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Josephine Wong

Law of Contract (3)

Contents
Doctrine of Privity:..........................................................................................................................3
The Burden Rule..........................................................................................................................3
Exception:................................................................................................................................3
The Benefit Rule..........................................................................................................................3
Criticism of Doctrine of Privy:....................................................................................................5
Circumventing the Doctrine of Privity........................................................................................9
Law Reform commission Privity of Contract (2005).........................................................11
Classification of Terms: Conditions, Warranties, Innominate Terms........................................12
Types of Breach:........................................................................................................................16
Choosing to Terminate:..............................................................................................................18
Actual Breach................................................................................................................................18
Choosing to terminate AFTER ACTUAL (repudiatory) Breach...............................................18
Choosing to affirm after ACTUAL (repudiatory) breach..........................................................20
Right to choose between termination and affirmation be lost? YES.........................................20
Affirmation/termination irrevocable decision........................................................................20
Anticipatory Breach.......................................................................................................................20
Choosing to terminate after anticipatory (repudiatory) breach same with actual breach.......20
Choosing to affirm after anticipatory (repudiatory) breach.......................................................20
Limitation:.................................................................................................................................21
Post-affirmation.........................................................................................................................22
Types of Loss.............................................................................................................................25
1) Expectation Loss.............................................................................................................25
2) Reliance Loss..................................................................................................................28
Protecting Reliance Interest...................................................................................................28
3. Consequential Loss.............................................................................................................29
Date of Assessment of Damages:..................................................................................................31
Exception...............................................................................................................................31
Limitation to an Award of Damages:.............................................................................................32
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Causation...................................................................................................................................32
3rd Party Intervention.............................................................................................................34
Contributory Negligence.......................................................................................................34
Law Amendment and Reform (Consolidation) Ordinance (Cap 23), s.21(1):..........................34
Remoteness of loss:.......................................................................................................................36
Type of loss v. Extent of loss.....................................................................................................39
Mitigation:.....................................................................................................................................42
What if the plaintiff takes reasonable steps in an attempt to minimise the loss but such steps
actually result in further loss?................................................................................................43
What if the act of mitigation actually wipes out the loss resulting from the breach? Is the
plaintiff still entitled to damages?..........................................................................................44
Mitigation and anticipatory breach:...........................................................................................44
Non-pecuniary loss........................................................................................................................44
Loss of amenity......................................................................................................................45
A more liberal approach.........................................................................................................46
Action for an agreed sum = action for the price........................................................................46
Liquidated damages...................................................................................................................46

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Privity and Third Parties


Doctrine of Privity:

The Burden Rule


- 3rd party cannot be subjected to a burden deriving from a contract to which he is not a part (not privy)

Exception:
- Lumley v Gye

Facts - Contract between Opera singer and theatre owner (P)


- Rival theatre (D) persuaded the opera singer to break her contract with P by promising
to pay her more money
- P brought an action against D for inducing the opera singer to break her contract with
him which caused him loss
Rule Held: D committed a tort by interfering with Ps contract with opera singer and liable to
pay damages

The Benefit Rule


- 3rd party cannot sue upon a contract to which he is not a party, even if the contract was made for his
benefit
- This is controversial A and B agreeing to confer a benefit on C, but C cannot sue to enforce that
benefit (UK modified, before HK still remains so)
- Tweddle v Atkinson

Facts - 2 fathers agreed to pay Tweddle a sum of money if he marries the daughter of D
- Tweddle married Ds daughter, but D refused to pay
Rule Held: Tweddle cannot enforce the contract because he was not a party and provided no
consideration that the benefit conferred

Wrightman, Crompton, Blackburn JJ:


- Stranger to consideration cannot enforce the promise, even if the contract was made for
his benefit
- (no need to base the result on the Privity doctrine)
Crompton:

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- It would be a monstrous proposition if a 3rd party was considered to be a party to the


contract for the purpose of suing upon it to his advantage, though not a party being
sued upon it

- Dunlop Pneumatic Tyre v Selfridge

Facts - Dunlop sold tyres to distributor (Dew & Co), on terms that Dew & Co would not sell
tyres at a price lower than Dunlops list price
- Dew & Co sold tyres to Selfridge who gave the required undertaking and agreed to pay
5pounds liquidated damages for each tyre sold at a price lower than the list price in
breach of the undertaking
- Selfridge later resold the tyres at a lower price than the list price
- Dunlop bought an action
Court HL
Rule Held: Dunlop was provided no consideration for Selfridges undertaking, rather the
consideration had come from Dew & Co
- Consideration must move from promisee ratio
Viscount Haldane
- Doctrine of Privity fundamental principle in English law that only a person who is a
party to a contract can sue on it. Dunlop was not a party to the contract between Dew &
Co and Selfridge

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B+B Construction Co Ltd v Sun Alliance and London Insurance plc

- Approved and accepted Dunlop


- Principles:
o Only a person who is a party of contract can sue
o Consideration must have been given by him to the promisor or to some other person at the
promisors request
o One may sue if the promisee really contracted as his agent. But he must have given
consideration personally or through the promisee

Criticism of Doctrine of Privy:


1. POTENTIAL INJUSTICE FOR A 3RD PARTY BENEFICIARY
- Beswick v Beswick

Facts - Uncle sold his coal-delivery business to nephew, in return for a promise that nephew
would pay a weekly sum to his uncle for the rest of uncles life, and to uncles widow
after uncles death
- After uncles death, nephew only paid one sum to widow and refused to make further
payments
- Widow brought an action as 1) administratrix of her husbands estate, 2) her personal
capacity
Court HL
Rule Held: widow cannot enforce the contract in her personal capacity - she was not a party (can
only sue as her husbands administratrix)
Potential injustice unfair to prevent a 3rd party from enforcing a benefit under a contract
which was made expressly for ones benefit

- Darlington Borough Council v Wiltshire Northern


o there is no doctrinal, logical, or policy reason why the law should deny effectiveness to a
contract for the benefit of a third party where that is the expressed intention of the parties
o The autonomy of the will of the parties should be respected

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2. COMMERCIAL INCONVENIENCE
- Makes it very difficult for an employer to extend to his employees (and agents) the benefit of an
exemption clause

- Scruttons Ltd v Midland Silicones Ltd

Facts - Contract between Owners of a drum of chemicals (Midland) and the carriers for
transportation
- Carriers limited their liability to US$500
- Carriers employed Scruttons as stevedovers
- Scruttons negligently dropped it and Midland sued Scruttons to recover the damages
for the loss
- Scruttons sought to rely on a limitation clause contained in both the contract between
Midland and carriers, and in contract between themselves and the carriers
Court HL
Rule Held: Scruttons could not rely on limitation clause against Midland neither party was
privy to the same contract
- No doctrine of vicarious immunity which would have allowed Scruttons, as agents
of the carriers, to claim the benefit of the immunity (or limitation of liability)
- Limitation clause only applied to carriers and afforded no protection to Scruttons

NOTE: Solution
Lord Reif separate contract between 3rd party and owner on basis of agency
1) Bill of lading makes it clear that the stevedore is intended to be protected by the
provisions of limiting liability
2) Makes it clear that the carrier is also contracting as agent for the stevedore
3) Carrier has authority from stevedore to act as agent
4) Any difficulties about consideration were overcome
BUT problem unknown which firm of stevedores would be contracted to unload the
goods

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1ST CRITERION: CLEAR INTENTION OF PROTECTION

London Drugs Ltd v Kuehne & Nagel International NEW exception to privity doctrine

Facts - Limitation clause in storage contract which limited the warehousemans liability
- Goods being stored were damaged y Ds employees
- Q: whether the employees, who were not expressed as parties to the contract rely on
the clause to limit their liability for damages
Court SC of Canada
Rule Held: The Eurymedon principle could not be extended
- Create a new exception although not party to the contract between employer and
another party, employees may benefit from a limitation clause in such a contract
but:
1) Limitation of liability must, expressly or impliedly, extended its benefit to
employees seeking to rely on it
2) Employees seeking the benefit must act in course of employment + performing
the very service in the contract
incremental change to the law common law develops in a manner that is
consistent with modern notions of commercial reality and justice

3RD CRITERION: AUTHORITY TO ACT AS AGENT

The Suleyman Stalskiy

Rule - No previous relationship between the stevedore and the carrier, the criterion not
fulfilled and so Privity doctrine prevailed

Port Jackson Stevedoring v Salmond & Spraggon (Australia) (The New York Star)

Rule Lord Wilberforce


- Principle in The Eumedon should be regarded as being of general applicability w/o
searching for fine distinctions based on the nature of the relationship between carrier
and stevedore
NOTE fair frequent commercial practice to seek to extend exemptions of liability to
cover 3rd parties

The Mahkutai

Rule Lord Goff


- Requirement of 3rd party having authorized the carrier to act on his behalf should not
present an obstacle to enforcing a Himalaya clause

Homburg Houtimport BV v Agrosin Private (The Starsin)

Rule Lord Bingham

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- Reasoning of The Eurymedon and the New York Star:


- a deft and commercially inspired response to technical English rules of contract,
particularly those governing Privity and consideration

DIFFICULTY OF 4TH CRITERION OVERCOME CONSIDERATION

- New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon)

Facts - Q: whether a firm of stevedores could avoid liability for damaging a drilling machine
whilst unloading it negligently
- Contract between shipper and carrier Himalaya clause designed to fulfill Lord
Reids criteria: expressly granted protection to servants, agents and independent
contractor + carrier was acting as agent on behalf of such persons
Court Privy Council
Rule - First 3 satisfied
- Difficulty of consideration overcome held that stevedores existing duty to perform
and unload the cargo could also constitute consideration moving to the shipper to
support a separate contract
- Confirmed correctness of Scotson v Pegg (As performance of a contractual
obligation owed to B could stand as good consideration for a 2nd contract between A
and C)
- possible to identify consideration moving from the stevedores to the shippers
doctrine of agency
Majority:
- Unilateral contract between shipper and stevedores by signing the bill of lading, the
shippers had made an offer to the world that whoever unloaded goods at port would
be entitled to benefit from exemption clause
- Lord Wilberforce complex of relations
Minority:
- 3rd party could be protected by an appropriately worded clause

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Circumventing the Doctrine of Privity


1) A CLAIM IN TORT
- 3rd party can choose to bring an action in the tort of negligence
- But not always possible promisor may not owe necessary dty of care to 3 rd party
- Tort measure reliance loss vs. contract measure expectation loss
- White v Jones

Facts - Solicitor of a testator negligently delayed the preparation of a changed will


- Testator died
- 2 daughters sued solicitor
Court HL
Rule Lord Goff (majority)
- our law of contract is widely seen as deificienta failure to recognize a 3rd party
right
- Doctrines of consideration and Privity present serious obstacles should allow for a
remedy in tort law
- Stressed: need to ensure practical justice and saw no unaccpetbale circumvention of
established principles of law of contract in permitting the claim to succeed in tort
Lord Keith (dissent):
- Allowing Ps claim would in substancebe to give them the benefit of a contract to
which they were not parties
- Tort of negligence should not be used to subvert the doctrine of Privity

-
Lord Browne-Wilkinson - There being an assumption of responsibility (Hedley Byrne)
Lord Nolan claim succeed extremely close relationship between paties
Lord Mustill (dissented) did not fit within the existing principles and nothing sufficiently
special

2) COLLATERAL CONTRACT
- Shanklin Pier Ltd v Detel Products Ltd

Facts - Shanklin consulted Detel Products about suitable paints for the pier.
- Detel made a representation to Shanklin that Detels paint was suitable and last for at
least 7 yrs
- Shankin then employed contractors to paint their pier and told them to purchase and
use Detels paint
- Paint was unsuitable after 3 months
Rule Held:
- Collateral contract between Shanklin and Detel
- Detels representation constituted a collateral warranty consideration for which was

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Shanklins instruction to the contractors to purchase the paint from Detel

- Charnock v Liverpool Corporation

Facts - Charnock took his car to Ds garage to repair


- Garage promised to complete repair within a reasonable time
- Car was repaired under a contract between garage and Ps insurance co
- Garage failed to carry out the repairs within a reasonable time
Rule Held:
- Charnock could bring an action collateral contract between garage and Charnock
- Consideration for garages promise to repair being: giving the garage the benefit of
entering into a repair contract with Charnocks insurance company

NOTE: if experienced commercial parties less likely to find a collateral contract

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Law Reform commission Privity of Contract (2005)


Arguments against reforming Privity doctrine Arguments for reforming Privity doctrine
rd
1. 3 party should not be able to sue in the 1. Frustrating parties manifest intention of
absence of consideration contract to benefit 3rd parties
rd
- Unreasonable to place 3 party who has not - Failure to give effect to the expressed
provided consideration in a better position intention of the parties
than a promisee who has not provided - Failure to provide remedy to 3rd parties
consideration - E.g. Tweddle v Atkinson
- Consideration doctrine vs. Privity doctrine
Reasonable to justify Privity doctrine on the 2. Privity doctrine unduly complex, uncertain,
basis of a lack of consideration artificial
Privity Q: who may enforce the contract? - Due to complexity, courts have overtime
Consideration Q: which promises may be circumvented the Privity doctrine to mitigate
enforced? its harshness
2. Contracts are personal transactions - This further increase the laws complexity and
- Ambit (scope) of a contract should extend artificiality
only to those who agree on its terms and - Need to circumvent demonstrates doctrine
scope, rather than any 3rd party beneficiary causes injustice
- Contracts need an element of consent - Casts doubt on the coherency of the doctrine
making an offer/ acceptance - E.g. The Eurymedon seeking to circumvent
- If not consented, party not obtain any and give effect to parties intention
contractual rights unnecessary complexities
- But arguably: 3rd partys enforcement of the - E.g. Scruttons v Midland shippers and
contract - promote autonomy of the stevedores
contracting parties, rather than reverse 3. The person who has suffered the loss cannot
3. Undesirable to subject promisor to 2 actions sue, while the person who has suffered no loss
- Promisor being liable to be sued by both can sue
promisee and 3rd party undesirable - Perverse and unjust result person who has
- But: possible to devise a rule to protect suffered the loss of the intended benefit (ie. 3rd
promisor form double liability party) cannot sue; while person who has
- E.g. England: Contracts (Rights of Third suffered no loss (ie. Promisee) can sue
Parties) Act 1999 promisee has recovered - E.g. Beswick
substantial damages representing the 3rd - HL achieved justice by ordering a specific
parties loss, 3rd party not entitled to an award performance and able to gain damages as an
rd
4. Unjust that 3 party can sue on the contract but administratrix but such remedy not available
cannot be sued in every case
- Avoids unjust result 3rd party can sue, not 4. Injustice to 3rd party who has relied on the
cannot be sued promise
- But: can be seen as an unilateral contract - Injustice where 3rd party regulates his affairs to
only 1 person is obliged to perform are his own detriment relied on promise, and
enforceable under the law of contract acted upon it, but cannot sue
- Up to parties to confer benefit on 3rd party 5. Widespread and continuous criticism of the
- Freedom of contractual parties - intend to doctrine, & abrogation of doctrine in other
benefit a 3rd party, but not allowing the 3rd jurisdictions
party to enforce it - Subject of considerable judicial criticism
5. Limits freedom of contracting parties to rescind - Professor Jack Beatson: no other doctrine of

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or vary and exposes them to a wide range of English contract law has been subjected to
possible 3rd party plaintiffs more criticism than Privity doctrine
- But: other jurisdictions: possible to strike - Steyn LJ in Darlington Borough Council
balance between interests of contracting there was no doctrinal, logical, or policy reason
parties in maintaining freedom to rescind and why the law should deny effectiveness to a
interests of 3rd parties e.g. C(RTP)A: parties contract for the benefit of a 3rd party where that
may vary or cancel contract until 3rd party was the expressed intention of the parties
has communicated his assent to the promise, - Andrew Burrows Denning in various cases
or has relied on it tried unsuccessfully to bring about reform
- Also: sufficiently circumscribed test to judicially. And Lords Reid, Scarman, Diplock,
decide who the 3rd party is narrow range of Goff, Steyn all in their judgments criticized
P and avoid flood of litigation the Privity doctrine and called for its reform
- Sir Roy Goode strong case for relaxing, if not
HK Federation of Women Lawyers, Chinese entirely abandoning, the Privity rule
General Chamber of Commerce expressed - In Aus (NT, WA, Qld), England, NZ, Singapore
reservations at relaxing the doctrine abrogated by legislation
- Europe also recognised and enforce 3rd
parties rights, e.g. Austria, France, Italy
HK Federation of Insurers no need to reform
- But: most states in Aus (NSW, Vic, ACT) not
reformed doctrine

- British Chamber of Commerce, Law Society


of HK, Consumer Council suppored the
relaxation of Privity doctrine extent that 3rd
aprties should be able to enforce contracts
which conferred benefits on them
Conclusion:
- Need to reform the Privity doctrine
- One subcommittee member not convinced
- Opposition reasons:
o No evidence that the abolition of the doctrine will benefit consumers
o Problems in construction industry compound cost and complexity of legal action by
purchase in cases involving sub-contractor
o bring injustice to a contractor if unscrupulous developer winds up its shelf company to avoid
liabilities unfair contractor unpaid for work, but also become involved in legal action
concerning work which may or may not be defective
o Social policy reason: little incentive for main contractor to improve risk management if he is
able to seek indemnity from sub-contractors insurer for damages caused by contractors
employees

Breach of contract

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Classification of Terms: Conditions, Warranties, Innominate Terms


Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd

Facts - Charterer hired a ship for 24 months


- There was a term in the charter-party that the ship was in every way fitted for
ordinary cargo services seaworthiness clause
- Ship quite old, required experienced maintenance
- Insufficient staff + incompetent chief engineer machinery breakdowns delays
as ship was off-hire for repair
Court of - Breach of seaworthiness clause not a condition
Appeal - Charterer had no right to terminate (or repudiate) the contract
- Delays were not so great as to sufficiently and detrimentally interfere with
commercial purposes still many months of hire remaining
Upjohn LJ:
- It is contrary to common sense to suppose that the slightest failure, e.g. missing nail
from ships hull/ incorrect no of anchors on board, would entitle charterers to
terminate the contract
NOTE: REAL REASON to want to terminate escape a bad bargain huge fall in market
freight prices want to renegotiate a new one at a lower hire-rate
Roskill LJ: (The Hansa Nord)
- Contracts are made to be performed, and not to be avoided according to the whims
of market fluctuations

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i. CONDITION (promissory term, not contingent conditions, i.e. not condition precedent/
subsequent)
Goes to the root of the contract
repudiatory (fundamental) breach
Entitle non-breaching party to choose to terminate the contract + claim damage
i. Diplock in HK Fir: Deprive the non-breaching party of substantially the whole
benefit
ii. But rejected definition Megaw LJ in Bunge Corp v Tradax SA too strict to say
that every breach must deprive the other party of substantially the whole benefit
iii. Megaw affirmed by HL Lord Wilberforce court not classify terms as conditions
too eagerly, more appropriate to categorise them as innominate terms
E.g. time is of the essence clause in commercial contracts commercial certainty
Union Eagle v Golden Achievement
ii. WARRANTIES
Lesser importances
Non-repudiatory breach
Entitle to damages, cannot terminate
iii. INNOMINATE TERMS (no pre-breach classification)
Non breaching parties rights depend on the seriousness of the effects of such breach
Intermediate terms
Serious repudiatory terminate + claim damages
Non-serious non-repudiatory damages

L Schuler AG v Wickman Machine Tool Sales ABp.325

Facts - Wickman was given the selling rights for panel presses (used in making cars)
manufactured by D Schuler
- Clause 7(b) it shall be a condition of their agreement that Wickman shall send its
representative to visit the six largest UK motor manufacturers at least once every
week, for the purpose of soliciting orders for panel presses
2 representatives chosen for the visits
- Clause 11 either party might determine the agreemet if the other party committed a
material breach and failed to remedy it within 60 days in writing
- Wickman failed to carry out all weekly visits Schuler initially waived the breach
- Schuler later terminated the contract when there were still failures (though less
frequent)
Court House of Lords
Rule Lord Reid (majority)
Held: clause 7(b) was not a condition Schuler not able to terminate the contract
- the use of the word condition by parties does not conclusively mean that the term is
in law a condition
- Potential clash between clause 7(b) and clause 11 allowed termination only on
giving notice allowing remedial action clause 7(b) construed as not being a
condition
- Unreasonable that one failure to visit out of the 1400 times would terminate the
contract
Lord Wilberforce (dissenting)

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- Clause 7(b) was a condition deprive Schuler of any remedy if clause 7(b), which is
so careful and specific in requirement, was held to be a term
- Test of the ubiquitous reasonable man

Cehave NV v Bremer Handelgesellschaft mbH, The Hansa Nord

Facts - D agreed to sell C a shipment of citrus pulp pellets for cattle food
- Clause 7 shipment to be made in good condition
- C paid the full contract price of 100,000. The market price of pellets then fell
- On arrival, 1/3 of the pellets were damaged
- C rejected to the whole cargo, alleging that it was not shipped in good condition and
claimed repayment of 100,000
- Subsequently, cargo was bought by 3rd party for 30,000 who sold it to C
- C then used the whole of that cargo, including the damaged pellets, to manufacture
cattle food
Court Court of appeal
Rule - Held: shipment in good condition was an innominate term and not a condition
- On the facts, the consequences of the breach of Clause 7 were not sufficiently serious
for the buyers to entitle them to terminate the contract, since C still used the damaged
pellets for cattle food
- shipment of good condition = fair average quality
- C not entitled to reject the goods
- If held to be a condition escape from a bad bargain
Principles to NOTE:
- Condition is a term, the failure to perform which entitles the other party to treat the
contract as at an end
- Warranty is a term, breach which sounds in damages but does not terminate, or
entitle the other party to terminate, the contract

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Bunge Corporation v Tradax Export SA

Facts - Bunge Corp (D) agreed to buy soya bean meal from C.
- Clause 7 buyers were to give at least 15 consecutive days notice of the probable
readiness of the ship for loading
- But Bunge failed to give notice by 13 June, and gave notice on 17 June
- C argued that D breach the contract and entitled them to terminate the contract and
recover damages for difference between market and contract price
Court House of Lords
Rule Held:
- Clause 7 was a condition, not an innominate term
- Sellers entitled to terminate the contract and recover damages
Lord Wilberforce
- Commercially most undesirable to adopt the gravity of the breach approach of the
HongKong Fir case
- Clearly essential that both buyer and seller should know precisely what their
obligations are, most esp. because the ability of the seller to fulfill his obligation may
well be totally dependent on punctual performance by the buyer
Lord Scarman:
- Mercantile contract parties required to know where they stood not merely later with
hindsight, but at once as events occurred
- Makes commercial sense
Lord Roskill:
- not believe Diplock LJs decision in Hong Kong Fir ever intended for a contract
breaker to escape by claiming that he had only broken an innominate term, when
upon its true construction, it is clearly a condition of the contract
- mercantile contract when a term has to be performed by one party as a condition
precedent to the ability of the other party to perform another term

Types of Breach:
1. ACTUAL
- Fails to perform his contractual obligations OR
- Perform them defectively not up to the standard of performance
Actual breach
o Strict obligations (e.g. s16(2) SOGO implied condition: merchantable quality, even if D
proved that reasonable care and skill)
o Qualified obligations (e.g. s5 of SS(IT)O carry out service reasonable care and skill
have to show that they are negligent, e.g. a lawyer cannot guarantee to win a case)
2. ANTICIPATORY BEFORE FIXED TIME OF PERFORMANCE
- Refuses, or makes it clear the he will not be able to fulfill his contractual obligations
- (Expressly or by conduct)
- (isnt technically a breach since not date to perform yet)
Anticipatory breach
o Intention not to perform
o Inability to perform

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- innocent party is entitled to terminate now and to recover damages at once by accepting the
anticipatory breach
- does not have to wait for actual breach at the due date of performance
Hochester v De La Tour

Facts on 12 April 1852, D agreed to employ C as a travel courier for 3 months starting on 1
June 1852
On 11 May, D wrote to C stating that he had changed his mind and would not require
his service
On 22 May, C commenced an action claiming damages for breach of contract
Court Court of Queens Bench
Rule Held:
- Entitled to terminate the contract and claim damages in advance of date of
performance for anticipatory breach
Lord Campbell:
- More rational, and more for the benefit of both parties that after the renunciation by
D, P should be at liberty to consider himself absolved from any future performance
and retain his right to sue for any damage he suffered
- The man who wrongfully renounces a contract, into which he has deliberately
entered, cannot justly complain if he is immediately sued for compensation in
damages
- The man who is injured reasonable to allow an option to sue immediate or to wait
till the time when the act was done
NOTE:
- Innocent party not bound to accept an anticipatory breach as terminating the contract
- If chooses not to accept the anticipatory breach, the contract continues in force. But
carries risks for innocent party
E.g. contract may become frustrated right to claim any damages for breach is lost
(Avery v Bowden)
E.g. innocent party may commit a breach of its own obligation the contract-breaker is
entitled to terminate the contract and to recover damages (Ferconetal)

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Choosing to Terminate:
- Only for breach of a condition, ie. Repudiatory breach
- Decro-Wall International SA v Practitioners in Marketing

MISTAKEN BELIEF OF RIGHT TO TERMINATE (BONA FIDE)

- Woodar Investment Development v Wimpey Construction


o Held: Lord Wilberforce: bona fide not breach
o Lord Salmon Dissent bad point of law to avail them how can B know and prove
whether the As mistakenly accepted Bs purported repudiation was not in good faith?
Keung Shui Tong approved Wilberforces position - a repudiation is not to be lightly inferred
Vaswani v Italian Motors

Facts -
Seller mistakenly calculated excess sum of payment which had previously been
agreed with the purchaser
- Purchaser rejected demand for payment of the higher price, but also failed to tender
even the originally agreed sum
- Purchaser brought an action to recover deposits argued that sellers had repudiated
the agreement by making their erroneous demand for payment at a higher price
Court Privy Council on appeal from HK
rule Held: sellers NOT repudiated the agreement
- Sellers conduct not totally inconsistent with the continuance of the contract
- It could constitute repudiation if that party went further than a mere assertion and
actually acted inconsistently with continuance of the contract
- Merely asserting a claim based on mistaken, but good faith interpretation would
NOT constitute a repudiation
- i.e. if conduct in Q was repudiatory/ inconsistent with continuance of the contract
bona fide motives of party responsible would be immaterial
Creatiles Building Materials Co if party acts in a way which is inconsistent with contract, party
acting in good faith is irrelevant

REPUDIATION IN ANTICIPATORY BREACH

- Express statements/ conduct suggestive on the balance of probabilities that contractual


performance will not be carried out
- Woodar Investment Development v Wimpey Construction
o Held by majority: To look at Ds conduct as a whole intention to abandon and refuse
performance
o Criticism: focussing on partys intention vs. Federal Commerce & Navigation v
Molena Alpha: focus on consequences of the conduct

Actual Breach
Choosing to terminate AFTER ACTUAL (repudiatory) Breach
Clear and unequivocal communication
o Vitol SA v Norelf (The Santa Clara)

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Facts: buyers sent a telex amounting to repudiatory breach, Q: whether the


sellers failure to perform their own obligations (by not tendering the bill of
lading) sufficient to constitute acceptance to buyers repudiation
Lord Steyn: Q of fact depend on the particular contractual relationship and
circumstances of the case
Need not be personally, or by an agent, notify the repudiating party sufficient
that the fact of the election comes to the repudiating partys attention
Conveying the reason for treating the contract as terminated
o Non-breaching party must make it clear and unequivocal the reason for his own non-
performance following the breach of the other party
o Kar Ho Development Co v Axis Investment
Facts: property purchasers failure to pay the purchase price when requested
could not be regarded as an unequivocal acceptance of the sellers repudiatory
breach, because there were other possible reasons
Must convey the reason why, i.e. because of the partys repudiatory breach that
we are now terminating the contract
Mere non-performance is very dangerous
o Arcos v EA Ronaasen & Son not matter what the real motive for non-breaching partys
choice to terminate?
A CANNOT choose to terminate the contract if Bs breach was caused by A
o New Zealand Shipping v Societe des Ateliers et Chantiers de France
Principle: man shall not be allowed to take advantage of a condition which he
himself brought about
o Kensland Realty v Whale View Investment
Facts: vendor cannot rely on purchasers lateness as a breach to terminate the
contract because it was vendors own failure to provide payment details that
caused the purchaser to complete payment 6 mins after deadline
Bokhary PJ: the law does not permit the party in breach to take
advantage of that state of affairs to the detriment of the other party

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Josephine Wong

Choosing to affirm after ACTUAL (repudiatory) breach


- Non-breaching party may choose to affirm
- To be valid must be aware of the facts of giving rise to this right to choose
- Clear and unequivocal that he is affirming the contract and intends to continue
Yukong Line of Korea v Rendsburg Investments Corporation of Liberia (The Rialto)
o Facts: non-breaching party saying totally unacceptable and request for party to
honour their obligations insufficient for a clear and unequivocal affirmation
o Moore-Bick J: it is often the most natural response to call on the other to change his
mindhighly unsatisfactory if, by responding in that way, the injured party was to
put himself at risk of being held to have irrevocably affirmed the contract
o NOTE: non-breaching can still claim damages for the breach

Right to choose between termination and affirmation be lost? YES


A. Estoppel
- Peyman v Lanjani
- If defrauded part does not know that he has a legal right to rescind, he is not bound by acts which
are only an intention to affirm the contract, unless those acts are adverse to the opposite party, i.e.
unless they involve something to the other partys prejudice or detriment estoppel the other
party has acted upon a representation made by the defrauded partys conduct, latter is going on with
the contract
B. SOGO s13(3)
- in absence of express or implied term to the contrary, once the buyer has accepted the goods, any
breach of a condition will be treated as breach of a warranty and not as a ground for rejecting the
goods and treating the contract as repudiated
- s37 deemed to have accepted the goods e.g.
o intimates to the seller that he is doing so
o acts inconsistently with the sellers ownership
o retains good beyond a reasonable lapse of time w/o intimating to the seller that he has
rejected them

Affirmation/termination irrevocable decision


- Johnson v Agnes
o Once terminated release parties from future obligations cannot resurrect
o Once affirmed waive the right to terminate

Anticipatory Breach

Choosing to terminate after anticipatory (repudiatory) breach


same with actual breach

Choosing to affirm after anticipatory (repudiatory) breach


- Fercometal SARL v Mediterranean Shipping (The Simona) non-breaching party may choose
to affirm and wait until the contractual date when performance is due

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Josephine Wong

Limitation:
- White & Carter v McGregor

Facts - WC agreed with M to advertise Ms business for 3 years


- On the same day, M repudiated the agreement, but WC went ahead and
performed their side of the contract for full 3 years
- EC later claimed the contract price
Court HL (3:2)
Rule - WC were not under an obligation to accept Ms repudiation, even though the
court acknowledged that it was unfortunate the WC saddle themselves with an
unwanted contract causing an apparent waste of time
- WC entitled to recover the contract price
- No requirement that WC mitigate their loss because it was a claim in debt and
not in damage
Lord Hodson refused to turn a claim in debt into a discretionary remedy where a
party would not be held to his contract unless court thought it reasonable to do so
NOTE: controversial wastage of performing unwanted performance

- Reichman v Beveridge

Rule - No duty to mitigate in a claim in debt


- Facts: no duty to mitigate in an action for arrears of rent after a tenant left
premises after only 3 years in a 5 year lease

(a) NO LEGITIMATE INTEREST


- White & Carter Lord Reid: the power to affirm the contract could not be exercised by a person
who had no legitimate interest in performing the contract rather than claiming damages
(b) WHOLLY UNREASONABLE
- Clea Shipping Corp

Facts - Charterers of ship rejected a 2 year charter after one year when the vessels
engine broke down and would require extensive repairs which would go on for
several months
- But shipowners had gone ahead and carried out the repairs, having the vessel
and crew ready to receive sailing instructions from the charterers upon
completion of repairs
- Charterers sought repayment of the hire price for the remainder of the charter
term to which shipowners replied that they were free to choose to affirm the
contract and keep the vessel at disposal of the charterers
Rule Held: shipowners conduct (refusing to accept the repudiation) was wholly unreasonable
- Though Charterers would have to pay damages, they were able to reclaim the
hire price for the remaining months
Lloyd J:
- There comes a point at which the court will cease, on general equitable
principles, to allow the innocent party to enforce his contract according to its

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Josephine Wong

strict legal terms


NOTE: consistent with the prevention of waste when the other party does not want to
require performance
(c) EXTREME CASES
- Ocean Marine Navigation (The Dynamic)

Facts - Ship charterers failed to redeliver the vessel to the shipowners on time
- Shipowners claimed the agreed hire fee for the additional time period, thereby
affirming the continuance of the contract, rather than being limited to damages
for repudiatory breach
rule Simon J:
- Lord Reids legitimate interest limitation (W&C) was designed to avoid
saddling (burdening) the other party with an additional burden with no benefit
to himself
(1) Burden is on the contract-breaker to show that the non-breaching party had no
legitimate interest in performing the contract, rather than claiming damages
(2) Burden is not discharged merely by showing that the benefit to the other party is
small in comparison to the loss to the contract-breaker
(3) Exception to the general rule (non-breaching party can choose whether to accept
repudiation or affirm contract) applies only in extreme cases, i.e. where
damages would be an adequate remedy and where an election to keep the
contract alive would be unreasonable

- Cited Gator Shipping any fetter(restrain) of the non-breaching partys right


to choose between acceptance of the repudiation and affirmation of the contract
should only be applied in extreme cases where damages would provide an
adequate remedy and continuing with the contract would be wholly
unreasonable

- Fuji Xerox (HK) Ltd v Vigers HK


o Adopted Simon Js approach and Lord Reids judgment in W&C
o General proposition that a party may enforce his contractual rights as he sees fit
whether it be in a reasonable or unreasonable waythe furthest he went was to suggest
that a party could not use his contractual rights to penalise the other party by taking
one course if there was another course which was equally advantageous to him

Post-affirmation
CAN AFFIRMATION BE REVOKED? NO

- Party cannot change his mind in the period between affirmation and date when performance is
due
- Fercometal SARL v Mediterranean Shipping (The Simona)
o Lord Ackner there is no third choiceto affirm the contract and yet be absolved from
tendering further performance unless and until the party in breach gives reasonable notice
that he is once again able and willing to perform

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Josephine Wong

- CONTINUING BREACH
o Stocznia Gdanska
o Thomas J: Earlier affirmation will not prevent Non-breaching party from choosing to
terminate in the period prior to the date set of performance
Consistent with preventing waste (i.e. where performance is unwanted by the
other party
o 2 CONFLICTING VIEWS:

Colman J Thomas J
- After the non-breaching party has affirmed - Concerned about the position of the non-
the contract, the party in breach should be breaching party who would otherwise be
able to rely on the fact that it will have a bound to continue performance which was
further opportunity to perform its clearly unwanted
contractual obligations
Uncertainty
Does law favour part in breach to rescue its initial non-performance (i.e. the possibility to be able
to cure the anticipatory breach at or before the contractual date for performance?
OR does law favour recognising the realities of the parties positions in the light of the recurrent
breach and therefore avoid the wasteful additional expenditure?

RISKS FOLLOWING THE DECISION TO AFFIRM

(1) If affirming party itself breaches the contract, he cannot argue that the earlier repudiation by the
other party operates as an excuse for his own subsequent breach
- The Simona

Facts - Charterers were entitled to cancel the charter if ship was not ready to load on or
before 9 July, under a charterparty
- On 2 July, following the shipowners request for an extension to 13 July,
charterers committed an anticipatory repudiatory breach by chartering another
ship to carry the cargo
- Shipowners did not accept this repudiation and gave notice to the charterers that
the ship would start loading on 8 July (affirmation)
- This notice was invalid ship was not ready to load shipowners were
committing a breach of contract
- Thus, Charterers rejected the notice and gave notice of cancellation
HL Lord Ackner:
- once contract had been affirmed, it was kept alive fir tge benefit of both parties
- the party affirming the contract could not both keep the contract alive and seek to
justify his own non-performance by reference to the earlier repudiation

(1) If the contract is frustrated in the period between affirmation and contractual due date for
performance, frustration will discharge the contract and so the non-breaching/affirming party will
lose the remedy of damages for breach
- Avery v Bowden

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Josephine Wong

Facts - Master of a ship had been informed, before the last possible date for loading, that
there was no cargo available (anticipatory breach)
- Master chose to affirm the contract and remain in the port, hoping that the cargo
would eventually be provided
- But before the last possible date for performance, the contract was frustrated by
the outbreak of the Crimean War (making it illegal to load cargo in an enemy port)
- Shipowners could not recover damages for anticipatory breach for the failure to
provide the cargo

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Josephine Wong

Damages
- Available as of right
- A secondary obligation
Every failure to perform a primary obligation is a breach of contract. The secondary obligation on
the part of the contract-breaker to which it gives rise by implication of the common law is to pay
monetary compensation to the other party for the loss sustained by him in consequence of the
breach...
- To compensation, No punitive damages effective breach
Addis v Gramophone Co Ltd
- Restitutionary damages
A-G & v Blake
- No general authority that punitive damages can be awarded for breach of contract

Types of Loss

1) Expectation Loss
- the position placed in the situation where the contract had been properly
- loss of the benefit of the promised performance, including the profit
- Protecting the expectation interest

- Robinson v Harman
Court of Exchequer
Facts: - Defendant agreed in writing to grant a 21-year lease of a house to the claimant for
an annual rent of 110.
- The defendant failed to grant the lease but the legal title was passed to the
trustees.
- The premises worth over 110 a year so the claimant had made a good bargain.
- Defendant argued that he would only pay the 20 expenses wasted because of the
breach but the trial judge granted the claimant 200 for the loss of the bargain.
Court: - The claimant was entitled to be put into the position as if the contract
had been performed
- rule of common law-breach of contract-same situation as the contract had
been performed
- cited Flureau v Thornhill (sale of real estate)-exception

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Josephine Wong

DIFFERENCE IN VALUE : THE MARKET PRICE RULE

- difference: what was promised and what was actually received


- S > D seller would be able to recover the profit made from this would-be sale:
- Thompson v Robinson
- S < D not successful seller could have sold it to both the original buyer and other alternative
buyer Charter v Sullivan
- If there is an available market seller will dulty be able to sell the goods to a substitute buyer,
leaving buyer to compensate for diff
- Seller could claim that he has lost part of the volume of sales could have sold other identical
goods
- S52(3) SOGO damages is to be ascertained by the diff between contract price and the market/
current price

- NO available market to decide the value is? Custom made? how to measure?
then the court will estimate.
But if it is too speculative and uncertain court would assign a reliance loss--< speculative
- If breach relates to a warranty non-serious non-breaching party is not expected to go to market
to seek substitute performance as a means of mitigating his loss wished to be compensated for the
lost expectation diff in value between goods warranted and delivered

COST OF CURE

Consumer surplus subjective benefit values which is placed by the individual recognised A-G v
Blake

LIMITATION

- Ruxley Electronics and Construction

Fact Swimming pool was built as 6 feet, but P demanded 7 feet


Court HL
Held: awarded only pecuniary damages (nominate) loss of amenity
- Swimming Only be cured by demolishing the existing and rebuild a new pool
high expense Cost of cure unreasonable and disproportionate to the
benefit/advantage
- No evidence for P to carry out the demolish intention of the parties
- no difference in value, the depth
- (Court recognised that courts do not usually care about how the damages are
used, but in this case: intention would be needed to decide reasonableness)

Analogy Lord Bridge:


- A house is to be built and the owner specifies that one of the lower courses of
brick should be blue. The house as built conforms to the specification except in
relation to the colour of this course of bricks. Yellow bricks have been used
instead of blue. To conform to the requirements of the owner would involve
knocking down the house and rebuilding, at great cost. unreasonable

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Josephine Wong

- Birse Construction Ltd v Eastern Telegraph

Facts - P built a residential college for D


- D complained that there were various defects
- D had already decided to sell the building and took no steps to rectify the defects
- P brought an action to recover monies (duties/ taxes) owed for the work done
Rule - Held: nominal damages awarded
- D suffered no loss from those defects since the proposed sale of the building had
already been negotiated with no discount in Ds price to the buyers to take account
of the defects
- Unreasonable to award cost of cure damages no intention to repair
It is now clear from Ruxley...that the normal measure of damages for defective
work is the cost of reinstatement (i.e., the cost of remedial works) but in every
instance it has to be reasonable to apply it.
2 competing interest

Out of proportion of the benefit of P Encourage building industry to get away by


No intention to carry out repair using cheaper material less chance of getting
Unjust enrichment of the non-breaching party catch, just have to pay nominal damages?
wrong signal

EXPECTATION LOSS SPECULATIVE & UNCERTAIN - CHANCES

- Court attempts to assess damages


- Simpson v London and North Western Railway late arrival of specimen for trade exhibition
allowed to speculate the loss of profit

Chaplin v Hicks

Facts - P entered a beauty contestant


- In the 2nd stage of the interview, manager failed to inform P of the
Rule - Loss of chance/ opportunity
- Chances of succeeding are quantifiable
- Though no certainty to be selected 12 people

Vaughan Williams LJ:


[T]he fact that damages cannot be assessed with certainty does not relieve the wrong-doer of
the necessity of paying damages for his breach of contract.

Fletcher Moulton LJ:


...it is for the [court] to do [its] best to estimate...
Where by contract a man has a right to belong to a limited class of competitors, he is
possessed of something of value, and it is the duty of the [court] to estimate the pecuniary
value of that advantage if it is taken from him.
- Everything that happens in the future depends on the contingency too wide to say

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Josephine Wong

that mere nominal damages would only be awarded

2) Reliance Loss
- Applies when expectation loss is too speculative and uncertain
- OR wasted expenditure

McRae v Commonwealth Disposals Commission

Facts - Purchase of a ship containing oil tanks off the coast of PNG
- No such vessel actually existed
- No such place as the Jourmannd Reef
Court HC of Aus
Rule Courts to access:
- Difficult to access
- unless it is impossible to say that damages should be accessed, the court has to estimate
Reliance loss:
- expectation loss is too speculative
- awarded 3000 pounds in preparation
- cannot claim profit
Distinguish on the material facts in exams

Distinguish between Chaplin v Hicks and McRae?


- Chaplin there was a real and actual loss of chance of obtaining a prize
o certain and definite benefit
- McRae P could not demonstrate that not purely speculative
o Uncertain and mere possible benefit

Protecting Reliance Interest


- Anglia Television v Reed

Facts - Actor refused to continue contract with TV


- TV has to abandon the film
Rule - Profit from film too speculative
- Reliance loss wasted expenditure recovered pre-contract production expenses
Lord Denning:
- P is not limited to expenditure incurred after the contract was concluded.
- He can claim also the expenditure incurred before the contract, provided that it was
such as would reasonably be in the contemplation of the parties as likely to be
wasted if contract was broken relate to REMOTENESS

BURDEN OF PROOF

o Burden of proving P on the BOP that he would have recouped (recovered) his
expenditure in absence of Ds breach
o Adv for P to frame its claim as reliance expenses, rather than directly seeking to put into
as good as a position as if the contracts been performed

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Josephine Wong

o P given the benefit of a rebuttable factual presumption that had the contract been
performed, it would have recouped its reliance expenses
- CCC Films (London) Ltd v Impact Quadrant Films

Facts - D granted a licence to P to exploit 3 films and P agreed to pay


- D, in breach of contract, failed to send P tapes of the films P unable to exploit the
films
- P did not seek to prove any loss of profit, but instead claimed damages of $12000 as
wasted expenditure
Held: the claim should succeed because D had not proved that the expenses would not have
been recouped had the contrast been performed

- Dataliner Ltd v Vehicle Builders & Repairers Association


o If nature of Ds breach makes it impossible for P to prove that his expenditure would
have been recouped but for Ds breach, burden shift to D to prove that P would not have
recouped his expenditure even in the absence of Ds breach (LM)
o No need to rely on the presumption where P can prove that it would have made
sufficient profits to recoup its expense (AB)

LIMITATION: ATTEMPTING TO ESCAPE A BAD BARGAIN

- Put in the better position by awarding reliance loss


- C & P Haulage v Middleton

Fact - P using Ds garage


- P equipped the garage
- In the licence agreement all fixtures and equipment that were installed in the
garage could not be removed at the end of the licence agreement, and would
become the property of the garage owner
- Owner breached the contract and eject P before the termination of the agreement
- P tried to recover the equipment installed
Rule - P could NOT claim the cost of the equipment
- Even if the owner has terminated lawfully, P would still have lost the equipment
- Ps lost not from Ds breach, BUT in fact his own bad bargain
- If Court compensating Ps cost of equipment, allow P to escape a bad bargain

- The Mamola Challenger


o Teare J: reliance damage are not based on a separate principle from the protection of the
expectation interest laid down by Robinson v Harman
o Expectation interest is one and only compensatory principle to be applied, so that as the
owners loss assessed according to that principle had been entirely mitigated, there was no
other loss to be compensated
o The recovery of wasted reliance expense is merely an indirect method, supported by a
reverse burden of proof, of protecting that expectation interest

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Josephine Wong

3. Consequential Loss
- Losses, though not resulting directly from the breach of contract inevitable consequence of the
breach
- May be recoverable
- Causation and remoteness i.e. loss resulted (though indirectly) from the breach? Or within
contemplation of the parties when contracting?
- H. Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd remoteness of damage

Facts - Parsons farmed pigs


- Bought bulk food storage hoppers form Uttley installed them on the farm
- Ventilator top was sealed when it was installed
- Parson did not notice this, and pigbuts became mouldy
- P though it would do pigs no harm
- 254 pigs died from E.Coli
- P sued Uttley for damages for loss of pigs and trading profits
Court CA
Rule Held: loss was not too remote type of loss

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Josephine Wong

Date of Assessment of Damages:


- General Rule: as at time of breach!
- Rationale: earliest time for P to mitigate (reduce) the loss by seeking substitute performance or take
other steps to minimise the loss
Miliangos v George Frank (Textiles) Ltd
S53(3) SOGO
o a buyers damages for non-delivery of goods will be assessed by reference to the
market...price of the goods at the time...when they ought to have been delivered

Exception
The Golden Victory

Facts - Charterparty of 7 yrs made in 1998 to 2005


- After 3 years, repudiatory breach by D, and accepted by shipowners a few days
later (17 Dec 2001)
- In March 2003 Iraq war broke out- under clause 33: cancel the contract
- Q: whether shipowners damages should be assessed as at the date of breach of the
basis of the value of 4-yrs remaining (ignore the war) or as at the date of trial on
the basis of a 15 month remaining charter party (taking into account the known
outbreak of war
Court HL (3:2) controversial + criticism damages up to the war, as D would have lawfully
terminated the charter at that point exception to the general rule
Rule Majority
Relied heavily on:
- Bwllfa and Merthyr Dare Stream Collieries (1891) Ltd v Pontypridd Waterworks
Co [1903] AC 426:
- Why should [the decision maker] listen to conjecture on a matter which has
become an accomplished fact? Why should he guess when he can calculate?
With the light before him, why should he shut his eyes and grope in the
dark?
(per Lord Macnaghten, Bwllfa)

- Subsequent events were known no need to speculate


- consistent with the principle of fair compensation as placing P in the position in
which he would have been but for the breach, BUT NO BETTER OFF i.e.
actual loss

Minority: (dissenting)
Lord Bingham:
the [majoritys] decision undermines the quality of certainty which is a traditional
strength and major selling point of English commercial law

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Josephine Wong

Majority in response: Lord Scott


BUT: certainty is a desideratum...it is not a principle and must give way to
principle. Otherwise, incoherence of principle will result.
Competing Wider application danger of setting a bad precedent ?
issues 2 competing issues:

1) Finality, certainty yet artificiality and shutting of eyes to the fact (minority)
2) Justice, flexible yet Uncertainty encourage delay tactics? (majority)

- Johnson v Agnew
o Date-of-breach principle not an absolute rule
o Damages award in lieu of specific performance
o this is not an absolute rule: if to follow it would give rise to injustice, the court has power to
fix such other date as may be appropriate in the circumstances

- Radford v De Froberville
o If probable that D will make good his default, damages will be assessed at the time when such P
no longer exists the duty to mitigate

Limitation to an Award of Damages:

Causation
- Must constitute an effective cause more than having merely provided P with an opportunity to
sustain loss
- Matter of fact
- C&P Haulage v Middleton equipped garage (above)
o Garage would have had a legal right to terminate installed equipment would
automatically become property of the garage owner
o Loss was caused by a term in the licence agreement i.e. NOT by the breach by a garage
owner (NOT because of wrongful termination)
- Quiin v Burch Bro

Facts D, in breach of contract, failed to supply a step-ladder to claimant who was a

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Josephine Wong

sub-contracting plasterer
Claimant stead used an unfooted trestle and collapsed. Claimant fell and injured
his heel
Trial judge dismissed Cs claim for substantial damages
C appealed
Court Court of Appeal breach did not cause the injury
Rule Sellers LJ:
- Cannot be said to be an accident which caused by Ds breach of contract
- Ds breach brought about Ps conduct, but in no way caused it
Danckwerts LJ:
- 1) there was no obligation on P to do the work w/o suitable equipment 2) P
voluntarily and w/o Ds knowledge chose to use the trestle 3) cause of Ps
accident was Ps choice to use the unsuitable equipment 4) failure of D to
provide equipment may have been the occasion of the accident, but was not the
cause
Salmon LJ:
- The breach of contract cannot, in the circumstances of this case, be said to have
caused Ps injury

Held: no substantial damages awarded

NOTE:
- Failure to supply the ladder in breach of contract was clearly a but for cause of
the injury not an effective cause??
- Galoo

Facts Cs (Galoo) companies argued that D (auditors) failed to use reasonable care to
reveal the C was insolvent
If D has so, then C would have stopped trading
C continued to operate business, and incurred further loss
C sought for damages for trading losses
Court Court of Appeal
Rule Held: auditors breach had not caused the trading losses not an effective cause
- Ds breach of contract must be an effective or dominant cause of his loss for P
to claim damages not just merely an opportunity
- Quoted: Monarch Steamship and Quinn v Burch
Wroth v Tyler

- Breach must be at least an actual cause relevant there are other contributory cause

County Ltd v Girozentrale Securities

- lesser of 2 contributing cause still recovered, given that it is an actual cause

cf: South Australia Asset Management Corp v York Montague Ltd

- full amount may not always be recoverable where there is another cause contributing to the loss

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Josephine Wong

- breach through a negligent overvaluation of the property Ds liability should be limited to the
direct consequences of the breach i.e. that P lenders had inadequate security for the mortgage
- Severe fall in property market not a direct consequence of Ds breach and thus not be recovered
in damages

3rd Party Intervention


- Ocean Tramp Tankers Corp v V/O Sovfracht (The Eugenia)
o Charterers breached contract in selling in the Canal danger zone. Charterer not excused
from paying the full payment due to 3rd party closing the Canal
o Foreseeable and reasonable intervention
o whether action could have been taken to avoid the consequences of such intervention

Contributory Negligence
- Ps own negligence can break chain of causation NAI

Beco Ltd v Alfa Laval Co Ltd

- Proportionate reduced to the extent of P contributed to Ps own loss

Law Amendment and Reform (Consolidation) Ordinance (Cap 23),


s.21(1):
- Where any person suffers damage as the result partly of his own fault and partly of the fault of
any other person...the damages recoverable in respect thereof shall be reduced to such extent as
the court thinks just and equitable having regard to the claimants share in the responsibility
for the damage...

Cases on the applicability of the 1945 Act to contract

Forsikringsaktieselskapet Vesta v Butcher

Facts Claimants (insurers) asked their brokers (D) by telephone to delete the term in
the offer of reinsurance (requiring a 24 hr watch over the fish)
D, in breach of their contractual and tortious duty of care, failed to delete that
term
C were contributorily negligent in relying on just one telephone call and did not
wait for Ds confirmation
Had the breach of contract caused loss, contributory negligence would have
applied and reduced damages by 75% (but in this case, Ds breach did not cause
C any loss. If term is crucial, C would have been entitled to substantial
damages)
Court Court of Appeal
Rule Hobhouse J:
- Tripartite classification of cases - standard way of analyzing the law in relation
to contributory negligence in contract. 3 categories:
1) Ds liability arises from contractual provision that does not depend on Ds

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Josephine Wong

negligence strict liability


2) Ds liability arises from a contractual obligation which is expressed in terms of
taking care, but not correspond to duty to take care in tort
3) Ds liability in contract is the same as his liability in tort of negligence
independently of the existence of any contract
- This case fell into category 3
- Damages would be reduced taking into account Ps own contributory negligence
- Same rule applies

Others:
1) Strict liability depends on its construction and implied terms no damages
reduced
2) After the authoritative acceptance of Henderson v Merrett Syndicates it is rare
for a case to fall within category 2 rather than category 3

- Barclays Bank Plc v Fairclough Building

Facts D, in breach of contract, failed to take proper precautions in cleaning Cs banks


storage warehouse roof
Roofs were made of asbestos cement sheeting
Due to Ds work, warehouse was contaminated with asbestos fibres and dust
remedial work of 4 million pounds
D alleged that Cs bank was partly responsible, through its property divison, for
proper precautions not having been taken and thus be reduction for contributory
negligence
Court Court of Appeal contributory negligence could not apply
Rule - Q: does section 1(1) of Law Reform (Contributory Negligence) Act 1945 apply
to actions in contract?
Beldam LJ: fell in category (1) of Forsikringsaktieselskapet Vestas judgment
- Contributory negligence is not a defence to a claim for damages founded on
breach of a strict contractual obligation

NOTE:
Law Commissions project on contributory negligence in contract Contributory
Negligence as a Defence in Contract (1993) recommended the minor reform that
contributory negligence should be extended to category 2, but rejected applying
contributory negligence to category 1 cases
Mitigation:

- DO NOT put you have a duty to mitigation


- duty
- P should take reasonable steps to reduce your loss

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Josephine Wong

Remoteness of loss:
Hadley v Baxendale

- Too remote/ improbable to be in the scope of liability cannot recover loss

Facts - Ps mill shaft broke and engaged D to take it to Greenwich for the manufacture of a
new shaft
- D returned late the mill and delayed the production resumption
Rule H: loss of profit not recoverable too remote - loss did not arise naturally insofar as P
might have a spare shaft

Alderson B:
- 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 contract, as the probable
result of the breach of it.
- special circumstances under which the contract was actually made were
communicated by the plaintiffs to the defendants - known to both parties, the
damages resulting from the breach of such a contract - reasonably contemplate -
amount of injury which would ordinarily follow from a breach of contract
- 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.

Two-limb test: (NOT 2 stage test)


(i) Normal Loss damages recovered for losses arising naturally according to
the usual course of things reasonable contemplation of the parties as a likely
result of a breach at time of contracting
o (regardless of actually foresaw such loss)
(ii) Special Loss damages recovered for losses arising from special
circumstances D knew of these circumstances Ds actual knowledge forms
the basis for the special loss being a reasonable contemplation of both parties at
time of contract formation

Overlap: not clear cut


- the lesser the likelihood of the injury the greater the Ds knowledge needed
The Heron II:
- the case may come under the first part of the rule or the second
- sometimes difference of opinion as to which is the part which governs a particular

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Josephine Wong

case and it may be that both parts govern it


Kpohraror v Woolwich Building Society:
- it may often be the case that the first and second parts of the rule overlap, or at
least that it is unnecessary to draw a clear line demarcation between them
Chen v Lord Energy Ltd
- the demarcation between the two limbs is sometimes blurred

Victoria Laundry Windsor v Newman

Facts - D engineering company contracted to sell a boiler to P and be delivered on a


specified date
- D were aware of the nature of Ps business and had been informed by letter that P
intended to use boiler immediately after delivery
- In breach D delivered boiler late
- P sought damages: (1) general loss of business during period delay (2) loss of highly
profitable Gov contract which they could and would have accepted
Rule - reasonably foreseeable as liable to result
- (1) loss of general profit recovered reasonably foreseen would have been Ds
reasonable contemplation
- (2) loss of Gov contract profits not recover not reasonably foreseeable D did
NOT know and could not have known about the gov contract at the time of contract
formation

The Heron II

Facts - 9 days delay for super


- Super price dropped
- Koufos claimed the difference in the loss of profit
- Czarkinow knew that there was a sugar market, but not that K intended to sell it
straight away
Held: the loss was not too remote
Rule - Doubted the formulation in Victoria Laundry
- Disapproved the use of serious possibility, real danger, on the cards, liable to
result Hadley would have been decided different
- liable is a very vague word
Lord Reid
- ...the question for decision is whether a plaintiff can recover as damages for breach
of contract a loss of a kind which the defendant, when he made the contract, ought
to have realised was not unlikely to result from a breach of contract causing delay
in delivery. I use the words not unlikely as denoting the degree of probability
considerably less than an even chance but nevertheless not very unusual and
easily foreseeable.

Correct interpretation:
- Alderson B [in Hadley v Baxendale] clearly did not and could not mean that it was

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Josephine Wong

not reasonably foreseeable that delay might stop the resumption of work in the mill.
He merely said that in the great multitude...of cases this would not happen. He was
not distinguishing between results which were foreseeable or unforeseeable, but
between results which were likely because they would happen in the great majority
of cases, and results which were unlikely because they would only happen in a
small minority of cases.

- ...a result which will happen in the great majority of cases should fairly and
reasonably be regarded as having been in the contemplation of the parties,
- but...a result which, though foreseeable as a substantial possibility, would only
happen in a small minority of cases should not be regarded as having been in
their contemplation.

Essentially not all loss is reasonable foreseeable should be regarded as arising naturally/ in
the usual course of things/ in the contemplation of the parties!!!!!

Remoteness test in CONTRACT = LORD REID **NOT UNLIKELY to result !!


Refining Hadley v Baxendale in The HeronII

Q: Why did Lord Reid use a double-negative in his terminology for the
reasonableness test (i.e. not unlikely)? Why not just use likely?

A: His Lordship later observed in the case of Davies v Taylor [1974] AC 207, when
talking about the evaluating chance:

-Sometimes it is virtually 100 per cent: sometimes virtually nil. But often it is
somewhere in between. And if it is somewhere in between I do not see much
difference between a probability of 51 per cent and a probability of 49 per cent.

Other JUDGES:
- rejected the term of on the cards, but still use other terms such as real danger or
serious possibility

REMOTENESS TEST - STRICTER IN CONTRACT THAN IN TORT:


- if one party wishes to protect himself against a risk which to the other party would
appear unusual, he can direct the other partys attention to it before the contract is
made...[b]ut in tort there is no opportunity for the injured party to protect himself in
that way.

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Josephine Wong

H. Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd

Facts - Contract concerned the sale and delivery of an animal feed hopper
- Ventilation of the hopper was defective breach
- Ps pigs became ill because food was mouldy due to defective ventilation and died
- P claimed lost herd of pigs
Rule Held: could recover the loss
Lord Denning:
distinction between ECONOMIC loss and PHYSICAL loss
PHYSICAL loss less strict (tort) test of remoteness
- (i.e. what the breaching party ought reasonably to have foreseen as long as
some physical loss could be foreseen, its precise nature is irrelevant)
- ...the makers of the hopper are liable for the death of the pigs. They ought
reasonably to have foreseen that, if the mouldy pignuts were fed to the pigs, there
was a possibility that they might become ill.
- Not a serious possibility. Nor a real danger. But still a slight possibility.

Scarman and Orr LJJ:


- Rejected Dennings distinction between economic loss and physical damage
- Considered the remoteness test in contract and tort were the same
- (Heron II said the remoteness tests are diff)

All reached the same result

Type of loss v. Extent of loss


Hughes v Lord Advocate

Facts - The paraffin lamp and the manhole


Rule - Type of loss is foreseeable (within reasonable contemplation) but extent of loss
need not be
NOTE:
- But difficult to distinguish

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Josephine Wong

Transfield Shipping v Mercator Shipping (The Achilleas)

Facts - Charterers (D) hired a vessel from P


- D required to re-deliver the vessel on 2 May 2004
- On 20 April D gave notice to P being re-delivered between 30 April and 2 May
- On 21 April P entered into new charterparty with Cargill Intl SA
- Cargill charterparty allowed for cancellation up to 8 May
- By 5 May clear that the vessel would not be available, thus P negotiated an
extension of the cancellation date for the Cargill charter
- But due to sharp fall in market hire rates, P agreed to reduce rate by 8000pounds per
day
- Total sum claimed by P over US$1.3m for the duration of whole new charterparty
Rule - HL
- Held: in favour of D
- Charterers D would not have had this sort of loss in their mind because
1. there was an unusually volatile market after the contract was made
2. D had no knowledge of Cargill charter and not had control over its terms

At least 2 diff approaches:


(1) The orthodox approach: Lord Rodger + Baroness Hale
Was the loss reasonably foreseeable as likely (or not unlikely) to arise from the
breach? NO

(2) A novel approach: Lord Hoffmann


Did the parties intend (objectively ascertained through interpretation of the contract
against its commercial background) that the defendants were assuming responsibility
for the type of loss which the plaintiffs claim? NO
(as opposed to Lord Reids test of not unlikely in Heron II which one is the correct test?)

Intention: could the parties be regarded as having assumed responsibility for such
losses?
Departure from the ordinary foreseeability rule will be unusual but more common
in the banking and shipping industries
Since all contractual liability is voluntarily undertaken, it is logical to base liability
upon an objective assessment of the parties intentions
It would be wrong to hold someone liable for a risk which he could not reasonably
have been considered to have undertaken doing so would give the other party
something for nothing
The question to be decided is whether the loss is of a kind or type which the
breaching party ought fairly to be taken to have accepted responsibility
The only rational basis for distinguishing between types of loss is that it reflects
what would have been reasonable for the breaching party to have regarded as
significant for the purposes of the risk he was undertaking
In Victoria Laundry, the profits from the lucrative govt. contracts were held to be a

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Josephine Wong

different type of loss than ordinary profits; they could only be recovered if the
defendant had sufficient knowledge of them to make it reasonable to attribute to
him acceptance of liability for such losses
The exceptional financial loss from the follow-on charter (in The Achilleas)
cannot be of a type for which the charterer was assuming responsibility in
light of the background market expectations, the charterers would not reasonably
have considered the type of loss claimed as being the extent of liability which they
were undertaking although the follow-on charter would be regarded as likely, it
would not be known when this would take effect nor for how long nor on what
terms
Although foreseeability is a question of fact, whether the parties have assumed
responsibility involves the interpretation of the contract as a whole against its
commercial background, and this, like all questions of interpretation, as a question
of law

Critique of Lord Hoffmanns approach:


There may be insufficient evidence of the parties intentions as to the scope of
responsibility they were assuming so that there cannot be a realistically objective
assessment of such
Doesnt this approach simply add another layer of uncertainty as to the correct
formulation for assessing damages?
Baroness Hale: this type of reasoning is artificial a deus ex machina capable of
causing injustice in future cases

Lord Walker did not take side

ASM Shipping of India v TTMI of England (The Amer Energy) referred to Achilleas

Rule Flaux J: Achilleas not change the law on remoteness


- 17...I do not consider that the House of Lords (at least the majority of their
Lordships) were intending to lay down some completely new test as to
recoverability of damages in contract and remoteness different from the so-
called rule in Hadley v Baxendale...as refined in subsequent cases, above all the
decision of the House of Lords itself in [The Heron II]. See Lord Hope at paras 31
to 34, Lord Rodger at paras 47 to 52, Lord Walker at paras 66 to 78 and Baroness
Hale at paras 89 to 93.
- 18 To the extent that Lord Hoffmann was purporting to lay down some new
test as to recoverability of damages in contract, he was in a minority. Although
Lord Hope adopts a similar analysis at paras 30 and 36, he does so essentially by
way of application of established principles. In any event it is important to note that
even Lord Hoffmann acknowledges in paras 9 and 11 of his opinion that
departure from the normal principles of foreseeability would be unusual....
- 19 ...I do not consider the decision of the House of Lords in The Achilleas to
have changed the law...

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Josephine Wong

Supershield Ltd v. Siemens Building Technologies FE Ltd [2010] EWCA Civ 7

Rule Toulson LJ:


- Hadley v Baxendale remains a 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.
- However, South Australia and Transfield Shipping 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. In those two
instances the effect was exclusionary; the contract breaker was held not to be liable
for loss which resulted from its breach although some loss of the kind was not
unlikely. But logically the same principle may have an inclusionary effect. If, on the
proper analysis of the contract against its commercial background, the loss was
within the scope of the duty, it cannot be regarded as too remote, even if it would
not have occurred in ordinary circumstances.

Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] EWHC 542 (Comm)

Rule - [40]. In my judgment, the decision in The Achilleas results in an amalgam of the
orthodox and the broader approach. The orthodox approach remains the general
test of remoteness applicable in the great majority of cases. However, there may
be "unusual" cases, such as The Achilleas itself, in which the context,
surrounding circumstances or general understanding in the relevant market
make it necessary specifically to consider whether there has been an
assumption of responsibility. This is most likely to be in those relatively rare
cases where the application of the general test leads or may lead to an
unquantifiable, unpredictable, uncontrollable or disproportionate liability or where
there is clear evidence that such a liability would be contrary to market
understanding and expectations.

- [48]. The orthodox approach therefore remains the "standard rule" and it is
only in relatively unusual cases, such as The Achilleas itself, where a consideration
of assumption of responsibility may be required.

- [49]. In my judgment, it is important that it be made clear that there is no new


generally applicable legal test of remoteness in damages. It appears that in a
number of cases this is being argued and that decisions are being challenged for
failing to recognize or apply the assumption of responsibility test. This results in
confusion and uncertainty.

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Josephine Wong

- [50]. In the vast majority of cases tribunals of fact can and should be able to apply
the well established remoteness test with which they are familiar and which, in the
vast majority of cases, works perfectly well.

Mitigation:
- Plaintiff must take reasonable steps
- No legal duty/obligation: BUT, failure to do so may preclude damages to the extent which the
court considers could have been avoided through the taking of reasonable steps
- duty to mitigate
- Burden of proof on defendant (to show plaintiff failed to mitigate)

British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of


London Ltd

Facts -
Rule Viscount Haldane LC
- The fundamental basis is...compensation for pecuniary loss naturally flowing from
the breach; but this first principle is qualified by a second, which imposes on the
plaintiff the duty of taking all reasonable steps to mitigate the loss consequent upon
the breach, and bars him from claiming in respect of any part of the damage which
is due to his neglect to take such steps...[T]his second principle does not impose on
the plaintiff an obligation to take any steps which a reasonable and prudent man
would not ordinarily take in the course of his business.

Reasonable steps

Pilkington v Wood [1953] Ch 770


James Finlay & Co Ltd v Kwik Hoo Tong [1929] 1 KB 400

Rule - Plaintiff only need take reasonable steps


- No need to risk reputation

Wroth v Tyler [1974] Ch 30


o reasonable = question of fact

What if the plaintiff takes reasonable steps in an attempt to minimise the


loss but such steps actually result in further loss?
- Yes, P can still recover the further loss

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Josephine Wong

- Reasonableness should be assessed as at the time when the steps are taken, not with the benefit of
hindsight
- So long as reasonable steps taken,

Banco de Portugal v Waterlow

Facts - Ds breach resulted in many forged bank notes went into circulation into the market
- P bank knew that the notes were forged, they still honoured the forged notes
because they didnt want to create a money crisis to protect public confidence
which increased their loss
Rule Lord Macmillan:
- It is often easy after an emergency has passed to criticise the steps which have been
taken to meet it, but such criticism does not come well from those who have
themselves created the emergency. The law is satisfied if the party placed in a
difficult situation by reason of the breach of the duty owed to him has acted
reasonably in the adoption of remedial measures, and he will not be held
disentitled to recover the cost of such measures merely because the party in
breach can suggest that other measures less burdensome to him might have
been taken.

What if the act of mitigation actually wipes out the loss resulting from the
breach? Is the plaintiff still entitled to damages?
- Yes, damages as of right
- P would be entitled to Nominal Damages

British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of


London Ltd

Facts - Ds breach of contract in producing wrong electrical turbine


- The wrong turbines were so much more efficient than the original turbines
contracted
Rule - Plaintiff only entitled to nominal damages

Mitigation and anticipatory breach:


- Accept the repudiation: Duty to mitigate from the moment of accepting the repudiation of the
anticipatory breach
- Affirm the contract: no duty to mitigate until the actual date of breach

Non-pecuniary loss
- Non-money losses - distresses
- General rule: not recoverable - Addis v Gramophone Co Ltd [1909] AC 488

- Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1:

Facts -

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Josephine Wong

Rule - Contract-breaking is treated as an incident in commercial life which players in the


game are expected to meet with mental fortitude.

Exceptions:
1. Distress resulting from physical inconvenience
2. Purpose to provide pleasure, relaxation, peace of mind or freedom from molestation

Farley v Skinner (No. 2)

Facts - Negligent property report


- Noise of airplanes hired specialist surveyor P not buy if affected by noise
- No different in market value
- Sued for damages
- Held: HL - physical discomfort compensated
Rule Lord Scott
- Consequential loss rea contemplation of the parties - recoverable
- If the cause is no more than disappointment that the contractual obligation has been
broken, damages are not recoverable even if the disappointment has led to a
complete mental breakdown. But, if the cause of the inconvenience or discomfort
is a sensory (sight, touch, hearing, smell, etc.) experience, damages can, subject
to the remoteness rules, be recovered.

Where the purpose of the contract is to provide pleasure / relaxation

Watts v Morrow

Rule - Bingham LJ
- Where the very object of the contract is to provide pleasure, relaxation, peace of
mind or freedom from molestation, damages will be awarded if the root of the
contract is not provided or if the contrary result is procured instead.

The holiday cases


Jarvis v Swans Tours Ltd P booked a winter hol promised in brochure a house part but in
2nd week hol, only himself in hotel
o can recover cost of hol and claim general damages for his disappointment
o Denning compensate for enjoyment
Jackson v Horizon Holidays Ltd

Loss of amenity
Ruxley Electronics and Construction Ltd v Forsyth

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Josephine Wong

- Loss of expected enjoyment


- For Disappointment
- Rarely given not given in commercial contract- only given in pleasure contract

Limitation

Regus (UK) Ltd v Epcot Solutions Ltd

Rule - As I read the decision... the House of Lords... upheld, for the most part in passing,
an award of damages of 2,500 for loss of pleasurable amenity (i.e. fun) of a
swimming pool.
- This was on the basis of the contract was one to provide pleasure and amenity
analogous to Jarvis and the holiday cases, and thus very different from the business
purpose of the contract in this case.
- Epcot does not however appear to claim damages for loss of any subjective or
idiosyncratic pleasure or amenity and it would be unusual, if not impossible for
a company to do so. For the most part a company's advances and setbacks are
measured in financial terms. I emphasise that I was taken to no authority on this
issue.

A more liberal approach


Farley v Skinner (No. 2) [2002] 2 AC 732

very object (Watts v Morrow) an important term (F v S) widen: not


necessarily to be a predominant purpose

- Should be restrained and modest (floodgate of litigation)

Hamilton-Jones v David & Snape (a firm) [2004] 1 WLR 924

a significant reason / a significant part of the purpose

- 20000 pounds awarded for distress

Action for an agreed sum = action for the price


- Ps already performed and claim for agreed sum/ previously promised
- A claim in debt! - NOT damages
- Most common type of claim
- Remoteness, mitigation not apply
- White v Council

Liquidated damages
- Agreed damages in advanced a definite sum of money which is stipulated in the contract
- Or stipulate the method of calculate the damages

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Josephine Wong

- A genuine pre-estimation of the loss


- That sum is payable regardless of whether the damages is higher or lower than that stipulated sum
- Allow party to know in advance the consequences of breach for insurance, avoid litigation
- Reduced litigation cost
- Prob: they are not penalties purely to compensate

Exam:

- Mon 5th
- 9:30-10:45
- 2 compulsory Q
o Mini-prob IRAC formula \
The issues is whether.
DO NOT RESTATE the FACTS or NOT Summaries
DO NOT RESTATE FACTs from Precedents UNLESS strong comparison, or
distinguish: prima facie
can mix law and application put case in brackets and
o Mini-essay
SUBSTANCE
Logical order
A QUOTE and to WHAT EXTENT you agree or disagree

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