Commercial Litigation: Damages and Other Remedies for Breach of Contract (Thorogood Reports)

THOROGOOD PROFESSIONAL INSIGHTS A SPECIALLY COMMISSIONED REPORT COMMERCIAL LITIGATION: DAMAGES AND OTHER REMEDIES FOR ...

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THOROGOOD PROFESSIONAL INSIGHTS

A SPECIALLY COMMISSIONED REPORT

COMMERCIAL LITIGATION: DAMAGES AND OTHER REMEDIES FOR BREACH OF CONTRACT Robert Ribeiro PhD Barrister


A SPECIALLY COMMISSIONED REPORT

COMMERCIAL LITIGATION: DAMAGES AND OTHER REMEDIES FOR BREACH OF CONTRACT Robert Ribeiro PhD Barrister

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Preface

What is new? The subject of damages for breach of contract has a long history, and has remained true to its roots, as set out in Hadley v Baxendale (1854). So with any new report on the subject, the first question to be asked must be “What is new?” To this there will be a number of interesting answers, not least because of the new emphasis on claims for damages for matters such as loss of business, loss of opportunity, loss of a chance, loss of use, loss of enjoyment, loss of amenity, loss of data and so forth. The computer age is giving a new slant to heads of damages. Claims have even begun to include damages in respect of fines imposed by regulatory authorities against stockbrokers whose computer systems were unable to meet requirements: SAM Business Systems v Hedley (2003). All of these issues will be addressed in this report.

Contract or tort? And then again, a ‘novelty’, if it be perceived as such, is the drawing together of principles applicable in claims for breach of contract, and those governing claims made in tort. There will still be some matters (such as jurisdiction) where the dividing line between such claims is very clear. And of course the tests for establishing the existence of a liability in the first place are quite different. On the other hand, in new cases such as Voaden v Champion (2002), or Alcoa Minerals v Herbert Broderick (2000), it will be noted that contract and tort precedents are discussed interchangeably, and many principles are common to both forms of claim. So whereas the first version of this report was prefaced by a comment that the work made no attempt to deal with damages arising in the law of tort, the same can no longer be said in this new edition. Cases such as Alfred Dunhill v Diffusion Internationale de Maroquinerie de Prestige SARL and others (2002) will show that in some commercial claims the same set of facts can be argued either on the basis of contract or of tort, and that the difference is often tactical.


P R E FA C E

Reasonableness and the ‘fact-specific’ approach What can definitely be said is that during the years between the writing of this report and its previous version, the courts have shown a marked tendency to develop judgments according to the precise facts of the case in front of them, rather than developing and applying broad principles. This has been called by a distinguished judge of the Court of Appeal a ‘fact-specific approach’, and some of the principles that were thought to have the status of rules, such as the ‘breach date rule’, or the rules about ‘new for old’ compensation have given way to this new approach. It cannot be faulted, since true justice does indeed require that each case be treated uniquely on its own facts and merits. Broad principles are only a short cut towards this process. Nevertheless, it does mean that in damages claims every minute detail will need to be looked at, along with the question of the reasonableness of each particular claim. Cases such as Voaden v Champion, and Kuwait Airways Corporation v Iraqi Airways may be taken as the shape of things to come.

The aims of this Report Although the title of this report is Commercial litigation, Damages and Other Remedies in Commercial Contracts, it does not mean that the report is only intended for litigation practitioners. Nor is it intended solely for those concerned with bringing or defending claims. It is hoped that an appreciation and update of this area of law will help those who draft and negotiate terms of contract to solve problems or to prevent problems similar to those illustrated from arising. In the Chiemgauer case (2001) (the case of the Millennium Dome), it would certainly seem to be true that more detailed terms about cancellation or termination would have prevented litigation from arising over that particular subject. And in other cases cited in this Report, there will be examples of effective and less effective drafting of terms controlling or limiting remedies. In the end, the aim is to assist those who wish to avoid litigation, as much as those with active claims, and above all, the hope is that this Report will make a difficult subject accessible. Robert Ribeiro


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CONTENTS

1

THE STARTING POINT FOR CALCULATIONS

1

A comparison of different remedies available for breach of contract .................................................................................2 Selecting the appropriate remedy: Hyundai Heavy Industries Co Ltd v Papadopoulos (1980) 2 All.E.R. 29 ...........................3 The remedy of Quantum Meruit ................................................................4 Damages versus debt: Jervis v Harris (1996) Ch.195...............................7 Contract or tort? ..........................................................................................9 Damages: the basic principle of assessment ..........................................10 The rules of remoteness ............................................................................13 ‘Remoteness of damages’: what does this mean? ..................................16 Putting together several different heads of claim: Hayes v Dodd (1990) 2 All.E.R. 815..........................................................17 Damages for mental distress ...................................................................19 Interest and financing charges.................................................................21 What is ‘consequential loss, or damage’; how does it relate to the principles already set out? ......................................22

2

THE MEASUREMENT OF DAMAGES

25

Putting figures to the claim.......................................................................26 The rule against double counting ............................................................29 Taxation and ‘double counting’ ................................................................32 Double counting and the recouping of loss............................................34 The rules about mitigation of loss............................................................35


v

CONTENTS

3

SPECIAL CASES INVOLVING DAMAGES

41

Damages for loss of a chance...................................................................42 Chances of earnings or of profitability: Days Medical Aids v Pihsiang Machinery Manufacturing Co (2004) 1 All.E.R. (Comm).......47 Contributory negligence and the measurement of damages ...............48 Drafting terms to control remedies .........................................................51 The Unfair Contract Terms Act 1977 .......................................................52 Liquidated damages ..................................................................................53 Clauses about currency and interest .......................................................55 The breach date rule..................................................................................57 Summarizing the principles applicable to a claim for damages...........58

4

OTHER REMEDIES FOR BREACH OF CONTRACT

60

The remedies .............................................................................................61 The declaratory judgment ........................................................................61 Retention of a deposit ...............................................................................62 Rescission ...................................................................................................66 Specific performance and specific delivery ............................................66 Injunctions ..................................................................................................69 The remedy of rectification.......................................................................73 Indemnities: what is their purpose? .......................................................75

APPENDICES

82

Appendix 1: List of cases cited .................................................................84 Appendix 2: List of statutes and other enactments mentioned in this report .....................................................86


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Chapter 1 The starting point for calculations A comparison of different remedies available for breach of contract ...........................................................................2 Selecting the appropriate remedy: Hyundai Heavy Industries Co Ltd v Papadopoulos (1980) 2 All.E.R. 29 .....................3 The remedy of Quantum Meruit ..........................................................4 Damages versus debt: Jervis v Harris (1996) Ch.195.........................7 Contract or tort? ....................................................................................9 Damages: the basic principle of assessment ....................................10 The rules of remoteness ......................................................................13 ‘Remoteness of damages’: what does this mean? ............................16 Putting together several different heads of claim: Hayes v Dodd (1990) 2 All.E.R. 815....................................................17 Damages for mental distress .............................................................19 Interest and financing charges...........................................................21 What is ‘consequential loss, or damage’; how does it relate to the principles already set out?................................22

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 seminar 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 of, 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

•

the remedy of declaration

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.


2

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

As an illustration of the problem of selecting the appropriate remedy, we may 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 contract. In these circumstances, 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 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,


3


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.

Debt What was actually sought and recovered in this case was the stage payments which 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 buyer 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 cashflow 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.


4


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.

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 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:


5


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. 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 argued also 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


6


with a benefit which it would normally have had to pay fees for, in the expectation that it would be awarded a contract. And 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.

Damages versus debt: Jervis v Harris (1996) Ch.195 This case gives lawyers in many different fields of commerce an insight into the difference between drafting a term of a contract as a promise or warranty giving rise to damages if broken, and drafting a similar term so as to bolt on to it a potential claim in debt. 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 of 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: “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.


7


“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.”

Tenant undertakes to keep premises in good repair

Contract also includes term permitting the landlord to enter the premises and to carry out the repairs.

Tenant undertakes to reimburse landlord

Breach

Breach

Claim for damages

Rules about remoteness, penalties, mitigation, etc, apply

Entry for repairs

Landlords claim is in DEBT so rules about remoteness, penalties, mitigation, etc, do not apply.

Figure 1: Jervis v Harris


8


Contract or tort? At this stage it is an appropriate moment to pause to reflect on another choice that has to be made in any case of commercial litigation, which is whether damages should be sought under the laws of contract or of tort. If defective goods are delivered, for example, the claim could be for breach of contract, or in some circumstances it could be made for negligence, under the law of tort. The same facts could be used to bring an alternative claim for misrepresentation, which itself straddles the boundaries of contract and tort. The tendency in commercial cases recently has been for the courts to draw together these different strands of argument, and to emphasize the similarities, rather than the differences. The cases on claims for damages for loss of opportunity will show this, since some of the cases could be brought on either basis, and the courts have regarded the principles of assessing damages on an ‘opportunity basis’ as being the same whether the claim is made in contract or in tort. More will be said about this in the third chapter. So the differences between claims in contract and claims in tort, in commercial cases, often come down to tactical matters, such as time limits for bringing claims, which of course are still different under statute, and such as jurisdictional matters, which under the Brussels Convention 1968 are capable of giving rise to important distinctions between contract and tort or delict.

Alfred Dunhill Ltd v Diffusion Internationale de Maroquinerie de Prestige SARL and others (2002) 1 All.E.R. Comm. This case shows that the same facts can give rise to claims for damages for financial loss, either in contract or in tort. In the event, both forms of claim were made, to test whether either could be brought under the jurisdiction of the English courts. As it happened, the formation of the contract, for the making of exclusive items of baggage for the luxury goods store, Dunhill, was not particularly clearly documented, and Dunhill had difficulty persuading the High Court that there was a contract with the particular defendant. Dunhill therefore decided to found its main line of argument on tort: negligent misstatements resulting in financial loss. (Negligent misstatements can either give rise to contractual remedies, under the Misrepresentation Act 1967, if they result in the making of a contract, or they can give rise to a common law claim in tort, whether or not a contract results.)


9


In the tort claim, Dunhill failed in its argument that jurisdiction lay with the English Courts, because the main rule under the Brussels Convention is that the place of domicile of the defendant is the proper place of jurisdiction. In this case this was Italy. An alternative argument, available in tort, that the harmful event took place in England, also failed, because it was held that this took place where the negligent misstatements were made, or where the damage occurred, which was Paris, where Dunhill placed the order for the goods, and the manufacturing problems occurred. If Dunhill had had contract documentation making an effective choice of law in England, the result would of course have been quite different, and a straightforward claim for damages for breach of terms of contract could have been made in the English courts.

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.


10


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. 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 usually achieved by the ‘successful transaction’ method, but if a business was making a profit before the contract giving rise to the claim was made, and then began to make a loss because of a breach of that contract, a no-transaction basis would be appropriate.

•

‘Opportunity damages’ are only achieved by the successful transaction method.


11


SAM Business Systems Ltd v Hedley & Co (2003) 1 All.E.R. (Comm) In this case, Hedley was making a claim for breach of contract by way of counterclaim in an action for the balance of the price of a software system by SAM. Hedley alleged defects, and Hedley’s heads of claim were: •

a refund of all sums paid to SAM;

•

increased costs of working;

•

fines and additional charges;

•

mitigation costs; and

•

loss of profits.

This is an example of a ‘no-transaction’ claim. The claim was loss of profits was presumably because Hedley & Co actually lost profit that it would normally have made, as a result of the performance of the contract. (In the event, Hedley’s counterclaim failed because of effective limits of remedies and of liability in SAM’s terms of contract.)

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 claim will be given later.


12


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. Here 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: •

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.

Hadley v Baxendale 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


13


•

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.”

(The paragraphing of the quoted passage does not appear in the actual text, but has been done here to show how lawyers have come to distinguish between two rules in this famous case.) 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 was 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


14


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.

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 knowledge 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.


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The claim was made by a construction company which had entered into an agreement for a 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 were seeking damages for the cost of demolition and reconstruction. 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.

‘Remoteness of damages’: what does this mean? People often talk about remoteness of damages, meaning damages which are too remote to be awarded by a court, but it is important to define our terms.

Chiemgauer Membran und Zeltbau GmbH (formerly Koch Hightex GmbH) v New Millennium Experience Co Ltd (formerly Millennium Central Ltd) January 16, 2001 The cases we have discussed so far on this subject are about foreseeable heads of damages. The Chiemgauer case is about a similar but different argument to those that have gone before, which is that the breach of contract did not actually cause the loss in question. The loss may or may not have been foreseeable, but the argument is that in any case it did not result from the breach of contract, but from other causes.


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The rules about remoteness are sometimes used in this different sense. The case we are about to look at illustrates both aspects of remoteness. The claim for damages was commenced by the contractors who had been awarded a contract to construct the roof of the Millennium Dome. The contract was alleged to have been wrongfully terminated. The claim was for loss of profit. The defence was that the contractor had subsequently become insolvent and had gone into liquidation. The argument of the defence was that the financial state of the contractor was such that at some time during the performance of the contract the contractor was to have gone into liquidation anyway. So the contractor would, according to this argument, have made a loss of profit even if the contract had not been terminated. So it was argued that the breach did not cause the loss. This preliminary issue was decided by the judge of the High Court in favour of the contractor. He considered that the loss of profit was caused by the wrongful termination of the contract: the insolvency after the termination was not material. The view of the judge was that 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 the insolvency subsequently occurred did not affect the assessment of the damages after the termination took place. The judge also ruled, on the foreseeability issue, that the loss of profit was a direct and natural consequence of the termination without cause. This case confirms the two points which may overlap or occur separately, one being that the damages must be foreseeable, and the other being that the damages must be caused by the breach of contract and not by other circumstances.

Putting together several different heads of claim: 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 may be 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


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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 plaintifs gave up trying to run their business, and eventually sold the properties. They claimed damages for breach of contract against the solicitors. 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


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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 set out 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. 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 LJ 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


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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 LJ 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. 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.

Farley v Skinner 2001 House of Lords (3 W.L.R.) This is the much awaited House of Lords case which was intended to explain and clarify the law about damages for mental distress. As expected, it was confirmed that this topic depends upon issues of public policy. This was not a commercial case. Public policy as applied by the courts recognises several classes of case as being appropriate for the award of damages for mental distress. These include contracts to provide peace of mind, and cases where mental distress is related to physical discomfort caused by the breach of contract. These categories are related to, although different from the ground of ‘loss of amenity’, or ‘loss of enjoyment’, which the courts had already applied in cases such as Ruxley Electronics and Construction Ltd v Forsyth (1995).


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The Ruxley case certainly made it easier for the House of Lords to develop principles relating to damages for mental distress. The facts of the case are that Mr Farley had engaged a surveyor to report on whether a property he was thinking of buying was affected by aircraft noise. The report was favourable, so Mr Farley bought the property, which in fact was seriously affected by air traffic into Gatwick. Mr Farley chose to stay in the property (the successful transaction approach) and to seek damages against the surveyor for loss of enjoyment, mental distress and disappointment. The judge of the High Court made an award of damages of £10,000 on this basis. The Court of Appeal overturned this award, but it was restored by the House of Lords, which took the view that the contract between Mr Farley and his surveyor was a contract to provide Mr Farley with relaxation and peace of mind. The decision of the House of Lords uses the words: ‘inconvenience’ and ‘discomfort’, as well as those already mentioned, and it is now clear that in appropriate kinds of case, damages will be awarded on these grounds.

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.

Bacon v Cooper (Metals) Ltd (1982) 1 All.E.R. 397 In this case 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.”


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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 on. 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.

What is ‘consequential loss, or damage’; 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. 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.


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Hotel Services Ltd v Hilton International Hotels (UK) Ltd (2000) 1 All..E.R. Comm. (Court of Appeal) In this case 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.

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’. 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.


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Pegler v Wang (2000) In this case the same 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.

Loss or Damage

Indirect or Consequential

Direct

Hadley v Baxendale Rule 1 (damages arising naturally)

Hadley v Baxendale Rule 2 (unusual or more remote damages)

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


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Chapter 2 The measurement of damages Putting figures to the claim.................................................................26 The rule against double counting ......................................................29 Taxation and ‘double counting’..........................................................32 Double counting and the recouping of loss......................................34 The rules about mitigation of loss .....................................................35

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’.


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2 THE MEASUREMENT OF DAMAGES

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.

Voaden v Champion (2002) CLC This may prove to be one of the most important decisions on damages of recent years. In this case the Court reviewed the above cases and made some fine distinctions. Ms Voaden had lost a sailing vessel, the Baltic Surveyor, due to the negligence of the defendant. Liability was admitted, and the case is of interest in that the arguments were entirely about the measurement of damages. Along with the vessel, its mooring was entirely lost. To replace the mooring pontoon would have cost £60,000. As new it would have a life of about 30 years, whereas the lost item had a remaining life of about 8 years. The above two cases were cited as arguments that Ms Voaden should receive £60,000 as damages for the loss of the pontoon, but in fact the Court of Appeal awarded only £16,000. (This was eight thirtieths of the full replacement cost.) At first sight, this seems to reverse the principle of full restitution stated in the earlier cases. However, the points made by the Court of Appeal were 1) that there is no rule that damages must always be on a particular basis: the correct approach is to make a ‘fact specific’ review of what the claimant has really lost.


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And 2) the test of reasonableness is relevant. These two tests, of reasonableness and of the particular facts of each case, appear to be gaining in importance: see also Kuwait Airways Corp v Iraqi Airways Co (2001) CLC. , in which Rix LJ said that it was impossible to lay down any universal formula. Among the specific facts about Ms Voaden’s claim, we may note that the pontoon was not required for the immediate running of a business, so the case was different from Bacon v Cooper Metals Ltd. Further, the pontoon was old, and had been purchased second-hand, and was heavily corroded. Where what is lost is old and second-hand, and coming to the end of its life, the loss is not prima facie to be measured by the cost of a brand new chattel. It should be said that although the claim of Ms Voaden was necessarily made in tort, the Court of Appeal discussed contract and tort precedents without making any particular distinctions.

Mathematical adjustments In some cases 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). 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.


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The Court of Appeal accepted this. 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 (£13,000 as adjusted by the Court)*

Damages awarded

= £92,047

* The reasons for the adjustment of the figure of £13,000 are somewhat involved and need not be detailed here.

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.


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The ‘Swimming Pool Case’: Ruxley Electronics and Construction Ltd v Forsyth (1995) 3 WLR 318, (1996) 1 AC 344. In 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 a few 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, £2,500, for loss of amenity, rather than reinstatement. 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.” NOTE: The award for loss of amenity, while substantially lower than the damages claimed by Mr Forsyth, establishes an important new head of damages. This was applied in Farley v Skinner (2000), although the latter case was also a case on mental distress.


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Reasonableness, fact-specific review, and the rule against double-counting With the benefit of both hindsight and the judgments of the High Court and the Court of Appeal in the recent case of Voaden v Champion (The Baltic Surveyor) 2002 CLC, we can now see some principles emerging which help to explain more clearly the Ruxley case. We can now say that all measurement of damages must take account of the specific facts of each case, and of any special features presented. Damages must not confer a gratuitous benefit on the claimant, although in a few cases an element of ‘betterment’, when property is replaced or repaired, may be unavoidable if a fair result is to be achieved. And the test of reasonableness is relevant.

MORE ABOUT VOADEN V CHAMPION (2002)

All of these principles arose in Voaden v Champion (2002) CLC, and it is worth looking at further details of this case. We have already noted that the court decided in this case, on the basis of the facts, and on grounds of reasonableness, not to award the cost of replacing a destroyed pontoon as new, but only to award the value of the lost item.

THE ISSUE OF ‘DOUBLE-COUNTING’ ALSO AROSE IN THIS CASE

A yacht belonging to the defendant had sunk both the Baltic Surveyor and its moorings, including the pontoon mentioned. As regards the loss of the vessel, Ms Voaden claimed, and was awarded its value (which could not be the value as new, because no new vessel of that kind could be bought; so the value was its estimated market value). On this sum, which was re-assessed by the Court of Appeal, and set at £145,000, interest at the rate of 8% was awarded. This interest amounted to £11,600 per annum. One of the points of the appeal was that the trial judge had disallowed Ms Voaden’s claim for additional damages for loss of personal use of the vessel, which was used as a holiday home. It was submitted that when a yacht or similar item is lost, the damages should comprise at least two separate heads: value of lost item; and loss of use of that item. This was described in the Court of Appeal as being similar to an additional claim for loss of amenity. (In Ruxley Electronics v Forsyth (1995), the damages eventually awarded were £2,500 as damages for loss of amenity. However, that case involved a contract to build an item which would provide an amenity, namely a swimming pool, and these damages were the only sum awarded to Mr Forsyth.)


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Whereas in the case of the Baltic Surveyor, Ms Voaden obtained £145,000 for loss of the vessel, together with the interest mentioned. As Mr Justice Colman said in the High Court, to have added extra damages for loss of use would have been “compensating the owner twice over”. In the Court of Appeal, Lord Justice Rix said: “It is true that between the time of loss and replacement Ms Voaden has had no use from the Baltic Surveyor or any other yacht. But that is what the payment of interest from the date of loss is designed to compensate.” In short, the award of a sum to replace a lost item, together with interest on the sum awarded, is, in many cases, the true measure of damages, and special circumstances are needed to justify a claim for additional damages for loss of use, or for loss of amenity.

Kuwait Airways Corp v Iraqi Airways (2001) Such special facts did arise in Kuwait Airways Corp v Iraqi Airways Co (2001) CLC, in which the Kuwaiti airline was suing in respect of aircraft confiscated illegally from it, and destroyed. Here, in the Court of Appeal, it was argued that to award the airline damages for loss of use or substitute capacity in addition to the value of the aircraft would be to give the owner damages twice over. However, the Court of Appeal rejected this argument, because these were profitearning chattels owned by an airline which was committed to running services and carrying a large infrastructure. As Rix LJ. stated: “If it loses its aircraft and cannot replace them immediately, it continues to suffer (much of) its expenses and loses offsetting income. In good times that income may be sufficient to make a profit, so that it loses those profits as well; in bad times it may make a loss, but the lack of income increases the loss.” It was in this context that Rix LJ. said (at p.394) that it is impossible to lay down any universal formula.

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, which would normally have been taxed, and if, under revenue law, that compensation was not liable to be taxed, the court making


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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.

Compensation for loss

Compensation for loss

If taxable then damages

If not taxable then damages

are payable as gross

only reflect what claimant

pre-tax amount

would have lost, and this may

of income

of income

be the sum after tax

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 following case:

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’. 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


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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 the following case:

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.


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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 by the City Council. This could be recovered as damages by St Albans City Council in its capacity as trustee for the chargepayers. But the £484,000 stood on a different footing. This was merely money not collected from the chargepayers 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 chargepayers 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 chargepayers 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.


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Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd (1970) 1 All.E.R. In this case, 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.

Banco de Portugal v Waterlow & Sons Ltd (1932) AC 452 In this case 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.


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The argument about whether or not the financial circumstances of the claimant are relevant to damages also arises the case that follows.

Alcoa Minerals of Jamaica Inc v Herbert Broderick (2000) Mitigation was also one of several interlocking strands of the decision of the Privy Council in Alcoa Minerals of Jamaica INC v Herbert Broderick (2000) BLR. This case involved 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. The claimant simply did not have the money to do the repairs, so it was reasonable to wait until he did have the money. The case is also about the so-called ‘breach date rule’, details of which will be given in the next chapter.

Western Web Offset Printers Ltd v Independent Media Ltd (1996) 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 (1996) CLC. The facts of the case 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 cost of materials (paper, ink and work) = Profit


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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 = Profit At this point it becomes evident that we are looking at the difference between concepts such as earnings, profit margin and pure profit. What they actually mean is a matter of definition, but it is clear that they are mathematically different. Each of these can be the subject of a claim, but the correct claim has to be made to suit the particular circumstances. 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. 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, calculated simply by deducting materials from the contract price, rather than the figure of £38,245 which was suggested by the defendants.


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Ruxley revisited: the mitigation aspect of the 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 being 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) 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 a adult of average or above average height to be able to dive into safely. So 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


39


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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Chapter 3 Special cases involving damages Damages for loss of a chance.............................................................42 Chances of earnings or of profitability: Days Medical Aids v Pihsiang Machinery Manufacturing Co (2004) 1 All.E.R. (Comm) ....................................47 Contributory negligence and the measurement of damages .........48 Drafting terms to control remedies ...................................................51 The Unfair Contract Terms Act 1977.................................................52 Liquidated damages ............................................................................53 Clauses about currency and interest .................................................55 The breach date rule............................................................................57 Summarizing the principles applicable to a claim for damages.......58

Chapter 3 Special cases involving damages

Damages for 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. We are usually looking at loss of earnings or loss of sales, or loss of profits, or loss of a successful investment. The chance element arises where these are irregular or where they have an unpredictable basis.

Chaplin v Hicks 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


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3 S P E C I A L C A S E S I N V O LV I N G D A M A G E S

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 5050, 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 assessment of a chance. 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.

Anglia Television Ltd v Reed 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 script writer, preparations, and so on (i.e. the ‘no-transaction’ approach as contrasted with the possible ‘successful transaction’ approach). The claim on this basis was successful.

First Interstate Bank of California v Cohen Arnold & Co 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.


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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 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 hypothetical 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%.


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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

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 ‘better term’ would carry a value which could be assessed as damages. 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,


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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 the above 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. 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 lessors 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 oppor-


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tunity, in the present case the chance was not a right or benefit or tangible thing of value, but an opportunity to negotiate a better term, 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, and 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.

Chances of earnings or of profitability: Days Medical Aids v Pihsiang Machinery Manufacturing Co (2004) 1 All.E.R. (Comm) This important commercial case has many issues, about restraint of trade, EU competition law, uncertainty of terms of contract, and invalidity and severance. One aspect of this case is about the extent to which one can make business projections into the future, as a basis for a claim for damages for loss of business earnings. Loss of regular earnings presents no problem. The chance basis comes in at the point when earnings become subject to unpredictable elements. Days Medical Aids, the claimants, were suing for damages in respect of a contract which the defendants had repudiated. The contract involved exclusive rights in favour of Days, as distributor for mobility vehicles made by the defendants. The initial period was five years, which Days could then renew for a further five years, and then for still further periods each of five years ‘for as long as permitted by law’.


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The first five years were performed, but the defendants refused to accept any renewal. The High Court awarded damages of £10 million, for the loss of earnings for the first five year period of renewal. The judge thought that the expression: ‘for as long as permitted by law’ was too vague to allow any subsequent renewals after the first right of renewal, but made hypothetical awards, just in case he was wrong on this point. •

initial period of five years (actually performed)

•

renewal period of five years (repudiated)

•

subsequent renewal periods of five years (probably not valid)

Mr Justice Langley made the following observations: “In the event that I am wrong in my conclusion and the claim extends to subsequent five year renewals, whilst I accept (counsel’s) evidence as the best evidence of the financial outcome over these extended periods, assuming unhindered renewal of the agreement… the outcome is speculative. The uncertainties are legion....” The judge went on to say that product development might lose its way; other manufacturers might enter the market with lower costs; the manufacturer might have found ways of making life difficult for the distributor, and so on. “In my judgment these uncertainties are such and sufficiently real that I do not think that it is possible to conclude that DMA suffered any measurable loss referable to a right to renew the agreement beyond 5 February 2016, and only a reducing chance of such discounted loss between 5 February 2006 and 2011, and 2011 and 2016. There can be no pretence at any scientific or even satisfying calculation, but doing the best I can I think a fair reflection of these matters would be to assess DMA’s loss at 50% of (counsel’s) figure for the period from 5 February 2006 to 2011, and 25% of his figure for the period from 5 February 2011 to 2016....”

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


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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.


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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.


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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.

Drafting terms to control 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. An 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.

Stocznia Gdanska S.A. v Latvian Shipping Co (1998) 1 WLR 574 In this case 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.


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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.

The Unfair Contract Terms Act 1977 This Act will apply in many cases where a party to a contract drafts terms that attempt to restrict remedies, whether those restrictions are framed in terms of time limits, or in cash terms, or to restrict the types of remedies that are available. There are of course many exemptions from the Act, and it is not within the remit of this report to explore its details. In purely commercial cases, many attempts to draft terms restricting rights or remedies will fall within either section 3, or section 6, or section 7, or section 8, or section 13 of this Act, all of which impose the requirement of reasonableness on such terms.

SAM Business Systems Ltd v Hedley & Co (2003) 1 All.E.R. (Comm) This case is a useful recent example of how terms of contract can successfully control remedies. SAM had sold computer software to Hedley. The terms were standard terms and among other things contained this clause: “In the event of the application software not being accepted according to the obligations and procedures outlined in sections 2.9 and 2.10, client shall have the right at its entire discretion to rescind this agreement and to be repaid all sums which have been previously paid to SAM in respect of the licence under this agreement. This shall be the sole and exclusive remedy available to client in the event of the application software not being accepted.” In a claim by Hedley in respect of defective software, it was held by the Technology and Construction Court that this term was reasonable and effective to limit the liability of SAM, and the remedies of Hedley. The ‘money back’ aspect of the clause made it reasonable, although without it an exclusion of liability would have been unreasonable. (A limitation of liability to the amount of money paid under the licence agreement would, in the opinion of the judge, have been reasonable). The parties were of equal bargaining power in terms of relative size and resources, and although the circumstances had put Hedley in a position where they had a limited choice, they did not even try to negotiate any changes to the standard terms of SAM.


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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 the 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


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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.

Duffen v Fra Bo Spa (1998) 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. In any case the courts do not normally question commercial arrangements made by the parties on the grounds that the liquidated damages are inadequate.


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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 laws of Consumer Credit, and under the EC Directive on Unfair Terms in Consumer Contracts 1993, in contracts to which these laws are applicable. (If the default is failure to pay a commercial debt for goods or services, the Late Payment of Commercial Debts (Interest) Act 1998 applies. Interest is set at a statutory rate, and attempts to alter or to contract out of this rate of interest are controlled by the Act itself, which states that any rate agreed by the parties instead of the statutory rate must be a substantial remedy.) Default interest on loans is subject to the rule against penalties, since it only applies if the borrower is in breach of a term of the loan contract.

LORDSVALE FINANCE PLC V BANK OF ZAMBIA (1996) 3 WLR 688

In this case 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?


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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.

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: Miliangos v George Frank (Textiles) Ltd (1976) AC 443 This case was 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. 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


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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.

The breach date rule We have already noted the tendency of the courts to turn away from hard and fast rules, in favour of looking at the facts of each case and the reasonableness of the claimant in the way in which he has formulated his claim or acted after the events giving rise to the claim. These new considerations have given an impetus to important changes in the way in which the courts will now apply what was once known as the ‘breach date rule’. If the rule were to be applied strictly, it would mean that damages are to be calculated at costs prevailing at the time of the breach (whether a breach of a term of a contract, or a breach of a duty of care in tort). The theory is that mitigation requires prompt action so as to lessen the effects of inflation, and that interest on damages should normally make up for any time taken in obtaining the damages from a court. However, there can be circumstances where to apply the breach date rule strictly would give rise to unfair consequences.

Alcoa Minerals of Jamaica Inc v Herbert Broderick (2000) BLR 729 This case has already been noted as a case about mitigation. But its most important aspect is that it demonstrates that the breach date rule is probably not a rule at all, but simply one way of assessing damages. It is probably the most common method, but other methods can be argued in appropriate cases. The house of Mr Broderick had been damaged by industrial pollution from the alumina smelting plant of Alcoa Minerals. The claim was brought in tort, but the Privy Council made it clear that they were applying the same principles that would have applied if the claim had been made in contract. Mr Broderick had originally claimed $211,140. Four years later, in 1994, while the case was still waiting to reach trial, he amended his claim to $938,400, on


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the grounds of increased costs between the date of the tort occurring, and the case reaching court. Alcoa Minerals appealed on the basis that the general rule should be applied, that is, that damages should be assessed as at the date of the breach of the duty in question.

Original Claim 1990

Amended Claim 1994

cost of repairs: $211,140

cost of repairs: $938,400

On the mitigation argument, we have already seen that the Privy Council thought that the claimant had acted reasonably, taking his personal circumstances into account, in deciding not to have the repairs done until he had received his damages. On the ‘breach date’ argument, the Privy Council held that the breach date method for assessing damages was not the invariable method, although it is the principal method. There were many cases where damages could 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 held that it was foreseeable that the claimant might not have had funds to repair his house. Indeed, they went as far as to note that in some cases even a person or business with sufficient funds might be reasonably entitled to make a commercial decision not to spend the money until it became available through the award of damages. In summary, this important decision confirms that each such case depends upon its own facts. And among the relevant facts are considerations about the financial circumstances of the claimant, and about what is reasonable and foreseeable.

Summarizing the principles applicable to a claim for damages At this stage of this report, a chart has been given, and it is hoped that it will be a useful summary of what has been discussed in the first three chapters, taking us through the choices to be made, and rules and principles that may apply, in


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structuring and calculating a claim for damages for breach of contract. Some of these will be applicable in some tort claims as well.

Claim for damages

‘Successful transaction’ approach

‘No transaction’ approach

£

£

Heads of damages (including loss of a chance)

Heads of damages (including losses and/ or wasted expenditure)

Measurement

Measurement

Apply rules about breach date or alternative date for measurement; rules about mitigation and double-counting; rules about contributory negligence, where applicable;

Apply appropriate method of assessing the value of a chance, if claim is for loss of a chance

Apply appropriate rules about measuring damages for loss of or damage to chattels


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Chapter 4 Other Remedies for breach of contract The remedies .......................................................................................61 The declaratory judgment ..................................................................61 Retention of a deposit .........................................................................62 Rescission .............................................................................................66 Specific performance and specific delivery ......................................66 Injunctions............................................................................................69 The remedy of rectification.................................................................73 Indemnities: what is their purpose? .................................................75

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 session is to re-examine the uses of these remedies, and their limitations, particularly in the light of some of the more recent cases.

The remedies •

The declaratory judgment

•

Retention of a deposit

•

Rescission

•

Specific performance and specific delivery

•

Injunctions

•

Rectification

•

Indemnities

Let us look at each of these remedies in turn.

The declaratory judgment This has been much used in public law, as a means of getting a statement from a court as to the rights or duties or other legal position of the parties. It is less common, but it can also be used in commercial contracts, particularly to obtain a quick resolution of a single issue. What the court does is to answer a question about the position of the parties under their particular contract, such as whether a term is enforceable or not, or whether a particular course of action or inaction of one of the parties amounts


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4 OTHER REMEDIES FOR BREACH OF CONTRACT

to a breach of that term. The court does not award damages, but simply answers the question. Because there is no assessment of damages, the remedy can be obtained relatively quickly. It will not directly compensate a party for anything, but it should operate to prevent a breach, by declaring the parties’ rights, duties or position under the contract.

Phillips Petroleum Co UK Ltd v Enron Europe Ltd (1997) CLC In Philips v Enron (1997) the claimant sought a declaration from the High Court that if Enron did not agree a commissioning date for certain facilities for natural gas, Enron would be in breach of a term that it would use reasonable endeavours to agree such a date. The relevant term, which was one of many in a complex contract for the construction of facilities and for sales of gas, provided for the parties to agree a commissioning date, but it put this on a ‘reasonable endeavours’ basis, and did not state what the criteria for such agreement were to be. The judge of the High Court granted the declaration. He declared that it would be a breach of the term if Enron were to fail to agree the commissioning date on any grounds other than operational or technical grounds. Later this was reversed by the Court of Appeal on the ground that the term was not intended to be enforceable, and in any case the term only required reasonable endeavours, and that Enron was not acting unreasonably within the context of the contract, in taking its own financial circumstances into account, as reasons for not being able to agree the commissioning date. But, notwithstanding that the declarations made by Mr Justice Colman were set aside on the merits of this particular case, the case at least illustrates the way in which the remedy of declaration can be used.

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,


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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, for example, the part payment was £1000, 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 on the distinction between a deposit and a part payment is Dies v British and International Mining and Finance Corporation Ltd (1939) 1 KB 724.

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.


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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.

Union Eagle Ltd v Golden Achievement Ltd (1997) 2 All.E.R. 215 The facts of this well-known case 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 been paid, which was 10% of the purchase price. The contract set down a date for completion, which was 5pm on 30 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. 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 was 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


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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 purchase, 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. The issue as to what conduct, or which form of words, amount to a waiver, and as to what is the exact scope of the waiver, is always a matter of evidence. It depends upon what the party giving the waiver intended, and upon what the party receiving the waiver could reasonably have understood that he intended. Sometimes those who draft contracts include boilerplate clauses controlling waiver, so as to protect their remedies or the remedies of their clients as far as possible. In the Union Eagle case, above, 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.


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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. Sometimes rescission is a remedy for misrepresentation, rather than for breach of contract, and in the case of misrepresentation it has the result of completely nullifying a ‘voidable’ contract. The contract is then for practical purposes treated as not having existed at all. 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. But rescission in this sense does not mean that the contract is entirely without consequences. 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.

Rescission and specific performance Rescission 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


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claimant. The most common cases of specific performance therefore occur with regard to 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 ground 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.

A brief note on equitable remedies generally 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.

QUADRANT VISUAL COMMUNICATIONS LTD V HUTCHISON TELEPHONE (UK) LTD (1991) THE TIMES 4 DECEMBER

In this case 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.


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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. But in Coca Cola Financial Corporation v Finsat International Ltd (1996) 2 W.L.R. 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.” The above 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, and it would take a work of greater length than this to discuss them in any great detail. 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.

The Wrotham Park case 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 of the claimant. The loss to the claimant is assessed by either the ‘no transaction’ method or the ‘successful transaction’ method. But applying either of these methods, it is likely that there will be circumstances in which the loss to the claimant will be nil.


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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. 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.

Surrey County Council v Bredero Homes Ltd (1993) 3 All.E.R. 705 In this case 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.


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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.

Agreed plan

New plan

(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 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


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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 under the ‘successful transaction’ method. Bredero had made a gain, which was different from the councils having made a loss of any expected gain.

The remedy of rectification Rectification has in common with declaration the fact that it 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 possible breach is that the parties disagree about what the terms of the contract actually are. Or it can be used where the parties have simply come to a major difference about what the terms are, and performance is at a stalemate. The courts not only have jurisdiction to rectify a contract, but also have jurisdiction to order specific performance of it as rectified.


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What does the party seeking the remedy have to prove? 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. So one could not have rectified either of the arrangements made in the cases discussed earlier about quantum meruit – the British Steel case, or the Countrywide Communications case – so as to produce valid contracts. In such circumstances, the terms in question were still under negotiation, so the only possible outcome was that the courts would 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.

Grand Metropolitan plc v William Hill Group Ltd (1997) BCLC A recent example of rectification is Grand Metropolitan plc v William 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. 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.


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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: what is their purpose? Are indemnities remedies or terms of contract? One of the preliminary questions to be considered here 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) 2 Lloyds Law Reports 139 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.

Indemnities are used as a form of risk management Indemnities are often given in contracts such as loan agreements; sales of companies; authorship, design work, project work, and so on. The risks covered by the indemnity will be different in each case. In a loan agreement the risk is of default. In design work or authorship the risk is of matters such as infringement of the intellectual property rights of third parties. In project work the risk is of errors or negligence, possibly causing accidents,


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and in such cases the reference to negligence bracketed in the paragraph above will be needed, although how it is worded will be a matter for negotiation. What the parties are agreeing, when using indemnities in the above circumstances, is the allocation of some or all of the risk to the party giving the indemnity. 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. So an indemnity that fails to mention negligence will not cover circumstances where the loss or damage has been wholly or partly caused by the party receiving the indemnity, even if the indemnifying party is mainly to blame. Now, taking the example given above, we may consider what the use of the term ‘indemnity’, (or the verb ‘indemnify’), actually does. It provides for one party to pay for and to protect the other party against claims, expenses. losses, damage, etc. And 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, unless there were accompanying words that made the meaning quite clear. This would be 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, without further explanation, pass this test. So we have arrived at the position where we can see that indemnities are definitely terms of contracts which allocate risk in particular ways, as agreed by the parties, and provide to a greater or lesser extent for the protection of one party by the other against losses, damage, claims and liabilities.


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The nature of an indemnity I promise to indemnify you…

means:

I will protect you

I will pay for certain

I will not sue you

against certain

losses or claims or

in respect of those

losses or claims or

types of damage

losses or claims or

types of damage

types of damage

Is an indemnity also a remedy? But perhaps an indemnity is more than just a term. Perhaps, implicit in an indemnity, there is also a provision for one or more remedies. One uses the word ‘perhaps’, because this aspect of the law is not completely settled, and to complicate matters, it has been noted by the courts that people making commercial contracts can use the word ‘indemnify’ or ‘indemnity’ in more than one sense. The case of Total Transport v Arcadia, which we will be looking at in detail shortly, makes it clear that: 1.

It is unlikely that a term will be construed as an indemnity unless very clear words are used. In debt cases, where one person assumes sole liability for the debt of another, this has been referred to as an indemnity, even where the word ‘indemnity’ has not been used. But in cases that are not strictly about debts, this is less likely.

2.

Even where the word ‘indemnify’ or ‘indemnity’ is used, it may, in its context, only be a contractual promise to pay such damages as have been suffered. In which case such an indemnity adds very little to a contract that is not already there.

The payment aspect of an indemnity: damages or debt? An indemnity 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?


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The answer to this question is by no means clear, but must to some extent depend upon the nature of the liability in respect of which the indemnity is given. If it is a debt, then the indemnity claim will be on an undertaking by one party to pay a debt to another by way of indemnity. It is difficult to see how such a liability could be anything other than a liability in debt. If the indemnity is in respect of the safekeeping of the property of the indemnified party, then a claim under such an indemnity will be very like a damages claim, since the indemnified party will be looking for compensation for damaged or destroyed property. There will be other instances where nature of the liability is arguable either way. The quotations given below must therefore be taken as referring to the kind of indemnity that is given in a liability case, particularly liabilities to third parties. 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


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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 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 Assoc’n) We may now look at the case which puts all of this in context.

TOTAL TRANSPORT CORPORATION V ARCADIA PETROLEUM LTD (1998) CLC

In this case there was a clause in a charter party 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 charter party 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.


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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 of the court 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 could mean any one of the following: Either: 1. The clause was not an indemnity, but only an ordinary contractual promise, so the ordinary rules about damages applied. This is the most plausible explanation of this case, since the term was insufficiently plain. Or: 2. The clause was an indemnity, but indemnities are subject to the same rules as damages. Or: 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.


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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?” From this we can deduce that if the word indemnity had been used, this would have cleared up any ambiguity about the nature of the term. But even this apparently simple conclusion is complicated by the fact that 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.” So the law on indemnities, so far as the remedial aspect is concerned, is not fully settled. People draft indemnities primarily to allocate risk. In loan agreements or other financial arrangements, they use indemnities to make it clear that one party has assumed primary responsibility to pay. In other types of contract, people use indemnities in the hope that there is a ‘value-added’ element in a remedial sense, namely that money to be paid under an indemnity may be assessed without the need to apply rules applicable to ordinary claims made for damages, such as mitigation and the rules of remoteness. Only this possible meaning of indemnity would have assisted the claimant in the case we have just discussed. It remains to be seen whether such a meaning actually exists or not. Possibly the answer will lie in the detail of the term. And certainly it will help if the words ‘indemnify’ or ‘indemnity’ are actually used.


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Appendices Appendix 1: List of cases cited ...........................................................84 Appendix 2: List of statutes and other enactments mentioned in this report ...............................................86

APPENDICES

Appendix 1 List of cases cited

Alcoa Minerals of Jamaica Inc v Herbert Broderick (2000) BLR 727 •

Alfred Dunhill Ltd v Diffusion Internationale de Maroquinerie de Prestige SARL and others (2002) 1 All.E.R. (Comm) 950

•

Allied Maples Group Ltd v Simmons & Simmons (1995) 1 WLR 1602

•

Anglia Television Ltd v Reed (1972) 1 QB

•

Argentino, The (1888) LT PD

•

Balfour Beatty Ltd v Scottish Power plc (1994) March 23, House of Lords

•

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

•

Bliss v South East Thames Regional Health Authority (1997) ICR 700

•

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. (1996) 2 W.L.R.

•

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

•

Days Medical Aids Ltd v Pihsiang Machinery Manufacturing Co (2004) 1 All.E.R (Comm) 991

•

Deeny and Others v Gooda Walker Ltd and Others, (No 4), (1995) The Times, June 29 1995


83

APPENDICES

•

Deepak v ICI (1998) 2 Lloyds Law Reports 139

•

Dies v British and International Mining and Finance Corporation Ltd (1939) 1 KB

•

Duffen v Fra Bo Spa (1998) The Times, June 15 1998

•

Farley v Skinner (2001) 3 W.L.R.

•

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

•

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) 1 All.E.R. Comm

•

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

•

Jervis v Harris (1996) Ch. 195

•

Kuwait Airways Corporation v Iraqi Airways Co (2001) CLC

•

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

•

Perry v Sidney Phillips & Son (1982) 3 All.E.R.

•

Quadrant Visual Communications Ltd v Hutchison Telephone (UK) Ltd (1991)

•

The Times, 4 December 1991

•

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


84

APPENDICES

•

SAM Business Systems v Hedley & CO (2003) 1 All.E.R. (Comm) 465

•

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

•

Total Transport Corporation v Arcadia Petroleum Ltd (1998) CLC

•

Union Eagle Ltd v Golden Achievement Ltd (1997) 2 All.E.R. 215

•

Voaden v Champion (2002) CLC 666

•

Western Web Offset Printers Ltd v Independent Media Ltd (1995) The Times, 10 October 1995. (1996) CLC

•

Wrotham Park Estate Co v Parkside Homes Ltd (1974) 2 All.E.R.


85

APPENDICES

Appendix 2 List of statutes and other enactments mentioned in this report

In chronological order •

Misrepresentation Act 1967

•

Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (1968) (as set out in Schedule 1 to the Civil Jurisdiction and Judgments Act 1982)

•

Unfair Contract Terms Act 1977

•

Sale of Goods Act 1979

•

Supreme Court Act 1981

•

EC Directive on Unfair Terms in Consumer Contracts 1993

•

Late Payment of Commercial Debts (Interest) Act 1998


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1 85418 241 2 • 2001 The rules and regulations are complex – but can be turned to advantage. The astute practitioner will understand the importance and relevance of costs to the litigation process and will wish to learn how to turn the large number of rules to maximum advantage.

Tendering and negotiating for MoD contracts TIM BOYCE

£125

1 85418 276 5 • 2002 This specially commissioned report aims to draw out the main principles, processes and procedures involved in tendering and negotiating MoD contracts.

International commercial agreements REBECCA ATTREE

£175

1 85418 286 2 • 2002 A major new report on recent changes to the law and their commercial implications and possibilities. The report explains the principles and techniques of successful international negotiation and provides a valuable insight into the commercial points to be considered as a result of the laws relating to: pre-contract, private international law, resolving disputes (including alternative methods, such as mediation), competition law, drafting common clauses and contracting electronically. It also examines in more detail certain specific international commercial agreements, namely agency and distribution and licensing.

For full details of any title, and to view sample extracts please visit: www.thorogood.ws You can place an order in four ways: 1 Email: [email protected] 2 Telephone: +44 (0)20 7749 4748 3 Fax: +44 (0)20 7729 6110 4 Post: Thorogood, 10-12 Rivington Street, London EC2A 3DU, UK

S e e f u l l d e t a i l s o f a l l T h o r o g o o d t i t l e s o n w w w. t h o r o g o o d . w s

HR AND EMPLOYMENT LAW

Employee sickness and fitness for work – successfully dealing with the legal system GILLIAN HOWARD

£129

1 85418 281 1 • 2002 Many executives see Employment Law as an obstacle course or, even worse, an opponent – but it can contribute positively to keeping employees fit and productive. This specially commissioned report will show you how to get the best out of your employees, from recruitment to retirement, while protecting yourself and your firm to the full.

How to turn your HR strategy into reality TONY GRUNDY

£129

1 85418 183 1 • 1999 A practical guide to developing and implementing an effective HR strategy.

Internal communications JAMES FARRANT

£129

1 85418 149 1 • 2003 How to improve your organisation’s internal communications – and performance as a result.

Data protection law for employers SUSAN SINGLETON

£129

There is growing evidence that the organisations that ‘get it right’ reap dividends in corporate energy and enhanced performance.

1 85418 283 8 • 2003 The new four-part Code of Practice under the Data Protection Act 1998 on employment and data protection makes places a further burden of responsibility on employers and their advisers. The Data protection Act also applies to manual data, not just computer data, and a new tough enforcement policy was announced in October 2002.

MARK THOMAS

£69

1 85418 270 6 • 2001 Practical advice on how to attract and keep the best.

Successfully defending employment tribunal cases

1 85418 008 8 • 1997

This report will help you to understand the key practical and legal issues, achieve consensus and involvement at all levels, understand and implement TUPE regulations and identify the documentation that needs to be drafted or reviewed.

New ways of working STEPHEN JUPP

DENNIS HUNT

£95

Why do so many mergers and acquisitions end in tears and reduced shareholder value?

Successful graduate recruitment JEAN BRADING

Mergers and acquisitions – confronting the organisation and people issues

£99

£95 1 85418 169 6 • 2000

1 85418 267 6 • 2003 Fully up to date with all the Employment Act 2002 changes. 165,000 claims were made last year and the numbers are rising. What will you do when one comes your way?

t +44 (0)20 7749 4748

e [email protected]

New ways of working examines the nature of the work done in an organisation and seeks to optimise the working practices and the whole context in which the work takes place.


A practical guide to knowledge management SUE BRELADE, CHRISTOPHER HARMAN

£69

•

What you need to watch for in the Human Rights Act 1998

•

TUC guidelines

•

Example of an e-mail and Internet policy document.

1 85418 230 7 • 2003 Managing knowledge in companies is nothing new. However, the development of a separate discipline called ‘knowledge management’ is new – the introduction of recognised techniques and approaches for effectively managing the knowledge resources of an organisation. This report will provide you with these techniques.

Applying the Employment Act 2002 – crucial developments for employers and employees AUDREY WILLIAMS

£129

1 85418 253 6 • 2003

Reviewing and changing contracts of employment ANNELISE PHILLIPS, TOM PLAYER and PAULA ROME

£129

1 85418 296 X • 2003 The Employment Act 2002 has raised the stakes. Imperfect understanding of the law and poor drafting will now be very costly. This new report will: •

Ensure that you have a total grip on what should be in a contract and what should not

•

Explain step by step how to achieve changes in the contract of employment without causing problems

•

Enable you to protect clients’ sensitive business information

•

Enhance your understanding of potential conflict areas and your ability to manage disputes effectively.

The consequences of getting it wrong, for both employer and employee, will be considerable – financial and otherwise. The Act affects nearly every aspect of the work place, including: •

flexible working

•

family rights (adoption, paternity and improved maternity leave)

•

changes to internal disciplinary and grievance procedures

•

significant changes to unfair dismissal legislation

•

new rights for those employed on fixed-term contracts

•

the introduction of new rights for learning representatives from an employer’s trade union

This specially commissioned new report examines each of the key developments where the Act changes existing provisions or introduces new rights. Each chapter deals with a discreet area.

Email – legal issues SUSAN SINGLETON

The Act represents a major shift in the commercial environment, with far-reaching changes for employers and employees. The majority of the new rights under the family friendly section take effect from April 2003 with most of the other provisions later in the year.

£129

1 85418 215 3 • 2001 What are the chances of either you or your employees breaking the law? The report explains clearly: •

How to establish a sensible policy and whether or not you are entitled to insist on it as binding

For full details of any title, and to view sample extracts please visit: www.thorogood.ws

•

The degree to which you may lawfully monitor your employees’ e-mail and Internet use

You can place an order in four ways:

The implications of the Regulation of Investigatory Powers Act 2000 and the Electronic Communications Act 2000

2 Telephone: +44 (0)20 7749 4748

•

•

How the Data Protection Act 1998 affects the degree to which you can monitor your staff

1 Email: [email protected] 3 Fax: +44 (0)20 7729 6110 4 Post: Thorogood, 10-12 Rivington Street, London EC2A 3DU, UK


SALES, MARKETING AND PR

IImplementing an integrated marketing communications strategy NORMAN HART

Defending your reputation SIMON TAYLOR

£99

1 85418 120 3 • 1999 Just what is meant by marketing communications, or ‘marcom’? How does it fit in with other corporate functions, and in particular how does it relate to business and marketing objectives?

1 85418 251 • 2001 ‘Buildings can be rebuilt, IT systems replaced. People can be recruited, but a reputation lost can never be regained…’ ‘The media will publish a story – you may as well ensure it is your story’ Simon Taylor ‘News is whatever someone, somewhere, does not want published’ William Randoplh Hearst

Strategic customer planning ALAN MELKMAN AND PROFESSOR KEN SIMMONDS

£95

£95

When a major crisis does suddenly break, how ready will you be to defend your reputation?

1 85418 255 2 • 2001 This is very much a ‘how to’ Report. After reading those parts that are relevant to your business, you will be able to compile a plan that will work within your particular organisation for you, a powerful customer plan that you can implement immediately. Charts, checklists and diagrams throughout.

Insights into understanding the financial media – an insider’s view SIMON SCOTT

£99

1 85418 083 5 • 1998 This practical briefing will help you understand the way the financial print and broadcast media works in the UK.

Corporate community investment CHRIS GENASI

£75

1 85418 192 0 • 1999

BRYAN CASSIDY

Supporting good causes is big business – and good business. Corporate community investment (CCI) is the general term for companies’ support of good causes, and is a very fast growing area of PR and marketing.

t +44 (0)20 7749 4748

European lobbying guide

e [email protected]

£129

1 85418 144 0 • 2000 Understand how the EU works and how to get your message across effectively to the right people.


Lobbying and the media: working with politicians and journalists

Managing corporate reputation – the new currency

MICHAEL BURRELL

SUSAN CROFT and JOHN DALTON

£95

1 85418 240 4 • 2001

1 85418 272 2 • 2003

Lobbying is an art form rather than a science, so there is inevitably an element of judgement in what line to take. This expert report explains the knowledge and techniques required.

ENRON, WORLDCOM… who next?

Strategic planning in public relations KIERAN KNIGHTS

£69

At a time when trust in corporations has plumbed new depths, knowing how to manage corporate reputation professionally and effectively has never been more crucial.

Surviving a corporate crisis – 100 things you need to know

1 85418 225 0 • 2001

PAUL BATCHELOR

Tips and techniques to aid you in a new approach to campaign planning.

1 85418 208 0 • 2003

Strategic planning is a fresh approach to PR. An approach that is fact-based and scientific, clearly presenting the arguments for a campaign proposal backed with evidence.

£125

£125

Seven out of ten organisations that experience a corporate crisis go out of business within 18 months. This very timely report not only covers remedial action after the event but offers expert advice on preparing every department and every key player of the organisation so that, should a crisis occur, damage of every kind is limited as far as possible.

FINANCE

Tax aspects of buying and selling companies MARTYN INGLES

Practical techniques for effective project investment appraisal £99

RALPH TIFFIN

£99

1 85418 189 0 • 2001

1 85418 099 1 • 1999

This report takes you through the buying and selling process from the tax angle. It uses straightforward case studies to highlight the issues and more important strategies that are likely to have a significant impact on the taxation position.

How to ensure you have a reliable system in place. Spending money on projects automatically necessitates an effective appraisal system – a way of deciding whether the correct decisions on investment have been made.

Tax planning opportunities for family businesses in the new regime CHRISTOPHER JONES

£49

1 85418 154 8 • 2000 Following recent legislative and case law changes, the whole area of tax planning for family businesses requires very careful and thorough attention in order to avoid the many pitfalls.


MANAGEMENT AND PERSONAL DEVELOPMENT

Strategy implementation through project management TONY GRUNDY

High performance leadership £95

PUBLISHED BY CRF PUBLISHING IN ASSOCIATION WITH THOROGOOD

£282

1 85418 250 1 • 2001

0 95443 900 7 • 2003

The gap

A major new report combining solid research, case studies

Far too few managers know how to apply project management techniques to their strategic planning. The result is often strategy that is poorly thought out and executed.

and contributions from expert thinkers. This 234 page report analyses contemporary leadership for success, failure and derailment. It examines what leaders and

The answer

leadership enablers – HR/OD directors/VPs who have to

Strategic project management is a new and powerful process designed to manage complex projects by combining traditional business analysis with project management techniques.

plan, deploy or build leadership – must do. And it makes challenging recommendations.

For full details of any title, and to view sample extracts please visit: www.thorogood.ws You can place an order in four ways: 1 Email: [email protected] 2 Telephone: +44 (0)20 7749 4748 3 Fax: +44 (0)20 7729 6110 4 Post: Thorogood, 10-12 Rivington Street, London EC2A 3DU, UK

t +44 (0)20 7749 4748

e [email protected]


Commercial Litigation: Damages and Other Remedies for Breach of Contract (Thorogood Reports)

Commercial Litigation: Damages and Other Remedies for Breach of Contract

Damages and Other Remedies for Breach of Commercial Contracts (Thorogood Report)

Commercial Contracts: Drafting Techniques and Precedents (Thorogood Reports)

Internal Communications (Thorogood Reports)

TUPE Regulations (Thorogood Reports)

Contract Damages: Domestic and International Perspectives

European Employment Law (Thorogood Reports)

Discrimination Law and Employment Issues (Thorogood Reports)

Tax Planning for Businesses and Their Owners (Thorogood Reports)

VAT Liability and the Implications of Commercial Property Transactions (Thorogood Reports)

International Commercial Agreements (Thorogood Professional Insights series)

Commercial Risk Management (Thorogood Professional Insights series)

Strategic Customer Planning, 2006 Update (Thorogood Reports)

Software Contract Agreements: Negotiating and Drafting Tactics and Techniques (Thorogood Reports)

International Financial Reporting Standards (Thorogood Reports)

Websites and the Law: Protect Your Position (Thorogood Reports)

Monetary Remedies for Breach of Human Rights: A Comparative Study (Hman Rights Law in Perspective)

DIABETES – DAMAGES AND TREATMENTS

Small Damages

Small Damages

Breach of Trust

A Breach of Promise

A Breach of Promise

A Breach of Promise

Breach Of Promise

A Breach of Promise

Breach of Trust

A Breach of Promise

Breach Of Promise

Commercial Litigation: Damages and Other Remedies for Breach of Contract (Thorogood Reports)