10 TYPES OF CLAIM

The issue of causation

In this regard no contract text would be complete without a discussion of Hadley v Baxendale.⁶ Here, a shaft in Hadley’s mill broke, rendering the mill inoperable. Hadley hired Baxendale to transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley’s servant told Baxendale’s clerk that the shaft must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived. Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut down for an additional five days. Hadley had paid £2 sterling and 4s to ship the shaft and sued for £300 damages due to lost profits and wages. The jury awarded Hadley £50 in damages and Baxendale appealed on the grounds that he did not know that Hadley would suffer any particular damage by reason of the late delivery.

The Court of Exchequer Chamber refused Hadley’s claim for the recovery of lost profits, deciding that Baxendale should only be held liable for losses that were generally foreseeable, or if Hadley had mentioned his special circumstances in advance. The fact that a party is sending something to be repaired does not necessarily mean that it would lose profits if it were not delivered on time. The court suggested various other circumstances in which Hadley could have entered into the contract that would not have presented such dire circumstances, noting that where special circumstances do exist, provisions can be made in the contract to impose extra damages for a breach. The court wrote:

“Now we think the proper rule in such a case as the present is this: 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, ie, 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 plaintiffs 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 these special circumstances 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, could 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. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract …

…

But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred, and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.”

The rule becomes that consequential damages are linked to knowledge and foreseeability at the time of contracting and deal with the recovery of damages for loss other than those arising naturally. The real issue today, however, is not an implied agreement but rather the foreseeability of the damage at the time of contracting. What is reasonably foreseeable at the time of contracting requires further evidence as to the circumstances in which the parties entered into the contract and what each knew about any potential risks inherent in the contract’s performance. This “knowledge” can be imputed to them from customary construction trade practices.

In principle, a breaching party could be held liable for all losses flowing from its breach even if the link between the breach and the damage incurred is tenuous at best, and unlikely or even remote in time. The case of South Australia Asset Management Corporation v York Montague Ltd and Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd⁷ arose from the property crash in the early 1990s, where banks were suing valuers for overpricing houses in order to recover the lost market value. Here, a valuer had (in breach of an implied term to exercise reasonable care and skill) negligently advised his client bank that property, which it proposed to take as security for a loan, was worth much more than its actual market value. The question was whether he should be liable not only for losses attributable to the deficient security but also for further losses attributable to a fall in the property market. The House of Lords decided that he should not be liable for this kind of loss and wrote:

“In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.

Here, though the losses were foreseeable in that property values go both up and down and that the losses had been caused by the negligent valuation, nevertheless it was excluded on the ground that it was outside the scope of the liability which the parties would reasonably have considered that the valuer was undertaking, and so there must be very convincing evidence for a defendant to be held to be the “insurer” of the claimant’s losses. The rule then becomes that, for a loss to be recoverable, it must be both factually and legally caused by the guilty party’s breach and must not be too remote.”

Then, in John Grimes Partnership Ltd v Gubbins⁸ and in contrast to SA Assest Corp, (which was considered by the Court of Appeal but determined to be irrelevant on the basis that it did not deal with delay) a consulting engineer was liable to pay damages to a developer for the diminution in the market value of a development whose completion had been delayed by the engineer’s breach of contract. The loss had been reasonably foreseeable at the time of contract, relevant to the point made regarding extending the scope of the duty so as to make a professional the underwriter of what is ordinarily a business risk.

In this case Grimes was engaged to design a road by March 2007. Mr Gubbins terminated Grimes and by April 2008 engaged a new engineer. Grimes sought outstanding fees and the client refused to pay. Grimes then commenced proceedings and Gubbins lodged a counterclaim on the basis that Grimes’ works were defective and were not complete by March 2007. The damages claimed resulted in a reduction in the values of the units and a reduction in the offer from the Housing Association, as well as an increase in building costs.

The court found a causal link between Grimes’ breach and the loss and held that while property markets rise and fall they do so over a prolonged period and it was the “egregious” delay of Grimes that caused the extent of the loss. On appeal the court emphasised that Hadley and Baxendale in the case of The Heron II⁹ the House of Lords had focused on what the contract breaker at the time of making of the contract ought reasonably to have contemplated would result from a breach of the contract. In Lord Reid’s view the type of loss was not too remote if the defendant had realised that it was “not unlikely” to result from the breach. Other members of the House of Lords had referred to “a real danger” or “a serious possibility”. Accordingly, if the type or kind of loss was, at the time of contract, reasonably foreseeable by the defendant as not unlikely to result from his breach (had he contemplated a breach) then such type or kind of loss was not too remote.

This rule as to causation, however, has many possibilities that change its dynamic. One of these is “remoteness”, which means that the damage must be both direct and proximate to the act occasioning it. The court in Lamb v Camden LBC¹⁰ was faced with the situation where Lamb rented out a furnished house to a tenant. The council caused flooding while replacing the sewer on the street in front of the house, which resulted in both damage to the house and the loss of the tenant. Lamb had the damage to the house repaired and went away leaving the house unoccupied. The unoccupied house attracted squatters who came into the house twice and caused £30,000 in damages. Lamb commenced proceedings against the council both for the damage caused by the sewer damage and for the damages caused by the squatters, but succeeded only for the claim for flood damages, the court holding that the damage caused by the squatters was too remote. The court wrote:

“The truth is that all these three – duty, remoteness and causation – are all devices by which the courts limit the range of liability for negligence … All these devices are useful in their way. But ultimately it is a question of policy for the judges to decide.”

The general rule in these situations is that the defendant will be held liable for the damage caused to the claimant only if the claimant’s damage would not have occurred “but for” the negligent act(s) of the defendant. Put another way, the defendant will not be held liable if the damage would or could, on the balance of probabilities, have occurred anyway, regardless of the defendant’s negligence. There is a distinction, therefore, between cause and a “precondition” for the actual happening of the events. This was brought out in the South Australia Asset Management Corporation case mentioned earlier where Lord Hoffmann gave the classic example:

“A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.”

Here, while climbing a rock, the climber slips and falls down the mountain and ends up with an injured knee. Although, because of the doctor’s negligence, the mountaineer did something he otherwise would not have done, this will not be sufficient causation to cause liability to the doctor as the doctor’s duty of care was to protect the mountaineer against injuries caused by the failure of the knee, not by falling rocks. Even though the injury might have been reasonably foreseeable, the doctor is not liable. Another way to approach this can be seen in the case of The Empire Jamaica,¹¹ where the ship’s owners used officers who were not properly licensed. The pilot fell asleep and a collision at sea occurred and, while the pilot was generally competent, he was negligent at the time. Here, it is clear that sending the ship to sea was “the cause” of the collision but was it the cause? The court looked at the situation objectively and made a determination of what would have happened if the ship’s owners had acted lawfully finding that, although they sent the ship to sea without licensed officers rather than with licensed officers, the actual cause of the collision was a failure to navigate a safe passage. The court found in favour of the shipowners because the pilot’s lack of a licence did not bear on his general competence. “The significant factor was the pilot’s negligence at the time, and the pilot’s lack of license made no difference there. Had the pilot been licensed, he would have been no less likely to sleep. The license would not have awoken him.”

Thus, in all tort claims the damages incurred must be shown, on the balance of probabilities, to have been a factual cause of the loss. It should be noted also that the Civil Liability (Contribution) Act 1978 allows apportionment of liability between various causes. In addition, the principles of joint and several liability make each “tortfeasor” liable to the claimant for the full extent of its loss. Further, under the Law Reform (Contributory Negligence) Act 1945, claims may be reduced if the loss is partly the fault of the claimant itself.

This becomes an issue in construction claims as there may be more than just one cause of loss. Under such circumstances, if there are several causes of the claimant’s loss, it is wise to consider whether or not the defendant’s acts materially contributed to the claimant’s loss. In IBA v EMI and BICC,¹² EMI were main contractors employed by IBA for the construction of the Emley Moor Television mast in Yorkshire. BICC were specialist subcontractors nominated by IBA for the design, supply and erection of the mast. The completed mast broke and collapsed following harsh weather conditions. The House of Lords held that BICC had been negligent in the design of the mast and that EMI were under a contractual liability to IBA for the design of the mast encompassing responsibility for the negligence of BICC. Two forces of stress on the mast, in fact, caused the collapse, but BICC were liable only in respect of one of them. The other stress, for which BICC were not liable, was “by far the more important cause” of the collapse. Lord Fraser commented:

“They were, in my opinion, therefore negligent in failing to take precautions against one of the two causes which materially contributed to the collapse. The case is one to which the following statement by Lord Reid in McGhee v National Coal Board 1973 SC (HL) 37 at 53 applies:

‘It has always been the law that a pursuer succeeds if he can shew that fault of the defender caused or materially contributed to his injury. There may have been two separate causes but it is enough if one of the causes arose from fault of the defender. The pursuer does not have to prove that this cause would of itself have been enough to cause him injury’.”

It should be noted here that in tort claims an objective public policy standard is applied to determine actual and proximate causation. Where there are concurrent causes in tort and the claimant causes none of them, the claimant will be able to recover against a defendant if it can be shown that the cause for which the particular defendant is responsible actually caused or materially contributed to the claimant’s loss.

So, for example, in Bonnington Castings v Wardlaw,¹³ Wardlaw contracted pneumoconiosis because of breathing in silica particles while employed at Bonnington Castings. Here, the particles could have been caused by either a pneumatic hammer and/or from swing grinders. The court found that Bonnington was liable only for the grinder dust despite the fact that it was clear that two sources had clearly contributed to Wardlaw’s disease. Lord Reid wrote:

“… I cannot agree that the question is: which was the most probable source of the respondent’s disease, the dust from the pneumatic hammers or the dust from the swing grinders? It appears to me that the source of his disease was the dust from both sources, and the real question is whether the dust from the swing grinders materially contributed to the disease. What is a material contribution must be a question of degree.”

This issue was also brought up in McGhee v National Coal Board,¹⁴ in which the House of Lords held that a material increase in the risk of injury was equivalent to a material contribution to the damage and wrote:

“It has always been the law that a pursuer succeeds if he can show that fault of the defender caused or materially contributed to his injury. There may have been two separate causes but it is enough if one of those causes arose from the fault of the defender. The pursuer does not have to prove that this cause would of itself have been enough to cause him injury.”

It should be noted that in the recent case of Heneghan v Manchester Dry Docks Ltd,¹⁵ the court interprets both Bonnington Castings and McGhee in relation to dust diseases. However, the text goes on to acknowledge that most contractual claims in causation arise out of an express provision in the contract; therefore, any modification may not be strictly relevant/necessary and may require further analysis.

It should be noted here that in Bonnington it was held that because swing grinders at the factory at which an employee worked materially contributed a quota of silica dust which was not negligible to that employee’s lungs, and helped to produce the disease that he suffered, his employer was liable. Then, in Thaine v London School of Economics,¹⁶ an employee appealed against the level of compensation awarded to her in respect of sex discrimination that she suffered at the hands of her employer, and relied upon the case of Bonnington Castings Ltd in support. However, the Employment Appeal Tribunal in Thaine held that such reliance was misconceived. In Bonnington Castings Ltd, there had been no claim for apportionment; the employer had argued, albeit unsuccessfully, that they should not be held liable at all. Thus, Bonnington Castings Ltd was of no application in Thaine, in which the tribunal below had quite properly discounted the compensation awarded by a percentage on account of the fact that the employee’s loss was caused by a combination of factors (only some of which amounted to unlawful discrimination for which the employer was liable).

In contractual claims causation can be different, as most claims arise out of an express contractual provision that is determinative of causation just as when an express agreement takes precedence over the general rules of the common law. In Tennant Radiant Heat v Warrington Development Corp,¹⁷ there were two competing claims, one in tort and the other in contract. Here, the claimant succeeded on its tort claim, and the defendant on its contract-based counterclaim – there was an apportionment of damages. The Court of Appeal regarded the apportionment as “a problem of causation”. It should be noted that the counterclaim was based on a strict contractual duty and as such the Law Reform (Contributory Negligence) Act 1945 was not to be applied. The court mentioned, however, that despite this the Act would have produced the same result.

Contribution

The issue of who bears responsibility for damages to the claimant can also be looked at in the reverse. In construction claims the claimant will, on many occasions, have claims against more than one defendant. Thus, if the roof leaks, the employer may have claims against the roofing material manufacturer, the installer and others involved in the entire finished product. In these cases the employer can commence proceedings against any one of these parties or all of them, as it so chooses. This usually leads to the claimant suing the defendant with the best ability to pay for the loss or the most perceived liability. Unfortunately, the matter does not always end there and the first defendant sued will often pursue any and/or all of the other defendants involved in the loss. So, in the example just given, if the employer sues the main contractor for the leak it will, in turn, come after the subcontractor roof supplier who will probably seek relief from the manufacturer of the roofing materials. This is all governed by the Civil Liability (Contribution) Act 1978. The most important provisions of the Act are as follows:

1. 
   

   “Entitlement to contribution

   
   
   
   
   1. 
      

      Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).

      
      
   2. 
      

      A person shall be entitled to recover contribution by virtue of subsection (1) above notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, provided that he was so liable immediately before he made or was ordered or agreed to make the payment in respect of which the contribution is sought.

      
      
   3. 
      

      A person shall be liable to make contribution by virtue of subsection (1) above notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, unless he ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right on which the claim against him in respect of the damage was based.

      
      
   4. 
      

      A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.

      
      
   5. 
      

      A judgment given in any action brought in any part of the United Kingdom by or on behalf of the person who suffered the damage in question against any person from whom contribution is sought under this section shall be conclusive in the proceedings for contribution as to any issue determined by that judgment in favour of the person from whom the contribution is sought.

      
      
   6. 
      

      References in this section to a person’s liability in respect of any damage are references to any such liability which has been or could be established in an action brought against him in England and Wales by or on behalf of the person who suffered the damage; but it is immaterial whether any issue arising in any such action was or would be determined (in accordance with the rules of private international law) by reference to the law of a country outside England and Wales.

   
   
2. 
   

   Assessment of contribution

   
   
   
   
   1. 
      

      Subject to subsection (3) below, in any proceedings for contribution under section 1 above the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question.

      
      
   2. 
      

      Subject to subsection (3) below, the court shall have power in any such proceedings to exempt any person from liability to make contribution or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.

      
      
   3. 
      

      Where the amount of the damages which have or might have been awarded in respect of the damage in question in any action brought in England and Wales by or on behalf of the person who suffered it against the person from whom the contribution is sought was or would have been subject to

      
      
      
      
      1. 
         

         any limit imposed by or under any enactment or by any agreement made before the damage occurred;

         
         
      2. 
         

         any reduction by virtue of section 1 of the Law Reform (Contributory Negligence) Act 1945 or section 5 of the Fatal Accidents Act 1976; or

         
         
      3. 
         

         any corresponding limit or reduction under the law of a country outside England and Wales;

      
      

      the person from whom the contribution is sought shall not by virtue of any contribution awarded under section 1 above be required to pay in respect of the damage a greater amount than the amount of those damages as so limited or reduced.”

The main issue that arises from the Act is the definition of what is “the same damage” as set out in section 1(1). In Royal Brompton Hospital NHS Trust v Hammond (No 3)¹⁸ this was one of the issues. Here, as a result of construction works between 1987 and 1990, claims arose and the main contractors, Taylor Woodrow, claimed against the hospital with the hospital bringing a counterclaim. This ended up in an arbitration, which was settled by the hospital agreeing to pay Taylor Woodrow £6.2 million and the hospital agreeing to indemnify Taylor Woodrow against any other proceedings. Then in 1993, after the settlement, the hospital commenced an action against its architects, structural engineers, electrical engineers, mechanical engineers and project managers. The architects then sought contribution from Taylor Woodrow, and Taylor Woodrow claimed that they were covered by the indemnity agreement with the hospital. However, this indemnity was not binding on the architects as they were not parties to the agreement. The issue was that even if the architects could show that Taylor Woodrow had been wrongly successful in the arbitration, the primary damage to the hospital would have been the wrongful delay in practical completion whereas the damage in the claim against the architects was that their behaviour had weakened the prospects of success in the arbitration and this was not the same damage. The House of Lords agreed and Lord Bingham wrote:

“… It is plain beyond argument that one important object of the 1978 Act was to widen the classes of person between whom claims for contribution would lie and to enlarge the hitherto restricted category of causes of action capable of giving rise to such a claim. It is, however, as I understand, a constant theme of the law of contribution from the beginning that B’s claim to share with others his liability to A rests upon the fact that they (whether equally with B or not) are subject to a common liability to A. I find nothing in section 6(1)(c) of the 1935 Act or in section 1(1) of the 1978 Act, or in the reports which preceded those Acts, which in any way weakens that requirement. Indeed both sections, by using the words ‘in respect of the same damage’, emphasise the need for one loss to be apportioned among those liable.

When any claim for contribution falls to be decided the following questions in my opinion arise:

1. 
   

   What damage has A suffered?

   
   
2. 
   

   Is B liable to A in respect of that damage?

   
   
3. 
   

   Is C also liable to A in respect of that damage or some of it?

At the striking-out stage the questions must be recast to reflect the rule that it is arguability and not liability which then falls for decision, but their essential thrust is the same. I do not think it matters greatly whether, in phrasing these questions, one speaks (as the 1978 Act does) of ‘damage’ or of ‘loss’ or ‘harm’, provided it is borne in mind that ‘damage’ does not mean ‘damages’ (as pointed out by Roch LJ in Birse Construction Ltd v Haiste Ltd (Watson and Anor, third parties) (1995) 47 ConLR 162 at 170, [1996] 1 WLR 675 at 682) and that B’s right to contribution by C depends on the damage, loss or harm for which B is liable to A corresponding (even if in part only) with the damage, loss or harm for which C is liable to A. This seems to me to accord with the underlying equity of the situation: it is obviously fair that C contributes to B a fair share of what both B and C owe in law to A, but obviously unfair that C should contribute to B any share of what B may owe in law to A but C does not.

Approached in this way, the claim made by the architect against the contractor must in my opinion fail in principle. It so happens that the employer and the contractor have resolved their mutual claims and counterclaims in arbitration whereas the employer seeks redress against the architect in the High Court. But for purposes of contribution the parties’ rights must be the same as if the employer had sued both the contractor and the architect in the High Court and they had exchanged contribution notices. The question would then be whether the employer was advancing a claim for damage, loss or harm for which both the contractor and the architect were liable, in which case (if the claim were established) the court would have to apportion the common liability between the two parties responsible, or whether the employer was advancing separate claims for damage, loss or harm for which the contractor and the architect were independently liable, in which case (if the claims were established) the court would have to assess the sum for which each party was liable but could not apportion a single liability between the two. It would seem to me clear that any liability the employer might prove against the contractor and the architect would be independent and not common. The employer’s claim against the contractor would be based on the contractor’s delay in performing the contract and the disruption caused by the delay, and the employer’s damage would be the increased cost it incurred, the sums it overpaid and the liquidated damages to which it was entitled. Its claim against the architect, based on negligent advice and certification, would not lead to the same damage because it could not be suggested that the architect’s negligence had led to any delay in performing the contract.”

Lord Steyn also wrote:

“… A description of the claims

The characterisation of the employer’s claim against the contractor is straightforward. It is for the late delivery of the building. This is not a claim which the employer has made against the architect. Moreover, notionally it is not damage for which the architect could be liable merely by reason of a negligent grant of an extension of time. It is conceivable that an architect could negligently cause or contribute to the delay in completion of works, eg by condoning inadequate progress of the work or by failing to chivvy the contractor. In such a case the contractor and the architect could be liable for the same damage. There are, however, no such allegations in the present case.

The essence of the case against the architect is the allegation that his breach of duty changed the employer’s contractual position detrimentally as against the contractor. The employer’s case is that the architect wrongly evaluated the contractor’s claim for an extension of time. It is alleged that by negligently giving an extension of time in respect of an unmeritorious claim by the contractor, the architect presented the contractor with a defence to a previously straightforward claim by the employer for breach of contract in respect of delay. The employer lost the right under the contract to claim or deduct liquidated damages for the delayed delivery of the building. The contractor committed no wrong by retaining the money until the extension of time had been set aside in an arbitration. The detrimental effect on the employer’s contractual position took place when the extension of time was negligently given. In such a case the employer must go to arbitration in order to restore his position. He has the burden of proof in the arbitration and has to face the uncertain prospect of succeeding in what may perhaps be a complex arbitration. The employer’s bargaining position against the contractor is weakened. A reasonable settlement with the contractor may reflect this changed position: a case with a 100% prospect of success may become, for example, a case with only a 70% prospect of success.”

Money damages but at what cost

Generally, a claimant is entitled to the reasonable cost of the remedial works. There is no requirement for the claimant to show that the Works were damaged by the acts of the contractor (defendant), nor to show how the damages, once collected, will be spent. This is based upon the general rule that a claimant can do whatever it chooses with the money received in damages. An interesting case in this regard is Ruxley Electronics and Construction Ltd v Forsyth.¹⁹ In this case the construction contract provided that a swimming pool was to be built to a depth of 7ft 6ins at a cost of £70,000. The 7-foot 6-inch depth was an express term. The pool as constructed was 9 inches less and the depth was thus 6ft 9 inches. To reconstruct it to the proper depth would cost an extra £21,500. The contractor accepted the fact that its failure to provide the required depth was a breach. The contractor was not paid in full and commenced proceedings for the balance due under the contract and Forsyth counterclaimed for breach of contract. The trial judge awarded £2,500 general damages for loss of pleasure and amenity but awarded no special damages on the ground that the pool, built at 6ft 9 inches, was safe for diving from the side of the pool and there was no difference in value between what had been contracted for and what was built, i.e. the pool as built and the pool as contracted for. The trial court took the position that the damages sought by the claimant were dependent upon showing that the remedial work was going to be done and that such work was reasonable and this was not shown at trial. Forsyth appealed. Before ending up at the House of Lords, the Court of Appeal held that it was unreasonable to claim for an expensive remedy especially if a cheaper one was available but that if there was no alternative which would provide what the claimant required or none which would cost less, then the claimant would be entitled to the cost of repair or replacement even if that was more expensive. Mr Forsyth was, therefore, entitled to the cost of the remedial work. The real question was how loss ought to be measured in such cases – the cost of remedying or the effect of the defective work on the building taken as a whole? The House of Lords wrote:

“… there would indeed be something wrong if, on the hypothesis that cost of reinstatement and the depreciation in value were the only available measures of recovery, the rejection of the former necessarily entailed the adoption of the latter; and the court might be driven to opt for the cost of reinstatement, absurd as the consequence might often be, simply to escape from the conclusion that the promisor can please himself whether or not to comply with the wishes of the promisee which, as embodied in the contract, formed part of the consideration for the price. Having taken on the job the contractor is morally as well as legally obliged to give the employer what he stipulated to obtain, and this obligation ought not to be devalued. In my opinion, however, the hypothesis is not correct. There are not two alternative measures of damage, at opposite poles, but only one: namely the loss truly suffered by the promisee. In some cases the loss cannot be fairly measured except by reference to the full cost of repairing the deficiency in performance. In others, and in particular those where the contract is designed to fulfil a purely commercial purpose, the loss will very often consist only of the monetary detriment brought about by the breach of contract. But these remedies are not exhaustive, for the law must cater for those occasions where the value of the promise to the promisee exceeds the financial enhancement of his position which full performance will secure. This excess, often referred to in the literature as the ‘consumer surplus’ (see e.g. the valuable discussion by Harris, Ogus and Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) 95 LQR 581) is usually incapable of precise valuation in terms of money, exactly because it represents a personal, subjective and non-monetary gain. Nevertheless, where it exists the law should recognise it and compensate the promise if the mis-performance takes it away. The lurid bathroom tiles, [for example] … may be so discordant with general taste that in purely economic terms the builder may be said to do the employer a favour by failing to install them. But this is too narrow and materialistic a view of the transaction. Neither the contractor nor the court has the right to substitute for the employer’s individual expectation of performance a criterion derived from what ordinary people would regard as sensible. … [T]he test of reasonableness plays a central part in determining the basis of recovery, and will indeed be decisive in a case such as the present when the cost of reinstatement would be wholly disproportionate to the non-monetary loss suffered by the employer. But it would be equally unreasonable to deny all recovery for such a loss. The amount may be small, and since it cannot be quantified directly there may be room for difference of opinion about what it should be. But in several fields the judges are well accustomed to putting figures to intangibles, and I see no reason why the imprecision of the exercise should be a barrier, if that is what fairness demands.

…

… once this is recognised, the puzzling and paradoxical feature of this case, that it seems to involve a contest of absurdities, simply falls away. There is no need to remedy the injustice of awarding too little by unjustly awarding far too much. The judgment of the trial judge acknowledges that the employer has suffered a true loss and expresses it in terms of money. Since there is no longer any issue about the amount of the award, as distinct from the principle, I would simply restore his judgment by allowing the appeal …

…

… In building cases, the pecuniary loss is almost always measured in one of two ways: either the difference in value of the work done or the cost of reinstatement. Where the cost of reinstatement is less than the difference in value, the measure of damages will invariably be the cost of reinstatement. By claiming the difference in value the plaintiff would be failing to take reasonable steps to mitigate his loss. In many ordinary cases, too, where reinstatement presents no special problem, the cost of reinstatement will be the obvious measure of damages, even where there is little or no difference in value, or where the difference in value is hard to assess.

This is why it is often said that the cost of reinstatement is the ordinary measure of damages for defective performance under a building contract. But it is not the only measure of damages. Sometimes it is the other way round. This was first made clear in the celebrated judgment of Cardozo J giving the majority opinion in the Court of Appeals of New York in Jacob & Youngs Inc v Kent (1921) 230 NY 239. In that case the building owner specified that the plumbing should be carried out with galvanised piping of ‘Reading manufacture’. By an oversight, the builder used piping of a different manufacture. The plaintiff builder sued for the balance of his account. The defendant, as in the instance case, counterclaimed the cost of replacing the pipework even though it would have meant demolishing a substantial part of the completed structure, at great expense …

Cardozo J’s judgment is important because it establishes two principles which I believe to be correct and which are directly relevant to the present case: first, the cost of reinstatement is not the appropriate measure of damages if the expenditure would be out of all proportion to the good to be obtained, and secondly, the appropriate measure of damages in such a case is the difference in value, even though it would result in a nominal award …

I fully accept that the courts are not normally concerned with what a plaintiff does with his damages. But it does not follow that intention is not relevant to reasonableness, at least in those cases where the plaintiff does not intend to reinstate. Suppose in the present case Mr Forsyth had died, and the action had been continued by his executors. Is it to be supposed that they would be able to recover the cost of reinstatement, even though they intended to put the property on the market without delay? …

In the present case the judge found as a fact that Mr Forsyth’s stated intention of rebuilding the pool would not persist for long after the litigation had been concluded. In these circumstances it would be mere pretence to say that the cost of rebuilding the pool is the loss which he has in fact suffered. This is the critical distinction between the present case and the example given by Staughton LJ of a man who has had his watch stolen. In the latter case, the plaintiff is entitled to recover the value of the watch because that is the true measure of his loss. He can do what he wants with the damages. But if, as the judge found, Mr Forsyth had no intention of rebuilding the pool, he has lost nothing except the difference in value, if any ….”

Despite this House of Lords decision, the general proposition remains that the cost to correct or remedy the defect is the ordinary measure of damages, but if the actual cost of remedying the defective work is out of proportion to what is sought to be corrected, then the damages should be measured by what the value of the building would have been had it been properly constructed less the actual value as built.

Along this vein is Birse Construction Ltd v Eastern Telegraph Ltd.²⁰ In this case, the defendant built a residential training college, which contained defects. The difference here was that the claimants were planning on selling the college without first repairing the defects but wanted to recover the cost of recovery in any event. The court did not agree and wrote:

“If a building owner disposes of property with defects attributable to some breach of duty by the defendant and for which the cost of reinstatement was the appropriate measure but does so without any reduction or loss on account of its condition then the loss that the law supposes is avoided and no damages are recoverable ….”

Reasonableness

The history of “reasonableness” would not be complete without mentioning Board of Governors of the Hospitals for Sick Children and another v McLaughlin & Harvey Plc and others,²¹ where negligent modifications to the piling design by the engineer resulted in defective foundations. Here, there was agreement that remedial work was necessary but an issue arose regarding the expert advice given as to the remedial work to be performed. The matter was heard in the TCC and Judge Newey wrote:

“The plaintiff who carries out either repair or reinstatement of his property must act reasonably. He can only recover as damages the cost which the defendant ought reasonably to have foreseen that he would incur and the defendant would not have foreseen unreasonable expenditure. Reasonable costs do not, however, mean the minimum amount which, with hindsight, it could be held would have sufficed. When the nature of the repairs is such that the plaintiff can only make them with the assistance of expert advice the defendant should have foreseen that he would take such advice and be influenced by it …

The independent cause may take the form of an event which breaks, that is to say, brings to an end, a chain of causation which he sustains after the event. The event may take the form of negligent advice upon which the plaintiff has acted. Another way of expressing the matter might be that the defendant could not reasonably have foreseen that the plaintiff would not act on negligent advice. Advice which is not negligent will not by itself break the chain.

….

If at the date of trial no remedial works have been carried out by the plaintiff, then the court has, in order to assess damages, to decide what work should be done. The parties are entitled to put forward rival schemes and the court has to choose between them or variants of them … The assessment has to be made on the basis of what the plaintiff can reasonably do.

Contrary to Mr Potter QC’s submissions, in my view where works have been carried out, it is not for the court to consider de novo what should have been done and what costs should have been incurred either as a check upon the reasonableness of the plaintiff’s actions or otherwise.”

According to this decision (which is known as the “Great Ormond Street principle”) if the claimant relies on “expert advice” it is entitled to the work thus performed even if the “advice” was flawed. However, if this was the case, then the defendant was able to, in effect, go behind the advice and show that it was negligent and, thus, negate the reasonableness of the repair work done. The theory behind this was that if the expert advice was negligent such advice would be the basis of a separate claim for negligence and as such would be an intervening act breaking the chain of causation discussed earlier.

In this regard, and in effect moving in a slightly different direction, is the case of Skandia Property UK Ltd v Thames Water,²² where the issue was whether flooding to a basement caused by the defendant was “reasonably repaired” by works that made the basement fully watertight. Here, experts had advised the claimant that the “Sika” tanking system was the only practical way to protect the flood-damaged building; the claimants agreed and acted upon this advice. Unfortunately, at the time the advice was given, the experts were not aware that prior to the flood the building had undergone a pressure grouting treatment and thus, in fact, the flood had not damaged the integrity of the building, which meant that the “Sika” system was not needed. Upon review by the court the claim for the cost of the “Sika” system was denied without the necessity of showing any negligence. The Court of Appeal upheld this view and Waller LJ wrote:

“If there has been an escape of water that causes some physical damage then prima facie it is only the cost of reinstatement of that physical damage which is recoverable. If the claimant is to recover damages for something beyond the cost of reinstatement of physical damage then he must on any view show that it was reasonable to incur expenditure beyond that quantifiable figure … What should be emphasised is that it must be rare if ever that a plaintiff will be able to establish the reasonableness of any assumption of damage to something which is accessible and inspectable …”

Here, the Great Ormond Street principle was not cited or relied upon and Waller LJ went on to write:

“Certainly, simple reliance by a plaintiff on an expert cannot be the test as to whether a plaintiff has acted reasonably in making an assumption, albeit, provided the plaintiff has provided the expert with all material facts and the expert has made all reasonable investigations, the advice will be a highly significant factor…”

However, in McGlinn v Waltham Contractors Limited & Others,²³ Mr Justice Coulson considered the Great Ormond Street principle and Skandia. Here, the claimant had a house called “Maison d’Or” built which took three years and was substantially complete by January 2002 when the contractors left. Thereafter, it remained empty for the next three years while investigations by experts and other contractors were carried out as to claimed defects and deficiencies. Then, in early 2005, the house was demolished and, by the time of the underlying proceedings, had not been rebuilt. The claimant took the position that Maison d’Or was so badly designed and built that he was entitled to demolish it and start again and he claimed damages for breach of contract and/or negligence against the building contractors, the architects, the structural and mechanical engineers and the quantity surveyors/project managers. The damages claimed were to recover the actual cost of demolition and for £3.6 million, which was the estimated cost of rebuilding the whole house. The claimant also took the alternative position that he was entitled to £2.5 million being the estimated cost of repairing the individual defects. The justification for this was that his decision to demolish Maison d’Or was taken on expert advice and, as there was no question as to the negligence of this expert advice, he was entitled to the costs, or a proportion of the costs of demolition and rebuilding as against each of the defendants in accordance with the Great Ormond Street principle.

Here, the Great Ormond Street issue was specifically brought up for discussion and the Judge dealt with it in detail at section K²⁴ of his judgment and distinguished Great Ormond Street on the facts. Here, however, the defendants had expressly asked for a ruling that Great Ormond Street was wrongly decided and should not be followed. The judge rejected this invitation but stated, however, (at paragraph [827] of the judgment):

“… it might well be said that his (Judge Newey’s) decision is authority for the relatively narrow proposition that, if two remedial schemes are proposed to rectify a defect which is the result of the defendant’s default, and one scheme is put in hand on expert advice, the defendant is liable for the costs of that built scheme, unless it could be said that the expert advice was negligent. For what it is worth, I consider that, subject to one potential vital qualification, set out below, this narrow proposition is generally in accordance with other authority and correct in law … The important qualification that needs to be made is outlined by Waller LJ in Skandia to this effect: although reliance on an expert will always be a highly significant factor in any assessment of loss and damage, it will not on its own be enough, in every case, to prove that the claimant has acted reasonably ….”

In essence the court ruled that the Great Ormond Street principle was narrow at best. Applied to the situation where two remedial schemes are set out to correct a defendant’s default and one of these schemes is adopted upon expert advice, the defendant will be liable for the costs unless it can show that the expert advice was negligent. However, this narrow principle was subject to Skandia in that, while reliance on an expert’s opinion and advice will be a significant factor in assessing damages, expert opinion alone will not be enough to always prove that the claimant acted reasonably. Further, the court wrote that the “reasonableness” of any decision made upon expert advice “does not require proof of conduct amounting to professional negligence or something of that sort”.

Additionally, this issue was also considered in Axa Insurance UK Plc v Cunningham Lindsey United Kingdom,²⁵ where a claim was brought against loss adjusters for negligent services and/or breach of contract arising from a claim for subsidence. The court held that Mr Justice Coulson’s statement of the law was correct and Mr Justice Akenhead went on to write:

“…whilst the advice of an expert may well (if not invariably) assist in establishing the reasonableness of a decision to adopt one remedial solution rather than another it will rarely, if ever, justify the recovery of the cost of remedial works relating to putting right a default or defect for which the defendant is not culpable.”

Contract versus tort damages

The rule relating to damages in tort is quite different from that in contract and imposes a wider liability. A defendant in tort is liable for any type of loss and/or damage that is a reasonably foreseeable result from the act or omission committed. In tort reasonable foreseeability is the basis upon which liability is determined and can cause the defendant to be responsible for something that, although reasonably foreseeable, may have been highly unusual, i.e. not likely to occur and/or in a much greater amount than anticipated. It is different in contract because if one party wants to protect itself against an unusual risk it can bring this “extra” risk to the other party’s attention before the contract is entered into.

A recent case highlights this situation. In Transfield Shipping Inc v Mercator Shipping Inc. (The Achilleas),²⁶ the original time charter, dated 22 January 2003, was to cover a period of time (five to seven months) at a daily rate of US$13,500. This was then changed by an addendum, dated 12 September 2003, to a rate of US$16,750 for an additional five to seven months with the date for redelivery being no later than 2 May 2004. During this extended period of time the market rates had gone down and delivery of the vessel to the new charterers was re-set for 8 May 2004. If delivery could not occur by that date, the new charterers could cancel.

Then, with less than two weeks left on the original charter, the charterers fixed the vessel under a subcharter to carry coals across the Yellow Sea, to which the owners made no objection. Unfortunately, despite finishing the additional voyage, the vessel was delayed and was not redelivered to the owners until 11 May 2004, which was three days after the cancellation date. As it turned out, by 5 May 2004 the new charterers and the owners had agreed an extension of the cancellation date to 11 May but, since the rates had fallen, the new agreed daily rate was reduced to US$13,500. The owners claimed damages in the sum of US$1,364,584.37 for the loss of the difference between the original rate and the reduced rate over the period of the new charter. The charterers took the position that the owners were entitled only to the difference between the market rate and the charter rate for the nine days during which they were deprived of the use of the ship, which amounted to US$158,301.17.

The matter was arbitrated and the majority²⁷ found for the owners, holding that the loss on the new fixture fell within the first rule of Hadley v Baxendale²⁸ as arising “naturally, i.e., according to the usual course of things, from the breach of contract itself”. It fell within the rule because it was damage of a kind which the charterer, when the contract was made, ought to have realised was not unlikely to result from a breach of contract by delay in redelivery,²⁹ i.e. that a broker in a similar “commercial situation” could have contemplated that the “not unlikely” results arising from late delivery would include such items as missing dates for a subsequent charter, a dry docking or the sale of the vessel and, accordingly, they felt that, as a matter of law, damages for these types of loss were recoverable. The award was appealed and the Court of Appeal upheld the arbitrator’s majority decision then the House of Lords allowed the charterers’ appeal.