Feature
Author Jeremy Cousins QC
Damages for delay: generally a liability
at large
This article considers remoteness of damage in breach of contract cases in the field of
banking and financial services in light of Grimes v Gubbins.
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Given the uncertainties, and
consequent economic volatility, that
may arise from a rise in interest rates,
now is an appropriate time to look at the
scope of damages claims where losses
concerned arise wholly or partly from
market movements outside the control
of the contracting parties, in the light of
last year’s decision of the Court of Appeal
in John Grimes Partnership Ltd v Gubbins
[2013] EWCA Civ 37, [2013] PNLR 17
which illustrates how damages for loss
arising from fluctuations in the property
market can represent a recoverable head
of loss for delay in the performance of a
contractual obligation. The case addresses
some constraints on recoverable damages
illustrated in the decisions of the House
of Lords in Banque Bruxelles v Eagle Star
Insurance Co Ltd [1997] AC 191 (the
SAAMCO case), and Transfield Shipping
Inc of Panama v Mercator Shipping Inc of
Monrovia, The Achilleas [2009] 1 AC 61.
This article is concerned with claims
for damages in contract; it extends to
professional liability where services are
rendered pursuant to a contractual retainer
(as was the case in Grimes). The starting
point is the decision of the House of Lords
in Koufos v Czarnikow Ltd (The Heron II)
[1969] 1 AC 350, where it was held that
liability for damages for breach of contract
depended upon what the contract-breaker
ought reasonably to have contemplated
would result from a breach of contract.
A type of loss is not too remote if the
defendant, when contracting, should have
realised that it was “not unlikely”, or a
“serious possibility” or a “real danger” per
Lords Reid, Pearce and Upjohn respectively.
THE DECISIONS
In SAAMCO mortgage-lenders made
loans in reliance upon negligent overvaluations. In several of the cases, a
significant element of the financial loss
which was suffered was due to a decline
in the property market following the
transactions concerned. The House of
Lords unanimously held that the valuers
were liable only to the extent of the
negligent over-valuation of properties,
and not for losses arising from the fall
in the market. The only fully reasoned
speech was that of Lord Hoffmann, who
explained ([1997] AC 191 at 214) that
a person who is “under a duty to take
reasonable care to provide information
on which someone else will decide upon
a course of action is, if negligent, not
generally regarded as responsible for
all the consequences of that course of
action. He is responsible only for the
consequences of the information being
wrong”. The losses stemming from the fall
in the property market were outside the
scope of the duty of care, and there was no
liability for them.
SAAMCO effected a serious restriction
on recoverability for certain kinds of
loss in respect of particular contractual
responsibilities, but it has been much
misunderstood, and attempts have been
made to rely upon it to limit or exclude
damages in cases (of which Grimes is an
example) which have nothing to do with
the scope of a duty of care to provide
information.
The Achilleas highlighted an important
qualification upon the width of the
liability in damages that might otherwise
Butterworths Journal of International Banking and Financial Law
apply under the Heron II. The case
arose from a charterparty. The charterer
returned the ship a few days late. The
arbitrators found that there was a general
understanding in the shipping market that
liability for late redelivery was confined
to the difference between the market
rate and the charter rate for the overrun
period. There was no general expectation
that there would be liability for losses
to the owners from losing a follow-on
charter. The House of Lords held that this
general expectation limited the scope of
damages for which the charterer assumed
responsibility. Lord Hoffmann said
([2009] 1 AC 61 at [11]–[12]):
DAMAGES FOR DELAY: GENERALLY A LIABILITY AT LARGE
KEY POINTS
The recent decision of the Court of Appeal in Grimes v Gubbins demonstrates that in
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delayed performance cases, contemplated loss which is “not unlikely” is the starting point
for considering assessment.
The decision of the House of Lords in The Achilleas, limiting the scope of recovery, is likely
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to affect assessment only where contracting parties expect a restriction to apply.
Even where market volatility increases losses, these may be fully recoverable if foreseeable.
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“[11] I agree that cases of departure from
the ordinary foreseeability rule based on
individual circumstances will be unusual,
but limitations on the extent of liability in
particular types of contract arising out of
general expectations in certain markets,
such as banking and shipping, are likely to
be more common.
[12] It seems to me logical to found
liability for damages upon the intention
of the parties (objectively ascertained)
because all contractual liability is
voluntarily undertaken. It must be in
principle wrong to hold someone liable for
risks for which the people entering into
such a contract in their particular market,
would not reasonably be considered to
have undertaken.”
Lord Hope, at [36], similarly
reasoned that “effect should be given to
the presumed intention of the parties”.
Lord Walker, at [84], expressed himself
similarly.
Lord Rodger, more narrowly, held (at
[60]) that the loss which arose was not
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DAMAGES FOR DELAY: GENERALLY A LIABILITY AT LARGE
Feature
foreseeable as a result of a nine-day overrun.
Baroness Hale, expressing doubts as to
the result of the appeal (at [93]), inclined
towards Lord Rodger’s approach.
In Grimes, Mr Gubbins owned a
development site in Cornwall. It was
adjacent to an A road. He obtained
planning permission for mixed residential
development, partly open-market and
partly “affordable” housing. Mr Gubbins
retained consulting engineers (Grimes)
to design a road and drainage system, and
to obtain approval for its adoption by the
highway authority pursuant to s 38 of the
Highways Act 1980. This contract, made in
Bio box
Jeremy Cousins QC practises from 11 Stone Buildings, Lincoln’s Inn, and also sits as a
deputy High Court Judge in the Chancery Division. Email: cousins@11sb.com
liability should be limited, so that Grimes
was responsible for the loss flowing from the
decline in the market, which it had known
could go up as well as down.
The Court of Appeal upheld the Judge’s
decision. The leading judgment was delivered
by Sir David Keene, who held that the fact
that a loss is suffered because of a change
in property values did not take it out of the
ordinary; the case was not one of unusually
volatile markets. He held that the absence of
evidence as to any general understanding, or
expectation, that an engineer would not be
taken to assume responsibility for loss arising
from movement in the property market
“What Grimes demonstrates very clearly is that absent
evidence of any agreement, or general expectation or
understanding in the market concerned, a limitation will
not be established.”
September 2006, was subject to an express
term, that Grimes should complete design
work by March 2007. Grimes knew that its
work was an essential part of the permitted
development, but there was delay, and
initial s 38 approval was not obtained until
February 2008. Dissatisfied with Grimes’
performance, Mr Gubbins, in April 2008,
engaged another engineer who redesigned
the layout, which was approved in June
2008. Grimes sued Mr Gubbins for some
unpaid fees, but he counterclaimed alleging
that Grimes’ work had been defective, and
seeking damages for failure to complete
the work by March 2007. This delay, it was
alleged, led to a reduction in the value of the
units, and increased building costs.
The trial judge (Judge Cotter QC) found
that Grimes’ breach of contract had caused 15
months’ delay in completing the development.
There was evidence that the gross sales value
of the development had declined by 14 per
cent during the relevant period; the judge
found that this amount needed assessment,
and he dealt only with issues of principle of
recoverability of damages. He found that,
unlike in The Achilleas, there was nothing in
the commercial background to suggest that
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May 2014
where there had been delayed performance,
showed that it was not an Achilleas type case
(at [26]). Similarly, Grimes could derive no
assistance from SAAMCO because that case
was not concerned with liability for delayed
performance. In a short concurring judgment,
Tomlinson LJ emphasised that this was not a
case of extreme price movements in a volatile
market, though he added, very importantly,
that “circumstances at the time of contracting
may be such as to render it foreseeable that
extreme volatility could be experienced in
certain foreseeable circumstances within
the lifetime of the contract”. He went on to
suggest that even in such circumstances it was
possible that the consequences of extremely
volatile market conditions might not be
axiomatically irrecoverable, whilst cautioning
that the point did not arise for decision in
Grimes. Laws LJ agreed with both judgments.
IMPLICATIONS
It is not difficult, in the field of banking and
financial services to identify many situations
in which delay in contractual performance,
coupled with adverse movement in markets,
could give rise to substantial loss. A bank
funding a commercial venture dependent
upon purchasing commodities, could readily
be exposed to a claim for significant losses
where an unjustified failure promptly to make
funding available results in the borrower’s
having to pay a much higher price for the
commodities concerned in the market place.
Similarly, a banker could incur substantial
liabilities if it failed, perhaps because
it erroneously maintained that lending
conditions had not been fulfilled, to make
funds available, with the result that the
borrower had to seek funding elsewhere at
a higher rate of interest because of a general
market increase in the cost of borrowing.
Equally, other parties could incur enhanced
liabilities to bankers because of delayed
performance of their obligations; for example,
a party failing timeously to introduce a
tranche of funding under a syndicated loan
could find itself liable to a bank that has to
find alternative funding for a borrower. At
a more modest level, a solicitor failing to
secure good title to a property taken by way
of mortgage security could well be exposed to
significantly increased damages if realisation
of the security were to be delayed at a time
when the property market was falling.
Although Lord Hoffmann, in Achilleas,
envisaged that limitations upon liability
might be more common, in banking, as
well as shipping cases, by way of exception
to the general foreseeability rule, he gave
no examples as to the situations where
such exceptions were well-established.
What Grimes demonstrates very clearly is
that absent evidence of any agreement, or
general expectation or understanding in the
market concerned, a limitation will not be
established. It is not open to the courts simply
to introduce a limitation on liability out of
some general sense of fairness; for example,
based upon the extent of liability being out
of all proportion to a fee charged. Indeed,
in Grimes the Court of Appeal specifically
held that such a consideration would not “by
itself suffice to establish such an absence of
responsibility”.
Given the winds now gathering behind
a change in the interest rate climate, it must
be likely that claims for delayed performance
will become a more regular feature in the
commercial litigation world.
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Butterworths Journal of International Banking and Financial Law