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Common Issues in Drafting Contracts

Iain Artis LLB MBA, Advocate

Introduction
I propose to focus on, firstly, contract interpretation, in particular the importance of pre-contract
negotiation, and, secondly, remoteness and loss in the event of breach. Brandon Malone will take
forward the issue of breach from the point of view of anticipating and limiting liabilities, and the
relationship between contract and delict.

One aspect to keep in mind throughout is that, from the perspective of the person drafting a
contract, all of these issues are interrelated. Drafting contracts is, or should be, a practical matter, with
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an eye to context in the real world. In law context is everything . A contract for the supply of crucial
safety or performance components for a nuclear power station is a different matter from the supply of
a simple service to consumers.

When thinking about drafting contracts we may naturally think about complex commercial
deals, whether in commercial property or in the supply of large plant. In many such cases there will be
industry norms, represented by standard forms of contract or by accepted schedules of boilerplate. In
any one of those contexts there will be very specific drafting issues to consider, perhaps focussed on
particular drafting techniques. What of any available forms should you use as the basis for a contract
proposal? What clauses do you put in general conditions and what in situation-specific schedules?
What phrases will work and what will not? What is the latest state of thinking on penalty clauses or
performance bonds? I do not propose to focus on such issues, important though they may be in
particular contexts, but on broader considerations.

Given the variety of means by which parties may come to agreement, and the variety of
media used, from velum to electrons, it would be impossible in a talk like this to address each type of
document that may feature, to give advice about the best means to approach the drafting of that
document. So I do not propose to go into questions of how to draft. (But I do make a plea for simple,
plain language.)

Getting on to substance, the starting point in drafting contract documents is the need to think
about what is appropriate to the circumstances: what are the real risks, what is likely to happen and
what might happen. What are the basic issues to consider? I spent the first decade of my career as a
Contracts Executive for engineering companies in the defence and energy equipment industries. I
then spent a decade doing other things, as a company secretary in the wine and spirits industry, and
for the last 13 years I have been at the bar. Whether in administration or in litigation, it seems to me
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Lord Steyn, R (Daly) v Home Secretary [2001] 2 AC 532, 548, para. 28

that the most frequent causes of problems are often the simplest to resolve, if thought of in advance.
But after the contract is signed they are often the most intractable. They are the basics.

Basic matters
The first matter to get right is the identity of the parties the who. Easy? Maybe not.
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The background to a recent case in the FTT, Maritsan Developments Ltd v HMRC was a
dispute about VAT, in the context of what might have been a joint venture: were payments made by
Maritsan to a company, MacIntyre House Ltd, remissions of a share of profits from a joint venture
between them, or were they the consideration for the supply of services. A related action had been
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raised by MHL against Maritsan in the Court of Session for payment; Maritsan counterclaimed for
rectification of the parties agreement. Rectification was necessary if the agreement was for a joint
venture, because its terms included boilerplate declaring that partnership and joint venture were
excluded. In the course of a judgment following debate on the relevancy of the liability for VAT and of
the averments for rectification Lord Hodge noted:

The contract is not easy to interpret and one is left with the feeling that the parties have given
insufficient thought to the expression of their intentions. $$. I am left with the clear impression that [a particular
clause] has been lifted from another contract and inserted into this agreement in a context in which nobody has
applied his mind to what the effect of VAT would be. I am not persuaded that the ordinary expectation that parties
to a formal document have chosen their words with care is met in this case. But the court cannot reframe a formal
contract, even if it is not skilfully drafted.

He proceeded to do his admirable best to make sense of the document. The parties later
agreed that their agreement should be rectified, with a view to clarifying that their relationship was that
of joint venture. But when the substantive VAT issue came before the Tribunal the evidence was that
there was not and never had been any joint venture between the companies. There had been a joint
venture between the two individuals who were the principals behind them. It was a case of a contract
formed on the basis of a handshake between two men in a field in Carluke. The badly drafted
agreement (which had been devised by experienced commercial solicitors) was utterly irrelevant; it
was between the wrong parties.

Next, one should be entirely clear about what it is that is being drafted: what is the obligation
that is intended to be entered into. In Harvela Ltd v Royal Trust of Canada

the defendants had

shares to sell in a bidding process between two bidders. They accepted an offer that was expressed
referentially - as y, or x more than any other offer, whichever was the higher. But it was found that
they had bound themselves to the bidders to accept only a fixed bid. After discussing the general
features of referential versus fixed bidding, Lord Templeman remarked:-

[2012] UKFTT 283 (TC)


2011 SLT 936, Lord Hodge
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[1986] AC 207
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Thus auction sales and fixed bidding sales are liable to affect vendors and purchasers in different ways
and to produce different results. The first question raised by this appeal, therefore, is whether Harvela and Sir
Leonard were invited to participate in a fixed bidding sale, which only invited fixed bids, or were invited to
participate in an auction sale, which enabled the bid of each bidder to be adjusted by reference to the other bid. A
vendor chooses between a fixed bidding sale and an auction sale. A bidder can only choose to participate in the
sale or to abstain from the sale. The ascertainment of the choice of the vendors in the present case between a
fixed bidding sale and an auction sale by means of referential bids depends on the presumed intention of the
vendors. That presumed intention must be deduced from the terms of the invitation read as a whole.

In other words, when drafting a contractual document such as an invitation to bid, be sure of
what you are drafting and that it expresses accurately the clients intentions with regard to the process
they are engaged in.

This may be of particular concern in Scotland due to the enforceability of a bare promise,
which if proved to be a positive engagement requires no delivery or acceptance to constitute an
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obligation. In Cawdor v Cawdor trustees of a pension scheme decided that they would convey certain
heritage to another pension scheme at the request of the beneficiaries. Certain properties were
transferred. However, on the facts there had been no obligation to transfer the balance. The Lord
President (Hamilton) observed:-

It is undoubted that the law of Scotland will recognise as obligatory a promise duly made. Delivery to or
acceptance by the promisee is not necessary to the constitution of a promise (Stair, Institutions , I.10.4), though,
in my view, the presence or absence of communication to the other party may be an adminicle of evidence in the
question whether the statement amounts to a promise in law. Stair (Institutions , I.10.2) distinguishes three acts
of the will, namely, desire, resolution and engagement. Only the third is obligatory. Having dealt with desire,
Stair continues:
Neither is resolution (which is a determinate purpose to do that which is desired) efficacious, because,
whatever is resolved or purposed, may be without fault altered, unless by accident the matter be
necessary, or that the resolution be holden forth to assure others.
Neither of the two exceptions mentioned applies here. $The words used $ do not, in my opinion,
suggest a promise made to any other person but rather an intention, in the light of the advice received, to make in
due course a transfer of the kind mentioned. $.To apply the description used by Lord Neaves in Macfarlane v
Johnston and ors the trustees' decision, although seriously taken, was not an engagement by them promising to
do anything; nor was it a declaration by which the trustees pledge[d] [their] faith that [they] would do a certain
thing. $.
No reference was made in the course of the discussion to the evidential requirements for the
constitution of a gratuitous unilateral obligation. Section 1(2) of the Requirements of Writing (Scotland) Act 1995
(cap 7) provides that a written document complying with sec 2 of the Act (subscription by the granter) is required
for the constitution of such an obligation, unless undertaken in the course of a business. The minute was signed
by the two trustees of the No 1 scheme but those signatures appear in the circumstances to be designed more to
acknowledge the accuracy of the minute rather than to point to the granting by the signatories of an obligation.
In these circumstances the actings of the trustees on 7 April 1993 gave rise, in my view, to no prestable
obligation either to the No 2 scheme trustees or to either of Lord or Lady Cawdor.

Compare and contrast a covering letter which encloses a bid which becomes uneconomic
due to unforeseen circumstances shortly after delivery, but which states, We undertake to keep this
offer open for 30 days. But buyers may ask for such undertakings, not least in uncertain times.

2007 SC 285

In a similar vein, one must be clear about the why the subject matter of the contract that is
being drafted. When acquiring goods, is it intended to acquire their property or mere possession; to
buy or rent them? When commissioning creative works for use in advertising or the like, is it the
intention to secure the copyright, and if so is it the copyright as an item of property or is it the intention
merely to secure a licence to use it in a particular campaign? The producers of a well-known brand of
tea which based its marketing on a series of cartoon characters failed to secure the copyright when
the characters were developed, and found they had to keep using the same agency to perpetuate
what became a foundation of their brand identity. They took a licence when they should have bought
a property.

Such issues are common when buying a business. What is it that one wants to buy, really. Is
it some physical asset or a less tangible asset such as goodwill or intellectual property, or a database.
Or is it actually a person or set of people that one wants to acquire? Unless one is clear, whole reams
of paper may be expended on the wrong warranties and disclosures, never mind hours wasted on
worthless due diligence.

Similar thought should go into the questions of where and when. The questions of where the
contract is to be concluded, and where it is to be performed, may involve nice questions of jurisdiction,
governing law, and even legality, which it may be necessary to attempt to clarify in the written terms.
For example, the Unfair Contract Terms Act 1977 in s. 27 provides that much of the Act does not
apply to a foreign contract which is governed by the law of a part of the UK only by choice of the
parties. But it will apply notwithstanding a term which applies the law of a country outside the UK
where the contract is with a consumer who is habitually resident in the UK or the term appears to
have been imposed for the purpose of evading the operation of the Act. Not perhaps an issue for
many clients, but how might an international timeshare company with both UK and foreign consumers,
and UK and foreign properties, approach the question of how far it can exclude liabilities? Similarly,
time may or may not be crucial to the conclusion or performance of the contract.

I could go on, but the main point is: before selecting those standard clauses, think about what
the obvious questions are, and ask them. One of the most important functions of pre-contract
negotiation is to make sure that the parties (the true parties) are on the same page with regard to the
basics.

Agreement on essentials
The negotiations and in due course the drafted contract should, of course, include provision for
agreement on all of the essential elements. In May and Butcher Ltd. v. The King [1934] 2 K.B. 17 (Note),
Viscount Dunedin said at p. 21:

This case arises upon a question of sale, but in my view the principles which we are applying are not
confined to sale, but are the general principles of the law of contract. To be a good contract there must be a
concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and
leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has
to be determined, but then that determination must be a determination which does not depend upon the
agreement between the parties. In the system of law in which I was brought up, that was expressed by one of
those brocards of which perhaps we have been too fond, but which often express very neatly what is wanted:
certum est quod certum reddi potest. Therefore, you may very well agree that a certain part of the contract of
sale, such as price, may be settled by someone else. As a matter of the general law of contract all the essentials
have to be settled. What are the essentials may vary according to the particular contract under consideration.

On the other hand, it may be that the contract expressly leaves open a matter that would
normally be essential, providing a mechanism for its agreement in due course. In R. and J. Dempster
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Ltd. v. Motherwell Bridge and Engineering Co. a contract for the sale of steel provided: The prices to
be mutually settled at a later and appropriate date. It was held that this did not prevent there being a
concluded contract between the parties. Lord Guthrie said at p. 332:
The object of our law of contract is to facilitate the transactions of commercial men, and not to create
obstacles in the way of solving practical problems arising out of the circumstances confronting them, or to expose
them to unnecessary pitfalls. I know of no rule of law which prevents men from entering into special agreements
to meet the requirements of special circumstances.
The matter for decision must always be whether parties have not got beyond the stage of negotiation,
or whether there is a concluded bargain. In the usual case, the price to be paid is one of the essential matters on
which agreement is necessary before either party is bound. If they have not agreed upon the actual sum or on a
method of deciding that sum, there is not the consensus in idem requisite before a contract can be completed.
But if they agree that the question of price shall be deferred, and agree on the things to be done to meet the
immediate needs of the situation, there is consensus in idem, and each can require the other to do what he has
undertaken to do before the price is settled.

Where the purported agreement has in truth been imposed by one party in its terms of
contract there may well be lacking either the appearance or the reality of consensus. So if in doubt it
may be better to air a matter in negotiation and include it in the terms expressly accepted by both
sides, especially if it is both essential and to be left for later determination. Even where the other side
is complaisant or subordinate you cannot always rely on dealing with such things unilaterally by the
terms of contract you impose. The risk is that you leave open the possibility of error. Mutual error as to
an essential can lead to reduction of the contract, and it may not be possible to avoid this by a
contract term that, for example, the buyer must satisfy himself as to title: e.g. Parvais v Thresher
Wines 2009 SC 151 (an error, which may have been mutual, as to whether a toilet was part of the
subjects being offered in articles of roup). Or to revert to the example of a potentially unfair term, the
imposition of a means of resolving the issue that is wholly in the hands of one party may fail the test of
reasonableness set out in Schedule 2 of the 1977 Act.

From a commercial viewpoint it may be just as necessary to ensure that something which is
not essential for the purposes of constituting the obligation is, nevertheless, spelled out, because as a
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1964 S.C. 308

matter of law it may well not be implied. In Neilson v Stewart

an agreement to sell shares on terms

whereby the price was to be lent back was found enforceable although payment of the loan was to be
deferred for one year and thereafter was to be negotiated to our mutual agreement and
satisfaction. The agreement seems to have been drafted and signed under fairly casual
circumstances. The defender argued that it was not intended to have contractual effect. He
argued that the contract of sale and loan was one agreement and that the controversial
phrase could not be severed from the agreement - it rendered the whole of no effect because
there was no present provision for interest or repayment of the loan. The court agreed that
the sale and loan were one agreement, but found that the phrase did not render it
unenforceable and could be disregarded. It was not essential for the constitution of loan that
either interest or repayment be agreed. The law implied repayment on demand at the end of
the year, and interest would be applied at the judicial rate. From analysis of the terms, the
parties had never intended that agreement to those matters was a prior condition for the sale
of the shares, and so the contract was enforceable despite the omission of provision for them.

After all, most provisions in a contract are not required as a matter of law for the
constitution of the obligations that are at the heart of the transaction; they are required to
make practical and commercial sense for the parties in their performance of the central
obligations, or to aid them in the event of dispute. But in the flurry of such details one can
forget about the essentials.

The general approach to contract interpretation


One should draft with an understanding of how the contract will be interpreted. One starts with the
terms of the contract as written, construing individual provisions in the context of the whole contract.
But what is the proper approach to meaning? What is the correct standpoint?
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In Investors Compensation Scheme Ltd v West Bromwich BS Lord Hoffman, in the leading
speech, summarised the principles by which contractual documents are construed nowadays. He
referred to there having been a fundamental change in the last 40 years or so:

The result has been, subject to one important exception, to assimilate the way in which such
documents are interpreted by judges to the common sense principles by which any serious utterance would be
interpreted in ordinary life. ....The principles may be summarised as follows:(1) Interpretation is the ascertainment of the meaning which the document would convey to a
reasonable person [i.e. the judge] having all the background knowledge which would reasonably have been
available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the matrix of fact, but this phrase
is, if anything, an understated description of what the background may include. Subject to the requirement that it
should have been reasonably available to the parties and to the exception mentioned next, it includes absolutely

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8

1991 SC (HL) 22
[1998] 1 WLR 896

anything which would have affected the way in which the language of the document would have been understood
by the reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their
declarations of subjective intent. They are admissible only in an action for rectification. The law makes this
distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we
would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. ....
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not
the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the
meaning of a document is what the parties using those words against the relevant background would reasonably
have been understood to mean. The background may not merely enable the reasonable man to choose between
the possible meanings of words which are ambiguous but even ... to conclude that the parties must ... have used
the wrong words or syntax ....
(5) The rule that words should be given their natural and ordinary meaning reflects the common
sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal
documents. On the other hand, if one would nevertheless conclude from the background that something must
have gone wrong with the language, the law does not require judges to attribute to the parties an intention which
they plainly could not have had....

Note that there is nothing in this restricting reference to the background as an aid to
construction only in the event of an ambiguity.

The status of pre-contract negotiations in the interpretation of contracts


So, if parties positions in negotiations are irrelevant to the interpretation of contracts, how can the
course of negotiations be important to the draftsperson?

Life is never tidy. For example, work can start before a contract is signed. There may not be a
neat transition between what is said in negotiation and what is said as a part of the contract. It may all
be part of the background. The distinction between things forming the contract and things said precontract is, however, crucial. Non-compliance with something that is part of the contract attracts
contractual remedies; non-compliance with something said pre-contract does not, and may not have
any remedy unless the something is a misrepresentation or can establish a collateral contract.

Hence the draftsperson tries to tidy matters up, usually by sweeping away the pre-contractual
detritus by means of entire agreement clauses and/or provisions for the exclusion of reliance on
misrepresentations and collateral agreements. Note that merely to say that an agreement is the entire
agreement of the parties does not bar action on a misrepresentation which induced the agreement.
Fraud or crime can never be excluded, and we have noted the problem of unfair terms.

And note also that the blank exclusion of pre-contractual matters may not be right when they
are in truth the basis upon which ones client has proceeded. It may be better to reduce them to
expressly agreed form within the body of the contract, or give clear expression to collateral
agreements by way of side-letters, etc (although these can raise their own problems where they
modify the express terms of the main contract). It may be better to leave them simply untouched for

what they may be worth in the event of dispute, if they form part of the background . For that
purpose, it is good practice to formalise communications in the course of negotiations, because the
reason evidence of previous negotiations are in principle irrelevant is largely to do with it being
subjective and open to dispute. Objective evidence of pre-contractual communing is much more likely
to be relevant to the background.

So, although on one view pre-contract negotiations are utterly irrelevant to contract
interpretation, from the draftspersons perspective they may be crucial. Negotiations are a process
which normally is intended to produce a result, a contract. Where that contract is to be framed in
terms of a formal document the drafting of that document ought to be the result of full use of the
negotiation process, to ensure that it embodies the intended result rather than something else. That
may mean articulating matters that otherwise would fall to be excluded from the relevant background
by the principle that evidence of previous negotiations are excluded.

If the document speaks for itself, that is generally the best route to avoiding dispute.

Remoteness and Loss


When discussing what damages are recoverable on breach of contract there are a number of interrelated aspects: causation was the loss actually caused by the breach or would it have happened
even had there been no breach; was the loss within the range of consequences on breach which the
guilty party is in law responsible for; what is the proper measure of the loss; and when is the loss to be
measured.

Some matters are prescribed in law. For example, the Sale of Goods Act 1979 provides at s.
50 that where a buyer is in breach by failing to accept and pay for goods the measure of damages is
the loss reasonably estimated as arising directly and naturally from the breach and, as with a claim by
a buyer for non-delivery of goods falling within s. 51, the prima facie measure of damages in a case of
goods for which there is an available market is the difference in the market price of the goods and the
contract price at the time at the time provided for delivery.

But what of the more general rules? Some seem obvious: damages are available only where
the breach has caused loss, and claims for damages are always susceptible to the parties
agreement, which might be for waiver, or compromise, or indemnity, or insurance, or liquidated
penalty. A claim for damages for breach always assumes the contract is enforceable and that
performance may be pressed; and many claims are met by a claim of a right of retention, which
9

See Lord Hoffman in Chartbrook v Persimmon Homes [2009] 1 AC 1101 at 1117

ultimately is based upon the mutuality principle loss caused by a contractually justified exercise of a
right of retention of performance is not caused by breach.

Setting aside such matters, and a whole weeks seminar could be taken up by causation
alone, the question comes down to one of remoteness: it is not really true that the innocent party is to
be placed in the same position he would have enjoyed but for the breach, so far as money can
achieve that. It might be said that he is to be placed by the defender in the same position that the
defender reasonably undertook to be liable for in the event of the defenders breach. Not all losses
which happened are necessarily the responsibility of the guilty party; not all losses that, in theory or
even in fact, the parties could contemplate at the time of breach will be recoverable. The mechanism
that has been adopted is that of what was in reasonable contemplation at the time of making the
contract. The starting point is often taken to be Alderson B in Hadley v Baxendale

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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. Now, if the special circumstances under which the
contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both
parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate,
would be the amount of injury which would ordinarily follow from a *356 breach of contract under these special
circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly
unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his
contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected
by any special circumstances, from such a breach of contract. For, had the special circumstances been known,
the parties might have specially provided for the breach of contract by special terms as to the damages in that
case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which
we think the jury ought to be guided in estimating the damages arising out of any breach of contract.

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With variations in terminology , the standard of what was in the parties reasonable
contemplation has prevailed. In Balfour Beatty v Scottish Power

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Lord Jauncey said:

The Lord Ordinary in Balfour Beatty Construction (Scotland) Ltd. v. Scottish Power plc 1992 S.L.T. 811
at p. 813 A, after referring to Hadley v. Baxendale (1854) 9 Exch. 341 and to a number of other authorities,
proceeded to deal with the claim for damages on the basis that the quantification thereof was: limited to the loss
which the defenders might reasonably have contemplated at the time of the contract, subject to the explanation
that it is sufficient that the loss be of a type which might have been so contemplated. That it was actually of an
unforeseeable scale is not relevant. He went on to say that the Board: should only be taken to have anticipated
the kind of loss arising naturally in the ordinary course of things from the breach of contract. No criticism has
been directed at the Lord Ordinary's statement of the appropriate law. Rather has it been said that he has erred
in his application of the law to the facts.

After quoting from Hadley v Baxendale he then went on:


This dictum has been subject to much dissection and interpretation in subsequent cases but for the
purposes of this appeal in which the law applicable is not in dispute, it is sufficient to refer only to a dictum of

10

(1854) 9 Ex 341 at 354, 355


rd
See McBryde Contact 3 ed at 643, 644
12
1994 SC (HL) 20
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Lord Reid in Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350 , at p. 388 E where, after referring to R. & H. Hall Ltd. v.
W. H. Pim (Junior) & Co. Ltd. (1928) 33 Com. Cas. 324 , he said: I would agree with Lord Shaw that it is
generally sufficient that that event would have appeared to the defendant as not unlikely to occur. It is hardly ever
possible in this matter to assess probabilities with any degree of mathematical accuracy. But I do not find in that
case or in cases which preceded it any warrant for regarding as within the contemplation of the parties any event
which would not have appeared to the defendant, had he thought about it, to have a very substantial degree of
probability.

The case was then decided on the basis that the losses claimed, which amounted to the
ripping up of a major section of concrete road that could not be poured in one go due to a failure in
electricity supply, could not have been in Scottish Powers reasonable contemplation because they
did not know and could reasonably be supposed to have been aware that the concrete had to be
poured in one operation.

Remoteness is thus about what the parties had in reasonable contemplation, and what they
knew or must have known, and is in every case a question of fact and circumstance. There is also the
closely-related issue that the defender will be liable for damages for the kind of loss for which he or
she ought to be liable, based on the obligation which he or she undertook. This is a difficult issue and
can be analysed as an issue of causation or in terms of the liability that was undertaken. It is perhaps
no surprise that it has been articulated in professional negligence cases where the contractual breach
is one of an implied duty of care for which there is also the possibility of a claim for delict.

In SAAMCo

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the issue was: what was the liability of a valuer who gave a negligent

overvaluation of property given as security for a loan. The lenders would not have lent had they
known the true values, and what happened was that the losses were exacerbated by falls in the
market which would have happened anyway. Lord Hoffman said:

Much of the discussion, both in the judgment of the Court of Appeal and in argument at
the Bar, has assumed that the case is about the correct measure of damages for the loss which
the lender has suffered. The Court of Appeal began its judgment, at pp. 401-402, with the citation
of three well known cases ... stating the principle that where an injury is to be compensated by
damages, the damages should be as nearly as possible the sum which would put the plaintiff in the
position in which he would have been if he had not been injured. It described this principle, at p.
403, as 'the necessary point of departure.'
I think that this was the wrong place to begin. Before one can consider the principle on
which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it
is necessary to decide for what kind of loss he is entitled to compensation. A correct description of
the loss for which the valuer is liable must precede any consideration of the measure of damages.
For this purpose it is better to begin at the beginning and consider the lender's cause of action.
...
In the present case, there is no dispute that the duty was owed to the lenders. The real
question in this case is the kind of loss in respect of which the duty was owed.
How is the scope of the duty determined? .... In the case of an implied contractual duty,
the nature and extent of the liability is defined by the term which the law implies. As in the case of
any implied term, the process is one of construction of the agreement as a whole in its commercial

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[1997] AC 191

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setting. The contractual duty to provide a valuation and the known purpose of that valuation
compel the conclusion that the contract includes a duty of care. The scope of the duty, in the
sense of the consequences for which the valuer is responsible, is that which the law regards as
best giving effect to the express obligations assumed by the valuer: neither cutting them down so
that the lender obtains less than he was reasonably entitled to expect, nor extending them so as
to impose on the valuer a liability greater than he could reasonably have thought he was
undertaking.

....
Rules which make the wrongdoer liable for all the consequences of his wrongful conduct
are exceptional and need to be justified by some special policy. Normally the law limits liability to
those consequences which are attributable to that which made the act wrongful. In the case of
liability in negligence for providing inaccurate information, this would mean liability for the
consequences of the information being inaccurate.
I can illustrate the difference between the ordinary principle and that adopted by the
Court of Appeal by an example. A mountaineer about to undertake a difficult climb is concerned
about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination
and pronounces the knee fit. The climber goes on the expedition, which he would not have
undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an
entirely foreseeable consequence of mountaineering but has nothing to do with his knee.
On the Court of Appeal's principle, the doctor is responsible for the injury suffered by the
mountaineer because it is damage which would not have occurred if he had been given correct
information about his knee. He would not have gone on the expedition and would have suffered no
injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury
has not been caused by the doctor's bad advice because it would have occurred even if the advice
had been correct.

Expressed in these terms, the defender is liable only in reparation for those losses which are
encompassed by the scope of the obligation he undertook. Thus the distinction between the liability of
a solicitor who is negligent in giving advice, and is thus liable for all the consequences of the advice
being wrong, and the liability of the person who merely undertakes to provide information but does so
not to the standard provided for in his contract. The latter is liable only for the consequences of the
information being wrong. The valuers in SAAMCo were liable only to the extent that their valuations
exceeded the true values at the time of valuation; they were not liable for the shortfalls in security
caused by falls in the market. Falls in the market may be in the reasonable contemplation of a valuer
who accepts a contract to provide valuations to lenders, but they are not within the scope of the
obligation undertaken they are valuers, not underwriters of value.
The question of remoteness is thus subordinate to the question of what obligation was
undertaken.

Even though the loss is the kind of loss that the defender reasonably ought to be liable for,
and was within his or her reasonable contemplation and thus not to remote, and was caused by the
breach, there may still be issues concerned with mitigation and with the proper means of assessment
of damages but those are for another day.

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