Transfield v Mercator House Of Lords Decision

What decision did the House of Lords reach in the case of Transfield Shipping Inc. v Mercator Shipping Inc, The Achilleas [2008] UKHL 48, [2008] 4 All ER 159? How has this decision affected the rules of remoteness in relation to an award of damages for breach of contract?

Rule of remoteness

Remoteness, generally speaking is the notion that a ‘claimants expectation interest will not be fully protected where some of the loss which he has suffered is too ‘remote’ a consequence of the defendants breach of contract’, severely restricting an innocent party’s right to recover damages [1] . Using remoteness is justified as it would be entirely unfair to prescribe legal liability upon a defendant for all losses, with no consideration to the unforseeability of the loss [2] . Justification for this turbulent area of contract law is available. It eases any potential harshness of the expectation measure which, if imposed with no regards to the foreseeability of loss, may inflict liability on the defendant with the possibility of such liability being disproportionate to the contract price [3] . A further advantage is that it ‘counteracts the deterrence to contracting that boundless liability might cause’ [4] . Other means such as exemption clauses or arranging liability insurance are not always obtainable. Thirdly, the rule on remoteness offers a restraint on recovery for consequential loss and anticipated profits [5]

Remoteness is an aspect of damages which has faced considerable upheaval in case law in its role as limiting the protection of the performance interest. The intricacies of the doctrine however, have varied considerably, pre and post, the notable case of Transfield Shipping Inc. v Mercator Shipping Inc, The Achilleas [6] . This particular area has been one of deep discussion amongst academics and judges alike and it is still evolving.

Rule of remoteness pre Transfield Shipping

The authority for remoteness pre Transfield can be found in the case of Hadley v Baxendale [7] . In the case, the defendants were carriers, who settled to carry the claimants shaft to a particular location for the intended purpose of it being used as a pattern in the manufacture of a new shaft. The defendants however, breached the contract by delaying the return of the shaft, consequently halting production at the claimant’s mill. Subsequently, the claimants looked to recover their loss of profits as damages for breach of contract. Alderson B in the case stated that where there is a breach in contract by one party, the damages the other ought to receive ‘should be such as may fairly and reasonably be considered arising naturally…according to the natural order of things’ [8] and it was ‘reasonably supposed… as the probable result’ [9] . The test laid down in Baxendale can be divided in two. The first is that liability arises for the defendant for losses occurring naturally. To meet the requirements for such a loss there must have been a ‘serious possibility’ a ‘real danger’ or a ‘very substantial probability that the loss would occur [10] . The notion that a defendant consenting to supply or repair a chattel which is being used for profit making purposes is liable for the ordinary loss of profits suffered as a result of his failure to supply or repair the chattel in time [11] . However, in Hadley the claimants couldn’t recover their loss of profits as the stoppage of the mill wasn’t naturally consequential of the carriers delay; there could have been a number of things which would have kept the mill in production e.g. a spare shaft [12] . In Balfour Beatty v Scottish Power plc [13] it was held that a defendant supplying a product for use in a construction or manufacturing process isn’t to be supposed to have knowledge of all the procedures undertaken by the claimant and the impact of any deficiency in the product supplied.

The second limb of the rule derived from Hadley is that a ‘defendant may be liable for all losses which did not arise naturally but were within the natural contemplation of both parties at the time they made the contract’ [14] . In Hadley however, this was not fulfilled as the claimants did not notify the defendants that a delay would cause a halt of production hence any loss couldn’t have been in the ‘reasonable contemplation of both parties’ [15] . It is essential for the defendant to know of the special circumstances.

The case of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [16] highlights the dissimilarity between natural and special losses. The defendants in this case were contracted to supply a boiler to the claimant, the use of which they knew would be immediate, in the claimant’s laundry business. However, the boiler was delivered five months late and as a result the claimants sued to recover the loss of profits they suffered as a result. The defendants were held liable for the loss of profits flowing naturally from their breach; however they were not liable for the loss of profits on many profitable contracts which the claimant had entered into. This was because the defendants had no knowledge of these contracts, hence the loss of profit with regards to these contracts were not within the reasonable contemplation of both parties [17] .

However, this case has faced many criticisms on the grounds that the two losses in question were different in ‘extent, not kind, and the law does not generally require that the extent of the loss be foreseen’. [18] This critique severely limits the importance of the ruling to some.

C Czarnikow Ltd v Koufos (the Heron II) [19] advances the law in Hadley v Baxendale. In this case, the claimants chartered the defendant’s vessel for the carriage of sugar with the intention of it being sold in Basrah. The predicted time this journey would take was twenty days; however there was a delay by nine days as a result of deviations to the prescribed route. If there was no delay, the sugar would have fetched £32 10s per ton instead of the £32 2s 9d per ton that was actually obtained. The defendants did not know of the claimant’s intention, but knew of the presence of a market for sugar at the destination, which if contemplated, would have caused him to realise it was not unlikely it would be sold immediately, and that prices often fluctuate. The claimants looked to recover the amount that would have been realised if there was no delay, and the amount that was actually realised. Here, it was held that the loss of profit was recoverable as the knowledge available to the ship owner at the time of contract should have led to the idea of the immediate sale of sugar on the ships arrival, as being such a probability that it should be considered as occurring in the usual course of things, hence being within the contemplation of the parties at the time of the contract. Hence, the loss of profit was found not to be too remote from the defendants actions.

In Transfield, Lord Walker criticises the reasoning in the Heron II on the basis of its obscure ratio ‘as the judges in that case did not say whether they agreed or disagreed with each other’ [20] ; a defect he was keen to avoid in Transfield.

HOL decision in Transfield

The case of Transfield Shipping Inc. v Mercator Shipping Inc, The Achilleas [21] was pivotal in shifting attitudes with regards to how and when remoteness should invoked evoked. The case concerned a charterer (A) who appealed against a decision which upheld an arbitrators ruling on damages to which the respondent ship owner (B) was entitled following the delayed return of a ship. The ship owner let his ship to the charterer for a maximum of seven months which was to end no later than May 2nd 2004. B subsequently contracted to let his ship to new charterers promising they would have the ship no later than May 8th, 2004 for $39,500 a day. However, due to a delay on its last voyage, A did not return until May 11th, 2004. The new contractors (C) agreed to take the ship, but as a result of fall in the market, would only take it at a reduced price of $31,500 a day. The issue raised was whether A was liable to pay only for the use of the ship and for the number of days it was late at the market rate at the time, or as B argued; he was liable to pay the difference between what B would have got from the new charter had the ship been returned in time and what it in fact got. The arbitrators adopted the latter approach by a majority and concluded that the loss on the new fixture fell within the first rule in Hadley v Baxendale [22] as arising ‘naturally’ as it was a damage which ought to have been in the charterers mind as being a likely result from a breach of contract. Therefore, on the foreseeability aspect of the loss, the charterers faced liability for the loss of profits over the entire period of the second charter. The House of Lords here put the entrenched laws on recoverability into disrepute, reducing the initial damages awarded by 90 per cent [23] . Lords Hoffman and Hope argued that the mere presence of a foreseeable loss was insufficient. A party cannot be held responsible ‘for something that he cannot control and because he does not know anything about it, cannot quantify’ [24] . This point of view seems entirely rational. Lord Walker corresponded with this view, however Lord Roger and Baroness Hale focused the appeal on Hadley v Baxendale foreseeability; ‘neither party would reasonably have contemplated that an overrun of nine days would…cause the owners the kind of loss for which they claim damages’ [25] . This reasoning would have great impact on any subsequent cases concerning the remoteness of damages. Consequently, businesses concerning the transportation of goods will all find either optimism, or pessimism with the House of Lords conclusion. A person who owns a transportation company for example may find leniency if a court case was to arise, with Transfield suggesting that judges are now increasingly willing to favour arguments on the basis of something being out of the defendants control; rather than arguments focusing on the maximum amount of profit that would have been obtainable if almost all circumstances were in the claimants favour.

Difficulties with the decision

Academic debate has found fault with Lord Rogers reasoning arguing that the ‘essence of market volatility is unpredictability, and at what stage does a market fluctuation become unpredictable?’ [26] This view may appear to have some strength. Markets, such as in Transfield have no signpost as to when they are going to become volatile, so shouldn’t those who have taken temporary responsibility of a particular transport take full liability whatever circumstances arise? Furthermore, if one was to follow his line of reasoning the assessment of the damages should have been done ‘on the basis of loss of the original new charterparty but with the recoverable hire rate capped at the foreseeable rate of volatility’ [27] . Some also favour the ‘assumption of responsibility’ reasoning of the majority on the grounds that ‘it is likely to lead to a fairer result than strict application of the ‘foreseeability of the type of loss’ approach’ [28] . But this view itself can be criticised as it may in practice give rise to uncertainty, with very little evidence ‘of a uniform market understanding of the correct measure of damages for a particular breach’ [29] as there was in Transfield Shipping. There will therefore be a requirement for defendants to prove the ‘background facts they intend to rely upon as restricting damages for foreseeable loss’ [30] .

Transfield opens up an array of questions about the drafting of contracts, whether claims should be framed in contract or tort, and whether damages should be valued on the basis of foreseeability or assumption of responsibility [31]

The House of Lords decision in Transfield has faced considerable criticisms as it uses a pure foreseeability test. This creates a ‘high degree of indeterminacy as it relies on only two concepts: kind of loss and degree of probability’’ [32] . But a number of different cases demonstrate that for the courts to attain what they believe to be a fair result, they are open to a great deal of manipulation. You can either deny liability or create it. In the former you can deny liability by stating it ‘really was unforeseeable’ [33] , and for the latter you can create liability by saying ‘that it is the same kind of loss as would have been, to some extent at least, foreseeable’ [34] . Many also argue that in reality, a single notion of foreseeability is an insufficient tool for explaining all possible cases for example if A tells his taxi driver B that unless he gets to his destination within a certain time, he will lose out on a deal worth £5 million pounds. However, if the driver misreads directions, and takes his passenger to Birmingham instead of London, why is he not liable for the £5 million damages?

Effects of Transfield on rules of remoteness

The impact of Transfield can be seen when setting it up against past cases following the same rationale.

Conclusion;

Transfield has changed significantly the way in which remoteness has been invoked.

Articles;

Andrew Ashworth, ‘Social Control and “Anti-Social Behaviour”: the Subversion of Human Rights’ (2004) 120 LQR 263, 276

Books;Author, Title in Italics (series title, edition publisher, place date) page