United Kingdom House of Lords Decisions

At delivering judgment, on 17th March 1994—

LORD KEITH OF KINKEL —My Lords, for the reasons given in the speech to be delivered by my noble and learned friend Lord Jauncey of Tullichettle, which I have read in draft and with which I agree, I would allow this appeal and make the orders which he proposes.

LORD BRIDGE OF HARWICH —My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Jauncey of Tullichettle. I agree with it and, for the reasons he gives, I would allow the appeal and make the orders he proposes.

LORD JAUNCEY OF TULLICHETTLE —My Lords, this appeal concerns remoteness of damage in breach of contract. In 1985 the respondents Balfour Beatty Construction (Scotland) Limited ("Balfour Beatty") were the main contractors for the construction of the roadway and associated structures of the Sighthill section of the Edinburgh city bypass. In order to carry out the necessary work they installed a concrete batching plant a few miles away at Hillwood Quarry, Ratho, and entered into an agreement for a temporary supply of electricity thereto with the appellants' predecessors, the South of Scotland Electricity Board ("the Board"). During the construction of a concrete aqueduct to carry the Union Canal over the road the batching plant ceased to operate due to the rupturing of fuses provided by the Board in their supply system. As a result of the failure, the aqueduct could no longer be completed to the standard required by Balfour Beatty's contract with Lothian Regional Council and it became necessary to demolish what had been constructed and to rebuild from scratch. This, in summary, is the background to the action in which Balfour Beatty sought to

recover from the Board, as damages, the cost of demolition and reconstruction.

After a proof before answer the Lord Ordinary, Lord Clyde, held that the Board were in breach of contract but that Balfour Beatty had failed to prove the only qualified loss which was before him. He therefore granted decree of absolvitor. Balfour Beatty reclaimed and the Second Division unanimously recalled the Lord Ordinary's interlocutor and granted decree for the agreed sum of £229,102.53 with interest. The Board's successors now appeal to your Lordships' House.

On 18th December 1984 there took place a meeting between representatives of Balfour Beatty and of the Board at which arrangements were made for the temporary supply of electricity. The Lord Ordinary found that no more detail was given to the Board than that the concrete from the batching plant was required for the structures and roadway of the bypass. After the supply had been connected the batching plant operated without problems for some months and the concrete was delivered to the site in lorries which kept it in motion throughout the 25-minutes journey. At Hillwood Quarry there was also a batching plant operated by another company from which Balfour Beatty took regular daily supplies of concrete. On 28th October 1985 Balfour Beatty required to construct stage 1 of the above-mentioned aqueduct. This required 360 cubic metres of concrete which had to be poured continuously, that is to say, with a gap of no more than 30 minutes between the pour from each lorry, so that each pour took place before the previous pour had hardened. During the evening, after some 320 cubic metres had been poured, the batching plant stopped working due to the rupture of the fuses, and because the other plant in the quarry had already closed down, Balfour Beatty were unable to pour more concrete that night. The concrete last poured therefore hardened.

Balfour Beatty initially attempted to overcome the problem by cutting back the concrete already poured to a face which might form a construction joint for the continuation of the concrete. However, the conditions of the contract required the aqueduct to be watertight both in the sense of keeping water out and of retaining the water carried by it and Balfour Beatty's project manager decided that this requirement could not be achieved by the use of a construction joint set into the existing concrete. In these circumstances it was decided to demolish all the concrete poured on 28th October 1985 and to rebuild stage 1 of the aqueduct. It was conceded by the Board during the proof that Balfour Beatty had no reasonable alternative to this course. It was the cost of this demolition and reconstruction which Balfour Beatty sought to recover from the Board.

The Lord Ordinary in Balfour Beatty Construction (Scotland) Ltd. v. Scottish Power plc 1992 S.L.T. 811 at p. 813A, after referring to Hadley v. Baxendale (1854) 9 Exch 341 and to a number of other authorities, proceeded to deal with the claim for damages on the basis that the quantification thereof was:

"limited to the loss which the defenders might reasonably have contemplated at the time of the contract, subject to the explanation that it is sufficient that the loss be of a type which might have been so contemplated. That it was actually of an unforeseeable scale is not relevant."

He went on to say that the Board:

"should only be taken to have anticipated the kind of loss arising naturally in the ordinary course of things from the breach of contract."

No criticism has been directed at the Lord Ordinary's statement of the appropriate law. Rather has it been said that he has erred in his application of the law to the facts.

In rejecting Balfour Beatty's claim, the Lord Ordinary made certain findings-in-fact which I find it necessary to narrate verbatim in view of the way in which the Second Division dealt with the reclaiming motion. At p. 813E, the Lord Ordinary said:

"The defenders could certainly contemplate that if the supply failed the plant would not operate and that if it was operating at the time the manufacture of concrete would be interrupted. What they did not know was the necessity of preserving a continuous pour for the purposes of the particular operation. They were not told of the practice of having standby plant for such operations nor were they asked to arrange any specially secure supply of electricity. Furthermore they did not know that a construction joint would not be an acceptable solution if the power was prematurely terminated so that demolition would follow."

In the context of certain observations of Lord Wright in Karlshamns Oljefabriker (A/B) v. Monarch Steamship Co. Ltd. 1949 SC (HL) 1, the Lord Ordinary at p. 813G-H said:

"The necessity for a continuous pour and the requirements of the work on which the pursuers were engaged on 28th October 1985 do not seem to me on the evidence to be notorious or obvious or so generally known as to be taken to be within the understanding of the defenders at the time of the contract. It may be that the technique of a continuous pour for certain concrete structures may be a regular part of industrial practice, and it may be that the fact that if concrete is poured into position it will harden is within common knowledge, but the fact that an interruption of the pour could lead to a condemnation of the whole operation seems to me to be beyond the defenders' reasonable contemplation."

He went on at p. 8131 to say:

"But interruption of the work is one thing, the demolition of what has been done is another."

In my view, the critical finding was that the Board were unaware of the need to preserve a continuous pour for the construction of the aqueduct.

In the Inner House the Lord Justice-Clerk [1993 S.C. 350 at p. 356E] considered that the issue of remoteness fell to be approached on the basis of the rule in Hadley v. Baxendale applied in the light of what had been said in later cases in this House. The well-known dictum of Alderson B. in Hadley v. Baxendale is in the following terms:

"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, 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."

This dictum has been subject to much dissection and interpretation in subsequent cases but for the purposes of this appeal in which the law applicable is not in dispute, it is sufficient to refer only to a dictum of Lord Reid in Czarnikow Ltd. v. Koufos [1969] 1 AC 350, at p. 388E where, after referring to R. & H. Hall Ltd. v. W. H. Pim (Junior) & Co. Ltd. (1928) 33 Com. Cas. 324, he said:

"I would agree with Lord Shaw that it is generally sufficient that that event would have appeared to the defendant as not unlikely to occur. It is hardly ever possible in this matter to assess probabilities with any degree of mathematical accuracy. But I do not find in that case or in cases which preceded it any warrant for regarding as within the contemplation of the parties any event which would not have appeared to the defendant, had he thought about it, to have a very substantial degree of probability."

The Lord Justice-Clerk having accepted the Lord Ordinary's finding that the Board were not told that Balfour Beatty intended to construct the aqueduct by continuous pouring of concrete, nevertheless continued at p. 356G–H:

"I am satisfied that the defenders must have been aware that the concrete was to be poured, and that at times continuous pouring would be in operation."

The Lord Justice-Clerk appeared to justify this conclusion by reference to three factors: (i) That Balfour Beatty had contracted for a continuous supply of electricity; (ii) That the site was floodlit; and (iii) That the Board in their pleadings criticised Balfour Beatty for not having available a back-up supply of concrete. There was no evidence that floodlighting of the site was known to the Board at the time the contract was entered into and it is difficult to see what relevance pleadings in an action raised in 1987 can have to the Board's state of mind in December 1984. A continuous supply of electricity is such as any normal consumer would require and in the absence of any evidence as to special circumstances seems to me to be entirely equivocal as to continuous production and pouring of concrete. The Lord Justice-Clerk went on to refer to the Lord Ordinary's findings that the Board did not know of the need to preserve "a continuous pour for the purposes of the particular operation" and to comment that it did not follow that they "were not aware that continuous pouring would be necessary on occasions". It is not easy to see how such a conclusion could be reached.

The Lord Justice-Clerk treated the Lord Ordinary's findings that the Board did not know that a construction joint would not be an acceptable solution to the problem as implying that the Board must have been aware that in some situations a construction joint would be an acceptable solution if continuous pouring was terminated by a power failure. The Lord Justice-Clerk supported this conclusion by a reference to the passage in the Lord Ordinary's judgment [1992 S.L.T. 811] at p. 813G-H to which I have already referred and continued at p. 357F-G:

"The first part of the preceding sentence appears to me to support the view that the defenders should have been aware that continuous pouring of cement is necessary for certain concrete structures, and that if concrete is poured into position it will harden. I agree that these are matters of common knowledge of which the defenders must have been aware. Moreover, for the Lord Ordinary to state that it was beyond the defenders' reasonable contemplation that an interruption of the pour could lead to a condemnation of the whole operation appears to me to support the view that it was within their reasonable contemplation that an interruption of the pour could lead to condemnation of part of the operation."

My Lords, it seems to me that the Lord Justice-Clerk is taking far too much from the passage in the Outer House judgment. The Lord Ordinary is not making a finding that continuous pour for certain concrete structures is a regular part of industrial practice. He is, in my view, doing no more than saying that even if it is the case that such a pour is a regular part of industrial practice, nevertheless the fact that interruption of pouring could lead to physical condemnation of the work was not within the Board's reasonable contemplation.

Lord Morison considered that it should have been clear to the Board that interruption of the supply of unset concrete to the site might well have an effect upon the civil engineering works and might well require remedial work. He derived confirmation for this view from the evidence of a consultant electrician at p. 367E:

"who had been asked to investigate the failure of the

supply, and who in cross-examination by the respondents' counsel stated that if a pour was interrupted he assumed that there would be a ‘civil engineering consequence’ due to the setting of the concrete which would become a problem for the remainder of the operation."

This evidence, however, was given in the context of the interruption of a continuous pour and throws little or no light on the assumed knowledge of a supplier of electricity who is unaware of the need for such a pour.

My Lords, in my view the Second Division were in error in imputing to the Board, at the time of entering into the contract, technical knowledge of the details of concrete construction with which they had not been furnished by Balfour Beatty. I am prepared to accept that as a matter of general knowledge the Board would have appreciated that concrete poured would ultimately harden. I do not, however, consider that the Board had any reason to be aware of the importance of the time involved in the hardening process, nor of the consequences of adding freshly poured concrete to that which had already hardened. Indeed, the Board had no reason to expect that concrete would be required for the construction of a watertight aqueduct.

There are two passages in the speech of Lord Wright in A/B Karlshamns Oljefabriker v. Monarch Steamship Co. which were relied upon by Balfour Beatty before your Lordships and which must, I believe, have influenced the reasoning of the Lord Justice-Clerk. At p. 19, Lord Wright, after referring to the celebrated dictum of Alderson B. in Hadley v. Baxendale and to what would have been the position if the pursuers in the appeal before him had claimed special and particular loss, said:

"The Court will, however, assume that the parties as businessmen have all reasonable acquaintance with the ordinary course of business."

He expressed similar views in the following terms at p. 21:

"but the question in a case like the present must always be what reasonable businessmen must be taken to have contemplated as the natural or probable result if the contract was broken. As reasonable businessmen each must be taken to understand the ordinary practices and exigencies of the other's trade or business."

My Lords, A/B Karlshamns Oljefabriker v. Monarch Steamship Co. was a case concerning the extra cost of transhipment of a cargo of soya beans due to the delay in completion of the voyage caused by the unseaworthiness of the ship. The facts were simple and the consequences of delay were in the circumstances within the reasonable contemplation of the shipowners. I do not, however, understand that Lord Wright was laying down a general rule to the effect that in all circumstances contracting parties are presumed to have reasonable knowledge of the course of business conducted by each other. I find support for this view in the following passage in the speech of Lord Upjohn in Czarnikow at p. 424C:

"Lord Wright pointed out in The Monarch that each must be taken to understand the ordinary practices and exigencies of the other's trade but it must be remembered when dealing with the case of a carrier of goods by land, sea or air, he is not carrying on the same trade as the consignor of the goods and his knowledge of the practices and exigencies of the other's trade may be limited and less than between buyer and seller of goods who probably know far more about one another's business."

It must always be a question of circumstances what one contracting party is presumed to know about the business activities of the other. No doubt the

simpler the activity of the one, the more readily can it be inferred that the other would have reasonable knowledge thereof. However, when the activity of A involves complicated construction or manufacturing techniques, I see no reason why who supplies a commodity that A intends to use in the course of those techniques should be assumed, merely because of the order for the commodity, to be aware of the details of all the techniques undertaken by A and the effect thereupon of any failure of or deficiency in that commodity. Even if the Lord Ordinary had made a positive finding that continuous pour was a regular part of industrial practice it would not follow that in the absence of any other evidence suppliers of electricity such as the Board should have been aware of that practice. I consider that the Lord Ordinary correctly interpreted Lord Wright's statements in the A/B Karlshmans case.

My Lords, at the end of the day it is a question of fact what must have been within the reasonable contemplation of the Board at the date of the contract. The Lord Ordinary in a carefully reasoned judgment has found that the demolition and reconstruction of the aqueduct consequent upon failure of the power supply was not within that contemplation. Their Lordships were referred to no evidence from which it could be said that it should have appeared to the Board that these consequences of the rupturing of the fuses would have had a very substantial degree of probability, from which it follows that the Second Division were not justified in differing from those findings.

Balfour Beatty argued that since the Board should have contemplated that some remedial work to the concrete already poured would be rendered necessary by an interruption of continuous pouring, they must therefore be held to have contemplated demolition and reconstruction which differed only in degree from other remedial work such as the insertion of a construction joint involving cutting back the concrete. In support of this proposition a number of cases were cited including Parsons (H) (Livestock) Limited v. Uttley Ingham & Co. Ltd. [1978] QB 791. In view of the conclusion which I have already arrived at, I do not find it necessary to deal with this argument nor to determine whether Parsons correctly stated the law in relation to this matter.

For the foregoing reasons I would allow the appeal, recall the interlocutor of the Second Division and restore that of the Lord Ordinary subject only to the question of expenses. The Lord Ordinary having found that the Board were in breach of contract but that Balfour Beatty had failed to establish the single head of damage which they claimed found no expenses due to or by either party. A tender for £10,000 had been lodged prior to the proof. Balfour Beatty moved your Lordships to adhere to the Lord Ordinary's interlocutor on expenses in the event of the appellants succeeding in this House. I see no reason for acceding to this motion. Balfour Beatty has failed to recover any damages and therefore I consider that the normal rule of expenses and costs following success should apply. The appellants should, therefore, have all their expenses in the Court of Session and their costs in your Lordships' House.

LORD BROWNE-WILKINSON —My Lords, for the reasons given by my noble and learned friend Lord Jauncey of Tullichettle I too would allow the appeal and make the orders which he proposes.

LORD NOLAN —My Lords, I too agree with the speech of my noble and learned friend, Lord Jauncey of Tullichettle. For the reasons which he gives I would allow the appeal and make the orders which he proposes.