Contractual Damages: Developments after Transfield

The English law on damages for breach of contract was discussed recently in the decision in Transfield Shipping v. Mercator, briefly discussed in this post. Transfield re-analysed the leading decisions on contractual damages beginning with Hadley v. Baxendale. The principles have been recently restated by the Court of Appeal in Supershield Ltd. v. Siemens Building Technologies, in the following words:

“The law on remoteness of damage in relation to claims for breach of contract is grounded on the policy that the loss recoverable by the victim should be limited to loss from which the party in breach may reasonably be taken to have assumed a responsibility to protect the victim. It follows that the question of remoteness cannot be isolated from consideration of the purpose of the contract and the scope of the contractual obligation... In Transfield Shipping the lateness of charterers in the redelivery of a vessel resulted in the owner having to re-negotiate a follow-on charter to its detriment. Arbitrators found that loss of such a kind was not unlikely. The House of Lords held that the damages recoverable by the owners were limited to the period of overrun and should not include any subsequent loss…. Lords Hoffmann and Hope took a broader approach. Developing the theme of his speech in South Australia, Lord Hoffmann said (at 24-25) that the rule in Hadley v Baxendale, as explained in Czarnikow v Koufos, is not inflexible; it is intended to give effect to the presumed intention of the parties and not to contradict them. Although the arbitrators had found as a fact that the owner's loss after redelivery was foreseeable, the question whether that loss was one for which the charterer assumed contractual responsibility involved the interpretation of the contract as a whole against its commercial background… Hadley v Baxendale remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, South Australia and Transfield Shipping are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties. In those two instances the effect was exclusionary; the contract breaker was held not to be liable for loss which resulted from its breach although some loss of the kind was not unlikely. But logically the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances…”

The decision may have important bearing on understanding how reasonable forseeability impacts the analysis of remoteness. I will have a detailed note up later this week, looking also at the Indian law on the point.