DEVELOPMENTS IN THE LAW RELATING TO ‘CONSEQUENTIAL LOSS’
Anthony Jucha, Jucha Legal
1. DAMAGES
2. REMOTENESS
3. HADLEY & BAXENDALE
4. FIRST LIMB
5. SECOND LIMB
6. EXCLUSION CLAUSES
7. CONSTRUCTION OF ‘CONSEQUENTIAL LOSS’
8. ‘NATURAL MEANING’ AND TWO (WRONG) SCHOOLS OF THOUGHT
9. THE ‘CROUDACE VIEW’
10. THE ‘MCGREGOR VIEW’
11. LAMENT?
12. UNCERTAINTY
13. DRAFTING
14. DRAFTING FOR SUPPLIER
15. DRAFTING FOR CUSTOMER
16. POST SCRIPT - A WORD ABOUT EXCLUSIVITY IN SUPPLY AGREEMENTS
1. DAMAGES
1.1 “In contract ‘where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.’”[1]
1.2 “[35-10] Protection of expectation. It is common, when damages are awarded in contract cases, for assessment to protect the plaintiff’s expectation of receiving the defendant’s performance… Thus… the plaintiff is entitled to be placed in the same situation as if the contract had been performed usually means that the plaintiff will recover an ‘expectation loss’.”[2]
1.3 “[35-11] Reliance damages. It is not at all uncommon for a plaintiff to expend money in the performance of a contract. If the defendant breaches the contract the plaintiff may find that the expenditure is wasted and may therefore seek to recover the wasted expenditure as damages.”[3]
1.4 “The main reason that the concept of reliance damages does not figure prominently in the cases is that generally a plaintiff is adequately compensated by damages awarded on an expectation basis, for loss of the bargain.”[4]
2. REMOTENESS
2.1 “[35-23] The remoteness concept. The plaintiff’s loss or damage, even if caused by the defendant’s breach, must not be too remote.”[5]
2.2 “At one time it seems to have been thought that the principles of law governing remoteness of damage are the same in tort and contract. However, in Koufos v C Czarnikow Ltd the House of Lords decided that the test of remoteness in contract is narrower than that applied in tort.”[6]
2.3 “It was necessary that some limitation should be introduced, and this task has been achieved in Hadley v Baxendale in 1854, the most celebrated case in the field of contract damages.”[7]
3. HADLEY & BAXENDALE
3.1 “We think the proper rule in such a case as the present is this: where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”[8]
3.2 “[35-09] General and special damages. Damages under the first limb of the rule in Hadley v Baxendale are sometimes described as ‘general’ damages, and those awarded under the second limb ‘special’ damages. Accordingly, ‘general’ damages are those which the law presumes to flow ‘naturally’ from the breach. ‘Special’ damages are of an exceptional nature and only recoverable where the defendant had prior knowledge of the likelihood that the loss would be suffered.”[9]
4. FIRST LIMB
4.1 “…arising naturally… according to the usual course of things…”[10]
4.2 “[35-24] How remote? Under the first limb of the rule in Hadley v Baxendale the damages claimed must flow ‘according to the usual course of things’ from the defendant’s breach. But what degree of certainty is actually required? Over the years the courts have tried to reformulate (or at least paraphrase) Alderson B’s statement, but without any obvious success…”[11]
4.3 “serious possibility” [12]
4.4 “grave risk” [13]
4.5 “reasonably foreseeable”[14]
4.6 “likely to result”[15]
4.7 “on the cards”[16]
4.8 “not unlikely”[17]
4.9 “liable to result”[18]
4.10 “serious possibility”[19]
4.11 “real danger” [20]
4.12 “The balance of Australian authority would seem to accept Lord Reid’s approach”[21] (being: ‘not unlikely’).
4.13 “The discussion in the Koufos case is hardly conclusive in favour of any one of the various expressions used. It does, however, indicate that a fairly high degree of probability is required in contract, certainly higher than that applied to damages claims in tort.”[22]
4.14 “[35-25] Losses in the ‘usual course of things’. Because each contract is unique, in one sense only limited assistance can be gained from previous cases on what is, or is not, to be regarded as in the usual course of things.”[23]
5. SECOND LIMB
5.1 “[35-27] Degree of knowledge required. A plaintiff who claims in respect of loss or damage which does not arise in the ‘usual course of things’ must bring the claim within the second limb of the rule stated in Hadley v Baxendale, by relying on knowledge actually possessed by the defendant.”[24]
5.2 “Now, if the special circumstances under which the contract was actually made were communicated by the claimants to the defendants and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, would only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract.”[25]
5.3 “[35-28] Acceptance of the risk. The most difficult aspect of the second limb of the rule stated in Hadley v Baxendale is the extent to which the defendant must have agreed to accept the risk of the damage. At one time it seems to have been thought that there must be a term of the contract indicating the defendant’s acceptance of the risk. Although this view has been rejected, there is, of course, nothing to stop the parties expressing their agreement on what is to be regarded as foreseeable. Where there is no express agreement it has been said that the:
‘Basis of the defendant’s liability … is his implied undertaking to the plaintiff to bear it. His actual knowledge of the special circumstances is relevant as one of the factors from which his undertaking can be implied. The second factor is also necessary, viz, that he should have acquired this knowledge from the plaintiff, or at least that he should know that the plaintiff knew that he was possessed of it at the time the contract was entered into and so could reasonably foresee at the time that an enhanced loss was liable to result from a breach. Where both these factors are present, the defendant’s conduct in entering into the contract without disclaiming liability for the enhanced loss which he can foresee gives rise to the implication that he undertakes to bear it.’”[26]
5.4 “(1) It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed. The purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule. Hence,
(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.
(3) What was at the time reasonably so foreseeable depends on the knowledge then possessed by the parties, or, at all events, by the party who later commits the breach.
(4) For this purpose, knowledge ‘possessed’ is of two kinds: one imputed, the other actual. Everyone, as a reasonable person, is taken to know the ‘ordinary cause of things’ and consequently what loss is liable to result from a breach of contract in that ordinary course. This is the subject matter of the ‘first rule’ in Hadley v Baxendale. But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses, of special circumstances outside the ‘ordinary course of things’, of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the ‘second rule’ so as to make additional loss also recoverable.
(5) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result.
(6) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough … if he could foresee it was likely so to result. It is indeed enough if the loss (or some other factor without which it would not have occurred) is a ‘serious possibility’ or a ‘real danger’. For short, we have used the word ‘liable’ to result. Possibly the colloquialism ‘on the cards’ indicates the shade of meaning with some approach to accuracy.”[27]
6. EXCLUSION CLAUSES
“In order to rebut the presumption implied by actual knowledge the defendant must show that there was no acceptance of the risk of liability for the damage. In commercial contracts this may be achieved by a suitably drafted exclusion clause.”[28]
7. CONSTRUCTION OF ‘CONSEQUENTIAL LOSS’
7.1 “In Holt & Co v Collyer Fry J was required to construe the word ‘beerhouse’ in a lease. It was, he said:
‘Important to the public that the meaning of the word ‘beerhouse’ should be ascertained once for all, because then persons who have to draw instruments relating to businesses of this sort will know on what principle to proceed, and counsel who are called upon to advise whether there is or not a case to proceed upon at law will know how to advise.’”[29]
7.2 “The passage illustrates a belief that words have ‘absolute and constant referents’.[30] It is seldom ventilated today. If the modern cases on the interpretation of contracts stand for anything, it is that the meaning of the words in a contractual document vary according to the context in which they are used. Yet, the cases interpreting the expression ‘consequential loss’ in exclusion clauses come close to emulating the non sequitur of Fry J.”[31]
7.3 “The starting point for constructing any contract…
…the question to be answered always is, “What is the meaning of what the parties have said?” not, “What did the parties mean to say?” … it being a presumption juris de jure … that the parties intended to say that which they have said.” [32]
7.4 “The construction rule in relation to expressed intention is therefore a legal presumption ‘that the parties intended to say that which they have said’. This is not, however, an entirely promising start.”[33]
7.5 “Take, for example, the use of labels. Lawyers love labels. They are frequently used in contracts in the interests of economy of effort. Obvious examples are words such as ‘condition’, ‘licence’, ‘agent’ and ‘indemnity’. Clearly, such words are regarded as having particular legal significances. Their use is suggestive of an express intention in relation to the legal effect of the contract. But the usage must be accurate. Merely attaching a label does not require a court to treat the contract as having the characteristics which might be thought to be inherent in the legal concept with which that label is frequently (or most naturally) identified. Conversely, an express denial that a particular legal label can be applied to the parties’ contract (such as ‘lease’) or relationship (such as ‘agency’) may be incorrect. Therefore, although the expressed intention of the parties in relation to the legal effect of a contract may appear to be clear, a court is not bound to give effect to it.”[34]
7.6 “There may be a presumption that the parties have chosen the right label, and intend the legal consequences which flow from that, but the label itself cannot be conclusive. It is probably more difficult to rebut the presumption in favour of expressed intention in the context of linguistic meaning than where legal effect is at issue. Although in each context the question is one of intention, where legal effect is at issue intention must be determined - with due regard to prior authority - as a matter of substance. Therefore, if a contract described as a ‘licence’ confers a right of exclusive possession it will have the legal attributes of a lease (or agreement to lease). That will be the legal effect of the contract notwithstanding the intention apparently expressed by the parties.”[35]