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DAMAGES 1KEY POINTSReadingFisher & Greenwood Remoteness 15.1: Mental Distress 15.1:Hall Remoteness 21.14-21: Mental Distress 21-21.REMEDIES FOR BREACH OF CONTRACTDAMAGESA. REMOTENESS – These rules determine the kind of loss P should be compensated for. It is generally recognised that it woul...

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DAMAGES 1 KEY POINTS Reading Fisher & Greenwood Remoteness 15.1.2: Mental Distress 15.1.3: Hall Remoteness 21.14-21.40: Mental Distress 21.98-21.100

REMEDIES FOR BREACH OF CONTRACT DAMAGES A.

REMOTENESS – These rules determine the kind of loss P should be compensated for. It is generally recognised that it would be unfair to make D liable in every case for all the loss that flows from a breach. For example a taxi fails to show up to take P to an important business meeting. Due to this P loses a HK$5 million business deal. Unfair to make taxi driver liable for this loss. The classic test to help judges decide where to draw the line was laid down in HADLEY v BAXENDALE the leading case on remoteness of damages in contract in the common law world. P can be compensated for such losses which arise (1) Naturally i.e. according to the usual course of things from the breach. Branch one covers normal loss - loss which parties are presumed to have contemplated. Nothing exceptional is known by D. (2) Losses which may reasonably be supposed to have been in contemplation of both parties at the time they made the contract as the probable result of the breach. Branch two covers abnormal loss - where D at time contract is made has knowledge of special circumstances and must have contemplated loss beyond usual course of things was "not unlikely" to result. Rules of remoteness not as wide as in tort where test is - is the loss reasonably foreseeable. Reid in HERON II stated it was reasonably foreseeable work in mill In Hadley V Baxendale might be stopped by the delay but it was not in D's contemplation that this was "quite likely to happen” In Heron II another phrase used was that the loss had to be a “serious possibility” Also in contract amount of knowledge D had is judged at the time the contract is made and not as in tort when the breach occurs .Reason encourages D to disclose unusual risks to P before the contract is made so that P can decide whether he can afford to take on this risk and make the contract or decide to take on extra insurance and pass the cost of this on to D through a higher price. Cases illustrating remoteness rules (1) FIRST BRANCH - where D has no knowledge of special circumstances. VICTORIA LAUNDRY v NEWMAN: BALFOUR BEATTY v SCOTTISH POWER: TRANSFIELD SHIPPING v MERCATOR SHIPPING (THE ACHILLEAS) 2008 HL. HK example CHIU CHIT v BANK of CHINA [2010] HKEC 119

2)

SECOND BRANCH - where D had knowledge of special circumstances at time he entered into contract. TSANG CHEUNG KIT V HONG KONG HOUSING AUTHORITY

Not all such knowledge can be taken into account. Knowledge of such extra loss got to be communicated in such a way that it is clear that D is assuming liability for it if he breaks the contract e.g. not sufficient that it is communicated in casual conversation KEMP v INTASUN HOLIDAYS. When the issue of remoteness in contract has been before the English House of Lords some of the judges have considered the two branch approach of Hadley v Baxendale unnecessarily complicated. In JACKSON V ROYAL BANK OF SCOTLAND 2005 Lord Walker made a general statement about Hadley v Baxendale. He felt that the division into two branches ordinary and special loss was unhelpful. He preferred the approach of Lord Reid in the Heron II where he said there were not two rules or two different tests. It is worth repeating what Lord Reid said “The crucial question is whether, on the information available to the defendant when the contract was made, he should or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation” Lord Walker was of the view that there should therefore be just one rule taking into account the information available to the Defendant at the time the contract was made would a reasonable man in his position regard this loss as sufficiently likely to result from the breach By way of example Lord Walker took the facts of Hadley v Baxendale and the first branch of the rule that P can recover for all the loss that arises naturally – the usual course of things from the breach. He felt that this rule about “ordinary loss” begs the question as in applying the rule you needed to know what knowledge was possessed by the D at the time the contract was made. Thus if all the carrier knew when the contract was made was that he was transferring goods from Gloucester to Greenwich the loss of business profit was not a natural loss. But if the carrier had known the broken crankshaft was to be used as a model for a new one which was urgently required for the only steam engine in the mill and this engine was standing idle until the new crankshaft arrived, then the loss of business profit was a natural consequence. See also the HK case CHEN v LORD ENERGY where it was considered not helpful to attempt to put the loss into one of the two branches The established views on remoteness have been complicated by PARSONS v UTTLEY INGHAM. Where the Court of Appeal applied the principle of Hughes v Lord Advocate from tort and held that if a particular type of loss is in contemplation of parties as a serious possibility it did not matter the extent of that loss was greater

than that contemplated. (See also WROTH v TYLER and BROWN v KMR SERVICES). Can this be reconciled with VICTORIA LAUNDRY v NEWMAN? The problem is that the rules as to whether a loss is a separate type of loss are very imprecise giving judges considerable discretion in deciding how to classify a particular loss. See THE ACHILLEAS case where the H of L decided that the exceptional loss that the owner suffered when a ship under charter was returned late was a separate type of loss and too remote. Furthermore a radically different approach to remoteness of damage was taken by Lord Hoffmann in THE ACHILLEAS where he stated a contract breaker should be only be liable for losses he had assumed responsibility for. The court he said “must first decide whether the loss for which compensation is sought is of a “kind” or “type” for which the contract-breaker ought fairly to have accepted responsibility” Some quotes from Hoffmann “It must in principle be wrong to hold someone liable for risks for which the people entering into such a contract in their particular market would not reasonably be considered to have undertaken”: paragraph 12 (emphasis added). “11. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common.” Hoffmann’s approach has been followed in HK by the CFA in RICHLY BRIGHT INTERNATIONAL v DE MONZA INVESTMENTS LTD [2015] HKEC 827. “With respect ,the analysis in the Achilleas regard the concept of assumption of responsibility is compelling . It represents a logical extension of the rule in Hadley v Baxendale…. Being firmly grounded in the contractual principle governing the relationship between the parties, the assumption of responsibility concept provides a principled basis for distinguishing between losses which are or are not too remote .We unhesitatingly adopt it as representing the law in Hong Kong” Ma CJ para 41 The experience in England is that judges have relegated Hoffmann‘s approach to an exception. In SUPERSHIELD v SIEMENS BUILDING TECHNOLOGIES FE LTD [2010] EWCA Civ 7 Toulson LJ referred to Hadley v Baxendale as the “standard rule” but went on to say “there may be cases where the court, on examining the contract and the commercial background decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties” However the potential importance of Hoffmann’s approach is that a loss which is clearly not too remote under branch 1 of Hadley v Baxendale – obvious lossmay be declared too remote under the ‘assumption of responsibility’ approach e.g. because the standard approach would result in giving more generous

damages that the general understanding of the industry that the parties are in. See JOHN GRIMES PARTNERSHIP v GUBBINS [2013] EWCA civ 37.Will the HK courts go the same way. Does this alternative approach not end up in making an uncertain area of the law even more uncertain? (This was the view of Baroness Hale now a NPJ CFA) in the Achilleas who stated that “questions of assumption of risk depend upon value judgments” and would “introduce much room for argument.” Remoteness of Damage Summary Here is my conclusion on the state of the law on remoteness today. Judges take the view that there is a presumption that if a contracting party should objectively know that a particular type of loss is a serious possibility if he breaks the contract then he intended to bear the risk of that loss. Also if P actually knows a particular type of loss is likely to result and is still happy to make the contract the logical inference is that P intends to bear the risk of that loss otherwise P would put something in the contract to protect himself. Remoteness is similar to the law on frustration in that the principle is all about the judges deciding what was the risk each contracting agreed to bear when the reality is that in most cases neither party had actually considered the matter at the time the contract was made. Therefore to some extent a legal fiction! What makes this area of law very unpredictable and thus encourages litigation is that the remoteness test gives the judge considerable degree of flexibility, such as in deciding whether a particular loss is a separate type and thus judges can use the Hadley v Baxendale rule to draw a line between losses they consider reasonable (Parsons v Uttley Ingham) and losses they consider unreasonable (Victoria Laundry v Newman; The Achilleas). Therefore judges use the remoteness rules to allocate the risk of loss in what they consider to be a fair way in order to achieve a just outcome. Thus in Achilleas faced with a loss that seemed obvious under basic branch one principles but the judges considered unfair to impose on the charterer, by either applying the assumption of responsibility approach or by rather artificially classifying the loss as being of a different type from that contemplated by the parties, the court was able to come to what it considered was a fair conclusion. Postscript A good summary of the law on remoteness of damage in Hong Kong today was given by Lo J in MULTIPLE SURVEYORS LTD v MULTIPLE SURVEYORS & CONSULTANTS LTD - [2017] HKCU 2766 An award of damages for breach of contract serves to place the innocent party, so far as a monetary award can do so, in the same position as if the contract had been performed in accordance with its terms;

(b) To avoid a defendant being made liable for all losses caused by a particular breach regardless of the improbability or remoteness of any item of loss, rules on remoteness of damages have been put in place; (c) Under the seminal rule in Hadley v Baxendale (1854) 9 Ex 341 (applied in Chen v Lord Energy Ltd (2002) 5 HKCFAR 297), damages are limited to those which may be regarded as being within the parties’ contemplation. As Alderson B held in Hadley v Baxendale (at 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 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 … ” (emphasis added)

(d) Both limbs of the Hadley v Baxendale test are the practical expression of a single principle that parties should only be liable for damages which were when they contracted within their contemplation in the event of a breach, and both limbs turn on an objective assessment of what the contract-breaker knew or ought to have known; (e) In The Achilleas [2009] 1 AC 61, the majority of the House of Lords (Lords Hoffmann, Hope and Walker) held that, in appropriate cases, it is also necessary to examine the contract breaker’s assumption of responsibility in a transaction in order to decide whether it is or is not proper to hold him liable for loss of a particular type; (f) Under this approach, whether a contract breaker has assumed responsibility for a particular type of loss is decided by viewing the nature and object of the contract against its commercial background. Similar to the approach for determining whether a contractual term should be implied, one ascertains by objective indicia whether the parties should be taken to have intended that the relevant type of loss flowing from breach of the contract falls within the scope of the contract breaker’s assumption of responsibility; and (g) The analysis in The Achilleas regarding the concept of assumption of responsibility is compelling and represents a logical extension of the rule in Hadley v Baxendale. It provides a principled basis for distinguishing losses which are or are not too remote, and was adopted by the Court of Final Appeal as representing the law in Hong Kong.”

The use of the assumption of responsibility principle in appropriate cases was also recognised in WONG WING MAN v LAM YUEN YEE [2019] HKCFI 2848 “It is also trite law that where two parties have made a contract which one of them has broken, the damages which the other party ought to receive should be such as may fairly and reasonably be considered either arising naturally from such breach 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. In appropriate cases, it may also be necessary to examine the contract breaker's assumption of responsibility in a transaction in order to decide whether it is or is not proper to hold him liable for loss of a particular type (see Richly Bright International Ltd v De Monsa Investments Ltd (2015) 18 HKCFAR 232 at §§15-41).”para. 16 My comment on the above summary re (e) when is it an appropriate case to apply The Achilleas/Richly Bright assumption of responsibility approach? No guidance is given making the existing law very uncertain. B.

NON PECUNIARY LOSS

Judges feel more at ease at awarding damages for financial loss as it is easily quantifiable This explains the following restrictions on awarding damages for nonfinancial loss (1)

Mental Distress

Rules used to be that, irrespective of remoteness, damages could never be recovered for injured feelings and that while P could recover for the physical inconvenience breach of contract caused (e.g. HOBBS v LONDON & SW PY – damages awarded for physical inconvenience of having to walk five miles home. There is no need to establish that P suffered some medically recognised illness or injury as a result of the inconvenience FARLEY v SKINNER HL 2001), no damages could be recovered for the mental distress e.g. annoyance, disappointment which the breach of contract caused. This is no longer the law as in JARVIS v SWAN TOURS1973 C.A.(followed in Hong Kong in RONALD CLAUD HARDWICK v SPENCE ROBINSON ) decided damages can be given for mental distress in contracts, such as to provide a holiday or entertainment, where parties must have contemplated that on breach there would be mental distress e.g. disappointment. It is now clear law that such damages can be awarded in consumer contracts if an important objective of the contract is to provide pleasure FARLEY v SKINNER 2001 HL. (e.g. RUXLEY v FORSYTH – building of a swimming pool or to provide freedom from distress HEYWOOD v WELLERS . Before FARLEY v SKINNER it had to be the main objective. As a matter of policy it will not be extended outside this area e.g. to employment contracts BLISS v S.E. THAMES REGIONAL HEALTH AUTHORITY or commercial contracts HAYES v DODD. See also REGUS v EPCOT SOLUTIONS [2007] where the court refused to apply the rule to a business agreement to hire

offices and distress was caused when in breach of contract the air conditioning failed to work properly. However it is sometimes difficult to predict which situations come within the exception- in both ALEXANDER v ROLLS ROYCE a contract to repair a Rolls Royce and WISEMAN v VIRGIN ATLANTIC [2006] a contract for a plane ticket, mental distress damages were denied. (2)

Injury to Reputation

While damages can be recovered for pecuniary loss flowing from a loss of reputation e.g. loss of profits AERIAL ADVERTISING v BACHELORS PEAS. damages cannot be recovered merely for injury to reputation. ADDIS v GRAMOPHONE CO, applied in MALIK v BCCI. Two exceptions (1) businessman can recover damages for injury to his business reputation where bank refuses to honour his cheque when he has sufficient funds to meet it. This has now been applied to consumers because of the adverse effect it could have on their credit rating KPOHAROR v WOOLWICH BUILDING SOCIETY. (2) Actor, author can recover damages for loss of publicity i.e. loss of chance of enhancing his reputation but not for injury to his existing reputation e.g. in HERBERT CLAYTON v OLIVER - actor was able to recover damages for loss of publicity when C broke a contract to give him leading role in his musical at London Hippodrome. Again in SADLER V REYNOLDS a journalist who had lost the chance to write a ghost autobiography was awarded compensation for the loss of the opportunity to enhance his reputation in this market. Because of the difficulty of accurately calculating this loss only £1,000 was awarded....