Wednesday, March 13, 2013

Excluding the 'Breach Date Rule' in Damages for Breach of Contract

It is well-known that a claimant who establishes that the defendant is in breach of contract is entitled to recover, as damages, any loss that was caused and which the defendant knew or ought to have known was likely to be caused by breach. As Professor Burrows explains in Remedies for Tort and Breach of Contract, the two limbs of the remoteness test in section 73 of the Indian Contract Act, 1872 (Hadley v Baxendale (1854) 23 LJ Ex 179) collapse into this single formulation, since the defendant ought to know that a type of loss which “naturally arises in the usual course of things” is likely to occur. One important question that the Indian courts have not explicitly considered is this: on what date is the claimant’s loss assessed for the purposes of section 73? This question is of considerable importance in principle and practice. Consider the facts of the Golden Victory, where the owner of a vessel claimed damages for the repudiation, in December 2001, of a charterparty by the charterers, some four years before the charterparty was to expire. The CPA provided that the charterers could cancel the charterparty (without any liability) should war break out between certain countries, including the UK, USA and Iraq. In March 2003, the Gulf War broke out and it was common ground that the charterers, if the CPA had been alive on that date, could have cancelled the charterparty. The question was whether the owners were entitled to damages (the difference between the market hire and the charter-hire) for the entire four year period, or only for the period between the repudiation (December 2001) and the outbreak of the Gulf War, when the charterers could have cancelled in any event. The owners argued that the subsequent outbreak of the war was irrelevant because loss must be assessed on the date of breach. By a majority, the House of Lords held that the owner could not recover damages for loss caused after March 2003 because that would leave the owner better off than if the contract had not been terminated. This was because the underlying principle of Hadley v Baxendale (and section 73) is that the claimant must be restored to the position in which he would have been had the contract been performed (Robinson v Harman (1848) 154 ER 363).

In the Golden Victory, the House of Lords accepted that loss ordinarily falls to be assessed “as of” the date of breach, but said that a court may exceptionally deviate from this if the interests of justice and/or the proper assessment of damages demand it. It is immediately obvious that this formulation of the exception is not satisfactory, for it offers little guidance as to the basis on which the exception must be made. In any case, the Golden Victory illustrates the importance of the ‘breach-date’ rule, as it is widely known.

In a recent decision at first instance, Novasen v Alimenta, Popplewell J. has considered two interesting points in relation to the Golden Victory: (a) whether it applies the same way to one-off contracts as it does to long-term contracts; and (b) how parties might exclude the operation of the Golden Victory and insist on assessment of loss as of the date of breach. Novasen agreed to sell about 2000 metric tons of Senegal crude groundnut oil to be delivered in Genoa by 10 January 2008 (later extended to 2 April 2008). Clause 22 of the contract, a Prohibition Clause, provided that if Senegal (or any other relevant Government) imposed a ban or embargo on the export of such products, the time for performance was to be extended by 30 days, and the contract would terminate at the end of that period if the ban was still in force. On 2 April 2008, there was such a ban in Senegal. Novasen communicated this to Alimenta but also purported to repudiate the contract on that date, which was accepted by Alimenta. The contract therefore came to an end, and Alimenta brought a claim for damages for wrongful repudiation. Novasen’s case was that, applying the Golden Victory, Alimenta had suffered no loss because, if the contract had not been terminated and therefore extended by 30 days, it would have come to an end in May 2008 because the ban imposed by the Senegal government was still in force.

Popplewell J. rejected that argument. He left open the question whether the Golden Victory can at all apply to a one-off sale, such as this contract. In principle, there seems to be no reason it should not (except perhaps the ‘certainty’ that a buyer has that he can recover a loss caused by entering the market and buying a substitute) but it was unnecessary for Popplewell J. to decide it because leading counsel for Alimenta did not press it. Alimenta’s case was, instead, that Clause 25 of the contract excluded the Golden Victory. Although of no wider significance to the law (except for one observation noted below), this raised an interesting issue of construction. As Popplewell J. explains, Clause 25 consisted of three components:

Clause 25
(1)   In default of fulfilment of this contract by either party, the other party at his discretion shall, after giving notice, have the right either to cancel the contract or the right to sell or purchase, as the case may be, against the defaulter who shall on demand make good the loss, if any, on such sale or purchase.
(2)   If the party liable to pay shall be dissatisfied with the price of such sale or purchase, or if neither of the above rights is exercised, the damages, if any, shall, failing amicable settlement, be determined by arbitration.
(3)   The damages awarded against the defaulter shall be limited to the difference between the contract price and the actual or estimated market price on the day of default. Damages to be computed on the mean contract quantity. If the arbitrators consider the circumstances of the default justify it they may, at their absolute discretion, award damages on a different quantity and/or award additional damages.

Alimenta’s case was that the Golden Victory did not apply because clause 25(3) expressly provided that damages shall be the difference between the market price and the contract price “on the day of default”. At first sight, this appears to be a strong argument, since it is, of course, open to parties to so agree. But Popplewell J. held that clause (3) did not confer a right to claim damages: it limited the right conferred by clause (2), which allowed the parties to claim “damages, if any”. The words “damages, if any” were a reference to the common law measure of damages, including the Golden Victory. Clause (3) limited this right: as Popplewell J. put it, “[i]t confers no right to recover “damages, if any” if no damage has been suffered”.

The important point of principle in the case is the relationship between the default rules of common law and contractually agreed remedies for breach. The usual context in which this arises is where parties attempt to limit a remedy that is otherwise available: by a variety of techniques, such as incorporation, the courts require clear words to give effect to an exclusion. This case was the converse: had the parties created a remedy that the common law does not otherwise provide (i.e., the ability to recover losses that had not, according to common law remoteness rules, been incurred?) Popplewell J. held that the same rule of construction applies—that is, clear words are required before the court is persuaded that the parties intended that one of them may recover damages although no loss has been sustained.

1 comment:

Renganath said...

Do you think Hooper v. Oates [2013] EWCA Civ 91 adds another layer to the issue? Even if it does, would the fact that Hooper concerns realty exclude its relevance in the present context?