England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON CIVIL JUSTICE CENTRE
(HHJ FREELAND QC)

		Royal Courts of Justice Strand London, WC2A 2LL
		29 October 2014

1. LORD JUSTICE BEATSON: The appellant, SC Confectia SA ("Confectia") manufactures clothing garments and is based in and incorporated in Romania. The respondent, Miss Mania Wholesale Limited ("Miss Mania") is a wholesale supplier to UK retail outlets. Confectia appeals against the order of His Honour Judge Freeland QC made on 18 March 2013 giving it judgment in the sum of £5,899.67 against the respondent, but ordering it to pay 80 per cent of Miss Mania's costs in the claim.
2. The dispute giving rise to these proceedings concerns a contract subject to Romanian law between Confectia and Miss Mania under which Confectia was to manufacture and supply clothing to Miss Mania. Clause 5.2 of that contract makes it clear that the customer (ie Miss Mania) is the ultimate arbiter of quality. It provides that Confectia shall have the duty to remove any quality flaws and to pay the cost of repair, shipment and storage. A total of seven consignments of clothing were supplied under the contract.
3. Before the judge, the parties' claims and counterclaims about a number of shipments included questions of late delivery, quality and discrepancies between delivery invoices and final invoices. The £5,899.67 in the order reflected the judge's conclusions on all these matters. The scope of this appeal, however, is significantly narrower. It concerns the only matter arising out of one shipment for which Sir Robin Jacob gave permission on 30 January 2014. The order granting permission states, perhaps rather delphicly: "the applicant's application for permission to appeal be granted on the issue of whether the third party being struck off is an intervening and/or unforeseeable event" and "permission is refused on all other points".
4. The other grounds upon which permission was sought are seen from Mr Anton van Dellen's statement on behalf of the Confectia for that hearing. They are the question of the contractual mechanism for defective quality and the question of whether an incorrect measure of damages was used. Permission was only given on the third point mentioned, which was whether the third party being struck off was an intervening event. So this appeal is solely concerned with the impact on the damages recoverable by Miss Mania as a result of its inability to recover garments which were of defective quality from a sub-buyer which had ceased trading. Was the judge correct to find that the insolvency of the sub-buyer was not reasonably contemplatable as a serious possibility at the time of contracting within the rule in Hadley v Baxendale and the subsequent case law so that that part of Miss Mania's claim was too remote? Was he correct to find, alternatively, that Miss Mania's inability to recover the garments broke the chain of causation? If so, what were the consequences of those findings? By how much did they reduce Confectia's liability? At what point in time were damages to be assessed?
5. I deal first with the contract and the background. The shipment in question was identified as docket 87 and was consigned in two batches at the end of November and the beginning of December 2010. Two invoices were raised under it for, respectively, the supply of 588 and 434 garments at £5 each. The amount under the first invoice was £2,940 and that under the second invoice was £2,170, making a total of £5,110. Miss Mania sold the garments covered by these invoices to two retailers for £32.40 per garment. It sold the 588 garments covered by the first invoice to Perera, and the 434 garments covered by the second invoice to Jo30. It appears that only 581 garments were delivered under the first invoice and 433 under the second invoice. This appeal only concerns the 581 garments sold and delivered to Perera. Accordingly, I need say nothing about Jo30, save that it accepted the defective garments subject to a deduction of £8 per garment because of the defect in quality.
6. Initially Perera also stated that it would accept the garments sold to it if the quality defect was rectified with a discount. But a week later, it rejected the garments and said it wanted to return them: see judgment, paragraphs 23 and 43-44. Miss Mania issued a credit note for £12,782 to Perera in respect of those garments, but has not recovered them. It appears from the summary of the part of the evidence of Mr Aksoy who gave evidence on behalf of Miss Mania that Miss Mania was expecting to get the goods back and to resell them. Mr Aksoy said (see paragraph 23 of the judgment):

"We wanted garments back. We could resell, but we never got the opportunity, because the witness said they went into liquidation."

In an email dated 30 May 2011, Mr Aksoy stated that Miss Mania asked Perera to send the garments back but they refused until the trial of a dispute between them. The email also stated:

"... hoping to get them back so you can put them correct and we can sell them in September this year to other customers to recoup the costs."

In context, the word "you" must be a reference to Confectia.

7. At any rate, after Perera stated that it rejected them, Miss Mania either took no steps or inadequate and insufficient steps to recover the garments. From the email dated 30 May 2011, it appears that the reasons were that the garments had been distributed to Perera's shops and Miss Mania would therefore incur expense in collecting them from the shops, and that the process would be time consuming: see paragraph 34 of the judgment for the relevant part of the email.
8. What Miss Mania did was to issue a debit note in the same sum as the credit note it had issued to Perera (£12,782). It was later unable to recover the garments from Perera because it had ceased trading and, in November 2011, was struck off the register and dissolved.
9. There was unchallenged evidence given on behalf of Miss Mania by Mr Aksoy that the garments were worth £5-6: see judgment, paragraphs 41, 42, 49 and 51. The judge stated (see paragraphs 12 and 38) that no reply to the defence was pleaded, there was no written evidence whatsoever from Confectia in relation to quality and no positive case in relation to that issue, and nothing in any witness statement dealing with quality. Notwithstanding some reservations about the email dated 30 May 2011, the judge accepted Mr Aksoy's evidence (see judgment, paragraphs 44-46 and 51) and held that the garments were worth £6 per garment.
10. I turn to the law. The judge found (see paragraphs 6 and 49) that under Romanian law compensation for breach of contracts was governed by what the parties would have foreseen at the moment when the contract was signed. He stated that this in turn meant he should apply the two-limbed principle in Hadley v Baxendale (1854) 9 Exch 341, and that the parties had agreed that this case fell within the first limb of the principle. He also stated that under Romanian law there was a duty to mitigate. In this court it appears from Mr van Dellen's submissions and from the written submissions of Mr Strutt on behalf of Miss Mania that both parties also proceeded on the basis that on the questions before us there is no difference between Romanian law and the law of England and Wales, save possibly that Romanian law applies a foreseeability test rather than a reasonable contemplation test.
11. The judge rejected (see paragraph 47) Miss Mania's primary submission that had the garments not been faulty it was likely that Perera would have paid the invoice and Miss Mania would not have suffered any loss at all. The judge accepted Miss Mania's alternative submission. This was that, if Perera's failure and Miss Mania's inability to recover the garments was unenforceable and thus too remote or broke the chain of causation, Miss Mania's loss was to be calculated on the basis that it would have recovered the garments and have been under a duty on mitigate its loss by selling them to another person. It is important to note that this aspect of any claim by Miss Mania against Confectia was found by the judge to be too remote.
12. The question was what was the value of the garments that Miss Mania should have recovered? Taking the value of £6 per garment found by the judge at paragraph 51, he concluded that the total value of the 581 garments delivered was £3,486. He also held at paragraph 52 that Miss Mania "would have been in a position to mitigate, but only in a position to mitigate to the extent of £6 per garment". He rejected (at paragraph 51) the argument that he should attribute a figure of £8 per garment "in order to bring into play parity between Jo30 and Perera" as "entirely misconceived, because there were differences in the Jo30 calculation" and because the only evidence, there being none on behalf of Confectia, was the unchallenged evidence of value to which I have referred. Accordingly, he concluded (see paragraphs 51 and 52) that Miss Mania was entitled to damages in the sum of £9,296 for this part of the matter. The figure was arrived at by deducting the £3,486 from the £12,782 credited to Perera.
13. The written submissions on behalf of Confectia are that the judge erred in allowing Miss Mania to claim the whole of the £12,782 in the credit note minus £6 per garment because the clearance price related to the period immediately after Christmas 2010 but Perera was only struck off in November 2011. The written ground of appeal states that:

"That measure of damages of the worth of garments thus falls away over time as by the time Perera is struck off, it is again late autumn/early winter and the value of the garments would have consequently risen again. By failing to mitigate their losses, Miss Mania cannot seek to claim the total of the credit note minus £6 per garment."

Reference was made to British Westinghouse v Underground Electric Railways [1912] AC 673.

14. Mr van Dellen refined that submission orally by focussing on what Mr Aksoy had said about selling in September. His core point was that what should have happened and what mitigation required to happen was that Miss Mania recover the garments from Perera and do what Mr Aksoy said that it would do, which was to keep them until September and sell them to other customers. Accordingly, to allow a value of only £6 to be given to them was to allocate this part of the loss to the manufacturer when the problem was a problem that arose between the wholesaler Miss Mania and Perera the retailer.
15. The written skeleton argument relies on a number of cases, but before us the crucial case for Mr van Dellen was The Achilleas [2008] UKHL 48, [2009] 1 AC 61. Mr van Dellen submitted on the basis of that case that as between Miss Mania and Confectia the risk of Miss Mania not being paid for goods delivered to Perera or not getting the goods back should be borne by Miss Mania. It was wrong, he argued, for Confectia to bear this risk, an event outside its control. It had no ability to get the goods back. That was a matter between its counterparty Miss Mania, and Perera, the third party. Mr van Dellen also relied on the references to allocation of risk in Andrews v Waddingham [2006] EWCA Civ 93, especially in the judgment of Richards LJ at paragraphs 35, 36 and 43-45.
16. Notwithstanding the attractive way Mr van Dellen put the case, I have concluded that the judge's approach and the calculations that led to his order are correct. I have already stated that the judge accepted Confectia's argument that Miss Mania's inability to recover the garments from Perera was unforeseeable. The consequence was that the loss Miss Mania suffered as a result of that inability was not recoverable from Confectia. Miss Mania's loss was therefore to be calculated on the basis that the reasonable steps to mitigate its loss it was required to take involved recovering the garments after Perera rejected them and then selling them to another person. The question thus becomes the relevant date at which to value those garments.
17. It is a basic principle of contract law that damages for breach of contract are normally to be assessed as at the date when the cause of action arose. That is the date of the breach of contract, in this case the supply of the defective garments: see, for example, Dodd Properties (Kent) Ltd v Canterbury City Council [1980] AC 174. But this is not a rigid rule, and the principle is to be applied flexibly. As Bingham LJ stated in County Personnel v Pulver [1987] 1 WLR 916 at 926, the rule that damages are assessed as at the date of the breach is not to be applied mechanistically where assessment at another date may more accurately reflect the overriding compensatory rule. That was done, for example, in Johnson v Agnew [1980] AC 367, a case of a specifically enforceable contract. The considerations in such a contract are different because damages are assessed as on the date when specific performance could have been ordered, which in that case was at the date of the judgment.
18. A flexible approach was also taken by the majority in The Golden Victory [2007] UKHL 12, [2007] 2 AC 353. That case, like The Achilleas, concerned a charter party. The Golden Victory was the subject of a seven-year charter. The charterers repudiated the charter party after three years, ie when it had four years remaining. The repudiation of the charter party brought the contract to an end. Subsequently, the Iraq war broke out. Damages were assessed at the date of the trial on the basis of a 15-month remaining charter party rather than at the date of the breach on the basis of a four-year remaining charter party. The reason for the flexibility in that case was that the later date more precisely measured the ship owner's known loss. The point was that the war clause in the charter party would have entitled the charterers to terminate the contract on the outbreak of the Iraq war. The court assumed that that is exactly what they would have done. The justification for the flexibility was that, in that case, the mitigation principle was irrelevant because at the time of the breach the shipowner had not attempted to mitigate its loss by concluding a substitute charter party for the four-year period. Accordingly, it could not have its damages based on the loss of hire for four years.
19. Mr van Dellen's written submissions about the date of assessment are put under the heading of "failure to mitigate" rather than explicitly in terms of departure from the basic contract breach date rule and his oral submissions which focus on remoteness also do not explicitly address that. But the written submission about the date of assessment and indeed the oral submissions in fact amount to a submission that in this case the contract breach date rule should not be applied or should be applied flexibly. The justification for regarding the relevant date as November 2011 (in the written submissions) or September 2011 (in the oral submissions) was stated in the written submissions to be that the £6-per-garment value "falls away over the time as by the time Perera is struck off, it is again late autumn/early winter and the value of the garments in Christmas 2010 was no longer a valid measure of the value of the goods". In my judgment, whether put in terms of a departure from the contract breach rule on the grounds of desirable flexibility or in terms of a failure to mitigate, the submission is fatally flawed for three reasons.
20. The first reason is that the requirement that the person who suffered loss from a breach of contract must take any reasonable steps that are available to mitigate the extent of the damage caused by the breach is one that arises at the date of the breach and is one which requires the person to make reasonable efforts. The requirement thus arose at the time of the breach and the judge accepted that the failure to recover the garments precluded Miss Mania from recovering the entire £12,782.
21. The second reason is that Confectia's case below and before this court assumes that Miss Mania would have got the garments back but would then not have sold them to another person for 9 or 11 months. The principle that a person who suffered loss cannot recover for loss due to its failure to take steps to mitigate that loss only requires that person to take reasonable steps. I reject the proposition that reasonableness required Miss Mania to keep any garments recovered from Perera after Perera rejected them for 9 or 11 months in the hope that the market would rise and to incur expenses for, inter alia, storage. It is true that Mr Aksoy's post-breach email to which I have referred states that, had Miss Mania got the garments back, it would have sent them back to Confectia to be "corrected" and would then have sought to sell them 9 months later to recoup its costs. But the email also makes it clear that it did not get the garments back because it could not get them back. It cannot therefore be said that this is a case where the loss is one that can be characterised as one which Miss Mania should have avoided. In a sense, Mr van Dellen is submitting that Confectia should have its cake by regarding Perera's failure to recover the garments as unforeseeable and too remote, and thus requiring Miss Mania to give credit for the value of what should have been returned, but should also be able to eat that cake by requiring Miss Mania not to take mitigating steps for a period of 9 or 11 months.
22. The third reason for rejecting the submission is a practical one. Although it was asserted by Mr van Dellen that by September or November 2011 the value of the garments would have risen there is no evidence to this effect. The result was that the only evidence about value before the judge was Mr Aksoy's evidence about the position at the time of the breach and Perera's rejection of the garments. It cannot therefore be said that a departure from the contract breach date principle in this case would enable compensation to be more accurately calculated.
23. As to The Achilleas, the effect of that case on the understanding of remoteness of damage in the law of contract has of course been profound. Law students up and down the country are probably set the task of identifying the ratio of that case. I have concluded, however, that taking paragraph 30 of Lord Hope's judgment, on which Mr van Dellen relied, as the ratio for present purposes, the case does not assist Confectia.
24. The Achilleas was about the irrecoverability of loss for which the charterer, the party in breach, was held not to have accepted liability either because of a trade practice (Lord Hoffmann) or because the loss was something out of the charterer's control and therefore unquantifiable (Lord Hope). Here, the recoverability of the garments from Perera was not in the control of Confectia, the party in breach. The judge's decision is consistent with The Achilleas because he held Confectia was not liable for the loss caused by the inability to recover on the ground that it was too remote or broke the chain of causation. The consequence is, as I have stated, that the question here is not strictly one of remoteness of loss, but as to the deduction to be made to reflect the value of the unrecovered goods. That value was not unquantifiable: the issue was the date on which it was to be valued.
25. Secondly, cases since The Achilleas have made it clear that, while it applies beyond the context of shipping contracts, that Hadley v Baxendale remains the standard rule and is grounded on policy. The standard rule can be displaced by an analysis based on the allocation of risk in the contract if, on examining the contract and the commercial background, it can be said that the loss in question is within or outside the scope of the contractual duties: see Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7. In this case, however, there is no evidence of practice about the effect of the insolvency of sub-buyers so that the conditions for displacing the standard rule have not been satisfied.
26. Finally, The Achilleas was a case about the second limb of Hadley v Baxendale. Here, it is common ground that this case has to be considered under the first limb, whether that is characterised as a loss which is foreseeable or a loss which is reasonably contemplatable.
27. For these reasons, notwithstanding Mr van Dellen's efforts, I would dismiss the appeal.
28. LORD JUSTICE FULFORD: I agree.