9. Remedies - These are the precise notes of the whole course, catering for revision and examination PDF

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Lui Sze Nok CONTRACT LAW - REMEDIES 1. PURPOSE OF DAMAGES Damages are meant to compensate the injured party for any consequences of the breach of contract. The underlying principle is to put the injured party financially as near as possible, into the position he would have been in had the promise be...

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Lui Sze Nok

CONTRACT LAW - REMEDIES 1.

PURPOSE OF DAMAGES

Damages are meant to compensate the injured party for any consequences of the breach of contract. The underlying principle is to put the injured party financially as near as possible, into the position he would have been in had the promise been fulfilled.

A. Compensatory Principle i.

2.

Addis v Gramaphone Co Ltd [1909] AC 488 Lord Atkinson said: "I have always understood that damages for breach of contract were in the nature of compensation, not punishment."

CAUSATION

Legal Principle: The plaintiff must show that his loss was one which resulted from a breach of contract by the defendant (a direct causal link). An act of the defendant in a sequence of events leading to a loss might not be held to be the cause of the loss. For example, a shipowner was not liable to a charterer when, as a result of delay, the ship ran into a typhoon, as such a catastrophe may occur anywhere: The Monarch SS Co Case [1949] AC 196. A. If there are two causes of the state of affairs resulting in damage, and both causes have equal effect, one will be sufficient to carry a judgment for damages. i.

See: Smith, Hogg & Co v Black Sea Insurance [1940] AC 997 A shipowner was held liable to a charterer in damages for loss of a cargo which had been caused by a combination of perils of the sea and the unseaworthiness of the ship. The latter was sufficient to carry a claim for damages.

B. An intervening act from the defendant (acting outside the instructions) and that this breach of contract is an effective cause of the claimant’s loss. It was immaterial that other factors, including the claimant’s own conduct, contributed to the loss. i.

See: County Ltd v Girozentrale Securuities [1996] 3 ALL ER 834 The plaintiff bank had agreed to underwrite a share placement. The defendant brokers made representations to potential investors outside and in breach of the terms of the engagement letter. The bank failed to check on the status of indicative commitments obtained by the chairman of the company. A significant number of shares were not taken up, and the bank held a loss. At trial Judge had held that ‘the brokers’ representations were not of equal efficacy with the bank’s decision to accept the quality of the indicative commitments … without making proper inquiries’. Held: The bank was entitled to recover its loss from the brokers.

Hobhouse LJ said: ‘Where a plaintiff does not know of a defendant’s breach of contract and where he is entitled to rely upon the defendant having performed his contract, it will only be in the most exceptional circumstances that conduct of the plaintiff suffices to break the causal relationship between the defendant’s breach and the plaintiff’s loss. The plaintiffs’ conduct was not voluntary in the sense of being undertaken with a knowledge of its significance. Conduct which is undertaken without an appreciation of the existence of the earlier causal factor will normally only suffice to break the causal relationship if the conduct was reckless. It is the character of reckless conduct that it makes the actual state of knowledge of that party immaterial.’ Where a defendant’s breach of contract remains an effective cause of the loss, at least ordinarily, the chain of causation will not be broken. C. An intervening act of a third party which itself causes the loss to the plaintiff, or aggravates the loss, caused by the defendant's breach, will not absolve the defendant from liability if the intervening act was reasonably foreseeable. i.

See: Stansbie v Troman [1948] 2 KB 48 A painter in breach of contract after he had completed decorations, left unlocked a house, which was later burgled by thieves. The defendant was held liable for the value of goods taken as this was exactly the sort of loss he should have guarded against and foreseen.

ii.

See: Weld-Blundell v Stephens [1920] AC 956 The plaintiff employed an accountant, the defendant, to investigate the affairs of a company he had invested in. The defendant's partner negligently dropped a letter from the plaintiff in the office of the company's manager, which the manager picked up and showed to his directors, who sued the plaintiff in libel and won. The plaintiff sued the defendant for breach of contract to recover the damages he paid out in the libel action. The court declared that the claim must be dismissed since (1) the plaintiff's liability for libel existed apart from the contract, and (2) the loss was not caused by breach of contract, but by the act of the company's manager showing the letter to the directors. This was an act the defendant could not have foreseen.

See: More cases C&P Haulage v General Principle: Middleton Damages can only be awarded upon breach of contract (direct casual link) The loss was caused by a term in the license agreement instead by a breach of contract by the garage owner (wrongful termination) Worth v Tyler

Legal Principle: Breach must be at least “an” actual cause of the loss P’s loss caused partly by the D’s breach; partly by the fact that the P lacked financial

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resources to mitigate his loss  Able to recover damages v Legal Principle: Even if the breach was lesser of the other two contributing causes of loss.  Damages still recoverable

County Ltd Girozentrale Securities South Australia Facts: Asset Management  Breach through negligent over-valuation of a property Corp v York  Other contributing cause: a severe fall in property prices (an adverse shift in the Montague Ltd market) Held:  D’s liability should be limited to the direct consequences of the breach  A severe fall in property prices was not a direct consequence of the D’s breach  Full amount not recoverable Ocean Tramp Third part intervention: where a third party contributed to the loss in addition to the D’s Tankers Corp v V/O breach, court may consider: Sovfracht (1) The extent to which the intervention is foreseeable, and (2) Whether appropriate actions could have been taken to avoid the consequences of such (The Eugenia) intervention If both says yes  third party intervention does not breach the chain of causation Facts: Charterers of a vessel breached the charterparty by sailing the vessel into the Suez Canal (considered a “danger zone” at that time) A third party closed the canal  loss exacerbated  Damages paid in full

Contributory negligence  

P’s own negligence breaks the chain of causation (a novus actus interveniens)  relieve the D from having to pay damages at all P’s own negligence is only a contributory factor to the loss sustained as a result of D’s breach of contract  damages proportionately reduced

Law Amendment and Reform [s. 21(2)] (Consolidation) Ordinance “Where any person suffers damage as the result partly of his own fault and (Cap. 23) partly of the fault of any other person… the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage…” “Fault means negligence, breach of statutory duty or other act or omission which gives rise to liability in tort or would, apart from this section, give rise to the defence of contributory negligence.” The nature of obligation   3

Ability for the D to reduce the amount of damages payable as a result of the P’s contributory negligence depends on the nature of the contractual obligation he has breached 3 categories of contractual obligation set out by Hobhouse J in Forsikringsaktieselskapet Vesta v Butcher

Category 1: Strict contractual obligations Barclays Bank plc v  Where the D has breached a strict contractual obligation  damages cannot be reduced to take into account the P’s own contributory negligence Fairclough Building Ltd* 

Rationale: Negligence by P is irrelevant to the D’s strict contractual liability

Category 2: Qualified contractual obligations (exercise reasonable care and skill), with no independent duty of care owed in the tort of negligence De Meza & Stuart v Apple van  Debatable whether damages can be reduced  The matter not resolved in this case, though the court at first instance stated Straten Shena & Stone that damages could so be reduced

Henderson v Syndicates Ltd

Law Commission of England and Wales recommended that damages should be reduced to take account of a P’s contributory negligence under this category Merrett Ever since the recognition of concurrent liability, unlikely to make a difference In this case, court found that it falls within category 3  

Therefore, it is unclear whether damages can be reduced In any event, such a situation in category two is unlikely to arise

Category 3: qualified contractual obligations with an independent duty of care owed in the tort of negligence Forsikringsaktieselskapet Vesta Hobhouse:  According to the Law Reform (Contributory Negligence) Act 1945, v Butcher damages under this category would be reduced to take into account the P’s own contributory negligence Same rule should apply to claims based on contract or tort where the act complained involves the breach of a duty of care

 AB Marintrans v Comet Shipping Co Ltd International Trading Co Ltd v Hong Kong position unclear Lai Kam Man (Hong Kong case) Facts: -

Solicitor negligently handled a property purchase transaction Client seek damages for breach of a duty under the contract for the solicitor’s services Solicitor: P was partly responsible for their own losses and sought reduction in damages to reflect this It was found that P had not been contributory negligent

Approved the judgment in the High Court of Australia case of Astley v Austrust Ltd 

Common law does not allow for contractual damages to be reduced to reflect the P’s own negligence (even LARCO s.21 did not change this position)

(No case)

Yet, there is authority to suggest that the Hong Kong courts accept that where an employee’s own negligence contributes to his injury at work, his damages for negligence and breach of implied terms to provide a safe working environment may be reduced to reflect his contributory negligence Hong Kong courts: depend on which context the claim is brought -

Industrial accidents: Cannot be reduced Non-industrial accidents: Can be reduced

But there is no convincing reason for such distinction 4

3.

REMOTENESS OF DAMAGE

A. Not every type of damage caused to the plaintiff as a result of the breach of contract will be recoverable. If the loss flowing from the breach of contract is too remote then it cannot be recovered. Losses, to be recoverable, must have been within the reasonable contemplation of the parties. See: Hadley v Baxendale (1849) 9 Exch 341 The crankshaft broke in the Claimant’s mill. He engaged the services of the Defendant to deliver the crankshaft to the place where it was to be repaired and to subsequently return it after it had been repaired. Due to neglect of the Defendant, the crankshaft was returned 7 days late. The Claimant was unable to use the mill during this time and claimed for loss of profit. The Defendant argued that he was unaware that the mill would have to be closed during the delay and therefore the loss of profit was too remote. Held: The Court accepted the defendant’s submission that the loss was too remote and should not be recoverable. It would have been an entirely different position if the defendants had been made aware that the mile would be inoperable without the part but they were not aware that this was the only crankshaft that the claimant possessed.

Hadley v Baxendale test of foreseeability Damages are recoverable under two limbs under Hadley v Baxendale: (i) Limb One: Normal loss: Common knowledge [ordinary course of thing] Damages which may fairly and reasonably be considered as arising naturally from the breach; (ii) Limb Two: Special loss: Actual knowledge [awareness/special knowledge] Damages which may reasonably be supposed to have been in the contemplation of both the parties, as liable to result from the breach, at the time of the contract was made. If any special circumstances exist which were actually communicated to the Defendant, the Claimant may recover any damages which would ordinarily follow from a breach of contract under the special circumstances communicated. Further Information: Economic justification for the test Under the first limb: Where the party is aware that he is liable for the losses occurring naturally from his potential breach 

Encourage risk sharing: Take appropriate steps to avoid such loss/ taking out insurance

Under the second limb: Where the party is aware (has knowledge) that he is made responsible for the “special losses”. 

Encourage pre contractual-disclosure



Encourage risk sharing: Assess scope of liability and inform choice as to appropriate insurance

B. Supporting case that restates the same principle governing the measure of damages: 5

See: Victoria Laundry v Newman Industries [1949] 2 KB 528 The claimant purchased a large boiler for use in their dying and laundry business. The defendant was aware that they wished to put it to immediate use and knew the nature of their business. The delivery of the boiler was delayed in breach of contract and the claimants brought an action for (1) the loss of profit which the boiler would have made during the period in which the delivery was delayed. The claim contained a sum for a particularly (2) lucrative contract which they lost due to the absence of the boiler. Held: The claimants could only recover losses which were in the reasonable contemplation of the parties which included the loss of additional profit that could be expected from the lack of use of the boiler, but the claimant could not recover for the loss of revenue from the exceptionally lucrative contract since the defendant was unaware of this contract. This was because the defendants were aware that the claimant’s aimed to increase their business by acquiring another boiler, thus (1) the loss of additional income was a ‘reasonably foreseeable’ consequence of breach, whereas there was nothing to suggest that the defendants were aware of the claimants’ plans concerning (2) governing contracts so this was not recoverable. Restated the test in Hadley v Baxendale Facts: damages for 1 2

General loss of business during the delay Loss of highly lucrative Government contracts

Held: Ds knew the boiler was intended for immediate use Reasonably foreseen that late delivery would lead to loss of business Ds unknown about potential lucrative contracts Could not reasonably have foreseen such loss of profits  P could only recover general loss of profit

Court’s approach in this case: making two subdivisions of the corresponding two limbs of the rule in Hadley v Baxendale (1) Dealing with losses that anyone could reasonably foresee (2) Dealing with losses that are foreseeable given the special knowledge of the defendant

Given the D’s knowledge at the time of contract  Whether the loss is reasonably foreseeable  And whether can be said to be in the reasonable contemplation of the parties Asquith LJ: (on the contractual test of foreseeability) The test would be same as that for foreseeability in the tort of negligence P may recover “such part of the loss actually resulting as was at the time of contract reasonably foreseeable as liable to result from the breach” C. The principles relating to remoteness of damage in concerning ‘level of probability’ were further considered in the House of Lords and given greater refinement in: See: Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350 A contract for the carriage of a cargo of sugar was delayed by 9 days. The market price of sugar dropped following this delay due to the arrival of another cargo of sugar. The claimant sought to recover the difference 6

from the defendant for their breach of contract. The defendant argued the damages were too remote since it was just as likely that the market price could increase. Held: Under the second limb in Hadley v Baxendale it was only necessary that the losses were in the reasonable contemplation of the parties as a possible result of the breach. There was no requirement as to the degree of probability of that loss arising. Since the defendant must have known that market prices fluctuate, the loss would have been in his contemplation as a possible result of the breach. Doubted the formulation of remoteness test in Victoria Lundry v Newman A. Disapproval of “Victoria Laundry’s” language of foreseeability (Lord Reid): 1. Use of phrases such as “a serious possibility”, “real danger” or “on the cards” for testing the foreseeability of loss  If such phrases formed the basis of the remoteness test, Hadley v Baxendale would be decided differently  Such a test would extend liability for breach of contract beyond what is reasonable and desirable, which would not be welcomed by the business community  Preferred to use “not unlikely” instead (See Davies v Taylor) 2. Use of the phrase “liable to result”  The phrase is vague and would lead to misunderstanding The correct interpretation: Hadley v Baxendale; foreseeability and contemplation o o

Results were likely because they would happen in the great majority of cases, not because it was foreseeable  in the reasonable contemplation of the parties Results were unlikely because they would only happen in a small minority of cases, not because it was unforeseeable  not in the reasonable contemplation of the parties

Therefore, not all loss that is reasonably foreseeable = arising naturally from breach/ in the contemplation of the parties (See Tsang Cheung Kit v Hong Kong Housing Authority) There should be no requirement as to the degree of probability of loss arising as long as the loss would have been in the contemplation of the party as a result of the breach. B. Disapproving the use of test of foreseeability in tort to be applied in contract  Remoteness test in tort is wider: D will be liable for any type of damage that is reasonably foreseeable (requires a mere possibility only)  Remoteness test in contract should be stricter (requires a serious possibility)  Reasons: In contract, a party can direct the other party’s attention to protect himself against unusual risk in the contract. In tort, there is no such opportunity for the injured party to protect himself in this way The effect of "the two limbs" in Hadley v Baxendale is as follows: 1) Losses which occur "in the ordinary course of things" only are recoverable under the first limb. i.

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See: Pilkington v Wood [1953] Ch 770 The plaintiff bought a house in Hampshire and his solicitor, in breach of contract, negligently failed to notice that the house had a defective title. The solicitor was held liable for the amount by which the house's value had been lessened by the title not being good. The plaintiff shortly afterwards took up work in Lancashire and suffered added loss as the house was hard to resell. However, the solicitor was not liable for the latter loss as he could not anticipate that the plaintiff would shortly move.

2) The defendant's knowledge of special circumstances under the second limb is not in itself sufficient to make him liable. There must be knowledge and acceptance by the defendant of the purpose and intention of the plaintiff. ii.

See: Horne v Midland Railway (1873) LR 8 CP 131 The defendant contracted to carry a consignment of shoes to London by 3 February, but delivered a day late. As a result of the delay, the plaintiff lost an opportunity of selling shoes at an exceptionally high price. It was held that the defendant was not liable for this loss. Although he knew the plaintiff would have to take the shoes back if they were no...