded on

the same basis as common law damages. Under the common law rules that we

have already discussed at some length the aim is to measure the loss to the claimant.

The loss to the claimant is assessed by either the ‘no transaction’ method or the

‘successful transaction’ method. By applying either of these methods, it is likely

that there will be circumstances in which the loss to the claimant will be nil.

Suppose that a buyer of land breaks a term of the contract of sale and purchase

of land, for example,by building something that he has promised not to build. If

we try to assess the loss to the seller by the normal methods, it will be difficult

to find any such loss, because the buyer will have paid the full purchase price

for the land. All that will have happened is that the buyer will have made an illicit

gain.But a gain to the buyer is not the same thing as a loss to the seller.Common

law damages measure loss, not gain.


62

But under the statutory rules stated above,the damages are instead of an injunction

and do not have to relate to any particular loss of the claimant. In the Wrotham

Park case, it was argued that the claimant’s loss was nil, and this was probably

true,in financial terms.But the judge was prepared to award damages which were

equivalent to part of the profit made by the party that was making a gain out of

the breach of profit.The judge stated:

“If, for social and economic reasons, the court does not see fit in the exercise

of its discretion, to order demolition of the 14 houses, is it just that the

plaintiffs should receive no compensation, and that the defendants should

be left in undisturbed possession of the fruits of their wrongdoing?”

This rhetorical statement summarises the principles applicable in cases of this

kind.

More recently,a case which was similar,but with an important difference,showed

how important it is that the precise nature and use of the remedies should be

properly understood.

In the case of Surrey County Council v Bredero Homes Ltd (1993) 3 All.E.R.

705 two councils sold land to a property developer.The contracts of sale contained

covenants to carry out the development in accordance with an agreed scheme.

The developer then obtained planning permission to carry out a different form

of development,which was completely contrary to the agreed scheme and involved

significantly more houses than originally contemplated.Although the local planning

authority had given planning permission, the local authorities had not modified

the covenants (and might well have charged a consideration for doing so).

When work started,the local authorities could have sought,and could have obtained

injunctions in either form,as well as specific performance of the original covenants.

But the councils chose not to take this course of action.What they did was to

wait until the estate was completely built according to the new plan, and then

they sued for damages for breach of contract.

(NB.These diagrams are for illustration only and not intended to be accurate representations of the two plans)

At this stage it must be noted that injunction and specific performance had never

been sought, and by this time were not in fact available.This was not a question

Agreed plan New plan


63

of discretion,or the balance of social and economic factors,as it had been in the

Wrotham Park case.It was a purely legal point:the houses had been sold,so there

was nobody against whom the remedies could be enforced.The new owners had

not broken any contracts, and the property developer no longer had the means

to carry out an order of any kind, whether by way of injunction or specific

performance.

The courts will not make orders of injunction or specific performance,whatever

the merits of the case or conduct of the parties, if the party against whom any

or all of these remedies are sought is for practical reasons unable to carry out

the orders.

If the equitable remedies had been sought before the properties had been sold

to their new owners,then the remedies would have been available.Then the court

could either have awarded them or else could have done what had been done

in the Wrotham Park case,and could have awarded damages in lieu of injunction;

and those damages could have amounted to a transfer of some or all of the profit

of the party in breach.

But by the time the case came to court,these statutory damages were not available.

This was because they can only be awarded if injunction or specific performance,

are still a possibility at the time of the claim (the writ). But those remedies had

ceased to be available well before the writ was issued. So the damages in lieu of

injunction were not available.

What this meant was that the councils could only claim common law damages.

But as we have just noted, common law damages will be nominal (nil in fact) in

this kind of case,because under the common law principles of assessment,there

will be no measurable damage.The argument,which was successfully put by Bredero

Homes Ltd, was that although it had broken the covenants, the breach did not

cause any financial loss to the councils.Or,put another way, the councils would

not have been in any way financially better off if the covenants had been observed

by Bredero Homes Ltd.

To get substantial damages under the common law principles that have been

discussed at length in this work,the councils would have had to have shown that

they had either lost expenditure,which they could recover under the ‘no transaction’

method, or that they had lost an expected profit or gain, recoverable under the

‘successful transaction’ method. But in fact they had lost nothing that could be

recovered under either of these methods.The expenditure was a normal part of

the sale,and not caused by the breach.Nor could it be said to be wasted expenditure.

And the councils could not be said to have suffered any loss of profit or gain that

was caused by the breach of covenant, and that would have been recoverable


64

under the ‘successful transaction’ method. Bredero had made a gain, which was

different from the councils having made a loss of any expected gain.

Rectification

Rectification does not necessarily require a breach of contract for it to be made

available by the courts. It can be used by a party who simply wants the terms of

a contract to be restored to what he originally took them to be.

But it can be used where a breach of contract is likely,and the cause of the breach

is that the parties disagree about what the terms of the contract actually are.The

courts not only have jurisdiction to rectify a contract, but also have jurisdiction

to order specific performance of it as rectified.

The usual way of proving one’s case for rectification is to produce the true and

correct text of the contract or term of it.But oral evidence is admissible to prove

that the agreement as written does not represent the true agreement of the parties.

Rectification will not be granted where the parties were negotiating terms about

which they disagreed,and did not in fact reach agreement.In such circumstances,

if the terms in question are of importance, it is more likely that the courts will

find that there was no contract at all.

Rectification will not be granted simply because a contract as drafted is

ambiguous or even absurd,unless in such circumstances there is a correct draft

of the contract to substitute for the ambiguous or absurd document. If there is

none, there will be nothing with which to rectify the agreement, and the courts

will have to make the best that they can of interpreting the agreement as drafted.

A recent example of rectification is Grand Metropolitan plc vWilliam Hill Group

Ltd (1997) BCLC.This case was about the sale and purchase of two companies.

The contract in question provided that there would be a stated price for the two

companies, and that later on this price would be reduced by reference to the

accounts of the two companies purchased. A question arose as to how these

accounts should be drawn up.Grand Metropolitan thought that the contract had

provided for consolidated accounts complying with the GAAP principles of

acquisition accounting.William Hill opposed this, and argued that the contract

as drafted and signed provided only for simple aggregation of the profits.

Advice was sought from leading counsel,who stated that the contract as signed

did in fact only provide for aggregation of profits.As this was not what Grand

Metropolitan had taken the terms of the contract to be,rectification was sought.


65

In the Chancery Division of the High Court,rectification was granted,so that the

accounts were to be prepared on the basis argued for by Grand Metropolitan.

The judge restated the requirements for rectification, which were:

1. There must be a continuing common intention, and this must

be shown to have not only existed, but to have persisted up to

the time of the written agreement.

2. It must then be shown that the written contract as actually

concluded did not reflect this intention.

3. Finally, if the court is to grant rectification, it must be sure that

there is no conflict in the provisions of the agreement as rectified.

It is not necessary to show the exact words expressing the common intention

of the parties, nor is it necessary that the continuing common intention of the

parties had amounted to a prior concluded agreement.

Indemnities

The issue that we will be looking at here is how indemnities relate to

remedies such as damages and specific performance.One of the preliminary

questions to be considered is whether an indemnity is a remedy at all,or simply

a term of a contract which gives rise to a number of possible consequences.

We may define an indemnity as a promise to pay for, or to keep another party

free from loss or damage.In Deepak v ICI (1998) the Court of Appeal also stated

that an indemnity contains within it an implied promise not to sue.

So if a term of a contract states that one party will indemnify the other party against

all loss or damage arising out of the operations under the contract, irrespective

of any negligence on the part of the indemnified party,this should not only mean

that the indemnified party can claim for all such loss or damage,but should also

mean that the party giving the indemnity cannot sue the indemnified party for

any loss to it caused by the breach of contract or negligence of the indemnified

party as part of the carrying out of the operations described in the contract.

Both the positive aspect of an indemnity (the undertaking to pay),and the negative

aspect (the promise not to sue),can only exist in relation to defined circumstances.

The courts will not stretch an indemnity to cover circumstances not expressly

mentioned unless there is only one set of circumstances to which the indemnity

can apply, in which case the indemnity will cover it by implication.


66

Now,taking the example given above,we may consider what the use of the term

‘indemnity’,(or the verb ‘indemnify’),actually does.It operates in part as an exclusion

of liability, as we have noted.This is considered to be a legitimate device as long

as it is genuine risk allocation between parties to a commercial contract.However,

under section 4 of the Unfair Contract Terms Act 1977, if an indemnity is

imposed upon a consumer by the terms of a contract,then it will be made subject

to the same requirements of reasonableness as an exclusion or limit of liability.

This is to prevent unreasonable exclusions or limits of liability being imposed

upon a consumer by a ‘back door’ method. Further, under the EC Directive on

Unfair Terms in Consumer Contracts, and the UK Regulations which

implement this Directive, the words ‘indemnity’and ‘indemnify’would probably

not be permitted in contract terms offered to consumers,because the words would

not satisfy the mandatory requirement that such contracts must be in ‘plain

intelligible language’. A test of plain intelligible language is whether or not a person

with no particular qualifications would be able to understand the meaning of the

words, and it is clear that the words we are discussing would not pass this test.

The payment aspect of an indemnity

An indemnity also operates to provide that the party giving the indemnity will

pay either the indemnified party, or in appropriate cases a third party, sums of

money to compensate for, or to make good, loss or damage.This aspect of an

indemnity has given rise to a difficult question:are sums of money payable under

an indemnity damages or debts?

The answer to this question is by no means clear, since not all indemnities are

alike, and in some cases the problem has been whether a particular term in a

particular contract was an indemnity or not.We will look more closely at this

point when we examine the Arcadia case.


67

Debts and indemnities

To some extent an indemnity resembles a promise that gives rise to a debt,since

the sums payable may be identifiable sums,which may include repayment of sums

paid by the indemnified party to a third party.

But the history of indemnities is different from the history of debts,which arise

from direct undertakings to pay,and analytically indemnities have some attributes

of damages.In the case of Firma C-Trade S.A.v Newcastle P & I Association (1991)

2 AC 1, Lord Brandon stated:

“There is no doubt that before the passing of the Supreme Court of Judicature

Acts 1873 and 1875 there was a difference between the remedies available

to enforce an ordinary contract of indemnity… at law on the one hand

and in equity on the other. At law the party to be indemnified had to discharge

the liability himself first and then sue the indemnifier for damages for breach

of contract. In equity an ordinary contract of indemnity could be directed

to be specifically performed by ordering that the indemnifier should pay

the amount concerned directly to the third party to whom the liability was

owed or in some cases to the party to be indemnified.There is further no

doubt that since the passing of the Supreme Court of Judicature Acts 1873

and 1875 the equitable remedy has prevailed over the remedy at law.”

From this passage it is clear that indemnity is not an entirely different concept

from damages.On the other hand it does have additional features that would not

arise if the contractual promise were a warranty rather than an indemnity.

A further passage from the same case, this time in the words of Lord Goff,shows

that the intervention of equity can turn the liability under an indemnity into

something very similar to a debt.This is no doubt why the argument has arisen

as to whether an indemnity gives rise to damages or debt.The answer appears

to be that it can give rise to either the one or the other, or a mixture of both.

Possibly it is best to regard an indemnity as a promise giving rise to a variable

mix of rights and remedies.

“I accept that, at common law, a contract of indemnity gives rise to an action

for unliquidated damages arising from the failure of the indemnifier to prevent

the indemnified person from suffering damage, for example by having to

pay a third party. I also accept that, at common law, the cause of action

does not (unless the contract provides otherwise) arise until the indemnified

person can show actual loss.

This is, as I understand it, because a promise of indemnity is simply a promise

to hold the indemnified person harmless against a specified loss or expense.

On this basis no debt can arise before the loss is suffered or the expense


68

incurred; however, once the loss is suffered or the expense incurred, the

indemnifier is in breach of contract for having failed to hold the indemnified

person harmless against the relevant loss or expense.There is no condition

of prior payment, but the remedies available at law (assumpsit for

damages or possibly in certain circumstances the common count for money

paid) were not efficacious to give full effect to the contract of indemnity. It

is for this reason that equity felt that it could and should intervene.”

(Lord Goff, in Firma-C Trade v Newcastle P&I Association.)

This analysis shows the unique and variable nature of an indemnity.For practical

purposes it must be emphasised that as with all contractual promises,everything

depends upon the exact terms,the language used,and the context.Clarity in drafting

is essential in order to avoid confusion as to what is meant.In the case that follows,

we will be looking at a contractual term (which could perhaps have been more

clearly drafted) and asking whether it is an undertaking to pay a specified sum

(a debt),or an indemnity,or an undertaking to pay damages for breach of contract.

And if it is an indemnity, we will be asking how it is to be interpreted in terms

of the remedies to which it gives rise.

In the case of Total Transport Corporation v Arcadia Petroleum Ltd (1998) CLC

there was a clause in a charterparty providing:

‘Owners shall be responsible for any time, costs, delays or loss suffered by

charterers due to failure to comply fully with charterer’s voyage instructions.

Provided such instructions are in accordance with the charterparty and

custom of the trade specified in voyage orders.’

The charterers claimed that the owners of the ship had, in breach of contract,

failed to comply with the instructions given by the charterers.The claim,which

originally went to arbitration,was made in the form of an action for damages for

breach of contract, or in the alternative, for money payable under a contractual

indemnity.

The claim was for $681,934.05, which represented the additional sum that the

charterers had had to pay for petroleum, due to the cargo being loaded at the

wrong time. If the instructions had been correctly carried out, then the bill of

lading would have been dated February 1,1992.In the event,because of the loading

of the petroleum being completed before 8 am on that date, the bill of lading

was dated 31 January, which attracted a higher price, since a price cut that had

come into effect was only for bills of lading which were dated in February.


69

The ‘8 am rule’ existed in Nigeria, and meant that for commercial purposes the

day did not begin until 8 am.The arbitrators stated in their award that they were

satisfied that although this rule was long established in shipping contracts in Nigeria,

it was extremely unusual and did not appear to exist anywhere else in the world.

They stated that:

“The parties did not and could not foresee that a procedural peculiarity that

is apparently unique to Nigeria would lead to the January rather than the

February contract price being paid”.

This of course was very relevant to the claim for damages.The owners had caused

the loss to the charterers by their failure to carry out instructions. But the loss

failed the tests stated in Hadley v Baxendale: the loss was not normally

foreseeable, and so it did not qualify for damages under the first rule in Hadley v

Baxendale, and the possibility of it happening had not been made known at the

time of the contract to the owners, so it did not qualify for damages under the

second Hadley v Baxendale rule.So the claim for damages failed in the arbitration

proceedings and was not renewed.The case before the Court of Appeal was as

regards the claim for indemnity.

Lord Justice Staughton considered that the appeal raised two issues:

1. Was the clause an indemnity?

2. If it was,are indemnities sums payable irrespective of whether the loss

is foreseeable, or are indemnities in this respect subject to the same

rules as damages?

The conclusion Lord Justice Staughton reached,with which the two other members

of the court agreed, was that it was not the intention of the parties to provide,

by means of the particular clause in this contract, that this clause should have

any different consequences from any other clauses in the same contract. So the

clause was subject to the rule applicable to damages, that only those losses that

were foreseeable would be payable.

But this conclusion is itself somewhat ambiguous. It could mean any one of the

following:

1. The clause was not an indemnity,but only an ordinary contractual promise,

so the ordinary rules about damages applied.

2. The clause was an indemnity,but liabilities under indemnities have the

same characteristics as damages.

3. The clause was an indemnity,and indemnities have variable characteristics.

In this particular case the parties intended this particular indemnity to

have the same features as any other promises giving rise to damages.


70

Of the three possibilities,the first appears to have been supported by Lord Justice

Balcombe, who stated:

“The word ‘indemnity’is not used in this clause, and the context is not such

as would lead one to expect an intention to provide for an indemnity.Why

should the parties have intended that this particular breach of contract

alone should entitle charterers to an indemnity?”

Clearly the Lord Justice is using the word ‘indemnity’here in a sense in which,as

a matter of definition, it is meant to lead to compensation which is exempt from

the rules of foreseeability of damages.

But Lord Justice Staughton stated that the word indemnity can be used in two

senses, one of which is simply about damages according to the usual rules, and

the other of which is about payment for ‘all loss suffered which is attributable

to a specified cause, whether or not it was in the reasonable contemplation

of the parties’.

Lord Justice Staughton added that:

“There is precious little authority to support such a meaning, but I do

not doubt that the word is often used in that sense.”

Later he added:

“No authority is cited for the proposition that remoteness is always

irrelevant to an indemnity obligation.”

If we are to draw any conclusions from this difficult case,they are that if a promise

or undertaking is intended to be an indemnity, then the word ‘indemnity’should

always be used. Even then, reading the clause in its context, the clause will not

necessarily be interpreted as giving rise to something different from damages.

However,the door has been left open for the possibility of a meaning of the word

‘indemnity’which goes beyond damages, and if a clause is suitably drafted, so as

to make it clear that this is the intention of the parties, there may be benefits to

be derived from this, for example by stating expressly that the parties intend the

indemnity to be for all losses whether foreseeable or not.


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Conclusion

The remedy that you get,and its adequacy in the circumstances that have occurred,

will depend to a great extent upon the precise words that you use. It should not

be assumed that a vague form of words allocating responsibilities will necessarily

provide the right financial remedy.


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Postscript

Farley v Skinner (2001) The Times, October 15

This case was decided in the House of Lords at the time that this Report was going

to press.The case confirms all that was said in the first chapter of this Report

about the principles that are beginning to emerge regarding damages for mental

distress (including vexation,anxiety, frustration and aggravation).The categories

of case for which damages of this kind may be claimed are, as stated, based on

considerations of public policy. Public policy recognises several classes of case,

including those cases where an important object of the contract is to give peace

of mind,or pleasure or relaxation;and including those cases where there is mental

distress related to physical discomfort caused by the breach of contract.

The facts,briefly,are that Mr Farley engaged a surveyor,and asked in particular for

a report on whether or not a property he was thinking of buying to live in was

affected by aircraft noise.The report was favourable,so Mr Farley bought the property,

only to discover after moving in that it was seriously affected by aircraft flying to

and from Gatwick. He could have chosen to sell, but decided to stay and to sue

for damages for discomfort.The judge of the High Court awarded him £10,000 on

this basis,but this was disallowed by a majority of the Court of Appeal.The House

of Lords restored the damages.

The main ground on which the House of Lords took the view that Mr Farley was

entitled to damages was that an important objective of the contract was to provide

Mr Farley with pleasure, relaxation or peace of mind. So the damages could be

described as damages for loss of enjoyment,and mental distress and disappointment.

Additionally, the House of Lords felt that the High Court judge had been entitled

to base his award on the alternative grounds of inconvenience and discomfort.

It is difficult to see how the Court of Appeal could have come to its conclusion,

in view of the Ruxley case (the ‘swimming pool case’,cited in this report),in which

the eventual award to Mr Forsyth was damages for loss of enjoyment or amenity.

So the decision of the House of Lords in this new case is consistent with their

previous ruling on this narrow ground. But looking at the wider view, Farley v

Skinner is the long awaited House of Lords ruling on the development law relating

to mental distress in all its forms,and it is to be welcomed for its clear and concise

statement of principles.

P O S T S C R I P T

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appendices

A P P E N D I X 1 : T H E C A S E O F T H E M I L L E N N I U M D O M E

A P P E N D I X 2 : L I S T O F C A S E S C I T E D

Appendix 1

The case of the Millennium Dome

What does this new case decide?

Chiemgauer Membran und Zeltbau GmbH (formerly Koch Hightex GmbH)

v New Millennium Experience Co. Ltd (formerly Millennium Central Ltd)

January 16, 2001.

At the time of writing this case is still unfinished,having been to court on a number

of preliminary issues.It is about wrongful termination (termination without cause).

It is also about damages for loss of profit; and it is also about a novel argument

about whether or not the defendants should be held liable for loss of profit in

the circumstances that occurred.

The action for damages was commenced by the contractors because the

defendants had,it was alleged,terminated without cause a contract between the

parties to build and to install the roof of the Millennium Dome.

There were, presumably, no terms in the contract permitting the purchasers to

cancel all or any part of the contract, and one of the lessons of this case is surely

that there are benefits for purchasers in having ‘cancellation for convenience’terms

in their contracts.These terms do not usually permit the purchaser to act unfairly

in the sense of terminating contracts without any subsequent legal obligations.

Usually after such cancellation the purchaser is bound by an agreed formula for

remuneration of the contractor, so that in effect the purchaser is buying its way

out of the contract. But at least with such terms the purchaser does not have to

find or to specify any cause for the termination,and no breach of contract is involved.

The contractor’s claim, in the circumstances, was for loss of profit, which is one

of the normal ways of measuring loss for cancelled contracts. But this claim was

met, in preliminary proceedings in the High Court, by the argument that the

contractor had subsequently become insolvent and had gone into liquidation.The

defence was that the financial state of the contractor was such that at some time

during the performance of the contract the contractor would have gone into

liquidation anyway,even if the contract had not been terminated.So the contractor

would have made a loss of profit in any case, and therefore the loss of profit was

not caused by the cancellation.Further,if the contractor had gone into liquidation,

A P P E N D I X 1

75

the contract could have been terminated then, lawfully,by the purchaser,and the

result would have been the same.

This preliminary issue was decided by the judge in favour of the claimant, the

contractor.

One had to look at the position of the parties at the time that the termination

took place.At that time it was not inevitable that the contractor would have become

insolvent. So the direct cause of the loss of profit to the contractor was the

termination without cause by the customer.The fact that insolvency subsequently

occurred did not affect the assessment of the damages after the termination had

taken place,and the judge ruled that the loss of profit was a natural consequence

of the termination without cause.

This case confirms that loss of profit falls into the category of direct and natural

damages (and not indirect or consequential damages).

It also confirms that one of the important principles for the assessment of damages

is that the damages must be caused by the breach of contract and not by any

other circumstances.

It also reminds us that good commercial planning involves drafting contracts under

which one can take effective commercial action without necessarily being made

liable for damages for breach of contract.

A P P E N D I X 1

76

APPENDIX 2

List of cases cited

• Alcoa Minerals of Jamaica Inc v Herbert Broderick (2000) BLR 727

• Allied Maples Group Ltd v Simmons & Simmons (1995) 1 WLR

• Anglia Television Ltd v Reed (1972) 1 QB

• Arab Bank plc v John D.Wood Commercial Ltd (2000) 1 WLR 857

• Argentino,The (1888) LT PD

• Banco de Portugal v Waterlow & Sons Ltd (1932) AC 452

• Bacon v Cooper (Metals) Ltd (1982) 1 All.E.R. 397

• Barclays Bank plc v Fairclough Building Ltd and Others (1995) 1 All.E.R.

289

• Bence Graphics International Ltd v Fasson UK Ltd (1997) 1 All.E.R.979

• Bliss v South East Thames Regional Health Authority (1997) ICR 700

• Bristol and West B.S. v May May & Merrimans (1998) 1 WLR 336

• British Steel Corporation v Cleveland Bridge & Engineering Co.(1984)

1 All.E.R. 504

• Chaplin v Hicks (1911) 2 KB

• Chiemgauer Membran und Zeltbau GmbH (formerly Koch Hightex

GmbH) v New Millennium Experience Co. Ltd (formerly Millennium

Central Ltd) (No 2) (2001) The Times, January 16, 2001

• Coca Cola Financial Corporation v Finsat International Ltd (1996) The

Times, 1 May 1996

• Countrywide Communications Ltd v ICL Pathway Ltd (2000) CLC 324

• Dagenham (Thomas) Dock Company, Re, ex parte Hulse (1873) IR. 8.

Ch. App

• Deeny and Others v Gooda Walker Ltd and Others, (No 4), (1995) The

Times, June 29 1995

• Dies v British and International Mining and Finance Corporation Ltd

(1939) 1 KB

A P P E N D I X 2

77

• Duffen v Fra Bo Spa (1998) The Times, June 15 1998

• Firma C-Trade SA v Newcastle P&I Association (1991) 2 AC 1

• First Interstate Bank of California v Cohen Arnold & Co.(1995) The Times

11 December 1995

• Firsteel Cold Rolled Products Ltd v Anaco Precision Pressings Ltd (1994)

TLR

• George Fisscher (Great Britain) Ltd v Multiconstruction Ltd (1995) BCC

• Grand Metropolitan plc v William Hill Group Ltd (1997) BCLC

• Hadley v Baxendale Ltd (1854) 9 Exch. 341

• Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co. Ltd (1970) 1

All.E.R.225

• Hayes v Dodd (1990) 2 All.E.R. 815

• Heron,The (1969) 1 AC 350

• Hotel Services Ltd v Hilton International Hotels (UK) Ltd (2000) Court

of Appeal, March 13, 2000

• Hyundai Heavy Industries Ltd v Papadopoulos (1980) 2 All.E.R. 29

• Jervis v Harris (1996) Ch. 195

• Livingstone v Rawyards Coal Co. (1880) 5 App. Cas 25

• Lordsvale Finance plc v Bank of Zambia (1996) 3 WLR 688

• Mc Conville and Others v Barclays Bank (1993) The Times,30 June 1993

• Miliangos v George Frank (Textiles) Ltd (1976) AC 443

• OT Africa Line Ltd v Vickers plc (1996) 3 All.E.R.

• Perry v Sidney Phillips & Son (1982) 3 All.E.R.

• Royscot Trust Ltd v Rogerson and Others (1991) 3 All.E.R. 294

• Ruxley Electronics & Construction Ltd v Forsyth (1995) 3 WLR 318

• St Albans City and District Council v ICL Ltd (1996) 4 All.E.R. 481

• Seven Seas Properties Ltd v Al-Essa and Another (No 2) (1993) 3 All.E.R.

• Sky Petroleum Ltd v VIP Petroleum Ltd (1974) 1 All.E.R.

• Stocznia Gdanska S.A. v Latvian Shipping Co. (1998) 1 WLR 574

• Surrey County Council v Bredero Homes Ltd (1993) 3 All.E.R. 705

• Thompson v Robinson (1995) 1 All.E.R. 154

• Total Transport Corporation v Arcadia Petroleum Ltd (1998) CLC

A P P E N D I X 2

78

• Union Eagle Ltd v Golden Achievement Ltd (1997) 2 All.E.R. 215

• Western Web Offset Printers Ltd v Independent Media Ltd (1995) The

Times, 10 October 1995

• Wrotham Park Estate Co. v Parkside Homes Ltd (1974) 2 All.E.R.

A P P E N D I X 2

79

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