England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EXETER COUNTY COURT
TECHNOLOGY & CONSTRUCTION COURT
HHJ Cotter QC
8PL03589

		Royal Courts of Justice Strand, London, WC2A 2LL
		05/02/2013

Sir David Keene :

Introduction

1. This appeal raises an issue of some importance about the law on the remoteness of damage in cases of breach of contract. Can a developer of land, whose development scheme is delayed in its implementation by the failure of a consulting engineer to perform tasks which he has contracted to perform by an agreed date, recover damages for the loss he suffers thereby from a diminution in the market value of the development which occurs during the period for which its completion is delayed?
2. This appeal is brought from a decision of His Honour Judge Cotter, Q.C., sitting at Exeter County Court. The proceedings involved a claim by the present appellant for unpaid fees, a claim which the Judge allowed. But there was also a counterclaim by the defendant which was successful, that counterclaim including within its scope a claim for damages for the fall in market value of the property in question. It is that judgment on the counterclaim which gives rise to the present appeal. Permission to appeal was granted by Aikens L.J. on one ground concerning the appellant's liability for that particular head of loss.

The Facts

3. The appellant is a company providing consulting engineering and geological services. It is based in Devon. The respondent is a farmer who in August 2006 obtained planning permission for the development of a field which he owned adjacent to an A class road in East Taphouse, Cornwall. The development permitted was for residential purposes so as to provide a mix of open-market dwellings and what are known as "affordable" dwellings.
4. The development permitted included a road to be built within the site so as to serve the dwellings. As is usual in such circumstances, it was the respondent's intention that the road upon its completion should be adopted by the highway authority, in this case Cornwall County Council, under section 38 of the Highways Act 1980, so that it would thereafter be maintained by that authority at public expense. That required the County Council's agreement, which in turn depended upon that Council approving the design of the estate road.
5. To that end, Mr. Gubbins engaged the appellant to design the road and drainage for the site and to obtain section 38 approval. There was initially an oral agreement made on 15 September 2006 between Mr. Gubbins and Mr. Swainson, a director of the appellant, with a fee payable (as originally agreed) of £15,000. Subsequently there was a formal letter of engagement. The Judge found that it was an express oral term of the contract that the appellant would complete the agreed work by March 2007, and indeed the Judge also found that that was a reasonable time for the work to be done. It is clear that the appellant was well aware that the work which it was to undertake formed an essential part of the permitted residential development, as indeed its counsel accepted in the course of the hearing in this court.
6. That work was not completed by March 2007. Indeed, an initial section 38 approval was not obtained until 17 February 2008, and even then some parts had not been finalised. Mr. Gubbins was dissatisfied with the appellant's performance and in April 2008 he engaged another consulting engineer, Mr. Powell of the Joint Technical Partnership Limited. The Judge found that Mr. Powell had in reality taken over from the appellant by 8 May 2008. Mr. Powell redesigned the road and drainage layout and submitted it to the Council on 16 June 2008. It was approved 2 days later.
7. The appellant had by this time received just under £20,000 by way of fees, but it invoiced the respondent for a further £2,893. Mr. Gubbins refused to pay and the appellant commenced these proceedings. Mr. Gubbins counterclaimed for the sums previously paid on the basis that the appellant's work had been defective and had had to be redone, but in addition he sought damages for the appellant's failure to complete the agreed work by March 2007. This, it was said, had resulted in a reduction in market value of the private residential units, a reduction in the offer from a Housing Association for the affordable units and an increase in building costs.

The Trial and Judgment

8. A number of issues arose at trial, most of which we are not concerned with on this appeal. The Judge noted a number of failings on the part of the appellant's Mr. Swainson, with there having been long periods of no or very limited progress with the contracted work. It was found that even as at May 2008 the appellant had failed to produce adequate drawings as required under the contract and that it was only when Mr. Powell's drawings were approved by the Council on 18 June 2008 that Mr.Gubbins was in the position that the express term of the contract would have placed him in at March 2007: paragraph 76. The Judge found in terms at paragraph 96 that the development of the site was delayed by those 15 months as a result of the appellant's breach of contract. He also found that, but for that breach, the respondent would have achieved completion of the development by June 2008.
9. The agreed evidence of the valuers for each side gave a figure for the gross sales value of the development as at that date of £3,827,500, had it been completed by then. There was also evidence that by July 2009, that figure had fallen by £398,000 to £3,429,500, prices having fallen by about 14% during that period of just over one year. But the Judge took the view that any loss associated with the decline in market values, if recoverable at all, would need to be assessed. He therefore dealt with the position at law as a matter of principle.
10. He found that the delay in the development had been caused by the appellant's breach of contract and that that had resulted in loss to Mr.Gubbins because of the reduced value of the development. So causation as such was established. But the remaining issue, and the one which gives rise to this appeal, is whether that loss was too remote. The Judge set out extensively passages from the judgment of Lord Hoffmann in Transfield Shipping Inc-v-Mercator Shipping Inc, more conveniently referred to as The Achilleas 2008 UKHL 48; (2009) 1 AC 61, and he referred to the classic decision on remoteness of damage in contract cases, Hadley-v-Baxendale (1854) 9 Exch 341; 156 Eng. R. 145. He concluded at paragraph 185 of his judgment that:

"It is clear that Mr. Swainson well knew at the time of entering into the contract that delay brought with it the risk that the property market might move considerably including to the significant disadvantage of Mr.Gubbins. In this regard he had actual knowledge and it was not in any sense loss of a type that he did not reasonably foresee, should significant delay occur. He knew exactly what Mr. Gubbins intended to do and when he intended to start. He knew that a delay could mean as "with all these things up and down". In short it would clearly have been within his contemplation, had he chosen to consider the issue, as an obvious potential effect of delay or a "real danger" if delay occurred. There was no idiosyncratic or unusual element to this relatively modest development, its funding or sale in this regard."

11. He then went on to consider the nature of the contract and whether the appellant could reasonably be considered to have assumed responsibility for such a type of loss, given the commercial background to the contract. I say at this point that there does not appear to have been any evidence put before him of any general understanding or expectation in the land development market as to assumption of responsibility for this type of loss, similar to that referred to in The Achilleas and other cases in certain types of market. The judge here observed that, while property markets do rise and fall, they tend not to do so overnight but over a prolonged period, and that it was the egregious delay of the appellant which had produced the extent of the loss in the present case. He noted that Mr. Swainson was a professional in a field closely allied to the property market. At paragraph 193 of his judgment he said that he did not regard the decision in The Achilleas as effecting a major change to the approach to be adopted to the recoverability of damages for breach of contract. In so saying, he was echoing views expressed in a number of High Court decisions, as we shall see.
12. Finally he added:

"It seems to me that, as a first principle, the Hadley-v-Baxendale approach remains the one to be taken. In my judgment Lord Hoffmann was setting out in The Achilleas that only if on consideration of the commercial background to the contract, the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties would losses not be recoverable. In the present case I have considered the commercial background to this particular contract and see no reason to limit liability as Mr Land submits I should.

In my judgment in this specific contract the Claimant is responsible for loss flowing from the property market decline."

That loss was to be assessed.

The Submissions

13. The appellant contends that the Judge adopted the wrong approach to this issue as a matter of law. It is said that to hold the appellant liable under its contract for losses flowing from a decline in the housing market, over which it had no control, was contrary to the principles set out in The Achilleas, particularly in the speech of Lord Hoffmann. Relying also on the House of Lords decision in the SAAMCO case (Banque Bruxelles-v-Eagle Star Insurance Co. Ltd.) (1997) AC 191, Mr. Lofthouse Q.C. submits that the first step in such an exercise is to establish the scope and nature of the duties owed under the contract and that in the present case there was no duty on the appellant to protect the respondent against losses due to falls in the market. The appellant, he emphasises, was not retained to advise on whether or not the development should proceed.
14. It is argued that it is not enough simply to apply a "but for" test for causation or to ask whether the type of loss was reasonably foreseeable. As established in The Achilleas, it is necessary to decide whether, when considered objectively, the appellant can be said to have accepted, at the time of contract, responsibility for that type of loss, were it to occur. Mr. Lofthouse observes that there is a dearth of decided cases holding professionals in the property market liable for losses flowing from falls in that market and that that suggests no such assumption of responsibility. He emphasises the contrast between the modest fee payable to the appellant under the contract and the potential scale of the losses through market movement, and the fact that the appellant had no control over the movement. It is contended that the type of losses for which the appellant should be liable for breach of this contract are the costs of having the necessary drawings made and submitted a second time by another engineer, which would include any increase in those costs which has come about because of the delay.
15. The respondent's position is that the correct approach to the remoteness of damage in a contract case is to ask whether, at the time of the contract, a reasonable person in the position of the defendant to such a claim would have realised that the kind of loss in question was one not unlikely to result from a breach by him of the contract. This is the traditional approach established in Hadley-v-Baxendale and developed by the House of Lords in Heron II (Koufos-v-C. Czarnikow Ltd.) (1969) 1 AC 350, especially in the speech of Lord Reid. It is submitted that that "standard approach" may be departed from sometimes where the nature of the contract and the commercial background, as established by evidence, indicates that the defendant could not be taken to have assumed responsibility for such a type of loss, as happened in The Achilleas. But Mr. Palmer, Q.C., for the respondent, argues that that is not the situation in the present case. The fact that a "modest" breach of duty gives rise to an award of substantial damages does not take a case out of the standard approach: see Siemens Building Technologies Ltd. –v- Supershield Ltd. (2010) EWCA Civ 7; (2010) 2 All ER (Comm) 1185.
16. The respondent submits that the Judge approached the issue in the appropriate way when deciding that it was the standard approach as set out in The Heron II that should be adopted. Having arrived at that position, his finding of fact at paragraph 185 (set out in this judgment at paragraph 10) that Mr Swainson knew at the time of contract that delay brought with it the risk that the property market might move to the significant disadvantage of Mr Gubbins patently more than met the Heron II test.

Discussion

17. The expression "remoteness of damage" is concerned, as is well- known, with the principles applied by the law to determine which types of losses suffered by a contracting party may be compensated for in damages when those losses may be said to have been caused by a breach of contract by the other party. As a result of applying such a legal test, some types of loss caused by the breach may be regarded as too remote for the contract-breaker to be held liable, despite there being a causal link between the breach and those losses. The classic exposition of the legal test in Hadley-v-Baxendale (ante) has been considered and re-formulated in a number of cases since the mid-nineteenth century and it is unnecessary to trace the development of the test, at any rate until one comes to the House of Lords decision in The Heron II (ante), some forty years ago. Their Lordships in that latter case expressed the test in a number of different ways, but all of them focussed on what the defendant at the time of making the contract ought reasonably to have contemplated would result from the breach of the contract. The degree of likelihood of a particular kind of consequence of breach required in order for there to be liability was described in various ways. Lord Reid's formulation was that a type of loss was not too remote if the defendant at time of contract ought to have realised that it was "not unlikely" to result from the breach (page 388 E-F), and Lord Morris of Borth-y-Gest agreed. Lord Pearce and Lord Upjohn put it in terms that a reasonable person would have appreciated that there was a "serious possibility" or "a real danger". Thus, 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 a type or kind of loss is not too remote. What was known to the defendant at the time of contract will clearly be relevant to what was reasonably foreseeable.
18. This approach has been applied in a very large number of cases since The Heron II: see, for example, H. Parsons (Livestock) Ltd. –v- Uttley Ingham and Co. Ltd. (1978) QB 791. Given the reliance placed by the present appellant on The Achilleas, and particularly on the speech of Lord Hoffmann, it is necessary to ask whether and, if so, in what way, the long-established approach to remoteness has been modified by that more recent decision.
19. The essence of The Achilleas was an emphasis upon the presumed intention of the parties at the time of contract. The House of Lords was dealing with a charter party case where the arbitrators had expressly found there to be a "general understanding in the shipping market …. that liability [in the event of late redelivery of the ship] was restricted to the difference between the market rate and the charter rate for the overrun period": paragraph 6. In other words, there was that general expectation that a charterer who returned a vessel late was liable in damages only for the period of late delivery and not for losses incurred through the owners losing a follow-on charter. This was the factual context for Lord Hoffmann's statement at paragraph 15 that a court:

"must first decide whether the loss for which compensation is sought is of a "kind" or "type" for which the contract-breaker ought fairly to be taken to have accepted responsibility."

As he said,

"It must in principle be wrong to hold someone liable for risks for which the people entering into such a contract in their particular market would not reasonably be considered to have undertaken": paragraph 12 (emphasis added).

20. Lord Hoffmann went on to say that:

"the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law."

It seems to me quite clear that Lord Hoffmann was not seeking to depart wholesale from the "reasonably foreseeable" test of remoteness, but rather to stress that what was reasonably foreseeable might sometime not prevail as the test if there were particular circumstances demonstrating that the parties could not have contracted on the basis that the defendant was to bear the liability of a particular kind of loss, even though reasonably foreseeable as a "not unlikely" consequence of breach. Thus at paragraph 11 he said:

11. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common."

21. Not all the members of the House in The Achilleas gave judgment in quite the same terms as Lord Hoffmann, but it is unnecessary to take time on a detailed analysis of the other speeches, since the decision has been carefully considered by this court in a decision binding upon us, Supershield Ltd.-v-Siemens Building Technologies FE Ltd. (ante). That case arose out of a contract for the installation of a sprinkler system in an office building. The supply of water came from a tank, where a float was supposed to cut off the inflow of water to the tank when enough had entered. A connection to the float failed, leading to flooding. There was a bund and a drainage system intended to cope with such an accidental overflow, but the drains had become blocked. Both the trial judge and the Court of Appeal held that, despite the blocked drains, the failure of the float connection was nonetheless an effective cause of the flood. So causation was established.
22. But it was contended by the appellant that the loss was too remote, because in the normal or usual course of things, the bund and drains system would have dealt with the problem. Toulson L.J., with whom the other two members of the court agreed, referred to Hadley-v-Baxendale, The Heron II, the SAAMCO case (ante) and The Achilleas. He then at paragraph 43 stated:

"Hadley-v-Baxendale remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, South Australia and Transfield Shipping are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties."

The appeal failed.

23. That passage from paragraph 43 of Supershield was cited and followed by my Lord, Tomlinson J., as he then was, in Pindell Ltd.-v- Air Asia Berhad (2011) 2 All ER (Comm) 396. The Judge there said that, like a number of other judges (who he listed), he did not consider that the decision in The Achilleas had effected a major change in the approach to the recoverability of damages for breach of contract, and he set out the passage from Supershield quoted above.
24. I too agree with the summary of the law provided by Toulson L.J. in Supershield, although I would put it in slightly different language. It seems to me to be right to bear in mind, as Lord Hoffmann emphasised in The Achilleas, that one is dealing with the law of contract, where the situation is governed by what has been agreed between the parties. If there is no express term dealing with what types of losses a party is accepting potential liability for if he breaks the contract, then the law in effect implies a term to determine the answer. Normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken. But if there is evidence in a particular case that the nature of the contract and the commercial background, or indeed other relevant special circumstances, render that implied assumption of responsibility inappropriate for a type of loss, then the contract-breaker escapes liability. Such was the case in The Achilleas.
25. How does that approach affect the outcome of the present appeal? There seems little doubt that the Judge here sought to apply those principles. He considered whether losses arising from movement in the property market were reasonably foreseeable at the time of contract as a consequence of delay by Mr. Swainson, and he concluded that they were. Indeed, he found that Mr Swainson actually knew that the property market could go up or down and knew what Mr. Gubbins intended to do by way of development and when: see paragraph 185 of his judgment, set out at paragraph 10 ante. But he did not stop there. Instead, he went on to consider whether this was one of those unusual cases which fell outside the more common Hadley-v-Baxendale approach. He expressly applied his mind to the commercial background of the contract and to whether the standard approach would not reflect "the expectation or intention reasonably to be imputed to the parties".: paragraph 193, set out at paragraph 11 ante. It seems to me that the Judge's approach to and summary of the legal principles cannot be faulted.
26. The appellant contends that the judge did not properly apply those principles. Yet it is beyond dispute that there was no evidence put before him to show that there was some general understanding or expectation in the property world that a party in this engineer's position would not be taken to have assumed responsibility for losses arising from movement in the property market where there had been delay in breach of contract. In that sense it was patently not an Achilleas type case.
27. Consequently Mr Lofthouse refers to other factors. It is said, entirely correctly of course, that the appellant had no control over the property market. But that is the case with all markets, and there are many decided cases where delay in delivery of goods has been held to give rise to damages for loss suffered through a change in the market price. Indeed, The Heron II itself is one such instance. So the fact that a loss is suffered because of a change in market values during the period of wrongful delay does not of itself in any way render the case out of the ordinary. It is true that sometimes a market is unusually volatile, so that there can be a dramatic change in prices in the course of a few days, but that is not the case here. The evidence in the present case was that property values fell by about 14 % in just over a year.
28. The appellant points to the fact that there are very few decided cases where a decline in the property market during a period of delay has been held to give rise to an actionable loss. That seems to be so. But nor are there cases from the property world deciding the other way. The case of SAAMCO, relied on by the appellant, was not a delay case, but one where the breach of contract was the giving of a negligently high valuation, and the discussion therein about the extent of the valuer's duty provides little guidance for present purposes. Indeed, in the course of his judgment, the only reasoned one in the case, Lord Hoffmann makes reference to the decision of the New Zealand Court of Appeal in McElroy Milne-v-Commercial Electronics Ltd. (1993) 1 N.Z.L.R. 39, where a solicitor's negligence caused a two year delay in the sale of a property. The Court of Appeal held that the property owner was, in Lord Hoffmann's words,

"entitled to the difference between what the property would have fetched if sold soon after its completion with the guaranteed lease and what it eventually fetched two years later."

There is no suggestion in Lord Hoffmann's speech that that was other than a proper conclusion.

29. There is also the case of T and S Contractors-v-Architectural Design Associates, unreported, a decision of HHJ Rich Q.C., sitting as an official referee, dated 16 October 1992. There the architect defendant had contracted to carry out a feasibility study and to seek planning permission on behalf of the plaintiff for a small housing development. As a result of the architect's negligence in surveying the site, a planning permission which was obtained proved incapable of implementation and a fresh permission had to be sought. The consequence of this was delay of some 14 months in the completion of the development. During that time the housing market suffered a decline, and the plaintiff sought damages (inter alia) for the loss in value. It was contended by the defendant that such loss was too remote. After referring to Victoria Laundry (Windsor) Ltd.-v-Newman Industries Ltd. (1949) KB 528, to The Heron II and other authorities, the Judge held that the loss was reasonably foreseeable as a serious possibility if there was delay and was not too remote. It may well be that the reason for the absence of many cases of this kind is that the property market does not move as quickly as certain other types of market involving commodities and other goods, and it takes a very lengthy delay in breach of contract before a provable loss of value can occur. A few days or even a few weeks delay is unlikely to give rise to a demonstrable loss on the property market. It was the appellant's delay of 15 months, in the Judge's words an egregious delay, which in the present case gave rise to a quantifiable loss.
30. Finally, there is the argument put forward by the appellant that the scale of the loss looks like being, when finally assessed, disproportionate to the £15,000 fee payable by the respondent under the contract. I do not find this argument persuasive. It may not infrequently be the case that the breach of a contract of modest size gives rise to a substantial claim in damages. Moreover, any such contrast is merely one possible pointer towards a contracting party not having undertaken a potential liability which is reasonably foreseeable and by itself would not normally suffice to establish such an absence of responsibility. It does not do so here.
31. I conclude, therefore, that the Judge was right to find that there was nothing to take this case out of the conventional approach to remoteness of damage in contract cases. It follows that I would dismiss this appeal.

Lord Justice Tomlinson :

32. I agree.
33. I would merely note, as does Sir David Keene at paragraph 27 above, that we are not in this case concerned with the problem which can be thrown up by a rapid and extreme movement of prices in a volatile market. As the judge himself here observed, while property markets do rise and fall, they tend not to do so overnight but over a prolonged period, and it was the egregious delay of the Appellant which produced the extent of the loss in this case. It follows that we are not here concerned with a loss of the type which can be generated in a very different type of market, such as was under consideration in Pindell, above, albeit the decline in market prices in both markets may be broadly traced to the same macro-economic conditions.
34. Some markets are extremely volatile by nature. Furthermore, circumstances at the time of contracting may be such as to render it foreseeable that extreme volatility could be experienced in certain foreseeable circumstances within the lifetime of the contract. Accordingly, I wonder in retrospect whether I was correct in paragraph 88 of my judgment in Pindell to attribute to Lord Rodger, Lord Walker and Baroness Hale in The Achilleas, above, the view that the consequences of extremely volatile market conditions are, axiomatically, irrecoverable. Happily this issue does not arise for decision here, as indeed it did not arise for decision in Pindell. When it does, I doubt if it permits of so trenchant or simplistic an answer as I was then, perhaps incautiously, inclined to supply.

Lord Justice Laws :

35. I agree with both judgments.