Discusión

The general principle applicable to causation and remoteness of damages for breach of contract derives from Hadley v Baxendale :¹⁹⁶

… 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. Now, if the special circumstances under which the contract was actually made were communicated by the claimants to the defendants and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under this special circumstance so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, would only be supposed to have had in his

contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.

The rule was refined by the House of Lords in in Heron II ,¹⁹⁷ in which Lord Reid clarified the law on the degree of likelihood required for a particular type of loss, and it is known as the ‘Reid test’:

… the question for decision is whether a plaintiff can recover as damages for breach of contract a loss of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from the breach of contract causing delay in delivery. I use the words ‘not unlikely’ as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.

For over a century everyone has agreed that remoteness of damage in contract must be determined by applying the rule … laid down … in Handley v Baxendale.

But many different interpretations of that rule have been adopted by judges at different times …

[The judge] was not distinguishing between results which were foreseeable or unforeseeable, but between results which were likely because they would happen in the great majority of cases, and results which were unlikely because they would only happen in a small minority of cases …

I do not think that there were to be two rules or that two different standards or tests were to be applied. … The line of reasoning [in Handley] is that because in the great majority of cases loss of profit would not in all probability have

occurred, it followed that this could not reasonably be considered as having been fairly and reasonably contemplated by both parties, for it would not have flowed from the breach in the great majority of cases …

… It is not enough that in fact the … loss was directly caused by the defendant’s breach of contract … the crucial question is whether, on the information

available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was

sufficiently likely to result from the breach to make it proper to hold that the loss flowed naturally from the breach, or that loss of that kind should have been within his contemplation.

The House of Lords, in The Achilleas ,¹⁹⁸ reaffirmed this standard rule of remoteness and held: when assessing damages for the late redelivery of a chartered vessel, the court should in the usual case restrict the charterer’s liability to the difference between the market rate and the charter rate for the overrun period. Lord Hoffman and Lord Hope explored also a broader test, namely the test of ‘assumption of responsibility’ by the defendant, to be

applicable to unusual cases. Although Lord Rodger was broadly in agreement, he did not, as he said, have to explore ‘assumption of responsibility’, but Baroness Hale doubted the appropriateness of the concept in contract cases (see below).

The owners (M) had let out their ship to T for a period of 5-7 months, to end no later than midnight on 2 May 2004. T notified M that the ship would be back no later than then. On this understanding, M, therefore, contracted to let the ship for the subsequent fixture to new charterers for a period of about 4-6 months, promising that it would be delivered no later than 8 May 2004. The agreed price of hire was US$39,500 a day. The ship was delayed on its last voyage, and M did not get it back until 11 May 2004. M negotiated with the new charterers, who agreed not to cancel the charter but to take the ship at a reduced daily rate of US$31,500, because the market rate had fallen sharply.

The issue on the assessment of damages before the arbitrators was whether T was liable to pay to M as damages the hire for the number of days that the ship was late, at the market rate prevailing during those days, or, as M argued, the difference between US$39,500 and US$31,500 for the period of the new charter, which would be what M would have got from the new charter had the ship been returned in time.

The arbitrators, by a majority, adopted the latter approach. They concluded that the loss on the new fixture fell within the first rule of Hadley, namely, it flowed

‘naturally, i.e. according to the usual course of things, from such breach of contract itself’.

In particular, they held that it fell within that rule because it was damage ‘of a kind which the [charterer], when he made the contract, ought to have realised that was not unlikely to result from a breach of contract [by delay in redelivery]’

and ‘the type of loss was readily identifiable’.

The dissenting arbitrator did not deny that T would have known that M would be very likely to enter into a following fixture during the course of the charter and that late redelivery might cause that fixture to be lost. However, he concluded that a reasonable man in T’s position would not have understood that he was assuming liability for the risk of the type of loss in question. He stated that the general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period, and that ‘any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable’.

On appeal to the court, Clarke J approved the majority’s award and, on further appeal, the CA¹⁹⁹ (with Rix LJ delivering the judgment) agreed and held that the majority arbitrators applied the doctrine of remoteness correctly; a charterer of a time-chartered vessel knew that a new fixture was very likely to be entered into by the owner of his chartered vessel so as to follow as closely as possible the redelivery of the vessel. The chartering market was the charterer’s own

business; he should have been cautious about the danger of late delivery, given his background knowledge, which arose out of the ordinary nature of things.

There was no fixed rule and no binding authority that damages for late redelivery of a time-chartered vessel were limited to the overrun period

measure. In order to accommodate the damages for loss of a fixture awarded by the majority arbitrators, the law would not have to change but merely to

develop, and that development would be entirely in accordance with principle.

The instant case was not one in which the argument in favour of certainty militated against the claim.

The House of Lords²⁰⁰ overruled the decision. It held (it seems by majority) that:

in The Heron II, their Lordships had had well in mind that it was not simply a question of probability but also of what the contracting parties had to be taken to have had in mind, having regard to the nature and object of their business

transaction. What mattered was whether the common intention of reasonable parties to a charterparty of this sort would have been that, in the event of a relatively short delay in redelivery, an extraordinary loss, measured over the whole term of the renewed fixture, was, in the words of Lord Reid in The Heron II, ‘sufficiently likely to result from the breach of contract to make it proper to

hold that the loss flowed naturally from the breach or that loss of that kind should have been within [the defaulting party’s] contemplation’.

That would not have been the common intention of reasonable contracting parties. It was contrary to the principle stated in Victoria Laundry (Windsor) v Newman Industries,²⁰¹ and reaffirmed in The Heron II, to suppose that the parties were contracting on the basis that the charterer would be liable for any loss, however large, occasioned by a delay in redelivery, in circumstances where it had no knowledge of, or control over, the new fixture entered into by M (Hadley v Baxendale, The Heron II and Victoria Laundry applied).

Lord Hoffmann (at para 23) stated:

If … one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility

[emphasis added]. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be.

Lord Hope, who followed Lord Hoffmann’s view on the ‘assumption of responsibility’ test, stated (at para 34) that:

… In the ordinary course of things rates in the market will fluctuate. So it can be presumed 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 charterers, which cannot.

Lord Rodger, who did not find it necessary to explore the issues concerning assumption of responsibility but was ‘otherwise’ in substantial agreement with the reasons given by Lord Hoffmann, said (at para 60) that the relevant question is whether at the time of the contract the parties would reasonably have

contemplated that an overrun of 9 days would ‘in the ordinary course of things’

cause the owners the kind of loss claimed, and he concluded that they would not have done.

He gave a couple of useful examples (at paras 58-60):

… it may be that, at least in some cases, when concluding a charter party, a charterer could reasonably contemplate that late delivery of a vessel of that particular type, in a certain area of the world, at a certain season of the year would mean that the market for its services would be poor. In these

circumstances, the owners might have a claim for some general sum for loss of business, somewhat along the line of the damages for the loss of business envisaged by the Court of Appeal in Victoria Laundry. … But, even if such loss of business could have been reasonably contemplated … this would not mean that the owners’ particular loss of profit [in this case] as a result of re-negotiation of the Cargill fixture should be recoverable. To hold otherwise would risk

undermining the first limb of Handley v Baxendale, which limits the charterers’

liability to ‘the amount of injury’ that would arise ‘ordinarily’ or ‘generally’.

… the position on damages might also be different, if, for example - when a charter party was entered into - the owners drew the charterers’ attention to the existence of a forward charter of many months’ duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under the charter would be liable to result in the loss of that fixture. Then the second rule or limb in Handley v Baxendale might well come into play. But the point does not arise in this case.

… the loss … occurred in this case only because of the extremely volatile market conditions which produced both the owners’ initial (particularly lucrative) transaction, with a third party, and the subsequent pressure on the owners to accept a lower rate for that fixture.

Baroness Hale made it clear that she was not deciding the case on the basis of assumption of responsibility, and that she had considerable doubts about its appropriateness in a contractual context.

Lord Walker made interesting observations of the traditional remoteness test (at paras 67-69, 86):

The recognition of the rule as a single principle accords with the reality that even under the first limb, the defendant often needs some particular knowledge … The degree of knowledge assumed under the first limb depends on the nature of the business relationship between the contracting parties …

Another consequence of the … assimilation of the two limbs is to raise doubt as to whether the notion of assumption of responsibility (as a precondition for liability for a larger measure of damages) is necessarily confined to second limb cases …

Businessmen who are entering into a commercial contract generally know a fair amount about each other’s business. They have a shared understanding

(differing in precision from case to case) as to what each can expect from the contract, whether or not it is duly performed without breach on either side. No doubt they usually expect the contract to be performed without breach, but they are conscious of the possibility of breach …

The decision has caused confusion by the introduction of the ‘assumption of responsibility’ test, which was clarified in subsequent cases and, in particular, by Hamblen J in The Sylvia .²⁰²

He held that The Achilleas did not involve any new, generally applicable legal test of remoteness in damages. Handley v Baxendale (as refined by The Heron II) remained the standard rule, and it was only in relatively unusual cases where a consideration of assumption of responsibility might be required. In particular, he stated (at paras 40-41, 49):

In my judgment, the decision in The Achilleas results in an amalgam of the

orthodox and the broader approach. 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 …

In my judgment, it is important that it be made clear that there is no new generally applicable legal test of remoteness in damages. It appears that in a number of cases this is being argued and that decisions are being challenged for failing to recognise or apply the assumption of responsibility test. This results in confusion and uncertainty.

He further commented on the individual reasons given by each of their Lordships in The Achilleas by saying that:

Two of their Lordships … decided the case on the orthodox approach, and two of them did so on the broader approach. Lord Walker gave a judgment which contained elements of the reasoning of both approaches and concluded that he was agreeing with the further reasons given by not only Lord Hoffmann and Lord Hope but also by Lord Rodger. Given the disparity between the two approaches this has understandably led to some confusion as to what is the ratio decidendi of the House of Lords’ decision.²⁰³

Considering the aforesaid, it may be that Lord Hoffmann might have used the phrase ‘assumption of responsibility’ (as the dissenting arbitrator did) to interpret the Reid test in The Heron II and was not intending to add a broader test. In the light of the dicta of Lord Walker (that the two limbs of the traditional test of remoteness are assimilated, at least partially) and the dicta of Lord Rodger and Baroness Hale, the ratio decidendi of the decision may be that it applied the traditional remoteness test. However, this is not clear,²⁰⁴ and it is upon judges, in subsequent cases, to interpret the case, if it is applicable, on a case-by-case basis, as, for example, Hamblen J did in The Sylvia.

In this connection, and for risk management purposes in drafting, the dicta of Baroness Hale, who regarded the issues before the court as an examination question, are extremely important for future cases (at paras 90-93):

… It was conceded before the arbitrators that the missing date for a subsequent fixture was a ‘not unlikely’ result of late redelivery. Both parties would have been well aware of that at the time when the contact was made. They would also have been aware that a new charter was likely to commit that particular ship rather than to allow the ship-owner to go into the market and find a substitute. … If the parties wish to exclude liability for consequential loss of this kind, then it will be very simple to insert such a clause into future charter parties. … To rule out a whole class of loss, simply because the parties had not previously thought about it, risks as much uncertainty and injustice as letting it in.

… We are looking here at the general principles which limit a contract breaker’s liability when the contract itself does not do so. … It is one thing to say, as the majority arbitrators, that missing dates for a subsequent fixture was within the parties’ contemplation as ‘not unlikely’. It is another thing to say that the

‘extremely volatile’ conditions which brought about this particular loss were ‘not unlikely’.

Another answer to the question, given as I understand it by my noble and learned friends, Lord Hoffmann and Lord Hope, is that one must ask, not only