'Confusion in Contract Damages: Loss, Value, Presumptions and Proxies'
Adam Kramer1
12.5.11, Oxford
The judges who set out the ‘major and important object’ rule for mental distress damages were not
completely wrong. A test is needed to determine when and how damages other than financial
consequential loss are recoverable, and the important factor is not which of substitutive value and
consequential loss they fall under, but what particular interests are protected by the contract. This
question is one of remoteness in its modern, assumption of responsibility/scope of duty, sense. When
applied, this permits recovery in the absence of financial consequential loss in a variety of service
cases, which include commercial organisations, charities and public authorities, as well as consumers.
Presuming that all obligations protect at least some interests/have at least some value, and that that
value is at least equal to the price (i.e. that the claimant would have broken even on the
contract/obligation), provides a starting point in quantification, and other proxies may assist in the
quantification process.
Introduction
1.
Considering service cases: I wish to consider awards of damages to employers
for non-supply or defective supply of services. This includes cleaning, teaching,
advising, carrying, building etc.
2.
Considering cases where breach not cured: The damages measure is easy (or at
least much easier) where a replacement service is available and reasonable. In
such cases the financial cost of cure is the proper measure of damages, being a
loss consequential upon breach and/or a cost incurred in reasonable mitigation
of any other loss, and fairly neatly avoiding any further losses (because the
employer receives what was promised or as near as damn it). Typical examples
include the employment of a replacement builder following breach of building
contracts by independent contractors,2 the employment of a replacement coal
worker when an employee failed to turn up on a Saturday, 3 the employment of a
replacement repairer where a tenant failed to keep or return leased property in
good repair.4
3.
There will often, however, be no cure: where no replacement is available (a
unique service), where it is too late to get a replacement (think of an employee
or contract cleaner who fails to turn up to work one day, or a tutor for a
particular French or driving exam the time of which has passed), or where a
replacement/cure is unreasonable (e.g. because disproportionately expensive
given the defect in the supplied service).
1
3 Verulam Buildings, London. All thoughts and comments gratefully received: akramer@3vb.com.
Typical in building contracts but refused as unreasonable in the leading case of Ruxley Electronics v
Forsyth [1996] AC 664 (HL).
3
National Coal Board v Galley [1958] 1 WLR 16 (CA).
4
Latimer v Carney [2006] EWCA Civ 1417 (although there is a statutory leaning towards the
difference in value: s18(1) of the Landlord and Tenant Act 1927).
2
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4.
Introduction: What I am interested in is when the claimant can recover in such
cases, particularly where there is no (and was never going to be any) financial
impact of the breach, and how much it will be. Ultimately it comes down to
whether remoteness has any role to play in determining recovery for the
claimant’s value of the performance that was not provided (quite apart from the
role of remoteness in determining recovery of consequential losses).
The traditional approach to damages for non-supply/defective supply of services
5.
The traditional approach to damages in this situation, i.e. to working out how to
value “the same situation… as if the contract had been performed”5, is
somewhat unsatisfactory.
6.
The first unsatisfactory aspect is the law’s obsession with the financial bottom
line. The law is most comfortable in cases where the service would have led to
the claimant having greater wealth through profits or other income, the value of
an asset which the service was to improve (typically construction), or costs that
resulted. No special rules apply, only the general rules of remoteness, causation
and mitigation.
7.
Of course, the law does recognise the need to award damages where the purpose
and effect of the service was not purely financial. In these cases the law seems
to apply a limiting rule that a “major object of the contract of the contract was
to give pleasure” rule6.
8.
What this test is getting at is that the law should not merely ask whether a
breach results in displeasure (i.e. as a matter of but for causation), as they pretty
much all do (and foreseeably). Instead, the law recognises that it needs to ask
whether the purpose of the contract all along was to give pleasure or avoid
displeasure of some sort. Typical examples are holidays that were not as fun or
comfortable as expected,7 failure to get the wedding photographs promised,8
failing to get the protection of a non-molestation order,9 failing to avoid
bankruptcy,10 losing custody of children,11 too much aircraft noise.12 It can be
seen that pleasure is a fairly wide concept, if it can cover all of these situations.
5
Baron Parke in Robinson v Harman (1848) 1 Ex Rep 850.
Deriving from the House of Lords decision in Farley v Skinner [2002] 2 AC 732 (HL) (see also
Hamilton Jones v David & Snape [2004] 1 WLR 924 (Neuberger J)), refined after a more limited test
was developed in Jarvis v Swan’s Tours Ltd [1973] QB 233 (CA), Heywood v Wellers [1976] QB 446
(CA) and Bliss v South East Thames Regional Health Authority [1987] ICR 700 (CA).
7
Jarvis v Swan’s Tours Ltd [1973] QB 233 (CA), Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468
(CA), Milner v Carnival plc [2010] 3 All ER 701 (CA). In Jarvis, the claimant got “desiccated biscuits
and crisps” not “delicious Swiss cakes”, “no yodler evening” etc.
8
1971 SLT (Sh Ct) 49.
9
Heywood v Wellers [1976] QB 446 (CA).
10
Demarco v Perkins [2006] EWCA Civ 188 (CA). The Court of Appeal increased the award from the
judge’s award of £2,000, and did not explain the legal basis for the decision other than to rely on
Heywood v Wellers.
11
Hamilton Jones v David & Snape [2004] 1 WLR 924 (Neuberger J).
12
Farley v Skinner [2002] 2 AC 732 (HL).
6
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9.
The next unsatisfactory aspect of the law is inconsistency. Building cases,
especially Ruxley Electronics v Forsyth, have made it clear that (without much
reference to the ‘major or important object’ rule13), damages for loss of amenity
are available where there is a consumer surplus, i.e. where the “value of the
promise to the promisee exceeds the financial enhancement of his position
which full performance will secure”,14 and so £2,500 was awarded for having to
put up with a pool that was shallower than promised. Damages are similarly
available where a porch did not match the other porch on the house,15 or where a
builder promises but does not provide the preferred ‘lurid bathroom tiles’ or
‘grotesque folly’ or second-hand rather than new bricks.16
10.
Also, damages have long been available in building and similar cases for
physical inconvenience and discomfort even where falling short of any personal
injury.17 There is no reference in these cases to pleasure being a ‘major object’
of the contract (although they would probably satisfy that test) and some
authority that this type of loss is nevertheless the same loss as mental
distress/lack of pleasure damages.18
11.
The key problem categories of cases the law has to deal with are: educational
services of all kinds; all personal consumer service cases: domestic cleaning,
hairdressing, cosmetic surgery, karaoke, car repair, gym membership; services
engaged by charities and public authorities: soup kitchens, rubbish collection,
leisure centres, running elections, child care centres, policing and other
emergency services; services engaged for the benefit of third parties (where the
employer will not be out of pocket in purchasing a replacement service):
especially family and friends paying for things benefiting each other, and group
companies doing the same for other group companies; residential
accommodation by lease or licence.
Awards in the case law of damages for the claimant’s ‘value’ (i.e. you can forget
the ‘distress’ test
12.
The concept of ‘pleasure’ is not wide enough, and having such a delimiting rule
rule at all starts to look foolish. As Lord Mustill put it far more sensibly in
Ruxley: the issue is “the value of the promise to the promisee”.19
13.
Roche LJ explained the problem where an employee does not turn up for work
as follows:
“In the case of a hewer [in a coal mine] such as Tew, the
application of these principles [of calculating lost profit] is
13
Only Lord Lloyd referred to the holiday cases and to the swimming pool being a pleasurable
amenity.
14
Lord Mustill in Ruxley at 360.
15
Freeman v Niroomand (1996) 52 Con LR 116 (CA).
16
Examples in Ruxley at 361 and 370-1; Bellgrove v. Eldridge (1954) 90 C.L.R. 613 (HCAustralia) at
618-9.
17
Watts v Morrow [1991] 1 WLR 1421 (CA).
18
Wallace Manchester City Council [1998] 3 EGLR 38 (CA) at 41 and 42.
19
We must remember that of course the claimant cannot recover the price or part of the price per se,
because even if the breach had not occurred, the claimant would have had to pay the price.
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not difficult. It may be more difficult with another class of
workman not so directly concerned in getting coal from the
seam. But with another class of workman, a tribunal must do
its best either to assess the contribution of the workman in
question to output and arrive at a figure representing his
notional output during the period of default, or if it cannot do
that, it must decide upon the evidence what would have been
the value to the employer of the services he did not give”
[emphasis added].20
14.
Similarly, damages are available where the defendant’s breach takes up
significant employee time even if no extra employees were taken on and so
there was no extra cost.21
15.
In White Arrow Express Ltd v Lamey’s Distribution Ltd22 it was held, obiter,
that damages would be available upon the provision of an ordinary rather than
(as promised) enhanced delivery service for “the difference between the value
(usually the market value) of what was contracted and the value (again usually
the market value) of what was provided” because the employer had suffered
“loss” (even though not financial loss).
16.
Lord Goff (but not the other judges) would have awarded the claimant damages
in Alfred McAlpine Construction Ltd v Panatown Ltd23 for the infringement of
its performance interest in the failure to confer the benefit (of proper
construction) on a third party even if no cost of cure was incurred or claimed.
17.
Most recently, in Giedo van der Garde BV v Force India Formula One Team
Ltd24 damages were awarded for the non-provision of time test-driving practice
laps on a Formula One racing track, by reference to the “value to the Claimants”
of the practice. Obiter, damages should be available in the case of provision of
music lessons by a musical nonentity instead of by a world famous celebrity as
promised,25 or the provision of only six out of a block booking of twenty driving
lessons.26
20
Roche LJ in Ebbw Vale Steel, Iron and Coal Co v Tew [1935] 1 LJNCCA 284 at 288. See also Lord
Templeman in Miles v Wakefield MDC [1987] AC 539 (HL) obiter at 560: “[a] strike may involve the
employer in a loss of profits but it is impossible to show that any particular proportion of the loss is
attributable to the industrial action of an individual worker…. An employer always suffers damage
from the industrial action of an individual worker. The employer suffers the loss of the services of the
worker… A man who pays something for nothing truly incurs a loss.”
21
Bridge UK.com Ltd v Abbey Pynford plc [2007] EWHC 728 (TCC) (Ramsey J). In relation to tort,
see R+V Versicherung Attorney General v Risk Insurance and Reinsurance Solutions SA [2006]
EWHC 42 (Comm) (Gloster J) and the cases cited therein.
22
[1995] 15 Tr L 69 (CA), Bingham MR.
23
[2001] AC 518.
24
Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) (Stadlen J)
at 496.
25
Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) (Stadlen J)
at paragraph458.
26
Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) (Stadlen J)
at paragraph458.
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18.
None of these cases are about ‘pleasure’. Some of the claims are brought
commercial organisations where the achievement of pleasure is not the purpose
of anything the organisation does.
19.
In all of these cases the judges naturally turn to ‘value’. This concept of ‘value’
is much richer than the financial ‘difference in value’ addressed in the case law
in e.g. building cases, and, unlike the traditional approach, can encompass and
explain recovery in all cases of non-supplied/defective/skimped services, even
where there is no financial loss and without asking about ‘pleasure’ or what was
a ‘major or important object’.
Explaining awards of value: Robert Stevens’ view
20.
The most extreme view is that of Prof. Robert Stevens. He starts from the
position that in every case the primary measure of damages is the vindication of
the right to performance or substitution of the contractual right breached, and
that this is measured by the difference in value between the service provided
and that promised, which value is subjective and can be greater than market
value although the latter is good evidence of it (and sometimes the cost of cure
will also be good evidence of the value).27 (The second purpose of damages for
Stevens is compensation for factual losses consequent upon the breach, and it is
only this type of damages that is affected by post-breach events.)
21.
For Stevens there is no need for a gateway to the question of when such value
damages are recoverable, as they are always recoverable (although perhaps not
when the defect has been cured after breach). For him any breach of a service
contract would sound in ‘value’ damages whether or not any financial loss is
suffered, although where it has been I understand that to usually inform or limit
the value recoverable.
22.
Others take a more orthodox approach but still argue that damages should be
recoverable in far more situations than at present, i.e. that a more expansive
approach should be taken than the ‘major or important object’ test.
My view on awards of value
23.
It must be right that that the can, does and should measure the value the
claimant puts on performance even where there is no consequential financial
loss.
24.
However, in my view:
24.1.
Stevens’ approach is incorrect. The existing law can satisfactorily explain
the cases on post-breach events (i.e. whether sub-sales and other matters
should be taken into account),28 although that is not the subject of this
‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh, S
Pitel (eds) Exploring Contract Law (Hart, 2009) at 187, 191-2.
28
Stevens rightly relies on these cases as providing some support for his view and some problems for
the view that the law is concerned with actual losses and nothing else. The cases we are talking about
27
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talk. It can also explain recovery generally, without needing the language
of infringement of rights to performance.29 Stevens’ approach does not
seem to explain why the cost of cure (a consequential post-breach cost)
limits the substitutive award (which on his view is incurred immediately
upon breach and is unrelated to loss). It is also difficult to see how on
Stevens’ view we can distinguish substitutive value from consequential
loss in non-financial cases (e.g. distinguish the preference value of a
particular obligation being complied with from the consequential
misery/lack of enjoyment resulting from its breach), and difficult to see
why we would want to bother.
24.2.
25.
The key: how do we know what is recoverable in a particular case? Of
more importance for our purposes, even if correct Stevens approach at
present fails to guide courts in assessing value. Does every commercial
and consumer claimant recover an award for the value of performance,
before we even get to consequential losses? Which aspects of valuing the
performance (money, fun, freedom from distress, whim etc) are to be used
in quantifying damages?
In my view (yes, you guessed it) the work of determining what is recoverable,
and what types of value are recoverable, is done by tools derived from decisions
such as The Achilleas.30
1) The central rule is of assumption of responsibility
26.
The scope of responsibility of a contract does not just govern whether the
defendant has responsibility for the (primarily financial) consequences of a
particular chain of events leading from breach (e.g. a water leak, a stopped
factory, the crash in the market).
27.
The scope of responsibility of a contract also governs whether damages are
recoverable in the absence of financial loss, including for the claimant’s value
of the service.31 This is what the ‘major and important object’ test (for mental
distress etc) is getting at, albeit imprecisely: whether the parties would have
contemplated that the employer valued the service in non-financial terms (as
clearly they would with a holiday and wouldn’t with commercial carriage of a
mill shaft).32 It applies more generally, though, the ultimate question being
whether the promise was oriented towards some valued purpose of the
here are, of course, Rodocanachi Sons & Co v Milburn Bros (1887) 18 QBD 67 (CA), Williams Bros v
Ed T Agius Ltd [1914] AC 510 (HL), Slater v Hoyle & Smith Ltd [1920] 2 KB 11 (CA), Bence
Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA).
29
C Webb, ‘Justifying damages’ in J Neyers, R Bronaugh, S Pitel (eds) Exploring Contract Law (Hart,
2009).
30
Transfield Shipping v Mercator Shipping, 'The Achilleas' [2009] AC 61.
31
CfMcKendrick and Worthington, ‘Damages for Non-Pecuniary Loss’ in Cohen and McKendrick
(eds), Comparative Remedies for Breach of Contract (Oxford, Hart Publishing, 2005) 286 at 302-3,
where the authors talk in terms of impliedly promising to confer a non-pecuniary benefit.
32
This is something I’ve been banging on about for some time: Kramer, 'An Agreement-Centred
Approach to Remoteness and Contract Damage' in Cohen and McKendrick (eds), Comparative
Remedies for Breach of Contract (Oxford, Hart Publishing, 2005) 249 at 277-9; Kramer, 'The New Test
of Remoteness in Contract' (2009) 125 LQR 408 at 414.
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promisee, whether or not it had financial value.33
2) There is no other special rule for non-financial ‘loss’ damages
28.
It is backwards to fix a rule seeking to say that damages should be recoverable
only for ‘loss’, or only for ‘mental distress’ or lack of ‘pleasure’.
29.
Only a psychologist would be interested in knowing what to call the value the
claimant puts on:-
knowing that they have an chance of winning the big prize in a lottery (even
though there is in practice only an infinitesimal chance of winning money),
-
having an office bathroom cleaned every hour rather than every day (even if
no one gets ill either way),
-
knowing that a teacher of piano is a former concert pianist (even if the teacher
may not be any better/more fun etc),
-
knowing that there is a security good patrolling at night or that there is a spare
fire-extinguisher being maintained (even if the chances of them being needed
are small and they are in fact not needed),
-
practicing driving on a formula one circuit with a hope (although perhaps not
expectation) of turning it into a career,
or why they put this value on it. It would be hard to find one word or a
definition that could encompass the value in all these cases, other than perhaps
‘value’.34
30.
Yet in every one of these cases, both parties would immediately understand that
the employer did in fact put a value on these things. i.e. the service-provider
would impliedly accept responsibility for them. This is equally true in a
commercial case where the service directly serves the bottom line, although in
such cases the value put on the service is (as both parties would understand)
instrumentally aimed at the goal of profit/money, and the primary or perhaps
only question is then which types of financial loss are not too remote.
3) Presumption: every obligation has some orientation
31.
The key thing that in most of these cases tells the parties that the employer put a
value of some type on a particular obligation, other than or in addition to merely
33
Kramer (2005) at 279. I am not saying that the parties impliedly undertake to pay damages in this
situation, but rather that there is implicit an orientation of obligations that encompasses a scope of
implied responsibility and risk, i.e. what the parties could be blamed for if things go wrong. The law
then responds to this by measuring and awarding damages but only in relation to the interests that are
protected by parties’ implied allocation.
34
See further Webb (2009) at 160, who points to the valuing of performance but explains how this is in
a sense ‘loss’.
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a financial bottom line, and would intend the service-provider to accept
responsibility for it, is that (i) the parties can see immediately that the
performance of the obligation (to give a massage, or to be an accredited
masseur, or an award-winning masseur; to paint the wall a lurid colour etc) is
not likely to be financially profitable for the employer, (ii) the employer is
apparently rational and has nevertheless decided to procure and pay for the
obligation.35
32.
This point is revealed by the thrust of the holiday cases and in the speeches in
Ruxley Electronics v Forsyth and the coal-mining and other cases referred to
above.
33.
Financially oriented obligations Some contracts/obligations are obviously
financial (carrying a mill shaft, building a development that is to be sold,
advising on investments, working in sales).
34.
Thus in the case of a commercial development, breach of an obligation to satisfy
an expressed preference for terracotta rather than cream carpets will only sound
in damages if the houses sell for less as a result (or the vendors incur liability to
the purchasers who were promised terracotta, or a fine to the council for
breaching the rules of a conservation zone etc): the parties know the
development is of properties for sale not as homes for the employers. Once the
court has established that there is no financial difference in value of the
property, and no consequential loss, because the scope of responsibility is
purely financial the court does not need to quantify some further value of the
performance. (And, to this extent, the builders have ‘got away with’ using
cream their carpets.) Further, if in such a case the court did decide there should
be an award for the employer’s value despite the lack of financial impact, it
would be based on a general commercial or other preference, rather than distress
or personal aesthetics, because the latter would (in such a commercial case) be
outwith the impliedly assumed responsibility of the contractor.
35.
Non-financially oriented obligations Other contracts/obligations are obviously
non-financial (holidays, haircuts, house-cleaning, domestic shower repair, repair
of rented property, operating a soup kitchen; in fact most things engaged by
consumers, or public authorities and other non-profit organisations).
36.
Obligations oriented both to financial and non-financial Some are obviously
both financial and non-financial (improvements to a residential property owned
by the employer, clearly both a home and an investment asset; avoiding
bankruptcy).
37.
In a domestic construction case, the law rightly allows recovery of both
financial difference in value (between cream and terracotta carpets), and any
consumer surplus, because both are within the scope of responsibility of the
Kramer (2005) at 259: the first ‘norm’, namely “Every obligation has some orientation”. Cf
McKendrick and Worthington (2005), who observe at 304 that where a contractual specification is of
no intrinsic financial value, it is reasonable to assume that the claimant expects to draw some form of
additional benefit from the fulfillment of the contractual term (but at 306 they say that this should not
apply in commercial cases).
35
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parties, although huge damages arising out of the discomfort brought on by a
phobic aversion to cream may well be unrecoverable as too remote. As to the
latter point, I cannot see any principle that would require or enable us to say that
the claimant’s value in terracotta is a separate thing to his consequential misery
resulting from terracotta, although that would explain (even on Stevens’ view)
why remoteness is applicable to the misery.
38.
Indirectly financial, and therefore also not oriented to financial loss For some
obligations it is clear to the parties there might be an indirect impact on
profit/money: a company wants clean toilets and a hygienic cafeteria kitchen
because happy workers make more profit, sick workers cost money or sue, and
regulatory bodies can fine for dirtiness. Likewise a higher standard of service
(White Arrow) may lead to a better reputation and more cases. Yet in such cases
it may be equally clear to the parties that, whatever the provable impact on
profitability, the employer valued the service (albeit probably because good for
business, although possibly also out of a feeling of moral duty or the way things
should be done).
39.
In all cases, the employer values the service, the service provider knows this,
and both intend the service provider to be liable to compensate upon nonperformance.36 Damages must be awarded in case of breach to protect the
interests that the parties impliedly agreed would be protected (i.e. towards
which the parties impliedly agreed the obligation would be oriented).37
Conclusion on the types of value or loss recoverable
40.
The question is what interests the parties would have understood the employer
to have in a particular obligation and the employee to have assumed
responsibility for. The only or main interest may be in financial consequences
(albeit subject to the rules on which post-breach events are to be taken into
account), or the interest may be in some other value placed on the performance,
which may be enjoyment, peace of mind, satisfaction of a whim or none of the
above. Whichever is within the scope of responsibility assumed (and whether or
not usefully describe as ‘loss’ or ‘value’), financial/non-financial,
commercial/distress etc will be recoverable, and whichever is outwith that scope
will be unrecoverable.
41.
Time is a quantification question only. If disappointment of a preference is
cured within a month (cream carpets replaced with terracotta) then the recovery
will be smaller than if not cured. However there is no principled reason to call it
consequential disappointment or not to do so.
36
However there may be cases where on the proper analysis no interest is intended to be protected by a
particular obligation: I wonder what possible losses were recoverable for breach of the obligation of
promptness in Hadley v Baxendale (1854) 23 LJ Ex 179 (Parke B)? Was that obligation more than
illusory? Stevens’ view would presumably give rise to an award in that case.
37
The language of protecting interests comes from Leon Green, Rationale of Proximate Cause (Kansas
City, Mo, Vernon Law Book Co, 1927). See further Kramer (2005) at 257 and 278.
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42.
There will be difficult cases: where someone engages a safety back up or
security mechanism (e.g. a burglar alarm that automatically calls the police), is
the obligation to provide the alarm or other mechanism (a) only intended to
protect the bottom line of what physical/financial/personal losses were
ultimately suffered when the safety was called upon, or (b) also intended to
protect the value to the employer in knowing it is there and having limited his
risks. (Fail safes are interesting for the purposes of contract damages because
they are often desired and paid for but rarely used, i.e. their absence or defect is
rarely causative of ‘loss’.) One would think that the answer would usually be
(b), but the cases do not necessarily take this view.38 It is no answer to say that
the promise was to provide the burglar alarm: the question is in what ways did
the contract contemplate that the provision of a burglar alarm was of value to
the claimant.
Measurement: proxies and presumptions
43.
Measurement of the amount of damages to be awarded is a different matter.
Translating any matter not directly dependant upon a bottom line amount of
money into money is difficult (cf personal injury damages).
44.
The following assistance is available, however:
A lesson from ‘reliance damages’: the presumption of breaking even
45.
Many of us were taught that there was a recoverable ‘reliance’ measure of
damages in contract law. The names of Fuller and Perdue, 39 and Atiyah,
featured heavily on those week one reading lists. They still do.
46.
We now all know, however, that reliance loss is not a separate measure of
contract damages. Instead it operates as a rebuttable presumption that the
claimant would have broken even (but not made a profit) in a particular contract
or business venture, i.e. would have recouped in revenue exactly the amount of
his expenditure (which expenditure he of course has to prove). Either party can
rebut this presumption by proving a higher or lower expected outcome, which
The former approach (a) appears to be that applied in the case of City of New Orleans v Fireman’s
Charitable Association (1891) 9 So 486 where no substantial award was made despite a skimped fire
protection service. Cf Sealace Shipping Co Ltd v Oceanvoice Ltd (The Alecos M) [1991] 1 Lloyd’s 120
(CA) where no substantial damages were awarded (other than scrap value) for the failure to provide a
spare propeller on a vessel. The latter approach, (b), leading to substantial damages even though the
safety was not called upon, was taken in Smith v Landstar Properties Inc 2011 BCCA 44 where a
borrower’s loan was not secured but was repaid. One might ask whether, e.g., if in Siemens Bulding
Technologies FE Ltd v Supershield Ltd [2010] 1 Lloyd's Rep 349 (CA) the valve had been found to be
weak but not yet failed, and it had been unreasonable to replace the valve (e.g. because expensive and
there being other failsafes making it very unlikely to cause any accident), could the claimant have
recovered damages for the loss of value of having a safe valve, or would it have had to wait and see if
there was ever an accident and if not be without any compensation?
39
I am of course referring to the ground-breaking but wrong Fuller and Perdue, ‘The Reliance Interest
in Contract Damages’ (1936) 46 Yale LJ 52.
38
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shows that there is no independent reliance measure that can be chosen by the
claimant or the judge as an alternative to expectation damages.40
47.
So far so unsurprising.41
48.
Applying the presumption generally, not just to monetary revenue But there
seems no reason why this presumption should not apply outside the financial
sphere. Logically, it makes sense to (rebuttably) presume that the “value of the
[benefits which the plaintiff would have derived from performance by the
defendant] would have been at least equal to the total detriment which has or
would have been sustained by the plaintiff in doing whatever was reasonably
necessary to procure and perform the contract”.42 This is really a presumption
of a consumer surplus equal to the difference between the price and financial
benefit of the obligation, such that there is a presumption that the total price
equals the total value of the obligation to the claimant. In more simple terms: a
person only pays what something is worth to them.
49.
This means that a focus on the price, in practice the part of the price that relates
to the particular obligation that was breached, usefully calculated by the
difference between the market prices of the service provided and that promised,
will provide a good starting point for measuring the value to the claimant in
cases not measured by financial benefit and loss.
50.
As Stevens points out, the value of the obligation to the claimant for which the
defendant has assumed responsibility may well be greater than any price or (in
his case) market measure:43 personal preferences with neutral cost difference (a
small difference in depth of the pool, colour of the walls) will often have no
price implication but still (obviously) be of value to the claimant.
Proxies
51.
Of course, awarding someone the difference in market pricing of the enhanced
and standard services, because it is evidence of the part of the actual price that
40
C&P Haulage v Middleton [1983] 1 WLR 1461 (CA), CCC Films v Impact Quadrant Films Ltd
[1985] QB 16 (Hutchinson J), Commonwealth of Australia v Amann Aviation (1992) 174 CLR 64
(High Court of Australia), Dataliner Ltd v Vehicle Builders & Repairers Association (27/8/95, CA), PJ
Spillings (Builders) Ltd v Bonus Flooring Ltd [2008] EWHC 1516 (QB) (Forbes J), Omak Maritime
Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm). See further Owen, ‘Some
Aspects of the Recovery of Reliance Damages in the Law of Contract’ (1984) 4 OJLS 393, Kelly, ‘The
Phantom Reliance Interest in Contract Damages’ [1992] Wisconsin LR 1755, the articles in the Issues
in Legal Scholarship, Symposium: Fuller and Perdue (Berkeley, CA, Berkeley Electronic Press, 2001),
McLauchlan, ‘Reliance Damages for Breach of Contract’ [2007] NZLR 417 and his recent case note in
the (2011) LQR 23.
41
In financial cases at least, the presumption may go further. Mersey Docks and Harbour Board v
Owners of the SS. Marpessa (‘The Marpessa’) [1907] AC 241 (HL) at 244-5 suggests that the court
might presume that an asset would earn enough profit to counterbalance its depreciation. Other cases
indicate a willingness to assume that assets will earn at least as much as the cost of the assets would
have earned in a deposit account: British Columbia and Vancouver’s Island Spar Lumber and Saw-Mill
Company Ltd v Nettleship (1868) LR 3 CP 499, Earl’s Terrace Properties Ltd v Nilsson Design Ltd
[2004] EWHC 136 (TCC) (Thornton QC) at paragraph 90.
42
Deane J in Amann Aviation at paragraph 11.
43
Stevens (2009) at 190.
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went on the enhancement, because that part of the price is presumed to be the
value the employer put on the enhancement, neither indicates that the law
measures loss by market value44 nor is it far-fetched or unusual for the law.
52.
Judges frequently (and legitimately) employ quantifications that look like a
particular measure of loss as a proxy, or the best evidence available, of another
measure. E.g.:
52.1.
In a successful transaction professional negligence case the true measure
is the price a claimant would have paid if the defendant had done his job
(e.g. warned of defects), but the courts will sometimes look to the market
value of the property as a proxy/starting point, although that is not a
separate recoverable measure of loss in such cases.45 This is reasonable:
the market price is the normal price.
52.2.
In the same cases, the courts will sometimes look to the cost of curing the
defect of the property as a proxy/starting point, although that is not a
separate recoverable measure of loss in such cases.46 This is reasonable: a
purchaser will often deduct the cost of work he will have to do from the
price he is willing to pay.47
52.3.
In a residential landlord’s failure to repair case, the true measure is the
loss of comfort and convenience which resulted from living in a property
not in the proper state of repair, but the courts will sometimes look to a
proportion of the rent payable under the tenancy, although that is not a
separate recoverable measure of loss in such cases.48 This is reasonable
(particularly in the light of the presumption of breaking event): what a
person will pay for a home is a useful indicator of a claimant’s valuation
of the amenity of that home.
52.4.
In a defective construction case, the true measure is (where the cure is not
reasonable) the loss of financial value and loss of amenity, but the courts
will sometimes look to the amount the defendant saved by skimping
performance, although this is not a separate recoverable measure of loss in
such cases.49
52.5.
In some cases where there is no financial loss (e.g. breach of a covenant
not to build more than a certain number of houses) the court will look to
what the defendant would have paid the claimant in a hypothetical
44
Any more than awarding reliance expenditure indicates that the law awards reliance loss as a
separate measure.
45
Perry v Sidney Phillips [1982] 1 WLR 1297 (CA) at 1302, Bigg v Howard Son & Gooch [1990] 1
EGLR 173 (Hicks QC) at 174.
46
Steward v Rapley [1989] 1 EGLR 159 (CA), Oswald v Countrywide Surveyors Ltd [1996] 2 EGLR
104 (CA), Hoadley v Edwards [2001] PNLR 964 (Evans-Lombe J).
47
Although e.g. some purchasers need an extra deduction to entice them to bother, and sometimes the
cure will improve the value of the property: Oswald v Countrywide Surveyors Ltd [1996] 2 EGLR 104
(CA) per Kennedy LJ at 105.
48
McCoy & Co v Clark (1982) 13 HLR 87 (CA).
49
Freeman v Niroomand (1996) 52 Con LR 116 (CA).
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negotiation for a waiver of the obligation (the Wrotham Park measure50).
As a financial loss, that is hard to justify, but as a proxy for the value of
the obligation to the claimant (where there was no financial value and yet
the claimant still exacted the promise and so must have valued it) this is
perfectly sensible.51
Conclusion
Thus:
(i) The implied assumption of responsibility test determines what types of value
of a performance (preference/whim/distress/risk avoidance etc) are
recoverable upon breach in service cases.
(ii) This is helped by the presumptions (a) that all obligations will have some
value (financial or otherwise), (b) the claimant will break even, i.e. receive
as much (financial or non-financial) value as the performance cost (i.e. as
the price/expenditure)
50
Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 W.L.R. 798 (Brightman J), but see
Surrey v Bredero Homes [1993] 1 WLR 1361 (CA).
51
Webb (2009) at 163-4. Cf Stevens (2009) at 192, although Stevens’ conclusion to this effect seems to
be partly dependent upon the covenant being a proprietary right and not contractual, and the damages
merely being the value of the infringement of that right. See also Kramer (2005) at 279.
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