UNL1622 – CONTRACT LAW II  TITLE: REMOTENESS

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Introduction

In an action to recover damages for a breach of contract, there has to be a sufficient connection between the breach and the loss where it must be caused from the breach of contract.

‘Remoteness’ refers to the test of causation that is used to determine the loss caused by a breach of contract.

It limits the ability of the plaintiff to recover damages to not too remote losses.

Generally, damages would not be considered as remote if the loss suffered was, arising naturally and reasonably foreseeable, and in an unusual loss technically unforeseeable but due to the defendant’s knowledge, was foreseeable. Hadley v Baxendale established the test for remoteness in essence, a test for foreseeability.

This means that the loss will be recoverable only if it was in contemplation of the parties. It ought to be not unlikely to happen, not just merely possible of happening

There are two limbs from this judgment. The first limb gives the right to the claimant in the situation that he is suffering loss which is caused by the breach of contract to the losses which are in the reasonable contemplation of the parties, as at the moment the contract is made.

The losses are arising naturally from the breach of contract, in that damage is an inevitable consequence of the breach and this is also known as direct loss. The second limb allows the claimant for the recovery of the loss which is in contemplation by the parties as at the date of the contract. This is known as consequential loss

In Malaysia, the principle of remoteness of damages is stated in section 74(1) of the Contract Act 1950

It is a statutory codification of the common law rule as stated in Hadley v Baxendale. Section 74(2) reinforces the principle by stating as follow:

“Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.”

Problems of Remoteness Confronted in Remoteness under Common Law

The leading case on remoteness of damages in contract law continues to be the 1854 decision of the Exchequer Court in Hadley v. Baxendale as discussed above.

This principle is upheld in the case of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd. In this case, the court held that the loss for which a plaintiff seeks to recover must be reasonably foreseeable, at the time of the contract, as liable to result from the breach knowledge possessed by the parties had been used to determine what was reasonably foreseeable by the parties.

The knowledge possessed by the parties was divided into two kinds, that is, imputed knowledge and actual knowledge.

However, the rule in Hadley v Baxendale is confronting some problems as it is quickly proved to be incomplete. In Gee v. Lancashire and Yorkshire Railway Co., Wilde B. Said:

“ I think that, although an excellent attempt was made in Hadley v. Baxendale to lay down a rule on the subject, it will be found that the rule is not capable of meeting all cases; and when the matter comes to be further considered, it will probably turn out that there is no such thing as a rule as to the legal measure of damages applicable in all cases.”

As a result, case of Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) compounded confusion in respect of the principle of remoteness of damages as it established a new legal test for remoteness instead of applying rule in the Hadley’s case.

In this case, the time charterer of a ship was nine days late in redelivering the ship to the owner’s disposition. The owner had meanwhile made a very profitable contract to charter the ship to another charterer following on at the end of the defendant’s charter.

The consequence of the defendant’s delay under the first charter was that the second charterer became entitled to cancel its contract because the ship could not be made available on the agreed date.

A compromise settlement was made between the owner and the second charterer, but, freight rates having declined in the meantime, the owner lost a large part of the benefit of the very profitable follow-on contract.

The arbitrators by a majority held that the owner was entitled to compensate for the loss by applying the rule in the Hadley’s case and this decision was upheld in the high court as well as the court of appeal, but reversed in the House of Lords.

The lower tribunals imposed liability by the reason that it was readily foreseeable, or highly probable that the owner would enter into follow-on contract. It is because the owners generally would not choose to keep their ships idle and such contract definitely would be lost if the delivery date was missed.

However, the defendant argued that there was a general understanding which was long-standing in legal and business shipping circles that charterers in such circumstances never had paid, and were never expected to pay more than the market freight during the period of the delay.

Regard to this argument, the arbitrators, in majority, agreed that there was such general understanding but this understanding was held to be legally irrelevant.

The confusion arose when the decision of the case from tribunals was reversed in the House of Lords and there were varying approaches applied by judges in formulating the judgment. In particular, Lord Hoffman and Lord Hope appeared to propose a new approach to the remoteness test.

Lord Hoffman decided that the determining factor was whether or not the party in breach had agreed to assume responsibility for losses of the type claimed.

Lord Hope agreed that the determining factor was whether the loss was the kind of loss which the party could be assumed to have taken responsibility, in the view of a reasonable man

Lord Rodger, with the support of Baroness Hale, adopted a more orthodox approach where he confined himself to the question of whether the loss could have been reasonably contemplated by the charterers.

This approach was also knows as reasonable contemplation approach. In short, forseeability was held not always to be, in isolation, an appropriate approach in ascertaining remoteness.

This judgment has brought an immediate result of great deal of discussion in legal circles. In Transfield Shipping Inc ‘s case, the house of Lords had treid to give the shipping world certainty by putting a limit to a charterer’s exposure to the extent of any delay and not to any loss or damage of business suffered by the owner as a result.

However, the judgment was incomplete as it had established a requirement for the assumption of responsibility by the parties in the contract but at the same time it was not clear that such assumption would be confirmed or negated under what facts or what circumstances.

This had left the rest of the world in confused. Had the judgments altered the previous test for remoteness which established in the Hadley’s case and if so, which of the opinions from the judges set out the revised test?

Therefore, the 2008 edition of Chitty on Contracts provided an opinion that the approach which was taken in Transfied’s case would be merely applied in exceptional circumstances.

Solutions for Problems Confronted in Remoteness under Common Law

The law on remoteness of damages is based on the rule established in Hadley v Baxendale and this rule is generally applied by the cases for remoteness for the loss which is within the reasonable contemplation of the parties at the time the contract was made.

However, in 2008, the judgment in Transfield Shipping Inc’s case has caused some confusion as the judgment was incomplete.

Nevertheless, in order to solve this situation, In Sylvia Shipping Co Limited v Progress Bulk Carriers Limited the High Court has held that the House of Lords' decision in Transfield Shipping Inc’s case did not establish a new remoteness test for damages in contract.  

In this case, Progress Bilk Carriers (Progress) was chartered a vessel by Sylvia Shipping (Sylvia). Progress sub-chartered the ship to Conagra Trade Group. However, Sylvia failed to maintain parts of the ship and the ship was not ready to be delivered to Conagra on time.

Progress claimed against Sylvia for the loss of profit on the cancelled sub-charter between Progess and Conagra as Sylvia was breach of contract. An award was made by the Arbitral Tribunal in favour of Progress.  

As a result, Sylvia appealed and the issue to be determined by High Court was whether the Tribunal had applied the correct remoteness test.

Sylvia argued that the test in Transfield Shipping Inc’s case (The Achilleas) should be applied whereas the Tribunal had applied the test established in Hadley v Baxendale.Mr Justice Hamblin in the High Court held that the Tribunal had applied the correct test.

He held that there is no new generally applicable legal test of remoteness of damages"

The judge stated:

"The orthodox approach remains the general test of remoteness applicable in the great majority of cases. However, there may be "unusual" cases, such as The Achilleas itself, in which the context, surrounding circumstances or general understanding in the relevant market make it necessary specifically to consider whether there has been an assumption of responsibility. This is most likely to be in those relatively rare cases where the application of the general test leads or may lead to an unquantifiable, unpredictable, uncontrollable or disproportionate liability or where there is clear evidence that such a liability would be contrary to market understanding and expectations. In the great majority of cases it will not be necessary specifically to address the issue of assumption of responsibility. Usually the fact that the type of loss arises in the ordinary course of things or out of special known circumstances will carry with it the necessary assumption of responsibility."

Therefore, the decision in Transfield Shipping Inc’s case does not establish a new remoteness test for damages in contract.

Generally, that the Hadley v Baxendale test remains the standard rule of remoteness and it is only in relatively unusual cases where a consideration of assumption of responsibility may be required

Problems of Remoteness Confronted in Remoteness under Section 74

In Malaysia, the principle of remoteness of damages is stated in section 74(1) of the Contract Act 1950.

As what stated in the introduction, remoteness in contract is depending on the foreseeability and causation test established in Hadley v. Baxendale.

Thus, there is no specific rule or determination from the court to consider the remoteness of damage in a contract although there is a main principle, but the court still has the discretion to build up a new approach depart from the main principle, for instance the decision from the case of of Transfield Shipping Inc v Mercator Shipping Inc

However, there is always confusion between remoteness and measure of damage. Measure of damage is actually used to determine the compensation to the victim in the breach contract which the wrongful party need to pay the damage or so called loss of damage, to the victim.

Generally, the victim will be the claimant of such cases. There are various ways to apply the measure of damage, for instance, it can be measured by law or regulation, by previous implicit or explicit contract, or by custom and practice of trade.

In the other words, measure of the damage can be considered as substitution for a complete contract. There might be incomplete contract sometimes, the measure of damage will be applied to determine roughly on what is the explicit agreement that would be the outcome of full contract.

Thus, the significant similarity between remoteness and measure of damage is both are used to determine the damage of contract.

Nevertheless, the damage should be remote in order to claim the compensation. If the damage is remote, measure of the damage will be used to determine how much should be wrongful party compensate the claimant.

But yet, there are still people confuse among remoteness and measure of the damage due to some unexpected circumstances

In the case of Scandinavian Bunkering (Singapore) Pte Ltd v. Misc Bhd, the defendant had made an agreement with Marinehub Sdn Bhd on purchasing the fuel oil for marine, but due to financial crisis, defendant refused to continue the agreement which defendant refused to purchase the fuel oil and the defendant had saved a lot of money for the refusal.

Prior to that, Marinehub Sdn Bhd had enteedr into contract with plaintiff to supply the fuel oil to defendant. The refusal of continuing the contract made plaintiff falling into trouble and therefore the plaintiff brought the case to the court which against the defendant for not accepting the delivery and terminating the contract with wrongful action.

Regarding the issue of whether remoteness or measure of damage should be applied, the Court of Appeal stated that as the plaintiff specifically claim on either general or special damage, it is falling under the measure of damage but not remoteness.

Solutions for Problems Confronted in Remoteness under Section 74 

Generally, the court will clarify whether remoteness or measure of damage should be applied in the unexpected situations or conflicts of law.

The provision under section 74 of the Contract Act 1950 should be interpreted more such as which damage is covered under this provision and the interpretation of such damage should be understood by the parties and the counsel in order to specify the issue in the case.

Back to the case of Scandinavian Bunkering (Singapore) Pte Ltd v. Misc Bhd, the Court of Appeal stated that as the plaintiff specifically claim on either general damage or special damage, it is falling under the measure of damage not remoteness.

From here, we know that in order to specify whether which principle should be used in a case, we need to understand what the claimant wants at the first instance then we can make the issue based on what the claimant wants.

To be noted that, if the loss or damages is caused naturally by defendants who breach the contract term which they know they should not breach, the issue of the case should fall within the scope under section 74 of Contract Act 1950.

This can be seen from the case of Caltex Oil Malaysia Ltd v. Suria Murni (Selangor) Sdn Bhd & Another Case, which the court held that the loss naturally arose from the defendant’s breach of the contract term should fall in ambit of section 74 of Contract Act since the defendant had done something which precluded the plaintiff from getting something or the defendant already knew the use of the contract and yet still breach it.

Conclusion

In short, Hadley v Baxendale remains the standard position on remoteness of damage under English law.

The Transfield case (The Achilleas) did not change the general law although it did suggest that in some cases, if the Court concludes that the standard approach does not reflect the expectation or intention reasonably imputed to the parties, the Court may deviate from the standard rule.

The judgment in Slyvia Shipping helpfully clarifies the uncertainty created by the House of Lords' decision in The Achilleas. 

The application of The Achilleas decision is now restricted to cases where exceptional circumstances justify a requirement that the party seeking "first limb" damages also demonstrate that the party in breach of contract assumed responsibility for the loss in question.

In the vast majority of cases, claimants will not have to demonstrate that the defendant accepted liability for the loss suffered. 

In determining how much to award, the Court will always considers two matters, firstly the measure of damages and secondly the remoteness of damages.

The measure of damages is quantum or the amount of money or lump sum that must be awarded while the remoteness of damages is the proximate cause of the breach.

Journals

The journal referred is Developments in Foreseeability and Remoteness: The Limits of Contract Damages written by Waddams, Stephen Michael in 2009.

This journal is discussing the leading case on remoteness of damages in contract law, which is Hadley v. Baxendale.

The rule in Hadley v. Baxendale quickly proved to be incomplete. Transfield Shipping Inc v. Mercator Shipping Inc. (The Achilleas) also has been discussed.

The author explains the judgment from Lord Hoffmann, Lord Hope, Lord Rodger, Baroness Hale and Lord Walker in details.

The author is then discussing the effects of The Achilleas towards the development of remoteness in Canada.

The second journal referred in this assignment is Remoteness of damage and assumption of responsibility written by Stephen Brett.

This journal discusses the case of Transfield Shipping Inc v. Mercator Shipping Inc in details.

Firstly, it states the background of this case and the judgments from the House of Lords. Then, it discusses the perceived consequences of the case and how the principle of the case can be applied in other cases.

It also discussed about how the Transfield case change the law but however it is stating that Transfiled case should not change the general position at law.