Money Awards in Contract Law 9781474201155, 9781782252962

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FOREWORD BY JUSTICE STEPHEN GAGELER

High Court of Australia It is now almost 170 years since Baron Parke enunciated his ‘ruling principle’1 with respect to damages for breach of contract at common law. The theoretical difficulties inherent in the outworking of that longstanding principle did not need to be addressed while common law procedure left damages to be determined by juries. The theoretical difficulties began to emerge as procedural reforms transferred questions of the quantification of damages increasingly to judges whose processes of reasoning were required to be articulated in their reasons for judgment. Despite significant common law developments in principles of contractual liability, the law of contract damages long remained largely un-theorised. Just over 100 years ago it could still be said that ‘[t]he quantum of damage is a question of fact, and the only guidance the law can give is to lay down general principles which afford at times but scanty assistance in particular cases’.2 Fuller and Perdue took an important step in the identification and articulation of intermediate principles of contract damages in their highly influential taxonomy of measures of financial loss which may flow from a breach of contract.3 Yet just under 20 years ago it could still be remarked that a simple question of contract damages could result in a wide variety of judicial opinion.4 More recent divisions of opinion as to the appropriate method of quantifying damages in novel but uncomplicated fact situations, in cases in the House of Lords5 and in the High Court of Australia,6 serve to illustrate the depth of the theoretical issues that remain. 1 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272, 286, quoting Wertheim v Chicoutimi Pulp Co [1911] AC 301 (PC) 307. 2 British Westinghouse Electric & Manufacturing Co v Underground Electric Railways Co of London [1912] AC 673 (HL) 688. 3 L. Fuller and W. Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law Journal 52. 4 Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL) 361. 5 Golden Strait Corporation v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353. 6 Clark v Macourt (2013) 88 ALJR 190, [2013] HCA 56.

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David Winterton in this book grapples with those deep philosophical issues. His contribution to the theorisation of contract damages is bold and ambitious. Critiquing Fuller and Perdue philosophically and analytically, Winterton provides an alternative theoretical explanation of the burgeoning mass of existing case law. His explanation is based on a conceptual framework within which the fundamental distinction is between damages which substitute for performance of a contract and damages which compensate for loss caused by non-performance. The thesis presented is developed through the application of what is helpfully identified in explicit terms as an ‘interpretative’ methodology, in which ‘principle’ is given primacy over ‘policy’, and in which ‘principle’ is charted as the line of most rational fit with the data provided by the decided cases. It is inevitable in the application of such a methodology that some aspects of the existing case law will be elevated, and other aspects of the existing case law de-emphasised, so as to achieve a rational fit with the conceptual distinction propounded. It is also inevitable that the distinction itself will require qualification and refinement so as to accommodate those aspects of the existing case law which the premises of the methodology require to be accepted. There will inevitably be flow-on effects to related doctrines. Not all aspects of all of the decided cases can be expected to survive unquestioned. Not every required qualification or refinement of the conceptual framework, nor every flow-on effect, can be expected to be recognised and articulated. No conceptual framework, new or old, can be expected to provide all answers to all problems; at best it can bring a measure of structure and consistency to the analysis of those problems, and a measure of predictability to the outcomes of that analysis. A new conceptual framework brings its own novel set of issues to be worked through, and tested, from case to case. Conscious of those ramifications of the ambitiousness of his project, David Winterton has done much to explain how many principles, including those of remoteness and mitigation, are to be fitted into his new conceptual framework, to anticipate some major objections to the framework, and to suggest how it might prove useful in practice in shedding new light on problems which have shown themselves to be difficult to resolve in the past. Economic and social consequences of adopting the new conceptual framework, including the systemic impact of the incentives it might create for contracting parties, are left for future exploration. The book is a welcome addition to the literature in a field for too long under-theorised.

ACKNOWLEDGEMENTS

This book is a revised and updated version of the doctoral thesis I defended in Oxford in October, 2011. Its production has depended heavily on assistance from numerous sources. In Justice James Edelman and Professor John Gardner, I had the benefit of two dedicated and inspirational DPhil supervisors who guided me carefully along the path to completion. From each of them I learned a great deal and I am extremely grateful for the support they provided during my time in Oxford. I also wish to express my deep gratitude to both the Rhodes Trust and Magdalen College for the generous support, financial and otherwise, that each institution afforded me during the course of my studies, as well as to Richard Hart for backing the project, and to his fantastic team for their hard work in helping to bring it to fruition. Via written comments, conversations, or simply friendship, numerous others also contributed to this book’s production. In this regard, I would particularly like to thank Scott Ralston, Carmine Conte, Fred Wilmot-Smith, Andrew Dyson, Andrew Lodder, Eli Ball and Tatiana Cutts for astute comments on earlier drafts and for their general willingness to engage in fruitful discussion on the topic. Ben Spagnolo deserves special praise in this regard; in addition to providing me with me a plethora of insightful comments, he was also instrumental in the very practical task of producing the final thesis document itself. I also wish to express my appreciation to Gageler J for kindly agreeing to write a foreword to the book and for his willingness to engage with me in discussion about some of its central concerns following publication of the High Court’s reasons in Clark v Macourt [2013] HCA 56. My final debt of gratitude is to my parents. Without my father’s encouragement and example of fine scholarship I may never have embarked upon this project and without my mother’s support and understanding I may never have finished it.

TABLE OF CASES

United Kingdom Addis v Gramophone Co Ltd [1909] AC 488 (HL)...............................................29, 255, 354 AIB Group v Mark Redler & Co Solicitors [2014] UKSC 58 ..............................................315 Alfred McAlpine Construction Ltd v Panatown Ltd (1998) 98 Construction L Rep 46 (CA) .........................................................................................57 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL) .............................................................................. 3, 15, 19, 41–2, 55–9, 112, 163–4, 184, 190, 194–5, 201, 261, 264, 266, 273–6, 284, 301, 318 Allen v F O’Hearn & Co [1937] AC 213 (HL) .......................................................................53 Aneco Reinsurance Underwriting Ltd (in liq) v Johnson & Higgins Ltd [2002] 1 Lloyd’s Rep 157 ..............................................................................242 Anglia Television Ltd v Reed [1954] 1 QB 292 (CA) ..........................................................100 Anguilla (Ahmed) bin Hadjee Mohamed Salleh Anguillia v Estate and Trust Agencies (1927) Ltd [1938] AC 624 (PC) ............................................143 Applegate v Moss [1971] 1 QB 406 (CA) ............................................................................190 Araci v Fallon [2011] EWCA Civ 668 ..................................................................................141 Attorney General v Blake [1998] Ch 439 (CA)......................................................................61 Attorney-General v Blake [2001] 1 AC 268 (HL) ................... 3, 19, 47–51, 102, 109, 114–15, 119, 133, 165, 208, 226, 271–2, 298 Attorney-General v Guardian (No 2) [1990] 1 AC 109 (HL) .............................................218 Baker v Willoughby [1970] AC 467......................................................................................223 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 (HL)............................248, 267–8 Bank of Credit & Commerce International (in liq) v Price Waterhouse (No 3) The Times 2 April 1998 ...........................................................225 Barlow v Broxbourne Borough Council [2003] EWCA 50 (QB); [2003] All ER (D) 208 (Jan)................................................................................34 Barnett v Chelsea Hospital [1969] 1 QB 428 .......................................................................223 Barrow v Arnaud (1846) 8 QB 595;115 ER 1000...................................................................69 Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm).....................................................................................76, 280 Bellingham v Dhillon [1973] 1 QB 304 .................................................................................94 Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA) .......................................................................... 69, 75–6, 165, 167, 175, 279–80, 284 Beswick v Beswick [1968] AC 58 (HL) ....................................................................52, 54, 137 Biggin v Permanite [1951] 1 KB 422 ......................................................................................80 Boardman v Phipps [1967] 2 AC 46 (HL) .....................................................................49, 107 Boone v Eyre (1777) 1 Hy.Bl 273 .....................................................................................7, 181 Bracewell v Appleby [1975] Ch 408 .....................................................................................205

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Bradburn v Great Western Railway Co (1874–75) LR 10 Exch 1 ...................................89, 95 Braddon Towers Ltd v International Stores Ltd [1987] 1 EGLR 209 .................................138 Braithwaite v Foreign Hardwood Company [1905] 2 KB 543....................................... 303–4 British and Beningtons Ltd v NW Cachar Tea Co [1923] AC 48 (HL) ..........................8, 304 British Columbia and Vancouver, Island Spar, Lumber and Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499 .........................................................237, 246 British Motor Trade Association v Gilbert [1951] 2 All ER 641 ...........................85–7, 208–9 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL) ................................................................................. 15, 24, 27, 76–8, 87–8, 90, 108, 250, 278–82, 284, 308, 319 Brown v KMR Services Ltd [1995] 4 All ER 598 (CA)........................................................231 Bulkhaul Ltd v Rhodia Organique Fine Ltd [2008] EWCA Civ 1452 ..................................69 Bwllfa and Methyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426 ........................................................288–9, 292 Callonel v Briggs (1703) 1 Salk 112; Holt KB 663 ..................................................................7 Campbell Mostyn (Provisions) Ltd v Barnett Trading Co [1954] 1 Lloyd’s Rep 65 (CA) ...........................................................................................166 Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 (CA) ............................................................................143 Channel Island Ferries Ltd v Cenargo Navigation Ltd, The Rozel [1994] 2 Lloyd’s Rep 161 (CA) ........................................................................200 Chaplin v Hicks [1911] 2 KB 786 (CA) .................................................................................87 Clea Shipping v Bulk Oil International (No 2) [1984] 1 All ER 129 ..................................292 Co-operative Insurance Society Ltd v Argyll Stores Ltd [1998] AC 1 (HL) .............................................................................. 101, 134, 137, 147, 198 Coles v Hetherton [2013] EWCA Civ 1704 ...........................................................................94 Compania Naviera Maropan SIA v Bowaters Lloyd Pulp and Paper Mill Ltd (The Stork) [1955] 2 QB 68 (CA).....................................................253 Continental Contractors v Medway Oil and Storage Company (1925) 23 Lloyd’s List Reports 124 ...................................................................................304 Cooper v Jarman (1866) LR 3 Eq 98 ....................................................................................143 Dalwood Marine Co v Nordana Line A/S (The Elbrus) [2010] 2 Lloyd’s Rep 315 ....................................................................................................94 Darlington Borough Council v Wiltshier Northern Limited [1995] 1 WLR 68 (CA) ........................................................... 55–6, 59, 83, 195–6, 198, 265 Davis Contractors Ltd v Fareham UDC [1956] AC 696 (HL) ............................................145 De Beers Ltd v Atos Origin IT Services UK Ltd [2010] EWHC 3276 (TCC) ..........................................................................................................196 Dean v Ainley [1987] 1 WLR 1729 (CA) ....................................................... 83, 196, 265, 270 Diamond Cutting Works Federation Ltd v Triefus & Co Ltd [1956] 1 Lloyd’s Rep 216 ..............................................................................................87 Diesen v Samson 1971 SLT 49 ................................................................................................30 Dimond v Lovell [2002] 1 AC 384 (HL) ......................................................................... 281–2 Doherty v Allman (1878) 3 App Cas 709 (HL) ...................................................................141 DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716.........................................................60 Duke of St Albans v Shore (1789) 1 Hy.Bl 270 ....................................................................181 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL) ...............................................................................................233

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Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] AC 847 .................................................52 Dunlop v Lambert (1839) 6 Cl & F 600 ...................................................................53, 59, 276 Earl of Ripon v Hobart (1834) 3 My & K 169; 40 ER 65 ....................................................125 East Ham Corporation v Bernard Sunley & Sons Ltd [1966] AC 406 (HL) ..................................................................... 183–4, 189, 192, 194, 262 Edmunds v Lloyds Italico & l’Ancora Compagnia di Assicurazione e Riassicurazione SpA [1986] 1 WLR 492 (CA) ..............................................................220 Ellen v Topp (1851) 6 Ex 424................................................................................................181 Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22 ..................................................................................................................224 Erie County Natural Gas and Fuel Co v Carroll [1911] AC 105 (PC) ..................................................................................................................88, 90 Esso Petroleum Co Ltd v Niad [2001] EWHC Ch 458 All ER (D) 324 (Nov) (CA) ....................................................................................................... 50–1 Experience Hendrix LLC v PPS Enterprises Inc [2003] EWCA Civ 323; [2003] FSR 46; [2003] 1 All ER (Comm) 830 (CA) .........................51, 61–2, 212 Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22 ...........................................223 Famosa Shipping Co Ltd v Armada Bulk Carriers Ltd (The Fanis) [1994] 1 Lloyd’s Rep 633.................................................................................94 Farley v Skinner [2000] PNLR 441 (CA) .............................................................................256 Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732 ....................................... 3, 19, 30, 32–3, 40–1, 108, 112, 254–5 Flame SA v Glory Wealth Shipping PTE Ltd [2014] 2 WLR 1405; [2013] 2 Lloyd’s Rep 653; [2013] EWHC 3153 (Comm); [2013] 2 CLC 527 ........................................................................................ 302–6 Foakes v Beer (1884) 9 App Cas 605 (HL) ...........................................................................145 Ford v White & Co [1964] 1 WLR 885 (CA) .............................................26, 32, 139, 211–14 Ford-Hunt and another v Ragbhir Singh [1973] 1 WLR 738 (Ch) ....................................149 Fouldes v Willoughby (1841) 81 M & W 540 ......................................................................218 Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain (The New Flamenco) [2014] EWHC 1547 (Comm)..........................................................................88, 94–5, 133, 227, 293, 303 Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 .................................................225 Gardner v Marsh & Parsons (a firm) [1997] 1 WLR 489; [1996] EWCA Civ 940 ................................................................................................... 92–3 Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC 1130 (HL) ........................................................................................................250 George Mitchell (Chesterhall) Ltd v Finney Lock (Seeds) Ltd [1983] QB 284 (CA) .........................................................................................................143 Giedo Van der Garde BV v Force India Formula One Team Limited [2010] EWHC 2373 (QB), noted (2012) 128 LQR 23 ............ 27, 59, 61, 108, 127, 163–5, 187–8, 195, 205, 212, 215, 273, 275, 298, 301 Gill & Duffus v Berger [1984] AC 382 (HL) ....................................................291, 303–4, 314 GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555 (CA) .............................240 Glazebrook v Woodrow (1799) 8 TR 366 ............................................................................181 Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2005] EWCA Civ 1190 (CA) .......................................................287

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Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2005] EWHC 161 (Comm) .........................................................287 Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12; [2007] 2 AC 353 .................................. 3, 8, 10, 16, 19, 24, 70, 90, 108, 285–6, 288–305, 314–15, 319 Goss v Chilcott [1996] AC 788 (PC) ....................................................................................164 Grant v Australian Knitting Mills Ltd [1936] AC 85 (PC)............................................29, 108 Grant v Dawkins [1973] 3 All ER 897; [1973] 1 WLR 1406 ...............................................158 Greer v Alstons Engineering Services and Sales Ltd [2003] UKPC 46 ............................ 46–7 Griffith v Selby (1854) 9 Exch 393 ...........................................................................................8 Gur v Bruton, 29 July 1993 (CA)..........................................................................................159 GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SC (HL).....................................................................................................56 H Dakin & Co Ltd v Lee [1916] KB 566 ................................................................................82 Hadley v Baxendale (1854) 9 Exch 341 ................................................... 167, 222, 225, 230–1, 235–8, 240–7, 255, 282 Hamilton Jones v David & Snape [2004] 1 WLR 924 ...........................................................31 Harbutt’s ‘Plasticine’ v Wayne Tank & Pump Co [1970] 1 QB 447 (CA) ............................................................................................ 83, 133, 227, 293 Hasham v Zenab [1960] AC 316 (PC) .....................................................125–6, 145, 147, 226 Hatton v Sutherland [2002] EWCA Civ 76............................................................................34 Heywood v Wellers [1976] 1 QB 446 (CA)............................................................................31 Hobbs v London & South Western Railway Co (1875) LR 10 QB 111 ..................28, 35, 108 Hochster v De la Tour (1853) 2 El & Bl 678; 118 ER 922........................................8, 144, 147 Hoenig v Isaacs [1952] 2 All ER 176 (CA) ...........................................................................262 Hong Kong Fir Shipping Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA) ........................................................................................................181 Horne v Midland Railway (1873) LR 8 CP 131 ...................................................................237 Hounslow LBC v Twickenham Garden Developments [1971] Ch 233......................... 153–4 Hussey v Eels [1990] 2 QB 227 (CA) ................................................................................ 91–3 Inverugie Investments Ltd v Hackett [1995] 3 All ER 841 (CA) ..................................65, 206 Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm)...........................................................................................155 Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 (CA)..................................................54 Jackson v Royal Bank of Scotland [2005] UKHL 3; [2005] 1 WLR 377.............................231 Jaggard v Sawyer [1995] 1 WLR 269 (CA)...................................................................118, 210 Jamal v Moolla Dawood, Sons & Co [1916] 1 AC 175 (PC) ...............................................166 James v Hutton and Cook Ltd [1950] 1 KB 9 (CA) ............................................................198 Jarvis v Swans Tours Ltd [1973] QB 233 (CA) ......................................................................30 Jebsen v East and West Indian Dock Company (1875) LR 10 CP 300 (CP) ........................90 Jefford v Gee [1970] 2 QB 130 (CA) ....................................................................................220 Jervis v Harris [1996] Ch 195 (CA) .....................................................................155–6, 165–6 Jobling v Associated Dairies Ltd [1982] AC 794..................................................................223 John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37 .................................235, 246 Johnson v Agnew [1980] AC 367 (HL) ...........................................................16, 158–60, 285, 308, 312–15, 319 Johnson v Gore Wood & Co [2002] 2 AC 1 (HL) ...............................................108, 111, 256 Johnson v Unisys Ltd [2001] UKHL 13; [2003] 1 AC 518 .............................. 29, 34, 108, 254

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Jones v Just (1868) LR 3 QB 197 ............................................................................................69 Joyner v Weeks [1891] 2 QB 31 (CA).........................................................84–5, 166, 171, 190 Kenny v Preen [1963] 1 QB 499 (CA)..................................................................................102 Kingston v Preston (1773) 2 Doug 684; Lofft 197 ...................................................................7 Koch Marine Inc v d’Amica Societa di Navigazione ARL (The Elena D’Amico) [1980] 1 Lloyd’s Rep 75 ...............................................94–5, 249, 286 Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350 (HL) (n 58).................................................................................... 230–1, 237, 239, 246, 256 Lagden v O’Connor [2004] 1 AC 1067 (HL) .......................................................................249 Lane v O’ Brien Homes Ltd [2004] EWHC 303 (QB)...........................................................61 Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 .............................................87, 90, 94 Lazenby v Wright [1976] 1 WLR 459 (CA) .................................................................... 277–8 Leeds Industrial Co-operative Society Ltd v Slack [1924] AC 851 (HL) ...........................157 Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2007] EWHC 451 (Ch) .......................295 Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2008] EWCA Civ 640; [2008] ETMR 63 ....................................................................................295 Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2009] EWCA Civ 68 ............................295 Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2009] EWCA Civ 457 ..........................295 Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2012] EWHC 485 (Ch D), substantively upheld on appeal (The Trademark Licensing Co Ltd & Anor v Leofelis SA & Ors [2012] EWCA Civ 985)...................................294, 296–7, 299–302, 305 Lep Air v Rolloswin [1973] AC 331 (HL) ............................................................................220 LG Schuler AG v Wickman Machine Tool Sales [1974] AC 235 (HL) ......................................................................................................................181 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 Build LR 57 (CA) ...............................................................................................89 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (HL) ...................................................................................55–9, 194–5, 273 Linklaters Business Services v Sir Robert McAlpine Ltd, Sir Robert McAlpine (Holdings) Ltd [2010] EWHC 2931 (TCC) ............................ 266–8 Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 (HL)..............................................116 Lumley v Gye [1853] EWHC QB J73 ...................................................................................146 McGhee v National Coal Board [1973] 1 WLR 1; [1972] UKHL 7 ....................................223 Malhotra v Choudhury [1980] Ch 52 (CA) ........................................................................158 Malik v BCCI [1998] AC 20 (HL) ..................................................................................29, 108 Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] QB 164..............................................295, 301, 303–4 Mayson v Clouet [1924] AC 980 (HL) .................................................................................135 Merrett v Capitol Indemnity Group Corp [1991] 1 Lloyd’s Rep 169 ...................................89 Mertens v Home Freeholds [1921] 2 KB 526 (CA) .............................................................262 Miles v Wakefield MDC [1987] AC 539 (HL) .......................................................82, 165, 301 Milner v Carnival Plc [2010] EWCA Civ 389; [2010] PIQR Q3 ...............................34–5, 108 Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch) .................................................................................................153 Mirant Construction (Hong Kong) Ltd v Ove Arup & Partners International Ltd [2007] EWHC 918 (TCC) ......................................................59 Monarch Steamship Co Ltd v Karlshamns Oljefebriker A/B [1949] AC 196 (HL) ..................................................................................................224, 240

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Mouat v Betts Motors Ltd [1958] UKPC 23; [1959] AC 71............................................. 86–7 Nadreph Ltd v Willmett & Co [1978] 1 WLR 1537...............................................................94 National Coal Board v Galley [1958] 1 WLR 16 (CA) ..................................................81, 165 National Coffee Palace Co, Re (1883) 24 Ch D 367 ............................................................167 Needler Financial Services Ltd v Taber [2002] 3 All ER 501 (Ch).......................................................................................................90–3, 95, 133 Newbigging v Adam (1886) 34 ChD 582 (CA) ...................................................................153 Newton Abbot Development Ltd v Stockman Bros (1931) 47 TLR 616 ............................190 Nykredit plc v Edward Erdman Group Pty Ltd (No 2) [1997] 1 WLR 1627 (HL) .................................................................................................225 OBG v Allan [2007] UKHL 21; [2008] 1 AC 1 ....................................................................146 Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd (The Mamola Challenger) [2010] EWHC 2026 (Comm); [2011] Bus LR 212; [2011] 1 Lloyd’s Rep 47..............................................................19, 100 Overstone Ltd v Shipway [1962] 1 WLR 117 (CA) .............................................................156 Owners of Cargo Laden on Board the Albacruz v Owners of the Albazero [1977] AC 774 (HL) .......................................................................53–6, 59 Owners of the Steamship ‘Mediana’, The v The Owners, Master and Crew of the Lightship ‘Comet’ [1900] AC 113 (HL) .....................................47 Pageler Ltd v Wang (UK) Ltd (2000) 70 Con LR 68 ...........................................................266 Palatine Graphic Arts Co Ltd v Liverpool City Council [1986] 1 QB 335 ..................................................................................................................94 Parry v Cleaver [1970] AC 1 (HL)................................................................................89, 94–5 Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 (CA) .....................................................................................................................239 Pell v Shearman (1855) 10 Ex 766 ................................................................................100, 151 Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45; [2010] BLR 73 (PC) ........................................... 65–7, 139, 206, 209–10, 283, 301 Perera v Vandiyar [1953] 1 WLR 672 (CA) .........................................................................102 Perry v Sidney Phillips & Son [1982] 1 WLR 1297 (CA) ......................................28, 139, 190 Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514.....................................................................................226 Phillips v Ward [1956] 1 WLR 471 (CA) .............................................................................139 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) ................................................................................... 12, 125, 134, 169, 172–3, 216, 219–20, 272 Pilkington v Wood [1953] Ch 770 .......................................................................................248 Pindell Ltd v Air Asia Berhad [2011] 2 All ER (Comm) 396 ..............................................235 Pratley v Surrey County Council [2003] EWCA Civ 1067 ...................................................34 Pykeryng v Thurgoode (1532) 93 SS 4.................................................................................151 R & H Hall Ltd and Pim (WH) (Jnr) and Co’s Arbitration, Re (1928) 33 Com Cas 324 (HL) .......................................................................70, 161, 279 Radford v De Froberville [1977] 1 WLR 1262 (Ch)............184–5, 193–4, 253, 263–4, 266–7 Rainbow Estates Ltd v Tokenhold Ltd [1999] Ch 64...................................................... 137–8 Raw v Croydon LBC [2002] CLY 941 ....................................................................................31 Regal Hastings Ltd v Gulliver [1967] 2 AC 134 (HL)..........................................................107 Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 361 (CA) ............................ 187–8 RJ Young v Thames Properties Ltd [1999] EWCA Civ 629...................................................38

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Robinson v Harman (1848) 1 Exch 850............................................ 2–3, 13, 18, 23–6, 28–30, 35, 42, 44, 50–1, 54, 84, 97–104, 108, 112, 129, 151, 162, 180, 216, 229, 261, 271, 306, 317, 319 Rodocanachi Sons & Co v Milburn Bros (1887) 18 QBD 67 (CA) .......................................................................................80, 89, 278 Roper v Johnson (1873) LR 8 CP 197 ..................................................................................250 Rothwell v Chemical & Insulating Co Ltd [2007] UKHL 39; [2008] 1 AC 281 ......................................................................................................... 109–10 Royle v Trafford Borough Council [1984] IRLR 184 ................................................81–2, 165 Ruxley Electronics & Construction Ltd v Forsyth [1994] 1 WLR 650 (CA) ................................................................... 35–42, 166, 196, 264, 268, 270 Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL) ..................................................................3, 15, 19, 27, 29–30, 35, 101, 108, 112–13, 119, 122, 128, 142, 183–5, 190, 193–5, 199–200, 256, 261–72, 276, 284, 318 St Albans’ CC v International Computers Ltd [1996] 4 All ER 481 .............................................................................................................53 Sealace Shipping Co Ltd v Oceanvoice Ltd, The Alecos M [1991] 1 Lloyd’s Rep 120 (CA) .........................................................................................200 Selectmove, Re [1995] 2 All ER 531 (CA) ............................................................................145 Shearman v Folland [1950] 2 KB 43 (CA).............................................................................94 Shipton v Dogge YB T.20 Hen VI f.34 pl.4; 51 SS 97 (Doige’s Case) ..................................151 Sidney Phillips & Son [1982] 1 WLR 1287 (CA)...................................................................28 Siu Yin Kwan v Eastern Ins Co Ltd [1994] 2 AC 199 (HL) ...................................................53 Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA) .............................. 73–6, 161, 186, 279–80, 284, 301 Smith v Wilson (1807) 8 East 437 ............................................................................................8 Smoker v London Fire Authority, Wood v London Fire Authority [1991] AC 502.............................................................................................95 South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (HL) .............................................................224–5, 229, 235 Staniforth v Lyall (1830) 7 Bing 169 ................................................................................88, 90 Stephenson Blake (Holdings) Ltd v Street Heaver Ltd [2001] Lloyd’ s Rep PN 44 ..................................................................................................51 Stilk v Myrick (1809) 2 Camp 317 .......................................................................................145 Stocznia Gdanska v Latvian Shipping Company [1998] 1 WLR 574 (HL) .......................164 Stoke-on-Trent City Council v W & J Wass Ltd [1988] 1 WLR 1406 (CA) .......................100 Strete’s Case (1528) BL MS 253 F.19 ....................................................................................151 Ströms Bruks Aktie Bolag v Hutchinson [1905] AC 515 (HL) ..................... 80, 278, 280, 284 Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7 ..............................................................................................234–6, 246 Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] EWHC 542 (Comm).....................................................................................235, 246 Tamares (Vincent Square) Ltd v Fairpoint [2007] EWHC 212 (Ch) ...................................63 Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC) ........................................49 Target Holdings v Redferns [1996] 1 AC 421 (HL) .............................................................152 Taylor v Oakes, Roncoroni and Co (1922) 27 Comm Cas 262 ...........................................304

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Technotrade v Larkstore Ltd [2006] EWCA Civ 1079...........................................................59 The Achilleas see Transfield Shipping Inc v Mercator Shipping Inc The Alaskan Trader [1983] 2 Lloyd’s Rep 645 ................................................................. 154–5 The Albazero see Owners of Cargo Laden on Board the Albacruz v Owners of the Albazero [1977] AC 774 (HL) The Aquafaith see Isabella Shipowner SA v Shagang Shipping Co Ltd The Dynamic [2003] 2 Lloyds Rep 693 ................................................................................155 The Elena D’Amico see Koch Marine Inc v d’Amica Societa di Navigazione ARL The Glory Wealth see Flame SA v Glory Wealth Shipping PTE Ltd The Golden Victory see Golden Strait Corp v Nippon Yusen Kubishika Kaisha The Gregos see Torvald Klaveness A/S v Arni Maritime Corporation The Heron II see Koufos v C Czarnikow Ltd The Mihalis Angelos see Maredelanto Compania Naviera SA v Bergbau-Handel GmbH The New Flamenco see Fulton Shipping Inc of Panama v Globalia Business Travel SAU The Odenfeld [1978] 2 Lloyd’s Rep 357................................................................................155 The Puerto Buitrago [1976] 1 Lloyd’s Rep 250 .............................................................153, 155 The Rijn [1981] 2 Lloyd’s Rep 267........................................................................................182 The Silver Sky [1981] 2 Lloyd’s Rep 95 .................................................................................224 The Simona [1986] 1 Lloyd’s Rep 171 ..................................................................................304 The Yasin [1979] 2 Lloyd’s Rep 45 ..........................................................................................94 Thorensen Car Ferries Ltd v Weymouth Portland BC [1977] 2 Lloyd’s Rep 614 ..................................................................................................142 Thornton v Place (1832) 1 Mood & R 217 ..................................................................100, 151 Thorp v Thorp (1702) 12 Mod 445 .....................................................................................142 Tidebrook Maritime Corporation v Vitol SA of Geneva (The Front Commander) [2006] EWCA Civ 944 .............................................................303 Tito v Waddell (No 2) [1977] Ch 106 ....................................................... 82, 101, 137–8, 190, 192–4, 200, 205, 263, 265 Todd v Gee (1810) 17 Ves Jun 273; 34 ER 106 .....................................................................152 Torvald Klaveness A/S v Arni Maritime Corporation [1994] 1 WLR 1465 (HL) .................................................................................................232 Trademark Licensing Co Ltd & Anor v Leofelis SA & Ors [2012] EWCA Civ 985 ......................................................................................................294 Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia [2006] EWHC 3030 (Comm) ..............................................................231 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48; [2009] 1 AC 61 ................................................................. 3, 19, 225, 229, 231–9, 243, 245–7 Tweddle v Atkinson (1861) 1 B&S 393 ..................................................................................52 Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch); [2010] Bus LR D141 .............................................................67, 210, 283 Victoria Laundry (Windsor) v Newman Industries [1949] 2 KB 528 ...............................245 Watts v Morrow [1991] 1 WLR 1421 (CA)..................................................... 28, 30–3, 39, 41, 108, 111, 254, 256 Wertheim v Chicoutimi Pulp Co [1910] UKPC 1; [1911] AC 301 (PC) .................................................................... 72, 88, 90, 278, 283–4, 319 Westminster (Duke) v Swinton [1948] 1 KB 524 ................................................................190

Table of Cases

xxvii

White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA) .................................................................. 27–8, 79, 93, 165, 187–8, 197, 213 White v Jones [1995] 2 AC 207 (HL) .....................................................................................54 White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL) .................................................................................. 149, 153–6, 166, 175, 189 Whittington v Seale-Hayne (1900) 82 LT 49 .......................................................................153 Wigsell v Schools for the Indigent Blind (1882) 8 QBD 357 ..................................191–2, 200 William Cory & Son Ltd v Wingate Investment (London Colney) Ltd (1980) 17 BLR 104 (CA) ............................................................................................267 Williams v Roffey Bros [1991] 1 QB 1 (CA) ........................................................................145 Williams Bros v ET Agius Ltd [1914] AC 510 (HL) .........................................69–70, 81, 161, 186, 278, 284, 301 Withers v General Theatre Corp Ltd [1933] 2 KB 536 (CA) ................................29, 108, 182 WL Thompson Ltd v Robinson (Gunmakers) Ltd [1955] Ch 177.....................................277 Woodar Investments Developments Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 (HL) ................................................................................... 54–5 World Wide Fund for Nature v World Wide Wrestling Federation (‘WWF’) [2007] EWCA Civ 286 (CA) ...................................................61, 119, 121–2, 212 Wroth v Tyler [1974] Ch 30 (Ch D) ................................................. 157–8, 160, 308, 312, 314 Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798 (Ch) ....................................................... 60–7, 85, 118, 139, 193, 204–5, 207–10, 212, 214, 283

Australia Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102 .........................152 Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310 ............................. 224–5 Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd [2009] FCAFC 85; (2009) 178 FCR 57 ............................................................................................................306 ASA Constructions Pty Ltd v Iwanov [1975] 1 NSWLR 512..............................................158 Baltic Shipping v Dillon (1993) 176 CLR 344 (HCA) ........................................................256 Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 (HCA) ........................................................................ 185, 188, 195, 200, 262, 270 Bowen Investments Pty Ltd v Tabcorp Holdings Ltd [2008] FCAFC 38 (FCA) ..........................................................................................196, 198 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 (HCA) .........................................................................................................250 Clark v Macourt [2013] HCA 56; (2013) 88 ALJR 190..............................................................3, 76, 78, 86, 162, 166, 187, 281 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (HCA) ...........................................................................................................100 Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 .........................................................291 Foran v Wight (1989) 168 CLR 385 .................................................................................8, 306 Graham v The Markets Hotel Pty Ltd (1943) 67 CLR 567 (HCA) .............................................................................................................84 Hospitality Group Pty Ltd v Australian Rugby Union Ltd (Hospitality Group) (2001) 110 FCR 157 (FCA) ............................................................102 Howe v Teefy (1927) SR (NSW) 301 ......................................................................................87

xxviii

Table of Cases

JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 (HCA) ..................... 140–1 Kenny & Good Pty v MGICA (1992) Ltd (1999) 199 CLR 413 ..........................................225 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 .......................................................135 Macourt v Clark [2012] NSWCA 367 ....................................................................................77 March v E & MH Stramare (1991) 171 CLR 506 (HCA)....................................................224 National Insurance Company of New Zealand Ltd v Espagne (1961) 105 CLR 569 ............................................................................................................94 Pakenham Upper Fruit Co Ltd v Crosby (1924) 35 CLR 386 (HCA) ................................140 Pourzand v Telstra Corporation Ltd [2012] WASC 210 .......................................................85 Rawson v Hobbs (1961) 107 CLR 466 .....................................................................................8 Sharjade Pty Ltd v The Commonwealth of Australia [2009] NSWCA 373 ......................................................................................................8, 306 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 ..........................................................................................184–5, 189–90, 269 Trident General Insurance v McNiece Bros (1988) 165 CLR 107 (HCA) ...........................................................................................................52 Wenham v Ella (1972) 127 CLR 454 (HCA) .......................................................................241 Young v Queensland Trustees Ltd (1956) 99 CLR 560 (HCA) ...........................................135 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; 212 CLR 484 ..............................................................................................152, 315 YP Barley Producers Ltd v Robertson (EC) Pty Ltd [1927] VLR 194 ........................304, 306

Canada Asamera Oil Corp Ltd v Sea Oil and General Corp [1979] 1 SCR 633 ..............155, 309, 311 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 (SCC).................152, 220, 315 Coarse v Ravenwood Homes Ltd (1998) 226 AR 214 .........................................................309 Cook v Lewis [1951] SCR 830 (SCC) ..................................................................................223 Eldon Weiss Home Construction Ltd v Clark (1982) 39 OR (2d) 129 (Comm) ....................................................................................................80 Fidler v Sun Life Assurance Co of Canada [2006] 2 SCR 3 (SCC) .....................................255 Jaggard v Sawyer [1995] 1 WLR 269 (CA)...........................................................................159 John E Dodge Holdings Ltd v 805062 Ontario Ltd (2001) 56 OR (3d) 341..................................................................................................................309 Metropolitan Trust Co of Canada v Pressure Concrete Services Ltd (1975) 9 OR (2d) 375; 60 DLR (3d) 431..........................................................................158 Red Deer College v Michaels [1976] 2 SCR 324 (SCC) ......................................................250 Royal Bank of Canada v W Got & Associates Electric Ltd (2000) 178 DLR (4th) 385 ....................................................................................................102, 216 Semelhago v Paramadevan [1996] 2 SCR 415 (SCC) .....................................159–60, 308–15 Smith v Landstar Properties Inc 2011 BCCA 44 (British Columbia CA) .......................................................................................................61 Southcott Estates Inc v Toronto Catholic District School Board (2012) SCC 51 (SCC) ........................................................................ 16, 152, 175, 250, 285, 307–11, 315, 319 Stewart v Ambrosina (1978) 63 DLR (3d) 595 ....................................................................158 Sunshine Exploration Ltd et al v Dolly Varden Mines Ltd (NPL) [1970] SCR 2 ................................................................................................................ 191–2 Whiten v Pilot Insurance Co 2002 SCC 18; [2002] 1 SCR 595...................................102, 216

Table of Cases

xxix

New Zealand Grocott v Ayson [1975] 2 NZLR 586 ...................................................................................158 McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 (NZCA) ......................241 Samson & Samson Ltd v Proctor [1975] 1 NZLR 655 (CA).................................................83 Souster v Epsom Plumbing Contractors Ltd [1974] 2 NZLR 5151....................................158

Singapore Out of the Box Pte Ltd v Wanin Industries Pte Ltd [2013] 2 SLR 363; [2013] SGCA 15 .................................................................................236

United States of America City of New Orleans v Firemen’s Charitable Association, 9 So 486 (1891 SC Lou) ............................................................................................. 211–12 Jacob & Youngs v Kent 129 NE 889 (1921) ..........................................................................185 Peeveyhouse v Garland Coal Mining Co, 382 P 2d 109 (Okl 1962) ...................................200

TABLE OF LEGISLATION

United Kingdom Arbitration Act 1966 s 68 .....................................................................................................................................303 s 69 ...............................................................................................................................94, 303 Carriage of Goods by Sea Act 1992 ........................................................................................53 s 2(4) ....................................................................................................................................53 Chancery Amendment Act 1858 (Lord Cairns’ Act) .......................................60–1, 66, 157–8 s 2 ...........................................................................................................................157–8, 313 Contracts (Rights of Third Parties) Act 1999 ........................................................................52 Judicature Act ........................................................................................................................137 Landlord and Tenant Act 1927, s 18(1) ..........................................................................84, 166 Law Reform (Contributory Negligence) Act 1945, s 1(1) ...................................................227 Matrimonial Homes Act 1967 ......................................................................................157, 312 Official Secrets Act 1911 .........................................................................................................48 Sale of Goods Act 1893 .........................................................................................................208 Sale of Goods Act 1897 ...........................................................................................................69 Sale of Goods Act 1979 .................................................................................................68–9, 73 s 51(3) ......................................................................................69–70, 75, 165, 183, 185, 278 s 53(2) ..................................................................................................................................75 s 53(3) ........................................................................................................69, 73–4, 183, 186 Supreme Court Act 1981, s 50 ..............................................................................................149 Statutory Instruments Civil Procedure Rules 1998 (SI 1998/3132), Pt 3, r 3.4 .......................................................295 Australia Human Cloning for Reproduction and Other Prohibited Practices Act 2003 (NSW), s 16 ..........................................................................................76 France Civil Code, Art 1144..................................................................................................199, 264–5 New Zealand Contracts (Privity) Act 1982...................................................................................................52

Introduction I. Context and Motivation Contracts are made and broken every day. Contracting parties also come in a variety of different forms—from sophisticated commercial parties pursuing profit, to everyday citizens looking to purchase property or secure a dependable wage. Regardless of one’s status or motive for entering into a particular contract, the legal responses available upon the other party’s failure to perform promises contained within it are generally of critical importance even if this is not always fully appreciated by the contracting parties at the time of formation. In responding to breaches of contract, the law of England and Wales (and other common law jurisdictions) has tended to exhibit a strong preference for ordering a breaching party to pay money rather than ordering the (late) performance of the promise broken. Despite general acceptance both of this approach and of the overriding principle said to govern the quantification of these monetary awards, there is sometimes significant judicial disagreement regarding the actual sum to be awarded. This disagreement provides the motivation for this book. It is at the very least arguable that one important purpose of the law is to do ‘justice’ between people. Much has been written regarding precisely what this entails but this important jurisprudential question lies beyond the scope of this book. At a minimum, ‘justice’ would seem to require that the law treat its subjects with equal concern,1 though even those who accept this claim may disagree meaningfully about precisely what it entails. The idea of equality before the law is often partially expressed through the principle that like cases should be treated alike. The account proposed here strives to promote this principle, suggesting that whilst English law generally conforms to this ideal, some relatively minor modifications are necessary for its full realisation in this context. But equal treatment before the law requires more than simply that similar cases be treated as such. The fulfilment of this ideal also necessitates that the principles used to decide cases appropriately balance the relevant interests of the parties involved where, as is often the case, these interests are in conflict. In the specific context of assessing the sum of money that should be awarded to a promisee following the promisor’s failure to perform as promised, ‘justice’ 1 See, for example, R Dworkin, ‘Justice and Rights’ in Taking Rights Seriously (Duckworth, 1977) 150, 180.

2

Introduction

thus requires that the two contracting parties’ interests be balanced in a way that appropriately reflects their competing strengths. Again, there may be room for reasonable disagreement regarding precisely what result such balancing produces and this disagreement no doubt accounts for many of the differences in judicial opinion that have been expressed on various aspects of the law of contractual money awards over the years. It nevertheless is contended that a significant number of the disagreements and deficiencies evident in this part of the law can be traced back to the failure to correctly identify the relevant governing principles and that this failure is itself attributable to four main factors: 1.

2. 3. 4.

that the principle generally accepted to govern the quantification of contractual money awards, as laid down in Robinson v Harman, is expressed at a sufficiently high level of generality as to be consistent with two quite different interpretations of it; that the terminology traditionally employed in discussions concerning the law of contractual money awards is notoriously ambiguous and confusing; English law’s rigid and myopic focus on identifying a ‘loss’ suffered by the victim of a breach before any substantial money award can be made; that very often, though not always, money awards that substitute for performance also have the effect of making good some or all of the detrimental factual consequences that the innocent party has suffered as a result of the breaching party’s failure to perform.

In combination, these four factors have helped conceal the fundamental distinction this book proposes between substitutionary and compensatory money awards in contract law. Fortunately, despite the existence of these internally generated obstacles to clarity, in most, though not all, cases the common law, as it often does, generally manages to reach the appropriate result. After exposing the deficiencies of the conventional account, as well as the obstacles standing in the way of the law’s principled development, this book endeavours to articulate the principles that should be applied in future cases when quantifying contractual money awards. Where necessary, minor modifications to existing principles also are suggested in order to ensure that future cases are decided correctly. The argument advanced hopes not simply to better explain the current law, but also to ensure that future disputes are resolved appropriately.

II. An Overview of the Argument In English law the orthodox understanding of contractual money awards is that they compensate the innocent party for ‘loss’ caused by the relevant breach of contract that falls within the limits defined by the applicable rule of remoteness and mitigation. In this context ‘loss’ is measured by comparing the position the innocent party would have been in had the contract been performed with the

An Overview of the Argument

3

position this party now occupies on account of the breach.2 In the law of contract, ‘loss’ also has traditionally been understood almost exclusively in financial terms with recovery for non-pecuniary harm only being allowed in limited situations. The correct application of this understanding of the law nevertheless has caused significant judicial disagreement at the highest level.3 The substantial divergence of opinion in the cases just cited demonstrates the significant uncertainty that exists with regard to the aim of enforcing a contract, or responding to breach, via an award of ‘damages’. It is contended that the major cause of the confusion is that two different principles are invariably conflated when courts make such awards. The principal objective of this book is to decouple these two different principles and explain their operation. In achieving this objective, all the cases cited in the previous paragraph are examined in significant detail, along with many other authorities as well. While the overwhelming majority of the decisions examined are English, important decisions from other jurisdictions also are considered where they help to illuminate the relevant principles. The substantial volume of decisions on ‘contract damages’ makes it necessary to choose between an approach focused on breadth of coverage and one focused on depth of analysis. This book adopts the latter approach. The aim is not to provide an encyclopaedic digest of all the cases,4 but rather to use key examples to show that the authorities pull in two different directions because of a misconception regarding the applicable fundamental principles. The objective is to expose this misconception and outline a coherent framework within which the various different questions that can arise in the quantification of contractual money awards may be resolved. This new framework is outlined in Part II of the book. The argument advanced is that, in contrast to the orthodox understanding of the law just outlined, there are, broadly speaking, two distinct kinds of money award in English law, which, in different ways, seek to uphold the aim of putting the innocent party into the position as if the contract had been performed. The first is a money award that substitutes for the promised performance. The basis for such an award is the right to performance that arises upon contract formation. The money awarded is given in substitution for the performance promised but not provided. The second kind of money award is one that aims to compensate for (ie ‘make good’) loss. The theoretical basis for such awards is controversial. The orthodox view is that such 2 The classic formulation is Parke B’s in Robinson v Harman (1848) 1 Exch 850, 855, discussed in greater detail in Chapter 1. For a comprehensive account of what this involves, at least in relation to a compensatory claim for factual loss, see A Kramer, The Law of Contract Damages (Hart Publishing, 2014), in particular chapters 11–13. 3 Six recent examples in the House of Lords are: Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL); Attorney-General v Blake [2001] 1 AC 268 (HL); Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL); Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732; Golden Strait Corporation v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353; Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] 1 AC 61. For a recent, striking example of such disagreement in the High Court of Australia, see Clark v Macourt [2013] HCA 56, (2013) 88 ALJR 190, discussed further below. 4 But for an impressive recent attempt at doing just this, see Kramer (n 2).

4

Introduction

awards are based upon a secondary right to repair that arises upon a breach of the primary right, but recently this view has come under attack. Whatever the true basis for compensatory awards, however, it is clear that they are in an important way distinct from awards that substitute for performance. The alternative understanding of contractual money awards this book proposes has at least two significant implications that demand emphasis. The first is that ‘compensating for loss’ should no longer be viewed as the principal objective of contractual money awards because not all awards are concerned with making good the detrimental factual consequences that breach has caused the promisee. Some awards instead aim to substitute for the promisor’s performance, even though in many cases they also have the effect of making good some or all of the factual loss that non-performance has caused to the promisee. Even when compensatory awards are made, moreover, on the understanding proposed here their aim, in making good certain factual detriment caused by breach, is simply a manifestation of the more fundamental purpose that underpins both substitutionary and compensatory awards, which is to achieve the next best thing to the promised performance having been provided. At least whenever the promisee has become entitled unconditionally to the performance promised,5 this is achieved by providing this party with both an appropriate substitute for this performance, (either via a coercive order or an appropriate money award) and an award designed to make good certain further detrimental consequences suffered as a result of the breach. The second significant implication of the proposed account is to cast doubt on the traditionally clear division between contractual money awards and coercive court orders by recognising that substitutionary money awards and coercive orders are simply different points along a remedial continuum, where all responses on this continuum are, at the highest level of abstraction, concerned with providing the innocent party with an appropriate substitute for the performance that was promised. There are numerous different ways, on this continuum, in which the common law could provide a response which substitutes for performance. At one extreme is a coercive order requiring a contracting party to perform on the date the relevant performance is due. This is essentially an order for actual performance accompanied by the threat of additional sanctions for non-performance. Because of the new court-ordered right this would create as well as these additional sanctions, this order may be viewed as a (very close) substitute for performance. Next, there is a coercive order that requires the breaching party to perform after the due date for performance has passed. Again, there will be additional sanctions for non-performance accompanying such an order. Since the time at which performance is due differs, as do the consequences of non-performance, this is a clearer example of a substitutionary order. Money awards can substitute for performance too. The common law could have made such awards conditional upon requiring that any sum awarded to the 5 This occurs when all conditions (precedent and subsequent) attaching to the promisee’s entitlement to his counterparty’s performance have been fulfilled.

The Need for the Proposed Distinction

5

innocent party be used to obtain the promised performance, or a close substitute for it. But it did not to do so, and there are sound reasons for this choice, which are explored in Section II.B of Chapter 5. This book identifies two monetary substitutes for performance that the common law has recognised. The first and closest money substitute for performance is an award of the cost of substitute performance, which provides the innocent party with the cost of obtaining a substitute for the promised performance either via repair or via replacement with a substitute from the market.6 However, when such an award is unquantifiable, another monetary substitute for performance may be more appropriate: this is an award of the reasonable price of ‘release’ from further performance. This award approximates the price a reasonable person in the innocent party’s position would have accepted, at the date of breach, to release the other party from future performance. The effect of the account proposed here is that at least when all conditions (precedent and subsequent) attaching to this party’s entitlement to receive the promised performance have been fulfilled,7 and it is both ‘reasonable’ and possible to obtain a substitute for such performance via repair or market replacement, that party is entitled either to a coercive order that compels the other party to perform or its monetary equivalent. A contracting party who is awarded one of these different monetary substitutes for performance or coercive relief also is entitled to an award of compensation to make good any additional factual detriment caused by the breach not made good by the substitutionary order, subject to the various restrictions that limit recoverable loss. The fundamental point, however, is that compensatory awards and the restrictions applicable to them are distinct from money awards that substitute for performance and the restrictions that limit the availability of these awards.

III. The Need for the Proposed Distinction An objection that might be raised against maintaining the distinction this book proposes is that ultimately both substitutionary and compensatory awards are grounded in the same underlying objective of putting the innocent party into a 6 There is thus more than one way to measure an award of the cost of substitute performance. First, substitute performance may be obtained via the purchase of a market substitute. Alternatively, substitute performance may be obtained by paying for the repairs necessary to ensure conformity with the contractual specifications. All this is outlined more fully in Chapter 5, where it is explained that, consistent with common sense, in choosing between these two alternatives the law awards the cheaper option. See the discussion at 179–188. 7 As foreshadowed a few paragraphs earlier and explained more fully below, this is a crucial constraint upon the availability of substitutionary awards that both significantly narrows the scope of their operation and explains many of the cases that might be thought to be inconsistent with the new account proposed here. Note also that substitutionary awards are available not only when all conditions (precedent and subsequent) attaching to this party’s right to performance have been satisfied, but also when the unsatisfied conditions involve the payment of money so that they can be satisfied by the court deducting the sum still due from the promisee from the substitutionary award due from the promisor.

6

Introduction

position that approximates that which he would have occupied had the contract been performed. Whilst these two awards do share this common theoretical basis, there are a number of reasons why it is nevertheless necessary, at least at a doctrinal level, to maintain the proposed distinction. First, other than at the highest level of abstraction, the motivation for each award is different. Substitutionary money awards aim to substitute for the performance promised irrespective of the factual detriment that breach has caused the innocent party. Compensatory awards aim to make good certain detrimental factual consequences that a breach has caused to the victim and thereby ensure that, at least within the limits imposed by the various restrictions that apply to such awards, this party is left no factually worse off as a result of the breach. Secondly, although ultimately both substitutionary and compensatory court orders are grounded in the primary right to performance that is created by contract formation, the significance of breach is fundamentally different for each kind of award. With regard to a compensatory money award, breach either generates the secondary right to repair that such awards enforce, or, alternatively, leaves the breaching party liable to be ordered to pay a sum of money later assessed by the court.8 By contrast, breach has no normative significance whatsoever in relation to the availability of a substitutionary money award, though typically it does provide the practical reason for the court order to enforce the innocent party’s primary right. Thirdly, and most importantly, the distinction this book proposes has important practical consequences for both the availability, and the quantification of contractual money awards. This can be seen most obviously in relation to the restrictions or conditions that are applicable to the different awards. Compensatory awards are subject to restriction on the grounds of ‘remoteness’ and ‘mitigation’,9 and the specific rules that limit recovery for non-pecuniary loss. Substitutionary awards are not subject to these restrictions since they are not concerned with loss. Such awards, however, are subject to different restrictions concerned with placing necessary and reasonable limits upon an innocent party’s right to insist upon substitute performance rather than with limiting this party’s entitlement to have the factual detriment attributable to the breach made good. The limits imposed on the availability of specific performance demonstrate the possibility of restricting the availability of a substitutionary court order. In a similar (but not identical) way, there are limits on the availability of specific performance’s monetary equivalent: an award of the cost of substitute performance. In particular, such an award is unavailable when it is unquantifiable because 8 These opposing analyses are examined in Chapter 6, but regardless of which analysis is preferred, breach has normative significance insofar as the promisee’s entitlement to an award that aims to make good the detrimental factual consequences that the breach has caused this party. In contrast, although breach has no normative significance as regards the promisee’s entitlement to a monetary substitute for performance, it generally is of practical significance in giving the court a reason to expend limited state resources on the enforcement of this party’s primary contractual right. 9 The meaning of these terms is explained in Chapter 6.

The Need for the Proposed Distinction

7

obtaining substitute performance is now impossible or when the particular circumstances make it ‘unreasonable’ for the innocent party to insist upon enforcing its primary legal right. At least in the former case, an approximation of the price that a reasonable person in the innocent party’s position would have accepted to release the breaching party from further performance should be, and increasingly is, awarded. While it is arguable that such awards also should be available in cases of the latter kind, there is presently little doctrinal support for this view. In addition, there is another important restriction that limits the availability of a substitutionary money award, but does not limit the availability of an award designed to make good the detrimental factual consequences caused by the breach, which reinforces the importance of the distinction here proposed. Contract formation creates reciprocal rights to performance in each of the contracting parties. Generally speaking, however, the rights to performance so created are not unqualified. In particular, depending on the correct construction of the particular contract, a promisee’s right to the promisor’s performance usually is subject to a condition (precedent or subsequent) that the promisee substantially performs certain of his own promises under the contract,10 or at least that he attempts to tender such performance.11 The existence of this further restriction on the availability of a substitutionary money award is most obviously seen when the promisee’s entitlement to the promisor’s performance is subject to a condition precedent that the promisee substantially provides or tenders his own performance. But even where there is no such condition precedent, the promisee’s entitlement to a substitutionary court order is very often, in fact typically, subject to a condition subsequent with similar content.12 Thus, just as one’s entitlement to a substitutionary order for specific performance usually is subject to the condition that one pays the balance of the purchase price owing under the contract, one’s entitlement to recover a monetary substitute for performance normally is subject to one substantially fulfilling some or all of one’s own contractual obligations.13 By contrast, when a contracting party is claiming compensation to make good the factual detriment that one has suffered as a result of the other party’s breach, the success of the claim usually will not depend upon whether that party has 10 The meaning of this claim is explained further below, but for now it is sufficient to note that removal of the historically strict distinction between dependent and independent promises was made clear by Lord Mansfield in Kingston v Preston (1773) 2 Doug 684, 689, Lofft 197 and the need for the qualification that generally the performance tendered need only be substantial was made clear in Boone v Eyre (1777) 1 Hy Bl 273. For further discussion, see S Stoljar, A History of Contract at Common Law (Australian National University Press, 1975) 157–60. 11 The origins of this idea can be seen in Lord Holt’s judgment in Callonel v Briggs (1703) 1 Salk 112, Holt KB 663. See further the discussion in Stoljar (n 10) 156. 12 Thus, to recover a monetary substitute for performance, it generally is not sufficient that the promisee was ‘ready, willing and able’ to tender such performance at the date of breach. This, as is explained immediately below, is to be contrasted with a compensatory claim for prospective loss. 13 While each case of course depends upon the proper construction of the bargain concluded by the parties, this is essentially because usually some or all of one party’s contractual undertakings are to be understood as the agreed ‘price’ for certain promises given by the other.

8

Introduction

substantially completed the performance of his own contractual undertakings.14 However, a party’s entitlement to recover compensation for prospective loss normally is subject to the condition that this party was ‘ready, willing and able to perform’ his own future obligations under the contract,15 or, in the case of an anticipatory breach, at least that this party had not substantially incapacitated himself from ‘doing in the future what the contract requires’.16 As will be shown in Chapter 7, appreciating the different conditions that attach to the two different kinds of prospective claim provides the key to understanding the House of Lords’ controversial decision in The Golden Victory, where the only claim available to the innocent shipowners was a compensatory one for prospective loss.

IV. The Place of Theory While the aims of this work are principally doctrinal, it does attempt to engage with, and make, theoretical claims in an attempt to fortify and expand upon the doctrinal account advanced. With this in mind, three important introductory theoretical remarks are in order. The first concerns the particular kind of substitutionary account advanced. The second concerns the kinds of consideration that may be taken into account in adjudicating private law claims, and in particular the commonly invoked distinction between considerations of ‘principle’ and considerations of ‘policy’. The third concerns the theoretical (or conceptual) foundations of the new account.

A. The Kind of Substitutionary Account Proposed It is necessary to explain the particular kind of substitutionary account this book proposes because it is distinct from other, similar theories of contract ‘damages’ that have been advanced. Recently, a body of scholarship has emerged which argues that private law decisions are best understood solely by reference to the

14 But there may be rare cases where this is not so because the substantial completion of one’s own contractual obligations is a condition precedent to the other party’s obligation to commence the performance of his own obligations. 15 See, for example, Smith v Wilson (1807) 8 East 437 and Griffith v Selby (1854) 9 Exch 393. Note, however, that an innocent party may be entitled to recover a monetary substitute for performance even if not ready and willing to perform at the date of breach if the other party’s anticipatory breach relieved the innocent party of any obligation to remain ready and willing to perform: see Hochster v De la Tour (1853) 2 E & B 678. It also should be unnecessary for an innocent party to be ready and willing to perform if merely wishing to terminate, without seeking to claim a substitutionary or compensatory money award. See Foran v Wight (1989) 168 CLR 385, 433 (Deane J) and JW Carter, ‘Discharge as the Basis for Termination for Breach of Contract’ (2012) 128 LQR 283, 300, approved more recently in Sharjade Pty Ltd v Commonwealth [2009] NSWCA 373 [62]–[68] (Hodgson JA). 16 See, for example, Rawson v Hobbs (1961) 107 CLR 466, 481 (Dixon CJ), referring with approval to Lord Sumner’s speech in British and Beningtons Ltd v NW Cachar Tea Co [1923] AC 48, 72 (HL).

The Place of Theory

9

rights individuals hold against each other.17 So-called ‘rights-based’ theories of private law also generally advocate a version of ‘corrective justice’,18 though this may not be a necessary feature of such accounts.19 Although rights-based theories have tended to focus on the law of torts,20 rights-based accounts of contract law (as well as other areas of private law) are also possible.21 The account of contractual money awards advanced here is based upon a contracting party’s primary right to performance. For this reason, it might be thought that it is ‘rights based’ in the sense just described. However, for at least two reasons this description would be misleading. First, ‘rights-based’ theories generally claim that it is unnecessary to have recourse to considerations external to the parties’ immediate transaction to explain private law decision making.22 The account proposed in this book does not make such a claim.23 The view taken here is essentially non-committal, recognising that it may be legitimate for courts to take into account broader ‘policy’ considerations relating to community welfare when adjudicating private law claims.24 Secondly, and more fundamentally, on the basis of the present academic literature, it appears that ‘rights-based’ theories generally view substitutionary money awards as substituting for the right to performance, whereas the account proposed in this book claims that such awards are understood best as substituting for the promised performance itself.25 This difference in focus can lead to

17 For an overview, see D Nolan and A Robertson, ‘Rights and Private Law’ in D Nolan and A Robertson (eds), Rights in Private Law (Hart Publishing, 2011) 1. 18 For Aristotle’s classic account, see The Nichomachean Ethics (Book V). The modern reinvigoration of ‘corrective justice’ accounts owes much to E Weinrib, The Idea of Private Law (Harvard University Press, 1995). 19 See, for example, A Beever, Rediscovering the Law of Negligence (Hart Publishing, 2007). Compare R Stevens, Torts and Rights (Oxford University Press, 2007). 20 See Weinrib (n 18) Beever (n 19); Stevens (n 19). 21 For example, see P Benson, ‘The Unity of Contract Law’ in P Benson (ed), The Theory of Contract Law (Cambridge University Press, 2001). 22 Such considerations might be termed ‘policy’ considerations, though there is considerable uncertainty regarding the meaning of the term ‘policy’ in this context, which is explored immediately below. Professor Dworkin famously described considerations of ‘policy’ as ‘that kind of standard that sets out a goal to be reached, generally an improvement in some economic, political, or social feature of the community’. See Dworkin (n 1) 22. 23 However, it also does not make the opposing claim that recourse to such considerations is necessary to explain private law decisions. The otherwise unexpressed view is that while such considerations do appear to have some influence over the decisions reached by judges when adjudicating at least some private law disputes, the precise nature and extent of this influence is unclear. 24 It is thus pluralist in the sense that Professor Gardner’s account of tort law appears to be in ‘What is Tort Law for? Part 1: The Place of Corrective Justice’ (2011) 30 Law & Philosophy 1. 25 In a sense, such awards obviously do substitute for the right to performance. But expressing the matter this way has the potential to mislead because the object of a substitutionary award—at least an award of the cost of performance—is to provide a substitute for performance itself, rather than to substitute for the innocent party’s right to such performance. The exercise, in other words, is not abstract and divorced from reality. The quantum of the award is determined by reference to the likely real world cost to the innocent party of actually obtaining a substitute for the promised performance and not necessarily by reference to the market value of the right at the date of breach as Professor Stevens claims in Torts and Rights (n 19) 57.

10

Introduction

important differences in quantification. According to Professor Stevens, for example, who argues that ‘damages’ awards for breach of contract substitute for the right infringed, the appropriate substitutionary measure is always the difference in value between the performance contracted for and the performance provided.26 By contrast, within the new account of contractual money awards proposed here, the appropriate substitutionary measure is always the minimum cost of obtaining substitute performance.27 In some cases where there is an available market for the goods or services promised, this will correspond to the ‘difference in value’ measure,28 but in other cases it will not.29 Because of the significant overlap between Stevens’s analysis and the account advanced here, there are many cases in which the new account will generate the same quantum as that which Stevens’s account produces, meaning that differences between the two accounts may be overlooked. But there are some cases where the two approaches diverge and, significantly, Stevens also argues that awards of the cost of substitute performance should be understood as compensatory rather than substitutionary. This is the conventional understanding of such awards, traditionally described as awards for the ‘cost of cure’ or the ‘cost of reinstatement’, but a substitutionary analysis of these awards is preferable for reasons that are outlined in Chapter 5. In consequence of this, the account proposed here is actually closer to the substitutionary theories advanced by Coote,30 Smith,31 and Webb,32 which all view 26 See R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing, 2009) 171. 27 This is the monetary equivalent of specific performance. Traditionally, it is described as the ‘cost of cure’, the ‘cost of repairs’ or the ‘cost of reinstatement’. 28 To be specific, the two measures will correspond whenever it is cheaper to purchase a market substitute than to repair the defective goods and services received. This is explained further in Chapter 6, Section II.B. Note also that not all cases in which the ‘difference in value’ measure is awarded are substitutionary in the sense proposed here because this measure also can be used as a means to approximate, at the date of breach, the prospective financial ‘loss’ attributable to the breach. This, for example, is the best interpretation of the approach taken by Lord Bingham and Lord Walker in their dissenting speeches in The Golden Victory (n 3), as is explained in Chapter 7, Section III.B. 29 When the cost of substitute performance is unquantifiable, an approximation of the reasonable price of release from further performance at the date of breach is appropriate because it is the next best substitute for performance available in the circumstances. That such an award really substitutes for the right to performance (rather than for performance itself) does not undermine this claim because providing such an award is, in the circumstances, the best that the law can do. Significantly, this measure actually coincides with the ‘difference in value’ measure whenever there is an available market for both the performance contracted for and the performance received since the ‘difference in value’ measure corresponds to the amount a rational market actor would have accepted to release his contractual counterparty partner from further performance at the date of breach, as also explained further in Chapter 5. 30 B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537 and B Coote, ‘The Performance Interest, Panatown and the Problem of Loss’ (2001) 117 LQR 81. 31 S Smith, Contract Theory (Oxford University Press, 2004) 420; S Smith, ‘Substitutionary Damages’ in C Rickett (ed), Justifying Private Law Remedies (Hart Publishing, 2008) 93. 32 C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 Oxford Journal of Legal Studies 41; C Webb, ‘Justifying Damages’ in Neyers, Bronaugh and Pitel (eds) (n 26) 139.

The Place of Theory

11

awards of the ‘cost of cure’ as the primary substitutionary measure. The proposed account nevertheless adds to these analyses by explaining more completely the nature and content of the various restrictions that limit the availability of substitutionary awards and also in recognising the possibility of an alternative monetary substitute for performance when the cost of performance is unquantifiable or ‘unreasonable’. Moreover, while these accounts generally recognise the need for some kind of ‘reasonableness-based’ restriction on awards of the cost of performance, there is disagreement amongst them regarding the content of this restriction. While the precise meaning of this term is difficult to articulate, Chapter 5 attempts to make some progress in this regard and also explains how recent developments in the law are consistent with the substitutionary analysis advanced here.

B. The Distinction Between ‘Principle’ and ‘Policy’ The preceding discussion observed that ‘rights-based’ theories of private law generally view external considerations of ‘community welfare’ as irrelevant in determining the appropriate way to resolve a private law dispute.33 Commonly, such concerns are described as considerations of ‘policy’ and it is also common for these concerns to be contrasted with matters of ‘principle’.34 Professor Dworkin famously described the latter kind of consideration as ‘a standard that is to be observed, not because it will advance or secure an economic, political, or social situation deemed desirable, but because it is a requirement of justice or fairness or some other dimension of morality’.35 Despite common references to the existence of a distinction between ‘policy’ and ‘principle’, this distinction has been described as ‘problematic, hard to define, and often inconsistently used’.36 No doubt there is much truth in this description, but it is contended that there nevertheless remains some value in it. Despite its frequent misuse and the existence of borderline cases that cannot easily be placed in either category, it is claimed that there is a basis for distinguishing considerations of community welfare from those of interpersonal justice as between the two parties and that there are some considerations that do fall clearly on one or other side of the divide. The maxim pacta sunt servanda is a ‘principle’, for example, and the claim that efficient breaches of contract should be encouraged is an argument of ‘policy’. As already explained, the account proposed in this book does not claim that only matters of ‘principle’ are relevant to the adjudication of private law disputes.

33 This is the term used by Professor Robertson in ‘Constraints on Policy-Based Reasoning’ in A Robertson and T Wu (eds), The Goals of Private Law (Hart Publishing, 2009) 261. 34 See Dworkin (n 1). For the view that this distinction ‘cannot withstand close scrutiny’, see J Umana, ‘Dworkin’s “Rights Thesis”’ (1975–1976) 74 Michigan Law Review 1167, 1171. 35 Dworkin (n 34) 22. See also R Dworkin, ‘Hard Cases’ (1975) 88 Harvard Law Review 1057, 1060. 36 See Beever (n 19) 50, engaging in a thoughtful and nuanced examination of the distinction.

12

Introduction

Not only is such a claim unnecessary to advance the argument proposed here but it seems unlikely to be true. As Professor Raz observed when analysing the normative basis for contractual obligation, ‘the law reflects too many competing strands of thought’ for any non-pluralistic account to be plausible.37 Nevertheless, for the reasons just outlined, the distinction between considerations of ‘principle’ and matters of ‘policy’ is one that this book does occasionally invoke. And for the avoidance of confusion, the terms are used in accordance with the definitions proposed by Professor Dworkin and Professor Robertson that were outlined above.

C. The Theoretical Basis for the Proposed Distinction The final introductory theoretical remark concerns the theoretical (or conceptual) basis for the new understanding of contractual money awards this book advances. A proper understanding of the nature of the new account here proposed requires an appreciation of the significance that the occurrence of a breach of contract has as regards the rights, duties and liabilities of each of the contracting parties. Lord Diplock famously advanced a view on this question in Photo Production Ltd v Securicor Transport Ltd,38 which since appears to have gained general acceptance. More recently, however, the question has become much debated in the academic literature, and a variety of different views now proliferate. The view favoured here is essentially the one proposed by Professor Gardner in the context of explaining the ‘corrective justice’ norm that operates in the law of torts. The details of this account are explained more fully in Section IV of Chapter 4, but for present purposes the critical aspects of this account are as follows. Following breach, the reasons that justified the creation of the primary right to contractual performance remain unsatisfied (ie they ‘persist’) and press for ‘next-best conformity’. Fulfilling this objective requires both that an appropriate substitute for performance be provided to the right holder and that certain loss caused by the relevant breach be made good. The choice of what constitutes an appropriate substitute for performance in the circumstances and which losses must be made good is governed by second-order considerations that are explained at relevant stages during the book.

V. The Structure of the Book This book is divided into three Parts. Part I outlines and then challenges English law’s orthodox understanding of contractual money awards. Part II advances an alternative account that draws a fundamental distinction between money awards that substitute for performance and money awards that compensate for loss, 37 38

J Raz, ‘Book Review: Promises in Morality and Law’ (1982) 95 Harvard Law Review 916, 933. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL).

The Structure of the Book

13

explaining the nature, quantification and restrictions that apply to each kind of award. Finally, Part III demonstrates the explanatory power of the new account, invoking it to account for certain aspects of some leading decisions that the accepted orthodoxy struggles to explain as well as demonstrating how the new account can be reconciled with some important aspects of the law that, without due reflection, might appear to be inconsistent with it.

A. Part I Part I of the book outlines and challenges English law’s accepted orthodoxy regarding contractual money awards. Chapter 1 outlines the orthodox account according to which in all but the most exceptional circumstances the purpose of a monetary award following a contractual breach is to compensate the innocent party for the ‘loss’ that this breach has caused. In outlining this account, two questions arise. One is the appropriate measure of loss in the contractual context. The other is the proper scope of loss-based recovery. As regards the first of these questions, the conventional view is that loss in the contractual context is measured by reference to the difference between the innocent party’s current position and the hypothetical position that party would have occupied had the breach not occurred. As regards the second question, loss traditionally has been interpreted narrowly, with a focus upon the deterioration in the innocent party’s financial position. But recently English contract law has moved towards the adoption of a broader conception of loss that takes account of a wider variety of non-pecuniary interests than it did previously and this chapter concludes by outlining this development. The remainder of Part I of the book mounts a challenge to this orthodox understanding. The challenge advanced in Chapter 2 is doctrinal. It demonstrates that there is a significant discrepancy between the orthodox account and the decided case law by outlining numerous occasions where the sum awarded by a court following a successful action for contractual breach does not correspond to the factual deterioration in the innocent party’s position that is attributable to the breach. Sometimes the amount awarded does not even purport to reflect the factual deterioration in the innocent party’s position. In other cases, the law claims to compensate for loss but the sum awarded does not correspond to the factual detriment that breach has caused the innocent party. This doctrinal discrepancy challenges the correctness of the orthodox account. Chapter 3 develops the challenge to the prevailing orthodoxy. Here the focus is on showing the conceptual incoherence of this account and the shortcomings in conventional terminology. The former problem stems principally from understanding the Robinson v Harman principle solely as a measure of loss. This principle is in fact better understood as a hybrid of two distinct principles: one concerned with substituting for performance; the other concerned with making good the factual detriment caused by breach. The dominance of the orthodox view has led to an excessive focus on identifying a ‘loss’ when quantifying contractual awards. In regard to the problems associated with conventional terminology,

14

Introduction

the central point made is that the ambiguous meaning of critical concepts such as ‘loss’, ‘damage’, ‘injury’, ‘harm’, ‘damages’, ‘compensation’ and ‘remedy’ has impeded the law’s conceptual clarity and allowed the prevailing orthodoxy to persist despite its doctrinal inaccuracy. The chapter concludes by suggesting clear and stable definitions for these important legal concepts, which in time it is hoped may come to govern future usage.

B. Part II Part II of the book advances an alternative account of contractual money awards in English law. According to this account, two distinct kinds of award may be made following one party’s actual or anticipated breach of contract. The first is a money award that substitutes for performance. The basis for this award is the right to performance that arises upon contract formation and the money is awarded as a substitute for that part of the promised performance that was not provided. Awards of this kind are distinct from those that make good factual loss. The theoretical basis for awards of the latter kind is controversial but for the purposes of this book it is not necessary to take a definitive position within the debate for reasons that are explained in Chapter 6. The foundations of the new account of contractual money awards are outlined in Chapter 4. This chapter has three main objectives. First, it defends the existence of a general right to contractual performance. This defence relies principally on exposing the fallacy of the claim that English contract law’s preference for a monetary response to breach is inconsistent with the idea that contracts invariably create rights to performance. However, further support for the existence of this right also is provided. Secondly, the chapter aims to defend the existence of the proposed distinction between substitutionary and compensatory money awards. Given the orthodox view that all money awards are compensatory, the focus here is on outlining certain aspects of the law that are inconsistent with the traditional, purely loss-based understanding of it. The final objective of the chapter was noted earlier. It is to outline two further aspects of the proposed account: the particular kind of substitutionary account advanced, and the theoretical basis for the fundamental distinction this book seeks to establish. The purpose of Chapter 5 is to explain the quantification and restriction of substitutionary money awards. The purpose of these awards is to provide a promisee who is or, via the payment of any sum still due under the contract, will be entitled unconditionally the promisor’s performance with the monetary substitute for performance that is most appropriate in the circumstances pertaining at the relevant time. Whenever it remains possible for the promisee to obtain from another source an equivalent to the performance promised, the closest monetary substitute for performance is the minimum cost of obtaining this equivalent. But awards of this kind are subject to a restriction that is best understood as an inquiry into whether, in the particular circumstances, it is ‘reasonable’ for the promisee to require the promisor to ‘cure’ the breach or pay the cost of doing so. English law’s

The Structure of the Book

15

historic preoccupation with the identification of a ‘loss’ in this context has led courts to overemphasise the significance of whether the promisee actually intends to repair the relevant defect in performance in adjudicating this question. Recent authority, however, suggests that an intention to ‘cure’ is not decisive and it is argued that this is the preferable approach. Section III of Chapter 5 defends the view that an alternative monetary substitute for performance should be, and generally is, available when the balance of relevant considerations does not favour ordering either specific performance or an award of the cost of substitute performance via either repair or market replacement. The appropriate basis for quantifying this alternative monetary substitute for performance is an award of the amount a reasonable person in the promisee’s position would have accepted to release the other party from further performance at the date of breach (‘the reasonable price of release’). Traditionally, English law has limited the availability of this measure, though there are signs that such awards are becoming more readily available. It also is suggested that the traditionally restrictive approach is largely attributable to the widespread acceptance of the law’s orthodox but misplaced focus on ‘loss’. With an understanding of substitutionary money awards in place, Chapter 6 explains the nature and content of compensatory awards. As already noted, the basis for such awards is controversial. Traditionally, they have been thought to give effect to a secondary duty to repair certain wrongfully caused loss, but recently this view has been challenged. This chapter commences by explaining the nature of this controversy and why resolving it is ultimately unnecessary here, as well as explaining two logically entailed limits on the scope of compensatory recovery. The chapter then defends the distinctiveness of compensatory and substitutionary awards in the contractual context. This defence is based principally on demonstrating that the various restrictions on loss-based recovery are best understood as default rules externally imposed by law rather than as limiting principles that give effect to the parties’ underlying agreement.

C. Part III With the details of the new account in place, Part III of the book seeks to draw the preceding chapters together to explain some of the important decisions left unresolved by earlier chapters. The focus of Chapter 7 is on certain leading decisions that the orthodox account has struggled to explain satisfactorily and which provided much of the inspiration for this book. In particular, the House of Lords’ decisions in Ruxley and Panatown are examined, as well as some important decisions concerned with the sale and carriage of goods, including, amongst others, the House of Lords’ famous ruling in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd.39 39 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL).

16

Introduction

While not every aspect of these authorities is rendered explicable by the new account, it is argued that the analysis of the law that this book proposes can explain much and significantly improves upon the accepted orthodoxy. Chapter 8 provides a detailed examination of some important decisions that may appear to challenge the status of the new understanding of the law proposed here. First, the threat arguably posed by the Golden Victory principle is neutralised by showing that this decision and the subsequent authorities it has produced are in fact consistent with the new account. Following this, some important decisions concerned with the relationship between specific performance and the quantification of ‘damages’, both in the alternative to, and in lieu of, coercive relief, are examined, including the Canadian Supreme Court’s recent decision in Southcott Estates Inc v Toronto Catholic District School Board,40 and the House of Lords’ important decision in Johnson v Agnew.41

VI. Methodology As should be clear from the structure just outlined, this monograph employs a methodology that is concerned with both a descriptive account of the law as well as a limited exploration of certain aspects of the law’s theoretical foundations. There has been much written about the theoretical justification for contractual rights and the appropriate default ‘remedy’ for breach.42 Detailed doctrinal analyses of contractual money awards also abound.43 That these distinct fields often fail to engage meaningfully with each other is understandable given the scope of their respective enterprises. This book nevertheless strives to bring these two distinct areas of scholarship a little closer together, at times utilising the theoretical literature to shed some light on the nature of the distinction between substitutionary and compensatory money awards as well as the quantification of, and restrictions applicable to, each of these respective kinds of award.

A. An Interpretative Approach In his book on contract theory, Professor Stephen Smith distinguishes four different types of legal theory: historical, prescriptive, descriptive and interpretative.44 40

Southcott Estates Inc v Toronto Catholic District School Board (2012) SCC 51. Johnson v Agnew [1980] AC 367 (HL). 42 For an overview, see Smith, Contract Theory (n 31), chapters 4 and 11 in particular. 43 For example, E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010); H Beale (ed), Chitty on Contract, 30th edn, (Sweet & Maxwell, 2010); H McGregor, McGregor on Damages, 18th edn (Sweet & Maxwell, 2010); A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford University Press, 2005). 44 Smith, Contract Theory (n 31) 5. For a different division see M Eisenberg, ‘The Theory of Contracts’ in P Benson (ed), The Theory of Contract Law (Cambridge University Press, 2001) 206, 208. 41

Methodology

17

In accordance with the kind of theories Smith focuses upon there, this book seeks to provide an interpretative account of English law. The aim of such an account is to make sense of the law by revealing the existence of an intelligible order. The adoption of an interpretative approach is not intended to diminish the value of any other theoretical approach. These other approaches simply constitute different projects. Importantly, however, as Smith explains, they are projects that ‘are clearly relevant to, and sometimes overlap with, the interpretative project’, which is why ‘nearly all interpretative theories include historical, prescriptive and descriptive elements’.45 The account presented here is no different. In attempting to reveal the intelligibility of the English law on contractual money awards, this book considers various historical, prescriptive and descriptive claims. The attempt to present an interpretive theory of contractual money awards raises the question of how such a theory should be evaluated. Smith proposes four criteria of particular relevance in assessing interpretive theories of contract law: fit, morality, coherence and transparency.46 In the context of this work, the first criterion is the most important. Essentially, it is concerned with the extent to which the theory advanced is consistent with the law as it presently exists. This book attempts to demonstrate that the proposed account of contractual money awards better fits the present English law than the conventional understanding of such awards. This emphasis on fit requires two important qualifications. The first is that this emphasis does not diminish the importance of the other criteria relevant to evaluating an interpretative account. In particular, this book places significant weight upon the ‘morality’ criterion. Smith distinguishes three different versions of this criterion. The strongest version claims that an interpretative theory must be evaluated partly by reference to the extent to which it presents the law as morally justified. The genesis of interpretative theories of law is usually attributed to Professor Dworkin,47 who explains that ‘A successful interpretation must not only fit but also justify the practice it interprets’.48 This claim is the basis for significant jurisprudential debates beyond the scope of this book. However, the present work does seek an account that both substantially fits the decided case law and is independently justifiable. The second qualification is that the criterion of ‘fit’ cannot be neatly separated from the other three criteria, which are relevant in judging the merits of an interpretive account.49 In particular, the extent to which the criteria of ‘fit’ and ‘justification’ (ie ‘morality’) are separable is open to debate. One possible view is that

45

Smith, Contract Theory (n 31) 5. ibid 7. 47 See generally R Dworkin, Law’s Empire (Hart Publishing, 1998). Smith explains that taking an interpretative approach ‘does not commit one to endorsing Dworkin’s particular understanding of interpretation’, Smith, Contract Theory (n 31) 5. 48 See Dworkin (n 47) 285. 49 Smith, Contract Theory (n 31) 11. 46

18

Introduction

a doctrinal explanation that does not provide good reasons for the legal position adopted fails even as a purely doctrinal explanation. As the preceding outline hopefully makes clear, the justificatory aspects of this book cannot be neatly separated from its doctrinal claims. The inextricable link between fit and justification in this work is demonstrated most clearly by the combination of doctrinal and theoretical arguments advanced in favour of the distinction between substitutionary and compensatory awards in Chapter 4. This reference to ‘coherence’ here raises the relevance of the other two criteria Smith proposes in evaluating interpretive legal theories. Although this book gives less emphasis to ‘coherence’ and ‘transparency’ than to ‘fit’ and ‘justification’ in advancing the new account, these additional two criteria are certainly also important in evaluating the account advanced. ‘Coherence’ is not prioritised simply because it does not add much to the requirements of ‘fit’ and ‘justification’. As Smith explains, the most appealing version of ‘coherence’ understands it as advocating nothing more than consistency, and ‘consistency in the sense of non-contradictoriness is a basic requirement of intelligibility’.50 The ‘transparency’ criterion has greater independent value. It is concerned with evaluating how well a theory accounts for the ‘internal’ explanation of a particular area of law.51 Smith explains that ‘law is transparent to the extent that the reasons legal actors give for doing what they are doing are their real reasons’.52 Again, Smith distinguishes weak, moderate and strong versions of this criterion but it is unnecessary to explore these distinctions here. For present purposes, it is only important to appreciate that the more closely an interpretative theory of the law aligns with the reasoning that judges actually rely upon in reaching their decisions, the more persuasive such a theory is. On this basis, the ‘transparency’ criterion might seem to present a problem for this book given its broader aim of demonstrating that the prevailing orthodoxy on contractual money awards is misconceived. But this problem is less significant than it may seem because the true position has been obscured principally by the variable use of expressions such as ‘loss’ and ‘compensation’ and because there are many cases in which the distinction is not of practical significance. Indeed, there may be greater respect for contractual rights in English law than in certain other common law jurisdictions given the special position that English courts occupy as the neutral arbiters of large-scale commercial disputes between sophisticated contracting parties. In essence, this book argues that the tension between pacta sunt servanda and a narrow interpretation of the Robinson v Harman formulation (hereafter sometimes referred to as ‘the compensatory principle’) dissolves once it is appreciated that the latter is not the fundamental principle which underpins this

50 51 52

ibid. See Weinrib (n 18) chapter 1. Smith, Contract Theory (n 31) 24.

Methodology

19

part of the law. Compensatory awards, like all contractual remedies, are fundamentally concerned with ensuring that the ‘next best thing’ to the contract’s actual performance occurs.53

B. Why Take this Approach? As just explained, the methodological approach this book adopts combines a descriptive account of the law with an account of certain aspects of the law’s theoretical foundations. It might be suggested that such an approach is inappropriate, either because the two areas of coverage are fundamentally different or because the book attempts to cover too much ground. Although it is accepted that this book cannot comprehensively explain all the cases or engage with all the relevant theoretical literature, it is contended that it is both possible, and legitimate, to employ the methodology adopted in relation to the present topic for two main reasons. First, it is clear that a crossroads has been reached in this area of the law. There are important authorities that are irreconcilable with the orthodox account. The recent decisions in Blake, Ruxley, Panatown, Farley, The Golden Victory and The Achilleas demonstrate the existence of deep division at the highest levels of the judiciary concerning the nature and quantification of contractual money awards. As a result, it is suggested that an exhaustive examination of the last 200 years of case law will not reveal the best way forward. This certainly does not mean that older decisions are ignored. To the contrary, this book contains a detailed treatment of many of these authorities. However, the purpose of examining these decisions is principally to demonstrate how the present juncture was reached and also to identify the law’s present topology. By contrast, more recent leading decisions are considered in significant detail. This is to identify particular problem areas and also to demonstrate the explanatory value of the distinction proposed in relation to current doctrinal debates. It is contended that this examination is sufficient to show that the traditional conception of contractual money awards is descriptively inadequate and that the proposed alternative is superior.

53 This claim applies to awards of compensation for wasted expenditure as well. Traditionally, these awards have been referred to as ‘reliance damages’. As Professor McLauchlan explains, however, this terminology is inappropriate. See D McLauchlan ‘Reliance Damages for Breach of Contract’ [2007] NZLR 417. Although it is sometimes said that courts are confronted with a choice between compensating for ‘reliance’ or ‘expectation’ loss, the better view is that compensation for wasted expenditure is awarded because it is ‘the closest provable approximation of the net expectancy amount’. See D Barnes, ‘The Net Expectation Interest in Contract Damages’ (1999) 48 Emory Law Journal 1137. This is consistent with the fact that the presumption in favour of recouping wasted expenditure may be rebutted by the breaching party (see Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd (The Mamola Challenger) [2010] EWHC 2026 (Comm), [2011] Bus LR 212, [2011] 1 Lloyd’s Rep 47) and also accords with the idea that such awards aim to provide the next best thing to actual performance in the particular circumstances.

20

Introduction

Secondly, this methodological approach is necessary because, with divergences in judicial reasoning, there is a need to re-examine the law’s theoretical foundations. English law’s present schizophrenia indicates the existence of theoretical incoherence in addition to doctrinal inaccuracy, which justifies the combination of doctrinal and theoretical arguments here advanced. The overriding aim of the book is to propose an account that can both substantially explain the current case law and also provide a theoretical framework for deciding future cases in a coherent and consistent manner. By doing this, it is hoped that those wavering between the two opposing viewpoints evident in the cases will be convinced of the rectitude of the approach advocated here.

1 An Overview of the Orthodox Account I. Introduction This chapter explains the conventional understanding of contractual money awards in English law. Section II outlines the orthodox interpretation of the principle widely recognised to govern the quantification of such awards. This principle is often described as ‘the expectation principle’. However, this terminology is problematic for various reasons that will become clear as the argument of the book progresses so the principle hereafter will be referred to as ‘the Robinson v Harman principle’ in recognition of Parke B’s classic formulation of it in that case. Section II.A observes that Parke B’s famous statement of principle contains two distinct sources of indeterminacy. The first concerns the purpose of awarding money as a response to contractual breach, while the second concerns the principle’s proper scope. In essence, the orthodox interpretation of the Robinson v Harman principle entirely overlooks the first indeterminacy, understanding the principle as merely advocating a particular measure of ‘loss’. Although a principal objective of this book is to provide a thorough exploration of the first indeterminacy, the present chapter seeks only to outline the law’s orthodox understanding so its focus is on explaining the second indeterminacy, the existence of which is not generally in dispute. Section II.B then explains that in the contractual context ‘loss’ traditionally has been interpreted quite narrowly to include only the detrimental financial consequences of breach, though more recently some exceptions to this narrow interpretation have been recognised. Section III of the chapter outlines the more expansive interpretation of loss that English law has come to adopt in the contractual context. As suggested by the methodological approach outlined in the book’s Introduction, this is done by highlighting important doctrinal landmarks rather than by providing a comprehensive survey of the substantial relevant case law. In relation to the recovery of money awards for non-pecuniary loss, the significant point is that the recent trend has been towards relaxing the historically restrictive approach. In particular, the availability of compensation for ‘mental distress’ consequent upon breach has increased significantly, though this is not the only development. Although undoubtedly an important question, determining precisely where the boundaries

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of loss-based recovery should lie is a matter that this book cannot address in any level of detail.

II. The Conventional Interpretation of the Robinson v Harman Principle The authority most commonly invoked as the starting point in assessing a contractual money award is Parke B’s famous statement of principle in Robinson v Harman.1 There, in response to the question of ‘what damages is the plaintiff entitled to recover’ in an action for breach of contract, his Lordship stated that: The rule of the common law is that where a party sustains loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.2

A. The Principle’s Indeterminacy The conventional understanding of Parke B’s formulation is that it stipulates the appropriate measure of financial loss, for which an innocent contracting party is entitled to be compensated upon any claim for ‘damages’ arising from a breach.3 Judges sometimes refer to this as contract law’s ‘compensatory principle’.4 In the academic literature it is typically described as the ‘expectation measure’ of loss, with a sum of money awarded in accordance with this principle generally labelled an award of ‘expectation damages’.5 On the law’s conventional understanding, any award inconsistent with this principle is understood as either a justifiable or unjustifiable exception to it. In reality, however, the Robinson v Harman principle contains two significant sources of indeterminacy, which are now explained.

1. Indeterminacy as to Purpose The first and most fundamental source of indeterminacy in the Robinson v Harman formulation concerns the underlying purpose of making a money award in accordance with this principle. On the basis of Parke B’s words alone, it is not 1

Robinson v Harman (1848) 1 Exch 850. ibid 855. 3 For example, see The Golden Victory [2007] UKHL 12, [2007] 2 AC 353 [9] (Lord Bingham); British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL) 689 (Lord Haldane). 4 For example, The Golden Victory (n 3) [9] (Lord Bingham), [38] (Lord Scott). 5 L Fuller and W Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law Journal 52. But for criticism of this terminology, see D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628 and C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 41. 2

The Conventional Interpretation of the Robinson v Harman Principle

25

clear whether the object of a monetary response to breach is limited to compensating the innocent party for the factual deterioration in the innocent party’s position that the relevant breach has caused or whether it extends to providing a substitute for the promised performance, irrespective of what detrimental consequences have in fact resulted from non-performance. As Chapter 2 demonstrates, even on a definition of loss that takes account of harm to certain non-pecuniary interests, these two different bases for quantification do not necessarily correlate, though the fact that in many cases they do partially explains the common failure to appreciate the existence of this distinction. Support for the orthodox understanding of contractual awards might be derived from the reference to ‘loss’ at the beginning of Parke B’s formulation. But this does not resolve this fundamental indeterminacy because ‘loss’ is an expression that is open to various interpretations. More specifically, it is possible to interpret ‘loss’ broadly to include the deprivation of performance that breach itself entails, particularly if one focuses on the latter half of his Lordship’s statement. On this interpretation of the Robinson v Harman principle, it can be understood as advocating an approach that is centrally concerned with providing the innocent party with a substitute for performance rather than simply making good the detrimental factual consequences that breach has caused. In other words, the object of the principle is to correct the absence of performance, rather than simply to make good any consequential factual loss. The characteristic elucidation of the Robinson v Harman principle in terms of ‘loss’ means that often this fundamental indeterminacy is overlooked.6

2. Indeterminacy as to Scope Even ignoring this fundamental indeterminacy with regard to purpose and assuming an interpretation of the Robinson v Harman principle that concentrates solely on the extent to which the innocent party is factually worse off as a result of breach, there is a second indeterminacy in the Robinson v Harman principle regarding its precise scope of application. This is because Parke B’s words do not make clear exactly which kinds of losses are included within the principle’s compensatory ambit. In particular, the extent to which the reference to ‘loss’ includes damage to various non-pecuniary interests which may be affected by breach is unclear. The purpose of this chapter is simply to outline the orthodox account of contractual awards and it therefore focuses only on this second source of indeterminacy. The more fundamental indeterminacy identified above underpins the arguments developed in the remainder of the book. The Robinson v Harman principle’s indeterminacy with regard to its scope of operation is caused, at least partly, by the words ‘so far as money can do it’. This phrase might suggest that only financial detriment caused by a breach should be made good. However, rather than suggesting that compensation should never be 6

Ambiguity surrounding meaning of loss is discussed below in Chapter 3.

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awarded for non-pecuniary harm, the more natural interpretation of this phrase is that it simply recognises that harms of this kind cannot be accurately measured in financial terms. This problem of incommensurability cannot be considered in this chapter, but is explored briefly in Chapter 3. With this basic conceptual overview of the Robinson v Harman principle in place, the focus of the discussion now shifts to explaining the way that courts generally interpret the meaning of ‘loss’ in the contractual context.

B. The Meaning of ‘Loss’ in the Orthodox Account It was noted above that the traditional focus on loss in interpreting Parke B’s formulation of the Robinson v Harman principle has led to it being labelled contract law’s ‘compensatory principle’; compensation being a term normally associated with the goal of making good loss. Although alternative conceptions of ‘compensation’ have been proposed, they are normally presented as challenges to this orthodox understanding.7 The purpose here is to explain more precisely what saying that contractual money awards are provided to ‘compensate for loss’ means in practice. As already observed, the conventional formulation of the Robinson v Harman principle is indeterminate. It is not sufficient to observe that the purpose of making awards is ‘to put the claimant in the same position as he would have been in had the contract been performed’ because the reference to ‘position’ in this context is ambiguous. Most fundamentally, it is not clear whether it is only the claimant’s factual detriment that is of concern or whether the focus of the principle extends beyond this to providing the innocent party with some kind of substitute for the performance that was promised but not provided, irrespective of what factual consequences have resulted.

1. A Focus on the Financial Consequences of Breach In the contractual context, ‘loss’ traditionally has been understood almost exclusively in financial terms. An example of this approach is Pennycuick J’s judgment in Ford v White & Co.8 The claimant bought property intending to develop it. In breach of contract, his solicitor failed to inform the claimant about a covenant against development. Evidence showed that the property would have been worth an additional £1,250 had it not been for this covenant. But the claimant had paid no more than the property’s actual value. The claimant brought an action for breach against the solicitor, seeking to recover £1,250. It was held that the claimant could not recover this sum since this would have put him in a better financial position than if the breach had not occurred. Without the breach, the claimant would have been informed of the restrictive covenant 7 8

Some of these are discussed in Chapter 3. Ford v White & Co [1964] 1 WLR 885 (CA).

The Conventional Interpretation of the Robinson v Harman Principle

27

and, so it was found, would not have proceeded with the purchase. But the property was worth exactly what the claimant had paid for it, so breach did not affect the claimant’s financial position. In reaching this conclusion, Pennycuick J cited with approval Lord Haldane’s statement in British Westinghouse that the ‘fundamental basis [for awarding damages for breach of contract] is … compensation for pecuniary loss naturally flowing from the breach’.9 In the Ruxley case, which is examined in greater detail below, Lord Lloyd also referred to this dictum with approval, stating that: Lord Haldane does not say that the plaintiff is always to be placed in the same situation physically as if the contract had been performed, but in as good a situation financially, so far as money can do it. This necessarily involves measuring the pecuniary loss which the plaintiff has in fact sustained.10

The decision in White Arrow Express Ltd v Lamey’s Distribution Ltd provides an important qualification to this understanding of the law.11 The claimant contracted with the defendant for the provision of an enhanced mail delivery service to its customers. Instead of providing this enhanced service the defendant provided only the standard service. The difficulty for the claimant was that although it could demonstrate that the defendant had not provided the service contracted for, it could not prove that this had resulted in any deterioration in its financial position as it suffered no quantifiable consequential financial loss as a result of the breach and in addition it received no formal complaints about the service that was provided. The Court of Appeal dismissed the claim, holding that a mere breach of contract without proof of loss only entitled the innocent party to a nominal award. Significantly, however, Sir Thomas Bingham MR’s leading speech in that case clarified that a party who contracted for goods or services of a certain quality but received something inferior did suffer a prima facie financial ‘loss’ even though its balance sheet may be unaffected by the breach. The measure of this loss was ‘the difference between the price paid (or, if it is lower, the market value of what was contracted for) and the market value of what was obtained’.12 But in order to recover this ‘difference in value’, the complaining party must plead and prove its existence. Unfortunately for the claimant in White Arrow this ‘loss’ was not pleaded and proved in that case. Instead, the claim was pleaded as one to recover a partial failure of consideration. On the basis that a failure of consideration must be total before any payment can be recovered, this claim was rejected.13 However, the claimant could, and should, have recovered an award assessed by reference to the

9

ibid 887. See British Westinghouse (n 3) 689. Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL) 366 (emphasis added). 11 White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA). 12 ibid 1255. 13 ibid 1256. For a recent consideration of the ‘total failure’ requirement, see Giedo Van der Garde BV v Force India Formula One Team Limited [2010] EWHC 2373 (QB), noted (2012) 128 LQR 23. For further academic analysis, see F Wilmot-Smith, ‘Reconsidering “Total” Failure’ (2013) 72 CLJ 414. 10

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difference in market values of the services contracted for and the services received. Lord Bingham MR explained this as a measure of the claimant’s financial loss.14 It is suggested, however, that postulating the existence of a financial loss in these circumstances is artificial. It is preferable to acknowledge that such an award is concerned to substitute for performance rather than to make good any alleged ‘loss’. That there is an important distinction between money awards that aim to substitute for performance and money awards that aim to make good certain detrimental factual consequences that have resulted from the breach of a primary legal duty constitutes the central thesis of this book. The chapters that follow will demonstrate that this distinction is one that the common law has long recognised, but which in modern times often seems to be overlooked. As Professor Nienaber said over 50 years ago, in the course of explaining the scope of the mitigation doctrine in relation to a claim for a money substitute for the promised performance following an ‘anticipatory repudiation’, in this context one must be very careful not to ‘cut across the distinction between claims on the contract for the promised performance and claims on breach of contract for compensation’.15 In White Arrow, Lord Bingham MR correctly identified the deficiency in the law that would exist were a substantive response to the defendant’s breach not available to the claimant in that case. Despite this, his Lordship nevertheless reiterated the conventional, narrow interpretation of the Robinson v Harman principle in terms of financial loss, stating that the Robinson v Harman formulation aims to put the claimant in the same financial position as he would have enjoyed if the contract had been performed … [this] formulation assumes that the breach has injured his financial position: if he cannot show that it has, he will recover nominal damages only.16

2. Limited Recognition of Non-Pecuniary Consequences Although loss in English contract law traditionally focused on the financial consequences of breach, it is clearly established that contractual awards may be provided for harm to certain non-pecuniary interests. For example, it is well established that damages can be recovered for substantial physical inconvenience caused by a breach of contract,17 and such awards now also appear to extend to any mental suffering ‘directly related to that inconvenience’.18 It is also the case that 14 This is also the view put forward in E McKendrick, ‘Breach of Contract and the Meaning of Loss’ (1999) 52 (1) Current Legal Problems 37. The argument McKendrick advances there has much in common with the argument of this book. However, McKendrick contends that English law requires ‘a more expansive notion of loss’ (at 38) to solve the problems he identifies while this book argues that many of the cases he discusses are best understood as occasions where the law provides a monetary substitute for performance rather than compensation for loss. 15 PM Nienaber, ‘The Effect of Anticipatory Repudiation: Principle and Policy’ (1962) 20 CLJ 213, 227. 16 White Arrow (n 11) 1254 (emphasis added). 17 Hobbs v London & South Western Railway Co (1875) LR 10 QB 111. 18 Watts v Morrow [1991] 1 WLR 1421 (CA) 1445, discussed below. Also see Perry v Sidney Phillips & Son [1982] 1 WLR 1287 (CA).

The Conventional Interpretation of the Robinson v Harman Principle

29

damages for physical injury caused by breach are recoverable provided such injury is not ‘too remote’.19 On occasion, damages for breach of contract may be recovered for loss of reputation too.20 Until recently, however, recovery for non-pecuniary loss caused by contractual breach appeared to be restricted to these three discrete pockets of liability. On this basis it was possible to maintain that generally ‘damages’ for breach of contract were recoverable only for proven financial detriment, as the statements outlined above suggest. In particular, at least since Addis v Gramophone Co Ltd,21 it has been thought that contractual awards for any kind of ‘mental distress’ or ‘injury to feelings’ are unavailable. A company there wrongfully dismissed its manager in a way that was ‘harsh and humiliating’.22 Although the manager was held to be entitled to an award for loss of his salary and commission, his claim for compensation for injury to his feelings caused by the manner of his dismissal was denied. As recently as the House of Lords’ decision in Ruxley, Lord Lloyd stated that Addis ‘established the general rule that in claims for breach of contract, the plaintiff cannot recover for his injured feelings’.23 Although it has been argued convincingly that the case does not actually stand for this proposition,24 until recently this general exclusion was considered a well-established principle of English law. Addis now appears to have been effectively overruled. In Johnson v Unisys Ltd,25 Lord Steyn, Lord Hoffmann and Lord Millett found it necessary to re-examine its status even though the claim before them was not one for anxiety or mental distress resulting from the manner of dismissal but one ‘solely for the recovery of special damages for financial loss’.26 Their Lordships found that although Addis still applies to prevent the recovery of damages for mental distress in a claim for wrongful dismissal, it does not stand in the way of an employee’s distinct claim for compensation.27 In consequence, it appears that Addis now stands only for the proposition that ‘an employee cannot recover damages for injured feelings, mental distress or damage to his reputation, arising out of the manner of his dismissal’.28 This reformulation is indicative of the development of the more expansive definition of loss in English contract law outlined in the next section.

19 20 21 22 23 24

Grant v Australian Knitting Mills Ltd [1936] AC 85 (PC). Withers v General Theatre Corp Ltd [1933] 2 KB 536 (CA); Malik v BCCI [1998] AC 20 (HL). Addis v Gramophone Co Ltd [1909] AC 488 (HL). ibid 493. Ruxley (n 10) 374. See N Enonchong, ‘Breach of Contract and Damages for Mental Distress’ (1996) 16 OJLS 617,

621. 25 26 27 28

Johnson v Unisys Ltd [2001] UKHL 13, [2003] 1 AC 518. ibid 529 (Lord Steyn). ibid 541 (Lord Hoffmann). ibid (emphasis added).

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III. Expanding Recovery for Non-Pecuniary Loss This section charts the development of the broader conception of recoverable ‘loss’ that English contract law now recognises. In accordance with the methodology outlined in the book’s Introduction, the discussion does not attempt comprehensively to cover the relevant case law, but rather seeks to provide a useful overview in combination with a focus on the leading authorities. In this regard, particular emphasis is placed upon the House of Lords’ decisions in Ruxley Electronics v Forsyth and Farley v Skinner for two main reasons. The first is that, together, these two decisions of the United Kingdom’s highest court make clear that English contract law has now moved well beyond an exclusively financial conception of loss. The second is that a comparison of the awards in Farley and Ruxley illustrates the fundamental indeterminacy at the heart of the Robinson v Harman principle that it is the aim of this book to resolve. The examination of these two decisions thereby provides the foundation for the challenge to the orthodox understanding of the Robinson v Harman principle that follows in the remainder of the book.

A. Damages for ‘Mental Distress’ and ‘Physical Inconvenience’ The discussion in this section has three objectives. The first is to explain the development of the two exceptions to the general prohibition on the recovery of contractual money awards for ‘mental distress’, as outlined by Bingham LJ in Watts v Morrow.29 The second is to explain the significance of the House of Lords’ decision in Farley v Skinner as concerns the availability of damages for mental distress.30 Although there was substantial disagreement regarding the precise basis for the damages awarded in that case, the decision is important in explicitly extending the scope of at least one, and perhaps both, of the exceptions outlined in Watts. The final aim is briefly to summarise some more recent developments concerning the recovery of damages for mental distress.

1. Two Exceptions to the General Bar on Recovery The traditional bar on damages for ‘mental distress’ began to look less tenable after the Court of Appeal’s decision in Jarvis v Swans Tours Ltd.31 Damages there were awarded to an aggrieved holidaymaker for the consequential ‘disappointment and distress’ he suffered as a result of the holiday provider’s failure to provide the contractually agreed standard of service provision. Since then, damages for ‘mental

29

Watts (n 18). Farley v Skinner [2001] UKHL 49, [2002] 2 AC 73. Jarvis v Swans Tours Ltd [1973] QB 233 (CA). Also note the earlier Scottish decision in Diesen v Samson 1971 SLT 49 where damages were awarded against a photographer for breach of a contract to take wedding photos. 30 31

Expanding Recovery for Non-Pecuniary Loss

31

distress’ have been awarded for a fairly wide variety of contractual breaches involving the provision of services. For example, in addition to awarding damages to disappointed holidaymakers, English courts have awarded damages against a solicitor who failed to take necessary steps in non-molestation proceedings,32 or a solicitor who failed negligently to obtain custody of the client’s children,33 as well as for the breach of a contract to transfer the remains of the claimant’s father to a new burial plot thereafter frequented by the claimant and his family on the assumption that the remains had been transferred.34 Despite this, until fairly recently it remained plausible to maintain the dominance of the purely financial conception of loss by characterising such cases as isolated exceptions to the generally applicable exclusionary rule. This understanding was supported by the fact that it was not realistically feasible to argue that the general prohibition imposed on the recovery of damages for certain forms of non-pecuniary loss was merely an application of one of the other generally accepted bases for restricting loss-based recovery such as, for instance, the contractual remoteness principle.35 In support of this view, Professor Burrows stated in 1984 that ‘mere application of a remoteness test does not dictate whether mental distress damages are in principle recoverable; rather, a more restrictive test is being applied by the courts’.36 The important judgment of Bingham LJ in Watts v Morrow supports this understanding of the restriction on the recovery of compensation for non-pecuniary loss for breach of contract. There, in the context of the breach of a survey contract, his Lordship affirmed the validity of the general exclusion on the recovery of damages for ‘mental distress’ and made clear that this rule is not based on the remoteness principle, but on ‘considerations of policy’.37 Significantly, however, Watts held that ‘mental distress’ damages could be recovered in two situations. The first was where ‘the very object of a contract was to provide pleasure, relaxation, peace of mind or freedom from molestation’,38 which takes account of the holiday and other service cases mentioned above. The second was when the claim was based on ‘physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort’.39 32

Heywood v Wellers [1976] 1 QB 446 (CA). Hamilton Jones v David & Snape [2004] 1 WLR 924. 34 Raw v Croydon LBC [2002] CLY 941. 35 For discussion of this principle see 229–247 below. 36 A Burrows, ‘Mental Distress Damages in Contract—A Decade of Change’ [1984] Lloyd’s Maritime and Commercial Law Quarterly 119, 134. 37 Watts (n 18) 1445. ‘Policy’ is a term commonly invoked in private law discourse but is notoriously difficult to define. As noted above, the term is generally contrasted with considerations of ‘principle’ and is used to refer to social and economic considerations of ‘community welfare’ which are external to the parties’ immediate transaction. For further discussion, see R Dworkin, ‘Hard Cases’ (1975) 88 Harvard Law Review 1057, 1060 and A Robertson, ‘Constraints on Policy-Based Reasoning’ in A Robertson and T Wu (eds), The Goals of Private Law (Hart Publishing, 2009) 261. But Professor Beever has questioned whether the distinction between ‘principle’ and ‘policy’ can be maintained. See A Beever, Rediscovering the Law of Negligence (Hart Publishing, 2007) 50. 38 Watts (n 18) 1445. 39 ibid. 33

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It might be thought that recognition of these two exceptions undermined the traditionally restrictive definition of loss in purely financial terms. In reality, however, Watts simply formalised the various exceptions to the general rule that had begun to develop without substantively challenging the status of the general exclusionary rule. This interpretation of Watts is supported by the fact that Bingham LJ prefaced his discussion of the two exceptions by reiterating the general rule that ‘a contract breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension, or aggravation which his breach of contract may cause the innocent party’.40

2. The Decision in Farley v Skinner The relevant contract in Farley was between a property surveyor and a potential purchaser. Despite being explicitly asked by the purchaser, Farley, to investigate the possibility of aircraft noise, the surveyor failed to point out the high levels of noise experienced at the residential property that Farley later purchased. Although Farley was unaware of the aircraft noise when he purchased the house, the price he paid took the noise into account. As a result, he had not incurred any financial loss as a result of the surveyor’s actions. Farley brought an action alleging that in breach of contract the defendant had failed to carry out his survey with reasonable care and skill. The trial judge found that the defendant had indeed been negligent but held that Farley was not entitled to any damages on a diminution-in-value basis since the property, like that in Ford v White, was worth what had been paid for it. Nevertheless, the judge awarded Mr Farley £10,000 in damages for the distress and inconvenience caused by the aircraft noise. An appeal was upheld on the basis that the contract between the parties was not to provide enjoyment or relief from stress and therefore did not fall within the first exception outlined in Watts. However, this decision was overturned unanimously on appeal to the House of Lords. The Court reasoned that although generally damages are not available for mere disappointment and annoyance suffered as a result of a contractual counterparty’s breach, the present case fell within both of the exceptions to this general rule laid down by Bingham LJ in Watts. In so finding, the Court effectively broadened the ambit of these two exceptions.41 As regards the first exception, the defendant’s submission that damages for distress and inconvenience could only be awarded where the provision of ‘peace of mind’ was ‘the very object of the contract’ was rejected by the House of Lords. It was held that for such damages to be available it was sufficient that the term broken was known by both parties to be an important one in the context of the contract overall. It also should be noted that the basis for distinguishing Farley from 40

ibid. This interpretation of the case is supported in E McKendrick and M Graham, ‘The Sky’s the Limit: Contractual Damages for Non-pecuniary Loss’ [2002] Lloyd’s Maritime and Commercial Law Quarterly 161, 162 and J Hartshorne, ‘Damages for Mental Distress after Farley v Skinner’ (2006) 22 Journal of Contract Law 118. 41

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33

Watts itself, which also involved the breach of a survey contract, was that in Farley there was a ‘breach of a specific undertaking to investigate a matter important for the buyer’s peace of mind’,42 while in Watts breach was merely in respect of an ‘ordinary surveyor’s contract’.43 The second of Bingham LJ’s exceptions in Watts allows damages for ‘physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort’. Lord Clyde upheld the appeal in Farley on this basis. This approach also received subsidiary support from the rest of the Court, though their Lordships primarily upheld the claim under the first exception in Watts. Nevertheless, on the basis of the judgments in the case, it is very difficult to state definitively the present scope of this exception. For instance, while Lord Steyn and Lord Hutton continued to use the language of ‘physical inconvenience’, Lord Scott rejected the notion that the inconvenience must be ‘physical’,44 and Lord Clyde found it unnecessary to provide any ‘detailed analysis or definition’ of inconvenience.45 A further important issue in the case was the question of how an award for inconvenience and discomfort should be quantified. As with all forms of nonpecuniary loss, this kind of harm is notoriously difficult to assess. One question that arises is how much weight should be given to the particular sensibilities of the claimant.46 Given that the evidence suggested that most residents in the area were not troubled by the level of noise, the test for measuring discomfort appears to be at least partly subjective. But any suggestion that such an approach is liable to open the floodgates of liability is rightly played down by McKendrick and Graham, who correctly observe that the availability of such damages can be constrained by the rules of remoteness.47 This suggestion is consistent with the actual decision since the surveyor’s liability for non-pecuniary loss there was dependent upon the claimant having specifically drawn the defendant’s attention to his desire to live in a house that was free from aircraft noise. But this is not to suggest that the restrictive approach to the recovery of damages for non-pecuniary loss can be explained simply as an application of the contractual remoteness principle.48

3. More Recent Developments a. Stress in the Workplace Following Farley, the Court of Appeal considered four claims brought by employees against their employers for psychiatric illness caused by stress at work in 42

Farley (n 30) 746 (Lord Steyn). ibid 756 (Lord Clyde). 44 ibid 768. 45 ibid 753. 46 This issue is discussed in J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundation of the Law of Unjust Enrichment (Oxford University Press, 2009) 211, 221. 47 McKendrick and Graham (n 41) 165. 48 For a defence of this claim see Chapter 6, Section III.C. 43

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Hatton v Sutherland.49 Each of the claimants based their claim on an allegation that the employers had breached their contractual duty to take reasonable care for the safety of their employees. Three of the claims failed on the basis that the relevant psychiatric injury was not a reasonably foreseeable consequence of the pressure placed on the employee. The fourth claim succeeded on the basis that the psychiatric illness was reasonably foreseeable and the employers had breached their contractual duty of care. The critical difference in this case was that the relevant employee had previously taken leave from work suffering from depression and anxiety. Although Hatton is sometimes treated as if it were part of the law of torts, the claims there were clearly contractual,50 and are consistent with the general trend towards wider recovery for non-pecuniary loss. In particular, the decision confirms the view expressed in Johnson v Unisys Ltd that employment contracts cannot be treated like ordinary commercial contracts because an employee’s interest in the relevant contract is not purely financial.51 Three considerations nevertheless counsel against exaggerating the significance of Hatton. First, the decision makes clear that stress alone is insufficient to ground recovery; it was critical that the stress led to an identifiable psychiatric illness. Secondly, the vast majority of the sum awarded to Hatton was for the earnings she lost as a result of her illness rather than for the physical harm it caused. Thirdly, the threshold requirements the Court laid down for recovery are not easy to satisfy as demonstrated by the fact that employees in subsequent cases have struggled to prove that their employer could have reasonably foreseen their psychiatric illness.52 b. Damages for a Ruined Holiday Relatively recently, Ward LJ provided an explanation of the various different heads of recovery in the context of a claim for contractual ‘damages’ following a ruined holiday in Milner v Carnival Plc.53 His Lordship there differentiated four different potential heads of compensable ‘loss’ in a claim of this nature. His Lordship labelled the first of these ‘pecuniary loss’ or ‘the diminution in value’, which was ‘the monetary difference between what was bought and what was supplied’.54 According to Ward LJ, in a case such as this, ‘the task is to assess the amount by which the advertised holiday turned out to be less in money terms than the customer had paid for it’.55 Despite such terminology, this book will argue that this 49

Hatton v Sutherland [2002] EWCA Civ 76. ibid Hale LJ [21]. This is also the view taken in E McKendrick and K Worthington, ‘Damages for Non-pecuniary Loss’ in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Hart Publishing, 2005) 276. 51 Unisys (n 25) [70]. 52 As argued by McKendrick and Worthington (n 50); see Pratley v Surrey County Council [2003] EWCA Civ 1067; Barlow v Broxbourne Borough Council [2003] EWCA 50 (QB), [2003] All ER (D) 208 (Jan). 53 Milner v Carnival Plc [2010] EWCA Civ 389, [2010] PIQR Q3. 54 ibid [29]. 55 ibid. 50

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35

is really an award substituting for performance rather than one compensating for loss. The second was ‘consequential pecuniary loss’, which ‘would cover out-ofpocket expenses such as the cost of alternative accommodation, the cost of alternative travel arrangements and so forth’.56 On the facts, his Lordship awarded the claimants £3,500 and £2,000 respectively under these two heads. Ward LJ distinguished these awards from those given in response to two further forms of consequential loss that might arise in this context, both of which are non-pecuniary in nature. The first of these losses was ‘physical inconvenience and discomfort’, with his Lordship noting that the recovery of such damages was long established where the physical inconvenience is ‘sufficiently serious’.57 The second was ‘mental distress’, and according to Ward LJ such loss ‘is surely measured by the extent of the failure to meet reasonable expectations … which is a question of fact and degree in each case’.58 In combination, his Lordship awarded Milner £4,000 and his wife £4,500 under these two heads. Milner is useful in distinguishing a substitutionary award from the various different kinds of compensatory award that might be made in response to a claim for breach of contract. Additionally, the decision also demonstrates the more liberal approach to the recovery of damages for ‘mental distress’ and ‘physical inconvenience’ which English law has come to adopt in more recent cases.

B. Damages for ‘Loss of Amenity’ The previous section demonstrated the recent expansion in the availability of damages for ‘mental distress’ for breach of contract. Despite these developments, uncertainty remains. An important source of this uncertainty is the ‘loss of amenity’ award provided to the disappointed homeowner in the well-known decision in Ruxley Electronics v Forsyth. This section explains the significance of Ruxley for the account this book subsequently advances. The discussion is in two parts. First, the different judicial views expressed in the Court of Appeal and the House of Lords, both in relation to Mr Forsyth’s entitlement to an award of the cost of demolishing and rebuilding the pool built by Ruxley and the basis for the ‘damages’ he actually received, are explored. Secondly, subsequent judicial analyses of Ruxley are considered. It is suggested that the views expressed highlight the difficulty in explaining Ruxley in conventional terms and thus cast doubt on the adequacy of the orthodox understanding of contractual awards.

1. Ruxley Electronics v Forsyth The Ruxley decision exemplifies the fundamental tension at the heart of the Robinson v Harman principle that this book seeks to resolve. There, a swimming 56 57 58

ibid. ibid; Hobbs (n 17) 117 (Cockburn CJ). Milner (n 53) [35].

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pool was built to a depth of six feet, nine inches, rather than the contractually specified depth of seven feet, six inches.59 The homeowner, Forsyth, refused to pay the contractor, Ruxley, the balance due under the contract and Ruxley brought a claim seeking to recover this amount. Ruxley succeeded at first instance. A counterclaim by Forsyth for the cost of demolishing and rebuilding the pool in accordance with the contractual specifications was dismissed by Judge Diamond QC on the ground that it was ‘unreasonable’, with the judge also holding that the pool as built was safe for diving if no diving board was installed and that Forsyth had no intention to demolish and rebuild. In addition to these findings, Judge Diamond QC held that the shallower depth did not affect the market value of the pool and therefore caused the claimant no financial loss. Nevertheless, His Honour did accept that the claimant had suffered a ‘loss of amenity’, awarding him £2,500 in recognition thereof. a. Judicial Approval for an Award of the Cost of Performance On appeal,60 Forsyth gave an undertaking to use any money awarded on a ‘cost of reinstatement’ basis actually to rebuild the swimming pool in accordance with the original contract specifications. The Court of Appeal accepted the trial judge’s finding that as built, the pool added the same financial value to the house as the deeper pool would have done. A majority of the Court nevertheless awarded Forsyth the cost of demolishing and rebuilding the pool in accordance with the contract, accepting the trial judge’s finding that this was necessary in order for Forsyth to build the pool to the required depth. In finding in favour of Forsyth, Mann LJ emphasised the pacta sunt servanda principle,61 but acknowledged that there may be cases where awarding the cost of ensuring conformity with the promised performance is ‘unreasonable’. This was not such a case, however, said his Lordship, because the only way to satisfy Forsyth’s bargained for ‘personal preference’ was to rebuild the pool as specified.62 Staughton LJ also upheld the appeal in that court, but his Lordship appeared to view the ‘reasonableness’ constraint as an aspect of the law of ‘mitigation’.63 In Staughton LJ’s view, since Forsyth could mitigate his loss only by rebuilding the pool, he was entitled to ‘damages’ assessed by reference to the reinstatement measure.64 It is possible, however, to read Staughton LJ’s analysis as in substance recognising that the meaning of ‘reasonable’ here is not exactly the same as its meaning in the standard mitigation context. This was because his Lordship also 59 Note that in the original contract, the pool’s depth of the pool was to be 6 feet 6 inches at the deep end. Subsequently, Mr Forsyth wanted the depth increased to 7 feet 6 inches and the contractor agreed to increase the depth without extra charge. This is noted at the outset of the speech of Lord Lloyd. 60 Ruxley Electronics & Construction Ltd v Forsyth [1994] 1 WLR 650 (CA). 61 ibid 661. 62 ibid. 63 ibid 659, noted by Lord Lloyd in the House of Lords Ruxley (n 10) 365. 64 Ruxley (n 60): ‘if there is no alternative course which will provide what he requires, or none which will cost less, he is entitled to the cost of repair or reinstatement even if that is very expensive’.

Expanding Recovery for Non-Pecuniary Loss

37

adopted a very broad conception of ‘loss’ according to which the mere failure to provide Forsyth with the pool he sought was itself ‘loss’. By contrast, this book argues that it is preferable not to describe as ‘loss’ a deficiency in performance, which may or may not have detrimental factual consequences for the promisee, because using this label tends to conceal the existence of the critical distinction this book seeks to highlight. b. Judicial Disapproval for Awarding the Cost of Performance The final speech in the Court of Appeal was delivered by Dillon LJ. In contrast to Staughton LJ, Dillon LJ rejected the view that the ‘reasonableness’ constraint here was simply an aspect of mitigation, stating that while it is true that ‘reasonableness lies at the heart of the doctrine of mitigation … [this] is not … the only impact of the concept of reasonableness on the law of damages’.65 Although Dillon LJ accepted that the diminution-in-value measure in these circumstances was nil, his Lordship concluded that the appeal should be dismissed because a ‘cost of reinstatement’ award was ‘wholly unreasonable’ here. Dillon LJ’s conclusion that the ‘reasonableness’ restriction on a ‘cost of reinstatement’ award is not simply an aspect of the doctrine of mitigation is supported here. To date, however, there has been some confusion in this regard because of the failure to distinguish substitutionary and compensatory money awards. Following a further appeal, the House of Lords overturned the Court of Appeal’s decision to award the cost of repair, effectively reinstating the trial judge’s award of £2,500.66 Again, the central question was not the basis for this award but whether the claimant was entitled to the cost of demolishing and rebuilding the pool. It was held unanimously that he was not. Despite reaching a different result from a majority of the Court of Appeal, again the House of Lords’ reasoning was expressed in terms of ‘reasonableness’. After reviewing the relevant authorities, Lord Jauncey affirmed the existence of a ‘reasonableness’ restriction on the cost of obtaining substitute performance and upheld the trial judge’s finding that in these circumstances it was ‘unreasonable’ for Ruxley to incur the cost of demolishing the existing pool to build a new and deeper one.67 Lord Lloyd expressed a similar view, holding that in cases involving defective construction a ‘cost of reinstatement’ award should be denied when ‘unreasonable’. His Lordship further concluded that this was the case here principally because ‘the judge found as a fact that Forsyth’s stated intention of rebuilding the pool would not persist for long after the litigation had been concluded’.68 According to

65

ibid 662. This was expressly supported by Lord Lloyd in the House of Lords Ruxley (n 10) 369. Ruxley (n 10). Apparently for tactical reasons, Ruxley’s counsel argued that the choice confronting the Court was between the cost of demolishing and rebuilding the pool (£21,560) and the difference in market value between the house with the pool as built and the house with the pool Forsyth contracted for. 67 ibid 359. 68 ibid 372. 66

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Lord Lloyd, when denial on this basis was justified, the difference in value between the performance agreed and the performance actually provided constituted the appropriate measure for any award, subject to the possibility of an additional award for consequential loss.69 Since the pool built added the same financial value to the house as the pool contracted for, his Lordship accepted the trial judge’s finding that the difference-in-value measure here was nil. Finally, it is worth noting that the ‘reasonableness’ restriction applied in Ruxley has been invoked to limit the amount of money awarded to the victim of a breach in subsequent cases. In R J Young v Thames Properties Ltd,70 for example, the claimant contracted to resurface a car park for a lump sum price. The work was done defectively but the car park was nevertheless perfectly usable. At first instance the trial judge held that the contract had been substantially performed so that the construction company was entitled to recover the contract price. On appeal a question arose as to what deduction should be made for the defective work. The Court of Appeal held that because the car park here was perfectly usable as built it was appropriate to deduct only the difference in value between the car park contracted for and the car park built rather than the amount required to make the car park conform to the contractual specifications. c. The Basis for the £2,500 Awarded to Mr Forsyth In Ruxley, the sole issue for determination in both the Court of Appeal and the House of Lords was whether an award of ‘the cost of reinstatement’ was available. But given the conclusion reached by the House of Lords on this question, the effect of the decision was to reinstate Judge Diamond QC’s decision to award Forsyth £2,500 for Forsyth’s ‘loss of amenity’. Although an explanation of the basis for this award was not strictly necessary to determine the dispute,71 both Lord Mustill and Lord Lloyd thought it appropriate to provide some, admittedly obiter, comments on the matter. Lord Mustill stated that contract law ‘must cater to those occasions where the value of the promise to the promisee exceeds the financial enhancement of his position which full performance will secure’.72 In accordance with the relevant economic literature, his Lordship described this phenomenon in terms of the ‘consumer surplus’,73 which has been defined as the excess in utility or subjective value obtained from a good or service over and above the utility associated with its market price.74 his Lordship noted further that ‘this excess … is usually incapable of precise valuation in terms of money, exactly because it represents a personal,

69

ibid 365–72. R J Young v Thames Properties Ltd [1999] EWCA Civ 629. 71 Ruxley (n 10) 354 (Lord Bridge). 72 ibid 360. 73 ibid 360. 74 D Harris, A Ogus and J Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) LQR 581, 582. 70

Expanding Recovery for Non-Pecuniary Loss

39

subjective and non-monetary gain’.75 Lord Mustill thus seemed to view the £2,500 as an award for Forsyth’s subjective loss. After noting that the trial judge appeared to rationalise the award as one for ‘disappointment’, Lord Lloyd upheld the award on the same basis, stating that it was possible or legitimate to make such an award where the aim of the contract was to provide some form of mental satisfaction. His Lordship also described the award as ‘a logical application or adaption … to a new situation’ of ‘the very object of the contract exception’ explained by Bingham LJ in Watts.76 But whether Lord Lloyd thought this award should be measured subjectively or objectively is unclear.77 Consistent with the idea that this is an award for the loss actually suffered by the claimant, the basis for assessment of the loss of ‘pleasure’ might be thought to be subjective, as Lord Mustill appeared to think. However, it may be that Lord Lloyd took the view that this award was to be assessed objectively on the basis of his Lordship’s statement that Forsyth was ‘lucky to have obtained so large an award for his disappointed expectations’.78 Lord Lloyd also noted that there may be cases where skimped performance does not produce any difference in value between the performance promised and the performance provided and the contract is not one for the provision of a pleasurable amenity. Significantly, his Lordship stated that in such cases there is no reason why the law should not award some ‘modest sum … to compensate the buyer for his disappointed expectations’.79 Although Lord Lloyd employed the conventional terminology of ‘compensation’ here, it is difficult to classify such an award as loss-based in the orthodox sense since the innocent party cannot prove that breach has caused him any identifiable factual detriment. A possible alternative rationalisation of the award is that it was an approximation of the price a reasonable person in Forsyth’s position would have accepted to ‘release’ Ruxley from further performance. In Chapter 5, it is argued that this is the alternative monetary substitute for performance that is appropriate when substitute performance is impossible and (perhaps) also when the cost of substitute performance is ‘unreasonable’, as was the case in Ruxley. Unfortunately, Lord Lloyd provided no further view as to how such an award might be measured. This is understandable given that strictly speaking this issue did not arise for determination in Ruxley itself. One possibility might have been the difference in market price between the pool contracted for and the pool provided. This assumes that the market price of a shallower pool is less than a deeper one. Although this seems logical since presumably a shallower pool is cheaper to build than a deeper one, it will not necessarily be true since a pool builder might

75

Ruxley (n 10) 360. ibid 374. 77 Contra Edelman (n 46) 222, who suggests that Lord Lloyd clearly thought the award should be measured objectively. 78 Ruxley (n 10) 374. 79 ibid. 76

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price a range of slightly different pools at the same price in order to facilitate consumer choice.80 In any event, the more fundamental problem with this suggestion is that even if a shallower pool is always cheaper to build than a deeper one, such an approach could lead to a substantive award only when the pool is too shallow rather than too deep. The above discussion highlights both the need for a coherent explanation of the award in Ruxley and the judicial impulse towards awarding money to substitute for performance. The account this book proposes seeks to provide this explanation in a way that recognises this impulse. In particular, the availability of the kind of objective award alluded to by Lord Lloyd is supported on the basis that it constitutes the next best substitute for performance when an award of the cost of obtaining substitute performance is ‘unreasonable’ or unquantifiable because the breach is irreversible. Chapter 5 argues that the appropriate basis for quantifying such an award is an approximation of the price a reasonable person in the promisee’s position would accept to ‘release’ the breaching party from further performance at the date of breach.

2. Subsequent Judicial Analysis of Ruxley The principal significance of the decision in Farley v Skinner was explained above in the discussion of the availability of damages for mental distress. However, another highly significant aspect of the case was the attempt by various judges to rationalise the award made to Mr Forsyth in the Ruxley case. Although a variety of different explanations were offered, the comments of both Lord Mustill and Lord Lloyd received endorsement from all the Law Lords who sat in the latter case. Lord Steyn, for instance, stated that he was ‘satisfied that the principles enunciated in Ruxley’s case in support of the award of £2, 500 for a breach in respect of the provision of a pleasurable amenity have been authoritatively established’.81 Three different explanations for the award in Ruxley were offered in Farley v Skinner. First, Lord Steyn and Lord Hutton classified the contract in Ruxley as one for the provision of a ‘pleasurable amenity’ so that the damages awarded reflected Forsyth’s ‘disappointment’ at the loss of this amenity. Their Lordships appeared to suggest that the Ruxley principle enabled a court to award a sum where there had been a failure to deliver a contractual specification of value to the claimant that would otherwise go uncompensated and that such awards were not restricted to building contracts.82 Lord Steyn also appeared to express support for Lord Mustill’s reasoning based on his reference to the ‘consumer surplus’. But Lord Steyn also recognised that ‘labels sometimes obscure rather than illuminate’,83 and

80 In this context, it is noteworthy that Ruxley actually agreed to modify the agreement originally reached by the parties to increase the depth of the pool at no additional cost to Forsyth. 81 Farley (n 30) 749. 82 See, in particular, ibid 760 (Lord Hutton). 83 ibid 748.

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referred to the £2,500 as a ‘moderate sum’, which might suggest some sympathy for the approach advocated by Lord Lloyd. Moreover, both Lord Steyn and Lord Hutton also endorsed the reasoning of Lord Lloyd in Ruxley, so it is not entirely clear which of the two distinct approaches they favoured. Secondly, Lord Clyde appeared to suggest that the award of damages in Ruxley was for ‘inconvenience’.84 However, as McKendrick and Graham note, this cannot be the true basis for this award since Lord Lloyd actually noted in his judgment that the trial judge in the case awarded Forsyth the sum of £750 for ‘general inconvenience and disturbance’.85 The third and probably most radical analysis of the Ruxley award evident in Farley v Skinner was that offered by Lord Scott. His Lordship stated that the Ruxley case establishes that if a party’s contractual performance has failed to provide to the other contracting party something to which that other was, under the contract, entitled, and which, if provided, would have been of value to that party, then, if there is no other way of compensating the injured party, the injured party should be compensated in damages to the extent of that value.86

His Lordship thus appeared to draw a distinction between the failure to obtain a valuable contractual benefit and the consequential loss, in the form of inconvenience or distress, which may result in consequence of breach. While the former should be assessed by reference to the approach in Ruxley, the latter should be assessed in accordance with Watts. Lord Scott also expressed the view that damages could be awarded to the claimant on either basis in Farley. As McKendrick has observed,87 a similar analysis was offered by Lord Millett in Panatown,88 where his Lordship stated that, viewed objectively, there was no ‘loss of amenity’ in Ruxley and the ‘loss’ could more accurately be described as a ‘defeated expectation’.89 This explanation of Ruxley is significant in the context of the present book because it can be understood as recognising, at least implicitly, the proposed distinction between substitutionary and compensatory awards. Given views Lord Scott has expressed extra-judicially,90 it seems unlikely his Lordship would support the existence of the distinction proposed here. In view of these writings and his comments in Farley, his Lordship appears to understand the Ruxley award as compensation for loss of the subjective value that the promisee 84

ibid 753–56. McKendrick and Graham (n 41) 166, referring to the speech of Lord Lloyd in Ruxley (n 10) 363. 86 Farley (n 30) 766. 87 E McKendrick, ‘The Common Law at Work: The Saga of Alfred McAlpine Construction Ltd v Panatown Ltd’ (2003) 3 Oxford University Commonwealth Law Journal 145, 170. 88 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL), discussed below in Chapter 2. 89 ibid 588. Significantly, however, in this case it was an ‘expectation’ to which Forsyth would have become unconditionally entitled upon payment of the balance due under the contract, subject of course to the ‘reasonableness’ constraint that a majority of the House of Lords concluded applied to deny Forsyth’s claim. 90 Lord Scott, ‘Damages’ [2007] Lloyd’s Maritime and Commercial Law Quarterly 465. 85

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attributed to exact performance. It is worth noting, however, that alternatively the ‘loss of amenity’ award in Ruxley might be understood as an attempt to provide an (admittedly very) imperfect substitute for performance in circumstances where it is ‘unreasonable’ for the promisee to insist upon being awarded the ‘cost of cure’. It is acknowledged that the substitutionary analysis just advanced is not the conventional understanding of the ‘loss of amenity’ award in Ruxley. But as will be explained in Chapter 7, this analysis is consistent with certain judicial comments made in the case itself. If this explanation for the award is preferred, to call the award ‘compensatory’ is artificial and liable to confuse. It is preferable to distinguish a failure to obtain contractual performance from the negative consequences that may follow from such failure. In Panatown, Lord Millett appeared to recognise the existence of this distinction, though his entire discussion occurred within the paradigm of ‘loss’ and he described the award in Ruxley as one for a ‘defeated expectation’.91 Such confusion reinforces the need for the new terminology proposed in Chapter 3.

IV. Conclusion This chapter commenced by observing the internal tension within the Robinson v Harman principle, which gives rise to two competing interpretations of the purpose of awarding money following an actual or anticipated breach of contract. The first interpretation understands contractual money awards as concerned only with making good some (or all) of the detrimental factual consequences that the innocent party has suffered as a result of the breach. The second interpretation recognises the possibility of a broader interpretation of ‘loss’ with the consequence that the more fundamental aim of contractual awards is to substitute for the performance promised, irrespective of what detrimental factual consequences have in fact resulted from the failure to perform as promised. English law’s prevailing orthodoxy is that the first interpretation is correct and the principal objective of this chapter was to explain this view of the law in sufficient detail for the challenge mounted against this view in the remainder of this book. Given the conventional preoccupation with identifying a ‘loss’ in this context, this chapter focused on explaining how traditionally English contract law has understood this concept. Although certain exceptions have been recognised, generally ‘loss’ has been interpreted relatively narrowly in the contractual context so that ‘damages’ were available only to make good certain proven financial detriment that could be causally attributed to the breach. However, these exceptions now have expanded sufficiently to render this narrow interpretation of ‘loss’ obsolete.

91

Panatown (n 88) 588.

Conclusion

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It should be emphasised, however, that most, but not all, of the decisions examined in this chapter are consistent with the understanding of the law that this book seeks to challenge. This is because most of the awards discussed above can be reconciled with the law’s conventional interpretation provided that the meaning of ‘loss’ is extended to include certain kinds of non-pecuniary damage that English law previously did not recognise as compensable in the contractual context. By contrast, the cases examined in the next chapter, in combination, do challenge fundamentally the law’s orthodox interpretation because, on any acceptable definition of ‘loss’, they are inconsistent with it. On this basis, it is claimed that in order properly to explain the present English law a new account is required.

2 The Doctrinal Inaccuracy of the Orthodox Account I. Introduction As Chapter 1 explained, English law’s accepted orthodoxy is that contractual money awards compensate for loss, and for loss alone. Although recently a broader conception of loss in the contractual context has come to prevail, a stable definition of the concept remains elusive. The aim of the present chapter is to demonstrate the doctrinal inaccuracy of the law’s orthodox understanding by detailing the numerous instances in which English law awards a promisee a sum of money that exceeds the loss this party can attribute to the promisor’s failure to perform as promised.1 Generally the preferred analysis of these decisions is left for later chapters, but on occasion it also is foreshadowed. Section II of this chapter identifies two distinct kinds of contractual money award that do not, in any sense, purport to ‘compensate for loss’. The first kind of award is one for ‘nominal damages’, including the possibility of substantial ‘nominal damages’. The second is an award that strips the entire profit the promisor derived from breach and gives it to the promisee. Although these kinds of awards are rare, it is clear that both are available in English law and neither of them can be understood as designed to make good the detrimental factual consequences that breach has caused the promisee. Section III continues the doctrinal challenge to the orthodox view, documenting various different situations where, despite purporting to compensate for ‘loss’, the sum awarded to the innocent victim of a breach of contract does not reflect the factual deterioration in that party’s position attributable to the relevant breach. The cases are sub-divided into the following five categories, which, in combination, it is contended fundamentally challenge the status of the orthodox account: (1) cases where a substantial award is made to a party even though the only factual loss caused by the relevant breach was suffered by someone who was not a party to the contract; 1 As noted in the Introduction, the narrow interpretation of the Robinson v Harman principle, according to which awards upholding it are concerned only with making good ‘loss’, is often referred to as contract law’s ‘compensatory principle’, so when this latter term is used in this book, this is the meaning that it is intended to convey.

Two Clear Examples of Non-Compensatory Money Awards

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(2) cases awarding the innocent promisee a sum measured by reference to a hypothetical ‘release’ bargain between the two parties assessed at the date of breach; (3) awards for the breach of a contract for the sale of goods that put the promisee into a factual position that is superior to the factual position that this party would have occupied had the breach not occurred; (4) various further miscellaneous cases where the promisee is awarded a sum that exceeds the detrimental factual consequences this party can attribute to the other party’s failure to perform as promised; (5) cases where the occurrence of post-breach events that eliminate or reduce the promisee’s prima facie loss are ignored for the purpose quantifying the sum of money to which this party is entitled in an action for breach.

II. Two Clear Examples of Non-Compensatory Money Awards This section of the chapter documents two clear examples of contractual money awards that are not measured by reference to the ‘loss’ suffered by the innocent party on any understanding of that expression. The discussion commences with awards of ‘nominal damages’ and then considers the possibility of gain-based awards. In both situations, the court explicitly recognises that it is making an award that is in no way concerned with making good the deterioration in the innocent party’s factual position that breach has caused. While both awards might be explained as justifiable exceptions to the general rule, the possibility of such awards demonstrates a fundamental truth: that in English law contractual money awards are not always concerned with making good the detrimental factual consequences suffered by the innocent party as a result of the promisor’s failure to perform as promised.

A. Nominal Damages for Breach of Contract According to Lord Scott, the purpose of nominal damages is vindicatory. Writing extra-judicially, his Lordship has stated that the aim of such awards is ‘to mark the existence of the right in question and to mark the fact of its violation by the wrongdoer’.2 This section makes two arguments. The first is that the mere existence of the category of ‘nominal damages’ casts doubt upon the correctness of any understanding of contractual awards that fails to recognise the significance of

2

Lord Scott, ‘Damages’ [2007] Lloyd’s Maritime and Commercial Law Quarterly 465, 469.

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the right to performance. The second is that the possibility of substantial ‘nominal damages’ represents a significant challenge to the orthodox understanding of contractual awards by illustrating that substantial awards provided in response to a breach of contract are not invariably concerned to make good the factual detriment caused by breach.

1. Conventional Nominal Damages Awards of ‘nominal damages’ are generally very small in amount and are given when the claimant demonstrates the existence of a breach but cannot prove any quantifiable ‘loss’ in consequence. It therefore might be said that awards of nominal damages actually demonstrate the truth of the orthodox account on the basis that substantial money awards responding to a breach of contract are only available when the innocent party can prove an identifiable loss. This characterisation of nominal damages is rejected here. In reality, the availability of nominal awards for the breach of certain legal duties, including a breach of the duty to perform a contract, is evidence in support of Birks’s supposition that ‘the notion of a wrong is detachable in principle from the compensable harm suffered’ as a result of that wrong.3 The possibility of nominal damages awards for breach of contract thus demonstrates that the law places at least some significance on the infringement of a contractual right, irrespective of whether any detrimental consequences accompany such infringement.4 This is because, as Lord Scott has observed, the only possible purpose of an award of nominal damages can be to ‘mark’ the infringement of (and arguably ‘vindicate’) the innocent party’s legal right.5 The possibility of a nominal damages award therefore demonstrates that English law recognises the distinction between the infringement of a right and its consequences. Nevertheless, the fact that nominal damages are generally insubstantial in amount might be thought to support the orthodox account of contractual awards on the basis that such awards simply demonstrate the correctness of that account in relation to substantive contractual awards. But the existence of substantial awards of ‘nominal damages’ undermines this claim.

2. Substantial ‘Nominal’ Damages In Greer v Alstons Engineering Services and Sales Ltd,6 Greer had bought a JCB backhoe from Alstons in 1978. Greer took it back to be repaired in 1982. Following 3 P Birks, ‘The Concept of a Civil Wrong’ in D Owen (ed), The Philosophical Foundations of Tort Law (Oxford University Press, 1995) 29, 31 and 36. 4 In Risks and Wrongs (Cambridge University Press, 1992), Professor Coleman distinguishes between the ‘infringement’ of a right (a justified rights invasion), which he calls a ‘wrong’, and the ‘violation’ of a right (an unjustified rights invasion), which he calls ‘wrongdoing’. While the distinction between these two concepts may have value for some purposes, the terms ‘infringement’ and ‘violation’ are used synonymously in this book. 5 Lord Scott (n 2). 6 Greer v Alstons Engineering Services and Sales Ltd [2003] UKPC 46.

Two Clear Examples of Non-Compensatory Money Awards

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its return, Greer alleged that it continued to be defective and returned it for further repairs in 1983. When Greer went to collect the machine in 1984, a stalemate developed because he refused to accept it unless he was allowed to test drive it and Alstons refused to allow him to test drive it unless he paid the sum of US $20,342.27, which was the amount outstanding for the repairs carried out in 1982. The Court of Appeal of Trinidad and Tobago ordered Alstons to pay Greer the assessed value of` the backhoe less the sum of US $20,342.27 for the 1982 repairs and that Greer should receive the sum of US $5,000 as ‘nominal damages’ for the infringement of his right to use the backhoe between 1982 and 1984, as well as interest from the date of judgment in 1995. Greer appealed to the Privy Council, arguing, inter alia, that he should have been awarded substantial rather than nominal damages for being deprived of the use of the backhoe during the relevant time period. In allowing the appeal, the Privy Council noted that the ‘loss’ for which Greer was seeking substantial damages was unquantified. The Court held that while the sum of US $5,000 was relatively small, it was not so low as to be wrong in principle so the award should not be disturbed. In its decision, the Privy Council emphasised that ‘nominal’ does not necessarily mean ‘small’. Reference was made to The Mediana,7 where a sum was awarded by the House of Lords for the defendant’s infringement of the claimant’s right to the use of a vessel damaged by the defendant’s negligence. In that case, Lord Halsbury LC also stated that ‘the term “nominal damages” does not mean small damages’.8 The decision in Greer demonstrates that substantial ‘nominal damages’ are possible and that damages may be awarded in an action for breach of contract where the claimant cannot causally attribute any loss to the relevant breach, or at least where the loss he claims cannot be quantified with sufficient certainty.

B. Gain-Based Awards for Breach of Contract The possibility of substantial awards of ‘nominal damages’ demonstrates that English law does not award money in response to a breach of contract only to make good ‘loss’. Another challenge to the hegemony of ‘compensation for loss’ in the contractual context is the decision in Attorney-General v Blake,9 where the House of Lords unequivocally recognised that in certain circumstances an award responding to a breach of contract may be measured by reference to the profits obtained by the defendant through breach, irrespective of what, if any, loss the innocent party suffered in consequence of such breach. This decision, as well as the subsequent cases that have followed it, are inconsistent with the orthodox understanding of contractual money awards.

7 The Owners of the Steamship ‘Mediana’ v The Owners, Master and Crew of the Lightship ‘Comet’ [1900] AC 113 (HL). 8 ibid 116. 9 Attorney-General v Blake [2001] 1 AC 268 (HL).

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1. Attorney-General v Blake The facts in Blake are well known. Blake was a former member of the British Secret Intelligence Services originally employed in 1944. Between 1951 and 1960 he disclosed secret information to the Russian government. In 1961 he was convicted for this and sentenced to 42 years’ imprisonment. Five years later the Russians freed him and he went to live in Moscow. His contract of employment with Her Majesty’s government contained an undertaking not to disclose any information, in any form, about his work in the secret service. This contractual undertaking also applied after his employment ceased. In 1990 Blake published an autobiographical book and entered into an agreement with a UK publisher under which he received some advance payments and was entitled to further royalties. The British government commenced an action seeking an account of Blake’s profits. However, because the information contained in the book was no longer confidential, no action could be brought for breach of confidence and any fiduciary duty that survived the termination of his employment did not extend to keeping secret any information that was no longer confidential. In an action for breach of contract, the Crown claimed whatever amount was owing to Blake from his publisher. An injunction was also granted preventing him from receiving any further payments from the publisher. Blake appealed the injunction and the Attorney-General cross-appealed, claiming that all profits derived from the book owing to Blake should be paid to the Crown. In the House of Lords, Lord Nicholls delivered the leading speech and held that in certain exceptional circumstances it may be open to order a breaching party to account for all profits either received, or entitled to be received in future, through breach. Although his Lordship refused to prescribe any ‘fixed rules’ as to when such an award would be available,10 he held that the instant scenario was such a case, making reference to a number of special aspects of the facts in support of this conclusion. Possibly the most important aspect of the case in this regard was that the work of the secret service depends on the confidentiality of information and as a result of his breach of confidentiality Blake was responsible for harming the public interest. Publication of the book was a further breach of that undertaking, even though the information contained within it was no longer secret. In addition to placing emphasis on the case’s public interest implications, Lord Nicholls noted various other considerations that in his view supported the availability of a gain-based response in this case. First, his Lordship observed that the disclosure of such information was a criminal offence under the Official Secrets Act 1911 and that an absolute rule against disclosure was necessary in order to ensure that members of the secret services are able to deal with each other in complete confidence. Secondly, the significant royalties Blake received were due to his

10

ibid 285.

Two Clear Examples of Non-Compensatory Money Awards

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ability to capitalise on his notoriety as a Soviet agent. In this context, Lord Nicholls noted the desirability of preventing a party from profiting from his wrong.11 The third reason identified by Lord Nicholls was that the usual contractual remedies of (compensatory) damages, specific performance and injunction were inadequate here. This aspect of the case might prompt the suggestion that the award is some kind of proxy for the Crown’s unquantifiable loss. But, as Cunnington observes,12 this rationalisation for profit stripping must fail because this remedy has been ordered in cases where no loss had been suffered,13 and where the claimant’s loss was easy to measure.14 Fourthly, emphasis also was placed on the fact that the undertaking here was akin to a fiduciary obligation, in concluding that this was an appropriate situation in which to impose a profit-stripping remedy.15 Lord Nicholls was of the view that in combination these considerations indicated that the Crown had a ‘legitimate interest’ in ensuring Blake did not benefit from revealing state information in breach of contract.16 The Blake decision has generated significant controversy. It has been argued that it is not binding on lower courts on the basis that it was given per incuriam because ‘a supposed contract case was decided without any careful investigation of the very existence of a binding contract, or of its scope and character’.17 For present purposes, however, the relevance of Blake is limited to the fact that the sum of money awarded clearly was measured by reference to the gain made by Blake in consequence of his breach of his contract with the British government, assuming such a contract existed. This claim is irrefutable. There is simply no way in which the damages awarded can be characterised as compensating for loss suffered by the Crown, even if one supposes that it was a proxy for an unquantifiable loss. In support of this analysis, Lord Nicholls stated that ‘when awarding damages, the law does not adhere slavishly to the conception of compensation for financial measurable loss’.18 On its face the decision appears to constitute a significant challenge to the orthodox understanding of contractual money awards since, after Blake, it simply cannot be maintained that compensation for loss is always the objective in making a substantial money award following a contractual breach. Despite this, the significance of Blake as regards the central argument of this book should not

11 ‘The broad proposition that a wrongdoer should not be allowed to profit from his wrong has an obvious attraction’, ibid 278. For a critique of the strength of this maxim, commonly invoked in the context of justifying gain-based awards for wrongs, see N McBride, ‘Restitution for Wrongs’ in C Mitchell and W Swadling (eds), The Restatement Third, Restitution and Unjust Enrichment: Comparative and Critical Essays (Hart Publishing, 2013), text at n 39. 12 R Cunnington, ‘Changing Conceptions of Compensation’ (2007) 66 CLJ 507, 509. 13 Boardman v Phipps [1967] 2 AC 46 (HL). 14 Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC). 15 Blake (n 9) 280. 16 ibid. 17 AWB Simpson, ‘A Decision Per Incuriam?’ (2009) 125 LQR 433, 439. 18 Blake (n 9) 285.

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be overstated because it is clear that the House of Lords there was not purporting to uphold the Robinson v Harman principle. Rather than being designed to put the innocent party into the position he would have been in had the contract been performed, Lord Nicholls viewed the award provided in Blake as a legitimate exception to the compensatory principle, while recognising that the availability of such relief should be confined to exceptional circumstances. In view of this, it might be claimed that Blake does not represent a challenge to the law’s orthodox understanding, but is simply an exception that highlights the general correctness of this view. If Blake were the only case in which noncompensatory awards had been made, such a claim might be defensible. But the remainder of this chapter is dedicated to demonstrating that this is not the case. This task commences by showing that the gain-based relief awarded in Blake has been endorsed in subsequent cases.

2. Subsequent Case Law Subsequent judicial support for Blake can be found in the decision in Esso Petroleum Co Ltd v Niad.19 Niad entered into a pricing agreement with Esso, who supplied the former with petrol for their station. This specific agreement was part of a larger scheme called ‘Pricewatch’ that Esso had agreed with all retailers in the area. Niad breached the pricing agreement by charging its customers a higher price than agreed under the scheme, meaning Niad paid less to Esso than it would have done if Esso had been aware of the overcharging that occurred in breach of their contract. Sir Andrew Morritt V-C held that the claimants were entitled to elect between three responses: compensatory damages, an account of profits stripping away Esso’s gains, or a ‘restitutionary remedy’ for the amount of price support Niad obtained from Esso. Arguably, it is difficult to draw a meaningful distinction here between an account of profits and this so-called ‘restitutionary remedy’, because it was possible that the defendant’s gain and the claimant’s loss were roughly equivalent.20 The case nevertheless provides a clear example of a gain-based award in a commercial context far removed from the special circumstances that arose in Blake. Such an award was found to be justified on the basis that compensatory damages were ‘inadequate’ (because it was almost impossible for Esso to establish the sales lost on account of Niad’s breach), the obligation to implement and maintain the recommended pump prices was ‘fundamental’ and the breach seriously undermined the effectiveness of Esso’s scheme, Niad’s breaches were calculated, and repetitive, and Esso ‘undoubtedly’ had a ‘legitimate interest’ in preventing Niad from profiting from its breaches.21 19

Esso Petroleum Co Ltd v Niad [2001] EWHC Ch 458, All ER (D) 324 (Nov) (CA). However, such loss was very difficult to prove with certainty since it was ‘almost impossible to attribute lost sales to a breach by one out of several hundred dealers who operated Pricewatch’, ibid [56]–[64]. 21 ibid [63]. 20

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The Niad decision has been criticised on the basis that profit stripping was inappropriate in the purely commercial circumstances that there arose.22 However, the Court of Appeal subsequently referred to the case without disapproval in Experience Hendrix LLC v PPS Enterprises Inc.23 Regardless of one’s view of the Niad decision, it does make clear that even in purely commercial contexts, when quantifying the sum to which the victim of a breach of contract is entitled, English law ‘does not adhere slavishly to the concept of compensation for financially measurable loss’.24

III. Other Awards Inconsistent with the Law’s Orthodox Understanding Section II of this chapter highlighted the existence of some decisions (and concepts) that are inconsistent with the orthodox understanding of contractual money awards. Sometimes there is simply no way that one can characterise the sum of money awarded to an innocent party as reflecting the ‘loss’ suffered by this party in consequence of breach. But the awards considered in the previous section did not actually purport to be compensatory in the sense in which that term is usually understood.25 Moreover, although these awards demonstrate the possibility of non-compensatory damages, it is arguable that they are simply justifiable exceptions to the general rule that ‘damages’ for breach of contract are awarded only to compensate for an established ‘loss’. The discussion that follows outlines many examples of awards that do purport to uphold the Robinson v Harman principle, but are nevertheless inconsistent with the way in which that principle conventionally is understood. Typically, the Robinson v Harman principle is interpreted strictly as concerned only with a comparison between the innocent party’s factual (or financial) position following breach and the (necessarily hypothetical) factual (or financial) position that this party would have occupied had the breach not occurred.26 It is argued that one simply cannot reconcile this interpretation with the decided case law and that this discrepancy demonstrates the doctrinal inaccuracy of the orthodox account. It is argued further that as a result of this doctrinal discrepancy, a new understanding of the law is required. 22 E McKendrick, ‘Breach of Contract, Restitution for Wrongs, and Punishment’ in A Burrows and E Peel (eds), Commercial Remedies (Oxford University Press, 2003) 93. 23 Experience Hendrix LLC v PPS Enterprises Inc [2003] EWCA Civ 323, [2003] FSR 46, [2003] 1 All ER (Comm) 830 (CA) [31], [38]. 24 Blake (n 9) 285. 25 That is, as concerned with making good the deterioration in the claimant’s factual (or financial) position. 26 See A Kramer, The Law of Contract Damages (Hart Publishing, 2014) 241, citing Stephenson Blake (Holdings) Ltd v Street Heaver Ltd [2001] Lloyd’s Rep PN 44 (Hicks QC), [158].

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A. Substantial Money Awards in the Three-Party Context According to the conventional view, the purpose of contractual money awards is to compensate the victim of a breach for that party’s own loss. A corollary of this principle is that an innocent party should not be able to recover a substantial award for loss that in fact is suffered by someone who is not a party to the contract. This restriction on recovery, in combination with the privity rule,27 gives rise to an apparent problem where A enters into a contract with B in order to benefit C. This is because, if B performs defectively, the party who suffers the loss (C) cannot enforce the contract, while the party that can enforce the contract (A) has suffered no loss. It is of course possible that in such circumstances A may be able to enforce the contract directly via an order for specific performance,28 or that C may in fact have a direct right of enforcement if the law is able to identify an assignment, agency or trust arrangement. But these methods of circumventing this ‘lacuna’ in English law are not always available. Moreover, they do not address the fundamental question of whether it is intelligible or legitimate to make A’s entitlement to a substantial award in these circumstances depend on whether he can prove that he has suffered ‘loss’ in consequence of B’s breach. The privity rule has been criticised stridently.29 In England, its effect has been abrogated substantially by the Contracts (Rights of Third Parties) Act 1999. Other Commonwealth jurisdictions have passed legislation conferring rights of enforcement on third parties as well,30 and in some jurisdictions the common law doctrine itself has been eroded.31 Despite this, the privity rule continues to persist in some form in most Commonwealth jurisdictions. But, at least in England, the same cannot be said in relation to the principle that an innocent party cannot recover substantial ‘damages’ for loss suffered by a non-party to the contract. Although still widely recognised to be the general rule from which deviation must be justified,32 the following sub-section will suggest that the exceptions to this rule have become sufficiently broad to threaten the general rule’s existence.

1. Specific Exceptions to the General Exclusionary Rule There are some well-established exceptions to the general rule that, in an action for breach of contract, the victim cannot recover more than the amount required

27 See Tweddle v Atkinson (1861) 1 B&S 393; Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] AC 847. 28 Beswick v Beswick [1968] AC 58 (HL). 29 See, for example, A Burrows, ‘Reforming Privity of Contract: Law Commission Report No 242’ [1996] Lloyd’s Maritime and Commercial Law Quarterly 467. Compare P Kincaid, ‘Third Parties: Rationalising a Right to Sue’ [1989] CLJ 243. 30 See Contracts (Privity) Act 1982 (New Zealand). 31 See, for example, Trident General Insurance v McNiece Bros (1988) 165 CLR 107 (HCA). 32 See Beswick (n 28).

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to compensate that party for his, her or its own loss. First, substantial damages can be recovered by a trustee even though the loss is suffered by the beneficiary and the same principle has been held to apply in the context of an agent–principal relationship where the principal is undisclosed.33 Secondly, in St Albans’ CC v International Computers Ltd,34 it was held that a local authority can recover for the loss ultimately suffered by its inhabitants because, although it was not strictly a trustee, it was obliged in the circumstances to act in the interests of these inhabitants by recovering a substantial money award for their benefit. In addition, at least since the mid-nineteenth century, the general rule has also been subject to a specific exception in the context of contracts for the carriage of goods.35 In Dunlop v Lambert the House of Lords held that a plaintiff consignor could recover substantial damages from a carrier of goods lost at sea, notwithstanding that by the time the loss occurred, the goods had become the property of the consignee. Although it has been argued that this decision ‘has been misunderstood and provides no principled basis for the rule ascribed to it’,36 the decision is now clearly entrenched in English law. In this book it is suggested that, despite its possibly shaky foundations, the result in the case is desirable because it is independently justifiable by reference to a broader principle underpinning the law of contractual money awards. The continued existence of this exception was confirmed by the House of Lords in The Albazero,37 albeit subject to an important qualification. This qualification was that the rule would not assist the consignor if the consignee had himself acquired a right to sue the shipowner under the contract or the contracting parties had contemplated a second contract, such as a bill of lading, coming into existence between the carrier and the actual owner, which regulated the liabilities between them in relation to the goods carried.38 This qualified version of the rule from Dunlop v Lambert is commonly referred to as ‘the Albazero exception’.39 In The Albazero itself, this qualification meant that the claimant was not entitled to recover substantial ‘damages’ in respect of the loss suffered by the relevant third party. It should be noted, however, that The Albazero has now been replaced by the Carriage of Goods by Sea Act 1992. But in relation to contracts to which this legislation applies, a special statutory exception to the general rule that a contracting party can recover damages only for its own loss is created by section 2(4) of the Act. The rule in Dunlop, even in the form qualified by The Albazero, clearly conflicts with the conventional understanding of contractual money awards given

33 E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010) [14-026]. For example, Allen v F O’Hearn & Co [1937] AC 213 (HL) 218; Siu Yin Kwan v Eastern Ins Co Ltd [1994] 2 AC 199 (HL). 34 St Albans’ CC v International Computers Ltd [1996] 4 All ER 481. 35 Dunlop v Lambert (1839) 6 Cl & F 600. 36 B Coote, ‘Dunlop v Lambert: The Search for a Rationale’ (1998) 13 Journal of Contract Law 91. 37 Owners of Cargo Laden on Board the Albacruz v Owners of the Albazero [1977] AC 774 (HL). 38 Coote (n 36) 91. 39 For example, Peel (ed) (n 33) 629.

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in accordance with the Robinson v Harman principle. But given this rule’s very specific application to contracts involving the carriage of goods, it might be characterised as a limited exception to the general rule, which poses no serious threat to the orthodox understanding of contractual money awards. This position has become far more difficult to maintain following a line of decisions concerned with the breach of a construction contract. These cases have significantly extended the scope of the Albazero exception. It is worth noting, however, that there were some signs of judicial dissatisfaction with the general exclusion even before these cases were decided.

2. Extending ‘the Albazero Exception’ Lord Denning doubted the validity of the general exclusionary rule in a very different context in Jackson v Horizon Holidays Ltd.40 The defendants there contracted to provide holiday accommodation to the claimant, his wife and their two young children. The accommodation fell well short of the promised standard and at trial the claimant recovered damages, including £500 for ‘mental distress’.41 In the Court of Appeal, Lord Denning held that although this amount would have been excessive compensation if given only for the claimant’s own distress, the award should be upheld on the basis that, in addition to his own loss, the claimant was entitled to recover in respect of the loss suffered by his wife and children.42 a. Woodar Investments v Wimpey Lord Denning’s approach in Jackson, though not the actual sum awarded, was subject to disapproval in the subsequent House of Lords decision in Woodar Investments Developments Ltd v Wimpey Construction UK Ltd.43 This disapproval was on the basis that it was inconsistent with Beswick v Beswick, where it was held that a testator’s estate could not recover more than nominal damages for the executor’s breach of contract since it had suffered no loss in consequence of this breach.44 However, the Court noted that Jackson was supportable on the alternative ground that the damages awarded were for the claimant’s own loss. In Woodar, a contract for the sale of land required the purchaser to pay £150,000 to a third party on completion of the sale. The vendor claimed compensation on the basis that the purchaser wrongfully repudiated the contract. However, because no such repudiation was held to have occurred, the ‘damages’ question did not arise for determination. Despite this, obiter comments were made describing

40

Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 (CA). ibid 1472. 42 ibid. 43 Woodar Investments Developments Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 (HL). The House of Lords expressed further disapproval for Lord Denning’s approach in Jackson in White v Jones [1995] 2 AC 207 (HL). 44 Beswick (n 28). 41

Other Awards Inconsistent with the Law’s Orthodox Understanding

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the hypothetical question of damages as one of ‘great doubt and difficulty’45 and suggesting that the general rule prohibiting a promisee from recovering for loss suffered by a third party for the benefit of whom the contract was entered into was ‘most unsatisfactory’.46 b. Linden Gardens v Lenesta Sludge This sort of judicial sentiment has contributed to the relatively recent expansion of the Albazero exception in a line of cases beginning with Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd.47 In that case a building contract provided that the contractor would develop a site owned by the employer. The site was later transferred by the employer to a third party. The proceedings assumed this third party had suffered financial loss in consequence of having to remedy breaches of the building contract committed after this transfer. The contractor defended the employer’s action for substantial damages in the predictable way by arguing that the employer had suffered no loss so that any sum awarded must be nominal. The House of Lords rejected this argument, but two distinct bases for this conclusion are evident in the judgments. First, the principal and narrower ground on which the employer’s argument in Linden Gardens was upheld was the same one relied upon by Lord Browne-Wilkinson in Alfred McAlpine Construction Ltd v Panatown Ltd,48 which is discussed in greater detail in the next section. In Panatown, Lord Browne-Wilkinson expressed the view that a promisee can recover a third party’s loss on a contract relating to property (whether goods or land) where it was contemplated that the property in question would be transferred to the third party, or where it was otherwise contemplated that loss in respect of that property would be suffered by the third party. The second ground upon which the employer’s argument in Linden Gardens was upheld was the principle upon which Lord Griffiths decided the case, which has become known as the ‘broad ground’ for recovery. This principle was that a contracting party may suffer financial loss where he has ‘had to spend money to give him the benefit of the bargain which the defendant had promised but failed to deliver’.49 Although other members of the House of Lords expressed some support for this view, they did not commit themselves to endorsing it.50 Significantly, however, this principle was endorsed by Lord Goff and Lord Millett in a similar context in the Panatown case, considered further below.

45

Woodar (n 43) 284 (Lord Wilberforce). ibid 291 (Lord Salmon). 47 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (HL). 48 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL). 49 ibid 97. 50 This is observed by Steyn LJ in Darlington Borough Council v Wiltshier Northern Limited [1995] 1 WLR 68 (CA). 46

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c. Darlington BC v Wiltshier Northern Ltd Finally, in Darlington Borough Council v Wiltshier Northern Ltd,51 the Court of Appeal further extended the narrow principle upheld by a majority of the House of Lords in the Linden Gardens case to a situation in which there was no actual transfer of the property affected by the breach from the promisee to a third party. The need for such a holding arose from the particular facts of the case. In Darlington, a local authority wished to develop land that it already owned. Because of government restrictions on local authority borrowing, the transaction was structured so that there was a building contract between the bank financing the development and the builder, as well as a contract between the council and the bank, under which the bank undertook to procure the erection of the buildings, pay all sums due under the building contract and assign the benefit of any rights against the defendant to the council. The bank duly assigned its rights against the defendant to the council, which claimed ‘damages’ as assignee in respect of defects in the work done by the defendant. The problem faced by the council was that an assignee cannot recover more than the assignor could have done and here the assigning bank had not itself suffered any loss. Nevertheless, the principle upheld by a majority of the Court in Linden Gardens was extended to cover this situation. In addition, the correctness of this finding was later approved by the House of Lords in Panatown.52 d. Summary and Preview The overall effect of this line of authority is that a promisee can recover a substantial award in respect of a third party’s loss on a contract relating to property, whether goods or land, where the parties contemplated that the property in question would be transferred to the third party, or where it was otherwise contemplated that loss in respect of that property would be suffered by that third party. The rationale for this rule has been said to be that it prevents a defeating of the parties’ intentions where it was anticipated that the real loss would be suffered by a third party rather than the promisee. This, in turn, is said to prevent the disappearance of a substantial claim down a legal ‘black hole’ where the promisee can sue but has suffered no loss and, because of the privity doctrine, the third party has suffered loss but cannot sue.53 As foreshadowed above, this principle was considered further and refined in the House of Lords’ important decision in Alfred McAlpine Construction Ltd v Panatown Ltd.

51

ibid. Panatown (n 48) 531 (Lord Clyde), 566 (Lord Jauncey). 53 See Lord Diplock in The Albazero (n 37) 847. The ‘black hole’ terminology originated with Lord Stewart in GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SC (HL)157, 166. 52

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3. The Significance of Panatown In the Panatown case, Panatown contracted with McAlpine for the purpose of constructing an office building in the city of Cambridge. Panatown and UIPL were companies controlled by the same parent, Unex. UIPL owned the site in question, but Panatown was the party that made the contract for the site’s development. The purpose of structuring the transaction in this way was so that UIPL could limit its VAT liability. A separate duty of care deed was entered into between McAlpine and UIPL on the same day as the main contract was concluded under which McAlpine accepted limited liability for negligence claims arising from the construction work. This deed contained a reference to the fact that in concluding the building contract Panatown was ‘acting on behalf of ’ the building owner UIPL. It was nevertheless clear that UIPL was not a party to the main contract. Panatown therefore entered the main contract with McAlpine as principal in its own right and not as an agent for UIPL. But the collateral warranty in the duty of care deed did give UIPL a direct right against McAlpine to claim ‘damages’ if the latter breached its contractual duty of care to Panatown under the main contract. In the event, the construction work was both late in being completed and defective. However, when Panatown sued McAlpine for breach of contract, claiming substantial damages for defective performance and delay, the latter responded that this claim must fail on the basis that Panatown had itself suffered no financial loss as a result of the breach. The ensuring litigation was protracted and complicated.54 Relevantly for present purposes, McAlpine appealed Panatown’s partial victory in the Court of Appeal, recovering a substantial award.55 a. Support for a Narrow Interpretation of Loss The House of Lords upheld McAlpine’s appeal by a majority of 3-2. The majority comprised Lord Clyde, Lord Jauncey and Lord Browne-Wilkinson. Their Lordships’ reasoning proceeded in three steps, although in one critical respect there was disagreement. First, all three of their Lordships stated that the general rule in an action for breach of contract is that a claimant can recover ‘damages’ only in respect of its own loss. Secondly, all three recognised the existence of an exception to this general rule in the form of the ‘narrow ground’ in Linden Gardens.56 It was explained above that this exception provides that a promisee can recover substantial compensation for a third party’s loss on a contract relating to property where it was contemplated that the property in question would be transferred to the third party, or where it was otherwise contemplated that loss in respect of that property would be suffered by the third party. But the majority held that

54 See E McKendrick, ‘The Common Law at Work: The Saga of Alfred McAlpine Construction Ltd v Panatown Ltd ’ (2003) 3 Oxford University Commonwealth Law Journal 145, 152. 55 Alfred McAlpine Construction Ltd v Panatown Ltd (1998) 98 Construction L Rep 46 (CA) 75. 56 Linden Gardens (n 47).

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this exception is inapplicable when the third party has been given a direct remedy against the promisor, as the duty of care deed did in Panatown.57 The third and final step in the reasoning of Lord Clyde and Lord Jauncey was a rejection of Lord Griffiths’s broader ground for recovery in the Linden Gardens case. There, it will be recalled, Lord Griffiths held that a person who enters a contract but does not get what was bargained for suffers financial loss merely ‘because he has to spend money [on the contract] to give him the benefit of the bargain which the defendant had promised but failed to deliver’.58 Although this principle was not accepted by Lord Clyde and Lord Jauncey, uncertainty over its status after Panatown was created by the judgment of Lord Browne-Wilkinson. This uncertainty arises because Lord Browne-Wilkinson was prepared to ‘assume’ Lord Griffiths’s principle was ‘sound in law’ but held that the point did not need to be decided in this case.59 His Lordship’s reasoning to this effect was based on the existence of UIPL’s direct remedy against McAlpine in the duty of care deed. By contrast, Lord Clyde rejected Lord Griffiths’s ‘broad ground’ in Linden Gardens on the basis that [a] breach of contract may cause a loss, but it is not in itself a loss in any meaningful sense. When one refers to a loss in the context of a breach of contract, one is referring to the incidence of some personal or patrimonial damage.60

b. Support for a Broader Understanding of Loss The minority in Panatown comprised Lord Goff and Lord Millett. Both of their Lordships supported Lord Griffiths’s broad ground in Linden Gardens on the basis that it is a general principle of English law that a promisee suffers loss where services contracted for are not performed. Significantly, their Lordships both held that because this is a general principle, rather than an exception to a general rule, there was no reason why it should not apply when the third party had its own direct remedy against the promisor. In consequence of this reasoning, both Lord Goff and Lord Millett held that on the facts of the case Panatown was entitled to a substantial award. The essential question upon which the difference in opinion in Panatown turned was therefore whether the mere failure to receive a contractually agreed performance is itself a compensable ‘loss’. While Lord Clyde and Lord Jauncey thought that breach could not meaningfully be considered ‘loss’, Lord Goff and Lord Millett thought otherwise. But difficulty arises because of the equivocal reasoning of Lord Browne-Wilkinson. As explained more fully below, the view endorsed here is that, although the terminology of ‘loss’ should be eschewed in this context, the

57 58 59 60

Panatown (n 48) 577 (Lord Browne-Wilkinson). Linden Gardens (n 47) 97. Panatown (n 48) 577. ibid 534.

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position taken by Lord Goff and Lord Millett in holding that a substantial money award is available to ‘remedy’ a defective performance is in substance correct.

4. Appraising the Current Legal Position The ratio in Panatown is not easily stated. The preferable view is that a majority of the House of Lords recognised that, absent a duty of care deed, Panatown had a right to recover the cost of obtaining the agreed performance, irrespective of whether they suffered any quantifiable financial loss.61 However, even if this view is not accepted, it is clear that where a contract is made for the benefit of a third party, the law governing the recovery of ‘damages’ for breach cannot be reconciled easily with the prevailing orthodoxy regarding contractual money awards. Indeed, this is probably the least that can be said. In the view of one set of commentators, writing shortly after the Linden Gardens and Darlington decisions, and before Panatown: It is now plain that Dunlop v Lambert has become the basis of dramatic new departures in the law of damages. It has been credited with propositions far from its reasoning and recruited to solve problems far from its facts. Through the series of building cases discussed … the principle attributed to it by Lord Diplock in The Albazero has been extended to situations where: (i) the subject matter of the contract is real rather than personal property; (ii) the contract prohibits assignment of its benefit to third parties; (iii) no property passes during the life of the contract, the identity of the owner remaining constant; and (iv) the party in breach enters into direct legal relations with the owner or other party who bears the loss. In all these situations substantial damages were awarded. The result is that the Dunlop v Lambert ‘exception’ now seems larger than the general rule which spawned it, while the general rule itself seems more hole than target.62

Depending on how one understands the significance of the decision in Panatown, the Albazero exception may now have been extended even further. In more recent developments, the reasoning of Lord Goff and Lord Millett in Panatown has been applied by lower courts in Mirant Construction (Hong Kong) Ltd v Ove Arup & Partners International Ltd,63 and Technotrade v Larkstore Ltd.64 Stadlen J also endorsed this reasoning in Giedo Van der Garde BV v Force India Formula One Team Limited.65

61 This was how the decision was understood on the remitter: Alfred McAlpine Construction Ltd v Panatown Ltd (No 2) [2001] EWCA Civ 485 [20]. This point is noted in J Edelman, ‘Money Awards of the Cost of Performance’ (2010) 4 Journal of Equity 122. 62 N Palmer and G Tolhurst, ‘Compensatory and Extra-Compensatory Damages: Linden Gardens and the Lord Griffiths’ Principle’ (1998) 13 Journal of Contract Law 143. 63 Mirant Construction (Hong Kong) Ltd v Ove Arup & Partners International Ltd [2007] EWHC 918 (TCC). 64 Technotrade v Larkstore Ltd [2006] EWCA Civ 1079. 65 Giedo Van der Garde BV v Force India Formula One Team Limited [2010] EWHC 2373 (QB). This case is discussed further below.

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Despite all this, the principle remains controversial. In DRC Distribution Ltd v Ulva Ltd,66 it was said that to the extent this principle exists it should be confined to services cases, suggesting that it does not apply to contracts for the sale of goods. The major reason for this controversy is the dominance of the conventional understanding of contractual money awards. But once a preoccupation with loss is jettisoned, awards of the kind just described can be recognised as unexceptional examples of substantial money awards that substitute for performance rather than compensate for loss.

B. Awards Based on a Hypothetical Release Bargain There are a number of English decisions where the victim of a contractual breach is awarded a sum assessed by reference to a hypothetical ‘release’ bargain between the two contracting parties as at the date of breach. The nature of these awards is controversial, but it is argued that to describe them as ‘compensatory’ requires adopting a strained and artificial conception of ‘loss’. The best understanding of awards assessed by reference to a hypothetical ‘release’ bargain, Chapter 5 argues, is that they substitute for performance in circumstances where an award of the cost of substitute performance is unavailable. But before this argument is advanced, the difficulty of reconciling these awards with the prevailing orthodoxy must be shown. The discussion that follows begins with the much analysed decision in Wrotham Park Estate Co v Parkside Homes Ltd.67 Following this, the availability of such awards in other contexts is considered.

1. Award In Lieu of a Restorative Injunction In Wrotham Park, the defendant company erected homes on its land in breach of a restrictive covenant that required it to obtain prior approval from the claimant before any building began. The defendant built 14 houses and a road from which it eventually made a profit of £50,000. Shortly after the development work began, the claimant issued a writ seeking a final injunction to restrain any further building on the land and the demolition of the building work done up to this point. At trial, Brightman J refused to order the mandatory restorative injunction sought by the claimant, finding that it would have constituted an ‘unpardonable waste’ of valuable public housing.68 Instead, his Lordship awarded damages in lieu of an injunction under Lord Cairns’ Act,69 taking the view that the claimant ought to receive damages on a ‘fair’ basis, which he assessed as 5 per cent of the defendant’s anticipated profits. This Brightman J described as ‘a sum that might reasonably have been demanded as a quid pro quo for relaxing the covenant’.70 66 67 68 69 70

DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716. Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798 (Ch). ibid 811. The Chancery Amendment Act 1858. Wrotham Park (n 67) 815.

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Strictly speaking, the cause of action in Wrotham Park was not for breach of contract since the rights arose from a previous contract between the claimant and the defendant’s predecessor in title. Nevertheless, as the Court of Appeal in Blake observed, ‘the measure of damages cannot depend on whether the proceedings are between the original parties to the contract or their successors in title’.71 Therefore, exactly the same issue would have arisen if the litigation had been between the parties to the initial contract so this aspect of the case does not prevent it from being considered as an example of an award for breach of contract. The kind of award provided in Wrotham Park, based on a hypothetical release bargain between claimant and defendant at the date of breach, has not been limited to the specific facts that arose there. On the contrary, awards of this sort have been given in a range of other cases involving a breach of contract where the contractual duty in question has been concerned to protect an interest in land or personal property, or one analogous to a proprietary interest. For example, awards have been made for the breach of a collateral contract restricting the development of land,72 and for the breach of a negative contractual obligation concerned to restrict the defendant’s use of master tapes,73 or of particular initials.74 Significantly, in Giedo Van der Garde BV & anr v Force India Formula One Team Ltd,75 Stadlen J held that such awards were not limited to cases based on an invasion of property rights. His Lordship also held that there was no requirement that the claim must be based on a breach of a restrictive covenant or that the claimant is seeking injunctive relief, or damages in lieu of such relief under Lord Cairns’ Act.76 This final point is highly significant in the context of the present book in recognising the possibility of awards at common law measured by reference to a hypothetical bargain ‘releasing’ the defendant from the obligation to perform. Finally, mention should be made of the relatively recent Canadian decision in Smith v Landstar Properties Inc.77 The Court of Appeal for British Columbia there considered the appropriateness of awarding a commercial lender a ‘reasonable fee’ award in circumstances where: (1) (2) (3) (4) (5)

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the borrower had promised that the parties’ contemplated loan would be secured; the loan in fact was not secured; the lender would not have agreed to make an unsecured loan, and the loan was repaid in full in any event, so that the lender could not demonstrate that the borrower’s breach of contract had caused it any financial loss.

Attorney General v Blake [1998] Ch 439 (CA). Lane v O’Brien Homes Ltd [2004] EWHC 303 (QB). 73 Experience Hendrix (n 23). 74 World Wide Fund for Nature v World Wide Wrestling Federation (‘WWF’) [2007] EWCA Civ 286 (CA). 75 Force India (n 65). 76 ibid [533]. 77 Smith v Landstar Properties Inc 2011 BCCA 44 (British Columbia CA). 72

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After noting that the case was ‘very similar to Experience Hendrix’, the Court observed that the appropriateness of a Wrotham Park award depended ‘upon what one understands by compensation and whether the term is only apt in circumstances where an injured party’s financial position viewed subjectively, is being precisely restored’.78 In the circumstances, the Court concluded that the lender was entitled to recover an award assessed by reference to the additional interest that the lender would have obtained in the market if an unsecured loan had been made. This award clearly exceeded the financial loss that the lender could attribute to the borrower’s breach and thus provides another example of an award inconsistent with the law’s orthodox interpretation. a. The Difficulty in Reconciling the Award of a Hypothetical Release Bargain with the Law’s Orthodox Understanding The award in Wrotham Park cannot be explained as an instance of compensation for financial loss consequent on breach because the claimant conceded that the value of its land was not reduced by the defendant’s building and evidence suggested that the claimant never would have agreed to release the defendant from the covenant not to build. The claimant was thus no worse off financially as a result of the defendant’s breach. Sharpe and Waddams nevertheless attempted to reconcile the decision with the orthodox view by arguing that the relevant ‘loss’ was the lost opportunity to bargain for the release of the covenant.79 Professor Burrows correctly dismissed this argument more than 20 years ago as fictional on the basis that there was no evidence that the claimant would ever have agreed to release the defendant from the covenant.80 More recently, Burrows has reiterated this view in the process of arguing that a close analysis of decisions following Wrotham Park reveals that awards of what Burrows labels ‘Wrotham Park damages’ or ‘damages based on a hypothetical release bargain’ simply cannot be explained as instances of ‘compensation for loss’.81 In addition to considering the possibility that such awards are best characterised as compensation for a lost opportunity to bargain, Burrows also examined three other possible loss-based explanations of such awards, rejecting all of them.82 The first suggestion was that awards given on a Wrotham Park basis are provided as compensation for the claimant’s lost opportunity to apply for an injunction.

78

ibid [39]–[42]. R Sharpe and S Waddams, ‘Damages for Lost Opportunity to Bargain’ (1982) 2 OJLS 290. 80 A Burrows, Remedies for Tort and Breach of Contract, 1st edn (Oxford University Press, 1987) 275. 81 A Burrows, ‘Are “Damages on the Wrotham Park Basis” Compensatory, Restitutionary or Neither?’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 165. 82 To be clear, Burrows considers these various ‘loss-based’ explanations not just in relation to the award made by Brightman J in Wrotham Park itself, but also in relation to the subsequent cases that have followed that decision in awarding damages assessed by reference to a hypothetical release bargain struck between claimant and defendant at the date of breach. 79

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In considering this suggestion, Burrows notes that this was the language used by Gabriel Moss QC in assessing ‘Wrotham Park damages’ in Tamares (Vincent Square) Ltd v Fairpoint.83 However, Burrows also observes that in both Tamares and Wrotham Park the claimant knew that the development was going on and therefore had the opportunity to apply for an interim injunction before the work was done so this simply cannot be a satisfactory explanation for these awards. The second possibility Burrows considers is Professor McInnes’s claim that the award in Wrotham Park was provided as compensation for a lost right.84 Burrows’s main objection to this suggestion is that to say that the claimant’s rights have been lost ‘seems to slide into a false use of the word lost’.85 This objection is supported here on the basis that to classify breach itself as a loss conflates the fundamental distinction between damnum and iniuria.86 Burrows suggests that what McInnes may really have in mind is that ‘the claimant has lost the opportunity to exercise control over property that proprietary rights give’.87 According to Burrows, this falls foul of the same objection as the explanation based on the alleged loss of opportunity to apply for an injunction.88 The third possible compensatory analysis of Wrotham Park that Burrows postulates is that the award is intended to compensate the claimant on an objective basis for any factual benefits lost as a result of the infringement. According to Burrows, this explanation comes very close to McInnes’s argument but avoids talking about compensation for a lost right.89 Any supposed similarity between these two explanations is rejected here. If the true basis for the award was compensation for lost factual benefits, this is quite distinct from a substantial award for the infringement of a right. This explanation is rejected by Burrows on the basis that it cannot explain cases, such as Wrotham Park itself, where the infringement of the right has not resulted in the objective loss of factual benefits. Professor Edelman has objected to Burrows’s dismissal of this argument, arguing that the sum awarded in Wrotham Park itself is best explained as compensation for non-pecuniary loss suffered by the claimant in consequence of breach.90 But this analysis is artificial for two reasons. First, such a rationalisation was clearly not the basis upon which Brightman J himself thought he was awarding ‘damages’ in the case since his Lordship does not mention any of the alleged non-pecuniary losses Edelman alleges. A second, closely related problem with Edelman’s analysis is that there is obviously no attempt by Brightman J to explain the correspondence between these supposed non-pecuniary losses and the actual sum awarded.

83

Tamares (Vincent Square) Ltd v Fairpoint [2007] EWHC 212 (Ch). See M McInnes, ‘Gain, Loss and the User Principle’ (2006) 14 Restitution Law Review 76. 85 Burrows (n 81) 173. 86 See the discussion in Chapter 3. 87 Burrows (n 81) 173. 88 ibid. 89 ibid 173. 90 J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundation of the Law of Unjust Enrichment (Oxford University Press, 2009) 211, 214. 84

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b. Possible Alternative Explanations Arguably, a preferable analysis of Wrotham Park is as an award of the market value of the contractual rights that were ‘transferred’ from claimant to defendant via breach.91 Professor Edelman has given awards of this kind the label ‘restitutionary damages’, which he distinguishes from awards that strip the defendant of all the consequential profits that were made from the breach.92 Edelman’s analysis has been criticised by Professor Rotherham on the basis that it ‘elides an important analytical distinction between subtractive transfers or “takings” and non-appropriative interferences with rights’.93 For Rotherham, characterising the breach of a legal duty that leads to a gain for the breaching party in terms of a ‘transfer’ from claimant to defendant is ‘particularly tenuous … where the right breached is in the nature of a restrictive covenant’ as it was in Wrotham Park.94 This book eschews the terminology of ‘restitutionary damages’ proposed by Edelman in preference for describing awards of the kind provided in Wrotham Park as approximating the reasonable price of ‘release’ from performance. Part of the reason for rejecting Edelman’s terminology is to avoid Rotherham’s criticism to the effect that it is artificial to describe breaches of this kind as involving a ‘transfer’ between claimant and defendant.95 More fundamentally, however, Edelman’s terminology (and analysis) is avoided because it fails to describe adequately what is occurring in these cases. The analysis preferred here, and outlined more fully in Chapter 5, Section III.A, is that awards based on a hypothetical ‘release’ bargain are best understood as providing an alternative monetary substitute for performance in circumstances where an award of the cost of obtaining substitute performance is unquantifiable. In Wrotham Park an award of the cost of ensuring that the restrictive covenant was complied with was found to be inappropriate because the public interest in preventing the wasteful removal of valuable housing outweighed the claimant’s interest in obtaining accurate performance. Alternatively, this measure might have been unquantifiable because the houses obviously were built on the defendant’s land and therefore removing them was beyond the claimant’s control, meaning that it was not possible for the claimant actually to obtain substitute performance. Regardless of which view is preferred, it is clear that the Wrotham Park decision lacks a convincing ‘loss-based’ explanation.

91 This is the analysis put forward in J Edelman, Gain-based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing, 2002) 179. 92 Edelman calls these awards ‘disgorgement damages’, ibid 72. Also see K Barnett, Accounting for Profit for Breach of Contract (Hart Publishing, 2012), using the same terminology. 93 C Rotherham, ‘The Conceptual Structure of Restitution for Wrongs’ (2007) 66 CLJ 172, 173. 94 ibid 176–77. 95 Presumably Edelman would maintain that describing breaches of this kind as involving a ‘transfer of value’ from claimant to defendant is legitimate in this context provided the concept is understood at an appropriately high level of abstraction, but this issue does not need to be resolved here.

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According to Professor Burrows, the best interpretation of the award is that it was based upon the gain made by the defendant as a result of its breach.96 But a gain-based analysis of the award also faces difficulties. Most obviously, an award made on this basis may go beyond the profits actually made by the breaching party. For example, in Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd,97 the sum awarded constituted the profit the claimant anticipated it would make from the parties’ joint venture as of the date of breach. This turned out to be significantly more than the profit that the claimant actually made. A further example of a ‘release’ award which cannot be explained by reference to the breaching party’s gain is Inverugie Investments Ltd v Hackett,98 where the defendants were required to pay a ‘reasonable fee’ for the right infringed even though they in fact made no profit from the relevant breach. A further problem with a gain-based analysis of Wrotham Park is that it adopts a conception of gain that is at odds with the proposed definition of ‘loss’. The definition of loss proposed in Chapter 3, which accords with how the term generally is understood, includes only deteriorations in a party’s factual position, excluding the mere infringement of a right. Consistency therefore requires that gain also be understood in a purely factual sense. For this reason, neither a loss-based or gainbased analysis of ‘reasonable fee’ awards is compelling. The best explanation for what courts are doing when making awards of what Edelman calls ‘restitutionary damages’ is providing a substitute for performance in circumstances where ‘curing’ breach is impossible so that the cost of ‘cure’ is unquantifiable. As Chapter 5 explains, in such circumstances the most appropriate substitute for performance is a reasonable approximation, assessed at the date of breach, of the price at which the promisee would have accepted to ‘release’ the breaching party from further performance. The more fundamental problem with explaining ‘reasonable fee’ awards as instances of partial disgorgement of the defendant’s profits from breach is that it fails to properly distinguish between remedial purposes and remedial effects. Even if such awards often can be characterised as instances of partial disgorgement of the breaching party’s profits, the reason that courts do this is because, given the particular circumstances, it constitutes the best available mechanism by which to substitute for the promisee’s entitlement to performance. All this, however, can be put aside for the moment because the principal aim of the present discussion is to demonstrate that awards assessed by reference to a hypothetical ‘release’ bargain generally cannot be explained as instances of compensation for factual detriment 96

Burrows (n 81). Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2010] BLR (PC), discussed further immediately below. 98 Inverugie Investments Ltd v Hackett [1995] 3 All ER 841 (CA). Admittedly, the claim here was in nuisance rather than for breach of contract, but it seems likely that whatever the true basis for ‘reasonable fee’ awards is, it will be consistent across the various causes of action for which such awards are made because the approach to quantifying these awards does not seem to vary across these different causes of action. 97

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consequent on breach and are thus at odds with the conventional understanding of contractual money awards.

2. Award for Breach of Exclusivity As just foreshadowed, the nature of ‘Wrotham Park damages’ was revisited by the Privy Council in Pell Frischmann Engineering Limited v Bow Valley Iran Limited & Others.99 The claimant (PFE) and defendant (BVE) were involved in negotiations for a joint venture following a tender for oilfield contracts with the National Iranian Oil Company (NIOC). In November 1996 they entered into an agreement which provided that BVE not divulge any of PFE’s information to a third party, that BVE would not approach NIOC directly on any of the projects without PFE’s consent, and that BVE would work exclusively on the projects with PFE. The relationship between BVE and PFE was tumultuous and collapsed in early July 1997. In addition, PFE ‘had irretrievably become persona non grata with NIOC’100 so that NIOC would not conclude a contract with PFE. In breach of the agreement between BVE and PFE, on 28 July 2007 BVE entered into a contract with NIOC on essentially the same terms that had been proposed by the joint venture. BVE’s contract with NIOC turned out to be considerably less profitable than expected and BVE’s eventual profit was between US $1m and US $1.8m. At first instance, PFE’s claim for certain breaches of contract was unsuccessful save that BVE and one of the other defendants were liable to PFE for breach of the obligation of confidence. The sum of £500,000 was awarded to PFE, who appealed to the Court of Appeal of Jersey. BVE cross-appealed as to the quantum of ‘damages’ awarded, and with regard to the amount of interest it was ordered to pay. The Court of Appeal adopted a different construction of the agreement, finding that the defendants were in breach of express contractual terms, as well as being in breach of an equitable obligation of confidence. Nevertheless, the Court held that the sum of £500,000 was still appropriate as an award of ‘Wrotham Park damages’. A further appeal by PFE was upheld and the sum awarded for breach of contract increased to £2,500,000. The central issue for the Privy Council was how the ‘Wrotham Park damages’ for breach of contract should be measured. Unfortunately, the nature of such awards was not clarified. They were expressed to be awarded for the ‘invasion of rights’101 and, when awarded under Lord Cairns’ Act, as ‘compensation for the court’s decision not to grant equitable relief ’102 and being of ‘a quasi-equitable nature’.103 Their Lordships’ discussion revolved around whether the damages were compensatory or restitutionary. Regardless of whether a gain-based analysis of the sum awarded is possible, it simply cannot be characterised satisfactorily as based on 99 100 101 102 103

Pell Frischmann (n 97). ibid [53]. ibid [48]. ibid. ibid [54].

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PFE’s financial loss since it was held that PFE and BVE never would have reached agreement on a release and an analysis of the award as one for non-pecuniary loss is very difficult to reconcile with the very substantial amount awarded. Chapter 5 contends that this award is also best understood as substitutionary on the basis that it constituted a reasonable approximation of the market value of PFE’s contractual right at the date of breach.104

3. Award for Breach of Confidentiality Another relatively recent example of an award of this kind in a similar context is the one that was made in Vercoe v Rutland Fund Management Ltd.105 Rutland, a venture capital company, there breached the terms of a confidentiality agreement with Vercoe by using confidential proposals about a management buy-in opportunity to proceed with the transaction without involving the parties who had proposed the opportunity, as the agreement required. The parties had agreed that if the defendant had breached its obligations, damages should be assessed by reference to what Rutland should have agreed to pay for the consent of Vercoe (and the proposer) to its using the confidential information for a purpose other than the business plan. Applying the precedent of Wrotham Park, and giving weight to the analysis in Pell Frischmann, Sales J found that the agreed method of calculation constituted the appropriate measure of ‘damages’ to award in a case such as this one. Significantly, his Lordship stressed that ‘Wrotham Park damages’ are not based on a simple assessment of what the parties to an agreement would in fact have agreed as the price to be paid by the obligor to the obligee in order to secure release from the negative covenant in question. Rather, said Sales J: ‘In assessing damages for breach of the restrictive covenant the court constructed a hypothetical agreement, based on what would have been a reasonable payment to make for relaxation of the covenant in all the circumstances of the case’.106 If the focus here was on what the parties would actually have agreed upon, such awards might be characterised as being awarded for a lost opportunity to bargain. But the assessment of the award on the basis of a hypothetical agreement conducted between reasonable parties rather than on what the two parties to the particular transaction would actually have agreed means that this analysis is fictional. The award cannot be said to be for a loss actually suffered if the promisee would never have agreed to release the breaching party from its obligation to perform. The possibility of such awards therefore further demonstrates the limitations of the law’s conventional understanding. As already noted, the preferable

104 This is also the analysis endorsed in T Cutts, ‘Wrotham Park Damages: Compensation, Restitution or a Substitute for the Value of the Infringement of the Right?’ [2010] Lloyd’s Maritime and Commercial Law Quarterly 215. 105 Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [2010] Bus LR D141. 106 ibid [290] (emphasis added).

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analysis of such awards, Part II of this book contends, is that they are an appropriate substitute for performance when compelling performance and awarding the cost of substitute performance are both inappropriate.

C. Awards for the Breach of a Contract of Sale that Exceed the Promisee’s Factual Loss The cases considered in the previous section involved breaches of contract that were either impossible or unjustifiable to reverse, but where the promisee was nevertheless awarded ‘damages’ assessed by reference to a ‘hypothetical release bargain’. This section examines another substantial area of English law that is difficult to reconcile with the orthodox view that awards of contract ‘damages’ are invariably awarded to compensate for the factual detriment that the promisee can attribute to the other party’s failure to perform as promised: awards for the breach of a contract for the sale of goods. The approach to quantification adopted here means that a buyer whose contract is breached by the seller may be entitled to a sum that places him in a better factual position than he would have occupied had the contract been performed. For the purposes of exposition, it is useful to divide the cases into three categories: those concerned with non-delivery, those concerned with late delivery, and those concerned with the delivery of defective goods.107 For each of these categories it is demonstrated that sometimes the sum awarded is inconsistent with the compensatory principle. It also should be noted that Professor Stevens previously has provided a similar treatment of most (if not all) of these cases,108 and there made broadly similar claims. The substitutionary analysis he advances is, however, distinct from the one advanced here, though one additional feature of this section is to highlight an area where the two different substitutionary approaches converge.109 Before embarking upon this task, however, an objection that might be raised against the inclusion of these cases in support of the book’s overall argument must be addressed. As outlined below, the appropriate measure of ‘damages’ for the breach of a sale contract is stipulated by the Sale of Goods Act 1979. Because these measures are mandated by statute, it might be claimed that the incompatibility of these cases with the compensatory principle does not contradict the truth of the orthodox account of contractual awards. This would be on the basis that the purpose of making awards in response to breach of contract at common law is to put the promisee into the same factual position the party would have been in had the contract been performed.

107

This is the approach taken in Peel (ed) (n 33) 1017. See R Stevens, ‘Damages and the Rights to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing, 2009) 171, 176–86. 109 The differences between the two accounts are explained more fully in Chapter 4, Section IV.A. 108

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The validity of this objection is denied here for two distinct reasons. First, even if this measure is characterised as imposed wholly by statute, it has now been discussed and interpreted by judges in a number of cases and this discussion has frequently involved consideration of how these statutory rules fit with the compensatory objective of contractual awards.110 To the extent that these discussions form the ratio of these decisions, it is now part of the corpus of case law that a comprehensive theory of contractual money awards must explain. Secondly, and more importantly, the relevant sections of the Sale of Goods Act merely codify the old common law position. For example, in Jones v Just,111 which precedes the first version of the relevant legislation,112 the claimant contracted to buy a quantity of first-quality hemp but received only second-quality hemp. Between breach and trial the market price of the second-quality hemp rose and the claimant sold the delivered hemp on at substantially the same price at which the first-quality hemp had stood at the time of delivery. A strong bench, consisting of Cockburn CJ and Blackburn and Mellor JJ, approved the trial judge’s direction to the jury that damages should be measured by reference to the difference between the market value of the hemp contracted for and the hemp received at the date of delivery. These principles have been incorporated into the modern statutory provisions.113

1. Non-delivery By virtue of section 51(3) of the Sale of Goods Act 1979, where a seller fails to deliver goods for which there is an ‘available market’ (ie the goods can be freely bought or sold at a price fixed by supply and demand),114 the buyer’s measure of ‘damages’ is ‘prima facie to be ascertained by the difference between the contract price and the market or current price of the goods’ at the date of breach. If the buyer does in fact go into the market to purchase substitute goods at the prevailing price, this measure accurately reflects the initial financial loss suffered, though this loss may yet be eliminated, reduced or increased by subsequent events. However, in Williams Bros v ET Agius Ltd,115 the House of Lords held that this ‘difference in value’ measure will not be displaced by demonstrating that on the particular facts of the case the buyer was not actually left as worse off as the ‘difference in value’ measure would suggest.

110

See, for example, Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA). Jones v Just (1868) LR 3 QB 197. For another example, see Barrow v Arnaud (1846) 8 QB 595, 115 ER 1000. 112 Sale of Goods Act 1897. 113 Sale of Goods Act 1979, s 53(3). 114 This is the definition in Peel (ed) (n 33) [20-048]. Peel also notes there that it has recently been held that the court ‘is entitled to infer the existence of a market from any sufficient evidence relevant to that issue’. See Bulkhaul Ltd v Rhodia Organique Fine Ltd [2008] EWCA Civ 1452 [29]. 115 Williams Bros v ET Agius Ltd [1914] AC 510 (HL). 111

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In Williams Bros the defendant sellers failed to deliver coal that they had agreed to sell to the claimants for 16s 3d per ton. At the time of breach the market price was 23s 6d per ton. The prima facie measure of ‘damages’ under section 51(3) was therefore 7s 3d per ton. But the claimants had also agreed to sell coal of the same quantity and description to a sub-buyer at a price of 19s per ton. Although the claimants intended to use the coal from the contract with the defendants to fulfil the contract with the sub-buyer, they were under no obligation to do so. Therefore, the claimants could have fulfilled their contract with the sub-buyers by going into the market to purchase substitute coal. In the event, however, the claimants did not purchase substitute goods at the higher market price. In addition, for reasons relating to the particular structure of the transaction, there was no chance of the claimants being sued for non-delivery by the sub-buyer. The defendants’ breach thus left the claimants with a financial loss (2s 9d per ton) that was less than the sum they were entitled to under section 51(3) (7s 3d per ton). Despite this, the House of Lords refused to reduce the damages payable, awarding the claimants the difference in value between the main contract price and the market price at the date of breach. As Burrows observes, if contractual awards are awarded simply to compensate a claimant for actual loss suffered, then the award in Williams wrongly over-compensates the claimants.116 Professor Bridge has suggested that the justification for the ‘market rule’ lies in certain benefits the rule provides such as commercial certainty and simplicity of application.117 It is of course true that applying this rule in cases like Williams Bros makes the task of quantifying awards simpler and improves the seller’s ability to predict his potential liability upon breach. These considerations might also provide practical reasons for the rule’s continued operation, irrespective of whether one accepts the account of contractual awards advanced here. Nevertheless, there are at least two problems with the suggestion that considerations of this kind are sufficient to justify this approach. First, as the majority observed in The Golden Victory, it is not entirely clear why ‘policy’ concerns like this are capable of overriding the compensatory principle. At the very least, further argument is needed to show that they are sufficiently strong to do so.118 Secondly, and more fundamentally, while sub-sales are not taken into account where they reduce a buyer’s loss, they may be taken into account when they increase a buyer’s loss, provided the consequential loss they cause is not ‘too remote’. This second claim is demonstrated by the decision in Re (R & H) Hall Ltd and Pim (WH) (Jnr) and Co’s Arbitration.119 Although more complicated, the facts in that case were similar to those in Williams Bros in relevant respects. The defendants 116

A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford University Press, 2004) 213. M Bridge, ‘The Market Rule of Damages Assessment’ in Saidov and Cunnington (eds) (n 81) 431. 118 It is arguable that ‘policy’ considerations should not be taken into consideration at all in the adjudication of private law claims. For defences of this view, see E Weinrib, The Idea of Private Law (Harvard University Press, 1995) and R Stevens, Torts and Rights (Oxford University Press, 2007) 307 (in particular). 119 Re (R & H) Hall Ltd and Pim (WH) (Jnr) and Co’s Arbitration (1928) 33 Com Cas 324 (HL). 117

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agreed to sell the claimants wheat at the price of 51s 9d a quarter. Shortly thereafter the claimants sub-sold goods of the same quality and description to a third party (X) for 56s 9d a quarter. X further agreed to sell such a cargo to Y for a higher price. The defendants then bought a cargo of wheat on board SS Indianic at 60s a quarter and secured agreement from all concerned that all the sub-sales should be treated as resales of the goods that constituted the subject matter of the preceding purchase in the chain. The defendants gave notice appropriating the Indianic cargo to its contract with the claimants and that notice was passed down the chain. But the defendants sold the Indianic cargo to a third party for a price greater than that at which they were contracted to sell to the claimants. Having sold the cargo, the defendants were unable to deliver the documents covering the cargo to the claimants. This constituted a breach of contract. When the cargo arrived, which was the date of breach, the market price was 53s 9d a quarter. The claimants claimed the difference between the contract price (51s 9d) and the price under the sub-sale to X (56s 9d). The House of Lords found in favour of the claimants, reversing the Court of Appeal’s decision to limit damages to the difference between the market price (53s 9d) and the contract price (51s 9d) at the date of the breach. It was further held that the claimants were entitled to an indemnity for the damages and costs which they would have to pay to the buyers who had bought from them and were liable to provide goods under the second sub-sale contract. Consequential loss suffered over and above the ‘loss’ reflected in the market rule was thus compensated, it being decided that this loss was not too remote because both parties were aware of the likelihood that the cargo would be resold whilst afloat. This was not only on the basis the contract itself provided for resale of the cargo, but also because there was correspondence concerning the actual appropriation of the vessel and on the basis that the resale of cargoes whilst afloat was common practice in the relevant industry. If simplicity of application and commercial certainty really was the true justification for the market ‘damages’ rule, the rule would be applied consistently regardless of whether it increased or decreased a buyer’s loss. Therefore, it must be that there is some other principle that justifies overriding the compensatory principle when a buyer is given the benefit of the market rule even though his actual loss is less than the amount awarded. This principle is that the claimant’s entitlement to performance must be respected. The reason that the applicable legal rule differs between cases where loss is increased and loss is reduced is that when loss is reduced, the two principles conflict and the more fundamental one must override. When loss is increased, however, the two principles point in the same direction, which means that the various ‘policy’ considerations supporting a consistent rule are not sufficiently strong to override them.

2. Late Delivery More difficult than the case law on breach of a contract of sale through nondelivery is that governing awards for breach in the form of delay. Where delay in

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delivery is a ground for rejection, and the right to reject is exercised, the buyer’s ‘damages’ are assessed in the same way as for non-delivery;120 namely by reference to the ‘difference in value’ between the market price of the goods at the date of breach and the contract price. Where late delivery is accepted, however, the buyer’s actual loss would seem to depend on his intended use of the goods. If the buyer intended to keep the goods himself he has suffered two distinct losses: (1) the use of those goods during the period of delay, and (2) any negative consequences resulting from not having possession during the period of delay. This is of course subject to the various restrictive doctrines that limit loss-based recovery. By contrast, if the buyer intended to resell the goods, his prima facie loss is the difference between the market value on the date at which delivery was supposed to occur and the date on which it did occur. Again, the case law in this area cannot be reconciled with the compensatory principle. In Wertheim v Chicoutimi Pulp Co,121 the defendant seller agreed to sell the claimant buyer 3,000 tons of wood pulp for delivery by November 1900. Before this agreement was concluded, the buyer contracted to sell 2,000 tons of wood pulp to a third party and after the agreement was concluded, made contracts to sell another 1,000 tons. Delivery by the seller was delayed until June 1901 by which time there was an extraordinary drop in the market price from 70s per ton to 42s 6d per ton. Despite the delay in delivery, the buyer was able to perform her subsale contracts by acquiring replacement wood pulp from elsewhere. The price the buyer obtained on these sub-sales was 65s per ton. The buyer sought to recover the difference between the market price at the time performance was due and the market price at the time of actual delivery. This is the normal measure of an award for delayed delivery,122 at least if the buyer intended to resell the goods in the market, as was the case here.123 But the Privy Council refused this claim on the basis that the buyer had avoided the majority of this loss via the sub-sales. The decision to refuse this claim obviously is reconcilable with the compensatory principle because, as Lord Atkinson explained, such an award would have put the buyer in a better position than if the contract had been performed.124 The difficulty, however, is that ‘damages’ were not actually assessed by reference to the buyer’s loss but by reference to the difference between the market price at the time performance was due and the price under the sub-sales (ie 5s per ton). The award in Wertheim is thus inconsistent with the law’s orthodox understanding because, as Professor McLauchlan observes: [This award] did in fact overcompensate [the plaintiff buyer] … The plaintiff ’s position if the contract had been performed and his actual position were exactly the same since

120

Peel (ed) (n 33) 1018. Wertheim v Chicoutimi Pulp Co [1911] AC 301 (PC). 122 D McLauchlan, ‘Expectation Damages: Avoided Loss, Offsetting Gains and Subsequent Events’ in Cunnington and Saidov (eds) (n 81) 349, 363. 123 See Peel (ed) (n 33) 1018–19. 124 Wertheim (n 121) 308. 121

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he was able to fulfil the sub-sales without buying in substitute goods at the higher market price. That price was irrelevant to the damages calculation on the particular facts.125

3. Defective Goods The prima facie measure of ‘damages’ for the provision of defective goods under a contract of sale is stipulated by section 53(3) of the Sale of Goods Act 1979. The Act provides that the receipt of goods that are not up to warranty entitles a buyer to an award assessed by reference to the difference in value between the goods promised and the goods received. Those maintaining the supremacy of the compensatory principle must characterise this measure as accurately capturing the loss suffered by the buyer as a result of the seller’s breach. If, after receipt of defective goods, a buyer sells on those goods at the market price of the goods he received then it could be said that the buyer’s loss is the difference between the market value of what was promised and the market value of what was received. However, it will be shown that in some situations this measure simply does not reflect the true loss suffered by the buyer. a. Slater v Hoyle & Smith Ltd A clear instance of when the measure stipulated by section 53(3) fails to accurately reflect the actual loss suffered by the buyer due to breach is when the defective goods are sold on to a sub-buyer. Often times, this occurs under a sub-contract that was entered into prior to the main contract of sale, or, even if the sub-contract is entered into after the formation of the main contract, sometimes the actual transfer of goods between buyer and seller under the main contract will occur after the formation of the sub-contract. When the defective goods are sold on for the same amount that they would have been sold at had there been no defect, the buyer’s loss as a result of the seller’s breach may not accord with the ‘damages’ awarded. The buyer may of course suffer some financial loss on account of the breach, but this may turn out to be less than the difference in market value measure. Nevertheless, if the buyer still receives the ‘difference in value’ measure then the sum awarded is not being measured by reference to his actual loss. This possibility just described is precisely what occurred in Slater v Hoyle & Smith Ltd.126 The claimant buyer contracted to buy unbleached cotton cloth from the defendant seller. After the cloth was delivered, the buyer bleached it and then used it to fulfil a previously formed contract of sale with a third party. The cloth supplied by the seller was inferior in quality to that warranted under the contract and in accordance with section 53(3) of the Sale of Goods Act 1979, the buyer recovered damages assessed by reference to the difference between the market value of the cloth delivered at the time of delivery and the market value of the 125 126

McLauchlan (n 122) 363. Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA).

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cloth warranted. This was despite the fact that the buyer finished up in a factual position no worse than he would have been in had the goods not been defective because the price under the sub-sale contract was paid in full and no claims were brought by the sub-buyer. Two attempts have been made to explain the sum awarded in Slater as compensation for loss. Ultimately neither of these explanations is convincing. In the case itself, Warrington LJ observed that since the sub-sale contract did not oblige the buyer to deliver to the sub-buyer the same goods that he had received under the main contract of sale, the buyer could have gone out and purchased other goods on the market to fulfil the sub-sale.127 It could be contended that the difference in value between these two amounts is the loss suffered by the buyer. It is true that if the buyer had actually done this, the ‘difference in value’ measure would have constituted his true loss since he would have paid the market value of goods conforming to warranty but be in possession of defective goods of a lesser value. However, the problem with this argument is that the compensatory principle is normally understood to be concerned with the promisee’s actual, rather than hypothetical, position, at least where this can be quantified at the date of assessment. A second explanation of Slater is that a buyer who contracts for goods of a particular quality but receives goods of inferior quality suffers actual loss by paying too much for inferior goods. This seems to more accurately reflect Warrington LJ’s decision.128 This explanation also has academic support.129 But this measure also cannot truly be said to reflect the actual loss suffered by the buyer for the same reason: in the end the seller’s deficient performance did not make a difference to the claimant’s factual position because the defective goods received by the buyer were sold on to another party. Nevertheless, this second attempt to explain the award holds intuitive appeal. This is not because this measure identifies the true loss suffered by the buyer, but because it suggests the real reason why the sum awarded in Slater was correct. In the process of attempting to explain the result in Slater by reference to ‘loss’, Hawes notes that a buyer in such a situation has ‘simply received less than the agreed consideration for his payment’.130 In other words, the buyer’s right to performance has not been fully conformed to and the amount required to enable him to obtain the performance he was entitled to is the difference in value between what he contracted for and what he received. Although, as it turned out, this deficiency in performance made no difference to the buyer’s overall financial position, this does not change the fact that the buyer did not receive the performance promised. It is therefore the buyer’s unfulfilled entitlement to performance rather than the compensatory principle or some other ‘policy’ consideration that generates the buyer’s entitlement to a ‘difference in value’ award. This measure is the appropriate 127 128 129 130

ibid 17. ibid 18. See C Hawes, ‘Damages for Defective Goods’ (2005) 121 LQR 389, 391. ibid.

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substitute for performance because it constitutes the minimum amount of money necessary for the buyer to obtain a substitute for the performance promised. The rationale underpinning such an award is that it provides the buyer with the sum of money required to enable him to sell the defective goods in the market and purchase the goods desired. Despite suggestions to the contrary, the decision in Slater is not consistent with the compensatory principle. The buyer recovered the minimum cost of acquiring substitute performance despite the fact that the seller’s breach left the buyer factually no worse off. b. Bence Graphics Similar arguments to those just considered were relied upon by the Court of Appeal to deny a claim for substantial ‘damages’ in Bence Graphics International Ltd v Fasson UK Ltd.131 The seller (Fasson UK Ltd) was the manufacturer of vinyl film, which it sold to Bence. It was a condition of the contract of sale that the film would stay in good condition for five years. Bence printed ID marks on the film and sold it on to customers for use in labelling bulk containers. There was a defect in the film that caused it to degrade so that the marks became illegible, which created the potential for claims against Bence. Although some complaints were made by the end user, these resulted in only one relatively minor claim, which was settled by Bence and reimbursed by Fasson. In an action for damages for breach of contract, Bence sought to recover the whole purchase price of £564,000. At first instance, the judge upheld Bence’s claim. He applied section 53(3) of the Sale of Goods Act 1979 in deciding that the appropriate measure of ‘damages’ was the difference in value between the goods on delivery and the value of the goods as warranted under the contract. After finding that the film delivered was worthless, he thus concluded that Bence was entitled to recover the purchase price in full. However, by a majority, the Court of Appeal allowed an appeal by Fasson holding that the seller’s liability was limited to restitution of the price paid for the small amount of film which Bence had not used but returned to Fasson, plus the amount of Bence’s liability to the ultimate users since this, in their opinion, constituted Bence’s actual loss. While the trial judge’s decision was based on a straightforward application of section 53(3) of the Sale of Goods Act 1979, the Court of Appeal’s conclusion was based on section 53(2) of the 1979 Act, which was said to express the ‘basic rule in terms of Hadley v Baxendale’.132 Although the Court correctly observed that the actual loss suffered was far less than the damages claimed, preoccupation with ‘loss’ led it to overlook that an award could and should still have been awarded on the alternative basis outlined above. On its face, the decision in Bence supports the conventional understanding of the contractual awards but the decision is problematic for two main reasons. First, the majority treated the case as turning upon whether the recovery of the 131 132

Bence (n 110). ibid (Otton LJ).

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loss claimed was too remote a consequence of breach. This was a mistake. When the sum claimed is the cost of curing the defective performance in the market, no issue of remoteness arises. Part II of this book argues that the reason for this is that this claim is in reality one seeking a substitute for performance and the remoteness doctrine only applies to the recovery of compensation for loss.133 But even if this is not accepted, it has never been thought that the doctrine of remoteness applies to restrict a claim for this kind of ‘direct loss’.134 Secondly, as Stevens has noted,135 the Bence majority failed to provide any convincing basis for distinguishing the case from the earlier binding decision in Slater. For these reasons the value of Bence as a precedent is minimal. In support of this conclusion, its reasoning has been confined to cases involving the delivery of defective goods.136 c. Clark v Macourt: The Australian Position Clarified The tension between the contrasting approaches in Slater and in Bence is evident in the Australian High Court’s recent and important decision in Clark v Macourt,137 which strongly supports the central argument of this book. Dr Clark and Dr Macourt were both registered medical practitioners who ran clinics specialising in providing assisted reproductive technology services. In the conduct of their practices, both doctors were bound by ethical guidelines that prohibited any ‘Commercial trading in gametes or embryos’ and ‘Paying donors … beyond reasonable expenses’.138 In 2002 Clark entered into a written deed with Macourt via a company (SGFC) whereby she agreed to buy certain assets owned by SGFC, including a quantity of donor sperm, for a sum to be calculated.139 Macourt guaranteed SGFC’s obligations under the deed and SGFC also warranted that the identification of sperm donors complied with the specified guidelines. Due to certain breaches of these guidelines, the trial judge (Gzell J) found that Clark was deprived of 1,996 usable straws of the promised sperm.140 At trial, Clark led uncontradicted evidence that, following the discovery of this breach, she was unable to purchase suitable replacement sperm in Australia but was able to acquire 133 Note that in Chapter 6 an attempt is also made to reconcile the difficult decision of the House of Lords in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL), which may appear to support the conventional view, with the proposed account. 134 See GH Treitel, ‘Damages for Breach of Warranty of Quality’ (1997) 113 LQR 188. 135 Stevens (n 108) 180. 136 Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm). 137 Clark v Macourt [2013] HCA 56, (2013) 88 ALJR 190. 138 As Gageler J noted, ibid [42], these ethical prohibitions were published by the National Health and Medical Research Council in 1996 and came later to be overlaid by a criminal prohibition in s 16 of the Human Cloning for Reproduction and Other Prohibited Practices Act 2003 (NSW), which was inserted in 2007. This provision made it an offence for a person intentionally to receive ‘valuable consideration’ from another person for the supply of a human egg, human sperm or a human embryo. 139 The purchase price was to be calculated by reference to a percentage of Dr Clark’s gross fee income in the years following the deed’s creation. 140 As explained below, in the appeal to the High Court, this figure was not challenged, with the dispute focusing on what ‘damages’ this deficiency in performance entitled Dr Clark to recover.

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usable sperm from an American supplier (‘Xytex’). Gzell J found that at the date of breach, purchasing 1,996 straws of replacement sperm from Xytex would have cost approximately AU $1.2m. Clark accepted that ethically she could not charge, and did not in fact charge, any patient a fee for using donated sperm that was greater than the amount she had outlaid to acquire such sperm. However, from time to time, Clark bought replacement sperm from Xytex and charged each patient a fee that substantially covered the costs she incurred in doing so. When Clark refused to pay the outstanding balance ($219,920) of the calculated purchase price ($386,950.91), SGFC sued to recover this amount. Clark counterclaimed against both SGFC and Macourt, claiming ‘damages’ for breach of warranty. Gzell J assessed the sum payable for the breach as the amount Clark would have had to pay Xytex to buy 1,996 straws of replacement sperm at the date of the breach. The New South Wales Court of Appeal unanimously allowed Macourt’s appeal, holding that the transaction had been mischaracterised as a contract for the sale of goods rather than as one for the sale of a business.141 It was also unclear whether any portion of the purchase price was attributable to the sperm.142 Finally, said the Court, to the extent that any loss had been suffered, Clark had in fact avoided such loss by passing on the costs of acquiring any replacement sperm to her customers.143 In an appeal to the High Court, Gzell J’s award was reinstated by majority (Gageler J dissenting). In the most comprehensive of the majority judgments, Keane J held that the Court of Appeal erred in treating Clark’s claim as one for the recovery of her outlay in obtaining replacement stock rather than a claim for the ‘value of the sperm which should have been delivered’, with ‘the amount [she] paid to Xytex [simply] being evidence of that value’.144 His Honour rejected Macourt’s argument that Clark’s claim for the cost of replacement sperm was precluded by the rules of ‘mitigation’.145 According to Keane J, Clark ‘was entitled to frame her claim in the manner most advantageous to her’, by claiming an award that gave her ‘so far as money is capable of doing so, something equivalent to the value of the worthless Sperm delivered’.146 While it was open to Macourt to adduce evidence that less expensive, guideline-compliant sperm was available, his Honour found that in the absence of any such evidence Clark’s entitlement was clear. Finally, Keane J also dismissed Macourt’s argument that, in accordance with the House of Lords’ decision in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd,147 Clark’s award was subject to

141

Macourt v Clark [2012] NSWCA 367 [67]. ibid [66], meaning that Clark could not prove that she had suffered any ‘loss’. 143 ibid [112]–[134]. 144 ibid [100] (emphasis added). The claim is essentially that Clark was entitled to recover the monetary equivalent of the performance which SGFC failed to provide, with the cost of purchasing replacement sperm being the best available evidence of that amount. 145 ibid [102], meaning that Clark ‘suffered no loss by reason of [SGFC’s breach]’. 146 ibid [103]. Also see Keane J’s discussion at [128]–[129]. 147 British Westinghouse (n 133) 689, discussed in greater detail in Section III.E below. 142

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a discount for ‘betterment’ (on the basis that Xytex’s sperm was ‘superior’ to the sperm that would have been supplied had SGFC complied with its contractual obligations). His Honour held that even if the information available concerning Xytex’s donors was more extensive than that which would have been available if SGFC’s sperm had been contractually compliant, the trial judge’s finding that Macourt failed to prove that this resulted in any financial benefit for Clark must stand.148 Keane J rejected this argument too, holding that the present case ‘is not analogous to British Westinghouse’,149 where ‘the cost of machines purchased as substitutes for defective machines was recoverable but subject to a reduction to take account of any extra profit to the buyer resulting from the replacement of the defective machines’,150 whereas in the present case it was ‘not suggested [by Macourt] that the evidence established extra profitability attributable to the use of the Xytex sperm’.151

4. Summary of the Sale of Goods Case Law The discussion above demonstrates that the law concerned with quantifying money awards for the breach of a contract of sale cannot be explained satisfactorily by reference to the conventional understanding of such awards. The significance of this conclusion is open to debate. It might be argued that it establishes only that this area of the law exhibits a complex compromise between the compensatory principle and certain conflicting ‘policy’ objectives such as the desirability of promoting commercial certainty and the efficient settlement of disputes.152 On this view, the failure to consistently adhere to a strict application of the compensatory principle may be no more problematic than the challenge posed from the opposite direction by doctrines such as ‘remoteness’ and ‘mitigation’ that place limits on the amount of compensation for loss that a party may recover. Given the importance traditionally attributed to certainty in the development of English commercial law, it seems unlikely that the policies identified by the likes of Professor Bridge and others have exercised no influence over the law’s development. Despite this, however, a consistent application of these policies

148

Clark v Macourt (n 137) [140]. ibid [142]. 150 ibid. In British Westinghouse the buyer claimed the cost of buying substitute goods several years after the original delivery of the machines. On this basis, Keane J explained, ‘the House of Lords held that the buyer’s action “formed part of a continuous dealing with the situation in which [the buyer] found [itself], and was not an independent or disconnected transaction”’. British Westinghouse is discussed further below in Section III.E and in Chapter 7 where it is suggested that the orthodox interpretation of the decision is misleading. 151 ibid [142]. According to Keane J, matters may have been different if Macourt had advanced evidence that permitted a finding that Xytex’s sperm was of a quality that would have commanded a higher price than contractually-compliant SGFC sperm, but Macourt adduced no such evidence. For reasons that will be made clear, this book rejects this proposition by reference to the proposed distinction between substitutionary and compensatory money awards. 152 For an argument to this effect, see Bridge (n 117). 149

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should dictate that they apply equally when loss is reduced, rather than increased, by subsequent events, which is simply not the case. Moreover, even if it might be possible to explain this particular section of the law (ie contractual money awards in the sale of goods context) by reference to such policies, it is not possible to explain other situations in which the law departs from the compensatory principle in the same way, which suggests that something more fundamental is at stake. In trying to defend the conventional view, it might be argued that other departures can be explained by reference to different ‘policy’ concerns which apply in the applicable context. But in moving the law increasingly further away from the ideal of ‘justificatory coherence’,153 this argument is unappealing. The principle that like cases should be treated alike suggests that, where possible, unifying legal principles should be pursued. It is therefore necessary to ask whether the law’s refusal to adhere stringently to the compensatory principle when quantifying contractual money awards in a variety of different contexts can be explained only by reference to specific ‘policy’ considerations operating in these various contexts, or rather is explicable by reference to more general principles that coherently unify the different strands of case law. This book argues that the recognition of a distinction between compensatory and substitutionary contractual money awards provides a normatively compelling overarching principle that both achieves this objective and explains relatively comprehensively the current law.

D. Contractual Awards in Other Contexts that Exceed the Promisee’s Factual Loss The cases examined in the previous section were all concerned with various different kinds of breach of a contract for the sale of goods. By contrast, it is difficult to identify a common feature amongst the cases examined in the present section other than that in all of them the promisee is awarded, following the promisor’s failure to perform as promised, a monetary sum that exceeds the factual loss that the promisee can attribute to the breach. Just like the Court of Appeal’s decision in White Arrow Express,154 discussed in Chapter 1, these cases often involve a breach that has no quantifiable detrimental factual (or at least financial) consequences for the victim, but a substantial money award nevertheless was made. These decisions therefore pose a further difficulty for the conventional ‘loss-based’ orthodoxy.

1. Contracts of Carriage As Professor Stevens has explained, the position that pertains in relation to contracts for the sale of goods also exists in relation to contracts for their carriage. 153 For an explanation of this concept, see E Weinrib, The Idea of Private Law (Harvard University Press, 1995), R Dworkin, Law’s Empire (Hart Publishing, 1998) and S Smith, Contract Theory (Oxford University Press, 2004) 11. 154 White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA).

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In Ströms Bruks Aktie Bolag v Hutchinson,155 the plaintiff charterers claimed damages for non-delivery of cargo under a voyage charter with the Swedish carriers. Under the terms of the contract, 900–1,000 tons of wood pulp was to be lifted in two shipments from Sweden to Cardiff: the first in May (FOW) and the second in August–September (at the shipowner’s option). The charterers’ purpose in making this contract was to fulfil an earlier contract they had made with a Cardiff company to deliver of 900–1,000 tons of wood pulp (cif). But the relevant dates in the two contracts did not coincide. While the charterers promised to deliver the cargo to the company by 30 September, the carriers were required only to ‘lift’ (ie to place on board) the second shipment by this date.156 In the event, the carriers failed to make the second shipment at all and the charterers reimbursed the Cardiff company for the money it had outlaid in bringing in 367 tons of wood pulp in several parcels from Manchester, Liverpool and London. In response to the charterers’ claim for damages, the carriers argued that their breach was not the cause of the charterer’s loss on the basis that the carriers could have performed in a manner consistent with the contract but still left the charterers unable to fulfil their obligations to the company under the contract of sale. This argument was rejected by the House of Lords, who held that the charterers were entitled to recover the full cost of purchasing replacement wood pulp at Cardiff at the time the cargo should have arrived less the market value of the goods in Sweden. Significantly, Lord Macnaghten distinguished between ‘ordinary’ and ‘special’ damage, at least implicitly holding that it is only special damages that must be ‘proved strictly’,157 and that the contract of sale with the Cardiff company was merely ‘the best evidence possible’ of the ‘damages’ that the charterers suffered due to the carriers’ breach.158 The Court of Appeal’s earlier decision in Rodocanachi Sons & Co v Milburn Bros159 provides another example of an award made to the victim of a breach of contract exceeding this party’s actual financial loss in the context of the breach of a contract for the carriage of goods. Like the House of Lords’ later decision in Ströms, Rodocanachi is also consistent with the approach taken in the sale cases discussed in the previous section. The plaintiff charterers brought an action for breach of contract against the defendant shipowner to recover the market value of cargo lost on account of negligence by the master of the ship. The charterers had entered into a contract to sell the cargo on at a price considerably lower than the market price pertaining at the time the goods should have arrived. This sale was conducted on a ‘to arrive’ basis so that the charterers had no obligation to the sub-buyer should the cargo fail to arrive.

155

Ströms Bruks Aktie Bolag v Hutchinson [1905] AC 515 (HL). ibid 519. 157 ibid 526. 158 See also Biggin v Permanite [1951] 1 KB 422, 438 (Devlin J); Eldon Weiss Home Construction Ltd v Clark (1982) 39 OR (2d) 129, 133 (Comm). 159 Rodocanachi Sons & Co v Milburn Bros (1887) 18 QBD 67 (CA). 156

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The Court rejected the defendant’s argument that in assessing ‘damages’ the charterers’ sub-sale price should be taken into account because the plaintiff should not be placed in a better position than it would have been in had there been no breach. It was held that the market value of the cargo was recoverable ‘independently of any circumstances peculiar to the plaintiff ’ since the sub-sale contract was viewed as something ‘accidental as between the plaintiff and defendant’.160 The decision, which received express approval from the House of Lords in Williams Bros v Agius,161 is thus inconsistent with the prevailing orthodoxy because the plaintiff ended up in a better financial position than it would have been in had the contract been performed.

2. Contracts of Employment Moving into the entirely different context of employment contracts, one nevertheless finds that a similar approach is taken. In National Coal Board v Galley,162 a deputy was in breach of contract by refusing to work on Saturdays over a period of several months. His refusal was part of wider industrial action. The combined effect of the refusal to work by the defendant and other deputies was that no productive work was possible at the colliery on a Saturday for approximately two months until the plaintiff succeeded in obtaining substitutes at a cost. In addition, the plaintiff suffered a loss in production of nearly £4,000 until substitute deputies were obtained. The Court of Appeal held that it could not be shown that the claimant’s loss of production had been caused or contributed to by the defendant’s breach of contract because, due to the others’ strike action, the deputy would not in any event have worked at the colliery if he had presented himself for work on Saturdays. Nevertheless, the claimant’s failure to prove any consequential financial loss from breach was held not to prevent it from recovering a substantial award measured by reference to the market value of the work which the defendant was contracted to provide. In Royle v Trafford Borough Council,163 a teacher with a class of 31 pupils had, in breach of contract, refused an instruction to take a further five pupils. The employer had suffered no loss as a result of this breach but, following National Coal Board v Galley, Park J awarded five thirty-sixths of the teacher’s salary. This he regarded as representing the notional value of the services which the teacher had not rendered. Thus Royle v Trafford, like the decision in Galley, was a case in which ‘damages’ for the breach of a contract for services were awarded despite the promisee’s inability to prove that it suffered any financial loss in consequence of

160 ibid per Lord Esher MR, 77. Similar statements can be found in the judgments of Lindley LJ, 78 and Lopes LJ, 80. 161 For discussion of this case, see XXXX above. 162 National Coal Board v Galley [1958] 1 WLR 16 (CA). 163 Royle v Trafford Borough Council [1984] IRLR 184.

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the breach. These ‘damages’ were assessed by reference to the value of the services contracted for but not delivered. Another example of this type of case is Miles v Wakefield MDC,164 where the claimant was a registrar of marriages who refused to officiate at weddings for three hours every Saturday morning. In response to this, the claimant’s employer deducted three thirty-sevenths from his weekly salary. The claimant sought to recover this difference in salary on the basis that the council had suffered no loss in consequence of breach. This was because, so he argued, the only effect of his refusal to conduct wedding ceremonies on Saturdays was that members of the public who wished to be married on that day at the Wakefield District Registry Office would be disappointed. The House of Lords rejected this argument and held that the employer council was entitled to deduct the wages they had. The question of quantification is critical in cases such as these. In both Royle v Trafford BC and Miles v Wakefield, ‘damages’ were assessed by reference to a proportion of the contract price that reflected the proportion of the services not provided. Additionally, in all three cases damages were awarded despite the fact that the claimants did not incur the cost of purchasing equivalent services elsewhere and therefore suffered no financial loss. In Royle v Trafford BC, for instance, Park J appears to have assumed that the award of ‘damages’ to the employer in Galley of the cost of employing a substitute employee was to compensate it for the financial loss it suffered in having to employ a substitute even though it had not actually incurred the cost of employing a substitute during this period.

3. Building Repairs In certain situations when one party defectively performs building work, the law awards the victim of breach the cost of ‘curing’ this defective performance. Traditionally, such awards have been characterised simply as one method of compensating a claimant for loss suffered in consequence of breach. Such an award is said to be one of two possible measures of the claimant’s financial ‘loss’.165 In addition to the conceptual difficulty involved in simultaneously recognising two distinct measures of financial loss,166 the problem with this understanding is that it appears to involve a somewhat strained and artificial use of the word ‘loss’ to say that this amount reflects what the claimant has lost on account of the breach if at the time of judgment the claimant has not cured the defect and has no intention to do so in the future. That such an award is possible when the claimant has no intention to ‘cure’ the breach is shown by the decision in H Dakin & Co Ltd v Lee.167 Concrete had 164

Miles v Wakefield MDC [1987] AC 539 (HL). For example, Tito v Waddell (No 2) [1977] Ch 106 (Megarry V-C); the other being the ‘difference in value’ between the performance contracted for and that provided. 166 This point is made by S Smith, ‘Substitutionary Damages’ in C Rickett (ed), Justifying Private Law Remedies (Hart Publishing, 2008) 93, 96. 167 H Dakin & Co Ltd v Lee [1916] KB 566. 165

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been laid to a depth of 1.5–2 feet rather than 4 feet as specified in the contract. Following a claim by the builder for the balance due under the contract, the Court of Appeal held that the owner of the land was allowed to set off his entitlement to the cost of curing this defect from the amount owing to the builder under the contract. This was the case even though it was clear that the claimant thought the work as performed was sufficient for its purpose and therefore had no intention to make the work comply with the contractual specifications. Additional judicial support for the availability of such an award in circumstances where an intention to repair is not clear also exists.168 These cases are examined more closely in Chapter 5 in examining the nature of the ‘reasonableness’ restriction that operates in relation to claims for the cost of substitute performance. A similar decision was reached in the New Zealand case of Samson & Samson Ltd v Proctor.169 The builder there failed to reinforce a house with steel as required by the contract. The house was then sold at a price that was undiminished by this defect in performance. Despite the fact that the breach of contract caused no identifiable loss to the building owner, financial or otherwise, the builder was found liable for the expense that he saved in failing to perform as promised. The market cost of rectifying the defective performance to make it conform to the contractual specifications would be at least this saved expense (and possibly more). The decision therefore constitutes a further example of an award inconsistent with a purely loss-based approach. Notably, the award is also a further example of either profit stripping for breach of contract, or an award of the cost of rectification in circumstances where the promisee clearly had no intention to effect the required repairs or a (very rough and ready) approximation of the reasonable price of ‘release’ from accurate performance. A different kind of over-compensation may result from a claim for the cost of repairing the consequences of a breach that has caused damage to the promisee’s property, which cannot be rectified without improving the property’s pre-breach value. This is precisely what occurred in Harbutt’s ‘Plasticine’ v Wayne Tank & Pump Co,170 where, in breach of its contract with Harbutt’s, Wayne Tank installed a pipeline made of unsuitable and dangerous plastic material wrapped in heating tape and attached to a useless thermostat. When this thermostat was switched on and the plant left unattended this resulted in a fire which destroyed the claimant’s mill. Significantly, the claimant was required to build a new factory because the relevant planning authorities would not have allowed the factory to be rebuilt along the old lines. The defendant argued that the claimant’s award should be limited to the difference in value of the old mill before and after the fire. But the Court of Appeal awarded the claimant the full cost of building a new factory. Strictly speaking, this award is inconsistent with the compensatory principle since it provided the 168 For example Darlington (n 50) (Steyn LJ); Dean v Ainley [1987] 1 WLR 1729 (CA) 1737 (Kerr LJ). 169 Samson & Samson Ltd v Proctor [1975] 1 NZLR 655 (CA). 170 Harbutt’s ‘Plasticine’ v Wayne Tank & Pump Co [1970] 1 QB 447 (CA).

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claimant with the value of a new (and better) factory than the one it had prior to the breach. However, this award was not one that substituted for the defendant’s defective performance but one designed to make good the detrimental factual consequences that breach caused to the claimant. As Denning LJ explained, it was simply that the course of action taken by the claimant was the only one available to it in order to keep its business going and thereby mitigate its lost profits.171

4. Breach of Tenant’s Obligation to Repair Although the common law position has now been altered by statute,172 the case law on covenants to render up premises in good repair at the expiration of a lease also contravenes the orthodox understanding of the Robinson v Harman principle. In Joyner v Weeks,173 a tenant was in breach of a covenant of repair but the landlord had suffered no financial loss because part of the repaired premises would have been demolished in any event and the landlord had entered into another lease under which the subsequent tenant agreed to effect any remaining repairs. Applying the orthodox approach to contractual money awards, the landlord should not have been entitled to a substantial award as he avoided incurring any loss in consequence of breach, but the landlord’s claim for substantial ‘damages’ succeeded. The Divisional Court held that the claimant was entitled to compensation based on the difference in value between the repaired and unrepaired premises. This award is inconsistent with the compensatory principle since, as just explained, the landlord ultimately suffered no financial loss. Significantly, however, the Court of Appeal overturned this decision, and held that the award should be assessed by reference to the cost of effecting the work required to cure the tenant’s breach of his obligation to repair. Such an award is even more difficult to reconcile with the orthodox understanding of contractual awards. This is because it cannot be said, as arguably it might be said in relation to an award of the ‘difference in value’ between the repaired and unrepaired premises, that this award constitutes a true measure of the financial loss suffered by the claimant as a result of the breach. As the Court of Appeal observed: [M]any cases may be put in which it is plainly immaterial that at the commencement of an action for a breach of contract the plaintiff is in fact no worse off than he would have been if the contract had been performed.174

It is suggested here that the Court of Appeal’s decision in Joyner is understood best as an early example of an award of the cost of substitute performance in circumstances where there was no intention on the part of the promisee actually

171

ibid 468. The mitigation principle is examined in more detail in Chapter 6. Landlord and Tenant Act 1927, s 18(1). 173 Joyner v Weeks [1891] 2 QB 31 (CA), approved by the High Court of Australia in Graham v The Markets Hotel Pty Ltd (1943) 67 CLR 567 (HCA). 174 Joyner (n 173) 33. 172

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to undertake the repairs necessary to ensure that the breach was remedied. More controversially, it might be said that the Divisional Court’s ruling constitutes an early example of an award of the alternative monetary substitute for performance, which this book suggests generally should be available when the cost of ensuring performance in accordance with the contract is adjudged ‘unreasonable’. This is because the difference in value between the repaired and unrepaired premises constitutes a very good approximation of the price a reasonable person in the landlord’s position would accept to ‘release’ the other party from performance in circumstances where the landlord had no intention to actually effect the repairs. It therefore is suggested that it is possible to understand the difference of opinion between the two courts in Joyner v Weeks as simply a disagreement about the kind of monetary substitute for performance that was appropriate in the particular circumstances of the case. While the Court of Appeal awarded the claimant the cost of substitute performance, the Divisional Court’s award may be understood either as a measure of the financial loss suffered by the promisee or as a reasonable approximation of the price of ‘release’. The result of all this is that Joyner is a highly significant decision in the context of the overall account advanced here. The case clearly demonstrates the inadequacy of the orthodox account and is powerful support for the particular understanding of contractual awards outlined in Part II.175

5. Breach of Restrictive Covenant in Relation to Goods British Motor Trade Association v Gilbert was decided prior to Wrotham Park, but was concerned with the same basic scenario: a breach of covenant causing the innocent party no demonstrable financial loss.176 The claimant, British Motor Trade Association (BMTA), was trying to control the price of cars shortly after the Second World War when they were in short supply. In furtherance of this policy, BMTA required purchasers of cars to covenant not to resell them for two years without the Association’s consent. Such consent would only be given if the car was first offered to BMTA (at the original price plus tax but less depreciation). Gilbert bought a car for £1,263 but resold it a month later on the open market for £2,200. An injunction had been obtained by BMTA to prevent the sale, but Gilbert sold the car in breach of it.177 At trial, the validity of the scheme was upheld but the appropriate sum to award BMTA as ‘damages’ for breach was unclear. BMTA had suffered no financial loss because the scheme prevented BMTA from selling the car at its market price. As Professor Edelman has observed, the very reason for the contractual restriction imposed by BMTA on Gilbert was to prevent any such market arising.178

175 For analogous support in the Australian context, see Pourzand v Telstra Corporation Ltd [2012] WASC 210 [214] (Edelman J). 176 British Motor Trade Association v Gilbert [1951] 2 All ER 641. 177 See ibid 642. 178 Edelman (n 91) 174–75.

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In addition, Danckwerts J found that the open market value of the car was approximately £100 less than the sum for which Gilbert actually sold it. In the circumstances, his Lordship ordered Gilbert to pay the Association £836, which constituted the difference between this open market value and the original price that Gilbert had paid for the car. Significantly, however, this award was less than the full profit that Gilbert made on the sale, meaning that the award cannot be characterised as an instance of full ‘disgorgement’ in the Blake sense. The award in Gilbert is nevertheless clearly inconsistent with the orthodox view that contractual money awards are only awarded for proven financial (or factual) ‘loss’. Significantly, a similar approach was taken by the Privy Council soon after Gilbert in Mouat v Betts Motors Ltd,179 which was in fact a standard case of non-delivery, but one that occurred in the unusual circumstances that also existed in Gilbert. There a seller failed to deliver the goods as promised and a question arose as to the ‘damages’ to which the buyer was entitled in circumstances where the market for resales was subject to price controls. In a passage cited by Crennan and Bell JJ in Clark v Macourt in support of the proposition that ‘Regulatory constraints on a promisee’s subsequent dealings with goods have no necessary relationship with the market price which a promisee may pay to be in as good a position as if a promisor had performed’,180 Lord Denning, on behalf of the Privy Council, described the buyer’s entitlement to ‘damages’ in the following terms: It does not lie in [the seller’s] mouth to say that, if he had fulfilled his covenant, the [buyers] could only resell the car for £1,207. That was a matter peculiar to the [buyers] which was no concern of his. The [buyers] were entitled in law to be put into as good a position as if … [the seller] had fulfilled his covenant: and to do this they were entitled to go into the market and buy a similar car at the market price … This rule applies even though the only available market is a surreptitious market which is fed by persons who have broken their covenants.181

In this context, there is a final observation to make. Earlier in their Honours’ judgment in Clark v Macourt, Crennan and Bell JJ held that, at least generally speaking, it ‘is the plaintiff ’s objectively determined expectation of recoupment of expenses which is protected by an award of damages for loss of a bargain’.182 This, their Honours explained, is done by providing the innocent party with the sum ‘theoretically needed to put the promisee in the position which would have been achieved if the contract had been performed’.183 Thus, their Honours concluded: Subject to being displaced for some reason, this is the applicable measure, notwithstanding the circumstance that a buyer is a non-profit organisation, or that the buyer is

179 180 181 182 183

Mouat v Betts Motors Ltd [1958] UKPC 23, [1959] AC 71. Clark v Macourt (n 137) [38]. ibid, citing Mouat (n 179) 82. ibid [28] (emphasis added). ibid (emphasis added).

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constrained in relation to market regulation and control as to the price at which it could sell the goods to a subsequent purchaser.184

E. Awards Exceeding Factual Loss Due to the Accrual of Post-Breach Benefits In quantifying a compensatory award for breach of contract, the loss suffered by the innocent party is normally assessed at the date of trial. When awards are assessed at the date of breach this is often because they are in fact substitutionary. It is not uncommon, however, for the full extent of a promisee’s loss to be unknown even by the time of trial because it is contingent upon events that have not yet occurred. In such circumstances, the law normally awards compensation for the innocent party’s estimated future loss in addition to awarding compensation for any loss already suffered. That has been proven with sufficient certainty.185 All this accords with the compensatory principle and thus poses no threat to the orthodox understanding of contractual money awards. There are, however, a number of cases where a promisee has been awarded a sum of money that puts him into a superior factual position than he would have been in if the breach had not occurred because some or all of the loss that he appeared likely to suffer at the date of breach has been made good by the occurrence of post-breach events. The sale of goods cases examined in the previous section exemplify this phenomenon, but it can occur in other contexts as well. Many of these cases are associated with the so-called ‘avoided loss rule’ of mitigation, which is said to preclude the victim of a civil wrong from recovering compensation for loss in fact avoided by events subsequent to breach unless the benefit that has been obtained is sufficiently ‘collateral’,186 or ‘indirect’.187 As earlier foreshadowed, the House of Lords’ well-known decision in British Westinghouse generally is regarded as the leading authority for the ‘avoided loss rule’. There London Underground (LU) entered into a £250,000 contract in 1902 with British Westinghouse (BW) for the purchase of eight steam turbines for electricity generation. The turbines proved to be defective, requiring significantly more coal than they should have to run. In using the machines over the next six years, LU spent approximately £43,000 more on coal than should have been

184 ibid, citing Diamond Cutting Works Federation Ltd v Triefus & Co Ltd [1956] 1 Lloyd’s Rep 216 in addition to both Gilbert and Mouat in support of this proposition. 185 A similar, albeit distinct, approach is taken with regard to a claim for the loss of a chance in the contractual context, but here it is the chance of loss that is estimated rather than the loss itself. See, for example, Chaplin v Hicks [1911] 2 KB 786 (CA) and Howe v Teefy (1927) SR (NSW) 301. 186 See H McGregor, McGregor on Damages, 18th edn (Sweet & Maxwell, 2010) [7-097]. This term was also used in this context by Lord Denning in Lavarack v Woods of Colchester Ltd [1967] 1 QB 278, 290–91. 187 See Burrows (n 116) 156. Sometimes it is said that benefits that are not taken into account are ‘res inter alios acta’. See, for example, British Westinghouse (n 133) 691 (Viscount Haldane).

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necessary had the machines been contractually compliant. In 1908 LU purchased and installed new turbines from Parsons at an estimated cost of £78,186. These machines were so efficient that even if BW’s original turbines had complied with the contractual specifications, it still would have been cheaper for the claimant to replace the original machines with those purchased from Parsons as soon as the latter became available on the market. When BW claimed the unpaid balance, LU counterclaimed for an award assessed by reference to the additional costs incurred over the period in which it had used BW’s machines before replacing them (ie the cost of the extra coal and other expenses), plus the cost of purchasing the Parsons machines.188 LU’s entitlement to the former sum was undisputed, but the House of Lords did not award the latter amount. The decision’s conventional interpretation, as authority for the ‘avoided loss rule’ of mitigation, is based upon the fact that LU could not recover the cost of purchasing the Parsons machines in combinations with certain observations that Viscount Haldane made in his leading speech. After discussing Erie County Natural Gas and Fuel Co v Carroll,189 and Wertheim v Chicoutimi Pulp Co,190 his Lordship said that a subsequent transaction will be taken into account in reducing the sum recoverable only if it is one ‘arising out of the consequences of the breach and in the ordinary course of business’.191 The difficulty with this, of course, lies in articulating precisely when a financial benefit that accrues to the innocent victim of a breach fits this description, so that it may be regarded as ‘collateral’. Unfortunately, the relevant cases are notoriously difficult to reconcile,192 which has led to the suggestion that this area of law is ‘one of the most intractable … relating to the assessment of damages for breach of contract’.193 While the new account proposed by this book does clarify some of the present confusion, it does not purport to resolve the difficult question of precisely when a factual benefit that accrues to the victim of a breach of contract must be taken into account in assessing an award of compensation for loss, narrowly understood.

188 LU initially in fact pleaded an additional ‘damages’ claim in the alternative for upwards of £280,000 for losses it estimated that it would be caused by this excessive coal consumption over the expected life of the original machines, but this claim was eventually abandoned on appeal. For a fuller account of the proceedings, see A Dyson, ‘British Westinghouse revisited’ [2012] Lloyd’s Maritime and Commercial Law Quarterly 412. 189 Erie County Natural Gas and Fuel Co v Carroll [1911] AC 105 (PC). 190 Wertheim v Chicoutimi Pulp Co [1910] UKPC 1, [1911] AC 301. 191 British Westinghouse (n 133) (690). There, after discussing Staniforth v Lyall (1830) 7 Bing 169, his Lordship observed that it illustrates the principle that when estimating the quantum of damage that a breach has caused to an innocent party, one may look at all the facts, ‘provided the course taken to protect himself by the plaintiff in such action was one which a reasonable and prudent person might in the ordinary course of business properly have taken, and in fact did take whether bound to or not’ (at 690). 192 But for an admirable recent attempt, see Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain (The New Flamenco) [2014] EWHC 1547 (Comm) (Popplewell J). 193 See McLauchlan (n 122) 360. Also see H McGregor, ‘Mitigation in the Assessment of Damages’ in Saidov and Cunnington (eds) (n 81) 329, describing the area as ‘of great difficulty’, 336.

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In any event, the aim of the present section is only to highlight the basic difficulty this area poses for the law’s conventional interpretation. First, the legal position when a party’s initial loss is reduced by the receipt of money from a third party is considered. Following this, certain others examples of awards exceeding a claimant’s factual loss are outlined. While the treatment of the authorities does not purport to be exhaustive, the discussion is sufficient to show the existence of an inconsistency between the law’s orthodox understanding and the decided cases.

1. Loss Reduced or Eliminated by a Third Party Payment In English law, third party payments to the victim of a wrong are generally not taken into account when assessing the victim’s entitlement to a money award from the wrongdoer.194 For instance, a party may be insured against certain losses she may suffer following another’s breach but the fact that she has recovered under her insurance policy does not prevent the recovery of a substantial sum of money.195 Similarly, it has been held that, if the claimant receives a benevolent payment from a third party that has the effect of reducing its loss, in principle this should not affect its entitlement to a substantial award.196 Such payments are said to be res inter alios acta.197 Like the sale of goods cases considered above, it has been said that these rules are best explained as promoting certain ‘policy’ objectives. For instance, the position with respect to benevolent payments might be rationalised on the basis that the law does not want to discourage such benevolence.198 Similarly, the status of insurance payouts might be explained on the basis that to do otherwise would be a disincentive to insure, or simply by reference to the perceived unfairness of not providing money awards to parties who take the responsible choice to insure against certain future risks.199 There is some support for such rationalisations in the case law.200 However, although these rules may be supported by these ‘policy’ considerations, a more principled explanation for them is that there are certain contractual money awards that are concerned to substitute for performance rather than to make good loss.

2. Loss Reduced or Eliminated by Other Post-Breach Events The decision in Rodocanachi,201 as well as some of the sale of goods cases discussed earlier, provide other useful illustrations of the phenomenon whereby the 194

For discussion see Burrows (n 116) 161. Bradburn v Great Western Railway Co (1874–75) LR 10 Exch 1; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 Build LR 57 (CA), 85. 196 Merrett v Capitol Indemnity Group Corp [1991] 1 Lloyd’s Rep 169. 197 ie a thing done between others. 198 This notion was discussed by various members of the House in Parry v Cleaver [1970] AC 1 (HL). 199 See the discussion of Lord Morris on this issue of unfairness, ibid. 200 ibid (Lord Reid). 201 See above n 159. 195

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detrimental factual consequences that, at the time of breach, appear likely to be suffered by the innocent party are not in fact incurred because of the occurrence of certain post-breach events, which have the effect of reducing the breach’s detrimental impact.202 British Westinghouse, discussed immediately above, is perhaps the best-known example of such a case in the contractual context, but other important decisions on the subject include the earlier decisions to which Viscount Haldane there referred in his leading speech,203 and the Court of Appeal’s later decision in Lavarack v Woods of Colchester Ltd.204 Often the latter case is cited to illustrate the distinction between benefits that are taken into account in reduction of the ‘damages’ payable and benefits that are not.205 a. Needler Financial Services Ltd v Taber A more recent example of a case in which the subsequent improvement in the innocent party’s position following a breach of contract was ignored for the purposes of quantifying ‘damages’ is Needler Financial Services Ltd v Taber.206 Needler was the financial adviser of the company that Taber worked for and, in breach of its contractual duty of care, advised Taber to transfer deferred benefits to which he was entitled under an occupational pension scheme into a personal pension plan with a mutual life assurance society. When Taber retired eight years later he discovered that his pension was about £21,000 less valuable than it would have been had he not followed the advice that he received. However, a year before this discovery (ie seven years after the initial breach), Taber was given shares in the company to which the society had transferred its business upon demutualisation, which he then sold for nearly £8,000. In response to Taber’s action for ‘damages’, Needler admitted liability but argued that this benefit must be brought into account in assessing ‘damages’. Sir Andrew Morritt V-C disagreed, finding that the profits obtained from selling the shares were ‘not caused by and did not flow, as part of a continuous transaction, from the negligence. In causation terms the breach of duty gave rise to the opportunity to receive the profit but did not cause it’.207 Professor McLauchlan has criticised this conclusion on the ground that Taber received this benefit from the very transaction that was induced by Needler’s breach. On this basis McLauchlan concludes that the case is inconsistent with the compensatory principle, as conventionally understood, and is therefore

202 The much discussed decision of the House of Lords in The Golden Victory [2007] UKHL 12, [2007] 2 AC 353 arguably provides a further example. This difficult case is considered in greater detail in Chapter 7, where it is explained why it is not inconsistent with the new account advanced in this book. 203 For example, Staniforth v Lyall (1830) 7 Bing 169; Jebsen v East and West Indian Dock Company (1875) LR 10 CP 300 (CP); Erie County Natural Gas and Fuel Co v Carroll [1911] AC 105; Wertheim v Chicoutimi Pulp Co (n 121). 204 Lavarack (n 186). 205 See, for example, Burrows (n 116) 159. 206 Needler Financial Services Ltd v Taber [2002] 3 All ER 501 (Ch). 207 ibid 512.

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incorrect.208 That the award in Needler is inconsistent with a strict application of the compensatory principle is difficult to deny. Without the breach of duty, Taber would not have lost £21,000 but he also would not have gained the extra £8,000, so the award exceeded the detrimental financial consequences that Taber suffered as a result of Needler’s breach. However, the award is equally difficult to explain by reference to the distinction this book proposes between substitutionary and compensatory awards. On this account, Taber’s compensatory award should have been limited to £13,000 (£21,000 minus £8,000), but he should also have received an appropriate monetary substitute for the defective performance he received (ie unsatisfactory financial advice). The difficulty in doing this, as Chapter 5 explains more fully, is that this was a case in which it was not actually possible to ‘cure’ the promisor’s defective performance,209 meaning that the only money substitute available to Taber was an award of the reasonable price of ‘release’ from further performance as at the date of breach. While it is possible that Sir Andrew Morritt V-C’s decision was influenced by a substitutionary impulse, it is also clear that substitutionary awards generally have not been made following the provision of defective advice and that to explain the award actually provided as substitutionary would be highly artificial. b. The Relevance of Some Earlier Tort Cases In Needler, Sir Andrew Morritt V-C applied the Court of Appeal’s controversial earlier decision in Hussey v Eels.210 The claimants there contracted to buy property from the defendants, relying upon the defendants’ false and negligent representation that the land was not subject to subsidence. Upon discovering that the house in fact was prone to subsidence, the claimants demolished it, taking the view that repair was not economically viable, acquired the planning permission required to rebuild, and sold the land (with the planning permission) to a third party for a profit. In assessing the claimants’ ‘damages’ in an action for negligent misrepresentation, the Court of Appeal declined to take into account the financial benefit they obtained as a result of these post-breach actions. As Professor Burrows has explained, the decision ‘is controversial because, although there was a considerable time lag, the seeking and obtaining of planning permission and subsequent sale

208

McLauchlan (n 122) 380. ‘Cure’ is used here in a specific sense to mean reversing the breach so that the innocent party actually obtains the performance promised rather than simply making good the detrimental factual consequences of the breach. This distinction can be illustrated by comparing this kind of case (ie provision of negligent advice) with the defective construction of a house. The latter kind of breach can be ‘cured’ in this specific sense by repairing the defects so that the innocent party ends up with the house that was promised. By contrast, it is simply impossible to create a world in which the innocent party actually receives non-negligent advice after he has acted on the negligent advice to his detriment, which of course is not to say that the detrimental factual consequences of his reliance on the negligent advice cannot be made good. 210 Hussey v Eels [1990] 2 QB 227 (CA). 209

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were clearly actions taken to avoid the subsidence problems’,211 meaning that the result appears to be inconsistent with the ‘avoided loss rule’ of mitigation. The approach taken in Hussey v Eels also was followed by the Court of Appeal in Gardner v Marsh & Parsons (a firm).212 The defendant surveyor there breached its contract with the claimants by providing a report that failed to disclose serious structural defects in the property in which the claimants eventually purchased a leasehold. The lease contract obliged the owner to repair defects of the kind to which the property was subject. Upon discovering these defects some time later, the claimants managed to get their landlord to repair the property at no charge, but only after a two-year delay that involved protracted negotiations and threats to commence legal proceedings against the landlord. By majority, the Court of Appeal nevertheless upheld the claimants’ action against the surveyor for the full difference as at the date of purchase between the market value of the property without the defects and its market value with defects. The decision in Gardner, like that in Hussey v Eels, is inconsistent with the compensatory principle’s conventional interpretation. The landlord’s repair of the defects constituted a post-breach event that reduced the factual loss suffered by the claimants. Moreover, because their contract with the landlord actually conferred the right to have the repairs done, this is not a case where it was difficult to claim that the loss-reducing event was ‘collateral’ to the breach.213 A substantial compensatory award might have been made for legal costs and other expenses incurred in getting the repairs done and in trying to resell the property, as well as for the substantial inconvenience caused by the whole ordeal, but this was not the basis on which the award was made and there was no correspondence between these losses and the sum that was awarded. That the approach taken in Hussey and Gardner, which both involved claims in tort for negligence, was adopted in Needler, where the claim was one for breach of contract, might be thought to require explanation given that the central thesis of this book is advanced only in relation to contractual money awards. In reality, the different nature of the claims made in these cases is not really significant for the following reasons: (1) The duty breached in Needler was a contractual duty of care so one would expect the ‘damages’ awarded to Needler, as Sir Andrew Morritt VC held, to be the same regardless of whether the claim was brought in tort or for breach of contract.214 211 Burrows (n 116) 161. See also McGregor (n 193) 329 observing that ‘it is difficult to see why those acts did not arise from the consequences of the wrong’, 339 and describing the whole area as one ‘of great difficulty’, 336. 212 Gardner v Marsh & Parsons (a firm) [1997] 1 WLR 489, [1996] EWCA Civ 940. 213 Contra Hirst LJ, ibid 503. 214 Moreover, even though this book is only concerned with contractual money awards, it is possible that a substitutionary analysis of ‘damages’ awards in tort is possible. Professor Stevens in fact has argued persuasively in support of such a view. See Torts and Rights (n 118). Significantly, however, the tort of negligence, where ‘damage’ is the gist of the action, appears to be somewhat of an outlier in this regard.

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(2) More fundamentally, none of the claims made in the three cases just discussed were in fact substitutionary in the sense in which that term is used in this book because in all of them the claimant was seeking only an award to make good the detrimental factual consequences caused by the breach. That the second of these claims is true is made clear by the fact that an award of the cost of substitute performance was not available in any of these three cases because it was no longer possible for the promisee to obtain it. As explained earlier in the discussion of Needler,215 once one has relied to one’s detriment upon negligent advice, it is simply not possible to create a world in which that party has received and acted upon non-negligent advice.216 The only (admittedly imperfect) way to substitute for performance in cases of this kind, which are similar to breaches of confidentiality or exclusivity and to the breach in White Arrow, is to award the promisee the market value of the services that he paid for, but did not receive.217 However, the availability of this alternative monetary substitute for performance is controversial and generally has not been awarded in cases involving the provision of sub-standard advice, though it is argued later that, subject to the promisee’s fulfilment of any necessary conditions, it should be.218 It may be that part of the reason that ‘over-compensatory’ awards were made in Hussey, Gardner and Needler was in an effort to recognise, albeit unsatisfactorily, the substitutionary entitlement of the claimant, which otherwise would have gone entirely unvindicated. Putting this (controversial) suggestion aside, there remains the question of why in each of these cases (and many others), the innocent party was ‘compensated’ in a way that left this party better off financially than it would have been had the breach not occurred. The simple answer is that even when awarding compensation for loss, English law does not always undertake a precise comparison of the innocent party’s post-breach factual position and its (hypothetical) nonbreach factual position.219 An important consequence of this is that the new account proposed here certainly does not claim that all decisions that are inconsistent with a strict interpretation of the compensatory principle can be explained by reference to the proposed distinction between substitutionary and compensatory contractual money awards.220

215

See the discussion in n 209. This world is to be distinguished from one in which one has not detrimentally relied upon the negligent advice. While this latter world cannot be perfectly recreated, the detrimental financial consequences of one’s reliance can at least be made good by an award of compensation for this loss. 217 When there is an available market for these services, this is the same as an approximation of the reasonable price of release, as is explained below in Chapter 5, Section III.A. 218 See ibid. 219 For a detailed explanation of how such an approach should work when it is taken, see Kramer (n 26) 239–86. 220 This analysis thus affirms the orthodox view of most cases in this part of the law that for certain reasons, the legitimacy of which may be questioned, in assessing the compensation to which the victim of a tort or a breach of contract is entitled, certain benefits that accrue to this party that can be causally attributed to the breach are not taken into account. 216

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c. The Significance of The New Flamenco A recent and important decision in the contractual context that demonstrates the point made in the final paragraph of the previous section is The New Flamenco.221 In an appeal from the arbitrator’s decision in favour of the charterers under section 69 of the Arbitration Act, the issue that there arose was whether the owners of the New Flamenco were required to account for the financial benefit that they obtained by selling the vessel in October 2007, following the charterers’ early redelivery of the ship around that time, rather than later in November 2009 when the charterparty would have ended had the charterers not repudiated. Due largely to the collapse of Lehman Brothers and the global financial crisis that consequently ensued, the difference in the market price of the ship between these two dates was very significant. In upholding the owners’ appeal, Popplewell J found that they were not required to account for the benefit they obtained by selling the ship at the earlier date. His Lordship’s reasoning to this conclusion began by noting that although both the owners and the charterers invoked the compensatory principle in support of their respective positions, recourse alone to this principle could not resolve the dispute. This, Popplewell J explained, is because the objective of putting ‘the innocent party in the same financial position as if the contract had been performed’ does not mean that an award of ‘damages’ for breach of contract always places the innocent party in precisely the same financial position that this party would have been in had the breach not occurred. Specifically, while principles of causation and remoteness may preclude the recovery of certain losses, the innocent party also may end up factually better off as a result of the breach due to the accrual of a benefit in his favour that he is not required to account for. After a comprehensive analysis of the numerous relevant authorities to which his Lordship was referred by counsel, Popplewell J concluded that ‘the search for a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach of contract or duty is elusive’.222 Despite this, he nevertheless helpfully identified a number of ‘principles’ that were discernible from these authorities in an effort to bring some much-needed clarity to this difficult area of the law.223 Applying these principles to the facts as found below, Popplewell J concluded that the arbitrator erred in requiring the owners to account 221 The New Flamenco (n 192). For discussion, see P Todd, ‘Mitigation, Causation and Policy’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 481. 222 The New Flamenco (n 192) [63], referring to Lord Wilberforce’s speech in Parry v Cleaver (n 198) 41–42 and Dixon CJ’s speech in National Insurance Company of New Zealand Ltd v Espagne (1961) 105 CLR 569. 223 The New Flamenco (n 192) [64]. In addition to referring to certain authorities mentioned in the present section, Popplewell J considered the significance of Shearman v Folland [1950] 2 KB 43 (CA); Lavarack (n 186); Bellingham v Dhillon [1973] 1 QB 304; Nadreph Ltd v Willmett & Co [1978] 1 WLR 1537; The Yasin [1979] 2 Lloyd’s Rep 45; The Elena D’Amico [1980] 1 Lloyd’s Rep 75; Palatine Graphic Arts Co Ltd v Liverpool City Council [1986] 1 QB 335; Famosa Shipping Co Ltd v Armada Bulk Carriers Ltd (The Fanis) [1994] 1 Lloyd’s Rep 633; Dalwood Marine Co v Nordana Line A/S (The Elbrus) [2010] 2 Lloyd’s Rep 315; Coles v Hetherton [2013] EWCA Civ 1704. See The New Flamenco (n 192) [19]–[63].

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for the financial benefit which they had obtained by selling the ship at the earlier date. According to his Lordship, this was principally because, while this benefit would not have accrued ‘but for’ the charterers’ repudiation, the benefit was not ‘legally caused’ by this repudiation, though he also found additional support for this conclusion in the ‘policy grounds which inform Bradburn’s case and its extension in Parry v Cleaver and Smoker’s case’.224 Like the many other cases examined in this chapter, The New Flamenco is inconsistent with the Robinson v Harman principle’s orthodox interpretation. This inconsistency also is not removed simply by saying that the benefit accruing to the owners from the earlier sale was not ‘legally caused’ by the charterers’ breach because, as Lord Hoffmann has noted, the distinction between ‘cause-in-fact’ and ‘cause-in-law’ has little or no explanatory power in the absence of an account of what these terms actually mean.225 To be clear, this is not meant to be a criticism of Popplewell J since his reasons in fact provided a convincing explanation for why the charterers’ breach here did not ‘legally cause’ the benefit accruing to the owners.226 The principal point made here is simply that The New Flamenco is another decision inconsistent with the law’s conventional interpretation. It will be shown, however, that, like Needler, a coherent explanation of this decision, to the extent that one exists, must be found elsewhere than in the distinction this book proposes between substitutionary and compensatory contractual money awards.

IV. Conclusion This chapter sought to demonstrate that the English law of contractual money awards is inconsistent with the way in which it typically is understood. Section II noted the existence of certain awards that do not, on any view, purport to make good ‘loss’. It first considered awards of ‘nominal’ damages, including substantial ‘nominal’ damages. The existence of such awards demonstrates an awareness of the distinction between the infringement of a right and the consequential loss that may (or may not) flow from such infringement. Following this, it was noted that English law sometimes makes awards aimed at stripping the profits that the

224 The New Flamenco (n 192) [72]–[73], the latter reference being to the House of Lords’ decision in Smoker v London Fire Authority, Wood v London Fire Authority [1991] AC 502, which held that the Bradburn (n 195) principle extended to pension payments which had been contributed to in part by an employer who was also the defendant tortfeasor. 225 See L Hoffmann, ‘Causation’ (2005) 121 LQR 592, 598. 226 According to Popplewell J, the relevant financial benefit was caused by the combination of ‘the fall in the market flowing from the financial crisis’, which occurred irrespective of the charterers’ breach and the owners’ decision to sell, which was a matter for their ‘commercial judgment and involved a commercial risk taken for their own account’, noting further that it ‘was legally independent of the breach … just as was the decision of charterers not to charter in substitute tonnage in The Elena D’Amico’, [66].

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defendant made from breach. The existence of such awards irrefutably demonstrates that English contract law sometimes departs from the aim of simply compensating for loss when making substantial money awards following a breach. Nominal and gain-based awards might be explained as justifiable exceptions to the normal rule that contractual money awards always aim to compensate for an established ‘loss’. However, the many other examples of awards for breach that, while often described as ‘compensatory’, put the promisee into a superior factual position than had the contract been performed cannot simply be explained on this basis. As Section III of the chapter showed, these examples are numerous and include awards measured by reference to loss suffered by a third party, awards assessed on the basis of a ‘hypothetical release bargain’ between the contracting parties at the date of breach, awards for breaches of a contract of sale that exceed the factual loss that the innocent party can causally attribute to the breach, various other miscellaneous awards of a similar kind outside the sale of goods context, including awards for the cost of repairs, and finally awards made following the occurrence of a post-breach event that eliminates or reduces the detrimental factual consequences of the breach on the innocent party. It is contended that, in combination, these various discrepancies with the law’s orthodox interpretation pose a fundamental challenge to that interpretation. While it is certainly not suggested that all of the decisions examined in this chapter can be explained by reference to the central distinction between substitutionary and compensatory money awards that this book proposes, it will be shown that a significant number of them can be and also that this distinction is both theoretically coherent and reconcilable with certain other decisions that might appear to challenge its correctness. On this basis it is argued that this new understanding of the law is superior to the traditional orthodoxy and should be used as the basis for reasoning in future disputes.

3 Conceptual and Terminological Difficulties with the Orthodox Account I. Introduction Chapter 1 of this book outlined the orthodox understanding of contractual money awards, according to which such awards simply aim to compensate for ‘loss’. Chapter 2 challenged the doctrinal accuracy of this account. The present chapter builds upon this challenge by demonstrating the conceptual problems with this account and the shortcomings in conventional terminology. The conceptual challenge is based upon the artificiality of describing the Robinson v Harman principle as a measure of loss. Section II of the chapter outlines this challenge and explains how Fuller and Perdue’s suggested response to this difficulty—that the purpose of awarding contractual awards is to protect the innocent party’s ‘reliance interest’—has skewed theoretical debates about contractual awards and inhibited an understanding of the true position. Section III explains the ambiguous meaning of ‘loss’ in the contractual context. Two principal reasons for this ambiguity are identified. First, it is not clear precisely how the concept of ‘loss’ maps onto the distinction between the infringement of a right and the consequences that may follow from it. Secondly, providing a clear definition of loss is made more difficult by the fact that the meanings of the concepts typically employed in articulating such a definition are also ambiguous and contested. In consequence, the concept of ‘loss’ has been used to cover situations where it is inappropriate and thus its meaning has been stretched beyond acceptable limits. The discussion concludes by outlining a preferable definition of the term that should be used henceforth in English contract law. Finally, Section IV of the chapter exposes the ambiguous meaning of other important concepts commonly employed in this area of legal discourse. It is argued that the uncertain meaning of key concepts like ‘damages’ and ‘compensation’ has inhibited the law’s conceptual clarity and, notably in the present context, led to a failure to distinguish awards that substitute for performance and from those that compensate for loss. In this regard, the absence of a clear conception of legal ‘remedy’ has been a further source of confusion. In an effort to reduce this confusion, the chapter concludes by suggesting clear and stable definitions for the various concepts outlined above, which it is hoped may come to govern future usage.

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II. The Conceptual Inadequacy of the Orthodox Account Debates concerning the kinds of ‘harm’ included within the Robinson v Harman principle’s compensatory ambit reflect one kind of indeterminacy evident in Parke B’s classic formulation in Robinson v Harman. However, as Chapter 1 foreshadowed, a more fundamental, but often overlooked, indeterminacy in the Robinson v Harman principle concerns the purpose of awarding money in response to a contractual breach. Parke B’s famous statement of principle does not make it clear whether the object of these money awards is limited to compensating the victim for factual detriment caused by the breach or extends to substituting for performance not received. English law’s traditional preoccupation with ‘loss’ in this context has led to significant judicial disagreements and occasional errors. In contrast to the orthodox view, this book contends that the Robinson v Harman principle conflates two distinct principles: one concerned with substituting for performance, and the other concerned with compensating for loss.

A. Fuller and Perdue’s Challenge This section outlines Fuller and Perdue’s famous critique of the expectation measure as the basis for quantifying contractual money awards. The section then responds to this critique by observing both the valuable and less valuable aspects of the argument Fuller and Perdue advanced.

1. Questioning the Priority of the Expectation Measure The orthodox understanding of the Robinson v Harman principle is that the principle posits the appropriate measure of ‘loss’ by reference to which an award of compensation for breach of contract should be measured. However, according to Fuller and Perdue, the expectation measure is ‘a queer kind of compensation’ because it gives the claimant ‘something he never had’.1 Precisely what Fuller and Perdue meant by this statement is uncertain because there are two ways in which their words might be interpreted. The first is that they were merely observing the ‘peculiar’ fact that the expectation measure assumes the existence of a factual position that the claimant never actually occupied. The second way to interpret Fuller and Perdue’s statement is that they were advancing the more fundamental claim that, whatever legal entitlement is created by the formation of a valid contract, it is not a right to performance. To explain further, it might be thought that what is ‘queer’ about the Robinson v Harman principle is that it adopts the claimant’s hypothetical, future factual 1 L Fuller and W Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law Journal 52, 53.

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position upon performance as the relevant starting point in assessing compensation for breach. However, this cannot be the true concern. Whenever a court is called upon to award compensation for loss in response to a civil wrong it must, to the extent possible, compare the claimant’s current position to the hypothetical position the party would have occupied had the wrong not occurred. This hypothetical, counterfactual position may differ from the innocent party’s position at the time of breach by, for example, including the value of a lost opportunity to profit from the other party’s fulfilment of the relevant legal obligation that was breached. Thus, the peculiar aspect to the expectation measure is not the fact that it entails a prospective counterfactual analysis but that it assumes the innocent party’s legal entitlement to be put into that future position. In substance, therefore, Fuller and Perdue sought to challenge the very existence of a legal right to performance in their famous critique of the expectation measure. Although a satisfying normative explanation for why it is that the formation of a contract creates reciprocal rights to performance in each of the parties (arguably) has proved elusive,2 there is substantial doctrinal support for the existence of the right to performance. Nevertheless, the fact that the Robinson v Harman principle assumes the existence of a legal right to performance does highlight the fundamental indeterminacy that exists with regard to the purpose of this principle. In essence, it is not clear whether the Robinson v Harman principle is concerned only with comparing the differences in the promisee’s factual position with and without breach, or with using money to enforce this party’s entitlement to the promised performance. This indeterminacy was overlooked by Fuller and Perdue in their seminal critique of the orthodox view. The authors’ response to the peculiarity they identified was to argue that at their core, contractual awards must be concerned with compensating the victim of a breach of contract for any loss it has expended in ‘reliance’ on the contract’s existence, rather than with protecting what they disparagingly referred to as the innocent party’s ‘expectation interest’.3 Nevertheless, Fuller and Perdue claimed that at least with regard to ‘bargain’ promises, adherence to the Robinson v Harman principle could be justified by reference to two distinct ‘policy’ considerations. The first was that the expectation measure is a good ‘proxy’ for difficult-to-quantify reliance losses. The second was that quantifying awards by reference to the Robinson v Harman principle encourages the valuable practice of bargaining by ensuring that parties obtain the benefits of their bargains.4

2 In this author’s view, the most convincing account yet provided is that developed in D Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart Publishing, 2003), where the author distinguishes between two different ways in which contract law contributes to the realisation by its participants of valuable personal autonomy. These are: (1) allowing parties to co-ordinate for the achievement of a mutually beneficial future outcome, and (2) enabling parties to achieve such co-ordination in the absence of the interpersonal trust that is otherwise normally necessary for any joint endeavour to succeed. 3 Fuller and Perdue (n 1) 56. 4 ibid 60.

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2. Response Professor Friedmann’s powerful response to Fuller and Perdue’s challenge criticised the expectation-based terminology they introduced and reasserted the primacy of the ‘performance interest’.5 As far as debate regarding the appropriate baseline for quantifying contractual awards is concerned, victory is clear. Exceptional circumstances aside, English law quantifies awards for breach of contract by reference to the position the promisee would have occupied had the contract been performed rather than the position this party would have occupied had the contract not been created.6 Moreover, the exceptional cases in which awards are made by reference to reliance losses are best explained by evidential difficulties in calculating the position the promisee would have occupied had the contract been performed.7 Rather than the expectation measure constituting a ‘proxy’ for difficult-to-quantify reliance losses (as Fuller and Perdue suggested), the reliance measure in fact operates as a proxy for the ‘expectation’ measure in such cases.8 Nevertheless, the solution Fuller and Perdue proposed to the conceptual difficulty they identified was understandable given the conventional view that ‘damages’ awards are concerned always with compensating for an identifiable ‘loss’.9 If one assumes that the purpose of making contractual awards is to compensate for loss, scepticism concerning the coherence of the Robinson v Harman principle as a measure of loss leads logically to suggesting that these awards should be assessed by reference to the promisee’s reliance loss. But as already observed, Parke B’s words in Robinson v Harman are actually highly ambiguous and may be interpreted as advocating a performance-oriented alternative to the assessment of contractual awards. Against this view, it might be argued that a performance-oriented interpretation of the Robinson v Harman principle is ruled out by Parke B’s reference to ‘loss’ in his famous dictum. Even putting aside the conceptual difficulty with describing the Robinson v Harman principle as a measure of loss, there are at least two reasons to reject this suggestion. First, as explained below, the meaning of ‘loss’ is notoriously uncertain. There are at least three different interpretations that could be given to the term in Parke B’s formulation, which means it is unclear precisely what his Lordship meant in referring to ‘loss’ in this context, and it is certainly not at all clear that he meant to exclude the possibility of awards substituting for performance.10 5

D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628. See, most recently, Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd (The Mamola Challenger) [2010] EWHC 2026 (Comm), [2011] Bus LR 212, [2011] 1 Lloyd’s Rep 47. 7 Anglia Television Ltd v Reed [1954] 1 QB 292 (CA); Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (HCA). 8 This was recently reaffirmed in The Mamola Challenger (n 6). For academic support see A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford University Press, 2004) 70. 9 See, for example, Stoke-on-Trent City Council v W & J Wass Ltd [1988] 1 WLR 1406 (CA)1410 (Nourse LJ). 10 This is supported by Parke B’s later decision in Pell v Shearman (1855) 10 Ex 766, 769 and his earlier decision in Thornton v Place (1832) 1 Mood & R 217, 219, as noted by B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537, 556. 6

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Secondly, the reference to ‘loss’ in Robinson v Harman ignores the other, arguably more significant, aspect of Parke B’s dictum, which is that contractual awards are intended to put the promisee in the position he would have been in ‘as if the contract had been performed’.

B. The Significance of Fuller and Perdue’s Critique Fuller and Perdue challenged the cogency of the ‘expectation’ measure of ‘loss’. The conceptual challenge to the orthodox understanding of contractual money awards proposed here posits that the Robinson v Harman principle actually should not be understood as a measure of ‘loss’ at all. Rather, this principle is best understood as a hybrid of two distinct principles: one concerned with substituting for performance, the other concerned with making good certain factual detriment caused by breach. These two principles often complement one another. However, as Chapter 2 demonstrated, sometimes they conflict, which can lead to awards inconsistent with the orthodox account. It is suggested that a significant reason why the account advanced here has not been recognised more widely is terminological. The ambiguities in conventional terminology are outlined in sections III and IV of this chapter. The failure to appreciate the possibility of a performance-oriented interpretation of the Robinson v Harman principle has had two unfortunate, related consequences, which have significantly impeded debates about contractual awards. First, it has been assumed that the objective in awarding contractual awards is always to compensate for loss.11 Secondly, as a result of this, debates about contractual money awards have focused on the appropriate baseline for measuring loss, rather than the more fundamental question of whether compensation (for loss) is truly the governing norm in this context.

1. The Dominance of the Compensatory Paradigm The failure to appreciate the fundamental indeterminacy in Parke B’s formulation is demonstrated by the common invocation of Robinson v Harman as authority for the orthodox understanding of contractual awards. Often this interpretation of the Robinson v Harman principle is asserted in the context of contrasting the compensation objective with some other possible goal such as punishing the breaching party,12 or stripping this party of the profits derived from breach.13 11 This perspective is demonstrated and criticised in LD Smith, ‘Disgorgement of the Profits of Breach of Contract: Property, Contract and Efficient Breach’ (1995) 24 Canadian Business Law Journal 121. 12 This contrast was made in Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 (HL) 353 (Lord Bridge) and 373 (Lord Lloyd). It was also made in Co-operative Insurance Society Ltd v Argyll Stores Ltd [1998] AC 1 (HL) 15 (Lord Hoffmann): ‘the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance’. 13 This contrast is made in Tito v Waddell (No 2) [1977] Ch 106, 332 (Megarry V-C).

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Although it is now recognised that profit-stripping awards are possible in exceptional circumstances,14 at least in England generally it is accepted that punitive damages are not available in an action for breach of contract.15 For example, in Perera v Vandiyar, an award of punitive or exemplary damages made at trial for breach of contract was overturned on appeal on the grounds that such damages are not available in English law.16 If one limits the legitimate purposes of contractual money awards to either compensation, punishment or the disgorgement of profits made from breach, it is unsurprising that compensation is viewed as the dominant objective since it would be very difficult (if not impossible) to make the case that either of these alternative possibilities should be generally available. Neither punitive awards nor profit stripping can be tied to the nature and value of the practice of contracting in any natural or obvious way.17 Rather, both punishment and disgorgement constitute extraordinary responses to contractual breach, which can be justified, if ever, only in exceptional circumstances. However, Parke B’s formulation in Robinson v Harman leaves open the possibility of awarding money in order to substitute for performance, regardless of what loss the promisee has suffered in consequence of breach. That contractual awards do not rigidly conform to the (compensatory principle’s) objective of putting the claimant in the same factual position as if the contract had been performed is clear. First, English law imposes certain restrictions upon the recovery of compensation for non-pecuniary loss. The significance of these restrictions is weakened by money’s incommensurability with nonpecuniary harm. This, as many have observed, means that in any event an award of damages can only ever be a proxy for such loss.18 Secondly, even if only financial loss has been incurred by the promisee, the restrictions imposed upon the recovery of compensation by the doctrines of remoteness, mitigation,19 and certainty of loss ensure that English law often fails to put the victim of a breach of contract, 14 Attorney-General v Blake [2001] 1 AC 268 (HL). Note that the legitimacy of punitive or gain-based awards for breach of contract has not yet been accepted in Australia. See Hospitality Group Pty Ltd v Australian Rugby Union Ltd (Hospitality Group) (2001) 110 FCR 157 (FCA). 15 Compare the Canadian position evident in Royal Bank of Canada v W Got & Associates Electric Ltd (2000) 178 DLR (4th) 385 and Whiten v Pilot Insurance Co 2002 SCC 18, [2002] 1 SCR 595. 16 Perera v Vandiyar [1953] 1 WLR 672 (CA). See also Kenny v Preen [1963] 1 QB 499 (CA). Compare N McBride, ‘A Case for Awarding Punitive Damages in Response to Deliberate Breaches of Contract’ (1995) 24 Anglo-American Law Review 369. 17 This point is well made by D Kimel, ‘The Morality of Contract and Moral Culpability in Breach’ (2011) 21 Kings Law Journal 213. The argument there accords with the theory of contractual obligation advanced by Kimel in From Promise to Contract: Towards a Liberal Theory of Contract (Hart Publishing, 2003). Professor Weinrib also rejects the legitimacy of punitive or disgorgement awards for breach of contract, though his views are grounded in a particular conception of private law based on Aristotelian ‘corrective justice’ and the Kantian conception of right. See, in particular, E Weinrib ‘Punishment and Disgorgement as Contract Remedies’ (2003) 78 Chicago-Kent Law Review 55. 18 For an illuminating discussion, see MJ Radin, ‘Compensation and Commensurability’ (1993) 43 Duke University Law Journal 56. 19 It is arguable, however, that the ‘avoidable loss rule of mitigation’ is best explained simply as an aspect of legal causation, a point discussed in greater depth in Chapter 6.

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or the victim of any civil wrong for that matter, in as good a factual position as if the wrong had not occurred. However, these restrictions on the provision of full compensation do not really threaten the status of the orthodox account because they can be accommodated within this account on the basis that they impose (arguably) justifiable limits on the scope of a breaching party’s compensatory liability. This is the understanding of these restrictions advocated in this book.20 The consequence of this is that any fundamental challenge to the conventional understanding of contractual awards must come from the opposite direction. In other words, any fundamental challenge to the prevailing orthodoxy must demonstrate that an award putting the victim of a breach of contract into a position that is better than she would have been in had the breach not occurred are not unknown to English law. The existence of many such awards was demonstrated in Chapter 2.

2. Preoccupation with the Appropriate Measure of Loss Reliance on Robinson v Harman as authority for the conventional understanding of contractual money awards demonstrates how the fundamental indeterminacy in Parke B’s classic formulation generally has not been appreciated. Instead, it is normally simply assumed that the purpose of making contractual awards is to compensate the victim of a breach for loss. A second important consequence of this assumption is that theoretical debates about the nature of contractual awards have tended to focus on the correct measure of loss rather than on the more fundamental question of whether loss is in fact the fundamental normative criterion for quantification. It seems likely that a significant reason that generally the Robinson v Harman principle’s essential indeterminacy has been overlooked is that Fuller and Perdue assumed a loss-based paradigm for contractual awards in their seminal critique of the orthodox account. Since this thesis has now become the assumed departure point for any subsequent attempt to engage in theoretical debates about contractual awards, the extensive literature it has spawned has tended both to replicate its terminology and to engage the relevant issues through the lens that Fuller and Perdue created.21 The dominance Fuller and Perdue’s thesis has exerted over subsequent theoretical writing about contractual awards in Anglo-American law provoked one notable contract theorist to suggest: [I]t is only a slight exaggeration to say that all subsequent [theoretical] efforts [to explain the law of contractual money awards] either take up and elaborate lines of argument suggested by this essay or attempt to forge an alternative approach in response to it.22

20

See Chapter 6. But see Friedmann (n 5) and C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 41. 22 P Benson, ‘Introduction’ in P Benson (ed), The Theory of Contract Law (Cambridge University Press, 2001). 21

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Obviously, the preceding discussion only serves to confirm this view. But the aims of this work are more in keeping with the latter half of the above quotation than the former half. Traditionally, the compensatory objective of contractual money awards has been assumed,23 with debates focusing on whether awards should be measured by reference to ‘expectation’ or ‘reliance’ loss. This book proposes an alternative understanding of the Robinson v Harman principle, which conceives of it as a composite of two distinct principles rather than simply a measure of ‘loss’. A comprehensive explanation of the new account must wait until Part II of this book. The remainder of this chapter clears the ground for this explanation by demonstrating and clarifying the deficiencies in the conventional terminology used within the orthodox account.

III. The Meaning of ‘Loss’ in English Contract Law Chapter 2 identified significant inconsistencies between the orthodox understanding of contractual awards and the decided case law. This book contends that the principal reason that the conventional account has persisted in the face of these inconsistencies is the significant ambiguity surrounding many of the key terms used in this part of the law. This ambiguity has allowed these concepts to be employed in an imprecise manner, obscuring the true nature of contractual awards. The most important source of ambiguity in this context concerns the relevant meaning of ‘loss’ itself. The ambiguous nature of this concept has enabled it to be used to refer to a variety of phenomena that are better viewed as distinct.

A. General Ambiguity Surrounding the Meaning of Loss It has been observed that the meaning of ‘loss’ in everyday language is uncertain and difficult to define precisely.24 According to the Oxford English Dictionary, a loss is the ‘diminution of one’s possessions or advantages … [or the] detriment or disadvantage involved in being deprived of something’.25 Thus, at a very general level, loss obviously connotes detriment or deprivation. But this leaves open the question of precisely what kinds of detriment or deprivation should be regarded as losses. The challenge is to move beyond a vague association of loss with such related concepts to articulate a more precise definition of the concept. An acute problem in successfully doing this is that the meanings of related concepts, which are almost always employed in trying to explain the meaning of ‘loss’, 23 For example, E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010) 992; H McGregor, McGregor on Damages, 18th edn (Sweet & Maxwell, 2010) [1-002], [1-021]. 24 A Tettenborn, ‘What is a Loss?’ in J Neyers, E Chamberlain and S Pitel (eds), Emerging Issues in Tort Law (Hart Publishing, 2007) 441. 25 Oxford English Dictionary Online (3rd edn, 2008).

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are also unclear and contested. An example of this phenomenon is demonstrated below through an examination of the relationship between the concept of ‘loss’ and ‘harm’. A second important reason for the present uncertainty, it is contended, is that by itself a reference to ‘loss’ obscures the basic distinction between the infringement of a right and the consequences that may flow from it. This aspect of the problem is explained below as well.

1. The Relationship Between Loss and Harm The concept of ‘harm’ is commonly invoked either in substitution for the word ‘loss’, or to explain its meaning. A notable example of the former phenomenon occurs in one of Professor Birks’s seminal works on private law taxonomy. There, Birks appears to use the word ‘harm’ to mean ‘factual detriment’, explaining that wrongs actionable per se are those in which the existence of a cause of action is not dependent on ‘proof of any harm in the sense of damage or injury’.26 This statement is potentially confusing because ‘damage’ is an expression that is usually contrasted with the concept of ‘injury’ rather than equated with it. But for present purposes the critical point is that Birks’s use of ‘harm’ in this sentence corresponds to the definition of ‘loss’ this book advocates. However, the meaning of ‘harm’ is also ambiguous and widely recognised to be so. One example of such recognition is Professor Feinberg’s exploration of the term in his examination of the moral limits of criminal prohibition.27 Feinberg’s discussion begins by observing that ‘the word “harm” is both vague and ambiguous’, and that its meaning is highly context specific, suggesting that a general definition of harm may be impossible, and perhaps even undesirable. Feinberg then proceeds to distinguish three different senses of ‘harm’ in general circulation. The first use of harm Feinberg identifies, which he claims is not philosophically interesting, ‘is a derivative or extended sense … in which we can say that any kind of thing at all can be “harmed”’.28 A second sense in which harm is used, says Feinberg, is to mean ‘a setback to an interest’ of a person where an interest is a distinguishable component of a person’s well-being.29 A third meaning of ‘harm’ understands it to occur whenever another person’s rights have been violated.30 As Feinberg explains, a major source of ambiguity in the meaning of ‘harm’ concerns the distinction between these second and third senses because the presence of one typically, but not always, coincides with the presence of the other. The conceptual nature of a ‘loss’ and its relationship to ‘harm’ makes articulating a general definition of ‘loss’ equally difficult to articulating such a definition 26 See P Birks, ‘The Concept of a Civil Wrong’ in D Owen (ed), The Philosophical Foundations of Tort Law (Oxford University Press, 1995) 29, 40. Note that Birks is using the expression ‘injury’ here to be synonymous with ‘damage’ in the sense of ‘factual detriment’. This is not the definition of ‘injury’ supported in this book, as is explained below. 27 J Feinberg, Harm to Others (Oxford University Press, 1984). 28 ibid 32 (emphasis added). 29 ibid 33–34 (emphasis added). 30 ibid 34 (emphasis in original).

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of ‘harm’. For current purposes, it is of course only necessary to explain how the former expression should be understood in the law of contract. Nevertheless, the difficulty in providing a workable definition of ‘loss’ is not avoided by limiting the discussion to the contractual context because in articulating a contractual conception of ‘loss’, commentators still tend to invoke other uncertain and contested concepts such as ‘harm’, ‘damage’ and ‘injury’. For example, the twelfth edition of Treitel’s Law of Contract states that, leaving aside the question of the extent to which harm to the person includes injury to feelings, the meaning of ‘loss’ for the purposes of a damages claim for breach of contract ‘includes any harm to the person or property of the claimant, and any other injury to his economic position’.31

2. Distinguishing Damage and Injury The definition of ‘loss’ adopted in Treitel explains the expression by reference to other contested concepts with meanings that are also difficult to define precisely. The ambiguous nature of ‘harm’ was just observed. However, the meaning of ‘injury’ is similarly unclear as demonstrated by Feinberg’s observation that ‘harming … is sometimes contrasted and sometimes identified with injuring’. According to Feinberg, the reason for this confusion is that while in ordinary speech, persons are not said to be injured by inflictions of harm to interests other than that in physical health and bodily integrity … ‘injury’ originally and for many centuries has meant a wrong, or a violation of one’s rights, or an injustice.32

Others have noted this change in the meaning of ‘injury’ as well. Professor Birks pointed it out in the process of contesting the proposition that the appropriate legal response to the commission of a civil wrong is always to award compensation for loss.33 There, Birks noted that the word ‘injury’ derives from the Latin iniuria. This was formed from the negative in- combined with ius, iuris, which was the word for ‘right’ or ‘law’. Thus, historically an injury was something done non iure or, in modern English, non-rightly.34 This distinction between the infringement of a right, which is generally accepted to be the logical corollary of the breach of a duty,35 (‘injury’) and the consequential loss or harm that may result from this infringement (‘damage’) is of fundamental importance in the law. The distinction between damnum and iniuria was recognised in Roman law, though it appears that the meaning of damnum was not settled.36 Birks demonstrated that English law also recognises this distinction.37 31

Peel (ed) (n 23) [20-005] (emphasis added). Feinberg (n 27) 107 (emphasis added). 33 Birks (n 26). 34 ibid 39. Feinberg also notes the word’s Latin roots: (n 27) 107. 35 See W Hohfeld, Fundamental Legal Conceptions as Applied to Judicial Reasoning and Other Legal Essays (Yale University Press, 1920). Alternative theories regarding the conceptual relationship between rights and duties exist, but such debates are beyond the scope of this book. 36 D Daube, ‘On the Use of the Term Damnum’ in Studi in Onore di Siro Solazzi ( Jovene, 1948) 93. 37 Birks (n 26) 39. 32

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One example is the existence of wrongs actionable per se, such as trespass, conversion or breach of contract. Another is the right of a trust beneficiary to recover gains made by the trustee in breach of trust, irrespective of whether the breach caused any deterioration in the beneficiary’s factual position.38 This distinction between damage and injury is essentially the same as the distinction Feinberg drew between the second and third senses of ‘harm’ he identifies. Unfortunately, ambiguity persists because of the various ways in which these words are employed. To give a final example, Professor Tettenborn draws a distinction between loss and damage but not in the manner just described. According to Tettenborn, while loss has inescapably pecuniary overtones, the concept of damage ‘wavers uncertainly between tangible loss and the more nebulous idea that the plaintiff has simply been deprived of something she was entitled to’.39 These definitions are not endorsed here, but Tettenborn’s suggestion does demonstrate the uncertainty that pervades the law. In essence, it is uncertain to what extent ‘loss’ extends beyond detrimental pecuniary consequences to include detrimental non-pecuniary consequences, or the distinct intangible ‘injury’ entailed by simply breaching a duty.

B. Clarifying the Meaning of Loss The preceding discussion explained the uncertainty that surrounds the meaning of ‘loss’ in general but left open precisely how this ambiguity should be resolved. The current section seeks to resolve the specific uncertainty that exists in the contractual context with the specific purpose of bringing some clarity and order to English contract law. As just observed, this task is made more difficult by the uncertain meaning of the associated concepts typically used in articulating the meaning of loss. For this reason, it is submitted that any progress towards illuminating the meaning of loss in contract law depends upon the adoption of clear definitions for these associated concepts. One of the aims of this book is to bring clarity to a part of the law riddled with uncertainty.

1. Three Different Conceptions of Loss in English Contract Law So far two different sources of ambiguity that arise with respect to the meaning of ‘loss’ have been identified. Both sources of ambiguity apply specifically in the contractual context as well. The first is the extent to which loss encompasses the ‘injury’ entailed simply through being deprived of the contractual performance promised, irrespective of the consequences that may follow. Although it is becoming more widely accepted that a contracting party’s right to performance may provide the

38 See ibid 40, citing Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL) and Boardman v Phipps [1967] 2 AC 46 (HL). 39 Tettenborn (n 24).

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basis for a substantial money award,40 to promote the conceptual clarity the law presently lacks, an infringement of this right should not be described as ‘loss’.41 Nevertheless, even focusing attention purely on consequential harm, there is a second source of ambiguity regarding the meaning of loss in the contractual context: the extent to which the non-pecuniary consequences of breach should be included within the meaning of this term. Traditionally, recovery for non-pecuniary loss caused by contractual breach has been viewed as exceptional.42 In particular, recovery for such loss was limited to ‘physical injury’,43 ‘substantial physical inconvenience’,44 and ‘damage to reputation’.45 In addition to these possibilities, the other main kind of nonpecuniary consequence that can arise from breach is deterioration in the innocent party’s psychological well-being. In Watts v Morrow, Bingham LJ observed that ‘distress, frustration, anxiety, displeasure, vexation, tension or aggravation’ are among the various possible kinds of psychological harm that may be caused by contractual breach.46 Although English law traditionally limited recovery for such consequences, these limits are increasingly being relaxed.47 All of this demonstrates that there are at least three distinct ways in which the concept of ‘loss’ could be understood in the context of discussions about contractual money awards.48 Under the first and most restrictive definition, ‘loss’ would

40 See, in particular, Giedo Van der Garde BV & anr v Force India Formula One Team Ltd (formerly Spyker F1 Team Ltd (England) [2010] EWHC 2373 (QB). 41 Contra E McKendrick, ‘The Common Law at Work: The Saga of Alfred McAlpine Construction Ltd v Panatown Ltd’ (2003) 3 Oxford University Commonwealth Law Journal 145. 42 For example, see Hobbs v London & South Western Railway Co (1875) LR 10 QB 111. Also see Lord Haldane’s statement in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL), 689 that Parke B’s famous statement of principle in Robinson v Harman (1848) 1 Exch 850 has been understood as articulating the appropriate measure of ‘pecuniary loss’ for an award of damages for breach of contract. Lord Haldane’s comments were endorsed in Ruxley (n 12), 366 (Lord Lloyd) and The Golden Victory [2007] UKHL 12, [2007] 2 AC 353 [9] (Lord Bingham). 43 Grant v Australian Knitting Mills Ltd [1936] AC 85 (PC). Note that injury is not being used here in the sense defined above, but to mean actual ‘damage’ (ie harm or loss in the sense in which those terms are defined below). 44 Hobbs (n 42). 45 Withers v General Theatre Corp Ltd [1933] 2 KB 536 (CA); Malik v BCCI [1998] AC 20 (HL). 46 See Watts v Morrow [1991] 1 WLR 1421 (CA), 1445. 47 After Sir Thomas Bingham MR restated the law in Watts, further developments occurred in Ruxley (n 12); Farley v Skinner [2001] UKHL 49, [2002] 2 AC 73; Johnson v Gore Wood & Co [2002] 2 AC 1 (HL); and Johnson v Unisys Ltd [2003] 1 AC 518. For a recent classification of the various different kinds of non-pecuniary loss potentially available to a claimant in the context of a ruined holiday, see Milner v Carnival Plc [2010] EWCA Civ 389. For further discussion, see Chapter 1. 48 At this juncture, it is timely to note Dr Rush’s thorough discussion of the meaning of ‘loss’ in the unjust enrichment context, drawing a threefold distinction between ‘loss meaning “detriment” (pecuniary and non-pecuniary), loss meaning “deprivation” (of a right) and loss meaning “opportunity forgone”’ (see M Rush, The Defence of Passing On (Hart Publishing, 2009) 93–107). According to Rush, it is only pecuniary detriment that should properly be considered ‘loss’ for the purposes of a claim in unjust enrichment. Although this tripartite classification is illuminating, this book does not endorse it for use in the contractual context because the third sense of ‘loss’ Rush identifies can also be incorporated within a broader conception of the first meaning of loss (meaning factual detriment).

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be limited to proven financial harm, perhaps with some narrowly defined exceptions, allowing recovery for certain specific kinds of non-pecuniary consequences of breach. As already explained, this is how the term was traditionally understood, but the range of non-pecuniary consequences for which compensation may now be awarded following a breach of contract has expanded to the point that this conception of ‘loss’ is no longer tenable. Under a second, less restrictive definition of ‘loss’, the expression includes anything that makes the claimant factually worse off, in either a pecuniary or nonpecuniary sense. In addition to the three specific categories of non-pecuniary loss historically recognised, this definition would include any form of ‘mental distress’ or ‘injury to feelings’, as well as any other possible non-pecuniary consequence of breach imaginable. This is the understanding of ‘loss’ favoured here. It is also increasingly being recognised as correct in the courts, though the extent to which recovery for all kinds of non-pecuniary detriment should be allowed remains open. The final and most expansive possible definition of loss is one in which a breach of contract is itself considered to be a ‘loss’. On this definition, simply not receiving the performance contracted for constitutes ‘loss’. This was the understanding adopted by Lord Nicholls in Attorney-General v Blake in stating that ‘On breach the innocent party suffers a loss. He fails to obtain the benefit promised by the other party to the contract’.49 This definition is not supported here, but this is not because the right to performance is considered unworthy of protection. To the contrary, to the extent that it is both reasonable and possible in the circumstances, an innocent party’s entitlement to performance should invariably be given effect through a monetary substitute for performance. Rather, this overly broad definition of ‘loss’ is rejected because, in being divorced from the consequences that may (or may not) flow from a breach, it is artificial and can lead to confusion and mistakes, as was explained above.

2. The Best Interpretations of ‘Loss’, ‘Damage’, ‘Injury’ and ‘Harm’ The distinction between ‘loss’ and ‘damage’ proposed by Tettenborn was queried earlier. But the principal concern expressed there was Tettenborn’s over-inclusive definition of damage rather than his preferred definition of loss. Although Tettenborn seems to think that loss is a concept that focuses on the pecuniary consequences of breach,50 he also notes that to ‘say someone has suffered a loss, we instinctively contemplate her being worse off in some factual, verifiable sense’.51 This is also the definition of loss supported by Lord Hoffmann in Rothwell v Chemical & Insulating Co Ltd.52 There, his Lordship treated loss and damage as synonymous, stating that loss or damage ‘in this sense is an abstract concept of

49 50 51 52

Blake (n 14) 282. See the discussion in the text at n 39. Tettenborn (n 24) 443. Rothwell v Chemical & Insulating Co Ltd [2007] UKHL 39, [2008] 1 AC 281.

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being worse off, physically or economically’.53 Professor Stevens also favours this definition of loss because it makes clear the fundamental distinction between damage and injury.54 For Stevens, losses and gains ‘are questions of fact: is the claimant factually worse off or the defendant factually better off as a result of the wrong?’55 For reasons more in keeping with Stevens’s claims than Tettenborn’s, this is also the definition of loss supported in this book. As for the word ‘damage’, it is suggested that this expression is a dangerous source of ambiguity in the law because of its natural association with ‘damages’. As explained more fully below, the meaning of ‘damages’ is contentious. Traditionally, awards of ‘damages’ have been associated with the goal of compensating for factual loss caused by common law wrongdoing, but the better view is that the meaning is wider than this. It seems likely that one reason why awarding ‘damages’ has been understood as synonymous with making good factual detriment caused by breach is that ‘damage’ is often (correctly) contrasted with ‘injury’ so that both ‘damage’ and ‘damages’ are identified with deteriorations in a party’s factual position. Given this, it might be desirable for references to ‘damage’ to be eliminated from this area of legal discourse. But this may prove impossible, so a definition of ‘damage’ probably remains necessary. Therefore, to the extent the term remains in circulation, its meaning should be restricted to be synonymous with ‘loss’ since this seems to be its most common understanding and also maintains its distinctiveness from the concept of ‘injury’. In terms of the relationship between ‘loss’ and other key associated terms, this book proposes the following definitions. First, in accordance with Lord Hoffmann’s speech in Rothwell,56 ‘loss’ is a term that should be used to refer only to the detrimental factual consequences arising from breach. Thus, a person suffers loss only when they are made factually worse off in either a pecuniary or nonpecuniary sense, while merely failing to receive the performance contracted for without any identifiable detrimental consequences does not constitute ‘loss’. Secondly, ‘loss’ should be contrasted with the concept of ‘injury’, which denotes the mere breach of a duty. Thirdly, although where possible there is good reason to avoid using the term ‘damage’ because of its natural association with ‘damages’, this may not occur. To this extent, ‘damage’ should be used in a restricted sense, which is synonymous with ‘loss’. Finally, the meaning of ‘harm’ should be defined. In terms of the basic distinction between ‘damage’ and ‘injury’, ‘harm’ appears closer to the former since ‘to harm’ is normally understood to involve causing pecuniary or non-pecuniary detriment to a person or group of people. But even if one’s focus is limited to a single individual, ‘harm’ could be understood more broadly to also encompass the ‘injury’ entailed by merely infringing a right, as recognised by Feinberg in 53 54 55 56

ibid [7]. R Stevens, Torts and Rights (Oxford University Press, 2007). ibid 61. Rothwell (n 52) [7].

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his discussion of the concept.57 Moreover, there may be an advantage in having a single expression broad enough to encompass both wrongdoing alone, and the possible consequences that may flow from it. But adopting this definition is not recommended. It is preferable to have a clear definition of ‘harm’ that fits with ordinary people’s understanding of the concept. For this reason, ‘harm’, like ‘loss’ and ‘damage’, should be limited to denoting only factual deteriorations in the position of a person or group of people.

3. Explaining the Proposed Interpretation of Loss The definition of loss advanced here includes anything that makes a party factually worse off in either a pecuniary or non-pecuniary sense. In addition to the three specific categories of non-pecuniary loss historically recognised, this definition of loss includes any form of ‘mental distress’ or ‘injury to feelings’. However, the list of the various forms of psychiatric damage given by Lord Bingham in Watts v Morrow does not exhaust the range of possible forms of ‘mental distress’. There are also additional, more particular kinds of distress that a contracting party may suffer in particular cases. The non-pecuniary loss allegedly suffered by the claimant in Johnson v Gore Wood & Co provides a good illustration of such additional possibilities.58 In the context of a claim against his solicitors for negligence and breach of contract, the claimant alleged that in addition to causing him general mental distress and anxiety, the protracted litigation process to which he had been subjected in consequence of the defendant’s breach caused him to suffer more specific non-pecuniary loss in the form of ‘extreme financial embarrassment … [and] deterioration in his family relationships’.59 It is possible to include harms of this kind within the category of ‘mental distress’. Alternatively, these harms could be classified as distinct from the general anxiety, vexation or frustration that may accompany some breaches. Regardless of the particular classification adopted, breaking down the nebulous concept of ‘non-pecuniary loss’ into more specific categories would be desirable because it will aid the development of clear and consistent legal principles. But this project lies beyond the scope of this book. For present purposes, it is only necessary to appreciate that the various forms of damage identified above fall within the broad category of consequential non-pecuniary loss. The extent to which English law should award compensation for such losses is a controversial question, which unfortunately cannot be pursued further here. Three significant final observations must be made. First, the definition of loss proposed here could (and should) correspond to the definition of loss that is appropriate in the law of torts.60 Secondly, it is important to appreciate that this 57 58 59 60

See text at n 27 and following. [2000] UKHL 65 (n 47). ibid 37. See Stevens (n 54).

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definition of loss includes not only the incidental financial losses caused by breach, but also the profits (or the chance to profit) which the innocent party has been deprived of as a result of breach, provided these lost profits (or the lost opportunity to make them) are proved on the balance of probabilities. The failure to obtain these profits means that the innocent party is not in as good a factual position as it would have occupied had the breach not occurred. This is a financial loss relative to the position that party expected to occupy if the contract had been performed as promised,61 which is the appropriate baseline for quantifying a compensatory money award for breach of contract.62 Thirdly, there is an additional ambiguity in the phrase ‘non-pecuniary loss’ which requires further explanation. It is sometimes said that damages for breach of contract are available for ‘disappointment’. However, it is unclear whether references to ‘disappointment’ in this context are meant only to connote the subjective displeasure or dissatisfaction that is in fact suffered by the innocent party in consequence of breach, or if such awards are actually principally intended to substitute for the objective deficiency in the breaching party’s performance. Only the former kind of award can truly be said to be ‘loss-based’ since only in this situation has it been proven that breach has put the innocent party into a worse factual position than had the contract been performed. It is not always clear which of these two possible meanings of ‘disappointment’ judges employ when awarding compensation under this head. For example, in Panatown Lord Millett described the award in Ruxley as one for ‘disappointed expectations’, suggesting that his Lordship understood the Ruxley award as substituting for the deficiency in the builder’s performance. By contrast, in Farley v Skinner (and certain other cases) ‘damages’ have been awarded for ‘disappointment and distress’. Coupling references to ‘disappointment’ with references to ‘distress’ suggests that such awards are really for factual loss suffered by the innocent party in consequence of breach, rather than being for an objective deficiency in performance. There is potentially a further complication here as well. Even assuming that a reference to ‘disappointment’ is a reference to actual consequential displeasure or dissatisfaction, this is arguably not non-pecuniary loss of the same kind as physical injury, such as, say, a lost limb. In the latter case the victim suffers loss that will stay with them for the rest of their life, whereas in the former case the damage will generally fade with the passing of time. In response, it may be observed that permanence is not the decisive factor in this context since a broken arm, which is clearly a compensable form of physical injury, will heal too. Psychiatric damage and substantial physical inconvenience are also harms that may fade with the passing of time. All this suggests that perhaps objections to awarding damages for ‘disappointment’ are in reality based upon a perception that this harm is not sufficiently 61 See J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundation of the Law of Unjust Enrichment (Oxford University Press, 2009) 211. 62 This accords with Parke B’s famous dictum in Robinson v Harman (n 42) 855.

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serious to warrant compensation. There certainly does seem to be a legitimate distinction between a medically recognised illness and the subjective displeasure one experiences in not getting what was promised. Even harms like anxiety, vexation and aggravation, which are less serious than actual psychiatric injury, seem to be more significant than mere ‘disappointment’, which might be viewed as simply one of life’s many vicissitudes. Thus, even if one adopts the compensatory understanding of ‘disappointment’ awards, it remains an open question whether or not contract law should award substantial compensation for it. On the basis of all this it may be desirable to draw a distinction between two different kinds of non-pecuniary loss. One category would include harms to physical well-being such as harm to bodily integrity and substantial physical inconvenience. Another category would include any form of harm to psychological well-being. But this classification may be insufficient to cover the field of relevant non-pecuniary losses. For instance, damage to reputation is not a kind of physical injury, but it is also distinct from psychiatric damage. Moreover, ‘disappointment’ in the sense of dissatisfaction or displeasure clearly does not fall within the first category of harm to physical well-being, but it is also not clear that it is properly regarded as harm to psychological well-being. To compensate for subjective dissatisfaction following breach might have the effect of degrading more serious forms of ‘mental distress’ that may follow breach. Additionally, it is also possible that even when courts claim to award damages for ‘disappointment’, their real motivation actually may be to substitute for the deficiency in the breaching party’s performance.63

IV. Other Sources of Terminological Uncertainty This section seeks to clarify various other important sources of terminological ambiguity in the law governing contractual money awards. The discussion begins with the meaning of ‘damages’. It is argued that the best understanding of ‘damages’ is ‘a money award for a wrong’. Next, the meaning of compensation is considered. It is suggested that although the motivation for suggesting alternative conceptions of compensation is understandable, this term should be reserved for awards that are concerned to make good factual detriment consequent on breach. Thirdly, the unstable meaning of legal ‘remedy’ is noted. It is suggested that a remedy should be understood as a right arising from a judicial command responding to an actual or threatened infringement of a substantive right. Finally, an appropriate terminology for money awards that substitute for performance is proposed. 63 For example, it is possible that the ‘loss of amenity’ award in Ruxley (n 12) is best explained as an attempt to substitute for a deficiency in performance. Alternatively, a compensatory analysis of this award (for the innocent party’s lost enjoyment of the benefits he hoped to obtain from the specific swimming pool contracted for) is also possible. For further discussion, see Chapter 7 of this book and D Winterton, ‘Money Awards Substituting for Performance’ [2012] Lloyd’s Maritime and Commercial Law Quarterly 446, 468.

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A. The Meaning of ‘Damages’ The preceding section sought to expose the ambiguity, and clarify the meaning, of the key concepts of ‘loss’, ‘harm’, ‘damage’ and ‘injury’ in the contractual context. But such ambiguity is only part of the reason for the law’s present uncertainty. The ambiguous meaning of other important terms, in particular ‘damages’ and ‘compensation’, also contributes to this problem. The remainder of this chapter seeks to expose this uncertainty and suggest clear and stable definitions for both these terms. The discussion begins with the meaning of ‘damages’ along with the concept of a legal ‘remedy’. This section first outlines the conventional understanding of ‘damages’ according to which it is necessarily concerned with making good or repairing ‘loss’. It then challenges this understanding, suggesting that the best available definition for damages is ‘a money award for a wrong’.

1. The Conventional Understanding of ‘Damages’ An award of ‘damages’ is usually understood to be a sum of money which aims to make good or repair ‘loss’ the innocent party has suffered following the commission of a common law wrong. It is true that non-reparative awards are sometimes described as ‘damages’, but such awards are viewed as exceptional, and typically presented in juxtaposition to the norm of an award concerned with making good factual detriment caused by breach. A typical example of the conventional understanding of ‘damages’ is the definition employed by McGregor in all but the two most recent editions of his comprehensive treatise on the subject.64 Up until the sixteenth edition, McGregor adopted a definition that focused principally on the goal of compensation, defining damages as: ‘in the vast majority of cases … the pecuniary compensation, obtainable by success in an action, for a wrong which is either a tort or a breach of contract’.65 At this juncture, it is important to note that the meaning of ‘compensation’ is itself highly ambiguous. Despite this, later passages of his book make it clear that McGregor understands compensation as necessarily concerned with making good or repairing ‘loss’, as defined above.66 Thus, in addition to demonstrating the interrelated meaning of ‘damages’ and ‘compensation’, McGregor’s previous definition makes it clear that, for him, the aim of awarding ‘damages’ in all but exceptional circumstances is to make good the factual detriment suffered by the victim of a common law wrong. This understanding is also evident in the case law. In his forceful dissenting speech in Attorney-General v Blake, for instance, Lord Hobhouse observed that the Crown was not claiming damages in that case

64 McGregor (n 23) [1-001]. In the two most recent editions of his book, McGregor explicitly recognises the inadequacy of his previous attempts to define ‘damages’, and reluctantly abandons the ‘search for a clear-cut, comprehensive definition’ of the term. 65 ibid. 66 ibid [1-021].

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because it did not assert that it had suffered any financial loss on account of breach.67

2. A Superior Definition McGregor’s definition of damages contains two controversial restrictions. The first is that damages are restricted to money awards that respond to common law wrongdoing. A compelling argument can be made that there is no real basis in principle or authority for limiting the availability of damages to common law claims.68 However, this contentious issue must be put to one side for present purposes since this book is concerned only to clarify the meaning of damages as it applies to claims for breach of contract, which are generally the exclusive province of the common law.69 The second controversial restriction within McGregor’s definition is his implicit suggestion that a damages award is necessarily concerned with making good factual detriment consequent on breach. In contrast to the former restriction, this limit is highly significant in the context of this book. It seems likely that this view has its roots in the words used by Sergeant Joseph Sayer in the first English textbook on the subject.70 There, Sayer stated that ‘damages are a pecuniary recompense for an injury’, but as Professor Edelman has noted, Sayer clearly did not intend that ‘recompense’ be read as synonymous with ‘compensation for loss’ since one of the examples Sayer provided of an early successful claim for ‘damages’ was an action for account in which damages were ‘recoverable for the profit which has been made or might have been made of the money’.71 Thus, as a matter of history it seems clear that damages awards were not restricted to awards concerned with making good loss. It is illuminating that in the next English book on the subject, which in its current form continues to be considered the leading text today,72 Mayne avoided reference to recompense or compensation altogether, defining damages as ‘the pecuniary satisfaction which a plaintiff may obtain by success in an action’.73 Although this definition was almost correct, by including successful claims for the enforcement of primary rights to money it was over-inclusive in an important respect. Claims for the enforcement of a primary

67 Blake (n 14) 298. Note, however, that while his Lordship adopted a narrow definition of damages, he did endorse a broad definition of compensation, according to which it includes awards that do not respond to ‘some identified physical or monetary loss to the plaintiff … [but which actually or effectively respond to] a compulsory purchase of the plaintiff ’s right or refusal’, 298. This ambiguity in the meaning of ‘compensation’ is discussed further below. 68 See J Edelman, ‘Gain-Based Damages and Compensation’ in A Burrows and Lord Rodger of Earlsferry (eds), Mapping the Law: Essays in Memory of Peter Birks (Oxford University Press, 2006) 144. 69 The obvious exception to this is of course a claim for damage in lieu of specific performance. The availability of such awards demonstrates well the possibility of equitable ‘damages’. 70 J Sayer, The Law of Damages (1760). 71 Edelman (n 68) 143 (emphasis in original). 72 McGregor on Damages (n 23). 73 J Mayne, A Treatise on the Law of Damages (1856) 1.

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right to money such as those for the restitution of value transferred unjustly or, perhaps less controversially, for a sum of money owing under a contract—the action for an agreed sum—must be distinguished from claims for the enforcement of a secondary right. Secondary rights are generated by the infringement of primary rights and it is important to distinguish such awards from those that, at least in a justificatory sense, are not based on the occurrence of wrongdoing.74 Thus, as Edelman observes, Mayne’s definition would have been correct had the reference to ‘action’ been qualified by the words ‘for wrongdoing’. Perhaps in an effort to address this deficiency, after taking over from Mayne as editor of his book, McGregor devised the new definition of damages quoted above. However, as already mentioned, in the process of remedying the small defect in Mayne’s formulation, McGregor introduced two new restrictions of his own. First, he limited the wrongs to which damages respond to those recognised by the common law. Secondly, and, more significantly for present purposes, he replaced the word ‘satisfaction’ with ‘compensation’. Given that compensation is normally associated with the goal of making good loss, this falsely created the impression that damages are only awarded to repair loss. The necessary association between damages and compensation for loss is unsustainable. This commonly made but false claim is often accompanied by a reference to Lord Blackburn’s famous dictum in Livingstone v Rawyards Coal Co.75 McGregor, for example, proposes this statement as the starting point in determining the measure of damages to be awarded for a common law wrong. In the Livingstone case, Lord Blackburn said: [W]here any injury is to be compensated by damages … you should as nearly as possible get at that sum of money that will put the party who has been injured, or has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.76

Yet, in that very case all of the Law Lords recognised that damages awards may sometimes be non-compensatory.77 Moreover, even McGregor, one of the strongest proponents of the traditional view that damages are necessarily concerned with compensating for loss, admits that in relation to awards traditionally viewed as compensatory, ‘there are certain circumstances where the claimant will recover more than his loss as defined by Lord Blackburn’s general rule’.78 In truth, Lord

74 See Birks (n 26). This qualification is important because the breach of a primary duty is often, though not always, a necessary condition for obtaining a court order enforcing a primary right, even if the breach itself plays no part in justifying the rights which the court order seeks to uphold. Thus, for example, it is usually the breach of the duty to pay a sum of money that creates a need for the innocent party to seek a court order for the enforcement of this right even if the breach itself plays no part in justifying such an order. 75 Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 (HL). 76 ibid 39. 77 Livingstone (n 75) 31 (Lord Cairns LC), 34 (Lord Hatherley), 39 (Lord Blackburn). See also J Edelman, Gain-based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing, 2002) 8. 78 McGregor (n 23) [1-025].

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Blackburn’s dictum is better understood as simply advocating the proposition that the aim of a money award responding to wrongdoing is to achieve the next best outcome to the primary right having been conformed to in the first place.79 Often this requires the court to make good loss caused by breach, but sometimes a different response is more appropriate. All of this makes it unsurprising that in the latest edition of his work, McGregor concedes that due to an increasing number of exceptions and qualifications, ‘a clear-cut definition [of damages] is no longer feasible’.80 Nevertheless, in substitution for an all-inclusive definition, McGregor still adheres to the priority of compensation, stating that other than in exceptional circumstances, the object of an award of damages is ‘to give the claimant compensation for the damage, loss or injury he has suffered’.81 The reference to ‘injury’ here is potentially significant given the distinction between ‘damage’ and ‘injury’ outlined earlier. But as is often the case in this area of the law it is not clear precisely what McGregor meant by invoking this term. In contrast to McGregor’s proposed definition, it is submitted that the best available definition of damages is ‘a money award for a wrong’.82

B. The Meaning of ‘Compensation’ Having outlined the uncertain meaning of ‘damages’ in English law, and proposed a preferable definition, this section explains how a true understanding of the nature of contractual money awards also has been inhibited by confusion regarding the meaning of ‘compensation’. The conventional understanding of compensation views it as necessarily concerned with making good ‘loss’, but alternative conceptions of compensation have been proposed. Although the motivations for these suggestions are understandable, this book endorses the conventional understanding of compensation. Consistently using this definition will help promote the clarity needed in this area of the law, helping to minimise misunderstandings and confusion.

1. The Orthodox Understanding It has been said that ‘compensation seeks to nullify the loss of the claimant’.83 This appears to reflect how the term is generally understood in the legal context. Just like an award of ‘damages’, an award of ‘compensation’ is typically understood

79 This point is made by Professor Stevens in ‘Rights and Other Things’ in D Nolan and A Robertson (eds), Rights and Private Law (Hart Publishing, 2012) 115, 136. 80 McGregor (n 23) [1-001]. 81 ibid [1-021]. 82 It is recognised that the legitimacy of labelling money awards for equitable wrongdoing as ‘damages’ has not been proven here. However, as noted above, the present concern is simply the meaning of ‘damages’ in English contract law, but a compelling case for the broader proposition can be made. See Edelman (n 77) 5. 83 F Giglio, The Foundations of Restitution for Wrongs (Hart Publishing, 2007) 34.

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as money provided to make good, or repair, ‘loss’. But the meaning of ‘loss’ is ambiguous, so there is also considerable ambiguity regarding the meaning of compensation in English law. Exceptional cases aside, it appears that when judges and commentators speak of ‘compensation for loss’ they normally use loss in the restricted sense advocated above so that compensatory awards are typically viewed as concerned to make good deteriorations in a party’s factual position. In the contractual context such deteriorations are usually, but not always, pecuniary in nature. Thus, without more, a breach of contract is not conventionally understood as compensable ‘loss’. However, as demonstrated above, ‘loss’ is not always used in this restricted sense. Thus, alternative conceptions of compensation do exist, which either adopt a broader conception of loss, or abandon the strict association between compensation and loss altogether. The conventional understanding of ‘compensation’ therefore raises similar ambiguities to those considered in the preceding discussion of the meaning of ‘damages’. But for reasons explained below, the scope for disagreement over the meaning of compensation is potentially even wider than that which exists regarding the meaning of damages. Despite this, the uncertain meaning of compensation is not always properly acknowledged. Even Professor Edelman, who recognises the inadequacy of the conventional understanding of ‘damages’, has been guilty of using compensation ambiguously, speaking of ‘rights-based compensation’ to describe an award for ‘the value of the right violated’.84 In reality, such awards are better understood as substitutionary.

2. Alternative Judicial Conceptions of ‘Compensation’ It has been suggested that compensatory awards are normally understood as concerned only with making good deteriorations in a party’s factual position. But the term is sometimes used in a manner that is inconsistent with this understanding. Given the difficulty involved in explaining the award in Wrotham Park Estate Co v Parkside Homes Ltd as one responding to ‘loss’,85 a possible example of this is Sir Thomas Bingham MR’s statement in Jaggard v Sawyer that ‘I cannot … accept that Brightman J’s assessment of damages in Wrotham Park was based on other than compensatory principles’.86 However, despite its generally acknowledged artificiality, some commentators do support a loss-based explanation of Wrotham Park,87 meaning that Sir Thomas Bingham MR’s reference to ‘compensation’ here might

84

Edelman (n 68) 141, 153. Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798 (Ch). For discussion of the difficulties of a loss-based analysis of Wrotham Park, see A Burrows, ‘Are “Damages on the Wrotham Park Basis” Compensatory, Restitutionary or Neither?’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 165. 86 Jaggard v Sawyer [1995] 1 WLR 269 (CA) 281. 87 See, for example, R Sharpe and S Waddams, ‘Compensation for Lost Opportunity to Bargain’ (1982) 2 OJLS 290 and Edelman (n 61) 211. 85

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conceivably be viewed as consistent with the conventional understanding of the expression. A clearer example of a reference to compensation divorced from ‘loss’ in the sense of factual detriment is Lord Hobhouse’s reference in Attorney-General v Blake to the award provided to the disappointed homeowner in Ruxley.88 Although referring to Ruxley as a case concerned with ‘compensation’, his Lordship explained that the award was not compensatory in the sense of ‘relating to loss as if there has to be some identified physical or monetary loss to a plaintiff ’ but was rather a ‘substitute for performance’.89 Even more obviously divorced from the conventional understanding of ‘compensation’ was Chadwick LJ’s reference to the term in—World Wide Fund for Nature v World Wide Wrestling Federation (‘the WWF case’).90 There, his Lordship said that: To label an award of damages on the Wrotham Park basis as a ‘compensatory’ remedy and an order for an account of profits as a gains-based remedy does not assist an understanding of the principles on which the court acts. The two remedies should, I think, each be seen as a flexible response to the need to compensate the claimant for the wrong done to him.91

This use of ‘compensation’ is far removed from the orthodox understanding outlined above. There is no legitimate way to characterise compensation as being solely concerned with making good ‘loss’ in this statement since an account of profits is expressly a measure of the defendant’s gain. To the extent that a fundamental characteristic of compensation can be identified in Chadwick LJ’s statement, it appears to be simply that it constitutes a response to the commission of a wrong rather than having a particular concern to make good factual detriment caused by that wrong. Chadwick LJ’s comments in WWF therefore constitute a fundamental challenge to the orthodox understanding of compensation. On this approach, the purpose of awarding compensation is broader than simply making good loss, on any possible definition of the term, because it also includes other potential responses to wrongdoing, such as profit stripping. This raises the question of whether the conventional definition of compensation is satisfactory. In answering this question it is useful to consider some alternative conceptions of compensation that have been proposed by academic commentators, as well as the reasons motivating these suggestions.

88 Ruxley (n 12). There, Ruxley agreed to build a pool of a specific depth on Mr Forsyth’s property. The pool was not of the required depth and Mr Forsyth claimed the cost of rebuilding the pool to make it comply with the contractual specifications. Overturning the Court of Appeal, the House of Lords refused this claim but did not disturb the trial judge’s award of £2,500 for ‘loss of amenity’. 89 Blake (n 14) 298. 90 WWF—World Wide Fund for Nature v World Wide Wrestling Federation [2007] EWCA Civ 286 (CA). 91 ibid [59]. For academic criticism of this decision, see R Cunnington, ‘Changing Conceptions of Compensation’ (2007) 66 CLJ 507.

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3. Alternative Academic Conceptions of ‘Compensation’ One frequently noted difficulty with the view that the purpose of awarding compensation is only to make good or repair ‘loss’ is that a money award will rarely achieve this objective precisely. Even when responding to purely financial losses, awards of compensation often fail completely to rectify the claimant’s loss since losses that are ‘too remote’, or not proved on the balance of probabilities, cannot be recovered. Sherwin focuses on this deficiency in compensatory awards in her critique of the orthodox understanding of compensation, arguing that despite general agreement that the goal of compensatory remedies is to restore victims to their rightful position, in practice ‘compensatory remedies depart in a number of ways from the assumed goal of reconstructing the claimant’s rightful position’.92 In an effort to explain the numerous discrepancies she identifies, Sherwin proposes an alternative theory of compensation in which ‘the object of compensatory remedies is not simply to adjust the absolute position of the claimant, but also to adjust an outcome in which the relevant positions of the claimant and the defendant are deemed to be unfair’.93 On this view, the point of compensation is not simply to undo the negative consequences the wrong has caused, but to ‘counterbalance’ a wrongful event. Sherwin draws support for this view from the Oxford English Dictionary definition of compensation, which states that ‘to compensate’ means not only to ‘make amends for’, but also to ‘counterbalance’.94 In suggesting that a precise equivalence between compensation awarded and loss suffered should be unnecessary, Sherwin also points to the fact that the word ‘compensate’ is derived from the Latin word compensare, meaning ‘to weigh one thing against another’. A second, more fundamental, problem with the conventional understanding of compensation arises if one accepts that money and non-pecuniary harm are incommensurable. Incommensurability is a term used in various contexts, but here refers simply to the debate in ethics about the possibility of equating different kinds of value.95 Professor Radin focuses on this problem in her critique of a purely loss-based conception of compensation in the law of torts,96 arguing that, contrary to the conventional model, compensation is actually a ‘contested concept’ with two core conceptions: a commodified conception under which any harm to a person can be equated with a dollar value and a non-commodified conception under which certain non-pecuniary harm cannot be so equated.97 According to Radin, one’s preference for one or other of these conceptions of compensation essentially comes down to one’s acceptance or rejection of the existence

92

E Sherwin, ‘Compensation and Revenge’ (2003) 40 San Diego Law Review 1387, 1388. ibid 1389 (emphasis added). 94 ibid, also ‘amends’ and the ‘rendering of an equivalent’. JA Simpson and ESC Weiner (eds), The Oxford English Dictionary, 2nd edn (Oxford University Press, 1989) 601. 95 For further discussion, see Radin (n 18) 62–64. 96 ibid. 97 ibid 67–69. 93

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of incommensurability. Significantly, Radin also claims that ‘understanding the relevance of commensurability to the debate about compensation should [also] shed light on the general problem of how to conceive of corrective justice’.98 If one rejects the notion that non-pecuniary loss can be measured in monetary terms, the payment of money is simply incapable of restoring people to the position they occupied prior to suffering such loss. This means that if corrective justice is understood to be about the ‘rectification’ of wrongful losses, this goal is unattainable whenever nonpecuniary loss is suffered. Accordingly, Radin suggests an alternative conception of corrective justice, in which ‘compensation is understood not as a commensurable quid pro quo for harm, but rather as a form of redress: affirming public respect for the existence of rights and public recognition of the transgressor’s fault with regard to disrespecting rights’.99 On Radin’s alternative conception of compensation, its primary purpose is to redress the occurrence of a wrong rather than to repair ‘loss’ resulting from that wrong. This, it will be recalled, is essentially how Chadwick LJ used the expression in the WWF case. Obviously one significant way to redress a wrong is to repair the harm resulting from it to the extent that this is possible in the circumstances. However, although recognised as an important objective, on Radin’s conception of compensation, making good loss should be seen as secondary to, and subsumed by, the primary goal of redressing the occurrence of the wrong via a public affirmation of respect for the right transgressed. In view of the above discussion, an interesting alternative definition of compensation suggested in a doctrinal textbook on remedies is ‘the reparation of a wrong through the delivery of an equivalent’.100 This definition appears to allude to both the ambiguities just outlined. First, it seems to make the wrong itself, rather than its consequences, the subject of reparation, though there is some ambiguity here since it could either be the original right, or the consequences of its infringement, that call for replacement. Secondly, using the word ‘equivalent’ refers to another uncertainty. If one assumes the conventional understanding of compensation is correct, there remains the question of whether the amount awarded is meant to correspond exactly with what was lost or need only be a substitute for it. This refers both to Radin’s incommensurability concern and Sherwin’s worry regarding the failure of compensatory awards to accurately achieve their supposed aim of making good loss, even leaving questions of incommensurability aside.

4. The Proposed Definition The preceding discussion demonstrates two important points. The first is that ‘compensation’ is not an expression used consistently by judges or commentators. On its orthodox understanding, compensation is concerned solely with making 98

ibid 57. ibid. 100 M Tilbury, M Noone and B Kercher, Remedies: Commentary and Materials, 5th edn (Lawbook, 2011) [3.05]. 99

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good or repairing factual detriment caused by civil wrongdoing. But the expression is sometimes used in a broader way to encompass other responses to wrongdoing, meaning that its meaning, like that of ‘damages’ and ‘loss’, is unsettled. This situation is problematic. A stable definition of compensation, at least as used by judges, is desirable. This leads to the second goal of the preceding discussion, which was to introduce some alternative conceptions of compensation, and identify the reasons motivating their proposal. In the two main alternatives presented, Sherwin and Radin both suggest that the conventional understanding of compensation should be abandoned because a sum of money is normally not capable, either in practice or in principle, of accurately making good the ‘loss’ caused by civil wrongdoing. Despite these views, this book endorses the conventional understanding of compensation, which understands it as concerned solely with making good factual detriments caused by breach. One reason for this is that neither of the respective deficiencies in the conventional understanding of compensation identified by Sherwin and Radin actually constitutes the reason for the inconsistent use of the term by judges in the examples outlined in this section. The motivation behind comments like those of Chadwick LJ in WWF, or Lord Hobhouse in Ruxley, is not that ‘compensatory’ awards are incapable of accurately making good an injured party’s loss, but that there is a perceived need to protect, vindicate or uphold such a party’s primary right to performance, irrespective of the factual detriment caused by the infringement of this right. This begs the question: why support the conventional understanding of compensation rather than a model in which this vindicatory impulse might be more readily accommodated? The reason is that adhering to the orthodox understanding of compensation will help to produce conceptual clarity. Upholding or vindicating primary rights through a money award should not be described as ‘compensation’ because such awards are normatively distinct from awards which aim to make good loss. Conceptual coherence demands that these awards have a different label. The question of what this label should be is important, but what is more important is simply that a separate label is chosen, and that its meaning is clear. Significantly, the reason advanced for endorsing the orthodox understanding of compensation here is thus different from the reason usually invoked to support this conception. According to most commentators, the conventional understanding of compensation should be supported because the purpose of any money award provided following civil wrongdoing is, within the confines permitted by the various doctrines that limit loss-based recovery, simply to make good ‘loss’ caused by breach. But this view no longer appears tenable, at least within the law of contract. Many now argue that substantial money awards are available to substitute for performance, or a contracting party’s right to performance. Given this, the orthodox, purely loss-based conception of compensation is supported here because maintaining this understanding helps delineate and reinforce the important distinction between substitutionary and compensatory money awards.

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C. The Concept of a Legal Remedy Conventionally, any money award provided following a successful action for breach of contract is described as a legal ‘remedy’. Birks demonstrated that the concept of a legal remedy is unstable, being capable of a variety of different meanings.101 In particular, Birks identified five different ways in which the word ‘remedy’ is employed in legal discourse.102 It is therefore useful to explain precisely how the term is used in this book. This is also the way it is suggested that the term ‘remedy’ should be used more widely within the law, though the path to instantiating such a change has many obstacles. In what follows, a clear definition of the concept of a legal remedy is outlined and the relationship between legal rights and remedies explained. The discussion begins with a brief explanation of the relevant understanding of legal rights.

1. Legal Rights Hohfeld distinguished four different legal concepts that have been labelled ‘rights’ in legal discourse, namely: claim-right, privilege, power and immunity.103 In addition, Hohfeld identified the correlative of each of these four concepts, namely: duty, no-right, liability and disability. According to Hohfeld it is only a claimright that is a legal right properly so called. It is the correlative of a legal duty and signifies one’s affirmative legal claim against another. It is to be distinguished from a ‘privilege’, which is merely one’s freedom from the claim of another. In the same way that right correlates to duty, privilege correlates to no-right. These are first-order legal relations.104 Second-order legal relations, which are sometimes described as ‘rights’, are powers and immunities. A ‘power’ enables a person to change the content of a set of instances at law, whereas an ‘immunity’ protects someone from having their legal relations changed by another.105 Hohfeld’s purely analytic conception of legal rights is sufficient for the current purpose of explaining the particular account of legal ‘remedy’ endorsed by this book. However, a different understanding of legal rights, which recognises the possibility of a normative conception of a right, helps to illuminate the argument advanced in Chapter 4 of the book as to why English law’s general reticence to order coercive relief is consistent with the claim that the creation of a valid legal contract immediately creates reciprocal rights to performance in each of the contracting parties. The particular account adopted is that proposed by Professor Raz. According to Raz, rights, including institutional rights such as legal rights, are best 101

P Birks, ‘Rights, Wrongs and Remedies’ (2000) 20 OJLS 1. ibid. W Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning and Other Legal Essays (Yale University Press, 1920). 104 For helpful discussion see P Eleftheriadis, Legal Rights (Oxford University Press, 2008) 109. 105 ibid. 102 103

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understood as reasons for action. The fundamental purpose of rights is to protect ‘interests’ and a right exists whenever there is an interest of sufficient strength to justify imposing a duty on another.106 This account and its relevance to the overall argument advanced here are explained in more detail in Chapter 4.

2. The Proposed Definition of a Legal ‘Remedy’ The understanding of legal ‘remedy’ adopted in this book is the one proposed by Dr Zakrzewski in Remedies Reclassified.107 There, Zakrzewski presents both a clear definition of a legal remedy as well as a comprehensive classification of the various different kinds of legal remedy ordered by courts operating within the common law tradition. After outlining the various different meanings that have been ascribed to the term in English law, Zakrzewski claims that the best definition of a legal ‘remedy’ is ‘the rights immediately arising from certain judicial commands and statements which aim to address a pre-suit grievance, usually an actual or threatened infringement of a substantive right’.108 This is the understanding of a legal remedy that this book adopts. One significant reason for the definition proposed by Zakrzewski is his belief in the importance of distinguishing between remedial and substantive rights—the latter being the rights said to exist prior to the making of a court order and the former being those rights created by a court order. Following Austin,109 Zakrzewski divides substantive rights into primary and secondary rights. The distinction between the two is based ‘on the origin of the right’ so that, while ‘primary rights exist independently of a wrong’, ‘a secondary right arises from a legal wrong’.110 As should by now be clear, this is also the division of substantive rights adopted in this book. The other noteworthy aspect of Zakrzewski’s account is its classification of remedial rights. According to Zakrzewski, all remedies are either replicative or transformative. Replicative remedies replicate pre-existing rights while transformative remedies seek to change the content of the original right on which they are based. In this book, the most relevant example of a remedy replicating a primary right, on Zakrzewski’s definition, is an order compelling a defendant to perform a contractual obligation. An example of a remedy replicating a secondary right, at least according to prevailing orthodoxy, is an award of compensatory damages following breach, which replicates the secondary legal right to reparation generated by the breach of the primary legal duty (to perform). Examples of transformative remedies on Zakrzewski’s classification include foreclosure orders and the creation of a remedial constructive trust.

106

J Raz, ‘Legal Rights’ in J Raz (ed), Ethics in the Public Domain (Oxford University Press, 1994). R Zakrzewski, Remedies Reclassified (Oxford University Press, 2005). 108 ibid 2. 109 Lecture XLV in R Campbell and J Murray (eds), Lectures on Jurisprudence (5th edn, 1885, reprinted by Lawbook Exchange, 2005). 110 ibid 13. Zakrzewski defines a wrong in the usual way as ‘a breach of duty’. 107

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As already mentioned, the definition of a legal remedy Zakrzewski adopts is one of two main points of interest his book possesses for the current book. In essence, Zakrzewski claims that the best definition of a legal remedy is the rights arising from court orders that aim to address a pre-suit grievance. There are two salient aspects to this definition. The first is his explanation of remedies in terms of rights. Zakrzewski’s focus on rights is useful because one of the main themes of this work concerns the connection between ‘primary’, ‘secondary’ and ‘remedial’ rights. Zakrzewski’s definition of legal remedies in terms of the rights to which court orders give rise thus provides a helpful foundation upon which to build the arguments in this book. The second noteworthy aspect of Zakrzewski’s definition is that a remedy does not necessarily respond to the infringement of a right. Although a claimant’s request for a remedy often does arise in response to the defendant’s violation of the former’s primary right, the remedy awarded will not necessarily be a response to this violation in the sense that the right’s violation provides the reason for the order made. For example, a request for specific performance of a contract will usually only be made once the defendant has committed a breach but the occurrence of breach itself plays no role in justifying the making of the order. This is demonstrated by the possibility of commencing an action for such an order prior to the date by which performance is due.111 Similarly, a quia timet prohibitive injunction may be granted on proof of a sufficiently imminent risk of breach.112 This demonstrates that it is the right to performance which grounds an order for specific performance rather than the occurrence of breach. Although there must be a threat of breach to justify the court’s involvement, this is only because without this threat there would be no reason for the court to waste its limited resources intervening in the dispute. By contrast, English law’s prevailing orthodoxy is that all contractual money awards uphold a secondary right of repair that is generated by the primary right’s violation.113 This book challenges this view, arguing that it is necessary to distinguish contractual money awards that substitute for performance from those that compensate for loss. The basis for substitutionary money awards is, like an order for specific performance, the primary right to performance, while the basis for compensatory awards is generally regarded to be a secondary right to repair which arises upon breach.

3. Classifying Legal Remedies For present purposes, the classificatory scheme Zakrzewski advances is the other noteworthy aspect of his book. The division of substantive rights into primary and secondary and the division of remedial rights into replicative and transformative is of particular relevance for the present book. The former division originated 111 112 113

Hasham v Zenab [1960] AC 316 (PC). For an example see Earl of Ripon v Hobart (1834) 3 My & K 169, 176, 40 ER 65. See Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL).

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with Austin in his Lectures on Jurisprudence. Since then this division has been used regularly by legal commentators and has received judicial acceptance as well.114 However, the later distinction is novel and originates with Zakrzewski. Whilst recognising that this distinction slightly oversimplifies matters, it is contended that it does help to illuminate the law’s basic structure. The main advantage of distinguishing between replicative and transformative remedial rights lies in distinguishing court orders that seek to alter significantly the parties’ original rights from those that essentially try to duplicate the parties’ pre-existing entitlements. This distinction also highlights the fact that remedies that might traditionally have been seen as performing very different functions can be seen to have a similar analytical structure. Thus, according to Zakrzewski’s understanding of the law, although an order for specific performance is in one sense quite different from an award of ‘damages’ for breach of contract because one replicates a primary right while the other replicates a secondary right, the two remedies share the structural similarity that they both replicate, rather than transform, the underlying substantive right.115 For Zakrzewski, an order for specific performance is a paradigm instance of a replicative remedy. However, this replication is clearly not perfect since the original right to performance is usually replaced by a new right to a similar, but not identical, performance. The content of a specific performance order is not necessarily the same as the content of the primary right because, most obviously, unless the request for the order is made prior to breach,116 the time stipulated for performance will be later than the time stipulated by the original contract. In addition, the court may give the content of the obligations greater specificity and will normally impose additional sanctions for non-performance, such as the possibility of a contempt of court order or further punishments in the case of a deliberate failure to comply with the new order. Procedural mechanisms, such as garnishee orders, also exist to enforce an order for specific performance. Similarly, the suggestion that ‘damages’ awards always replicate a secondary right to repair that arises upon the infringement of the relevant primary right is also open to question. The central claim of this book is that, at least in the contractual context, some money awards actually substitute for the primary right itself by providing the promisee with an amount that either enables this party to obtain a close equivalent to the promised performance or gives this party the next best substitute for such performance available in the circumstances. The first of these possibilities, which constitutes the primary contractual substitutionary measure, is analogous to the court order that is made following a successful action for a debt that has become due or for the taking of an ‘account’ in equity.117 The availability of such 114 Austin’s ‘two-tiered structure was given prominence in the law of contract by Lord Diplock’: Zakrzewski (n 107) 13. 115 Note, however, that Zakrzewski’s claim to this effect has since been forcefully challenged. The nature of this challenge and its significance for this book is explained in Section II.A of Chapter 6. 116 See Hasham (n 111). Of course, the order obtained cannot compel the defendant to perform prior to the date performance is due. 117 For discussion, see J Edelman, ‘Money Awards of the Cost of Performance’ (2010) 4 Journal of Equity 122 and S Elliott, ‘Compensation against Trustees’, DPhil Thesis (University of Oxford, 2002).

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an award, however, does not affect the possibility of the promisee recovering ‘compensation’, possibly replicating a secondary right of repair arising upon breach, to make good any detrimental factual consequences caused by non-performance that have not been made good indirectly by the substitutionary award. To summarise and conclude, two contrasting lessons can be drawn from the above discussion. The first is that the basic distinction highlighted by Zakrzewski between remedies that replicate underlying primary and secondary rights and remedies that transform such rights is valuable. An order compelling the defendant to perform his unperformed contractual obligations clearly attempts to replicate the underlying primary right. Similarly, an order that the promisor fulfil his primary obligation via the payment of an appropriate monetary award clearly transforms the content of the underlying right in a significant way. Nevertheless, the second lesson to be drawn is that Zakrzewski’s basic distinction should be applied with caution because his rigid classification obscures the fact that many remedial orders sit somewhere between perfect replication and complete transformation.118 For example, as noted above, an order for specific performance does not replicate perfectly the underlying primary right. Conversely, a money award upholding a contracting party’s right to performance is closer to a transformation, rather than a replication, of the underlying right, even though the content of the underlying right does determine the precise amount that is awarded. This remedy therefore can be understood to sit somewhere between the opposing poles of perfect replication and complete transformation.

D. The Need for New Terminology This chapter has argued that one of the principal reasons that the account proposed here has not been appreciated is the existence of ambiguity concerning the meaning of ‘loss’, as well as other important concepts such as ‘compensation’ and ‘damages’. The labels given to legal concepts are significant. It is therefore important that the particular label used to describe a money award substituting for performance is appropriate. Possible labels include ‘performance damages’ or ‘performance interest damages’. The latter was used recently by Stadlen J in Giedo van der Garde BV v Force India Formula One Team Ltd (Force India).119 On its face, this suggestion is intuitively appealing. It is both relatively simple and conveys the fundamental point that the purpose of the award is to give effect to a contracting party’s entitlement to performance. Despite this, both of these labels are problematic. Earlier in this chapter it was argued that the best definition of ‘damages’ is a money award for a wrong. As already noted, however, the basis for a monetary substitute for performance is the right to performance rather than any secondary right to repair created by breach.

118 This point is also made by S Smith, ‘Book Review : Rafael Zakrzewski, Remedies Reclassified’ (2006) 122 LQR 164. 119 Force India (n 40).

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While breach does provide a practical reason to substitute for performance with a money award, the possibility of awards for anticipatory breach demonstrates that the court may have reason to do this before an actual breach has occurred. Thus, a monetary substitute for performance is not provided in response to breach. Despite the intuitive appeal of ‘performance damages’ or ‘performance interest damages’, these labels therefore must be rejected. Another possible label is ‘substitutive compensation’. As the next chapter explains in greater detail, this label has been used to describe monetary awards that substitute for the performance of a trustee’s equitable duty to the beneficiary.120 In avoiding any use of the word ‘damages’, this label is preferable to those discussed in the previous paragraph. It is suggested, however, that it is also desirable to avoid associating substitution with the concept of ‘compensation’ given the variety of different interpretations of the latter term that presently exist. For this reason, it is preferable, if possible, to describe only those awards concerned with making good factual detriment as ‘compensatory’, though it is recognised that in practice it may be very difficult to prevent the continuing use of the terms ‘compensation’ and ‘damages’ in this context. The problem of finding the best possible label for money awards substituting for performance therefore persists. In Ruxley, Lord Lloyd referred to a ‘cost of reinstatement’ award as ‘the monetary equivalent of specific performance’.121 This description is accurate and is supported here. On this basis, awards of this kind hereafter will be referred to either in this way or simply as ‘the cost of substitute performance’ or ‘the cost of performance’.122 It will be recalled, however, that this book argues that awards of the price of ‘release’ from further performance are also best understood as alternative monetary substitutes for performance that are available when awards of the cost of performance are unquantifiable, and perhaps also when they are ‘unreasonable’. Thus, both of these awards together may be described as ‘substitutionary money awards’.

V. Conclusion After demonstrating the existence of a significant discrepancy between English law’s orthodox understanding of contractual awards and the decided case law in Chapter 2, the present chapter sought to develop further the challenge here mounted against the conventional view by demonstrating the conceptual shortcomings of this account and the inadequacy of the terminology it employs. This exposition had a further important purpose as well, which was to show that the widespread use of this terminology helps to explain why the purely loss-based 120 121 122

Elliott (n 117). Ruxley (n 12) 365. Edelman (n 117).

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conception of contractual awards has persisted for so long in the face of the doctrinal and conceptual inadequacies so far identified. Section II of the chapter focused on the conceptual inadequacy of the conventional account. The failure to appreciate the fundamental indeterminacy in the Robinson v Harman principle has meant that this principle, which assumes the existence of a legal right to performance, is understood as a measure of ‘loss’. It was argued that an important consequence of this has been that debates about contractual money awards have assumed a compensatory paradigm, focusing on the appropriate baseline against which loss should be measured rather than on the logically prior question of whether the essential purpose of such awards is to make good loss at all. Section III explored the uncertainty that surrounds the meaning of ‘loss’ in English contract law. It was suggested that this uncertainty stems from two related sources: the ambiguous meaning of words commonly used to describe the concept of ‘loss’, and the failure consistently to distinguish the infringement of a right from the detrimental factual consequences that may follow from such infringement. The law needs to recognise both forms of ‘harm’, but at the moment it arguably lacks a satisfactory terminology for doing so. Three distinct conceptions of loss in the contractual context were then outlined. Although English law has moved beyond the narrowest of these conceptions to allow recovery for certain forms of non-pecuniary damage, it should not adopt the broadest conception in which breach itself is classified as a ‘loss’ in the relevant sense. Section IV suggested that the pursuit of a correct understanding of contractual money awards also has been hindered by the ambiguous meaning of other important concepts typically employed in this area of the law. In particular, it was demonstrated that the meaning of ‘damages’, ‘compensation’ and ‘remedy’ are all highly uncertain. Clear and stable definitions of these terms were suggested, as well as a new terminology for money awards that substitute for performance. The overriding objective underpinning the various definitions proposed is an improvement in the law’s conceptual clarity so that the distinction between substitutionary and compensatory awards will be appreciated and future disputes correctly resolved.

4 Foundations of the New Account I. Introduction This chapter outlines the doctrinal and theoretical foundations of the new account of contractual money awards advanced in this book. Section II details the significant doctrinal support that exists for the notion that contract formation creates reciprocal rights to performance in each contracting party. Claims to the contrary generally seem to be based on English law’s supposed preference for awarding ‘damages’ over ordering coercive relief. It is shown, however, that the true doctrinal position is more nuanced than sometimes suggested and also that there is substantial additional support for the view that contract formation creates reciprocal rights to performance in the contracting parties. More fundamentally, it is argued that this objection is based on a flawed understanding of legal rights, which fails to distinguish the question of a right’s existence from the question of how the right should be enforced by a court. Section III of the chapter defends the existence of the fundamental distinction this book proposes between substitutionary and compensatory contractual money awards. The existence of this distinction is demonstrated most obviously by certain money awards that exceed the detrimental factual consequences that a promisee can attribute to the promisor’s breach. There are, however, numerous other sources of support for this distinction too. This support includes the historical recognition of this distinction at both common law and equity, the action for the agreed sum and awards in lieu of specific performance. Further support can be found in the inapplicability of principles of remoteness and mitigation to the quantification of substitutionary awards, which is consistent with the notion that such awards are not concerned with making good the detrimental factual consequences of a breach.1 1 It is, however, important to reiterate that not all money awards that are inconsistent with a strict interpretation of the compensatory principle can be rationalised as substitutionary. In addition to the possibility of a disgorgement award such as the one ordered in Attorney-General v Blake [2001] 1 AC 268 (HL), another important (but quite distinct) example is when, in quantifying ‘damages’, the law disregards certain financial benefits that have accrued to the innocent party as a consequence of the breach. Notable instances of this latter phenomenon include the awards made in Needler Financial Services v Taber [2002] 3 All ER 501 (Ch), The New Flamenco [2014] EWHC 1547 (Comm) and Harbutt’s ‘Plasticine’ v Wayne Tank & Pump Co [1970] 1 QB 447 (CA).

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Section IV of the chapter outlines two further preliminary aspects of the new account. First, in order to make clear the particular kind of substitutionary account advanced, it is explained precisely how the new account is different from the distinct substitutionary analysis recently proposed by Professor Stevens. Secondly, a theoretical (or conceptual) account of the relationship between substantive and remedial rights in English contract law is advanced. After explaining the uncertain nature of Lord Diplock’s famous account of this relationship in Photo Production v Securicor, Professor Gardner’s proposed solution to the analogous problem that arises in the law of torts is considered. It is suggested that this account, according to which the reasons that justified the creation of the relevant primary legal duty persist following breach and press for ‘next-best conformity’, provides a compelling way in which to understand the relationship between substantive and remedial entitlements in the contractual context.

II. A Defence of the Right to Contractual Performance An important assumption underpinning the new account of contractual money awards is that the formation of a valid contract invariably creates a legal right to performance in each of the contracting parties. Although this assumption may appear to be obviously true, some have challenged it.2 The principal basis for this challenge is that awarding ‘damages’, not ordering specific performance, is the default response to breach. This section responds to this challenge by arguing that this objection provides a weak basis for questioning the existence of the right to contractual performance for three main reasons. First, English law is less hostile towards compelling performance than this (basic ‘Holmesian’) objection suggests. Secondly, there is also forceful additional doctrinal support for existence of such a right. Thirdly, and most fundamentally, this objection misconceives the nature of legal rights by conflating the distinction between the question of whether a legal right exists and the question of how that right should be enforced.

A. The Basic ‘Holmesian’ Objection It is normally said that an award of ‘damages’, rather than an order for specific performance, is the default remedy for breach of contract.3 On this basis, the strength 2 For example OW Holmes, The Common Law (Little, Brown and Co, 1881). Significantly, however, Professor Lionel Smith claims that Holmes’s famous comments on the non-bindingness of contractual obligations should be understood as making a point about the nature of legal obligations generally rather than about contractual obligations specifically. See LD Smith, ‘Understanding Specific Performance’ in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Hart Publishing, 2005) 221. See also J Perillo, ‘Misreading Oliver Wendell Holmes on Efficient Breach and Tortious Interference’ (2000) 68 Fordham Law Review 1085. 3 See, for example, Co-operative Insurance Society Ltd v Argyll Stores Ltd [1998] AC 1 (HL).

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of English law’s commitment to the direct enforcement of the primary contractual obligation to perform is sometimes queried, and with it, the very existence of such an obligation.4 In reality, however, the common law contains a robust regime for enforcing primary contractual rights, via the making of coercive orders. The first is an order compelling a defendant to perform as yet unfulfilled contractual obligations. The second is an injunction ordering a defendant not to breach. The third is the order following a successful action for the agreed sum, which compels a defendant to pay a debt which has become due. The first two orders had their origins in the Court of Chancery, while the third is an order that originated in the common law courts. Turning the basic objection on its head, it could be argued that the clearest support for the right to performance is that, in the face of an actual or threatened breach of contract, courts ever make orders compelling a breaching party to perform. The most logical and obvious basis for such orders is that the formation of a valid contract creates a legal right to performance.5 Significantly in this regard, the action for the agreed sum is actually the order most commonly made following breach.6 Whenever a party’s right to recover a fixed and certain sum of money under a contract has accrued unconditionally, that party is entitled to recover this sum rather than to an award of compensation for loss.7 The significance of this should not be overlooked. It provides powerful support for the existence of the right to performance. Nevertheless, as already mentioned, when faced with the enforcement of a contractual obligation other than the payment of a sum of money English law generally exhibits a preference for awarding money rather than compelling performance, which has led some to dispute the existence of the right to performance. To spell this claim out more fully, it is said that because it is not always possible to compel a promisor to perform that which he has undertaken to do, the entitlement that is created by contract formation is not, or at least not always, one to performance.

B. Overcoming this Objection Proponents of this objection all tend to assume the truth of the orthodox understanding of contractual awards. However, once it is accepted that the promisee’s entitlement to performance can be given effect to via an appropriate monetary 4 Holmes (n 2). See also P Atiyah, ‘Holmes and the Theory of Contract’ in his Essays on Contract (Clarendon Press, 1986) 57, 62. 5 Contra P Jaffey, ‘Damages and the Protection of Contractual Reliance’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 139. 6 For statistical support see R Zakrzewski, Remedies Reclassified (Oxford University Press, 2004) 67. 7 See, for example, Young v Queensland Trustees Ltd (1956) 99 CLR 560 (HCA), 567 (Dixon CJ, McTiernan and Taylor JJ). Conversely, if a sum has been paid but the condition upon its retention later fails, that sum is recoverable. See Mayson v Clouet [1924] AC 980 (HL) and McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 477 (Dixon J).

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substitute, the limited availability of specific performance no longer provides a compelling basis for disputing the existence of this right. Nonetheless, to rely on the proposed account to demonstrate the existence of a right to performance would assume the conclusion to prove the premise. Alternative support for the right to performance is necessary to defend the proposed account from such attacks. To that end, in what follows various doctrinal considerations that weaken the force of the basic ‘Holmesian’ objection are outlined.

1. Understanding English Law’s Approach to Coercive Relief It is important not to exaggerate the strength of English law’s preference for making money awards rather than ordering coercive relief. In particular, there are four important considerations that weaken its force. First, English law’s general preference for awarding money cannot be divorced from the historical separation of equity from the common law. Secondly, the law’s alleged preference for awarding ‘damages’ rather than ordering specific performance is actually less clear than often assumed. Thirdly, there are some obvious practical considerations that limit the potential for a court to order specific performance, which means that in many cases the court in fact has no choice but to make a monetary award. Finally, a decree of specific performance is not the only way in which a court can coerce a party to perform its primary contractual obligation. Other coercive responses exist and are usually less difficult to obtain than specific performance. a. The Historical Separation of Law and Equity The orthodox position under civil law is that specific performance, rather than monetary relief, is the default response to breach. Although it has been observed that the differences between civil and common law systems in this regard can be overstated,8 the subsidiary status of specific performance in English law is clearly a feature of the legal landscape that calls for explanation. Substantive reasons for English law’s preference for monetary responses do exist. However, in a descriptive sense the principal explanation for the traditional status of specific performance is that its historical origins lie in the Court of Chancery, meaning that specific performance was simply unavailable at common law.9 The traditional status of equitable remedies as available only on a discretionary basis to ameliorate harsh common law results goes a significant way towards

8 E McKendrick, ‘The Common Law at Work: The Saga of Alfred McAlpine Construction Ltd v Panatown Ltd’ (2003) 3 Oxford University Commonwealth Law Journal 145. But compare the views in S Rowan, Remedies for Breach of Contract (Oxford University Press, 2012) with regard to the difference between French and English law in this regard. 9 For the history of equitable jurisdiction see RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th edn (Butterworths, LexisNexis, 2004) [3-85].

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explaining English law’s restrictive approach to the availability of specific performance. Before the passing of the Judicature Act, it was simply not open to a common law court to make a decree of specific performance. But although this explanation provides a coherent historical explanation for the traditional approach to specific performance, by itself it does not provide a satisfactory explanation for the law’s present state. Moreover, Kimel has observed that even within the boundaries of this explanation ‘the problem is bound to resurface’, noting that ‘once courts have the discretion to order specific performance … [the question is] why exercise this discretion so sparingly?’10 b. A Superior Understanding of the ‘Inadequacy of Damages’ Test The second reason for caution in assessing the strength of the classic ‘Holmesian’ objection is that the preference for money awards in English law is weaker than the orthodox view suggests. The traditional position is that specific performance is only available following an action for breach when damages are ‘inadequate’,11 but this is an oversimplification. For instance, in Beswick v Beswick,12 emphasis was placed on the overall justice of making such an order rather than simply on the ‘inadequacy’ of damages. Megarry J also expressed a similar sentiment in Tito v Waddell (No 2),13 though his Lordship decided not to order specific performance or its monetary equivalent in that case. More recently, in Rainbow Estates Ltd v Tokenhold Ltd,14 Lawrence Collins QC appeared to accept that English law has now shifted towards the position that the availability of specific performance should be determined by reference to whether it is the more appropriate remedy in the circumstances rather than by reference to whether damages are ‘inadequate’.15 In response, it might be argued that this general trend towards the greater availability of specific performance was halted by the House of Lords’ decision in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd.16 This case might appear to reaffirm the orthodox view that specific performance is only available when damages are ‘inadequate’. The defendant breached a term of its lease requiring it to keep open a supermarket in a large commercial shopping centre. Many of the other tenants depended on the supermarket’s existence to make their own businesses viable, given its ability to attract customers to the centre. The landlord sought an order to compel the defendant’s performance of its contractual obligations.

10 D Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart Publishing, 2003) 96. 11 Argyll Stores (n 3) 11. 12 Beswick v Beswick [1968] AC 58 (HL). 13 Tito v Waddell (No 2) [1977] Ch 106, 322. Aspects of this decision, which is sometimes referred to as ‘the Ocean Island case’, are considered in greater detail in Chapter 5. 14 Rainbow Estates Ltd v Tokenhold Ltd [1999] Ch 64. 15 ibid 72–73. 16 Argyll Stores (n 3).

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In the leading speech, Lord Hoffmann referred to the ‘adequacy of damages’ test and held that the discretion whether or not to order specific performance was governed by well-established principles.17 Although specific performance was denied on the facts, this decision was attributable to certain considerations said to ‘bar’ the availability of specific performance. In particular, the remedy was refused because it would involve ‘constant supervision’, require the court to specify new obligations on the defendant with respect to opening hours and the like, and contravene the established principle that courts will not force a party to run a business.18 In view of this, it is far from clear that the decision should be seen as indicating a significant reversal of the more liberal attitude towards specific performance that appears to have developed in recent years. This explanation of the case raises the question of what significance should be afforded to the various ‘bars’ that limit the availability of an order for specific performance. Unfortunately, it is not possible to examine the ‘status’ of these ‘bars’ properly within the confines of this book. To the extent that they constitute justifiable restrictions on the availability of specific performance, this is explicable simply on the basis that, in the particular circumstances of the case, the (practical or normative) consideration that underlies the relevant ‘bar’, in combination with concerns of more general application that tend not to favour compelling performance—such as the undesirability of state-sanctioned coercion—together justifies a court refusing to order specific relief. An assessment of all the considerations relevant to choosing the appropriate means of enforcing a contracting party’s primary right to performance normally tends to favour the award of an appropriate monetary substitute for performance rather than the making of an order for specific performance. Overall, it might be said that the English law on specific performance, much like the law of contractual awards more generally, is presently in a state of flux.19 The precise circumstances in which such an order will be available are unclear. Obviously this is somewhat inevitable given the discretionary nature of the decision to make such an order. Although some additional certainty would be welcome, suggesting that a new formulation is beyond the scope of this work. For present purposes, it is only important to appreciate that English law recently appears to have shifted towards increasing the availability of specific performance. In consequence, it can probably now be said that, subject to the operation of various ‘bars’ that restrict the availability of this order in particular situations, specific performance will be available when it will ‘do more perfect and complete justice’ than an appropriately measured monetary award.20 17

ibid 9. ibid 11, citing Braddon Towers Ltd v International Stores Ltd [1987] 1 EGLR 209, 213 (Slade J). 19 This is the view expressed in E McKendrick, Contract Law: Text, Cases and Materials, 3rd edn (Oxford University Press, 2008) 960. However, in J Beatson, A Burrows and J Cartwright, Anson’s Law of Contract, 29th edn (Oxford University Press, 2010), the authors state that despite the new terminology ‘it seems clear that no different underlying approach to the relationship … [between damages and specific performance] has been heralded’, 576. 20 Tito (n 13) 322; Rainbow Estates (n 14) 72. 18

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c. Practical Restrictions on the Availability of Specific Performance The third reason not to exaggerate the significance of English law’s preference for money awards over specific performance is that there are certain considerations that, in practice, provide a court with less reason to make an order of the latter kind. The first is that the claimant actually may prefer a money substitute for performance to an order for specific performance. One reason for this is that delay may have reduced the value that the claimant places on receiving performance;21 another is that the relationship between the parties may have been damaged irreparably. In addition, specific performance may be inappropriate because, even though the claimant still values performance highly, he has little faith in the defendant and wishes to avoid having to return to court to seek further assistance in enforcing his rights. A second consideration that limits the availability of specific performance in practice is that the time for useful performance may have passed. The most obvious situation where this occurs is when the contract stipulates that time is ‘of the essence’. But the time for useful performance also may pass because there is a significant delay between breach and trial or because of the nature of the relevant breach. The facts in Pell Frischmann illustrate the latter possibility.22 There the obligation breached was one to work exclusively with the claimants on any projects involving a third party. Once breached, this obligation was no longer capable of performance so specific performance could not be ordered. This phenomenon also may occur when the relevant obligation breached is one of confidentiality or the provision of certain advice with due care.23 The problem that arose in Pell Frischmann often arises where the obligation breached is one to refrain from doing a certain act. Nevertheless, it should be noted that Wrotham Park is a case involving the breach of a negative covenant where performance in accordance with the contract remained possible but a money substitute was still awarded.24 The houses built in breach of the covenant could have been torn down but Brightman J refused to make such an order because it would have constituted an unjustifiable waste of valuable public housing. This is yet another reason for refusing specific performance. Although the court could have undone the breach of the obligation not to build, it declined to do so not because this was impossible but because it was undesirable for extraneous reasons of public policy. This decision is a good example of how English law takes into account

21 On the significance of the subjectivity of value in contract remedies see D Friedmann, ‘Economic Aspects of Damages and Specific Performance Compared’ in Saidov and Cunnington (eds) (n 5) 65. 22 Pell Frischmann [2009] UKPC 45, [2010] BLR (PC). 23 As to the latter, compare Phillips v Ward [1956] 1 WLR 471 (CA) with the more recent decisions in Ford v White [1964] 1 WLR 885 (CA) and Perry v Sidney Phillips & Son [1982] 1 WLR 1297 (CA). As explained below in Chapter 5, although the approach in Phillips v Ward is not supported here, neither is the refusal in both Ford and Perry to award the market value of the services that were promised, but not provided. 24 Wrotham Park Estate Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (Ch).

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various other relevant considerations in determining how best to give effect to a promisee’s right to performance in the particular circumstances of the case. Strictly speaking, there is a further restriction on the availability of specific performance: it is a response that applies only to the enforcement ‘in specie’ of an executory contract.25 An executory contract is one that requires the execution of an instrument, or the doing of an ‘act in the law’, which will put the parties in the position relative to each other that the contract contemplates.26 Examples include contracts for the sale of land, which require the execution of a conveyance, or contracts for the sale of goods requiring the performance of some legal act before property will pass from seller to buyer.27 By contrast, an executed contract is one that does not require the execution of an instrument or the doing of an act in law to put the parties in the position that the contract contemplates. If the court directs a party to an executed, rather than executory, contract to perform its obligations, that is not specific performance in the proper sense but relief ‘approximate’ to specific performance.28 This distinction is of practical importance. In cases of true specific performance, it is necessary for the claimant to plead and prove performance of, or readiness and willingness to perform, its own obligations under the contract.29 In addition, an order for true specific performance is an order that the whole contract, rather than individual obligations under it, be performed.30 An order of the latter kind is normally reserved for executed contracts and referred to as either a prohibitive or mandatory injunction depending on whether the relevant underlying obligation is negative or positive.31 Also, there may be further practical consequences in terms of the defences available to the defendant in seeking to persuade the court not to exercise its discretion in favour of the claimant.32 The existence of this technical distinction, however, does not affect the basic point made here that the practical restrictions on the availability of specific performance, as a discretionary response, demonstrate that English law is not as reticent to compel a breaching party to perform as sometimes is suggested. d. Other Direct Enforcement Orders Finally, it is important to emphasise that specific performance is not the only response to breach which directly enforces a contracting party’s primary right. In addition to the commonly claimed action for the agreed sum, prohibitory and mandatory injunctions are available to prevent a future breach, or undo a past 25

See J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 (HCA) 297 (Dixon J). ibid and see Meagher, Heydon and Leeming (n 9) [20-010]. ibid. 28 ibid, where the authors note that this terminology comes from Pakenham Upper Fruit Co Ltd v Crosby (1924) 35 CLR 386 (HCA), 394 (Isaacs and Rich JJ). 29 Meagher, Heydon and Leeming (n 9) [20-015]. 30 See ibid [20-130]. 31 ibid [20-015]. 32 ibid [20-055]. 26 27

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breach, respectively. Moreover, although discretionary in nature, absent particular hardship to the defendant, a prohibitory injunction will normally be granted as a matter of course.33 As Lord Cairns LC stated in Doherty v Allman, speaking with regard to negative covenants: If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court of Equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction of the process of the Court to that which already is the contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury—it is the specific performance, by the Court, of that negative bargain which the parties have made, with their eyes open, between themselves.34

Perhaps, as Dixon J suggested, Lord Cairns spoke too absolutely, and the position is rather, or at least should be, that if ‘a clear legal duty is imposed by contract to refrain from some act, then, prima facie, an injunction should go to restrain the doing of that act’.35 In addition, although the grant of a prohibitory interlocutory injunction may not be made quite so readily when it effectively amounts to a final determination of the parties’ rights, such an order is still available, taking account of the strengths and weaknesses of the respective cases, and the likelihood of the claimant’s eventual success at trial.36 Moreover, where the defendant was proposing to act in clear breach of a negative covenant there must be special circumstances before the court would exercise its discretion to refuse an injunction.37 Thus, the position of the claimant is significantly stronger than that of the defendant in both interlocutory and final hearings, which highlights the not-insignificant protection English law affords to the right to performance.

2. Additional Doctrinal Support for the Right to Performance The preceding discussion demonstrated that English law is less averse to compelling a party in breach to perform subsisting contractual obligations than Holmes appeared to suggest when outlining his classic objection to the existence of the right to contractual performance. Not only are coercive responses ordered more regularly than sometimes suggested but in practice there are a number of considerations that limit the situations in which coercive orders are and can be sought. In what follows, further doctrinal evidence for the existence of a right to performance is outlined. This evidence provides even stronger grounds for concluding that the creation of a contract invariably creates a legal right to performance in each of the parties.

33 34 35 36 37

Doherty v Allman (1878) 3 App Cas 709 (HL). ibid 720. Lukey (n 25) 299. Araci v Fallon [2011] EWCA Civ 668. ibid [39].

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a. The Enforcement of Wholly Executory Promises It is a bedrock principle of English law that a contract in which neither side has yet to commence performing their contractual undertakings is enforceable.38 Provided the promisee has promised to perform an act that is capable of constituting sufficient consideration for the promisor’s promise (and that any other requirements necessary for the formation of a valid contract have been complied with), the promisor’s original promise may be enforced against him even if the promisee is yet to commence the performance of his own contractual obligations.39 It must be stressed, however, that a critical feature of the new account proposed here is that a promisee’s ability to enforce his primary right to performance via an appropriate money award depends upon the fulfilment of all conditions precedent and subsequent to which this right was made subject.40 Moreover, generally the promisee’s right to the promisor’s performance is subject to a condition (precedent or subsequent) that the promisee has substantially performed certain of his own contractual obligations or at least tendered the performance of these obligations. Despite Professor Atiyah’s insistence that there is no ‘apparent reason for enforcing executory contracts’,41 English law continues to do so. This principle only makes sense on the basis that the mere formation of a contract necessarily creates a legal right to performance in the promisee. This aspect of English law therefore provides strong support for the notion that contracts invariably generate legal rights to performance rather than rights to something else such as, for example, compensation for loss induced by reasonable reliance on another’s promise. b. The Pacta Sunt Servanda Principle in Operation In Ruxley, Lord Mustill referred to the pacta sunt servanda principle in stating that the court should honour the claimant’s choice of what performance he required in exchange for the contract price.42 At an abstract level, regular invocation of

38 See E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010) [3-008], citing Thorensen Car Ferries Ltd v Weymouth Portland BC [1977] 2 Lloyd’s Rep 614, 619. 39 ibid, citing Thorp v Thorp (1702) 12 Mod 445, 449. 40 As noted earlier, it is sufficient that such conditions can be fulfilled by the court deducting any money that the promisee is obliged to pay from the monetary sum to which he otherwise is entitled. 41 See P Atiyah, ‘Executory Contracts, Expectation Damages, and the Economic Analysis of Contract’ in his Essays on Contract (n 4) 150, 171. However, the point made in the previous paragraph must be stressed here because it means that the situations in which the entitlement to a substitutionary money award arises are more limited than otherwise might be thought to be the case. It also demonstrates that while Atiyah’s claims go too far, there is an important truth contained within them. This truth is that promises to which the promisee has not yet become unconditionally entitled should be accorded a lesser degree of enforceability than promises whose performance the promisee has unconditionally ‘earnt’. The practical effect of this is that if the promisee cannot prove that all the conditions to which his entitlement to performance was subject have been fulfilled, he will be limited to a compensatory claim for prospective loss, which generally still requires, amongst other things, proof of ‘readiness and willingness’ to perform one’s own future obligations under the contract. 42 Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL) 360.

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this principle in a variety of contexts supports the claim that the formation of a contract gives each party a legal right to performance. For instance, in George Mitchell (Chesterhall) Ltd v Finney Lock (Seeds) Ltd,43 in the context of considering the proper construction of an exclusion clause, Oliver LJ stated that ‘the purpose of a contract is performance and not the grant of an option to pay damages’.44 A similar sentiment was expressed by Roskill LJ in Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord).45 In the context of determining the appropriate classification of a term, his Lordship cautioned against being overly willing to classify terms as conditions on the basis that contracts are made to be performed and not to be avoided according to the whims of market fluctuation and where there is a free choice between two possible constructions I think the court should tend to prefer the construction that will ensure performance, and not encourage the avoidance of contractual obligations.46

The decision in Cooper v Jarman provides a further illustration of the support English law provides for the pacta sunt servanda principle.47 Jarman entered into a contract with a builder for the construction of a house but died before completion. Following Jarman’s death, the builders completed the work and were paid by the administrators of Jarman’s estate. The report is unclear but it appears that the contract price for completing performance was more than the compensatory damages the builders would have been entitled to recoup had the administrators repudiated the contract, as they were entitled to do. The issue for determination was whether the estate was liable for the full cost of performing the contract or could limit its liability simply to the compensatory damages claim as that was the expense the administrators could have chosen had they repudiated. The case therefore raised the question of whether the administrator had a duty to perform even though the contract was for personal services and therefore not specifically enforceable. The Court held that all costs paid out for the completion of the building were properly expenses of the estate on the basis that the administrator had ‘a clear duty to perform’.48 This result was approved by the Privy Council in a case with very similar facts.49 There, Lord Romer stated that ‘the breaking of an enforceable contract is an unlawful act … it can never be the duty of … an administrator to commit such an act’.50

43

George Mitchell (Chesterhall) Ltd v Finney Lock (Seeds) Ltd [1983] QB 284 (CA). ibid 304. 45 Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 (CA). 46 ibid 70–71. 47 Cooper v Jarman (1866) LR 3 Eq 98. 48 ibid 102. 49 Anguilla (Ahmed) bin Hadjee Mohamed Salleh Anguillia v Estate and Trust Agencies (1927) Ltd [1938] AC 624 (PC). 50 ibid 635. 44

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c. The Concept of Breach and the Doctrine of Frustration More fundamentally, the existence of a right to performance and a correlative duty to perform is logically implied by the very concept of contractual breach. In response, one might claim that acceptance of the concept of ‘breach’ does not determine the content of the duty (or right) created by contract formation. Logically, however, the content of the duty created by contract formation must be to perform the contractual promises undertaken since it is only the failure to perform such a promise that can properly be described as a ‘breach’. A breach of contract is a breach of some aspect of the duty to perform. Assuming the correlativity of legal rights and duties,51 the concept of breach therefore implies the existence of a legal right to performance. Additional (and perhaps less abstract) support for the existence of a right to performance can be found in the doctrine of frustration. If the right created by the formation of a contract was not to performance as stipulated under the contract but only to either performance or a compensatory money award for loss caused by non-performance, the doctrine of frustration would not operate as it currently does. This is because, leaving aside a case where the defendant is actually incapable of paying ‘damages’ to compensate the claimant for loss, it should always be possible for the defendant to fulfil its primary obligation to ‘perform’ by paying compensatory ‘damages’.52 d. The Significance of Anticipatory Breach The possibility of bringing an action for breach prior to the date at which performance is due also is premised upon the idea that the content of the primary duty created by contract formation is ‘performance’ rather than something else such as (say) ‘protection from reasonable wasted expenditure incurred in reliance on the contract’s existence’. Normally the response sought in this context is a money award.53 As is explained later on, the availability of a substitutionary money award in an action for anticipatory breach will depend, amongst other things, on whether the promisee has fulfilled all the conditions precedent and subsequent to which his entitlement to performance was subject, while the availability of an award of compensation for prospective loss will depend, amongst other things, on whether the promisee is ‘ready, willing and able’ to perform his side of the bargain. However, further support for the existence of a right to performance, as well as for the new account proposed in this book, can be derived from the fact that an order for specific performance may be sought prior to the date on which

51 For discussion, see W Hohfeld, Fundamental Legal Conceptions as Applied to Judicial Reasoning and Other Legal Essays (Yale University Press, 1920). 52 This observation is made in R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing, 2009) 171, 172 and S Smith, Contract Theory (Oxford University Press, 2004) 384. 53 See, for example, Hochster v De la Tour (1853) 2 El & Bl 678, 118 ER 922.

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performance is due, as recognised in the Privy Council’s decision in Hasham v Zenab.54 There the defendant was in anticipatory breach of a contract for the sale of land. Some weeks before the last day for completion, the claimant instituted proceedings for specific performance. That proceedings were instituted prior to the date by which performance was due did not affect the claimant’s entitlement to obtain the order. e. A Restrictive Approach to One-sided Contractual Modifications A one-sided contractual modification is an agreement reached by the parties subsequent to their original contract in which one party agrees to give more or accept less for the performance originally bargained for. In English law such modifications are generally unenforceable in the absence of fresh consideration.55 At least one reason for the rule is to prevent opportunistic exploitation of one contracting party by the other. The prevention of such exploitation is certainly a worthwhile objective. However, the occurrence of events subsequent to contract formation may render one party’s contractual obligations significantly more onerous than originally envisaged, even though this change in circumstances is insufficient to constitute ‘frustration’,56 and for this reason some adjustment in the parties’ obligations may be appropriate.57 The existence of this rule has been criticised.58 Its effect also has been eroded somewhat by the finding that a ‘practical benefit’ can constitute good consideration.59 The basic rule nevertheless remains intact and the ‘practical benefit’ exception has not been expanded to the part payment of debts.60 Moreover, in Williams it was observed that the threat posed by the risk of opportunistic exploitation is now adequately dealt with by the modern doctrine of economic duress, which did not exist when the earlier cases generating the basic rule were decided. Thus, it is not that English law has now relaxed the level of protection afforded to contractual rights, but rather that it employs a different doctrinal mechanism to achieve this objective. This cautious approach to enforcing onesided contractual modifications is further evidence of the existence of, and weighty protection afforded to, the right to contractual performance.

54

Hasham v Zenab [1960] AC 316 (PC). Stilk v Myrick (1809) 2 Camp 317; Foakes v Beer (1884) 9 App Cas 605 (HL). 56 This is because the new circumstances may not be ‘radically different’. See Davis Contractors Ltd v Fareham UDC [1956] AC 696 (HL), 729 (Lord Radcliffe). 57 For a recent discussion see M Chen-Wishart, ‘A Bird in the Hand: Consideration and Contract Modifications’ in A Burrows and E Peel (eds), Contract Formation and Parties (Oxford University Press, 2010) 89, 91. 58 J Dawson, Gifts and Promises: Continental and American Law Compared ( Yale University Press, 1980) 4. 59 Williams v Roffey Bros [1991] 1 QB 1 (CA). 60 Re Selectmove [1995] 2 All ER 531 (CA). 55

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f. Collateral Support from the Law of Torts Finally, the very possibility of bringing a claim in tort for inducing a breach of contract assumes the existence of the right to contractual performance.61 If the breach of a contract (ie infringement of the right to performance) did not constitute a legally wrongful act, one party’s inducement of breach in another could not give rise to a legally recognised cause of action against the inducing party. The entire premise of the tort, in other words, is that breaching a contract is unlawful. The tort of causing loss by unlawful means provides further support for the existence of the right to performance since the requirement of an unlawful threat can be satisfied by a threat from the defendant to break a contract with the claimant or a third party.62

3. Theoretical Support: The Nature of Legal Rights At an abstract level, the more fundamental problem with the argument that English law’s preference for money awards over compelled performance undermines the existence of a right to performance is that it rests on a flawed understanding of the nature of legal rights. The argument conflates the question of a right’s existence with the question of how such a right should be enforced. On a normative conception of legal rights that recognises their critical role in practical reasoning, rights are best understood as ‘reasons for action’. This conception of rights recognises their dynamic aspect, which allows the content of the duties that they ground to change over time. On such an understanding of rights, there is an important distinction between the prima facie existence of a right and the appropriate response to its infringement. a. Distinguishing Between the Existence and the Enforcement of Legal Rights The basis Holmesian objection to the existence of a general legal right to performance presupposes that the existence of a legal right can be equated with its enforcement in a particular way. In particular, the argument assumes that the creation of a legal right to performance brings with it an entitlement to obtain an order for specific performance following the right’s infringement. This argument is fundamentally misconceived because it conflates two distinct inquiries. The question of whether a right exists is distinct from the question of how it should be enforced in the aftermath of its violation. The existence of this distinction is evident throughout private law. For instance, the fact that a party cannot always obtain an injunction to prevent the commission of a threatened tort, even when it is certain to occur, does not contradict the existence of the underlying right. It simply means that absolute protection of this right must sometimes give way to other competing considerations. 61 62

The classic statement occurs in Lumley v Gye [1853] EWHC QB J73. See OBG v Allan [2007] UKHL 21, [2008] 1 AC 1.

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This principle can be generalised. The normative force exerted by competing considerations means that it is not always appropriate to maximally protect rights. These interests may be sufficiently strong to ground conflicting rights and duties or they may not. In either case, these interests will limit the scope of operation of the competing right. Distinguishing between the existence and enforcement of legal rights is particularly acute in the legal context where practical, in addition to normative, considerations will impact the determination of what means of enforcement is most appropriate in the aftermath of, or even prior to,63 the right’s infringement. The principal normative consideration relevant to the question of the appropriate response to breach is the extent to which the defendant’s liberty is limited. However, practical considerations also matter in this context. The fact that specific performance will not be ordered when there is a need for supervision by the court (to ensure compliance with the order) is a good example of this.64 Arguably, a further example of a practical consideration that impacts upon the way contractual rights are enforced is the concern amongst certain judges regarding the possibility of accurately differentiating valid claims for non-pecuniary loss from fraudulent ones. Scepticism in regard to this ability may help to explain English law’s restrictive approach towards such recovery.65 b. Rights as Reasons for Action Hohfeld’s purely analytical account of legal rights was outlined in Chapter 3. The focus of Hohfeld’s account was not on making clear the distinction between the existence and enforcement of legal rights but on classifying the various different legal relations that can exist between persons. However, the distinction between the existence and enforcement of legal rights is highlighted by a normative account of rights, which understands rights as ‘reasons for action’. The account advanced by Professor Raz is one prominent example of a normative theory of legal rights. Raz’s account begins with the logically prior concept of an ‘interest’. A person has an interest whenever an aspect of his or her well-being is affected,66 and, according to Raz, interests play a special role in explaining institutional (including legal) rights.67 On Raz’s account, a right exists whenever an interest of the individual right holder is a sufficient reason to hold some other

63 See Hasham v Zenab (n 54) (order for specific performance prior to actual breach) and Hochster v De la Tour (n 53) (money award made prior to actual breach). 64 For example, see Argyll Stores (n 3). 65 It is not necessarily suggested that this concern is valid. For criticism of it as a basis for English law’s restrictive approach in this context, see A Burrows, ‘Mental Distress Damages in Contract—A Decade of Change’ [1984] Lloyd’s Maritime and Commercial Law Quarterly 119 and S Harder, Measuring Damages in the Law of Obligations (Hart Publishing, 2010) 113. 66 J Raz, The Morality of Freedom (Oxford University Press, 1986) 166, 180. 67 See J Raz, ‘Legal Rights’ in J Raz (ed), Ethics in the Public Domain (Oxford University Press, 1994) 254.

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person or persons under one or more duties to protect or promote that interest. Thus, for Raz: If conflicting considerations show that the basis of the would-be right is not enough to justify subjecting anyone to any duty, then the right does not exist. But often such conflicting considerations, while sufficient to show that some action cannot be required as a duty on the basis of the would-be right, do not affect the case for requiring other actions as a matter of duty. In such cases the right exists, but it successfully grounds duties only for some of the actions which could promote the interest on which it is based.68

This understanding of legal rights makes clear how the existence of a legal right to contractual performance is not inconsistent with English law’s regular refusal to order coercive relief in the aftermath of breach. The balance of considerations relevant to determining the content of the duty grounded by the right to performance is different following breach from the balance of considerations that existed at the time of contract formation. Initially, the idea that the content of the duty that correlates to a particular right can change may seem odd. But as the above extract makes clear, Raz’s explanation for this is simply that there is a dynamic aspect to rights, which means they have a capacity to generate new duties as circumstances change. All this of course leaves unanswered the question of exactly why the formation of a valid contract should generate reciprocal rights to performance in each of the parties. This question is the subject of a long-standing debate in contract law theory, which cannot be pursued in this book.

III. The Doctrinal Basis for the Distinction Between Substitution and Compensation Section II of this chapter demonstrated that significant doctrinal support exists for the view that a legally valid exchange of enforceable promises invariably creates reciprocal rights to performance in both of the parties to the exchange. This section of the chapter demonstrates that there is also significant doctrinal support for the existence of the distinction this book proposes between substitutionary and compensatory money awards. Given that the prevailing orthodoxy in English contract law is that all money awards following breach compensate for loss, the focus here is on demonstrating the existence of some awards that can be understood only as a monetary substitute for performance (rather than as an award of compensation for loss). Chapter 6 refutes the more radical suggestion that all contractual awards can be understood as substitutionary. This basic objective of the discussion that follows is to demonstrate that, in addition to sometimes providing awards solely concerned with making good the

68

Raz (n 66) 183 (emphasis added).

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detrimental factual consequences caused by a contractual breach, English law sometimes makes substantive money awards that substitute for performance. It is important to appreciate, however, that it is very common for such awards also to have the effect of making good some, or all, of the factual detriment suffered by the innocent party. But while this overlap helps to explain the tendency to conflate the two kinds of awards, Chapter 2 demonstrated that there are certain situations where this overlap does not occur. The making of substantive awards that exceed the loss actually suffered by the promisee demonstrates that sometimes the justification for an award is this party’s entitlement to the promised performance rather than the contingency that loss has been suffered in consequence of the other party’s failure to provide this performance.

A. Historical Foundations The possibility of obtaining an award compensating for loss in addition to an order compelling the breaching party to perform is one important source of support for the existence of the basic distinction this book proposes between substitution and compensation.69 Another important doctrinal feature that highlights the existence of the proposed distinction is that while the defendant’s breach of the primary obligation to perform is a necessary element of a claim for compensation, the existence of a ‘breach’ is not essential to maintain an action to enforce the primary right. As Professor Nienaber explained in the course of a masterful discussion of the history and consequences of the doctrine of ‘anticipatory repudiation’: Breach of contract is not even a condition precedent to a true claim ex contractu, but for a claim for damages it constitutes the very essence of the cause of action. The mitigation of damages rule is a rule which restricts the measure of compensation payable as a result of breach of contract. As its name implies it operates only when damages are claimed.70

In understanding Nienaber’s claim, it is important to appreciate that his objective is to make clear that a ‘party who declines to accept the repudiation is in effect demanding what he has been promised; he is not claiming damages and ought not therefore to be fettered by the mitigation rule’.71 Nienaber is not here concerned with drawing a distinction between the two different kinds of contractual money awards or ‘damages’ that it is the main purpose of this book to reveal. Nienaber’s argument is nevertheless entirely consistent with, and supportive of, the central thesis of this book. The existence of the proposed distinction is evident across many aspects of English law, but it is perhaps most clearly demonstrated in the

69 Supreme Court Act 1981, s 50. Damages for delay in completion in addition to specific performance were awarded in Ford-Hunt and another v Ragbhir Singh [1973] 1 WLR 738 (Ch). 70 PM Nienaber, ‘The Effect of Anticipatory Repudiation: Principle and Policy’ (1962) 20 CLJ 213, 227. 71 ibid, discussing the House of Lords’ controversial decision in White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL), which is considered in greater detail later in this chapter.

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context of claims for specific performance. As Williams observed almost 90 years ago: ‘a breach of contract … is not necessarily a condition precedent to the other party’s obtaining an order for its specific performance; though a breach of contract is usually requisite to induce the court to interfere’.72 As just foreshadowed, the need to distinguish substitutionary and compensatory court orders is not, however, a phenomenon confined to the law of contract. The distinction is of more general application and is strongly evident in the history of English law. This suggestion is now explained more fully below via a brief account of how the distinction historically operated in both the common law and in Chancery courts.

1. The Distinction at Common Law English law has always recognised the existence of a basic distinction between claims asserting the vindication of a right and claims seeking satisfaction of the detrimental consequences for the victim of the right’s violation. The difference between these two types of claim was immanent in the scheme of classification of original writs from which the modern common law developed.73 A demand for the vindication of a right, such as to restore a chattel (detinue) or to pay a certain sum of money that was owed (debt), was by the writ of praecipe. Professor Baker explains that all praecipe writs have in common that they look not to compensation for misconduct but to the restoration of some right; they are prospective rather than retrospective, in the subjunctive mood rather than the active, and in the present tense rather than the past. Where possible they resulted in the recovery of the right, enforced by a writ to hand over the thing in demand or to do what was asked.74

By contrast, says Baker, a claimant who originated his action by way of plaint— known as a plaintiff—sued for ‘damages’ on the violation of his rights. For instance, a claimant in trespass did not ask for the prospective enforcement of his rights but for redress for their past infringement. This can be contrasted with the old action for detinue. Here the claimant sued for the return of property detained by the defendant or for payment in lieu, with the choice being for the defendant to make. The optional pecuniary sum would be measured by the market value of the property and the claimant would not be compensated for any additional damage suffered.75 One of course might cite this historical distinction in support of the orthodox view that ‘damages’ are only available to compensate for proven ‘loss’. But as

72 T Williams, The Contract of Sale of Land as Affected by the Legislation of 1925 (Sweet & Maxwell, 1930) 132. 73 J Baker, An Introduction to English Legal History, 3rd edn (Butterworths, 1990) 67. 74 ibid 69. 75 See D Ibbetson, A Historical Introduction to the Law of Obligations (Oxford University Press, 1999) 89, 111.

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Ibbetson and Baker both explain, the true picture was far more complex than this basic dichotomy might suggest.76 Since the assessment of ‘damages’ in any ‘action on the case’ (including an action for ‘assumpsit’) was at this time wholly within the discretion of the jury, there is a great deal of uncertainty in relation to how such early awards of ‘damages’ for failures to perform contractual promises were quantified. Significantly, however, it is far from clear that such awards were limited to the factual loss that the innocent party could prove had been caused by the other party’s failure to perform as promised.77 In addition, when the assessment of such awards later fell to the judiciary, it is apparent that sometimes a claimant was awarded the monetary equivalent of the promised performance rather than just a sum aiming to make good their factual loss.78

2. The Distinction in Equity On its face, the rise of trespass dramatically reduced the range of circumstances in which common law courts would be called upon to enforce vindication claims. However, in an unpublished (but compelling) doctoral thesis, Dr Elliott explained how the triumph of trespass was qualified in two important ways, which supports the observations made in the previous paragraph.79 First, certain ideas about the substance of liability haphazardly survived transplantation into the trespass framework. A simple example is the claim for the payment of an agreed sum. Over time, the praecipe writ of debt came to be replaced by the trespassory writ of indebitatus assumpsit. However, the underlying idea that the claim was for the enforcement of the primary right rather than one to make good the consequences of the right’s infringement remained. The second qualification on the triumph of trespass was that despite the rise of trespass at common law, Chancery courts were increasingly willing to entertain vindicatory claims, of which the bill for an account is perhaps the most straightforward example. The fundamental distinction between the vindication (or substitution) of rights and the reparation (or compensation) of ‘loss’ consequent on a right’s violation is also supported and reflected by the distinction between awards of ‘equitable compensation’ and awards of common law ‘damages’. When it has become impossible for a vendor to transfer property that conforms to his contractual promise, equitable compensation may be awarded as a way of making up the deficiency or ‘perfecting the performance’.80 76 For a good overview of the development of the action in ‘assumpsit’ out of ‘trespass on the case’, see JH Baker, An Introduction to English Legal History, 4th edn (2002, Butterworths LexisNexis) 330–44. For a similar but not identical treatment, see Ibbetson (n 75) 71–94 and 126–52. 77 For an illuminating discussion, see Ibbetson (n 75) 131–32, referring to some cases in support, including Shipton v Dogge YB T.20 Hen VI f.34 pl.4, 51 SS 97 (Doige’s Case), Strete’s Case (1528) BL MS 253 F.19 and Pykeryng v Thurgoode (1532) 93 SS 4. 78 For two notable examples, see Thornton v Place (1832) 1 Mood & R 217, 219 and Pell v Shearman (1855) 10 Ex 766, 769; both decisions of Parke B, author of the Robinson v Harman principle. 79 S Elliott, ‘Compensation against Trustees’, DPhil Thesis (University of Oxford, 2002) 35. 80 ibid 46.

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The use of the term ‘compensation’ in this context is unfortunate because such awards are not concerned with making good loss and are distinct from awards of compensatory damages for wrongdoing. This point was made clear by Eldon LC in Todd v Gee.81 His Lordship there illustrated the distinction between the two kinds of award through the use of an example concerning a contract for the sale of land, where the purchaser has contracted to sell the land on to another under the same description. While the purchaser would be entitled to specific performance with compensation for the land that was not title free, he would need to bring a claim for ‘damages’ in order to recover the lost profits on the subsequent sale. A relatively recent example of recognition of the distinction between substitution and compensation in equity is the High Court of Australia’s decision in Youyang Pty Ltd v Minter Ellison Morris Fletcher.82 The Court there appeared to recognise that the monetary response available in the context of a claim for the misapplication of trust property is substitutionary rather than compensatory in the sense that those terms are used here, holding that even though the claimant (Youyang) would have ended up in the same position regardless of the defendant’s breach, this did not affect the defendant’s liability to restore the trust money it had paid out in breach of its primary duty.83 In contrast to the approach of the Australian High Court in Youyang, the House of Lords, in Target Holdings Ltd v Redferns,84 refused to apply the traditional equitable approach in the context of modern commercial bare trusts.85 Somewhat analogously to the approach taken recently in Southcott Estates Inc v Toronto Catholic District School Board,86 a decision examined critically in Chapter 8 of this book, the Supreme Court of Canada failed to appreciate the need to distinguish substitutionary and compensatory responses in the context of a claim for ‘equitable compensation’ for breach of fiduciary duty in Canson Enterprises Ltd v Boughton & Co.87 In addition to equity’s traditional accounting mechanism, Dr Elliott also identifies a further possible example of a substitutionary money award which has been recognised in the Chancery courts. This is the ‘compensation’ that may be awarded 81

Todd v Gee (1810) 17 Ves Jun 273, 278, 34 ER 106. Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15, 212 CLR 484. Compare the House of Lords’ earlier decision in Target Holdings v Redferns [1996] 1 AC 421. For discussion, see S Elliott and J Edelman, ‘Target Holdings Considered in Australia’ (2003) 119 LQR 545. 83 A recent judicial discussion of the distinction between ‘substitutive’ and ‘reparative’ equitable compensation occurred in Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102 [333] (Edelman J). 84 Target Holdings (n 82). 85 ibid 434 (Lord Browne-Wilkinson). 86 Southcott Estates Inc v Toronto Catholic District School Board (2012) SCC 51 (SCC). This is an important decision in the context of the present book, which is discussed further below. Also see M McInnes, ‘Specific Performance and Mitigation in the Supreme Court of Canada’ (2013) 129 LQR 165, 166. 87 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 (SCC), criticised on this very basis in L Smith, ‘The Measurement of Compensation Claims Against Trustees and Fiduciaries’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge University Press, 2010) 363. 82

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when working out the rescission of a transaction where the property cannot be returned to its original condition. Some examples of this phenomenon identified by Elliott include Newbigging v Adam,88 and Whittington v Seale-Hayne.89

B. The Action for the Agreed Sum The clearest example of a money award that substitutes for the promised performance is the order made following a successful action to recover a contractual debt that has become due. In these circumstances, the contract generally creates in one party a legal right to obtain a particular sum of money from the other. If the party who owes the debt fails to pay this sum by the date upon which it falls due, the other party normally is entitled to a court order requiring that he do so. But, at least when such a claim is made in the aftermath of the promisor’s repudiation of the contract, this usual entitlement is subject to at least two important qualifications, which are now explained.

1. Two Limits on the Recovery of Contractual Debts Two important qualifications on an innocent party’s right to recover the contract price following the other party’s repudiation of the contract were recognised by Lord Reid in the leading House of Lords’ decision in White & Carter (Councils) Ltd v McGregor.90 The first of these qualifications is that before the promisee is able to claim the contract price this party must be able to continue with its performance without the breaching party’s co-operation,91 at least where the relevant obligation is entire.92 The second qualification is that the promisee must have a ‘legitimate interest’ in continuing to perform, rather than accepting the repudiation and claiming ‘damages’ for loss suffered in consequence of the other party’s breach. The ‘legitimate interest’ qualification has been a source of continuing controversy in English law since White & Carter was decided. One reason for this is uncertainty regarding the nature of this restriction. In particular, it is unclear whether this principle limits the promisee’s right to affirm the contract or only this party’s right to recover the contract price. If the latter, the court is simply refusing to grant the promisee certain relief rather than actually restricting this party’s entitlement to affirm. The better view appears to be that the ‘legitimate interest’ qualification restricts the right to affirm the contract itself, whereas the

88

Newbigging v Adam (1886) 34 ChD 582 (CA). Whittington v Seale-Hayne (1900) 82 LT 49. 90 White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL). 91 For an example of this restriction in operation, see Hounslow LBC v Twickenham Garden Developments [1971] Ch 233 (Megarry J). 92 In these circumstances, the breaching party has no obligation to pay without the innocent party’s complete performance: see Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch) (N Strauss QC). 89

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‘co-operation’ limit outlined above only restricts the promisee’s entitlement to recover the contract price. It is not clear, however, that this distinction is universally accepted.93 The second reason that the ‘legitimate interest’ qualification has generated so much uncertainty is that its precise meaning and significance is unclear. In White & Carter itself, the appellants agreed to attach plates to bins advertising the respondents’ garage business over a period of three years. The respondents repudiated the contract on the same day it was made but the appellants nevertheless prepared the plates, displayed them for a period and sought the full amount due under the contract, claiming the advantage of an accelerated time provision. A majority of the House of Lords upheld the promisee’s action for the agreed sum following its decision to affirm the contract in the face of the promisor’s repudiation. The majority in the House of Lords comprised Lord Reid, Lord Tucker and Lord Hodson. The proposition for which the case generally is understood to stand is the basis upon which Lord Reid decided the case. His Lordship stated that the recovery of an agreed sum under a contract following one party’s repudiatory breach, where the right to payment was contingent upon the claimant’s performance, was not possible where the claimant had no ‘legitimate interest’ in performance.94 Significantly, however, Lord Hodson and Lord Tucker did not express agreement with Lord Reid. Lord Hodson thought that the claimant’s interest in performance was deserving of even greater protection, holding that it had an unfettered discretion whether to accept the breaching party’s repudiation or affirm the contract and continue to perform in accordance with its terms,95 while Lord Tucker also declined to endorse Lord Reid’s restrictions. Given this disagreement, a question arose as to the exact principle for which the decision stands. In Hounslow London Borough Council v Twickenham Garden Developments Ltd,96 Megarry J endorsed the view that the ratio of the case is to be found in the view expressed by Lord Reid.97 This must be the correct interpretation of the case because even though the other members of the majority did not endorse the existence of Lord Reid’s ‘legitimate interest’ qualification, without Lord Reid’s concurrence in the result there would have been no majority.

93 See JW Carter, ‘White & Carter v McGregor—How Unreasonable?’ (2012) 118 LQR 490, 491, noting that in The Alaskan Trader [1983] 2 Lloyd’s Rep 645, 651 Lloyd J held that the ‘legitimate interest’ qualification is a restriction on the right to sue for the contract price, whereas in The Puerto Buitrago [1976] 1 Lloyd’s Rep 250, Lord Denning MR treated it as a restriction on the right to affirm. 94 White & Carter (n 90) 431. Arguably, however, Lord Reid’s ‘legitimate interest’ qualification was merely obiter, the case being authority only for the proposition that there is no requirement that an innocent party act reasonably in exercising an election to affirm, and that the mitigation doctrine is inapplicable in actions to recover an agreed sum. See Carter (n 93) 490. 95 White & Carter (n 90) 445. 96 Hounslow LBC (n 91). 97 ibid 254.

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A further source of uncertainty in regard to Lord Reid’s ‘legitimate interest’ qualification is what exactly the term ‘legitimate’ means in this context.98 Recently, Liu has attempted to reformulate this restriction, arguing that it prevents recovery where, following breach, the ‘wastefulness’ of the promisee’s continued performance outweighs that party’s interest in earning the contract price.99 According to Liu, the clash of interests here is between sanctity of contract (including commercial certainty) and economic efficiency. This reformulation no doubt constitutes an improvement on Lord Reid’s ‘uncharacteristically vague statement of principle’.100 Despite the difficulty involved in balancing the possibly incommensurable values he identifies, Liu does provide a coherent explanation of many of the authorities applying this restriction. Moreover, his reformulation also seems to offer an explanation that is materially different from the one which Treitel proposed.101 All this, however, only serves to highlight the uncertain meaning in this context of the ‘legitimate interest’ concept. Matters are further complicated by the strong dissents in White & Carter delivered by Lord Keith and Lord Morton. Lord Keith took a far more defendant-friendly position based upon a requirement that the claimant minimise the damage suffered in consequence of breach, as embodied in the doctrine of mitigation.102 This was despite the fact that it is clear that this doctrine does not apply to an action for the agreed amount.103 Analogously, it has been held that a claimant seeking specific performance owes no duty to mitigate his loss, provided he possesses a ‘legitimate interest’ in continuing to insist upon performance.104 White & Carter thus contains a considerable range of views concerning the degree of respect that English law affords to a contracting party’s right to the promised performance. Although this book expresses some sympathy for the view expressed by Lord Hodson, it recognises that English law adopts the more moderate position articulated by Lord Reid. It is worth reiterating, however, that the ‘legitimate interest’ restriction is distinct from the restriction on compensatory awards that is commonly described by reference to the term ‘mitigation’.105 An order for the payment of the agreed sum is not one for the payment of compensation for 98 This was noted by Professor Furmston at the time of the decision. See MP Furmston, ‘The Case of the Insistent Performer’ (1962) 25 MLR 364. For another recent example, see Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm). This case, like The Puerto Buitrago and The Alaskan Trader, occurred in the charterparty context. For further examples, see The Odenfeld [1978] 2 Lloyd’s Rep 357 and The Dynamic [2003] 2 Lloyds Rep 693. 99 Q Liu, ‘The White & Carter Principle: A Restatement’ (2011) 74 MLR 171. 100 See Carter (n 93) 491, analysing The Aquafaith [2012] EWHC 1077 (Comm). 101 In attempting to clarify the ‘legitimate interest’ qualification, Treitel suggested that it is essentially concerned with whether the hardship an innocent party’s affirmation places upon the breaching party is sufficient to outweigh any prejudice caused by restricting the innocent party to a claim for damages, and this appears to be the view of the current author of Treitel’s famous treatise on the law of contract as well. See Peel (ed) (n 38) [21-012]. 102 White & Carter (n 90) 439. 103 Jervis v Harris [1996] Ch 195 (CA) 202. 104 See Asamera Oil Corp Ltd v Sea Oil and General Corp [1979] 1 SCR 633, 666 (Estey J). 105 The true scope of the mitigation doctrine is explained in Chapter 6, Section III.B.

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loss. Rather, it is an order that the defendant fulfil his primary contractual undertaking to pay the sum agreed upon. Lord Keith’s focus on mitigation in McGregor incorrectly conflates the distinction between substitutionary and compensatory money awards.

2. A Claim in Debt is not a Claim for Loss While more could be said about Lord Reid’s ‘legitimate interest’ qualification, particularly as regards the uncertain meaning of ‘legitimate’ in this context, for present purposes there are two essential points to make. The first is that an innocent party’s entitlement to recover the contract price is not unlimited. The second is that an order to enforce a party’s entitlement to a contractual debt is an unequivocal example of a money award substituting for performance. As just noted with respect to principles of ‘mitigation’, this latter point means that principles limiting the recovery of compensation for loss do not apply in an action to recover a contractually agreed sum. The inapplicability of doctrines concerned to limit the recovery of compensation for loss in a claim for debt was affirmed by the Court of Appeal in Jervis v Harris.106 The claimant leased premises to the defendant, who promised either to repair or, failing repair, to reimburse the claimant for any expenses incurred in effecting repairs. In the event, the defendant failed to repair and the claimant landlord expended money in doing the repairs himself. The Court of Appeal emphasised that the landlord’s claim that the defendant pay the cost of repairs in performance of his required obligations was not a claim for ‘damages’ but a claim for debt. It was said that a claimant who claims payment of a debt need not prove anything beyond the occurrence of the event or condition on the occurrence of which the debt became due. He need prove no loss; the rules as to remoteness of damage and mitigation of loss are irrelevant.107

That an order for the payment of a contractually agreed sum is not an award of compensation for loss is supported by three further propositions. First, in an action for the price of goods it is irrelevant how much the goods were actually worth.108 Secondly, the availability of such an order is unaffected by the occurrence of a post-breach event that reduces the actual loss suffered by the claimant.109 Thirdly, it is also significant that, as with an order for specific performance, where the agreed sum is not paid and the claimant suffers additional loss, she may be able to bring a claim for the recovery of this sum and the recovery of compensation for loss.110

106 107 108 109 110

Jervis v Harris (n 103) 202. ibid 201 (Millett LJ). Peel (ed) (n 38) [21-002]. Jervis v Harris (n 103). Overstone Ltd v Shipway [1962] 1 WLR 117 (CA).

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The availability of an action to recover a contractually agreed sum demonstrates that the common law recognises the possibility of money awards substituting for performance. But the right in question here is one to a sum of money. The possibility of a substitutionary award when the content of the primary right is not to a sum of money, (for example, a right to goods or services), is more controversial. Nevertheless, this book argues that such awards, analogous to the action for the agreed sum, are (and should be) available in English law. This is demonstrated first in relation to money awards provided in lieu of specific performance and then, in the next section, through the possibility of other money awards enforcing contractual obligations to provide goods and services.

C. Money Awards In Lieu of Specific Performance The availability of money awards in lieu of specific performance further supports the existence of the distinction this book advances between substitutionary and compensatory money awards. Generally, the way that awards of this kind are measured is consistent with the view that normally their basis is the promisee’s right to performance rather than the factual detriment that the promisee has suffered in consequence of the relevant breach.

1. The Law in England In Wroth v Tyler,111 the defendant vendor entered into a contract for the sale of the bungalow where he lived with his wife and adult daughter. After contracts were exchanged, the vendor’s wife entered a notice onto the Land Register of her rights of occupation under the Matrimonial Homes Act 1967 in an attempt to prevent the sale from proceeding. The vendor could not persuade his wife to remove the notice and informed the purchasers he could not complete. In addition to other relief, the purchasers sought specific performance and equitable relief under section 2 of the Chancery Amendment Act, which gives Chancery courts the power to award ‘damages’ in addition to or in lieu of an injunction or specific performance. Megarry J refused specific performance on the grounds that it might split up the family but awarded the claimants equitable ‘damages’ in lieu. A question arose as to the appropriate date for assessment. This was held to be the date of trial, rather than the date of breach, during which time the value of the bungalow had risen from £7,500 to £11,500. In reaching this conclusion, Megarry J reasoned that different principles govern the assessment of ‘damages’ at common law and equity for two reasons. The first was that it was clear that ‘damages’ are available under Lord Cairns’ Act in situations where they cannot be awarded at common law. An example of this provided by Megarry J was where the House of Lords awarded equitable ‘damages’ in lieu of a quia timet injunction.112 111 112

Wroth v Tyler [1974] Ch 30 (Ch D). Leeds Industrial Co-operative Society Ltd v Slack [1924] AC 851 (HL).

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The second reason for the difference in approach was that the wording of section 2 of the Chancery Amendment Act 1858 ‘at least envisages that the damages awarded will in fact constitute a true substitute for specific performance’ … [so they should be quantified to give to the claimant] as nearly as may be what specific performance would have given’.113 Applying this principle, Megarry J concluded that an award of ‘damages in lieu’ should be assessed at the date of judgment so as to reflect the fact that specific performance was a ‘continuing remedy’.114 As this chapter later explains, at least where the claimant’s right to performance has accrued unconditionally, this conclusion is consistent with the theoretical foundations of the new account proposed in this book in which an innocent party’s primary right to performance persists and presses for ‘next-best conformity’ following breach. Notably, Megarry J’s approach was ‘purportedly followed’ by Goff J in Grant v Dawkins.115 In awarding ‘damages’ under the Act, his Lordship there gave the plaintiff purchaser the benefit of the property’s appreciation in value between the date of breach and the date for completion in the court order. It has been said, however, that it ‘may be doubted’ whether Wroth in fact required this because that case was concerned with an award of ‘damages’ in lieu of specific relief rather than an award in addition to specific relief as occurred in Grant v Dawkins. For this reason, the award in the latter case could not have been substitutionary and therefore must be seen as another instance—perhaps an unjustifiable one—of a compensatory award that puts the innocent party into a superior factual position than if the breach had not occurred. The foregoing observation implies no criticism of Wroth. In Johnson v Agnew, however, Lord Wilberforce did question the correctness of Megarry J’s decision, at least to the extent that it establishes different principles for the assessment of contractual ‘damages’ at common law and in equity.116 There Lord Wilberforce held that although ‘damages’ might be awarded in lieu of specific performance in some cases where they could not be recovered at common law, the Chancery Amendment Act 1858 did not warrant the assessment of ‘damages’ other than on a common law basis.117 Because his Lordship also found that in a case involving the

113

Wroth (n 111) 58–59. For additional support, see Malhotra v Choudhury [1980] Ch 52 (CA). Wroth (n 111) 60. 115 Grant v Dawkins [1973] 3 All ER 897, [1973] 1 WLR 1406, discussed in Meagher, Heydon and Leeming (n 9) [23-070]. There the authors note that Wroth ‘was followed and applied in quantifying an award of equitable “damages” in lieu of specific relief in Souster v Epsom Plumbing Contractors Ltd [1974] 2 NZLR 5151 and Grocott v Ayson [1975] 2 NZLR 586’, as well as in the Canadian decisions: Metropolitan Trust Co of Canada v Pressure Concrete Services Ltd (1975) 9 OR (2d) 375, 60 DLR (3d) 431 and Stewart v Ambrosina (1978) 63 DLR (3d) 595, but that in ASA Constructions Pty Ltd v Iwanov [1975] 1 NSWLR 512, Needham J assessed an award of this kind at the date of breach. While his Honour there conceded ‘the force’ of Megarry J’s reasoning, he held that the ‘present case … [is one] where the party seeking relief has not shown that the application of the principle would work justice rather than injustice’, 519. 116 Johnson v Agnew [1980] AC 367 (HL). 117 ibid 400. 114

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breach of a contract for the sale of land, common law ‘damages’ should be assessed at the date the contract was lost provided the innocent party reasonably tried to have the contract completed, Lord Wilberforce thus concluded that the date for the assessment of equitable ‘damages’ here should be that on which the remedy of specific performance became aborted rather than the date of breach. Professor Mitchell has claimed that there are strong grounds for challenging Lord Wilberforce’s apparent view in Johnson v Agnew that the assessment of ‘damages’ at common law and in equity always should be governed by the same principles.118 In addition, Mitchell says that subsequent judicial considerations of Lord Wilberforce’s speech,119 although demonstrating deference, also have tended to confine the application of his statements strictly to situations where equitable and common law ‘damages’ are recoverable in respect of the same underlying cause of action. On this basis, claims Mitchell, his Lordship’s comments ‘cannot sensibly have any application where the claim at common law is in respect of a past trespass or breach of covenant and … [the claim] under the Act is in respect of future trespasses or continuing breaches of covenant’.120 To the extent that Lord Wilberforce was advocating that the assessment of ‘damages’ in equity should be governed by precisely the same principles as those applicable at common law, these subsequent decisions, in combination with Professor Mitchell’s criticisms, raise doubts about the correctness of his Lordship’s analysis. However, proper consideration of this matter is not possible here because it raises difficult questions that do not affect the central argument of this book. Lord Wilberforce’s expressed preference for a ‘more flexible’ approach to the assessment of contractual money awards is, however, an issue that directly affects the central argument of this work. This, too, is a suggestion that has received academic criticism,121 though it also has received some support, even amongst commentators who support the orthodox understanding of contractual money awards.122 The correctness of this view is not addressed directly now, but more will be said about it later.123

2. The Canadian Position Further support for the proposed account derives from the Canadian Supreme Court’s decision in Semelhago v Paramadevan.124 The defendant breached his 118 C Mitchell, ‘Johnson v Agnew’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract (Hart Publishing, 2008) 351, 369. 119 For example, Bar Gur v Bruton (CA) 29 July 1993 (Dillon LJ) and Jaggard v Sawyer [1995] 1 WLR 269 (CA) 281 (Millett LJ). 120 See Jaggard (n 119) 291 (Millett LJ), where the relevant issue was the basis for assessing damages in lieu of granting an injunction to restrain a threatened or continuing trespass or breach of a restrictive covenant. 121 See also the criticisms in S Waddams, ‘The Date for the Assessment of Damages’ (1981) 97 LQR 445. 122 See, for example, A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford University Press, 2004) 192. 123 See Chapter 8, Section III.B. 124 Semelhago v Paramadevan [1996] 2 SCR 415.

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contract to convey an estate in land to the claimant. It was agreed that specific performance was available in principle but the claimant was limited to an award of ‘damages’ in lieu because the estate had already been conveyed to a third party. The value of the estate rose between breach and trial and the claimant retained possession of his own house during this time. The defendant argued that the amount awarded should take account of this rise in the value of the claimant’s property on the basis that, had the defendant performed, the claimant would have sold his old house and therefore not acquired this gain. The Court rejected this argument, holding that the purpose of awarding ‘damages’ in lieu of specific performance is not to put the relevant party into the position he would have been in had the breach not occurred, but ‘to be a true equivalent of specific performance’.125 Sopinka J cited Wroth in support of his decision in Semelhago, observing that it had not been overruled by Johnson v Agnew. This is not the conventional understanding of Johnson v Agnew,126 and it is arguable that an English court would not assess ‘damages’ in lieu of specific performance on the same basis as the Canadian Supreme Court did in Semelhago. It is hoped, however, that the re-examination of Johnson v Agnew provided in Chapter 8 will convince sceptics of the correctness of the Canadian approach. Regardless of this, the preceding discussion at least demonstrates that the approach taken in Semelhago is a legitimate one because of the soundness of the underlying principle upon which it is based. Where a contracting party has or can, via an award of ‘damages’, fulfil all conditions attaching to his right to performance, and is also prima facie entitled to specific performance, but this order cannot be made because of the intervention of third party rights, he is nevertheless entitled to a monetary equivalent for that order regardless of what detrimental factual consequences can be causally attributed to the breach.

D. Other Clear Examples of Substitutionary Money Awards Two distinct situations in which English law provides money awards that substitute for performance rather than simply making good the factual detriment caused by the breach were just outlined. Although sometimes awards of the former kind have the effect of making good the innocent party’s loss, the fact that such an award does not in fact correspond to the loss suffered by the innocent party does not bar the recovery of the monetary equivalent of an order for specific performance (or a debt that has become due). However, the two monetary substitutes outlined above arise in special circumstances. The action for the agreed sum is available only in respect of a contractually owed debt and an award in lieu of specific performance is available only when the court has jurisdiction to order specific performance. On this basis it might be suggested that these substitutionary money awards are exceptional and thus do not pose a significant challenge to the orthodox view. 125 126

ibid [19]. For discussion, see Peel (ed) (n 38) [21-061].

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But this is not the case. The current section demonstrates that, in addition to awarding monetary substitutes for performance in the situations outlined above, English law unequivocally awards money in substitution for performance in certain other situations as well. In essence, the discussion shows that sometimes the sum awarded to the innocent party is explicable only on the basis that it is provided in substitution for the promised performance (rather than as compensation for loss) because the sum exceeds the factual detriment that breach has caused the innocent party. Following this, the distinctiveness of substitutionary and compensatory awards is highlighted by showing that the various doctrines restricting the amount of compensation recoverable by an innocent party in an action for breach do not apply to awards that substitute for performance.

1. The Right to Recover Under a Deed The clearest example of a substitutionary money award is when a promisee obtains a money award in substitution for a promise made by deed, which is unsupported by consideration.127 The fact that the promisee has provided nothing in return for the promise and may not expend any money in reliance on the promise’s existence, does not prevent this party from obtaining a substantial money award in lieu of the performance not provided. On any understanding of ‘loss’, it is simply absurd to say that in these circumstances the promisee has suffered ‘loss’ on the basis that he has not received the performance promised. The situation just outlined is the clearest instance of a case where the failure to perform a promise has not caused any ‘loss’. But adding the fact that the promisee has provided ‘consideration’ for the other party’s promise does not alter the essential position because it cannot be said that by simply making a promise, which remains unperformed, one has suffered ‘loss’. What is perhaps more controversial is to claim that even the performance of one’s contractual obligations does not of itself constitute ‘loss’ in the relevant sense. The central argument of this book is that, certain exceptional cases aside, the basic position just outlined in regard to promises made by deed also generally applies to all binding contractual promises, provided that the non-breaching party has provided, or at least has not been substantially incapacitated from providing, the relevant counter-performance that was promised as ‘consideration’ for the breaching party’s performance.

2. Contracts for the Sale of Goods That such an award is available in the context of a contract for the sale of goods is demonstrated by many of the authorities outlined in Section III of Chapter 2.128

127

For discussion of the effect of a deed see Halsbury’s Laws, 4th edn (LexisNexis, 2007) vol 13 [57]. For example, Williams Bros v ET Agius Ltd [1914] AC 510 (HL); Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA); Re (R & H) Hall Ltd and Pim (WH) (Jnr) and Co’s Arbitration (1928) 33 Com Cas 324 (HL). 128

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There it was observed that because many of these awards can be understood alternatively as a measure of the innocent party’s immediate financial loss at the date of breach, often the true nature of these awards is not appreciated. Nevertheless, because generally the entitlement to the difference in market value between the goods promised and those provided is unaffected by the occurrence of a postbreach event that reduces the immediate factual detriment that the innocent party has suffered, it is clear that the fundamental purpose of such awards is to substitute for performance rather than to compensate for loss. As Chapter 2 explained, a striking example of a substitutionary award of this kind was the one recently made by the High Court of Australia in Clark v Macourt.129 It will be recalled that there the innocent buyer of a fertility clinic sold by deed was deprived of a significant portion of the donor sperm she was promised as part of the assets of that business. The facts of the case were, however, unusual in at least three significant respects: (1) the cost of acquiring replacement sperm from the American supplier Xytex was more than three times the sale price of the clinic under the deed; (2) Clark recouped most of the expenses she incurred in purchasing sperm from Xytex by passing on the costs of acquisition to her patients; and (3) Clark was bound by certain ethical guidelines that prohibited her from realising a profit from the sale of donor sperm. Despite these unusual circumstances, Clark nevertheless recovered the full cost of purchasing replacement sperm from Xytex at the date of breach. In response to her claim, Macourt argued that, on a correct interpretation of the Robinson v Harman principle, Clark was limited to an award of the expenses associated with procuring replacement sperm.130 Explained in the terms this book employs, Macourt’s argument was essentially that the only claim available to Clark was a compensatory one to make good the financial loss she suffered in consequence of SGFC’s breach. However, as Keane J explained in a passage that indisputably endorses the central thesis of this book, Clark ‘was entitled to frame her claim in the manner most advantageous to her’,131 and an alternative (and more advantageous) claim available to Clark was one for an award that, as paragraph 13(a) of her reply in the Supreme Court alleged, gave her the benefit of her bargain under the Deed by giving her, so far as money is capable of doing so, something equivalent to the value of the worthless Sperm delivered to her, as opposed to damages to compensate her specifically for her outlay to Xytex.132

3. Contracts for the Provision of Services In addition to the aforementioned examples, substitutionary awards are also available in the context of contracts to provide services. A significant House of 129 Clark v Macourt (2013) 88 ALJR 190, [2013] HCA 56. For the facts of the case, see Chapter 2, Section III.C.3. 130 ibid [105]. 131 ibid [103]. 132 ibid [103].

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Lords authority supporting this proposition is Alfred McAlpine Construction Ltd v Panatown Ltd. The facts of this case also were outlined in Chapter 2 and its significance for the argument advanced in this book is now explained. Following this, Stadlen J’s decision in Giedo van der Garde BV & anr v Force India Formula One Team Ltd is considered. In providing the innocent party in that case with a substantial money award in the absence of proof by him of any identifiable loss, as well as endorsing the approach adopted by Lord Goff and Lord Millett in Panatown, Stadlen J’s decision provides significant support for the understanding of the law advanced in this book. a. The Significance of Panatown In Panatown, both Lord Goff and Lord Millett found that Panatown was entitled to substantial ‘damages’ for McAlpine’s breach. In doing so, their Lordships held that it is a general principle of English law that a promisee suffers ‘loss’ where services are not performed for which it has contracted. In addition, their Lordships held that because this is a general principle, rather than an exception to a general rule, there was no reason why the principle should not apply when the third party had its own direct remedy against the promisor. By contrast, although Lord Browne-Wilkinson was prepared to ‘assume’ that this general principle was ‘sound in law’, he felt he did not need to decide the point conclusively here because of the existence of UIPL’s direct remedy against McAlpine under a duty of care deed, which was collateral to the main contract.133 The reference to ‘loss’ here is confusing because the claimant has not suffered any loss in the sense in which this term is typically understood. Rather, to the extent that any ‘loss’ was suffered, it was a loss of the performance that the innocent party was entitled to under the contract. However, in accordance with the definitions proposed in Chapter 3 and just reiterated, the mere occurrence of breach, without more, should not be classified as ‘loss’ in the relevant sense. For the sake of conceptual clarity, and to minimise the possibility of errors, references to ‘loss’ should be confined to describing deteriorations in a party’s factual position. Thus, although this book disagrees with the result reached by Lord Clyde, it does endorse his Lordship’s comment that: A breach of contract may cause a loss, but it is not in itself a loss in any meaningful sense. When one refers to a loss in the context of a breach of contract, one is referring to the incidence of some personal or patrimonial damage.134

By contrast, while this book does not support Lord Goff ’s and Lord Millett’s use of the word ‘loss’ in Panatown to describe the deprivation in performance that a breach entails, the result reached by their Lordships in the case is endorsed on the basis that a party in Panatown’s position has a right to receive the performance it contracted for. When one party commits an actual or anticipatory breach of 133 134

Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL) 577. ibid 534.

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contract, the law must decide whether to compel that party to perform or to pay an appropriate monetary substitute in lieu.135 Prima facie, the most appropriate substitutionary measure is the cheapest price of obtaining substitute performance elsewhere. But when this measure is unquantifiable, an alternative substitutionary award is appropriate. This book argues, and some cases demonstrate, that in these circumstances the ‘next best’ substitutionary measure is a reasonable approximation of the price that the innocent party would have accepted to ‘release’ the breaching party from further performance at the date of breach. b. Force India: A New Formula for Recovery The reasoning of Lord Goff and Lord Millett was endorsed as the majority approach in Panatown relatively recently at first instance by Stadlen J in Giedo van der Garde BV & anr v Force India Formula One Team Ltd.136 The claimant and the defendant there entered into two agreements, which, inter alia, required the defendant to permit the claimant to drive a Formula One racing car in testing, practising or racing for a minimum of 6,000 kilometres. In consideration, the claimant was required to pay the defendant $3 million. This amount was paid. The claimant’s reason for entering this contract was to further his aspirations to become a Formula One driver. In the event, the defendant failed to permit the claimant to drive a Formula One car for the agreed distance, restricting the claimant to driving 2,004 kilometres only. Given the law’s conventional understanding, the claimant’s difficulty was in proving that the relevant breach had caused him any loss. This was because he could not establish that if he had been permitted to drive the remaining kilometres to which he was contractually entitled, he would have been any more likely to fulfil his ambition of becoming a Formula One driver. Thus, in addition to a claim in unjust enrichment for ‘failure of consideration’,137 a speculative claim for the loss of opportunity to make a profit and a claim for ‘Wrotham Park damages’, the claimant brought an action seeking ‘damages’ for breach of contract measured by reference to the value of the performance which the defendant had agreed, but failed, to provide. Stadlen J upheld this so-called ‘performance interest damages claim’ and awarded the claimant the (market) value of the kilometres and associated benefits that should have been provided ‘but for’ the breach.138

135 It must be emphasised, however, that the innocent party’s entitlement to a monetary substitute for performance (in these circumstances) is dependent on the unconditional accrual of its right to performance (or at least that the innocent party remain ready, willing and able to provide the relevant counter-performance). 136 Giedo van der Garde BV & anr v Force India Formula One Team Ltd [2010] EWHC 2373 (QB). 137 This claim failed because of the requirement that any failure in this context be ‘total’. See, for example, Goss v Chilcott [1996] AC 788 (PC) and Stocznia Gdanska v Latvian Shipping Company [1998] 1 WLR 574 (HL) 590 (Lord Goff). For discussion, see D Winterton and F Wilmot-Smith, ‘Steering a Course on Contract Damages and Failure of Consideration’ (2012) 128 LQR 23. 138 Giedo van der Garde BV & anr v Force India Formula One Team Ltd (n 136) [498].

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Significantly, Stadlen J’s decision to uphold this claim was on the basis that it was not inconsistent with any authority brought to his attention and that it was supported by analogy to the approach to the assessment of ‘damages’ for nondelivery of goods in section 51(3) of the Sale of Goods Act 1979, as well as the old common law authorities that this section reflects.139 His Lordship also argued that the award was consistent with the decisions and approach in Miles v Wakefield MDC,140 National Coal Board v Galley,141 and Royle v Trafford,142 outlined in Chapter 2. In addition, Stadlen J held that the award was analogous to the approach to the assessment of ‘damages’ for delivery of inferior services articulated by Sir Thomas Bingham MR in White Arrow,143 and was also supported by Lord Nicholls’s speech in Blake.144 This award of the (market) value of the services agreed under the contract but not in fact provided is another unequivocal example of a substantial money award substituting for a contractually agreed performance.

E. Restrictions on Compensatory Recovery do not Apply to Substitutionary Awards The distinctiveness of an award substituting for performance compared to an award compensating for consequential loss is further demonstrated by the inapplicability of doctrines such as remoteness and mitigation, which limit the recovery of compensation for loss, to substitutionary awards. The conventional understanding of contractual awards has caused much confusion in this regard, meaning that these doctrines are occasionally misapplied to limit the recovery of awards substituting for performance.145 For the most part, however, courts have respected the distinction between substitutionary and compensatory awards. That the restrictions encapsulated by the doctrines of ‘remoteness’ and ‘mitigation’ are inapplicable to substitutionary awards becomes obvious upon appreciating that these doctrines are concerned only with placing reasonable limits on the scope of an innocent party’s recoverable loss.

1. Mitigation It was explained above that in Jervis v Harris the Court of Appeal recently recognised that the restrictions encapsulated by principles of remoteness and mitigation 139

ibid [486]. Miles v Wakefield MDC [1987] AC 539 (HL). 141 National Coal Board v Galley [1958] 1 WLR 16 (CA). 142 Royle v Trafford [1984] IRLR 184. 143 White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA). 144 Blake (n 1). The performance-oriented account advanced in this book does not purport to be able to explain the decision in Blake. However, to the extent that the profit-stripping remedy provided there was awarded with the aim of protecting the right to performance in a generalised sense by deterring cynical breaches it is at least potentially consistent with the understanding of contract damages proposed here. 145 For example in Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA). See discussion below. 140

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do not apply to a claim for the recovery of an agreed sum.146 But these restrictions are also inapplicable to awards upholding a right to a non-monetary performance, such as those provided in cases like Clark v Macourt and Joyner v Weeks.147 As Chapter 2 explained, in the latter case a tenant was in breach of his covenant to repair. Any loss the landlord appeared likely to suffer at the date of breach had been mitigated because part of the premises were to be demolished in any event and, in respect of the rest of the premises, the landlord had entered into another lease under which the subsequent tenant agreed to effect any remaining repairs. The Court of Appeal nevertheless held that the landlord was entitled to a substantial money award assessed by reference to the cost of repairs. The decision in Joyner is a clear example of a substitutionary money award. It is also a clear demonstration of the principle that acts of mitigation do not affect the availability of such an award. Although the specific ruling in Joyner has now been overturned by statute,148 the truth of the general proposition that acts in mitigation do not affect the availability of an award substituting for performance was reaffirmed by the Privy Council149 in a decision subsequently followed by the Court of Appeal.150 In these two cases the buyer’s liability to the seller, following the latter’s acceptance of the former’s repudiatory breach, was assessed at the date of breach despite a subsequent fluctuation in the subject matter of the contract, which reduced the seller’s actual loss. The truth of all this may have been obscured by the tendency to express the restriction imposed on the recovery of substitutionary awards in terms of whether such an award is ‘reasonable’. Understandably, this had led to parallels with the mitigation doctrine.151 However, as Chapter 5 explains, this restriction is best understood as an independent constraint concerned with deciding whether the circumstances make it reasonable for the innocent party to insist upon obtaining a close substitute for the promised performance in the aftermath of breach. Although the misapplication of mitigation principles in quantifying primary awards is somewhat understandable given the common terminology used in both contexts, it is important that these two different meanings of ‘reasonableness’ be appreciated, as noted by both Dillon LJ and Mann LJ in the Court of Appeal in Ruxley.152

2. Remoteness Perhaps surprisingly, a similar mistake is sometimes made in relation to the applicability of principles of contractual remoteness. A notable example of this 146

Jervis v Harris (n 103). Joyner v Weeks [1891] 2 QB 31 (CA). 148 Landlord and Tenant Act 1927, s 18(1). 149 Jamal v Moolla Dawood, Sons & Co [1916] 1 AC 175 (PC). 150 Campbell Mostyn (Provisions) Ltd v Barnett Trading Co [1954] 1 Lloyd’s Rep 65 (CA). 151 A notable example of this is the minority’s reasoning in White & Carter Councils v McGregor [1962] AC 413 (HL). 152 Ruxley Electronics & Construction Ltd v Forsyth [1994] 1 WLR 650 (CA) 660. 147

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phenomenon is the Court of Appeal’s decision in Bence Graphics.153 Recall that the majority’s decision in that case to limit the buyer’s ‘damages’ to the factual loss it suffered as a result of the seller’s breach of quality was based on an application of Hadley v Baxendale.154 However, as Sir Guenter Treitel argued forcefully at the time, this is not where the analysis should have begun.155 The claim in Bence was one for the difference in value between the goods contracted for and the goods provided, not one for consequential loss. Sometimes circumstances may make it ‘unreasonable’ for the innocent party to insist upon receiving a monetary substitute for performance, but performance of the contract according to its terms can never be beyond the parties’ ‘reasonable contemplation’ at the time of contract formation. The reason for this confusion, this book contends, is the conflation of substitutionary and compensatory awards within the orthodox account. A final point should be made. For obvious reasons, the remoteness and mitigation doctrines, as well as the specific restrictions that operate on the recovery of compensation for non-pecuniary loss, also do not apply to restrict the entitlement to the alternative monetary substitute for performance, which is measured by reference to an award approximating ‘the reasonable price of release’. The idea that such an award should be subject to such restrictions is nonsensical since no question of the remoteness of loss or the need to mitigate arises in the circumstances in which such awards are made, which of course only serves to highlight that in reality such awards aim to substitute for performance rather than to make good the detrimental factual consequences that breach has caused the innocent party.156

IV. Theoretical Underpinnings of the New Account In this final section of the chapter, two further important foundational aspects of the new account are explained. The first is the specific kind of substitutionary account proposed and, in particular, how this account is distinct from competing substitutionary analyses. The second is the theoretical basis for substitutionary and compensatory awards. The account endorsed is essentially the one that Professor Gardner has advanced to explain the analogous puzzle that arises in the law of torts. The essence of Gardner’s account is that, following breach, the reasons justifying the existence of the primary right (to performance) persist and press for ‘next-best conformity’. These still persisting reasons, in combination with any new considerations that have become relevant following breach, together may justify

153

Bence Graphics (n 145). Hadley v Baxendale (1854) 9 Exch 341. 155 GH Treitel, ‘Damages for Breach of Warranty of Quality’ (1997) 113 LQR 188, 190. Support for this proposition can be found in Re National Coffee Palace Co (1883) 24 Ch D 367, 372. 156 The difficulties involved in a gain-based analysis of these awards were outlined in Chapter 2. 154

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the court’s particular substitutionary order. Achieving ‘next-best conformity’ with these reasons, however, also requires that certain detrimental factual consequences attributable to the breach be made good; hence the need to supplement the substitutionary order with an award of compensation for certain additional factual loss.

A. The Kind of Substitutionary Account Advanced The main aim of this section is to distinguish the account of contractual money awards proposed in this book from the distinct substitutionary analysis recently advanced by Professor Stevens. For Stevens, the usual purpose of a money award responding to any civil wrong, including a breach of contract, is to achieve the ‘next best thing’ to the wrong not having occurred. With respect to common law wrongdoing, two distinct responses are necessary to achieve this objective. The first is an award that values the infringement of the right at the date of breach. The second is an award of compensation for any additional loss suffered in consequence of the wrong, assessed at the date of trial. Stevens’s account may appear to be very similar to that advocated in this book, but there are some important differences between the two approaches, which must be explained.

1. Professor Stevens’s ‘Substitutive Damages’ Theory According to Professor Stevens, ‘damages’ in the law of torts are awarded, in the first place, to achieve the next best thing to the primary right not having been infringed.157 For Stevens, this means that awards of ‘damages’ can serve two distinct functions. First, damages awards may substitute for the value of the infringement of the primary right entailed by the tortfeasor’s breach of his primary duty. Secondly, such awards may compensate the victim of a breach for loss suffered in consequence of the infringement. On Stevens’s account both of these functions serve the more abstract purpose of achieving the next best outcome to the right not having been infringed in the first place. Critically, in contrast to the orthodox understanding of damages for civil wrongs, Stevens’s account claims it is ‘the infringement of rights, not the infliction of loss … [that] is the gist of the law of torts’.158 Stevens’s book is principally one about the basis for ‘damages’ in the law of torts. However, on Stevens’s understanding of private law a tort is nothing more than the breach of a primary legal duty. Thus, his book applies equally to awards of ‘damages’ for breach of contract as it does for ‘damages’ awarded in response to torts like trespass, conversion and defamation.159 On Stevens’s account of contractual money awards, the infringement of the primary right to performance gives rise to 157

See, for example, R Stevens, Torts and Rights (Oxford University Press, 2007) 59. ibid 2. 159 ibid 70. The legitimacy of treating breach of contract as analogous to these more conventional torts is far from clear. For example, see Ibbetson (n 75) 126–54. 158

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a new, secondary right to damages in accordance with Lord Diplock’s dictum in Photo Production v Securicor.160 Stevens claims that the same two objectives underpinning awards of ‘damages’ in the law of torts also underpin contractual awards. He also explains the rationale for such awards in essentially the same terms, stating that ‘damages awards are the law’s attempt to reach the “next best” position to the wrong not having been committed. For breach of contract, this is the next best position to the performance having been rendered’.161 Stevens’s account has been subjected to forceful criticism by, amongst others, Professor Burrows and Professor Edelman. Edelman’s principal (and arguably strongest) objection is that ‘we cannot understand “value of an infringement” or “value of a right” without reference to the deterioration of the claimant’s [factual] position’.162 For this reason, as Edelman correctly observes, Stevens’s mode of substitution essentially ‘collapses into valuing the consequences’ of the infringement and this, on Stevens’s own definition, equates to nothing other than valuing a loss. In a recent challenge to Stevens’s approach, Professor Burrows outlined the same objection to Stevens’s analysis, albeit in slightly different terms,163 in addition to five others. Some of Burrows’s objections certainly have merit, but responses are available to others, as Stevens’s own contribution to the same volume of essays makes clear.164 For example, Burrows claims that Stevens’s account ‘contradict[s] the law on … mitigation and compensating advantages’.165 However, as Stevens explains, the law of mitigation is incoherent precisely because of the dominance of the conventional, purely loss-based understanding of contractual money awards. Later in this book it will be shown why at least some of this incoherence can be removed by a substitutionary analysis of the law.

2. Dissimilarities from the Account Proposed Here Broadly speaking, Professor Stevens’s analysis of contractual money awards has much in common with the account advanced in this book. Prominent amongst the similarities are the need to distinguish substitutionary and compensatory contractual money awards and the explanation of these different awards in terms of the desire to achieve ‘next-best conformity’ with the original primary right to performance. However, at the doctrinal level there are also at least two important differences between the two theories, which must be highlighted. One important difference between the two ‘substitutionary’ analyses is that Professor Stevens appears to adopt an understanding of compensatory money 160

Stevens (n 52) 172. ibid 174. 162 J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundation of the Law of Unjust Enrichment (Oxford University Press, 2009) 211, 219. 163 See A Burrows, ‘Damages and Rights’ in D Nolan and A Robertson (eds), Rights and Private Law (Hart Publishing, 2012) 275, 279. 164 See R Stevens, ‘Rights and Other Things’ in D Nolan and A Robertson (eds) (n 163) 115. 165 Burrows (n 163) 278. 161

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awards in the contractual context according to which its scope is determined by reference to the parties’ underlying agreement.166 However, in Section III of Chapter 6 it will be argued that, in contrast to Stevens’s views, the parties’ agreement is often insufficiently detailed to provide the necessary evidential foundation for a court to determine the scope of the breaching party’s liability to compensate for loss caused by the breach. In such circumstances the decision as to where the limits of recovery lie must be governed by considerations that are external to the parties’ agreement. The second, and more significant, difference between Stevens’s analysis and the account proposed here concerns the appropriate measure for a substitutionary money award. On the account presented here, when the breach is reversible and acquiring substitute performance is a ‘reasonable’ course of action for the promisee to adopt, the appropriate substitutionary measure is prima facie the minimum cost of (substitute) performance. By contrast, Stevens’s central claim is that ‘substitutive damages’ are always to be measured by reference to the difference in value at the date of breach between the performance promised and that provided. As explained earlier,167 the proposed account is thus closer to substitutionary analyses advanced by Coote, Smith and Webb,168 which all view ‘cost of cure’ awards as the primary substitutionary measure. But the new account is also distinct from these accounts in recognising the availability of an alternative substitutionary measure when the cost of performance is unquantifiable or ‘unreasonable’. Moreover, the understanding of the ‘reasonableness’ restriction proposed here does not accord in all respects with the way it is understood in these various alternative accounts. To reiterate, according to Stevens substitutionary awards are always measured by reference to the difference in value between the performance promised and that provided at the date of breach. As already observed, Edelman has argued convincingly that such an award is simply a measure of the innocent party’s immediate financial loss at this time.169 However, because Stevens advocates this measure even when this immediate loss is reduced by subsequent events, his analysis constitutes a challenge to the orthodox understanding of contractual awards that is distinct

166 This is consistent with Stevens’s overall approach and is supported by a post of his to the Obligations Discussion Group on 4 August 2008. In the context of a discussion of The Achilleas, Stevens wrote: ‘The secondary obligation to pay damages is based upon the primary obligation to perform. Inevitably, therefore, just as the primary right is sourced in the agreement, so is the obligation to pay damages. We don’t forget about the parties’ agreement when we get to the quantification of damages stage’. Professor Stevens’s discussion in Torts and Rights (n 157) is not clear on this point: see 152. 167 See Section IV.A of the Introduction to this book. 168 See B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537; B Coote, ‘The Performance Interest, Panatown and the Problem of Loss’ (2001) 117 LQR 81. Smith, Contract Theory (n 52) 420; S Smith, ‘Substitutionary Damages’ in C Rickett (ed), Justifying Private Law Remedies (Hart Publishing, 2008) 93. C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 41; C Webb, ‘Justifying Damages’ in Neyers, Bronaugh and Pitel (eds) (n 52) 139. 169 Edelman (n 162) 219.

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from the challenge advanced here.170 It is nevertheless important to appreciate that in practice these two different substitutionary measures will often correspond, such as where there is an available market for both the performance agreed upon and that provided, meaning that differences between the two accounts are liable to be overlooked. Despite this, there are at least some cases in which the two measures will not correspond, such as where there is no available market for either the performance agreed upon or that provided, or when the cost of repairing the defect is cheaper than this difference in market value. Another instance of potential divergence occurs when the breach in question is the defective performance of a contract for the construction of some object. In such cases, Stevens regards a ‘cost of reinstatement’ award as a measure of loss rather than as a substitute for performance. Thus, Stevens believes these awards should be available only when the promisee has already had the repairs done or has shown a clear intention to do so in the future. This is to be contrasted with the understanding of such awards articulated in Chapter 5, which suggests that their availability is not contingent upon the promisee’s intention to procure performance. There it is noted that there is also significant support for this approach in the case law. According to Stevens, therefore, repair costs are a measure of loss and their only relevance in quantifying a substitutionary award is as evidence of the value of the right to performance at the date of breach.171 Stevens’s interpretation of Joyner v Weeks, for instance, is that the value of the landlord’s right to repairs was quantified by reference to the difference in value between the repaired and unrepaired premises, capped by the cost of doing the repairs.172 But this claim appears to contradict his statement three pages later that ‘damages should … be capped at the difference in value between the work promised and the work performed’.173 If the ‘difference in value’ and ‘cost of cure’ measures are not equal then Stevens’s account provides no clear guidance as to which amount should be awarded in a situation such as that which arose in Joyner. By contrast, on the account proposed here the reason why the cost of performance was awarded in Joyner is clear. Such an award was the most appropriate substitutionary measure because it was both quantifiable and ‘reasonable’ in the circumstances.

170 As Gardner explains, there are various different reparative measures, ‘the choice among which depends on the logic of “next-best conformity”’. See J Gardner, ‘Torts and Other Wrongs’ (2011) 39 Florida State University Law Review 43, 56 (fn 50), referring to his discussion of ‘next-best conformity’ in ‘What is Tort Law for? Part 1: The Place of Corrective Justice’ (2011) 30 Law & Philosophy 1, 44. Thus, at a higher level of abstraction, substitution and compensation, whether understood in the sense proposed here or in the way that Stevens suggests, are simply two different reparative measures and the differences between the two different interpretations of ‘substitution’ are attributable to different views of what constitutes ‘next-best conformity’ with the primary right to performance. For the account proposed here, the main objective is to provide a substitute for the contract’s subject matter, while for Stevens it is substituting for the right to performance which is paramount. 171 Stevens (n 52) 189. 172 ibid 186. 173 ibid 189.

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B. The Theoretical Basis for the Proposed Distinction This section outlines the theoretical foundations of the new account of contractual awards this book proposes. The essence of the account advanced is that following breach the reasons that grounded the primary right to performance persist and press for ‘next-best conformity’. Achieving this ‘next-best conformity’ requires two distinct responses. First, the promisee must receive an appropriate substitute for the performance that was promised but not provided. Secondly, certain detrimental consequences caused by the breach must be made good. The substitutionary order that is appropriate depends upon the particular circumstances pertaining at the time the court’s jurisdiction is invoked and it is also generally accepted that a breaching party’s liability to make good the loss caused by breach is limited by notions of reasonableness, which are given specific content via the relevant rules of remoteness and mitigation.

1. The Uncertain Relationship Between Substantial and Remedial Rights in English Contract Law Part I of this book outlined certain doctrinal, conceptual and terminological shortcomings in the orthodox account of contractual money awards. In addition to these shortcomings, there is also uncertainty regarding the precise conceptual relationship between substantive and ‘remedial’ rights in English contract law. Lord Diplock famously attempted to fill this lacuna in the law in Photo Production Ltd v Securicor Transport Ltd, where his Lordship stated that: Leaving aside those comparatively rare cases in which the court is able to enforce the primary [contractual] obligation by decreeing specific performance of it, breaches of primary obligations give rise to substituted or secondary obligations on the part of the party in default … to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach.174

The first point to notice about this statement is that it (unsurprisingly) appears to reiterate the orthodox, purely loss-based understanding of contractual money awards. The second point to note is that Lord Diplock’s use of the phrase ‘substituted or secondary’ is ambiguous. His Lordship appears to suggest that, leaving specific performance aside, a breach of the substantive right to performance itself triggers a substitution of this right with a new, secondary right to monetary compensation. However, in the absence of further explanation, this statement leaves many unanswered questions. To be sure, much of the uncertainty is clarified by the paragraphs of Lord Diplock’s speech that follow. There his Lordship suggests that, at least leaving two exceptional cases aside, the primary obligation to perform is not really substituted with a secondary obligation to pay compensation at all. Rather, the ‘general secondary obligation’ to pay compensation for non-performance arising in all cases 174

Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) 848 (emphasis added).

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of breach appears to be a new obligation generated by the breach itself, since his Lordship states that, ‘with two exceptions, the primary obligations of both parties so far as they have not yet been fully performed remain unchanged’ by breach. The two situations that Lord Diplock identifies where the primary obligation to perform does not remain following breach are: [W]here the event resulting from the failure by one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract … [and] where the contracting parties have agreed, whether by express words or by implication of law, that any failure by one party to perform a particular primary obligation … irrespective of the gravity of the event that has in fact resulted from the breach, shall entitle the other party to elect to put an end to all primary obligations of both parties remaining unperformed.175

With these qualifications explained, Lord Diplock’s account becomes both more complete and more compelling. Nevertheless, unanswered questions remain concerning precisely why it is that certain breaches transform the primary right to performance into a new right to ‘monetary compensation’ and how such an analysis can be reconciled with the availability of decrees of specific performance. The nature of substitutionary and compensatory court orders also remains unexplained on this account. In consequence of this uncertainty, further clarification is required.

2. Towards a Superior Account As just explained, the precise conceptual relationship between substantive and ‘remedial’ rights in contract law is unclear. The account of that relationship proposed here is that, following an actual (or anticipatory) breach of contract, the reasons justifying the existence of the primary right to performance persist and press for ‘next-best conformity’. Although the thesis of this book does not depend upon any particular theoretical conception of contract law,176 the present author’s view is that, as Kimel argues, these reasons principally pertain to the valuable contribution to personal autonomy that the facility to undertake binding contractual obligations provides.177 But this understanding of the nature of the relationship between substantive and ‘remedial’ contractual rights may be reconcilable with other explanations of the binding nature of contractual undertakings.

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ibid 849. As (Professor Stephen) Smith notes, ‘the continuity thesis is neutral regarding the kinds of reasons that explain primary duties … [so that in principle] utilitarian theorists can adopt the thesis’. See S Smith, ‘Duties, Liabilities and Damages’ (2012) 125 Harvard Law Review 1727, 1737. 177 See Kimel (n 10), where Kimel identifies two distinct ways in which contract law contributes to the realisation by its participants of valuable personal autonomy: first, allowing parties to co-ordinate to achieve a mutually beneficial future outcome and secondly, to achieve such co-ordination without the interpersonal trust otherwise normally required for any successful joint endeavour. 176

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To explain further, the occurrence of a breach of contract means that perfect conformity with the promisee’s primary right to performance is no longer possible. But this does not mean that the reasons that justified the existence of this primary right to performance do not continue to exert their normative force by pressing for ‘next-best conformity’ with the original duty that they grounded.178 If substitute performance remains possible, these persisting reasons can be given effect to via a new court-ordered right to such a substitute and, after assessing all the relevant considerations, the court should (and generally does) choose the substitute for performance that is most appropriate in the circumstances. Thus, the content of the new (court-ordered) right to substitute performance is determined by combining the reasons that justified the creation of the original right to performance with any further considerations now relevant to the court’s assessment of what constitutes the most appropriate way of conforming to the reasons that grounded the original right (and correlative duty). In addition to requiring an appropriate substitute for performance, however, achieving ‘next-best conformity’ also requires that certain detrimental factual consequences of the breach be made good. Traditionally, the occurrence of breach has been understood as generating a new, secondary right to repair. Recently, however, this view has been challenged and the better view may be that the commission of a breach simply leaves the breaching party liable to be ordered to undertake certain actions by a court, including the payment of monetary compensation that aims to make good certain of the detrimental consequences that the promisee has suffered.179 Regardless of which view is correct, compensatory money awards also are grounded ultimately in the promisee’s primary right and, at a higher level of theoretical abstraction, are also ordered in order to achieve ‘next-best conformity’ with the original reasons that justified this primary right. In essence, this account is an application of Professor Gardner’s explanation of the corrective justice norm that operates in the law of torts.180 This account applies with equal or perhaps even greater force in the contractual context, where often it is possible to provide a closer substitute for the original right than it is following the breach of other primary legal rights.181 On Gardner’s account, the secondary right to repair that is generated by a breach of the primary right is coextensive with the requirement of ‘next-best conformity’, rather than simply an aspect of it. But Gardner’s account is provided in the context of explaining the duty to repair wrongfully caused losses in the law of torts, where compensation always looks backwards to a victim’s earlier position rather than forwards to a future one, as it does in the law of contract. The law of torts, in other words, lacks

178

See Gardner (n 170) 33. This controversy is discussed in greater detail in Chapter 6, Section II. 180 See J Gardner (n 170) 28 and following. The view adopted is in essence the claim that Gardner refers to as ‘the continuity thesis’ at 33. 181 In this context it is significant that the example from which Professor Gardner develops his account is that of a broken promise, ibid 28–33. 179

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the forward-looking aspect of ‘next-best conformity’ present in the law of contract, meaning that recognising the two distinct aspects of ‘next-best conformity’ which this book proposes is in fact consistent with Gardner’s overall approach.182 As already noted, philosophically the two different kinds of money award identified in this book might be understood simply as two different aspects of the ‘next-best conformity’ called for in the aftermath of a contractual breach. Doctrinally, however, substitutionary and compensatory money awards are better understood as distinct. This is principally on the basis that their conflation produces mistakes. Notable examples of such mistakes include the Court of Appeal’s decision in Bence Graphics,183 the approach taken by the two minority members of the House of Lords in White & Carter (Councils) Ltd v McGregor, and the analysis adopted recently by a majority of the Canadian Supreme Court in Southcott Estates Inc v Toronto Catholic District School Board. This does not mean, however, that the distinction between the two kinds of money award is a mere doctrinal construction because, other than at the highest level of theoretical abstraction, the objectives of substitutionary and compensatory awards are fundamentally different. While substitutionary awards aim to substitute for performance irrespective of the consequences of non-performance, compensatory awards aim to make good the detrimental factual consequences that breach has caused. Thus, in translating the theoretical picture just outlined into coherent legal doctrine it is necessary to distinguish these two different aspects of ‘next-best conformity’. Regardless of precisely how this account is conceptualised, its effect is as follows: (1) Assuming the promisee’s entitlement to performance has accrued unconditionally and leaving aside exceptional cases where a promisor might be required to disgorge profits derived from his failure to perform as promised,184 a successful action for breach of contract requires a court to decide upon the most appropriate way to give effect to the promisee’s two distinct entitlements to substitute performance and to reparation to make good certain detrimental factual consequences of the breach. (2) With regard to the entitlement to substitute performance, the immediate choice is usually between specific performance and the minimum cost of obtaining substitute performance (either via repair or replacement), though sometimes both of these orders are unavailable because the breach is irreversible. (3) When the latter qualification is operative, a reasonable approximation of the sum the promisee would have accepted to ‘release’ the promisor from future 182

For support, see Gardner (n 170) 56 (fn 50). Bence Graphics (n 145), explained by Treitel (n 155). 184 It is not conceded that such an award constitutes a justifiable response to a breach of contract. But to the extent that it can be justified, this justification would appear to lie in considerations that are external to the account advanced here. For example, amongst those who support the availability of punitive or disgorgement awards for breach of contract, the justifications typically advanced are the need to punish particularly egregious breaches of contract or the desirability of deterring these kinds of breaches from happening in the future. See, for example, K Barnett, Accounting for Profit for Breach of Contract (Hart Publishing, 2012) 7. 183

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performance at the date of breach is the next best thing that the law can do to substitute for performance. (4) Finally, in choosing between ordering specific performance and awarding its monetary equivalent, English law generally prefers the latter option and this preference is probably justifiable by reference to a variety of normative and practical considerations.185 With regard to making good the detrimental factual consequences of breach, the only choice open to the court is to award monetary compensation designed to reverse these consequences so far as this is possible. With regard to financial loss caused by breach, this is clearly the most natural and logical response for the law to adopt. In regard to non-pecuniary loss, however, monetary compensation is awarded not in order precisely to make good such loss, but simply because it is the ‘next best’ thing that the law can do in the circumstances.186 Compensatory awards, however, also are subject to certain restrictions, which are examined in Chapter 6. It is argued there that these restrictions cannot be explained wholly by reference to the parties’ underlying agreement, which reinforces the need for the fundamental distinction this book proposes.

V. Conclusion This chapter had three main objectives. The first was to defend the claim that the formation of a valid contract invariably creates reciprocal legal rights to performance in each of the contracting parties. Principally on the basis that ‘damages’ rather than ‘specific performance’ is the default response to breach, this

185 While it is beyond the scope of this book to consider whether the limited availability of specific performance in English law is justified, it is the present author’s view that the basic preference for awarding monetary substitutes for performance rather than making coercive orders is justifiable for a combination of normative and practical reasons. First, consistent with at least one interpretation of ‘the harm principle’, a monetary award normally constitutes a lesser interference with the defendant’s personal liberty at minimal, if any, cost to the claimant. Secondly, the ability to substitute money for performance may assist individuals to minimise the consequences of mistaken decisions and move on with their lives, which itself provides a further valuable contribution to the realisation of valuable personal autonomy. Thirdly, the adoption of a general preference for monetary substitutes also may help to minimise potential harm to the institution of contract law by reducing the abuse of legal rights as well as the costs of disputes, and it also may extend the range of situations in which the institution’s benefits can be realised by promoting participation in the practice of contracting. 186 It also is arguable that compensatory awards for non-pecuniary loss have a different, more symbolic, function than awards of compensation for pecuniary loss. This is consistent with Professor Stephen Smith’s more general claim that ‘in the common law, damages are awarded not in order to uphold defendants’ post-infringement moral duties, but instead in order to vindicate plaintiffs’ rights’ by having this infringement ‘publicly acknowledged’. As Smith states, on this view the intention of the award ‘is not to attempt to make the world as if the wrong never happened, but instead to make it clear to the world, or more precisely to the two parties, that the wrong was a wrong that should never have happened’. See Smith (n 176) 1753–55.

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claim is sometimes denied. Nevertheless, the existence of a general legal right to performance was defended on three distinct bases. The first was the various considerations that undermine the validity of Holmes’s famous characterisation of the primary contractual duty as being either ‘to perform or pay damages’. The second was the fact that there are numerous additional doctrinal features of English law that support the existence of the right to contractual performance. Finally, it also was argued that, more fundamentally, the basic Holmesian objection misunderstands the nature of legal rights in a way that conflates the question of whether a right exists with that of how a pre-existing right should be enforced. The second objective of this chapter was to demonstrate the extent to which English law currently recognises the distinction between substitution and compensation that it is the principal aim of this book to establish, and that it is simply irrefutable that some contractual money awards aim to substitute for performance rather than making good the factual loss caused by breach. After showing that the distinction between substitution and compensation is embedded historically in English law, the nature of claims to recover contractual debts and awards of ‘damages’ in lieu of specific performance was explained. Both of these awards are usually principally concerned with providing the claimant with a substitute for performance rather than to make good the detrimental factual consequences of a breach. The same can be said in relation to awards for unperformed promises made under a deed and for certain unperformed contractual undertakings to provide goods and services. That such awards are not for ‘loss’, narrowly understood, is highlighted by the inapplicability to them of various restrictions imposed on compensatory money awards. Finally, Section IV of the chapter detailed two further important preliminary aspects of the new account. First, Section IV.A sought to provide a clearer picture of the particular kind of substitutionary analysis advanced by explaining how this account is distinct from the theory of ‘damages’ recently proposed by Professor Stevens. Secondly, Section IV.B sought to provide a coherent theoretical explanation of the proposed distinction between substitution and compensation. On this account, the reasons justifying the primary right to performance persist following breach and press for ‘next-best conformity’. At least where the promisee has become entitled unconditionally to the promised performance, achieving this requires that an appropriate substitute for performance be provided and that certain factual detriment caused by the breach be made good. English law achieves these complementary, but distinct, objectives by providing either coercive relief or an appropriate monetary substitute for performance alongside an award designed to make good certain factual loss that can be causally attributed to the breach.187

187 Note that this summary of the contents of the chapter does not properly take account of the observation made in the preceding text that compensatory awards for non-pecuniary loss do not actually ‘make good’ the factual detriment caused by the breach and thus may have a more symbolic or ‘vindicatory’ function.

5 Money Awards that Substitute for Performance I. Introduction Section III of Chapter 4 demonstrated that English law recognises a distinction between money awards that substitute for a promised performance and money awards that are concerned with making good certain detrimental factual consequences caused by non-performance. The remaining chapters in this part of the book further defend this distinction and explain how it operates in the specific context of common law claims for the enforcement of promises to provide goods or services. The present chapter focuses on substitutionary money awards. The substitutionary analysis of the law advanced here is controversial but there is significant doctrinal support for it. Chapter 6 explains how compensatory money awards fit into the new picture of the law proposed by this book. The availability of such awards is not controversial, but it is argued that the scope of their operation has been exaggerated. Section II of this chapter explains how substitutionary awards are quantified. Prima facie, the appropriate basis for such an award is the minimum cost of obtaining substitute performance from a source other than the original promisor, either via repair or market replacement to the extent that a relevant market exists. Section II.A demonstrates that the prima facie availability of this measure has strong theoretical and doctrinal support. However, as Section II.B explains, at least in relation to awards of the cost of repairs, the availability of such awards is subject to restriction on the basis that, in the circumstances, the promisee’s insistence upon obtaining substitute performance is ‘unreasonable’. The section begins with a critique of the traditional interpretation of this restriction, which focuses on the promisee’s intention to ‘cure’ the breach. It is argued that while a promisee’s intended use of any potential award may be relevant in deciding whether this party’s insistence upon obtaining substitute performance is ‘reasonable’, it should not determine the inquiry and doctrinal support for this position is also outlined. In addition to being subject to denial on the grounds of ‘unreasonableness’, an award of the cost of substitute performance will be unavailable if the breach is irreversible because in these circumstances such an award simply cannot be quantified. It is argued that, at least in this situation and perhaps also when such an

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award is ‘unreasonable’, the promisee should be entitled, at least, to the sum that a reasonable person in his position would have accepted, as at the date of breach, to ‘release’ the counterparty from future performance.1 Defending this claim and explaining the restrictions presently imposed upon the recovery of such awards is the aim of Section III of this chapter. In addition to defending the legitimacy of such awards, three further claims are made: first, although the cases do not speak with one voice, there is doctrinal support for this claim; secondly, despite the lack of justification for doing so, sometimes the availability of this measure in the aforementioned circumstances is restricted; thirdly, this is explicable principally by reference to the dominance of the law’s conventional interpretation.

II. Awards of the Cost of Substitute Performance Section IV of Chapter 4 outlined a theoretical account of the relationship between contractual rights and ‘remedies’. According to this account, the occurrence of an actual or anticipatory breach of contract does not prevent the reasons that justify the existence of the right to performance that arises upon contract formation from persisting and pressing for ‘next-best conformity’.2 If the contract is brought to an end prematurely, the right to performance (and the reasons that justify it) may still be given effect via the award of an appropriate substitute for performance provided any conditions upon the enforcement of this right have been fulfilled. When it remains possible for the promisee to obtain an equivalent for the promised performance, this might be specific performance. Alternatively, the influence of other considerations may mean that, all things considered, an appropriate monetary substitute for performance is a preferable means by which to enforce the promisee’s right to performance.

A. Quantification In determining how a monetary substitute for performance should be quantified (and when it should be available) the appropriate starting point is that, subject to the existence of any unfulfilled conditions to which the right’s enforcement is subject, the creation of a valid contract creates in each party a right to the performance promised by his counterparty. On this basis, at least when it is both

1 Note, however, that the availability of such an award (as well as an award of the cost of repairing a defective performance) is dependent on the promisee having become unconditionally entitled to the promisor’s performance. 2 This is an application of Gardner’s account of corrective justice, See J Gardner, ‘What is Tort Law for? Part 1: The Place of Corrective Justice’ (2011) 30 Law & Philosophy 1.

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reasonable and possible for the promisee to do so, that party should be awarded the minimum amount required to enable him to obtain a close equivalent to the performance promised (either via market replacement or repair). Prima facie, therefore, the appropriate basis for quantifying a substitutionary money award is the minimum cost of obtaining substitute performance from elsewhere. The purpose of the present section is to defend this claim and to demonstrate the existence of this measure in the case law. The discussion divides in accordance with these two objectives.

1. Justification The justification for awarding a contracting party a money award that substitutes for the performance promised by his counterparty is simply that the creation of a valid contract gives to each party a legal right to the other’s promised performance. It is, however, critical to recognise that each party’s right to performance may be subject to certain conditions precedent and/or subsequent. This is of course well known, but its significance in regard to the assessment of contractual money awards generally seems to remain under-appreciated. To the extent that there remains an unfulfilled condition precedent to which a promisee’s right to performance is subject, that party obviously has no power to enforce this right at all. But the effect of an unfulfilled condition subsequent upon a promisee’s right to performance is critically different. While the existence of such a condition will not prevent a party from bringing a compensatory claim to make good the loss attributable to the other party’s failure to perform as promised, it will bar this party from fully enforcing this right either via a coercive order or an appropriate monetary substitute for performance.3 This analysis reveals the existence of two distinct ways in which a right to contractual performance may be enforced via the provision of a money award, both of which are capable of being made consistent with the Robinson v Harman principle’s stated (but prima facie indeterminate) objective of placing a party in ‘the same situation … as if the contract had been performed’. To be clear, one way of giving effect to this principle, often assumed to be the only means available at common law, focuses only on making good certain detrimental factual consequences that the promisee can attribute to the other party’s failure to perform. The other possible way of upholding the Robinson v Harman principle, which is

3 This is essentially because some or all of a contracting party’s promises are provided ‘in exchange’ for the other party’s promises. Thus, while each case will depend upon a construction of the particular contract that the parties have concluded, generally speaking one cannot insist upon receiving the subject matter promised under a contract of sale via a substitutionary court order compelling performance without paying the balance of the purchase price. Similarly, a buyer cannot insist upon receiving a monetary substitute for a seller’s failure to perform without paying the purchase price under the contract of sale.

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often overlooked, gives the promisee the monetary equivalent of the performance promised, provided his right to such performance has accrued unconditionally.4 Critically, the availability of an award of the latter kind, which this book refers to as an award of the cost of substitute performance, does not depend in any way upon the contingency of whether the enforcing party can prove that it has suffered loss as a result of its counterparty’s failure to perform. A further important consequence of this view, as noted above, is that breach’s role in justifying the entitlement to a substitutionary money award is entirely indirect. The occurrence of a breach, which if sufficiently serious in either its nature or consequences will give the promisee a right to terminate the contract,5 merely provides the court with a good reason to intervene and enforce the a promisee’s primary right. Of course, the occurrence of the breach also leaves the breaching party liable to make good at least some of the detrimental factual consequences that the innocent party can prove this event has ‘caused’ it in the relevant sense. The objective of a substitutionary money award is to provide the victim of breach with the monetary substitute for performance that is appropriate in the circumstances. Given this objective, the applicable measure for such an award is normally the minimum cost of obtaining an equivalent to the promised performance. The intuitive appeal of this claim can be demonstrated via a simple example. Suppose that a party contracts for the sale and delivery of a machine and pays the price agreed upon. The machine is delivered but is seriously defective. The defect is so severe that the cost of repairing it to make it comply with the contractual specifications is £200,000, but the cost of purchasing a new machine is only £150,000. In this situation, the lesser sum is obviously appropriate to award because this is the minimum amount required to enable the promisee to obtain a close substitute for the promised performance. According to the orthodox account, such an award would be explained as a measure of the victim’s ‘loss’. Professor Burrows, for instance, might say that this sum is simply a true reflection of the loss suffered by the promisee as a result of the breach.6 But this is true only if at the relevant time (ie either the time of the breach or the time of the trial), the promisee can prove, on the balance of probabilities,

4 To reiterate the point made in the previous footnote, there are many situations in which a party’s entitlement to the other party’s enforcement is subject to a condition (precedent or subsequent) that certain of its own contractual undertakings have been substantially fulfilled. And to reiterate another point made in Chapter 4, this demonstrates that while Atiyah went too far in rejecting altogether the enforcement of wholly executory promises, his arguments contain an important truth: namely that generally speaking the full enforcement of a party’s contractual rights in the sense of an order for specific performance or its monetary equivalent is subject to that party substantially performing its own contractual undertakings, or at least upon tendering such performance. 5 For the origins of this requirement, see the discussion of Boone v Eyre (1777) 1 Hy.Bl 273 in Duke of St Albans v Shore (1789) 1 Hy.Bl 270; Glazebrook v Woodrow (1799) 8 TR 366, 374; and Ellen v Topp (1851) 6 Ex 424, 442. For more recent consideration, see Hong Kong Fir Shipping Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA) and LG Schuler AG v Wickman Machine Tool Sales [1974] AC 235 (HL). 6 See A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford University Press, 2004) 210.

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that it has purchased, or intends in the future to purchase, a substitute machine at the market price. In addition, as Chapter 2 demonstrated, the promisee’s entitlement to such an award is generally unaffected by third party acts of benevolence. In reality, therefore, the award is best understood as one that substitutes for performance in accordance with the original contract. The sum awarded is the minimum cost of ensuring the promisee is able to obtain such a substitute and this provides the best explanation of why this award is appropriate in the circumstances. The basic principle just identified has two important aspects. The first is that the sum awarded must be sufficient to ensure that the promisee can obtain a close substitute for the performance bargained for. This follows directly from the idea that formation of a valid contract creates a legal right to performance in each of the parties, at least to the extent that the relevant party remains ready, willing and able to perform his side of the bargain. While some have questioned the notion that contracts do in fact create legal rights to performance, the previous chapter demonstrated that there is significant doctrinal support for such a right and its existence is generally accepted. The second noteworthy aspect of the principle underpinning this measure is that the sum awarded must be the minimum amount necessary to enable the promisee to obtain the substitute. This requirement can be explained as a simple application of the minimum contractual obligation principle. As conventionally understood, this principle applies in the context of assessing compensatory damages for loss. However, once the possibility of an award substituting for performance is recognised, it is clear that by analogy this principle should apply equally in this context. The minimum contractual obligation principle stipulates that ‘where a contract entitles a party to perform in alternative ways … damages are generally assessed on the basis that the breaching party would have performed in the way most favourable to herself ’.7 An analogous application of the rationale underpinning this principle means that when there are grounds to award a monetary substitute for performance, the amount awarded should be limited to imposing the minimum financial burden on the breaching party. More generally, the minimum contractual obligation principle—both in its conventional form and as just modified—can be seen as a specific application of the harm principle.8 This book supports the view that much of contract law’s remedial scheme can be understood as upholding this principle.9 The conclusion stemming from this discussion is that an award of the cost of substitute performance is justified only to the extent that it gives effect to the promisee’s 7 ibid 147. For application, see Withers v General Theatre Corp Ltd [1933] 2 LB 536 (CA) and The Rijn [1981] 2 Lloyd’s Rep 267. 8 JS Mill, On Liberty ( JW Parker and Son, 1859), 21–22. For a modern restatement of the principle within a ‘perfectionist’ political morality, see J Raz, The Morality of Freedom (Oxford University Press, 1986) 412. 9 To this extent, this book generally endorses the view advanced in D Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart Publishing, 2003) chapter 4.

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entitlement to performance in the cheapest possible way. To do otherwise would require the breaching party to go beyond the legitimate objective of substituting for performance, which arguably amounts to a kind of punishment for breach.

2. Doctrinal Support Contrary to the orthodox view, the discussion that follows demonstrates that English law generally conforms to the principled position just outlined. Two basic kinds of situations must be distinguished. The first involves claims for the cost of rectification or repair. In these cases the court awards the claimant the minimum amount required to repair the defective performance provided, with this sum normally assessed at the time when the promisee could, with reasonable diligence, have discovered the defect.10 Assessing the award at this date is consistent with understanding its purpose as being to give the claimant the minimum amount required to obtain substitute performance from elsewhere since the claimant can only reasonably be expected to take such action once he becomes aware of the defect. The second kind of situation identified involves a claim for the cost of purchasing an appropriate market substitute for goods or services not provided in breach of contract. Such claims depend upon the existence of an available market for both the performance contracted for and that provided. In such cases the appropriate measure for a substitutionary award is the difference between these two market values. This sum gives the promisee the amount required to obtain a substitute for the agreed performance by selling the defective performance in the market and purchasing goods or services conforming to the original contract. For both goods and services, this measure may be adopted even though the promisee will not actually purchase a substitute. The appropriate time for quantification is either the date of breach,11 or the date at which the promisee could have discovered the breach acting with reasonable diligence.12 Again, this is consistent with the underlying principles outlined above. a. Claims for the Cost of Performance via Rectification The House of Lords recognised the possibility of awarding the cost of substitute performance in Ruxley Electronics v Forsyth.13 However, as explained above,14 such an award was held to be ‘unreasonable’ on the particular facts and therefore refused. The basis for this finding is considered below. Significantly, however, the usual availability and primacy of this measure was not questioned by the House of Lords and such an award was in fact made by the Court of Appeal. In the leading 10 11 12 13 14

East Ham BC v Bernard Sunley Ltd [1966] AC 406 (HL). Sale of Goods Act 1979, s 51(3). ibid s 53(3). Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL). See the discussion in Chapter 1, Section III.B.

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speech in the House of Lords, Lord Lloyd noted that this is usually the appropriate measure for an award following the defective performance of a construction contract.15 A majority of the House of Lords also recognised the availability of this measure in the Panatown case. Lord Goff and Lord Millett there accepted,16 and Lord Browne-Wilkinson was prepared to assume,17 that a promisee could recover the cost of correcting a defective performance even where work was performed on the property of another. On the facts, Lord Goff and Lord Millett held that Panatown was entitled to this award but Lord Browne-Wilkinson held that it was unnecessary to decide conclusively whether recovery was possible under the ‘broad ground’ because of a duty of care deed between McAlpine and Unex, the third party owner of the land, which gave the latter a legal right to claim substantial damages in any event. For his Lordship, this meant that there was no actual ‘damage’ to the ‘performance interest’ of Panatown.18 But reasoning of this kind conflates the distinction between substitution and compensation and is premised on the false view that contractual awards are only concerned to compensate for factual loss. The availability of an award of the cost of repairs also received strong endorsement from the High Court of Australia in the relatively recent case of Tabcorp Holdings Ltd v Bowen Investments Pty Ltd.19 Office premises were leased for a period with the tenant covenanting not to make any substantial alterations or additions to the premises without prior written approval. A director of the landlord discovered that the recently installed foyer was being destroyed by the tenant with a view to its replacement. The director became seriously distressed upon discovering this in light of the care she had lavished over the foyer’s design and requested the tenant to halt the works immediately. Nevertheless, over her protestations, the tenant continued with the planned refurbishment relying upon an apparent assumption that destruction and replacement would cause little, if any, diminution in the value of the building. Although this assumption found favour at first instance, the High Court of Australia upheld the Full Federal Court’s decision to increase this award to the cost of restoring the foyer to its original state. The clause breached was an express negative covenant capable of grounding injunctive relief if the tenant’s ‘contumelious disregard’ for the landlord’s rights had not prevented this possibility. The Court cited Oliver J’s statement in Radford v De Froberville with approval that the words ‘the same situation, with respect to damages, as if the contract had been 15

Ruxley (n 13) 365–66. See, for example, the award provided in East Ham (n 10). Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL) 548 (Lord Goff), 587 (Lord Millett). 17 ibid 577–78. 18 ibid. 19 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8. For discussion see M Bell, ‘After Tabcorp, For Whom Does the Bellgrove Toll? Cementing the Expectation Measure as the “Ruling Principle” for Calculation of Contract Damages’ (2009) 33 Melbourne University Law Review 684. 16

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performed’ do not necessarily mean ‘as good a financial position as if the contract had been performed’.20 Significantly, in upholding the landlord’s entitlement to the ‘cost of reinstatement’, the High Court noted that this entitlement is not unqualified. In the earlier case of Bellgrove v Eldridge,21 cited with approval in Tabcorp,22 the High Court stated that the entitlement to an award of the cost of restoration following the defective performance of a building contract depends upon whether undertaking the work is both ‘necessary to produce conformity’ and ‘a reasonable course to adopt’.23 As explained below, there is also a condition in English law that the restoration work be ‘reasonable’ before the cost will be awarded, which was affirmed and applied in Ruxley.24 In Tabcorp itself, the High Court noted that it is rare that the cost of restoration will be ‘unreasonable’, citing with approval the hypothetical example given in Bellgrove of a builder who builds a wall out of new, rather than second-hand, bricks when the latter was stipulated in the contract. In such a case the cost of restoration would be ‘unreasonable’ in the relevant sense.25 This is analogous to the facts in the famous United States case of Jacob & Youngs v Kent.26 There, instead of using the contractually specified ‘Reading’ pipe, the defendant performed the building work using a different kind of piping. In these circumstances, Cardozo J, for the majority, declined to award the cost of substitute performance because it was ‘grossly and unfairly out of proportion to the good to be attained’ from the contract’s performance. b. Claims for the Cost of Performance via Market Substitution In Chapter 2 it was explained that section 51(3) of the Sale of Goods Act 1979 provides that, where a seller fails to deliver goods for which there is an ‘available market’,27 the buyer’s measure of damages is ‘prima facie to be ascertained by reference to the difference between the contract price and the market or current price of the goods’ at the date of breach. In accordance with the conventional understanding of contractual money awards, a ‘difference in value’ award of this kind has traditionally been understood as a measure of the promisee’s financial loss at the date of breach.28 If the buyer does go into the market to purchase substitute goods at the prevailing price at the date of breach or soon after, this measure indeed will reflect 20

Radford v De Froberville [1977] 1 WLR 1262 (Ch) 1273. Bellgrove v Eldridge [1954] HCA 36, (1954) 90 CLR 613 (HCA). 22 Tabcorp (n 19) [17]. 23 Bellgrove (n 21) 617–18. 24 See, in particular, the speeches of Lord Jauncey and Lord Lloyd. 25 ibid, discussed in Tabcorp (n 19) [17]. 26 Jacob & Youngs v Kent 129 NE 889 (1921). 27 This means goods that can be freely bought or sold at a price fixed by supply and demand. See E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010) [20-044]. 28 See, for example, Burrows (n 6) 209. 21

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his financial loss. However, this loss may be eliminated or reduced by subsequent events. On the orthodox view, this should be reflected in the amount awarded. But as explained earlier, this ‘difference in value’ measure will not be displaced by demonstrating that on the particular facts the buyer was not left worse off as a result of the seller’s breach.29 This result is clearly at odds with the orthodox account. For this reason, a ‘difference in value’ award is better understood as substitutionary. The difference in value between the market price and the contract price of the goods at the date performance was due quantifies the minimum cost of obtaining substitute performance from elsewhere. The award of this substitutionary measure is also evident in the case law on defective goods. The prima facie measure of ‘damages’ for the provision of defective goods under a contract of sale is the difference in market value between the goods contracted for and the goods in fact received.30 But again such an award does not always accurately reflect the financial loss in fact suffered by the buyer. The clearest example of this is when the defective goods are sold on to a sub-buyer and the original buyer manages to avoid, or at least to minimise, the negative consequences of receiving the defective goods. This is demonstrated by Slater v Hoyle,31 which also was discussed in Chapter 2. Recall that in Slater the innocent buyer contracted to buy unbleached cotton cloth. After it was delivered, the buyer bleached the cloth and then used it to fulfil a previously formed contract of sale with a third party. The cloth supplied by the seller was inferior in quality to that warranted and, in accordance with the relevant statutory provision, the buyer recovered ‘damages’ assessed by reference to the difference between the market value of the cloth delivered at the time of delivery and the market value of the cloth as warranted. This was despite the fact that the buyer ended up no worse off than he would have been had the goods not been defective since the price under the sub-sale contract was paid in full and no claim was brought by the sub-buyers for breach of their sub-sale contracts. As explained in Chapter 2, none of the different ‘loss-based’ explanations of the decision in Slater are convincing. Awarding the difference between the market value of the cloth delivered at the time of delivery and the market value of the cloth as warranted is best understood as another example of a substitutionary money award. The sum awarded was the minimum cost of obtaining substitute performance by giving the claimant in that case the amount required to go into the market and obtain goods conforming to the contract specifications upon a sale of the defective goods received.32 Significantly, although the basis for this measure is 29

See Williams Bros v ET Agius Ltd [1914] AC 510 (HL). Sale of Goods Act 1979, s 53(3). Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA). 32 The fact that in claims of this kind, the time for meaningful substitute performance may have passed does not prevent the award from being a monetary substitute for performance for the obvious reason that the award is just a substitute. Additional support for this view can be derived from the fact that the cost of obtaining substitute performance will be the same as a reasonable approximation of the price of release. The next section argues that this is the appropriate alternative substitute for performance when the cost of substitute performance cannot be quantified. 30 31

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that it constitutes the amount required to obtain substitute performance, it is not necessary that the promisee actually use the sum awarded to purchase substitute performance. This is consistent with the position in relation to claims for the cost of repairs, as demonstrated below. The High Court of Australia’s recent decision in Clark v Macourt affirms the correctness of this approach. Recall that there the innocent buyer of a fertility clinic was deprived of the donor sperm promised as part of the assets of that business. Even though she recouped from her patients most of the costs she outlaid in acquiring contractually compliant sperm and that, as a registered medical practitioner, she was prohibited ethically from profiting from the sale of donor sperm, she nevertheless was held to be entitled to the full cost of purchasing replacement donor sperm from overseas at the date of breach. Given these unusual facts, it is clear that Clark’s successful claim cannot be understood as an award designed to make good the factual loss she actually suffered and is comprehensible only as a monetary substitute for the seller’s defective performance. Finally, it must be noted that the principles outlined above in relation to the sale of goods also apply to the defective performance of a contract for the provision of services. The decision in White Arrow Express Ltd v Lamey’s Distribution Ltd was introduced in Chapter 1.33 Although counsel’s approach in claiming for failure of consideration made recovery difficult there, Sir Thomas Bingham MR recognised the possibility of a substitutionary award, though describing it in terms of ‘loss’, measured by reference to the difference in market value between the services contracted for and those actually provided. As Chapter 4 explained, a substantial sum substituting for the performance of services not provided in the absence of proven financial loss also was awarded recently in Giedo Van der Garde BV v Force India Formula One Team Limited. Citing Sir Thomas Bingham MR’s comments in White Arrow with approval, Stadlen J awarded the claimant the market value of the kilometres and associated benefits which should have been, but were not in fact, provided.34 A similar award was also made in Regus (UK) Ltd v Epcot Solutions Ltd.35 The claim there was for various breaches of contract, including that the air-conditioning provided on the leased premises did not meet the contractually agreed standard. Again, in claims of this kind it is not necessary that the promisee actually use the money to obtain substitute performance.36 It is also important to appreciate that the sum of money to which the claimant is entitled in a claim of this type does not necessarily depend upon the original contract price since this may or may not reflect the market price of the performance. Nevertheless, in an appropriate case an inference may be drawn from the contract

33 White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA). See Chapter 1, Section I.B.1. 34 Giedo Van der Garde BV v Force India Formula One Team Limited [2010] EWHC 2373 (QB) [498]. 35 Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 361 (CA). 36 This is discussed further below at pp 194–199.

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price as to the market value of the services that the promisee has failed to receive. Thus, the contract price will often still be relevant as evidence rather than in a substantive sense. This proposition was reasserted by Stadlen J in Force India,37 and is supported by the following comment by Morritt LJ in White Arrow, which Stadlen J also endorsed in Force India. According to Morritt LJ: It may be that there are cases in which because there is no readily identified market the contractual price for the benefit promised but not provided is adopted as the best evidence of the market value of that benefit … But if it is it is because it is accepted as the market value and not because it is the contract price.38

Further support for this view can be derived from Regus, where Rix LJ held that, in the absence of evidence to the contrary, the appropriate measure of ‘damages’ in such a case was to be calculated ‘on the assumption … that the cost of the fees [in the contract] reflects the market value of the services promised’.39 Although his Lordship referred to this award as one concerned with ‘loss’, for the reasons already explained, it is better understood as another example of a money award substituting for performance.

B. Restriction The closest monetary substitute for actual performance in accordance with the contract is an award of the minimum cost of substitute performance. However, the question arises as to whether there are, or should be, any restrictions upon the availability of such an award. It might be argued that at least where the promisee has become unconditionally entitled to the promised performance and it remains possible for the promisee to obtain a close substitute for such performance from elsewhere there should not be any such restriction. That is, it might be said that when specific performance is not requested, or is otherwise inappropriate, an award of the cost of performance invariably should be available. English law has not taken this position. Just as the availability of an order for specific performance is qualified, so is the availability of its monetary equivalent. Typically, this restriction is expressed in terms of whether awarding the cost of curing the breach is ‘reasonable’ in the circumstances. The basis for this restriction is the view that sometimes the promisee simply is not justified, all things considered, in insisting upon having the breach rectified to ensure that the contractual specifications are complied with exactly. While reasonable minds may differ as to precisely when this point is reached (and what considerations are relevant to its identification), it is difficult to argue that no such limit is required. The hypothetical example provided by the High Court of Australia in Bellgrove v Eldridge,40 noted earlier in this chapter and referred to with approval 37 38 39 40

Force India (n 34) [487]. ibid [433] (emphasis added). Regus (n 35) [30]. Bellgrove (n 21) 618.

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in the Court’s subsequent decision in Tabcorp,41 of a builder who builds a wall out of new bricks when the contract required only second-hand bricks illustrates the basic point. It is exceedingly difficult (if not impossible) to maintain that in such a case the promisee nevertheless should be entitled to the full cost of rectification, at least leaving aside the possibility that the second-hand bricks specified have some peculiar, idiosyncratic value to the promisee. Despite general recognition that there are some situations in which it is ‘unreasonable’ for the promisee to insist upon obtaining performance (or its monetary equivalent) the content of the ‘reasonableness’ restriction is difficult to articulate with precision. An analogy may be drawn with the ‘legitimate interest’ restriction on a promisee’s right to recover the contract price following a promisor’s repudiation of the contract.42 Regardless of whether one endorses Liu’s recent reformulation of the latter restriction,43 to some extent both doctrines clearly do prevent recovery where, in the particular circumstances, performance would be unjustifiably wasteful or burdensome on the promisor. This is not necessarily to suggest that the two doctrines should be merged into a single restriction applicable to both kinds of substitutionary claims. Although such a merger would be consistent with the overall argument advanced in this book, it also may be premature at this stage of the law’s development, particularly given that it is at least open to question whether the two doctrines should be perfectly coextensive.

1. Restriction on the Ground of ‘Reasonableness’ A contracting party who fails to obtain the performance bargained for is entitled to the most appropriate substitute for performance available in the circumstances. All else being equal, where the promisee can still acquire the subject matter of the contract from an alternative source the most appropriate substitute for performance is the minimum cost of obtaining such performance. However, all else is rarely equal so, at least in English law, this general rule is subject to a restriction that insisting upon accurate performance must be ‘reasonable’ in the circumstances. Although the principle potentially has wider application, claims of this type commonly arise in the construction context when repairs are required to make a defective performance comply with the contractual specifications. In East Ham Corporation v Bernard Sunley & Sons Ltd,44 for example, in the context of a claim following the defective performance of a building contract, Lord Cohen stated that ‘There is no doubt that wherever it is reasonable for the employer to insist upon reinstatement the courts will treat the cost of reinstatement as the measure of damage’.45 41

See n 19. See White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL) 431 (Lord Reid). 43 See Q Liu, ‘The White & Carter Principle: A Restatement’ (2011) 74 Modern Law Review 171, arguing that this restriction prevents recovery where, following breach, the ‘wastefulness’ of the innocent party’s continued performance outweighs that party’s interest in earning the contract price. 44 East Ham (n 10). 45 ibid 434. 42

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In certain contexts an innocent party’s entitlement to the cost of ensuring performance following breach has been expressed in stronger terms. In Westminster (Duke) v Swinton,46 for instance, it was said that Joyner v Weeks held that ‘the cost of repairs was the measure of “damages” in all cases’ of breach of a covenant to deliver up in good repair at the end of the lease.47 However, as Megarry V-C observed in Tito v Waddell (No 2),48 Lord Esher MR’s judgment in Joyner expressly refrained from holding this to be so. His Lordship and Fry LJ stated that the cost of repair measure was ‘the ordinary prima facie rule’ but was subject to there being no circumstances making it inapplicable.49 The better view, therefore, is that the entitlement to the cost of substitute performance is subject to a general restriction that this award be ‘reasonable’ in the circumstances. The existence of this restriction was affirmed by the House of Lords in Ruxley, where it was applied to deny a claim for the cost of substitute performance. It also was affirmed in Panatown,50 where it did not affect the promisee’s entitlement to a substantial award.

2. The Uncertain Meaning of ‘Reasonableness’ in this Context The claim that awarding the cost of substitute performance must be ‘reasonable’ in the circumstances requires further explanation. Despite numerous statements confirming the existence of this restriction, precisely what ‘reasonableness’ means in this context remains obscure. Part of the reason for this may be that the restriction is only rarely invoked to defeat a claim for the cost of substitute performance. As Professor Coote has observed, there are only a very small number of reported cases where, following the defective performance of a building contract, an award of the cost of performance is refused on this basis.51 Coote also notes that in two of these cases there were unexplained concessions by counsel regarding the appropriate measure of ‘damages’,52 and in a third case the possibility of awarding the cost of repairs was not even raised.53 This is consistent with the view, expressed by the High Court of Australia in Tabcorp, that the decision to deny the cost of repairs in Ruxley is best explained by the case’s ‘quite exceptional’ facts.54

46

Westminster (Duke) v Swinton [1948] 1 KB 524. ibid 533. 48 Tito v Waddell (No 2) [1977] Ch 106, 329. 49 Joyner v Weeks [1891] 2 QB 31 (CA) 43, 44, 47. 50 Panatown (n 16) 568 (Lord Goff), 577 (Lord Browne-Wilkinson), 592 (Lord Millett). 51 B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537, 558. 52 Newton Abbot Development Ltd v Stockman Bros (1931) 47 TLR 616 and Perry v Sidney Phillips & Son [1982] 1 WLR 1287 (CA). 53 Applegate v Moss [1971] 1 QB 406 (CA). 54 See Tabcorp (n 19) [18]. Much can (and will) be said about Ruxley in this book but the most ‘exceptional’ aspect of the case is probably the stark choice between the ‘cost of cure’ and ‘difference in value’ measures its facts presented. It will be rare to have a case where the ‘difference in (market) value’ between the performance promised and the performance provided is nil but the cost of obtaining substitute performance is roughly equivalent to the original contract price. 47

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Because the ‘reasonableness’ restriction is invoked rarely to defeat a claim for the cost of substitute performance, there is little direct authority to assist in articulating precisely what is meant by ‘reasonableness’ in this context. The authority that does exist for a general restriction based on the notion of ‘reasonableness’ rests largely on dicta in cases where the restriction was not actually invoked to deny an award of the cost of obtaining substitute performance.55 Traditionally much significance has been placed on the promisee’s intention to ‘cure’ the defective performance. However, in more recent cases the significance of such an intention has been doubted. This development is supported here because, as explained further below, it is consistent only with the view that awards of the cost of rectification are substitutionary rather than compensatory. a. The Traditional Focus on Intention In determining the ‘reasonableness’ of awarding the cost of rectification, traditionally English law placed much significance on whether the court believes that the promisee intends to ‘cure’ the breach to make the promisor’s defective performance conform to the contractual specifications. The reason for this emphasis appears to be a concern that the promisee ought not to be placed in a better factual position than had the breach not occurred. Such a concern is understandable if one assumes the conventional understanding of contractual awards according to which their purpose is simply to compensate for demonstrable ‘loss’. On such a view, to award a contracting party the amount required to repair a defective performance in the absence of evidence that the repairs actually will be done amounts to ‘over-compensation’. An early example of such reasoning occurred in Wigsell v Schools for the Indigent Blind.56 There, a grantee of land promised to construct around the land conveyed, on all sides where it abutted on the grantor’s land, a seven-foot brick wall. The surrounding context made it clear that the grantor’s purpose in obtaining the promise from the grantee was to protect the grantor’s land from the inmates of an asylum that the grantee proposed to build. But the grantee later abandoned the proposal to build the asylum and also failed to build the wall as promised. Any decrease in the value of the adjoining land as a result of the failure to build the wall was insignificant in comparison to the amount required to do so. In refusing to award the grantor the cost of construction, the Court observed that erecting it would be a waste of money because the grantor would probably never think about incurring this expenditure now. More recently, in Sunshine Exploration Ltd et al v Dolly Varden Mines Ltd (NPL),57 the Supreme Court of Canada explained in convincing terms why the precedential value of Wigsell should be confined to its particular facts. In Sunshine

55 56 57

For example, in East Ham (n 10). Wigsell v Schools for the Indigent Blind (1882) 8 QBD 357. Sunshine Exploration Ltd et al v Dolly Varden Mines Ltd (NPL) [1970] SCR 2.

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Exploration, the Court was asked to quantify the sum to which the owner of certain mining properties, who had granted Sunshine an exclusive right to explore and develop those properties, was entitled following Sunshine’s failure to carry out the exploration and development work it had promised to do. In the event, the Court awarded the owner of the land the full cost of performing the work (based on the best evidence available), observing that it was ‘pointless, in these circumstances, to suggest that a comparison be made between the value of the mining property with and without the work being done’.58 In explaining why Wigsell was distinguishable from the present case and should not be followed, the Court observed that it was a case of a purchaser’s covenant, similar to a restrictive covenant, taken by the seller for the protection of his adjoining land, and the measure of damages in such cases is usually the diminution in value of the adjoining land resulting from non-performance. In cases of this kind, the grantor has available the remedy of specific performance, where damages would not adequately protect his rights.59

Concern regarding a claimant’s intention to ‘cure’ the breach also was evident in the well-known decision of Tito v Waddell (No 2).60 The defendant mining company there breached its contractual undertaking to the claimants, who were the former inhabitants of the Pacific island of Banaba, to restore the island as nearly as possible to its previous state when it finished mining the island for phosphate. After the company’s mining operations ceased, but before replanting commenced, the island was bombed extensively during the Second World War, which significantly increased the cost of restoring the island to an inhabitable state. The cost was now in the order of millions of pounds. In addition, the Banaban islanders had moved to another island 1,500 miles away, where they were living at the time of the action. The former inhabitants sought specific performance or, alternatively, an award of the cost of replanting the island and relocating to it. Both claims were denied; the latter principally on the basis that there was no evidence of an intention to replant and relocate. Megarry V-C stated that if the plaintiff has suffered little or no monetary loss in the reduction in value of his land, and he has no intention of applying any damages towards carrying out the cost of the work contracted for, or its equivalent, I cannot see why he should recover the cost of doing work which will never be done.61

The decision to confine the claimants to an award of the ‘difference in value’ of the land attributable to the breach in Tito has been criticised.62 Although the cost of replanting increased significantly as a result of the bombing, the defendant’s 58

ibid 22. ibid 20. Alternatively, it may have been possible to construe the grantee’s promise to build the wall in Wigsell as subject to an implied condition that the construction of the asylum also proceed. 60 Tito v Waddell (No 2) (n 48). 61 ibid 332. 62 See, for example, G Jones, ‘The Recovery of Benefits Gained from Breach of Contract’ (1983) 99 LQR 442 and P Birks, ‘Restitutionary Damages for Breach of Contract (1987) Lloyd’s Maritime and Commercial Law Quarterly 421. 59

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failure to replant the island was done deliberately in order to save the expense of performing its side of the bargain. More extreme is the claim that the islanders should have been entitled to recoup the profits made by the mining company as a result of its breach, as both Professor Jones and Professor Birks have argued independently.63 In this regard, the current editor of Treitel has suggested that the cases indicate that ‘the cynical and deliberate nature of the breach’ appears to be the most important factor in determining when it will be appropriate to award either an account of profits or ‘Wrotham Park damages’.64 Even if an award of the cost of obtaining substitute performance was indeed ‘unreasonable’ in the circumstances that arose in Tito, there does appear to be a strong prima facie case for awarding the islanders a reasonable approximation of the price they would have accepted at the date of breach to ‘release’ the defendant mining company from its obligation to replant. However, an alternative claim for such an award was in fact denied by Megarry V-C and it seems that no subsequent case has recognised unequivocally the availability of an award of this kind in circumstances where an award of the cost of rectification has been found to be ‘unreasonable’.65 The decision’s principal significance is perhaps to demonstrate the emphasis traditionally placed on a claimant’s intention to ‘cure’ the breach in deciding whether or not to award the cost of effecting such a cure. As is typical in judicial discussions of this issue, the question of determining the appropriate sum to award was viewed through the prism of loss. Megarry V-C stated that it is fundamental to all questions of damages that they are to compensate the plaintiff for his loss or injury by putting him as nearly as possible in the same position as he would have been in had he not suffered the wrong … the essential question is what his loss is.66

This focus on loss explains why his Lordship placed so much emphasis on the claimants’ intention to ‘cure’ the breach. If an innocent party’s intention to ‘cure’ can be demonstrated on the balance of probabilities, that party can be said to have proven the existence of a prospective financial loss equal to the sum required to obtain such a cure. However, once the myopic focus on identifying a ‘loss’ to be ‘compensated’ is jettisoned, as this book argues it should be, the associated need to assess the promisee’s intention to ‘cure’ the breach also can be abandoned. Oliver J’s judgment in Radford v de Froberville appears to provide further support for the understanding of ‘reasonableness’ adopted by Megarry V-C in Tito. The claimant there sold a plot of land to the defendant, which was adjacent to other land owned by the claimant. One of the terms of the sale was that the defendant would erect a wall on the plot so as to divide it from the claimant’s adjacent plot. The defendant failed to erect this wall and the claimant brought an action 63

ibid. See Peel (ed) (n 27) [20-017]. 65 Note, however, that a possible reinterpretation of the Ruxley decision would be to explain the award for ‘loss of amenity’ on this basis, although it admittedly would be difficult to maintain that this was the basis upon which their Lordships made the award in that case. 66 Tito v Waddell (No 2) (n 48) 332. 64

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seeking the cost of building a similar wall on his own land. The defendant argued that any award should be limited to the difference in value between the land with and without the wall, on the basis that a prefabricated fence would do just as well as the wall which was agreed upon. Oliver J rejected the defendant’s argument, holding that the claimant was entitled to the cost of erecting the suggested wall on his own land. His Lordship stated that an important consideration in making this determination was whether repairing the defective performance was ‘a reasonable thing for the plaintiff to do’ in the circumstances.67 However, in determining whether the claimant’s proposed actions were ‘reasonable’, Oliver J followed Megarry V-C’s lead in Tito by focusing almost exclusively on the claimant’s intention to repair the breach. His Lordship regarded it as very important that the claimant genuinely intended to erect the wall that the breaching party had failed to build, stating that to provide the award in the absence of such an intention would give the claimant an ‘uncovenanted profit’.68 This might appear to provide further support for the view that, in determining the ‘reasonableness’ of awarding the cost of performance, the claimant’s intention to repair is determinative. However, the claimant in Radford was not seeking the cost of obtaining the subject matter of the contract since the contract actually required the wall to be built on the defendant’s land. Rather, the claimant was seeking the amount of money required to erect a similar wall on his own land. Thus, as Lord Goff noted in Panatown, the issue of ‘reasonableness’ that arose in Radford ‘was not the same issue as that raised in Lord Cohen’s statement of principle in East Ham’.69 As Oliver J himself noted, the issue was ‘really one of mitigation’.70 The confusion is understandable given the common terminology employed in both contexts. But as Lord Lloyd noted in Ruxley, expressing agreement with Dillon LJ in the Court of Appeal, ‘mitigation is not the only area in which the concept of reasonableness has an impact on the law of damages’.71 b. The Alternative View: Intention is not Determinative As earlier foreshadowed, the view that ‘reasonableness’ is principally about intention is not the only one possible. In Panatown, Lord Clyde recognised the existence of what he termed the ‘more radical formulation’ of the principle expressed by Lord Griffiths in Linden Gardens, though he did not endorse it.72 According to this understanding, it is not necessary that the claimant intends to ‘cure’ the breach in order to obtain an award measured by reference to the cost of obtaining

67

Radford (n 20) 1283. ibid 1270. 69 Panatown (n 16) 550. 70 Radford (n 20) 1284 (emphasis added). 71 Ruxley (n 13) 369. 72 This is what was termed ‘broad ground’ in the discussion of Linden Gardens in Chapter 2, Section III.A. 68

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substitute performance. Notably, the Australian High Court earlier adopted this view in its important decision in Bellgrove v Eldridge.73 The possibility that Miss Eldridge might retain the sum awarded to her and not undertake the rectification work required to repair her house’s defective foundations was considered ‘quite immaterial’ by the Court in deciding that the award was ‘reasonable’ in the circumstances.74 The significance of the claimant’s intended use of an award of the cost of rectification in English law was clarified when Ruxley reached the House of Lords. The significance of Ruxley was noted in Chapter 1 and the decision is reconsidered in Chapter 7. For the moment, however, it is sufficient to note that the House made it clear that ‘reasonableness’ is an objective criterion as there is no suggestion that the claimant himself should be the arbiter of what is ‘reasonable’.75 Thus, although a claimant’s intention to ‘cure’ may be a useful indicator of whether awarding the cost of rectification is ‘reasonable’, there is no necessary connection between an intention to ‘cure’ and an innocent party’s entitlement to such an award. Further support for this approach was expressed by Lord Goff and Lord Millett in Panatown. According to Lord Goff, an innocent party’s intention to carry out the work necessary to produce conformity with the contract does not determine the question of ‘reasonableness’, but is simply one factor relevant to this inquiry.76 Lord Millett expressed a similar view,77 but Lord Clyde and Lord Jauncey took the contrary view. Some ambiguity arises in regard to the ratio of the decision since Lord Browne-Wilkinson did not conclude this point either way, though his Lordship appeared to favour the approach adopted by Lord Goff and Lord Millett. This particular interpretation of Panatown was also endorsed by Stadlen J in Force India, who observed that: The decision in Panatown is not authority for the proposition that it is a precondition of recovering damages for failure to supply services to the claimant in breach of contract that the claimant must have purchased, or at least expressed an intention to purchase, elsewhere the services wrongly withheld.78

In Panatown, Lord Clyde noted that this was also the view taken by Steyn LJ in Darlington BC v Wiltshier Northern Limited.79 After expressing agreement with the broad principle outlined by Lord Griffiths in Linden Gardens, Steyn LJ suggested that this principle was subject to the qualification that it is not a precondition to the recovery of substantial ‘damages’ in construction or sales contracts that the 73

Bellgrove (n 21). ibid 620 (Dixon CJ, Webb and Taylor JJ). 75 Ruxley (n 13) 358. 76 Panatown (n 16) 547. It should be noted, however, that his Lordship was acutely aware of the fact that although the damages would not be awarded to UIPL directly, they would be available to the group to which UIPL belonged if awarded to Panatown and therefore, in a sense, indirectly available to UIPL. The author is indebted to Professor Peel for this observation. 77 ibid 591 (Lord Millett). 78 Force India (n 34) [484]. 79 Darlington BC v Wiltshier Northern Limited [1995] 1 WLR 68 (CA) 80 (see Panatown (n 16) 533). 74

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claimant actually proposes to undertake the necessary repairs. As his Lordship noted, ‘it is no concern of the law what the plaintiff proposes to do with his damages … In this field English law adopts an objective approach’.80 On this point, Steyn LJ was in agreement with the observations of Kerr LJ in Dean v Ainley,81 and Staughton LJ in the Court of Appeal in Ruxley.82 Stadlen J’s statement of principle was endorsed again at first instance in De Beers Ltd v Atos Origin IT Services UK Ltd.83 The claim there was for ‘damages’ for breach of contract following Atos’s failure to provide De Beers with the software system it had contractually promised to provide. In finding that in principle De Beers was entitled to the cost of building the replacement system, Mr Justice Edwards-Stuart stated that: If there is substantial non-delivery of those services … DB is entitled to recover the cost of purchasing elsewhere the services not provided, unless it would be unreasonable of it to do so … [I]t does not matter whether or not DB has an actual intention of doing so or has not made up its mind whether or not to do so.84

3. Against a Focus on Intention To the extent that an intention to ‘cure’ breach was previously decisive in a claim for the cost of substitute performance, this is no longer the case. The authorities discussed above demonstrate that an understanding of ‘reasonableness’ that views the promisee’s intention to repair the breach as non-determinative has received strong judicial endorsement. This is also the preferable approach in principle. The fundamental reason for this is that only this approach properly recognises that the object of an award directed towards providing the promisee with the means to obtain the promised performance is substitutionary rather than compensatory. To make the promisee’s intention decisive wrongly focuses on whether this party has suffered, or will suffer, loss rather than on the content of that party’s contractual right.85 In essence, making the availability of an award of the cost of substitute performance dependent upon the promisee’s intention to ‘cure’ the breach conflates the distinction between compensation for loss and substitution for performance. An additional, related advantage of the approach advocated here is that it allows for consistency between construction and sale contracts. Recall that the usual and proper measure for awards in the latter context is the difference in value between the goods contracted for and the goods provided where there is an available market

80

Darlington (n 79) 80. Dean v Ainley [1987] 1 WLR 1729 (CA) 1737. 82 Ruxley (CA) [1994] 1 WLR 650, 657. 83 De Beers Ltd v Atos Origin IT Services UK Ltd [2010] EWHC 3276 (TCC). 84 ibid [345]. 85 Additionally, it is also inconsistent with the objective approach to contractual interpretation, as Rares J observed in the Full Federal Court in Bowen Investments Pty Ltd v Tabcorp Holdings Ltd [2008] FCAFC 38 (FCA)[51]. 81

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for both.86 Earlier, it was argued that a principled explanation of this measure is that this is the minimum cost of ensuring substitute performance. However, this measure will not be displaced by showing that the promisee has no intention to ‘cure’ the breach by purchasing goods conforming to the original bargain. The view of intention endorsed here is also consistent with the approach adopted in contracts for the provision of services more generally. That the absence of an intention to cure the breach generally does not preclude an award of the minimum cost of substitute performance in services cases was confirmed in White Arrow Express Ltd v Lamey’s Distribution Ltd.87 There, it will be recalled, the claimant contracted with the breaching party for the provision of an enhanced delivery service to the claimant’s customers but instead received only the standard level of service. Sir Thomas Bingham MR dismissed the claimant’s appeal on the basis that no difference in the value of the services provided and those contracted for had been established. However, his Lordship endorsed the general principle that the measure of ‘damages’ in such cases is the value of the services not provided and that it is not a necessary bar to recovery of an award assessed by reference to the cost of obtaining those services elsewhere that the claimant did not, or could not, obtain such services. The inclusion of the ‘could not’ here is significant because substitute performance is often not possible when an inferior service has been provided, suggesting that this is a case where the alternative monetary substitute for performance should be awarded. This is true. It is simply that these two alternative ways of substituting for performance correspond in such a case because the difference in market value between the two different levels of service here constitutes the best available approximation of the reasonable price of ‘release’. This observation reinforces the notion that at a higher level of abstraction the two substitutionary measures are simply two specific applications of the general principle that following breach, the promisee is entitled to the most appropriate substitute for performance available in the circumstances. The view that a promisee’s intention to repair a defectively performed construction contract should not determine whether awarding the cost of rectification is ‘reasonable’ is thus both preferable in principle and provides a better ‘fit’ with the decided case law. It is now argued that there are also sound ‘policy’ reasons to favour this view. Depending on one’s view of precisely what kinds of considerations it is legitimate for judges to take into account when resolving private law disputes,88 these considerations may or may not provide additional support for the approach supported here. Either way, at a minimum they do not detract from the principled arguments already outlined. 86

See the earlier discussion in Chapter 4, Section IV.A. White Arrow (n 33). 88 It would appear, for instance, that Professor Stevens would not accept the notion that considerations of this kind are relevant in the adjudication of private law disputes. See R Stevens, Torts and Rights (Oxford University Press, 2007) 307. Others have made similar claims. See, for example, E Weinrib, The Idea of Private Law (Harvard University Press, 1995) and A Beever, Rediscovering the Law of Negligence (Hart Publishing, 2007). 87

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The first ‘policy’ consideration in support of the approach outlined here is that a focus on a promisee’s intention to ‘cure’ breach is liable to produce commercial uncertainty because this is not something that a promisor will be able accurately to predict or determine.89 Secondly, such a focus creates the possibility for abuse by dishonest claimants. The difficulty in accurately determining a party’s intentions are well known. Moreover, even in the absence of dishonesty, a party’s intentions may genuinely change after the trial and it will be difficult to determine whether this change of mind has occurred in good faith. Thirdly, an excessive focus on intention is likely to prejudice claimants of lesser means (and thus arguably contravene the principle of equality before the law). This is because wealthier claimants are more likely to use an award to cure a breach than poorer claimants on the basis that those in the latter category are more likely to display a preference towards directing the money towards some purpose other than achieving exact conformity with the original contract specifications.90 One option suggested in this context is that of making an award of the cost of rectification conditional upon the promisee actually using the sum awarded to obtain performance.91 This is an approach the common law could have taken, but has not. English law generally does not impose conditions on its monetary awards,92 and there are good reasons for this. First, such conditions impose an additional burden on the court of supervising a successful claimant’s post-trial conduct. In this regard, it is well known that the need for supervision is one important basis upon which the availability of specific performance is restricted.93 Secondly, as O’Sullivan has observed, to impose such a condition would create an incentive for the promisee to claim an intention to repair when he has none and then ‘hold out’ for a favourable settlement.94 Finally, just as a claimant is free to spend an award given on a compensatory, punitive or disgorgement basis as desired, he should also be free to spend a substitutionary award as he pleases. That the basis for the award is the party’s right to performance does not mean that he should have to spend the sum awarded on obtaining the promised performance.95

89

This was observed by Rares J in Bowen (n 85) [86]. This is not to suggest that richer claimants are always more likely to intend to cure the breach than poor claimants. Clearly, other factors such as whether precise conformity had special value to the claimant will influence matters too. The claim made here is simply that, all else being equal, a wealthier person will be more willing to spend money on securing a particular personal preference than someone of lesser means. 91 See C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 4, 61. 92 James v Hutton and Cook Ltd [1950] 1 KB 9 (CA)15; Darlington (n 79) 80 (Lord Steyn). 93 Co-operative Insurance Society Ltd v Argyll Stores Ltd [1998] AC 1 (HL). 94 J O’Sullivan, ‘Loss and Gain at Greater Depth: The Implications of the Ruxley Decision’ in F Rose (ed), Failure of Contracts—Contractual, Restitutionary and Proprietary Consequences (Hart Publishing, 1997) 1, 11. 95 To reiterate the point made in the text, a party who receives an award of compensatory damages for either pecuniary or non-pecuniary loss is under no obligation to actually use that money to try to ‘undo’ or ‘make good’ this loss, remaining completely free to spend the money howsoever he or she chooses. 90

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In response to this suggestion (ie that the claimant should be free to spend any money awarded on a substitutionary basis as he pleases), it might be said that the position is different when the object of the award is to substitute for performance rather than to compensate for loss. But it is not clear why this is so. An award of compensation for non-pecuniary loss is still ‘compensatory’ even though it is generally accepted that money and non-pecuniary harm are incommensurable so that it is simply impossible for such an award actually to make good the detrimental factual consequences that the breach has caused. In the same way, an award of the cost of rectification remains a substitutionary award even when not spent on obtaining what was originally promised because the justification for the award that is that the promisee has become unconditionally entitled to the promiser’s performance. Of course, it may be that, all things considered, the imposition of a condition on an award of the cost of rectification would make such an award a closer substitute for performance than an unconditional award of the same measure. On this basis, it might be argued that this kind of award should be added to the armoury of orders that courts can make. There may be some merit in this proposal, but English law has not taken this position,96 and some reasons for this have been outlined already. In Ruxley, Forsyth’s undertaking to actually use any money awarded to build a pool adhering to the contractual specification was not sufficient to convince the Court that such an award was warranted. This does not necessarily preclude the possibility of the law developing to allow for the imposition of such a condition in future cases since the decision in Ruxley might be justified on other grounds.97 Regardless of this, it is clear that such conditional awards are not currently available in English law.

4. Understanding the ‘Reasonableness’ Restriction All this leaves open the question of what exactly ‘reasonableness’ means in this context. This is undoubtedly a very difficult question. Various suggestions have been postulated, but none has won clear support. In Ruxley much emphasis was placed upon the concept of disproportionality, though it is not clear that their Lordships were in agreement as to precisely what is to be compared in this context.98 A comparison of the cost of rectification to the benefit to be obtained from doing the work appears to be the best interpretation of what the House of Lords meant by invoking the concept.99 While there does appear to be some explanatory 96 This kind of award is recognised in some civil law systems, such as in France (see Article 1144 of the French Civil Code). 97 For instance, the decision might be explained either on the basis that the appellate courts did not wish to disturb the trial judge’s finding of fact, or because the award was determined to be ‘unreasonable’ on whatever view of that restriction is preferred. 98 For discussion see O’Sullivan (n 94) 10. 99 This fits with Lord Lloyd’s comment in Ruxley (n 13) that ‘the monetary equivalent of specific performance … is not the appropriate measure of damages if the expenditure would be out of all proportion to the good to be obtained’. This is also the understanding of disproportionality suggested in E Peel, ‘Loss and Gain at Greater Depth: the Implications of the Ruxley Decision—A Comment’ in Rose (ed) (n 94) 27, 31.

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force in this idea,100 it is inherently vague and therefore creates uncertainty.101 The same may be said of the related concept of ‘economic waste’ employed in the United States,102 which the Australian High Court has observed may preclude recovery in too broad a range of cases.103 Loke has gone even further and argued, quite convincingly, that this concept is entirely unhelpful in this context because it is ‘inconsistent with the compensatory aim of damages’.104 Whilst recognising the difficulty in stating clearly the meaning of ‘reasonableness’ in this context, Professor Tettenborn claims that ‘a number of principles can be stated with some confidence’.105 The first principle he identifies is that an award of the cost of rectification, which he refers to as ‘cost of cure damages’, is easier to recover in non-commercial cases where it is more likely that the promisee has a legitimate reason to insist on performance in specie. In commercial cases, by contrast, the promisee’s interest in performance is more likely to be purely, or at least predominately, financial.106 The second principle Tettenborn identifies is that a claimant may be more generously treated where the defendant has ‘entirely failed to fulfil his contractual objective’ than where the claimant is simply seeking to rectify a defective performance, which seems to be a fairly uncontroversial proposition.107 Tettenborn also claims that an intention to procure substitute performance is necessary to obtain a ‘cost of cure’ award.108 However, this contention is rejected here on the basis of the authorities and arguments outlined above. Whether a preferable formulation of the ‘reasonableness’ restriction is possible is a difficult question that cannot be addressed in any significant detail here. Overall, it seems unlikely that a single criterion will be sufficient to explain all the cases, particularly given English law’s traditional loss-centred focus on the 100 For instance, some of the earlier cases focusing on ‘intention’ might be reinterpreted on this basis, such as perhaps Wigsell (n 56) and Tito (n 48). 101 As noted by O’Sullivan (n 94) 10. 102 See, for example, Peeveyhouse v Garland Coal Mining Co 382 P 2d 109 (Okl 1962) and, more generally, Corbin on Contracts (West Publishing Co, 1964) chapter 60, § 1089. 103 Bellgrove (n 21) [6]. 104 See A Loke, ‘Cost of Cure or Difference in Market Value? Towards a Sound Basis for Quantifying Expectation Damages’ (1996) 10 Journal of Contract Law 189, 201. Although Loke’s arguments implicitly rest upon the conventional understanding of the law this book seeks to challenge, many of his observation remain valuable to the present discussion. One controversial suggestion, which he notes ‘would sit very uncomfortably with English law’, is that of taking the ‘wilfulness’ of the promisor’s breach into account in deciding whether to award the ‘cost of cure’, discussing the views in P Marshall, ‘Wilfulness: A Crucial Factor in Choosing Remedies for Breach of Contract (1982) 24 Arizona Law Review 733. 105 A Tettenborn, The Law of Damages, 2nd edn (Butterworths LexisNexis, 2003) [19.97]. 106 As Tettenborn observes, this accords with the decision not to award the cost of substitute performance in Channel Island Ferries Ltd v Cenargo Navigation Ltd, The Rozel [1994] 2 Lloyd’s Rep 161 (CA) and Sealace Shipping Co Ltd v Oceanvoice Ltd, The Alecos M [1991] 1 Lloyd’s Rep 120 (CA), which both involved the breach of a commercial contract entered into by the innocent party with a view to profit making. 107 Tettenborn (n 105) [19.98]. Lord Jauncey made the same point in Ruxley (n 13) 361. 108 Tettenborn (n 105) [19.99]. This is consistent with Tettenborn’s assumption, in accordance with orthodoxy, that such awards aim to compensate for loss.

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promisee’s intention to ‘cure’ the breach. Significantly, however, while the promisee’s intention to repair the breach should not be decisive, it does not follow that it is completely irrelevant.109 There may be some scope for intention to have a subsidiary role in assessing ‘reasonableness’, even if only as an evidential guide as to whether performance is ‘disproportionate’, ‘wasteful’ or whatever other concept (or combination of concepts) is found to be most useful in guiding the court’s discretion in this context.110 The fundamental point is that any ‘reasonableness’ restriction on awarding the cost of rectification should be determined objectively by reference to whether in the particular circumstances of the case there are countervailing considerations of sufficient strength to override the promisee’s entitlement to receive the promised performance. Notably, as was outlined briefly in Chapter 4, a similar analysis has been articulated recently in the context of actions to recover the contract price.111 The view expressed there by Liu is that the ‘legitimate interest’ qualification operates to prevent recovery where the ‘wastefulness’ of the promisee’s continued performance following breach outweighs that party’s interest in earning the contract price. It should be apparent that this view is consistent with the account advanced here, which views actions for an agreed sum as essentially equivalent, or at least closely analogous, to claims for the cost of obtaining a close equivalent for the promised performance from another source.

III. Awards of the Price of ‘Release’ from Further Performance Substitutionary money awards aim to provide the non-breaching party with the monetary substitute for performance that is most appropriate in the particular circumstances. All else being equal the most appropriate monetary substitute for performance is an award of the minimum cost of obtaining a close equivalent for the contract’s subject matter. This is either the amount required to repair the defective performance directly or, where there is an available market for both the goods or services received and those that were promised, the difference between these market prices. However, as just explained, on occasion English law restricts the availability of the former because the circumstances make it ‘unreasonable’ for the promisee to insist upon rectification of the breach. 109 This is the view taken in E McKendrick, ‘Breach of Contract and the Meaning of Loss’ (1999) 52(1) Current Legal Problems 37, 50. 110 This concurs with views expressed by Lord Millett in Panatown (n 16) 592. The reference to ‘discretion’ here should not be taken as support for the strong kind of judicial discretion advocated by Wright, but rather as support simply for the kind of ‘weak’ discretion advocated by the likes of Professor Birks. Compare, for example, D Wright, ‘Wrong and Remedy: A Sticky Relationship’ [2001] Singapore Journal of Legal Studies 300 with P Birks, ‘Three Kinds of Objection to Discretionary Remedialism’ (2000) 29 University of Western Australia Law Review 1. 111 See Liu (n 43).

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In addition, it is sometimes impossible to quantify the cost of obtaining substitute performance because the breach is irreversible. However, this does not preclude the possibility of awarding some other kind of monetary substitute for performance. In what follows, the claim that when breach is irreversible the appropriate basis for quantifying a substitutionary award is the sum a reasonable person in the promisee’s position would have accepted to ‘release’ the breaching party from performance at the date of breach is defended and also shown to have significant doctrinal support. Following that, Section III.B argues that, at least where the promisee is not disabled from providing the promised counter-performance, the entitlement to this alternative measure should not be restricted. That English law sometimes does so is attributable mainly to the dominance of the orthodox, purely loss-based understanding of the law.

A. Quantification This section explains how awards of the reasonable price of release from further performance are quantified. It first outlines the justification for this measure and then demonstrates its application in the case law in various different contexts.

1. Justification A substitutionary award aims to provide the promisee with the most appropriate substitute for performance in the circumstances. If coercive relief is not requested or is otherwise unavailable, this is prima facie the minimum cost of obtaining substitute performance. Sometimes, however, neither specific performance nor its monetary equivalent constitutes an appropriate substitute for performance. This will be the case either when obtaining substitute performance is no longer possible (so that there is no basis for quantifying the cost of doing so), or when circumstances make it ‘unreasonable’ for the promisee to insist upon rectification. Nevertheless, in such cases the same fundamental principle should apply to determine the appropriate measure of a substitutionary award. That is, the award should provide the promisee the substitute for performance that is most appropriate in the circumstances a. The Basic Rationale for Awarding the Price of ‘Release’ This book contends that when specific performance is unavailable and awarding the cost of rectification is ‘unreasonable’ the next best substitute for performance is the sum a reasonable person in the promisee’s position would have accepted to ‘release’ the breaching party from performance at the date of breach. The basis for this claim is that breach effectively involves the unauthorised expropriation by one party of the other party’s contractual right. In these circumstances it is appropriate to require the breaching party to pay the promisee a reasonable price

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for the right expropriated.112 In support of this assertion, one might point to Professor Lionel Smith’s claim, in the context of defending the occasional availability of full ‘disgorgement’ for breach of contract, that such awards may be justified on the grounds that ‘between a wrongdoing defendant and his victim, the choice might seem easy … If disgorgement is not allowed and the wrongdoing defendant is allowed to keep the gain, then in essence the court is allowing rights to be expropriated’.113 The account of contractual awards advanced here does not go as far as defending the occasional availability of full ‘disgorgement damages’ for breach of contract.114 It may be that ordering a defendant to give up all the gains they have made from breach is legitimate in certain, exceptional cases. However, it is contended that proponents of this view must do more to establish the legitimacy of such awards because it is not clear that the commonly invoked rationales of ‘deterrence’ and ‘punishment’115 actually provide the compelling basis for making such awards, which they are often assumed to.116 Regardless of whether full disgorgement for breach of contract is defensible, Professor Smith’s observation has value for the more limited purpose of justifying the availability of awards of the price of ‘release’ from performance. For such awards, the law is essentially awarding the promisee the objective value of the right it held against the breaching party but can no longer enforce because of the breaching party’s conduct. When one contracting party unilaterally decides to deprive the other party of an entitlement the latter received upon contract formation the very least that the former party should be required to do is pay the market value of this right. b. Dealing with Some Objections The objective of the preceding paragraphs was to explain why, when no other substitute for performance is suitable, it is appropriate to award an innocent contracting party the amount which a reasonable person in the promisee’s position would have accepted to ‘release’ the breaching party from further performance at the date of breach. Despite the forceful logic behind this approach, some may object to the availability of this as a monetary substitute for performance. The purpose of what

112

See C Rotherham, ‘The Conceptual Structure of Restitution for Wrongs’ (2007) 66 CLJ 172, 173. L Smith, ‘Disgorgement of the Profits of Breach of Contract: Property, Contract, and “Efficient breach”’ (1995) 24 Canadian Business Law Journal 121, 122–23. 114 This terminology was also used by J Edelman in Gain-based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing, 2002). It has subsequently been adopted by others. See, for example, K Barnett, Accounting for Profit for Breach of Contract (Hart Publishing, 2012). 115 For instance, Barnett (n 114) 7 cites the twin ‘moral’ rationales of ‘deterrence’ and ‘punishment or retribution’ in support of her view that awarding ‘disgorgement damages’ to a victim of contractual breach is sometimes justifiable. 116 For discussion, see C Rotherham, ‘Deterrence as a Justification for Awarding an Account of Profits’ (2012) 32(3) OJLS 537 and D Winterton, ‘Contract Theory and Gain-Based Recovery’ (2013) 76 MLR 1129. 113

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follows is to deal with three possible objections that might be raised against the characterisation of awards assessed by reference to a hypothetical bargain between the two contracting parties at the date of breach as ‘substitutionary’ in the relevant sense. One possible objection to making awards of the price of release, or at least against characterising such awards as ‘substitutionary’, is that these awards do not adequately account for the additional subjective value the promisee placed upon accurate performance, over and above the right’s objective market value. This additional value has been called ‘consumer surplus’.117 Translating this value into money once again raises the problem of incommensurability. Additionally, there are practical difficulties involved in measuring this loss accurately because the claimant may be the only person able to provide evidence of the value he placed upon receiving proper performance, and in providing evidence of the value he placed upon such performance, the claimant may (deliberately or inadvertently) exaggerate. There are two ways in which the problem of accounting for subjective value might be addressed within a substitutionary account. The first is to adopt what might be termed ‘situational objectivity’, which would allow for certain relevant personal characteristics of the claimant to be attributed to the hypothetical reasonable person when quantifying the price of release. A significant problem with this approach is that sometimes, as in Wrotham Park, the particular claimant would never have agreed to a ‘release’ so this attribute must be discounted to make this approach workable, making it somewhat artificial. More fundamentally, situational objectivity is at odds with the basic distinction between substitution and compensation. The difficulty involved in accurately identifying and quantifying the subjective value the claimant attributed to performance is a difficulty in accurately quantifying the claimant’s loss. This explains why appropriately recognising this value through a money award is a general problem for the law of ‘damages’ rather than one specific to the account proposed here. Substitutionary awards, by contrast, are not concerned with loss and always should be assessed objectively. For this reason, the preferable way of accounting for subjective value is to allow an award of compensation for non-pecuniary loss in addition to a substitutionary award of the price of ‘release’. Although the difficulty in accurately quantifying the ‘consumer surplus’ remains on this approach, this problem will exist on any account of contractual awards. Moreover, for those who think that particular personal characteristics of the promisee that the breaching party was, or should have been, aware of at the time of contract formation actually should be relevant in quantifying the price of ‘release’, the suggested approach is flexible enough to allow this by attributing these characteristics (and these characteristics only) to the hypothetical reasonable person. Importantly, however, the difficulty of calculating

117 D Harris, A Ogus and J Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) 95 LQR 581.

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these awards in cases where the claimant never would have agreed to a ‘release’, or places an unforeseeably high value on accurate performance, is minimised under this approach because generally compensatory recovery for such loss will be precluded by the remoteness rule.118 A second objection that might be raised against the proposed analysis is that an approximation of the reasonable price of ‘release’ is not truly a substitute for performance since it does not enable the promisee to obtain substitute performance from elsewhere. While it is certainly true that this measure is not a true substitute for performance, this is not a strong reason to deny its use as an alternative substitutionary measure. The very availability of this measure is premised on the fact that obtaining substitute performance is impossible.119 Therefore, although the reasonable price of release does not enable the promisee to obtain a true equivalent to performance, it does provide this party with a true substitute for the right to performance since it at least gives this party the objective market value of that right at the date it was compulsorily acquired.120 Because a true substitute for performance is impossible (or ‘unreasonable’), such an award constitutes the next best thing that the law can do in the circumstances.121 Finally, Professor Rotherham’s objection to Edelman’s characterisation of ‘reasonable fee’ awards as reversing a ‘transfer of value’ between claimant and defendant should be revisited.122 Rotherham may object to the analysis proposed here on a similar basis because it also essentially views breach as involving a ‘taking’. But an important difference between the analysis advanced here and Edelman’s own account is that the former explicitly recognises its own limitations.

118 However, there does, remain the problem of cases where the breaching party knew (or perhaps ought to have known) at the date of contract formation that the innocent party would never have agreed to ‘release’ the breaching party from performance. 119 Note that a case also might be made for also awarding the price of release when an award of the cost of rectification is denied on the basis that it is ‘unreasonable’, though such a claim is more controversial. Notably, this alternative claim was in fact made in Tito v Waddell (No 2) (n 48). However, Megarry V-C denied it (at 335) on the basis that the breach of contract there was not analogous to Wrotham Park [1974] 1 WLR 798 (Ch) and Bracewell v Appleby [1975] Ch 408 (where such awards were made) on the basis that in those cases the right infringed was a restrictive covenant and an easement of way respectively. Professor Gareth Jones criticised this reasoning in ‘The Recovery of Benefits Gained from a Breach of Contract’ (1983) 99 LQR 443, 459 on the basis that ‘it is not easy to see why the quantum of damages should be so different if the defendant breaks a promise which incidentally creates an equitable interest in land as distinct from a promise which does not’ and it is notable that Megarry V-C’s reasoning was not followed in Force India (n 34) [525]–[527]. 120 The ‘reasonable price of release’ at least equals the objective market value of the right to performance at the date of breach. However, in cases where the objective market value is nil or there is no objective market value, it may be appropriate for the court to award something other than the objective market value as ‘the price of release’. Examples of cases where such an approach may have been appropriate include Ruxley and Tito. 121 For this reason it can be referred to as an (admittedly very imperfect) monetary substitute for performance. Alternatively, if one prefers to eschew the terminology of ‘substitution’ in relation to such awards, some other label may be preferred. The important point is not that ‘release’ awards are referred to as monetary substitutes, but that they are awarded when awards of the cost of rectification (or market substitution) are unquantifiable (or ‘unreasonable’). 122 See Rotherham (n 112) 173.

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The claim advanced here is simply that awards of the price of ‘release’ constitute the ‘next best thing’ that the law can do when ordering either specific performance or when an award of its monetary equivalent cannot be quantified because the breach is irreversible. It is not suggested that the analysis presented provides a perfect ‘fit’ with all the decided cases. As just explained, it is recognised that such an award in reality substitutes for the promisee’s right to performance rather than substituting for performance itself. In the circumstances, however, this is the best that the law can do. No other account has achieved perfect doctrinal ‘fit’ or theoretical ‘coherence’ either though. There are, for instance, significant difficulties with Rotherham’s own analysis of ‘reasonable fee’ awards as instances of partial disgorgement of the defendant’s profits from breach,123 which were outlined briefly in Chapter 2.124 To recap, the first problem is that of ‘fit’: sometimes the defendant makes no gain from the breach but a ‘reasonable fee’ is still awarded to the promisee. One example of this in the contractual context is the decision in Pell Frischmann, which is discussed further below. An example outside the contractual context is Inverugie Investments Ltd v Hackett,125 where the defendant trespassed on the claimant’s land by wrongfully evicting him from an apartment block, but made no financial gain in consequence. Even though the apartment block was only 35 per cent occupied and the defendant had been running the block at a loss, the Privy Council awarded the claimant the market rental rate based on full occupancy. The more serious problem with Rotherham’s analysis, however, is that it fails to properly distinguish between remedial purposes and effects, thereby failing to acknowledge the fundamental reason why courts make what are often described as ‘reasonable fee’ awards. In truth, courts make such awards not to undo the consequences of the defendant’s breach, but out of a concern to uphold, or ‘vindicate’, the claimant’s primary right that the defendant has violated through breach. The claim advanced here is simply that the substitutionary analysis of these awards proposed here as a reasonable approximation of the price of ‘release’ is consistent with most of the cases and is also capable of being accommodated within the broader theoretical framework proposed.

2. Doctrinal Support In quantifying an award of the price of release, the relevant question is how much a reasonable person in the claimant’s position would have accepted to release the breaching party from his duty to provide further performance at the date of 123

This is also the analysis advocated in Barnett (n 114), chapter 6 in particular. See Chapter 2, Section III.B.1. 125 Inverugie Investments Ltd v Hackett [1995] 3 All ER 841 (CA). Admittedly, the case involved a trespass rather than a breach of contract. However, Rotherham claims that his account applies generally across the law of civil wrongs and not just to breaches of contract. By contrast, the account advanced here only purports to explain awards of the price of release made in response to a breach of contract. 124

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breach. Again, the breaching party also will be liable to compensate the promisee for any additional factual losses suffered in consequence of this failure to perform, subject of course to the restrictive doctrines that operate to constrain such awards. In what follows, some significant support for this alternative substitutionary measure of performance in the case law is demonstrated. a. Breach of a Restrictive Covenant The decision in Wrotham Park was discussed in Chapter 2.126 It was argued that the sum awarded in this case cannot be explained as an instance of compensation for financial loss. The claimant conceded that the value of the land was not reduced by the defendant’s building and evidence supported the conclusion that the claimant never would have agreed to release the defendant from the covenant in any hypothetical bargaining scenario. The claimant was thus financially no worse off as a result of the breach. To the extent that any loss was suffered, it was non-pecuniary. The inability to explain Wrotham Park ‘damages’ satisfactorily as an example of compensation for financial loss is supported by a leading proponent of the orthodox understanding of contractual awards.127 According to Burrows, the best interpretation of Wrotham Park is that the award was based upon the gain made by the defendants through breach.128 But since only 5 per cent of their profits were stripped, this analysis leaves open the question of why this particular measure of gain was chosen. This book contends that the best explanation of Wrotham Park is that Brightman J attempted to provide the claimant with the next closest substitute for performance in circumstances where both a restorative injunction and an award of the cost of substitute performance were inappropriate. In relation to the coercive order, this was because the houses had already been built and it would have constituted an unjustifiable waste of valuable public housing to sanction their removal. The denial of an award of the cost of substitute performance also might be justified on this basis. Alternatively, it can be explained by the fact that it was not possible for the claimant to ‘cure’ the breach because the houses were built on their neighbours’ land and therefore it was beyond their control to remove them. In these circumstances the most appropriate substitute for performance was a reasonable approximation of the price of release. Whether Brightman J’s valuation of this measure was correct is certainly open to debate. The appropriate test is what a reasonable person in the claimant’s position would have accepted to release the defendant from performance. Again, this raises the question of the extent to which the claimant’s own personal proclivities are relevant to quantification since the evidence in Wrotham Park suggested that 126

See Chapter 2, Section III.B.1. A Burrows, ‘Are “Damages on the Wrotham Park Basis” Compensatory, Restitutionary or Neither?’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 165. 128 ibid. 127

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the claimant never would have agreed to release the defendant from performance. As just explained, this book suggests that when a particular characteristic of the claimant can be proven on the balance of probabilities, it may be legitimate to attribute it to the hypothetical reasonable person in qualifying a ‘release’ award. But this does not mean that all personal characteristics should be attributed. There is a need for certain limits on this principle to make it workable. If so, that the claimant never would have agreed to ‘release’ the defendant from performance would seem to be such a characteristic given that to do otherwise would render this method of substitution unworkable. b. An Explanation for British Motor Trade Association v Gilbert The facts of BMTA v Gilbert were outlined in Chapter 2,129 and will not be rehearsed again here. Professor Edelman’s analysis of the decision is the same as his original analysis of Wrotham Park. Thus, for Edelman the sum awarded to BMTA is best understood as an example of ‘restitutionary damages’ for breach of contract.130 In Blake, Lord Nicholls cited Gilbert as an instance of profit stripping for a breach of contract.131 This is an example of what Professor Edelman terms ‘disgorgement’.132 But Edelman suggests that Danckwerts J really treated the case as one of ‘restitutionary damages’ on the basis that his Lordship’s focus on the price at which the defendant sold the car was not for the purposes of quantifying the defendant’s actual profit but in order to ascertain the car’s open market value. Edelman appears to derive support for his analysis of Gilbert from the fact that Danckwerts J calculated the hypothetical market price at £100 less than the sum for which the car was actually sold.133 As already observed, Edelman’s claim that certain cases like Wrotham Park and others can be explained by reference to a ‘transfer of value’ from claimant to defendant has been subjected to forceful criticism by Professor Rotherham.134 Rotherham’s central objection to Edelman’s analysis is that in reality the cases Edelman identifies as examples of ‘restitutionary damages’ cannot be said to involve a reversal of an enrichment obtained by the defendant via a ‘transfer’ from the claimant. In addition, specifically in relation to the decision in Gilbert, Rotherham argues that Danckwerts J chose to award a sum that did not reflect the defendant’s actual profit not for the reasons advanced by Edelman but because his Lordship was operating within the confines of the Sale of Goods Act 1893, which, like the legislation that has replaced it, was concerned, at least prima facie, to calculate loss rather than gain.135 Satisfactorily explaining Danckwerts J’s award in Gilbert is difficult. But whatever its true basis, the award clearly defies a compensatory analysis since BMTA 129 130 131 132 133 134 135

British Motor Trade Association v Gilbert [1951] 2 All ER 641. See p 85. Edelman (n 114) 174. Attorney-General v Blake [2001] 1 AC 268 (HL) 283. Edelman (n 114) 81. ibid 175. Rotherham (n 112) 175–83. For further discussion, see ibid 179.

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did not suffer any financial loss as a result of Gilbert’s breach. The case might be explained as a measure of the value transferred from claimant to defendant by breach, but the problems with such an analysis have been noted. A preferable analysis is that Danckwerts J was attempting to provide BMTA with an appropriate monetary substitute for performance in circumstances where ‘curing’ the breach was impossible so that an award of the cost of substitute performance was unquantifiable. Significantly, it is suggested that Edelman’s explanation of the awards in Wrotham Park and Gilbert as ‘restitutionary damages’ can in fact be reconciled with this analysis. But given Rotherham’s powerful critique to the effect that there is no meaningful ‘transfer of value’ in the cases Edelman cites in support of his analysis, this book prefers to eschew the terminology of ‘restitutionary damages’ altogether in preference for describing such awards as a reasonable approximation of the price of release. Support for this analysis of Gilbert can be found in Danckwerts J’s disinterest in the defendant’s profits for their own sake but because these profits constituted evidence of the market value of the contractual right that was infringed, as Edelman himself admits. c. Breach of an Exclusivity Agreement A more recent example of a case involving a breach rendering substitute performance impossible is the Privy Council’s decision in Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd,136 which was discussed in Chapter 2. The discussion there demonstrated that the case cannot be analysed as an example of compensation for financial loss. One possible explanation is that the award was based upon BVE’s gain from breach. BVE wanted to enter into a contract with NIOC and it achieved its desired object without buying out the claimant’s rights as it should have done. This analysis faces a significant difficulty.137 An alternative (and preferable) analysis is that a sum of money was awarded in substitution for the promisee’s right to performance that was compulsorily acquired through breach. Given that performance of the contract was no longer possible, the appropriate measure for this award was a reasonable approximation of the price of release. This analysis is consistent with the amount awarded and with the Privy Council’s insistence that the award should be valued as the reasonable price to release BVE from its duty to perform. It also explains why the award was valued at 28 July 2007, when performance was no longer possible, and why the Privy Council insisted that the issues in measuring these ‘damages’ ought not to be confused with the ‘wider issue of whether the court is awarding compensatory or restitutionary damages’.138 in addition, it fits with Lord Walker’s comments that the ‘Wrotham 136

Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2010] BLR (PC). Recall that in Pell Frischmann the Privy Council awarded the claimant £2,500,000. Although this sum constituted the profit the claimant anticipated it would make from the transaction as of the date of breach, it was actually greatly in excess of the actual profits made by the defendant as events transpired. 138 Pell Frischmann (n 136) [50]. 137

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Park damages’ awarded in Pell Frischmann were effectively substitutive of the right to an injunction (as described in Jaggard v Sawyer)139 and therefore disconnected from events occurring after the date of the Wrotham Park-style ‘hypothetical bargain’. d. Breach of a Confidentiality Agreement The facts in Vercoe v Rutland were outlined in Chapter 2 as well.140 There, Sales J held that where ‘damages’ are to be awarded on a Wrotham Park basis, what is required from the court is an assessment of a fair price for ‘release’ or relaxation of the relevant negative covenant, having regard to three factors. The first is the likely parameters given by ordinary commercial considerations bearing on each of the parties. The second is any additional factors particularly affecting the just balance to be struck between the competing interests of the parties. Here, his Honour noted Brightman J’s reference in Wrotham Park to the conduct of the beneficiary of the restrictive covenant as a factor tending to moderate the award of ‘damages’ in its favour and the Privy Council’s reference in Pell Frischmann to the relevance of extraordinary and unexplained delay by the claimant as a factor that was relevant to assessment in that case.141 The third factor relevant to an assessment of the reasonable price of release is the Court’s overriding obligation to ensure that an award of ‘damages’ for breach of contract does not provide relief out of proportion to the real extent of the claimant’s interest in proper performance, judged on an objective basis by reference to the situation that presents itself to the Court.142 This final consideration emphasises the fundamental purpose of such an award as a way of providing a substitute for performance. Although sometimes circumstances may dictate that fulfilling the objective of the contractual arrangement is no longer possible, this does not preclude the possibility of providing an appropriate award in substitution.

B. Restriction It was just argued that where the minimum cost of obtaining substitute performance is unquantifiable the promisee should be, and often is, entitled to a reasonable approximation of the price of releasing the breaching party from the latter’s obligation to provide further performance at the date of breach. Such an award constitutes the next best substitute for performance in the circumstances. Section III.A demonstrated the existence of significant doctrinal support for the availability of this measure in such circumstances. However, it certainly cannot be said that this measure is always awarded in cases of this kind, as is now explained. 139 140 141 142

Jaggard v Sawyer [1995] 1 WLR 269 (CA) 281. Vercoe v Rutland [2010] EWHC 424 (Ch), [2010] Bus LR D141. See Chapter 2, Section III.B.3. ibid [292]. ibid.

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1. The Current Position An example of a case in which performance in accordance with the contract was no longer possible, and no monetary substitute for performance was awarded, is Ford v White & Co,143 which was mentioned in Chapter 1.144 The result there is explained below. Following this, the famous American decision in City of New Orleans v Firemen’s Charitable Association is considered.145 In relation to both decisions it is suggested that an award of the price of ‘release’ from performance should have been made as a ‘next best’ substitute for performance in circumstances where curing the breach was impossible. The fact that in neither case was such an award made is explicable principally by reference to the dominance of the conventional, loss-focused understanding of contractual money awards. a. Explaining Ford v White & Co Recall that in Ford v White the claimant bought a property which he intended to develop. In breach of contract, the claimant’s solicitor failed to bring to his attention the existence of a covenant against development. This is an example of an irreversible breach. The evidence showed that the property would have been worth an additional £1,250 had it not been for the covenant. However, the claimant had paid no more than what the property was actually worth. Given that it was obviously no longer possible for the negligent solicitor to comply with his obligation to inform the claimant of the existence of the restrictive covenant prior to purchase, neither specific performance nor an award of the cost of substitute performance was possible. Moreover, if the solicitors had in fact complied with this obligation, the claimant would not have purchased the property and therefore would have been in exactly the same financial position he was now in. This meant that the claimant had suffered no financial loss. On this basis the Court correctly held that he was not entitled to the £1,250 claimed as financial loss. However, on the account proposed here, he should have been entitled to a reasonable approximation of the price of releasing the defendant from performance. Given that the entire purpose of the contract was to gain reliable information as to whether the planned development was possible, it seems likely that a reasonable person in the claimant’s position would accept nothing less than a full refund of the solicitors’ fees as the price of release from performance. This analysis would produce the same result as a claim for a total failure of consideration. No such award was provided in Ford v White and the question arises as to why. One possible explanation is that just as English law restricts the entitlement to the prima facie performance measure when it is ‘unreasonable’ for the promisee to insist upon performance, it sometimes restricts the entitlement to this alternative 143 144 145

Ford v White & Co [1964] 1 WLR 885 (CA). See Chapter 1, Section II.B.1. City of New Orleans v Firemen’s Charitable Association 9 So 486 (1891 SC Lou).

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measure. However, it is not obvious why it would ever be unreasonable to make such an award, at least where the breach has not caused the promisee any financial loss that can be claimed as compensation.146 If a claimant has a right to performance, there is no reason for not awarding a reasonable approximation of the value of the right infringed by the defendant in a way that essentially deprives the claimant of the entirety of that right’s value. Ford itself demonstrates this point. On the account proposed here, the claimant should have been entitled to recover the value of the advice contracted for but, as observed already, this amount was not awarded. Another possible explanation for this result is simply that such an award was not claimed. Although this is no doubt a large part of the reason for the decision the question again arises as to why. The principal reason for this is likely to have been the dominance of the conventional understanding of contractual awards according to which such awards are understood as concerned exclusively with compensating for loss. Thus, the more fundamental explanation for the decision in Ford is that it simply reflects the failure to appreciate the basic distinction this book proposes. This failure is unsurprising given that Ford was decided prior to Wrotham Park. Since the latter case was decided, the availability of ‘reasonable fee’ awards generally has been limited to cases where the claimant was seeking some kind of injunctive relief or ‘damages’ in lieu of an injunction, or the claim was based on a breach of restrictive covenant or the invasion of a property right held by the claimant. Significantly, in Force India Stadlen J held that a Wrotham Park claim is not precluded by the absence of these commonly occurring scenarios.147 b. The City of New Orleans Case The famous American decision in City of New Orleans v Firemen’s Charitable Association148 is another example of an earlier decision where the price of release should have been awarded but was not. The defendant contracted to provide the claimant with a fire fighting service and was paid the contract price. After the contract expired, the claimant discovered that the defendant had not provided the stipulated number of firemen or horses or the promised length of hosepipe. In consequence of the breach, the defendant had saved itself significant expense but this had not caused the claimant any loss because there had not been any fires inadequately handled during this period. The claimant in the City of New Orleans case recovered only a nominal award. The Court was led astray by its preoccupation with discovering a ‘loss’.

146 Experience Hendrix LLC v PPS Enterprises Inc [2003] EWCA Civ 323, [2003] FSR 46, [2003] 1 All ER (Comm) 830 (CA) [56]; World Wide Fund for Nature v World Wide Wrestling Federation (‘WWF’) [2007] EWCA Civ 286 (CA)[59]. Significantly, in Force India (n 34) Stadlen J did not consider it a bar to an award of ‘Wrotham Park damages’ that the claimant might have been entitled to a modest award for consequential loss. This is noted in Peel (ed) (n 27) [20-017]. 147 Force India (n 34) [503]. 148 City of New Orleans v Firemen’s Charitable Association (n 145).

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A substitutionary award should have been awarded on these facts. Because the breach was irreversible, it is contended here that the appropriate measure for such an award was a reasonable approximation of the price of release from further performance assessed at the date of breach. In the absence of further evidence, the difference in market value between the services contracted for and those supplied provides the obvious basis for assessing this amount, in accordance with the approach outlined by Lord Bingham MR in White Arrow Express.

2. Future Direction To clarify, it is suggested that the failure to award the alternative substitutionary measure in certain cases where there was an irreversible breach is attributable to three factors. The first and most important is the dominance of the conventional understanding of contractual awards. The prevalence of this way of viewing the law has prevented courts from appreciating the possibility of awarding a monetary substitute for performance, irrespective of what loss has been suffered in consequence of the breach. It has also led to the second problem, which is that such awards are not always claimed, as in Ford v White, where the cost of substitute performance was unquantifiable. A final reason why awards of the price of release have not been provided in all situations where they are appropriate may be the difficulties involved in quantifying them. Although sometimes significantly complicated by past or future uncertainty,149 quantifying a financial loss is generally a relatively straightforward exercise. By contrast, quantifying the price of ‘release’ is more difficult and less certain. Nevertheless, the very possibility of obtaining compensation for non-pecuniary loss demonstrates that difficulties in quantification provide an insufficient basis for failing to make a substitutionary award. Although this exercise may be more difficult than the quantification of financial loss, and for this reason more prone to inaccuracy, following a breach of contract the law should uphold the breaching party’s duty to do the next-best thing to performing the promise by ordering him to provide an appropriate substitute for performance. The inevitable inaccuracies involved in awarding ‘damages’ for non-pecuniary losses do not prevent the law from attempting to compensate such losses, and they should not prevent the law from also striving to provide an appropriate monetary substitute for performance either. To the extent that the common law currently does restrict the availability of this alternative substitutionary measure where the prima facie measure is unquantifiable because the breach is irreversible, this book contends that such a restriction is unjustifiable. Although it may be ‘unreasonable’ to award a party the full cost of obtaining substitute performance in certain situations, it is difficult to envisage circumstances where awarding a reasonable approximation of the price of release 149 For discussion see M Bridge, ‘Expectation Damages and Uncertain Future Losses’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford University Press, 1991) 427.

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ever will be inappropriate. This is the very least a claimant should be entitled to when her right to performance is infringed by the defendant in a way that essentially deprives the claimant of any value that the right possessed. To summarise, although restricting the availability of the alternative monetary substitute for performance is difficult to justify, at present English law sometimes does so. In cases where the promisee also suffers financial loss as a result of the breach this discrepancy might not always be appreciated. However, in cases like Wrotham Park and Ford v White, where the promisee suffers no financial loss, the indefensibility of the position becomes clear because it deprives this party of any effective ‘remedy’ at all. Although an award was provided in the former case, none was provided in the latter. This might be explained on the basis that such an award was not claimed. But the more fundamental explanation for this is the dominance of the conventional understanding of contractual awards, and the difficulty in accurately quantifying the sum which the promisee would have accepted to ‘release’ the breaching party from further performance at the date of breach.

IV. Conclusion This chapter has explained the quantification and restriction of money awards that substitute for performance. The theoretical basis for such awards is the right to performance created by contract formation. In the absence of any additional considerations, the closest substitute for performance is an order for specific performance. However, when the balance of relevant considerations does not support such an order, or the promisee would prefer a money substitute for performance, English law should and generally does choose the latter option as the appropriate means by which to enforce a promisee’s primary entitlement to performance. In making a substitutionary money award the law’s objective is to provide the promisee with the monetary substitute for performance that is most appropriate in the particular circumstances. More specifically, two distinct monetary substitutes for performance were identified (and their availability justified) in this chapter. The first was an award of the cost of substitute performance. It was argued that at least when the promisee has become entitled unconditionally to the promisor’s performance, such an award is prima facie the most appropriate monetary substitute for performance upon the occurrence of a reversible breach because it provides the promisee with the means necessary to obtain a close equivalent to the performance promised. In addition, it was argued that when the breach is instead irreversible an alternative monetary substitute for performance—an award of the market price of ‘release’ as at the date of breach—should be available on the basis that, in essence, the breaching party has compulsorily acquired the promisee’s primary contractual right to performance. In addition, doctrinal support for the existence of both kinds of award was advanced.

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Finally, it was noted that currently English law also does not always award this alternative monetary substitute for performance in cases where an award of the cost of substitute performance is unquantifiable. While this is certainly understandable given the law’s prevailing orthodoxy, and the difficulty commonly involved in quantifying the price of ‘release’, an overly restrictive approach to the availability of such awards is indefensible. The injustice of restricting this measure is particularly apparent in cases where there is a substantial deficiency in performance that fails to cause the promisee any demonstrable loss in consequence (such as in Force India). However, suffering financial loss as a result of the breach should not bar the promisee from an award of the price of ‘release’ provided any double recovery also is precluded. Thus, although English law’s traditional reticence to award the price of ‘release’ is understandable, it is argued that the increasing availability of such awards should be encouraged. Some of the arguments advanced in this chapter are controversial. Traditionally, Commonwealth jurisdictions have been fixated upon identifying the existence of a ‘loss’ when quantifying a money award for breach of contract. Nevertheless, this chapter demonstrates that the common law is largely consistent with the bifurcated account of the law proposed here and also that the alternative substitutionary measure advocated is increasingly being awarded. As Chapter 4 explained, this approach must be distinguished from the understanding of contractual money awards recently advocated by Professor Stevens.150 However, it also must be distinguished from the agreement-centred understanding of contractual money awards advocated by writers such as Adam Kramer and (possibly) Lord Hoffmann. These alternative accounts are examined in the latter half of the next chapter where the view that all contractual awards are best understood as simply upholding the parties’ underlying bargain is refuted.

150 R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing, 2009) 171.

6 Money Awards that Compensate for Loss I. Introduction The account this book advances is that there are two distinct kinds of money award directed towards upholding the Robinson v Harman principle. First, substitutionary awards aim to give the promisee a monetary substitute for a promised performance to which this party has or can, via the payment of money, become unconditionally entitled. As the previous chapter explained, the appropriate measure for such an award is determined by the particular situation in which the promisee finds himself. In addition to outlining the two different monetary substitutes for performance recognised by English law—an award of the cost of substitute performance (either via repair or market replacement) and an award of the price of ‘release’ from further performance—the previous chapter explored the uncertain nature and content of the ‘reasonableness’ restriction that is applicable to such awards. The second kind of money award directed towards upholding the Robinson v Harman principle is a compensatory award that aims to make good certain detrimental factual consequences that the promisee can attribute to the breach. This chapter explains the nature and content of these awards. English law’s prevailing orthodoxy is that, exceptional circumstances aside,1 the purpose of all contractual money awards is to make good certain ‘loss’ caused by the breach.2 This book strives to demonstrate that if ‘loss’ is understood to be synonymous with ‘factual detriment’ (as it should be), this view of the law oversimplifies reality. However, in contrast to substitutionary money awards, the status of compensatory money awards in English law is not in doubt. Subject to the challenge considered in Section III of this chapter, generally it is accepted that there are at least some occasions when money is awarded to the victim of a breach 1 This qualification is to recognise that, exceptionally, English law awards the innocent party the profits the breaching party made from the breach. More controversially, it may be thought that an award of ‘punitive damages’ for breach of contract is justified in some rare cases, though English law has so far resisted this possibility. Compare the Canadian approach evident in Royal Bank of Canada v W Got & Associates Electric Ltd (2000) 178 DLR (4th) 385 and Whiten v Pilot Insurance Co 2002 SCC 18. 2 This is the orthodox understanding of damages awards for breach of contract. See Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) 848 (Lord Diplock).

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of contract simply in order to make good the detrimental factual consequences that breach has caused this party rather than to enforce directly the other party’s promise to perform.3 Despite this, the theoretical basis for compensatory money awards is contentious. The orthodox view is that these awards uphold a secondary right to repair that arises upon the breach of the primary duty to perform. Recently, however, this view has been challenged with scholars increasingly arguing that a party has no legal (or moral) duty to pay compensatory damages until ordered to do so by a court. For reasons explained below, proving the central thesis of this book does not require taking a clear position within this debate. The objective here is to demonstrate merely that the law’s coherence and consistency can be improved by recognising, at the doctrinal level, the existence of a distinction between substitutionary and compensatory contractual money awards. That there is no need for the present work to advocate a particular view with regard to the basis for compensatory money awards for breach of contract is subject to one important qualification that was alluded to in the previous paragraph. This qualification arises out of recent criticism of the orthodox account of contractual remoteness. According to this account, the contractual remoteness principle is an externally imposed default rule designed to keep a promisor’s liability to make good the detrimental consequences of a breach within reasonable limits. But recent challenges to this understanding of contractual remoteness from within both the judiciary and the academy claim that the remoteness rule in contract is not externally imposed by law, but in reality simply enforces directly the parties’ agreement. Section III.A of this chapter responds to this challenge by defending the conventional understanding of contractual remoteness. Although proponents of the agreement-centred challenge have identified certain limitations in the conventional approach, their proposed reconceptualising of the law pushes the objective approach to contractual interpretation beyond its limits. Regardless of this, any claim that the distinction between substitution and compensation can be collapsed because all contractual money awards are sourced ultimately in the parties’ underlying agreement must be rejected. This is principally, though not exclusively, because there are other restrictions on compensatory recovery, such as those encapsulated by the rules of ‘mitigation’ and the particular restriction on recovery for non-pecuniary loss resulting from a contractual breach, that simply cannot be explained as merely enforcing the parties’ agreement. The only plausible interpretation of these restrictions is that they are externally imposed default rules of law that aim to place reasonable limits on a breaching party’s liability to make good the detrimental consequences that the breach has caused the other party.

3 A clear example of such an award is one provided in addition to an order for specific performance in order to make good certain loss suffered by the innocent party on account of the breaching party’s delay.

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II. Fitting Compensatory Awards into the New Account This section has two aims. Section II.A examines the question of what the theoretical basis for compensatory awards for breach of contract is before explaining why it is unnecessary to answer this question definitively for the purposes of establishing the central thesis of this book. Section II.B outlines the maximal scope of a breaching party’s compensatory liability by explaining the two restrictions that are logically entailed by the very nature of compensatory awards.

A. The Theoretical Basis for Compensatory Money Awards The orthodox view of the compensatory money awards available for both breaches of contract and other civil wrongs is that these awards give effect to a secondary right to repair that arises upon the violation of the applicable primary right. Recently, however, the conventional understanding of compensatory money awards has been challenged on the basis that any duty to pay monetary compensation in fact is imposed on wrongdoers by courts rather than being grounded in any pre-existing moral or legal duty to repair the harmful consequences of one’s wrongful conduct. Although it is unnecessary to explore the nuances of this debate here, a brief overview is necessary to explain why it does not affect the central argument of this book.

1. The Controversial Status of the Secondary Duty to Repair It generally is accepted that the breach of a primary legal duty is a civil wrong.4 Two examples of civil wrongs are the common law tort of conversion and the equitable wrong of breach of confidence. The first involves a breach of the duty not to act inconsistently with another’s right to possess certain forms of property.5 The second involves the breach of the duty not to convey confidential information to a third party.6 To note this structural similarity is not to suggest that distinctions between the two primary duties should not be relevant to deciding upon the appropriate response to a breach of one of them.7 A breach of contract is also a civil wrong because it involves the breach of the primary legal duty to perform a contractual undertaking. At least for wrongs historically recognised by the common law, the conventional view is that breach of any primary legal duty invariably

4 For discussion, see P Birks, ‘The Concept of a Civil Wrong’ in D Owen (ed), The Philosophical Foundations of Tort Law (Oxford University Press, 1995) 29. Compare R Posner, Economic Analysis of Law, 7th edn (Aspen, 2007) 93. 5 See Fouldes v Willoughby (1841) 81 M & W 540, 550: ‘a taking with the intent of exercising over the chattel an ownership inconsistent with the real owner’s right of possession’ (Rolfe B). 6 See Attorney-General v Guardian (No 2) [1990] 1 AC 109 (HL). 7 For instance, a gain-based response to breach may be appropriate only for certain breaches of the duty not to convey confidential information to a third party.

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generates a secondary legal duty to make good at least some of the loss that the promisee incurs in consequence.8 A persistent puzzle for private law theorists lies in explaining the basis for this supposed secondary legal duty to repair (certain) wrongfully caused loss. One popular answer locates the basis for this secondary duty to repair in the concept of ‘corrective justice’.9 Corrective justice theories tend to suggest that this legal duty to repair wrongfully caused loss is based on a corresponding moral duty, though this may not be a necessary feature of such accounts. Both the basis for and existence of any supposed moral duty to repair wrongfully caused loss are matters of significant controversy.10 The main challenge to the existence of such a duty comes from proponents of the economic analysis of law. According to such theorists, compensatory awards are based not upon any moral or legal duty to repair, but upon the desirability of promoting certain goals such as economic efficiency or wealth maximisation.11 But the existence of a secondary legal (or moral) duty to repair certain loss caused by breaching one’s primary legal duty has been challenged on non-consequentialist grounds as well. Professors Zipursky and Goldberg, for example, argue that a defendant’s liability to pay compensation for loss upon the commission of a civil wrong is not grounded in any duty arising upon the violation of a primary right but is rather imposed by the court via a principle of ‘civil recourse’.12 According to Zipursky and Goldberg, upon the breach of a primary legal duty, no secondary legal (or moral) duty to repair the detrimental consequences of that breach arises. A court nevertheless may impose liability upon a wrongdoer to pay compensation to the injured party in order to ‘vindicate’ the latter’s primary right.13 8 In the contractual context see Lord Diplock’s classic explanation in Photo Production Ltd v Securicor Transport Ltd (n 2) 848, which was discussed at some length in Chapter 4, Section IV.B. 9 For Aristotle’s classic account, see The Nichomachean Ethics (Book V). The most influential modern account in tort law is E Weinrib, The Idea of Private Law (Harvard University Press, 1995). For a corrective justice account of the law of contract, see P Benson, ‘The Unity of Contract Law’ in P Benson (ed), The Theory of Contract Law (Cambridge University Press, 2001). 10 In the tort context compare J Coleman, Risks and Wrongs (Cambridge University Press, 1992), Weinrib (n 9) and S Perry, ‘Responsibility for Outcomes, Risk and the Law of Torts’ in G Postema (ed), Philosophy and the Law of Torts (Cambridge University Press, 2001). For yet another view, see N MacCormick, ‘The Obligation of Reparation’ in N MacCormick, Legal Right and Social Democracy (Clarendon, 1982) 212. 11 See Posner (n 4). See page 93 of Posner’s book for his discussion of ‘contract rights and remedies’. Conventionally, legal economists claim there is in fact no ‘duty’ to repair here because they view the primary legal duty as being to perform or pay compensation for non-performance. But note that Professor Smith has argued that, contrary to popular conception, legal economists (along with other utilitarian scholars) are actually committed to viewing damages awards as based on a moral duty of repair. See S Smith, ‘Duties, Liabilities and Damages’ 125 Harvard Law Review (2012) 1727. 12 See B Zipursky, ‘Civil Recourse, Not Corrective Justice’ (2003) 91 Georgetown Law Journal 695, 719. For a more recent discussion of the ‘civil recourse’ theory, see B Zipursky and J Goldberg, ‘Torts as Wrongs’ (2010) 88 Texas Law Review 917. 13 Professor Gardner notes that there is some ambiguity in Zipursky’s work as to whether this means ‘only that the tortfeasor has no legal duty to pay any reparative damages unless and until ordered to pay them by the court’ (emphasis in original), or whether he is ‘saying that even after an award of reparative damages has been made by the court … there is no legal duty on the tortfeasor to pay those damages’. See J Gardner, ‘Torts and Other Wrongs’ (2011) 39 Florida State University Law Review 43, 57–58,

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Others have made similar claims. According to Professor Stephen Smith, the fact that no ‘duty’ to compensate the victim of one’s civil wrong arises until a court orders payment is demonstrated by several aspects of the law.14 Chief among these features, argues Smith, is the fact that the existence and content of any such duty cannot be determined in advance of a court order compelling payment,15 and that paying damages prior to the making of such a court order is no defence to the victim’s claim.16 In addition, Smith notes that a failure to pay damages until ordered to do so by a court is never a source of further compensatory liability and that common law judges typically, though not exclusively,17 speak in terms of wrongdoers being ‘liable’ to pay damages rather of them having pre-judgment ‘duties’ to do so.18 Presumably, all proponents of corrective justice accounts of the law of torts and contract would challenge the notion that the breach of a primary legal duty does not at least give rise to a moral duty to repair certain ‘harm’ caused in consequence of the breach. Nonetheless, some of these scholars may accept that no legal duty to pay compensatory damages is owed by the wrongdoer until the court orders such payment. Notably, however, Professor Gardner maintains that tortfeasors and contract breakers do in fact have pre-judgment legal duties ‘to pay reparative damages before the court awards a liquidated sum’.19 In defending this view, Gardner points to the fact that in England and Wales statutory interest may (and sometimes must) be awarded on money awards for the period between the time when the cause of action arose and the time at which the court order is made.20 claiming that fortunately, Zipursky more often appears to mean the former. While Gardner disagrees for reasons explained in the text below, he notes that either way ‘the court has a legal duty to award a liquidated sum in reparative damages’ against the wrongdoer, meaning that the plaintiff ’s primary right ‘grounds a legal duty on the court to impose a new legal duty on the tortfeasor’, 58. 14 See S Smith, ‘Why Courts Make Orders (And What This Tells us About Damages)’ (2011) 64 Current Legal Problems 51. See also Smith (n 11). For another argument to similar effect, see N Oman, ‘Why There is No Duty to Pay Damages: Powers, Duties and Private Law’ (2011) 39 Florida State University Law Review 137. 15 See Smith, ‘Why Courts Make Orders’ (n 14). 16 ibid, citing Edmunds v Lloyds Italico & l’Ancora Compagnia di Assicurazione e Riassicurazione SpA [1986] 1 WLR 492 (CA). Note that a possible response to this argument is that settlement of an action generally is a defence to a claim for compensatory damages. To this it might be objected that the payment must be provided in settlement of the action to discharge liability. But in response it could be said that this assumes an unrealistic level of specificity for the secondary duty. The objection, in other words, assumes that the duty arising upon the breach of a primary duty is a duty to pay a particular sum of money rather than a more general reparative duty to make good the harm one has caused as a result. 17 See Lord Diplock in Photo Production Ltd v Securicor (n 2) and Lord Reid in Lep Air v Rolloswin [1973] AC 331, 345 (HL). 18 See Smith, ‘Why Courts Make Orders’ (n 14). 19 See Gardner, ‘Torts and Other Wrongs’ (n 13) 58. As Chapter 4 explained, the explanation for the moral duty to repair wrongfully caused loss favoured here is the one advanced by Professor Gardner in ‘What is Tort Law For? Part 1: The Place of Corrective Justice’ (2011) 30 Law & Philosophy 1. According to the ‘continuity thesis’ Gardner there advances, following the breach of a primary legal duty, the reasons justifying this duty persist and press for ‘next-best conformity’. 20 See Gardner, ibid (n 13), citing Jefford v Gee [1970] 2 QB 130 (CA) and Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, 547 (McLachlin J).

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2. Significance of this Debate for the Argument of this Book The preceding discussion casts significant doubt upon the common assumption that the breach of a primary legal duty itself generates a secondary legal (or moral) duty to make good certain loss caused to the victim in consequence. To the contrary, the various arguments advanced by Professors Smith, Zipursky, Goldberg and others (eg Oman)21 suggest that the breach of a primary legal duty simply renders the wrongdoer liable to be placed under a legal duty to compensate the victim of the breach. The consequence of this would be that compensatory money awards are not based on a (moral or legal) duty of repair but rather are imposed by courts in order to vindicate primary rights. These claims might appear to constitute a fundamental challenge to the central argument advanced in this book on the basis that, on the account proposed here, ‘vindicating’ primary rights is precisely what substitutionary awards are supposed to do. However, the notion that compensatory awards also aim to ‘vindicate’ primary rights does not necessarily undermine this book’s central claim because the distinction here proposed is one that operates principally at the doctrinal, rather than theoretical, level. The thesis advanced is simply that the quantification and restriction of contractual money awards will be more principled, and important mistakes avoided, if a distinction between awards that substitute for performance and awards that make good factual loss is recognised. At a higher level of theoretical abstraction, it is of course true that both kinds of award are directed towards the common aim of ‘vindicating’ the promisee’s primary legal right. The matter may be put less abstractly, but also less simply, by observing that both kinds of award aim to achieve ‘next-best conformity’ with the reasons that justified the existence of the promisee’s primary legal right.22 Thus, as Chapter 4 explained, according to the ‘continuity thesis’ that Professor Gardner has advanced and is supported here: Once the time for performance of a primary obligation is past … one can often nevertheless still contribute to satisfaction of some or all of the reasons that added up to make the action obligatory. Those reasons, not having been satisfied by performance of the primary obligation … [await] satisfaction in some other way. They call for next-best satisfaction.23

The observation that the proposed distinction between substitution and compensation operates at a different level of theoretical abstraction from debates regarding the existence of any general (moral or legal) duty to repair wrongfully caused loss is one that Gardner himself has made. As Chapter 4 noted, in an unpublished doctoral thesis concerned with compensation claims against trustees, Elliott proposed a distinction between ‘substitutive’ and ‘reparative’ compensation,24 21 22 23 24

Oman (n 14). See Gardner, ‘What is Tort Law For?’ (n 19) 28–33. ibid 33. See S Elliott, ‘Compensation against Trustees’, DPhil Thesis (University of Oxford, 2002).

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which essentially mirrors the distinction this book proposes between substitutionary and compensatory money awards in the contractual context. In response to Elliot’s proposal, Gardner has said that he regards the former measure ‘not as a rival to the reparative measure, but as just one among many possible reparative measures’. Thus, for Gardner, in regard to the terminology adopted in this book: ‘substitution [and compensation] stands to reparation as terrier stands to dog. Reparation in turn stands to correction as dog stands to canine’.25 For this reason, the challenges articulated by Smith, Zipursky, Goldberg and others in regard to the existence of a secondary legal duty to repair wrongfully caused loss do not undermine the existence or usefulness of the distinction this book proposes between substitutionary and compensatory money awards. This, as just explained, is essentially because the challenge advanced by these scholars operates at a higher level of theoretical abstraction than the distinction proposed here. While these scholars disagree with Gardner’s view that there is both a moral and legal duty to repair certain loss one’s breach has caused the promisee, either of these views is consistent with the existence of the distinction this book proposes between substitutionary and compensatory money awards. This does not mean, however, that the existence of the proposed distinction is incontestable. As foreshadowed above, even at the doctrinal level at which this distinction operates, the notion that compensation and substitution are meaningfully distinct has been challenged. This challenge arises principally out of recent criticism of the orthodox understanding of the remoteness rule in contract, which claims that this restriction on compensatory recovery simply enforces the parties’ underlying agreement.26 However, before this challenge is outlined and refuted, it is necessary to explain two inbuilt limits on the scope of compensatory awards that are entailed by the very logic of loss-based recovery.

B. Two Inherent Limits on the Recovery of Compensation for Breach of Contract This book argues that English law recognises an important distinction between substitutionary and compensatory money awards. On one view, these two different kinds of award reflect the two distinct legal rights possessed by a contracting party following breach: the primary right to performance which arises upon formation, and a secondary right to reparation which arises upon breach. As explained above, an alternative view is that the occurrence of breach does not in fact give rise to a moral or legal right to repair, but simply leaves the wrongdoer liable to be ordered to make good certain loss the innocent party has incurred as a

25 See Gardner (n 13) 56 fn 50, noting that the choice among these various possible reparative measures depends on the logic of ‘next-best conformity’ as sketched in Gardner ‘What is Tort Law For?’ (n 19) 28–37. 26 Hadley v Baxendale (1854) 9 Exch 341, 354.

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result of the breach.27 Either of these accounts is consistent with the view that the underlying objective of a contractual remedy is to achieve ‘next-best conformity’ with the reasons that justified the contract’s creation. Regardless of which of these accounts is preferred, it is clear that there are a variety of legal doctrines that limit the size of compensatory awards. The limits on compensatory recovery imposed externally by law are examined in Section III of this chapter, but first it is necessary to outline two important limits on compensatory awards, that follow logically from the very nature of loss-based recovery. The first is that the innocent party must demonstrate that the relevant ‘loss’ in fact was ‘caused’ by the breach rather than by some other preceding concurrent or supervening event. The second is the principle against double recovery, which provides that the victim of the breach cannot recover for loss already made good through the provision of a substitutionary award.

1. The Causation Principle The legal meaning of ‘causation’ is controversial, but the full extent of this controversy cannot be explored here.28 The orthodox view is that at least two facts must be true before the claimant can causally attribute loss to a defendant. The first is that, on the balance of probabilities, the claimant would not have suffered the loss for which compensation is sought ‘but for’ the defendant’s breach.29 This requirement essentially stipulates that every necessary antecedent of an event is a prima facie factual cause of that event. It is, however, well recognised that the ‘but for’ test does not sufficiently limit the set of causal antecedents of an event for the purposes of identifying those causes that are legally significant. Moreover, the ‘but for’ test is not even accepted as the universally appropriate test of factual causation. This is principally because of the existence of cases involving concurrent or successive sufficient causes,30 which have led to the proposal of alternative tests of factual causation based on sufficiency rather than necessity.31 As just observed, generally it is acknowledged that the ‘but for’ test does not sufficiently limit the set of possible causes of a loss to those of legal significance. For this reason, the second limitation imposed on attributing loss to a wrongdoer 27

Intermediate views are clearly possible but exploring this possibility is unnecessary here. For a classic discussion, see HLA Hart and A Honoré, Causation in the Law, 2nd edn (Clarendon, 1985). For a recent challenge to the orthodox view, see J Stapleton, ‘Reflections on Common Sense Causation in Australia’ in S Degeling, J Edelman and J Goudkamp (eds), Torts in Commercial Law (Thomson Reuters, 2011). 29 Barnett v Chelsea Hospital [1969] 1 QB 428. 30 See Baker v Willoughby [1970] AC 467 and Jobling v Associated Dairies Ltd [1982] AC 794. A distinct type of problem case for the ‘but for’ test is one involving a material increase of risk. See, for example, Cook v Lewis [1951] SCR 830 (SCC); McGhee v National Coal Board [1973] 1 WLR 1, [1972] UKHL 7; and Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22. 31 For example, according to the ‘NESS’ test of causation a particular condition is a cause of— meaning a condition contributing to—a particular consequence if and only if this condition was a necessary element of a set of antecedent actual conditions that was sufficient for the occurrence of that consequence. For further discussion, see Hart and Honoré (n 28) and R Wright, ‘Causation in Tort Law’ (1985) 73 California Law Review 1735, 1788–813. 28

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is that there was no supervening (or preceding) event that sufficiently ‘severed’ the causal link between the wrong and the innocent party’s loss such that this event is more appropriately seen as the ‘true’ cause of the loss.32 This requirement, which, at least with respect to a supervening event, is often described as a novus actus interveniens, is essentially an inquiry into whether the particular loss properly is to be attributed to the defendant’s breach or to some other event that may have made a more (legally) significant causal contribution to the loss’ occurrence. According to Lord Hoffmann, the answer to this inquiry seems to depend on the reason for which the primary duty was imposed,33 but it is arguable that in cases involving a supervening event, this second aspect of causation might be better understood as part of the ‘remoteness’ inquiry. An illuminating example of how the issues raised in this context may be seen as raising a question of causation or remoteness is provided by Alexander v Cambridge Credit Corporation.34 In that case Cambridge Credit breached their contractual duty of care in 1971 by overstating the value of Alexander’s assets. If this breach had not occurred Alexander would have been put into receivership in that year. However, the company continued to trade until 1974 before going into receivership. The trial judge found that ‘but for’ the auditor’s breach the company would have sustained losses of around $10m. By 1974, however, the losses were approximately $155m and Cambridge Credit claimed $145m in damages. While the auditor’s breach of contract was certainly a ‘but for’ cause of the company’s loss, the extent of this loss was due to some significant supervening events, the most prominent of which was the collapse of the property market in which Cambridge Credit had invested. In these circumstances, a majority of the NSW Court of Appeal rejected Cambridge Credit’s claim on the basis that the relevant losses were not caused by the auditor’s breach.35 McHugh JA held that Cambridge Credit’s submission essentially amounted to claiming that the continued existence of the company during the period between 1971 and 1974 was the cause of its subsequent losses. According to his Honour, with whom Mahoney JA substantially agreed on this point, this could not be correct as a matter of ‘common sense’.36 Significantly, even supposing that causation was satisfied here, McHugh JA concluded that the losses were irrecoverable in any event on the basis that they were ‘too remote’ a consequence of the auditor’s breach.37 The issue raised in Alexander v Cambridge Credit was essentially the same as that which arose in the House of Lords’ now well-known decision in South Australia Asset Management Corporation Respondents v York Montague Ltd,38 where a surveyor negligently overvalued property which constituted the security for the 32

See, for example, The Silver Sky [1981] 2 Lloyd’s Rep 95. See Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22, 31 (Lord Hoffmann). 34 Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310. 35 ibid 334 (Mahoney JA), 359 (McHugh JA). Glass JA dissented. 36 ibid 359, discussing Monarch Steamship Co Ltd v Karlshamns Oljefebriker (A/B) [1949] AC 196. This approach to causation was endorsed in March v E & MH Stramare (1991) 171 CLR 506 (HCA). 37 Alexander v Cambridge Credit Corporation (n 34) 366–68. 38 South Australia Asset Management Corporation Respondents v York Montague Ltd [1997] AC 191 (HL). 33

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borrower’s loan from a mortgage lender. When the borrower’s venture failed and the property market crashed in the early 1990s, the lender incurred heavy losses. Although these losses were found to be reasonably foreseeable by the surveyor at the time of its valuation, the surveyor was not held liable for all the lender’s losses. Instead, liability was capped at the amount of the negligent overvaluation because, in the words of Lord Hoffmann, the further losses caused by the property market crash were outside the scope of the duty that the surveyor had undertaken.39 The SAAMCO principle, as it often is called,40 has been upheld in a number of subsequent decisions. For instance, in Galoo Ltd v Bright Grahame Murray,41 a case with facts very similar to those in Alexander v Cambridge Credit, a negligent audit resulted in the subject company continuing to trade and suffering additional losses when it should have been put into liquidation. The Court of Appeal held that even though the losses were reasonably foreseeable at the time the audit contract was entered into, the auditor’s liability was limited on the basis that the losses caused by continuing to trade were outside the scope of the contractual duty undertaken. It might be thought that the ‘scope of duty’ principle enunciated in SAAMCO is simply an aspect of causation or remoteness, as two judges in the NSW Court of Appeal seemed to think in Alexander v Cambridge Credit. However, in Nykredit plc v Edward Erdman Group Pty Ltd (No 2),42 Lord Hoffmann appeared to reject this view, holding that the ‘essence’ of the decision to limit the negligent valuer’s liability in such cases is that ‘the valuer is responsible only for the consequences of the lender having too little security’.43 But Lord Hoffmann’s words in the Nykredit case indicate only that this so-called ‘scope of duty’ restriction is not based on principles of foreseeability or intervening cause.44 This does not rule out the possibility that the restriction is part of some broader principle of remoteness, which is not coextensive with the Hadley v Baxendale principle of ‘reasonable foreseeability’, and this in fact appears to reflect his Lordship’s view on the matter.45

39

See ibid [15] (Lord Hoffmann). For example, see A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford University Press, 2004) 110. 41 Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360. For the same analysis in a similar case, see Bank of Credit & Commerce International (in liq) v Price Waterhouse (No 3), The Times, 2 April 1998. 42 Nykredit plc v Edward Erdman Group Pty Ltd (No 2) [1997] 1 WLR 1627 (HL). 43 ibid 1638. Note that that the SAAMCO principle was rejected by a majority of the High Court of Australia in Kenny & Good Pty v MGICA (1992) Ltd (1999) 199 CLR 413, though the minority (McHugh and Gummow JJ) thought that Kenny was distinguishable from SAAMCO meaning that arguably the Court’s consideration of SAAMCO was not strictly necessary to decide the case. 44 Lord Hoffmann subsequently appears to have disavowed this language in extra-judicial writing. See, for example, L Hoffmann, ‘Causation’ (2005) 121 LQR 592, 596. 45 The evolution of the contractual remoteness principle from Hadley v Baxendale to the present day is traced in the next section of the chapter where The Achilleas is discussed in some detail. It is explained there that in The Achilleas Lord Hoffmann appeared to adopt a view similar to that just postulated in the text (ie that the ‘remoteness’ restriction on the recovery of compensation for breach of contract is not coextensive with the Hadley v Baxendale rule). Rather, his Lordship appeared to hold, a breaching party’s liability is governed more fundamentally by the risks the party accepted at the time of contract formation. 40

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2. Prohibition on Double Recovery The second implicit limitation on the scope of a breaching party’s liability (or duty) to compensate for loss caused by breach is the prohibition on double recovery. The scope of any liability to repair the detrimental consequences of a breach of duty is limited to compensating for loss not made good indirectly via the provision of a substitutionary award. Indirect compensation of this kind is possible because usually, though not always, a failure to receive performance also leaves the innocent party factually worse off by reference to the position he would have occupied had the breach not occurred. For instance, in the context of defective building work, awarding the cost of substitute performance may compensate indirectly for loss actually suffered if the innocent party has spent already the amount necessary to obtain substitute performance or has proven on the balance of probabilities an intention to do so in the future. The principle against double recovery can be explained further in the following terms. The commission of a legal wrong gives rise to a duty (or leaves the wrongdoer liable) to make good certain losses that the victim has suffered in consequence of this breach. In the usual case there is no justification for requiring a breaching party to do more than substitute for performance and make good certain additional detrimental factual consequences caused by the failure to perform.46 Awards of compensation for loss complement a money substitute for performance in the same way that such an award (for example, to make good the detrimental consequences of delay) may complement an order for specific performance. The consequence of all this is that a monetary substitute for performance and an award of compensation for loss are cumulative, rather than alternative, responses to breach.47 In Personal Representatives of Tang Man Sit v Capacious Investments Ltd,48 Lord Nicholls explained that where responses are cumulative the claimant is not required to choose between them but may take both subject to the principle

46 The qualification is included to recognise the possible legitimacy of a gain-based (or punitive) award for breach in certain exceptional cases. The justification for any such award, to the extent that such awards can be justified, cannot lie in protecting the particular victim of the breach, though it may lie in a concern to protect the practice of contracting or the victims of future breaches. For example, the account of profits awarded in Attorney-General v Blake [2001] 1 AC 268 (HL) is a non-compensatory money award for breach of contract that cannot be explained as an award substituting for performance but nevertheless might be justified on some other basis such as the desirability of deterring certain egregious breaches of contract—perhaps as a means to protect the institution of contract law. For further discussion, see D Kimel,‘The Morality of Contract and Moral Culpability in Breach’ (2010) 21 King’s Law Journal 213, 226–28. 47 It is worth reiterating that a substitutionary award in fact is not really a ‘response’ to breach at all, but rather the court’s attempt to provide the innocent party with a substitute for the promised performance. Breach is of course relevant to the provision of such awards in that it normally provides the practical reason for the innocent party’s request for the order. Nevertheless, breach is not a necessary precondition for making a substitutionary award, as demonstrated by the decision in Hasham v Zenab [1960] AC 316 (PC), where an order for specific performance was granted prior to the date upon which the promisor’s performance was due. 48 Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514.

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of full satisfaction.49 This principle generally should prevent a party from recovering compensation that, in combination with a substitutionary award, puts him into a better factual position than had the breach not occurred. While a substitutionary money award may improve the promisee’s factual position, it generally is illegitimate, all else being equal, for an award of compensation to do so. However, as earlier chapters have noted, on occasion it is possible for a compensatory award to have the effect of improving the promisee’s factual position because no deduction is made for financial benefits that have accrued to this party as a result of the promisor’s failure to perform.50

3. Summary and Preview The causation principle and the principle against double recovery are not best understood as limiting principles externally imposed on a wrongdoer’s prima facie compensatory liability. Rather, these principles simply define the natural limits of such liability, being logically entailed by the fact that such awards are concerned with making good the detrimental factual consequences of the relevant breach for the promisee. The causation principle ensures that compensation is only available for loss suffered because of the promisor’s failure to perform rather than because of some other event. The principle against double recovery is logically entailed by the fact that the justificatory basis for compensatory liability is the promisor’s duty (or liability) to ensure that the promisee is left no factually worse off by the breach. Nevertheless, on the account advocated here, there are at least three other restrictions upon the scope of a breaching party’s liability to make good loss caused by the breach of a primary legal duty to perform a contractual promise.51 The first restriction is that traditionally described as the contractual ‘remoteness’ rule. The second is that encapsulated by the principle of ‘mitigation’. The third incorporates the various limits imposed on the recovery of compensation for non-pecuniary loss consequent on a breach of contract. In what follows, these three restrictions on a breaching party’s compensatory liability are examined. It is argued that none of them can be explained wholly by reference to the agreement reached by the two contracting parties. This conclusion reinforces the need for the fundamental distinction this book proposes between substitutionary and compensatory money awards. 49

ibid 521–22. This occurred, for example, in Harbutt’s ‘Plasticine’ v Wayne Tank & Pump Co [1970] 1 QB 447 (CA), where the breach of contract caused the claimant’s factory to be burnt down and the only way to make good this loss was to provide the claimant with the cost of building a new factory, and in The New Flamenco [2014] EWHC 1547 (Comm), where the charterer’s early redelivery of the owner’s vessel enabled the latter party to sell it for a much higher price than would have been obtained had the sale occurred upon the charterparty’s natural cessation. 51 Another restriction on recovery is provided by the defence of contributory negligence. See the Law Reform (Contributory Negligence) Act 1945, s 1(1). The law governing the application of this defence to claims for breach of contract is somewhat unclear. Fortunately, however, it is unnecessary to consider the operation of this limiting principle here because it does not impact upon the general argument advanced. 50

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Before this argument is made it is worth pausing to make clear why the view that the limits on compensatory recovery (ie ‘remoteness’, ‘mitigation’ etc) are ultimately sourced in the parties’ agreement challenges the existence of the distinction this book proposes between substitutionary and compensatory awards. The need for this explanation becomes clear upon reflection that the substitutionary status of coercive orders and awards of the cost of performance is not challenged by the fact that the content of the restrictions that limit their availability are influenced by considerations that are external to the parties’ agreement.52 The need for the arguments that follow in Section III can be explained in the following terms: (1) While there is no doubt that contracting parties to some extent bargain for ‘performance’, there is some uncertainty as to precisely what is meant by ‘performance’ in this context. (2) In particular, it is unclear whether in this context ‘performance’ means only providing the subject matter of the contract (ie delivery of goods, provision of services) or whether it also includes paying money instead of providing this subject-matter, including making good certain detrimental factual consequences resulting from the failure to do so.53 (3) On either interpretation of ‘performance’, an award of the sum necessary to acquire the contract’s subject matter will be substitutionary. However, it is only on the latter interpretation of ‘performance’ that an award designed to make good certain detrimental factual consequences of breach also might be understood as ‘substituting for performance’. (4) The aim of the discussion that follows is to show that is not a plausible interpretation of the law as we find it.

III. Understanding the Restrictions Applicable to Compensatory Money Awards Thus far, the need for the new account proposed here has been defended on the ground that the orthodox understanding of contractual money awards is doctrinally inaccurate in addition to being conceptually and linguistically inadequate. In establishing the doctrinal inaccuracy of the conventional account, it was explained that often it is easy to confuse an award substituting for performance with one that compensates for loss. At least two reasons for this were advanced. The first is that the meaning of the word ‘loss’ is ambiguous (or indeterminate) because it can be 52 The restrictions referred to here are the ‘reasonableness’ constraint upon the recovery of awards of the cost of performance and the restrictions that limit the availability of coercive relief. 53 This is essentially what Professor Smith refers to as the ‘conjunctive obligation’ theory of contract law, though his discussion of this idea occurs in the context of explaining the ‘strict’ nature of contractual obligations. See S Smith, Contract Theory (Oxford University Press, 2004) 384.

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used to describe phenomena operating at different levels of theoretical abstraction. This means that the term may be used to denote a deficiency in performance without any identifiable detrimental consequences. The second reason postulated for why the distinction between substitutionary and compensatory awards tends to be overlooked is that in most cases an award substituting for performance also has the effect of compensating for either retrospective or prospective loss. This means that even when ‘loss’ is used restrictively as a synonym for ‘factual detriment’ a substitutionary award often can be characterised alternatively as compensatory. Nevertheless, the preceding chapters have shown that at least some substitutionary awards cannot be so characterised, highlighting the mistakes that can result from failing to distinguish the two kinds of awards and demonstrating the need to recognise the proposed distinction.54 As noted above, the substitutionary analysis proposed above raises the question of whether all contractual money awards are best understood as simply enforcing the parties’ agreement and thereby as ‘substituting for performance’. This view of the law seems to be evident in the work of certain academic commentators and speeches by Lord Hoffmann in the House of Lords in decisions principally concerned with questions regarding ‘causation’ and ‘remoteness of loss’ in the contractual context.55 This challenge is addressed now via a defence of the orthodox view that the restrictions imposed on the recovery of awards of compensation for breach of contract cannot be explained wholly on the basis that they simply enforce the underlying agreement reached by the contracting parties.

A. Remoteness Following a breach of contract, the breaching party is at least liable (and perhaps obligated) to make good certain loss that the breach has caused to the innocent party. Two inbuilt limits on the scope of a breaching party’s duty or liability to compensate for wrongfully caused loss were outlined above. But the scope of this duty or liability also is subject to various other restrictions traditionally described in terms of ‘remoteness’, ‘mitigation’ and other more specific restrictions on compensatory liability (ie the limits imposed on the recovery of compensation for non-pecuniary loss). The orthodox understanding of these restrictions is that they are default legal rules that aim to place appropriate limits on the extent of a wrongdoer’s compensatory liability.56 But recently this understanding 54 To these two reasons may be added a third related reason, which the discussion in Chapters 1 and 3 hopefully made clear. This reason is that the Robinson v Harman principle itself is formulated in language that is sufficiently vague and indeterminate as to be read as consistent with either the law’s orthodox understanding or the new account proposed here. 55 For example, in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (HL) and Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48. 56 On one view, all or some of these doctrines are concerned only with ‘justly’ balancing the competing interests of the two contracting parties, meaning that broader considerations of ‘policy’ are irrelevant in determining the appropriate limits on recovery. On another view, broader considerations

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of contractual remoteness has been challenged: some argue that the remoteness restriction is concerned only with identifying the implicit allocation of risk in the parties’ underlying agreement. This section briefly outlines this challenge before defending the conventional view.

1. The Orthodox Approach It is uncontroversial that a promisee cannot recover for loss found to be ‘too remote’ a consequence of the promisor’s breach. The orthodox understanding of this restriction is based on Alderson B’s well-known statement of principle in Hadley v Baxendale. There, in an apparent attempt to formulate a rule of general applicability, his Lordship stated that where a party has breached a contract, the damages which the other party ought to receive should be such as may fairly and reasonably be considered, either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.57

This statement has been reinterpreted and restated in numerous cases since Hadley was first decided. During that time the rule generally has been viewed as separable into two distinct ‘limbs’. According to this view, the first limb covers only those losses likely to arise upon any instance of the particular breach, while the second is concerned with losses that, though not likely to arise in the ordinary course of events, might have been in the contemplation of a reasonable person in the breaching party’s position at the time of contract formation because of the particular circumstances then pertaining. This limb generally is invoked when, even though the particular loss may not occur in the ordinary course of events, the contract breaker had (or at least should, if acting reasonably, have had) sufficient knowledge of the innocent party’s circumstances that he should have realised that the particular loss in question was a ‘serious possibility’58 or a ‘not unlikely’ result of the breach.59 All this will be very familiar to most readers. There is also now good authority to suggest that, even on the conventional understanding of the contractual remoteness rule, the two limbs are not analytically distinct but are in fact based on the

of ‘policy’ are at least relevant to, or perhaps even determine, the content of these various limiting doctrines. This book does not take a firm position as between these competing views because it is unnecessary to do so. However, it is explained below that the specific restrictions that limit the recovery of compensation for non-pecuniary loss do seem difficult to explain other than by reference to considerations of ‘policy’. 57 58 59

Hadley (n 26) 354. Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350 (HL) 425 (Lord Upjohn). ibid 388 (Lord Reid).

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same underlying principle.60 In addition, it recently was suggested that the effect of subsequent reinterpretations and restatements of the Hadley formulation, probably the most notable of which was that given by Lord Reid in The Heron II,61 is that it now could be expressed in the following terms: [A] type or kind of loss is not too remote a consequence of a breach of contract if, at the time of contracting (and on the assumption that the parties actually foresaw the breach in question), it was within their reasonable contemplation as a not unlikely result of that breach.62

Regardless of whether the two limbs in Hadley are best viewed as analytically distinct or as part of a single unified contractual remoteness principle, the orthodox understanding of this restriction is that it is an externally imposed default rule of law that seeks to place ‘reasonable’ limits on a breaching party’s liability to compensate the innocent party for loss caused by the breach.63 However, following the House of Lords’ decision in The Achilleas some uncertainty has arisen in regard to whether this understanding of contractual remoteness remains correct. Given the potentially significant impact of such a change, a closer examination of this decision is warranted.

2. The Challenge Posed by The Achilleas The dispute in The Achilleas arose after a delay in redelivering a time-chartered vessel. A substantial fall in the market forced the owners of that vessel to accept a significantly reduced rate for a follow-on charter. The owners sued to recover the difference between the original rate of hire and the reduced rate over the full duration of the follow-on period. Delivering the leading judgment in the Court of Appeal, Rix LJ thought that a refixing of the rate was certainly ‘not unlikely’ and ‘highly probable’ so that this loss was covered by the ‘first limb’ in Hadley v Baxendale.64 In other words, the loss resulting from the refixing was recoverable not because of any special circumstances made known to the charterers at the time of contract formation but because under the first limb in Hadley a lost fixture was what any reasonable person in the charterers’ position would have contemplated as arising ‘naturally’ or ‘in the usual course of things’ from a failure to redeliver the ship in a timely manner. In an appeal to the House of Lords, the charterers sought to rely on what they alleged to be a common understanding in the shipping industry that damages for late redelivery under a time charter were limited to the difference between the market and charter rates of hire during the overrun period. In support of this 60

Jackson v Royal Bank of Scotland [2005] UKHL 3, [2005] 1 WLR 377 [48] (Lord Walker). The Heron II (n 58) 388–90. 62 H Beale (ed), Chitty on Contract, (30th edn (Sweet & Maxwell, 2010) [26-054]. This sentence was quoted with approval by Smith-Stuart LJ in Brown v KMR Services Ltd [1995] 4 All ER 598 (CA) 621. 63 E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010) [20-082]. 64 Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia [2006] EWHC 3030 (Comm) [96]. 61

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contention, the charterers pointed to a number of judicial statements, for example Lord Mustill’s dictum in The Gregos,65 that liability for the difference between the market and contract rates for the full follow-on period would not have been the common intention of reasonable contracting parties. Overturning a unanimous Court of Appeal, the House of Lords, also unanimously, allowed the charterers’ appeal. a. Lord Rodger and Baroness Hale Beneath the House of Lords’ unanimity, however, lay two fundamentally different understandings of the theoretical basis for the contractual remoteness rule. Lord Rodger, with whom Baroness Hale agreed, followed the Court of Appeal in endorsing the conventional understanding of this rule. The only difference between their approach and that of the Court of Appeal was in the application of the rules to the particular facts at hand. Both Lord Rodger and Baroness Hale held that the loss claimed by the owners was not within the reasonable contemplation of the charterers at the time of entry into the contract because ‘this loss could not have been reasonably foreseen as being likely to arise out of the delay in question’.66 However, as the current editor of Treitel has observed, this conclusion appears to be at odds with authority since, according to Lord Rodger, it was not so much the lost fixture that had to have been contemplated, but the financial consequences that had occurred as a result of that loss on the facts.67 This runs counter to the commonly accepted view that to recover loss for a breach of contract, as in the law of torts, it is only necessary that the parties contemplate the ‘type’ of loss that could flow from the breach and not the ‘extent’ of that loss.68 As a result, it is submitted that Professor Peel is correct to conclude that the result reached by the Court of Appeal is a preferable application of orthodox contractual remoteness principles.69 b. Lord Hoffmann and Lord Hope Of greater relevance in the present context is the theoretical basis for the contractual remoteness rule that was endorsed by Lord Hoffmann and Lord Hope in The Achilleas. In contrast to the approach of Lord Rodger and Baroness Hale, Lord Hoffmann and Lord Hope allowed the charterers’ appeal on the ground that they had not ‘assumed responsibility’ for the type or kind of loss claimed. Lord Hoffmann held that ‘one must first decide whether the loss for which compensation is sought is of a “kind” or “type” for which the contract-breaker ought fairly

65 66 67 68 69

Torvald Klaveness A/S v Arni Maritime Corporation [1994] 1 WLR 1465 (HL). The Achilleas [2008] UKHL 48, [2009] 1 AC 61 [60]. E Peel, ‘Remoteness Revisited’ (2009) 125 LQR 6, 8. ibid. ibid.

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to be taken to have assumed responsibility’.70 Similarly, Lord Hope stated that the question is ‘whether the loss was a type of loss for which the [contract breaker] can reasonably be assumed to have assumed responsibility’.71 The primary reason their Lordships reached this conclusion was their view that a party cannot be expected to accept responsibility for an unquantifiable risk.72 Both Lord Hoffmann and Lord Hope thus appeared to adopt a fundamentally different conception of the basis for the contractual remoteness principle than the orthodox approach adopted by Lord Walker and Baroness Hale.73 Lord Hoffmann’s argument for adopting this conception of contractual remoteness started from the premise that all contractual liability is ‘voluntarily undertaken’.74 Lord Hope agreed with this sentiment. Significantly, Lord Hoffmann also adverted to the usual ‘understanding’ in the shipping industry that liability for late redelivery was limited to the difference between the market and charter rates over the period of delay.75 Given the existence of this understanding, said his Lordship, circumstances indicated that the charterers had assumed responsibility only for the difference between the charter and market rates for the duration of the overrun period and, for this reason, were only liable for this amount. It should by now be abundantly clear that this book advocates an approach to the quantification of contractual money awards that focuses on their critical role in enforcing the parties’ contractual rights. Moreover, although this role is predominately performed by substitutionary awards, it is recognised that through their agreement the parties may impose either express or implied restrictions on their liability for losses consequent on breach. While Friedmann was correct to observe that the ‘essence’ of contract is performance,76 it is certainly open to the parties in their contract to make provision for certain consequences of nonperformance.77 The argument advanced below is simply that, generally speaking, restrictions imposed on compensatory money awards cannot be explained wholly by reference to the parties’ agreement. Recourse to considerations extrinsic to the

70

The Achilleas (n 66) [15]. ibid [32]. 72 ibid [23] (Lord Hoffmann), [34] (Lord Hope). 73 Professor Peel (n 67) described Lord Hoffmann’s approach as ‘more radical’ (8) and ‘more than just a logical extension of the rule of remoteness as previously understood’ (9). 74 His Lordship stated that it ‘seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken’, The Achilleas (n 66) [12]. 75 ibid [7]. His Lordship’s emphasis upon this aspect of the facts provides a possible way to reconcile his approach with the conventional understanding of contractual remoteness. The basis for reconciliation is that the understanding just adverted to may have been so widespread as to allow for the implication of a term by custom into the contract that liability be so restricted. See P Wee, ‘Contractual Interpretation and Remoteness’ [2010] Lloyd’s Maritime and Commercial Law Quarterly 150. 76 D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628, 629. 77 Express limits may be imposed via a ‘liquidated damages’ clause provided that such a clause is not deemed to be a ‘penalty’. For Lord Dunedin’s classic explanation of the distinction and principles of construction, see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL) 87. 71

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parties’ bargain is often necessary to explain why it is appropriate to limit the breaching party’s compensatory liability. c. Lord Walker The final speech in The Achilleas was delivered by Lord Walker. In professing agreement with both the agreement-centred approach advanced by Lord Hoffman and Lord Hope and the orthodox understanding supported by Lord Rodger, his Lordship’s views are more difficult to classify. Although there is not space here for a detailed analysis of Lord Walker’s speech, it certainly contains sections that suggest support for the approach favoured by Lord Hoffmann and Lord Hope.78 Such a proposition must be qualified by recognising that his Lordship also seems to have thought that focusing on the parties’ common intention is what the law has always done and therefore that the ‘assumption of responsibility’ approach does not constitute a radical departure from orthodoxy.79 In any event, it is certainly at least arguable that an agreement-centred conception of contractual remoteness achieved a bare majority in the case.80

3. Subsequent English Decisions The ‘assumption of responsibility’ approach possibly adopted by a majority of the House of Lords in The Achilleas also received qualified endorsement from the Court of Appeal in Supershield Ltd v Siemens Building Technologies FE Ltd.81 There Siemens sub-contracted Supershield to install a sprinkler system in an office building. The unusual feature of the case was the simultaneous failure of the system’s two separate protective mechanisms. The water storage tank for the sprinkler system was located in the building’s basement. A flood was caused when a float valve that filled the tank failed due to a breach of the sub-contract by Supershield. The water from the tank overflowed into a bunded area that contained a 600mmhigh wall designed to retain any overflowing water. But due to a blockage the protective drains in the tank room floor within this area also failed. Water then overflowed the bund and reached electrical equipment in the basement, resulting in substantial damage. The specific issue on appeal was whether Siemens acted reasonably in deciding to settle the claims brought against it by parties higher up the contractual chain on the basis of the loss caused by Supershield’s breach of the sub-contract. In considering this question, Toulson LJ had to consider whether, because the blockage of the drains was not reasonably foreseeable by Siemens at the time it entered

78

For example The Achilleas (n 66) [68]. Despite the prevailing view that these two approaches constitute rival views, it is certainly possible that they may be reconcilable or at least much closer than sometimes thought. This point is explored further in the text below. 80 This is the interpretation supported in Wee (n 75). 81 Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7. 79

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into the main contract, the overflow of the tank was ‘too remote’ a consequence of Siemens’s breach for it to have been liable to parties higher up the chain. Toulson LJ addressed this argument by applying the ‘scope of responsibility’ approach, concluding that because Siemens had assumed responsibility for loss of the kind which eventuated it had acted reasonably in settling the claims.82 Significantly, his Lordship reiterated that Hadley remains a ‘standard rule’, whilst recognising that there may be cases where the court, on examining the contract and the commercial background, decides that a strict application of the usual approach would not reflect the intention reasonably to be imputed to the parties.83 The continuing relevance of Hadley v Baxendale also was affirmed in Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd,84 where Sylvia Shipping chartered a vessel to Progress Bulk Carriers, who sub-chartered to Conagra. The ship was not ready to be delivered to Conagra on time because, in breach of its contract with Progress, Sylvia failed to maintain certain ship parts. Progress sought to recover from Sylvia its lost profits on the sub-charter with Conagra. In finding for Progress the Arbitral Tribunal applied the Hadley test. On appeal to the High Court the question was whether this was the correct approach, with Sylvia arguing that this test had been displaced by the approach favoured by Lord Hoffmann and Lord Hope in The Achilleas. In upholding the Tribunal’s decision, Hamblin J held that ‘there is no new generally applicable legal test of remoteness’ and that only in relatively unusual cases will a consideration of the ‘assumption of responsibility’ principle also be necessary.85 More recently, in John Grimes Partnership Ltd v Gubbins,86 the Court of Appeal endorsed the approach articulated by Toulson LJ in Supershield, which essentially makes the orthodox approach to contractual remoteness subject to an overriding ‘assumption of responsibility’ inquiry. In that case Gubbins engaged John Grimes to design the road and drainage for a site the former hoped to develop. John Grimes did not complete the design until 15 months after the agreed completion date. In response to an action for outstanding fees, Gubbins counterclaimed, seeking ‘damages’ for breach on the basis that the market value of the residential units on the site had been reduced as a result of John Grimes’s delay.

82 Thus, the ‘assumption of responsibility’ principle was employed to allow recovery by the innocent party here rather than to disallow it as occurred in The Achilleas and in SAAMCO, where Lord Hoffmann employed a similar kind of analysis (expressed in terms of ‘scope of duty’) to the one he adopted in The Achilleas to limit the liability of negligent auditors for the loss suffered by their clients. 83 Supershield (n 81) [43]. 84 Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] EWHC 542 (Comm). See also the comments of Tomlinson J in Pindell Ltd v Air Asia Berhad [2011] 2 All ER (Comm) 396, stating that he did not consider that The Achilleas had effected a major change in the approach to the recoverability of damages for breach of contract and expressing approval for Toulson LJ’s judgment in Supershield. 85 Sylvia Shipping Co Ltd (n 84) [60], [82]. 86 John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37, Laws and Tomlinson LJJ concurring with the leading speech of Sir David Keene.

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The trial judge’s interpretation of The Achilleas was that the Hadley test still applied unless the contract’s commercial background showed that it would not reflect the intention reasonably to be imputed to the parties.87 Here John Grimes was an industry professional who knew that it was possible for the property market to fall during the period of delay. This meant that on a strict application of Hadley, John Grimes was liable under the second limb. As there was nothing in the agreement’s commercial background to negate this outcome, John Grimes was liable for the loss claimed by Gubbins. The Court of Appeal upheld this finding unanimously. Expressing agreement with the trial judge’s interpretation of The Achilleas and Toulson LJ’s judgment in Supershield,88 the Court confirmed that the correct approach is to first apply the Hadley test and then to consider whether the contractual background showed that the breaching party had (or had not) assumed responsibility for the particular kind of loss which resulted.89

4. A Defence of the Orthodox Approach The cases just discussed indicate that the best interpretation of the current English approach to contractual remoteness is that any new ‘assumption of responsibility’ principle does not displace the orthodox approach based on ‘reasonable foreseeability’. Rather, to the extent the law has been altered, the principle enunciated in The Achilleas simply means that an innocent party’s entitlement to compensation may be further restricted (or possibly extended) in comparison to the recovery that would result from a mechanical application of the Hadley test. There is not really anything controversial about such an approach. It always has been the case that contracting parties may impose their own limits on (or extend) a breaching party’s compensatory liability following breach. The real point of controversy is the extent to which it is possible to identify an implicit allocation of risk with respect to various losses in the parties’ agreement when the contract is silent about any such allocation. While the agreement-centred challenge claims that identifying such an implicit allocation of risk is always possible, the orthodox approach to remoteness rejects this suggestion.90 This section defends the latter view. When the agreement is silent on this matter (as it frequently will be), the Hadley rule,

87

This is in accordance with what Toulson LJ said in Supershield. ibid [24]. 89 Compare the Singapore Court of Appeal’s recent endorsement of the conventional approach based on Hadley v Baxendale in Out of the Box Pte Ltd v Wanin Industries Pte Ltd [2013] 2 SLR 363, [2013] SGCA 15. 90 Thus, the entire debate seems to be reducible to a disagreement regarding just how far it is possible to push the objective theory of contractual interpretation. The disagreement, in other words, concerns whether at the time of contract formation it can be said that a reasonable person in the breaching party’s position would have understood the content of its contractual undertaking to be either to perform or to compensate the other party for a certain amount of the loss that results from not performing (possibly in addition to providing a monetary substitute for performance, provided there were no remaining unfulfilled conditions attached to the promisee’s entitlement to such performance). 88

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or some alternative default rule,91 must be invoked to determine the extent of a promisor’s compensatory liability. Moreover, in applying this rule courts necessarily take into account considerations that are external to the parties’ agreement. a. Understanding the Agreement-Centred Challenge In The Achilleas, Lord Hoffmann referred to various academic analyses of contractual remoteness, including the agreement-centred account advanced by Adam Kramer.92 Contrary to the conventional approach, Kramer argues that the remoteness principle is based fundamentally on the parties’ contract rather than upon the ‘fairness’ of restriction based on reasonable foresight. Kramer’s principal claim is that although contract law’s rules of remoteness are normally described in terms of what was ‘reasonably foreseeable at the time of contracting’, in reality the law allocates responsibility for the consequences of breach by reference to the (explicit or implicit) intentions of the parties at the time of contract formation. Thus, for Kramer, the Hadley restriction is not a strict rule but rather a useful guide to the correct allocation of risk since in most cases it leads to the same conclusion as an inquiry into what responsibilities the parties actually undertook to each other at the time of contract formation.93 Ten years earlier, Professor Dawson advanced a similar thesis, arguing that just as a promisor’s primary obligation to perform is best explained as flowing from the promisor’s assent to be bound, so the promisee’s right to recover damages for breach of contract … is best viewed as the enforcement of a consensual obligation … assented to by the defaulting promisor at the time that the promisor enter into the agreement.94

According to Dawson, the ‘central idea that underlies Hadley v Baxendale’ is that ‘the law’s task is to assess the extent of the secondary obligation undertaken by the promisor’ and this ‘is clearly discernible in all the leading cases’,95 citing Horne v Midland Railway,96 British Columbia and Vancouver, Island Spar, Lumber and Saw Mill Co Ltd v Nettleship,97 and Lord Diplock’s speech in The Heron II in support. 91 It would be possible, of course, to take the view that there should be no limit on a breaching party’s liability to compensate for loss caused by a breach. Alternatively, it would be possible to limit recovery strictly to only the direct consequences of breach. But for good reasons, English law, along with most other sophisticated legal systems, does not adopt either of these approaches. 92 See A Kramer, ‘An Agreement-Centred Approach to Remoteness and Contract Damages’ in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Hart Publishing, 2005) 249; referred to by Lord Hoffmann in The Achilleas (n 66) [11]. It is, however, certainly arguable that Lord Hoffmann’s view is different from Kramer’s in that his Lordship viewed the principle he, Lord Hope and possibly Lord Walker enunciated in The Achilleas as not displacing the Hadley rule but simply providing an additional constraint upon an innocent party’s recovery of compensation in an action for breach of contract. 93 Kramer (n 92). Of course, this intention is construed objectively. 94 J Dawson, ‘Reflections on Certain Aspects of the Law of Damages for Breach of Contract’, (1995) 9 JCL 125, 125. 95 ibid. 96 Horne v Midland Railway (1873) LR 8 CP 131. 97 British Columbia and Vancouver, Island Spar, Lumber and Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499.

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Professor Tettenborn has criticised the traditional foreseeability-based approach to remoteness as well, making the case for ‘a different approach based on the reasons why people make contractual promises, together with a fairly sophisticated notion of causation’.98 This proposal may appear to be a version of, or at least very similar to, the agreement-centred challenge. In a sense this is correct because the focus of the inquiry is on the benefit that the contract was intended to convey to the innocent party. However, Tettenborn is also strongly critical of Kramer’s view that the Hadley formation is usually an accurate proxy for what the parties actually agreed upon, claiming that ‘there is simply nothing to indicate that … [the Hadley rule] is what parties actually intend when contracting with one another’.99 b. Academic and Judicial Support for the Orthodox Approach Despite the existence of this support for an agreement-centred understanding of contractual remoteness,100 the majority of academic opinion appears to reject this analysis. Professor Peel, for example, has criticised Lord Hoffmann’s speech in The Achilleas on the basis that an agreement-centred approach to contractual remoteness is ‘artificial’,101 has been rejected by judges (probably ‘because of doubts as to its utility’),102 and creates ‘the risk of considerable [commercial] uncertainty’.103 Peel argues instead in favour of the orthodox view that the remoteness restriction is a ‘not … completely inflexible’ default rule of law, which the parties can avoid by express stipulation in their contract.104 Additionally, Peel notes that while judges have recognised that in some cases, ‘something more’ than the reasonable contemplation of a type of loss may be necessary before the loss can be regarded as not too remote…. Dicta to this effect have always been concerned with losses falling within the ‘second limb’ of the rule of remoteness … [while in] The Achilleas … the losses in question fell within the first limb.105

Professor Cartwright similarly rejects the notion that the remoteness rule in contract is based upon an (explicit or implicit) acceptance of certain risks by the breaching party. According to Cartwright, ‘it is clear’ that the remoteness test, ‘does not require a contractual promise (express or implied) by the defendant about the extent of his liability’ nor is an express acceptance of risk required’.106

98 See A Tettenborn, ‘Hadley v Baxendale Foreseeability : A Principle Beyond its Sell-by Date?’ (2007) 23 Journal of Contract Law 120, 134. Tettenborn calls this the ‘instrumental promises’ theory. 99 ibid 131. 100 This is not to suggest that Kramer and Lord Hoffmann are in complete agreement on the details of their approach. As explained below, it would appear that Lord Hoffmann’s views diverge less from orthodoxy than may at first appear to be the case. 101 Peel (n 67) 11. 102 ibid 10, citing The Heron II (n 61) 422 (Lord Upjohn). 103 ibid 11. 104 ibid. 105 ibid 9–10. 106 J Cartwright, ‘Remoteness of Damage in Contract and Tort: A Reconsideration’ [1996] 55 CLJ 488, 492.

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In an article published prior to The Achilleas, Professor Robertson also defended forcefully the orthodox understanding of the contractual remoteness rule.107 Robertson’s principal objection to the agreement-centred approach seems to be that it is simply artificial in stretching the objective principle of construction beyond acceptable limits.108 According to Robertson, this is because not only is there seldom much helpful evidence about the extent of the risks the parties would have thought they were accepting at the time the contract was formed,109 but there is also considerable empirical evidence to suggest that ‘people are [systemically] unrealistically optimistic’,110 tending only to contemplate performance of their contractual obligations rather than breach. This observation seriously calls into question the notion that any hypothetical reasonable person in the breaching party’s position would have contemplated all seriously possible or ‘not unlikely’ risks that may occur as a result of a particular breach. Moreover, the mere fact that apparently reasonable people appear to disagree about precisely what level of foresight is necessary to sustain compensatory liability in the contractual context arguably further supports the view that the agreement-centred view pushes the objective approach to construction beyond acceptable limits. Robertson, it is contended, is therefore correct to reject Kramer’s view that the remoteness rule is ‘concerned with identifying an implicit allocation of risk made by the contracting parties at the time of formation and in defending the orthodox view that the rule is as ‘a gapfilling device concerned with ensuring a contract breaker is not subjected to an unreasonable burden’.111 As both Cartwright and Robertson note, there is also significant judicial support for the orthodox approach. For example, in what has been described as ‘the most influential contemporary formulation of the remoteness test’, in The Heron II Lord Reid framed the relevant question in this context as whether the defendant, with the information he had available, ‘should, or the reasonable man in his position would’ have realised that the particular kind of loss was likely to result from the breach.112 Scarman LJ also clearly recognised the speculative nature of the inquiry’ in Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd.113 According to Cartwright, the reason for the many erroneous references to intention and ‘risk

107 The article, along with the aforementioned articles by Kramer and Tettenborn, was also referred to by Lord Hoffmann in The Achilleas (n 66) [11]. 108 A Robertson, ‘The Basis of the Remoteness Rule in Contract’ (2008) 28(2) Legal Studies 172, 176–80 in particular. 109 ibid. Note that this is not to preclude the possibility of such evidence in some cases. 110 ibid 176, citing M Eisenberg, ‘The Limits of Cognition and the Limits of Contract’ (1995) 47 Stanford Law Review 211, 216. But note that this is not (quite) the same as saying that a reasonable person in the defendant’s position would have accepted liability for this loss. 111 Robertson (n 108) 178. 112 The Heron II (n 58) 385. See Robertson (n 108) 175. 113 Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 (CA). Compare the approach taken by Lord Denning MR in that case.

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acceptance’ in this context was best explained by Bridge LJ in GKN Centrax Gears Ltd v Matbro Ltd,114 where his Lordship stated that: If a party entering into a contract would as a reasonable man forsee that his breach would be likely to cause loss of a certain kind to the other contracting party, then it must be from that and nothing else that the implication would arise of his contractual willingness to accept liability for that loss.115

c. A More Nuanced Understanding of the Orthodox Approach The reasons identified by Peel, Cartwright and Robertson, alongside the significant judicial support which exists for the orthodox view, ultimately render the agreement-centred account of contractual remoteness unconvincing. Even on a broad understanding of the objective theory of contractual interpretation, agreements often fail to allocate responsibility for a particular risk and, when this occurs, ‘the governing norm is not intention but reasonableness’.116 This, however, does leave open the question of what exactly is the basis for employing ‘reasonable foreseeability’ as the touchstone of liability for consequential loss in the law of contract, as well as precisely what is meant by ‘reasonableness’ in this context. Robertson and Cartwright both claim that the answer to the former question is ‘fairness’ as between the parties.117 Thus, for Robertson, the basis for the Hadley rule is the notion that it is fair to impose liability only for loss which is of a kind that a reasonable person would have contemplated if they had turned their mind to the possibility of the relevant type of breach at the time the contract was made.118

It certainly is arguable that a more sophisticated account of why ‘reasonable foresight’ is the appropriate test of ‘fairness’ in this context is required. However, regardless of (and consistent with) this observation, in recognition of the fact that a strict application of the Hadley rule ‘occasionally’ may produce injustice, it has been acknowledged that there is ‘considerable’ judicial support for an additional constraint upon recovery, which takes the form of a ‘fairness rider’ on the ‘reasonable contemplation’ test.119 For example, Robertson observes that in Monarch Steamship Co Ltd v Karlshamns Oljefebriker A/B,120 Lord Du Parq stated that the ‘court must be careful … to see that the principles laid down are never so narrowly interpreted as to prevent a jury, or judge of fact, from doing justice between the parties because ‘Circumstances are so infinitely various that, however carefully general rules are framed, they must be construed with some liberality, and not too rigidly applied’.121 114

GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555 (CA). ibid 580, cited by Cartwright (n 106) 494. 116 See Robertson (n 108) 180. 117 See ibid and Cartwright (n 106) 491. 118 Robertson (n 108) 180 (emphasis added). 119 See ibid. 120 Monarch Steamship Co Ltd v Karlshamns Oljefebriker A/B [1949] AC 196 (HL). 121 ibid 232; referred to by Robertson (n 108) 188 and by Sir Robin Cooke in ‘Remoteness of Damages and Judicial Discretion’ (1978) 37 CLJ 288, 289–90. 115

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Lord Du Parq’s observations were cited favourably by the High Court of Australia in Wenham v Ella, where Walsh J commented that the remoteness rules should be treated simply as ‘prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve an appropriately balanced result’.122 Further support judicial can be found in Hardie-Boys J’s comments in the New Zealand Court of Appeal’s decision in McElroy Milne v Commercial Electronics Ltd where his Honour stated that the Hadley test might be disapplied if it failed to produce a result that was ‘just to both parties’.123 Although Robertson claims that remoteness cases ‘provide very few, if any, instances in which the reasonable contemplation test … produce[s] an unjust outcome’,124 he proposes that the ‘fairness rider’ is best understood as a ‘gloss’ on this test designed to ensure that it is applied in such a way ‘as to do justice between the parties’.125 On this basis a material difference between the ‘reasonable contemplation’ test and the ‘fairness rider’ might seem difficult to discern because the former principle is also said to be based on ‘fairness’. But the two inquiries do appear to be distinct. As Cartwright explains, while the ‘reasonable contemplation’ test is concerned with balancing the interests of the contracting parties, its ‘main thrust is to view the problem from the defendant’s position’.126 By contrast, the ‘fairness rider’, claims Robertson, calls for a more impartial assessment of the situation to ensure that applying the ‘reasonable contemplation’ test has not produced an outcome that is unjust as between the two contracting parties.127 Of course, it might be claimed that the result produced by the ‘reasonable contemplation’ test is necessarily fair as between the two parties on the basis that it simply articulates the principle of justice that applies to determine a contracting party’s compensatory liability. As just explained, however, to the extent that the ‘fairness rider’ is necessary, the need for it must arise from the inability of the ‘reasonable contemplation’ test to articulate completely the norm of justice that indeed is appropriate in this context. This failure, in turn, must arise from the inability to formulate a single principle that is able ‘justly’ to apportion responsibility for consequential loss in all cases of contractual breach. On reflection, this is not at all surprising given the complex multifaceted questions of responsibility that can

122

Wenham v Ella (1972) 127 CLR 454 (HCA) 466–67. McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 (NZCA) 44. 124 Robertson states that ‘the great majority of the recent … judgments indicate that the courts are simply striving to apply the reasonable contemplation test on its own terms. Robertson (n 108) 190–91. Tettenborn also argues that ‘perhaps the most straightforward argument in favour of a Hadley-type rule is simply pragmatic’ on the basis that ‘a foreseeability criterion is familiar, easily expressed and readily understood … [and] often not too difficult to apply to concrete circumstances’. See Tettenborn (n 98) 127. 125 ibid 188–89. 126 Cartwright (n 106) 491 (emphasis added). 127 See Robertson (n 108) 189, noting that the idea that remoteness principles ‘must be applied … [so] as to ensure justice between the parties is occasionally cited in support [both] of conclusions that a particular loss should and that a particular loss should not be treated as too remote’ (emphasis added). 123

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arise in this context and the various different sorts of contractual obligations and breaches that can occur.128 As Robertson recognises, the ‘fairness rider’, particularly when understood in the terms just outlined, is open to the criticism that it is ‘unacceptably imprecise’.129 His first response to this objection is that it is only in very rare cases that this additional inquiry is necessary, noting that in providing examples where the reasonable contemplation test can be said to operate unjustly, ‘writers on this topic have to resort to hypothetical fact situations’, such as the now famous taxi driver example.130 This hypothetical involves a taxi driver informed by a businessman at the time the contract is made that he needs the driver to get him to an important meeting on time to conclude a profitable transaction. Due to the driver’s breach of this contract, the businessman arrives late, misses the meeting and suffers significant financial loss in consequence. The critical question is whether the driver is liable to compensate the business man for this loss. Nevertheless, to the extent that the ‘fairness rider’ is necessary to ameliorate ‘occasional’ injustices, Robertson does recognise the need for further precision. In particular, he proposes four considerations that may be relevant in determining ‘whether it is just for the defendant to bear … a particular risk’: the extent of the breaching party’s culpability, the degree of disproportion between the relevant loss and the benefit the breaching party stood to gain from performance, commercial practice and the availability of insurance, and whether the breaching party had a reasonable opportunity to limit his or her liability through an express contractual provision.131 An important feature that these various considerations have in common is that, perhaps with the exception of the third consideration, they do not incorporate broader concerns of ‘policy’, but instead appear to be concerned only with matters of interpersonal justice as between the two contracting parties. Although Robertson recognises that ‘these considerations have received little explicit attention in the case law’, he does point to some judicial or extrajudicial support for the view that each of them may be relevant to the remoteness inquiry.132 A good example of how such considerations may allow for an explanation of rare cases where the ‘reasonable contemplation’ test seems to produce 128 Support for the ‘fairness’ rider therefore does not necessarily entail criticism of the Hadley rule. To the contrary, it seems highly unlikely that any attempt to articulate the appropriate norm of justice in this context in a single formulation will be able to cover all possible cases. The idea is thus that while the ‘reasonable contemplation’ test may closely approximate the appropriate principle of justice to apply in this context, there may be rare cases where this test does not produce the appropriate result; hence the need for the ‘fairness rider’. Of course, some may argue that the importance of a clear and certain rule in this context outweighs the desirability of sufficient flexibility to achieve justice in the individual case. For an illuminating judicial perspective on this debate, see AM Gleeson, ‘Individualised Justice—The Holy Grail’ (1995) 69 Australian Law Journal 421. 129 Robertson (n 108) 190, citing Lord Steyn’s disapproval of such an approach in Aneco Reinsurance Underwriting Ltd (in liq) v Johnson & Higgins Ltd [2002] 1 Lloyd’s Rep 157. 130 ibid 191. The taxi driver example appears to have originated in D Harris, D Campbell and R Halston, Remedies in Contract and Tort, 2nd edn (Butterworths, 2002) 97. 131 Robertson (n 108) 192. 132 ibid 192–95.

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injustice in the relevant sense is the taxi driver hypothetical just outlined.133 If one takes into account both the degree of disproportion between the relevant loss and the benefit the driver stood to gain from performance as well as, at least on one version of the scenario, the lack of a reasonable opportunity for the driver to limit his liability by way of an express term, the appropriateness of denying recovery in this case becomes relatively clear. There does remain the question of whether incorporating these various considerations into the remoteness inquiry is legitimate. To the extent that such concerns are used as a means of determining whether it is ‘just’ or ‘reasonable’ for the defendant to bear a particular risk there does not seem to be an obvious reason to exclude them.134 Of course, it might be suggested that the extent of a breaching party’s moral culpability should not be taken into consideration in determining liability for consequential loss on the basis that contract law is generally unconcerned with culpability in breach.135 It is, however, by no means obvious that disregarding a breaching party’s culpability for the purposes of substitutionary liability (ie to provide a monetary or non-monetary substitute for performance) is inconsistent with taking this culpability into account in determining the scope of the party’s liability to make good the detrimental factual consequences of breach. Such an approach would in fact be readily reconcilable with the fundamental distinction that this book advances. To summarise, for the reasons identified by Peel, Cartwright and Robertson, the agreement-centred understanding of contractual remoteness ultimately is unsupportable. The fundamental problem with this approach is that it assumes a level of agreement that contracting parties simply do not reach, even taking a very broad view of the objective theory of contractual interpretation. Of course, it may be true that in certain cases the primary obligation undertaken by a party is to perform or provide a certain level of compensation for non-performance. Perhaps it is even true that this is the norm in commercial charterparties such as the one that was at issue in The Achilleas, with the possible result that the decision in fact does not really challenge the traditional conception of contractual remoteness at all.136 But this phenomenon cannot be relied upon as the basis for a more general rule applicable in all cases. The agreement-centred view does not accord with the understanding of remoteness in the leading authorities and is based on a fictional understanding of how contracting actually works in practice. In essence,

133

See n 130. It may even be permissible to take account of broader considerations of ‘policy’ in this context. This suggestion is perhaps more controversial, but it is unnecessary to take a definite position on this issue here. 135 Tettenborn, for example, makes this suggestion in ‘Hadley v Baxendale Foreseeability’ (n 98) 129. 136 As noted in n 75, there is much to be said in support of this view on the basis that the general understanding in the shipping industry that liability for late redelivery was limited to the difference between the market and charter rates over the period of delay means that it was strongly arguable that a term to the effect that liability be so restricted was implied by custom into the parties’ contract. For a fuller version of this argument, see Wee (n 75). 134

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this approach fails to accord sufficient weight to the primacy of performance (rather than the possible consequences of non-performance) in the mind of even the most reasonable promisor.

5. Can the Agreement-Centred View be Salvaged? The preceding discussion outlined the difficulties that commentators and judges have identified with the view that the contractual remoteness restriction on compensatory recovery merely seeks to enforce the parties’ underlying agreement. It was argued instead that this restriction is best understood as a default legal rule that seeks to ensure that a contract breaker is not subjected to an unreasonable burden, whilst also attempting to ‘fairly’ balance the interests of the two contracting parties in the relevant context. Additionally, it was shown that the substantial academic support for the orthodox approach is supported by the existence of numerous judicial statements to similar effect. Nevertheless, in an attempt to rescue the agreement-centred theory of contractual remoteness from (at least some of) the difficulties that have been identified with it, modified versions of the theory have been proposed. In what follows, these alternative accounts are considered. While it is argued that the first alternative, based on the idea of implicit risk allocation, must fail, it is acknowledged that the second alternative may offer a plausible alternative conception of the contractual remoteness restriction on compensatory recovery. There are, however, certain difficulties with this approach too, meaning that its superiority to the orthodox account remains to be established. a. An Approach to ‘Remoteness’ Based on Implicit Risk Allocation In an attempt both to salvage the agreement-centred understanding of contractual remoteness and to identify a possible rationale for the Hadley v Baxendale rule, Professor Tettenborn has considered whether a modified version of the agreement-centred theory based on implicit risk allocation might succeed. The proposal Tettenborn examines is as follows: (1) Since the transfer of certain risks is a necessary feature of the contracting process, when parties intend to contract, they also must intend to transfer these risks. (2) Moreover, in the absence of contrary agreement, the risks the parties must naturally intend are ‘only those risks the parties had in mind (or might reasonably be thought to have had in mind) at the time of contracting’. (3) Since this is all that is ‘inherent in the arrangement … it follows that other, undetermined, risks remain where they fall’.137

137

Tettenborn (n 98) 133.

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As Tettenborn notes, however, this argument can be attacked on the basis that it provides for either more, or less, recovery than is appropriate. This is because there is no basis for supposing that the implicit allocation of risk accepted by the parties at the time of contract formation was that all losses reasonably contemplated at this time would be recoverable or that only some of these losses would be recoverable.138 It therefore seems that a modified version of the agreementcentred approach based on the notion of reciprocal implicit risk allocation cannot save the agreement-centred view from the defects others have identified with it. These defects have been detailed already in the process of outlining the significant academic and judicial support which exists for the orthodox understanding of contractual remoteness. b. The ‘Implied Undertaking’ Rider In an article published shortly after The Achilleas was handed down,139 Lord Hoffmann appeared to suggest that the principle possibly enunciated by a majority of the House of Lords in that case is best understood as operating merely in addition to, rather than instead of, the traditional rule derived from Hadley. According to his Lordship, there are some situations, particularly cases not concerned with the asymmetry of information problem that arose in Hadley itself and some other cases (eg Victoria Laundry (Windsor) v Newman Industries)140 where ‘reasonable foreseeability’ of damage is simply an insufficient constraint upon liability because the kind of loss suffered plainly was foreseeable, even if outside the scope of the risks accepted by the parties at the time of contract formation.141 In these cases, Lord Hoffmann argued, there is a need for a further restriction on the scope of a contracting party’s liability for consequential loss, which, in his Lordship’s view, is based simply on an objective construction of the parties’ agreement. If the ‘assumption of responsibility’ principle possibly adopted by a majority in The Achilleas is understood in this limited way (ie as merely constituting a further constraint upon recovery in addition to the Hadley rule) it may be defensible.142 There do appear to be cases where a strict application of the ‘reasonable contemplation’ test will produce injustice as between the contracting parties, meaning that something in addition to this test is required to both qualify the principle and explain all the authorities. Arguably the ‘fairness rider’ articulated by Robertson provides an adequate mechanism for achieving these goals, but there are certainly

138 ibid 132. As Tettenborn states, ‘it is just as plausible to regard the object of the contract as being to transfer the risk of merely non-consequential losses … or any number of other possibilities’. 139 L Hoffmann, ‘The Achilleas: Custom and Practice of Foreseeability?’ (2010) 14 Edinburgh Law Review 47. 140 Victoria Laundry (Windsor) v Newman Industries [1949] 2 KB 528. 141 Hoffmann (n 139) 51. 142 Note, however, that it is not clear that this is the approach that Lord Hoffmann and Lord Hope actually intended to articulate in The Achilleas itself.

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some objections to it that must be overcome first.143 An alternative approach, however, is to adopt the ‘implied undertaking’ rider Lord Hoffmann seemed to endorse in his extra-judicial defence of The Achilleas and which appears to have been supported in the subsequent English decisions that were discussed earlier in the chapter, such as Supershield, Sylvia Shipping and John Grimes Partnership.144 In support of this new ‘hybrid’ approach one might claim that this analysis avoids, or at least minimises, the major difficulties others have identified with a purely agreement-based conception of contractual remoteness. But it is far from clear that this is actually true. Robertson has argued forcefully that, as with the agreement-centred approach more generally, there is often ‘no factual basis for judging the intentions of the parties’ as the remoteness restriction is commonly invoked ‘to deal with situations in which there is no indication of what the parties intended’.145 In addition, it is unclear precisely how the new English test improves upon the orthodox approach in any meaningful way. Yihan, for instance, argues that the ‘assumption of responsibility’ rider not only adds nothing to the traditional Hadley test, but also significantly increases commercial uncertainty in this context.146

6. Summary To recap and summarise, the lengthy discussion in this section supports the following conclusions. First, while there are cases where the parties’ agreement either explicitly or implicitly allocates responsibility for loss caused by a particular breach, there are at least some cases where an objective construction of the parties’ agreement does not allocate the particular risk that has eventuated, which means that a default rule of ‘remoteness’ is necessary. Secondly, the Hadley rule, as modified by subsequent cases, focusing on the kinds of losses that reasonably could have been contemplated at the time of contract formation, generally seems

143 As explained above, Robertson’s four criteria were proposed in response to the objection that the ‘fairness rider’ is ‘unacceptably imprecise’. Articulating the criteria relevant to appreciating what is meant by ‘fairness’ in this context, while possibly able to overcome the ‘lack of precision’ objection, opens up further possible objections. Probably the most obvious and important such objection is why the particular criteria Robertson suggests are appropriate. An answer to this is needed if Robertson’s view is to triumph. 144 It must be emphasised, however, that in Supershield the ‘assumption of responsibility’ principle was invoked in support of an argument that Siemens had assumed responsibility for the loss which eventuated rather than that it had not assumed responsibility. Thus, it does not seem possible to simply equate the ‘assumption of responsibility’ principle now apparently accepted as part of English law with the ‘implied undertaking’ rider, which seems to have its origins in the British Columbia v Nettleship decision (n 97) and seems to be concerned only with imposing an additional constraint upon recovery. 145 Robertson (n 108) 185. In addition, at 182 Robertson claims that the ‘implied undertaking’ rider is inconsistent with the House of Lords’ decision in The Heron II. 146 According to Yihan, this is because English courts ‘have not clarified how the “assumption of responsibility” test is to be applied in conjunction with the Hadley test’. For discussion, see G Yihan, ‘Contractual Remoteness in England and Singapore Compared: Orthodox Preferable?’ (2013) 30 Journal of Contract Law 233, 237.

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to produce a result that is ‘fair’, as between the parties, in the significant majority of cases.147 Thirdly, while the Hadley rule may approximate the appropriate norm of justice that applies in this context, on occasion a strict application of the rule produces injustice, meaning that some kind of qualification to it is necessary. In recognition of this final observation, commentators have proposed two different ‘riders’ to the Hadley rule: one based on achieving a ‘just’ outcome as between the parties; the other based on an inquiry into whether the breaching party impliedly undertook responsibility for the particular loss. As noted above, Robertson has argued forcefully in favour of a particular version of the former, principally on the basis that it is very rarely possible to imply the necessary undertaking.148 Nevertheless, it is certainly arguable that the English cases decided since The Achilleas demonstrate a preference for an ‘implied undertaking’ rider and this approach also appears to be the one that Lord Hoffmann favoured in his extra-judicial analysis of The Achilleas. Hadley thus remains the starting point in determining where the boundaries of compensatory liability lie in a claim for breach of contract. Unsurprisingly though, it is always necessary also to inquire whether the parties’ agreement has in fact allocated responsibility for the particular loss in question and possibly also whether Hadley should not be applied strictly on the basis that doing so produces an outcome that is ‘unjust’ as between the parties.149

B. Mitigation Debate surrounding the theoretical basis for the contractual remoteness principle is representative of more general uncertainty concerning the basis for the various restrictions English law imposes on the recovery of compensation for consequential loss following breach. In addition to remoteness, these restrictions include those imposed by the ‘mitigation’ doctrine, limitations on the recovery of compensation for non-pecuniary loss and certain other specific restrictions on recovery such as the qualification on recovery provided by the defence of contributory negligence.150 It seems quite unlikely that Lord Hoffmann or Adam 147 It is recognised that this claim is somewhat problematic given that it is likely that perceptions of ‘fairness’ in this context are affected by the pre-existing (Hadley) rule. 148 Robertson must be correct to claim that this is the preferable ‘rider’ because if in every case it were possible to imply the necessary undertaking, there would be no need for the Hadley rule at all. 149 As the previous note hopefully makes clear, this approach, while perhaps useful in practice, is conceptually incoherent because it reverses the correct order of analysis. Subject to overriding legal prohibitions and the like, the logical starting point in determining whether a particular loss is recoverable must be the parties’ agreement. If, on its true construction, that agreement allocates the loss in question, the decision maker should enforce the allocation that the parties have made. But if the agreement does not allocate the loss, the Hadley rule, as modified by subsequent cases and (perhaps) by some kind of ‘fairness’ rider, should be applied to determine whether the loss is recoverable or not. 150 There is neither space nor need to examine the basis for this restriction on compensatory recovery for breach of contract. To the extent that this restriction applies, it appears to be concerned with fairness as between the parties, though it may also serve the ‘policy’ objective of discouraging negligent conduct by the non-breaching party. For a comprehensive discussion of the law, see Burrows (n 40) 129–44.

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Kramer would explain these other restrictions as agreement-centred, but either way this understanding remains a theoretical possibility requiring consideration. The claim defended below is that it is an unpersuasive one. As the previous section explained, it is of course true that the parties’ underlying agreement always will be relevant to the scope of the secondary obligation (or liability) to make good losses caused by breach. Moreover, in some cases it may even fully determine the scope of this obligation, such as where the parties have agreed upon a valid liquidated damages clause. Nevertheless, the parties’ underlying agreement cannot account comprehensively for the various limits imposed on the recovery of compensation for loss caused by a breach of contract. In defining the limits of the breaching party’s compensatory liability courts have regard to various considerations that are external to the allocation of risks that the parties have (either explicitly or implicitly) undertaken.

1. The Rules of ‘Mitigation’ The ‘mitigation’ principle generally is thought to apply to all forms of common law wrongdoing, meaning that the various rules that apply in the contractual context are thought to apply in essentially the same way to limit the recovery of compensation following the commission of a tort. Despite being commonly invoked by courts as a basis to limit the recovery of compensatory damages, the concept of ‘mitigation’ remains somewhat obscure and there has been a surprising lack of critical analysis regarding both its theoretical basis and precise meaning.151 For example, in his famous treatise on the law of damages, Harvey McGregor QC states that ‘[t]he expression “mitigation of damage” is an umbrella term applied … to a number of matters, some of which are related and some of which are completely unconnected’.152 In the contractual context, it appears to be generally accepted that a reference to ‘mitigation’ is intended to describe an overarching principle or doctrine comprising three inter-related rules.153 The first rule—often called ‘the avoidable loss rule’—is that a claimant cannot recover for loss that could have been avoided through reasonable action.154 The second rule—often called ‘the reasonable expenses rule’—provides that a claimant can recover for loss incurred through reasonable attempts to minimise loss.155 The third rule—typically described as

151 A notable exception is M Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1989) 105 LQR 398. 152 See H McGregor, McGregor on Damages, 18th edn (Sweet & Maxwell, 2010) [7-001]. 153 See, for example, McGregor ibid. Compare Remedies for Torts and Breach of Contract (n 40), where Professor Burrows treats cases concerned with the third rule, which he describes under the heading of ‘compensating advantages’, at 156, quite separately from cases concerned with the first two rules, at 122. 154 In applying this rule, the law does not make overly onerous demands of the claimant. See Peel (ed) (n 63) [20-099], citing Pilkington v Wood [1953] Ch 770. 155 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 (HL).

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the ‘avoided loss rule’—asserts that a claimant cannot recover for loss in fact avoided by post-breach conduct, even if such conduct went beyond that required by the avoidable loss rule, unless the benefit accruing to the claimant is sufficiently ‘collateral’.156 The principal difficulty in this context is to articulate precisely when a benefit is ‘collateral’ in the required sense, with the relevant authorities being notoriously difficult to reconcile with each other.157 For the purposes of this book a reference to ‘mitigation’ should be understood as including only the first two rules. In contrast to the prevailing orthodoxy, it is suggested that the third rule, to the extent that it exists, is not really part of any broader ‘mitigation’ principle. The conventional view that the third rule is an aspect of the law of ‘mitigation’ is a by-product of the orthodox (but misguided) understanding of contractual money awards.158 Although a claimant generally cannot recover compensation for loss not actually suffered,159 the fact that a loss has been avoided through the occurrence of a post-breach event does not preclude the recovery of a substantial money award to substitute for performance. As Professor McLauchlan has demonstrated, the relevant authorities in this area of the law are very difficult to reconcile with the conventional account.160 It is contended that the principal reason for this is the failure to appreciate the distinction between substitutionary and compensatory awards because the tendency to conflate these two kinds of award has produced unprincipled and incoherent doctrine. A variety of different justifications for the ‘mitigation’ principle have been proposed.161 The most common justification appears to be that where the principle applies this is because the claimant’s loss was not in fact legally caused by the defendant’s breach but rather by the claimant’s failure to act reasonably.162 This, for instance, was the understanding of ‘mitigation’ adopted by Robert Goff J in The Elena D’Amico.163 On this understanding of the law, the ‘mitigation’ principle is simply a further aspect of the causation principle that was outlined earlier in the chapter. Another significant judicial endorsement of this understanding of

156 McGregor, McGregor on Damages (n 152), [7-004]–[7-006]. Note that in reality the ‘avoidable loss rule’ does not ‘require’ any conduct because as explained in the text that follows and in contrast to common statements to the contrary, there is in fact no ‘duty’ to mitigate. 157 A number of these cases were discussed in Chapter 2, Section III.E. 158 For example, H McGregor, ‘Mitigation in the Assessment of Damages’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 329, 336. 159 However, note that even compensatory recovery may be possible in these circumstances where the benefit accruing to the victim of the breach is regarded as sufficiently ‘collateral’. 160 McLauchlan, ‘Expectation Damages: Avoided Loss, Offsetting Gains and Subsequent Events’ in Saidov and Cunnington (eds) (n 158) 349. 161 See Bridge (n 151). 162 For example, this is the explanation favoured by Burrows (n 40) 122. 163 Koch Marine Inc v d’Amica Societa di Navigazione ARL (The Elena D’Amico) [1980] 1 Lloyd’s Rep 75, 88. This passage was expressly approved by Lord Walker in Lagden v O’Connor [2004] 1 AC 1067 (HL) [99].

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‘mitigation’ is Viscount Haldane’s statement in British Westinghouse that a party’s entitlement to damages for a breach of contract is qualified by a rule which imposes on the plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damages which is due to his neglect to take such steps.164

It seems now generally to be recognised that despite Lord Haldane’s suggestion to the contrary in British Westinghouse,165 references to a so-called ‘duty to mitigate’ in this context are misleading.166 Strictly speaking, the claimant has no ‘duty’ to mitigate its loss in the aftermath of a breach since the defendant has no correlative ‘right’ that the claimant take such mitigatory action. However, the rule does prevent the victim of a breach of contract (or a tort) from recovering compensation to make good loss that could have been avoided by taking reasonable post-breach action,167 meaning that its practical effect is more or less the same as if there were such a duty.168 This observation aside, Viscount Haldane’s comments are nevertheless illuminating in this context because they draw attention to the basic need for the avoidable loss rule: at some point the innocent party becomes responsible for minimising the detrimental factual consequences flowing from another’s breach of legal duty. But while important, this observation provides an incomplete explanation of ‘the avoidable loss rule’. Viscount Haldane’s reference to ‘due’ in British Westinghouse cannot simply be equated with factual causation because of the ‘reasonableness’ aspect of the inquiry. Clearly, considerations other than the ‘but for’ test, or any alternative test of factual causation for that matter, are relevant in determining when it becomes appropriate to shift responsibility for loss caused by the relevant breach from defendant to claimant. Fully exploring these considerations is, however, beyond the scope of this book. The point now made is simply the relatively obvious one that the meaning of ‘reasonable’ in this context cannot be determined wholly by reference to the agreement made by the two contracting parties.

164 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL) 689 (emphasis added). 165 ibid. 166 For example, E McKendrick, Contract Law: Text, Cases and Materials, 3rd edn (Oxford University Press, 2008) 908; Smith (n 53) 428. In the recent Canadian Supreme Court decision in Southcott Estates Inc v Toronto Catholic District School Board (2012) SCC 51, McLachlin CJ stated that: ‘A plaintiff is not contractually obliged to mitigate … However, if the plaintiff unreasonably fails to mitigate, its damages for breach of contract may be reduced’, [72]. 167 For discussion, see McGregor (n 152) [7-015]–[7-090]. 168 Significantly, however, it is accepted that the burden of proving that the promisee did not take reasonable action, or that actions taken increasing loss were unreasonable, falls on the promisor. See, for example, Roper v Johnson (1873) LR 8 CP 197; Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC 1130 (HL); Red Deer College v Michaels [1976] 2 SCR 324 (SCC) and Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 (HCA).

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2. Not Agreement Based To claim that the contractual ‘mitigation’ principle simply gives effect to the parties’ underlying agreement would amount to saying that when two parties enter into a contract the obligation each undertakes is to perform or to make good at least those losses resulting from a breach that could not have been avoided by taking reasonable post-breach action. Stating the hypothesis in this way, it is suggested, makes clear the significant artificiality that is involved in such an analysis. Contracting parties often simply do not always turn their minds to the possible consequences of breach, which is precisely why background default rules are required to determine who should bear responsibility for such consequences. It is of course true that an objective construction of the parties’ contract may reveal that the parties did in fact agree to incorporate into their agreement some restriction on recovery akin to the mitigation principle stated above or, what is perhaps more likely, that the parties contracted with the knowledge that principles of mitigation operate as default rules. However, to go further and suggest that the three rules of ‘mitigation’, in general, do nothing more than give effect to the parties’ underlying agreement simply cannot be correct. This is demonstrated by the basic observation that the ‘mitigation’ rules applying in the contractual context are identical to those that apply in the law of torts, where there is generally no underlying agreement between the parties to which the court may have reference. This state of affairs can be contrasted with principles of remoteness, where the relevant rules are different in the law of torts from those that govern the recovery of compensation for loss consequent on contractual breach. While the ‘reasonable foreseeability’ of damage test of remoteness in tort is applied at the date the wrong is committed, the ‘reasonable contemplation’ test in contract is applied at the date of contract formation. Thus, while the idea that the contractual remoteness restriction is based on the parties’ underlying agreement is at least intelligible, even if ultimately unconvincing,169 it is simply implausible to make the analogous claim in relation to the restriction on compensatory recovery encapsulated by the rules of ‘mitigation’.170 For both torts and breaches of contracts the ‘reasonableness’ of the innocent party’s post-breach conduct is judged at, or soon after, the date of breach and in determining what ‘reasonableness’ means in the context of a claim for compensation following a breach of contract, the parties’ underlying agreement generally will not provide the answer. Thus, even more clearly than in the remoteness context, principles of ‘mitigation’ simply provide a mechanism by which courts achieve what they perceive to be a ‘just’ attribution of responsibility for loss by reference to considerations

169

As argued above in Section III.A of this chapter. This, presumably, is the reason it does not seem to be a position held by any notable commentators. 170

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that cannot be gleaned entirely from the parties’ contract. The extent to which these attributions of responsibility (ie the meaning of ‘reasonableness’ in this context) depend only on considerations of interpersonal justice as between the two contracting parties—and thus exclude broader considerations of ‘policy’— is contentious. The more popular view, however, appears to be that ‘policy’ considerations generally do have some influence over the determinations that courts make in resolving questions of ‘mitigation’.171 If ‘policy’ considerations are indeed relevant in this context, it seems likely that they include a concern to reduce economic waste and to promote desirable levels of personal responsibility. A further possibility suggested by Professor Bridge is the advantage of having clear and simple legal rules.172 This suggestion may have some force but it seems to have been made principally in order to account for the over-compensation that exists in many of the sale of goods cases outlined in Chapter 2. It is contended, however, that these authorities are best explained as examples of substitutionary money awards rather than by reference to the ‘policy’ objective of maintaining clear and simple legal rules,173 which may have the effect of rendering this argument largely unnecessary.

3. Not an Aspect of ‘Remoteness’ Professor Stephen Smith has suggested that principles of ‘mitigation’ are simply an aspect of a broader principle of remoteness.174 On this view, an agreement-centred understanding of the rules of ‘mitigation’ might be defended if one accepts the possibility of an agreement-centred account of contractual remoteness. Critically, however, Smith does not support the agreement-centred understanding of remoteness and his account of ‘mitigation’ would not actually make sense if he did. Smith instead claims that questions of remoteness in the contractual context turn on ‘a complex, multifaceted notion of responsibility’.175 On the assumption that ‘multifaceted’ responsibility determinations are sensitive to considerations external to the parties’ underlying agreement, this simply amounts to a particular version of the more general understanding of remoteness that has been argued for in this chapter.

171 For instance, in ‘Mitigation of Damages in Contract (n 151), Professor Bridge cites several different policies that he claims are promoted by principles of mitigation and Professor Burrows states that: ‘The policy [underpinning ‘the duty to mitigate’] is one of encouraging the claimant … to be to a reasonable extent self-reliant or … to be efficient’. See Burrows (n 40) 122. 172 Bridge (n 151). 173 For a defence of this claim, see Chapter 7, Section IV.B. 174 Smith (n 53) 428. 175 ibid 427.

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On a remoteness-based understanding of ‘mitigation’, loss consequent upon a failure to mitigate is irrecoverable because reasonable people in the position of the contracting parties at the time of contract formation would not have contemplated such recovery. This understanding has some support in English case law,176 but Professor Bridge has criticised it on the ground that ‘it is not easy to say how it adds to, or improves upon, factual causation’ as an explanation.177 This is problematic because, as just explained, the causation-based view of ‘mitigation’ provides no guidance as to what is meant by ‘reasonable’ in this context. In accordance with another point made earlier, Bridge also observes that principles of remoteness are concerned with the hypothetical question of the foreseeable consequences of breach at the time of contract formation, while the restriction on recovery encapsulated within the ‘mitigation’ doctrine is concerned invariably with a factual assessment of the claimant’s behaviour in the particular circumstances that this party occupied at the time of the relevant breach. The above discussion leads to the conclusion that it is difficult to see how any of the rules of ‘mitigation’ can be encapsulated within the contractual remoteness principle. More importantly, the discussion demonstrates the implausibility of viewing the mitigation ‘principle’ as simply an aspect of the remoteness principle on the agreement-centred understanding of this principle. This is not to reject outright the suggestion that the ‘mitigation’ and remoteness principles may share a common theoretical underpinning. Bridge himself postulates that a possible justification for both doctrines is that they promote forward-looking behaviour, preventing an excessive focus on the past. This is a possible explanation but obviously more work is necessary in order to substantiate it. Wherever the truth lies, the critical point for present purposes is that neither limitation can be explained wholly by reference to the parties’ underlying agreement.

C. Restrictions on Recovery for Non-Pecuniary Loss The final important restriction on compensatory money awards to be addressed in this chapter is that which limits recovery for non-pecuniary loss. Chapter 1 observed that, apart from some narrowly defined exceptions, historically, recovery for breach of contract has tended to be limited to proven deterioration in the claimant’s financial position measured against the baseline of future performance. In particular, ‘damages’ for ‘mental distress’ generally have not been awarded. Recently, however, there has been some relaxation of this restriction.178

176 See, for example, Compania Naviera Maropan SIA v Bowaters Lloyd Pulp and Paper Mill Ltd (The Stork) [1955] 2 QB 68 (CA) 98 (Singleton LJ); Radford v De Froberville [1977] 1 WLR 1262 (Ch) 1272 (Oliver J). 177 Bridge (n 151) 403. 178 Indeed, the recovery of damages for mental distress may now be easier in an action for breach of contract than it is in an action for the tort of negligence.

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The ‘very object of the contract’ exception recognised by Bingham LJ in Watts was expanded in Farley so that it can now be said that such ‘damages’ are recoverable for the breach of a term concerned with pleasure, relaxation and peace of mind, whenever it was known by both parties to be important in the context of the contract overall. In addition, the second of Bingham LJ’s exceptions in Watts v Marrow recognises the possibility of ‘damages’ for ‘physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort’.179 Chapter 1 explained that, although the precise status of this exception is unclear after Farley v Skinner,180 English law is generally moving towards recognising a broader conception of recoverable loss in the contractual context. An example of this is the holding in Johnson v Unisys Ltd that Addis v Gramophone Co Ltd now stands only for the proposition that ‘an employee cannot recover “damages” for injured feelings, mental distress or damage to his reputation, arising out of the manner of his dismissal’.181 Despite this receding significance, the limited availability of awards for nonpecuniary loss constitutes an important restriction on the scope of a promisee’s entitlement to recover compensation to make good the factual detriment caused by the promisor’s breach. The question therefore arises as to whether this restriction simply gives effect to the parties’ underlying agreement so that when ‘damages’ are awarded it can be said that an award simply enforces the promisee’s primary contractual right.182 The position defended here is that it cannot. Once again the argument proceeds by demonstrating that the restrictions imposed on the recovery of such losses generally cannot be sourced directly in the parties’ agreement. Following this, it is shown that these restrictions also cannot be explained as simply part of the contractual remoteness principle, particularly if one supposes that an agreement-centred understanding of the latter is possible.

1. Not Agreement Based The claim that the restrictive approach to the recovery of ‘damages’ for nonpecuniary loss in English contract law is based simply on properly construing the parties’ agreement is unsupportable. The essential reason for this is the same as that 179

Watts v Marrow [1991] 1 WLR 1421 (CA) 1444. Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732, 849. 181 See Johnson v Unisys Ltd [2001] UKHL 13, [2003] 1 AC 518 [44] (Lord Hoffmann) (emphasis added). 182 Note that the problem of incommensurability between money and non-pecuniary loss makes possible a different kind of non-compensatory analysis of awards for such loss. It might be said, in other words, that because money cannot ‘make good’ non-pecuniary loss in the sense of accurately restoring the victim to his or her pre-breach position, awards for such loss are merely symbolic of the wrong and thus ‘vindicate’ the existence of the primary right. This might appear to come very close to characterising awards for non-pecuniary loss as ‘substitutionary’ but even on this analysis of such awards they are not substitutionary in the sense in which that term is used in this book because such awards focus only on the consequences of the wrong rather than on the objective of facilitating performance or a close substitute for it. 180

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which undermined the analogous claim in the context of the contractual remoteness and ‘mitigation’ restrictions. Essentially, this suggestion imputes a level of agreement to the contracting parties that they often simply do not reach. The decided cases in this area lack the evidential foundation necessary to support the claim that in limiting recovery for non-pecuniary loss, courts simply give effect to the parties’ underlying agreement. Although there may be occasions where the parties do reach agreement on these matters, contracting parties generally bargain for performance rather than for performance or a certain level of indemnification for non-performance. Of course, in many commercial transactions both parties enter into the contract purely for financial profit. As a result, the recovery of compensation for nonpecuniary loss in such case may not, in fact, be within the parties’ ‘reasonable contemplation’ at the time of contract formation. Nevertheless, as argued above, this is quite different from saying that the parties actually expressly or impliedly agreed not to provide compensation for such loss should it eventuate. In any event, this suggestion raises the possibility that the restrictive approach to the recovery of non-pecuniary loss consequent upon contractual breach might be explained as an application of the principles of contractual remoteness. In what follows it is argued that this possibility is also unconvincing.

2. Not an Aspect of ‘Remoteness’ The contractual remoteness principle cannot adequately explain the current restrictions on the recovery of non-pecuniary loss for breach of contract. The argument that it can is based upon the assumption that in normal commercial contracts parties contract for financial gain and do not contemplate the possible non-financial consequences of a breach. This, it is said, explains both the general exclusion on the recovery of non-pecuniary loss and also the exception that applies whenever ‘a major or important object of the contract was to give pleasure, relaxation and peace of mind’.183 In Fidler v Sun Life Assurance Co of Canada,184 the Supreme Court of Canada explained the Addis rule and the ‘very object of the contract exception’ as simple applications of Hadley v Baxendale and this view also has received academic support.185 This explanation for the law’s present shape certainly has some intuitive appeal. In addition, it is consistent with the fact that compensatory recovery for certain forms of non-pecuniary loss was available for some torts before it was available for breaches of contract. Although in some contexts a tortfeasor clearly can ‘reasonably foresee’ that another person may suffer non-pecuniary loss in consequence of his tort, it is at least arguable that such loss is not contemplated by parties 183

See, for example, Farley v Skinner (n 180) (Lord Steyn). Fidler v Sun Life Assurance Co of Canada [2006] 2 SCR 3 (SCC) [45] (McLachlin CJC and Abella J on behalf of the court). For discussion see S Harder, Measuring Damages in the Law of Obligations (Hart Publishing, 2010) 91. 185 For example, see J Hartshorne, ‘Damages for Mental Distress after Farley v Skinner’ (2006) 22 Journal of Contract Law 118. 184

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contracting for financial gain, particularly if the reference to ‘contemplation’ here is understood as imposing a higher level of foresight than mere ‘foreseeability’.186 Despite such support, this explanation for the various exceptions to the general rule was rejected by Bingham LJ in Watts v Morrow, which was, until Farley v Skinner, the leading English authority on the subject.187 This view was echoed in the Australian context by McHugh J in Baltic Shipping v Dillon,188 where his Honour stated that the remoteness explanation for the general rule excluding ‘damages’ for non-pecuniary loss does not accord with everyday experience relating to the making of contracts. The parties to many contracts, including many commercial contracts, are fully aware, when they make them, that breach will result in disappointment and sometimes distress to the innocent party.189

This opposition to the remoteness-based explanation for the traditional reluctance to award compensation for non-pecuniary loss consequent on contractual breach is forceful; it also raises the question of what ‘policy’ considerations do in fact underpin the present law. The principal reasons traditionally advanced in support of the restriction include (i) the inherent difficultly both in proving the existence of non-pecuniary losses and in accurately quantifying such loss,190 (ii) that contract law is concerned primarily with commercial matters,191 and (iii) arguments based on contract law’s unique role in facilitating the market economy.192 Examining the force of these possible explanations is beyond the scope of this book, but it seems likely that all three have made some contribution to the development of the present legal position. It is of course possible that the current restrictions on recovery in this context are indefensible. But to the extent that the present approach can be justified, the only conceivable view appears to be that it is best explained as upholding the ‘policy’ concerns just identified rather than simply giving effect to the parties’ underlying agreement.

IV. Conclusion English law’s accepted orthodoxy is that, apart from some rare exceptions, all contractual money awards aim to make good certain ‘loss’ caused by the relevant breach. On the alternative account proposed here, some (but not all) contractual money awards substitute for performance. This chapter has sought to explain 186 This is generally accepted to be the case. For judicial support, see The Heron II (n 58) 413 (Lord Pearce), 422 (Lord Upjohn). For academic support, see Cartwright (n 106) 493–94. 187 Watts (n 179) 1445 (Lord Bingham MR). 188 Baltic Shipping v Dillon (1993) 176 CLR 344 (HCA). 189 ibid [24] (emphasis added). 190 See, for example, Farley v Skinner [2000] PNLR 441 (CA) 454 (Mummery LJ). 191 Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL) 353 (Lord Lloyd) and Johnson v Gore Wood & Co [2002] 2 AC 1 (HL) 49 (Lord Cooke). 192 Baltic Shipping (n 188) 369 (Brennan J).

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precisely how awards that do compensate for loss fit within this new picture of the law. Section II.A explored the basis for compensatory awards. It was explained that while there is significant disagreement amongst commentators with regard to the existence of a secondary duty to repair one’s wrongfully caused loss, there is no need to take a definitive position on this question here because the debate operates at a higher level of theoretical abstraction than the doctrinal distinction argued for here. Section II.B outlined the maximal scope of a breaching party’s compensatory liability by explaining the two inherent restrictions entailed by the very logic of compensatory awards: the causation principle and the prohibition on double recovery. Section III of the chapter sought to defend the need for the distinction this book proposes between substitutionary and compensatory money awards by demonstrating that compensatory awards cannot be explained simply as enforcing directly the promisee’s primary contractual rights. In its strongest form the agreement-centred understanding of contractual money awards claims that the content of the primary right created by a contract is to performance or a certain level of compensation for non-performance determined wholly by reference to the parties’ agreement. By contrast, the account advanced here claims that often contracting parties simply do not reach a consensus in regard to the scope of each other’s compensatory liability. The restrictions on recovery encapsulated by principles of remoteness and mitigation and those governing recovery for nonpecuniary loss cannot always be derived from the parties’ agreement. Rather, these doctrines attempt to ‘fairly’ apportion loss between the two parties by reference to various considerations that are extrinsic to the parties’ underlying bargain.

7 Explaining Some Important Decisions in Tension with the Orthodox Account I. Introduction This chapter seeks to develop further the new understanding of the law this book advances by providing a detailed examination of some important and controversial English decisions that are inconsistent with the law’s conventional interpretation. The facts and central holdings of most of these decisions have been outlined already in earlier chapters in the course of demonstrating the doctrinal inadequacy of the orthodox interpretation of the Robinson v Harman principle. The present chapter’s main objective is to highlight precisely what aspects of these authorities the new account can (and cannot) explain. The discussion begins with a close re-examination of the House of Lords’ important decisions in Ruxley Electronics & Construction Ltd v Forsyth and Alfred McAlpine Construction Ltd v Panatown Ltd. Following this, Section IV reconsiders, in light of the law’s proposed reorientation, some of the leading cases concerned with awards in the sale of goods context. Cases involving a breach by the buyer are considered first and it is shown that the basic approach taken in these cases is consistent with the reorientation of the law proposed here. Following this, certain leading decisions concerned with a breach by the seller, which were considered in great detail in Chapter 2, are re-examined and also shown to be consistent with the new account.

II. Substitutionary Awards for the Cost of Repairs Chapter 5 explained that whenever it remains possible for a promisee to obtain a close substitute for the promised performance by alternative means, and any other conditions to which the availability of such an award is subject have been fulfilled,1 1 This includes, at least when the claim is one for the cost of repairs rather than market replacement, that it is ‘reasonable’ for the innocent party to insist upon obtaining such performance in the circumstances, and also that the innocent party has fulfilled any conditions (precedent or subsequent) to which his entitlement to performance was subject.

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he is entitled to an award of the minimum cost of achieving this objective, regardless of whether it is possible for the promisee to show that the promisor’s failure in performance caused him any detrimental factual consequences. There it also was explained that the two different ways to acquire substitute performance are by purchasing a market replacement for the promised performance and by obtaining the repairs necessary to ‘cure’ the breach. Where there is in fact an available market for the goods or services that were promised, this is generally the difference in market value between such goods or services and those that in fact were received. By contrast, the cases considered in this section of the chapter are concerned with situations in which a court considers the possibility of measuring a substitutionary money award by reference to the cost of repairing the defective performance rather than the cost of obtaining a market substitute.2 Chapter 5 explained that a substitutionary award of the cost of repairs is subject to at least one important restriction usually expressed in terms of whether curing the breach is ‘reasonable’ in the circumstances. Although the precise content of this constraint remains obscure, some suggestions were made regarding how it should be understood and applied. While the main aim of what follows is to provide a comprehensive analysis of Ruxley, the discussion begins with a brief review of some important earlier authorities.

A. The Law Prior to Ruxley A party in breach of a contractual undertaking to perform certain building work is prima facie liable to pay the innocent party the cost of rectifying the performance defectively provided.3 The extent to which this entitlement is subject to restriction was not settled definitively until the middle of the twentieth century. In Bellgrove v Eldridge,4 a formidable Australian High Court bench held that the prima facie entitlement to an award of the cost of repairs following the defective performance of a building contract depended upon whether undertaking the work was both ‘necessary to produce conformity’ with the original contract specifications and ‘a reasonable course [for the claimant] to adopt’.5 The existence of a similar restriction in English law was confirmed by the House of Lords in East Ham Corporation v Bernard Sunley & Sons Ltd.6 As Chapter 5 explained, this restriction on the availability of awards of the cost of repairs was considered further in two important English decisions in 1977. 2 For examples of awards of the cost of obtaining a market substitute see Section II.C of this chapter. 3 See Mertens v Home Freeholds [1921] 2 KB 526 (CA) 535 (Lord Sterndale MR); Hoenig v Isaacs [1952] 2 All ER 176 (CA) 180 (Somervell LJ), 181 (Denning LJ), 182 (Romer LJ). 4 Bellgrove v Eldridge [1954] HCA 36, (1954) 90 CLR 613 (HCA). 5 ibid 617–18. 6 East Ham Corporation v Bernard Sunley & Sons Ltd [1966] AC 406 (HL), 434 (Lord Cohen). In Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (HL) 356, Lord Jauncey also referred to a number of lower court decisions subsequent to East Ham confirming the existence of this restriction.

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In the first, Tito v Waddell (No 2),7 Megarry V-C denied the Banaban claimants an award of the cost of restoring their previous island home to its original condition after the defendant mining company breached its contractual undertaking to replant their island after it finished mining the island for phosphate. In the second, Radford v de Froberville,8 Oliver J considered Megarry V-C’s decision in Tito in upholding a claimant’s request for an award of the cost of building a substitute wall on his own land after the defendant, in breach of contract, had failed to erect a wall on his land so as to divide the two plots. It might be suggested that the decision to refuse the cost of restoration in Tito strongly supports the conventional understanding of contractual money awards. It is true that in that case Megarry V-C confronted the question of ‘damages’ through the prism of ‘loss’, focusing principally upon whether the Banaban claimants had demonstrated an intention to use the sum requested to restore the island to its previous state. However, his Lordship’s decision to deny an award of the cost of restoration might be reconcilable with the new account advanced here because it was at least arguable that the islanders’ insistence upon performance was not ‘reasonable’ in the circumstances. The island had been bombed extensively during the Second World War so that the cost of restoring it had increased significantly. Moreover, the islanders had relocated to a different Pacific island 1,500 miles away, with apparently no intention to return. On the other hand, it has been argued that it is likely that the decision in Tito cannot survive Ruxley … [on the basis that] is hard to see why it is unreasonable for indigenous claimants, who retain strong affinity with their land, to ask that environmental devastation be rectified, or the cost of doing so be paid.9

There is considerable force in this view and it is of course true that Tito becomes significantly harder to justify once it is accepted that proving an intention to cure the breach is not a necessary precondition to recovering the cost of rectification. The point made here is simply that the islanders’ apparent lack of intention to carry out the work when combined with the momentous cost of doing so might justify Megarry J’s decision to refuse such an award. Regardless of this, it is arguable that his Lordship erred in refusing the islanders’ alternative claim for a reasonable ‘price of release’ assessed at the date of breach, though on the state of the authorities existing at that time, such a refusal was understandable. In Radford v de Froberville, Oliver J adopted a similar approach to that taken by Megarry V-C in Tito. In assessing whether the claimant’s proposed actions were ‘reasonable’, his Lordship focused almost exclusively on the claimant’s intention to cure the breach, regarding it as very important that the claimant genuinely intended to erect an equivalent wall on his own land. As observed in Chapter 5,10

7 8 9 10

Tito v Waddell (No 2) [1977] Ch 106. Radford v de Froberville [1977] 1 WLR 1262 (Ch). J Edelman, ‘Money awards of the cost of performance’ (2010) 4 Journal of Equity 122, 133. See Chapter 5, Section II.B.

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this focus on the claimant’s intention to repair appears to support the view that awards of the cost of repairs are compensatory rather than substitutionary. But in the earlier discussion it was noted that the claimant in Radford was not seeking the cost of performance. Achieving the promised performance was in fact impossible since the contract required the wall to be built on the defendant’s land. Rather, the claimant was seeking the cost of erecting a similar wall on his own land, which meant that the issue of ‘reasonableness’ which arose in Radford was, as Oliver J himself noted in the case, ‘really one of mitigation’.11

B. Making Sense of the Ruxley Decision The facts in the Ruxley case were outlined in Chapter 1. It was noted there that two particular features of the House of Lords’ unanimous decision to reinstate Judge Diamond QC’s findings at trial call for explanation. The first is the decision to refuse Mr Forsyth the cost of demolishing the pool built by Ruxley, the contractor, and constructing a new pool in accordance with the contractually specified depth on the ground that such an award was ‘unreasonable’ in the circumstances. The second is the basis for the £2,500 awarded to Forsyth. Both aspects of the case are now examined in light of the new account of contractual money awards that is proposed in this book.

1. Refusal to Award the Cost of Substitute Performance Recall that at trial Judge Diamond QC held that Forsyth did not intend to ‘cure’ the defective performance provided to him by Ruxley. In the Court of Appeal, Forsyth gave an undertaking to use any money awarded on a cost of reinstatement basis to demolish the pool built and construct a new pool that conformed to the specifications in the parties’ original contract. English law has yet to recognise the possibility of making conditional orders of this kind.12 Had such an order been made, it would have been a (conditional) award for the cost of substitute performance, which would have introduced a new kind of substitutionary money award into English law. a. The Significance of Mr Forsyth’s Undertaking to Demolish and Rebuild Despite the undertaking provided by Forsyth, both a conditional and an unconditional award of the cost of rectification was denied on the basis that it was ‘unreasonable’ in the circumstances. The House of Lords’ (justifiable) failure to recognise 11 See Radford (n 8) 1284 (emphasis added). Lord Goff also made this observation in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL) 550. 12 As Lord Jauncey observed, English law is generally unconcerned with what a claimant does with his ‘damages’ (see Ruxley (n 6) 359). Compare the position under French law where, pursuant to article 1144 of the French Civil Code, one measure of damages is the faculté de remplacement discussed in S Rowan, Remedies for Breach of Contract (Oxford University Press, 2012) 114.

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the possibility of making conditional awards of the cost of rectification raises the question of how Forsyth’s undertaking to demolish and rebuild the defectively built pool was relevant. The rejection of the possibility of such conditional awards in English law meant that the significance of this undertaking, to the extent that it was relevant at all,13 was limited to providing evidence of Forsyth’s intention to carry out the repairs necessary to produce conformity with the contract. On the traditional compensatory analysis of awards of the cost of ‘rectification’, the existence of such an intention would appear to be critical to establishing the entitlement to an award of this kind,14 and in the House of Lords Ruxley’s counsel unsurprisingly argued in favour of this approach.15 But this was not the view accepted by the Court. Instead, their Lordships held, in accordance with some more recent dicta in the Court of Appeal,16 that an innocent party’s intention actually to carry out the repairs necessary to produce conformity is simply one of the factors that should be taken into account in determining whether awarding the cost of undertaking such repairs is ‘reasonable’ in the circumstances.17 The Court’s holding that an intention to carry out the repairs required to produce conformity is not necessary to recover the cost of rectification is significant. As just noted, an important implication of the traditional view that awards of the cost of ‘reinstatement’ compensate for loss is that the innocent party either must have carried out the necessary repairs or prove, on the balance of probabilities, an intention to do these repairs in the future in order to establish the alleged loss with sufficient certainty. Thus, the finding that the innocent party’s intention to repair does not determine whether he is entitled to the cost of rectification is inconsistent with a compensatory analysis of such awards, as was explained in Chapter 5.18 b. The Two Different Senses of ‘Reasonableness’ in this Context The ‘reasonableness’ of any rectification work that the innocent party has completed prior to commencing the action for ‘damages’ is critical in determining whether recovering the cost of doing such work is precluded by rules of ‘mitigation’. However, even the shared terminology of ‘reasonableness’ in this context in combination with the conventional, purely ‘loss-based’ understanding of the law has not prevented an appreciation of the two different ways in which 13 It is actually not clear that Forsyth’s undertaking could have any relevance to the appeal given that it was first introduced in the Court of Appeal and therefore constituted evidence additional to that provided at trial. But for reasons explained in the text immediately below, the House of Lords found it unnecessary to make a definitive ruling on the admissibility of this evidence because of the way it interpreted the content of the ‘reasonableness’ restriction that applies in this context. 14 See, for instance, Megarry V-C’s analysis of the ‘damages’ claim in Tito (n 7) discussed above. 15 See Ruxley (n 6) 346. The claim must be that even if demolishing and rebuilding constitutes a comparably very expensive measure given the value of the contract overall, this was the only way to make good the particular non-pecuniary loss Forsyth suffered as a result of the breach. 16 See, for example, Darlington Borough Council v Wiltshier Northern Limited [1995] 1 WLR 68 (CA) (Steyn LJ) and Dean v Ainley [1987] 1 WLR 1729 (CA) 1737 (Kerr LJ). 17 See Ruxley (n 6) 359 (Lord Jauncey), 373 (Lord Lloyd). 18 See Chapter 5, Section II.B.3.

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‘reasonableness’ can be invoked to limit the recovery of claims for the cost of rectification. As Professor Tettenborn has observed, although the two distinct senses in which ‘reasonableness’ is used in the law of ‘damages’ have ‘a good deal in common … the two doctrines are not quite coextensive’.19 The two different senses in which ‘reasonableness’ is used in this context have received judicial acknowledgment too. In Ruxley, for example, Lord Lloyd refused to accept that ‘reasonableness is confined to the doctrine of mitigation’. Instead, his Lordship stated that the concept ‘has a wider impact’ and that there is more than one way in which the term is used in the law of ‘damages’.20 Other judges also have appreciated the two different meanings of ‘reasonableness’. As Chapter 5 observed, Lord Goff demonstrated an awareness of the distinction in Panatown, when discussing Oliver J’s speech in Radford v de Froberville.21 More recently, in Linklaters Business Services v Sir Robert McAlpine Ltd, Sir Robert McAlpine (Holdings) Ltd,22 Aikenhead J recognised the importance of differentiating between cases in which the remedial work … has actually been done and those in which it has not been. In the latter case the judge will be left with a decision based on the evidence as to what is the appropriate solution which will, all things being equal, reasonably put the claimant back into the position it would have been if there had been no material breaches of contract … Somewhat (albeit not entirely) different considerations apply when the remedial works have been done.23

However, for reasons explained below, the temporal distinction drawn by Aikenhead J does not perfectly correspond to the distinction between substitutionary and compensatory awards for the cost of rectification. The essential reason for this is that recognition of the two different meanings of ‘reasonableness’ in this part of the law has not generally led to an appreciation of the distinction between substitutionary and compensatory money awards. As Chapter 5 explained, a consequence of this oversight is that traditionally too much significance has been placed on the claimant’s intention to repair in determining whether it is ‘reasonable’ to award the cost of obtaining substitute performance. Fortunately, this latter trend has been reversed recently, which supports the substitutionary analysis advanced here. c. Distinguishing Between Substitutionary and Compensatory Claims for the Cost of Repairs This failure clearly to distinguish substitutionary and compensatory money claims for the cost of rectification in Ruxley is understandable given the confused state 19 A Tettenborn, The Law of Damages, 2nd edn (Butterworths LexisNexis, 2003) [19.95]. Perhaps the most obvious difference is that while the defendant bears the burden of proving that the claimant has failed to act reasonably in the ‘mitigation’ context, the claimant must prove the ‘reasonableness’ of awarding the cost of substitute performance. See Pageler Ltd v Wang (UK) Ltd (2000) 70 Con LR 68. 20 Ruxley (n 6) 370. 21 See Chapter 5, Section II.B. 22 Linklaters Business Services v Sir Robert McAlpine Ltd, Sir Robert McAlpine (Holdings) Ltd [2010] EWHC 2931 (TCC). 23 ibid [125].

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of the law and the (related) fact that the operative restriction on each award is expressed in the identical language of ‘reasonableness’. A further reason for confusion in this context is that similar, but not identical, considerations are relevant to both inquiries. This means that when action taken by a claimant is found to constitute ‘reasonable’ mitigatory conduct, it is also likely that a substitutionary award will be ‘reasonable’ in the circumstances. Ruxley itself demonstrates this point since if Mr Forsyth had gone ahead and completed the work before bringing a claim for loss it is likely that a compensatory claim also would have been denied on the ground that it was an unreasonable way to mitigate the loss he actually suffered as a result of Ruxley’s breach.24 As just explained, in Linklaters,25 Aikenhead J suggested that different considerations apply when assessing whether remedial work already done—often but not always to mitigate loss—was ‘reasonable’ as opposed to assessing whether proposed remedial work will be ‘reasonable’ in the circumstances. In explaining why this is so, his Lordship went on to cite Lord MacMillan’s suggestion in Banco De Portugal v Waterlow & Sons,26 that the law should be fairly generous towards a claimant who goes to significant lengths to extricate himself from an embarrassing situation, even though the defendant might point to some more ‘reasonable’ measures that, with the benefit of hindsight, could have been adopted.27 An important point of clarification is necessary at this juncture. Normally a claim for the cost of ‘rectification’ brought prior to the work being done is best characterised as substitutionary in nature,28 while a claim for the cost of ‘rectification’ brought after the work’s completion may be characterised as either substitutionary or compensatory; the latter characterisation being made possible by the fact that the financial cost of repairs has in fact been incurred. However, it is also theoretically possible to bring a compensatory claim for prospective loss prior to any rectification work being done, as Radford v De Froberville itself demonstrates.29 The success of this type of claim of course depends upon the claimant establishing an intention to carry out the required work, which is consistent with Oliver J’s emphasis on the claimant’s intention to build the proposed wall on his own land. 24 The relevant ‘loss’ here would be Forsyth’s subjective lost enjoyment or ‘disappointment’ in not receiving the exact pool he was promised. 25 Linklaters (n 22). 26 Banco De Portugal v Waterlow & Sons [1932] AC 452 (HL). 27 It is of course possible that the law could take the position that any claim for the cost of repairing a defective performance (whether before or after the work is done) is to be treated as substitutionary. 28 Note that it has been held that a claimant will not necessarily lose his entitlement to recovery if he waits for the outcome of the case before carrying out the remedial works—it all depends upon the circumstances of the case: William Cory & Son Ltd v Wingate Investment (London Colney) Ltd (1980) 17 BLR 104 (CA). 29 The use of the word ‘repair’ here is misleading because the reason why the claim was compensatory rather than substitutionary was that the claimant could not actually cure the breach, since the promised dividing wall was to be built on the defendant’s land. The claimant sought to recover the cost of building a similar wall on his own land in order to mitigate the (difficult to quantify) loss he would suffer as a consequence of the promised wall not being constructed.

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As just noted, it should be possible to bring a substitutionary claim for the cost of rectification either before or after the work has been carried out. In many cases these costs may be recovered more easily as compensation for loss in fact suffered given that the innocent party will have incurred these costs already and because the burden of proving that recovery is precluded by the rules of ‘mitigation’ falls upon the breaching party whereas the burden of proving that it is ‘reasonable’ for the innocent party to insist upon performance in the circumstances falls upon the innocent party.30 However, one situation where a substitutionary claim for the costs of ‘rectification’ may be appropriate even after the completion of repairs would be where the innocent party has not in fact incurred the cost of the repairs because they were done gratuitously or paid for by a third party. Provided it was ‘reasonable’ for the innocent party to insist upon performance in such a case and his right to performance has accrued unconditionally, the cost of these repairs should be recoverable on a substitutionary basis in these circumstances, thereby avoiding the necessity of having recourse to the res inter alios acta principle. d. Overlap and Variance Between the Two Meanings of ‘Reasonableness’ This qualification aside, the temporal focus adopted by Aikenhead J in the Linklaters case and (by extension) by Lord MacMillan in Banco De Portugal is generally sensible. If one assumes that claims brought after the repairs have been done usually are compensatory and claims brought prior to the work commencing usually are substitutionary, Lord MacMillan’s comments also suggest that establishing one’s right to a substitutionary award will be more difficult than demonstrating one’s right to a compensatory award. As just explained, the distribution of the relevant burdens of proof with regard to the two ‘reasonableness’ tests would seem to support this view. However, because the ‘reasonableness’ restriction applicable to substitutionary claims may take account of all the circumstances of the case, there may in fact be cases in which it is ‘reasonable’ to recover the cost of rectification even though recovering the cost of repairs already undertaken may be precluded by the rules of mitigation. Ruxley itself illustrates the possible divergence between the two tests. It is difficult to resist the notion that when assessing the ‘reasonableness’ of Mr Forsyth’s claim, the trial judge (and perhaps also the House of Lords) took into account the behaviour he displayed during the parties’ relationship.31 First, Forsyth only raised the issue of the pool’s depth—via an amendment to his defence to Ruxley’s claim 30 It thus seems likely that in most cases where recovery would be possible on a substitutionary basis (ie because doing the repairs is ‘reasonable’), the defendant will face considerable difficulty in proving that the claimant’s actions were not a reasonable way to mitigate the detrimental consequences of the breach. 31 In this context it worth noting Dr Rowan’s observation that ‘Another reason for the restricted availability of cost of cure damages is to avoid undue hardship being visited on the defaulting promisor. As with specific performance, the objective is to balance the competing interests of the promisor and the promisee. Awarding the cost of curing the breach where there is disproportion with the benefit to be obtained would have the potential to overburden the promisor’. See Rowan (n 12) 112.

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for the balance of the contract price—five years after entering his original defence. Secondly, Ruxley had earlier agreed to build the pool a foot deeper than was originally agreed to at no extra charge to Forsyth.32 Finally, Ruxley arranged for the pool originally constructed by its subcontractor, which had a defective bottom, to be demolished and rebuilt at no extra cost to Forsyth, but Forsyth subsequently objected to paying the agreed contract price because of the disturbance he alleged this work had caused him. By way of compensation for this disturbance, Ruxley agreed to reduce the price by £10,000 but Forsyth nevertheless refused to pay for either the pool or the building enclosing it. But let us put to one side Mr Forsyth’s extreme insistence upon enforcing his (allegedly) strict legal rights for the moment. If the original contract had made it clear that the pool’s depth was a matter of vital importance to Forsyth it seems far more likely that a (substitutionary) claim for the cost of rectification by Forsyth would have succeeded, despite the high cost of the work as compared to the value of the original contract to Ruxley. Of course, had the repair work already been done in such circumstances, this also may have made a compensatory claim for loss less likely to be denied on the grounds of mitigation. However, it must be remembered that substitutionary claims have the significant advantage of being able to succeed even if the innocent party is unable to prove that the work actually has, or will, be done, though this does appear to be a factor that courts are entitled to take into consideration in deciding upon the ‘reasonableness’ of the promisee’s insistence upon receiving the promised performance. In assessing the appropriateness of a substitutionary award for the cost of rectification, the relevant question is whether it is ‘reasonable’ in all the circumstances for the promisee to insist upon performance in accordance with the contract. As Chapter 5 noted, precisely what the term ‘reasonable’ means in this context is unclear. The principal reason that the House of Lords gave for finding Forsyth’s rectification claim ‘unreasonable’ in Ruxley was the disproportionality between the cost of ensuring conformity and the benefit Forsyth would obtain from doing the work. Their Lordships took the view that Forsyth would not obtain significant benefit from the repairs being done on the basis that he appeared to place no special value on the pool being built to the contractually specified depth. The ‘disproportionality’ analysis therefore favoured Ruxley given that the cost of fixing the defect was almost equal to the original contract price. The difference in opinion between the House of Lords and Court of Appeal, however, does suggest that the question of ‘reasonableness’ in Ruxley was finely balanced.33 Putting aside Staughton LJ’s view in the Court of Appeal that reconstructing the pool constituted ‘reasonable’ action in mitigation of Forsyth’s non-pecuniary loss, there was actually a significant amount of agreement amongst the appellate judges 32 The relevant details are summarised in the speech of Lord Lloyd and also by B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537, 538–39. 33 In this context, note the High Court of Australia’s view in Tabcorp that the facts in Ruxley were ‘quite exceptional’. See Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 [18].

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who gave opinions in the two Ruxley appeals. Similarly to Lord Lloyd in the House of Lords, both Dillon LJ and Mann LJ in the Court of Appeal recognised the distinction between the two different senses in which ‘reasonableness’ is used in this context. The latter stated that the case before them was ‘not concerned with any failure to mitigate but rather with disappointment at the unfulfilled bargain’.34 Significantly, however, Mann LJ went on to conclude that because the only way Forsyth’s interest in getting the pool he bargained for could be served was by building a new pool, an award of the cost of rectification was not ‘unreasonable’ here. Mann LJ also expressed agreement with Kerr LJ’s holding in Dean v Ainley that what a plaintiff intends to do, or does, with his ‘damages’ is immaterial.35 This is consistent with an implicit recognition of the fundamental distinction between substitutionary and compensatory awards. However, his Lordship also noted that there may ‘be instances where the cost of rectifying a failed project is not reasonable, as, for example, where no personal preference is served or where there is no preference and the value of the estate is undiminished’.36 This highlights that often considerations that make an act ‘unreasonable’ for ‘mitigation’ purposes will also make it ‘unreasonable’ for the claimant to insist upon obtaining an award of the cost of substitute performance too. Despite Mann LJ’s conclusion to the contrary, the House of Lords’ holding in Ruxley seems difficult to argue against on any interpretation of the ‘reasonableness’ restriction that gives weight to the concept of ‘disproportionality’ as their Lordships conceived it.37 However, the matter does seem to be one upon which reasonable minds may differ. In addition, it seems difficult not to conclude that in deciding whether it was ‘reasonable’ for Forsyth to recover the cost of constructing the pool he was promised, both Judge Diamond QC and the House of Lords were not to some extent influenced by the (arguably unreasonable) manner in which Forsyth conducted himself throughout the course of the parties’ dealings.38

2. The Award for ‘Loss of Amenity’ The second important question raised by Ruxley is whether it is possible to explain the £2,500 awarded to Forsyth by reference to the understanding of contractual 34

Ruxley Electronics & Construction Ltd v Forsyth [1994] 1 WLR 650 (CA), 660. ibid. 36 ibid. 37 A similar claim might be made in relation to the concept of ‘economic waste’ employed in some American cases. However, in Bellgrove v Eldridge (n 4) [6] the High Court of Australia suggested that a focus on wastefulness in this context may preclude recovery in too many cases and the concept also has received forceful academic criticism. See A Loke, ‘Cost of Cure or Difference in Market Value? Towards a Sound Basis for Quantifying Expectation Damages’, (1996) 10 Journal of Contract Law 189, 201. 38 Note that the analogous nature of claims for specific performance and substitutionary claims for the cost of rectification raises the question of whether discretionary factors of this kind may legitimately be taken into account in applying the ‘reasonableness’ constraint in the same way that such factors are relevant in deciding whether to grant the equitable remedy of specific performance. Given that substitutionary money claims are a common law remedy, any such proposal, however, seems open to the charge that it involves a ‘fusion fallacy’. For further discussion, see RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th edn (Butterworths LexisNexis, 2004) [2.100]. 35

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money awards this book proposes. One way to explain the award of this sum is simply that the trial judge’s decision to make it was not challenged on appeal. This would provide a basis for marginalising the significance of the award, but this is unsatisfying since both Lord Lloyd and Lord Mustill thought the award should not be disturbed and attempted to provide some explanation for Judge Diamond QC’s decision to provide it. On the basis of the account proposed here, there seem to be three possible explanations for the award. The first is that it was compensation for the consequential non-pecuniary loss Forsyth himself actually suffered as a result of breach. This, indeed, is how Lord Mustill appeared to view the award.39 The second is that it was an objectively assessed award of compensation for Forsyth’s lost enjoyment or disappointed expectations. This seems to reflect Lord Lloyd’s understanding of the award.40 A third possible explanation for the ‘loss of amenity’ award in Ruxley is that it was an alternative monetary substitute for performance in circumstances when awarding the cost of repairs was ‘unreasonable’. While neither Lord Mustill nor Lord Lloyd explained the award expressly in these terms, it is arguably possible to derive some support for this understanding in both of their Lordships’ speeches. Although Lord Mustill spoke in terms of a subjective loss of ‘consumer surplus’,41 his Lordship also appeared to recognise that the award was in some sense a substitute for performance.42 Lord Lloyd, on the other hand, specifically adverted to the possibility of awards that substitute for a deficiency in performance but seemed to leave open the question of whether English law should recognise such awards.43 The third explanation for the Ruxley ‘loss of amenity’ award is thus that it was a next-best substitute for performance in circumstances where it was ‘unreasonable’ to award the full cost of rectification and there was no difference in the property’s market value with and without the promised performance. This analysis of the award is controversial and it is accepted that it is not how any of their Lordships explained the sum in the case itself. Awards of the price of ‘release’ are of course always open to the charge of artificiality, but there is arguably an additional problem in using this measure here because it can be viewed as inconsistent with the Robinson v Harman principle. It is one thing to award this measure when the breach cannot be cured, but it might be argued that it is arguably quite another to do so when cure is possible but considered ‘unreasonable’. Support for this interpretation may be derived from Lord Hobhouse’s dissenting speech in Blake. There, after discussing Ruxley and referring to Lord Diplock’s

39

See Chapter 1, Section III.B. ibid and see Ruxley (n 6) 374. 41 ‘There are not two alternative measures of damage, at opposite poles, but only one; namely, the loss truly suffered by the promisee’, Ruxley (n 6) 360. 42 Lord Mustill appeared to view the £2,500 award as a third alternative when both the ‘cost of cure’ and ‘difference in value’ measure are inappropriate and accurate performance constitutes ‘a personal, subjective and non-monetary gain’, ibid. 43 See Chapter 1, Section III.B. 40

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famous dictum in Photo Production v Securicor, his Lordship stated that the objective of all ‘damages’ awards for breach of contract is to ‘substitute for performance’.44 It is also significant that Lord Hobhouse recognised that the conventional way of expressing the applicable legal principles in this part of the law can be misleading because of the ambiguous meaning of the word ‘compensation’. As his Lordship observed: The error is to describe compensation as relating to a loss as if there has to be some identified physical or monetary loss to the plaintiff. In the vast majority of cases this error does not matter because the plaintiff ’s claim can be so described without distortion. But in a minority of cases the error does matter and cases of the breach of negative promises typically illustrate this category.45

It was suggested in Chapter 5 that an award of the price of ‘release’ should be assessed by reference to what a reasonable person in the claimant’s position would have accepted at the date of breach to ‘release’ the defendant from further performance of the contract. Expressing the matter in this way suggests that inquiry is strictly objective. The formulation thus appears inconsistent with Lord Mustill’s explanation of the award in Ruxley in terms of Forsyth’s loss of consumer surplus, which is understood as a measure of subjective loss. In a standard commercial case this problem generally does not arise because the claimant’s sole, or at least predominant, motive for entering into the contract is to make money so that a ‘release’ award generally corresponds to the market value of the right as of the date of breach. But matters are not so simple when the claimant has entered into the contract for non-financial reasons. One way to get around the particular problem raised by the ‘loss of consumer surplus’ in such cases would be to attribute certain personal proclivities of the claimant to the hypothetical reasonable person in quantifying an award of the price of ‘release’, focusing on the fact that the test is what a reasonable person in the claimant’s position would have accepted.46 Obviously, the more one recognises the claimant’s particular idiosyncrasies in making this assessment, the more closely a purely objective approach and Lord Mustill’s more subjective approach converge. An alternative approach would give ‘position’ a more objective interpretation in this context, ensuring that ‘release’ awards always are assessed by reference to the market value of the right, but allowing further claim for any additional factual loss caused to the promisee by breach (and proven on the balance of probabilities). While Ruxley is arguably reconcilable with either approach, the latter view may be preferable within the account advanced in this book because it more strictly maintains the proposed distinction between substitution and compensation.

44

See Attorney-General v Blake [2001] 1 AC 268 (HL) 298. ibid. 46 This is essentially the approach advocated in D Harris, A Ogus and J Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) LQR 581, 585. 45

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III. Panatown: Substitutionary Awards in the Three-Party Context Claims for money following the breach of a contract made for the benefit of a nonparty to the contract provide a particularly stark example of the inadequacy of the conventional understanding of contractual money awards in English law because in such cases the party with the right to contractual performance is not the party who suffers factual loss on account of the breach. The aim of what follows is to explain how this area of the law works or, to the extent that it currently does not work, how, as a matter of principle, it should work via an explanation of the House of Lords’ decision in Panatown. The case in which the innocent contracting party’s insistence upon rectification is ‘reasonable’ is first examined. Following this, the situation in which this party’s insistence upon performance is not ‘reasonable’ is considered, in addition to certain other matters such as the quantification of an award in substitution for the right to timely performance.

A. Availability of an Award of the Cost of Substitute Performance Recall that in Panatown, both Lord Goff and Lord Millett held that it is a general principle of English law that a promisee suffers ‘loss’ where services are not performed for which that party has contracted. Moreover, because their Lordships were of the view that this principle is of general application, rather than an exception to the general rule, they held that it applies even where a third party beneficiary of a contract has its own direct remedy against the promisor. On this basis, Lord Goff and Lord Millett held that in response to McAlpine’s failure to perform as promised Panatown was entitled to a substantial award assessed by reference to the market price of the repairs. If Lord Browne-Wilkinson’s speech in Panatown is interpreted as supporting the approach taken by Lord Goff and Lord Millett,47 the decision also provides strong support for the existence of the distinction between substitutionary and compensatory money awards proposed here. It may be recalled that the performance supplied by McAlpine was both late in being completed and defective in its completion. In these circumstances Lord Goff and Lord Millett both held, applying Lord Griffiths’s ‘broad ground’ of recovery in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd,48 that Panatown was entitled to recover the cost of curing the defective performance simply because it had not received the performance that was promised. Importantly, both of their Lordships found that this entitlement was not affected by whether Panatown actually intended to ‘cure’ the breach.

47 This was the interpretation favoured by Stadlen J in Giedo Van der Garde BV v Force India Formula One Team Limited [2010] EWHC 2373 (QB) [484]. 48 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (HL).

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B. Availability of an Award in Substitution for the Right to Timely Performance In addition to what has just been said, both Lord Goff and Lord Millett held that Panatown was entitled to substantial ‘damages’ for McAlpine’s delay in completing the contract. As Lord Goff explained in a passage that is consistent with the central thesis of this book: The employer has, after all, contracted not only for the work to be performed by the contractor as specified, but also for it to be performed within a specified time, and has given consideration for the contractor’s promise to perform.49

On this basis, said his Lordship, the employer has ‘a contractual right to the performance by the contractor of his obligation as to time, as much as he has to his performance of the work to the contractual specification’.50 Lord Millett seemed to agree with this,51 so that both their Lordships would have awarded Panatown the cost of repairing the defective building work supplied by McAlpine and the market value of the right to timely performance. That ‘damages’ should be available in relation to both of these different kinds of failures in performance might appear to be relatively obvious and uncontroversial. However, Lord Goff ’s emphasis on the ‘consideration’ provided by the employer as the basis for that party’s entitlement to ‘damages’ is significant given that, on a true construction of the parties’ contract, a party’s entitlement to a substitutionary money award is usually conditional upon that party providing at least some essential aspect of the counter-performance (ie the ‘consideration’) that was promised. Lord Goff ’s implicit support for a substitutionary approach can be seen in the views he expressed as regards the approach to the quantification of ‘damages’ for delay. Although his Lordship acknowledged that the approach to quantifying ‘damages’ that is appropriate in the case of defective work ‘is not so easily applicable in the case of delay’,52 he rejected the view that the loss of the opportunity to take advantage of the completed building, either by disposing of it through a sale or long lease, or by putting it to profitable use … will inevitably fall on the owner of the building, and not on the employer who does not own it.53

According to Lord Goff, in the case of a commercial development such as in the present case, the appropriate basis for quantifying this lost opportunity in ‘damages’ is not by reference to what factual consequences in fact result from it.

49 50 51 52 53

Panatown (n 11) 554. ibid. ibid 591. ibid. ibid.

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Rather, this ‘loss’, which is better described as a deficiency in the promisor’s duty to provide timely performance, can be measured objectively in financial terms with reference to the anticipated profitability of the development; and this can provide an appropriate yardstick for measuring the estimated damages for delay in the performance for which the employer has contracted, even where the development was to be carried out on a site belonging to another person.54

The approach taken by Lord Goff and Lord Millett in Panatown is thus consistent with the new understanding of the law proposed here. However, one consequence of this approach that Panatown reveals is that in a three-party case (where the person benefitting from contractual performance is not a party to the contract) the promisee will not be able to claim for any further consequential losses suffered by the third party beneficiary as a result of the breach. Given that an award both for the right to accurate performance of the building work and for the right to have such performance completed on time was created by the relevant contract in Panatown, it may be thought unimportant that an award for any consequential losses suffered by Unex could not have been provided without the ‘duty of care’ deed. If a contracting party wants to ensure that it can recover for any loss suffered by a third party beneficiary, it might be said, this party can always make provision for this in the contract. This indeed was the construction of the contract in Panatown that Lord BrowneWilkinson adopted. As Professor Stevens has observed,55 whether his Lordship was right to refuse to allow a claim on the broad ground in Panatown depends upon the correct construction of the main contract. If what was bargained for was not just a building but in fact ‘a building or a money claim in substitution for the building’, Lord Browne-Wilkinson’s decision to deny Panatown substantial ‘damages’ at common law on these facts would be correct because UIPL’s right to claim under the deed would exclude the ability to recover on any other basis. However, according to Stevens, the more plausible construction of the parties’ contract is that the duty of care deed was included for the benefit of subsequent purchasers of the premises rather than to give UIPL a claim for ‘damages’ in its own right.56 On this interpretation, the claim for the cost of performance in Panatown ought to have succeeded. In Force India, Stadlen J took the view that it did, despite the ambiguity that exists in the speech of Lord Browne-Wilkinson.

C. Two Further Matters One question that might be raised in response to the solution just outlined to the three-party problem that arose in Panatown is whether it is also possible for 54 ibid. Arguably, such an award alternatively can be seen as a reasonable approximation of the ‘price of release’ from further performance. 55 R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing, 2009) 171, 189. 56 This analysis is supported by I Wallace, ‘Third Party Damage: No Legal Black Hole?’ (1999) 115 LQR 394; see also Panatown (n 11) 593 (Lord Millett).

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a promisee to recover for consequential loss suffered by the third party. On this issue, this book endorses the solution proposed by Professor Coote, which is to allow a claim by the promisee to operate at two levels, under the ordinary common law rules in respect of his performance interest, and under Dunlop v Lambert for losses actually suffered by the third party, with consequent accountability for the latter proportion of the damages recovered.57

A second question raised by the proposed solution is what happens when an award of the cost of substitute performance is held to be ‘unreasonable’ in the Ruxley sense. The problem arises, in other words, as to what kind of award, if any, an innocent party is entitled to when it is found that in the circumstances of the particular case it is ‘unreasonable’ for this party to insist upon receiving the financial means necessary to obtain actual performance in accordance with the original contractual specifications. At present, the answer appears to be that such a party is not entitled to any kind of award at all. However, Chapter 5 noted the possibility of awarding a party in this position (even in the standard two-party case) a reasonable approximation of the ‘price of release’ from further performance assessed at the date of breach on the basis that this constitutes the ‘next-best’ substitute for performance available in the circumstances. Significantly, adopting this solution may be consistent with most of the two-party cases in this area because the ‘difference in market value’ measure that generally is used when an award of the ‘cost of cure’ is found to be ‘unreasonable’ usually can be characterised alternatively as a reasonable approximation of the price of ‘release’, at least whenever there is an available market for the goods or services promised under the contract. The principal advantage of this approach, however, is that it allows the promisee to recover the ‘difference in value’ between the performance promised and that received even though he cannot prove that the breach has diminished his financial position to this extent. Despite this, it is clear that there are some authorities that are inconsistent with such an analysis and also that the adoption of this approach would involve some development of the law beyond its present state. It is, however, strongly arguable that the reasoning favoured by Lord Goff (and Lord Millett) in Panatown with respect to the quantification of ‘damages’ for delay provides support for the adoption of such an approach. But as noted earlier, however, there is one additional hurdle to overcome in making the case for this approach, which is that generally awards of the reasonable ‘price of release’ have been made only when there is no other basis for quantifying a monetary substitute for performance (ie when the breach is irreversible), as opposed to simply when such an award is found to be ‘unreasonable’ in the circumstances. On this basis, some may argue that extending this alternative measure to such cases, particularly in light of the fact that it is admittedly a quite imperfect substitute, is inappropriate. 57

B Coote, ‘The Performance Interest, Panatown and the Problem of Loss’ (2001) 117 LQR 81, 94.

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IV. Contractual Awards in the Sale of Goods Context Some of the difficult English case law involving contracts for the sale of goods was outlined in Chapter 2. There a significant number of cases were identified where a buyer of goods was awarded ‘damages’ that exceeded the financial loss that this party could causally attribute to the seller’s contractual breach. This section re-examines some of these decisions, demonstrating why many of them can be explained by reference to the proposed distinction between substitutionary and compensatory money awards. Prior to this re-examination, however, some cases not yet considered involving a breach by the buyer are considered and it is shown why these cases also are consistent with the new account of the law here proposed.

A. Awards for Breach by the Buyer The sale of goods cases examined in Chapter 2 all involved breaches of contract by the seller. This is admittedly where most of the controversy in regard to the assessment of ‘damages’ for contractual breach arises in this context. However, cases involving a breach by the buyer are not entirely free from contention either. In particular, there is a tension between, on the one hand, decisions like WL Thompson Ltd v Robinson (Gunmakers) Ltd,58 where the seller was held entitled to recover a substantial award following the buyer’s default and, on the other hand, decisions like Lazenby v Wright,59 where the seller recovered only ‘nominal damages’ following the buyer’s failure to pay the stipulated purchase price. It might be wondered whether the argument advanced so far assists in resolving the apparent tension between these conflicting decisions. The answer is that it does not other than to make clear the nevertheless significant point that in both cases the nature of the claim brought by the seller was compensatory rather than substitutionary in the sense in which those terms are used here. This is because in each case the seller did not actually deliver to the buyer the promised car, meaning that he did not fulfil all conditions (precedent and subsequent) to which his entitlement to the buyer’s performance was subject and therefore was not entitled to a substitutionary award. Because the claims in both cases were compensatory rather than substitutionary, the seller’s recovery in each case depended upon what financial loss he could causally attribute to the buyer’s breach. In the WL Thompson case, the subject car was new and the seller’s supply of cars exceeded demand, which meant that the buyer’s failure to complete the contract did in fact cause the seller to be factually worse off than he would have been had the buyer performed his side of

58 59

WL Thompson Ltd v Robinson (Gunmakers) Ltd [1955] Ch 177. Lazenby v Wright [1976] 1 WLR 459 (CA).

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the bargain. In Lazenby, by contrast, the subject car was second-hand, held to be ‘unique’ and, between breach and trial, the seller sold the car to a third party for a higher price, which meant that the seller could not attribute any lost profits to the buyer’s failure to complete.60

B. Awards for Breach by the Seller This section reconsiders some of the controversial sale of goods authorities that were examined in Chapter 2 involving breach by the seller, explaining why most of these decisions can be explained by reference to the distinction this book proposes between substitutionary and compensatory money awards. The discussion commences with awards made in the context of non-delivery. Then some important decisions concerned with the delivery of defective goods are re-examined, including the House of Lords’ landmark decision in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd. Finally, the discussion turns to cases of late delivery, which involves a reconsideration of the Privy Council’s important decision in Wertheim v Chicoutimi Pulp Co.61

1. Availability of an Award for Non-Delivery Recall that where a seller fails to deliver goods for which there is an available market the buyer’s measure of ‘damages’ is ‘prima facie to be ascertained by the difference between the contract price and the market or current price of the goods’ at the date of breach.62 However, in Williams Bros v ET Agius Ltd, the House of Lords held that this so-called ‘market rule’ for ‘damages’ assessment will not be displaced by demonstrating that, because of the existence of a sub-sale arrangement, such an award will put the buyer into a better position than it would have been in had the seller’s breach not occurred.63 The approach taken in Williams Bros also underpins the similar results reached in the carriage context in Ströms Bruks Aktie Bolag v Hutchinson,64 and Rodocanachi Sons & Co v Milburn Bros.65 60 All this more or less accords with the conventional analysis of these cases. See, for example, the discussion in E McKendrick, ‘Breach of Contract and the Meaning of Loss’ (1999) 52(1) Current Legal Problems 37, 63. 61 Wertheim v Chicoutimi Pulp Co [1911] AC 301 (PC). 62 Sale of Goods Act 1979, s 51(3). 63 Williams Bros v Agius [1914] AC 510 (HL). For discussion see Chapter 2, Section III.C.1. 64 Ströms Bruks Aktie Bolag v Hutchinson [1905] AC 515 (HL), see Chapter 2, Section III.E. In assessing the ‘damages’ to which the innocent charterers were entitled there, the House of Lords disregarded the carrier’s argument that the charterers would have incurred the financial loss that was suffered even if the carriers had complied with their contractual obligations. 65 Rodocanachi Sons & Co v Milburn Bros (1887) 18 QBD 67 (CA). The Court there rejected the defendant shipowner’s plea that the cheaper sub-sale price at which the subject goods were to be sold upon arrival be taken into account in assessing the claimant’s ‘damages’ for the defendant’s breach, holding that the market value of the cargo was recoverable ‘independently of any circumstances peculiar to the claimant’ since the sub-sale contract was viewed as something ‘accidental as between the plaintiff and defendant’.

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Chapter 2 noted that a suggested justification for the ‘market rule’ lies in the supposed benefits that the rule provides, including commercial certainty and simplicity of application.66 Professor Stevens has refuted this suggestion on the basis that while sub-sales are not taken into account when they reduce a buyer’s loss, they may be taken into account when they increase it, provided the loss they cause is not ‘too remote’.67 This claim is supported by Re (R & H) Hall Ltd and Pim (WH) (Jnr) and Co’s Arbitration.68 The difficult facts in that decision were also outlined in Chapter 2.69 The case essentially involved a complicated subsale arrangement between various parties, where the seller’s failure to deliver the relevant goods increased the buyer’s loss rather than decreasing it as occurred in Williams Bros. Despite this, the additional loss suffered by the buyer was found to be recoverable on the basis that the events triggering it were within the contemplation of the parties at the time of contract formation and therefore not ‘too remote’.

2. Availability of an Award for Defective Goods This sub-section first briefly revisits the tension between the Court of Appeal’s twin decisions in Slater v Hoyle & Smith Ltd,70 and Bence Graphics International Ltd v Fasson UK Ltd,71 reiterating why the decision in Slater, which accords with the new account this book proposes, is preferable. After this, the House of Lords’ controversial decision in British Westinghouse Ltd is re-examined.72 It is explained both why the decision’s importance tends to be exaggerated and precisely what legal significance should be attributed to the case today. a. The Significance of Slater and Bence Chapter 2 outlined the tension that exists between the Court of Appeal’s conflicting decisions in Slater v Hoyle, and Bence Graphics. It was explained that while Bence, and not Slater, can be reconciled with the orthodox understanding

66 M Bridge, ‘The Market Rule of Damages Assessment’ in D Cunnington and R Saidov (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 431. Other ‘policy’ advantages of the market rule there identified by Bridge include that it avoids multi-party complexity, treats buyers and sellers even-handedly and that it encourages bilateral settlement. 67 Stevens (n 55) 178. 68 Re (R & H) Hall Ltd and Pim (WH) (Jnr) and Co’s Arbitration (1928) 33 Com Cas 324 (HL). 69 See Chapter 2, Section III.C.1. 70 Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA). 71 Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA). 72 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL). For earlier discussion and an account of the facts, see Chapter 2, Section III.E.

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of contractual money awards, the Court’s analysis in Slater is superior for at least two main reasons. First, the Bence majority treated the case as turning upon whether the loss claimed was ‘too remote’ a consequence of the breach. This was a mistake because questions of ‘remoteness’ do not arise in relation to claims for the difference in market value between goods promised and goods received.73 Secondly, in Bence the majority failed to provide any convincing basis for distinguishing the case from the earlier binding authority of Slater.74 Additional support for the view that Bence should not be followed can be found in the subsequent judicial disapproval of its reasoning in a case concerned with a contract for the sale of note-issued distressed debt.75 b. Understanding British Westinghouse Like Bence, the House of Lords’ decision in British Westinghouse might appear to support the law’s orthodox understanding.76 Again, the facts of the case were outlined earlier in the book.77 It will be recalled that in response to a claim for the unpaid contractual balance by British Westinghouse (BW), London Underground (LU) counterclaimed for ‘damages’, seeking to recover the costs it incurred over the period in which it continued to use BW’s sub-standard machines before replacing them (approximately £43,000 on coal in addition to some further expenses) and for the cost of the Parsons machines (£78,186). While BW did not dispute LU’s right to recover the former sum, it did challenge LU’s entitlement to the latter amount. In the earlier discussion of British Westinghouse, it was explained that the case tends to be regarded as the leading authority for the ‘avoided loss rule’ of mitigation. However, there it also was observed that the subsequent case law in this area is notoriously confusing because of the difficulty involved in articulating precisely when a post-breach benefit that accrues to the victim arises ‘out of the consequences of the breach’. In addition, there is a further difficulty with the orthodox understanding of British Westinghouse that generally is not appreciated. Given the rate at which steam turbine efficiency was advancing in the early 1900s, a party in LU’s position could have expected to need to replace even non-defective machines approximately every five years or so.78 For this reason, it simply could not be said that it was reasonable for LU to continue to use the Westinghouse

73 As Sir Guenter Treitel observed at the time of the decision: see GH Treitel, ‘Damages for Breach of Warranty of Quality’ (1997) 113 LQR 188. To similar effect, see Lord Macnaghten’s comments in Ströms Bruks Aktie Bolag (n 64) 526. 74 As Professor Stevens has observed: see Stevens (n 55) 180. 75 See Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm). 76 British Westinghouse (n 72). 77 See Chapter 2, Section III.E. 78 A Dyson, ‘British Westinghouse Revisited’ [2012] Lloyd’s Maritime and Commercial Law Quarterly 412, 413 and 422.

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turbines until they wore out, even if those machines had complied with the contractual specifications.79 On this basis, Dyson has argued convincingly that there was in fact no need to invoke the avoided loss rule (as conventionally understood) … to justify the result … [in British Westinghouse since] contrary to the finding of the arbitrator … [LU in fact] did no more than it was reasonably expected to do by replacing the Westinghouse turbines.80

As Dyson explains, this means that although British Westinghouse ‘is not a good illustration of the avoided loss rule’ of mitigation, it is ‘a good—albeit complicated—illustration of the reasonable expenses rule’;81 also noting that powerful support for this understanding of the decision can be found in Lord Hoffmann’s speech in Dimond v Lovell.82 An alternative explanation of British Westinghouse, advanced by Professor Stevens, focuses on the (supposed) fact that the buyer there ‘did not claim the difference between the actual value of the goods at the time of delivery and the value they would have had if they had complied with the seller’s contractual obligations’.83 But strictly speaking this is incorrect because, as Dyson too has shown, LU did make a ‘difference in value’ claim in the House of Lords, albeit not in the original pleadings.84 The principled reason why this aspect of LU’s claim was denied must be that a promisee can recover either the difference in value between the goods promised and those supplied or the cost of curing the breach, irrespective of whether the former or the latter sum is claimed on a substitutionary or compensatory basis. To award a promisee both the ‘difference in value’ between the goods promised and the goods provided and the costs incurred in making good the defect in performance would constitute double recovery, as Stevens himself explains,

79 As Dyson notes, ibid at 423, LU in fact decided to replace the Parsons turbines as early as 1913 (five years after they were purchased), even though these machines ‘had met or even slightly improved upon their guaranteed efficiency’. 80 See ibid. That is, the most reasonable course of action for LU to pursue in 1908 was to replace the defective Westinghouse machines with the significantly more efficient Parsons machines, meaning that, in accordance with the reasonable expenses rule, the costs incurred in doing this were recoverable. 81 There is no dispute as to the existence of this rule. As Dyson observes, at 423, ‘it is trite law that expenses reasonably incurred in mitigation [of loss] are recoverable’, but these expenses must be offset against any benefits that accrue from taking such action. For further support, see H McGregor, McGregor on Damages, 18th edn (Sweet & Maxwell, 2010) [7.091]–[7.096]. 82 Dimond v Lovell [2002] 1 AC 384 (HL) 401, where the claim for damages arose from negligence rather than a breach of contract. 83 See Stevens (n 55) 181. See also M Bridge (ed), Benjamin’s Sale of Goods, 8th edn (Sweet & Maxwell, 2010) [17-056]); Clark v Macourt (2013) 88 ALJR 190, [2013] HCA 56 [143] (Keane J). 84 See Dyson (n 78) 424, where the author notes that counsel is reported as arguing: ‘the respondent’s position is that being defective the machines are worth so much less than the contract, and this is a proper consideration for the arbitrator’. See British Westinghouse (n 72) 685–86.

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observing that ‘Recovering the former means that the latter loss is, to that extent, not incurred’.85 All this means that the effect of British Westinghouse can be summarised as follows. In 1908, LU had two claims available to it. One involved claiming, on a substitutionary basis, the minimum cost of replacing BW’s defective turbines at or within a reasonable time of the breach. As explained already, whenever there is an available market for the subject goods, this is the difference in market value between the goods promised and those provided at this time. Pursuing this option would have meant that LU could not recover any loss directly incurred in curing the breach because, as just explained, a promisee cannot recover both the difference in value between what was promised and what was received and the expense in fact incurred in making good this specific deficiency. However, this would not prevent this party from recovering any further consequential losses in fact incurred as a result of the breach, provided such losses were not ‘too remote’ or that the recovery of these losses was not precluded by either the ‘avoidable loss’ or ‘reasonable expenses’ rule of mitigation.86 LU’s second option, and ultimately the one it pursued, was to claim, on a compensatory basis, the costs it incurred in neutralising (ie making good) the detrimental consequences caused by the defective machines up until the time it became ‘unreasonable’ to keep incurring these costs because the only prudent course of action available to it (in order to minimise the loss resulting from BW’s breach) was to purchase new machines.87 Prima facie, the costs incurred in purchasing the new machines also were recoverable on a compensatory basis via the reasonable expenses rule of mitigation. However, as Dyson explains, these costs needed to be offset against any financial benefits that accrued to LU by taking this action, 85 See Stevens (n 55) 181. That the costs of curing the breach here were in fact incurred might suggest that LU could have recovered these costs on either a substitutionary or a compensatory basis, with the costs incurred merely providing evidence for an appropriate substitutionary award. However, a claim for additional expenses incurred in neutralising the direct effects of breach is better viewed as compensatory. This is essentially because a substitutionary claim for the ‘cost of cure’ is normally one for the cost of repairing the defect in order to ensure conformity with the contractual specifications rather than one for the costs associated with making good the direct consequences of the defect. Expenses incurred in making good the direct (or indirect) consequences of defective performance are usually claimed as compensation for loss attributable to the breach provided these expenses are not ‘too remote’ or precluded by the relevant rules of mitigation. 86 In this context, direct loss means loss within the first limb of Hadley v Baxendale (1854) 9 Exch 341, 345 (ie loss arising in the usual course of events), while the term ‘consequential loss’ potentially includes everything else. 87 As explained in n 85, an alternative possible explanation of LU’s claim for the expenses incurred in neutralising the effects of BW’s breach is that it was a substitutionary claim for the ‘cost of curing’ this breach. Although this characterisation would be consistent with the fact that the benefits LU obtained from the new Parsons machines were not set off against these expenses, it is unnecessary to characterise the claim this way in order to explain this result because this benefit was clearly ‘collateral’ to the original transaction on any understanding of that term. In addition, characterising LU’s claim for the expenses it incurred in neutralising the breach as substitutionary faces the difficulty, also explained in n 85, that the normal way of quantifying a substitutionary claim for the ‘cost of cure’ is the reasonable cost of repairing the breach rather than the reasonable cost of neutralising it, making this characterisation seem somewhat artificial. For this reason, it is submitted that Dyson’s explanation of the decision, which notably accords with Lord Hoffmann’s account in Dimond v Lovell, is to be preferred.

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because calculating the expenses sustained by the innocent party in taking reasonable action to mitigate loss ‘involves an assessment of the net expenses [incurred], taking into account the losses and gains that actually accrued to the claimant’.88

3. Availability of an Award for Late Delivery Recall that in Wertheim v Chicoutimi Pulp Co the defendant seller agreed to provide the claimant buyer with 3,000 tons of wood pulp by a certain date. Before this contract was formed, the buyer contracted with a third party to sell 2,000 tons of wood pulp. After this contract was made, the buyer also contracted to sell the extra 1,000 tons. Delivery by the seller was delayed significantly and by the time the goods did arrive there had been an extraordinary drop in the market price. The buyer was nevertheless able to perform its sub-sale contracts by acquiring replacement wood pulp from elsewhere. The normal measure of recovery in a case such as this (ie delayed delivery against the background of a sub-sale arrangement) is the difference between the market price of the goods at the time performance was due and the market price of the goods upon delivery.89 The buyer sought to recover this sum, but the Privy Council refused to award it on the basis that the buyer had avoided most of this prima facie ‘loss’ through the fulfilment of her sub-sale contracts. This holding is consistent with the accepted orthodoxy because awarding the normal measure would have put the buyer in a better factual position than had the contract been performed. But the decision instead to award ‘damages’ by reference to the difference between the market price at the time performance was due and the price under the sub-sales is not consistent with the orthodox approach since it had the effect of putting the buyer into a superior factual position than she would have been in had the breach not occurred. The award in Wertheim is therefore difficult to explain on either the conventional understanding of contractual awards or by reference to the new account of the law that is advanced here. Perhaps the best available, albeit imperfect, explanation for the award is that it constitutes an early example of an attempt to provide an alternative monetary substitute for performance in circumstances when substitute performance of the contract was no longer possible, though it is acknowledged that this was not the explanation actually provided by the Privy Council. English law has developed significantly since then so that it is now significantly more willing to make substitutionary awards in these circumstances, as Chapter 5 explained.90 As also noted earlier, there is a major prima facie difficulty with respect to awarding an alternative monetary substitute for performance when substitute performance is no longer possible, which is that there is no obviously appropriate basis 88

Dyson (n 78) 423. See D McLauchlan, ‘Expectation Damages: Avoided Loss, Offsetting Gains and Subsequent Events’ in Cunnington and Saidov (eds) (n 66) 349, 363 and E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010) [20-046]. 90 For example, Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798 (Ch); Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2010] BLR 73 and Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [2010] Bus LR D141. 89

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for quantifying such awards. Chapter 5 argued that the preferable solution to this problem is to award the innocent party an approximation of the sum that a reasonable person in that party’s position would have accepted to ‘release’ the breaching party from further performance at the date of breach. Because in Wertheim the relevant breach was with respect to time, it is at least arguable the award made there can be explained as an approximation of the amount a reasonable person in the buyer’s position would have accepted to waive her right to timely performance. While it is recognised that there is significant artificiality in this analysis, the central point is that the award may be viewed as an (admittedly imperfect and not well-explained) attempt to uphold the substitutionary viewpoint that underpins both the central thesis of this book and the various alternative substitutionary analyses that other authors have proposed.91

V. Conclusion This chapter sought to demonstrate the explanatory power of the new account by showing how it can assist in explaining a number of important authorities that are difficult to reconcile with the law’s orthodox interpretation. The chapter commenced with a close re-examination of the House of Lords’ landmark decisions in Ruxley Electronics & Construction Ltd v Forsyth and Alfred McAlpine Construction Ltd v Panatown Ltd. Although substantial clarificatory work remains to be done before it can be said that English law unequivocally subscribes to the new account proposed here, much of what was said in these two cases provides considerable support for this alternative understanding of the law and it was explained how certain unanswered questions raised by these cases might be answered in a way that is consistent with the new approach. Following this, certain problematic sale of goods cases were considered. After first briefly explaining why the approach taken in cases involving a breach by the buyer is generally consistent with the new account proposed here, the discussion went on to re-examine some leading decisions involving breach by the seller, which Chapter 2 discussed in considerable detail. In addition to the Court of Appeal’s twin decisions in Slater and Bence, these decisions included Wertheim v Chicoutimi Pulp Co and the House of Lords’ important decisions in Williams Bros v ET Agius Ltd, Ströms Bruks Aktie Bolag v Hutchinson and British Westinghouse. With the account’s explanatory power (as well as its limits) more clearly identified, the next chapter turns to consider some important decisions that may appear to threaten the correctness of the new understanding, explaining why this is not in fact so.

91 See, for example, Stevens (n 55); B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537; S Smith, ‘Substitutionary Damages’ in C Rickett (ed), Justifying Private Law Remedies (Hart Publishing, 2008) 93; C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 41.

8 Defusing Some Potential Doctrinal Objections I. Introduction Having shown how the new account improves our understanding of certain problematic, but important, English decisions, the present chapter moves on to consider some key authorities that might seem to be inconsistent with this new account. While all the decisions discussed in Chapter 7 also were considered earlier in the book, some of the cases examined in this chapter are considered for the first time, creating the need for some additional groundwork. Section II focuses on the scope of the principle that the House of Lords enunciated in The Golden Victory.1 Section II.A examines the decision itself, explaining why the approaches taken by both the majority and the minority there are consistent with the new account. Following this, Sections II.B and II.C consider the scope of the principle there established via a close examination of two more recent first instance decisions. Section III of the chapter considers a quite distinct, but equally important, area of the law that also might seem to contradict the new account: the relationship between specific performance, awards of equitable ‘damages’ in lieu of such relief and the avoidable loss rule of mitigation. Section III.A focuses on the Canadian Supreme Court’s recent decision in Southcott Estates Inc v Toronto Catholic District School Board,2 showing why its result does not undermine the status of the new account, though it is suggested that the majority’s reasoning should not be followed in future cases. The focus of Section III.B is on the quantification of a ‘damages’ award in lieu of specific performance or other coercive relief and, in particular, on explaining why the House of Lords’ landmark decision in Johnson v Agnew is not inconsistent with the new account.3

1 Golden Strait Corporation v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353. 2 Southcott Estates Inc v Toronto Catholic District School Board (2012) SCC 51. 3 Johnson v Agnew [1980] AC 367 (HL).

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II. The Significance, Application and Scope of the Golden Victory Principle The aim of this section of the chapter is to reconcile the controversial principle enunciated in The Golden Victory (and some of its important subsequent applications at first instance) with the new account of the law advanced here. Section II.A examines the content and merit of the two quite different approaches that were taken when the case reached the House of Lords. While it is recognised that there is much to be said for the minority’s analysis, it is shown why both approaches can be reconciled with the new account.4 Following this, two subsequent, illuminating applications of the Golden Victory principle are examined. Both of these decisions are defended on the basis that they fall within the scope of the principle that the House of Lords established in addition to the fact that they are both compatible with the new understanding of the law this book proposes.

A. The Golden Victory: Prospective Loss Reduced by an Extraneous Event The issue that arose in The Golden Victory was the appropriate quantification of ‘damages’ following the shipowners’ acceptance of a repudiation of a time charter midway through its duration. The majority’s rigid adherence there to what their Lordships described as the ‘compensatory principle’ might appear to pose a serious challenge to the central argument this book has advanced. However, after outlining the facts as well as the approaches taken by both the majority and the minority in the House of Lords, it will be shown why this is not in fact the case.

1. The Facts and Decisions Below The charterers’ repudiation in The Golden Victory involved returning the vessel to the owners on 14 September 2001 when there were still almost four years left to run on the charter. Three days later the owners accepted the repudiation and sought ‘damages’ based on the difference between the contract and the market rates of hire for the remaining four-year period of the charter. Although the owners did not claim to have entered into a substitute contract at the market rate, since an available market was found to have existed at the date of breach, this was the appropriate ‘prima facie’ measure of damages, in accordance with Goff J’s earlier decision in The Elena D’Amico.5

4 This is essentially because the locus of the disagreement between the majority and the minority was not about whether to make a substitutionary award or a compensatory award as those terms are understood here but in regard to how and when to measure the shipowner’s loss. 5 Koch Marine Inc v D’Amica Societa Di Navigazione ARL(The Elena D’Amico) [1980] 1 Lloyd’s Rep 75.

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Significantly, the contract provided that either party could cancel the charter if war broke out between any two or more of a number of countries, including the United States, the United Kingdom and the Kingdom of Iraq. On 20 March 2003 the Iraq War commenced. If the contract had not been terminated already, the commencement of this war, 14 months after the repudiation was accepted, would have enabled either party to terminate the contract. It was also accepted as evidence that the charterers would indeed have cancelled under the war clause had the charter remained in force. For this reason the defendant charterers sought to reduce the owners’ ‘damages’ to the difference between the contract and market rates of hire for the 14-month period rather than the full period remaining under the charter. At first instance, Langley J decided the dispute in favour of the charterers,6 upholding the finding of the arbitrator. The Court of Appeal affirmed Langley J’s decision.7 In the House of Lords, a bare majority also dismissed the owners’ appeal. This decision does not undermine the conventional understanding of contractual awards since the amount awarded to the owners arguably reflected the actual loss they suffered. However, there is substantial academic support for the approach taken by the minority, which did not restrict the owners’ damages to the actual loss suffered. The case therefore merits closer scrutiny.

2. The Decision in the House of Lords The difference of opinion between the majority and the minority in The Golden Victory did not concern whether the ‘compensatory principle’ was applicable to the case at hand but precisely how it should be applied in the particular circumstances. The contrasting approaches that were taken in the House of Lords are now explained. a. The Majority’s Approach The House of Lords’ majority comprised Lord Scott, Lord Brown and Lord Carswell, who explained the objective in awarding ‘damages’ for breach of contract in terms of providing compensation for financial loss, with such loss being measured against the baseline of the position the injured party would have been in had the contract been performed. According to their Lordships, the paramount importance of the ‘compensatory principle’ had two significant consequences. First, it meant that, assuming the charter had remained on foot, the possibility that it nevertheless might have been terminated early on the occurrence of a particular event must be taken into account in assessing the ‘damages’ to be awarded. This

6 Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2005] EWHC 161 (Comm). 7 Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2005] EWCA Civ 1190 (CA).

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was true regardless of how likely or unlikely that possibility was, and the appropriate mechanism for doing this was by way of a discount for the chance of early termination.8 This meant that even though the chance of the Iraq War commencing might have been very small at the date on which the contract was terminated, that chance must be taken into account in quantifying the shipowners’ award. The second important consequence of the ‘compensatory principle’, according to the majority, was that when a supervening event actually had occurred prior to the assessment of an award, estimates and conjecture in relation to the chance of the supervening event occurring at the date of termination must give way to the actual facts. This was said by their Lordships to be an application of what they termed ‘the Bwllfa principle’.9 Since war had broken out in March 2003 and it was assumed that the charterers would have cancelled the charter at this time, this meant the owners’ entitlement to ‘damages’ was limited to any loss suffered only up until the date of the outbreak of war. In the words of Lord Scott, this ensured the owners were not put into a better position than they would have been in had the contract been performed.10 b. The Minority’s Reasoning The minority in The Golden Victory, consisting of Lord Bingham and Lord Walker, did not reduce damages because of the outbreak of war. Their Lordships calculated the owners’ award by reference to the entire four-year period that remained on the charter at the date the contract was terminated. Lord Bingham gave the leading minority speech. Although affirming the centrality of the compensatory principle,11 his Lordship considered that this principle did not resolve the critical issue in this case, which was whether an injured party’s ‘damages’ should be assessed at or soon after the date of an accepted repudiation or at a later date, taking into account the occurrence of events occurring subsequent to breach. Lord Bingham agreed with Lord Scott and the rest of the majority that the compensatory principle dictated that an injured party was to be compensated only for the value of what he actually lost. But his Lordship took a different view from that of the majority as to what exactly was ‘lost’ here. According to Lord Bingham, the claimant ‘lost’ the value of its rights assessed at the date the repudiation was accepted, or shortly thereafter. If the contract was terminable on a future event that was ‘likely but not certain’, that possibility should certainly be taken into account in quantifying that ‘lost’ value but whether this event did in fact occur was wholly irrelevant.12 In contrast to the majority, Lord Bingham thus held that the Bwllfa principle was inapplicable on the basis that the present case was relevantly 8

The Golden Victory (n 1) [66] (Lord Carswell). This principle was so named because it was said to emanate from, or at least was applied in, the House of Lords’ earlier decision Bwllfa and Methyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426. 10 The Golden Victory (n 1) [30]. 11 ibid [9]. 12 ibid [22]. 9

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different.13 In particular, none of the cases where the Bwllfa principle was applied ‘involved repudiation of a commercial contract where there was an available market’.14 Lord Bingham also noted that if the possibility of the future event is negligible, this negligible chance should not affect the value of the rights lost. In reaching a final decision in favour of the owners, Lord Bingham also reasoned that any concerns regarding the owners’ alleged over-compensation must give way in the face of the combined force of a variety of other considerations that pointed strongly in favour of assessing ‘damages’ at the date of termination, or shortly thereafter. The first of these considerations was that ‘contracts are made to be performed, not broken. It may prove disadvantageous to break a contract’.15 The second was that to find in favour of the charterers would reward their delay in fulfilling their obligation to pay, since if this obligation had been promptly honoured the transaction would have been settled well before the Second Gulf War became a reality. The third was essentially a reiteration of the reasoning outlined in the previous paragraph, with his Lordship stating that the owners were … entitled to be compensated for the value of what they had lost on the date it was lost, and it could not be doubted that what the owners lost on that date was a charterparty with slightly less than four years to run … By describing the prospect of war in December 2001 as ‘merely a possibility’ … the arbitrator can only have meant that it was seen as an outside chance, not affecting the marketable value of the charter at that time.16

The fourth consideration was the increased ‘certainty and predictability’ that results from assessing awards at the date of breach. The majority’s response to this particular argument was that such ‘policy’ considerations must give way to the ‘principle’ that the purpose of contractual awards is to compensate for actual loss and no more.17 Finally, Lord Bingham noted that ‘the idea that a party’s accrued rights can be changed by subsequent events is objectionable in principle’, and that damages for breach of contract are normally assessed at the date of breach meaning that such an approach here contributes to the overall ‘coherence’ of legal principle.18

3. Subsequent Controversy The Golden Victory has sparked extensive academic debate. While much of the subsequent commentary supports the outcome reached by the House of Lords,19 13

ibid [12]. ibid. 15 ibid [22]. 16 ibid. 17 ibid [32] (Lord Scott) 18 ibid [23] (Lord Bingham) 19 For example, D Capper, ‘A “Golden Victory” for Freedom of Contract’ (2008) 24 Journal of Contract Law 176; Q Liu, ‘The Date for Assessing Damages for Loss of Prospective Performance Under a Contract’ [2007] Lloyd’s Maritime and Commercial Law Quarterly 273; J Carter and E Peden, ‘Damages Following Termination for Repudiation: Taking Account of Later Events’ (2008) 24 Journal of Contract Law 145. 14

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the majority approach has received substantial criticism as well.20 Either way, Lord Mustill seems correct to observe that the decision has in some way ‘touched a nerve’.21 In the case itself, as in much of the commentary subsequent to it, the issue was presented largely as a battle between the desirability of a commercially certain rule quantifying ‘damages’ at a fixed date and the ‘fairness’ of limiting a breaching party’s liability to no more than the loss actually caused by the breach. However, according to Professor Reynolds: If it is necessary to contrast commercial certainty with actual loss … it is easy to see that the second appears more glamorous … But the law of damages has various purposes in vindicating an obligation. In particular, it is not always concerned to compensate for actual consequential loss, and it need not be inoperative if there is none.22

This statement recognises the possibility of a broader theoretical basis for the outcome reached by the minority. According to Reynolds, this should be supported not for the various ‘policy’ reasons identified by Lord Bingham but because ‘the law marks, and should mark, the deficiency of the performance received’.23 This book also advances an understanding of contractual awards that emphasises the important vindicatory role that contractual money awards possess, but argues that the primary aim of such awards is to give the innocent party the closest equivalent to actual performance possible in the circumstances rather than to simply ‘mark’ a deficiency in performance.24 Significantly, however, the account advanced here is distinct from that proposed by Reynolds in being reconcilable with the conclusion reached by the majority in The Golden Victory. An attempt might be made to defend the majority’s ruling on the basis that the case was one of anticipatory breach.25 However, Reynolds’s characterisation of the case as an instance of actual breach is more convincing.26 The best explanation of the decision, it now will be shown, is simply that no substantial substitutionary claim was available on the facts because the dependent nature of the contractual obligations assumed meant that at the date of breach the owners had not become unconditionally entitled to the charterers’ future performance.

20 For example, B Coote, ‘Breach, Anticipatory Breach, or the Breach Anticipated?’ (2007) 123 LQR 503; J Morgan, ‘A Victory for “Justice” over Commercial Certainty’ (2007) 66 CLJ 263; F Reynolds, ‘The Golden Victory—A Misguided Decision’ (2008) 38 Hong Kong Law Journal 333; M Mustill, ‘The Golden Victory—Some Reflections’ (2008) 124 LQR 569. 21 Mustill (n 20) 569. 22 Reynolds (n 20) 344. 23 ibid 341. 24 To be sure, it is likely that Professor Reynolds also thinks that this vindicatory purpose of ‘damages’ should be fulfilled via a particular measure, but he appears to prefer the substitutionary analysis advanced by Stevens to the account proposed here. 25 Liu (n 19). 26 Further support for this analysis can be found in Mustill (n 20).

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4. The Preferable Analysis In line with the views advanced by Reynolds, it might be thought that the facts of The Golden Victory are best analysed as follows. The charterers’ early redelivery of the ship was a repudiatory breach of contract that gave the owners the option to terminate the contract forthwith. By taking redelivery, the owners elected to accept the repudiation and thereby terminate the charter. This brought the contract to an end and rendered future performance of the charterers’ obligations impossible. Quantifying the owners’ entitlement in financial terms involved, in Reynolds’s words, marking ‘the deficiency of the performance received’ and this, in turn, involved awarding the difference between the market and contract rates of hire at, or soon after, the contract’s termination for the remainder of the charter period. If this analysis were correct, it would be the result reached by the minority, rather than the majority that should be preferred. a. The Owners’ Claim was Compensatory not Substitutionary To analyse The Golden Victory in this way, however, would be a mistake. The award made there was not one designed to substitute for performance, but one designed to make good the ‘loss’ that the charterers’ breach had caused the owners. The suggestion that the owners were entitled to a substantial award based on a contractual right to payments from the charterers is inconsistent with the dependent nature of the primary obligations undertaken by the parties. If A undertakes to pay B £100 for every week she uses B’s car under a 10-week contract for hire, the obligation to pay typically will be dependent on B continuing to make the car available to A each week,27 and the same can be said in regard to a typical contract of employment.28 Similarly, the charterers’ obligation to pay the contractually agreed instalments was dependent upon the owners continuing to make the ship available. This meant that once the owners accepted the charterers’ repudiation by taking redelivery of the ship, the charterers had no further obligation to continue making payments in

27 This situation can be contrasted to the standard sale of goods contract where the obligations of the buyer and seller are independent so that the buyer’s right to full performance of the contract is not dependent upon any action other than the buyer’s payment of the contract price. The independent nature of the parties’ obligations in this context can lead to results that are arguably counterintuitive, such as that which occurred in Gill & Duffus v Berger [1984] AC 382 (HL). 28 For a classic exposition, which supports the critical distinction drawn by this book, see Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435, 463 where Dixon J held: ‘In certain forms of executory contract … [including many contacts of employment or sale] the promise to pay the price or reward is not construed as a simple obligation to pay a sum or sums at a future date supported solely by a consideration consisting in the corresponding promise to … do the work, serve, or provide the things or services’. Thus, Dixon J explained, in a typical contract for the sale of goods, it is not ‘to the point that the seller remains ready and willing to deliver the goods and refuses to treat the rejection as discharging the contract … Even so the price is not payable … [as] it is for the goods that the price is to be paid and until they are accepted there is no indebtedness’. Moreover, his Honour continued, while the parties may ‘contract for payment of a sum certain at a time certain and make it clear that the payment is independent of the transfer of the goods … that is not how an agreement to sell is ordinarily understood’ (emphasis added).

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performance of the contract.29 Whether the owners could have refused to accept redelivery and insist upon the charterers’ continued performance is a difficult question that cannot be addressed here.30 Regardless of whether they could have, the charterers’ breach did render them liable to make good certain loss caused to the owners in consequence. Given that the charterers’ primary obligation to continue paying instalments was discharged upon the owners’ acceptance of the repudiatory breach, the owners’ right to future payments did not accrue. Therefore, the owners were limited to a compensatory claim for the financial loss they suffered as a result of the breach. The normal rule for assessing the loss of a party in the owners’ position is the difference between the contract rate of hire and the market rate of hire at the date of breach (or termination) since this represents the best approximation of the innocent party’s immediate financial loss at the time the possibility of future performance ceased. However, English law does not adhere rigidly to quantifying loss at this date when there is evidence that this sum does not represent the loss truly suffered by the innocent party.31 As matters turned out in The Golden Victory, the Iraq War commenced 14 months after the charterers’ repudiation was accepted. In addition, the arbitrator found that the charterers would have exercised their right to cancel under the war clause at this time because they were ‘fundamentally disenchanted’ with the charter.32 For the majority, this meant that any further losses suffered by the owners after this date were attributable to the outbreak of war rather than to the charterer’s repudiation, which must be reflected in the damages awarded to the owners. However, the validity of this reasoning has been challenged by Professor McLauchlan, who argues that ‘the only basis for reducing recovery in the circumstances before the court would be a finding that a substitute charter also would have been cancelled’ because only then could it be said that the charterer’s breach did not in fact cause the loss of hire that the owners claimed.33 29 Note that in some situations a party is unable to refuse the other’s repudiation and insist upon actual performance. For a notable example see Clea Shipping v Bulk Oil International (No 2) [1984] 1 All ER 129. 30 For a discussion of this problem see Q Liu, ‘The White & Carter Principle: A Restatement’ (2011) 74 MLR 171. 31 This principle was applied in the context of a statutory claim for compensation in Bwllfa (n 9). For an excellent recent examination of this area of the law, see A Dyson and A Kramer, ‘There Is No “Breach Date Rule”: Mitigation, Difference in Value and Date of Assessment’ (2014) 130 LQR 259. There the authors argue that ‘most of the work supposedly done by the date of assessment rule is really done by mitigation … [which] requires damages to be assessed as if the claimant acted reasonably’ even if in fact he did not’, 260. 32 This was a fact found by the arbitrator on the basis that, despite the probable increase in market rates accompanying the outbreak of war, the charterers were ‘fundamentally disenchanted’ with the charter. 33 See D McLauchlan, ‘Expectation Damages: Avoided Loss, Offsetting Gains and Subsequent Events’ in D Cunnington and R Saidov (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008) 349, 358 (emphasis added). McLauchlan also contends that any such cancellation was ‘highly improbable’ on the basis that ‘charterparties are by no means invariably cancelled by charterers upon the outbreak of war … since market rates are likely to have risen’.

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b. Precise Correspondence Between the Promisee’s Factual Loss and a Compensatory Money Award is Unnecessary There is arguably a further difficulty with the majority’s reasoning distinct from McLauchlan’s objection that the sum their Lordships awarded was not a true reflection of the financial loss that the charterers’ repudiation caused to the owners. This further difficulty is that their Lordships’ approach ignores the numerous other occasions in which English law departs from rigidly applying the compensatory principle. Even putting aside cases that are best explained as awards of a monetary substitute for performance, there remain cases where the innocent party is awarded compensation that leaves that party in a better factual position than had the breach not occurred. One notable example is Harbutt’s Plasticine. Popplewell J’s recent first instance decision in The New Flamenco is another.34 Just as certain considerations extraneous to the parties’ agreement may justify limiting the scope of a breaching party’s compensatory liability, other extrinsic considerations might justify either ignoring certain factual benefits that accrue to the innocent party as a result of the breach or choosing to assess compensation at the date of breach rather than at some later date when more information as regards the innocent party’s factual position is available, even if this results in the innocent party being placed in a superior factual position than had the breach not occurred. It also might be said that the external considerations that supported assessing the owners’ loss at the date of breach in The Golden Victory were particularly strong, and therefore justified quantifying the owners’ loss at the date of breach rather than later at the date of trial. On this basis it might be suggested that either of the two approaches taken in the House of Lords is defensible. Ultimately, the preferable approach will depend upon whether one considers the ‘policy’ considerations identified by Lord Bingham as sufficiently strong to ignore the later reduction of the owners’ loss in this particular context.35 Given the particular importance of certainty in this very commercial area of English law, Lord Bingham’s conclusion that they were has much to recommend it, particularly once one jettisons the mistaken view that the compensatory principle, at least as strictly construed, overrides all other considerations in this context.

34 Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain [2014] EWHC 1547 (Comm). For discussion, see P Todd, ‘Mitigation, Causation and Policy’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 481. An overview of this decision was provided in Chapter 2, Section III.E.2. 35 Of course, if McLauchlan’s analysis is correct, then the minority correctly assessed the loss that the charterers’ breach in fact caused the owners, leading to the conclusion that the majority erred. Notably, it does not necessarily follow from such a conclusion that the decisions considered in the next two sections, which have applied the Golden Victory principle, are incorrect. To the contrary, it is suggested that these decisions in fact withstand McLauchlan’s criticism of The Golden Victory because they are independently justifiable as correct applications of the compensatory principle, properly understood.

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B. Leofelis v Lonsdale: Prospective Loss Reduced by the Contract’s Early Termination The scope of the principle pronounced in The Golden Victory was considered at first instance subsequently in Leofelis SA & Anor v Lonsdale Sports Ltd & Ors.36 That decision required Roth J to determine an application for summary judgment in each of two separate actions arising out of a prolonged trade mark licensing dispute. One of these applications raised the question of whether the compensatory liability of a party in breach of a specific contractual term ceases upon the contract’s early termination, even if this termination was in fact precipitated by the breaching party’s own later repudiation of the agreement. In what follows, his Lordship’s conclusion that it did is defended on the basis that it involved a correct application of the Golden Victory principle and that his reasoning is consistent with the new understanding of the law this book proposes.

1. The Decision a. The Relevant Factual Background The relevant facts against which the dispute in Leofelis arose were complicated. In 2002 Lonsdale and Leofelis entered into an exclusive licensing agreement, which required Leofelis to pay Lonsdale fixed annual royalties for a six-year term in return for the right to use specified trade marks in most Member States of the European Union. The agreement also gave Leofelis the right to extend the licence until 2014 and the right to grant sub-licences. Leofelis granted a sub-licence to an Italian company soon after the contract was formed and to a German company the following year. Leofelis later alleged that Lonsdale had breached this agreement by allowing branded goods to be circulated contrary to the agreement’s exclusivity clause and subsequently Lonsdale obtained an injunction preventing Leofelis from selling goods in Germany. Leofelis took the view that Lonsdale’s conduct amounted to a repudiation of the licensing agreement and consequently purported to terminate that agreement in late September 2007. In response, Lonsdale alleged that Leofelis’s purported termination was ineffective and demanded that Leofelis continue to pay it royalties under the contract. When Leofelis failed to pay, Lonsdale itself purported to terminate the licensing agreement in early November 2007 citing Leofelis’s nonpayment of royalties as a repudiation of the agreement that justified Lonsdale’s termination. From these events, two separate causes of action arose, though only the first of these actions is of present relevance.37 36 Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2012] EWHC 485 (Ch D) (hereafter Leofelis), substantively upheld on appeal (The Trademark Licensing Co Ltd & Anor v Leofelis SA & Ors [2012] EWCA Civ 985). 37 For a fuller account of the decision, including consideration of the other cause of action, see D Winterton, ‘Prospective Liability for Breach and Repudiation’ [2012] Lloyd’s Maritime and Commercial Law Quarterly 626.

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In what Roth J described as ‘the 2005 Action’, Leofelis sought ‘damages’ for certain alleged breaches of the exclusivity clause by Lonsdale. More specifically, Leofelis sought a declaration and claimed compensation for loss of actual and projected royalty income in Belgium up until 2014 as a result of Lonsdale’s alleged breaches. In an earlier trial on liability, Evans-Lombe J gave judgment predominately in favour of Leofelis.38 The Court of Appeal partially reversed this decision.39 But Evans-Lombe J’s findings as to breach went unchallenged and Leofelis’s damages claim persisted. The summary judgment application in The 2005 Action arose from the termination of the licensing agreement in 2007. Lonsdale submitted that Leofelis could not recover damages for the period following 28 September 2007, applying for summary judgment or ‘strike out’ for this part of Leofelis’s claim,40 which amounted to over €26 million. b. The Parties’ Arguments Lonsdale’s application for summary judgment in The 2005 Action asserted that its liability for breaches of the exclusivity clause should not extend beyond 28 September 2007 on the basis that Leofelis repudiated the agreement on this date. According to Lonsdale, this conclusion followed from a straightforward application of the Golden Victory principle. Lonsdale recognised that at the time of the relevant breaches of exclusivity, and indeed when The 2005 Action commenced, the future duration of the licensing agreement was uncertain. Lonsdale nevertheless argued that because the agreement was now known to have ended in late 2007, permitting Leofelis to recover compensation on the assumption that the contract continued for its maximum possible duration, including a likely renewal until the end of 2014, was illegitimate since it would involve awarding damages on a factual basis that was now known to be false. In response, Leofelis argued that it is a fundamental principle that contractual awards are quantified at the date of breach, and only in limited circumstances can a court take account of subsequent events in its assessment. Leofelis sought to distinguish The Golden Victory from the present case on the basis that the contract there ended because of an independent event. Leofelis accepted that the Golden Victory principle would apply if its own repudiation had brought the contract to an end, as it alleged had occurred in The Mihalis Angelos.41 However, because

38

Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2007] EWHC 451 (Ch). See Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2008] EWCA Civ 640, [2008] ETMR 63; Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2009] EWCA Civ 68 and Leofelis SA & Anor v Lonsdale Sports Ltd & Ors [2009] EWCA Civ 457. 40 Under CPR rule 3.4. 41 Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] QB 164. This is not the analysis of The Mihalis Angelos favoured in E Peel (ed), Treitel’s Law of Contract, 12th edn (Sweet & Maxwell, 2010), [20-071]–[20-072]. There, it is argued that there was no repudiatory breach by the claimant; rather the right to cancel arose from an independent event—that the ship was not ready to load by the stipulated date. 39

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liability remained to be resolved at trial, Leofelis argued that Lonsdale’s repudiation must be assumed to be the event triggering the contract’s discharge for the purposes of deciding this summary judgment application. Leofelis then argued that where a party is responsible for both the initial breach and a subsequent repudiation that triggers the contract’s discharge, the innocent party’s recovery for the earlier breach should not be restricted. To hold otherwise, claimed Leofelis, would enable the guilty party ‘to profit from its own wrong’. c. Roth J’s Reasoning In deciding the application, Roth J agreed with Leofelis that Lonsdale’s repudiation of the agreement must be assumed. His Lordship nevertheless decided the application in Lonsdale’s favour, holding that to permit Leofelis to recover damages on the assumption that the agreement continued for its maximum possible duration would involve making an award on a factual basis that was known to be false.42 On his Lordship’s analysis, The Golden Victory makes clear that where damages fall to be assessed on the basis of lost future benefits, the court must take account of events occurring after the breach that reduce the value of those benefits. Additionally, as between 27 September and 2 November, the earlier date was appropriate since this was the date on which Leofelis treated itself as no longer bound by the agreement. Finally, it is also significant that Roth J disregarded the fact that this result might be seen as having the effect of enabling a guilty party to profit from its own wrong. According to his Lordship, this possibility did not provide a convincing basis for departing from a strict application of the compensatory principle.43 Roth J’s approach is thus in harmony with the way this area of the law conventionally is understood. For this reason, it might be thought that his Lordship’s decision, like The Golden Victory itself, undermines the new account proposed here. However, this is not in fact the case. Roth J’s decision not only involved a correct application of The Golden Victory, but is also consistent with the new account here proposed.

2. A Defence of the Decision To recap, the relevant application for summary judgment in The 2005 Action required Roth J to determine whether, following Lonsdale’s breach of a specific term of the exclusivity agreement, its liability to compensate Leofelis for the prospective loss that, as at the date of breach, Leofelis appeared likely to suffer should cease following the contract’s early termination, even if this early termination was precipitated by Lonsdale’s later repudiation of the agreement. In answering this question affirmatively, Roth J applied The Golden Victory in the face of Leofelis’s

42 Leofelis (n 36) [42], where Roth J discussed The Golden Victory at length, particularly the speech of Lord Scott. 43 Leofelis (n 36) [49].

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insistence that the two cases were not relevantly alike. It is argued below that his Lordship’s decision to do so was correct and also that the result Roth J reached is consistent with the new understanding of the law this book advocates. a. Roth J was Correct to Apply the Golden Victory Principle This sub-section makes two points, which in combination strongly support Roth J’s decision to follow The Golden Victory in deciding the application for summary judgment in The 2005 Action. The first is that the factual differences between the two cases did not provide reason not to apply The Golden Victory in deciding the 2005 summary judgment application in Leofelis. The second is that the ‘policy’ arguments cited by Lord Bingham in support of his approach in The Golden Victory also did not provide reason to distinguish The Golden Victory. i. No Relevant Factual Differences Between the Two Cases In arguing that Roth J should not follow The Golden Victory in deciding the 2005 summary judgment application in Lonsdale’s favour, Leofelis pointed out some potentially significant factual differences between the two cases, which raises the question of whether Roth J was correct to apply The Golden Victory. These factual differences were that: (1) the damages claim in The Golden Victory arose from an accepted repudiation of the contract, whereas in Leofelis the claim was for certain non-repudiatory breaches of a particular term—the exclusivity clause;44 (2) the reduction in liability in The Golden Victory was based upon a hypothetical cancellation of the contract, which it was accepted would have occurred but for the earlier termination for repudiatory breach, whereas in this case Lonsdale relied upon an event that actually happened—the contract’s termination—to reduce its liability; (3) the right to cancel in The Golden Victory arose from an event occurring independently of the parties, whereas assuming the future success of Leofelis’s case on liability in The 2009 Action, the right to terminate here arose from Lonsdale’s repudiatory breach of the agreement. Despite these differences, Roth J’s decision to apply The Golden Victory to the application before him was correct because none of these differences justified a departure from that authority. With respect to difference (1), a damages claim for certain non-repudiatory breaches of a particular term actually provides a stronger basis for adopting a ‘wait and see’ approach to quantification than a claim based upon a repudiation of the entire agreement. Concerns expressed by the minority in The Golden Victory regarding commercial certainty (reiterated below) are really 44 Although in The 2009 Action Leofelis argued that these breaches of exclusivity were sufficient to justify its termination of the contract in September 2007, this claim was not relevant for the purposes of The 2005 Action.

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only relevant when the breach is sufficiently serious to justify the contract’s termination because a decision to terminate will require the innocent party to seek a market substitute for any outstanding performance, while being the victim of nonrepudiatory breaches of a particular term generally does not require such action. The non-hypothetical nature of the contract’s termination in the present case (difference (2)) also provides a firmer basis for reducing liability than the hypothetical cancellation that occurred in The Golden Victory because a reduction for actual cancellation is the a fortiori case upon which reduction for a hypothetical cancellation is based. To explain further, the law treats proof on the balance of probabilities that an event would have occurred ‘but for’ the relevant breach as equivalent to proof that the event did occur. Nevertheless, the distinction between these cases must be remembered: a claim that damages should be reduced because of an actual cancellation of a contract is stronger than a claim for reduction based upon a hypothetical cancellation. Finally, it is necessary to address Leofelis’s argument that the different bases for termination in the present case and The Golden Victory are significant because reducing liability in the former effectively allows Lonsdale ‘to profit from its own wrong’ by relying on its own later repudiation of the agreement to reduce its liability for an earlier breach (difference (3)). This submission raises an important question of principle. However, for the following reasons, it is argued that this difference also did not justify a departure from The Golden Victory: (1) Characterising Lonsdale’s reduced damages liability as ‘profit’ from breach is arguably inappropriate here because, while a saved expense is normally considered ‘profit’,45 Lonsdale can only be understood to have saved an expense if one assumes it had a liability to Leofelis at the time of the summary judgment application. In reality, this liability was yet to be determined, meaning that the alleged ‘saved expense’ was one step further removed from ‘profit’ than is usual. (2) Even supposing it is legitimate to characterise Lonsdale’s reduced liability as ‘profit’, stripping gains made from a contractual breach is an exceptional remedy that is only available (at least) when the usual responses to breach are ‘inadequate’ and also (perhaps) when the breach is deliberate.46 But in the absence of evidence that either of these conditions were satisfied here there appears to be no reason for the law to be concerned with stripping Lonsdale’s gains. (3) Perhaps most importantly, Lonsdale’s repudiation did not directly ‘cause’ the reduction in Leofelis’s prospective loss. Lonsdale’s repudiation gave

45 For example, see Giedo Van der Garde BV v Force India Formula One Team Limited [2010] EWHC 2373 (QB) [549] (Stadlen J), and J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford University Press, 2009) 211. 46 See Attorney-General v Blake [2001] 1 AC 268 (HL) 285 (Lord Nicholls). While it is clear that something more than mere ‘inadequacy’ of the usual remedies is required, precisely what this is remains uncertain.

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Leofelis the option to terminate (and perhaps discharged it from further performance).47 But it was only Leofelis’s decision to exercise this option, rather than affirming the contract, that discharged Lonsdale from further performance and allowed it to reduce its prospective liability to Leofelis. ii. Considerations of ‘Policy’ Did Not Justify a Departure from The Golden Victory Roth J’s finding that Lonsdale could rely on Leofelis’s termination for Lonsdale’s later repudiatory breach to reduce its liability was based on endorsing the ‘principle’ that when assessing damages a court should not shut its eyes to events that it knows have occurred. In The Golden Victory, Lord Bingham, dissenting, noted the undesirable consequences, which he described as considerations of ‘policy’, that may follow from inflexibly applying this principle in all cases. While there are some who argue that it is never legitimate for courts to take ‘policy’ considerations into account in deciding private law disputes, this book does not adopt this position. In any event, this debate can be avoided for present purposes because the argument advanced here is that, even if it is legitimate for courts to take ‘policy’ considerations into account, there were no compelling reasons to do so in Leofelis. One of the consequences identified by Lord Bingham in The Golden Victory was that of ‘inconsistency’ in the sense that the court’s assessment of loss may vary significantly depending upon the time at which the claim is brought.48 It is of course true that the owners in The Golden Victory could have recovered more had the claim been arbitrated before the war commenced. But this alone is insufficient to render the majority’s approach incorrect. By its very nature, a contractual money award can only approximate the objective it seeks to achieve, whether that aim is to make good certain detrimental factual consequences caused by a breach of duty, to disgorge certain financial gains, or to substitute for performance not provided. That the approximation of a claimant’s loss may vary depending on the time at which the claim is brought shows only that the quantification of loss is a fact-sensitive exercise, which depends on the information available to the decision maker at the time that the assessment occurs. It is also important to remember that any perceived injustice resulting from following The Golden Victory is reduced by the fact that recovery for prospective loss generally does not occur on an all-or-nothing basis.49 An award of compensation for future loss must be discounted to reflect the possibility that it would not in fact have been suffered, provided this possibility was of ‘some real and not just minimal significance’ at the time of assessment.50 Thus, had the Second Gulf War become a realistic possibility before the charterers’ repudiation in The Golden Victory, any 47

See J Carter, ‘Discharge as the Basis for Termination for Breach of Contract’ (2012) 128 LQR 283, 284. The Golden Victory (n 1) [23]. Also see GH Treitel, ‘Assessment of Damages for Wrongful Repudiation’ (2007) 123 LQR 9. 49 See The Golden Victory (n 1) [66] (Lord Carswell). 50 ibid [76]. 48

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claim for future loss by the owners would need to have been discounted accordingly, with the quantum recovered decreasing as the outbreak of war approached certainty. This observation highlights that while the time at which the claim is brought does affect the sum awarded, it does so in a manner that is sensitive to the information available at the time when quantification occurs. In the present case, had Leofelis instituted a damages claim before the contract was terminated such that recovery for prospective loss was possible, this claim should still have been subject to a discount to reflect the possibility that the contract would have been discharged prior to 2014, provided this chance was of ‘some real and not just minimal significance’ at this time. Finally, Lord Bingham also suggested in The Golden Victory that other considerations favoured assessing damages at the date of breach. These included the importance of commercial certainty,51 and the undesirability of rewarding a defendant’s delay in discharging its secondary obligation to pay ‘damages’.52 But neither of these considerations favours a departure from The Golden Victory in Leofelis either. First, while obviously desirable, certainty is a second-order concern that alone cannot trump a legal ‘principle’ that it conflicts with.53 In any event, this concern was far less important in Leofelis than it was in The Golden Victory because being able to predict the quantum of damages recoverable in relation to a breach is only of real value when a party is faced with a choice between terminating the contract (and seeking a market substitute for the outstanding performance) or affirming and claiming compensation for loss caused by the breach. Secondly, while delaying tactics are undesirable, it is not clear that adopting a ‘wait and see’ approach to quantification actually encourages them because a defendant’s prevarication also might increase a claimant’s recoverable loss provided such loss is not ‘too remote’. b. Roth J’s Decision is Consistent with the New Account So far it has been shown that neither the factual differences between The Golden Victory and Leofelis, nor any of the ‘policy’ considerations that Lord Bingham invoked in the former case provided good reason to depart from the ‘wait and see’ approach to quantification adopted by Roth J. In The Golden Victory, Lord Scott had what he claimed was a more fundamental response to Lord Bingham’s ‘policy’ arguments, which was that they must give way to the ‘principle’ that an innocent party should be compensated only for loss actually suffered as a result of the breach.54 In giving paramount status to the compensatory principle in The Golden Victory, the majority arguably did overlook the many exceptions to it that

51

ibid [23]. ibid [22]. 53 It is of course open to the parties to agree to make certainty a dominant concern by including a liquidated damages clause, provided it is not determined that this clause is a ‘penalty’. 54 The Golden Victory (n 1) [30]. 52

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this book has outlined.55 But for essentially the same reasons that The Golden Victory can be reconciled with the new understanding of the law proposed here, the decision in Leofelis is also consistent with this account. A useful starting point in explaining why this is so is Roth J’s suggestion that, even without The Golden Victory, The Mihalis Angelos makes clear Leofelis’s inability to claim damages up until the time the contract was due to conclude in 2014.56 The Mihalis Angelos might be dismissed as irrelevant to the present case on the basis that it involved an anticipatory, rather than an actual, repudiatory breach.57 A similar debate occurred in regard to the significance of The Mihalis Angelos in The Golden Victory. But the nature of the breach in The Golden Victory was not relevant to determining the correct basis for quantification. As explained earlier, the real reason why damages were not assessed at the date of breach there is that the claim was in respect of contractual obligations to pay hire that had not accrued unconditionally by the time the contract was terminated.58 To reiterate, the doctrine of anticipatory breach allows a promisee to accelerate its right to claim a money award in respect of the promisor’s defective performance. But the approach to quantification under this doctrine is essentially the same as for an actual breach. Once the repudiation is accepted (and the contract thereby discharged), a substitutionary money award may be claimed in respect of any unperformed obligations to which the innocent party has become unconditionally entitled. But unless the promisee has performed fully its side of the bargain, that party usually has not become so entitled and, generally speaking, is thus limited to recovering compensation to make good the detrimental factual consequences causally attributable to the promisor’s (anticipatory) breach. As just explained, where these detrimental consequences are unknown, the law must approximate them, and in doing so it must account for any relevant contingencies. When, however, these consequences are known at the time of quantification, no need to approximate arises. As the earlier discussion of The Golden Victory explained, in that case the shipowners’ right to further payment following its acceptance of the charterers’ repudiation never accrued because the owners did not continue to make the ship available to the charterers after this date. For this reason, limiting the owners to a claim for factual loss suffered in consequence of the breach was appropriate. The 55 For example, Williams Bros v ET Agius Ltd [1914] AC 510 (HL); Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA); Miles v Wakefield MDC [1987] AC 539 (HL); Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL); Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2010] BLR and Force India (n 45). 56 Leofelis (n 36) [48]. 57 Compare Peel (ed) (n 41) [20-082], where it is said that the reduction in damages liability that occurred in The Mihalis Angelos was not attributable to a breach at all, but rather to the independent event that the ship was not ready to load on the due date, which gave the charterers the right to cancel under a cancellation clause. 58 A similar observation is made by R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing, 2009) 171, 196.

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correct quantification of this loss depended upon the date at which it was assessed. It was either the difference between the contract rate of hire and the market rate of hire at the date of breach for the remainder of the charter period or the difference between these two rates up until the time that war broke out on the basis that, with the benefit of hindsight, it was known that the charterers would have cancelled the contract at the later date.59 The relevant ‘damages’ claim in Leofelis was for actual and projected loss of income caused by Lonsdale’s various breaches of the exclusivity clause. However, the licensing agreement’s termination prevented the unconditional accrual of Leofelis’s right to exclusive use of Lonsdale’s trademarks because this right was subject to a condition that Leofelis continued to perform its side of the bargain,60 which became impossible once the contract was terminated. For this reason, Roth J was correct to apply The Golden Victory and to conclude that Leofelis was limited to recovering an award of compensation to make good the lost income it could prove was attributable to Lonsdale’s breaches of exclusivity up until 28 September 2007.

C. The Glory Wealth: Prospective Loss Must be Proved on the Balance of Probabilities Even more recently, in The Glory Wealth,61 a distinct but related question of principle regarding the assessment of an award of damages for breach of contract arose. That question was whether, following one party’s actual repudiatory breach of contract, the other party’s entitlement to a money award that aims to place that party in ‘the same situation … as if the contract had been performed’ is conditional upon proof, on the balance of probabilities, that this party would have been able to perform its own prospective obligations under the contract. After a brief overview of the facts and Teare J’s reasoning, this section explains why his Lordship’s decision was both correct and consistent with the new account of the law this book proposes.

1. The Decision a. The Facts and Arguments On 19 August 2008 Flame SA (Flame) and Glory Wealth Shipping (GWS) entered into a contract of affreightment (the ‘COA’), under which GWS undertook to carry six cargoes of coal in bulk in each of the years 2009, 2010 and 2011. Flame, as 59 Recall that the assumption that the charterers would have cancelled has been challenged convincingly by Professor McLauchlan. See McLauchlan (n 33) 358. 60 The licensing agreement required Leofelis to pay Lonsdale a fixed annual sum rising through the six-year term and payable each year in advance by four quarterly instalments. See Leofelis (n 36) [9]. Whether this was a condition precedent or a condition subsequent depends upon the correct construction of the parties’ contract. 61 Flame SA v Glory Wealth Shipping PTE Ltd [2013] 2 Lloyd’s Rep 653, [2014] 2 WLR 1405, [2013] EWHC 3153 (Comm), [2013] 2 CLC 527.

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charterers, failed to declare laycans for the fifth and sixth shipments of coal in 2009 and for all six shipments in 2010.62 The arbitration panel found that the charterers were in actual repudiatory breach of the COA by failing to declare these laycans and that each such repudiatory breach had been accepted by the disponent owners as terminating their obligation to carry cargoes on those voyages.63 GWS claimed US$5, 426, 608.60 plus interest in damages for these breaches on the basis that this constituted the difference between the contract and market rates of hire at the date of breach. As in The New Flamenco,64 this very large difference (in value) was attributable to the consequences for the relevant market of the collapse of Lehman Brothers in the latter half of 2008.65 At arbitration, Flame defended GWS’s claim on the basis that the latter’s entitlement to the amount sought depended on GWS proving, on the balance of probabilities, that they would have performed their prospective obligations under the COA, which, said Flame, they were unable to do. The arbitration panel rejected this argument and Flame appealed under sections 68 and 69 of the Arbitration Act 1996.66 While accepting that the prima facie measure of GWS’s lost profits from the breach was the sum that they would have earned had the contract been performed less the cost to them of providing the nominated vessel (ie the difference between the contract and market rates of freight), Flame argued, relying on The Golden Victory67 and The Mihalis Angelos,68 that in assessing this loss any contingencies that might have prevented GWS earning freight under the COA must be taken into account. In response, GWS relied on a number of authorities, but placed particular importance on Braithwaite v Foreign Hardwood Company,69 and Gill & Duffus v Berger.70 The effect of these authorities, said GWS, was that their acceptance of 62 A ‘laycan’ is a period of time defined by Rix LJ in Tidebrook Maritime Corporation v Vitol SA of Geneva (The Front Commander) [2006] EWCA Civ 944 [38] as: ‘the earliest day upon which an owner can expect his charterers to load and the latest day upon which the vessel can arrive at its appointed loading place without [the voyage] being at risk of being cancelled’. 63 This way of expressing the matter creates some ambiguity in relation to whether each failure to declare a laycan was a repudiatory breach of the COA or that the cumulative effect of the eight failures was a single repudiatory breach of the COA. It appears that each failure to declare was treated as a repudiation of the obligation to carry cargoes on that particular voyage. For present purposes, nothing seems to turn on this. 64 The New Flamenco (n 34). An overview of this decision was provided in Chapter 2, Section III.E.2. 65 In October 2008 the Baltic Index was 3,025 but by December 2008 it had fallen by more than 75% to 700. See The Glory Wealth (n 61) [3]. 66 ibid [5]. The first question on appeal was whether ‘in order to displace a party’s prima facie substantial measure of damages for breach of contract, the “contract breaker” must prove that at the time when the innocent party accepted the repudiatory breaches, said innocent party was already in [repudiatory] breach’. The second was whether ‘in order to fulfil contractual obligations under a COA it is sufficient for the vessel “owner” to arrange for vicarious performance of its contractual obligations (ie by procuring vessels over which it had no contractual control), or whether control by an Owner or disponent Owner over a nominated vessel was an essential characteristic of a contractual nomination’. 67 [2007] 2 AC 353. 68 [1970] 2 Lloyd’s Rep 43. 69 Braithwaite v Foreign Hardwood Company [1905] 2 KB 543. 70 Gill & Duffus v Berger [1984] AC 382.

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Flame’s repudiatory breaches (and the contract’s consequential termination) released them from any future obligations that they otherwise would have owed under the contract. On this basis, GWS claimed that their ‘loss’ must be assessed as if they would have performed their future contractual obligations.71 Flame’s response was that while GWS’s acceptance of their repudiatory breaches released them from future performance, any damages awarded to GWS must be assessed as if Flame were not in repudiatory breach and that GWS remained obliged to perform. Only by doing this, argued Flame, could the court truly be said to be comparing the position GWS would have been in had the contract been performed with the position that they occupied as a result of Flame’s breaches. b. Teare J’s Reasoning After a thorough review of many relevant authorities, Teare J upheld Flame’s appeal on this point,72 concluding that the arbitrators erred in holding that GWS did not have to prove, on the balance of probabilities, that they would have been able to perform their obligations under the contract as and when they arose in order to recover their expected profits. Teare J reasoned to this conclusion in three steps: (1) Although neither The Golden Victory nor The Mihalis Angelos ‘dictates the outcome of the present case’ since each was concerned with an express right to cancel on the happening of a certain event as opposed to the possibility of the innocent party’s breach ‘the importance ascribed to the compensatory principle in the Golden Victory is a powerful argument for applying it in the present case’.73 (2) The decisions GWS relied upon (namely Braithwaite, Taylor v Oakes, Roncoroni and Co,74 British and Beningtons Ltd v NW Cachar Tea Co,75 Continental Contractors v Medway Oil and Storage Company,76 and Gill & Duffus) did not ‘bind … [him] to depart from the compensatory principle’ because these cases were ‘concerned with establishing the plaintiff ’s cause of action’ for breach rather than with the quantification of ‘damages’.77 (3) While the House of Lords’ reasoning in Gill & Duffus and The Golden Victory ‘lead[s] in different directions … neither is a decision on the actual point 71 It appears that GWS also submitted that it was not even open to Flame to prove otherwise so that the dispute did not turn purely on which party has the burden of proving (or disproving) ‘readiness and willingness’ to perform in these circumstances. 72 As regards the second question, Teare J was not persuaded that the arbitration panel had erred in law in their construction of the COA and therefore concluded that there was ‘no cause to allow the appeal by remitting the award to the arbitrators for their consideration’. The Glory Wealth (n 61) [98]–[99]. 73 ibid [81]. 74 Taylor v Oakes, Roncoroni and Co (1922) 27 Comm Cas 262. 75 British and Beningtons Ltd v NW Cachar Tea Co [1923] AC 48 (HOL). 76 Continental Contractors v Medway Oil and Storage Company (1925) 23 Lloyd’s List Reports 124. 77 The Glory Wealth (n 61) [82] (emphasis added), citing McArthur J in YP Barley Producers Ltd v Robertson (EC) Pty Ltd [1927] VLR 194 and Leggatt J in The Simona [1986] 1 Lloyd’s Rep 171. Thus, according to Teare J, these decisions demonstrate only that ‘where there has been an accepted repudiation the innocent party is released from its future obligations so that the party in breach cannot rely upon a future hypothetical breach as an ex post facto justification for its repudiation’ [82].

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which the court must determine’,78 and in resolving the tension between them, ‘the compensatory principle’ endorsed by the House of Lords in the Golden Victory should be followed because: there has been no clear decision of an appellate court which is binding upon the court and pursuant to which the application of the contractual principles regarding an accepted repudiation has led to an award of damages which puts the innocent party in a better position than he would have been in had the contract been performed.79

2. A Defence of the Decision It appears that both Professor Reynolds and Sir Guenter Treitel would dispute the correctness of Teare J’s decision. Reynolds’s view was made clear in the earlier discussion of The Golden Victory.80 Similarly, Treitel has claimed that once a charterer’s repudiatory breach has been accepted and the contract thereby terminated, the shipowner is ‘relieved of any further obligation to perform, so that his failure to perform on the due day could no longer be a breach’, with the consequence that the shipowner’s damages cannot be reduced to a nominal amount.81 According to Professor Bridge, by contrast, there is ‘some doubt’ regarding whether and in what circumstances the buyer may raise as a defence to liability, in reduction of the damages payable, the fact that the seller was or would have been incapable of performing the contract in accordance with its terms.82

It might be thought that the tension between these academic views can be dissipated by reference to the distinction between an actual, and an anticipatory, repudiatory breach. As explained in the earlier discussion of Leofelis, however, this is not correct. In principle, the approach to quantifying contractual money awards, whether substitutionary or compensatory, is the same regardless of whether the breach is actual or anticipatory in nature.83 Thus, at least as a matter of principle

78

The Glory Wealth (n 61) [84]. ibid. 80 See Section II.A.2 above and Reynolds, (n 20) 343. Teare J also refers to this article in The Glory Wealth (n 61) [61]. 81 See The Glory Wealth (n 61) [11], citing E Peel (ed), Treitel’s Law of Contract, 13th edn (Sweet & Maxwell, 2014) [20-082]. 82 The Glory Wealth (n 61) [13], citing M Bridge (ed), Benjamin’s Sale of Goods, 8th edn (Sweet & Maxwell, 2010) [9-011]. Compare the views expressed by Treitel in the same volume at [19-169] and [19-170]. 83 It seems that Reynolds himself would agree with this view: see Reynolds (n 20). However, the historical requirement that a claimant aver ‘readiness and willingness’ to perform does appear to have been applied differently in some cases depending upon whether the repudiatory breach relied upon is anticipatory rather than actual, which has created some confusion. For a fuller discussion, see D Winterton, ‘A Voyage to the “Higher Altitudes of Contract Law”’ [2015] Lloyd’s Maritime and Commercial Law Quarterly 124, drawing on the following illuminating sources: F Dawson, ‘Waiver of Conditions Precedent on a Repudiation’ (1980) 96 LQR 239; S Stoljar, ‘Some Problems of Anticipatory Breach’ (1974) 9 Melbourne University Law Review 355; MG Lloyd, ‘Ready and Willing to Perform: The Problem of Prospective Inability in the Law of Contract’ (1974) 37 MLR 121 and Q Liu, Anticipatory Breach (Hart Publishing, 2011). 79

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(and on the balance of authority),84 the preferable understanding of this area of the law can be summarised by reference to the following two propositions: (1) In relation to both an actual, and an anticipatory, repudiatory breach, proof on the balance of probabilities that one would have performed one’s future contractual obligations is necessary to enforce the contract prospectively via an order for specific relief or a Robinson v Harman award, whether substitutionary or compensatory.85 (2) At least where the obligations breached are independent (and breach by the party seeking to terminate has not caused the breach this party seeks to rely on), proof of ‘readiness and willingness’ to perform, in any sense, is unnecessary for a party who merely wishes to be discharged from future performance without seeking the contract’s prospective enforcement.86 Two important qualifications to these propositions, however, must be noted. The first is that, in the absence of proof to the contrary by the promisor, it may be that all a promisee needs to show in order to satisfy the requirements in proposition (1) is that, at the time of the promisor’s repudiatory breach, the promisee could have performed his prospective obligations under the contract, with the burden of proof then shifting to the promisor to show that, on the balance of probabilities, the promisee’s future performance was unlikely. The second qualification is that, depending upon whether a promisee must establish a cause of action for repudiatory breach if seeking only to be discharged from future performance, there may (or may not) be an intermediate position between propositions (1) and (2) concerned with precisely what a party must prove in order to establish a cause of action for repudiatory breach that is of more than merely theoretical significance.87 Regardless of all this, for present purposes the critical point is that Teare J’s finding in The Glory Wealth that to recover a Robinson v Harman award for prospective loss, a promisee must prove its own ‘readiness and willingness’ to perform on the balance of probabilities is consistent with the understanding of the law proposed here. As this book has attempted to stress, in contrast to what must be shown to establish a right to an award of the cost of substitute performance, the recovery of compensation for (retrospective or prospective) loss requires, at the very least,88 84

For a defence of both claims, see Winterton (n 83). See Foran v Wight (1989) 168 CLR 385, 433. Note, however, that in order to recover a substitutionary award the promisee also must show (at least) that all conditions precedent and subsequent to which its right to performance was subject have been fulfilled. 86 ibid where Deane J said that ‘Absence of actual or potential readiness or willingness to perform a contract … does not, of itself, preclude rescission of the contract by acceptance of the other party’s repudiation’, using the term ‘rescission’ to mean prospective termination rather than rescission ab initio. Further support for this view in Australian law can be found in Sharjade Pty Ltd v The Commonwealth of Australia [2009] NSWCA 373 [54] (Hodgson JA) and in Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd [2009] FCAFC 85, (2009) 178 FCR 57 [55]–[76] (Perram J, Goldberg and Jacobson JJ agreeing). 87 This point is discussed in YP Barley Producers Ltd v Robertson (EC) Pty Ltd [1927] VLR 194, 208–12, a decision discussed by Teare J in The Glory Wealth (n 61) [43]. 88 It is also necessary, for instance, for the promisee to prove that the loss was in fact suffered with sufficient certainty and also that it was within the scope of the applicable remoteness principle. 85

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that the promisee is able to causally attribute, on the balance of probabilities, such loss to the relevant breach.

III. Specific Performance, ‘Mitigation’ and Damages In Lieu of Coercive Relief An area of the law in which the failure to recognise the distinction between substitutionary and compensatory contractual money awards understandably leads to confusion and mistakes is how the principles of mitigation apply to a claim for ‘damages’ brought in the alternative to an eventually unsuccessful suit for specific performance. A related, but distinct, area of difficulty concerns the principles that govern the quantification of ‘equitable damages’ awarded in lieu of specific relief. Both English and Canadian case law contain judicial statements at the highest level that might be thought to be inconsistent with the new account of the law proposed here. In what follows it is explained why this is not the case.

A. The Relationship Between Specific Performance and ‘Mitigation’ Reconciling the cases so far examined in this chapter with the new account of the law advanced above has revolved largely around explaining the distinction between substitutionary and compensatory money awards. However, general acceptance of the orthodox (but incorrect) understanding of contractual money awards may lead to a mistaken understanding of the relationship between principles concerned with limiting compensatory recovery and other kinds of substitutionary orders. The principal context in which this problem arises is at the intersection of the rules of ‘mitigation’ and those governing the availability of specific performance. In this section, the relationship between these two areas of the law is explained. This explanation is then invoked to illustrate the mistaken analysis recently adopted by the Canadian Supreme Court in Southcott Estates Inc v Toronto Catholic District School Board.89

1. A Restatement of the Basic Principles The equitable remedy of specific performance, just like the common law action for the agreed sum, is a substitutionary court order designed to enforce the innocent party’s primary contractual right to performance. Neither of these substitutionary orders are concerned to compensate the innocent party for loss suffered in consequence of breach. Principles of mitigation, on the other hand, are concerned only with placing reasonable limits on the recovery of compensation for consequential 89

Southcott Estates (n 2).

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loss. This of course means that such principles have no relevance when it comes to determining whether a substitutionary order should be made, and in particular whether an order for specific performance is appropriate in the circumstances.90 A question arises as to whether this is also true of equitable ‘damages’ awarded in lieu of specific performance. It is argued that in appropriate cases it should be and, at least in Canada, this is so because of the Supreme Court’s decision in Semelhago v Paramadevan, which held that a money award in lieu of specific performance has the same purpose as an order for specific performance.91 Semelhago confirms that such an award is designed to be a true substitute for performance rather than simply to make good the loss caused by breach and therefore may have the effect of putting the non-breaching party into a superior factual position than had the breach not occurred. Chapters 4 and 5 of this book demonstrated that other substitutionary money awards are also commonly made and often have the same effect as the award that the Canadian Supreme Court upheld in Semelhago.

2. The Decision in Southcott Estates The material facts in Southcott Estates were simple. The dispute arose out of a contract for the sale of land. Southcott was a single-purpose corporation created solely in order to purchase certain land owned by the vendor School Board for residential development. Southcott possessed no assets other than the money advanced to it by its parent (Ballantry) for the deposit relating to this purchase. The Board breached the contract by failing to satisfy a condition that it use its ‘best efforts’ to obtain a severance from the Committee of Adjustments on or before the closing date, as required by the relevant Planning Act. In addition, the Board refused Southcott’s request to extend this date. Southcott promptly sought specific performance, and in the alternative claimed ‘damages’ for its loss of the chance to profit from the investment. a. The Reasoning of the Majority A majority of the Canadian Supreme Court held that specific performance was inappropriate, and that Southcott’s alternative claim for ‘damages’ was confined to a nominal amount because of its failure to mitigate. The majority’s reasons, delivered by Karakatsanis J, commenced by observing that a claimant generally cannot recover for ‘loss’ which could have been avoided through reasonable action.92 Whilst recognising that the breaching party has the burden of proving that the innocent party’s loss could have been so avoided,93 her Honour found that the School Board had met this burden in the present case. 90

See the discussion in Chapter 4, Section III.E. Semelhago v Paramadevan [1996] 2 SCR 415 (SCC), discussed above at pp 159–160. Compare the apparent tension in English law between Wroth v Tyler [1974] Ch 30 (ChD) and Johnson v Agnew (n 3) discussed earlier in Chapter 4, Section III.C.1, which are shown to be reconcilable below. 92 Southcott Estates (n 2) [24], citing British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL). 93 Southcott Estates (n 2) [24]. 91

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This conclusion rested on three findings. First, Southcott had reasonable opportunities to mitigate the loss it suffered as a result of the School Board’s failure to perform.94 Secondly, Southcott was in a position to take the mitigatory action required to minimise its loss because its very act of seeking specific performance showed that it was ready, willing and able to complete and its alternative claim for lost profits was predicated upon its financial capacity to do so. Finally, Southcott did not in fact mitigate its loss because the other purchases made by the Ballantry group between breach and trial were ‘collateral’ in the sense that they would have occurred regardless of the School Board’s breach.95 b. McLachlin CJ’s Dissent In dissent, McLachlin CJ agreed that the Board first needed to establish that reasonable opportunities for Southcott to mitigate existed, and that it had failed to take advantage of such opportunities (if they did exist).96 In contrast to the majority, however, her Honour saw no basis to overturn Spiegel J’s finding at trial that the Board had failed to establish that Southcott did in fact have reasonable opportunities to mitigate.97 Whilst this finding was sufficient to dispose of the appeal, McLachlin CJ also held that even if the trial judge erred and reasonable opportunities to mitigate did exist, Southcott had acted reasonably in not pursuing these opportunities. According to her Honour, there are various reasons why a failure to mitigate may be ‘reasonable’. One such reason, as the majority justices did acknowledge, is that the claimant had a ‘fair, real, and substantial justification’ for seeking specific performance.98 But in contrast to the majority, the Chief Justice thought such justification existed here. Although the common law presumption of real property ‘uniqueness’ no longer holds in Canada,99 a claim for specific performance

94 In reaching this conclusion, Karakatsanis J gave weight to two facts. One was that expert evidence established that 130 undeveloped or subdivided properties were sold in the Greater Toronto Area between the time of breach and the time of trial. The other was that Southcott’s parent, Ballantry, itself purchased seven properties during the same period. On the basis of these facts, her Honour reached the view that the totality of the evidence supported the inference that Southcott had reasonable opportunity to mitigate its loss by purchasing a comparable property between breach and trial. 95 Southcott Estates (n 2) [30]. The majority also emphasised that Southcott’s responsibility to mitigate should not be affected by its status as a single-purpose corporation, which existed solely to buy the subject land. For their Honours, Southcott could not take the benefits of limited liability without also accepting certain countervailing burdens too. 96 ibid [91]. 97 ibid [90]. 98 Applying the test outlined in Asamera Oil Corp Ltd v Sea Oil and General Corp [1979] 1 SCR 633, 667–68 (Eastey J). 99 See Semelhago (n 91) 428. This development is controversial and has been criticised by commentators—see, for example, R Chambers, ‘The Importance of Specific Performance’ in J Edelman and S Degeling (eds), Equity in Commercial Law (Lawbook, 2005) 431 and N Siebrasse, ‘Damages in Lieu of Specific Performance: Semelhago v Paramadevan’ (1997) 76 Canadian Bar Review 551. However, the development also has been affirmed in subsequent cases, such as Coarse v Ravenwood Homes Ltd (1998) 226 AR 214, 218 (Master Funduk) and John E Dodge Holdings Ltd v 805062 Ontario Ltd (2001) 56 OR (3D) 341 [50] (Lax J).

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remains reasonable if the property has ‘unique characteristics’ such that substitute property was not readily available in the market.100 Disagreeing with the majority, her Honour thought there was no basis to challenge Spiegel J’s finding at trial that the relevant property here was uniquely suited to Southcott’s needs for single-family residential development in Toronto. Significantly, for McLachlin CJ, the trial judge’s dismissal of Southcott’s claim for specific performance did not necessarily mean that Southcott’s decision to seek such an order was unreasonable. Her Honour also observed that an additional reason why a claimant’s failure to mitigate may be reasonable is that the financial position it occupied at the date of breach prevented it from pursuing otherwise reasonable opportunities to minimise loss.101 McLachlin CJ fortified her conclusion that Southcott acted reasonably in the circumstances on this basis. In her Honour’s view, Southcott, a single-purpose company with no assets other than the money advanced to it to pay the deposit, was in such a financial position because it lacked the resources to go into the market and purchase substitute property between breach and trial.102

3. A Preferable Understanding of the Law The new account of the law advanced in this book stipulates a hierarchy of contractual ‘remedies’ in which a court order may be classified by reference to how close it gets to providing the innocent party with the promised performance. An order for specific performance is the closest substitute for actual performance, but for various reasons such an order is usually inappropriate.103 The next best substitute for performance is an award of the cost of rectification (or market replacement), which represents the monetary equivalent of specific performance. As explained above, however, the availability of such awards also is restricted. In particular, such an award is unavailable when the innocent party has not become unconditionally entitled to the promised performance, the breach is irreversible, or the circumstances make it ‘unreasonable’ for the innocent party to insist upon obtaining substitute performance.104 In Southcott Estates, an award of the cost of rectification was unavailable because the breach was rendered incurable once specific performance was refused. This will always be the case when the subject matter of a contract of sale is ‘unique’ and this is consistent with the existence of a presumption in favour of specifically enforcing contracts of this kind. This book also argues that when an award of the 100

Southcott Estates (n 2) [95], citing Semelhago (n 91). ibid [74], citing H McGregor, McGregor on Damages, 18th edn (Sweet & Maxwell, 2010). 102 Southcott Estates (n 2) [96]. Significantly, the majority disagreed on this point because it took the view that Southcott had ‘access’ to funds through the Ballantry group. 103 The most important reason is the infringement of the breaching party’s liberty that is entailed in compelling performance, but other considerations—such as the impracticability of supervising performance—are also relevant. 104 As Chapter 5 explained, the meaning of ‘unreasonable’ in this context is difficult to articulate, but recent case law is consistent with the substitutionary analysis proposed here. 101

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cost of rectification is unavailable because the breach is irreversible, an award that reasonably approximates a hypothetical ‘release’ bargain between the two parties should be, and generally is, available. Fortunately, one does not need to resort to this aspect of the new account to explain the decision in Southcott Estates because, generally speaking, a party’s entitlement to a substitutionary money award, like its entitlement to an order for specific relief, is conditional upon it substantially performing some or all of its own contractual obligations. Here, Southcott’s primary contractual obligation was to pay the purchase price, but providing such payment became redundant once its claim for specific performance was denied, which meant that Southcott never became unconditionally entitled to the School Board’s performance, and therefore was limited to a compensatory claim for the factual loss it could causally attribute to the School Board’s breach. In accordance with orthodox principles of mitigation, Southcott’s entitlement to a substantial money award thus depended on whether it acted ‘reasonably’ following breach. Significantly, a majority of the Canadian Supreme Court did not actually disagree with this understanding of the law. In particular, the justices in the majority recognised that, in accordance with the test articulated in Asamera Oil Corp Ltd v Sea Oil and General Corp,105 if Southcott had possessed a ‘substantial and legitimate’ interest in the contract’s performance, so as to make its decision to seek specific performance (rather than purchasing a substitute property in ‘mitigation’ of its loss) ‘reasonable’, it would have been entitled to follow the course of action it did. The fundamental difference between the majority and minority was whether Southcott did in fact possess such an interest. At trial, Spiegel J held that Southcott’s ‘loss’ was not ‘too speculative or uncertain’ to assess and the property’s ‘unique qualities’ related solely to the development’s profitability, therefore concluding that ‘damages’ were an ‘adequate’ response. The majority saw no reason to dispute this holding, even though both of Spiegel J’s findings were debatable. Regardless of this, on the basis that ‘damages’ were ‘adequate’ in the circumstances, both the trial judge and a majority in the Supreme Court concluded that specific performance was inappropriate on the facts. Essentially on this basis alone, and in contrast to Spiegel J’s conclusion at trial, the majority took the further step of holding that Southcott could not justify its decision to seek specific performance rather than attempting to mitigate its loss by purchasing a ‘comparable’ substitute property following breach. Despite the recent erosion of the traditional presumption in favour of the specific enforceability of contracts for the sale of land in Canada,106 it is debatable whether the trial judge in Southcott Estates was correct to refuse specific performance. Regardless of one’s view on this matter, Spiegel J’s decision to do so does appear to have been within the discretionary range that Canadian law presently affords to first instance decision makers. But in concluding that Southcott’s decision to seek specific performance was ‘unreasonable’ only because ‘damages’ 105 106

Asamera Oil Corp Ltd v Sea Oil and General Corp [1979] 1 SCR 633, 666 (Estey J). See Sopinka J’s obiter comments in Semelhago (n 91) 429.

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were ultimately found to be an adequate response to breach, it is argued that the majority erred. As McLachlin CJ explained, deciding that specific performance should not be ordered does not necessarily mean that a claimant acted ‘unreasonably’ in seeking such an order. The availability of specific performance is a matter of discretion and some leeway must be given to a party who, in good faith, pursues such an order at the trial’s commencement but is ultimately unsuccessful. As the Chief Justice also observed, contracts are made first and foremost to be performed and, in contrast to the majority, her Honour saw no reason to question Spiegel J’s finding that the subject property was uniquely suited to Southcott’s needs.107 Primarily on this basis, McLachlin CJ concluded that even if Spiegel J’s decision not to grant specific performance was legitimately within the discretion presently afforded to trial judges, his Honour was correct to hold that Southcott did not act ‘unreasonably’ in pursuing this course of action rather than seeking out a comparable substitute property in the market. As the Chief Justice explained, it is critical to draw a distinction between the question of whether the innocent party had a ‘substantial and legitimate’ interest in seeking specific performance and whether specific performance should have been ordered at trial after a consideration of all the evidence.108

B. Damages In Lieu of Specific Performance Another distinct area of the law that has been a source of significant disagreement, among both the judiciary and the academy, is the quantification of an award of damages in lieu of specific performance. The purpose of what follows is to explain why the approach adopted in quantifying these awards is consistent with, and indeed strongly supports, the arguments advanced in this book. After a brief recap of Wroth v Tyler,109 and Semelhago v Paramadevan,110 the discussion moves on to consider the significance of Johnson v Agnew. While this decision might appear to pose a problem for the new account, it will be shown that this is not in fact the case.

1. The Decisions in Wroth and Semelhago It will be recalled that in Wroth v Tyler the defendant vendor entered into a contract for the sale of the bungalow where he resided with his wife and daughter. Following exchange, he was unable to complete because his wife entered a notice onto the Land Register of her rights of occupation under the Matrimonial Homes Act 1967. Upon the vendor informing the purchasers of his position, they sought, in 107 Note that this is not inconsistent with the trial judge’s finding that the ‘unique qualities’ of the property here related solely to the development’s profitability. 108 That this is also the view expressed in M McInnes, ‘Specific Performance and Mitigation in the Supreme Court of Canada’ (2013) 129 LQR 165, 166. 109 Wroth v Tyler (n 91). 110 Semelhago (n 91).

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addition to other relief, specific performance or an award of ‘damages’ in lieu of such an order under section 2 of the Chancery Amendment Act. Megarry J refused specific performance on the grounds that it might split up the family, but upheld the purchaser’s alternative claim for equitable ‘damages’ in lieu. The ‘damages’ to be awarded on this basis depended on the appropriate date for quantifying the award. Megarry J held that this was the date of trial, rather than the date of breach, on the basis that different principles govern the assessment of ‘damages’ at common law and in equity and also on the basis that an award of ‘damages in lieu’ of specific performance should be assessed at the date of judgment to reflect the fact that specific performance is a ‘continuing remedy’.111 In the circumstances, the provision of a monetary substitute for performance was both ‘reasonable’ and possible. Because of this and the fact that the only further condition to which the purchaser’s entitlement to performance was subject was his payment of the balance of the purchase price, which would be fulfilled by awarding him the difference in the value of the property between breach and trial (ie £11,500 minus £7,500), the purchaser was entitled to an award of £4,000. As already explained, this approach was taken a step further by the Canadian Supreme Court in Semelhago v Paramadevan, where the Court rejected the breaching vendor’s assertion that, when quantifying an award of damages in lieu of an order for specific performance, the financial benefit that accrues to the innocent purchaser as a result of retaining possession of his own house between breach and trial should be taken into account. As Sopinka J explained, the purpose of awarding ‘damages’ in lieu of specific performance is not to put the relevant party into the same factual position he would have been in had the breach not occurred, but ‘to be a true equivalent of specific performance’.112

2. Explaining Johnson v Agnew It might be thought that the House of Lords’ decision in Johnson v Agnew is inconsistent with this approach. But this is not so. The claimant there was the vendor of land who had obtained an order for specific performance against the defendant purchaser. However, because the purchaser had delayed in complying with that order (combined with the fact that the vendor was in default of his mortgage contract), the land was sold off by the land’s mortgagees at below its market value following both the purchaser’s initial breach of contract and the vendor’s subsequent attempts to enforce his order for specific performance. The question arose as to the date at which the vendor’s claim for ‘damages’ in relation to the purchaser’s initial breach of contract should be assessed. As noted earlier, Lord Wilberforce held that this should be the date at which the vendor’s reasonable attempts to have the contract specifically enforced failed (or, in other words, when the remedy of specific performance was aborted).113 111 112 113

ibid 60. Semelhago (n 91) [19]. Johnson v Agnew (n 3) 401. See the discussion in Chapter 4, Section III.E.

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It should be apparent that the vendor’s claim in Johnson v Agnew was for compensation for loss caused by the purchaser’s breach rather than, as often occurs when ‘damages’ are sought in lieu of an order for specific performance, one seeking a monetary substitute for the promised performance. By the time that the order for ‘damages in lieu’ came to be made, the vendor was unable to transfer title in the property to the purchaser, which in a typical contract of sale is a necessary pre-condition for the seller to ‘earn’ the contract price.114 This inability to transfer title thus meant that the vendor’s right to the purchaser’s counter-performance had not accrued unconditionally and therefore that the vendor was limited to a compensatory claim for loss caused by the purchaser’s breach.115 As observed earlier in the context of explaining The Golden Victory, the question of when this loss should be assessed is not solved by recognising the distinction this book proposes. But in Johnson v Agnew considerations of justice, possibly in combination with the equitable nature of the claim, at least arguably supported Lord Wilberforce’s decision to assess the award at the date of trial rather than at the earlier date of breach. This analysis can be contrasted with the decisions in both Wroth and Semelhago. In each of these cases it was the purchaser who was seeking specific performance of the contract (or ‘damages in lieu’ of such an order). The making of an order for specific performance in each of these cases would have been conditional upon the purchaser paying the balance of the purchase price due upon settlement because the purchaser’s right to the vendor’s performance was conditional upon the purchaser (at least) substantially fulfilling this obligation. For this reason, the availability of a monetary award in lieu of specific performance also would be subject to the fulfilment of this condition. However, because the ‘counter-performance’ required by the purchaser here to ‘earn’ title to the land was simply the payment of money, the performance of this obligation ‘merges’, for want of a better term, in the order for ‘damages in lieu’.

IV. Conclusion This chapter considered two significant and relatively recent decisions of final appellate courts that may appear to challenge the new understanding of the law this book proposes. The focus of Section II was on the significance and scope of 114 Notable exceptions to this are certain kinds of documentary sales, such as those conducted on a cif basis. See, for example, Gill & Duffus v Berger (n 27), which is cited in J Beatson, A Burrows and J Cartwright, Anson’s Law of Contract, 29th edn (Oxford University Press, 2010) for the proposition that ‘because of the involvement of third parties in documentary sales, the obligation of a buyer to pay when the shipping documents are tendered has been held to be independent of the seller’s obligation to supply goods conforming to the contract’, 519. 115 That the appropriate date for assessment identified by Lord Wilberforce was the date upon which the innocent party reasonably continued to have the contract completed is also consistent with this analysis because any further loss incurred after this date would be attributable not to the purchaser’s breach but to the vendor’s failure to take efforts to mitigate his loss.

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the principle articulated by the House of Lords in The Golden Victory. Section II.A explained why the disagreement between the majority and minority approaches there was not in regard to whether to assesses ‘damages’ on a substitutionary or compensatory basis but rather with the correct time at which to assess the owners’ compensatory claim for prospective loss, thereby demonstrating why either of these approaches is reconcilable with the central argument of this book. Following this, Sections II.B and II.C respectively considered the way in which the Golden Victory principle has been applied in two subsequent first instance decisions, explaining why each of these decisions is consistent with the new account. Section III of the chapter examined another important area of the law that might appear to undermine the status of the new account: the relationship between specific performance, principles of ‘mitigation’ and awards of equitable ‘damages’ in lieu of specific relief. Section III.A focused on the Canadian Supreme Court’s recent decision in Southcott Estates. Whilst obviously not binding on English courts, this case illustrates the dangers of failing to appreciate the fundamental distinction that exists between substitutionary and compensatory court orders.116 The majority’s reasoning there was criticised on this basis and a preference was expressed for McLachlin CJ’s reasoning in dissent. Section III.B focused on the quantification of an award of ‘damages’ in lieu of an order for specific performance, explaining how the House of Lords’ landmark decision in Johnson v Agnew is reconcilable with both the Canadian Supreme Court’s important decision in Semelhago v Paramadevan as well as the new understanding of the law advanced in this book.

116 Recently, in AIB Group v Mark Redler & Co Solicitors [2014] UKSC 58, the UK Supreme Court appeared to downplay the significance of the distinction between substitution and compensation, as those terms have been used here, in the context of a claim by a beneficiary to ‘reconstitute’ the trust following the trustee’s breach of duty. In holding that the beneficiary’s claim was limited to the factual loss it could causally attribute to the trustee’s breach, it is at least arguable that the Supreme Court erred in the same way that the Canadian Supreme Court did in its earlier decision in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 (SCC). Compare, in this context, the Australian High Court’s decision in Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15, 212 CLR 484, which, at least in its result, correctly recognised the distinction between what have been referred to as ‘substitutive’ and ‘reparative’ claims for ‘equitable compensation’. For discussion, see S Elliott, ‘Compensation against Trustees’, PhD Thesis (University of Oxford, 2002).

Conclusion I. Summary of the Argument English law’s accepted orthodoxy is that in other than certain exceptional cases the sole purpose of awarding money following a breach of contract is to compensate the promisee for the ‘loss’ that the promisor’s failure to perform has caused. Stating the principle in this way, however, obscures much of the uncertainty that exists with regard to the meaning of ‘loss’ in this context. One historical source of the uncertainty concerns the ‘position’ against which the relevant ‘loss’ is to be measured. Fuller and Perdue famously argued that the ‘expectation’ measure of recovery was in reality just a ‘proxy’ for the more normatively justifiable protection of the promisee’s ‘reliance’ on the breaching party’s undertaking.1 While the Fuller and Perdue thesis has fuelled considerable academic disagreement, it has exercised little influence in the courts, with it generally being accepted that the appropriate baseline against which loss must be measured in the contractual context is the position the promisee would have been in had the breach not occurred. To the extent that alternative measures are used, they are viewed either as proxies for, or justifiable exceptions to, this baseline. Another important source of uncertainty and controversy in this part of the law has been the question of precisely which kinds of losses should be compensable in an action for breach of contract. While compensatory awards in the contractual context have focused predominately on the financial consequences of breach, more recently the courts have shown a greater willingness to allow recovery for the detrimental non-pecuniary consequences of contractual breach, at least in certain, specific types of case. Although this book has discussed the two sources of uncertainty just mentioned, neither of them constituted the focus of the central argument advanced. This argument focused on a distinct source of uncertainty (or indeterminacy) that arises purely from within the accepted ‘expectation-based’ framework. This is the question of whether awards upholding the ‘Robinson v

1 As Chapter 3 explained, Fuller and Perdue ultimately accepted that the usual award of ‘expectation damages’ was justifiable on the basis that, first, this measure was a useful ‘proxy’ for difficult-to-quantify reliance losses and because, secondly, protecting the ‘expectation interest’ encourages the beneficial practice of bargaining. However, both of these reasons are derivative (or second-order) in nature and Fuller and Perdue made clear their view that protecting the promisee’s ‘reliance interest’ had a stronger normative justification than the protection of the promisee’s ‘expectation interest’.

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Harman principle’ are concerned only with making good the detrimental factual consequences that the innocent party has incurred as a result of the breach or are more fundamentally concerned with upholding this party’s entitlement to receive the performance promised, irrespective of the factual loss caused. English law’s accepted orthodoxy is that the purpose of all money awards upholding the Robinson v Harman principle is to make good the detrimental financial (or factual) consequences that breach has caused the promisee. This book challenged this view, proposing a new account in its place. Part I of the book outlined this challenge. Chapter 1 explained the law’s orthodox interpretation and charted its development. It commenced by exploring the Robinson v Harman principle’s two distinct sources of indeterminacy. The more fundamental indeterminacy, which concerns the underlying purpose of this principle, generally has been overlooked, so in outlining the orthodox account Chapter 1 focused on the principle’s second source of indeterminacy, which concerns the scope of recoverable loss. It was observed that traditionally the ambit of the Robinson v Harman principle has been confined by contract law’s narrow conception of loss. More recently, a broader understanding of loss has been adopted, enabling the recovery of ‘damages’ for harm to various non-pecuniary interests. Chapters 2 and 3 challenged the orthodox account on doctrinal, conceptual and terminological grounds. The doctrinal challenge was mounted in Chapter 2, which sought to catalogue the numerous occasions in English contract law where an innocent party is awarded a sum of money that does not reflect the detrimental factual consequences that this party can attribute to the promisor’s breach. Section II of the chapter focused on ‘damages’ awards not purporting to compensate for loss at all. These awards might be classified as isolated exceptions to the orthodox view were it not for the many decisions examined in Section III of the chapter. In these cases awards were made that purported to be compensatory but which manifestly failed accurately to reflect the deterioration in the innocent party’s factual position that was attributable to the relevant breach. The challenges advanced in Chapter 3 were conceptual and terminological. The conceptual challenge was based on the difficulties associated with understanding the Robinson v Harman principle as a measure of ‘loss’. This measure of compensation presumes the prior existence of a right to performance. The existence of this right raises the possibility that substituting for performance is the more fundamental purpose of at least some of the money awards made in response to a contractual breach. In addition, it was argued that the excessive focus on identifying a ‘loss’ has skewed theoretical debates about contractual money awards and inhibited true understanding. Finally, the chapter sought to highlight the ambiguous and inconsistent terminology that plagues this area of law and suggested that these difficulties help to explain the persistence of the orthodox account in the face of the doctrinal inaccuracy identified in Chapter 2. In place of this inadequate terminology, new definitions for a number of important legal concepts were proposed. Part II of the book advanced an alternative, bifurcated account of money awards upholding the ‘Robinson v Harman principle’. The foundations of this

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account were outlined in Chapter 4. Section II of the chapter defended the claim that English law recognises the existence of a right to contractual performance. This defence was based on highlighting the existence of various legal doctrines that assume the existence of such a right and also by demonstrating the fallacy of the argument contesting the existence of such a right on the basis of the limited availability of specific performance. Section III outlined the significant doctrinal support that exists for the proposed distinction between substitutionary and compensatory money awards both from within the law of contract and elsewhere. Section IV explained the specific kind of substitutionary account advanced and also presented a theoretical explanation for the proposed distinction based on the ‘continuity thesis’ advanced by Professor Gardner. Chapter 5 outlined the quantification and restriction of money awards that substitute for performance. The object of such an award is to provide the promisee with the monetary substitute that is most appropriate in the particular circumstances. It was argued that, at least where the promisee has become entitled unconditionally to the performance promised, the appropriate basis for quantifying such an award is prima facie the cost of obtaining a close equivalent for this performance from elsewhere either via rectification or market replacement. When, however, the promised performance can no longer be obtained or circumstances make it ‘unreasonable’ for the promisee to insist upon obtaining it, the law nevertheless should endeavour to provide a substitutionary alternative. It was argued that the appropriate basis for quantifying such an award is an approximation of the price that a reasonable promisee would have accepted to ‘release’ the promisor from performance at the date of breach. In addition, support for the award of both of these measures, as well as for a substitutionary interpretation of the ‘reasonableness’ constraint, in the case law was outlined. The focus of Chapter 6 was on explaining the nature and content of money awards that compensate for loss as well as the restrictions that limit these awards. The discussion commenced by noting the significant academic controversy that exists with regard to the theoretical basis for compensatory awards, before it was explained that this debate operates at a higher level of theoretical abstraction from the doctrinal distinction proposed in this book, meaning that it is unnecessary to take a definitive position within this debate here. Section III of the chapter defended the proposed distinction by showing that the restrictions imposed on compensatory awards for breach of contract cannot be explained wholly by reference to the parties’ agreement. This means that such awards do not simply directly enforce the promisee’s primary right to performance; in restricting the recovery of compensation for loss, English law takes account of various considerations, some of which may be entirely extrinsic to the agreement reached by the parties. Part III of the book contained two chapters. Chapter 7 demonstrated how the proposed distinction can explain certain aspects of some of English law’s leading authorities on ‘contract damages’ that are difficult to reconcile with the law’s conventional understanding. After closely re-examining the House of Lords’ important decisions in Ruxley and Panatown, highlighting precisely what aspects of these authorities the new account can and cannot explain, attention turned

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towards the difficult case law on contracts for the sale of goods. Here again it was shown what aspects of the law the new account can explain and what aspects it cannot. Not only does the new account make sense of some decisions that are otherwise highly perplexing, it is also consistent with British Westinghouse and might be understood as reconcilable with the Privy Council’s otherwise apparently inexplicable decision in Wertheim v Chicoutimi Pulp Co. After this, in Chapter 8, attention turned to explaining certain features of the law that might appear to contradict the new account, but do not in fact do so. The main focus was on The Golden Victory and two more recent applications of the principle that the House of Lords there enunciated. Not only was it shown why these decisions are consistent with the new account, but also why these more recent decisions are correct. Following this, attention turned to the difficult law concerning the relationship between specific performance, ‘mitigation’ and awards of equitable ‘damages’ in lieu of coercive relief. The principal objective here was to explain why neither the Canadian Supreme Court’s decision in Southcott Estates nor the House of Lords’ holding in Johnson v Agnew are inconsistent with the new account.

II. Principal Conclusions and Implications The major purpose of this book was to demonstrate the existence, and explain the operation, of two distinct kinds of contractual money awards that exist in English law. On the law’s orthodox understanding, all contractual awards given in accordance with the Robinson v Harman principle are concerned to make good the ‘loss’ suffered by the promisee in consequence of the promisor’s breach. But this account is both conceptually and doctrinally inadequate, and requires revision. In its place a new account was proposed. According to this account, it is necessary to distinguish compensatory awards, which seek to make good certain detrimental factual consequences that breach has caused the promisee, from substitutionary awards, which, at least when certain conditions are met, aim to provide the promisee with an appropriate monetary substitute for the performance that was promised but not provided. In addition to this objective, the book had various important subsidiary aims. The first subsidiary aim was to clarify and reclassify much of the ambiguous terminology that pervades discussions of this area of the law. As Chapter 3 observed, there are presently at least three different senses in which the word ‘loss’ is used in the contractual context and the confusion this creates is exacerbated by the similar uncertainty that surrounds the meaning of other important, related concepts such as ‘harm’, ‘damage’ and ‘injury’. Stable definitions for these terms in the contractual context were proposed. Most significantly, it was suggested that ‘loss’ is a term that should be used to refer only to deteriorations in a contracting party’s factual position. On this definition, the ‘harm’ entailed merely by the infringement of a right without more is not a ‘loss’. Chapter 3 also observed that the ambiguity that surrounds the meaning of these terms also occurs in relation to other important legal concepts employed in this

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part of the law, such as ‘damages’, ‘compensation’ and ‘remedy’ and stable definitions for these terms also were proposed. It was suggested that the expression ‘damages’ means nothing more than a money award for a wrong and that, while legitimate alternative conceptions exist, conceptual clarity would be improved if the term ‘compensation’ was reserved for awards to the victim of a wrong that aim only to rectify deteriorations in that party’s factual position. After noting the unstable meaning of ‘remedy’, Zakrzewski’s suggestion that a remedy is best defined as the rights arising from judicial commands responding to an actual or threatened infringement of a substantive legal right was explained and endorsed, and the usefulness of his proposed distinction between replicative and transformative remedies, as well its limitations, also discussed. Finally, a new terminology for money awards substituting for performance was advanced. The second, more substantive, subsidiary aim of the book was to outline a coherent performance-oriented account of the law of contractual money awards and coercive orders. According to the account proposed, the object of any court order that aims to enforce contractual rights, including following an action for anticipatory breach, is to achieve ‘next-best conformity’ with the promisee’s primary contractual right to receive the promised performance. Chapter 4 explained that achieving ‘next-best conformity’ in this context requires that two distinct objectives be achieved. The first is that, at least where the promisee has become entitled unconditionally to the promised performance,2 that party receives an appropriate substitute for this performance. The second is that certain detrimental factual consequences resulting from a breach are made good. While this second objective can be achieved only by awarding ‘compensation for loss’, there are various different ways of ‘substituting for performance’, with the appropriate mode depending on the particular circumstances of the case. The closest substitute for performance is an order that compels a contracting party to perform (or prohibits breach) at the time at which such performance is due. The next closest substitutionary order is one compelling substitute performance at a time after the performance was due. This covers most instances of specific performance as well as the order made following a successful action for an agreed sum. Controversially, however, this book also argued that in addition to these direct enforcement orders, English law also provides monetary substitutes for performance, which provide a more indirect mode of enforcing a party’s entitlement to the promised performance. Chief amongst these monetary substitutes for performance is an award of the cost of obtaining a close equivalent for the promised performance via rectification or market replacement. Despite an innocent party’s prima facie entitlement to such an award, English law restricts its availability to situations where it is ‘reasonable’ in the circumstances for the innocent party to insist upon obtaining accurate performance, 2 As explained elsewhere in the text, this will be the case whenever all conditions (precedent and subsequent) attaching to this party’s entitlement to receive the promised performance have been fulfilled or, when the condition involves the payment of a sum of money, can be fulfilled via an appropriate order of the court.

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at least in cases concerned with the defective performance of a contract for the provision of services. Possibly in such cases, but at least in situations where substitute performance is now impossible because the breach is irreversible, it was argued that English law should (and increasingly does) award the innocent party an alternative monetary substitute for performance measured by reference to what a reasonable person in the innocent party’s position would have accepted at the date of breach to ‘release’ the breaching party from further performance. This kind of award whilst also a substitute for performance, is considerably further away from the ideal of actual performance than the other performance-oriented court orders that are further up the substitutionary hierarchy. On the view proposed here, therefore, the overriding purpose of any response to breach is, subject to certain constraints that limit the availability of substitutionary or compensatory court orders, to achieve ‘next-best conformity’ with actual performance of the contract. This is attained directly by coercive orders, or indirectly by monetary substitutes for performance. More indirect still is the collateral protection to the right to performance afforded by awards of compensation to make good certain detrimental factual consequences of non-performance. At a higher level of abstraction, compensatory awards are directed ultimately towards the same objective as substitutionary orders because, whatever the true basis for compensatory awards, they are justified ultimately by reference to the prior existence of the primary right.3 In consequence, the essential principle underpinning the argument here advanced is that substituting for performance, rather than making good factual loss, is the fundamental normative principle that underpins the English law of contractual ‘remedies’. It is simply that substitutionary and compensatory awards pursue this objective in different ways. While substitutionary awards provide the innocent party with a substitute for the performance promised, compensatory awards are concerned to make good some of the detrimental factual consequences that the promisee has suffered due to breach. This important goal of outlining a coherent performance-oriented account of the English law of contract remedies has further implications. An important one, which easily might be overlooked, concerns the ‘reliance-based’ criticisms of the orthodox account that were advanced by Fuller and Perdue and Professor Atiyah. Atiyah, in particular, sought to stress the inappropriateness of fully enforcing wholly executory promises.4 As noted earlier,5 by appearing to further extend the approach he denigrated, the new account may seem to be even more susceptible to Atiyah’s critique than the accepted orthodoxy. But for reasons that are hopefully 3 To be clear, this is because in order to justify a duty (or liability) that a breaching party comes under to make good the deterioration in the innocent party’s factual position, measured against the baseline of future performance, the existence of a primary right to such performance is necessary. The one qualification to this would be if this baseline were used as a ‘proxy’ for a (justified) alternative baseline such as that of wasted expenditure or ‘reliance’, as argued by Fuller and Perdue. 4 See P Atiyah, ‘Executory Contracts, Expectation Damages, and the Economic Analysis of Contract’ in his Essays on Contract (Clarendon, 1986) 150, 171. 5 See the discussion in Chapter 4, Section 1.A.2.

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by now clear, this is not the case. First, the requirement that an innocent party be ‘ready, willing and able’ to perform its prospective contractual obligations in order to recover compensation for the lost bargain at least partially alleviates Atiyah’s principal concern. Secondly, and more fundamentally, the substitutionary extension this book proposes is unaffected by Atiyah’s criticisms because a party’s entitlement to such an award is dependent, at least, upon the fulfilment of all conditions (precedent and subsequent) to which his right to performance was subject. Moreover, in recognising the need to distinguish a case where not all these conditions have been fulfilled from one where the innocent party’s entitlement to performance has accrued unconditionally, the new account is actually in harmony with the essential spirit of Atiyah’s critique, which was to ensure an appropriate differentiation in the enforcement of executed and executory promises. A second important implication of the new account is that it may reduce the perceived need exceptionally to allow profit stripping as a response to certain kinds of cynical or egregious contractual breaches. As Professor Peel has noted, ‘the clamour for restitutionary damages is based on the perceived inadequacies of compensatory damages’.6 However, once the fallacy of the hegemony of (reparative) compensation is excised from the law and the possibility of substitutionary awards is recognised, many of these perceived inadequacies dissolve. To explain further, it was noted in Chapter 2 that the performance-oriented account advanced here may remove the need for the separate category of gain-based awards that Edelman and others have labelled ‘restitutionary’.7 But in the above quotation Peel was using the term ‘restitutionary’ in a broader sense to include awards that Edelman (and others) would describe as instances of ‘disgorgement’. The legitimacy of such awards has been challenged,8 but to the extent that they are justifiable, the best explanation for them may lie in the desirability of deterring certain egregious breaches of contract.9 Such a view might be consistent with the emphasis on performance advocated in this book, but substantial additional work is needed to demonstrate that this is the case.10 Moreover, to the extent that profit stripping continues to be perceived as necessary, a greater appreciation of the possibility of substitutionary money awards may reduce this perception in any event.

6 E Peel, ‘Loss and Gain at Greater Depth: The Implications of the Ruxley Decision—A Comment’ in F Rose (ed), Failure of Contracts—Contractual, Restitutionary and Proprietary Consequences (Hart Publishing, 1997) 27, 29. 7 J Edelman, Gain-based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing, 2002) 113. See Chapter 2, Section III.B. 8 For one notable example, see D Campbell and D Harris, ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2000) 22 Legal Studies 208. 9 Edelman (n 7) 83–86. For an explanation of why the current author remains sceptical of this, see D Winterton, ‘Contract Theory and Gain-Based Recovery’ (2013) 76 MLR 1129. 10 This claim is supported by the forceful arguments recently mounted against allowing such awards in C Rotherham, ‘Deterrence as a Justification for Awarding an Account of Profits’ (2012) OJLS 537.

INDEX

action for agreed sum: see recovery of debt action amenity: see loss of amenity (Ruxley) anticipatory breach doctrine 305–6 balance of probabilities test 306 case law The Glory Wealth 302–7 The Golden Victory 290: see also Golden Victory (compensatory principle) Hasham v Zenab 125n 111, 144–5, 147 Leofelis 294–302, 305–6 The Mihalis Angelos 301 The New Flamenco 94–5 Panatown 163–4 Rawson v Hobbs 8 White & Carter 153–6 mitigation and 149 ‘next best thing to performance’ 179, 320 performance, reciprocal right to and 8, 144–5, 149–50, 173, 179, 302–7 quantification of award 301–2 substitutionary vs compensatory award 14, 28, 42, 144–5, 149–50, 301–2 third parties and 56 unconditional entitlement to performance requirement 144 anticipatory repudiation: see anticipatory breach doctrine Aristotle 9, 219 Atiyah, P 135, 142, 181n 4, 321–2 Austin, J 124, 125–6 Baker, J 150–1 balance of probabilities 112, 120, 181–2, 193, 208, 223, 226, 265, 272, 298, 302–7 Barnes, D 19n 53 Barnett, K 175n 184, 203n 114, 206n 123 Beatson, J, A Burrows and J Cartwright 138n 19, 314n 114 Beever, A 9n 19, 11n 36, 31n 37 Bell, M 184n 19 Benson, P 9n 21, 103, 219n 9 Birks, P 46, 105–6, 116, 123, 192n 62, 193, 201n 110, 218n 4 Bridge, M 70, 78–9, 149, 213n 149, 248n 151, 252, 253, 279, 305

British Westinghouse absence of detriment/enhanced position, relevance 77–8 compensatory principle 27, 76n 133 expectation damages 24 mitigation/avoided loss rule 87–9, 90, 249–50, 280, 308 post-breach benefits 87–9, 90, 249–50 building work, defective performance 82–4 burden of proof 27–8, 80, 81–2, 250n 168, 266n 19, 268, 304n 71, 306, 308 Burrows, A 16, 31, 52, 62–3, 65, 70, 87, 89, 90, 91–2, 100n 8, 118n 85, 147n 65, 169, 169n 163, 181–2, 185n 28, 207, 225n 40, 247n 150, 249n 162, 252n 7 Campbell, D and D Harris 322n 8 Capper, D 289n 19 carriage of goods contracts case law Dunlop/Albazero 53–4 Rodocanachi 80–1, 278 Ströms Bruks 80, 278 consignor’s right of recovery after transfer of property to consignee (Dunlop/Albazero) 53–4 Carriage of Goods by Sea Act 1992 (UK) 53 conflict with Robinson v Harman principle 53–4 difference in value measure 79–81 Carter, J and E Peden 289n 19 Carter, JW 8n 15, 154, 155, 299 Cartwright, J 238, 239–40, 241, 243–4, 256n 186 causation: see also remoteness rule ‘but for’ test 223–4, 250 case law Alexander v Cambridge Credit 224 Baker v Willoughby 223 Barnett 223 Cook v Lewis 223 Empress Car 224 Fairchild 223 Galoo 225 Jobling 223 McGhee 223

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Index

Nykredit 225 SAAMCO 224–5, 235 Silver Sky 223–4 mitigation principle and 102n 19, 249–50 novus actus interveniens 223–4 overview 223–5 Chambers, R 309n 99 Chen-Wishart, M 145n 57 coercive orders: see injunctions (prohibitory/ mandatory); specific performance Coleman, JL 46n 4, 219n 10 compensation, definitions of academic conceptions Radin 120–1, 122 Sherwin 120, 122 Tilbury, Noone and Kercher 121 ambiguity 117–18, 319–20 case law Blake 119 Jaggard 118, 159 Ruxley 119, 122 Wrotham Park 118–19 WWF 119, 121, 122 ‘damages’ distinguished 110, 114–15 ‘making good factual detriment’ (‘compensatory principle’) 4, 13, 25, 26, 42, 44n 1, 110, 114–22, 180, 216–17, 319–20 ‘reparation of a wrong through the delivery of an equivalent’ 121 substitutive vs reparative compensation 221–2 vindication of primary right distinguished 122, 206 compensatory money award 216–57: see also factual detriment as measure of compensation; Golden Victory (compensatory principle); Robinson v Harman principle; substitutionary vs compensatory award, distinctions basis contention over 110, 115, 217, 318 parties’ agreement 257 primary right to performance 6, 12, 122, 142, 174, 318 secondary right to repair: see secondary right to repair as basis of compensatory award breach as trigger 6 definition/purpose 3, 6 limits on compensatory recovery: see also causation; double recovery, prohibition; mitigation/avoidable loss rule; non-pecuniary harm, recovery for, limitations on; remoteness rule inherent limits 222–7 parties’ agreement and 228

measure as difference between present position and hypothetical position in absence of breach 3, 13, 27, 28, 86–9, 93, 94, 98–9, 100–1, 102–3, 111–12, 180, 184–5, 302 as replicative remedy 124–7, 320 confidentiality, award for breach of 67–8, 210, 283 continuity thesis 172–6, 220n 19, 221–2, 313, 318: see also ‘next best thing to performance’, post-breach persistence of reasons grounding right to performance as basis contracts of carriage 79–81 contractual performance, right to: see performance, reciprocal right to contractual remoteness rule: see remoteness rule Cooke, R 240n 121 Coote, B 10–11, 53, 100n 10, 170, 190, 269n 32, 276, 284n 91, 290n 20 corrective justice 9, 12, 102, 120–1, 174, 179, 219–20 cost of cure award: see cost of repairs award cost of market substitute award 185–8 case law Clark v Macourt 187 Force India 187–8 Regus 187 Slater 186–7 White Arrow 187, 188 commercial predictability, relevance 297, 300 definition 183 as measure of cost of substitute award 5n 6 as minimum cost/cheapest way 10n 28, 186 as next best thing to performance 320 SGA 51(3) 185–6 cost of repairs award 183–201, 261–70: see also cost of substitute performance award (general) Note: also known as ’cost of cure’ or ‘cost of reinstatement’ award absence of detriment/enhanced position, relevance 82–4 building repairs defective performance of building work 82–4 tenant’s obligation to repair 84–5 case law Bellgrove 185, 188–9, 195, 200, 262, 270n 37 Darlington 98, 195–6, 265 De Beers 196 Dean v Ainley 83, 196, 265, 270 East Ham 183, 184n 15, 189, 191, 262 Jacob & Youngs 185 James v Hutton and Cook 198 Joyner 84–5, 165–6, 171, 190 Linklaters 266, 267, 268

Index Panatown 184, 194–5, 201, 273–6 Peeveyhouse 200 Radford v De Froberville 184–5, 193–4, 263, 266, 267 Ruxley 36–7, 38–42, 113n 63, 119n 88, 183–4, 193n 65, 195, 199, 264–72 Samson 83 Tabcorp 184, 185, 188–9, 190, 269n. 33 Tito 82, 137, 138, 192–3, 200, 263, 265 Westminster (Duke) v Swinton 190 Wigsell 191, 192, 200n 100 definition 183 difference in value award, distinguishability 170–1, 190n 54, 281–2 intention to cure, relevance 82–3, 84–5, 191–9, 200, 264–5, 271n 42 as measure of cost of substitute award 82, 318 as minimum cost/cheapest way 183, 261–2 mitigation/avoidable loss rule 36–7, 84, 194, 249–50, 264, 265–70 as monetary equivalent of specific performance 10n 27 as primary substitutionary measure 10–11, 170, 320 compensatory award distinguished 10–11, 266–8, 282nn 85 and 87 reasonableness requirement 188–201, 205n 119, 261–70, 318 various meanings of ‘reasonableness’ 268–70 unconditional entitlement to performance requirement 261–2 cost of substitute performance award (general): see also cost of market substitute award; cost of repairs award; difference in value award; price of release award; substitutionary vs compensatory award, distinctions; third party-related award, exclusionary rule exceptions alternative terminology 127–9 breach, relevance 6n 8 case law: see also cost of repairs award, case law AIB 315n 116 The Alecos M 200 Channel Island Ferries 200 Ford v White 26–7, 139, 211–12, 213 Hussey/Gardner/Needler 93 Pell Frischmann 66–7, 209–10 Sunshine 191–2 White Arrow 197 compensatory element 2 compensatory money award distinguished 28 compensatory or substitution award? 10–11, 170 definition 3, 5

325

dependence on fulfilment of promisee’s own obligations 7 difference in value award, distinguishability 39, 170–1, 190n 54: see also difference in value award English law’s preference for monetary award 1, 40, 135–6 civil law practice 199 intention to cure the breach, relevance 4–5, 37–8, 82–3, 84–5, 191–9 irreversibility of breach and 93, 178–9 measure/quantification 179–88 cost of repairs: see cost of repairs award harm principle 176n 185, 182–3 lost opportunity 274–5 market value of services not received (cost of market substitute): see cost of market substitute minimum cost test/cheapest way 5n 6, 10, 14, 74–5, 170, 175, 178, 179–80, 181–3, 186, 188, 189, 197, 201, 202, 210, 261–2 possibilities 5n 6 ‘reasonable approximation of price of release’ 65, 66–7, 84–5, 176–7, 186n 32, 193–4, 205, 206, 207, 209, 210–13, 276 as ‘next best thing to performance’ 4, 40, 116–17, 126–7, 167–8, 320 quantifiability requirement 5, 6–7, 10n 29, 11, 128, 178–9 requirements quantifiability 6–7 reasonableness 7, 11, 42, 170, 188–201, 261–70, 271–2, 273 unconditional entitlement to performance requirement 4, 5, 7–8, 135, 179, 180–1, 261–2, 320 ‘restitutionary damages’ as 65, 66–7, 209 right to performance as basis 3, 6, 14, 107–8, 179–80, 226n 47 as replication of primary right 124–7, 320 substitution for performance vs right of performance 9–10 rights-based theories and 9–10 substitutive damages theory and (Stevens) 9n 29, 10, 68, 117, 128, 134, 152, 168–71, 177, 209–10, 215, 275, 281–2, 284, 290, 315n 116 Cunnington, R 49, 119n 91 damages, definitions of 114–17, 320 performance damages 127–8 substitutive damages theory 9n 29, 10, 68, 117, 128, 134, 152, 168–71, 177, 209–10, 215, 275, 281–2, 284, 290, 315n 116 damnum vs iniuria 63, 106–7 Daube, D 106 Dawson, F 305n 83 Dawson, J 145, 237

326

Index

debt recovery: see recovery of debt action deficiencies in the law, contributory factors 2 detriment, relevance: see difference in value award, absence of detriment/enhanced position, relevance; factual detriment as measure of compensation difference in value award absence of detriment/enhanced position, relevance 69–70, 72–3, 77–8, 186, 278, 279 accrual of post-breach benefits 87–95: see also post-breach benefits breach of contract other than for sale of goods 79–87 profit-stripping remedy 83, 208 absence of difference 39 breach of contract other than for sale of goods breach of restrictive covenant 85–7 contracts of carriage 79–81 contracts of employment 81–2 defective performance of building work 82–4 tenant’s obligation to repair 84–5 compensatory or substitutionary award? 185–6, 226–7 intention to cure the breach, relevance 37–8, 82–3 as measure of prospective financial loss 10n 24 policy considerations 79 remoteness, relevance 75–6, 94, 103 right to performance as basis/as substitution award 74, 161–2 sale of goods: see sale of goods, award for breach of contract by seller exceeding promisee’s factual loss standard/burden of proof 27–8, 80, 81–2 vs minimum cost of substitution 10 difference in value award, case law: see also post-breach benefits, case law Bence 75–6, 166–7, 279–80, 284–5 Clark v Macourt 3, 76–8, 86, 162, 187, 281 Dakin v Lee 82–3 Force India 187–8 Galley 81–2, 195 Gilbert 85–6, 208–9 Harbutt’s ‘Plasticine’ 83–4, 227, 293 Jones v Just 69 Joyner 84–5, 165–6, 171, 190 Miles 82, 165 The New Flamenco 88n 192, 293 Rodocanachi 80–1 Royle 81–2, 165 Ruxley 37–8, 39 Samson 83 Slater 73–5, 186–7 Ströms Bruks 80, 278

Wertheim 72–3, 278, 283–4, 319 White Arrow 27–8, 165, 187, 188, 189, 197, 213 Williams Bros 69–70, 81, 186, 278, 279, 285, 300–1 ‘disappointment’ as basis of award 32, 39, 40–1, 112–13, 267n 24, 270 disgorgement: see punitive damages/ disgorgement double recovery, prohibition 226–7 British Westinghouse 281–2 Hasham v Zenab 226n 47 Tang Man Sit 226–7 duty of care deed/contractual provision 33–4, 57–8, 59, 90–1, 163, 184, 275 Dworkin, R 1, 9n 22, 11–12, 17, 31n 37, 79 Dyson, A 88n 188, 280–3 Dyson, A and A Kramer 292n 31 economic duress 145 Edelman, J 33n 46, 39n 77, 59n 61, 63, 64, 65, 85, 112, 115–17, 118, 126n 117, 128, 169, 170, 203n 114, 205–6, 208–9, 263, 298n 45, 322: see also Elliott, S and J Edelman Eisenberg, M 16n 44, 239n 110 Eleftheriadis, P E 123n 104 Elliott, S 126n 117, 128, 151, 152–3, 221–2, 315n 116 Elliott, S and J Edelman 152n 82 employment contracts 33–4, 81–2 Farley 33–4 Galley 81–2 Hatton 33–4 Johnson v Unisys Ltd 34 Miles 82 Royle 81–2 Enonchong, N 29 equality before the law 1, 198 equitable remedies 136–7 exclusivity, award for breach of 66–7, 209–10, 294–6, 297, 302 expectation measure (Robinson v Harman) as alternative to ‘compensatory principle’ 24 criticism of 98–9 reliance damages and 24, 98–9, 100, 316, 321 factual detriment as measure of compensation: see also sale of goods, award for breach of contract by seller exceeding promisee’s factual loss absence of detriment/enhanced position, relevance 69–70, 72–3, 77–8, 186, 278, 279 as additional entitlement 5, 177 examples of challenge to doctrine 44–5 factual detriment as synonym for 216, 229, 319–20

Index financial loss as traditional focus 3, 13, 26–8, 42–3, 214, 317 ‘so far as money can do it’ (Robinson v Harman) 25–6, 27, 162, 254n 182 ‘harm’/‘injury’ as detriment 105, 108n 48 limitation of ‘compensatory awards’ terminology to awards making good factual detriment 113, 122, 128, 216–17 restrictions on recovery of compensation and 217, 227, 281, 282–3 limits on compensatory recovery: see causation; double recovery, prohibition; Golden Victory (compensatory principle); mitigation/avoidable loss rule; non-pecuniary harm, recovery for, limitations on; remoteness rule non-compensatory money awards distinguished 45, 51 non-correspondence between award and detriment 4, 13, 46, 65–6, 119, 121–2, 133n 1, 149, 160 expectation measure 24–5, 98–9 Robinson v Harman principle and 13–14, 98, 101, 316–17 substitutionary awards distinguished 5–6, 133, 151–2, 157, 160–2, 175–6, 177, 178, 321 as synonym for ‘loss’ 216, 229, 319 Feinberg, J 105–6, 107, 110–11 financial detriment as focus: see factual detriment as measure of compensation, financial loss as traditional focus Friedmann, D 24n 5, 100, 103, 139n 21, 233–4 frustration of contract 144, 145 Fuller, L and W Perdue: see Robinson v Harman principle, Fuller and Perdue’s challenge gain-based award 47–51 case law Blake 48–50, 102, 133n 1, 165, 226n 46 Experience Hendrix 51 Inverugie 65, 206 Niad 50–1 Pell Frischmann 65, 66–7, 206, 209 Wrotham Park 65, 119 WWF 119 as exception to compensatory principle 49–50, 51 no-gain 65, 206, 209–10 ‘no profit from own wrong’ principle 48–9 profit-stripping remedy 49, 50–1, 101–2, 119, 165n 144 restitutionary remedy distinguished 50 Gardner, J 9n 24, 219n 13, 220, 221–2, 318: see also ‘next best thing to performance’, torts ‘corrective justice’ analogy (Gardner) Giglio, F 117 Gleeson, AM 242n 128

327

Glory Wealth (balance of probabilities) 302–7 court’s decision 304–5 defence of 305–7 factual background and arguments 302–4 Golden Victory (compensatory principle) 286–302: see also Loefelis (breach of exclusive licensing agreement) anticipatory breach doctrine and 291 as compensatory award 291–2, 300–2 date for determination of compensation (Bwllfa principle) 288–9, 292n 31 decisions academic controversy 289–90 Court of Appeal 287 High Court 287 House of Lords majority 287–8 minority 288–9 factual background 286–7 justice and 299–300, 314 policy considerations (commercial certainty) 70, 289, 290, 293, 297–8, 300 post-breach benefits/enhanced position, relevance 289, 293 unconditional entitlement to performance requirement 290–2 Graham, M: see McKendrick, E and M Graham Harder, S 255n 185 ‘harm’ as factual deterioration 110–11 loss distinguished 105–6 harm principle 176n 185, 182–3 Harris, D, A Ogus and J Phillips 38, 204, 272 Harris, D, D Campbell and R Halston 242n 130 Hart, HLA and A Honoré 223nn 28 and 31 Hartshorne, J 32n 41, 255n 185 Hawes, C 74 Hoffmann, L (extrajudicial) 95, 225n 44, 245, 247 Hohfeld, W 106, 123–4, 144n 51, 147 Holmes, OW 134–5 Holmesian objection 134–41, 146–7, 177 Ibbetson, D 150–1, 168n 159 infringement of right and loss flowing from that infringement distinguished 46, 95–6, 105, 106–7 infringement/violation, distinguishability 46n 4 injunctions (prohibitory/mandatory) 141–2 Doherty v Allman 141 right to performance and 141 ‘injury’ 106–7 interpersonal justice vs policy considerations 11, 229n 56, 242, 247n 10, 251–2

328

Index

interpretative legal theories, criteria 16–19 coherence 18 fit 17 morality/justification 17–18 overlap 17–18 transparency 18–19 Jones, G 192n 62, 193, 205 justice: see also corrective justice elements/principles balance between parties 1–2 equality before the law 1, 198 principles as basis 11 as fundamental principle 1–2 The Golden Victory 299–300, 314 Hadley rule/fairness rider and 240–3, 245–7 Johnson v Agnew 314 specific performance and 137, 138 Kimel, D 99n 2, 102n 17, 137, 173, 226n 46 Kramer, A 3n 4, 51, 93n 219, 215, 237–8, 239, 247–8: see also Dyson, A and A Kramer late delivery of goods 71–3 legal remedy equitable remedies 136–7 recommended definition (Zakrzewski) 124–5 replicative vs transformative classification 124–7, 320 uncertainty of meaning 123 legal rights/duties alternative conceptions of 123–4 rights as reasons for action 147–8 duty in absence of right 250 primary and secondary rights distinguished 124 right and enforcement of distinguished 123–7, 134, 146–8 substantive and remedial rights, relationship 113, 124, 126, 134, 320 continuity thesis 172–6, 220n 19, 221–2, 313, 318 ‘legitimate interest’ profit-stripping awards 49, 50 recovery of debt action and 153–6, 189, 201 Linden Gardens exception (promisee’s right to recover third party’s loss on property contract) 55–60 Panatown application of availability of direct remedy, relevance 57–8 ‘broad’ principle, rejection/support for 58–9 defective performance as ‘loss’ 58–9 endorsement of general exclusionary rule 57

intention to cure, relevance 194–5, 273 ‘narrow’ principle endorsement 55, 56, 57–8 promisee’s right to recover for defective performance compared 57–8 limitation of Linden Gardens exception to 10 statement of principle 55, 56, 57 Liu, Q 155, 189, 201, 289n 19, 290, 292n 30, 305n 83 Loefelis (breach of exclusive licensing agreement) 294–302 applicability of Golden Victory principle 295–302 comparability of cases 297–9 compensatory principle 300–2 date for determination of compensation 296–7 factual background 294–5 parties’ arguments 295–6 policy considerations 299–300 Loke, A 200, 270n 37 ‘loss’: see also damages, definitions of; factual detriment as measure of compensation ‘damage’ as synonym 110 damage vs injury (damnum vs iniuria) 63, 106–7 defective performance as 25, 36–7, 58–9, 60, 107–8, 109, 162–5 financial loss 107–9 ‘harm’ 105–6, 110–11 ‘injury’ distinguished 106–7 lost profits as 111–12 non-pecuniary harm 107–9, 111–13: see also non-pecuniary harm, recovery for physical or economical deterioration 109–13 recovery under a deed award 161 Robinson v Harman principle and 25, 103–4, 129, 317 tort definition, identity with 112 variety of meaning/ambiguity 13–14, 25, 104–13; possible definitions (loss/damage/ injury/harm) 109–11, 319 loss of amenity (Ruxley) alternative possibilities/relevant factors cost of repairs award 36–7, 38–42, 113n 63, 119n 88, 193n 65, 264–72 difference in value award 37–8, 39 intention to cure defect 37–8, 195, 199 pacta sunt servanda 36, 142–3 as price of release award 39–40 unquantifiability/unreasonableness of cost of substitution 36–7 Watts ‘very object of the contract exception’ 39

Index facts 35–6 summary of judgments Court of Appeal 36–7 House of Lords 37–8 trial judge 35–6 lost opportunity 62–3, 67–8, 99, 111–12, 274–5 lost profits 111–12 McBride, N 49n 11, 102n 16 MacCormick, N 219n 10 McGregor, H 16n 43, 87, 88n 193, 92n 211, 104n 23, 114–17, 248–9, 250, 281n 81, 310n 101 McInnes, M 63, 312n 108 McKendrick, E 28n 14, 41, 51, 57, 108n 41, 136, 138, 201, 250n 166, 278n 60 McKendrick, E and K Worthington 34nn 50 and 52 McKendrick, E and M Graham 32n 41, 33, 41 McLauchlan, D 19n 53, 72–3, 88, 90–1, 249, 283, 292–3, 302n 59 Marshall, P 200n 104 Mayne, J 115–16 Meagher, MJ, JD Heydon and MJ Leeming 270n 38 measure/quantification of cost of substitute performance: see cost of market substitute award; cost of repairs award; cost of substitute performance award (general), measure/ quantification; price of release award mental distress, changing attitudes to compensation for case law Addis 29, 254, 255 Farley v Skinner 32–3, 40–2, 112, 254, 255 Fidler 255 Hatton 33–4 Jarvis v Swans Tours Ltd 30–1 Johnson v Gore 111, 256 Johnson v Unisys Ltd 29 Milner 34–5 Ruxley 29 Watts 28, 30, 31–3, 39, 108, 111, 254, 256 contractual remoteness, relevance 31, 33 examples 30–1 damages for ruined holiday 34–5 stress at work 33–4 measure of compensation 33, 34–5 substitutionary vs compensatory award 34–5 overview 23–4, 28–9, 30–5 policy considerations as basis 31 threshold requirements 34 tort and contract compared 253

329

Watts exceptions to financial detriment requirement ‘peace of mind as very object of contract’ 31, 32–3, 39 ‘physical inconvenience … and mental suffering directly related’ 31, 33 Mill, JS 182 Mitchell, C 159 mitigation/avoidable loss rule 247–53, 308–10 anticipatory breach, relevance to 149 burden of proof 268 case law Banco De Portugal 248, 267, 268 British Westinghouse 87–9, 90, 249–50, 280–3, 308 Clark v Macourt 77, 166 Dimond 281, 282n 87 The Elena D’Amico 95n 226, 249 Hussey 91–2 Jervis v Harris 155, 156, 165–6 Joyner 166 Ruxley 36–7, 166, 194 Samson 84 Southcott Estates: see Southcott Estates (specific performance/mitigation relationship) White & Carter 155–6 causation as aspect of 102n 19, 249–50 elements of avoidable loss rule 248 avoided loss rule 248–9 reasonable expenses rule 248 incoherence of the law 169, 247–50 parties’ agreement, relevance 251–2 policy considerations 251–2 ‘reasonableness’, relationship with 36–7, 194, 249–50, 265–70 recovery of debt action and 154n 94 remoteness rule and 252–3 as restriction on compensatory liability 227–8 specific performance and: see Southcott Estates (specific performance/mitigation relationship) substitutionary and compensatory awards distinguished 6, 28, 133, 149, 165–6, 167, 217 Monarch Steamship 240 money awards: see compensatory money award; cost of market substitute award; cost of repairs award; cost of substitute performance award (general); price of release award; recovery of debt action; recovery under a deed award; specific performance, monetary award in lieu of; substitutionary vs compensatory award, distinctions Morgan, J 290n 20 Mustill, M (extra-judicial) 290

330

Index

‘next best thing to performance’ anticipatory breach doctrine 179, 320 case law Livingstone 116–17 Ruxley 40 Wroth 157–8 compensatory award as 4, 19, 320 awards for wasted expenditure/reliance awards 19n 53 secondary right to repair 174–5 cost of substitute performance as 4, 40, 116–17, 126–7, 167–8, 310 objectives 320–1 post-breach persistence of reasons grounding right to performance as basis 12, 134, 158, 167–8, 171, 172–6, 179: see also continuity thesis court-ordered right 174 price of release award as 10n 29, 163–4, 206 specific performance as 179, 214, 310, 320 torts ‘corrective justice’ analogy (Gardner) 12, 134, 167–8, 171n 170, 174–5, 179n 2 unconditional entitlement requirement 4, 177, 320 Nienaber, PM 28, 149–50 Nolan, D and A Robertson 9: see also Robertson, A nominal damages in absence of [quantifiable] financial harm 27, 28, 47 case law Greer 46–7 The Mediana 47 conventional nominal damages 46 infringement of right and loss flowing from that infringement distinguished 46, 95–6 ‘nominal’ 47 substantial nominal damages 46–7 vindicatory purpose 45 non-delivery of goods 69–71, 278–9 non-pecuniary harm, recovery for ‘disappointment’ as basis of award 32, 39, 40–1, 112–13, 267n 24, 270 limitations on 3, 28–9, 102, 108, 253–6 relaxation of 13, 23–4, 30–42, 108–9, 316–17 ‘so far as money can do it’ (Robinson v Harman principle) 25–6, 27, 162, 254n 182 loss of amenity: see loss of amenity (Ruxley) mental distress: see mental distress, changing attitudes to compensation for price of release award 63

suggested bases for rule parties’ agreement 254–5 remoteness rule 255–6 vindication of primary right to performance 254n 182 Oman, N 220n 14, 221 O’Sullivan, J 198, 199n 98, 200n 101 pacta sunt servanda 11, 12–13, 36, 142–3 Palmer, N and G Tolhurst 59 Panatown: see Linden Gardens exception (promisee’s right to recover third party’s loss on property contract) Peel, E 195, 199n 99, 232, 233, 238, 240, 243, 322: see also Treitel’s Law of Contracts Pell Frischmann breach of exclusivity 66–7, 209–10 compensation vs restitution 66–7 as gain-based award 65, 66–7, 206, 209 as price of release award 209–10 as substitution for right to injunction 209–10, 283 reasonable fee award 206 specific performance, impossibility of 139, 209–10 summary of case 66–7 performance damages 127–8 performance, reciprocal right to 134–8, 318 as basis for compensatory award 8, 144–5, 149–50, 302–7 cost of substitute performance award 179–80 difference in value award 74 injunction 141 money award in lieu of specific performance 157 nominal damages 45–7 specific performance, monetary award in lieu of 157, 160 specific performance/coercive orders 134–6, 141, 144–5, 157, 160, 314, 321 substitution award 3, 6, 14, 107–8, 226n 47 case law Cooper v Jarman 143 George Mitchell 143 The Glory Wealth 302–7 Hansa Nord 143 Ruxley 36, 142–3 White & Carter 153–6 conditions precedent/subsequent and 4, 5, 7–8, 135, 142, 180–1, 261–2

Index evidence of anticipatory breach doctrine 8, 144–5, 149–50, 302–7 concept of breach 144 enforcement of executory contract 142, 291n 28, 321–2 frustration doctrine 144 pacta sunt servanda principle 142–3 restrictive approach to one-sided contractual modifications 145 tort claim for inducement of breach 146 Friedmann on 100–1 Fuller and Perdue on 99 Holmesian objection 134–5 ‘loss’ and 107–9 performance and right to performance distinguished 9–10, 98 sufficiency of breach to create right to a remedy 121, 122 Perry, S 219n 10 policy considerations appropriateness in private law claims 9, 11–12, 70–1 case law Bradburn 89, 95 Clark v Macourt 79 The Golden Victory 70, 289, 290, 293, 297–8, 300 Hall and Pim 70–1, 279 Loefelis 299–300 The New Flamenco 94–5 Parry v Cleaver 95 Robinson v Harman principle and 99 Slater 74–5 Smoker’s case 95 Watts 31 Wrotham Park 61, 64, 139–40, 207 definition 9n 22 examples avoidance of waste 60, 64, 139–40, 199–200, 207, 252, 270n 37 commercial certainty/simplicity of application 70, 71, 78–9, 155, 279, 289, 290, 293, 297–8, 300 consistency of judicial decisions 79 promotion of personal responsibility 252 intention to cure the breach 196–9 interpersonal justice contrasted 11, 229n 56, 242, 247n 150, 251–2 limitations on recovery and 229n 56 mental distress awards 31 mitigation/avoidable loss rule 251–2 principles distinguished 11–12, 300 sale of goods case law 78–9 third party/insurance payments 89

331

Posner, R 218n 4, 219 post-breach benefits case law British Westinghouse 87–9, 90, 249–50, 280–3 Gardner 92–4 The Golden Victory 289, 293 Harbutt’s ‘Plasticine’ 133n 1 Hussey 91–3 Lavarack 87, 90 Needler 90–1, 92–3, 133n 1 The New Flamenco 94–5, 133n 1, 227n 50, 293, 303 Rodocanachi 89–90 cost of substitute performance award and 181–2 defective performance (sale of goods) 185–6 mitigation/avoided loss rule: see mitigation/ avoidable loss rule profit-stripping remedy 95–6 Robinson v Harman principle, compatibility with 95 as substitution vs compensation award 93 third party/insurance payments 89 tort claims compared 92–3 price of release award 60–8, 163–4, 201–15 availability of 15 breach of confidentiality award 67–8, 139, 210 breach of exclusivity award 66–7, 209–10 case law Experience Hendrix 61, 62 Force India 61, 205n 119 Gilbert 208–9 Inverugie Investments 206 Needler 91 post-Wrotham Park 61 Ruxley 39–40 Smith v Landstar Properties Inc. 61–2 Tamares 63 Tito 205nn 119 and 120 Vercoe 67–8, 210, 283 Wrotham Park 60–1, 62–8, 207–8: see also Wrotham Park award as compensation common law and 61 definition 5, 15, 206–7 difference in value as measure 10n 29 examples of application 61–2 justification 7, 39, 201–2 impossibility of ‘cure’ 207 unquantifiability/unreasonableness of cost of substitution and 5, 6–7, 10n 29, 39–40, 201–3, 205n 121 limitations as a substitute for performance 320–1 as ‘next best thing to performance’ 10n 29, 163–4, 206

332

Index

objections to mismatch between ‘reasonable approximation’ and cost of substitution 205 subject value/incommensurability issues 204–5, 207–8 treatment of breach as a ‘taking’ 205–6 quantification 202–10 disgorgement 65, 102, 198, 203, 206, 208 personal characteristics, relevance 207–8 reasonable fee award 61, 65, 205–6, 212 relevant factors 210 remoteness rule and 204–5 restriction of award City of New Orleans 212–13 criticism of 213–14 Ford v White 26–7, 139, 211–12, 213 reasons for 213 Robinson v Harman approach, compatibility with 60, 62–3 as substitution/compensation for lost factual benefits 63, 118–19 lost opportunity to bargain for release 62 lost opportunity to seek injunction 62–3 lost right to performance 10n 29, 63 non-pecuniary loss 63 performance 210, 283 restorative injunction 60–6 transfer of value (restitutionary damages) 64, 65, 208–9, 322 principle vs policy 11–12 primacy of principle 300 privity rule 52 Contracts (Privity) Act 1982 (New Zealand) 52 Contracts (Rights of Third Parties) Act 1999 (UK) 52 profit from own wrong/unjust enrichment 48–9, 108n 48, 164, 298 profit stripping remedy: see gain-based award; punitive damages; punitive damages, profitstripping/disgorgement remedy public interest considerations 48, 64 punitive damages 65, 86, 102, 133n 1, 175, 198, 203, 206, 208, 216n 1, 226n 46, 322: see also gain-based award profit-stripping/disgorgement remedy 49, 50–1, 83, 95–6, 101–2, 119, 165n 144, 175, 198, 208, 322 Radin, MJ 102n 18, 120–4 Raz, J 12, 123–4, 147–8, 182n 8 reasonable fee award 61, 65, 205–6, 212 recovery of debt action 153–7 case law Jervis v Harris 156 White & Carter 153–6

contractually-owed debt, limitation to 160 ‘legitimate interest’ requirement 153–6, 189, 201 mitigation obligation 154n 94 promisee’s ability to continue with performance 153 as substitution award 153–6 recovery under a deed award consideration and 161 ‘loss’ 161 reliance damages 19n 53, 91n 209, 93n 216, 97, 100, 104, 142, 144, 161, 321 expectation damages as proxy for 98–9, 100, 316 remedy: see legal remedy remoteness rule case law The Achilleas 225n 45, 229, 231–4, 235–6, 237, 238, 243, 245–6, 247 Bence 75–6, 166–7 GKN Centrax Gears 240 The Gregos 231–2 The Heron II 230, 231, 237, 238, 239, 246n 145, 256n 186 Horne 237 Jackson 230–1 John Grimes 235–6, 246 McElroy Milne 241 Nettleship 237 Out of the Box 236n 89 Parsons (Livestock) 239–40 Supershield 234–5, 236, 246 Sylvia Shipping 235, 246 Victoria Laundry 245–6 Wenham v Ella 241 causation/novus actus interveniens principle and 223–4: see also causation difference in value award 75–6, 94, 103, 166–7 fairness rider 237, 240–4, 245–7 implied undertaking rider 245–6, 247 mental distress and 31, 33 mitigation/avoidable loss rule and 252–3 non-pecuniary harm, as suggested basis for non-recovery rule 255–6 parties’ agreement on allocation of risk as basis 217, 229–30, 233–4, 236–40, 243–7 price of release award and 204–5, 225 reasonable contemplation/foreseeability test 167, 225, 231, 232, 236, 237–8, 240–2, 245–6, 251, 255 as restriction on compensatory liability (Hadley v Baxendale) 225, 227–8, 229–47 criticism of 217, 222 summary of 230–1 substitutionary and compensatory award distinguished 6, 133, 165, 166–7

Index restitutionary damages 64, 65, 208–9, 322 gain-based award distinguished 50 Reynolds, F 290–1, 305 rights-based theories of private law 8–11: see also legal rights/duties Robertson, A 11–12, 31n 37, 239–40, 241–2, 243, 245–6, 247: see also Nolan, D and A Robertson Robinson v Harman principle: see also compensation, definitions of; compensatory money award; factual detriment as measure of compensation; substitutionary vs compensatory award definitions/alternative terminology compensation or substitution for performance? 3–4, 24–5, 98 compensatory principle 18, 24, 26, 44n 1 expectation measure 24, 98–9 as hybrid principle 13–14, 101 indeterminacy (purpose) 23, 24–5, 98, 99, 101–4, 180–1, 316–17 indeterminacy (scope) 23, 25–6, 99, 317 ‘loss’ 25, 101–2 as ‘next best thing to performance’: see ‘next best thing to performance’ ‘so far as money can do it’ 25–6, 27, 162 exceptions 44–5: see also carriage of goods contracts; gain-based award; nominal damages; non-pecuniary harm, recovery for Fuller and Perdue’s challenge 98–104 expectation damages as proxy for reliance damages 24, 98–9, 100, 316, 321 legal right to performance 99 response to 100–1 policy considerations and 99 text 24 Rotherham, C 64, 203n 116, 205–6, 208–9, 322n 10 Rush, M 108n 48 Ruxley: see loss of amenity (Ruxley) sale of goods, award for breach of contract by buyer 277–8 Lazenby 278 WL Thompson 277–8 sale of goods, award for breach of contract by seller exceeding promisee’s factual loss 68–79: see also carriage of goods contracts case law Bence 75–6, 166–7, 279–80, 284–5 British Westinghouse 77–8, 87–9, 90, 249–50, 280–3, 308, 319 Clark v Macourt 3, 76–8, 86, 161–2 Hall and Pim 70–1, 161, 279 Jones v Just 69

333

Slater 73–5, 186–7, 279–80 Wertheim 72–3, 278, 283–4, 319 Williams Bros 69–70, 81, 161, 186, 278, 279, 300–1 compensatory award 282–3 cost of market substitute 185–6 defective goods (SGA 53(3)) 73–8, 279–83 deviation from compensation principle 78–9, 185–6 difference in value award 72–3, 74–5, 282 double recovery, prohibition 281–2 late delivery 71–3, 283–4 minimum cost test/cheapest way 74–5 mitigation/avoidable loss rule 77, 280–3 non-delivery (SGA 51(3)) 69–71, 278–9 policy considerations 78–9, 252, 279 post-breach benefits 185–6 remoteness rule 75–6, 78 Sale of Goods Act 1979 51(3) as measure, common law, relationship with 68–9, 165, 185–6 as substitutionary award 161–2 substitutive damages theory and (Stevens) 68 summary of case law 78–9 Sayer, J 115 Scott, Lord (extra-judicially) 41–2, 45–6 secondary right to repair as basis of compensatory award 3–4, 125–7, 168–9, 172–5 corrective justice and 12, 120–1, 174, 219–20 court-imposed nature of duty to pay alternative 6, 174, 218–22, 237, 257 enforcement of primary right to money distinguished 115–16 generation by infringement of primary right 6, 116, 124, 125, 221 ‘next best thing to performance’ and 174–5 as orthodox view 125, 217 parties’ agreement, relevance 170n 166, 237, 248, 254 Photo Production Ltd 12, 125, 134, 168–9, 172–3, 216, 220, 271–2 services, monetary award for breach of contract analogy with non-delivery of goods (SGA 51(3)) 165, 187 case law Force India 164–5, 187–8 Panatown 162–4 Regus 187, 188 White Arrow (difference in value award) 187, 188 as substitution award 161–5 Sharpe, R and S Waddams 62, 118n 87 Sherwin, E 120, 121, 122 Siebrasse, N 309n 99 Simpson, AWB 49 Smith, LD 101n 11, 134n 2, 152n 87, 203

334

Index

Smith, S 10–11, 16–19, 79n 153, 82n 166, 127n 118, 144n 52, 170, 170n 168, 173n 176, 176n 186, 219n 11, 220, 221–2, 228n 53, 250n 166, 252, 284n 91 Southcott Estates (specific performance/ mitigation relationship) 307–12 court’s decision dissent 309–10 majority 308–9 factual background 308 mitigation/‘reasonableness’ relationship 311–12 specific performance constraints, impossibility of performance/ rectification 310–11 substitutionary and compensatory award, failure to distinguish 152, 175, 315 specific performance alternative coercive measures 136 civil law practice 136 as closest substitute for performance 179, 214, 310, 320 constraints claimant’s preference for monetary award 139 impossibility of performance/ rectification 310–11 passage of time 139 policy considerations 139–40 right and enforcement of right distinction 123–7, 146–8 supervision by court requirement 147 as continuing remedy 158 equitable origin 136–7 executory contract and 140, 142, 181n 4, 321–2 inadequacy of damages test 137–8 mitigation and 250n 166, 307–12 specific performance, case law Beswick 52, 137 Grant v Dawkins 158 Hasham v Zenab 144–5, 147 Johnson v Agnew 158–9, 160, 313–14 Pell Frischmann 139, 209–10 Rainbow Estates 137, 138 Semelhago 159–60, 308, 309–10, 311, 313, 314, 315 Southcott Estates: see Southcott Estates (specific performance/mitigation relationship) Tito 137, 138 Wroth 157–9 Wrotham Park 139–40 specific performance, monetary award in lieu of 157–60, 312–14: see also injunctions (prohibitory/mandatory) assessment at common law and in equity distinguished 152–3, 175 constraints 6–7, 310–11

date of assessment 157–9, 313 dependence on court’s jurisdiction to order specific performance 160 money awards in lieu of: see specific performance, monetary award in lieu of right to performance as basis 134–6, 144–5, 157, 160, 314 substitutionary and compensatory awards distinguished 152, 157–9, 175, 315 uncertainty of current status 138 standard of proof balance of probabilities 112, 120, 181–2, 193, 208, 223, 226, 265, 272, 298 The Glory Wealth 302–7 burden of proof 27–8, 80, 81–2, 250n 168, 266n 19, 268, 304n 71, 306, 308 Stapleton, J 223n 28 Stevens, R 70n 118, 76, 79, 92n 214, 110, 144n 52, 197n 88, 279, 280, 301n 58: see also cost of substitute performance award (general), substitutive damages theory and (Stevens) substitution for timely performance award 274–5 substitutionary vs compensatory award, distinctions: see also compensatory money award; cost of substitute performance award (general); difference in value award; price of release award; recovery of debt action; recovery under a deed award; services, monetary award for breach of contract anticipatory breach and 14, 28, 42, 144–5, 149–50, 301–2 coercive orders/substitutionary monetary award as continuum 4 compensation for mental distress 34–5 cost of repairs award 266–8 factual detriment, relevance 5–6, 133, 151–2, 157, 160–2, 175–6, 177, 178, 321 historical background common law actions 150–1 equitable awards 151–3 mitigation/avoidable loss rule 6, 28, 133, 149, 165–6, 167, 217 normative significance of breach 6, 124, 149–50 remoteness rule 6 substitutive vs reparative compensation 221–2 theoretical bases compared 3–4, 5–6, 148–77 terminological difficulties 2, 13, 27, 42, 65, 97, 104-22, 127-8, 163-4, 317, 319-20: see also compensation, definitions of; ‘loss’, variety of meaning/ambiguity; Robinson v Harman principle, definitions/alternative terminology Tettenborn, A 104, 107, 109–10, 200, 238, 241n 124, 243n 135, 244–5, 266

Index third party-related award, exclusionary rule basis of/circumvention 52, 54 judicial dissatisfaction with 54–5 privity rule 52 third party-related award, exclusionary rule exceptions Carriage of Goods by Sea Act 1992 (UK) 53 carriage of goods contracts (Dunlop/Albazero) 53–4 case law Albazero 53–4 Beswick 52, 54 Darlington 56 DRC v Ulva 60 Dunlop 53–4 Jackson 54 Linden Gardens 55 Panatown 55, 56–60, 273–6 post-Panatown 59 St Albans CC v ILC 53 Woodar 54–5 case law summarised 56 cost of substitution for timely performance award 60, 274–5 extension of Albazero exception 53–6, 59 Linden Gardens exception: see Linden Gardens exception (promisee’s right to recover third party’s loss on property contract) price of release award 276 recovery by trustee or agent 53 rule as exception 59–60 third party/insurance payments 89 Tilbury, M, M Noone and B Kercher 121 Todd, P 293n 34 torts claims compared 9, 12, 34, 91–3, 95n 224, 112, 114, 120, 146, 167 corrective justice analogy 134, 168–9, 174–5 Treitel, GH 76, 167, 280, 299n 48, 305 Treitel’s Law of Contracts 16, 53, 68, 69, 71–2, 104, 106, 142, 155, 156, 160, 185, 193, 212n 146, 231, 248n 154, 283, 295n 41, 301n 57, 305 unjust enrichment/profit from own wrong 48–9, 108n 48, 164, 298

Waddams, S 159: see also Sharpe, R and S Waddams Wallace, I 275n 56 Watts: see mental distress, changing attitudes to compensation for, Watts exceptions to financial detriment requirement Webb, C 10–11, 103n 21, 170n 168, 198, 284n 91 Weinrib, E 9n 18, 18, 70n 118, 79n 153, 102n 17, 197n 88, 219n 9 Wertheim (difference in value) 72–3, 278, 283–4, 319 White Arrow (difference in value award) 27–8, 165, 187, 188, 213 intention to cure defect, relevance 197 Williams Bros (difference in value award) absence of detriment to claimant, relevance 69–70, 81, 186, 278, 279 compensatory principle and 70, 300–1 Williams, T 150 Wilmot-Smith, F 27n 13, 164n 137 Winterton, D 113n 63, 203n 116, 294n 37, 305n 83, 322n 9 Winterton, D and F Wilmot-Smith 164n 137 Worthington, E: see McKendrick, E and K Worthington Wright, D 201n 110 Wright, R 223n 31 Wrotham Park award as compensation: see also price of release award gains to defendant (gain-based award) 65, 119 impossibility of specific performance 283n 90 lost factual benefits 63, 118–19 lost opportunity to bargain for release 62 lost opportunity to seek injunction 62–3 lost profits 64 lost right to performance 63 non-pecuniary loss 63 policy considerations 61, 64, 139–40, 207 summary of case 60–1 transfer of value (restitutionary damages) 64, 65, 208–9, 322 Yihan, G

Vercoe (breach of confidentiality) as price of release award 67–8, 210 as substitution for performance 210, 283 summary of case 67–8

335

246

Zakrzewski, R 124–7, 135n 6, 320 Zipursky, B 219, 221, 222 Zipursky, B and J Goldberg 219n 12, 221, 222