It is convenient to distinguish three principal purposes which may be pursued in awarding contract damages. These purposes, and the situations in which they become appropriate, may be stated briefly as follows:

First, the plaintiff has in reliance on the promise of the defendant conferred some value on the defendant. The defendant fails to perform his promise. The court may force the defendant to disgorge the value he received from the plaintiff. The object here may be termed the prevention of gain by the defaulting promisor at the expense of the promisee; more briefly, the prevention of unjust enrichment. The interest protected may be called the restitution interest …

Secondly, the plaintiff has in reliance on the promise of the defendant changed his position. For example, the buyer under a contract for the sale of land has incurred expense in the investigation of the seller’s title, or has neglected the opportunity to enter other contracts. We may award damages to the plaintiff for the purpose of undoing the harm which his reliance on the defendant’s promise has caused him. Our object is to put him in as good a position as he was in before the promise was made. The interest protected in this case may be called the reliance interest.

Thirdly, without insisting on reliance by the promisee or enrichment of the promisor, we may seek to give the promisee the value of the expectancy which the promise created. We may in a suit for specific performance actually compel the defendant to render the promised performance to the plaintiff, or, in a suit for damages, we may make the defendant pay the money value of this performance. Here our object is to put the plaintiff in as good a position as he would have occupied had the defendant performed his promise. The interest protected in this case we may call the expectation interest.

p. 800↵It will be observed that what we have called the restitution interest unites two elements: (1) reliance by the promisee, (2) a resultant gain to the promisor. It may for some purposes be necessary to separate these elements. In some cases a defaulting promisor may after his breach be left with an unjust gain which was not taken from the promisee (a third party furnished the consideration), or which was not the result of reliance by the promisee (the promisor violated a promise not to appropriate the promisee’s goods). Even in those cases where the promisor’s gain results from the promisee’s reliance it may happen that damages will be assessed somewhat differently, depending on whether we take the promisor’s gain or the promisee’s loss as the standard of measurement. Generally, however … gain by the promisor will be accompanied by a corresponding and, so far as its legal measurement is concerned, identical loss to the promisee, so that for our purposes the most workable classification is one which presupposes in the restitution interest a correlation of promisor’s gain and promisee’s loss. If, as we shall assume, the gain involved in the restitution interest results from and is identical with the plaintiff’s loss through reliance, then the restitution interest is merely a special case of the reliance interest; all of the cases coming under the restitution interest will be covered by the reliance interest, and the reliance interest will be broader than the restitution interest only to the extent that it includes cases where the plaintiff has relied on the defendant’s promise without enriching the defendant.

It should not be supposed that the distinction here taken between the reliance and expectation interests coincides with that sometimes taken between ‘losses caused’ … and ‘gains prevented’. In the first place, though reliance ordinarily results in ‘losses’ of an affirmative nature (expenditures of labor and money) it is also true that opportunities for gain may be foregone in reliance on a promise. Hence the reliance interest must be interpreted as at least potentially covering ‘gains prevented’ as well as ‘losses caused’. … On the other hand, it is not possible to make the expectation interest entirely synonymous with ‘gains prevented’. The disappointment of an expectancy often entails losses of a positive character.

It is obvious that the three ‘interests’ we have distinguished do not present equal claims to judicial intervention. It may be assumed that ordinary standards of justice would regard the need for judicial intervention as decreasing in the order in which we have listed the three interests. The ‘restitution interest’, involving a combination of unjust impoverishment with unjust gain, presents the strongest case for relief. If, following Aristotle, we regard the purpose of justice as the maintenance of an equilibrium of goods among members of society, the restitution interest presents twice as strong a claim to judicial intervention as the reliance interest, since if A not only causes B to lose one unit but appropriates that unit to himself, the resulting discrepancy between A and B is not one unit but two.

On the other hand, the promisee who has actually relied on the promise, even though he may not thereby have enriched the promisor, certainly presents a more pressing case for relief than the promisee who merely demands satisfaction for his disappointment in not getting what was promised him. In passing from compensation for change of position to compensation for loss of expectancy we pass, to use Aristotle’s terms again, from the realm of corrective justice to that of distributive justice. The law no longer seeks merely to heal a disturbed status quo, but to bring into being a new situation. It ceases to act defensively or restoratively, and assumes a more active role. With the transition, the justification for legal relief loses its self-evident quality. It is as a matter of fact no easy thing to explain why the normal rule of contract recovery should be that which measures damages by the value of the promised performance. Since this ‘normal rule’ throws its shadow across our whole subject it will be necessary to examine the possible reasons for its existence. It may be said parenthetically that the discussion which follows, though directed primarily to the normal measure of recovery where damages are sought, also has relevance to the more general question, p. 801↵why should a promise which has not been relied on ever be enforced at all, whether by a decree of specific performance or by an award of damages? …

Why Should the Law Ever Protect the Expectation Interest?

Perhaps the most obvious answer to this question is one which we may label ‘psychological’. The answer would run something as follows: The breach of a promise arouses in the promisee a sense of injury. This feeling is not confined to cases where the promisee has relied on the promise. Whether or not he has actually changed his position because of the promise, the promisee has formed an attitude of expectancy such that a breach of the promise causes him to feel that he has been ‘deprived’ of something which was ‘his’. Since this sentiment is a relatively uniform one, the law has no occasion to go back to it. It accepts it as a datum and builds its rule about it.

The difficulty with this explanation is that the law does in fact go back on the sense of injury which the breach of promise engenders. No legal system attempts to invest with juristic sanction all promises. Some rule or combination of rules effects a sifting out for enforcement of those promises deemed important enough to society to justify the law’s concern with them. Whatever the principles which control this sifting out process may be, they are not convertible into terms of the degree of resentment which the breach of a particular kind of promise arouses. Therefore, though it may be assumed that the impulse to assuage disappointment is one shared by those who make and influence the law, this impulse can hardly be regarded as the key which solves the whole problem of the protection accorded by the law to the expectation interest.

A second possible explanation for the rule protecting the expectancy may be found in the much-discussed ‘will theory’ of contract law. This theory views the contracting parties as exercising, so to speak, a legislative power, so that the legal enforcement of a contract becomes merely an implementing by the state of a kind of private law already established by the parties. … It is enough to note here that while the will theory undoubtedly has some bearing on the problem of contract damages, it cannot be regarded as dictating in all cases a recovery of the expectancy. If a contract represents a kind of private law, it is a law which usually says nothing at all about what shall be done when it is violated. A contract is in this respect like an imperfect statute which provides no penalties, and which leaves it to the courts to find a way to effectuate its purposes. There would, therefore, be no necessary contradiction between the will theory and a rule which limited damages to the reliance interest. Under such a rule the penalty for violating the norm established by the contract would simply consist in being compelled to compensate the other party for detrimental reliance. Of course there may be cases where the parties have so obviously anticipated that a certain form of judicial relief will be given that we can, without stretching things, say that by implication they have ‘willed’ that this relief should be given. This attitude finds a natural application to promises to pay a definite sum of money. But certainly as to most types of contracts it is vain to expect from the will theory a ready-made solution for the problem of damages.

A third and more promising solution to our difficulty lies in an economic or institutional approach. The essence of a credit economy lies in the fact that it tends to eliminate the distinction between present and future (promised) goods. Expectations of future values become, for purposes of trade, present values. In a society in which credit has become a significant and pervasive institution, it is inevitable that the expectancy created by an enforceable promise should be regarded as a kind of property, and breach of the promise as an injury to that property …

p. 802↵The most obvious objection which can be made to the economic or institutional explanation is that it involves a petitio principii. A promise has present value, why? Because the law enforces it. ‘The expectancy’ regarded as a present value, is not the cause of legal intervention but the consequence of it. This objection may be reinforced by a reference to legal history. Promises were enforced long before there was anything corresponding to a general system of ‘credit’, and recovery was from the beginning measured by the value of the promised performance, the ‘agreed price’. It may therefore be argued that the ‘credit system’ when it finally emerged was itself in large part built on the foundations of a juristic development which preceded it.

The view just suggested asserts the primacy of law over economics; it sees law not as the creature but as the creator of social institutions. The shift of emphasis thus implied suggests the possibility of a fourth explanation for the law’s protection of the unrelied-on expectancy, which we may call juristic. This explanation would seek a justification for the normal rule of recovery in some policy consciously pursued by courts and other lawmakers. It would assume that courts have protected the expectation interest because they have considered it wise to do so, not through a blind acquiescence in habitual ways of thinking and feeling, or through an equally blind deference to the individual will. Approaching the problem from this point of view, we are forced to find not a mere explanation for the rule in the form of some sentimental, volitional, or institutional datum, but articulate reasons for its existence.

What reasons can be advanced? In the first place, even if our interest were confined to protecting promisees against out-of-pocket loss, it would still be possible to justify the rule granting the value of the expectancy, both as a cure for, and as a prophylaxis against, losses of this sort.

It is a cure for these losses in the sense that it offers the measure of recovery most likely to reimburse the plaintiff for the (often very numerous and very difficult to prove) individual acts and forbearances which make up his total reliance on the contract. If we take into account ‘gains prevented’ by reliance, that is, losses involved in foregoing the opportunity to enter other contracts, the notion that the rule protecting the expectancy is adopted as the most effective means of compensating for detrimental reliance seems not at all far-fetched. Physicians with an extensive practice often charge their patients the full office call fee for broken appointments. Such a charge looks on the face of things like a claim to the promised fee; it seems to be based on the ‘expectation interest’. Yet the physician making the charge will quite justifiably regard it as compensation for the loss of the opportunity to gain a similar fee from a different patient. This foregoing of other opportunities is involved to some extent in entering most contracts, and the impossibility of subjecting this type of reliance to any kind of measurement may justify a categorical rule granting the value of the expectancy as the most effective way of compensating for such losses.

The rule that the plaintiff must after the defendant’s breach take steps to mitigate damages tends to corroborate the suspicion that there lies hidden behind the protection of the expectancy a concern to compensate the plaintiff for the loss of the opportunity to enter other contracts. Where after the defendant’s breach the opportunity remains open to the plaintiff to sell his services or goods elsewhere, or to fill his needs from another source, he is bound to embrace that opportunity. Viewed in this way the rule of ‘avoidable harms’ is a qualification on the protection accorded the expectancy, since it means that the plaintiff, in those cases where it is applied, is protected only to the extent that he has in reliance on the contract foregone other equally advantageous opportunities for accomplishing the same end.

But, as we have suggested, the rule measuring damages by the expectancy may also be regarded as a prophylaxis against the losses resulting from detrimental reliance. Whatever tends to discourage breach of contract tends to prevent the losses occasioned through reliance. Since the expectation interest furnishes a more easily administered measure of recovery than the reliance interest, it will in practice offer a more effective sanction against contract breach. It is therefore possible to view the rule measuring damages by the expectancy in a quasi-criminal aspect, its purpose being not so much to compensate the promisee as to penalize breach of promise by the promisor. The rule enforcing the unrelied-on-promise finds the same justification, on this theory, as an ordinance which fines a man for driving through a stop-light when no other vehicle is in sight.

In seeking justification for the rule granting the value of the expectancy there is no need, however, to restrict ourselves by the assumption hitherto made, that the rule can only be intended to cure or prevent the losses caused by reliance. A justification can be developed from a less negative point of view. It may be said that there is not only a policy in favor of preventing and undoing the harms resulting from reliance, but also a policy in favor of promoting and facilitating reliance on business agreements. As in the case of the stop-light ordinance we are interested not only in preventing collisions but in speeding traffic. Agreements can accomplish little, either for their makers or for society, unless they are made the basis for action. When business agreements are not only made but are also acted on, the division of labor is facilitated, goods find their way to the places where they are most needed, and economic activity is generally stimulated. These advantages would be threatened by any rule which limited legal protection to the reliance interest. Such a rule would in practice tend to discourage reliance. The difficulties in proving reliance and subjecting it to pecuniary measurement are such that the business man knowing, or sensing, that these obstacles stood in the way of judicial relief would hesitate to rely on a promise in any case where the legal sanction was of significance to him. To encourage reliance we must therefore dispense with its proof. For this reason it has been found wise to make recovery on a promise independent of reliance, both in the sense that in some cases the promise is enforced though not relied on (as in the bilateral business agreement) and in the sense that recovery is not limited to the detriment incurred in reliance.

The juristic explanation in its final form is then twofold. It rests the protection accorded to the expectancy on (1) the need for curing and preventing the harms occasioned by reliance, and (2) on the need for facilitating reliance on business agreements. From this spelling out of a possible juristic explanation, it is clear that there is no incompatibility between it and the economic or institutional explanation. The essence of both of them lies in the word ‘credit’. The economic justification views credit from its institutional side; the juristic explanation views it from its rational side. The economic view sees credit as an accepted way of living; the juristic view invites us to explore the considerations of utility which underlie this mode of living; and the part which conscious human direction has played in bringing it into being.

p. 803↵At the end of the day Fuller and Perdue do not seriously challenge the courts’ practice of awarding expectation damages. Rather, they challenge the theoretical justifications for making such awards. The justification, in their view, lies not in the need to protect the ‘interest’ created by a binding promise but in the desire to provide a cure for, and prophylaxis against, reliance losses. Other jurists, building on the work of Fuller and Perdue, went further and openly questioned the justifications for awarding damages to protect the claimant’s expectation interest, particularly in the case where the contract remained executory. The courts have, however, remained stubbornly resistant to Fuller and Perdue’s analysis and have not demonstrated a willingness to abandon their commitment to the protection of the expectation or the performance interest (see S Macauley, ‘The Reliance Interest and the World Outside the Law Schools’ Doors’ [1991] Wisc LR 247, esp. pp. 266–287).

p. 804↵Fuller and Perdue’s analysis has been challenged, in what is suggested is a convincing fashion, by Professor Friedmann in the following terms:

The essence of contract is performance. Contracts are made in order to be performed. This is usually the one and only ground for their formation. Ordinarily, a person enters into a contract because he is interested in getting that which the other party has to offer and because he places a higher value on the other party’s performance than on the cost and trouble he will incur to obtain it. This interest in getting the promised performance (hereafter the ‘performance interest’) is the only pure contractual interest. The performance interest is protected by specific remedies which aim at getting the innocent party the very performance promised to him, and by substitutional remedies. The specific remedies are:

(1)

Specific performance and injunction, originally equitable and, therefore, discretionary remedies.

(2)

The recovery of a debt …

The substitutional remedies are:

(1)

Compensating damages or ‘loss of bargain’ damages. It is also possible to term them ‘performance damages’, since they are intended to put the plaintiff in as good a position as that in which he would have been, had the contract been performed.

(2)

Recovery of the ‘substitute’ which relates to the situation in which the promisor can no longer perform but has obtained a substitute for the promised performance. Examples of such a ‘substitute’ include insurance proceeds for a loss, and damages or price paid by a third party …

(3)

Recovery in restitution of profits made by the other party through the breach. This remedy partly overlaps the right to the substitute … but the extent of its availability has been much debated …

The performance interest is also protected against third parties by means of the tort of inducement of breach of contract and also by equitable and restitutionary remedies.

The Ranking of Interests and the New Terminology

Fuller and Perdue … identified three interests: the expectation interest, the reliance interest and the restitution interest. These interests were ranked in accordance with the strength of their claim for judicial intervention. Restitution arrived first and reliance second. The expectation interest ended at the bottom of the list.

The expectation interest is simply an inappropriate term describing the performance interest. The other two have acquired the title ‘interest’ probably under the influence of German law. Whatever is the nature of reliance and restitution, they are certainly not contractual interests. Thus, the interest of a person who made a payment in order to get a house, a car or even a pizza is to get the house, the car or the pizza. Such a person will be greatly surprised to learn that upon contracting to purchase a house, he acquired an interest in getting his payment back (restitution interest). In all probability he is likely to protest that this is not p. 805↵what he wanted. Had he preferred the money to the house he would not have made the contract in the first place. He would need a lot of coaching in an American course on contracts to learn that his interest in getting his payment back ranks higher in the hierarchy than his interest in getting the house …

The greatest terminological innovation of Fuller and Perdue and the most inappropriate one, was the invention of the ‘expectation’ or ‘expectancy’. This term … was used to describe the normal measure of contractual damages, namely the measure based upon the right to get the promised performance … one can hardly conceive of a term that is less appropriate than ‘expectancy’ or ‘expectation’. ‘Expectancy’ is often used to describe a prospect or a probability of receiving a benefit in the future, when this possibility is not supported by a legal right … Indeed, the term ‘expectation’ may be more appropriate in this context, in which the expectation is not based upon a legal right, than in the contractual context, in which the plaintiff has a legal right to receive that which was promised to him.

The Marginalisation of the Performance Interest

The next step in Fuller and Perdue’s derogation of the right to performance comes in the process of the ranking of interests, in which the performance interest (now already diminished to a mere ‘expectancy’) is outclassed by both restitution and reliance. That being accomplished, there comes a question which casts doubt upon the very legitimacy of the right to performance. The subtitle on page 57 of the article reads: ‘Why Should the Law Ever Protect the Expectation Interest?’ This is followed by a rather detailed discussion in which expectation again does not fare too well. In essence, three explanations are offered …

The third and only justification which Fuller and Perdue find for what they term ‘expectation’ damages lies in the ‘difficulties in proving reliance and subjecting it to pecuniary measurement … To encourage reliance we must therefore dispense with its proof’. Performance damages, thus, receive an additional blow. They are not justified in their own right. They are merely parasitic and exist because of the difficulties in measuring the ‘real’ interest, namely reliance.

The argument is most unconvincing. The proof of reliance losses is by no means more difficult than proof of performance (or ‘expectation’) losses, even if they are to include ‘loss of opportunity’. … In fact, reliance damages are sometimes awarded on the ground that it is impossible to appraise the performance, or ‘loss of bargain’, damages. This, of course, is the very opposite of the argument made by Fuller and Perdue.

The difficulties with Fuller and Perdue’s reasoning are, however, more fundamental … they accept the ‘will theory’ and the premise that a contractual promise is legally binding. They assume, however, that the question of the remedy is completely divorced from the nature of the right. It is, therefore, open to prefer the reliance measure of damages to that of the performance (in their terminology ‘expectation’). The reasoning is, however, most unconvincing. It is, of course, legitimate to examine the grounds for recognizing the binding effect of contracts. … However, Fuller and Perdue avoided this question. They accepted the validity of the contractual obligation but erroneously assumed that it entails few consequences as to the remedy.

It is, of course, true that the mere recognition of a specific right does not provide answers to all issues regarding the remedies available for its protection. Thus, the fact that the legal system recognizes the right of ownership does not tell us whether the owner, whose property was misappropriated, will be entitled to restitution in specie or merely to damages. The rules on remoteness of damages are similarly not self-evident. It is, however, an unwarranted p. 806↵jump to conclude that the right tells us nothing about the remedy and that rights and remedies raise totally unrelated issues.

It is submitted that the very recognition of a legal right entails some consequences regarding the remedy, one of which relates to the initial point of inquiry. This initial point relates to the value of legal right, at least where such value can be ascertained. The right of recovery may be qualified or subject to exceptions. The initial point is, however, clear.

Thus, suppose that P acquired for $300 shares which are now worth $1000. The shares have been misappropriated by D. In Fuller and Perdue’s terminology the $300 represents ‘reliance loss’ whereas the $1000 represents ‘expectation damages’. After all, P never had the $1000. He had shares which he could expect to sell. This expectation, if realised, would yield him $1000. However, the translation of the situation into Fuller and Perdue’s terminology merely confuses the issue. The historical expenditure or the reliance interest (in the above example, $300) is irrelevant, except where it serves as evidence of existing value. Recovery is based upon the present value of the shares. The recognition of P’s right of property suffices to justify such recovery.

It is clearly legitimate to question the justification of private property. However, once private ownership is recognized, it follows as a matter of course that the owner whose property has been misappropriated will either recover it in specie or will get damages reflecting its value. In order to justify this result, there is no need to resort to the ‘lost opportunity’ explanation (the owner could have bought other shares that might have similarly appreciated in value) or to some other fiction.

Let us now revert to the contract situation. Suppose that in consideration of $300 D undertook to transfer to P, within 6 months, certain shares. After 5 months, when the price of the shares reaches $1000, D reneges. If we assume that the contract was valid so that it vested in P the right to the promised performance, it follows that P would be entitled either to specific performance (the value of which is $1000) or to the substitutionary remedy of damages, which will be based upon the value of the promised performance, namely $1000.

This argument, as well as the analogy to property, is strengthened by the possibility of assignment. In the property example P could sell the shares for $1000. In the contract example he could have assigned his contractual right to receive the shares for a similar amount. In both instances, the measure of recovery ought, therefore, to be similar. To claim that the contract was binding, i.e. that P was entitled to D’s performance, and yet that recovery can be confined to P’s expenditure ($300), is a contradiction in terms.

Fuller and Perdue feel, however, that the obvious result needs explanation. The superfluous explanation is based upon the lost opportunity theory, which forms part of the reliance loss. Because P entered into contract no. 1 with D, he gave up the possibility of another potential contract (contract no. 2) with a third party (T) which would have yielded him similar gains. The argument is doubly flawed. First, if P’s gains from the actual contract (no. 1) with D are not recoverable in their own right as part of his performance (or ‘expectation’) interest, why do these very gains become recoverable when attributed to another potential contract (contract no. 2)? Is it because they have changed denomination and appear under the guise of reliance? Second, the whole argument is based on circular reasoning. If it is assumed that the entitlement to recover performance (expectation) damages in contract no. 1 derives solely from the lost opportunity (potential contract no. 2), we have to examine the value of this opportunity. This is obviously dependent upon the nature of the entitlement and the ensuing measure of damages in potential contract no. 2. If there is no justification for performance damages (other than lost opportunity) then the value of contract no. 2 was not $1000, but a mere $300, unless we assume that the recovery will again be based on lost opportunity (potential contract no. 3) and so ad infinitum.

p. 807The Value of the Legal Right and the Measure of Damages in Contract and Tort

Fuller and Perdue raise the question whether broad adoption in contracts of the so called ‘tort principle’, namely, the reliance interest, would not ‘blur the lines of division separating the different branches of the law’. In their view the breaking of the barriers between the branches of the law of obligations ‘would represent a distinct service to legal thinking’.

The basic assumption that there exists, on this specific point, such a barrier between tort and contract damages is, however, erroneous. It is assumed that tort damages look backwards and aim at returning the plaintiff to the status quo ante whereas contract damages look forward and strive to put the plaintiff in the position in which he would have been in had the contract been performed. Reliance damages are, thus, akin to the tort principle since they are meant to put the plaintiff in his pre-contract position, whereas performance damages reflect the contract principle.

This analysis is based on a misconception which derives from the failure to adequately distinguish between rights and remedies. It is submitted that the basic principle as to damages is identical in contract and tort, though there may be some variations in its application. The principle provides in essence that the purpose of damages is to put the plaintiff, in economic terms, in the position in which he would have been had the wrong (either a tort or breach of contract) not been committed. The different results reached in tort and contract derive from the fact that they are usually called on to protect different rights. Where, however, they are invoked to protect the same right, the calculation of damages, which reflect the value of this right, either in tort or in contract, will be similar …

The Impact of Fuller and Perdue—Terminology and Substance

(a) Terminological impact

As already pointed out, the most significant effect of Fuller and Perdue lies in the introduction of new terminology. No student is likely to complete an American course on contracts without reciting ‘expectation interest’ and ‘reliance interest’. In recent years the new terminology has spread to England and to other Commonwealth jurisdictions …

(b) Substantive impact

… Fuller and Perdue did not expressly advocate the curtailment of the protection granted to the performance interest. However, much of the article consists of an attempt to question its justification, to describe it as an ‘expectancy’ and to suggest its legitimacy depends on reliance. They also hinted at the possibility of limiting recovery to reliance losses in certain cases in which a binding contract has been concluded, notably in situations that are not within the credit system. Professor Atiyah went a step further. He was ‘troubled and uncertain about the extent to which executory contracts should be enforced, and the extent to which the expectation damages measure is appropriate … ’ He also considered that ‘it would not be surprising if future developments tend to show a still further whittling down of expectation damages’.

Modern law hardly reflects any traces of this approach … Notwithstanding The Reliance Interest there are no signs of weakening of the performance interest. On the contrary, one of the major trends in modern contract law is the strengthening of the protection accorded to the performance interest. Traditional limitations upon the availability of specific performance and upon the recovery of performance damages have either been removed or severely curtailed …

The scope of specific performance has spread beyond real estate cases to many other types of contracts. … The law of damages shows similar signs of expanding the protection granted to the performance interest. The fundamental principle under which, so far as money can do it, the injured party should be placed in the same situation as if the contract had been performed, is constantly applied. Furthermore, legal rules that have in the past limited the prospect of obtaining full performance damages seem to lose at least part of their effect. … Another development which reflects the strengthening of the performance interest relates to the measure of recovery where the defendant renders a defective performance or a performance which is not in line with contract requirements. The cost of curing the defect is usually higher than the difference in market value between the performance as rendered and the value of the performance had it conformed to the terms of the contract. In this type of situation recovery was often confined to the difference in value, if the cost of cure was disproportionate to the difference in value. However, the present tendency is to award the plaintiff the cost of repair even where there is a large disparity between this cost and the difference in value, provided that it is reasonable for the plaintiff to insist on reinstatement. Furthermore, circumstances are conceivable in which the costs of repair are unreasonable while the difference in value is small or even nil. Under the traditional approach, in such a case, the plaintiff might have been left without a remedy. The recent decision of the House of Lords in Ruxley Electronics Ltd [23.3.1] indicates that these two measures of recovery are not exhaustive, and that damages might be awarded by reference to the fact that the plaintiff’s performance interest has been frustrated by the defendant’s breach. The court may, thus, be required to appraise an element that has no market price in order to provide an adequate remedy. Needless to say, this development is predicated on the approach that pacta sunt servanda and that the plaintiff’s performance interest should be respected.

The expansion of the protection afforded to the performance interest is also reflected in the rules relating to non-economic losses. Traditionally, recovery of damages for such losses, resulting from breach of contract, has not been allowed. But this rule is becoming the subject of ever-increasing exceptions …

There is a great discrepancy between The Reliance Interest’s intellectual appeal and its effect on substantive law. The article made a deep impact on academic thinking, upon the language and discourse of contracts and led to the adoption of new terminology, which in the case of ‘expectation’ was an unhappy development. Its effect on substantive law is at best secondary. The attack upon the performance interest goes against the grain. This interest constitutes the very core of contract law. Its ample protection is likely to be maintained and possibly expanded as long as the essence of contract law as we know it remains.

The plaintiffs granted the defendant a contractual licence to use the plaintiffs’ premises for the defendant’s business on a renewable six-month basis. The licence provided that any fixtures added to the premises by the licence holder could not be removed upon the termination of the licence. Despite this, the defendant incurred expense in making improvements to the premises in order to make them suitable for his business. Ten weeks before the end of a six-month period, the defendant was unlawfully ejected from the premises by the plaintiffs. The defendant secured temporary permission from the local authority to use the garage of his home as his place of work. The defendant used his home in this manner until well after the six-month period would have expired. The plaintiffs brought an action against the defendant in relation to a cheque that had been stopped by the defendant. The p. 827↵defendant counterclaimed for damages for the cost of the improvements he had made to the premises and the appeal to the Court of Appeal was solely concerned with the counterclaim. At first instance, it was held that the defendant had suffered no loss as he had been able to move the business into his home where he did not have to pay any rent and the cost of improvements to the premises would have been lost in any event when the licence lawfully terminated after six months. The defendant appealed to the Court of Appeal who dismissed his appeal.

Ackner LJ

[set out the facts of the case, considered the decision of the Court of Appeal in Anglia Television v. Reed (earlier in this section) and continued]

The case which I have found of assistance—and I am grateful to counsel for their research—is a case in the British Columbia Supreme Court: Bowlay Logging Ltd v. Domtar Ltd [1978] 4 WWR 105. Berger J, in a very careful and detailed judgment, goes through various English and American authorities and refers to the leading textbook writers, and I will only quote a small part of his judgment. At the bottom of p. 115 he refers to the work of Professor LL Fuller and William R Perdue, Jr, in ‘The Reliance Interest in Contract Damages: 1’ (1936), 46 Yale Law Journal 52 and their statement, at p. 79:

‘We will not in a suit for reimbursement for losses incurred in reliance on a contract knowingly put the plaintiff in a better position than he would have occupied had the contract been fully performed.’

Berger J, at p. 116, then refers to L Albert & Son v. Armstrong Rubber Co (1949) 178 F 2d 182 in which Learned Hand CJ, speaking for the Circuit Court of Appeals, Second Circuit:

‘held that on a claim for compensation for expenses in part performance the defendant was entitled to deduct whatever he could prove the plaintiff would have lost if the contract had been fully performed.’

What Berger J had to consider was this, p. 105:

‘The parties entered into a contract whereby the plaintiff would cut timber under the defendant’s timber sale, and the defendant would be responsible for hauling the timber away from the site of the timber sale. The plaintiff claimed the defendant was in breach of the contract as the defendant had not supplied sufficient trucks to make the plaintiff’s operation, which was losing money, viable, and claimed not for loss of profits but for compensation for expenditures. The defendant argued that the plaintiff’s operation lost money not because of a lack of trucks but because of the plaintiff’s inefficiency, and, further, that even if the defendant had breached the contract the plaintiff should not be awarded damages because its operation would have lost money in any case.’

This submission was clearly accepted because the plaintiff was awarded only nominal damages, and Berger J said, at p. 117:

‘The law of contract compensates a plaintiff for damages resulting from the defendant’s breach; it does not compensate a plaintiff for damages resulting from his making a bad bargain. Where it can be seen that the plaintiff would have incurred a loss on the contract as a whole, the expenses he has incurred are losses flowing from entering into the contract, not losses flowing from the defendant’s breach. In these circumstances, the true consequence of the defendant’s breach is that the plaintiff is released from his obligation to complete the contract—or in other words, he is saved from incurring further losses. If the law of contract were to move from compensating for the consequences of breach to compensating for the consequences of entering into contracts, the law would run contrary to the normal expectations of the world of commerce. The burden of risk would be shifted from the plaintiff to the defendant. The defendant would become the insurer of the plaintiff’s enterprise. Moreover, the amount of the damages would increase not in relation to the gravity or consequences of the breach but in relation to the inefficiency with which the plaintiff carried out the contract. The greater his expenses owing to inefficiency, the greater the damages. The fundamental principle upon which damages are measured under the law of contract is restitutio in integrum. The principle contended for here by the plaintiff would entail the award of damages not to compensate the plaintiff but to punish the defendant.’

It is urged here that the garage itself was merely an element in the defendant’s business; it was not a profit-making entity on its own. Nevertheless, if as a result of being kept out of these premises the defendant had found no other premises to go to for a period of time, his claim would clearly have been a claim for such loss of profit as he could establish his business suffered.

In my judgment, the approach of Berger J is the correct one. It is not the function of the courts where there is a breach of contract knowingly, as this would be the case, to put a plaintiff in a better financial position than if the contract had been properly performed. In this case the defendant who is the plaintiff in the counterclaim, if he was right in his claim, would indeed be in a better position because … had the contract been lawfully determined as it could have been in the middle of December, there would have been no question of his recovering these expenses. …

I do not consider that a plaintiff is entitled in an action for damages for breach of contract to ask to be put in the position in which he would have been if the contract had never been made. Accordingly, save in the respect to which I have already made reference, namely that there should be judgment for the defendant for nominal damages of £10, I would dismiss the appeal.

Fox LJ

The present case seems to me to be quite different both from Anglia Television Ltd v. Reed [1972] 1 QB 60 and from Lloyd v. Stanbury [1971] 1 WLR 535 in that while it is true that the expenditure could in a sense be said to be wasted in consequence of the breach of contract, it was equally likely to be wasted if there had been no breach, because the plaintiffs wanted to get the defendant out and could terminate the licence at quite short notice. A high risk of waste was from the very first inherent in the nature of the contract itself, breach or no breach. The reality of the matter is that the waste resulted from what was, on the defendant’s side, a very unsatisfactory and dangerous bargain.

I agree with Ackner LJ that the appeal must be dismissed.

The plaintiffs entered into a contract with the defendants under which they agreed to buy from the defendants a large boiler for use in their business as launderers and dyers. At the time at which the contract was concluded the boiler was installed on the defendants’ premises. It was therefore necessary to dismantle the boiler before it could be delivered to the plaintiffs. The boiler was badly damaged while it was being dismantled and the consequence was that there was a delay of some five months in delivering it to the plaintiffs. The defendants knew that the plaintiffs were launderers and dyers and that they wanted the boiler for use in their business. During the negotiations the plaintiffs expressed their intention to put the boiler ‘into use in the shortest possible space of time’. The plaintiffs brought an action for damages for the losses they had suffered as a result of the defendants’ breach of contract.

The trial judge, Streatfeild J, gave judgment for the plaintiffs for damages of £110 under certain minor heads, but held that the plaintiffs were not entitled to recover damages in respect of their loss of profit during the period of delay. He concluded that the boiler was not a whole plant capable of being used by itself as a profit-making machine, that the case fell within the second limb of the rule laid down in Hadley v. Baxendale, and that the defendants were not liable for the plaintiffs’ loss of profit because the special object for which the plaintiffs were acquiring the boiler had not been drawn to the defendants’ attention. The plaintiffs appealed to the Court of Appeal who allowed the appeal and held that the plaintiffs were entitled to recover damages for their general loss of profits but not for the loss of profits which they suffered on the lucrative contracts that they had concluded with the Ministry of Supply.

Asquith LJ

[delivering the judgment of the court]

The authorities on recovery of loss of profits as a head of damage are not easy to reconcile. At one end of the scale stand cases where there has been non-delivery or delayed delivery of what is on the face of it obviously a profit-earning chattel; for instance, a merchant or passenger ship. … In such cases loss of profit has rarely been refused. A second and intermediate class of case in which loss of profit has often been awarded is where ordinary mercantile goods have been sold to a merchant with knowledge by the vendor that the purchaser wanted them for resale; at all events, where there was no market in which the purchaser could buy similar goods against the contract on the seller’s default … At the other end of the scale are cases where the defendant is not a vendor of the goods, but a carrier, see, for instance, Hadley v. Baxendale 9 Exch 341. … In such cases the courts have been slow to p. 849↵allow loss of profit as an item of damage. This was not, it would seem, because a different principle applies in such cases, but because the application of the same principle leads to different results. A carrier commonly knows less than a seller about the purposes for which the buyer or consignee needs the goods, or about other ‘special circumstances’ which may cause exceptional loss if due delivery is withheld.

Three of the authorities call for more detailed examination.

[He examined Hadley v. Baxendale, British Columbia Sawmills v. Nettleship LR 3 CP 409, and Cory v. Thames Ironworks Company LR 3 QB 181 and continued]

What propositions applicable to the present case emerge from the authorities as a whole, including those analysed above? We think they include the following:—

(1)

It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed: (Sally Wertheim v. Chicoutimi Pulp Company [1911] AC 301). This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognized as too harsh a rule. Hence,

(2)

In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.

(3)

What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.

(4)

For this purpose, knowledge ‘possessed’ is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the ‘ordinary course of things’ and consequently what loss is liable to result from a breach of contract in that ordinary course. This is the subject matter of the ‘first rule’ in Hadley v. Baxendale 9 Exch 341. But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses, of special circumstances outside the ‘ordinary course of things’, of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the ‘second rule’ so as to make additional loss also recoverable.

(5)

In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result (see certain observations of Lord du Parcq in the recent case of A/B Karlshamns Oljefabriker v. Monarch Steamship Company Limited [1949] AC 196).

(6)

Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is indeed enough, to borrow from the language of Lord du Parcq in the same case, at page 158, if the loss (or some factor without which it would not have occurred) is a ‘serious possibility’ or a ‘real danger’. For short, we have used the word ‘liable’ to result. Possibly the colloquialism ‘on the cards’ indicates the shade of meaning with some approach to accuracy.

p. 850↵[He set out the facts of the case and continued]

Since we are differing from a carefully reasoned judgment, we think it due to the learned judge to indicate the grounds of our dissent.

[He set out the reasoning of the trial judge and continued]

First, … the learned judge appears to infer that because certain ‘special circumstances’ were, in his view, not ‘drawn to the notice of’ the defendants and therefore, in his view, the operation of the ‘second rule’ was excluded, ergo nothing in respect of loss of business can be recovered under the ‘first rule.’ This inference is, in our view, no more justified in the present case than it was in the case of Cory v. Thames Ironworks Company (1868) LR 3 QB 181. Secondly, that while it is not wholly clear what were the ‘special circumstances’ on the non-communication of which the learned judge relied, it would seem that they were, or included, the following:—(a) the ‘circumstance’ that delay in delivering the boiler was going to lead ‘necessarily’ to loss of profits. But the true criterion is surely not what was bound ‘necessarily’ to result, but what was likely or liable to do so, and we think that it was amply conveyed to the defendants by what was communicated to them (plus what was patent without express communication) that delay in delivery was likely to lead to ‘loss of business’; (b) the ‘circumstance’ that the plaintiffs needed the boiler ‘to extend their 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; (c) the ‘circumstance’ that the plaintiffs had the assured expectation of special contracts, which they could only fulfil by securing punctual delivery of the boiler. Here, no doubt, the learned judge had in mind the particularly lucrative dyeing contracts to which the plaintiffs looked forward and which they mention in … [their] statement of claim. We agree that in order that the plaintiffs should recover specifically and as such the profits expected on these contracts, the defendants would have had to know, at the time of their agreement with the plaintiffs, of the prospect and terms of such contracts. We also agree that they did not in fact know these things. It does not, however, follow that the plaintiffs are precluded from recovering some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected.

Thirdly, the other point on which Streatfield J largely based his judgment was that there is a critical difference between the measure of damages applicable when the defendant defaults in supplying a self-contained profit-earning whole and when he defaults in supplying a part of that whole. In our view, there is no intrinsic magic, in this connection, in the whole as against a part. The fact that a part only is involved is only significant in so far as it bears on the capacity of the supplier to foresee the consequences of non-delivery. If it is clear from the nature of the part (or the supplier of it is informed) that its non-delivery will have the same effect as non-delivery of the whole, his liability will be the same as if he had defaulted in delivering the whole … [On the facts of the present case] there was no question of a total stoppage resulting from non-delivery, yet there was ample means of knowledge on the part of the defendants that business loss of some sort would be likely to result to the plaintiffs from the defendants’ default in performing their contract.

The plaintiff chartered the defendant’s vessel to carry 3,000 tons of sugar to Basrah. In breach of contract, the vessel arrived at its destination nine days late. The plaintiff intended to sell the sugar at Basrah. However, by the time the vessel arrived the market for sugar had fallen from £32 10s per ton to £31 2s 9d per ton. The plaintiff sued the defendant for breach of contract, claiming the difference in price as damages. At trial, it was found that, although the defendant did not know what the plaintiff intended to do with the sugar, the defendant did know that there was a market for sugar in Basrah. However, the judge found that it was impossible to say that it was reasonably foreseeable to the defendant that delay in delivery would result in that kind of loss. The Court of Appeal reversed this decision, and held that loss due to the fall in market prices was not too remote. The House of Lords unanimously affirmed the decision of the Court of Appeal.

Lord Reid

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 … 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.

But then it has been said that the liability of defendants has been further extended by Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. I do not think so.

[He set out the facts of the case and considered the six propositions of law to be found in the judgment of Asquith LJ (earlier in this section) and continued]

But what is said to create a ‘landmark’ is the statement of principles by Asquith LJ. This does to some extent go beyond the older authorities and in so far as it does so, I do not agree with it. In paragraph (2) it is said that the plaintiff is entitled to recover ‘such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.’ To bring in reasonable foreseeability appears to me to be confusing measure of damages in contract with measure of damages in tort. A great many extremely unlikely results are reasonably foreseeable: it is true that Lord Asquith may have meant foreseeable as a likely result, and if that is all he meant I would not object further than to say that I think that the phrase is liable to be misunderstood. For the same reason I would take p. 852↵exception to the phrase ‘liable to result’ in paragraph (5). Liable is a very vague word but I think that one would usually say that when a person foresees a very improbable result he foresees that it is liable to happen.

I agree with the first half of paragraph (6). For the best part of a century it has not been required that the defendant could have foreseen that a breach of contract must necessarily result in the loss which has occurred. But I cannot agree with the second half of that paragraph. It has never been held to be sufficient in contract that the loss was foreseeable as ‘a serious possibility’ or ‘a real danger’ or as being ‘on the cards.’ It is on the cards that one can win £100,000 or more for a stake of a few pence—several people have done that. And anyone who backs a hundred to one chance regards a win as a serious possibility—many people have won on such a chance. … It appears to me that in the ordinary use of language there is wide gulf between saying that some event is not unlikely or quite likely to happen and saying merely that it is a serious possibility, a real danger, or on the cards. Suppose one takes a well-shuffled pack of cards, it is quite likely or not unlikely that the top card will prove to be a diamond: the odds are only 3 to 1 against. But most people would not say that it is quite likely to be the nine of diamonds for the odds are then 51 to 1 against. On the other hand I think that most people would say that there is a serious possibility or a real danger of its being turned up first and of course it is on the cards. If the tests of ‘real danger’ or ‘serious possibility’ are in future to be authoritative then the Victoria Laundry case would indeed be a landmark because it would mean that Hadley v. Baxendale would be differently decided today. I certainly could not understand any court deciding that, on the information available to the carrier in that case, the stoppage of the mill was neither a serious possibility nor a real danger. If those tests are to prevail in future then let us cease to pay lip service to the rule in Hadley v. Baxendale. But in my judgment to adopt these tests would extend liability for breach of contract beyond what is reasonable or desirable. From the limited knowledge which I have of commercial affairs I would not expect such an extension to be welcomed by the business community and from the legal point of view I can find little or nothing to recommend it …

It appears to me that, without relying in any way on the Victoria Laundry case, and taking the principle that had already been established, the loss of profit claimed in this case was not too remote to be recoverable as damages.

Lord Morris of Borth-y-Gest

I think it is clear that the loss need not be such that the contract-breaker could see that it was certain to result. The question that arises concerns the measure of prevision which should fairly and reasonably be ascribed to him.

My Lords, in applying the guidance given in Hadley v. Baxendale I would hope that no undue emphasis would be placed upon any one word or phrase … The result in any particular case need not depend upon giving pride of place to any one of such phrases as ‘liable to result’ or ‘not unlikely to result.’ Each one of these phrases may be of help but so may many others …

My Lords, the words, phrases and passages to which I have referred are useful and helpful indications of the application of the rule in Hadley v. Baxendale. But they neither add to the rule nor do they modify it. I regard the illuminating judgment of the Court of Appeal in Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. as a most valuable analysis of the rule. It was there pointed out that in order to make a contract-breaker liable under what was called ‘either rule’ in Hadley v. Baxendale it is not necessary that he should actually have asked himself what loss is liable to result from a breach but that it suffices that if he had considered the question he would as a reasonable man have concluded that the loss in question was liable to result. Nor need it be proved, in order to recover a particular loss, that upon a given state p. 853↵of knowledge he could, as a reasonable man, foresee that a breach must necessarily result in that loss. Certain illustrative phrases are employed in that case. They are valuable by way of exposition but for my part I doubt whether the phrase ‘on the cards’ has a sufficiently clear meaning or possesses such a comparable shade of meaning as to qualify it to take its place with the various other phrases which line up as expositions of the rule.

If the problem in the present case is that of relating accepted principle to the facts which have been found, I entertain no doubt that if at the time of their contract the parties had considered what the consequence would be if the arrival of the ship at Basrah was delayed they would have contemplated that some loss to the respondents was likely or was liable to result. The appellant at the time that he made his contract must have known that if in breach of contract his ship did not arrive at Basrah when it ought to arrive he would be liable to pay damages. He would not know that a loss to the respondents was certain or inevitable but he must, as a reasonable business man, have contemplated that the respondents would very likely suffer loss, and that it would be or would be likely to be a loss referable to market price fluctuations at Basrah. I cannot think that he should escape liability by saying that he would only be aware of a possibility of loss but not of a probability or certainty of it. He might have used any one of many phrases. He might have said that a loss would be likely; or that a loss would not be unlikely; or that a loss was liable to result; or that the risk that delay would cause loss to the respondents was a serious possibility; or that there would be a real danger of a loss; or that the risk of his being liable to have to pay for the loss was one that he ought commercially to take into account. As a practical business man he would not have paused to reflect on the possible nuances of meaning of any one of these phrases. Nor would he have sent for a dictionary … Lord Hodson

A close study of the [remoteness] rule was made by the Court of Appeal in the case of the Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd. The judgment of the court … was delivered by Asquith LJ, who referred to the Monarch Steamship case [1949] AC 196 and suggested the phrase ‘liable to result’ as appropriate to describe the degree of probability required. This may be a colourless expression but I do not find it possible to improve on it. If the word ‘likelihood’ is used it may convey the impression that the chances are all in favour of the thing happening, an idea which I would reject.

Lord Pearce

[T]he case of Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd … represented (in felicitous language) the approximate view of Hadley v. Baxendale taken by many judges in trying ordinary cases of breach of contract.

It is argued that it was an erroneous departure from Hadley v. Baxendale in that it allowed damages where the loss was ‘a serious possibility’ or ‘a real danger’ instead of maintaining that the loss must be ‘probable,’ in the sense that it was more likely to result than not … in my opinion the expressions used in the Victoria Laundry case were right. I do not however accept the colloquialism ‘on the cards’ as being a useful test because I am not sure just what nuance it has either in my own personal vocabulary or in that of others.

Lord Upjohn

Asquith LJ in Victoria Laundry used the words ‘likely to result’ and he treated that as synonymous with a serious possibility or a real danger. He went on to equate that with the expression ‘on the cards’ but like all your Lordships I deprecate the use of that phrase which is far too imprecise and to my mind is capable of denoting a most improbable and unlikely event, such as winning a prize on a premium bond on any given drawing …

It is clear that on the one hand the test of foreseeability as laid down in the case of tort is not the test for breach of contract; nor on the other hand must the loser establish that the loss was a near certainty or an odds-on probability. I am content to adopt as the test a ‘real danger’ or a ‘serious possibility.’ There may be a shade of difference between these two phrases but the assessment of damages is not an exact science and what to one judge or jury will appear a real danger may appear to another judge or jury to be a serious possibility.

The defendant company contracted to supply and install a large cylindrical metal hopper on the plaintiffs’ pig farm, in which the plaintiffs intended to store pig feed. When they erected the hopper the defendants failed to notice that the ventilator at the top of the hopper was p. 855↵closed. The plaintiffs then filled the hopper with pignuts and subsequently fed them to the pigs. As a result of the lack of ventilation the nuts began to turn mouldy over a period of time. The plaintiffs continued to feed the nuts to the pigs because mouldy nuts do not generally cause harm to pigs. Over time the pigs began to show signs of illness and the plaintiffs eventually discovered the lack of ventilation in the hopper. The plaintiffs alleged that a large number of their pigs contracted E coli as a result of eating the mouldy nuts. They alleged that 254 pigs had died as a result of the outbreak, that they had incurred considerable expense in combating it, and that they had suffered a substantial loss of profit.

The defendants denied that they were liable for the loss of profit suffered by the plaintiffs on the basis that it was too remote a consequence of their breach of contract. The Court of Appeal held that they were liable for the illness and death of the pigs, albeit that the judges gave different reasons for allowing the claim.

Lord Denning MR

The law as to remoteness

Remoteness of damage is beyond doubt a question of law. In C Czarnikow Ltd v. Koufos [1969] AC 350 the House of Lords said that, in remoteness of damage, there is a difference between contract and tort. In the case of a breach of contract, the court has to consider whether the consequences were of such a kind that a reasonable man, at the time of making the contract, would contemplate them as being of a very substantial degree of probability. (In the House of Lords various expressions were used to describe this degree of probability, such as, not merely ‘on the cards’ because that may be too low: but as being ‘not unlikely to occur’ (see pp. 383 and 388); or ‘likely to result or at least not unlikely to result’ (see p. 406); or ‘liable to result’ (see p. 410); or that there was a ‘real danger’ or ‘serious possibility’ of them occurring (see p. 415).)

In the case of a tort, the court has to consider whether the consequences were of such a kind that a reasonable man, at the time of the tort committed, would foresee them as being of a much lower degree of probability. (In the House of Lords various expressions were used to describe this, such as, it is sufficient if the consequences are ‘liable to happen in the most unusual case’ (see p. 385); or in a ‘very improbable’ case (see p. 389); or that ‘they may happen as a result of the breach, however unlikely it may be, unless it can be brushed aside as far-fetched’ (see p. 422).)

I find it difficult to apply those principles universally to all cases of contract or to all cases of tort: and to draw a distinction between what a man ‘contemplates’ and what he ‘foresees’. I soon begin to get out of my depth. I cannot swim in this sea of semantic exercises—to say nothing of the different degrees of probability—especially when the cause of action can be laid either in contract or in tort. I am swept under by the conflicting currents. I go back with relief to the distinction drawn in legal theory by Professors Hart and Honoré in their book Causation in the Law (1959), at pp. 281–287. They distinguish between those cases in contract in which a man has suffered no damage to person or property, but only economic loss, such as, loss of profit or loss of opportunities for gain in some future transaction: and those in which he claims damages for an injury actually done to his person or damage actually done to his property (including his livestock) or for ensuing expense (damnum emergens) to which he has actually been put. In the law of tort, there is emerging a distinction between economic loss and physical damage … It seems to me that in the law of contract, too, a similar distinction is emerging. It is between loss of profit consequent on a breach of contract and physical damage consequent on it.

p. 856Loss of profit cases

I would suggest as a solution that in the former class of case—loss of profit cases—the defaulting party is only liable for the consequences if they are such as, at the time of the contract, he ought reasonably to have contemplated as a serious possibility or real danger. You must assume that, at the time of the contract, he had the very kind of breach in mind—such a breach as afterwards happened, as for instance, delay in transit—and then you must ask: ought he reasonably to have contemplated that there was a serious possibility that such a breach would involve the plaintiff in loss of profit? If yes, the contractor is liable for the loss unless he has taken care to exempt himself from it by a condition in the contract—as, of course, he is able to do if it was the sort of thing which he could reasonably contemplate. The law on this class of case is now covered by the three leading cases of Hadley v. Baxendale, 9 Exch 341; Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528; and C Czarnikow Ltd v. Koufos [1969] 1 AC 350. These were all ‘loss of profit’ cases: and the test of ‘reasonable contemplation’ and ‘serious possibility’ should, I suggest, be kept to that type of loss or, at any rate, to economic loss.

Physical damage cases

In the second class of case—the physical injury or expense case—the defaulting party is liable for any loss or expense which he ought reasonably to have foreseen at the time of the breach as a possible consequence, even if it was only a slight possibility. You must assume that he was aware of his breach, and then you must ask: ought he reasonably to have foreseen, at the time of the breach, that something of this kind might happen in consequence of it? This is the test which has been applied in cases of tort ever since The Wagon Mound cases [1961] AC 388 and [1967] 1 AC 617. But there is a long line of cases which support a like test in cases of contract.

One class of case which is particularly apposite here concerns latent defects in goods: in modern words ‘product liability’. In many of these cases the manufacturer is liable in contract to the immediate party for a breach of his duty to use reasonable care and is liable in tort to the ultimate consumer for the same want of reasonable care. The ultimate consumer can either sue the retailer in contract and pass the liability up the chain to the manufacturer, or he can sue the manufacturer in tort and thus by-pass the chain. The liability of the manufacturer ought to be the same in either case. In nearly all these cases the defects were outside the range of anything that was in fact contemplated, or could reasonably have been contemplated, by the manufacturer or by anyone down the chain to the retailers. Yet the manufacturer and others in the chain have been held liable for the damage done to the ultimate user …

Instances could be multiplied of injuries to persons or damage to property where the defendant is liable for his negligence to one man in contract and to another in tort. Each suffers like damage. The test of remoteness is, and should be, the same in both.

Coming to the present case, we were told that in some cases the makers of these hoppers supply them direct to the pig farmer under contract with him, but in other cases they supply them through an intermediate dealer—who buys from the manufacturer and resells to the pig farmer on the self-same terms—in which the manufacturer delivers direct to the pig farmer. In the one case the pig farmer can sue the manufacturer in contract. In the other in tort. The test of remoteness should be the same. It should be the test in tort.

Conclusion

The present case falls within the class of case where the breach of contract causes physical damage. The test of remoteness in such cases is similar to that in tort. The contractor is p. 857↵liable for all such loss or expense as could reasonably have been foreseen, at the time of the breach, as a possible consequence of it. Applied to this case, it means that the makers of the hopper are liable for the death of the pigs. They ought reasonably to have foreseen that, if the mouldy pignuts were fed to the pigs, there was a possibility that they might become ill. Not a serious possibility. Nor a real danger. But still a slight possibility. On that basis the makers were liable for the illness suffered by the pigs. They suffered from diarrhoea at the beginning. This triggered off the deadly E. coli. That was a far worse illness than could then be foreseen. But that does not lessen this liability. The type or kind of damage was foreseeable even though the extent of it was not: see Hughes v. Lord Advocate [1963] AC 837. The makers are liable for the loss of the pigs that died and of the expenses of the vet and such like, but not for loss of profit on future sales or future opportunities of gain: see Simon v. Pawson and Leafs Ltd (1932) 38 Com Cas 151.

So I reach the same result as the judge, but by a different route. I would dismiss the appeal.

Orr LJ

I agree with Lord Denning MR and also with Scarman LJ, whose judgment I have had the opportunity of reading, that this appeal should be dismissed, but with respect to Lord Denning MR I would dismiss it for the reasons to be given by Scarman LJ and not on the basis that a distinction is to be drawn for the present purposes between loss of profits and physical damage cases. I have not been satisfied that such a distinction is sufficiently supported by the authorities.

Scarman LJ

My conclusion in the present case is the same as that of Lord Denning MR but I reach it by a different route. I would dismiss the appeal. I agree with him in thinking it absurd that the test for remoteness of damage should, in principle, differ according to the legal classification of the cause of action, though one must recognize that parties to a contract have the right to agree on a measure of damages which may be greater, or less, than the law would offer in the absence of agreement. I also agree with him in thinking that, notwithstanding the interpretation put on some dicta in C Czarnikow Ltd v. Koufos [1969] AC 350, the law is not so absurd as to differentiate between contract and tort save in situations where the agreement, or the factual relationship, of the parties with each other requires it in the interests of justice. I differ from him only to this extent: the cases do not, in my judgment, support a distinction in law between loss of profit and physical damage. Neither do I think it necessary to develop the law judicially by drawing such a distinction. Of course (and this is a reason for refusing to draw the distinction in law) the type of consequence—loss of profit or market or physical injury—will always be an important matter of fact in determining whether in all the circumstances the loss or injury was of a type which the parties could reasonably be supposed to have in contemplation.

In C Czarnikow Ltd v. Koufos [1969] 1 AC 350 (a case of a contract of carriage of goods by sea) the House of Lords resolved some of the difficulties in this branch of the law. The law which the House in that case either settled or recognized as already settled may be stated as follows. (1) The general principle regulating damages for breach of contract is that ‘where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation … as if the contract had been performed’: see per Lord Pearce, at p. 414, quoting Parke B in Robinson v. Harman (1848) 1 Exch 850, 855. (2) The formulation of the remoteness test is not the same in tort and in contract because the relationship of the p. 858↵parties in a contract situation differs from that in tort: see per Lord Reid, at pp. 385–386. (3) The two rules formulated by Alderson B in Hadley v. Baxendale, 9 Exch. 341 are but two aspects of one general principle—that to be recoverable in an action for damages for breach of contract the plaintiff’s loss must be such as may reasonably be supposed would have been in the contemplation of the parties as a serious possibility had their attention been directed to the possibility of the breach which has, in fact, occurred.

Two problems are left unsolved by C Czarnikow Ltd v. Koufos: (1) the law’s reconciliation of the remoteness principle in contract with that in tort where, as, for instance, in some product liability cases, there arises the danger of differing awards, the lesser award going to the party who has a contract, even though the contract is silent as to the measure of damages and all parties are, or must be deemed to be, burdened with the same knowledge, or enjoying the same state of ignorance; and (2) what is meant by ‘serious possibility’ or its synonyms: is it a reference to the type of consequence which the parties might be supposed to contemplate as possible though unlikely, or must the chance of it happening appear to be likely? (see the way Lord Pearce puts it, at pp. 416–417).

As to the first problem, I agree with Lord Denning MR in thinking that the law must be such that, in a factual situation where all have the same actual or imputed knowledge and the contract contains no term limiting the damages recoverable for breach, the amount of damages recoverable does not depend upon whether, as a matter of legal classification, the plaintiff’s cause of action is breach of contract or tort. It may be that the necessary reconciliation is to be found, notwithstanding the strictures of Lord Reid at pp. 389–390, in holding that the difference between ‘reasonably foreseeable’ (the test in tort) and ‘reasonably contemplated’ (the test in contract) is semantic, not substantial. Certainly, Asquith LJ, in Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528, 535 and Lord Pearce in C Czarnikow Ltd v. Koufos [1969] 1 AC 350, 414 thought so; and I confess I think so too.

The second problem—what is meant by a ‘serious possibility’—is, in my judgment, ultimately a question of fact. I shall return to it, therefore, after analysing the facts, since I believe it requires of the judge no more—and no less—than the application of common sense in the particular circumstances of the case. …

The court’s task, therefore, is to decide what loss to the plaintiffs it is reasonable to suppose would have been in the contemplation of the parties as a serious possibility had they had in mind the breach when they made their contract.

I now turn to the facts of the case …

Given the situation of the parties at the time of contract, was the loss of profit, or market, a serious possibility, something that would have been in their minds had they contemplated breach?

It does not matter, in my judgment, if they thought that the chance of physical injury, loss of profit, loss of market, or other loss as the case may be, was slight, or that the odds were against it, provided they contemplated as a serious possibility the type of consequence, not necessarily the specific consequence, that ensued upon breach. Making the assumption as to breach that the judge did, no more than common sense was needed for them to appreciate that food affected by bad storage conditions might well cause illness if the pigs fed upon it.

As I read the judgment under appeal, this was how the judge … reached this decision. In my judgment, he was right, upon the facts as found, to apply the first rule in Hadley v. Baxendale, 9 Exch 341 or, if the case be one of breach of warranty, as I think it is, the rule in section 53(2) of the Sale of Goods Act 1893 without inquiring as to whether, upon a juridical analysis, the rule is based upon a presumed contemplation. At the end of a long and complex dispute the judge allowed common sense to prevail. I would dismiss the appeal.

A charterer of a vessel redelivered the vessel late and, as a result, the owners of the vessel had to agree a reduced rate of hire for the follow-on time charter. They claimed that their loss amounted to $8,000 per day for the duration of the follow-on charter (which was 191 days). Thus they claimed $1,364,584 in damages. The charterers submitted that their liability was confined to the difference between the market and the charter rates of hire for the nine days during which the owners were deprived of the use of the ship. On this basis damages amounted to $158,301.17. It was found that the general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period. The House of Lords, allowing an appeal from the decision of the Court of Appeal, held that liability was confined to the latter figure.

Lord Hoffmann

9. The case … raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable (‘not unlikely’) an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have p. 860intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses? …

11. The question of principle has been extensively discussed in the literature. Recent articles by Adam Kramer (‘An Agreement-Centred Approach to Remoteness and Contract Damages’ in Cohen and McKendrick (ed), Comparative Remedies for Breach of Contract (2004) pp 249–286), Andrew Tettenborn (‘Hadley v Baxendale Foreseeability: a Principle Beyond its Sell-by Date’ in (2007) 23 Journal of Contract Law 120–147) and Andrew Robertson (‘The basis of the remoteness rule in contract’ (2008) 28 Legal Studies 172–196) are particularly illuminating. They show that there is a good deal of support in the authorities and academic writings for the proposition that the extent of a party’s liability for damages is founded upon the interpretation of the particular contract; not upon the interpretation of any particular language in the contract, but (as in the case of an implied term) upon the interpretation of the contract as a whole, construed in its commercial setting. Professor Robertson considers this approach somewhat artificial, since there is seldom any helpful evidence about the extent of the risks the particular parties would have thought they were accepting. 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. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v. Irwin [1977] AC 239, 257–258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract.

12. It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle 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.

13. The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing. And as Willes J said in British Columbia Saw Mill Co Ltd v. Nettleship (1868) LR 3 CP 499, 508:

‘I am disposed to take the narrow view, that one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.’

14. In their submissions to the House, the owners said that the ‘starting point’ was that damages were designed to put the innocent party, so far as it is possible, in the position as if the contract had been performed: see Robinson v. Harman (1848) 1 Exch 850, 855. However, in Banque Bruxelles Lambert SA v. Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v. York Montague Ltd) [1997] AC 191, 211, I said (with the concurrence of the other members of the House):

‘I think that this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.’

15.p. 861 In other words, one 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 …

21. It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v. Baxendale … That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But … it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility.

22. What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would have been reasonable and have been regarded by the contracting party as significant for the purposes of the risk he was undertaking. In Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528, where the plaintiffs claimed for loss of the profits from their laundry business because of late delivery of a boiler, the Court of Appeal did not regard ‘loss of profits from the laundry business’ as a single type of loss. They distinguished (at p 543) losses from ‘particularly lucrative dyeing contracts’ as a different type of loss which would only be recoverable if the defendant had sufficient knowledge of them to make it reasonable to attribute to him acceptance of liability for such losses. The vendor of the boilers would have regarded the profits on these contracts as a different and higher form of risk than the general risk of loss of profits by the laundry.

23. If, therefore, one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision for timely redelivery in the charterparty is to enable the ship to be at the full disposal of the owner from the redelivery date. If the charterer’s orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner’s arrangements for the next charter. That is regarded by the market as being, as the saying goes, res inter alios acta.

24. The findings of the majority arbitrators [that the charterers were liable for the loss on the new fixture because it arose naturally from the breach] shows that they considered their decision to be contrary to what would have been the expectations of the parties, but dictated by the rules in Hadley v. Baxendale as explained in The Heron II [1969] 1 AC 350. But in my opinion these rules are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them. …

26. The owners say that the parties are entirely at liberty to insert an express term excluding consequential loss if they want to do so. Some standard forms of charter do. I suppose it can be said of many disputes over interpretation, especially over implied terms, that the parties could have used express words or at any rate expressed themselves more clearly than they have done. But, as I have indicated, the implication of a term as a matter of p. 862construction of the contract as a whole in its commercial context and the implication of the limits of damages liability seem to me to involve the application of essentially the same techniques of interpretation. In both cases, the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the trouble by using clearer language. In my opinion, the findings of the arbitrators and the commercial background to the agreement are sufficient to make it clear that the charterer cannot reasonably be regarded as having assumed the risk of the owner’s loss of profit on the following charter. I would therefore allow the appeal.

Lord Hope of Craighead

31. Assumption of responsibility, which forms the basis of the law of remoteness of damage in contract, is determined by more than what at the time of the contract was reasonably foreseeable … The fact that the loss was foreseeable—the kind of result that the parties would have had in mind, as the majority arbitrators put it—is not the test. Greater precision is needed than that. The question is whether the loss was a type of loss for which the party can reasonably be assumed to have assumed responsibility …

34. In this case it was within the parties’ contemplation that an injury which would arise generally from late delivery would be loss of use at the market rate, as compared with the charter rate, during the relevant period. This is something that everybody who deals in the market knows about and can be expected to take into account. But the charterers could not be expected to know how, if—as was not unlikely—there was a subsequent fixture, the owners would deal with any new charterers. This was something over which they had no control and, at the time of entering into the contract, was completely unpredictable. Nothing was known at that time about the terms on which any subsequent fixture might be entered into—how short or long the period would be, for example, or what was to happen should the previous charter overrun and the owner be unable to meet the new commencement date. It is true that neither party had any control over the state of the market. But in the ordinary course of things rates in the market will fluctuate. So it can be presumed that the party in breach has assumed responsibility for any loss caused by delay which can be measured by comparing the charter rate with the market rate during that period. There can be no such presumption where the loss claimed is not the product of the market itself, which can be contemplated, but results from arrangements entered into between the owners and the new charterers, which cannot. …

36. … a party cannot be expected to assume responsibility for something that he cannot control and, because he does not know anything about it, cannot quantify. It is not enough for him to know in general and on open-ended terms that there is likely to be a follow-on fixture … What he needs is some information that will enable him to assess the extent of any liability. The policy of the law is that effect should be given to the presumed intention of the parties. That is why the damages that are recoverable for breach of contract are limited to what happens in ordinary circumstances—in the great multitude of cases, as Alderson B put it in Hadley v. Baxendale—where an assumption of responsibility can be presumed, or what arises from special circumstances known to or communicated to the party who is in breach at the time of entering into the contract which because he knew about he can be expected to provide for. This is a principle of general application. We are dealing in this case with a highly specialised area of commercial law. But the principle by which the issue must be resolved is that which applies in the law of contract generally.

37. For these reasons … I too would allow the appeal.

p. 863Lord Rodger of Earlsferry

53. … the extent of the relevant rise and fall in the market within a short time was actually unusual. The owners’ loss stemmed from that unusual occurrence.

54. The obligation of the charterers was to redeliver the vessel to the owners by midnight on 2 May. Therefore, the charterers are taken to have had in contemplation, at the time when they entered into the addendum, the loss which would generally happen in the ordinary course of things if the vessel were delivered some nine days late so that the owners missed the cancelling date for a follow-on fixture. Obviously, that would include loss suffered as a result of the owners not having been paid under the contract for the charterers’ use of the vessel for the period after midnight on 2 May. So, as both sides agree, the owners had to be compensated for that loss by the payment of damages. But the parties would also have contemplated that, if the owners lost a fixture, they would then be in a position to enter the market for a substitute fixture. Of course, in some cases, the available market rate would be lower and, in some cases, higher, than the rate under the lost fixture. But the parties would reasonably contemplate that, for the most part, the availability of the market would protect the owners if they lost a fixture. That I understand to be the thinking which lies behind the dicta to the effect that the appropriate measure of damages for late redelivery of a vessel is the difference between the charter rate and the market rate if the market rate is higher than the charter rate for the period between the final terminal date and redelivery …

58. I would enter two caveats [to the principle set out in the last sentence of [54]]. First, it may be that, at least in some cases, when concluding a charterparty, a charterer could reasonably contemplate that late delivery of a vessel of that particular type, in a certain area of the world, at a certain season of the year would mean that the market for its services would be poor. In these circumstances, the owners might have a claim for some general sum for loss of business, somewhat along the line of the damages for the loss of business envisaged by the Court of Appeal in Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528, 542–543. Because of the agreement on figures, the matter was not explored in this case and I express no view on it. But, even if some such loss of business could have been reasonably contemplated, as Victoria Laundry shows, this would not mean that the owners’ particular loss of profit as a result of the re-negotiation … should be recoverable. To hold otherwise would risk undermining the first limb of Hadley v. Baxendale, which limits the charterers’ liability to ‘the amount of injury’ that would arise ‘ordinarily’ or ‘generally’.

59. Secondly, the position on damages might also be different, if, for example—when a charterparty was entered into—the owners drew the charterers’ attention to the existence of a forward charter of many months’ duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under that charter would be liable to result in the loss of that fixture. Then the second rule or limb in Hadley v. Baxendale might well come into play. But the point does not arise in this case.

60. Returning to the present case, I am satisfied that, when they entered into the addendum in September 2003, neither party would reasonably have contemplated that an overrun of nine days would ‘in the ordinary course of things’ cause the owners the kind of loss for which they claim damages. That loss was not the ‘ordinary consequence’ of a breach of that kind. It occurred in this case only because of the extremely volatile market conditions which produced both the owners’ initial (particularly lucrative) transaction, with a third party, and the subsequent pressure on the owners to accept a lower rate for that fixture. Back in September 2003, this loss could not have been reasonably foreseen as being likely to arise p. 864out of the delay in question. It was, accordingly, too remote to give rise to a claim for damages for breach of contract …

63. I have not found it necessary to explore the issues concerning South Australia Asset Management Corpn v. York Montague Ltd [1997] AC 191 and assumption of responsibility, which my noble and learned friend, Lord Hoffmann, has raised. Nevertheless, I am otherwise in substantial agreement with his reasons as well as with those to be given by Lord Walker of Gestingthorpe. I would allow the appeal.

Lord Walker of Gestingthorpe

69. … the underlying idea—what was the common basis on which the parties were contracting?—seems to me essential to the rule in Hadley v. Baxendale as a whole. Businessmen who are entering into a commercial contract generally know a fair amount about each other’s business. They have a shared understanding (differing in precision from case to case) as to what each can expect from the contract, whether or not it is duly performed without breach on either side …

[He considered the authorities and the findings of the arbitrators and concluded]

86. … No doubt the fixture was made at an appropriate time … But it was contrary to the principle stated in the Victoria Laundry case, and reaffirmed in The Heron II, to suppose that the parties were contracting on the basis that the charterers would be liable for any loss, however large, occasioned by a delay in re-delivery in circumstances where the charterers had no knowledge of, or control over, the new fixture entered into by the new owners.

87. For these reasons, and for the further reasons given by my noble and learned friends Lord Hoffmann, Lord Hope and Lord Rodger, whose opinions I have had the advantage of reading in draft, I would allow this appeal.

Baroness Hale of Richmond

90. My Lords, this could be an examination question …

91. … We are looking here at the general principles which limit a contract breaker’s liability when the contract itself does not do so. The contract breaker is not inevitably liable for all the loss which his breach has caused. Loss of the type in question has to be ‘within the contemplation’ of the parties at the time when the contract was made. It is not enough that it should be foreseeable if it is highly unlikely to happen. It would not then arise ‘in the usual course of things’: see The Heron II [1969] 1 AC 350, 385, per Lord Reid. So one answer to our question, given as I understand it by my noble and learned friend, Lord Rodger of Earlsferry, is that these parties would not have had this particular type of loss within their contemplation. They would expect that the owner would be able to find a use for his ship even if it was returned late. It was only because of the unusual volatility of the market at that particular time that this particular loss was suffered. It is one thing to say, as did the majority arbitrators, that missing dates for a subsequent fixture was within the parties’ contemplation as ‘not unlikely’. It is another thing to say that the ‘extremely volatile’ conditions which brought about this particular loss were ‘not unlikely’.

92. Another answer to the question, given as I understand it by my noble and learned friends, Lord Hoffmann and Lord Hope, is that one must ask, not only whether the parties must be taken to have had this type of loss within their contemplation when the contract was made, but also whether they must be taken to have had liability for this type of loss within their contemplation then. In other words, is the charterer to be taken to have undertaken legal responsibility for this type of loss? What should the unspoken terms of their contract be p. 865taken to be? If that is the question, then it becomes relevant to ask what has been the normal expectation of parties to such contracts in this particular market. If charterers would not normally expect to pay more than the market rate for the days they were late, and shipowners would not normally expect to get more than that, then one would expect something extra before liability for an unusual loss such as this would arise. That is essentially the reasoning adopted by the minority arbitrator.

93. My Lords, I hope that I have understood this correctly, for it seems to me that it adds an interesting but novel dimension to the way in which the question of remoteness of damage in contract is to be answered, a dimension which does not clearly emerge from the classic authorities. There is scarcely a hint of it in The Heron II, apart perhaps from Lord Reid’s reference, at p 385, to the loss being ‘sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation’ (emphasis supplied). In general, The Heron II points the other way, as it emphasises that there are no special rules applying to charterparties and that the law of remoteness in contract is not the same as the law of remoteness in tort … To incorporate it generally would be to introduce into ordinary contractual liability the principle adopted in the context of liability for professional negligence in South Australia Asset Management Corpn v. York Montague Ltd [1997] AC 191, 211. In an examination, this might well make the difference between a congratulatory and an ordinary first class answer to the question. But despite the excellence of counsels’ arguments it was not explored before us, although it is explored in academic textbooks and other writings, including those cited by Lord Hoffmann in paragraph 11 of his opinion. I note, however, that the most recent of these, Professor Robertson’s article on ‘The basis of the remoteness rule in contract’ (2008) 28 Legal Studies 172 argues strongly to the contrary. I am not immediately attracted to the idea of introducing into the law of contract the concept of the scope of duty which has perforce had to be developed in the law of negligence. The rule in Hadley v. Baxendale asks what the parties must be taken to have had in their contemplation, rather than what they actually had in their contemplation, but the criterion by which this is judged is a factual one. Questions of assumption of risk depend upon a wider range of factors and value judgments. This type of reasoning is, as Lord Steyn put it in Aneco Reinsurance Underwriting Ltd v. Johnson & Higgins Ltd [2002] 1 Lloyd’s Rep 157, [186], a ‘deus ex machina’. Although its result in this case may be to bring about certainty and clarity in this particular market, such an imposed limit on liability could easily be at the expense of justice in some future case. It could also introduce much room for argument in other contractual contexts. Therefore, if this appeal is to be allowed, as to which I continue to have doubts, I would prefer it to be allowed on the narrower ground identified by Lord Rodger, leaving the wider ground to be fully explored in another case and another context.