Following a breach of contract, the innocent party will want to recover all of its loss - why should it be otherwise? The reality is that an innocent party will not be entitled to losses which are too remote.

One particularly thorny area is diminution in market value. Should the contract-breaker's liability extend that far? This was the issue before the Court of Appeal in John Grimes Partnership Ltd v Gubbins. In this case, a farmer successfully counterclaimed against consultant engineers for delay and convinced the court that the engineers should pay for the drop in value of his proposed development.

Where there is a breach of contract, the claimant is entitled to be put into the position as if the contract had been performed. Damages for breach of contract are compensatory in nature and subject to the principles of remoteness, causation and mitigation.

Losses must not be too remote - they must either flow naturally, or be reasonably supposed to have been in the contemplation of the parties, at the time the contract was made, as a probable result of the breach. However, some losses may be considered to be too remote despite there being a causal link between the breach and those losses. But how remote is too remote?

Background

John Grimes Partnership Ltd (JGP) provided consultancy and geological services. Mr Gubbins was a farmer who in August 2006 had obtained planning permission for the development of a field which he owned adjacent to an A class road in East Taphouse, Cornwall. The development was for residential purposes, providing a mix of open-market dwellings and affordable homes.

Mr Gubbins engaged JGP to design a road to be built within the site to serve the dwellings and to obtain "section 38" (Highways Act 1980) approval, so that Cornwall County Council would then adopt and maintain the road.

The parties agreed that JGP would complete the work by March 2007. JGP was aware that the work it was undertaking formed an essential part of the permitted residential development. The work was not completed by March 2007 and in fact an initial section 38 approval was not obtained until 17 February 2008.

Dissatisfied with JGP's performance, Mr Gubbins instructed another consulting engineer, Mr Powell of the Joint Technical Partnership Ltd, who took over on 8 May 2008. Mr Powell redesigned the road and drainage layout and submitted it to the council on 16 June 2008. It was approved two days later.

Having received £20,000 in fees, JGP invoiced Mr Gubbins for a further £2,893 but he refused to pay. Consequently, JGP sued Mr Gubbins for non-payment of its fees. Mr Gubbins counterclaimed for the sums he had previously paid, on the basis of JGP's defective work which had had to be redone. He also sought damages for JGP's failure to complete the work on time, resulting in:

  • a reduction in the offer from a Housing Association for the affordable units;
  • an increase in building costs; and
  • a reduction in the market value of the private residential units.

The first instance decision

The judge at first instance (HHJ Cotter QC in the Exeter Technology and Construction Court) found that it was only when Mr Powell's drawings were approved on 18 June 2008 that Mr Gubbins was in the position that the contract with JGP would have placed him in at March 2007. JGP's breach led to a delay of 15 months.

The judge found that JGP's breach of contract had caused loss to Mr Gubbins because the value of the development reduced during the 15 month delay. Further, on the facts, the relevant engineer at JGP (whom the judge noted was a professional in a field closely related to the property market):

"...well knew at the time of entering into the contract that delay brought with it the risk that the property market might move considerably including to the disadvantage of Mr Gubbins....he had actual knowledge and it was not in any sense loss of a type that he did not reasonably foresee, should significant delay occur. He knew exactly what Mr Gubbins intended to do and when he intended to start. He knew that a delay could mean as 'with all these things up and down'. In short it would clearly have been within his contemplation, had he chosen to consider the issue, as an obvious potential effect of delay or a 'real danger' if delay occurred".

Having decided liability, the judge decided that the loss associated with the reduction in market value would need to be assessed.

The appeal

At this point, JGP appealed. It argued that the judge had adopted the wrong legal approach in relation to damages. It could not be held liable for losses flowing from a decline in the housing market, over which it had no control. JGP submitted that it was necessary to establish, objectively, that it could be said to have accepted, at the time of the contract, responsibility for that type of loss. JGP argued that there was a dearth of cases holding professionals in the property market liable for such loss. It also highlighted the fact that the fee payable to JGP was modest, in contrast to the potential scale of losses through market movement.

JGP argued that it should only be liable for the costs of having the necessary drawings made and submitted a second time by another engineer, which would include any increase in those costs, due to delay.

According to Mr Gubbins, the correct approach was to ask whether at the time of the contract a reasonable person in the position of the defendant, would have realised that the kind of loss in question was one not unlikely to result from a breach by him or the contract. Indeed, Mr Gubbins emphasised the finding of the first instance judge. The judge concluded that the relevant engineer from JGP knew at the time of the contract that delay risked a change in the property market creating a significant disadvantage for Mr Gubbins.

Standard rule on "remoteness of damage" can be displaced

There are certain situations or markets where the standard approach is displaced. In these situations the standard approach does not (as per the first instance judgment) reflect "the expectation or intention reasonably to be imputed to the parties". In the shipping market, for example, the standard approach is displaced so that a charterer who returns a vessel late is usually only liable for damages covering the period of late delivery; not for losses incurred through the owners losing a follow-on charter.

A further example is the principle set out in SAAMCo (South Australian Asset Management Corp v York Montague Ltd (1996)), where the liability for losses due to a valuer's negligently high report was limited to the difference between the true value of the property and its reported value; but did not include all the consequences of the negligent report including the property crash. The essence of the principle is that lenders would have suffered losses due to the property crash whether or not the valuation had been correct.

Decision

The Court of Appeal dismissed JGP's appeal. Its legal analysis was that if there is no express term dealing with the losses for which a party is accepting liability if it breaches the contract, then the law implies a term to determine the answer. Specifically, Sir David Keene (delivering the leading judgment) said that:

"Normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken. But if there is evidence in a particular case that the nature of the contract and the commercial background, or indeed other relevant circumstances, render that implied assumption of responsibility inappropriate for a type of loss, then the contract-breaker escapes liability."

The approach of the first instance judge had been correct. He had firstly concluded that losses arising from movement in the property market were, at the time of the contract, reasonably foreseeable as a consequence of delay. He had then gone onto consider whether that loss fell outside the standard approach, and concluded it did not. Importantly, Sir David Keene highlighted that:

"... there was no dispute put before him [the first instance judge] to show that there was some general understanding or expectation in the property world that a party in this engineer's position would not be taken to have assumed responsibility for losses arising from movement in the property market where there has been delay in breach of contract."

In dismissing the appeal, the Court of Appeal rejected JGP's arguments, as follows.

No control over the property market

The judge drew a comparison with delivery of goods cases and said that in many cases change in market conditions does give rise to loss. There was nothing out of the ordinary in this respect. Unusually volatile markets might lead to a different result where "there can be a dramatic change in prices in the course of a few days, but that is not the case here. The evidence in the present case was that property values fell by about 14% in just over a year."

Very few cases where property market decline has led to actionable loss

The fact that there were very few relevant decided cases did not assist JGP. The judge commented that: "That seems to be so. But nor are there cases from the property world deciding the other way". He also said that SAAMCo was not a delay case and was of limited assistance in any event.

However, there was a useful case cited in SAAMCo where a solicitor's negligence caused a two-year delay in the sale of a property. The property owner was entitled to the difference between what the property would have fetched if sold soon after its completion with a guaranteed lease and what it eventually fetched two years later.

There was also a further unreported decision, T and S Contractors v Architectural Design Associates (1992). Here, as a result of an architect's negligence in surveying a site, a planning permission which was obtained proved incapable of implementation and a fresh permission had to be sought. This led to a 14-month delay in the completion of the development, during which the housing market suffered a decline. The judge held that the loss was not too remote.

Interestingly, as to the absence of cases relating to the property market, the judge observed that: "It may well be that the reason...is that the property market does not move as quickly as certain other types of market involving commodities and other goods, and it takes a very lengthy delay in breach of contract before a provable loss can occur".

Loss disproportionate to £15,000 fee

The judge did not find this argument persuasive - "It may not infrequently be the case that the breach of contract of modest size gives rise to a substantial claim in damages". Further, this situation would not, by itself, normally suffice to establish an absence of responsibility.

Commentary

This decision is a clear warning to professionals that delay in performing their services can give rise to substantial damages where there has been a decline in the relevant market. It cannot be assumed that such loss is too remote and therefore irrecoverable. Nor does there have to be express agreement for the professional to assume such liability.

Interestingly, the Court of Appeal's legal analysis gave rise to an implied assumption of responsibility which had not, on the evidence, been displaced. Consequently, it makes sense for professionals to seek to exclude or limit (as far as is reasonable) liability for particular types of loss in their contracts. Needless to say, delay in the performance of services can prove a lot more costly than a little less than £3,000 in unpaid fees!