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CONTRACT LAW

Arguably more problematic than both causation and mitigation is the third main control device: remoteness. Generally, the defendant will not be liable for loss caused by the breach of contract which is too remote. The classic test for remoteness remains that set out by Alderson B in Hadley v Baxendale.

Hadley v Baxendale (1854) 9 Exch 341

A shaft in C’s mill broke. D agreed to transport the shaft to be mended but delayed in doing so. As a result, production at the mill was stopped for longer than it should have been. C sought to recover its loss of profit as damages for D’s breach of contract. The Court of Exchequer held that C was not entitled to damages for its lost profits.

‘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 as either arising naturally, that is 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.’ (Alderson B).

The following cases demonstrate that application of Alderson B’s test has not always proved straightforward.

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA)

C ran a laundering and dyeing business. It contracted with D for the supply of a new boiler. In breach of contract, delivery of the boiler by D was delayed by several months. C claimed damages for loss of the profits it would have made had the boiler been delivered on time. This included the profits it would have made from certain highly lucrative contracts C had with the government. The Court of Appeal held that D must have anticipated that C would suffer some loss of profit from its breach of contract, but that the particular losses from the government contracts were too remote.

‘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 . . . This 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.’ (Asquith LJ).

Koufos v C Czarnikow Ltd, The Heron II [1969] 1 AC 350 (HL)

C chartered a ship from D to carry sugar from Constanza to Basrah. The ship deviated from the agreed route and reached Basrah nine days late. Due to a fall in the market price for sugar, C obtained less for the cargo than it would have done had the ship arrived on time. The House of Lords held that C was entitled to recover the difference in price.

H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 (CA)

C purchased a bulk feed storage hopper from D and used it to store pig nuts to feed to its herd of pigs. Because of a defect in the hopper, the pig nuts became mouldy. At first, C continued to feed its pigs with the mouldy nuts since, as a rule, mouldy nuts were not seen as harmful to pigs. When some of the herd became ill, C made further investigation and the defect in the hopper was discovered. However, by this time, the herd contracted E Coli from the pig nuts and over 250 pigs died. Swanwick J found that the hopper had not been reasonably fit for purpose. He further held that D were liable for the sickness and death of the pigs as this was the natural and direct consequence of the breach. D’s liability was not affected by the fact that at the date of the contract the possibility that pigs might contract E coli from mouldy nuts would not have been within the reasonable contemplation of the parties. The CA dismissed U’s appeal.

Jackson v Royal Bank of Scotland plc [2005] UKHL 3

T was one of C’s main customers. For several years C had obtained dog chews from Thailand which it sold on to T. Both T and C banked with D. By mistake, D sent to T documents which revealed the substantial mark-up which C added to the prices it charged T for the dog chews. As a result, T stopped dealing with C and began to obtain the dog chews directly from Thailand. In its action against D, C claimed damages for loss of the opportunity of earning further profits by trading with T. The judge awarded damages for lost profits for a period of four years on a sliding scale. The CA reduced the damages on the ground that D’s liability only extended to that period which would have been in the reasonable contemplation of the parties at the time of the breach, which the CA fixed as one year.

The HL, allowing C’s appeal, restored the judge’s award. RBS had not limited its liability for the loss of repeat business to any particular period. As such it was liable for the period until the question of loss being sustained by its breach became too speculative to sound in damages. The judge had assessed this as four years, and that was as good an estimate as could now be made. Lord Hope said the evidence showed that C was ‘in a precarious position’ as T knew the identity of C’s supplier. As such it was only a matter of time before T would consider whether the costs of obtaining its supplies through C could be reduced or eliminated.

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