Summer 2015 Editor: Melanie Willems THE ARBITER International Disputes Newsletter IN THIS ISSUE Sumption to Think About: A War about Illegality in the Supreme Court by Ryan Deane 03 07 11 What’s in a Name? A Salutary Tale of Financial Instruments, Fraud and Jurisdictional Wrangling by Markus Esly From Philadelphia to the Moon! by Robert Blackett T H E A R B I T E R S U M M E R 2 0 1 5 2 T H E A R B I T E R S U M M E R 2 0 1 5 3 Sumpon to think about: A war about illegality in the Supreme Court by Ryan Deane Introducon “In the two centuries which followed Lord Mansfield’s apparently simple proposion, it was among the most heavily ligated rules of common law, and by the end of the tweneth century it had become encrusted with an incoherent mass of inconsistent authority.” Lord Sumpon in Jevia v Bilta [2015] UKSC 23 The rule referred to in the above quotaon is commonly expressed through the maxim: ex turpi causa non oritur aco. Or, as Lord Mansfield put it in 1775: “No court will lend its aid to a man who founds his cause of acon upon an immoral or an illegal act.” It is the defence of illegality. There is currently a war in the Supreme Court over the very founda on of the defence. Three bales have been fought in the highest court of the land, with differently constuted benches reaching seemingly inconsistent decisions. Before reviewing the most recent judgments, however, it is helpful to remind ourselves of the legal landscape as it stood before the most recent shots were fired. Background Not long before the turn of the last century, the courts’ approach to the illegality defence was by way of the ‘public conscience’ test. As Lord Nicholls LJ stated in Saunders v Edwards [1987] 1 WLR 1116, the relevant queson was: “whether to uphold the claim would be an affront to the public conscience in appearing indirectly to encourage the unlawful conduct of which the [claimants] had been guilty.” This inquiry necessarily involved the exercise of a judge’s discre- on as to what the public conscience was, and whether the illegality complained of was serious enough to affront it. Although this approach was taken with a desire to achieve a fair and just outcome in each case, some commentators expressed the view that the public conscience test had led to uncertainty and unpredictability in the law. They advocated a new approach based on a principled test that could be applied uniformly and predictably by the courts. The House of Lords agreed with these concerns. It decisively rejected the public conscience test in Tinsley v Milligan [1994] 1 AC 340. In its place the majority substuted the ‘reliance test’, by which a claimant was entled to recover as long as he was not forced to plead or rely on the illegality when making his claim. There was no room for discreon on the part of the judge. The test acquired the character of a procedural rule of pleading. The reliance test was received with widespread disapproval by commentators, judges and the Law Commission. The laer expressed support for the old public conscience test in its paper The Illegality Defence: A Consultave Report (2009). There was an expecta on that the highest court in the land might re-visit the illegality defence in the near future in order to ameliorate the indiscriminate, and somemes harsh, effect of the reliance test. With this background in mind, we turn to the first recent Supreme Court case in which bale commenced over the defence of illegality : Hounga v Allen [2014] UKSC 47. Hounga v Allen In January 2007 Miss Hounga, aged about 14, was trafficked into the UK from Nigeria under arrangements made by the brother of Mrs Allen. He told Miss Hounga that Mrs Allen had offered to send her to school and pay her £50 per month in addion to the provision of bed and board. Miss Hounga willingly accepted the offer and achieved entry into the UK by her presentaon to the immigra- on authories of a false identy and their grant to her of a visitor’s visa for six months. For the following 18 months Miss Hounga lived with Mrs Allen and her husband. Although Miss Hounga had no right to work in the UK, and no right to remain there aer July 2007, Mrs Allen employed her as an au pair in the family home. Contrary to what had been promised, she was not sent to school and received no wages. Instead, Mrs Allen inflicted serious physical abuse on Miss Hounga and told her that, were she to leave the house and be found by the police, she would be sent to prison because her presence in the UK was illegal. On 17 July 2008, Miss Hounga’s employment terminated when she was beaten by Mrs Allen and thrown out of the house. She was found the next morning in the car park of a local supermarket and was taken to the social services department of the local authority. A claim was made on her behalf in the employment tribunal consis ng of contractual claims (unfair dismissal, unpaid wages, holiday pay, etc.) and a claim under the Race Relaons Act 1976 (“the Act”) for dismissal on racial grounds. The tribunal held that the former, contractual, claims were all barred by the defence of illegality. It did, however, uphold the discrimina on claim under the Act, finding that Mrs Allen had dismissed Miss Hounga from her employment because of her vulnerability consequent upon her immigraon status. The employment appeal tribunal upheld the judgment in full, but when the case reached the Court of Appeal the court held that each of Miss Hounga’s claims were barred by the illegality defence, and it set the order for compensaon aside. 4 T H E A R B I T E R S U M M E R 2 0 1 5 The only claim to reach the Supreme Court was the complaint of discriminaon under the Act in relaon to Miss Hounga’s dismissal. The queson was: did the criminal offence commied by Miss Hounga (under secon 24(1)(b)(ii) of the Immigraon Act 1971) preclude her from enforcing her rights under the Act? Lord Wilson, with whom Lady Hale and Lord Kerr agreed, began his analysis by disnguishing Tinsley, nong that Miss Hounga’s claim was based on a statutory tort. He stated that the relevant test was the ‘inextricable link’ test, which was “overlapping with the reliance test, but not co-terminus with it”. He gave the following colourful example from the case of Cross v Kirkby [2000] EWCA Civ 426: “The claimant was a hunt saboteur and the defendant a local farmer. The claimant shouted to the defendant “You’re f**king dead” and jabbed him in the chest and throat with a broken baseball bat. In order to ward off further blows, the defendant grappled with him. He wrested the bat from him and hit him on the head, causing his skull to fracture. The Court of Appeal held that the claimant’s claim for assault and baery failed both because the defendant was acng in selfdefence and because it was defeated by the illegality defence.” The Court of Appeal in Cross held that the claimant’s claim was so closely connected or inextricably bound up with his own illegal conduct that the court could not permit him to recover without appearing to condone the conduct. Aer seng out what he thought was the correct test, however, Lord Wilson decided the case on an enrely different point: that of compeng public policies. His starng point was Lord Mansfield’s classic exposion of the illegality defence in Holman v Johnson (1775) 1 Cowp. 341, which begins “The principle of public policy is this …” Lord Wilson held that the illegality defence was predicated on the duty of the courts to preserve the integrity of the legal system, and on prevenng a person from profing from his own wrong. But in his view these jusficaons were not applicable to Miss Hounga’s claim because: (a) The award of compensaon did not allow her to profit from her wrongful conduct in entering into the contract of employment. The award was for injury to feelings consequent on her dismissal; (b) The award did not permit evasion of a penalty prescribed by criminal law. Miss Hounga has not been prosecuted for her entry into the contract and, even had a penalty been imposed upon her, the award would not represent evasion of it; (c) The idea that the award compromised the integrity of the legal system by encouraging those in Miss Hounga’s posion to enter into illegal contracts of employment was fanciful; and (d) The integrity of the legal system might be compromised if the award was set aside. It could engender a belief that employers could discriminate against such employees with impunity. Lord Wilson’s conclusion was that the consideraons of public policy militang in favour of applying the illegality defence “scarcely exist[ed]” on the facts of Miss Hounga’s case. Lord Wilson then asked whether there was any compeng public policy that could override the public policy underpinning the illegality defence in the current circumstances. He found his answer in the an-trafficking convenons that the UK was a party to, including the UN Protocol to Prevent, Suppress and Punish Trafficking in Persons 2000 and the Council of Europe Convenon on Acon against Trafficking in Human Beings 2005. The public policy underlying these convenons was the protec- on of vicms of human trafficking, such as Miss Hounga. Lord Wilson thought that the public policy in support of the applicaon of the illegality defence, to the extent that it existed at all, should give way to the public policy against trafficking and the protecon of its vicms. On that basis he allowed Miss Hounga’s appeal. The other members of the court, Lords Hughes and Carnwath, felt unable to agree with the majority’s approach based on compe ng public policies. Instead they applied the inextricable link test that Lord Wilson had inially set out in his judgment. They concluded that there was an insufficiently close connecon between Miss Hounga’s immigraon offences and her claims for the statutory tort of discriminaon, and allowed the appeal. The majority of the Supreme Court had therefore applied the illegality defence with no more than a passing reference to Tinsley. It was unclear to what extent the court intended to depart from that decision, but nevertheless opponents of the reliance test latched onto the majority judgment as evidence that the highest court in the land may be changing direcon on the ex turpi causa principle. While the result in Hounga represented a victory for those who favoured more flexibility in the illegality defence, it also highlighted the problems with such an approach. When the Court of Appeal heard the case it too applied the inextricable link test. It came to the exact opposite conclusion to that of the Supreme Court. Rimer LJ went so far as to say the illegality and the claim were “obviously” inextricably linked. Indeed it seems a fine disncon to draw between one’s contractual rights under a contract of employment and one’s torous rights not to be dismissed under the same contract. Les Laboratoires Servier v Apotex The next bale was fought three months later in the Supreme Court judgment in Les Laboratoires Servier v Apotex [2014] UKSC 55. Les Laboratoires Servier (“LLS”) was a French pharmaceucal company. It discovered the perindopril erbumine compound, an ACE inhibitor used for treang hypertension and cardiac insufficienT H E A R B I T E R S U M M E R 2 0 1 5 5 cy. It was granted patents for the compound in several countries, including in the UK and Canada. Apotex was a Canadian company specialising in the manufacture and markeng of generic pharmaceucal products. In March 2006 it wrote to LLS to nofy them that Apotex intended to manufacture and market a specific crystalline form of perindopril in the UK. LLS sought and obtained an interlocutory injuncon in the UK courts prevenng Apotex from imporng and selling the crystalline form of perindopril in the UK. LLS gave the normal undertaking to compensate Apotex for any loss caused if the injuncon was later found to have been wrongly granted. This indeed turned out to be the case. On 11 July 2007 Pumfrey J held that the patent in issue was invalid, and discharged the injuncon. LSS’s subsequent appeal to the Court of Appeal was dismissed. Meanwhile, on 2 July 2008, LLS was granted a final injuncon against Apotex in the Canadian courts restraining it from manufacturing the perindopril compound in Canada. Apotex could therefore lawfully sell the compound in the United Kingdom, but could not lawfully manufacture it in Canada, where its manufacturing operaon was based. The queson before the Supreme Court was whether it was contrary to public policy for Apotex to recover damages for being prevented from selling a product in the United Kingdom whose manufacture in Canada would have been illegal in that country. All the members of the Supreme Court agreed that the illegality defence failed, but again the reasons given in the judgments differed. Lord Sumpon, with whom Lord Neuberger and Lord Clarke agreed, lamented the “disordered state of case law” and was at pains to re-anchor the law on the House of Lords decision of Tinsley v Milligan. He emphasised that the effect of that decision was to make clear that the applicaon of the illegality defence was not discreonary but instead operated as a rule of law. Lord Sumpon rejected the ‘public conscience’ test as contrary to 200 years of authority and cricised the Law Commission for its suggeson in its consultaon paper, The Illegality Defence: A Consultave Report (2009), that the test was: “useful in suggesng that the present rules should be regarded as no more than guidance that help the court to focus its aenon on parcular features of the case before it. What lies behind these ‘rules’ is a set of policies. This is why the courts are somemes required to ‘bend’ the rules (if possible) to give beer effect to the underlying policies as they apply to the facts of the case before them.” The majority of the Supreme Court thought that this approach would make the law uncertain and unprincipled, and the outcome exceponally difficult for a party’s advisors to predict in advance. Notably, however, the majority made no reference to the decision of the court in Hounga, which had taken a markedly different approach to the illegality defence. This is even more surprising because in both cases the wrong in queson was a statutory tort. It was accepted in Les Laboratoires that an infringement of a Canadian patent constuted a strict liability statutory tort under Canadian law. Lord Sumpon highlighted three quesons that would oen arise in the applicaon of the ex turpi causa principle: (i) what acts constute turpitude for the purpose of the defence? (ii) what rela- onship must the turpitude have to the claim? (iii) on what principles should the turpitude of an agent be aributed to his principal? Only the first of these quesons was relevant to the dispute before the court. Aer the lengthy discussion on the foundaons of the illegality defence, the majority decided that the defence was not engaged at all, because Apotex’s manufacture in breach of a patent would not constute the necessary turpitude for the purpose of the defence. A criminal or ‘quasi-criminal’ act was required. Only private rights were engaged by the breach of the patent, which could be sufficiently vindicated by the availability of damages for the infringements in Canada. Lord Mance gave a separate short judgment agreeing with the majority’s reasoning. Lord Toulson, by contrast, while agreeing that the illegality defence should fail, conspicuously did not approve the reasoning of the other members of the court. Instead Lord Toulson jusfied the result on the rather narrow ground that LLS was aempng to extend the doctrine of illegality beyond any previously reported decision and he saw no good public policy reason to do so. For Lord Toulson that was sufficient reason to dispose of the appeal, but he took the me to approve Lord Wilson’s speech in Hounga and call for a detailed re-analysis of the Tinsley decision. In applying the illegality defence it was necessary in his view to “consider the policies which underlie the broad principle”. In contrast to Hounga, the Les Laboratoires Servier decision struck a blow for the Tinsley status quo. With one victory each in the Supreme Court, this set up both warring sides for the largest skirmish on the baleground of the illegality defence. Jevia v Bilta The case of Jevia SA v Bilta (UK) Ltd [2015] UKSC 23 took place in front of 7 Supreme Court Jusces. Bilta (UK) Ltd (“Bilta”) was an English company whose directors entered into a series of transacons relang to European Emissions Trading Scheme Allowances (beer known as ‘carbon credits’) with Jevia SA (“Jevia”), a Swiss company. These transacons were made in order to perpetrate a carousel fraud against Her Majesty’s Revenue & Customs (“HMRC”). The effect of the transacons was to place Bilta under an obliga- on to account to HMRC for output VAT. It was inherent in the fraud that Bilta would always be insolvent and unable to meet this obligaon. Bilta was compulsory wound up upon peon by HMRC and a liquidator was appointed. The liquidator brought proceedings 6 T H E A R B I T E R S U M M E R 2 0 1 5 against Jevia, Jevia’s chief execuve, and the two former directors of Bilta, one of which was also the sole shareholder of the company. The four defendants applied to strike out Bilta’s claim. They argued that Bilta could not succeed because the fraud of its directors could be aributed to the company itself, which could not recover loss resulng from its own fraud. The applicaon was refused at first instance and the defendants’ subsequent appeal to the Court of Appeal was dismissed. Unsurprisingly, the Supreme Court unanimously dismissed the defendants’ appeal. The bale lines in the Jusces’ reasoning, however, were sharply drawn. There was no agreement on the fundamental approach that the court should adopt in relaon to the ex turpi causa principle. Lord Sumpon was again the standard bearer for the decision in Tinsley. Lord Toulson was back on the side of the majority in Hounga, this me joined by Lord Hodge. Lord Neuberger, with whom Lord Clarke and Lord Carnwath agreed, was le to act as umpire between the two sides. Lord Mance expressed no view on the maer. Lord Sumpon set out the law as stated in Tinsley. He viewed the decision as binding authority, which the highest court had never been invited to overrule. It stood for the proposion that the illegality defence depends on a rule of law and was “not a discre- onary power on which the court is merely entled to act, nor is it dependent upon a judicial value judgment about the balance of the equies in each case”. Unlike in Les Laboratoires Servier, Lord Sumpon did offer a view as to the interpretaon of the majority judgment in Hounga. He said that it was not inconsistent with the reliance test as set out in Tinsley, and the court was not purporng to depart from that decision without saying so. He disnguished it a case which arose in a very different context of unlawful discriminaon and human trafficking, and expressed the opinion that no statement of principle of general applicaon should be drawn from the decision. By contrast, Lords Toulson and Hodge viewed the dispute through the lens of public policy as Lord Wilson had done in Hounga. In their view the crical issue was: “whether it is contrary to public policy that the company, through the liquidators, should enforce for the benefit of its creditors the duty which the directors owed for the protecon of the creditors’ interests as part of their fiduciary duty to the company.” They came to the conclusion that it was not. Encouraging such enforcement was in fact advancing a valuable public policy, namely protecng creditors of an insolvent company. As the illegality defence was based on public policy, and there was no public policy which would be protected by the applicaon of the defence, it had no applicaon to the facts of the case. Lords Toulson and Hodge directly addressed the arguments made by Lord Sumpon. They took the posion that the approach of the majority in Hounga was not precluded by the decisions in Tinsley or Les Laboratoires Servier. The did acknowledge however, that the difference in approach between them and Lord Sumpon suggested a pressing need for a review of the law. Lord Neuberger recognised the struggle before him over the proper approach to be adopted to the defence of illegality. He referred to the “strongly held differing views” in the two opposing judgments of Lord Sumpon and Lords Toulson and Hodge. In a carefully worded secon of his judgment, Lord Neuberger conceded that both sides had made valid points. He opined that Les Laboratoires Servier provided a basis for saying that the approach in Tinsley had been recently reaffirmed by the Supreme Court and that it would be inappropriate for the court to visit the point again. On the other hand, he noted that the majority in Les Laboratoires Servier reached their decision without reference to Hounga, which had arguably refused to follow Tinsley. The correct course of acon, he concluded, was for the Supreme Court to address this topic again in front of seven or nine Jusces as soon as possible, with full argument on the basis of the ex turpi causa principle. As with Hounga and Les Laboratoires Servier, the debate over the foundaon of the illegality defence was all obiter, and all the Jusces agreed that the appeal should be dismissed on the ground that the fraudulent acons of Bilta’s directors could not be aributed to Bilta itself, and so Bilta was involved in no illegality on which the ex turpi causa principle could bite. Conclusion The various debates in the Supreme Court can be seen as epitomising the familiar tension between the need for principle, clarity and certainty in the law with the equally important desire to achieve a fair and appropriate result in each case. The approach in Tinsley has the advantage of certainty and uniformity of applicaon. It is a fundamental tenet of the rule of law that pares should be able to idenfy, with the help of legal advice if necessary, how the law will be applied and what the likely outcome will be if a maer came before the courts. On the other hand, the objecons to the Tinsley approach were best expressed by McHugh J in the High Court of Australia in Nelson v Nelson (1995) 184 CLR 538: “The [reliance] rule has no regard to the legal and equitable rights of the pares, the merits of the case, the effect of the transacon in undermining the policy of the relevant legisla- on or the queson whether the sancons imposed by the legislaon sufficiently protect the purpose of the legislaon. Regard is had only to the procedural issue; and it is that issue and not the policy of the legislaon or the merits of the par- es which determines the outcome. Basing the grant of legal remedies on an essenally procedural criterion which has nothing to do with the equitable posions of the pares or T H E A R B I T E R S U M M E R 2 0 1 5 7 the policy of the legislaon is unsasfactory, parcularly when implemenng a doctrine which is founded on public policy.” Conversely, while the Hounga approach has the benefit of being able to consider important factors which would otherwise be ignored, its applicaon is undoubtedly uncertain, as illustrated by the difference in its applicaon by the Court of Appeal and the Supreme Court in Les Laboratoires Servier. As things stand, the safe bet is that the law underpinning the illegality defence remains as stated in Tinsley v Milligan. The decision remains binding authority unless and unl the Supreme Court expressly departs from its approach. With the prospect of a final bale involving every member of the Supreme Court, however, it is advisable to wait unl the dust seles before a victor in this war about illegality can be declared. What’s in a name? A salutary tale of financial instruments, fraud and jurisdic- onal wrangling by Markus Esly Exclusive jurisdicon clauses or arbitraon agreements are meant to ensure that disputes are heard in a single forum that is acceptable to both pares. The tribunal is selected so as to be neutral, independent and experienced in dealing with the issues. When differences do arise, however, not all pares are willing to stand by their agreement. Some deliberately seek to undermine the contractual dispute resolu on mechanism, by commencing proceedings in a jurisdicon believed to offer an advantage to the rogue party. Parallel proceedings and a ‘race to judgment’ may ensue. In Spliethoff’s Bevrachngskantoor BV v Bank of China Ltd [2015] EWHC 999, the Commercial Court was recently asked to enforce a judgment of the Chinese Courts obtained in blatant breach of an arbitraon clause and in contravenon of injuncons meant to restrain the Chinese proceedings. The case serves as a useful reminder of the issues, both legal and taccal, that arise where there is a clash of compeng courts or tribunals. It also shows that having a foreign judgment recognised in England may not always be the end of the story. Background: a mulplicity of proceedings Spliethoff’s Bevrachngskantoor BV (“SBV”), one of the largest Dutch ship operang companies, had entered into two shipbuilding contracts with a Chinese shipyard and a related enty. Both contracts contained London arbitraon clauses, and were governed by English law. Bank of China had provided two guarantees in support of some of the shipbuilder’s obligaons under those agreements. SBV paid almost US$ 27 million by way of advance instalments to the yard. The contracts provided that, in the event of terminaon, these advance payments were to be refunded to SBV. Bank of China’s guarantees secured that obligaon to repay SBV. The guarantees were also subject to English law. The vessels were so late that SBV exercised its terminaon rights under the contracts. SBV asked for a refund of the advance instalments. The yard refused. SBV then made wrien demands under both guarantees, requiring Bank of China to pay it the US$ 27 million. Proceedings in London and in China ensued, and ulmately formed the background to SBV’s claims against Bank of China under the guarantees that were decided by the Commercial Court in April 2015. Arbitraon and court proceedings in England: - Two arbitral tribunals, appointed under each of the shipbuilding contracts, both found that SBV was entled to terminate by reason of the yard’s delay, and that SBV was, therefore, entled to recover the advance payments. - Following ligaon commenced by the yard in China, SBV obtained an-suit injuncons to restrain the yard from connuing with the Chinese proceedings in breach of the arbitraon clause. SBV was granted an interim injuncon by the Commercial Court, and final injuncons from two further arbitral tribunals. The arbitrators also found that SBV was, in principle, entled to damages for any loss suffered by SBV as a result of the Chinese proceedings - so damages that might amount to the exact same sums that the yard might be awarded by the Chinese Courts, which would in effect cancel out the oppressive foreign proceedings. The yard did not comply with any of the awards or court orders made in England. Ligaon in China: - While the arbitraon proceedings were ongoing, the yard sought interim relief from the Qingdao Marime Court. The Chinese Court made ex parte, interim orders requiring SBV to pay the sum of US$ 16.3 million, or put up a guarantee in that amount, and prohibing Bank of China, or any of its overseas branches, from making payments to SBV under the guarantees. - The yard also advanced substanve claims for damages against SBV in the Chinese ligaon. It alleged that SBV had fraudulently conspired with the manufacturers of the engines for the two ships, such that refurbished, and defecve, engines had been supplied unbeknownst to the yard, and had been passed off as new. - SBV challenged the jurisdicon of the Chinese Court. When the jurisdiconal objecons were dismissed at first instance, SBV appealed all the way to the Supreme People’s Court. This appeal 8 T H E A R B I T E R S U M M E R 2 0 1 5 did not operate as a stay of the yard’s substanve proceedings, and so SBV decided to parcipate fully in a number of hearings concerning the substanve claims whilst waing for the ul- mate decision on jurisdicon. - The Supreme People’s Court dismissed SBV’s jurisdiconal challenge. Thereaer, following further hearings in which SBV defended the claims on the merits, the Qingdao Marime Court upheld the yard’s fraud claims. It held SBV liable for substanal damages. - While SBV appealed that judgment to the Supreme People’s Court, it was common ground in the Commercial Court that under Chinese law, the decision at first instance in favour of the yard was final and effecve. As of April 2015, when the Commercial Court claims were decided, the yard was acvely seeking to locate assets of SBV located within China, with a view to enforcing the judgment of the Qingdao Marime Court. The Commercial Court Claim against Bank of China SBV’s claim in the Commercial Court was against Bank of China under the guarantees, rather than against the yard. Bank of China resisted the claim on a number of grounds. A number of arguments made in the bank’s defence depended on the nature of the contract between Bank of China and SBV. Bank of China argued that the contract was a true guarantee, given by way of security, rather than an on-demand guarantee, or a performance bond. The disncon under English law between a guarantee and a performance bond is an important one. In the present case, if the contract was really a guarantee, then Bank of China might not have to pay, because the Chinese Courts had found SBV guilty of fraud. Under a true guarantee, SBV’s fraud would discharge Bank of China - always provided that the judgment of the Qingdao Marime Court was recognised by the Commercial Court. A guarantor or surety can rely on a number of equitable defences that relate to the underlying contract. Fraud affecng the underlying transacon will usually discharge the guarantor. A material alteraon of the obligaons in the underlying contract will also have that same effect, unless the guarantor has consented to it. That is because the law takes the view that the surety has only promised to guarantee performance of the bargain as it was originally agreed (and not any subsequent variaons): this is usually referred to as the rule in Holme v Brunskill [1878] 3 QBD 495. If, on the other hand, the contract between Bank of China and SBV was in law a performance bond, then the Chinese judgment would be irrelevant, irrespecve of whether it had to be recognised in England. A performance bond is not a contract of surety, but rather one of indemnity. The issuer of a performance governed by English law bond cannot have regard to any dispute rela ng to the underlying contract, and the obligaon to pay under the bond is enrely separate and disnct. None of the equitable defences available to a surety are open to a party that has in fact given a performance bond. As the Commercial Court recognised, in internaonal commerce, performance bonds are treated as the equivalent of cash, and it is important that there is certainty that any financial instuon that has issued such a bond will pay on demand. Of course, if the Chinese judgment holding that SBV had been dishonest and fraudulent did not have to be recognised, then Bank of China might have had to pay out even if the contract were a true guarantee, and not a performance bond. As against that background, Carr J proceeded to consider the issues. Recognion of the Chinese judgment in breach of the arbitraon clause As regards recognion of the judgment of the Chinese Courts, the first queson was whether SBV had voluntarily submied to the jurisdicon. If SBV had so submied, then it might not maer that the Chinese ligaon had blatantly and deliberately been pursued in breach of the arbitraon clauses. Recognion of the Chinese judgment was governed by Civil Jurisdicon and Judgments Act 1982 (“CJJA”). Secons 32 and 33 of the CJJA specifically deal with proceedings that contravene any agreement for selement of disputes (such as an arbitraon clause or an exclusive jurisdicon provision), and set out the statutory criteria for determining whether a party has ‘submied’ to foreign proceedings. A party will be deemed to have submied if it agrees to the foreign proceedings or advances a counterclaim, but it will not submit if it only parcipates in the ligaon in order to (i) contest the jurisdicon of the court or (ii) “to protect, or obtain the release of, property seized or threatened with seizure in the proceedings”. The judgment of Carr J provides further guidance on the test that the English Courts will apply when considering whether a party has submied to the jurisdicon of a foreign court: - Parcipang or appearing in the proceedings in order to defend the merits of the claim will generally be treated as having submi ed. - Any formal steps taken in the proceedings (beyond simply objec ng to jurisdicon) will put the onus on the party arguing that it did not submit. The queson that the English Court will ask is: “… were the acts of the defendant which are pointed to “obviously and objecvely” inconsistent with the defendant’s submission to the jurisdicon of the foreign court: if they were, they will not be characterised as submission … but otherwise they will.” - It would be odd if, when considering recognion of a foreign judgment, the English Court found that a defendant had submi ed to the jurisdicon of a foreign court, when that would not also be the posion under the foreign law in queson. The English Court will therefore want to be sasfied that there has also been a submission to jurisdicon in accordance with foreign law. T H E A R B I T E R S U M M E R 2 0 1 5 9 SBV had submied to the jurisdicon of the Chinese Court Here, SBV had fully parcipated in the Chinese proceedings aer the Supreme People’s Court had dismissed its jurisdiconal challenge. At that stage, as the Commercial Court noted, SBV faced a simple (although perhaps stark) choice: either SBV ceased to take any further part in the Chinese ligaon, risking adverse orders or judgments against it, or SBV defended the claims on the merits. SBV chose the laer, and in doing so submied to the jurisdicon of the Chinese Courts. Carr J noted that, in effect, SBV could not have its cake and eat it, too: “Had SBV been successful in so doing, it would no doubt have regarded that as conclusive and the judgment as binding and to be recognised in that regard.” As regards Chinese law, both pares had led expert evidence, but there had been no posive case that SBV, having fully taken part in the trial before the Qingdao Marime Court, would not be treated as having submied under the Chinese law - something that would have been surprising, to say the least. The Commercial Court therefore concluded that the posion under Chinese law was perfectly in line with a finding that SBV had submied. SBV also sought to rely on the statutory proviso in Secon 33(1) (c) of the CJJA, pursuant to which a party that takes steps to protect its property against seizure or enforcement measures is not to be taken as having submied. SBV did challenge a number of such (ex parte) orders, but, once these challenges had been dismissed, it then went on to parcipate in the trial of the substanve claims. In doing so, SBV stepped beyond the boundaries of the ‘protecon of property’ excepon. Does the English Court retain a discreon to nonetheless refuse recognion? That le one point to be decided. SBV may have submied to the Chinese Courts, but the ligaon had been in flagrant breach of the arbitraon clauses. English law recognises that public policy militates against upholding judgments obtained by a party riding roughshod over the contractual dispute resoluon procedure. In Philip Alexander Securies & Futures Ltd v Bamberger [1996] CLC 1757, Waller J stated that: “There are cases where it is in blatant disregard of an arbitra- on provision that a party has commenced proceedings abroad and where the party is acng vexaously and oppressively. In such cases, judgments obtained on the substance of the dispute (it can be argued) should not be recognised … It would seem to be me prima facie that if someone proceeds in breach of, and with noce of, an injuncon granted by the English court to obtain judgments abroad, those judgments should not, as a maer of public policy, be recognised in the UK.” SBV prayed in aid that same public policy, as qualifying Secons 32 and 33 of the CJJA. SBV invited the Commercial Court to carry out an evaluave exercise of the Chinese judgment, in order to determine whether it ought to be recognised. SBV’s argument was that even though it might have submied to the jurisdicon of the Chinese courts, the English Court nonetheless retained a discreon not to enforce a judgment that was so clearly against public policy. SBV relied on statements made by Rix LJ in the Court of Appeal in AES Ust-Kamenogorsk Hydropower Plant LLP v AES Ust- Kamenogorsk Hydropower Plant JSC [2012] 1 WLR 920, to the effect that: “It was common ground before the judge, and it has been common ground in this court, that secon 32(3) [of the CJJA] gives to the English court discreon whether to recognise or enforce in circumstances where the general rule does not apply. I am not sure that discreon is the right concept here; it may be that it would be beer to say that whether the foreign judgment should be recognised or enforced is a maer for evaluave judgment.” The general rule set out in the statute that was referred to by Rix LJ was that judgments given in breach of an arbitraon clause or a similar provision should not be enforced unless that breach had in effect been waived by a submission: in other words, the Court of Appeal suggested that Parliament had intended for the Courts to retain some element of a discreon, perhaps meant to be applied in circumstances where a party felt it was caught between a rock and a hard place and ended up going too far in taking part in the foreign proceedings. Carr J rejected the argument, and expressly disagreed with the statement made by Rix LJ, which was obiter. The relevant provisions in the CJJA were plainly meant to govern the circumstances in which a foreign judgment obtained in breach of an arbitraon clause should not be recognised or enforced. Parliament had provided that recognion of such a judgment should be refused in all cases, unless the defendant had submied to the jurisdicon of the foreign court. There was, therefore, a clear excepon - and one that SBV fell squarely within. None of the authories that SBV had pointed to concerned a situaon where a party resisng a judgment given in breach of an arbitraon clause had in effect accepted the jurisdicon of the foreign court by fighng the claim on the merits. The decision makes it clear that there is no room under English law for a party parcipang fully in foreign proceedings that it considers to be in breach of contract, whilst reserving its posion on jurisdicon. The advice to any party faced with the same predicament as SBV, and who intends to resist recognion or enforcement in England, must therefore be to abandon and take no further part in any such ligaon as soon as the jurisdiconal issues have been dealt with, and to make no submission on the merits. 1 0 T H E A R B I T E R S U M M E R 2 0 1 5 A twist in the tale: SBV was entled to demand payment under the guarantee aer all At this point, one can be forgiven for thinking that maers look rather bleak for SBV. However, SBV did in fact go on to snatch victory from the jaws of defeat. It was able to persuade the Commercial Court to order Bank of China to pay out under the guarantee, irrespecve of a Chinese judgment holding SBV liable for fraud which the English Courts had to recognise. SBV did this by successfully arguing that the guarantee was not really a guarantee, but a performance bond. In arriving at that conclusion, the Commercial Court looked at substance and not form, and was clear that any labelling or references to the contract being a ‘guarantee’ could not be decisive. Having reviewed the authories, Carr J idenfied four general principles: - the queson of whether a document such as each of the Guarantees is a true guarantee or a performance bond is a maer of construcon to be determined on a case-by-case basis; - there are certain factors which may be indicave of the nature of the instrument, but these are not necessarily decisive; - the queson that the Court will always be faced with is what, objecvely, the pares to the contract intended; - in the modern commercial world, pares are capable of draing agreements that are clear and that oblige the surety to pay regardless of the existence of any underlying liability if that is what they intend. Carr J also cited with approval a presumpon set out in Paget’s Law of Banking as to when an instrument will be a performance bond, or an ‘on demand guarantee’: “Where an instrument (i) relates to an underlying transacon between the pares in different jurisdicons, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “wrien”) and (iv) does not contain clauses excluding or liming the defences available to a guarantor, it will almost always be construed as a demand guarantee. …” It is helpful to consider the decision on this point by looking at some of the wording of the contract, and in parcular a proviso that Bank of China relied on heavily in arguing that it was a true guarantor, and was not obliged to stand as surety when SBV had been found guilty of fraud in China. The contract proclaimed that: “We, Bank of China, Shandong Branch, as the primary obligor, not as security, do hereby irrevocably, uncondionally and absolutely guarantee repayment to you by the Seller”. It then went on to state expressly that Bank of China’s obliga- ons were not affected “… by any dispute between [SBV] as the Buyer and [the yard as] the Seller under the Shipbuilding Contract or by the Seller’s delay in the construcon and/or delivery of the Vessel due to whatever cause …”. The contract also stated that Bank of China would pay “within 30 days aer our receipt of the relevant wrien demand from you for repayment.” The promise to pay was, however, made subject to the following proviso: “However, in the event of any dispute between you and the Seller in relaon to: 1. Whether the Seller shall be liable to repay the instalment or instalments paid by you and 2. Consequently whether you shall have the right to demand payment from us, And such dispute is submied either by the Seller or by you for arbitraon or appeal in accordance with arcle XIII of the contract, we shall be entled to withhold and defer payment unl the arbitraon award or court order is published. We shall not be obligated to make any payment to you unless the arbitraon award or court order orders the Seller to make repayment. If the Seller fails to honour the award or court order, then within thirty (30) days aer the publicaon of award or court order we shall refund to you to the extent the arbitraon award or court order orders but not exceeding the aggregate amount of this guarantee plus the interest described above.” Carr J first of all found that the guarantee sasfied important elements in Paget’s presumpon, being a contract issued by a bank in internaonal commerce, including ‘on demand’ wording. It was essenally limited to repayment of the instalments (as opposed to be being a guarantee for the yard’s manifold and considerably more extensive and financially onerous obligaons under the shipbuilding contracts). She did not agree with Bank of China that the promise to pay on demand was undermined by the proviso requiring SBV to refer any dispute to arbitraon. The judge found that, in any event, under the contract Bank of China was never concerned with or could have regard to the substance of any dispute between SBV and the yard. If SBV fell within the arbitraon proviso, then all this meant was that SBV would have to provide an addional document in support of a demand for repayment: an arbitraon award. This SBV was able to do, having referred the maer to London tribunals. Accordingly, Bank of China was liable. The Chinese judgment holding that SBV had engaged in dishonesty was not, on a true construcon of the guarantee, sufficient reason for Bank of China to object to SBV’s demand. One can only speculate whether Carr J’s decision that the contract was a performance bond was in any way movated by the underlying merits. It certainly offered a very elegant way of ensuring that SBV was not le out in the cold. T H E A R B I T E R S U M M E R 2 0 1 5 1 1 From Philadelphia to the Moon! by Robert Blacke A decision which has always interested me is that of the House of Lords in Brish Wesnghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673. More than 100 years aer it was decided, the case connues to generate academic arcles and new decisions. Brish Wesnghouse also provides an excuse to tell the story of American rail tycoon Charles Tyson Yerkes, of which the case forms part - a story which began in Philadelphia in the 1860s and ended on the moon in the 1950s. While hardly essenal to an understanding of the case, Yerkes’ story is interesng in its own right, and so I have said something about him below. The concept of migaon A claimant is entled, so far as money can do it, to be placed in the posion it would have been in if the contract had been performed. The difference between the posion the claimant is in, and the posion the claimant would have been in if the contract had been performed, is the claimant’s loss. But once a breach has occurred acon (or inacon) on the part of the claimant may have the effect of prevenng (or failing to prevent) losses which the claimant would otherwise have suffered. The concept of migaon is oen said to comprise three ‘rules’, described in McGregor on Damages 19th Ed. (2014) as follows: “(1) The first and most important rule is that the claimant must take all reasonable steps to migate the loss to him consequent upon the defendant’s wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable acon or inacon, to avoid. Put shortly, the claimant cannot recover for avoidable loss. (2) The second rule is the corollary of the first and is that, where the claimant does take reasonable steps to migate the loss to him consequent upon the defendant’s wrong, he can recover for loss incurred in so doing; this is so even though the resulng damage is in the event greater than it would have been had the migang steps not been taken. Put shortly, the claimant can recover for loss incurred in reasonable aempts to avoid loss. (3) The third rule is that, where the claimant does take steps to migate the loss to him consequent upon the defendant’s wrong and these steps are successful, the defendant is entled to the benefit accruing from the claimant’s acon and is liable only for the loss as lessened; this is so even though the claimant would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mi- gang steps, by reason of these steps not being ones which were required of him under the first rule. ... Put shortly, the claimant cannot recover for avoided loss.” A recent arcle (A Dyson and A Kramer, “There is No ‘Breach Date Rule’” (2014) 130 LQR 259, 263) suggests that the concept of migaon can be expressed much more simply: “Migaon is oen said to comprise three rules, but it is beer expressed using just one: damages are assessed as if the claimant acted reasonably, if in fact it did not act reasonably.” The standard of reasonableness is not parcularly exacng. In Banco de Portugal v Waterlow [1932] AC 452) Lord MacMillan said that the steps a claimant must take “ought not to be weighed in nice scales at the instance of the party who ... has occasioned the difficulty”. The claimant “will not be held disentled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken”. There is authority that a claimant need not prejudice his commercial reputaon, need not act so as to injure innocent par- es, need not sacrifice rights or property of his own, and need not take the risk of starng ligaon against a third party. It is convenient to speak of the claimant as having been under a ‘duty’ (or ‘bound’ or ‘required’) to do the reasonable thing and that terminology is used in this arcle and in many of the judgments to which it refers. But there is no duty in any strong sense of the word. The claimant has no liability to any other party if they fail to do that thing. We mean only that, if they fail to do that thing, their losses fall to be assessed as if they had done that thing. The doctrine of migaon might be appear to be an applicaon of the doctrine of causaon or remoteness: (a) The claimant’s unreasonable behaviour is like a new intervening act, which breaks the chain of causaon between the breach and the loss. The law treats the loss as caused by the unreasonable behaviour, and not by the original breach. (b) A defendant is only liable for loss which was foreseeable to any reasonable person in the defendant’s posion; or the likelihood of which was clear to the defendant in the parcular circumstances of the case. A defendant might say it is likely that a claimant will act reasonably to avoid loss, and is entled to assume that they will do so. But migaon, causaon and remoteness are not quite the same. There are cases where reasonable acons by claimants have been held to sever the causal link. The Elena D’Amico [1980] 1 Lloyd’s Rep 75 is an example - a chartered vessel became unavaila1 2 T H E A R B I T E R S U M M E R 2 0 1 5 ble. The charterers decided not to charter a replacement, and this was held to have been commercially reasonable, even though it led to the loss of a lucrave market. Even if not a failure to migate, the loss was not caused by the breach. McGregor’s third rule (the authority for which is, supposedly, the Brish Wesnghouse case) has been the subject of some cri- cism. Suppose a claimant does not do what is reasonably required. Suppose that, instead, they either do less, or go beyond what is reasonably required. According to McGregor’s third rule: (a) if an extra loss results, then the claimant must bear that loss; but (b) if an extra benefit results, then the claimant must give credit for the benefit, and the defendant’s liability is reduced commensurately. This seems asymmetric - if the claimant goes beyond what is reasonably required, they take all the risk, and the defendant will enjoy any reward. This arcle considers whether Brish Wesnghouse really supports McGregor’s third rule, and looks at how judges have dealt with Brish Wesnghouse in some later cases. Charles Tyson Yerkes Yerkes (which rhymes with “turkeys”) was born in Philadelphia in 1837. He made, and lost, one fortune in Philadelphia in the 1860s, where he rose from clerk in a grain brokerage to become the banker and stockbroker to the city’s treasury, risking public money in huge stock speculaons. In 1871 the Great Chicago Fire triggered plummeng stock prices, leaving Yerkes insolvent and owing colossal sums to the City of Philadelphia. Sentenced to 33 months in prison, he publically denounced two local policians whom he said had collaborated in his unlawful speculaons with public money. Concerned at the ramificaons for his elecon campaign, President Ulysses S. Grant granted Yerkes a pardon in exchange for Yerkes withdrawing his allegaons against Grant’s supporters. Yerkes then headed for Chicago. The city whose conflagraon had lost Yerkes his first fortune soon made him a second as he mounted takeovers of the various companies which ran Chicago’s rail and tram services, and bribed and blackmailed policians in an aempt to try and secure a monopoly. Though a monopoly eluded him, he soon controlled nearly all the city’s streetcar lines and buses. During this period he was approached by various astronomers from the University of Chicago. Despite Yerkes having no interest whatever in astronomy, they succeeded in persuading him to donate $300,000 to pay for a new observatory to be named in his honour, probably in the hope that this would improve his terrible public image. By the late 1890s, however, Yerkes had grown sick of Chicago, and the people of Chicago had apparently grown sick of him too. A narrow majority of a reformed city council refused Yerkes’ bribes, and voted against the extension of his companies’ franchises. Yerkes sold almost all his stock in those businesses, and turned his eye to London. In 1900, Yerkes established “The Underground Electric Railways Company of London” (“UERL”). As this was something of a mouthful, the company, and the railways it operated, quickly came to be known simply as “the Underground”. At the me, there were various companies which were licensed to operate underground rail lines in London, and UERL set about acquiring these. In 1901 UERL succeeding in acquiring the Metropolitan District Railway Company. That company operated the lines which later became the modern London Underground network’s District, Circle, Hammersmith and City and Metropolitan lines. At the me, those lines used steam locomoves. Through the sale of what were (for the me) novel financial instruments, UERL obtained finance for a huge project to electrify the lines it had bought, buy new rolling stock and to build the biggest power staon on earth in order to supply the electricity required. Permission was given to build that power staon at a site in Chelsea at Lots Road by the Thames River. In 1902 UERL contracted to buy eight steam turbines and turbo alternators for the Lots Road power staon from Brish Wesnghouse for £250,000. Brish Wesnghouse was the Manchester-based subsidiary of Pisburgh’s Wesnghouse Electric and Manufacturing Company. Work on construcon of the power staon began that same year. The Lots Road power staon opened in 1905, but Yerkes himself died soon aerwards. Having led a highly leveraged life, he died with debts in excess of $21 million. Once these were paid off, his remaining estate proved to be worth considerably less than $1 million. The dispute between UERL and Brish Wesnghouse The turbines and alternators which Brish Wesnghouse had installed at Lots Road proved defecve. They consumed more fuel, generated less power and produced more waste than the contract spulated. UERL persisted in using the turbines for a few years and tried to modify them to achieve beer performance. In 1908, UERL eventually gave up and bought replacement turbines and alternators from C.A. Parsons & Company, a company based in Newcastle upon Tyne. The new Parsons turbines were more powerful than the Wesnghouse turbines - they could generate 10% more power, and were expected to last longer. The Parsons turbines were more efficient than the Wesnghouse turbines would have been even if they had been as contracted for. The Parsons company’s founder was, himself, an interesng character. Charles Algernon Parsons was the son of the Third Earl of Rosse. The Earl had, like Yerkes, spent vast sums on astronomy, though in the Earl’s case due to a genuine enthusiasm rather than as a cynical PR move. In parcular, in the 1840s, the Earl had paid to construct what was then the world’s biggest telescope, known as the “Leviathan”, in his garden at Birr Castle in Ireland. The Earl’s T H E A R B I T E R S U M M E R 2 0 1 5 1 3 son was a brilliant engineer and the original inventor of the ‘axial flow’ steam turbine, upon which all modern turbines are based. In late 1908 the dispute between UERL and Brish Wesnghouse was referred to arbitraon before a sole arbitrator, Alfred Lyelton QC (Lyelton had, incidentally, been the first person to play for England in both football and cricket, and had served in government unl 1905 as Secretary of State for the Colonies). Brish Wesnghouse sought to claim the unpaid balance of the purchase price. The precise amount claimed by Brish Wesnghouse is unclear. The judgments say: “The respondents at various dates paid to the claimants on account of the price of the said machines the sum of [£] 159,431 … and aer allowing for certain agreed reducons of the contract price and also for certain sums admied as due from the claimants to the respondents there sll remained a large sum as the unpaid balance of the contract price.” So perhaps the balance of the contract price may have been something like £90,000 (the £250,000 purchase price minus approximately £160,000 already paid). UERL claimed: (a) £280,000, to represent the extra coal which would be consumed by the Brish Wesnghouse turbines if UERL had used them for their full 20 year life; alternavely (b) £42,000 to represent the extra costs which UERL had incurred during the 3 years it had already operated the Brish Wesnghouse turbines; and (c) £78,186 to represent the cost of the replacement Parsons turbines and alternators. It is not clear why UERL tried to claim £280,000 for 20 years of extra coal for the life of the Wesnghouse turbines. UERL had used the Wesnghouse turbines for three years and used £42,000 worth of extra coal. It had then replaced the Wesnghouse turbines, and was going to use the Parsons turbines for the remaining next 17 years. UERL had migated that loss. In the later judgments UERL’s £42,000 claim is always referred to as having been for extra coal used in the three years before the Wesnghouse turbines were replaced. But it probably also included the cost of disposing of waste in excess of that which the Wesnghouse turbines would have produced if they had been as contracted for. It may also have included a claim for the cost of repairing and modifying the machines. It is unclear whether UERL’s claim included any element of downme. UERL’s claim for £78,186 does not sound like very much for eight replacement turbines and turbo alternators given that the contract price for the eight original Wesnghouse turbines had been £250,000, and that the Parsons turbines had 10% more generang capacity. The arbitrator’s award Lyelton found that: “… the purchase of the Parsons machines by [UERL] was a reasonable and prudent course, and that it migated or prevented the loss and damage which would have been recoverable from [Brish Wesnghouse] if [UERL] had connued to use [Brish Wesnghouse’s] defecve machines in the future. … the purchase of the Parsons machines was to the pecuniary advantage of [UERL] and that the superiority of Parsons machines in efficiency and economy over those supplied by [Brish Wesnghouse] was so great that, even if [Brish Wesnghouse] had delivered to [UERL] machines in all respects complying with the condions of the said contract, it would yet have been to the pecuniary advantage of [UERL] at their own cost to have replaced the machines supplied to [UERL] by Parsons machines so soon as the laer could be obtained.” Lyelton had determined that it would have been “to the pecuniary advantage of UERL” to buy the Parsons turbines, even if the Wesnghouse turbines had complied with the contract. In order for it to be to UERL’s advantage to replace Wesnghouse turbines which were as contracted for with Parsons turbines, it must have been the case that: (a) the Parsons turbines would generate at least the same power as the as-contracted-for Wesnghouse turbines; and (b) in order to do so, the Parsons turbines would use so much less coal than the as-contracted-for Brish Wesnghouse turbines (over the ensuing 17 years) as to jusfy spending the £78,186 purchase price today. Exactly how much the Parsons turbines were expected to save over 17 years is unclear. Presumably, in order to jusfy spending £78,186, the Parsons turbines must have been expected to realise a saving which, even when discounted to reflect the fact that it would only be received over a period of 17 years, sll exceeded £78,186. UERL arguably received another benefit as a result of installing Parsons turbines. The Wesnghouse turbines had an expected life of 20 years, so if they had been as contracted for, UERL would have needed to replace them in 1925. As a result of its migang ac- ons, UERL now had new, Parsons turbines. Even if the Parsons turbines were only expected to last 20 years then UERL would not need to replace them unl 1928. Compared to the posion it would have been in if the Wesnghouse turbines had been as warranted, UERL had an extra three years before it would need to incur the expense of installing new turbines. This benefit is not discussed in the judgments. UERL had not just gone into the market and bought substute turbines which were as good as Brish Wesnghouse had warranted its turbines would be. UERL had instead gone and bought turbines which were beer. Lyelton referred the queson of whether UERL could recover 1 4 T H E A R B I T E R S U M M E R 2 0 1 5 the money it had spent on the new Parsons turbines to the court (under a procedure analogous to that in secon 45 of the Arbitra- on Act 1996). The court held that UERL could recover the cost of the Parsons turbines from Brish Wesnghouse, as being “the necessary cost and expense incurred by [UERL] in migang or prevenng (as from the respecve dates when a Parsons machine was substuted for each of the claimant’s machines) the damages which they would otherwise have been entled to recover from [Brish Wesnghouse]”. Lyelton issued an award. He adopted the court’s answer, dismissed Brish Wesnghouse’s claim for the balance of the purchase price and awarded UERL £15,394. It is not clear how Lyelton arrived at that figure. In light of the court’s finding, one might have expected him to award UERL the following, in order to put UERL in the posion it would have been in if the contract had been performed: (a) £42,000 for three years of extra coal which UERL would not have had to buy if the Wesnghouse turbines had been as contracted for; plus (b) £78,186 for the Parsons turbines which UERL had bought to replace the defecve Wesnghouse turbines; minus (c) the balance of the contract price which UERL would have had to pay if the Wesnghouse turbines had been as contracted for (perhaps around £90,000, but the figure could have been higher or lower). That would suggest an award of around £30,000. It may be that a lower amount was awarded because the balance of the contract price was higher - it is impossible to tell from the judgments. Brish Wesnghouse sought to have Lyelton’s award set aside on the ground that it was wrong in law - arguing that UERL should not have been awarded anything in respect of the cost of the new turbines. This is because UERL should have to give credit for the greater efficiency of the Parsons turbines compared to if the Wesnghouse turbines had been as contracted for, and this saving would wipe out UERL’s loss. The award was upheld at first instance, and by the Court of Appeal and the case eventually reached the House of Lords. The decision of the House of Lords The House of Lords reversed the decisions below, and remied the award to the arbitrator, with a direcon that the cost of the Parsons machines was not recoverable from Brish Wesnghouse. Viscount Haldane said (emphases added): “The fundamental basis is thus compensaon for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plainff the duty of taking all reasonable steps to migate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. … this second principle does not impose on the plainff an obligaon to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken acon arising out of the transacon, which acon has diminished his loss, the effect in actual diminuon of the loss he has suffered may be taken into account even though there was no duty on him to act. The subsequent transacon, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business. Provided the course taken to protect himself by the plainff … was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, … an arbitrator may properly look at the whole of the facts and ascertain the result in esmang the quantum of damage.” It seems that conduct giving rise to a benefit is to be taken into account when it “arises out of the consequences of breach”. The passages underlined support the view that, if conduct “arises out of the consequences of breach”, a claimant must give credit for any benefit which results, even if the conduct goes beyond what is reasonably required. Hence McGregor’s third rule. There is, however, a queson, whether that was really the rao for deciding that UERL had to give credit for the saving it enjoyed. Did the court think that by buying the Parsons turbines, UERL: (i) went beyond what was reasonably required (“over-migated”); or (ii) did what was reasonably required? If (i) then Brish Wesnghouse is authority for McGregor’s third rule. If (ii) then the judgment leaves open the queson of whether a claimant must account for the benefits of doing more than is reasonably required. Given that UERL had to give credit for all the savings which would result from using the Parsons turbines relave to ascontracted- for Wesnghouse turbines, then there are three possible readings of the judgment: (a) Rather than buy the Parsons turbines, reasonableness only required UERL to buy turbines which were: (i) cheaper than the Parsons turbines; and (ii) less efficient than the Parsons turbines; but (iii) as efficient or more efficient that the Wesnghouse turbines should have been. By instead buying the Parsons turbines, UERL went beyond what was reasonably required. If that was the court’s view, then McGregor’s third rule is correct. (b) Reasonableness imposed a duty on UERL to buy the Parsons turbines specifically. If UERL had declined the opportunity to buy the Parsons turbines, and had bought any other turbine, UERL would have been acng unreasonably. If that was the court’s view, then Brish Wesnghouse is not direct authority for McGregor’s third rule, since in buying the Parsons turbines, T H E A R B I T E R S U M M E R 2 0 1 5 1 5 UERL did not go beyond what was reasonably required. (c) There was a range of acons which it would have been reasonable for UERL to take. It would have been reasonable to buy the Parsons turbines. It would also have been reasonable to buy different, less efficient, but cheaper turbines. UERL reasonably decided to buy the Parsons turbines, and so had to account for the benefits of having done so. If instead, UERL had bought cheaper, but less efficient, turbines then it would instead have had to account for: (i) the cost saving it enjoyed by buying the cheaper turbines; and (ii) any efficiency saving of those turbines relave to as-contracted-for Wesnghouse turbines. If that was the court’s view, then Brish Wesnghouse is not direct authority for McGregor’s third rule, because UERL’s acons in purchasing the Parsons turbines did not go beyond what was reasonably required. It should be said at the outset that there is no evidence that UERL had the opon of buying turbines which were cheaper than the Parsons turbines; less efficient than the Parsons turbines; but as or more efficient than the Wesnghouse turbines should have been. But it is only if UERL could have bought such turbines that Brish Wesnghouse is a direct authority for McGregor’s third rule. Is this realisc? In 1902 the contract price for the Wesnghouse turbines had been some £250,000. Six years later, the contract price for the much superior Parsons turbines, with 10% more genera ng capacity, was only around £80,000. That suggests a rapid fall in the price of turbines, but it might also suggest that the technology had moved on, and turbines had generally become more efficient and powerful. We have no idea as to how a reducon in capacity would have affected the price. It may even be that in 1908, a turbine which performed as the Wesnghouse turbines should have done would have cost much the same as the Parsons turbine. In one passage, Viscount Haldane can be read as saying that, by buying the Parsons turbines, UERL did go beyond what was reasonably required by way of migaon (emphasis added): “The arbitrator appears to me to have found clearly that the effect of the superiority of the Parsons machines and of their efficiency in reducing working expenses was in point of fact such that all loss was exnguished, and that actually the respondents made a profit by the course they took. They were doubtless not bound to purchase machines of a greater kilowa power than those originally contracted for, but they in fact took the wise course in the circumstances of doing so, with pecuniary advantage to themselves.” At the same me, the reference to the purchase of the Parsons turbines as having been “the wise course” could be read as meaning that it was a reasonable course of acon (but not the only reasonable course of acon). Viscount Haldane’s reference to “power” is probably a mistake. The “pecuniary advantage” of Parsons turbines to UERL compared to as contracted for Wesnghouse turbines was not due to greater power output but greater efficiency. Suppose the Wesnghouse turbines had been as contracted for and UERL replaced them with new turbines which were capable of generang 10% more power but which would require 10% more coal in order to do so. UERL would not enjoy any saving as a result of having replaced the Wesnghouse turbines with more powerful turbines. UERL’s saving arose not because the Parsons turbines produced more power, but because they would require less coal in order to produce the power which the Wesnghouse turbines would have produced if they had been as contracted for. Elsewhere in the judgment Viscount Haldane said: “Apart from the breach of contract, the lapse of me had rendered the [Wesnghouse] machines obsolete, and men of business would be doing the only thing they could properly do in replacing them with new and up to date machines.” There are two ways this could be read: (a) UERL’s expenditure on the Parsons turbines did not “arise[e] out of the consequences of the breach” - UERL would as a maer of fact always have replaced the Wesnghouse turbines in 1908 anyway, in the ordinary course of UERL’s business, even if the Wesnghouse Turbines had been in compliance with the contract. The cost of replacing the turbines was not recoverable because it was a cost which would have been incurred irrespec- ve of any breach. (b) Due to the breach, UERL had no choice but to replace the defec- ve turbines with new turbines. When UERL bought the Parsons turbines, it did what was reasonably required (and no more). UERL, when it had the opon of buying the Parsons turbines, would have been acng unreasonably if it had instead opted to purchase different turbines whose performance was merely equivalent to that of the Wesnghouse turbines it originally contracted for. A good argument can be made that, by buying the Parson’s turbines, UERL did what was reasonably required, and no more. That argument is as follows. (a) The Wesnghouse turbines were defecve. (b) If UERL replaced them with turbines which were at least as efficient as the Wesnghouse turbines should have been, UERL would avoid a £238,000 loss (nearly as much as the cost of the original Wesnghouse turbines). (c) It was evidently possible to replace the turbines for much less than £238,000 (because, in the event, that is what UERL did). (d) It follows that it would have been unreasonable to keep using the Wesnghouse turbines, and that UERL was under a duty to buy replacements. (e) What opons did UERL have available? We only know of one such opon - that Parsons had offered to supply replacement turbines which would cost a fracon of what the Wesnghouse turbines had cost, and which promised to be much more efficient. 1 6 T H E A R B I T E R S U M M E R 2 0 1 5 (f) There is no evidence that UERL could have bought some other turbines which were cheaper than the Parsons turbines, less efficient than the Parsons turbines, but as efficient or more efficient that the Wesnghouse turbines should have been. (g) Since UERL had a duty to buy replacement turbines and since the only offer of replacement turbines we know about was Parsons’ offer, UERL’s duty was to accept Parsons’ offer. In accep ng Parsons offer, UERL did not go beyond what was reasonably required, but did exactly what was reasonably required. Purchasing the turbines from Parsons could not be, at one and the same me, both migaon and over-migaon. It can be seen that, on a close reading, Brish Wesnghouse does not really seem to close the door completely on the issue of whether a claimant which takes some acon which “arises out of the consequences of breach”, but goes beyond what is reasonably required, must account for the resulng benefit. The “available market” cases In 110 years since Brish Wesnghouse, there seem to be rela- vely few reported cases where a queson has arisen whether a claimant must account for a profit as a result of acon (or inacon) in migaon. The reason is probably because so many disputes involve the sale of goods or services for which there is an available market, and the law analyses those cases in a very parcular way. If a buyer does not receive goods he has contracted for he should (if not prevented from doing so by impecuniosity) immediately go into the market and buy a substute. His claim is then for the difference between the contract price and the cost of acquiring the goods on the missed delivery date. If he instead chooses to delay, and the market rises, he cannot recover the extra cost. If the market falls, he need not account for the saving. The raonale is that the buyer’s decision whether to buy a subs tute immediately on breach or else to delay is (per Goff J in The Elena d’Amico): “… an independent decision, independent of the breach, made by the buyer on his assessment of the market.” The same reasoning applies where a buyer refuses to take delivery of goods for which there is an available market. The seller should sell the goods on the delivery date at the market price and, if he realises a price which is lower than the contract price, claim the difference from the defaulng buyer. If the seller delays, and the market rises, he need not account for his extra profit. If the market falls, he cannot recover his extra loss. For cases involving the sale of goods, this presumpon as to how damages will be calculated is laid down by statute, specifically sec- ons 50 and 51 of the Sale of Goods Act 1979. But the same reasoning which applies to sale of goods seems to apply to any contract where there is an available market for whatever is contracted for. It applied, for example, to a contract for the sale of shares in Jamal v Moolla Dawood, Sons & Co [1916] 1 AC 175. There the claim was for failure by a buyer to accept shares under a contract of sale for delivery on a specified date. Two months later the sellers began to re-sell the shares on a rising market. It was held that the profit thus accruing should not be deducted from the damages for non-acceptance, which were to be ascertained as at the date of the breach. The early redelivery of ships by charterers seem to be subject to a similar analysis. Goff LJ again in the Elena D’Amico: “The normal measure of recovery in cases of premature wrongful repudiaon of a me charter is that, if there is at the me of terminaon of the charterparty an available market for the chartering of ... a ... vessel, the damages will generally be assessed on the basis of the difference between the contract rate for the balance of the charter period and the market rate for ... that period.” If there is an available market, the owner must enter a new charter and claim the difference. If they delay, and the market rises, they get the benefit, if they delay, and the market falls, they bear the loss. It is worth nong Goff J’s reference to the “normal” measure. The Sale of Goods Act 1979 only provides that, where there is an available market, the measure of damages is “prima facie” the difference between the contract price and the price and the market price on the date when the goods should have been delivered / accepted. It should not be assumed that this measure will always apply. A case in which this prima facie measure was not applied is R. Pagnan & Fratelli v Corbisa Industrial Agropacuria Limited [1970] 1 WLR 1306. There the pares had contracted for the sale of a quan- ty of maize. The maize was not delivered by the contractual delivery date. The buyer agreed to accept late delivery if sasfied with the condion of the cargo on arrival. When the cargo arrived, part was in bad condion, and the buyer rejected it. In the meanme, the buyer had obtained (in effect) a freezing injuncon to prevent the seller disposing of the cargo, pending resoluon of the buyer’s claim to damages. Unable, due to the freezing injuncon, to sell the goods at their market price, the seller was instead forced to sell the goods to the original buyer at a price which was much less than the market price and also much less than the contract price. The buyer connued to pursue its claim for damages, claiming the difference between the contract price and the market price on the delivery date. It was held that the purchase of the maize at a depressed price formed part of a connuous dealing and was not an independent or disconnected transacon. To use the Brish Wesnghouse terminology, the purchase “arose out of the consequences of breach” - because but for the breach and the freezing injuncon the buyer could never have obtained the maize at the depressed price. The buyer therefore had to account for the saving it had enjoyed, which migated any loss it might have suffered. T H E A R B I T E R S U M M E R 2 0 1 5 1 7 Lack of choice? In 1897 William Harbu, an art teacher, invented ‘plascine’, the modelling clay beloved of children and stop-moon animators, a version of which is sll sold under that name today. In 1962 the company to which he gave his name, Harbu’s ‘Plascine’ Limited, retained a contractor to design, supply and install certain equipment in its factory. The equipment proved defecve, and caused a fire which destroyed the factory. Harbu’s claimed the cost of rebuilding the factory. Harbu’s did not rebuild the factory to the original design (they could not obtain planning permission to do so) so instead used a substanally different design. The contractor argued that in calculang damages a deducon should be made from the rebuilding cost to reflect the benefit to Harbu’s of having a new factory in place of the old one. The Court of Appeal rejected that argument. Lord Denning MR said: “When this mill was destroyed, the plascine company had no choice. They were bound to replace it as soon as they could, not only to keep their business going but also to mi- gate the loss of profit (for which they would be able to charge the defendants). They replaced it in the only possible way, without adding any extras. I think they should be allowed the cost of replacement. True it is that they got new for old; but I do not think the wrongdoer can diminish the claim on that account. If they had added extra accommodaon or made extra improvements, they would have to give credit. But that is not this case.” Widgery LJ said that to require credit to be given for beerment because the factory was “modern in design and materials” would be: “the equivalent of forcing the plainffs to invest their money in the modernising of their plant which might be highly inconvenient for them”. Is this reasoning consistent with Brish Wesnghouse? There can be no queson that the rebuilding of the factory “arose out of the consequences of the breach” - it was the only thing which Harbu ’s could do in response to the breach. Also, by rebuilding the factory, Harbu’s had done what was reasonable, and no more (if that maers). So one might have thought that Harbu’s should have accounted for any benefit they obtained as a result of having a new factory rather than an old one. Is it relevant that Harbu’s had no choice but to improve their factory? Does this serve to disnguish Harbu’s from Brish Wesnghouse? It would seem illogical if the fact there was was more than one opon reasonably open to a claimant to migate its loss meant that the benefits of the chosen opon must be taken into account, and yet where only one opon was available they had to be ignored. Also (as has already been stressed) there is no evidence as to what (if any) choices were open to UERL. It might well be that the only opon reasonably open to UERL was to buy a turbine which was more efficient and 10% more powerful, simply because turbine technology had moved on. Perhaps a beer reason for the decision in Harbu’s was not that any benefit was unlooked for and effecvely forced upon Harbu ’s or that Harbu’s had no choice. Rather, that the supposed benefit (“new for old”) was so nebulous and hard to value. It might simply have been that the contractor failed to discharge the burden of proving that there had been a benefit to Harbu’s, and the value of that benefit. This was certainly the argument advanced by Harbu’s counsel. Denning LJ’s judgment seems to accept that if the contractor had proven any benefit to have resulted (“if they added extra accommodaon or made extra improvements”) then Harbu’s would have had to give credit - it was simply that this was “not the case”. Cross LJ seems to have made his decision on the ground that the benefits of “new for old” had not been proved: “I can well understand that if the plainffs in rebuilding the factory with a different and more convenient lay-out had spent more money than they would have spent had they rebuilt it according to the old plan, the defendants would have been entled to claim that the excess should be deducted in calculang the damages. But the defendants did not call any evidence to make out a case of beerment on these lines and we were told that in fact the planning authories would not have allowed the factory to be rebuilt on the old lines. Accordingly, in my judgment, the capital sum awarded by the judge was right.” In The Gazelle (1844) 2 W Rob 279 a ship’s engine rotor was damaged and had to be replaced with a new rotor resulng in the lengthening of the engine’s life. The claimant recovered the full cost of the repairs, with no credit for the incidental benefit: “… if that party derives incidentally a greater benefit than mere indemnificaon, it arises only from the impossibility of otherwise effecng such indemnificaon without exposing him to some loss or burden, which the law will not place upon him.” In Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397 the claim was for irreparable damage to a rotor in a machine for crushing scrap metal. The damaged rotor was 3.25 years old and such rotors normally had a service life of seven years. The defendant argued that, if the claimant recovered the cost of the new rotor, it would be in a beer posion than if the rotor had never been damaged, since it would have the benefit of an extra 3.75 years of use. The court allowed the claimant the full cost of the new rotor. There was no available market in second hand rotors - the claimant had no choice but to buy a new one. In Voaden v Champion (The “Balc Surveyor”) [2002] EWCA Civ 89 a pontoon was lost as a result of the defendant's negligence. The judge found the pontoon had eight years of life le, that no suitable second-hand pontoon was available as a replacement and 1 8 T H E A R B I T E R S U M M E R 2 0 1 5 that a new pontoon would have a life of 30 years and would cost £60,000. The judge awarded damages of £16,000 calculated as 8/30 of the cost of replacing the pontoon. The Court of Appeal upheld this approach. Rix LJ considered the true principle to be that, where the claimant has received a benefit which is “of real pecuniary advantage”, the benefit must be taken into account. How does this case fit with Harbu’s, the Gazelle and Bacon v Cooper? It is hard to see any disncon. In each case, a claimant owned something, the life of which had partly expired, and which had to be replaced. An exact replacement was unavailable, and so the claimant had to buy new-for-old, gaining the benefit of an increased working life. In Harbu’s (a Court of Appeal case), The Gazelle and Bacon v Cooper, no credit had to be given for the extended life, but in The Balc Surveyor, it did. Hussey v Eels [1990] 2 WLR 234 In Hussey v Eels the Husseys bought a bungalow for £53,000 from the Eels. The Eels had misrepresented that the bungalow had not been subject to subsidence. In fact the bungalow had been subject to subsidence, and the market value of the property was only £36,000, which was £17,000 less than the purchase price. The cost of remedying the subsidence was beyond the Hussey’s means. The Husseys obtained planning permission to demolish the bungalow and erect two new buildings. The Husseys then sold the property for £78,000. The Husseys claimed £17,000 as the difference between the price the Husseys had paid for the property and the then market value. The judge at first instance dismissed the Hussey’s claim, on the ground that the subsequent resale and profit had wiped out the Hussey’s loss. But, on appeal, the Husseys were awarded £17,000. In his judgment Musll LJ discussed Wesnghouse. Crically, he said: “The respondents had bought equipment with a greater output than before - presumably at greater cost than if exactly equivalent replacements had been obtained.” In other words, Musll LJ assumed that UERL could have bought some other turbines which were cheaper than the Parsons turbines, less efficient than the Parsons turbines, but at least as efficient as the Wesnghouse turbines should have been. As previously discussed, there is scant evidence that this was the case. Musll LJ said: “Once it was found that the purchase had been reasonably made the conclusion in favour of [Brish Wesnghouse] now seems inevitable, given that the act which constuted the migaon and the act which was said to constute the overmi gaon were in the event the same. Thus, there was no queson of the case being concerned with a chain of disconnected transacons, and so, I cannot follow the judge in treang the present case as directly governed by Wesnghouse.” Musll LJ concluded: “Did the negligence which caused the damage also cause the profit - if profit there was? I do not think so. It is true that in one sense there was a causal link between the inducement of the purchase by misrepresentaon and the sale 2 years later, for the sale represented a choice of one of the opons with which the plainffs had been presented by the defendants’ wrongful act. But only in that sense. To my mind the reality of the situaon is that the plainffs bought the house to live in, and did live in it for a substanal period. It was only aer two years that the possibility of selling the land and moving elsewhere was explored, and six months later sll that this possibility came to fruion. It seems to me that when the plainffs unlocked the development value of their land they did so for their own benefit, and not as part of a connuous transacon of which the purchase of land and bungalow was the incepon.” So it seems that the benefit in Hussey v Eels did not need to be accounted for because the acon which led to it (the decision to apply for planning permission, and sell the land) was not mandated by the breach, but made independently - it did not “arise out of the consequences of breach”. Dimond v Lovell [2002] 1 AC 384 In Dimond v Lovell, Mrs Dimond’s car was damaged in an accident which was Mr Lovell’s fault. For the period while her car was being repaired, she hired a replacement car through a credit hire company. Credit hire companies specialise in supplying replacement cars to drivers whose cars are being repaired following accidents. When a motorist seeks a replacement car for the period while his own car is off the road, the company checks whether the motorist seems to have an unanswerable claim against the other driver. Having sasfied itself on this score, the company provides the car sought, without requiring any up-front payment, and then seeks to recover its charges from the negligent driver (or, rather, the negligent driver’s insurer). The hirer is relieved of the necessity of laying out the money up front to pay for the car, relieved of the trouble and anxiety of pursuing a claim, relieved of the risk of having to bear the irrecoverable costs of successful ligaon, and relieved of the risk of having to bear the expense of unsuccessful ligaon. Depending upon the terms of agreement, the hirer may also be relieved of the possibility of having to pay for the car at all. For these services, which go beyond simple car hire, credit hire companies charge an addional fee, such that the total cost exceeds that which would have been incurred if the motorist had used a tradi- onal hire company. At first instance Mrs Dimond recovered the fee the credit hire T H E A R B I T E R S U M M E R 2 0 1 5 1 9 agency had charged. On appeal, the House of Lords held that the parcular credit hire agreement which was the subject of that case was unenforceable because it did not comply with the requirements of the Consumer Credit Act 1974. Mrs Dimond had no liability under that agreement, and so could not recover in respect of it from Mr Lovell. Lord Hoffmann went on to say, however, that there was another reason why Mrs Dimond should not have been allowed to recover the whole of the credit hirer’s fee: “If Mrs. Dimond had borrowed the hire money, paid someone else to conduct the claim on her behalf and insured herself against the risk of losing and any irrecoverable costs, her expenses would not have been recoverable. But the effect of the award of damages is that Mrs. Dimond has obtained compensa on for them indirectly because they were offered as part of a package by 1st Automove. There is in my opinion something wrong with this conclusion. I think that what has gone wrong is that the Court of Appeal did not consider the rule that requires addional benefits obtained as a result of taking reasonable steps to migate loss to be brought into account in the calculaon of damages. How does one calculate the addional benefits that Mrs. Dimond received by choosing the 1st Automove package to migate the loss caused by the accident to her car? The hiring contract does not disnguish between what is aributable simply to the hire of the car and what is aributable to the other benefits. But I do not think that a court can ignore the fact that, one way or another, the other benefits have to be paid for. 1st Automove have to bear the irrecoverable costs of conducng the claim, providing credit to the hirers, paying commission to brokers, checking that the accident was not the hirer's fault and so on. A charge for all of this is built into the hire. How does one esmate the value of these addional benefits that Mrs. Dimond obtains? It seems to me that prima facie their value is represented by the difference between what she was willing to pay 1st Automove and what she would have been willing to pay an ordinary car hire company for the use of a car. As the judge said, 1st Automove charged more because they offered more. The difference represents the value of the addional services which they provided. I quite accept that a determinaon of the value of the benefits which must be brought into account will depend upon the facts of each case. But the principle to be applied is that in the Brish Wesnghouse case [1912] A.C. 673 and this seems to me to lead to the conclusion that in the case of a hiring from an accident hire company, the equivalent spot rate will ordinarily be the net loss aer allowance has been made for the addi- onal benefits which the accident hire company has provided.” Lagden v O’Connor [2004] 1 AC 1067 In Lagden v O’Connor, the facts were very similar to Dimond v Lovell. Mr Lagden’s car was damaged in an accident which was Mr O’Connor’s fault. For the period while his car was being repaired, he hired a replacement car through a credit hire company. The difference was that Mrs Dimond chose to hire a car from a credit hire company because it was more convenient, but could have hired a car from a convenonal hire company instead. Mr Lagden could not afford to hire a car from a convenonal hire company and, if he wanted a replacement car, had no choice but to hire it from a credit hirer. The House of Lords decided by a majority of 3 to 2 that Mr Lagden could recover the full amount charged by the credit hire company (Lords Nicholls, Slynn and Hope in the majority). Only Lord Hope addressed Brish Wesnghouse. He said: “In that case the turbines which were purchased in place of the defecve turbines were more efficient than the defecve turbines supplied by Brish Wesnghouse, even if those turbines had been in accordance with the specificaon in their contract with the railway company. In the result the railway company obtained benefits over and above their contractual entlement. That was their choice, and it was a reasonable and prudent choice to make in the circumstances. But it was held that it was nevertheless necessary to balance loss against gain when the amount of the damages was being calculated. So far so good. But what if the injured party has no choice? What if the only way that is open to him to minimise his loss is by expending money which results in an incidental and addional benefit which he did not seek but the value of which can nevertheless be idenfied? Does the law require gain to be balanced against loss in these circumstances? If it does, he will be unable to recover all the money that he had to spend in migaon. So he will be at risk of being worse off than he was before the accident. That would be contrary to the elementary rule that the purpose of an award of damages is to place the injured party in the same posion as he was before the accident as nearly as possible. It is for the defendant who seeks a deducon from expenditure in migaon on the ground of beerment to make out his case for doing so. It is not enough that an element of beerment can be idenfied. It has to be shown that the claimant had a choice, and that he would have been able to migate his loss at less cost. ... [I]f the evidence shows that the claimant had a choice, and that the route to migaon 2 0 T H E A R B I T E R S U M M E R 2 0 1 5 which he chose was more costly than an alternave that was open to him, then a case will have been made out for a deduc on. But if it shows that the claimant had no other choice available to him, the beerment must be seen as incidental to the step which he was entled to take in the migaon of his loss and there will be no ground for it to be deducted.” Mr Lagden unlike Mrs Dimond, had no choice. In order to mi- gate the loss he would otherwise suffer (the inconvenience of being deprived of the use of his car) he had to hire a replacement and it was impossible for him to hire a car other than through a credit hire company, and thereby obtaining the incidental benefits of hiring through such a company. Lord Hope, then, presumably thought that in Brish Wesnghouse, UERL had a choice. It had a duty to replace the defecve turbines, but not with the Parsons turbines. UERL could properly have bought less efficient turbines, but chose instead to purchase the Parsons turbines, which could be assumed to have been more expensive. The problem is that there seems to have been no evidence in the Brish Wesnghouse case to show that UERL had such a choice, or as to what (if any) alternaves to the Parsons turbines were available which it would have been reasonable for UERL to purchase. Fulton Shipping Inc of Panama v Globalia Business Travel SAU (The "New Flamenco") [2014] EWHC 1547 (Comm), [2014] 2 Lloyd's Rep 230 In repudiatory breach of a me charter, charterers re-delivered the vessel two years early. The owners accepted the repudiaon and, in circumstances where there was no suitable alternave employment, sold the vessel for US$23,765,000. The owners claimed as damages the net loss of profits which they would allegedly have made during the remaining period of the charter. The charterers argued that the owners were bound to give credit for the difference between the amount for which the vessel was sold and the value of the vessel at the end of the charter period in November 2009 – by which me the market had collapsed and the vessel could only have been sold for US$7 million. The arbitrator found that the sale of the vessel was caused by the charterers’ breach and was in reasonable migaon of damage, and that the benefit which accrued to the owners from selling the vessel in October 2007 rather than at the end of the charter period in November 2009 should be brought into account in the assessment of damages. Popplewell J allowed the owners’ appeal. He said: “The causaon queson is not concluded by the tribunal’s finding that the sale was in reasonable migaon of loss. The loss in queson which was migated was the owners’ net loss of income from the charterparty. The sale of the vessel mi- gated this loss because it reduced the connuing costs of operang or laying up the vessel. To the extent that the benefits flowing from the sale comprised such cost savings, there is no difficulty in treang the causal nexus between breach and benefit as established through the migang step of selling the vessel. But insofar as the sale gave rise to a capital benefit, it was not caused by the breach, but by the independent decision of the owners to realise the capital value of their asset. Although that was a benefit which flowed from the migang step of selling the vessel, it does not sasfy the principle that benefits are only to be taken into account to the extent that they are caused by the breach.” Popplewell J disnguished between the owners’ right to earn income from the vessel (with the associated liability to pay the opera ng costs) during the charter and the right to do so aer that me. In principle the owners could have sold one right without the other. In selling the vessel when they did, the owners sold all their rights in the vessel. The owners thereby relieved themselves of the costs which they would have incurred in operang or laying up the vessel during the rest of the charter period. Insofar as it relieved them of those costs, the sale was a step reasonably taken in miga- on of loss, the benefits of which had to be brought into account. However, in so far as the sale comprised all the owners’ residual rights in the vessel, the benefit which they obtained from the sale could not properly be regarded as the result of an acon reasonably taken in migaon of loss. Rather, it represented the result of an independent decision based on the owners’ commercial judgment, the risk and benefit of which were for their own account. How does this sit with Brish Wesnghouse? It will be recalled that there are three possible readings of Brish Wesnghouse: (i) UERL went beyond what was reasonable when it bought the Parsons turbines; (ii) UERL was under a duty to buy the Parsons turbines; (iii) it was reasonable for UERL to have bought the Parsons turbines, but it would also have been reasonable to buy other, cheaper but less efficient turbines. Assume that the posion in Brish Wesnghouse was (iii): it was reasonable for UERL to have bought the Parsons turbines, but it would also have been reasonable to buy other, cheaper but less efficient turbines. Buying the Parsons turbines was therefore in reasonable migaon of loss - just like selling the ship was in the New Flamenco. Just like in the New Flamenco, the benefits which resulted can be divided into benefits which were caused by the breach, and benefits which were caused by an independent decision of the claimant: (a) The consequence of the breach was that UERL had to buy replacement turbines. (b) UERL had a choice whether to buy Parsons turbines or cheaper, but less efficient turbines. (c) Either course of acon would wipe out the loss which UERL would otherwise suffer as a result of the underperformance of the Wesnghouse turbines. (d) UERL had to buy turbines, but the decision whether to buy Parsons turbines or some other turbines was not dictated by the breach - it was a commercial decision for UERL. T H E A R B I T E R S U M M E R 2 0 1 5 2 1 (e) UERL chose to spend the extra money and buy the Parsons turbines. (f) Insofar as UERL, by spending the extra money, obtained an extra efficiency saving, that was the result of UERL’s independent decision - not the breach. (g) UERL should not, therefore, have been able to recover the extra cost of the Parsons turbines relave to the cheaper turbines, but neither should UERL have had to give credit for the benefit it obtained by spending that extra money. Thai Airways v KI Holdings [2015] EWHC 1250 Thai Airways is the most recent case to have considered the effect of Brish Wesnghouse. Thai Airways (“Thai”) is the naonal airline of Thailand. Koito Industries (“Koito”) was a Japanese manufacturer of aircra seats. Thai entered a series of contracts with Koito for the supply of new economy class seats. (a) Koito was to supply new seats for B777 aircra being refurbished. Koito supplied an incomplete shipset for one of the B777s, with 99 seats missing. Thai had the incomplete shipset installed but the aircra remained grounded awaing delivery of the new seats. Thai ulmately took the decision to re-install old seats to enable the aircra to fly. The inferior quality of the old seats meant that Thai was unable to sell those seats to passengers, and so operated the aircra with a reduced seat capacity for around 18 months unl the remaining seats were delivered and installed. (b) Koito was to supply seats for new A330 aircra being built for Thai by Airbus. Koito failed to supply any seats for five of the aircra, so Thai had to take delivery of those aircra with no seats. Those aircra were flown to Bordeaux and placed in storage unl seats could be installed. Thai bought new seats from another supplier, but, on average, the new aircra sll went into operaon 1.5 years late. (c) Koito was to supply seats for six new A380 aircra being built for Thai by airbus. Koito failed to supply any seats. Thai purchased replacement seats, at greater cost, from another supplier. Koito’s failure to supply the seats did not delay delivery of the aircra . The grounding of the B777 and the delayed commissioning of the A330s meant Thai had fewer aircra than it had expected. In response Thai brought some old aircra back into operaon, but also hired three B777 aircra from Jet Airways for three years under what were known as the “Jet Leases”. The five delayed A330 aircra were all brought into service and the missing seats for the B777 were installed during the first two years of the Jet Leases. During the third year of the leases, therefore, Thai was no longer suffering any lack of capacity as a result of Koito’s breaches of contract but instead had addional capacity from the aircra leased from Jet. The leased aircra made a posi- ve contribuon to Thai’s profits aer deducon of their rental and running costs. Legga J discussed Brish Wesnghouse at some length. He evidently thought that, in Brish Wesnghouse, it was reasonable for UERL to buy the Parsons turbines, but it would also have been reasonable to buy cheaper but less efficient turbines instead: “There is thus no need to invoke McGregor’s “avoided loss” rule in order to explain the decision. Nor is there any asymmetry in the principle of migaon. The Brish Wesnghouse case simply demonstrates that, provided the claimant’s response to the breach is one which a reasonable person could be expected to adopt, the measure of damages is the loss which the claimant has actually suffered taking account of both costs and benefits resulng from the defendant’s breach of contract.” In other words, Brish Wesnghouse is not authority for McGregor’s third rule (though that would not mean McGregor’s third rule is wrong). Koito argued that the Jet Leases were a step which Thai took in migaon, so that Koito should have the benefit of the profit which was generated by the leased aircra during the third year. Thai claimed the cost of leasing the aircra for the first two years as costs it had incurred in migaon. But Thai argued that, when it leased the aircra, it could have done so for a period of either two or three years. It chose to lease the aircra for three years rather than two, not to migate its loss, but as an independent business transacon, quite unrelated to Koito’s breach. In respect of the Jet Leases, Legga J referred to the evidence as showing that: “While the main reason for leasing the three B777-300ER aircra from Jet was to migate the consequences of Koito’s breaches of contract, that reason would not have jusfied leasing the aircra for three years rather than two. The choice of a three rather than a two year lease term (with an opon to extend for a further two years) was driven by other commercial consideraons. I accordingly find that the decision to lease the aircra for a third year was not a step which was taken nor which it would have been reasonable for Thai to take in migaon of loss, and is therefore not aributable to Koito’s breaches of contract.” Here, Legga seems to disnguish Brish Wesnghouse on grounds related both to causaon (“not a step which was taken … in migaon of loss”) and reasonableness (“not … a step … which it would have been reasonable for Thai to take in migaon of loss”). So: (a) In Brish Wesnghouse, the decision to buy new turbines arose “out of the consequences of breach”. Thai decided to hire the aircra for two years to migate the consequences of Koito’s breach, and for a third year for its own commercial purposes. (b) In Brish Wesnghouse (at least according to Lega J) it would 2 2 T H E A R B I T E R S U M M E R 2 0 1 5 have been reasonable for UERL to buy either Parsons turbines or cheaper turbines. Whereas it was reasonable for Thai to hire planes for 2 years, but unreasonable to hire planes for longer. If that is correct, and Legga J did decide the case on both these grounds, then Thai Airways would seem to be authority that a claimant who fails to act reasonably (or goes beyond what is reasonable) and thereby obtains a benefit which he would not have obtained if he had acted reasonably, need not give credit for that benefit. In other words, Thai Airways seems to be authority that McGregor’s third rule is wrong. A further issue in the case was that replacement seats purchased by Thai were lighter than the Koito seats would have been, and that Thai would enjoy a saving in terms of the cost of fuel, for which Thai should give credit. Legga J considered the queson whether credit must be given for an ‘unchosen’ benefit, which a party had no choice but to accept. His conclusion, was that: “As I see it, what disnguishes the Brish Wesnghouse case from the Harbu’s Plascine case and Lagden v O' Connor is not that [UERL] had a relevant choice but that the benefit which they obtained was pecuniary. Where a claimant as a result of a step reasonably taken to migate its loss receives money which it would not have received if the defendant had performed the contract, jusce requires the sum received to be brought into account in the calculaon of damages whether its receipt was an unavoidable consequence of migaon or not. That is because money is enrely fungible. Thus, there is generally no material difference between incurring a cost which results in the receipt of money back and simply incurring a lower cost. … in assessing damages for breach of contract, credit must be given for any monetary benefit, whether chosen or not, which the claimant has received or will receive as a result of an ac- on reasonably taken to migate its loss. By a “monetary benefit”, I mean a benefit which either takes the form of money or which the claimant could reasonably be expected to realise in terms of money.” This does not explain the decisions in The Gazelle or Bacon v Cooper. The future savings which the claimants in those cases could expect to enjoy were monetary, just as were the ancipated savings in Brish Wesnghouse and The Balc Surveyor. It may simply be that The Gazelle and Bacon v Copper are wrongly decided. Conclusions A claimant which takes reasonable acon in an aempt to mi- gate loss must give credit for any benefits of that acon, whether desired or not, but only insofar as the same takes the form of money or money’s worth. In any given case, a range of reasonable ac- ons may be available. It remains unclear whether a claimant which fails to take reasonable acon or, in an aempt to migate loss, takes acon which goes beyond what was reasonable, and thereby enjoys a benefit in excess of that which they would have enjoyed had they only acted reasonably, must give credit for the addional benefit. It is, at least, arguable that the claimant in such a case need not do so. Finishing the story I will finish by saying something about the characters and companies in the Brish Wesnghouse case, and what became of them. Alfred Lyelton QC, who acted as the arbitrator in the Brish Wesnghouse case died in 1913 aer being struck in the stomach by a cricket ball. UERL connued to expand aer Yerkes’ death, merging with or acquiring London’s rail and bus operators. The company Yerkes founded was ulmately bought by the Brish government in the early 1930s, and the lines it operated remain part of the London Underground network. Brish Wesnghouse was the subject of various consolidaons, and its successor was ulmately acquired by Wesnghouse’s great rival, General Electric, in 1967. The Lots Road power staon was remodelled in 1932 and (24 years aer they were installed) the Parsons turbines and alternators were replaced. In 1969 it was converted to burn oil rather than coal, then in 1977 converted again, to a gas fired power staon. Lots Road power staon was eventually closed in 2001. The site is presently being redeveloped as a complex of shops, restaurants and apartments called “Chelsea Waterfront”. Following a series of mergers C.A. Parsons & Company’s successor was acquired by Rolls Royce in 1989, which was itself bought by Siemens in 1997. It sll has some facilies in Newcastle, but its manufacturing operaon is now based in Budapest. An example of a Parsons turbine can be seen in the Science Museum in London (it’s in the “Making of the Modern World” gallery). Parsons’ father’s “Leviathan” telescope is sll in working order, more than 170 years aer it was built, and can be seen in the garden at Birr Garden, Parsonstown in Ireland. One object which the Leviathan telescope could be used to observe is an otherwise unremarkable crater on the moon called “Yerkes”. It was given that name in 1959 by the Internaonal Astronomical Union, in recognion of Charles Yerkes’ (purely financial) contribuon to astronomy. 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United Kingdom
June 26 2015
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