Principle of awarding damages to a party

Damages are a financial remedy which aims to compensate the injured party for the consequences of a breach in the contract they were in. In general, the principle of awarding damages to a party is to put them back into the position, as far as possible, that they would have been in had the breach not have occurred. However, there are limitations to that principle which may affect the availability of damages. This essay will look at the rules on the remoteness of damage and how the decisions of the House of Lords in the case of Transfield Shipping Inc. v Mercator Shipping Inc, The Archilleas [1] has affected those rules in the awarding of damages for the breach of contract. However, in order to understand this, one must begin by looking at the law prior to The Archilleas.

A claimant cannot recover damages in respect of a loss which is too remote a consequence of the defendant’s breach of contract. [2] The amount of damages available to the plaintiff for breach of contract was not considered by the courts until Hadley v Baxendale [3] in 1854. The claimants in this case were the owners of a mill. A crankshaft, which was essential for the operation of their mill has broken down and needed to be replaced. In order to replace it, the owners needed to make a template using the old crankshaft which was to be carried out by engineers in Greenwich. The claimants therefore got in touch with the defendants, a firm of carriers, to transport the broken part to the engineers. However the defendants failed to deliver by the specified timeframe and thus delayed the arrival of the new crankshaft back to the mill and caused the mill to stand inoperative. The claimants therefore sought damages to compensate for the losses sustained whilst the mill was out of use and the question put to the Court of Exchequer was whether or not this was too remote as a result recoverable or not. Baron Sir Edward Hall Alderson, declined to allow Hadley to recover the lost profits, concluding that Baxendale could only be held liable for the losses that were foreseeable. Therefore the loss was too remote and should not be recoverable. The fact that a party sends something to be repaired, isn’t an indication that they will suffer a loss in profits should there be a late delivery unless it was directly communicated. Baxendale were not made aware of the fact that the crankshaft in their possession was the only one and that the mill would stand idle without it.

The judgement in this case gave rise to all new forseeability test per Alderson B:

‘Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.’ [4] 

This created two different situations in which the requirement for remoteness will be satisfied, and is usually known as the two limbs of the Hadley v Baxendale forseeability test. This new test of forseeability to determine the amount of damages to be recovered by the claimant was considered in a further two subsequent cases.

In the case of Victoria Laundry Ltd v. Newman Industries [5] the claimants who ran a laundry business had purchased a boiler from the defendants which was due for delivery in July. The boiler was installed on the defendants’ premises and therefore required dismantling before delivery could be made. The boiler was badly damaged whilst being dismantled and consequently caused a five month delay from the delivery date. The defendants were aware that the claimants owned a laundry business and their intention to put the boiler ‘into use in the shortest possible space of time’. [6] The claimants bought an action for damages to recover the loss of profits they would have made if the boiler had arrived as agreed, and also for the loss of a cleaning contract from the Ministry of Supply.

It was held that the claimants could recover the damages for the loss of additional profits that the boiler may have generated but nor for the loss of the cleaning contract from the Government. The reason for this judgement was due to the fact that the defendants were aware that the claimants aimed to increase business with an additional boiler in place. Therefore this additional loss was ‘reasonably forseeable’. However, the defendants were not made aware of the cleaning contract the claimants may have had with the Ministry of Supply and therefore this loss could not be recovered. This shows the second limb of the Hadley v. Baxendale test in operation and sets the standard of remoteness as ‘reasonably forseeable’. However, the House of Lords disagreed with this level of probability in another key case, The Heron II. [7] 

The claimant had chartered a ship (The Heron II) to transport a cargo of sugar from Czarnikow to Basra. The journey should have taken twenty days, but instead due to a deviation from the set route, it was delayed by nine days during which the price of sugar fell dramatically. Due to the breach of contract, the claimant suffered financial loss and thus sought damages to cover the difference in the price he received for the sugar and the higher price that he would have received had the ship not been delayed. Although the claimant had not made it aware to the defendant his intention to sell sugar at the destination point in Basra, the defendant was nonetheless aware that he was carrying a sugar load and that Basra was a common trading place for sugar.

Although the defendant was not aware that the claimant wished to sell as soon as the boat arrived, the House of Lords held that due to his awareness that the destination was a popular place for sugar trade was sufficient knowledge to make it so probable that it must have been within his contemplation at the time the contract was made. The House of Lords criticised the ‘reasonably foreseeable test’ saying that it was more appropriate in tort cases rather than contract. Each of the Law Lords had differing arguments as to which test should apply in place of the ‘forseeability test’, although the consensus was that the damage must arise with a high degree of probability from the breach. [8] 

The House of Lords in The Archilleas, re-considered the law relating to remoteness of damage, signalling that a narrower approach to the recovery of damages, although the precise ambit of the decision remains unclear. [9] The case concerns a dispute over the amount of damages that should be paid out by the charterers of a ship for the late delivery back to its owners. Transfield Shipping Inc, had chartered The Archilleas, a single decker bulk carrier, for the duration of five to seven months at a daily hire rate of US$13,500. The parties at a later date, agreed to a further five to seven months at a daily rate of US$16,750. The latest date for redelivery was the 3nd of May, 2004. By April 2004 the market rates for timed charter vessels had more than doubled compared to the previous year. On the 20th april 2004, the charterers gave notice of redelivery and as result the owners, Mercator, fixed the vessel for a new four to six month hire to CargillI, another charterer at the new daily rate of US$39,500. With less than a fortnight to go before the new charterers were due to receive The Archilleas, they had fixed the vessel under a sub charter to carry coals from Quingdao in China across the Yellow Sea to discharge at two Japanese ports, Tobata and Oita. [10] 

By the 5th of May, it had become clear that the vessel wouldn’t be returned to the owners before the final cancellation date of the 8th of May and by that time the rates had also fallen. The owners wanted to make an extension to the cancellation date and take it to the 11th of May and as a result, the new charterer’s demanded a reduction to the daily hire for the new fixture at a rate of US$31,500. [11] 

The Mercator claimed for damages for the loss of the difference between the original rate and the reduced rate over the period of the fixture to the new charterers, Cargill. The sum calculated by Mercator came to a total of US$1,364,584.37, with the daily rate of US$8,000. However, the charterers argued that Mercator was not entitled to damages calculated by reference to their dealings with other new charterers. Rather that they were only entitled to the difference between the market rate and the charter rate for the number of days that they were deprived of their ship. Transfield therefore claimed that they should only pay out the sum of US$158,301.17. [12] 

The House of Lords held that liability would be confined to the latter figure. However, while they all agreed in the end result, their Lordships reasoning differed significantly making it a difficult task to determine the ratio of the case. Lord Hoffman and Lord Hope said that the fact that the loss was foreseeable was not enough. They gave importance to the question whether or not the defendant has, objectively assumed responsibility for the loss in question at the time of contracting. [13] Lord Hoffman gave the judgement that, ‘a party cannot be expected to assume responsibility for something that he cannot control and, because he does not know anything about it, cannot quantify. It is not enough for him to know in general and on open-ended terms that there is likely to be a follow-on fixture.’ [14] He also held that having regard to the expectations of the market, the contracting parties wouldn’t have considered that a late return of the ship, which caused a financial loss in the follow up fixture, to be a kind of loss that the charterer was assuming responsibility for.

Lord hope also added that the assumption of responsibility is ‘determined by more than what at the time of the contract was reasonably foreseeable.’ [15] Therefore in his judgement, it wasn’t sufficient that the defendants knew general terms about the likelihood of a follow-on fixture. Lord Walker was also of the viewpoint that forseeability on its own was not a satisfactory test.

In Lord Rodger’s view, the loss suffered by the owners wasn’t the ordinary consequence of the breach of contract. The loss arose as a result of the ‘extremely volatile market conditions’ which could not have been reasonably foreseen as being likely to arise out of the delay. [16] Both Lord Rodger and Baroness Hale decided the appeal on the more traditional basis of Hadley v Baxendale forseeability, i.e. that neither of the parties would have reasonably thought that a late return by nine days would cause the kind of loss for which the owners were trying to claim. [17] 

The House of Lords decision in The Archilleas is significant for two main reasons, firstly for its introduction of an ‘assumed responsibility test’ into the law of remoteness of damages and secondly for confirming that the ‘reasonably foreseeable test’ was becoming unpopular with the Law Lords as a means to assess whether damages are too remote. The notion of the ‘assumed responsibility test’, as proposed by Lords Hoffman and Hope, states that, a Court must look at the parties’ understanding and knowledge as to the types of losses each party would bear, should there be a breach of contract in order to determine the amount to damages to be paid. Lord Walker also stated that he agreed with Lords Hoffman and Hope corroborating the notion of an ‘assumed responsibility test’.

The question to be asked is whether this new test is an effective method which should be applied to the law of remoteness for breach of contract. Lords Hoffman and Hope in their judgements do not assess the difficulties in using this test to determine what ‘assumed responsibilities’ are for the parties in relation to the types of loss, as this is in itself a difficult task. When two parties enter into a contract, their main focus is on the completion of the task at hand and not the possible types of losses they are ‘assuming responsibility’ for should there be a breach. Therefore a court cannot determine what losses the parties assumed responsibility for and thus look to what the reasonable party would have contemplated. [18] 

It is also more than likely that the courts will look into the current market practice as it is a key factor in ‘assessing the breadth of the presumed assumption of responsibility’, [19] which will aid in the decision of whether or not the loss is recoverable. In the Transfield case, one of the critical factors which persuaded the House of Lords, to conclude that the loss wasn’t recoverable was the general understanding at that time amongst shipping lawyers, that liability was restricted to difference between the market rate and the charter rate for the overrun period. Had their Lordships not considered this point, the decision may have differed.

In conclusion it can be seen that decisions of the House of Lords in The Archilleas has introduced a new assumed responsibility test, to determine the remoteness in relation to the awarding of damages for breach of contract. It also suggests that courts may be less willing to see ‘forseeability’ as the determinative factor as it does not provide sufficient regard to commercial practice. I