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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Hotel Services Ltd. v Hilton International Hotels (Uk) Ltd. [2000] EWCA Civ 74 (15 March 2000)
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Cite as: [2000] EWCA Civ 74
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Case No: QBENF 1998/1259/A2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM OFFICIAL REFEREE'S COURT
(HIS HONOUR JUDGE DAVID WILCOX)
Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday 15th March, 2000
LORD JUSTICE SEDLEY
LADY JUSTICE HALE
and
MR. JUSTICE RATTEE
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HOTEL SERVICES LTD. |
Appellant | |
- and - |
||
HILTON INTERNATIONAL HOTELS (UK) LTD. |
Respondent |
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Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr. T. Etherton QC and Mr. P.J. Kirby (instructed by Memery Crystal London WC1B 5HT for the Appellant)
Mr. P. Naughton QC and Miss McCredie (instructed by Goldsmiths London SW1Y 6SE for the Respondent)
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE SEDLEY:
This is the judgment of the court.
1. In the minibar to be found in many hotel bedrooms unimagined problems lurk.
The honesty minibar, which depends on guests accounting for what they have
used, generates forms of dishonesty ranging from leaving without paying to
refilling bottles with water or other suitably coloured fluids. One answer to
this problem was the Robobar, a device developed and marketed by the
appellants, which electronically registered on the guest's account any
incursion into its contents. The respondents, a large hotel chain, between 1986
and 1996 used the appellants' Robobars in a number of their hotels. But the
Robobars themselves proved problematical: their chillers leaked ammonia which
both corroded the equipment and created a risk (albeit a very small one) of
injury or even fatality to guests. Repeated endeavours to correct the
malfunction failed.
2. We are concerned in this appeal with a single action brought by the hotel
chain (Hilton) in respect of two of its hotels, the Park Lane Hilton and the
Langham Hilton, both in London. In each of these the respondents (Hilton) in
1990-1 installed Robobars rented, generally on 10-year fixed-term agreements,
from the appellants (HSL). At the end of 1995 all the Robobars were switched
off in Hilton's UK hotels. They were dismantled and removed, but those in the
Park Lane and Langham Hiltons, where alone they had been showing a profit, were
reinstalled without their chillers and from February to May 1996 remained in
use. But, functioning now at room temperature, they ceased to show a profit and
in June 1996 were finally replaced.
3. Hilton had by then issued proceedings alleging repudiatory breach of an
implied term of merchantable quality and claiming damages. In the Official
Referee's Court His Honour Judge David Wilcox found for Hilton on liability in
the action relating to the Langham and Park Lane hotels and awarded them
damages, with interest, under the following heads:
* Rental either overpaid or paid on a failed consideration
* Cost of removal and storage of the chiller units and cabinets
* Loss of profit on the minibars.
4. This appeal is about the last two of these heads of damage. They amounted
respectively to £151,065 (together with interest) and £127,000. The
appeal, which concerns not their quantification but their recoverability, turns
almost entirely on the exemption clause in both rental contracts:
"SECTION 14: LIABILITY
(1) The Company [HSL] will not in any circumstances be liable for any indirect
or consequential loss, damage or liability arising from any defect in or
failure of the System or any part thereof or the performance of this Agreement
or any breach hereof by the Company or its employees.
(2) Without prejudice to paragraph (1) above all and any liability on the
Company's part arising in contract or tort (including negligence) or otherwise,
howsoever, for any loss, damage, liability or injury of whatsoever nature
arising in any way whatsoever from or in connection with this Agreement and/or
the System and any part thereof (including without limitation the use, supply,
possession, installation, repair or presence of the same) shall be limited to
the net value of the System and the Company's performance of its obligations
under Section 9.
(3) The limitation on and exclusions from liability contained in this Section
shall not apply to or affect the Company's liability for death or personal
injury caused by the negligence of the Company or its employees for which it is
legally liable.
5. Pleaded by way of defence, the exemption clause was met with a bare denial
that HSL could rely on it; and, having been barely alluded to in argument, it
played no part in the judgment. Before us, Mr. Terence Etherton QC for HSL
contended that once the validity of the clause was admitted (as it was) he was
entitled to succeed without more, there being no pleaded ground for excluding
Hilton from its effect. Moreover, he submitted, the applicability of the words
"indirect or consequential" is fact-sensitive, and there are no relevant fact
findings. For Hilton, Mr Philip Naughton QC contends not only that he can
properly argue the inapplicability of the exemption clause to the two material
heads of damage but that Mr Etherton's ground of appeal is not large enough to
allow him to argue, as he has to, that the damage comes within the second limb
of Hadley v Baxendale. For reasons which we hope will be apparent from
what follows, the court was attracted by neither submission and heard out the
arguments.
6. For HSL Mr Etherton submitted (a) that the law on exemption clauses has
taken a wrong turning from which it is not too late for this court to retrieve
it; but (b) that even on its present path of error the law exempts HSL under
the clause. Mr Naughton for Hilton contested both propositions and submitted
that on any view both contentious heads of loss fall outside the exemption
clause.
7. Before turning to the decided cases, it is relevant to look at the letter of
29 April 1988 from HSL which opened the negotiations:
"...We believe Robobar presents a very viable opportunity for your Hotel to
increase it's Food and Beverage profit as is already the case at many Hotels
throughout the World."
8. It is clear from the evidence that Hilton thereafter rented Robobars in
order to sell drink at a profit, and preferably an improved profit. It does not
follow, for example, from the fact that most of its Robobars in the event made
steady losses that Hilton's aim was simply to increase the hotels' overall
profitability by using the Robobars as a loss leader. In this situation we see
nothing wrong with the simple conclusion that both the cost of having to get
and keep the equipment out of the hotel bedrooms and the loss of any profits
which it would otherwise have been earning were direct or natural consequences
of the dangerous unserviceability of the equipment and therefore untouched by
an exemption clause which (since all recoverable loss is literally
consequential) plainly uses "consequential" as a synonym of "indirect".
9. But nothing, at least in this area of the law, is so simple. Mr Naughton
contends that a solid body of authority treats "indirect or consequential"
damage as loss arising out of mutually known special circumstances, leaving all
naturally occurring loss in the category of direct or immediate damage. Mr
Etherton submits that this simplistic allocation of contractual intent between
the two limbs of Hadley v Baxendale is erroneous. He takes his stand on
the different taxonomy adopted by Mr Harvey McGregor QC in the leading textbook
on damages. In his first chapter (paragraph 25) McGregor rejects the
distinction between general and special damage in favour (paragraph 26) of
"normal" and "consequential" losses: the former he describes as those which
every claimant in a like situation will suffer, the latter as those peculiar to
the particular claimant's circumstances. As an instance of normal damages he
gives the net market value of a benefit lost by the breach. Then:
"Consequential losses are anything beyond this normal measure, such as profits
lost or expenses incurred through the breach, and are recoverable if not too
remote. The distinction is not the same as that between the first and second
rules in Hadley v Baxendale: a consequential loss may well be within the
first rule."
10. If consequential losses include profits lost or expenses incurred through
breach, it is unsurprising that such loss may come within the first rule in
Hadley v Baxendale. What we find more problematical than the conclusion
is the premise that such losses cannot be normal losses in the author's own
sense of losses which every plaintiff in a like situation will suffer. Whether
they do, it seems to us, must depend on the facts - and to this extent Mr
Etherton is right to submit that the question is fact-sensitive. McGregor, by
contrast, derives his meaning of "consequential" from the more catholic usage
to be found in cases such as Mondel v Steel (1841) 8 M&W 858. This
was an unsuccessful demurrer to an action for damages for consequential loss
brought by a plaintiff who had already succeeded in setting off damages for
failure to meet the contractual specification in an action against him for the
contract price. Parke B spoke differentially of loss in market value and "any
consequential damage". This is of course a legitimate usage which, to the
extent that it cuts across the two Hadley v Baxendale categories, simply
requires cases to be decided in a different vocabulary. The difference barely
affects the recoverability of damages, since both normal and consequential
damages are in Mr McGregor's scheme recoverable so long as they are not too
remote; but while in relation to damages this represents a continuum, its
effect on exclusion clauses is to require a knife to be inserted between the
two kinds of loss. This no doubt is why, in a note contained at present in his
supplement, Mr McGregor reflects:
"It may be that there is justification for the courts to construe the term
consequential loss more narrowly where exclusion clauses are concerned -
exclusion of liability for consequential loss is a common feature of commercial
contracts - but the argument in the text as to the term's proper meaning is
still adhered to. Ideally one would wish it to be possible to construe
consequential loss narrowly where exclusion clauses are concerned but resort to
the contra proferentem rule and widely in all other cases; but two
competing interpretations of this nature may be difficult to achieve."
We may perhaps add that we are not convinced by the passage in which Mr McGregor goes on argue that those authorities which appear to confine the meaning of consequential loss to the second limb of Hadley v Baxendale lack logic. Not only do we have some difficulty in accepting the reasoning (namely that it is contradictory first to communicate special circumstances and then to accept an exclusion of liability for damage arising out of them: all worthwhile exclusions are contradictory); we find difficulty in allowing a substituted meaning of "consequential", even if it is analytically more satisfactory, to colour decisions based on a different and usage-based meaning.
11. It may be thought, however, that the source of the difficulty is not the
need to find a differential rule for the ascertainment of liability and the
construction of exclusion clauses respectively but the underlying distribution
of losses between the normal and the consequential. One would like to say
simply that all consequential losses are recoverable provided they were either
objectively or subjectively foreseeable by the parties; but to do this is to
restore to the word "consequential" the natural meaning of which commercial and
legal usage in exclusion clauses has long since robbed it. Instead one has to
go back to the language of the clause in its documentary and factual context
and try to see what it means. In this exercise we have found no real help in
the other parts of the contract, save that Section 18, dealing with force
majeure, excludes liability for "any direct or indirect loss", thereby
emphasising the familiar distinction.
12. Both parties, however, argue for a meaning which is heavily qualified - in
fact determined - by case-law. Mr Etherton, following McGregor, founds upon
Mondel v Steel, adopting it, however, not simply as a suitable
description of conventional heads of damage but as an exclusionary principle.
He finds its categories reproduced in Mellowes Archital Ltd v Bell Projects
Ltd (1997) 87 BLR 26, where, adopting earlier decisions in Oastler v
Pound (1863) LT(NS) 852 and Davis v Hedges (1871) LR 6 QB 687, this
court held that abatement of price was restricted to diminution in value of
"the thing itself", any other loss having to be recovered by equitable set-off
or action. "In most contractual relationships," said Hobhouse LJ (at 40),
"there would be no need to draw a distinction between the two types of defence.
But under DOM/1 [a form of contract limiting the right of set-off but not of
abatement] it is necessary to do so." Even so, in P and M Kaye Ltd v Hosier
and Dickinson Ltd [1972] AC 146, one sees Lord Morris of Borth-y-Gest (at
153), Lord Wilberforce (at 156) and Lord Diplock (at 169) using "consequential"
to describe damage in the sense espoused by McGregor. So too in the judgment
of this court delivered by Sir Raymond Evershed MR in George Cohen, Sons and
Co Ltd v Docks and Inland Waterways Executive (1950) 84 Ll LR 97.
13. This is the path of rectitude in Mr Etherton's argument. It leads, he
submits, to the exclusion by virtue of Section 14(1) of the contract of both
contentious heads of damage. But for reasons we now turn to there seems to us
to be an initial difficulty in following Mr Etherton down this road; and a
second difficulty is that, if one goes that way, the losses in issue in this
court appear still to come fairly within McGregor's class of "normal" damage.
An example of consequential loss might be injury to the profitability of the
hotel itself. But where the contract is one of hire, the "thing itself" is not
the equipment but the use of the equipment, and if through breach of contract
it becomes unusable and dangerous the natural or immediate loss is, it seems to
us, the profit (if any) which it would otherwise be yielding and the cost of
neutralising the danger. The latter, in fact, is as much for HSL's as for
Hilton's benefit in view of the provision of clause (3) of Section 14.
14. The rule in Hadley v Baxendale (1854) 9 Ex 341, known to every law
student, 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 a 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." (per Alderson B at 354).
15. This is not a dichotomous but a continuous classification, bringing into
the region of recoverability all loss which the parties must in the nature of
things or for known reasons have anticipated. It is the framing of exclusion
clauses which has made it necessary to divide up its elements in order to keep
the contractual effects within acceptable bounds. Thus in Millar's Machinery
Co Ltd v David Way and Son (1935) 40 Com. Cas. 204 a clause excluding
"responsibility for consequential damages" was read down by this court so as
not to exclude liability for damage occurring naturally or directly. In an
inadequately reported decision upholding Branson J, Maugham LJ is recorded in
indirect speech as having held that "the word `consequential' had come to mean
`not direct'," and Roche LJ as having applied this reading to the contract. We
do not accept Mr Etherton's submission that Millar's Machinery was in
truth an abatement case and was decided, for want of reference to such cases as
Mondel v Steel, per incuriam. In the present case, it will be recalled,
the phrase is "indirect or consequential" - as it was in Saint Line Ltd v
Richardsons, Westgarth and Co Ltd [1940] 2 KB 99 where Atkinson J,
construing a byzantine exclusion clause which included the same phrase as in
the present case, said:
"Direct damage is that which flows naturally from the breach without other
intervening cause and independently of special circumstances, while indirect
damage does not so flow. The breach certainly has brought it about, but only
because of some supervening event or some special circumstances. The word
`consequential' is not very illuminating, as all damage is in a sense
consequential..."
Having considered both the dictionary and the decision in Millar's
Machinery, he concluded:
"In my judgment the words `indirect or consequential' do not exclude liability
for damages which are the natural result of the breaches complained of. ... If
one takes loss of profit, it is quite clear that such a claim may very well
arise directly and naturally from the breach based on delay."
16. We do not know whether Atkinson J would, or might, have excluded damage
flowing from special facts known to the parties; but how difficult it can be to
draw a bright line between this and damage flowing naturally from a breach is
illustrated by the classic decision in Victoria Laundry (Windsor) Ltd v
Newman Industries Ltd [1949] 2 KB 528 where, adopting the Hadley v
Baxendale description of recoverable damage, this court reversed the trial
judge's decision that loss of profit was a special circumstance not drawn to
the defendants' attention as a potential consequence of breach. It held that,
knowing what they did of the plaintiffs' business, the defendants must be
regarded as having known that some loss of profit was liable to result from
their breach, though not profit on other contracts of which they knew nothing.
Speaking for the court, Asquith LJ said of the likelihood that delay in
delivering the boiler would cause a loss of profits and impede the extension of
the plaintiffs' business:
"It was surely not necessary for the defendants to be specifically informed of
this as a precondition of being liable for loss of business. Reasonable persons
in the shoes of the defendants must be taken to foresee, without any express
intimation, that a laundry which, at a time when there was a famine of laundry
facilities, was paying 2,000l. odd for plant and intended at such a time to put
such plant "into use" immediately, would be likely to suffer in pocket from
five months' delay in delivery of the plant in question, whether they intended
by means of it to extend their business, or merely to maintain it, or to reduce
a loss"
One sees readily why McGregor is ready to allow that consequential loss in the
sense adopted by him may be within the first limb of Hadley v Baxendale.
But the passage also illustrates the difficulty of allocating loss of profit
and removal and storage charges in a case such as the present to the region of
indirect loss; and, like Atkinson J, we would regard consequential loss, where
the two are bundled together, as synonymous with it.
17. If, contrary to our view, the issue in this appeal depends not on first
principles but on authority, it is necessary to consider four further decisions
of this court. In Croudace Construction Ltd v Cawoods Concrete Products
Ltd (1978) 8 BLR 20 the distinction drawn at first instance by Parker J
between consequential loss and natural or direct loss for the purposes of an
exclusion clause was held to be correct. Megaw LJ considered the court to be
bound by Millar's Machinery - which in any event he considered rightly
decided. In British Sugar plc v Projects Ltd (1997) 87 BLR 42 Waller LJ
(with whom Evans and Aldous LJJ agreed) rejected the submission that
"consequential" loss, to a reasonable businessman, would include loss of
profits. Among his reasons was that Croudace Construction and
Millar's Machinery were on closely similar exclusion clauses, and
that:
"... once a phrase has been authoritatively construed by a court in a very
similar context to that which exists in the case in point, it seems to me that
a reasonable businessman must more naturally be taken to be having the
intention that the phrase should bear the same meaning as construed in the case
in point."
18. Most recently, in Deepak Fertilisers Ltd v ICI Chemicals and Polymers
Ltd [1999] Ll.L.R.387 this court, construing a clause which expressly
excluded liability for loss of profits as well as "indirect or consequential
damage", held (at 403):
"The direct and natural result of the destruction of the plant was that Deepak
was left without a methanol plant, the reconstruction of which would cost money
and take time, losing for Deepak any methanol production in the meantime.
Wasted overheads incurred during the reconstruction of the plant, as well as
profits lost during that period, are no more remote as losses than the cost of
reconstruction. Lost profits cannot be recovered because they are excluded in
terms, not because they are too remote. We consider that this court is bound by
the decision in Croudace where a similar loss was not excluded by a
similar exclusion and considered to be direct loss."
19. We venture the comment that the reasoning in this passage would be no less
potent without its final sentence. That the issue is still not problem-free is
illustrated by the subsequent decision of Rix J (who had been overset in
Deepak Fertilisers) in BHP Petroleum Ltd v British Steel plc
[1999] Ll.L.R. 583, an incisive judgment which merits close reading, especially
(for present purposes) in relation to the need for special knowledge (at
600-602). For the present it is sufficient to record his conclusion, in the
light of the same authorities as we have been considering, that:
"...the parties are correct to agree that authority dictates that the line
between direct and indirect or consequential losses is drawn along the boundary
between the first and second limbs of Hadley v Baxendale."
20. This conclusion has the virtue of practicality; but - as Rix J's judgment
itself illustrates - it does not automatically tell one on which side the line
a case falls. Although we would if necessary adopt Waller LJ's position in
relation to decided cases on similar words (not forgetting the cautionary
remarks of Sir George Jessel MR in Aspden v Seddon (1875) 10 Ch.App.
394, 397 n.1 about the risks of this mode of construction), one has to be
continuously alive to differences of surrounding fact. We prefer therefore to
decide this case, much as Victoria Laundry was decided, on the direct
ground that if equipment rented out for selling drinks without defalcations
turns out to be unusable and possibly dangerous, it requires no special
mutually known fact to establish the immediacy both of the consequent cost of
putting it where it can do no harm and - if when in use it was showing a
direct profit - of the consequent loss of profit. Such losses are not embraced
by the exclusion clause, read in its documentary and commercial context. We
would accordingly dismiss this appeal.
(Order does not form part of the approved judgment)