REMEDIES AND DAMAGES ( PART 4)

Distress

Distress resulting from a contract was the basis of Lord Scott’s decision in Farley v Skinner. Distress is different to consumer surplus in that it actually results in a negative experience, physically or mentally, for the individual. Consumer surplus relates to an expectation, whereas distress is an actual result.

Distress being an actionable type of loss was questioned by the other judges in Farley v Skinner. Lord Scott explained that the question to ask is whether there has been distress caused by an unwelcome sensory experience. In Farley, the distress was caused by the unwelcome noise.

However, the difficulty in using the test from Farley v Skinner is that the legal authority is questionable. The test did not form the ratio decidendi of the decision. Every other judge based their decision on the consumer surplus.

Usually, there is an overlap between the consumer surplus and distress. One or the other may be claimed. It is suggested that the legal basis for claiming under consumer surplus is favourable due to the majority of the judges opting for it in Farley v Skinner. This is not to say the test for distress from Lord Scott should not be applied, just that it should be done cautiously and you should explain the weakness of the concept.

Did the breach of contract cause the loss?

In order for a loss to be actionable, the claimant must show that the breach of contract caused the loss. Causation requires both legal, and factual causation.

Factual causation

Factual causation requires an application of the ‘but for’ test; but for the breach of contract, would the claimant have suffered the loss?

This is a simple concept and is the easier of the two tests to prove.

Legal causation

Legal causation requires the breach of contract to be the direct cause of the loss. There must not be any subsequent actions which breach the ‘chain of causation’. This actions can be those of the claimant, or a third party.

If the claimant may have broken the chain of causation, the courts will consider whether the acts of the claimant were reasonable or not. The claimant will break the chain of causation where they were so unreasonable that it must relieve the defendant of all liability. This threshold is very high and difficult to prove.

If it is a third party who has broken the chain of causation, there are a number of things to consider:

• Did the claimant have a duty to prevent the act occurring? (Stansbie v Troman [1948] 2 KB 48). If the claimant had a duty to prevent the act occurring, the action may break the chain of causation.
• How likely was the intervening act to happen? (Monarch Steamship Co Ltd v Karlshamms Oljefabriker [1949] AC 196). The more likely the act to happen, the less likely it would break the chain of causation.
• How reasonable was the intervening act?  The more reasonable the act, the less likely it would break the chain of causation.

Was the type of loss reasonably foreseeable?

This stage of assessing whether damages will be an appropriate remedy is the most important stage, and is where a lot of claims will fail. The purpose of this stage is to consider the remoteness of the damage. Consider the following example:

• Party A contracts with Party B for some denim
• Party A intends to use the denim to make into jeans and sell to Party C
• The denim is of a poor quality, meaning Party A cannot fulfil their contract with Party C
• As a result, Party C ceases all dealings with Party A
• Party A has been dealing with Party C for ten years, and would be dealing with them for the foreseeable future
• Can Party A claim for all future earnings they would have made with Party C from Party B, as Party B’s breach of contract caused Party C to cease dealings with them?

This is a question of foreseeability; is it reasonable that Party B would have foreseen that Party A would lose their lucrative contracting deal with Party C? In this case, probably not, those subsequent contracts could be worth millions. Therefore, the courts have some tests which impose limitations on what damages can be claimed.

In the case of Hadley v Baxendale, the test for foreseeability of damages was laid out. Alderson B explained that where there is a breach of contract, damages can be claimed under two different limbs:

1. The damages which would fairly and reasonably be considered to arise naturally from the breach of contract itself
2. Damages which reasonably would have been supposed to have been in the contemplation of both parties at the time of the making of the contract as a probably result of a breach

Case in focus: Hadley v Baxendale [1854] EWHC J70

This case is the leading authority on the test of foreseeability of damages. In this case, the claimant ran a mill. The mill broke down as a result of a broken crank-shaft, and they did not have a replacement. The claimant therefore contracted with the defendant to provide them with a replacement crank-shaft. At the time of the contract, the defendant was unaware that the claimant’s mill was unable to operate without the crank-shaft. The defendant did not provide the crank-shaft on time, and the claimant sued for breach of contract. They claimed damages for the loss of profits suffered due to the fact that the mill was not operating.

It was held that the damages for the loss of profits were not claimable. This was because they did not fall under either limb of the test laid out in the case. Those losses would not have fairly and reasonable arisen from the breach of contract, and the defendants were unaware that the mill was not in operation without the crank-shaft. Therefore, the claim fails under limb two, as those losses were not in the contemplation of both parties at the time of the making of the contract (it was only in the mind of the claimants).

The first limb of the test is relatively easy to understand. These are damages that would be obvious under a contract. For example, in a sale of goods, if the goods are faulty, the natural damages fairly arising out of this would be the repair/replacement of the goods.

The second limb of the test is the more complicated one. These are those losses which would not normally be ordinarily expected for somebody to suffer as a result of the breach. Therefore, for them to be actionable, they must have been reasonably contemplated by both parties at the time of contracting. The easiest way this will arise is where the claimant directly informs the defendant of the potential loss. If we take the above case of Hadley v Baxendale, if the claimant had explained the importance of the crank-shaft, telling the defendant that their mill was not in operation and they needed to crank-shaft for it to work, the loss would have then been in both parties’ reasonable contemplation.

There are various cases which should help outline the rules of the test of foreseeability. The first of these is Victoria Laundry Ltd v Newman Industries Ltd [1949] 2 KB 528. In this case, the contract was for a boiler which was required for the expansion of the claimant’s business, and the defendant was aware of this. The claimant attempted to claim for their loss of profits, and the loss of some lucrative contracts that they would have obtained with the boiler. The court held that the loss of profits would have been in the reasonable contemplation of the defendants, and would thus be claimable, but the loss of the lucrative contracts would not have been in the reasonable contemplation of the defendants, and were not claimable. Therefore, it is clear in our original example with the denim and jeans, the loss of the future contracts would not have been reasonably foreseeable.

Exam consideration: Do you think the decision in Victoria Laundry Ltd would have been different if they had specifically told the defendant that if the boiler was not delivered they would miss out on some contracts? (The answer is yes!) Why?

The case of Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 confirmed an important part of the rule from Hadley v Baxendale. It is the type of loss which needs to be reasonably contemplated under the second limb, not the extent or the exact nature. Therefore, if we consider Hadley v Baxendale, the defendant need not know exactly how extensive the loss of profits would have been for the mill if that type of loss was contemplated, the defendant would be responsible for the extent of them. This rule has been criticised, as it could result in a defendant being responsible for a million-pound contract when in fact they only contemplated the loss of a sub-contract which was worth £100.

Did the claimant mitigate the loss?

In order for a claim for damages to be successful, the claimant must take reasonable steps in order to mitigate the loss. There are three general rules relating to mitigation.

First, as per British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 the claimant will be unable to claim for damages in respect of any loss that he could have reasonably avoided.

For example, if there was a contract for the sale of steel which was faulty, the claimant must mitigate their loss by attempting to sell the faulty steel on. They may only make 20% of the price they paid, but this is a step in mitigating the loss.

Secondly, the claimant may recover all expenses incurred whilst taking reasonable efforts to mitigate the loss. In our above example, costs of advertising, shipping and other expenditure incurred attempting to sell the steel would be claimable.

Thirdly, if the claimant avoids further potential losses, they cannot recover for the loss they avoided. If we consider a breach of a contract of employment, if the claimant then finds another job one week later, they cannot continue to claim for loss of salary, because they have mitigated this further loss by finding another job.

Did the claimant contribute to the loss?

If the claimant contributed to the loss in question, the courts may reduce the amount of damages the claimant is able to claim, proportionately in line with the fault of the claimant. This rule has statutory footing in Section 1 of the Law Reform (Contributory Negligence) Act 1945.

There are three types of contributory negligence in relation to breaches of contract:

1. Where the defendant’s liability arises from a contractual provision which does not rely on the negligence of the defendant
2. Where the defendant’s liability arises from a contractual obligation which is expressed in terms of ‘taking care’
3. Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract.

The case of Barclays Bank plc v Fairclough Building Ltd [1994] EWCA Civ 3 confirms that contributory negligence will only be available in situation ‘3’. Therefore, there must be a concurrent liability in tort in order to claim contributory negligence as to a claim for damages.

Once the claim falls into situation ‘3’, the defendant must show the claimant was at fault, and the fault was a factual cause of the loss the claimant sustained (the ‘but for’ test). The courts will then reduce the damages ‘to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage’ as per Section 1(1) of the Law Reform (Contributory Negligence) Act 1945.

Agreed damages clauses

So far, this chapter has dealt with the situation in which the courts will assess the amount of damages to be awarded. The contractual freedom of parties allows them to pre-agree an appropriate amount of damages in the event of certain things. These are common in commercial contracts, and are advantageous for a number of reasons:

• They provide certainty
• The claimant does not have to prove the amount of loss, as the amount will be pre-agreed under the contract
• The defendant cannot claim the loss was unforeseeable, as they are contracted into it
• They are efficient, and prevent the relationship between two parties being disruption through large amounts of litigation

There are two types of damages clauses; a liquidated damages clause and a penalty clause.

Liquidated damages clause

A liquidated damages clause is one which can be considered a genuine attempt to pre-estimate the loss which will be suffered by the breach (Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79).

If a damages clause is identified as a liquidated damages clause, the sum in the clause will be payable, irrespective of whether the actual loss is greater or smaller than the sum in the clause. In Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd [1933] AC 20 the contract provided for a liquidated damages clause of £20 per week late. The delay was thirty weeks long, and actual loss for delay was £5,850, but as the £20 clause was a genuine pre-estimate of loss, the non-breaching party could only claim for £600 (£20 per week for 30 weeks).

Penalty Clauses

A clause will be classified as a penalty clause where the sum in the clause is not a genuine pre-estimate of the loss suffered in event of a breach, but instead is a threat to compel the other party to perform.

Case in focus: Jobson v Johnson [1989] 1 WLR 1926

In this case, the contract was for the purchase of shares in a football club. One of the terms was that if there was a failure to pay one of the instalments of the purchase price, the shares would need to be retransferred for £40,000. The defendant failed to pay one of the instalments when he had already paid £140,000.

It was held that the retransfer for £40,000 was a penalty clause, as it was not a genuine pre-estimate of the loss, instead it was akin to a penalty.

The general rule is that penalty clauses will be unenforceable. The case of Dunlop Pneumatic Tyre gives guidance on how far a clause must go in order to be considered a penalty clause; it must be ‘extravagant and unconscionable’ in comparison to the greatest loss that might be caused by the breach.

The case of Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 has provided some well-needed clarity in this area. Lord Neuberger explained that the test to apply is:

“whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”

Case in focus: ParkingEye Limited v Beavis [2015] UKSC 67

In this case, Parkingeye managed a carpark who imposed an £85 penalty on those who did not comply with the two hour only free parking stay. Beavis breached this term of the car park, and was issued an £85 penalty. Beavis refused to pay the penalty, arguing that it was a penalty clause.

The court held that this was not a penalty clause. Despite the £85 perhaps not being representative of any loss suffered by the car park, it was a deterrent which had a legitimate interest; it protects overstaying in the car park which was important for the efficiency and management of the car park. The £85 was also not any more exorbitant than penalties imposed for other parking violations.

You should use the test from Makdessi v Cavendish Square Holdings when assessing whether a clause is a penalty. The test for penalty clauses is yet another one which can be difficult to apply in practice. A sensible approach would be to consider:

1. Is there a legitimate interest protected by the penalty?
2. Is the amount exorbitant in comparison to other similar contracts/breaches of this type?
3. Is the protection of the interest proportionate?