Court of Appeal considers limits of recoverable loss in contract

The Court of Appeal has considered the correct approach to determining when a type of loss caused by a breach of contract should nonetheless be regarded as too remote to be recovered by the innocent party, introducing a potential important link to implied terms: John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37.

The key message for contracting parties is that, as with most issues, it will often be sensible to deal with this issue expressly in the contract. If not dealt with expressly, then in most cases a contract breaker will be held liable for the types of loss which, at the time of the contract, could reasonably have been foreseen as not unlikely to result from a breach. This is the classic test for remoteness of damage, though in the present case the Court of Appeal analysed this as an implied term of the contract.

If a party wishes to argue that it has not assumed responsibility for a type of loss that was reasonably foreseeable, it will generally need to adduce evidence of special circumstances, such as a general understanding or expectation in the relevant market, which render the assumption of responsibility inappropriate in the particular case.

The courts are unlikely to be swayed by an argument that the scale of loss is disproportionate to the contract price (in this case potentially £400,000 compared to approximately £20,000 paid under the contract). As the Court of Appeal commented, "It may not infrequently be the case that the breach of a contract of modest size gives rise to a substantial claim in damages." Gary Milner-Moore and Darren Kidd comment on the decision below.  

	Gary Milner-Moore Partner +44 20 7466 2454
	Darren Kidd Associate +44 20 7466 7466

Legal background

"Remoteness of damage" in contract refers to the principle limiting which types of loss caused by a breach may be recoverable in damages. Some types of loss may not be recovered, even though they are caused by the breach, because they are regarded as too remote. 

The classic test of remoteness in contract is set out in Hadley v Baxendale (1854) 9 Ex 341. A claimant will be able to recover: 

• losses arising naturally, according to the normal course of things, from the breach of contract itself; and
• such loss as may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as a probable result of the breach (in which case the claimant must prove special knowledge of the circumstances leading to the loss).

The test was refined in subsequent cases, in particular by the House of Lords in Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350, so that if the type or kind of loss was, at the time of contract, reasonably foreseeable by the defendant as not unlikely to result from his breach, then such a type or kind of loss is not too remote. 

The House of Lords decision in Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48 led to uncertainty as to whether that remained the test for remoteness of damage in contract. In The Achilleas members of the House of Lords, in particular Lord Hoffmann, suggested that a claimant will not recover losses that were reasonably foreseeable if the defendant cannot reasonably be regarded as having "assumed responsibility" for losses of the particular kind suffered (see post).  This brought into the law of remoteness in contract similar considerations to those in the law of remoteness in tort following the House of Lords decision in Banque Bruxelles Lambert v Eagle Star Insurance Co (SAAMCo) [1996] UKHL 10. In that case, Lord Hoffmann referred to the concept of "scope of duty"' (which has also been referred to as "extent of liability"), the effect of which is to limit the losses for which a tortfeasor is liable. SAAMCo concerned claims arising out of negligently overstated valuations of properties. The defendant surveyors were found not to be liable for the damages attributable to a fall in the property market, notwithstanding that those losses were foreseeable, because the losses did not fall within the scope of the defendants' duty of care. Lord Hoffmann specifically referred to SAAMCo in his judgment in The Achilleas. 

The Achilleas was considered by the Court of Appeal in Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7. Toulson LJ (who gave the judgment of the Court of Appeal) said that: 

• Hadley v Baxendale remains the standard rule, but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract, a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach; 
• SAAMCo and The Achilleas are authority that 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.

On the facts of Supershield, loss resulting from a flood was held to be not too remote even though the failure of a ball valve (which constituted the relevant breach of contract) was very unlikely to result in a flood because there was a second means of protection (drains) that would ordinarily have dealt with the problem. The flood which resulted from the escape of water from a sprinkler tank, even if it was unlikely, was within the scope of the defendant's contractual duty to prevent, hence the losses were recoverable. 

Facts and first instance decision 

Mr Gubbins had engaged John Grimes Partnership Ltd ("JGP") to design a road and drainage for a residential development and to obtain approval from the local authority for the road's design. JGP failed to complete the work by the date agreed. Mr Gubbins eventually engaged another engineer, who completed the designs and obtained the relevant approval 15 months after the agreed date. 

At first instance, before HHJ Cotter QC, JGP successfully claimed for unpaid fees against Mr Gubbins (just under £3,000 in addition to nearly £20,000 that had been paid). However, Mr Gubbins successfully counterclaimed for damages as a result in the decline in value of the residential development during the period for which its completion had been delayed as a result of JGP's breach of contract in failing to complete its work on time. (The loss remained to be assessed, but there was evidence to suggest it was nearly £400,000.) 

JGP appealed, relying on The Achilleas (and SAAMCo) in submitting that JGP could not be said to have accepted, at the time of the contract, responsibility for loss arising from a diminution in value of the development, i.e. the type or kind of loss claimed. 

Court of Appeal decision

The Court of Appeal dismissed the appeal. It held that HHJ Cotter QC had been right to find that there was nothing to take the case out of the conventional approach to remoteness of damage in contract. The judge had considered whether losses arising from movement in the property market were reasonably foreseeable at the time of contract as a consequence of any delay by JGP, and had concluded that they were. He had gone on to consider whether the case was unusual so as to take it outside the Hadley v Baxendale approach, i.e. whether The Achilleas was applicable. He had considered the commercial background of the contract and whether the standard approach would reflect the expectation or intention reasonably to be imputed to the parties. There had been no evidence before him to show that there was some general understanding or expectation in the property world that a party in JGP's position would not be taken to have assumed responsibility for losses arising from movement in the market where there had been delay in breach of contract. This can be contrasted with the facts of The Achilleas itself where it was found that there was a general expectation that a charterer who returned a vessel late was liable in damages only for the period of late delivery and not for losses incurred through the owners losing a follow-on charter. The fact that a loss was suffered because of a change in market values during the wrongful delay did not render the case out of the ordinary. 

Comment 

The leading judgment of the Court of Appeal was given by Sir David Keene. In line with judicial comment in previous cases (including the earlier Court of Appeal decision in Supershield, which was binding on the Court of Appeal in this case), he did not consider that the House of Lords in The Achilleas had effected a major change in the approach to the recoverability of damages for breach of contract. 

Where his judgment (with which Tomlinson LJ and Laws LJ agreed) perhaps goes further is that he introduced the concept of implied terms in rationalising the authorities in this area. He said that if there is no express term dealing with what types of losses a party is accepting potential liability for if he breaks the contract, then the law in effect implies a term to determine the answer. He added that, normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken (i.e. The Heron II). However, if there is evidence in a particular case that the nature of the contract and the commercial background, or indeed other relevant special circumstances, render that implied assumption of responsibility inappropriate for a type of loss, then the contract-breaker escapes liability (i.e. The Achilleas). 

The impact of this conceptual shift in viewing the law of remoteness in contract as a question of implied terms is as yet unclear. It will depend, in part, upon how far the implication of terms is governed by the decision of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 (whether the term would spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean) over earlier, more constrained tests, such as business efficacy (the proposed term will be implied if it is necessary to give business efficacy to the contract), or  'officious bystander' (the proposed term must be so obvious that it goes without saying). The Court of Appeal did not address this issue, which may require clarification in the future.

The decision is also noteworthy for comments added by Tomlinson LJ in relation to losses which (unlike on the facts of this case) arise by rapid and extreme movement of prices in volatile markets. In Pindell Ltd v Air Asia Berhad [2010] EWHC 2516 Tomlinson J (as he then was) had expressed the view that such losses would always be irrecoverable. However, in this case he explicitly qualified that position, noting that circumstances at the time of contracting may be such as to render it foreseeable that extreme volatility could be experienced within the lifetime of the contract. He suggested that when a case involving such losses next comes before the courts careful consideration should be given as to whether they are recoverable.