Edinburgh Centre for Commercial Law Annual Lecture – Lord Hoffmann

With less than a month to go before the annual Edinburgh Centre for Commercial Law lecture, those in the Centre are eagerly anticipating the opportunity to hear Lord Hoffmann’s thoughts on remoteness of damages in contract (the event is ticketed, and those wishing to obtain a ticket should contact myra.reid@ed.ac.uk).

This is not the context within which to provide a full analysis of the case decided last year by the House of Lords on this topic (Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48). Nor would one wish to pre-empt anything to be said by Lord Hoffmann in his Centre lecture.  It may, however, be appropriate to provide a few thoughts here in this blog in order to get our minds working about remoteness of damages in contract before the day of the lecture (12 May).

Lord Hoffmann encourages us to ask ourselves what remoteness rules actually are.  What is their purpose? He states [at para 9]:

“The case therefore raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable (“not unlikely”) an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?”  

Choosing the latter option he later explains [at para 12]:

“It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken.  It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.”

Remoteness as the voluntary assumption of responsibility is also a key issue for Lord Hope.  In this case, a charterer breached a contract by failing to return a ship to the owner timeously on the expiry of the charter, causing the owner loss through the owner’s inability to honour a subsequent charter according to its terms.  He states [at para 34]:

“So it can be assumed that the party in breach has assumed responsibility for any loss caused by delay which can be measured by comparing the charter rate with the market rate during that period.  There can be no such presumption where the loss claimed is not the product of the market itself, which can be contemplated, but results from arrangements entered into between the owners and the new charters, which cannot.”

Lord Rodger’s approach can be characterised as a classic application of remoteness precedents.  Providing close analysis of the judgment of Alderson B in Hadley v Baxendale (1854) 9 Exch 341, he emphasises the unusual nature of the circumstances which had combined to make the owner’s loss an extensive one.  He adds what is, it seems, an unavoidable conclusion that “…it would not …make good commercial sense to hold a charterer liable for such a potentially extensive loss which neither party could quantify at the time of contracting.” [para 61]

So far, so good.  If I have the opportunity I would like to ask for Lord Hoffmann’s thoughts on a different part of his speech.  He indicates [at para 14] that before even applying the normal test for damages, i.e. that damages are designed to put the innocent party, so far as possible, in the position as if the contract had been performed, one should ask a different question.  That question is whether the loss for which the compensation is sought is of a “kind” or “type” for which the contract breaker ought fairly to be taken to have accepted responsibility.  This test will be familiar to those who have read the valuer’s negligence case of South Australia Asset Management Corpn v York Montague Ltd [1970] AC 191, 211.  Lord Hoffmann’s colleagues on the bench did not seem to share his views on this point (Lord Rodger, for example, indicating at para 63 that he had not found it necessary to explore the issues concerning this case which Lord Hoffmann had raised).  Whether it is correct to ask this question at the very start of a contractual damages analysis is an issue which needs to be resolved.  No doubt we will have the opportunity to discuss this and many other interesting issues on the night itself.