CONSTRUCTION OF CONTRACTS

There are 3 Sections to this paper:

(1) The rules of construction generally

(2) Construing oral agreement

(3) The meaning of some specific words or phrases

(1) THE RULES OF CONSTRUCTION GENERALLY

1. Before even beginning to draft any contract, however simple, it is essential to be aware of the basic principles which the court will apply when construing it.

any contract must be construed in context

2. In construing any written agreement the Court is not only entitled to look at evidence of the objective factual background known to the parties at or before the date of the Contract, including evidence of the ―genesis‖ and objectively the aim of the transaction but must do so. This principle does not, however, entitle the Court to look at the evidence of the subjective intentions of any party.

3. In St. Edmundsbury and Ipswich Diocesan Board of Finance v. Clarke1 Sir John

Pennycuick delivering the Judgment of the Court of Appeal rejected the contention that the proper method of construction in relation to a Contract is first to construe the words of the instrument in isolation and then look at the surrounding circumstances in order to see whether they cut down the prima facie meaning of the words. He stated that:

―It seems to us that this approach is contrary to well-established principle. It is no doubt true that in order to construe an instrument one looks first at the instrument and no doubt one may form a preliminary impression on such inspection. But it is not until one has considered the instrument and the surrounding circumstances in conjunction that one concludes the process of construction‖.

4. Similarly, in Hvalfangerselkapet Polaris A/S v. Unilever Limited2, Lord Russell of

Killowen stated that:

―Before a Court begins to construe a written contract, it must know all the relevant circumstances which exist and are within the knowledge of the contracting parties at the time when they make their contract‖.

5. The starting point of the modern authorities on the factual background of a written agreement is Prenn v Simmonds

3, in which Lord Wilberforce (1384 G) held that, in

construing a written agreement, evidence of negotiations ought not to be received by the court and that evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract including evidence of the

1 (No. 2) [1975] 1 WLR 468

2 (1933) 46 Lloyds’ Reports 29

3 [1971] 1 WLR 1381

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―genesis‖ of the contract and objectively the ―aim‖ of the transaction. We shall see that this principle has become less certain.

meaning contract conveys to reasonable man

6. The most recent and authoritative enunciation of the rules was in Investor’s Compensation Scheme Ltd v West Bromwich Building Society

4 and appears in

the speech of Lord Hoffman at page 912F: ― …I should preface my explanation…with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds …and Reardon Smith Line Ltd v Hansen-Tangen…, is always sufficiently appreciated.[emphasis added]. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted in ordinary life. Almost all the intellectual baggage of ‗legal‘ interpretation has been discarded. The principles may be summarised as follows: Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The background was famously referred to by Lord Wilberforce as the ‗matrix of fact‘, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are only admissible in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.‖

7. Lord Hoffman‘s words in PRENN were revisited in the House of Lords in the case of Bank of Credit and Commerce International SA (in liquidation) v Ali and others

5.

It is clear from, inter alia, paragraph 31 of the speech of Lord Nicholls of Birkenhead, that the exceptions to the rule that evidence of negotiation is to be excluded remain, albeit that the boundaries of the exception are ill-defined. It is clear also that Lord Hoffman was not attempting to draw a ‗line in the sand‘, and that their Lordships recognise continued movement toward a more liberal approach in this area. Lord Nicholls said:

―For many years the accepted wisdom has been that evidence of the actual intention of the parties is not admissible on the interpretation of a written agreement, although such evidence is admissible for other purposes, for example…rectification. In Investor‟s Compensation Scheme Ltd v West Bromwich Building Society, Investors Compensation Scheme Ltd v Hopkin & Sons (a firm), Alford v West Bromwich Building Society, Armitage v v West Bromwich Building Society [1998 1 WLR 896 at

4 [1998] 1 WLR 896

5 [2001] 1 All ER 961

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913,…Lord Hoffman pointed out that the exclusion from evidence of the previous negotiations of he parties and their declarations of subjective intent is for reasons of practical policy. He added that the boundaries of this exception are in some respects unclear. Whether these reasons of practical policy still hold good today in all circumstances has become increasingly the subject of debate in recent years. The debate is still continuing: see the recent observations of Thomas J in the Court of Appeal of New Zealand in paras 59 to 95 of his judgment in Yoshimoto v Canterbury Golf International Ltd (27 November2000, unreported). This is not the moment to pursue this topic, important though it is, because the point does not arise on this appeal. I desire, however, to keep the point open for careful consideration on a future occasion‖.

8. At paragraph 39 Lord Hoffman clarifies his statements in West Bromwich:

―I was merely saying there was no conceptual limit to what can be regarded as background. It is not, for example, confined to the factual background but can include…proved common assumptions which were in fact quite mistaken…I was certainly not trying to encourage a trawl through ‗background‘ which could not have made a reasonable person think that the parties must have departed from conventional usage‖.

9. Lord Clyde, at 78, also makes reference to the words of Lord Hoffman in West

Bromwich at 912-913 and continues, ―The problem is not resolved by asking the parties what they thought they intended. It is the imputed intent of the parties that the court is concerned to ascertain…It is an objective approach which is required and a solution should be found which is both reasonable and realistic. The meaning of the agreement is to be discovered from the words which they have used read in the context of the circumstances in which they made the agreement. The exercise is not one where there are strict rules, but one where the solution is to be found by considering the language used by the parties against the background of the surrounding circumstances‖.

the words are to be given natural and ordinary meaning

10. It is a basic principle of construction that the words in the agreement are to be given their natural and ordinary meaning. In Melanesian Mission Trust Board v Australian Mutual Provident Society

6, the Privy Council held [Lord Hope,

page129F] that where parties to a formal document have used ordinary words, the parties must be taken to have used those words according to their ordinary meaning. If their meaning is clear and unambiguous then effect must be given to them because that is what the parties have agreed by their contract. It is not the function of the court to search for ambiguity. Unless the context shows that the ordinary meaning cannot be given to the words then or that there is an ambiguity, the ordinary meaning of the words used in the document must prevail.

ambiguous words: parties negotiated on agreed basis

11. On the other hand, if and in so far as the meaning is not readily apparent and is ambiguous or equivocal, then it is permissible for the Court to look at the negotiations between the parties to see if such words have, in the course of negotiations, acquired some particular agreed meaning by the parties which ought to be adopted by the court.

12. In The “Karen Oltmann”7 the court was concerned with the construction of the

phrase:

6 [1997] 2 EGLR 128

7 [1976] Lloyds LR 708

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―Charterers to have the option to redeliver the vessel after 12 months‘ trading subject to giving 3 months‘ notice‖.

13. The Court accepted that, in its context, the word ―after‖ was susceptible of two meanings: (1) ―on the expiry of‖ and (2) ―at any time after the expiry of‖.

14. At page 712, Kerr, J held that: ―If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the Court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention. Such cases would not support a claim for rectification of the contract, because the choice of words in the contract would not result from any mistake. The words used in the contract would ex-hypothesi reflect the meaning which both parties intended‖.

15. He observed that (at page 712, left column) such situations were a long way from the attempts made in Prenn and in Arrale to adduce extrinsic evidence to persuade the court that one interpretation was in all the circumstances to be preferred to the other.

16. It would be absurd that where parties have a clear pre-existing agreement which is either inaccurately or incompletely reflected in the written agreement which is intended to reflect that pre-existing agreement, that rectification should be available but that where the written agreement simply ambiguously reflects what they have agreed that no relief is available.

17. There is, furthermore, authority for this principle in PRENN and before. In PRENN, Lord Wilberforce in his speech accepted that the rules of construction should not be unduly legalistic. He also stated at page 1384 A that:

―…Lord Blackburn‘s well-known judgment in River Wear Commissioners v. Adamson (1877) 2 App. Cas. 743, 763 provided ample warrant for a liberal approach. We must iinquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (Macdonald v Longbottom, 1 E.&E. 977) it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term.”

negotiations: meaning of words/phrases: when admissible

18. The rationale for excluding evidence of ―negotiations‖ when construing a contract is that the Court will not take into account the subjective intentions of the parties but only the objective common intention of the parties because the former is unhelpful and of little if any weight.

19. The relevant case law does not quite define what ―negotiations‖ are for this purpose. In I.C.S. v West Bromwich B.S.

8, Lord Hoffman stated:

―(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this

8 [1998] 1 WLR 896 at 913

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distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.‖

20. Doing the best that one can in the unhelpful absence of authority, it is submitted that ―negotiations‖ in this context means discussions between parties with a view to entering into a contract in the course of which discussions the parties indicate what they are prepared to offer and what they expect to receive under the proposed contract.

21. If this definition is correct and if all aspects of negotiations are excluded from consideration then there is scarcely any admissible material available to the court when trying to establish the objective intention, the context and the commercial purpose of the contract.

22. Consequently, evidence of negotiation is not, per se inadmissible, only that it is inadmissible for the purpose of putting before the court the subjective intentions of the parties as a means of interpreting the contract.

23. A statement made by a party in the course of negotiations may at one and the same time be (1) a statement of his subjective intention and negotiating position and (2) be a statement containing information which may form part of the factual matrix which the Court is bound to take into account when construing the contract.

effect must be given to all parts of the contract

24. Every part of the contract must be considered, the document must be read and construed as a whole and effect must be given to every part. It is to be assumed that there is no surplusage exists and that every word is intended to have effect. It has been held, however, that in relation to leases and other conveyancing documents, this presumption is weakened.

25. In Norwich Union Life Insurance Society v British Railways Board

9, the court held

that it cannot insist on giving each word in a series a distinct meaning because: ―Draftsmen frequently use many words either because it is traditional to do so or out of a sense of caution so that nothing which could conceivably fall within the general concept which they have in mind should be left out‖.

26. Similarly, in Tea Trade Properties Ltd v CIN Properties Ltd

10, Hoffman J said:

―I have never found the presumption against superfluous language particularly useful in the construction of leases. The draftsmen traditionally employ linguistic overkilland try to obliterate the conceptual target by using a number of phrases expressing more or less the same thing‖.

words used will be construed against the person putting them forward

27. This is generally known as the “contra proferentem” rule. There is some doubt as to whether the rule really still exists. It has been given at least four different definitions over the centuries. Judges find it a useful means of resolving stalemate in construction and, for that reason alone, it remains important. It is used in a variety of confused ways. The most frequent are: ambiguity will be resolved against the landlord because he drafted the lease; if, on the other hand, the tenant drafted the relevant clause, then the ambiguity will be resolved against him; traditionally, it does not matter

9 (1987) 283 EG 846

10 [1990] 1 EGLR 155

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who drafted it, the ambiguity is to be resolved against the party who benefits from the provision.

(2) CONSTRUING ORAL AGREEMENT

28. Simple: all the above principles apply save that the court will look at evidence of SUBJECTIVE intention:

(a) the interpretation of a purely written contract is a matter of law, and depends on a relatively objective contextual assessment, which almost always excludes evidence of the parties' subjective understanding of what they were agreeing, but (b) the interpretation of an oral contract is a matter of fact or inference from primary fact, rather than one of law, on which the parties' subjective understanding of what they were agreeing is admissible:

Lord Hoffmann in Carmichael v National Power plc [1999] 1 WLR 2042, 2048E–2051C (3) THE MEANING OF SOME SPECIFIC WORDS OR PHRASES

29. There are certain words or phrases which we lawyers use with great frequency. We think we know what they mean. We are invariably approximately correct if for no other reason than that words are given their natural and ordinary meaning. But there is a considerable body of case law which we could usefully take into account when construing or drafting a contract.

30. This section will focus upon the following terms:

„procure‟;

„secure‟

„so far as practicable‟.

„reasonable endeavours‟

„all reasonable endeavours‟ and

„best endeavours‟

„time of the essence‟ (addressed in a separate section below)

31. An obligation to ‗secure‟ or ‗procure‘ a result is strict; failure to secure the result is a breach of the obligation.

―… the verbs ‗secure‘ and ‗ensure‘... mean exactly what they say, and ... to water them down to an obligation to do no more than use best endeavours was an unwarranted dilution and amounted to a ‗Humpty-Dumpty‘ approach to construction.‖

John Mowlem & Co plc v Eagle Star Insurance Co Ltd (No. 2) (1995) 44 Con LR 134,

Hirst LJ

―… the normal meaning of the word 'procure' is to 'see to it'. Thus a person agreeing to procure that someone else performs a contractual obligation first is required to attempt to procure that person complies with the obligation and in the event that he fails to comply to pay damages calculated by the amount that ought to have been paid by the third party‖.

Peter Smith J, Nearfield Ltd v Lincoln Nominees Ltd [2007] 1 All ER (Comm) 441 at [37]

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32. ‗So far as practicable‘ is rather difficult to define with any certainty. There is evidence

in the cases of the interpretation of these words in the context of their statutory use. For example, discussing this language in regulations under the Industrial Relations Act 1971, Scarman LJ said:

The word ‗practicable‘ is an ordinary English word of great flexibility: it takes its meaning from its context. But, whenever used, it is a call for the exercise of common sense, a warning that sound judgment will be impossible without compromise. Sometimes the context contemplates a situation rarely to be achieved, though much to be desired: the word then indicates one must be satisfied with less than perfection: see, for example, its use in section 5 of the Matrimonial Property Act 1970. Sometimes, as is submitted in the present case, what the context requires may have been possible, but may not for some reason have been ‗practicable‘. Whatever its context, the quality of the word is that there are circumstances in which we must be content with less than 100%: and it calls for judgment to determine how much less.

Dedman v British Building & Engineering Appliances Ltd [1974] 1 WLR 171 at

179

33. Clauses containing the phrases "reasonable endeavours", "best endeavours" and

"all reasonable endeavours" are commonly found in all types of commercial contracts and contracts relating to the disposition of an interest in land. Despite their long and frequent use, the actual meaning of these expressions, and the extent of the obligations they impose, is rarely entirely clear in the contract itself and, to add this uncertainty, the case law tends to add confusion rather then clarity.

34. We shall look at a number of examples. 35. An obligation to use „best‟ or „reasonable‟ endeavours is not so strict. The question

is whether the defendant used the level of ‗endeavours‘ he promised.

36. It is worthwhile focussing just a little on “best endeavours”.

37. Where a party has assumed an obligation to do his best, then that is what he is obliged to do. A performance which is second best is a breach of this obligation. He has assumed an obligation to do all in his power yet within the limits of what is reasonable, He is not required to take commercially unreasonable steps.

38. Caution must be exercised in relying on previous cases for a definition of „best

endeavours‟, particularly where the context was different:

The respondent sought to rely upon cases decided in this Court upon other words used under different circumstances. We think that nothing is more misleading than this use of precedent. We think that ‗best endeavours‘ means what the words say; they do not mean second-best endeavours.

Lawrence J, Sheffield District Railway Company v Great Central Railway

Company (1911) 27 TLR 451 at 452

39. Best endeavours‟ requires more than just acting in the same way as others would do:

I would ... not accept that a bare finding that a particular exporter acted in accordance with the common practice of other exporters is by itself to be equated with a finding to the effect that he used his best endeavours [to obtain an export licence]

Kerr J, Malik Co v Central European Trading Agency Ltd

[1974] 2 Lloyd‘s Rep 279 at 284

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40. Sometimes the courts speak as though the obligation is at the level of a duty to take

such steps as a reasonable person would take, although in context it is really a more stringent standard than this:

What would an owner of the property ... who was anxious to obtain planning permission, do to achieve that end? The ... covenantors are bound to take all those steps in their power which are capable of producing the desired results, namely the obtaining of planning permission, being steps which a prudent, determined and reasonable owner, acting in his own interests and desiring to achieve that result, would take.

Buckley LJ, IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335

I would construe a contract by the parties to ‗use their best endeavour‘ to complete a purchase by a given date to mean what it says. ‗Best endeavours‘ are something less than efforts which go beyond the bounds of reason, but are considerably more than casual and intermittent activities. There must at least be the doing of all that reasonable persons reasonably could do in the circumstances.

Megarry V-C, Pips (Leisure Productions) Ltd v Walton (1980) 43 P & CR 415

The buyers took all steps that were reasonably open to them—in other words, that they used their best endeavours.

Lloyd J, Coloniale Import-Export v Loumidis Sons [1978] 2 Lloyd‘s Rep 560 at

563-564 (buyers applied in good time for export licence, although finally failed

to obtain it)

...whether the sellers were in breach of an implied promise to proceed with all due despatch to recover demurrage from their suppliers. To my mind there is in fact little if any difference between such an obligation and one of best endeavours, or indeed due diligence, at least in the present context. In my view, in the context under discussion, best endeavours entails that the person with that obligation must take all steps in his power which are capable of producing the desired result, being steps which a prudent, determined and reasonable person would take, assuming that it was in his interests to achieve the result and that he desired to do so: see IBM v Rockware Glass.

Saville J, Marc Rich & Co AG v SOCAP International Ltd, 6.7.1992

I do not think that the contracts here could be construed more favourably for the defendants than that their obligation [to use best endeavours to exploit inventions and designs licensed by the claimant] was to do what they could reasonably do in the circumstances. The standard of reasonableness is that of a reasonable and prudent board of directors acting properly in the interests of their company and applying their minds to their contractual obligations to exploit the inventions.

Sellars J, Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234

(See also Ryanair Ltd v SR Technics Ireland Ltd [2007]EWHC 3089 (QB))

41. A duty to use best endeavours to obtain a result, e.g. to obtain an export licence, or planning permission, may include a duty to take steps in litigation or by way of appeal against an initial refusal: Pips (Leisure Productions) Ltd v Walton (1980) 43 P & CR 415 (breach of vendor‘s duty to use best endeavours to complete sale of lease by a given date, by (inter alia) failing to seek relief against

forfeiture by lessor); Linder v Pryor

(1838) 8 C & P 518 (covenant by lessee to use ―best and utmost endeavours‖ to continue it open as a public house and to increase trade: breach by failing, e.g., to apply for re-hearing of case when licence taken away by magistrates).

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42. The standard has been stated differently:

if an appeal to the Secretary of State would have a reasonable chance of success, it could not, in my opinion, be said that he had ‗used his best endeavours‘ to obtain the planning permission if he failed to appeal.

Buckley LJ, IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335

If there is machinery for appealing and no finding that any appeal was doomed

to fail, then the obligation to use best endeavours clearly requires the use of

the appeal system. The point at which the line is to be drawn is the point at

which the tribunal of fact is satisfied that no further efforts could have made

any difference to the result or that in all the circumstances it would have been

unreasonable to expect the exporter to have done more.

Kerr J, Malik Co v Central European Trading Agency Ltd [1974] 2 Lloyd‘s Rep 279

at 284

43. But the duty does not require the party to take steps which are commercially unreasonable: Monkland v Jack Barclay Ltd [1951] 2 KB 252 (retail seller of cars undertook to use best endeavours to secure delivery of a car for the plaintiff, from the manufacturers: no breach where seller complied with manufacturer‘s instructions not to allow plaintiff to have car without signing undertaking not to sell it on, because to fail to comply with the instructions would have ‗put them on the stop list (of the Motor Trade Association), thereby killing them stone dead in a commercial sense.‘)

44. Nor does it require the party to incur expenditure which would simply be wasted.

―contractual obligations to use due diligence and their best endeavours to promote sales ... would not require the directors to carry on the manufacture and attempted sale to the certain ruin of the Company or to the utter disregard of the interests of the shareholders; but before that extreme position could be reached ... there would arise questions ... as to the amount of money to be expended on the production and on advertisement and vending of the goods and how far money was to be borrowed for the purpose, if it could be and was not already available. The submission of the defendants has been that the contracts, read as a whole, required them to do only that which was commercially practicable, and this was interpreted to mean that the defendants were to vend the goods to the extend which was consistent with running the Company efficiently and prudently in the interests of the Company and to no greater extent.‖

Sellars J, Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234

―The words of obligation by lessee to use ‗best endeavours‘ to develop the lessors‘ through railway traffic do not mean that the Great Central must so conduct its business as to offend its traders and drive them to competing routes. They do not mean that the limits of reason must be overstepped with regard to the cost of the service; but short of these qualifications the words mean that the Great Central Company must, broadly speaking, leave no stone unturned to develop traffic on the ... line‖

Lawrence J, Sheffield District Railway Company v

Great Central Railway Company (1911) 27 TLR 451 at 451

―With regard to the first alleged breach of covenant that Lumley would use his best endeavours to improve the Opera House for the purpose for which it was demised to him, of which it was alleged that there was a breach by his not having

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kept it open in the seasons of 1853 and 1854 .... there was no pretence for saying that there had been any breach of covenant upon that ground; ... the meaning of the covenant was, that he should, by having proper scenes, and by having the house properly painted and kept in good order, improve the house, but not if he found that there would be no benefit in opening the house at all; if it would not pay the expenses of having theatrical representation at all, that he should at his own loss, with no benefit to the landlords keep it open without any corresponding advantage‖.

Lord Cranworth, Croft v Lumley (1858) 6 HLC 672 at 735-736

45. Although it is not possible to give a general definition of ‗best endeavours‘ which will apply in all cases, it is an obligation which is sufficiently certain to be enforcible—provided that the object of the obligation is itself sufficiently certain.

The relief [by way of injunction] must be commensurate with the duties, express or implied, of the defendants under the contract, and those at most only require the first defendants to use their best endeavours to procure, if practicable, the development of the property for the purposes of a marine with associated recreational facilities. I ask myself, could anything be less specific or more uncertain? There is absolutely no criterion by which best endeavours and practicability are to be judged.

Goff J, Bower v Bantam Investments Ltd [1972] 3 All ER 349

In Bower v Bantam Investments Ltd I was not in any way suggesting that an obligation to use best endeavours is uncertain and cannot be enforced. The difficulty over uncertainty in Bower‘s case was that the object which the best endeavours were to be used to promote was left wholly indefinite. It was an arena unspecified as to type or size, and even that was only to be provided if practicable.

Goff LJ, IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335

An undertaking to use one‘s best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one‘s best endeavours to agree, however, is no different from an undertaking to agree, to try to agree or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable obligation.

Millett LJ, Little v Courage (1994) 70 P & CR 469 at 476

46. We need to consider, and in a little detail, the recent case of CPC Group Limited v Qatari Diar Real Estate Investment Company [2010] EWHC 1535 (Ch) came before the High Court. The case related to the redevelopment of the former Chelsea Barracks in an architecturally sensitive part of Chelsea. The parties were joint venture partners for a project to develop the site. The parties had entered into a sale and purchase agreement, pursuant to which Qatari undertook to:

"use all reasonable but commercially prudent endeavours to enable the achievement of the various threshold events and Payment Dates"

47. Following the intervention of the Prince of Wales and public opposition, Qatari

withdrew the application for planning permission for the redevelopment. The consequence of this withdrawal was a delay in a payment due under the agreement.

48. One of the issues at trial was whether the withdrawal of the planning application was

a breach of Qatari‘s obligation under the above clause.

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49. The judge considered the decision in Yewbelle Limited v London Green

Developments [2007] EWCA Civ 475 (above) and found that:

(1) the wording "all reasonable but commercially prudent endeavours" was not the same as a "best endeavours" obligation; and

(2) the obligation to use "all reasonable endeavours" does not always require the performing party to disregard his own commercial interests.

50. Whilst one would have thought that the inclusion of the words "but commercially

prudent endeavours" clarified the obligation, it was not apparently decisive. 51. And now to revisit these terms and to compare them.

52. ‗Reasonable endeavours‘ is less onerous than ‗best endeavours‘: in substance, it is the same as the familiar standard in negligence: UBH (Mecanical Services) Ltd v Standard Life Assurance Co The Times, 13.11.1986 (Rougier J: a lessee required to use reasonable endeavours was entitled to perform a balancing act, placing on one side of the scales the weight of his obligations to the lessor and on the other commercial considerations, including his relationships with his sub-tenants, his reputation as a landlord, and the uncertainties of litigation).

53. A "reasonable endeavours" clause does not require the performing party to take a step which is disadvantageous to him BUT if the contract specifies that certain steps have to be taken in performance of an obligation then those steps must be taken even if they involve the sacrificing of a party's commercial interests. This may extend to include conducting litigation (this is analagous with specific performance: although hardship is a factor in the court‘s discretion whether to menforce, it is of little weight where a party is being obliged by the order to the very thing which he willingly undertook to do under the contract).

54. The performing party may be obliged take only one reasonable course in a given situation to achieve a particular end: Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 (Comm).

55. It is an objective standard of what an ordinary competent person might do in the same circumstances and it allows commercial considerations to be taken into account (e.g. relationships with third parties, relations with commercial associations of which the party is a member, the reputation of the performing party, the likelihood of success and the costs to be incurred by the performing party.

56. ‗All reasonable endeavours‘ sounds higher, but the courts have not in fact distinguished particularly between ‗reasonable endeavours‟ and „all reasonable endeavours‟.

57. Interpreting a clause in an insurance contract which provided that the insurer would not be liable ‗for any claim for loss or damage when the insured making such claim has not used all reasonable endeavours to save his vessel from such loss or damage‘ Lord Keith said:

The question whether the taking of a particular course of action would have constituted a reasonable endeavour to save the vessel is essentially one for the judgment of the Court, to be arrived at upon an evaluation of all the evidence, which where appropriate may include expert evidence. The test is an objective one, directed to ascertaining what an ordinarily competent fishing boat skipper might reasonably be expected to do in the same circumstances.

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Expert evidence is capable of throwing some light on that matter, particularly as indicating the degree of skill and knowledge which such a skipper would normally possess.

Lord Keith, A P Stephen v Scottish Boatowners Mutual Insurance

Association (The Talisman) [1989] 1 Lloyd‘s Rep 535 at 539

58. In Yewbelle Ltd v London Green Developments Ltd [2007] 1 EGLR 137 Lewison J,

interpreting a clause requiring the seller of development property to use ‗all reasonable endeavours‟ to obtain planning permission and a completed s. 106 agreement, said:

for how long must the seller continue to use reasonable endeavours to achieve the desired result? In his opening address, Mr Morgan said that the obligation to use reasonable endeavours requires you to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted. You would simply be repeating yourself to go through the same matters again. I am prepared to accept this formulation, subject to the qualification that account must be taken of events as they unfold, including extraordinary events.

Lewison J, Yewbelle Ltd v London Green Developments Ltd

[2007] 1 EGLR 137 at [123]

59. This view was upheld in the Court of Appeal: Yewbelle Ltd v London Green Developments Ltd [2007] EWCA Civ 475, [2008] 1 P & CR 279, [2007] 23 EG 164 (CS), [2007] All ER (D) 379 (May)

60. An "all reasonable endeavours" obligation does not necessarily equate to a "best endeavours" obligation (Qatari). It appears that an "all reasonable endeavours" clause

―requires you to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted" : Yewbelle v London Green, above.

61. The obligation to use "all reasonable endeavours" does not always require the performing party to disregard his own commercial interests: Qatari.

"Best Endeavours"

62. A "best endeavours" obligation is more onerous than a "reasonable endeavours" obligation.

63. Always dependent on context, generally a party should undertake all the reasonable courses which could be taken in a given situation to achieve the particular end.

64. A "best endeavours" obligation will generally require the performing party to expend time and money but only where there is a reasonable prospect of success. This may include litigation or even an appeal.

© David di Mambro 2011

13

REPUDIATION IN CONTRACT LAW

STEPHEN ACTON

RADCLIFFE CHAMBERS

SECTION 1: INTRODUCTION

ROLE AND EFFECT

1. A contract continues until it is brought to an end by an event which is effective in law for

that purpose. One such event, of course, is completion of performance, which in the case

of a contract for the provision of goods or services for reward entitles the performing party

to payment in accordance with the terms of the contract. Other ways in which a contract

may be brought to an end, or ―discharged‖, have different consequences: eg. by

agreement or on the occurrence of an event provided for in the contract as resulting in

termination; or by operation of law in other circumstances such as frustration, merger,

death (in the case of a personal contract), effect of insolvency provisions or alteration of a

written instrument.

2. Repudiation, where this is ―accepted‖ by the ―innocent party‖ (see below), is another

method by which a contract may be brought to an end, which has its own particular

consequences. Its field of operation is where the contract has been (or will inevitably be)

breached by one of the parties to it11

(―the party in default‖). English law operates on the

basis that there comes a point when the actions of the party in default have such an effect

on the ongoing contractual relationship between the parties that the innocent party is

entitled to put an end to the contract rather then having to continue to demand

performance, and carry out his own contractual obligations, under it. Where the innocent

party has this choice the party in default is said to have repudiated the contract. However,

it is the innocent party‘s choice and in English law the repudiation does not of itself

11

This paper assumes that there are two parties to a contract but of course contracts can be multi-party.

14

(normally at least

12) bring the contract to an end. Where the innocent party accepts the

repudiation as terminating the contact13

, the law then provides for the consequences of

that termination.

3. It is not (by any means) every breach of contract which constitutes a repudiation. Whilst

every repudiation is based upon an actual, anticipated or inevitable breach (as further

explained below) not every breach amounts to a repudiation. Where it does not, the

innocent party is entitled to damages caused by the breach, but the contract remains on

foot and each of the parties remains bound to continue performing it in accordance with

its terms. Section 2 of this paper explains the modes of repudiation, distinguishing

between those breaches which do, and those which do not, constitute a repudiation. One

of the modes of repudiation is renunciation – evinced intention not to perform – and

section 3 below focuses on a difficult aspect of that: where an assertion by a party that he

is not bound to perform what he is in fact bound to do, based upon an erroneous

interpretation or mistake, does not constitute a sufficient evinced intention not to perform

so as to amount to a repudiation.

4. Section 4 looks at the choices open to the innocent party and the tactical considerations

to be taken into account. One of the pitfalls facing the innocent party is that he might

involuntarily disentitle himself from accepting the repudiation, and this is considered in

section 5. Finally, where the contract is discharged by the innocent party‘s acceptance,

the consequences of this are summarised in section 6.

SECTION 2

MODES OF REPUDIATION

5. There are 3 sets of circumstances which constitute a repudiation of the contract, viz:

12

See, further, paragraph 23 below. 13

This is often referred to as “rescinding” the contract, but it has quite different consequences from those

which occur when a contract is “rescinded ab initio” e.g. for misrepresentation.

15

Failure of performance

Renunciation

Impossibility created by one of the parties

Failure of performance

6. A failure of a party to perform his contractual obligations fully or partially, or his

performance of them defectively, is the most common mode of repudiation in practice.

Whether any particular breach constitutes a ―repudiatory breach‖, or merely a breach

entitling the innocent party to damages but not to terminate the contract, can give rise to

extremely difficult questions of fact and law. The applicable legal principles, and indeed

even the terminology and the meanings ascribed to the terminology used, have evolved

steadily under the pressure of judicial scrutiny. The current state of the law may be

summarised as follows.

Dependent or Independent promises

7. It is firstly necessary to construe the contract so as to ascertain whether the innocent

party‘s promise to perform was dependent upon the promise of the party in default which

he has not performed, or which he has performed defectively; or whether each party‘s

promise was made independently of the other‘s, i.e. each party promised absolutely to

perform his own obligation whether or not the other part performed his. A finding of

independent mutual promises may at one time have been much more likely than now14

.

However, this approach continues to cause difficulty in the law of landlord and tenant,

where it has long been the law that the tenant‘s obligation to pay rent is independent of

the landlord‘s promise to repair15

(but subject to the tenant‘s ―ancient common law right‖ to

recoup his actual expenditure on landlord‘s repairs out of future rents)16

. The harshness of

14

See, for example, Fearnon v Earl of Aylesford (1884) 14 QBD 792 at 800, where the court construed a

covenant by a husband in a separation deed to pay his wife money as being totally independent of her

obligation not to molest him. 15

Taylor v Webb [1937] 2 KB 283. 16

See Woodfall’s Landlord and Tenant at 7.112.

16

this rule is now mitigated by the modern law of equitable set off

17. Unless driven to such a

construction by the language used, courts are now very unlikely to construe modern

contracts as containing independent promises, leaving it instead to the mechanisms next

discussed to determine the effect of a breach on the future of the contract.

Types of terms

8. Next, assuming dependent promises, the breach of such a promise by one party may

constitute a repudiation of the contract, but it does not have to. This is dependent in the

first place upon the category of term broken. Terms now fall into three types:

Conditions

Warranties

Intermediate terms.

Conditions and warranties are long established concepts in English contract law.

Intermediate (or innonimate) terms have been fully recognised more recently.

Conditions

9. If a term is a condition of the contract18

that means that any breach of it, however minor,

and regardless of the fact that it may cause little (if any) damage to the other party,

constitutes a repudiation. A term is a condition of the contract if the parties expressly

stipulate it as such or statute does (e.g. many of the implied terms under SOGA 1979). It

will also be a condition if this is a necessary implication arising from the nature, purpose

and circumstances of the contract and the term in question. In certain cases such terms

have been so categorised by previous judicial decision, but otherwise the most usually

quoted test for this is

17

See Woodfall at 7.114-115. 18

The term condition here is used in the promissory sense, whereby one party promises to fulfil the term.

That is to be contrasted with a contingent condition (which will bring into force or suspend an obligation

without any promise by either party that it will occur) or a condition precedent or subsequent (the

occurrence of the former of which is necessary for the bilateral contract to become effective, and the

occurrence of the latter of which may terminate or suspend the parties’ obligations, again without any

promise by either party that the condition will or will not occur).

17

"whether the particular stipulation goes to the root of the matter, so that failure to perform

it would render the performance of the rest of the contract a thing different in substance

from what the defendant has stipulated for".19

10. However, this can work harshly. Time stipulations have usually been regarded by the

common law as being ―of the essence‖, i.e. conditions, which means that any delay in

performance, however minor, would amount to a repudiation. This is still typically the case

in mercantile, especially shipping, contracts, where certainty is highly valued, but was

displaced as regards contracts for the sale of land by the equitable rule which does not

regard time stipulations as essential, and discarded by the House of Lords in the case of

rent review time-tables.20

Warranties

11. A warranty in the present context21

is to be contrasted with a condition. This is a term of

the contract, the breach of which may give rise to a claim for damages but not to a right to

treat the contract as repudiated, however substantial that breach is, and however much

damage it might cause to the other party. Again, a warranty may be expressly or impliedly

classified as such by the parties (interpreted in the latter case in the light of precedent), or

by statute (again, some of the terms implied by SOGA). However, terms that may formerly

have been construed as warranties will now often be construed as "intermediate terms".

Intermediate (or innominate) terms

12. These are terms of the contract the breach of which will not automatically have the effect

of either constituting a repudiation or of only giving rise to a right to damages. Instead, the

court enquires into the nature and consequences of the breach, so as to determine

whether, on the true construction of the contract and in all the circumstances of the case,

19

Bettini v Gye (1876) 1QBD 183 at 188 per Blackburn J. 20

United Scientific Holdings Ltd v Burnley BC [1978] AC 904. 21

Again, this term is used in other senses. It often refers to a promise that a state of affairs exists or will

exist, most notably in share sale agreements. It is also used to refer to an undertaking given separately from

the main contract, often between one of the parties to it and another, where it is known as a "collateral

warranty".

18

the breach does or does not "deprive the party not in default of substantially the whole

benefit which it was intended he should obtain from the contract."22

Other expressions

used are whether the breach "goes to the root of the contract", "affects the very substance

of the contract", or "frustrates the commercial purposes of the venture". This accordingly

enables the court to distinguish between less serious breaches and those which are so

fundamental as to undermine the entire purpose of the contract.23

13. Whereas at one time ―intermediate terms‖ appeared not to be recognised as such, the

modern development of the law in this area is to categorise terms as intermediate unless

shown otherwise. This accordingly represents the replacement of a ―bright line‖ law

promoting certainty with a judgmental law designed to promote justice on the particular

facts of each case. In practice, the question of whether a failure of performance does or

does not constitute a repudiatory breach, where the term cannot be categorised as either

a condition or warranty, is often a very difficult question of fact and judgment.

Renunciation

14. A renunciation of a contract occurs when a party by his words or conduct evinces an

intention not to perform or be bound by its essential obligations, i.e. those obligations the

non-performance of which by him would constitute a repudiation (see above). This must

amount to ―an intention to abandon the contract‖ or ―altogether‖ or ―absolutely‖ ―to refuse

future performance of the contract.‖ 24

This may occur prior to the time fixed for

performance, in which case the breach is said to be an ―anticipatory breach‖25

, or at or

during the time for performance. The renunciation must be unequivocal, and the test is an

22

Per Diplock LJ in the Hongkong Fir Shipping Co Ltd case [1962] 2 QB 26 at 70. 23

For example, in the Hongkong Fir case itself the breach was as to the shipowner's obligation to provide

the charterers with a seaworthy vessel. The vessel was not seaworthy and had to be repaired on a number of

occasions. However, the court of appeal declined to hold that seaworthiness was a condition of the contract,

and went on to find that, on the facts, given the totality of the delays, the charterers were not deprived

substantially of the whole benefit which it was intended they should obtain from the contract, and so could

not treat themselves as discharged from it. 24

See, for example, per Lord Coleridge CJ in Freeth v Burr (1874) LR 9CP 208 at 213; Lord Selbourne LC

in Mersey Steel v Naylor (1884) 9 App Cas 434 at 439; Atkin LJ in Spettabile 121 LT 628 at 634-5; and

Lord Wilberforce in Woodar v Wimpey [1980] 1 WLR 277 at 280-283. 25

Although this term may mislead. The doctrine is not based upon the fiction that there has been an actual,

albeit “anticipated”, breach of the obligation in question, but on the renunciation itself constituting a distinct

and different category of breach: see Xenos v Danube (1863) 13 CB (NS) 825.

19

objective one, i.e. what would the reasonable promisee understand by the words or

conduct. However, where the renunciation is not by plain words, the conduct may of

course still be sufficiently unequivocal for the doctrine to apply. Moreover, words falling

short of ―I will not perform‖ can suffice, e.g. ―I will not perform unless you do X‖, where the

other party is not required to do X, or ―I intend to perform by doing Y‖, when Y would

amount to performance substantially inconsistent with that party‘s obligations.26

However,

see the next section for when the putative repudiator acts in the bona fide belief that this

performance would be justified by the terms of the contract, but is wrong. Where the

promisor‘s conduct is not clear, he may of course subsequently or alternatively repudiate

by an actual failure of performance.

Impossibility created by the promisor

15. This is the final mode of repudiation. This occurs where a party has, by his own act or

default, made it impossible for him to perform his contractual obligations in some essential

respect (i.e. the failure to perform which would amount to a repudiation). The inability

must be established on the balance of probabilities, but the cause of the inability need not

be a deliberate act (e.g. a judgment creditor taking goods in execution which the promisor

has agreed to sell27

). A breach by this mode will usually be anticipatory. The same

conduct could arguably amount to a renunciation or the creation of impossibility, and the

innocent party will often find it easier to rely upon renunciation (which depends upon what

a reasonable man would be led to believe) rather than impossibility (which necessitates a

finding of the fact of impossibility28

).

SECTION 3

ERRONEOUS INTERPRETATION AND MISTAKES IN RENUNCIATION CASES

26

See Ross T Smyth v TD Bailey [1940] 3 All ER 60 at 72. 27

Keys v Harwood (1846) 2 CB 905. 28

Although since this is to be found on the balance of probabilities, it allows the court to be realistic: cf

Omnium D’enterprises v Sutherland [1919] 1 KB 618 where the shipowner's sale of a ship agreed to be

chartered was held to make performance impossible, notwithstanding the possibility that he could have

bought it back again prior to the time for performance.

20

16. Since the test for renunciation is objective (what would the reasonable person in the

position of the promisee be led to believe), it might be thought (consistently with contract

law and interpretation rules generally) that a promisor who evinces his intention of

performing the contract otherwise than in accordance with his true contractual obligations

would thereby automatically renounce the contract, and should not be able to rely upon

his own erroneous interpretation or mistakes (of fact or law), which led him to his mistaken

belief, to argue otherwise. This orthodox view was upheld by the House of Lords in

Federal Commerce v Molena29

. In that case the House decided that the shipowners‘

instructions to the master (their own agent), under a charterparty, to refuse to sign bills of

lading ―freight pre-paid‖, which would have been in breach of contract and have had so

serious an effect upon the charterers' business as to constitute a repudiaton of the

contract, although not yet acted upon, amounted to a renunciation. This was so,

notwithstanding that the owners took such action because they considered that the

charterers had wrongfully made deductions from the charter hire fees, which dispute they

had already referred to arbitration. The owners‘ argument that they did not by the totality

of their conduct evince an intention not to continue to perform the charterparty in

accordance with its true terms if they were wrong about the deduction dispute, or in any

event once the arbitration had been determined, was not successful. They had taken their

stance, which evinced an immediate intention not to perform the contract in accordance

with its true terms, and this amounted to a renunciation.

17. However, the law is not this simple. There are occasions when a contracting party can

express, or even act upon, a bona fide but mistaken view of the agreement without being

held to have repudiated it. The court still needs to assess the entirety of the party's

conduct to see whether he is evincing a refusal to go on with the contract, come what

may, even if he is wrong as to his expressed view of its construction. In the first of these

cases, James Shaffer v Findlay30

, the distributors passed on to the manufacturers fewer

orders than, as the court held on the true construction of the contract, they were bound to,

although they were doing their best to pass on as many as they could (but did not receive

29

[1979] AC 757. 30

[1953] 1 WLR 107

21

sufficient orders to fulfil their contractual obligation). The distributors wrongly (the court

held) argued that they were not in breach of contract on the true construction of the

contract. However, since they were still attempting to obtain and pass on as many orders

as possible, it is perhaps not surprising that the court of appeal held that the mere

expression of an erroneous, but bona fide and reasonable, view as to the construction of

the contract did not amount to a repudiation of it, and that in all the circumstances they

had not evinced a clear intention not to be bound by it.

18. This was taken a step further in Sweet & Maxwell v Universal News Services31

. In that

case, it was held that the assertion by a party who was contractually bound to take a

lease on certain terms, of an erroneous, but bona fide and reasonable, view as to those

terms in solicitors‘ correspondence for the lease, would not of itself necessarily amount to

a renunciation of the contract32

. This depended upon the overall intention evinced by that

party in all the circumstances. If this went so far as to indicate that he would not in any

circumstances enter into a lease containing the terms in question (when in fact he was

contractually bound so to do), this would amount to a repudiation, but the court held that

merely putting forward an erroneous view would not of itself amount to an unequivocal

expression of such an intention.

19. These cases reached their high water mark in the controversial House of Lords case of

Woodar v Wimpey33

. In that case the purchasing property developer (against whom the

market had dropped in the 1973-4 property slump) served a purported contractual notice

of rescission upon the vendor, in the bona fide belief that it was justified under the

contractual term in question. The court at first instance held that it was not, and this was

never appealed (in truth it was barely arguable). In the court of appeal it was argued that

this nevertheless did not amount to a renunciation of the contract, but was merely the

expression of an erroneous but bona fide belief as its meaning, and that the developers

did not evince an unequivocal intention not to be bound by the contract, even if they were

31

[1964] 2QB 699. 32

In fact the court held that the view was correct anyway, but this was an alternative ground for the

decision. 33

[1980] 1 WLR 277.

22

wrong. The court of appeal rejected this argument by a majority, but it succeeded in the

House of Lords on a 3-2 split decision34

.

20. It might be thought that service of a contractual notice of rescission, which turns out to be

unjustified, is an unequivocal act which necessarily evinces an intention not to be bound

by the true terms of the contract, whatever the precise circumstances of the case. This

was indeed the view of the minority: see especially per Lord Russell at 292A-G. However,

the majority held that this was not so and that, in all the circumstances of the particular

case, the developer did not evince an intention not to continue with the contract if it turned

out to be mistaken as its contractual right to serve the notice. 35

21. Chitty36

expresses the view that Federal Commerce and Woodar v Wimpey (both House

of Lords decisions) are difficult to reconcile. However, this may not be so on the facts. In

Federal Commerce the owners instructed the master to act in a way which would, in

breach of contract, have destroyed the commercial efficacy of the contract for the

charterers, during the period it so operated. Although the owners had referred the

deduction dispute to arbitration, and they argued that, if wrong on that dispute, they would

then have resumed contractual performance, they would still have acted in a manner

entirely inconsistent with the contract in the meantime.37

In contrast, in Woodar v Wimpey,

the parties anticipated that the vendor would challenge the notice, and this dispute would

then be determined well before the time for further performance (completion of the

contract for the sale of land). There was then sufficient material for the court to find that

the developer had not indicated that it would not perform that contract if the notice was

successfully challenged.

34

To the surprise of the successful developers’ own counsel, who ran the point only because they were

anyway arguing a third party damages point (which also succeeded obiter), and they had the benefit of a

dissenting judgment on this point in the court of appeal. The present writer knows this because he was the

then very junior counsel brought into the case at the House of Lords stage! 35

The circumstances are particularly set out by Lord Wilberforce at 281-2, and relate to the conversations

and correspondence between the parties which it was successfully argued meant in effect that the point

would be tested in court but that, if it was wrong, the developer would still perform the contract. 36

Chitty on Contracts 30th

ed at 24-019, n139. 37

Indeed, they did not claim that, if they were right as regards the deduction dispute, that would have

entitled them to give the master the instructions which they did. They simply used this as a means of

exerting pressure, albeit that they also argued (wrongly) that, as a matter of construction of the charterparty,

the master was entitled to act in this way anyway.

23

22. The real doubt about Woodar v Wimpey, it seems to me, is whether there is room for this

approach once a party has purported to rescind the contract. As Lord Russell put it at p

292B:

I deny that a clear case of the purported exercise of the power of rescission, a total

renunciation of all future obligation to perform any part of the contract …. can by any

circumstances be watered down or deprived of its repudiatory quality."

Moreover, could this approach also operate in the case of normal ―rescission for breach‖?

Where party B purports to accept party A‘s alleged repudiatory breach as terminating the

contract, and accordingly makes clear that he will not carry out any further performance of

his own, but it turns out that he was not entitled so to do (because A was not in breach or

that breach was not repudiatory), is this an unequivocal act, putting B himself in

repudiatory breach, or is there scope for B to show on the facts that he still intended to

perform the contract if wrong about A‘s alleged repudiatory breach, if the time for his own

performance has not yet arrived? So far as I am aware, no case has gone so far as to

extend this approach to such cases, and perhaps Woodar v Wimpey should be restricted

to cases of rescission pursuant to a purported contractual right.38

SECTION 4

CHOICES OPEN TO THE INNOCENT PARTY

23. The innocent party may choose to accept a repudiatory breach or repudiatory conduct

(renunciation or creation of impossibility) by the other party as terminating the contract.

This brings the contract to an end for both parties so that neither party is bound to render

38

This is consistent with Lord Wilberforce’s view that the purported exercise of such a right, in good faith,

even if it turned out to be wrong, was an invocation of the provisions of the contract rather than indication

of an intention to abandon it: see at p280G-H. It can be argued that this is different in kind from the case of

a purported, but erroneous, attempt to rescind for breach, where the right purportedly invoked is a right

conferred under the general law of contract rather then a right expressly conferred by the contract in

question.

24

further performance or accept any further performance by the other party under it.

However, the innocent party does not have to exercise his choice in this way. Instead,

whilst the contract remains executory,39

he may (normally at least40

) elect to treat it as

continuing, that is, ―affirm‖ it. If he does this the contract remains in being for both

parties41

, albeit the innocent party will normally have the right to sue (or claim a set off) in

respect of any damages which he can establish he has suffered by reason of the other

party‘s breach (where the breach has actually occurred, in contrast to cases of

renunciation). By definition, there can be no such choice in cases of impossibility created

by the party in default.

24. The innocent party must elect between these two choices. Having elected, that election is

irrevocable, without the need to establish detrimental reliance by the party in default.42

However, if the contract is affirmed, but the other party persists in renouncing it, or

commits further repudiatory breaches of it, the innocent party can thereafter rescind on

the basis of the continuing repudiatory conduct or new repudiatory breaches. Affirmation

requires both knowledge of the facts giving rise to the breach (or at least means of

knowledge) and knowledge of the party's legal right to choose between the alternatives

open to him. The law does not too readily find affirmation, and it is said that it must be

―clear and unequivocal‖. However, it may be express or implied by some unequivocal act

from which it may be inferred that the innocent party intends to go on with the contract

and not exercise his right to treat it as terminated. Accordingly, for example, he may be

able to call upon the other party to perform his obligations without this amounting to an

affirmation.43

Further, the innocent party does have a period of time, depending on all the

circumstances, to make up his mind, but, although mere inactivity for a while after breach

39

i.e. it has not been completely performed. 40

This may not always be the case, especially in employment law, when an employer cannot normally insist

on a repudiating employee continuing to work, or an employee (leaving aside specific statutory rights) insist

on a repudiating employer continuing to employ him. In other cases the innocent party may have no

practical choice but to accept the repudiation where he cannot complete the contract without the co-

operation of the other. 41

“An unaccepted repudiation is a thing writ in water”: Howard v Pickford Tool Co [1951] 1 KB 417 at

421. 42

Although it has been suggested that this may not be so in cases of anticipatory breach where, having

affirmed, the innocent party should still be able to change his mind and later rescind absent detrimental

reliance by the party in default: see Chitty at 24-004, n27. 43

Yukong Line v Rendsberg Investments [1996] 2 Lloyds Rep 604.

25

does not amount to affirmation, unless some activity is otherwise called for

44, ―if he does

nothing for too long, there may come a time when the law will treat him as having

affirmed‖45

.

25. If the innocent party affirms the contract he must normally perform his own contractual

obligations under it, and will be in breach if he does not. However, this will not be so if the

effect of the other party‘s breaches prevents performance of the innocent party's

obligations, or prevents them from becoming due, or constitutes a representation that

particular performance is no longer required, or is required in a different way, with which

the innocent party attempts to comply. However, controversially, even where the innocent

party no longer has to perform because the contract is wrongfully cancelled, and

performance is no longer required by the other party, the innocent party may continue to

perform his own contractual obligations and then sue for the price, rather than simply

claim damages.46

Further, the contract remains in being for both parties, so that the

innocent party takes the risk that the contract may come to an end in some other way

which is less favourable to him, e.g. by frustration47

or by his own repudiatory breach48

.

The party previously in repudiatory breach might also, of course, subsequently perform it,

despite a previous renunciation, or by remedying defective performance.

26. Accordingly, the innocent party will often have a difficult tactical choice to make. This will

depend upon all of the applicable circumstances, including his prospects of getting the

other side to perform, the risk that he himself may not be able to perform, or that the

contract might otherwise go off, and the damages which might be recovered either for any

existing breach, or following acceptance of any current or future repudiation, compared

with the contractual reward payable if the contract is performed49

. In addition, particularly

44

E.g. building contractor accepting employer’s wrongful termination by not returning to the site. 45

Per Rix LJ in Stoeznia Gdanska v Latvian Shipping [2002] 2 Lloyds Rep 436 at [87]. Affirmation may

also be statutorily regarded as having occurred by lapse of (reasonable) time, even where the innocent party

has no knowledge of the breach: see SOGA s 11(4), loss of right to reject. 46

The notorious White v McGregor case [1962] AC 413, where the advertisers continued to advertise for 3

years after cancellation and successfully sued for the price. 47

See, for example, Avery v Bowden (1855) 5 E & B 714 & (1856) 6 E & B 953. 48

See, for example, Fercometal Sarl v Mediterranean Shipping [1989] AC 788. 49

See, further, paragraphs 29 &30 below.

26

since the rise of the innominate term, a party purporting to accept a repudiation must also

sometimes bear the risk that the other party has not in fact repudiated, and that that

party's own purported acceptance itself amounts to a repudiation.

SECTION 5

INVOLUNATARY LOSS OF RIGHT TO TERMINATE: WAIVER BY ESTOPPEL

27. Notwithstanding the quite strict conditions required for an affirmation (as discussed in

paragraph 24 above), the innocent party may still involuntarily lose the right to accept the

repudiation as terminating the contract. This may occur where the innocent party

represents that he will not exercise his right to treat the contract as repudiated, or

conducts himself so as to lead the party in default to believe this, and the party in default

then acts on the basis of such representation or conduct. This may estop the innocent

party from thereafter relying upon the breach or repudiatory conduct as a repudiation.

This is sometimes referred to as ―waiver by estoppel‖.

28. Like an affirmation, this requires a clear and unequivocal representation by the innocent

party, by word or conduct, that he will not exercise his strict legal right to treat the contract

as repudiated. However, unlike an affirmation, election by waiver does not require the

innocent party to know (or have the means of knowledge) of the facts giving rise to his

right to terminate, or even of the existence of that right50

. It is sufficient that the party in

default relies upon the apparent election made by the representation and that it is

inequitable for the innocent party to go back on the representation51

.

50

Peyman v Lanjani [1985] Ch 457. 51

The court of appeal has even purported to dispense with this last requirement, on the basis that a party

cannot blow hot and cold and must act consistently, even if there is no detrimental reliance by the party in

default: see the Panchaud Freres case at [1970] 1 Lloyds Rep 53. However, this case can be explained on

other grounds, and subsequent cases have not supported this separate doctrine of consistency.

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SECTION 6

CONSEQUENCES OF DISCHARGE

29. As has already been said, where the innocent party accepts the repudiation as

terminating the contract, this brings the contract to an end for both parties, so that neither

party is bound to render further performance or accept any further performance by the

other party under it. The innocent party may then sue the party in default for damages for

failure to perform on the basis of loss of bargain, i.e. for the loss of profit which he would

have earned had the contract been duly performed. He can also sue for any past

breaches to the extent that he has suffered any separate losses not encompassed in his

loss of bargain claim. The right to sue for damages is of course in contrast to the

consequences of rescission ―ab initio‖, e.g. for misrepresentation, where the purpose of

that type of rescission is to put the parties back in the position as if the contract had never

been entered into, and hence each party‘s obligation is to restore the benefits received

from the other under the contract (restitutio in integrum).

3O. Where the repudiation takes the form of a renunciation, i.e. an anticipatory breach, the

innocent party may immediately accept it, and sue for damages, notwithstanding that the

time for performance has not arrived.52

The innocent party does not have to prove that he

was ready and willing to perform the contract at the date of renunciation, or would have

been able to perform it when the time for performance arrived53

. However, if the

repudiation is not then accepted, and there is a subsequent failure to perform, or the

repudiatory conduct is subsequently accepted, damages will fall to be assessed from the

date of the subsequent breach or acceptance, and may not be recovered in respect of

any loss arising solely between the date of the unaccepted repudiation and the later

breach or acceptance.54

52

See Hochster v De la Tour (1853) 2 E & B 678 and Johnstone v Milling (1886) 16 QBD 640. 53

Although this latter may affect the damages recoverable. 54

The second Avery v Bowden case above.

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Stephen Acton

Radcliffe Chambers,

11, New Square,

Lincoln‘s Inn,

London WC2A 3QB

29

DAMAGES: A REFRESHER ON BASIC PRINCIPLES

AND AN UPDATE ON SOME NEW PROBLEMS

A. General Principles

Compensatory Function

1. Lord Diplock said in The Albazero [1977] AC 774 at 841 that ―…the general rule in English law today as to the measure of damages recoverable for the invasion of a legal right, whether by breach of contract or by commission of a tort, is that damages are compensatory. Their function is to put the person whose right has been invaded in the same position as if it had been respected so far as the award of money can do so‖.

2. Damages are awarded not to punish the party in breach, nor to confer a windfall on the innocent party, but to compensate the innocent party and repair his actual loss. ―The rule in common law is that where a party sustains loss by reason of a breach of contract he is, so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed‖ – per Parke B in Robinson v Harman (1848) 1 ExCh 850 at 855.

3. Only in exceptional circumstances do courts depart from this policy and award some greater or lesser sum. Ordinarily there is just one measure of damages in contract, which is the loss truly suffered by the promisee.

Interests Protected

4. Money awards made in actions for breach of contract may protect one or more of three interests of the innocent party, namely (1) the expectation interest, (2) the reliance interest, and (3) the restitutionary interest. The distinction can be demonstrated by taking a simple example. Suppose a seller of goods wrongfully fails to supply them. If the buyer has a claim against the seller for loss of profit (the amount by which the value exceeds the price) these damages protect his expectation interest. The buyer‘s claim for expenditure wasted in an abortive attempt to collect the goods protects his reliance interest whilst his restitutionary interest is reflected in his right to recover money paid by him for the goods he does not get.

5. Nowadays, if a buyer claims damages based on having paid for something he does not get, he is often treated as suing on the basis of his reliance interest. If he seeks the return of a payment on the basis of a failure of consideration, this is now generally regarded as a purely restitutionary cause of action and less to do with the law of damages. I propose therefore to consider in a little more detail expectation and reliance damages before going on to look at other claims for consequential losses.

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6. Expectation damages compensate the claimant for failure to obtain some benefit he would have got under the contract had it been properly performed. Their measure is the value of the benefit the claimant failed to get. In the sale of goods example above it would be the difference between the value and the price of the goods. Similarly in the converse situation, where the buyer fails to accept, the seller claims the difference between the price and the value.

7. In order to obtain damages of this kind the claimant merely has to show breach by the defendant, and that, but for the breach, he would have gained some benefit he does not have now. What he does not have to show is that he knew of the term broken, and ―he need prove no actual reliance‖ on performance being forthcoming per Slade LJ in Harlington & Leinster Enterprises Christopher Hull Fine Art [1991] QB 564,584.

8. The claimant will however only recover that which is reasonable, his ―net loss‖. In the context of supply of services remedial costs may be deemed unreasonable and damages measured otherwise. This was the case in Ruxley Electronics v Forsyth [1996] AC 344. The claimant specified that a swimming pool should be 7‘ 6‖ deep at the deep end. The depth at that end was in fact 6‘. It would have cost over £20,000 to lower the deep end to the correct depth. The pool was otherwise functional and safe to use and its value was not diminished. The claimant was awarded only the sum of £2,500 for his disappointment in not receiving the pool of his choice.

9. Reliance Damages compensate for losses suffered by the claimant as a result of his having in some way relied on the contract being observed by the other party and being disappointed in that reliance – he would have acted differently if he had known that the contract would be broken and, had he done so, he would have avoided the loss in question.

10. Proof of reliance is crucial. So, a purchaser of property which his surveyor has overvalued in breach of contract cannot recover that loss if he did not rely on the surveyor‘s advice in entering into the transaction. Similarly, a litigant whose lawyer‘s negligence causes his claim to become statute-barred cannot recover if it shown that in fact he would not have proceeded with his action anyway.

11. Straightforward claims for wasted expenditure such as these often occur in cases of professional negligence or negligent misinformation. So, where a lender advances money on the basis of a negligent property valuation and subsequently loses part or all of it, his claim is that, if he had been properly advised, he would not have lent what he did – the client has relied on the professional to advise him properly and been disappointed in that reliance.

12. Another type of reliance loss occurs where the expenditure would have been incurred whether or not the contract was broken but has become wasted or abortive because the contract has been broken. Take for example the case of CCC Films (London) Limited v Impact Quadrant Ltd [1985] 1 QB 16: there the claimants paid the

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defendants $12,000 for a licence to distribute certain films. When the defendants failed to provide copies of the films, the claimants successfully sued for return of their $12,000.

13. It is the waste of expenditure rather than the expenditure itself which sounds in reliance damages. In this way they can compensate a claimant for pre-contract spending. In Anglia Television v Reed [1972] 1 QB 60 an actor agreed to appear in a television series but then realised that he was committed elsewhere and pulled out, thereby repudiating the agreement. The series had to be aborted and Anglia sued Reed for wasted expenditure, most of which had been incurred before the contract had been signed. It succeeded in recovering it because, according to Lord Denning MR, Reed must have realised that, if he broke the contract, all Anglia‘s expenditure would be wasted.

14. The claimant must show not only that his expenditure has been wasted, but also that it has been wasted as a result of the defendant‘s breach. In other words, causation must be proved. In C & P Haulage v Middleton [1983] 3 All ER 94 a licensee of premises for a period of six months spent substantial sums in improving them knowing that, by the terms of the licence, the benefit of the improvements would vest in the licensor. Having been wrongfully evicted he sought to recover his expenditure as damages for breach of contract. In rejecting the claim Lord Justice Fox said at page 100: ―While it is true that the expenditure could in a sense be said to be wasted in consequence of the breach of contract, it was equally likely to be wasted if there had been no breach‖. In other words the contract was a ―bad bargain‖ as far as the claimant was concerned.

15. Procedurally, once the innocent party has sought damages for wasted expenditure, the burden shifts to the contract-breaker to establish that the expenditure would have been wasted in any event – see CCC Films (above) per Hutchison J at 40D. Filobake v Rondo [2005] EWCA 563 was just such a case where the claimant was seeking as damages for wasted expenditure the price of a defective commercial pastry making machine and the defendant‘s position was that there was never a profit to be made by the claimant from the use of the machine. At paragraphs 60-62 Chadwick LJ summarised the position thus:

―[Filobake] could not prove what its profits would have been, so [it claimed that] it could fall back on claiming the expenditure that flowed from what…had been Rondo‘s breach in selling what was effectively a useless piece of equipment.

Rondo‘s principal…reply was based on C & P Haulage v Middleton, where…this court drew attention to two elementary principles of the law of damages: that an award of damages should not place the claimant in a better position than he would have been in had the contract been performed; and that any award, be it in terms of loss of profits or wasted expenditure, must quantify only damage that has been caused by the breach. It was said that Filobake‘s decision to purchase the equipment had been, in the colloquial language adopted in Middleton, a bad bargain. On the judge‘s findings Filobake would have lost money on the enterprise even if the equipment had operated fully as promised; or, to put the same point under a different legal characterisation, its loss, at least in terms of wasted expenditure, had been caused not by the breach but by its foolish decision to try to expand its business by buying the equipment.

In response to that,[Filobake] relied on the decision of Mr. Justice Hutchison in CCC Films… that once a breach of contract was established the burden passed to the contract-

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breaker to prove that it would not have caused loss. We would accept that proposition, which …represents the law.‖

16. Having reviewed the authorities, and the evidence before the trial judge, the Court of Appeal came to the conclusion that the burden was almost certainly discharged by the contract-breaker in that case and the appeal was dismissed for that and a number of other reasons.

17. Apart from expectation and reliance damages, the claimant can recoup from the defendant any other losses (or loss of profits) naturally resulting from the defendant‘s breach (Consequential Damages), for example loss of lucrative markets, loss of prospective profits, personal injury, damage to property, liability to third parties or to public charges, or loss of a cause of action due to solicitor‘s negligence.

18. The three different kinds of damages described above may arise as a result of the same breach of contract. They are not necessarily inconsistent with one another – two or more could be combined, though a court must take care to avoid double accounting. As we have seen above in the Filobake case, a victim of a breach of contract who cannot prove any loss of profit often chooses instead to sue for wasted expenditure. It has been suggested on this basis that reliance and expectation damages are true alternatives – see Anglia (above) per Lord Denning MR at 692 ―A plaintiff can either claim for his loss of profits or for his wasted expenditure. But he must elect between them. He cannot claim both.‖

19. A different interpretation had been put on it by the Court of Appeal in Cullinane v British Rema Manufacturing Co [1954] 1 QB 292. In that case sellers, in breach of contract supplied a clay pulveriser which was useless. Three years later the buyers sued for the wasted costs of acquisition and erection, plus the profits they would have made from using the machine had it worked properly. The majority held that both claims could not be sustained, not because the claims were alternatives but because, in order to make the profits, the buyers would have had to incur the capital cost. To give them both would therefore indemnify them twice for one loss.

20. It is important to bear in mind that a claimant is entitled to be put into the position he would have been in had the contract been performed, and no more. If, therefore, he elects to claim reliance damages he must give credit for any loss which he has avoided because the contract was not performed. So in CCC Films (above), while the judge held that the claimant could recover its $12,000 as damages, he also held that any recovery fell to be reduced in so far as the claimant would have made a loss in distributing the films had they been provided. However, as we have also seen above, he said that the burden of proving that loss lay with the defendant and, on the facts, it had not been satisfied.

Date of Assessment

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21. The normal date for the assessment of damages is the date of breach. That general rule accords with both the compensatory function of damages and the innocent party‘s duty to mitigate – later losses occurring after breach may be due to a failure to mitigate on breach. On the other hand, the duty to mitigate is merely a duty to act reasonably and, consistently with this, an innocent party may be allowed a period after breach in which to decide on his course of action. That naturally puts back the date on which damages are assessed.

22. For another example of where the date of assessment may be other than the date of breach see Carbopego-Abastecimento de Combustiveis SA v Amici Export Corp [2006] 1 Lloyds Rep 736 where the breach took the form of a failure to deliver but the parties obligations were not terminated by that fact and the breach was not accepted. So damages were not assessed at that point.

23. So, in contract, as in tort, the date of wrongdoing is merely a starting point for the assessment of damages. It is otherwise where the adoption of a later date is necessary to compensate the claimant and do substantial justice between the parties. That necessity might arise where the innocent party did not know of the breach at the time of its commission, or knew of the breach but was prevented by circumstances beyond its control from taking immediate steps to counter it. In these or similar events damages may be assessed at such later date as is appropriate in the circumstances. That may be the date when the breach was or could reasonably have been discovered, the date when the innocent party could reasonably have acted to combat it, or some other date between that of breach and judgment, including that of judgment itself. However, the timing of the assessment must be consistent with the innocent party‘s obligation to mitigate his loss.

24. Where the party in breach repudiates the contract before the time fixed for performance and the innocent party does not accept the repudiation, damages are assessed according to normal principles. The primary point of assessment is therefore the date on which performance was due. If the claimant‘s loss increases after the date of repudiation that loss is normally recoverable. This is consistent with the compensatory function of damages, protecting the innocent party‘s financial expectation by placing him in the position he would have occupied had the contract been performed.

25. Where repudiation occurs before the time for performance and is accepted by the innocent party damages are again assessed according to normal principles, the time of assessment being the date when performance was due. This necessarily involves an element of conjecture where the action is commenced before the date of performance, because the court is obliged to predict what the position would be had that future date already arrived.

26. The court may take into account any post-breach event which casts light on the innocent party‘s loss. For example, in Aitchison v Gordon Durham & Co (30

th June

1995, unreported) the Court of Appeal agreed that, when assessing damages payable by the builder to his co-developer for the builder‘s wrongful withdrawal from a joint development agreement, the judge was right to take account of site values and costs which were realised in an agreement made between a builder and a buyer of the site.

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27. The court may also take into account the chance of the occurrence of a future event which would, in the absence of the breach, have the effect of reducing the contractual benefit of the claimant. In Golden Straight Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] 2 AC 353 a charterparty for seven years from 1998 to 2005 contained a war clause entitling the charterer to cancel the charter in the event of war between certain countries including the UK, the USA and Iraq. In repudiatory breach of the charterparty the charterers redelivered the vessel to the owners in December 2001 and the owners accepted the breach as terminating the charter. So, at the date of breach the charter still had four years to run. Fourteen months later war broke out in Iraq.

28. The charterers contended that, if they had not repudiated, the war clause would have entitled them to cancel the charter on the outbreak of the Iraq war. The owners were therefore only entitled to damages for the fourteen months between the date of termination and the start of the war. Not surprisingly the owners contended for damages for the remaining four years of the charter.

29. All five members of the House of Lords accepted that, as a general rule, damages for breach or contract, or indeed tort, are assessed based on what is known at the date of the breach, or of the tort, but that the court could depart from this rule where it judged it necessary to do so to compensate the victim properly. They differed however as to whether the court was justified in departing from the general rule in the case of commercial contracts.

30. The majority held that the owners‘ right to damages ceased when war broke out. Lord Scott said that, if damages were assessed on the basis of what was known at the time of breach – rather than what was known at the time of assessment – the owners would be overcompensated.

31. The minority led by Lord Bingham would have awarded damages for the remaining four years of the charterparty. Contracts were made to be performed, not broken, the charterers ought to have paid damages promptly on termination and had they done so they would not have been able to avail themselves of the war clause argument, and the idea that a party‘s accrued rights could be altered by subsequent events militated against certainty and predictability in commercial transactions.

32. The result seems to be that, if a terminating event such as war, which, at the time of repudiation was a mere possibility, occurs between termination and the assessment of damages, it now stands to be treated as if it was inevitable. On the other hand, perhaps we are just seeing the courts being flexible in the assessment of damage. Commenting on the House of Lords decision in The Golden Victory in Tele2 International Card Co v Post Office [2008] EWHC 158 (QB) HHJ Seymour QC said at paragraph 258: ―the current state of the law is that damages for breach of contract fall to be assessed as at the date of the breach, but that in making that assessment, it is appropriate to take into account matters which have occurred and which impact upon the question how valuable the contractual

35

rights lost or broken would have proved to be, but for the breach of contract complained of.‖ Judge Seymour‘s approach to the assessment of damages in this case was approved by the Court of Appeal - [2009] EWCA Civ 9.

B. Tortious Damages Compared

33. Similarities:

Principle function of damages is compensatory

Assessed according to claimant‘s actual loss

Same test of causation

Damages normally assessed as at date of wrong

Deductions for betterment governed by same principles

Similar duty to mitigate

34. Differences:

In contract, damages only exceptionally awarded for distress, vexation, loss of enjoyment unrelated to physical inconvenience

Not normally awarded to compensate expectation interest – seek to restore claimant to position he was in before tort occurred

No defence of contributory negligence in contract cases

No punitive damages in contract cases

Foreseeability test more exacting in contract cases – in tort, a claimant need (generally) only show that the loss was reasonably foreseeable by the party in breach; in contract, the claimant may have to, at the time of the formation of the contract, give to the other party specific information about the type of loss the claimant is likely to suffer if the contract is broken

C. Restitutionary Claims/Accounting For Profits

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35. With breach of contract the court‘s primary concern is the victim‘s position and the not that of the wrongdoer. In awarding damages it seeks to put the victim in the position he would have been in had the contract been fulfilled, rather than ensuring the contract breaker is in no better position as a result of having breached than he would have been in had the contract been performed properly.

36. Occasionally, however, awards are made which seem to be aimed at recouping the defendant‘s gain rather than making good the claimant‘s loss. In Penarth Dock & Engineering v Pounds [1963] 1 Lloyds Rep 359 the defendants hired the claimants‘ wharf to store an old pontoon for a certain time, but failed to remove it when the time expired. Even though the claimants had no alternative use for the pontoon damages were set at a reasonable rate for the use of the wharf which the defendants had avoided paying.

37. Where, for example, a restrictive covenant in respect of land is broken, the practice is well-established of giving the owner of the dominant tenement damages based on a reasonable buy-out price, in other words, the amount for which a hypothetical reasonable owner might have been expected to release his rights – see Wrotham Park Estates v Parkside Homes [1974] 2 All ER 321.

38. It was in Attorney-General v Blake [2001] 1 AC 268 where an award of damages for breach of contract was genuinely aimed at requiring a defendant who had profited from the breach to account for that profit. In that case a convicted spy who had previously worked for MI6 was paid £100,000 for a book about his experiences. The information was in the public domain so that there was no breach of confidence, but he was clearly in breach of his contract with the Crown. Even though the Crown could establish no loss, it was held by a majority of the House of Lords to be entitled to damages based on his profits. Lord Nicholls, having restated the general rule restricting a contract claimant to his own loss, went on to say that there were ―many commonplace situations where a strict application of this principle would not do justice between the parties‖. For that reason, he said, it would be permissible in exceptional cases to award damages based on the gain to the defendant.

39. In an attempt to identify those exceptional cases he said that the court should consider ―all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought‖. He added that a useful general guide was whether the claimant had a legitimate interest in preventing the defendant‘s profit-making activity and hence in depriving him of his profit.

40. In the actual circumstances of the case Lord Nicholls was of the view that the reasons justifying the profit measure were that the case was similar to one of breach of fiduciary duty (for which an account of profits was available in equity) and that damages based on the Crown‘s loss would be unrealistic and inadequate. Lord Steyn concurred in the result but limited himself to saying that in the exceptional circumstances the remedy requested was in the interests of justice.

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41. In Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830, where the defendants published certain recordings of the late Jimi Hendrix in breach of a contractual agreement with the claimants compromising previous litigation, the claimants‘ counsel conceded that there was no evidence of financial loss on the part of his clients. The Court of Appeal was therefore called upon to consider the question whether, in these circumstances, the court could and should order an account of profits. Following Blake it declined to do so because, per Mance LJ, the case was ―not exceptional to the point where the court should order a full account of all profits made by the breach.

42. It nevertheless ordered the defendant to pay a reasonable sum for its use of the material in breach of the settlement agreement, being the amount the claimant could reasonably have demanded for a relaxation of the contractual restrictions. Peter Gibson LJ decided that a gains-based remedy was justified by the defendant‘s breach for its own reward, the claimant‘s difficulty in establishing loss and its legitimate interest in preventing the defendant‘s profit making activity in breach of contract.

43. In WWF World Wide Fund For Nature v World Wrestling Federation Entertainment Inc [2008] 1 All ER 74 where the former had sued the latter in respect of its use of the initials ―WWF‖, Chadwick LJ expressed the view that, in the light of the judgments in the Experience Hendrix case, it must now be regarded as settled in the Court of Appeal that, on a claim by a covenantee for an injunction and damages against a covenantor who has acted in breach of a restrictive covenant, the court may, in addition to granting an injunction to restrain further breaches, award damages in respect of past breaches notwithstanding that the covenantee cannot establish actual financial loss.

44. The current position is well summarised by these further comments of Lord Justice

Chadwick in the WWF case:

―When the court makes an award of damages on the Wrotham Park basis it does so because it is satisfied that that is a just response to circumstances in which the compensation which is the claimant‘s due cannot be measured (or cannot be measured solely) by reference to identifiable financial loss. Lord Nicholls‘ analysis in Attorney General v Blake demonstrates that there are exceptional cases in which the just response to circumstances in which the compensation which is the claimant‘s due cannot be measured by reference to identifiable financial loss is an order which deprives the wrongdoer of all the fruits of his wrong. The circumstances in which an award of damages on the Wrotham Park basis may be an appropriate response, and those in which the appropriate response is an account of profits, may differ in degree. But the underlying feature, in both cases, is that the court recognises the need to compensate the claimant in circumstances where he cannot demonstrate identifiable financial loss. To label an award of damages on the Wrotham Park basis as a ―compensatory‖ remedy and an order for an account of profits as a ―gains-based‖ remedy does not assist an understanding of the principles on which the court acts. The two remedies should, I think, each be seen as a flexible response to the need to compensate the claimant for the wrong which has been done to him.‖

D. Exemplary Damages

45. Unlike various classes of damages discussed elsewhere in this paper, exemplary damages are not compensatory in nature. They are awarded at the discretion of the court

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which, according to Lord Devlin in Rookes v Barnard [1964] AC 1129 at 1227C should be exercised ―whenever it is necessary to teach a wrongdoer that tort does not pay‖. The jurisdiction is not however limited to punishment – it is also used to deter others and to make clear that, per Lord Hutton in Kuddus v Chief Constable of Leicestershire Constabulary [2002] AC 122 at paragraph 79, ―the courts will not tolerate such conduct.‖

46. The Supreme Court of Canada has in the recent past allowed exemplary damages for breach of contract in exceptional circumstances in the cases of Royal Bank of Canada v W Gott & Associates (2000) 178 DLR (4

th) 385 and Whiten v Pilot Insurance Co (2002)

209 DLR (4th) 257. In this country their recovery was effectively prevented by the House

of Lords decision in Addis v Gramophone Co [1909] AC 488, a case of wrongful dismissal where the claimant was seeking such damages for injury to his feelings in circumstances where the dismissal was carried out in a humiliating manner.

47. Lord Devlin identified the three categories of case where an award could however be made, in Rookes v Barnard [1964] AC 1129. The first is where there is oppressive, arbitrary or unconstitutional conduct by a government servant; the second is cases where the defendant‘s conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the claimant; and the third is express authorisation by statute. It is plainly the second category which is relevant in the context of commercial disputes.

48. The second category was considered slightly more recently in Broome v Cassell [1972] AC 1027. There the House of Lords concluded that the fact that the wrongful conduct occurred in a business context was not enough on its own to bring the case within Lord Devlin‘s second category. It must additionally be shown that the defendant made a decision to proceed with the conduct knowing it to be wrong, or being reckless as to whether or not it was wrong, because the advantages of going ahead outweighed the risks involved. However, the calculation involved in the second category is not intended to be of the mathematical kind conducted when, for example, preparing a balance sheet.

49. Lord Devlin referred in Rookes to the three matters always to be borne in mind when considering an award of exemplary damages: (1) the claimant must be the victim of the impugned conduct; (2) awards should be moderate; and (3) the defendant‘s means. Other factors to be taken into account include: (1) the conduct of the parties, down to the date of judgment; (2) the amount awarded to the claimant as compensation; (3) any criminal penalty imposed on the defendant – punishing twice for the same misconduct offends against basic principles of justice; (4) the position of joint and vicarious wrongdoers.

50. Exemplary damages may be awarded even though they exceed the amount of the gain made by the tortfeasor. As Lord Diplock said in Broome at page 1130C:

―To restrict the damages recoverable to the actual gain made by the defendant if it exceeded the loss caused to the plaintiff would leave a defendant contemplating an unlawful act with the certainty that he had nothing to lose to balance against the chance that the plaintiff might never sue him or, if he did, might fail in the hazards of litigation. It is

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only if there is a prospect that the damages might exceed the defendant‘s gain that the social purpose of this category is achieved – to teach the wrong-doer that tort does not pay.‖

E. Mitigation

51. The claimant must take all reasonable steps to mitigate the loss which he has sustained consequent upon the defendant‘s wrong, and, if he fails to do so, he cannot claim damages for any such loss which he ought reasonably to have avoided: British Westinghouse v Underground Electric Railways [1912] AC 673 at 689 per Viscount Haldane LC. Where the defendant alleges that the claimant has failed to take such steps the burden of proof is upon him; Roper v Johnson (1873) LR 8 CP 167 at 181 per Brett J.

52. If, in taking such steps, the claimant incurs expenses or further loss, he may recover such expenses or further loss from the defendant, even if the resulting damage is greater than it would have been had the mitigating steps not been taken: Banco de Portugal v Waterlow & Sons [1932] AC 452 at 506 per Lord Macmillan.

53. Whether a claimant has acted reasonably is a question of fact in the circumstances of each case. So, for example, in Hussey v Eels [1990] 2 QB 227 the purchaser of a bungalow, which he had bought in reliance on a misrepresentation, was under no duty to obtain planning permission for the construction of new houses on the land, and the profit made on the sale of the land was not deducted from the damages he recovered.

54. In cases of breach of contract the claimant is under no obligation to do anything other than in the ordinary course of business. ―Where he has been placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the defendant whose breach of contract has occasioned the difficulty‖ per Lord Macmillan at page 506 in Banco de Portugal.

55. Neither is a claimant obliged to risk his money too far. He need not seek to recover compensation from a third party who, in addition to the defendant, is also liable to him, and he need not seek to lessen his loss by embarking on complicated and difficult litigation against a third party, even if he is given an indemnity as to costs by the defendant. In Pilkington v Wood [1953] Ch 770 a house purchaser found that, due to his solicitor‘s negligence, he had acquired a defective title. It was held that he was not required to sue the vendor for breach of covenant of title before suing his solicitor.

56. In sale of goods actions the claimant often has to mitigate his loss by going into the market, where one is available, and buying and selling as the case may be,. It may also be the claimant‘s duty to mitigate his loss by accepting an offer by the defendant to supply the goods on different terms, or where the goods do not comply with the contract terms, to buy them back.

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57. In the employment context, a claimant who has been wrongfully dismissed must take reasonable steps to obtain suitable alternative employment. He must accept employment which, having regard to his standing, experience and personal history, he can reasonably be expected to accept, even if this means at a lower remuneration. Where the defendant himself offers the claimant alternative employment it may be reasonable for the claimant to refuse the offer if, having regard to the dispute between them, he could not reasonably be expected to work for the defendant again.

58. Where the claimant‘s property has been damaged, the cost of repair is the usual measure of damages. If, however, the cost of such repair will exceed the value of the property the claimant must mitigate his loss by replacing the property. If he chooses nevertheless to repair the property he can only recover the cost of replacement from the defendant.

59. Where the claimant has taken more steps in mitigation than were required of him, and has thereby reduced, or further reduced, his loss, the defendant may take advantage of the reduction unless the steps in mitigation were completely unrelated to the original wrong. In British Westinghouse the turbines purchased to replace the deficient ones supplied by the defendant were superior and led to increased profit for the claimant. It was held that this increased profit should be brought into account in assessing the damages due from the defendant.

F. Remoteness/Foreseeability

60. The general principle is as follows: In the absence of some special statutory or contractual provision, the damages to which an innocent party is normally entitled in respect of a breach of contract are such as may fairly and reasonably be considered either as arising naturally (that is according to the usual course of things) from the breach, 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: Hadley v Baxendale (1854) 9 Exch 341 per Alderson B at 354.

61. There are thus two aspects to the principle: (1) those losses which result from normal or usual or everyday circumstances, and (2) those which result from special or unusual or extraordinary circumstances not predictable in the ordinary run of events. The former are deemed to be within the knowledge of every reasonable person entering into a contract and therefore require no pre-contract communication from one party to the other for their recoverability. The latter are not deemed to be within the knowledge of the party in breach and will only therefore be recoverable where there has been such communication and he has the requisite special knowledge.

62. More recently the principle has been analysed as stating a single rule. In Victoria Laundry (Windsor) Ltd v Newman Industries [1949] 2 KB 528 it was said at page 539 that ―… in cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as likely to result from the breach…what was at the time reasonably so foreseeable

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depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach…‖

63. The House of Lords developed the principle and explained the words of Alderson B ―in the contemplation of both parties at the time they made the contract‖ in the case of Czarnikov v Koufos (The Heron II) [1969] 1 AC 350. Lord Reid said at page 385F: ―The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.‖

64. The reference by Lord Reid to contemplation of ―loss of that kind‖ refers to broad types or general categories of loss rather than to precise particulars or forms of loss. Lord Justice Scarman made it clear in Parsons v Uttley Ingham [1978] QB 791 at 806 that it was merely the type of consequence, not the specific consequence, which needed to be contemplated.

65. The House of Lords had reason to revisit this area of the law recently in Transfield Shipping v Mercator Shipping (The Achilleas) [2009] 1 AC 61. In that case time charterers had agreed to redeliver the vessel to its owners by the 2

nd May 2004. On the

21st April 2004 the owners therefore agreed to charter it to new charterers on terms that

the latter could cancel the charterparty if the vessel was not available by the 8th May 2004.

By the 5th May 2004 it became obvious that she would not be redelivered by the 8

th May

2004. So the owners negotiated an extension of the new charterparty‘s cancellation date to the 11

th May 2004. By that time however hire rates had fallen considerably and they

were forced to accept a reduction in the daily rate from $39,500 to $31,500.

66. The owners claimed damages for loss of the original terms of the new charterparty at the difference between the original rate and the reduced rate. Over the duration of the charterparty this produced a figure of $1.365m. The charterers admitted the breach but contended that they only had to pay damages at the market rate for the six days the owners were deprived of the vessel – only $158,301.

67. It was common ground that the owners‘ loss of the original terms of the charterparty was caused by the charterers‘ breach and that, at the time the charterparty was made, it was foreseeable that the late return of the vessel was likely to result in the type of loss which in fact occurred, namely the loss of the vessel‘s next employment. Therefore, applying the general principle in Hadley v Baxendale, as developed and explained in the Heron II, one would have expected the owners to have recovered their entire loss. The House of Lords, however, held that the damages payable were limited to the market rate of hire for the six days.

68. The majority held that foreseeability of the type of loss suffered was not the correct test. Rather, one should ask whether, at the time the contract was made, the loss was of a

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type for which the contract breaker ought fairly to be taken to have accepted responsibility. That was what was meant by the words of Alderson B in Hadley v Baxendale such damages were recoverable ―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‖.

69. To determine the liability for damages assumed by the parties one had to interpret the contract as a whole in its commercial setting. On the facts, the charterers could not be taken to have assumed responsibility for the loss of a following charterparty in respect of whose timing, duration and hire rate they could have no knowledge or control. Depending on market fluctuations, such assumption of responsibility could result in an enormous claim for a minor breach.

70. The decision in The Achilleas has resulted in much debate and discussion about remoteness of damage and whether a new test of ―assumption of responsibility‖ for a particular type of loss had been introduced by at least a majority of their Lordships. In the Amer Energy [2009] 1 Lloyds Rep 293 Mr Justice Flaux did not consider that any new test had been laid down. Mr Justice Hamblen in Sylvia Shipping Co Limited v Progress Bulk Carriers Limited [2010] EWHC] 542 (Comm) (The Sylvia) took a similar view and indicated that the orthodox approach to remoteness of damage remained the ―standard rule‖ and that it is only in relatively unusual cases such as The Achilleas itself where a consideration of assumption of responsibility might be required.

71. One further important development in recent times is in relation to impecuniosity. The position had been that a claimant‘s lack of means was not to be taken into account in assessing his loss on the grounds that it was too remote – see The Liesbosch [1933] AC 449. In Lagden v O’Connor [2004] 1 AC 1067 Lord Hope expressed the view that such an approach was no longer appropriate - if an innocent claimant‘s impecuniosity means that he has to avail himself of the services of a credit hire company, so that the expense he incurs in procuring a substitute vehicle is greater than ordinary car hire, those costs are still recoverable by the claimant from the defendant.

Simon Williams

Radcliffe Chambers