| Date | 16 February 2005 |
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| Judgment | Jackson v Royal Bank of Scotland, House of Lords 26 January 2005 |
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| The Issue | Examining the question of remoteness of damages for breach of contract. |
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| Implication |
The test for remoteness of damages is to be made at the time the contract is made and not at the time of the breach. |
printThe 1854 case of Hadley v Baxendale identified certain time honoured rules for testing the remoteness of damages flowing from a breach of contract. These rules are very familiar to every student of contract law and indeed many would be able to recite them by heart. It is surprising therefore to find a case in which the House of Lords has held that the Court of Appeal has misunderstood the rules. This was the finding of the House of Lords in the recent decision in the case of Jackson v Royal Bank of Scotland. The case does not concern the construction industry but its principles would equally apply to the assessment of damages for breach of a construction contract. The rules set out in Hadley v Baxendale are as follows. "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it". The effect of these rules is that when there is a breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of making the contract reasonably foreseeable as likely to result from the breach. Hadley v Baxendale is therefore not so much concerned with the quantification of damages but rather with the character or the nature of the loss which is recoverable in an action for breach of contract. Thus, if the loss is of a type which is too remote or unforeseeable at the time of making the contract, it will be unrecoverable as damages. Jackson traded under the name of Samson and imported dog chews from Thailand. Samson sold the dog chews on to a customer in the UK named Economy Bag. Payment was arranged on the basis of transferable letters of credit raised by the Royal Bank of Scotland naming Samson as the primary beneficiary. Broadly, the Bank would pay Samson under the letters of credit upon production of a relevant invoice together with evidence of insurance and shipping. Thirty three substantial orders for dog chews were arranged in this manner until early 1993. Though Economy Bag knew the identity of the supplier in Thailand, it knew nothing of the commercial arrangements which existed between that supplier and Samson. In particular it knew nothing of the mark-up that Samson was obtaining on each order. Indeed that was one of the key features of the letter of credit arrangement. Unfortunately however, this relationship came to an end unexpectedly as a result of a breakdown in these arrangements for which the bank was responsible. In March 1993 the Bank erroneously sent a completion statement and other documents including an invoice from the Thai supplier to Economy Bag instead of to Samson. Economy Bag immediately saw the amount of mark-up that Samson had been making on every shipment. Furnished with this knowledge Economy Bag decided to cut Samson out of the equation as a middle man. As for Samson, the loss of this business had disastrous consequences. Deprived of its principle income, it ceased trading. Proceedings were commenced against the Bank. At the trial of these matters the judge held that the Bank was in breach of an obligation of confidence not to disclose to Economy Bag any of the documents relating to Samson's purchase of goods from Thailand. Samson was entitled to damages for the loss of opportunity to earn future profits from its trading relationship. The judge held that there was a significant chance that Samson's relationship with Economy Bag would have continued for a further four years. Thereafter, Samson's chance of obtaining repeat business was considered to be too speculative for the award of damages. Damages were awarded accordingly. The matter then came before the Court of Appeal who substantially reduced the level of damages. Surprisingly, the Court of Appeal held that the judge should have focused on the Bank's limited knowledge of the facts at the date of the breach. At that point the Bank's knowledge of Samson's trading relationship was limited to the individual transactions conducted prior to the breach. The Court of Appeal concluded that there was no sufficient basis on which the judge should have based his award upon a period covering anything like as long as four years. In consequence, the award of damages was reduced to cover a period of one year from the date of the breach, all other loss being regarded as too remote. The House of Lords held that it was wrong to limit the period for which damages were recoverable by reference to what was within the reasonable contemplation of the Bank at the time of the breach. Lord Nicholls commented that once the test of remoteness has been satisfied according to the rules of Hadley and Baxendale, there is no arbitrary limit that can be applied to the amount of the damages if no cut-off point is provided by the contract. Accordingly, the only limit to the period of liability was that which the trial judge had identified. This was essentially a limit of quantification and not of foreseeability. The award which the judge had made on a reducing basis extending over a four year period was as good an estimate as could now be made. The appeal was therefore allowed and the original judge's order restored.
CJ-0506
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