Week 1 Lecture 2 Causation and Remoteness in Contract PDF

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Week 1 Lecture 2 Causation and Remoteness in Contract

The Damages Assessment ‘Process’ 1. 2. 3.

Causation – was the damage claimed by the plaintiff caused by the breach? Remoteness – is the damage within the bounds of remoteness or ‘scope of liability’? a. Does the law think the defendant should be responsible for the plaintiff’s loss? Assessment issues – measures of damages: ‘reliance loss’ v ‘expectation loss’ and the different ways of measuring ‘expectation loss’ a. What position the party would have been in but for the breach. Contract measure is forward looking. What position the party would have been if the contract had been performed. Default position, both parties would have been in better position if the contract performed.

Causation in Contract What is the purpose of ‘causation’ principles? (litigated more in tort law for causation problems) - To establish an historical connection between breach and loss - To appropriately limit a wrongdoer’s responsibility o Worth thinking about rules of causation different to rules of remoteness. Difficult to arrive at an intellectually satisfactory set of rules which can govern causation and produce intuitively satisfactory results in ‘hard cases’ The result is arguably that the present rules are the product of a pragmatic but conceptually unsatisfying compromise (same as tort for the principles of causation in contract) - Common law approach – apply ‘but for’ test to decide whether something is ‘a’ cause, limited by reference to ‘common sense’ and ‘policy’: see March v Stramare, which held: o Whether or not a subsequent event breaks the cause of chain should be assessed by reference to the standard of “common sense” and policy o (Legally relevant cause) -

How to deal with intervening causes? Compare mere preconditions to the occurrence of the loss? o E.g. Voluntary human action? Of other people coming in between breach and loss will be intervening cause depending on how foreseeable it was. o E.g. Unforeseeable natural or unnatural events? Earthquake will be Novus actus intervenes

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Section 5D, Civil Liability Acts: when does it apply to contract claims? Example of need to attention to detail in applying statues (when the duty that has been breached in contract, is the one to exercise due care and skill)

5D General Principles (1) A determination that negligence caused particular harm comprises the following elements: a. That the negligence was a necessary condition of the occurrence of the harm (“factual causation” or but for test) and b. That it is appropriate for the scope of the negligent person’s liability to extend to the harm so caused (“scope of liability”) Question – Is ‘scope of liability’ just a synonym for ‘remoteness’?? See Lord Hoffmann’s reasoning in The Achilleas (discussed below). Probably not exactly the same but similar idea. This limitation on when someone will be held responsible within the scope of liability. Re-characterised the remoteness by referring to scope of liability

5A Application of Part (1) This Part applies to any claim for damages for harm resulting from negligence, regardless of whether the claim is brought in tort, in contract, under statute or otherwise

(2) This Part does not apply to civil liability that is excluded from the operation of this Part by section 3B See Monaghan Surveyors Pty Ltd v Stratford Glen-Avon Pty Ltd [2012] NSWCA 94 (discussed below)

Causation in Contract Reg Glass Pty Ltd v Rivers Locking System Pty Ltd (1968) 120 CLR 516 - Defendant contracted to supply a ‘rear single door’ at the plaintiff’s shop premises - Purpose of door was to prevent burglaries, but thieves broke in, forcing door out of position and stole a large quantity of stock. (no express term in the contract regard to that; but sale of goods there will be implied term that the good will be fit for purpose. They went to lot effort to force the door open. Was the door provided fir for purpose?) Held (3-2): - The contract contained an implied term that defendant’s door would provide ‘reasonable protection’, which was breached. (The Q was these thieves did at night time with a whole period of time at which they cracked door open; 3-4 hours. Even if it was built to the requisite standard and provide protection, it was arguable than they would have broken in anyway. So, can we say the breach caused the loss? Can we held manufacturer of the door responsible because they have through their actions? Because evidence going both ways;) - Once breach is established and it appears that the claimed loss flows from this breach, it will be presumed that it does – BUT it remains open for the defendant to negate causation o Come back and say that even if we built the door to standard, it would have still happened (shift in the burden of proof) Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310: (raises causation and remoteness)

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Due to a breach of their contractual duty of care, auditors of CCC overstated value of the company’s assets If assets had been properly valued, CCC would have been put into receivership in 1971, but it continued trading until 1974. (Negligent audit, they failed to identify the company insolvent.)

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If the company had gone into receivership in 1971, its losses would have totalled ~$10m. Instead, losses were ~155m. The claim was for this difference (i.e. $145m). [We suffered 145 as a result of negligent audit]

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Although the ‘but for’ test was satisfied here, McHugh and Mahoney JJA held that the auditor’s breach was not the (legal) cause of the company’s losses (if the audit had been done properly, the company would have not suffered additional losses, but this is not even to say the breach was the legal cause of the loss)

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McHugh JA also though the loss was ‘too remote’ Compare Glass JA in dissent, finding the loss was recoverable

McHugh JA: - Focused on “common sense” => The auditor’s negligence was sufficiently superseded in potency by supervening events as to not be a (legal) cause o 1971 to 1974 for the huge losses to eventuate. The legal causation; factual causation is present, no legal causation as common sense tells you that it cannot just be the negligence of the auditors. You will be saying that the company continued existence was the cause of the loss; which does not make sense as it is the trading activity. - Also found the loss was “too remote” b/c the loss CCC suffered between 1973-74 was not of a “kind…which the parties would have contemplated as being a serious possibility … in 1970” (Koufos standard applied) o Flagging the ideas that what was the kind of loss reasonably foreseeable. Leading house of lords on the level of foresight is the case of Koufos. Mahoney JA: - Questioned the usefulness of the ‘but for’ test of causation – in any event, found that “allowing a co to remain in existence does not, without more, cause losses from damages incidental to mere existence”. Glass JA: (on the other hand) - Auditor’s negligence was a common sense b/c it was a ‘but for’ cause o Equating legal causation with factual causation. For him, any limit you would be remoteness. - Losses also not ‘too remote’ b/c auditors aware that decision regarding receivership depended on their findings and that failure to close the co down when there was a breach of the relevant ratios created a ‘serious possibility’ that markets movement would cause serious losses.

Remoteness in Contract -

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Was the relationship between contractual ‘remoteness principles and the rules of causation’? o Legal causation is a factual causation for Glass. But, if you take a more common view legal causation is not the same, limited by common sense and policy. What events are legally relevant. Is the rule agreement-based or a default rule externally imposed by the law to achieve fair, proportionate and/or efficient results?

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See The Achilleas and Stuart v Condor (below)

The governing principle is said to come from Hadley v Baxendale (1854) 9 Ex 34, where Alderson B held that losses are recoverable if they fall within either the: - First limb (‘general damages’): arising naturally, that is, according to the usual course of things, from breach; or o If you a shop and retailer, and sell the goods at a cheaper price, then the loss you suffered will be the first limb; loss that arises in every case of that kind - Second limb (‘special damages’): such as may be reasonably supposed to have been in the contemplation of both parties at the time they made the contract, as probable result of breach o Cases where the parties have made special provision; say party retailer tells wholesaler, you need to supply good by the weekends as I expect special customers/Christmas present (but nothing in Christmas is mentioned in contract), but they do realised that they will experience substantial loss. Because of special circumstance there is loss that would have not happened in the ordinary cause of things. - Facts: person seeking to have crankshaft fixed, was the carrier liable. If the owner of the crankshaft made it clear, and they need to have that by this time, recoverable. How given that no information, it was not recoverable. Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (a case about Hadley’s second limb): - Sale of a boiler to launderers and dyers - Buyers told sellers that they intended to put the builder to use ‘in the shortest possible time’ - Delivery was delayed by a little over 5 months Buyer claimed for lost profits of two kinds: i) Ordinary business during that period (ordinary profits loss had the breach occurred at any time) ii) Extraordinary profits due to being unable to accept new particularly lucrative (post-war) contracts from UK govt. Held: - Ordinary profits recoverable but not the profits lost by failing to be able to perform the exceptionally lucrative gov’t contracts since this loss was not within seller’s reasonable contemplation o No way of foreseeing that as a likely or serious possibility. o Where things get more complicated; suppose that the buyers told the sellers about the lucrative contracts give stronger argument. However, not end of story. Example: which is say I go to business meeting at 9am, I hail taxi and 15 min away, and tell the taxi driver about losing the business deal. He says not a problem and higher fee. Traffic delayed. Would the taxi driver responsible? You suggest you should be able to recover. (recording 9:47)

What degree of likelihood or contemplation is required? Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350 (HOL) - A charted ship arrived late by which time the market price of sugar had dropped, so the charterers (who were shipping sugars) claimed the difference between the price they actually obtained by selling the sugar and the price they would have obtained had the sugar arrived on time. - This difference was recoverable even though owners did not know that the charterers intended to sell the sugar immediately upon arrival (Didn’t know they were going to sell the sugar immediately; they were still liable) o [The meaning of reasonable contemplation is a stricter test. Different ways of formulating the likelihood required.] The aspects of the same principle; put first limb in the second limb. The real test is that you can recover for those losses that reasonably be in contemplation. Any losses that fall in the first limb may be in the second limb. Lord Reid: - The relevant question is whether the defendant, with the information he had available (shipping sugar to other place/selling commodities), “should, or the reasonable man in his position would” have realised that the particular kind of loss was ‘not unlikely’ to result from the breach. o Defendant does not need to get tell the explicit consequences. They only need to reasonable foresee. Wholesaler knows the reason as charterer want to sell as soon as possible for trading commodities. Lord Upjohn: - For a reasonable person the breaching party’s position, the particular loss must be a ‘ serious possibility’ or a ‘real danger’ result of the breach. o (Two terms are generally used for the degree of likelihood required). What level of foresight is required? Case make it clear that the test for contract is narrower in the breach of contract claim what is required in tort/negligence claim. If something is unlikely even if foreseeable, not recoverable in contract. Concurrent claims which remoteness exist.

Distinction between different kinds of loss and the ‘kind’ vs ‘extent’ of loss H Parsons (Livestock) v Uttley Ingham & Co Ltd [1978] QB 791 (CA)

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Plaintiffs purchased a metal storage hopper from the defendant to feed pignuts to their pigs Due to its defective installation, the hopper’s ventilation system malfunctioned, and the nuts became mouldy This caused many of the plaintiff’s pigs to develop E coli, which eventually led to the death of 254 pigs.

The plaintiffs claimed for (1) the loss of the pigs, (2) costs incurred in dealing with the infection and (3) damages for lost ‘turnover’ o Loss profits they incurred in the regenerations of pigs; half of those would have been killed. Applied the Koufos test; using the language of John; the fact that the illness incurred was serious possibility, the death was recoverable; only have to recover the type of the loss. Applies to most relevant in contract. As long as you can foresee economic loss is recoverable, the extent of it might not have been foreseeable o You can’t recover for subsequent generations. Disproportionate to the breach. They felt like they had to draw line somewhere. Scarman LJ (Orr LJ agreeing): - Koufos applied  illness of the pigs due to breach a ‘serious possibility’ so that loss (and costs incurred) was recoverable. - Death of the pigs then also recoverable due to ‘egg-shell skull rule’ o Applies in contractual context; case where the loss was not in an original form. Frame as a property damage. The tort test in negligence was in physical damage. - But damages for lost ‘turnover’ not recoverable b/c ‘too remote’ c.f. Denning LJ’s approach, which focussed on the distinction between physical damage and economic loss

A different Approach to Remoteness in Contract Law Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48 (a first limb case)

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Concerned with a character’s late redelivery of a ship to the ship owner On its voyage, ship was delayed in part and thus returned 9 days late This late redelivery caused the owner to miss the last delivery date for the next charter that it had already committed to perform,

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This delay gave the follow-on charterer the right to cancel, which it was pleased to take b/c market rates had since fallen sharply since the follow-on charter role had been agreed

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The case therefore raised the question of whether a charterer breaching a contract through late redelivery was liable for the owner’s lost profit on a subsequent charter.

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Significantly, there was an understanding in the shipping industry supported by obiter dicta in some cases & textbook commentary, that a charterer’s liability for late redelivery was limited to the difference between the market rate the charter rate for the period of the overrun (9 days). This was about US $160,00 (from Charterer) vs the US $1,300,000 lost profit suffered by the owners o Relying on the fact that there was an understanding in the industry that was the extent of liability.

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Held to be a background understanding. Made clear in the parties contract.

Reasoning The Court of Appeal: held that the loss claimed by the owners was certainly ‘not unlikely’ and ‘highly probable; so that this loss was covered by the ‘first limb’ in Hadley v Baxendale and therefore recoverable Follow on contract, and understood that this is how the industry works. Not unlikely, it was serious possibility that the fact that you only need to see the kind of harm in the drop-in charter rates. The extent of loss was significant did not matter (egg-shell-skull rule). Said that the loss was recoverable; HL thought that it was disproportionate The House of Lord unanimously overturned this decision Lord Hoffman: - ‘One must first decide whether the loss for which compensation is sought of a ‘kind’ or ‘type’ for which the contract-breaker ought fairly to be take to have assumed responsibility’

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Similar approach here, gave difficulty; generally been excepted; his view was that in order to figure out what the damages must be; instead of focusing on what the contract reasonably contemplated, the question was looking at the contract what loss could we say that the contract fairly taken to responsibility.

Lord Hope: - The question is ‘whether the loss was a type of loss for which the [contract-breaker] can reasonably be [taken] to have assumed responsibility’ Lord Rodger and Baroness Hale: - Loss claimed by the owners not within the reasonable contemplation of the characters at the time formation because ‘this loss could not have been reasonably foreseen as being likely to arise out of the delay in question’ o The extent of the drop was not foreseeable; it’s not recoverable; however, this is inconsistent. Note (1) Lord Walker: agreed with both approached, so what is the ratio??? (2) Subsequent UK decisions have attempted to restate the correct approach a. Some variety; in the UK was decided in 2008. That both Handley and Baxendale; in order for UK now loss to be recoverable under remoteness, need to look at both rules and the assumption of responsibility. Whether party assumed responsibility, you might get a different answer. [Taxi example; should they liable for huge loss? For a matter of common sense, it is not fair; unreasonable that the taxi driver assumed responsibility for this loss. We don’t have explicit case that adopts the Achilleas in Australia.

An illuminating and relatively recent Australia Case Stuart Pty Ltd v Condor Commercial Insulation Pty Ltd [2006] NSWCA 334

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S, a construction company, contracted with the Cth to replace insulation in a number of residential properties in Sydney under the SANIP scheme

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S sub-contracted some of this work to Condor, but each property was subject to a separate sub-contract between S and C (sub contract worth less money)

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After a fire broke out in one of the houses as a result of C’s negligence, the Cth cancelled its main (and very lucrative) contract with S. (S wanted to argue that Condor breached the subcontract with us, and we have lost the main contract. Stuart and Condor was less money compared to the main contract)

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S sought to hold C responsible for its loss of the main contract with the Cth

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Beazley JA -

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Useful in Australia; the court said no recovery here because that ultimately, Stuart was responsible for the work; Stuart’s obligations to ensure that the works are done properly. You cannot hold condor liable for that. Stuart was responsible. Reallocation.

Loss (2) not w/in reasonable contemplation of parties at contract formation as not possible to infer C undertook or assumed responsibility for this risk o Not unlikely or the degree of contemplation/foresight (Tort reasonable foresight, and Contract contemplation). Secondly, part of the reason why her view was not recoverable was something like assumption responsibility analysis. This was principally because C had ultimate responsibility for oversight of S’s work and b/c of the disproportionate nature of any such liability on C. o Disproportion between the contract price and the loss; clearly something you need to be aware of. Contract is small about of money but huge loss; clearly going to be a factor in determining whether or not the loss is recoverable.

Relationship between Contractual Remoteness and the CL...