The Court of Appeal recently confirmed in John Grimes Partnership Ltd v Gubbins(1) that the classic test for remoteness of damage established in Hadley v Baxendale(2) remains good authority. However, the Court of Appeal noted that although this continues to be the standard test for remoteness, the House of Lords decision in Transfield Shipping Inc v Mercantor Shipping Inc (The Achilleas)(3) may in some cases require further consideration to be given to a contract's commercial context.
The defendant and counter-claimant was a farmer who had obtained planning permission to develop a field for residential purposes. This permission included plans for a road to be built to the site. It was the defendant's intention that on completion, the road would be adopted by the local highway authority under Section 38 of the Highways Act 1980. He engaged the claimant, John Grimes Partnership Limited (JGP), to design the road and drainage for the site and to obtain Section 38 approval.
An initial oral agreement between the defendant and JGP was concluded in September 2006, followed by a formal letter of engagement. Judge Cotter QC found that it was an express oral term of the contract that JGP would complete the work by March 2007, and that this was a reasonable timeframe. JGP failed to complete the work by this date. In April 2008 Grimes engaged another engineer, Mr Powell, who redesigned the road and drainage layout and submitted this for approval in June 2008. The new proposal was approved two days later. The completion of the development was delayed by 15 months.
JGP had already been paid nearly £20,000 of fees and invoiced the defendant for a further £2,893. The defendant refused to pay and JGP commenced proceedings. The defendant counterclaimed for the fees previously paid for the defective work, which had needed to be redone, and also claimed for nearly £400,000 in damages suffered because of JGP's failure to complete the work by March 2007. Damages were claimed for the losses incurred as a result of the long delay by JGP and included losses for the reduction in the market value of the residential units, a reduction in the offer from a housing association for the affordable units and an increase in building costs.
The classic authority on remoteness of damage in breach of contract cases is Hadley v Baxendale, which established that some losses, although caused by a breach of contract, may not be recovered because they are too remote from that breach.
A claimant can recover:
- losses arising naturally from the breach of contract; and
- such loss as may reasonably be supposed to have been contemplated by the parties at the time that they made the contract, as a probable result of the breach.
This test has been refined in subsequent cases, particularly by Koufos v C Czarnikow Ltd (The Heron II).(4) In this case, the House of Lords held that if, at the time of the contract, the type of loss was reasonably foreseeable by the defendant (the contract breaker) as not being unlikely to result from its breach, that type of loss was recoverable.
The House of Lords decision in The Achilleas cast some doubt as to whether the Hadley v Baxendale test remained good law. In this case, the House of Lords – in particular, Lord Hoffman – suggested that a claimant cannot recover losses that were reasonably foreseeable if the defendant cannot be regarded as having "assumed responsibility" for those losses. The House of Lords found that there was a general expectation in the shipping market that a charterer returning a shipping vessel late would be liable only for damages for the period of late delivery, and not for losses incurred by the owners in losing a follow-on charter.
The Achilleas therefore established that there may be cases where the court, having examined the contract and commercial context, concludes that the standard approach does not reflect the expectation or intention that can reasonably be imputed to the parties.
JGP was successful in its claim for unpaid fees. However, the defendant's counterclaim for damages resulting from the delay also succeeded. The judge held that JGP was in breach of contract. Even by May 2008 JGP had failed to produce adequate drawings as required under the contract. The development of the site had therefore been delayed by 15 months as a result of JGP's breach of contract. The judge found that had it not been for JGP's breach of contract, the development of the site would have been completed in June 2008.
The significant delay resulted in loss to the defendant because the property market dropped and the value of the development was reduced. The remaining issue, and the subject of JGP's subsequent appeal, was whether that loss was irrecoverable by reason of it being too remote.
The judge found that JGP knew when it entered into the contract that significant delay carried a risk of movement in the property market to the disadvantage of the defendant. JGP therefore had actual knowledge, and this was not a type of loss that it could not have reasonably foreseen to arise from a significant delay.
The Court of Appeal dismissed JGP's appeal and held that there was nothing in this case to take it outside the standard test for remoteness of damage set out in Hadley v Baxendale. The Court of Appeal held that this was not a case that could be brought within The Achilleas reasoning. There was no evidence that there was a general understanding in the property industry that a party such as JGP would not have been taken to have assumed responsibility for losses arising from movement in the market.
Sir David Keene, giving the leading judgment, said that where a contract does not deal expressly with the losses for which a party is accepting liability (if it breaches the contract), the law will imply a term. Further, he noted that 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". The Court of Appeal was also not persuaded by JGP's argument that the scale of loss was disproportionate to the fees payable by the defendant under the contract and dismissed JGP's appeal.
Some uncertainty had remained following The Achilleas as to whether the test in Hadley v Baxendale continued to be good authority for remoteness of damage in breach of contract cases. The Court of Appeal's decision in this case followed the earlier Court of Appeal decision in Supershields Limited v Siemens Building Technologies FE Ltd(5) in upholding the classic test, but interestingly, the court went slightly further in implying a contractual term regarding responsibility for reasonably foreseeable losses. Contracting parties will need to ensure that they expressly exclude types of loss for which they do not wish to bear responsibility; otherwise, an assumption of responsibility may be implied into the contract.
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(1)  EWCA Civ 37.
(2)  9 Exch 341.
(3)  UKHL 48.
(4)  1 AC 350.
(5)  EWCA Civ 7.