Damages for loss caused by fall in value of land not too remote (Court of Appeal)

In a breach of contract case, a party may only recover damages for loss that is not too remote. The test of remoteness is set out in Hadley and another v Baxendale and others [1854[ EWHC Exch J70. Under this test, the claimant will be able to recover either:

The first limb is an objective test and concerns general damages. This test is concerned with what a reasonable man should know to be the "ordinary course of things" (Victoria Laundry v Newman Industries [1949] 2 KB 528) and what is within his reasonable contemplation (C Czarnikow Ltd v Koufos [1967] UKHL 4 [1967] (The Heron II)). This will be a question of fact in the circumstances.

In Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, the House of Lords held that a claimant will not recover losses that may occur in the usual course of things if the defendant cannot reasonably be regarded as having assumed responsibility for losses of the particular kind suffered. The House of Lords found that there was a general expectation in the shipping market that a charterer who returned a vessel late was liable in damages only for the period of late delivery, and not for losses incurred through the owners losing a follow-on charter (see Legal update, Lords rule on remoteness of damage).

The Court of Appeal considered Transfield in Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7. Toulson LJ confirmed that Hadley v Baxendale remained the "standard rule" but it had been rationalised on the basis that it reflected the expectation to be imputed to the parties in the ordinary case, that is, a contract breaker should ordinarily be liable to the other party for losses resulting from his breach if, but only if, at the time of making the contract, a reasonable person would have had damage of that kind in mind as not unlikely to result from a breach.

At paragraph 43, Toulson LJ went on to say that Transfield, and South Australia Asset Management Corp v York Montague Ltd [1996] UKHL 10, are authority that there may be cases where the court, having looked at the contract and the commercial background, can decide that the standard approach will not reflect the expectation or intention reasonably to be imputed to the parties.

For detailed discussion about remoteness of damage, see Practice note, Remedies: damages and agreed remedies: Remoteness.

The respondent (Mr Gubbins) obtained planning permission for development of a field for residential purposes. In September 2006, he engaged the appellant (JGP), a consulting engineer, to design a road within the site, as well as drainage, and to obtain the required statutory approval so that the road could be adopted by the local authority. It was an express oral term of the contract that JGP would complete the work by March 2007.

The work was not completed by March 2007. In April 2008, Mr Gubbins engaged another consulting engineer, who re-designed the road and drainage layout and submitted it to the local authority, which approved it a short time later.

JGP invoiced Mr Gubbins for £2,893 in unpaid fees. Mr Gubbins refused to pay and JGP commenced proceedings. Mr Gubbins counterclaimed for almost £20,000 previously paid to JGP, on the ground that JGP's work had been defective and had to be re-done. In addition, he sought damages for JGP's failure to complete the agreed work by March 2007. Mr Gubbins claimed that the delay had resulted in a reduction in market value of the private residences to be built, a reduction in the offer from a housing association for the affordable units, and an increase in building costs.

At trial, HHJ Cotter QC held that JGP was in breach of contract. That breach had caused delay in the development and that had resulted in loss to Mr Gubbins, because of the reduced value of the development. He awarded damages for the loss flowing from the decline in the property market, to be assessed. Applying the test in Hadley v Baxendale, that loss was not too remote. JGP had known when it entered the contract what Mr Gubbins intended to do with the land and when he intended to start. It had also known that delay brought the risk that the property market might move considerably upwards or downwards. Therefore, this was not loss that JGP did not reasonably foresee if there was significant delay. Taking into account the commercial background to the contract, there was no reason to limit JGP's liability to exclude the loss due to the fall in the property market.

JGP appealed. It argued that the judge adopted the wrong approach to the issue of remoteness, as a matter of law. As established in Transfield, it was necessary to decide whether, considered objectively, JGP could be said to have accepted, at the time of contract, responsibility for that type of loss, were it to occur.

The Court of Appeal dismissed the appeal.

Giving the leading judgment (with which Tomlinson LJ and Laws LJ agreed), Sir David Keene first considered the approach to be taken to the issue of remoteness of damage in a breach of contract case. He rejected JGP's argument that the principles set out in Transfield had replaced the "reasonably foreseeable" test in Hadley v Baxendale. The "reasonably foreseeable" approach, as refined by the House of Lords in Heron II, remained the standard one. However, Transfield was authority for the proposition that there may be cases where that might not be the correct test, if there were particular circumstances to show that the parties could not have contracted on the basis that the defendant was to bear the liability of a particular kind of loss, even though that loss was reasonably foreseeable.

Sir David Keene's analysis of the law was that, if there is no express term dealing with the losses for which a party is accepting liability if it breaches the contract, then the law implies a term to determine the answer. He went on to say:

"Normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken. But, if there is evidence in a particular case that the nature of the contract and the commercial background, or indeed any other relevant special circumstances, render that implied assumption of responsibility inappropriate for a particular type of loss, then the contract-breaker escapes liability."

(Paragraph 24, judgment.)

That was the case in Transfield.

Sir David Keene's view was that HHJ Cotter QC's approach to, and summary of, the legal principles could not be faulted. Furthermore, he had correctly applied those principles, as this was not a Transfield type case. There was no evidence before the judge of any general understanding or expectation in the property world that a party in JGP's position would not be taken to have assumed responsibility for losses arising from movement in the property market where there was a delay. Nor did the fact that loss was suffered because of a change in market values during the period of wrongful delay take this case out of the ordinary.

Sir David Keene was not persuaded by JGP's argument that the scale of loss, when assessed, would be disproportionate to the fee payable by Mr Gubbins under the contract. This would not normally, of itself, suffice to establish an absence of responsibility for such loss.

The House of Lords' decision in Transfield led to some uncertainty as to the law of remoteness of damage in breach of contract cases. Although it was consistent with the Court of Appeal's decision in Supershield, that Transfield has not replaced the Hadley v Baxendale test, the Court of Appeal's analysis of the law in this case, which involved implying a contractual term regarding responsibility for reasonably foreseeable losses, is interesting. Parties wishing to ensure that they are not held liable for particular types of loss, should ensure that they expressly exclude them when making the contract. Otherwise, to escape liability, they will have to demonstrate circumstances that make the implied assumption of responsibility inappropriate for the type of loss in question.

John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37 (05 February 2013).