Part Two Compensation, s.Two Damages for the Different Types of Loss, 10 Pecuniary loss (except consequent on personal injury, death, or loss of reputation)
Andrew Burrows QC FBA
- Breach of contract — Remedies for breach of contract — Loss of profit and damages
Breach of contract damages are normally sought and awarded for this type of loss. It is therefore not surprising that there is a host of different ways of analysing and subdividing it. Here the approach adopted will be to divide between basic pecuniary loss, which will be primarily concentrated on, and which focuses on the benefit to which the claimant was contractually entitled and of which it has been wholly or partially deprived by the defendant’s breach, and additional pecuniary loss.1
On the other hand, for torts, where the central focus is on wrongful interference rather than a failure to benefit, it has been considered more helpful to adopt a division which gives some flavour of the interference in question. This type of tortious pecuniary loss is therefore examined under three heads:2 damage to property, including destruction; wrongful interference with goods or land, other than causing property damage; and pure economic loss.3
(1) The content of the promise
It is crucial to keep constantly in mind what the defendant contractually promised, so as not to put the claimant in a better or worse economic position than if the contract had been performed.
(p. 188) A good illustration of how easy it is to drift away from the basic compensatory principle is where a surveyor contracts to survey a house for a prospective house purchaser. Subject to any express term, the surveyor will be taken to have promised contractually to use reasonable care in making the survey. The surveyor will not be taken to have warranted either that the house is worth any particular price or that it is free from any defects other than those reported. It follows that if in reliance on the survey the purchaser goes ahead and buys the house and it transpires that the survey was made in breach of contract, because the surveyor did not report reasonably discoverable defects, the aim of damages will be to put the claimant into as good a position as if reasonable care had been used in making the survey and the report; they are not aimed at putting the claimant into any (other) warranted position. There are two possible positions the claimant may argue that he would have been in if reasonable care had been used in making the survey and report. Either he would not have bought the house at all or he would have bought it but for less than he paid. Applying the former, the claimant’s basic loss will be the purchase price paid minus the house’s actual value. Applying the latter, the basic loss will be the same if one assumes that the claimant would have paid the actual value of the house. Alternatively, the court might take the cost of repairs as a convenient starting point for the deduction in price the purchaser would actually have made from the purchase price if he had known of the defects.
These principles were clearly and correctly applied by the Court of Appeal in cases such as Perry v Sidney Phillips & Son4 and Watts v Morrow5 but in other cases concerning negligent surveys the court’s failure to reason from the basic compensatory principle is shown not so much by wrong decisions but rather by statements suggesting that damages are to be calculated according to the warranted value or condition of the property minus its actual value.6
One might argue that the effect of the controversial SAAMCO principle is that the house purchaser could not recover more than the difference between the value of the house, had the report been accurate, and its actual value. But even if that were the law (and it has been argued above that the SAAMCO principle is flawed)7 it is submitted that one should regard SAAMCO as a restriction (because of the ‘scope of the duty’) on the damages that would otherwise be awarded applying the compensatory aim. One must first apply the compensatory aim correctly by bearing in mind what the defendant contractually promised.
Another good illustration of the need to keep constantly in mind what the defendant contractually promised—so as to avoid awarding an erroneous measure of compensatory damages—is provided by breach of an agent’s warranty of authority. This occurs where an agent, who does not have its principal’s authority (for example, to conclude a contract), contractually warrants to the claimant that it does have that authority. If the claimant sues for breach of the agent’s contractual warranty of authority, the aim, bearing in mind the contractual promise, must be to put the claimant into as good a position as if the agent did have the principal’s authority. And if the agent did have that authority, the claimant would, for example, have had a valid contract with the principal so that the damages against the agent must ultimately be based on the claimant’s position had there been a valid contract between the principal and the claimant.8
There is often a choice between awarding the difference in value or the cost of cure. The former directly awards the claimant the financial advantage it has lost by being deprived, partially or wholly, of the benefit to which it was contractually entitled. The cost of cure, on the other hand, seeks to award the claimant the additional financial sacrifice it would have to incur to put itself into as good a position as if it had received the benefit to which it was contractually entitled.
In many situations the difference in value is in practice the only possible measure because no replacement benefit is available at any cost: for example, the party in breach may alone be capable of performing the contract or the delay may have made the performance impossible. Where both are possible measures, which will be awarded is a central question of interest and will be constantly referred to when looking at examples of the measures of basic pecuniary loss applied. But it is useful here to point to three of the factors that should and do influence the courts in making this choice. First, the claimant’s duty to mitigate means that it will recover the cost of cure where it has, or ought to have, incurred that cost in reasonably seeking to minimise its losses. Secondly, the fact that the claimant has cured or intends to cure may be a decisive factor favouring the cost of cure. Thirdly, the claimant’s purpose for wanting performance may be relevant; so if the claimant wanted performance primarily to reap economic gain, the difference in value will fully compensate the claimant; that is, it will obtain the intended profits. But if performance was wanted for other reasons (eg for pleasure), difference in value will not, or not as fully, compensate the claimant.
It is important to note that this long-standing choice in the law of contract damages (which also applies in analogous areas of tort damages)9 has recently been the subject of academic and judicial scrutiny. The cornerstone of this debate was an article by Brian Coote entitled ‘Contract Damages, Ruxley and the Performance Interest’.10 In it, Coote took Friedmann’s terminology of ‘performance interest’, which Friedmann had himself regarded as merely synonymous with ‘expectation interest’,11 and used it as a label to describe ‘cost of cure’ damages. Performance interest damages were contrasted with ‘difference in value’ damages which Coote saw as ‘mere compensation for the economic consequences of breach’12 or as being ‘to compensate for the loss of the economic benefits of performance’.13 Coote then suggested that there has been a tendency in the law of damages for the ‘performance interest’ to be subordinated to the ‘compensation approach’.14
It is submitted that Coote’s terminology is unhelpful. Both ‘difference in value’ and ‘cost of cure’ are concerned to compensate the claimant by putting him or her into as good a position as if the contract had been performed. Both are measures of pecuniary loss. The one is concerned with the loss of financial advantage, the other with the cost (ie the out-of-pocket loss) that the claimant must now incur. It is erroneous to treat only difference in value as compensating pecuniary loss. The overall interest normally protected by contractual damages is usefully labelled the expectation interest or performance interest. It is at a lower, (p. 190) more specific, level that one must then go on to choose, in protecting that expectation/performance interest, between difference in value or cost of cure.
Moreover, it is misleading to indicate that English law has been more committed to ‘difference in value’ than ‘cost of cure’. As we shall see throughout this chapter, various factors have influenced the courts in deciding between those two measures. Neither is dominant over the other.
Coote’s arguments are, arguably, more powerful in so far as he argues that ‘cost of cure’ (using that traditional terminology) should be even more widely favoured than it traditionally has been. In particular, he would favour ‘downgrading’ the importance attached to the claimant’s intention to cure in favour of a single ‘reasonableness’ test albeit that he would clothe the reasonable person with the needs and tastes of the actual promisee.15 Coote argues that in contracts made for the benefit of third parties, this approach would lead to ‘cost of cure’ damages being naturally recoverable by the contracting party as its own ‘loss’, irrespective of whether that party has cured or intends to cure.16
As we shall see, that approach apparently found favour with Lords Goff and Millett (dissenting) and, to an extent, Lord Browne-Wilkinson in Alfred McAlpine Construction Ltd v Panatown Ltd,17 which concerned a construction contract for a third party’s benefit. But, with respect, the traditional reliance on the claimant’s intention to effect cure makes good sense in avoiding overcompensation of the claimant; and in the context of a contract for the benefit of a third party it also avoids unacceptable double liability to both the contracting party and the third party.18 We shall return to these matters when discussing the Panatown case.
This is not to deny that there are some cases, considered at various points in this chapter, where the courts have awarded damages which appear to overcompensate the claimant. One might argue that those cases are simply wrong for that reason. Alternatively they can perhaps be justified, while maintaining the view that the damages are compensatory, by recognising that, for pragmatic reasons, the courts may prefer a simple and certain objective or standard measure of damages. A further justification might be that such cases are treating the damages as a corollary of the ‘duty to mitigate’: that is, that the defendant cannot complain that the claimant is being overcompensated by cost of cure damages in a situation where such damages would indisputably have been recoverable as reasonably incurred had the claimant chosen to incur the cost of cure (even if it has not done so and will not do so).19
(3) The general formulae for assessing basic pecuniary loss
From what has already been said it can readily be seen that, taking into account the advantages as well as the disadvantages resulting from the breach, the claimant’s basic pecuniary loss can be represented as follows: the value to the claimant of the benefit it should have received (minus the value of any benefits gained under the contract or that have, or ought to (p. 191) have, been gained as a result of the breach) minus the cost it has, or ought to have, avoided as a result of the breach; or the cost required to put the claimant into as good a position as if it had received the benefit minus the cost it has, or ought to have, avoided as a result of the breach; put shortly, difference in value minus cost avoided or cost of cure minus cost avoided.
The beauty of such formulae is that they can be applied whatever the nature of the benefit contracted for: that is, whether it comprised the delivery of goods, the transfer of land, the rendering of services, or the payment of money.
(4) Examples of the measures of basic pecuniary loss applied
These examples show the above general formulae in operation in respect of two of the most common types of contract—contracts for the sale of goods (examples (a)–(g))20 and contracts for the building or repairing of real property (examples (h)–(j)).
(a) Breach by seller failing to deliver goods wanted for resale
The buyer’s duty to mitigate generally dictates that it should buy substitute goods in the market so as to make its resale profit. Therefore, as laid down in the Sale of Goods Act 1979, s 51(3), the generally appropriate measure is market price at time fixed for delivery minus contract price, with the market price here referring to the market buying price.21 This is a cost of cure rather than a difference in value measure, with the contract price, assuming unpaid or recovered, being deducted as a cost avoided.
A higher resale price (that is, the price at which the buyer has contracted to sell the goods) clearly does not displace the market price, since it does not affect the buyer’s duty to mitigate. More controversial is a lower resale price. Several cases indicate that this should also be ignored. The leading one is William Bros Ltd v Agius Ltd22 where the defendant contracted to sell coal to the claimant at 16s 3d per ton. The claimant agreed to resell the coal to a third party for 19s per ton. The defendant failed to deliver. The market price at the date of breach was 23s 6d. The claimant was awarded damages of 7s 3d per ton, that is 23s 6d minus 16s 3d. The defendant’s argument that the damages should have been only 2s 9d per ton, that is 19s minus 16s 3d, was rejected. Although some commentators support this decision,23 it would seem that ignoring the resale overcompensated the claimant. True, it is often reasonable, given the claimant’s potential liability to the sub-buyer, to buy at a higher market price. But on the facts the claimant had not done so; and there was no question of liability on the resale contract because the sub-buyer had assigned its rights to the defendant. Nor is it satisfactory to say that, if the contract had been performed, other goods (p. 192) could still have been bought to fulfil the resale, leaving the claimant free to sell the goods that should have been delivered by the defendant at the market selling price; for those other goods would still have to be bought at the higher market price and resold at the lower resale price, thereby producing an identical loss. So, it is submitted that, applying a compensatory analysis, a lower resale price should displace the market buying price, except where the claimant has reasonably bought substitute goods to fulfil the resale (or there is liability on the sub-sale), in which case damages should be the price paid for the substitutes minus the original contract price (or the amount of damages the buyer has to pay the sub-buyer).
It should be recognised, however, that William Bros Ltd v Agius Ltd is one of several leading cases24 in which the courts have overcompensated the claimant. On the face of it, this seems wrong. However, it might perhaps be justified simply as a pragmatic preference for a clear and certain objective measure (ie what a reasonable claimant would have lost). Alternatively, as a corollary of the ‘duty to mitigate’, it might be said that the defendant cannot complain if damages are based on what the defendant would have had to pay as damages if the claimant had acted reasonably by buying in substitute goods.25 So on the facts of William Bros Ltd v Agius Ltd, the claimant, to put itself most closely into as good a position as if the contract had been performed, could reasonably have bought in substitute goods at 23s 6d. Applying this analysis, it did not matter that it had not in fact done so.
Where the claimant cannot mitigate by buying substitute goods in the market, it is entitled to a difference in value measure. A good example is Re R & H Hall and W H Pim, Jr & Co’s Arbitration.26 The claimants could not mitigate because they had contracted to resell the specific cargo of grain, and no other, to be delivered by the defendant. They were held entitled, subject to remoteness, to the actual resale price, which was higher than the market price, minus the contract price.
(b) Breach by seller failing to deliver goods wanted for use
The buyer’s duty to mitigate means that it should generally buy substitute goods in the market so as to make its user profit and again, therefore, as laid down in the Sale of Goods Act 1979, s 51(3), the generally appropriate measure is market buying price at time fixed for delivery minus contract price. However, where the buyer cannot so mitigate and cannot mitigate in other ways, for example by having substitute goods manufactured and adapted,27 it will generally be awarded its lost user profit as the difference in value measure.28
Exceptionally, a buyer is awarded the market resale price of goods (minus the contract price if unpaid or recovered). This will be so where the cost of replacing the goods exceeds that resale value, the claimant has no intention of replacing the goods, and there is no obvious lost user profit. In Sealace Shipping Co Ltd v Oceanvoice Ltd, The Alecos M29 the defendants contracted to sell a ship, including its spare parts, to the claimants. However, when it was delivered, the defendants failed to deliver also its spare propeller. The arbitrator (p. 193) awarded $1,100 for that breach on the grounds that the claimants were not interested in buying a replacement spare propeller (which would cost $121,000) and that, as there was no commercial market in second-hand propellers, the resale value of a propeller was its scrap value of $1,100. Steyn J disagreed and awarded $121,000 but the Court of Appeal allowed an appeal by the defendants and restored the lower award made by the arbitrator.
(c) Breach by seller delivering defective goods wanted for resale30
While one can imagine situations31 in which the duty to mitigate would dictate that the buyer should render the goods non-defective before reselling, hence entitling it to the cost of cure, a difference in value measure is here generally applied. As laid down in the Sale of Goods Act 1979, s 53(3) the buyer is generally awarded the market price that the goods would have had if of the contracted-for quality, less the market price of the goods actually delivered, and it is clear that the market price here refers to the market selling price.32 The contract price is not deducted because it is payable by the buyer and is therefore not a cost avoided.
Resale prices here seem relevant in two senses. First, if prior to the breach the buyer had made a resale contract of the goods, one would expect the resale selling price to displace the market selling price of the goods had they been of contracted-for quality. Secondly, if after breach the buyer had sold the goods, one would expect the resale price to displace the market selling price of the goods actually delivered if the former was higher. But in Slater v Hoyle and Smith Ltd,33 where a resale concluded prior to breach had been carried through after breach, resale prices were considered irrelevant, whether prior or subsequent, and the claimant was held entitled to the normal measure under the Sale of Goods Act 1979, s 53(3). The claimant bought cotton cloth from the defendant to fulfil a contract of sale already made. The cloth delivered was of inferior quality than warranted, although the claimant was able to use it as intended to fulfil his sub-contract and received the full contract price from the sub-buyer. The price paid by the sub-buyer was greater than the market selling price of the cloth delivered but less than the market selling price of the cloth as warranted. The defendant contended that the claimant’s damages should be nominal because the resale contract price concluded prior to breach minus the resale contract price received subsequent to breach amounted to nil. But the Court of Appeal rejected this, considered cases like Williams Bros v Agius Ltd34 to be correct, and awarded the claimant damages assessed according to s 53(3). Again while some commentators support this approach,35 there are difficulties in justifying it on compensatory reasoning because it appears to leave the claimant in a better position than if the contract had been properly performed.
If it is to be justified, it is submitted that, as has been explained above in relation to William Bros Ltd v Agius Ltd,36 it is best viewed either as representing a pragmatic preference for a simple and certain objective or standard measure or as a corollary of the ‘duty to mitigate’ (it would have been reasonable for the claimant to have bought in replacement goods so as to fulfil the sub-contract and the defendant cannot complain if damages are based on that reasonable conduct).
(p. 194) There is strong support in Bence Graphics Int Ltd v Fasson UK Ltd37 for the view that Slater v Hoyle and Smith Ltd was incorrect to disregard the resale price. Here the defendants supplied vinyl film to the claimants for £564,328.54. As the defendants knew, this film was to be used, and was so used, by the claimants to manufacture many thousands of ‘decals’ (that is, self-adhesive transfers) for use in identifying bulk containers. The decals were sold to various customers who owned bulk containers. The film supplied was defective so that some decals became illegible more quickly than they should have done. The essential question at issue was whether, applying the Sale of Goods Act 1979, s 53(3), the claimants were entitled to £564,328.54 as the difference between the market price of the film as it should have been and as it was; or were the claimants merely entitled to damages indemnifying them for the (apparently relatively minor) claims against them by their customers consequent on the decals being defective. The majority (Thorpe LJ dissenting) held that the latter was the appropriate measure. Contrary to Slater v Hoyle and Smith Ltd, the sales by the claimants to their customers should not be ignored. They meant that the claimants had not suffered a loss from being unable to sell on the film. Auld LJ, in an enlightened judgment, boldly said that the Slater case should be reconsidered not least because it awarded a buyer more than the evidence clearly showed he had lost. Otton LJ preferred to distinguish the Slater case on the grounds—rather unconvincing as he himself seemed inclined to recognise—that in that case, in contrast to Bence, the same goods were sub-sold without any manufacturing process and the defendant sellers did not know of the particular sub-sale.
While one can imagine situations38 where the duty to mitigate would dictate that the buyer should render the goods non-defective, hence entitling it to the cost of cure, a difference in value measure is here generally applied whereby the buyer is normally entitled to its lost user profit. For example, in Cullinane v British Rema Manufacturing Co Ltd,39 the defendants sold and delivered to the claimant a clay pulverising machine warranting that it would process clay at six tons per hour. In fact it could process clay at only two tons per hour. The claimant sought damages, inter alia,40 for his lost user profit and throughout the judgments it was taken for granted that the buyer was so entitled.41 Jenkins LJ said:
‘The plant having been supplied in contemplation by both parties that it should be used by the plaintiff in the commercial production of pulverised clay, the case is one in which the plaintiff can claim as damages for the breach of warranty, the loss of the profit he can show that he would have made if the plant had been as warranted.’42
A difference in value formula is generally applied whereby, as laid down in Elbinger Aktiengesellschaft v Armstrong,43 the claimant is entitled to the market selling price at the (p. 195) time when the goods should have been delivered minus the market selling price at the time when they were actually delivered.
As regards resale prices, in Wertheim v Chicoutimi Pulp Co44 a resale after breach was taken into account but a resale prior to breach was not; ie the higher resale price received subsequent to breach displaced the market selling price of the goods when actually delivered but the lower resale price concluded prior to breach did not displace the market selling price of the goods at the time when they should have been delivered. The case concerned a contract for the sale of a number of tons of wood pulp. Applying the normal measure of market selling price at the time when the goods should have been delivered (70s per ton) minus the market selling price when actually delivered (42s 6d), the claimant would have been entitled to damages of 27s 6d per ton. However, the Privy Council awarded damages of 5s per ton on the ground that the claimants had subsequently resold the same goods at 65s per ton (ie 70s minus 65s). It would seem, however, that the Privy Council was taking an unsatisfactory mid-position. Either the Slater v Hoyle and Smith Ltd45 approach of ignoring resale prices applies, in which case the claimants should have been entitled to 27s 6d per ton or, and preferably, applying a compensatory approach, resale prices of goods both prior and subsequent to breach are taken into account—in which case the claimants should have been entitled to merely nominal damages (ie 65s minus 65s).46
A difference in value measure is here generally applied, whereby the buyer is normally entitled to its lost user profit. An illustration of this is provided by one of the classic cases on remoteness, Victoria Laundry (Windsor) Ltd v Newman Industries,47 where the claimants were awarded damages for loss of their ordinary (but not exceptional) user profit following the defendants’ breach of contract in delivering five months late a boiler to be used in the claimants’ business.
The duty to mitigate generally dictates that the seller should sell the goods to another buyer. Therefore, as laid down by the Sale of Goods Act 1979, s 50(3), the general measure is the contract price minus the market price at the date of breach.
This is a difference in value measure—the contract price represents the value to the claimant of the defendant’s performance as it should have been and the market price is the market selling price48 and represents the benefit the seller has or ought to have gained by selling the goods to another buyer.
If the seller resells the goods at a price higher than the market selling price, one would expect that this resale price—being the benefit gained—would displace the market selling price as the sum deducted from the contract price. However, in Campbell Mostyn (Provisions) Ltd v Barnett Trading Co49 (as we have seen, analogously, in relation to a buyer’s damages for non- or defective delivery) it was held that the resale price should (p. 196) be ignored. The defendants had refused to accept 350 cases of tinned ham, which they had contracted to buy from the claimants. The claimants were awarded damages of the contract price minus the market price at the date of breach, even though they had subsequently sold the goods at or above the contract price. This approach leaves a claimant in a better position than if the contract had been performed and therefore runs contrary to the avowed compensatory goal.
If it is to be justified, it is submitted that, as has been explained above in relation to William Bros Ltd v Agius Ltd,50 it is best viewed either as representing a pragmatic preference for a simple and certain objective or standard measure or as a corollary of the ‘duty to mitigate’ (it would have been reasonable for the claimant to have sold the goods to another buyer at the market price and the defendant cannot complain if damages are based on that reasonable conduct).
Where the seller cannot mitigate by selling in the market—for example, where supply exceeds demand—the Sale of Goods Act 1979, s 50(3) does not apply, and the claimant will instead be basically entitled to its loss of profit on that sale (ie contract price minus cost avoided) without any deduction of the market selling price.51 This is shown by W L Thompson Ltd v Robinson (Gunmakers) Ltd52 in which there was a contract to sell a Vanguard car. The supply of those cars exceeded the demand and therefore when the buyer refused to take the car the seller was held entitled to his loss of profit on the sale even though there was no difference between the contract price and the market selling price at the date of breach. A particularly clear analysis of Thompson v Robinson was made by Jenkins LJ in Charter v Sullivan.53 There, because demand exceeded supply, Thompson v Robinson was distinguished and s 50(3) applied entitling the seller of a Hillman Minx car to merely nominal damages. Jenkins LJ said:
‘The number of sales he [the plaintiff] can effect and consequently the amount of profit he makes, will be governed, according to the state of the trade, either by the number of cars he is able to obtain from the manufacturers or by the number of purchasers he is able to find. In the former case demand exceeds supply, so that the default of one purchaser involves him in no loss, for he sells the same number of cars as he would have sold if that purchaser had not defaulted. In the latter case, supply exceeds demand so that the default of one purchaser may be said to have lost him one sale …’54
and later he went on to say:
‘Upjohn J’s decision in favour of the plaintiff dealers in Thompson’s case was essentially based on the admitted fact that the supply of the cars in question exceeded the demand and his judgment leaves no room for doubt that if the demand had exceeded the supply, his decision would have been the other way.’55
It should further be added that, as laid down in Lazenby Garages Ltd v Wright,56 Thompson v Robinson cannot be applied to sales of second-hand cars, because one cannot say of such cars that supply exceeds demand, or that a subsequent sale does not mitigate the seller’s loss of profit. As Lord Denning said, ‘… it is entirely different in the case of a secondhand car. Each second-hand car is different from the next, even though it is the same make.’57
One obvious possibility is that the owner will here be awarded the difference in value (ie difference in market selling price) between his property as it should have been if the contract had been performed and its actual value.58 However, the cost of cure, ie the cost of engaging someone to complete the work, is often awarded instead. This may be because the cost of cure is less than the difference in the property’s value and hence the owner’s duty to mitigate dictates that she should recover only the cost of cure. But even where the cost of cure greatly exceeds the difference in the property’s value, the owner has been held entitled to that cost provided she has cured or intends to cure. Three main cases repay examination.59
In Tito v Waddell (No 2)60 a British company mining for phosphate on Ocean Island, a small island in the Pacific, had contractually promised to restore the land mined by replanting trees but had failed to do so. One of the questions that arose was whether the islanders would be entitled as damages to the cost of cure (ie the cost of replanting the land) which ran into thousands of pounds, or merely to the difference in value between the land as it was and as it would be if replanted, which at most ran to a few hundred pounds. Megarry V-C thought that the fundamental issue was whether the claimant had already cured or intended to cure. If so, the higher cost of cure would be awarded. He said, ‘… if the plaintiff establishes that the contractual work has been or will be done, then in all normal circumstances, it seems to me that he has shown that the cost of doing it is, or is part of, his loss and is recoverable as damages.’61 Of course, where the court is basing itself on the claimant’s intention to cure it cannot be absolutely sure that this is what the claimant will do but Megarry V-C thought that probable intention would be sufficient. He further suggested that in cases of doubt the court might be satisfied if the claimant gave an undertaking to do the work;62 but such an undertaking might produce problems of enforcement and satellite litigation and was subsequently rejected as an idea by the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth.63 On the facts of Tito v Waddell it was held that there was not a sufficiently clear intention on the part of the islanders to use the damages to replant Ocean Island. In particular this was because they were now living on a different island. Damages based on the lower difference in the property’s value were therefore awarded.
In Radford v De Froberville64 the claimant had sold a plot of land to the defendant on terms, inter alia, that the defendant would erect a wall on the plot so as to divide it from the claimant’s land. The defendant had failed to do so. One question was whether the claimant was entitled to damages assessed according to the cost of cure (ie the cost of building a wall on his land), which at the time of trial would have cost £3,400 and at the time of breach £1,200, or according to the difference in the land’s value with and without the wall, which (p. 198) was almost nil. Oliver J, applying Tito v Waddell (No 2), held that the claimant was entitled to the cost of cure. He said, ‘In the instant case, I am entirely satisfied that the plaintiff genuinely wants this work done, and that he intends to expend any damages awarded on carrying it out.’65
In the leading case of Ruxley Electronics and Construction Ltd v Forsyth66 the claimant contracted to have a swimming pool built with the depth at the deep end of 7ft 6ins. When built the pool was in fact only 6ft 9ins at the deep end. Nevertheless, it was still perfectly safe for swimming and diving so that the difference in resale value of the property was not affected by the admitted breach of contract. To increase the depth of the pool to the agreed depth would cost £21,460 (nearly a third of the total price of the pool). Overturning the Court of Appeal, the House of Lords refused to award the claimant the cost of cure of £21,560; that would be unreasonable, because of the contrast with the nil difference in value. Moreover the first instance judge had found that the claimant had no intention to use the damages to rebuild the pool. But rather than awarding the claimant no damages at all for the breach the House of Lords upheld the first instance judge’s award of damages of £2,500 for loss of amenity. Although there has been disagreement as to the basis of such damages,67 it appears that they fall within the well-recognised category of damages for mental distress where the predominant (or an important) object of the contract is mental satisfaction. Mr Forsyth’s diving was not as pleasurable as it would have been had the pool been of the depth contracted for.68
The House of Lords took account both of reasonableness and the claimant’s intentions. On the facts, both pointed in the same direction: the claimant did not intend to have the pool rebuilt and it was thought unreasonable (given the disparity with the difference in value) to have done so. The same is true of Tito v Waddell. Where ‘reasonableness’ and ‘intention’ point in different directions, it is submitted that the ‘intention’ test is the more important.69 Indeed the best approach is that the courts will award a higher cost of cure if the claimant intends to effect the cure unless effecting the cure would be contrary to the claimant’s standard duty to mitigate his or her loss. So had Mr Forsyth already rebuilt the pool to the specified depth, or had he intended to do so, he should have been entitled to the cost of cure of £21,560. For a consumer to expend money to ensure that a swimming pool is of the depth he contracted for (because, for example, as on these facts, he is a tall man who wants to feel entirely comfortable when diving) should not be regarded as contrary to his duty to mitigate. In contrast, Mr Forsyth would have been acting contrary to his duty to mitigate if he had been a property speculator, who was intending to sell the property, and (p. 199) yet insisted on rebuilding the pool to the required depth even though that made no difference to the property’s value.
It is sometimes suggested that this emphasis on the claimant’s intention is unacceptable because it runs counter to the rule that the courts are not concerned with the use to which damages are put. This is a misleading objection. In assessing damages, the courts commonly have to assess the likely future costs of the claimant on the assumption that damages will cover those costs (for example, damages for the cost of care in a personal injury claim). The true rule is that, once awarded, the courts are not concerned with how the damages are used. That is, the damages are not clawed back if the claimant chooses to spend them inappropriately. But nothing that is here being said about the importance of the claimant’s ‘intention’ in a case like Ruxley contradicts that ‘no claw-back’ rule.
Earlier cases support the ‘intention’ approach. For example, while the Landlord and Tenant Act 1927, s 18 lays down that, for a tenant’s breach of a covenant to repair, the measure of damages is the extent by which the market value of the reversion at the end of the lease is diminished by the want of repair,70 cases like Smiley v Townshend71 and Haviland v Long72 have awarded the cost of repairs that have been or are intended to be carried out, albeit under the pretence that the cost of repair represented the diminution in value. In Haviland v Long Denning LJ said:
‘The measure of damage is the extent by which the market value of the reversion at the end of the lease was diminished by the want of repair. That depends on whether the repairs are going to be done or not. In cases where they have been or are going to be done the cost of repair is usually the measure of damage …’73
Clearly the danger of this approach, where the claimant has not yet effected cure, is that he may not use the damages as he appears to intend, and will thereby end up with a windfall. But the main alternative of awarding difference in value if the cost of cure is far higher and therefore deemed to be unreasonable or, in the language used in the US, ‘economically wasteful’,74 fails to compensate a claimant fully, wherever he has contracted for a purpose not reflected in the objective market value, ie this often fails to recognise properly the ‘consumer surplus’75 such as the claimant’s interest in privacy in Radford or pleasure in diving in Ruxley. For this reason the reliance on the claimant’s intention seems preferable. However, it should be reiterated that where the claimant wanted the contractual performance solely to make a profit (so that the difference in value can fully compensate him) and the cost of cure is far higher than the difference in value, the standard duty to mitigate should override the claimant’s intention to effect cure and the lower difference in value only should be awarded.
It finally remains to consider three further approaches that have been advocated for this situation where the cost of cure far exceeds the difference in value.
The first is to abandon the traditional compensatory analysis and to treat the cost of cure as the primary and non-compensatory measure. On this approach, while the (p. 200) reasonableness requirement is still relevant (although it is hard to see why) the intention of the claimant should be irrelevant. We have examined this approach, albeit to reject it, in chapter 3.76
The second is to award as damages a figure representing what the claimant would have reasonably accepted to release the defendant from its contractual obligation.77 These are now referred to as ‘negotiating damages’.78 But in this context this approach was specifically rejected in Tito v Waddell and, after Morris-Garner v One Step (Support) Ltd,79 it would appear that negotiating damages are not available in a standard breach of contract situation.
The third is to award a restitutionary remedy assessed by the cost the defendant has saved by not performing. Restitutionary remedies are discussed in chapter 19.80 It is there explained that a restitutionary remedy for a breach of contract is very rare (even assuming that the courts recognise an ‘expense saved’ restitutionary measure as opposed to a stripping of profits).
(i) Breach by builder in carrying out work late
There are no authorities on the measure of damages in this situation, but presumably the owner is entitled to either the value (market selling price) of the property at the time the work should have been completed minus its value at the time the work was actually completed, or if it intended to use the property for profit, the loss of user profit in the interim period of delay.
There are again no cases on the measure of damages in this situation.81 However, applying the general difference in value formula (and assuming no other profitable work has or should have been taken on in the time now left free) the builder should be entitled to the contract price minus the cost avoided because of the breach. So, for example, if a house owner has contracted with a builder for the building of an extension for £2,000 payable on completion, and it will cost the builder £800 for materials and £1,000 on labour to complete the job, and the owner repudiates when the job is three-quarters of the way through, the builder will be basically entitled to damages of £1,550, ie contract price (£2,000) minus cost avoided (£200 + £250).82
Subject to exceptions, perhaps most importantly now the Contracts (Rights of Third Parties) Act 1999, the doctrine of privity prevents actions for breach of contract by third parties. But what is the measure of damages if the promisee chooses to sue on a contract made for another’s benefit?
Applying the normal expectation principle, the claimant is entitled to be put into as good a position as it would have been if the contract had been performed; ie the relevant loss is the claimant’s not the third party’s. This has been accepted as the generally correct approach and Lord Denning’s reasoning to the contrary in Jackson v Horizon Holidays Ltd83 (allowing the promisee to recover the third party’s loss) has been rejected.84
However—and again as the authorities have made clear—this does not mean (even putting to one side the possibility of specific performance85 and looking just at damages) that the promisee is necessarily restricted to nominal damages.86 On the contrary, one would expect that in many contracts made for a third party’s benefit, the defendant’s failure to benefit the third party will constitute a substantial pecuniary loss to the promisee.87 This may be, for example, because the promisee required the defendant to pay the third party in order to pay off a debt owed by the promisee to the third party. Or the promisee may have stood to gain from the use to be made by the third party of the promised benefit. And, by analogy to the cases allowing a cost of cure in excess of a difference in value,88 the claimant should be entitled to substantial damages (measured by the cost of cure) where it has subsequently conferred the benefit on the third party or intends to do so.89
Moreover, the courts have recognised an important exception to the general rule (that the promisee recovers for its own loss not the third party’s).90 Developed from The Albazero91 through Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd92 to Darlington BC v Wiltshier Northern Ltd93 it has been laid down that a promisee can recover a third party’s loss on a contract relating to property (whether goods or land) where it was contemplated that the property in question would be transferred to the third party or where it was otherwise contemplated that loss in respect of that property would be suffered by the third party. Having recovered the damages the promisee is then bound to account for them to the third party.
The rationale of this exception is that, on the assumption that the third party cannot itself sue, the exception prevents a defeating of the parties’ intentions where it was clearly anticipated that the real loss would be suffered by the third party rather than the promisee. The exception prevents damages disappearing down a ‘black hole’ where the promisee can sue but has suffered no loss and the third party who has suffered the loss cannot sue.
(p. 202) The scope of this exception (the so-called Albazero exception) came before the House of Lords in the controversial and difficult case of Alfred McAlpine Construction Ltd v Panatown Ltd.94 Panatown entered into a construction contract with McAlpine for McAlpine to design and construct an office building on land owned by Unex Investment Properties Ltd (UIPL). The building was defective and delayed and Panatown sought damages for the cost of repair, loss of use, and delay. These losses were actually suffered by UIPL not by Panatown so that, at least on the face of it, the claim was by a promisee to recover damages suffered by a third party. It should be noted that Panatown was in the same group of companies—the Unex Group—as UIPL; and that the reason the contract was made with Panatown rather than UIPL was as a means of avoiding value added tax.
Judge Thornton QC, as official referee, had held that Panatown could recover only nominal and not substantial damages. The Court of Appeal had overturned that and, by extending the Albazero exception to the normal rule that a promisee can recover only its own loss, had held that Panatown was entitled to substantial damages for UIPL’s loss. By a three–two majority, the House of Lords restored Judge Thornton’s decision. Panatown was not here entitled to substantial damages.
The approach of the majority (Lords Clyde, Jauncey, and Browne-Wilkinson) was to accept the Albazero exception while holding that it did not here apply because UIPL was not merely a third party beneficiary of the main construction contract but had also been given a direct contractual right against the promisor. That is, UIPL had been given a contractual warranty comprising a duty of care deed which gave UIPL direct contractual rights against McAlpine for breach of the latter’s contractual duty of care. In Lord Clyde’s words, ‘the express provision of the direct remedy for the third party is fatal to the application of The Albazero exception.’95 And according to Lord Browne-Wilkinson, ‘If the contractual arrangements between the parties in fact provide the third party with a direct remedy against the wrongdoer the whole rationale of [the Albazero] rule disappears.’96
The difficulty with this is that the direct contractual right given to UIPL was not co-extensive with the promisee’s rights under the main contract. For example, liability under the collateral warranty was for negligence and not for strict liability and, moreover, there were liquidated damages and arbitration clauses in the main contract but not in the duty of care deed. It followed that the third party might be worse off under its direct collateral contract than if the promisee sued and recovered the third party’s loss under the main contract. Moreover, it appears that the purpose of the collateral warranty was to replace the tort liability that would have existed pre-Murphy v Brentwood DC:97 it was surely not intended to prevent Panatown, as contracting party, recovering damages on behalf of UIPL as the known first owner of the building. It is submitted, therefore, that in this case the fact that the third party had a direct contractual right was not a good ground for excluding the Albazero exception.
But it is not only the decision of the majority that has proved controversial. The minority judges (Lords Goff and Millett) took a different starting point. Rather than regarding there as being a valid exception to the general rule (that the promisee recovers its own loss, not the third party’s) they considered that, applying what was referred to as Lord Griffiths’ ‘broad ground’ in the Linden Gardens case, the promisee is recovering its own loss in these cases. The broad ground is that a promisee itself suffers loss where services are not performed for which it has contracted even though those services are for the benefit of a third (p. 203) party. So here, according to the minority, Panatown was entitled to substantial damages for its own loss.
The difficulty with this is that, as Lords Clyde and Jauncey persuasively argued, it seems fictional. There is no (pecuniary) loss to the promisee (other than the reliance loss constituted by the contract price paid) where the promisor has broken its contract with the promisee to render services to a third party. To award substantial damages to the promisee would therefore overcompensate the promisee (or, to put it another way, would give the promisee a windfall). In contrast, there would be a true loss to the promisee if the promisee had paid for the ‘cost of cure’ or intended to do so. But on the facts Panatown had not itself carried out the repairs nor did it intend to do so. Even if one were to say that the minority’s speeches are best interpreted98 as loosening the normal requirements for the recovery of a higher ‘cost of cure’ (as against a lower or nil difference in value)—so that, for example, a higher ‘cost of cure’ will be awarded, irrespective of the claimant’s intention to cure, unless the defendant satisfies the court that such an award would be unreasonable—this could not account for the fact that damages for loss of use and delay were also claimed (and regarded as recoverable by the minority) even though they would not be covered by the ‘cost of cure’.
A further problem with the minority’s reasoning is that, on the face of it, it produces problems of double liability. If one says that the repair cost is the promisee’s own loss, irrespective of whether it incurs that cost, and that it does not need to account for those damages to the third party, then in a situation, as on the facts of this case, where the third party also has direct contractual rights, it is hard to see how one can avoid saying that both the promisee and the third party are entitled to the repair costs. Admittedly Lords Goff and Millett suggested ways round this although, with respect, neither is entirely convincing.
Although problematic,99 the reasoning of Lords Goff and Millett cannot simply be dismissed as being merely a minority view. This is not only because of the stature of Lords Goff and Millett. It is also because Lord Browne-Wilkinson, while agreeing with the majority’s decision, was prepared to assume that the ‘broad ground’ was correct and disagreed with Lords Goff and Millett only because he thought that the broad ground was inapplicable where, as on these facts, the third party had been given a direct contractual right against the promisor.
In summary, therefore, McAlpine v Panatown raises several difficult issues. It is submitted that, contrary to the reasoning of all their Lordships, the Albazero exception should have been applied so that Panatown should have been entitled to substantial damages for which it was bound to account to UIPL.
A final question in relation to contracts for the benefit of third parties concerns the third party’s measure of damages where, under an exception to privity, the third party has a right to sue the promisor. For example, in relation to assignment the general rule has been that, as an assignee takes ‘subject to equities’, an assignee cannot recover more from the debtor than the assignor could have done had there been no assignment.100 Say, for example, a building is sold at full value along with an assignment to the purchaser of claims in contract (p. 204) or tort in relation to the building. The building turns out to need repairs as a result of a breach of the builder’s contract with the assignor (whether that breach is prior, or subsequent, to the sale to the assignee) or of a tort (damaging the building prior to the sale). The assignee pays for the repairs. It might be argued that the assignor in that situation has suffered no loss so that, applying the governing principle that the assignee cannot recover more than the assignor, the assignee has no substantial claim. If correct, ‘… the claim to damages would disappear … into some legal black hole, so that the wrongdoer escaped scot-free’.101 Acceptance of the argument would also nullify the purpose of the governing principle which is to avoid prejudice to the debtor and not to allow the debtor to escape liability. Perhaps not surprisingly, therefore, that argument was rejected in Offer-Hoar v Larkstore Ltd.102 The Court of Appeal said that, in applying the principle that the assignee cannot recover more than the assignor, one should be asking what damages the assignor could itself have recovered had there been no assignment and had there been no transfer of the land to the assignee. Substantial damages were, therefore, recoverable where an assignor had sold its land to an assignee along with, or prior to, the assignment of the relevant cause of action relating to the land.
In any event, the problem could normally be circumvented by the courts’ recognition of the Albazero exception. In other words, as we have seen,103 where a third party is, or will become, owner of the defective or damaged property, there is an exception to the general rule that a contracting party can recover damages only for its own loss and not the loss of the third party. Where the Albazero exception applies, the contracting party (the assignor) is entitled to substantial damages for the loss suffered by the third party (the assignee): by the same token, where the third party (the assignee) is itself suing, an award of substantial damages to the assignee does not infringe the principle that the assignee cannot recover more than the assignor.
Similar questions may arise where third parties are given rights to sue under the Contracts (Rights of Third Parties) Act 1999.104 In contrast to assignment, the Act is not based on the third party taking over the promisee’s rights. Rather both the promisee and the third party are regarded as having separate rights to sue and as suffering separate losses. But to avoid injustice to the promisor one could not always simply award the third party damages for its own loss without taking into account the position as between the promisor and the promisee. In particular, it may be unfair to the promisor on an unexecuted contract to award the third party its own full loss without taking into account the promisee’s own saved cost of performance. It would appear, therefore, that in construing the Contracts (Rights of Third Parties) Act 1999, s 1(5),105 the third party’s damages should be assessed in an analogous, but not necessarily identical, way to those of the promisee.
To put the claimant into as good a position as if the contract had been performed, all other pecuniary loss caused to the claimant by the defendant’s breach and not ruled out by limiting principles, such as remoteness and the duty to mitigate, must be added to the basic measures of pecuniary loss so far discussed (unless already covered by the basic measure).
Loss of user profit may be an additional pecuniary loss: for example, where the claimant is basically awarded the costs of replacing and adapting goods, it is also entitled to any interim loss of user profit. Additional pecuniary loss may also comprise—albeit fairly rarely—damage to or destruction of the claimant’s property. So, for example, in Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd106 the defendant’s breach of contract in installing an unsuitable heating system and insulating the pipes with unsafe material led to the claimant’s factory burning down. Such damage to property is directly analogous to tortious damage to property and it has therefore been considered preferable to discuss the few contract cases in that tort subsection.107
However, the commonest form of additional pecuniary loss is expenses caused by the breach, other than those that have been awarded within a cost of cure measure.108 These expenses are referred to in the US Uniform Commercial Code as giving rise to ‘incidental damages’. By the Uniform Commercial Code, s 2-710 a seller’s incidental damages include ‘any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of the goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach’. By the Uniform Commercial Code, s 2-715 a buyer’s incidental damages include ‘… expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach’. Two common examples following a seller’s breach are compensation paid to a sub-buyer and the costs incurred in defending a sub-buyer’s claim. Henry Kendall & Sons v William Lillico & Sons Ltd109 provides an example of the former. The buyer bought groundnut extractions from the seller, which were then used for making a poultry food, that the buyer sold to a game farm. The groundnut extractions were contaminated and many of the game farm’s poultry died or grew up stunted. The buyer was liable to pay damages to the game farm but it successfully claimed compensation in respect of those damages from the seller. An example of the latter is the award in Hammond & Co v Bussey.110 There the claimants bought coal from the defendants and resold it with the same description to X who used it for steamships. The defendants knew that it was the claimants’ business to supply coal to steamships. The coal delivered by the defendants was, however, not of the (p. 206) warranted quality. The defendants admitted responsibility in respect of the claimants’ liability to pay damages to X, but disputed that they should also have to pay damages for the claimants’ legal costs in defending X’s action against the claimants. The Court of Appeal held, however, that the defendants were liable to pay such damages, because not only were those costs not too remote, but also the claimants had not failed in their duty to mitigate by defending X’s action, since the defect in the coal was discoverable only by X’s using the coal and not by mere inspection, and hence there was some doubt as to X’s claim.
This section is concerned with where the defendant’s tort (such as trespass to land or goods, negligence, nuisance, or conversion)111 has caused damage to the claimant’s existing property, whether real or personal. Cases where damage to property is an additional pecuniary loss consequent on a breach of contract will also be considered.112 Whether for torts or breach of contract, the general compensatory aims dictate that the claimant should be put into as good a position as if its property had not been damaged. This was emphasised in relation to tortious damage to a ship in The Liesbosch,113 where Lord Wright said:
‘… the owners of the vessel are entitled to what is called restitutio in integrum which means that they should recover such sum as will replace them, as far as can be done by compensation in money, in the same position as if the loss had not been inflicted on them …’114
A basic choice is generally presented between awarding diminution in value of the property or cost of cure. The former compensates the claimant for its loss of financial advantage in being deprived of its property, while the latter compensates for the cost of putting the claimant into as good a position as if its property had not been damaged. This choice is analogous to that presented in assessing compensation for tortious interference with goods by misappropriation or loss and in assessing basic pecuniary loss for breach of contract (the damaged property corresponds to a deprivation of the contractual benefit). The decision therefore similarly rests on factors such as the claimant’s duty to mitigate, whether it intends to cure, and for what purpose it owned the property.
The details of the law are best examined by dividing between damage to real and personal property. Separate consideration will also be afforded to the so-called ‘betterment’ question.
(1) Damage to real property
The diminution in value of real property is normally assessed by taking the difference between the market selling price of the damaged and undamaged property, while the cost of cure normally comprises the cost of repair or, as a more appropriate term where a building has been destroyed, the cost of reinstatement. The cost of cure might alternatively comprise the market cost of buying or building replacement property elsewhere, minus the selling value of the claimant’s damaged property, but in view of the nature of real property, this is rarely a realistic option in practice.115
(p. 207) A useful dictum on the choice between diminution in value and cost of cure is Donaldson LJ’s in Dodd Properties v Canterbury City Council,116 a case where the claimant’s building had been damaged by the defendants’ pile-driving. In an action for negligence and nuisance, the defendants conceded that they were liable for the cost of repairs. Donaldson LJ, however, took the opportunity to explain the law on damages for property damage. Having said that there are two possible measures he went on:
‘The first is to take the capital value of the property in an undamaged state and to compare it with its value in a damaged state. The second is to take the cost of repair or reinstatement. Which is appropriate will depend on a number of factors, such as the plaintiff’s future intentions as to the use of the property and the reasonableness of those intentions. If he reasonably intends to sell the property in its damaged state, clearly the diminution in capital value is the true measure of damages. If he reasonably intends to continue to occupy it and to repair the damage, clearly the cost of repairs is the true measure. And there may be in-between situations.’117
There have been several cases in which a decision between the two measures has had to be made. In Hollebone v Midhurst and Fernhurst Builders Ltd118 the claimant’s dwelling house had been damaged by fire due to the admitted negligence of the defendant. The claimant was awarded the cost of repairs (£18,991 5s 8d) rather than the difference between the value of the house in its undamaged and damaged state (£14,850). This was an undoubtedly correct decision as the claimant had already carried out the repairs and it was reasonable for him to have done so given that he owned the house for living in. Similarly in Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd,119 the claimants’ factory was burnt down as a result of the defendant’s breach of contract. The claimants were awarded the cost of building and equipping a new factory (£146,581) rather than the diminution in value (£116,785). Again the claimants had already had the factory rebuilt and, given that the factory was owned for business, it was not only reasonable to do so but, as stressed by the Court of Appeal, necessary in order to keep their business going.
The cost of reinstatement was also preferred, though subject to an important qualification, in Ward v Cannock Chase District Council.120 Here the defendant council’s negligence in failing to maintain their houses in a particular terrace had led, through the activities of vandals, to the destruction of the claimant’s two houses where he had been living with his large family. Scott J held that the cost of reinstatement should be awarded, provided that the claimant could obtain planning permission to rebuild the houses. If not, and if permission was also refused to convert another of the claimant’s houses nearby,121 he should instead be awarded the diminution in value of the properties.
Again in Dominion Mosaics and Tile Co Ltd v Trafalgar Trucking Co Ltd,122 in which the claimants’ business premises had been burnt down because of the defendants’ negligence, the Court of Appeal followed Harbutt’s Plasticine and awarded a cost of cure measure (albeit the cost of leasing property elsewhere rather than the cost of reinstatement). Salient points were that the claimants had leased other property, that it was reasonable for them to do so to mitigate their loss of use, and that the cost of the lease was significantly less than the cost (p. 208) of rebuilding. The claimants were awarded £390,000, as the cost of the lease, even though the diminution in the value of the site was estimated at merely £60,000.
Contrasting with those four decisions is CR Taylor (Wholesale) Ltd v Hepworths Ltd,123 where the claimants’ disused billiard hall was destroyed by fire. The cost of reinstating it was agreed at £28,957. The diminution in value of the site was notionally £2,500, although in the event of sale for redevelopment this would be completely offset by the beneficial effect of the fire in saving the expense of clearing the site. May J held that the diminution in value measure should here be preferred (and hence no damages were awarded under this head). This was because the site and billiard hall were owned by the claimants as an investment, which in time would be sold off for redevelopment. The claimants had no intention, prior or subsequent to the fire, of rebuilding the billiard hall.
A further issue, that arose at first instance in the Dodd Properties case,124 is what exactly is meant by repair (or reinstatement). Cantley J said:
‘The plaintiffs are entitled to the reasonable cost of doing reasonable work of restoration and repair. They are, of course, not bound to accept a shoddy job or put up with an inferior building for the sake of saving the defendants expense. But I do not consider that they are entitled to insist on complete and meticulous restoration when a reasonable building owner would be content with the less extensive work which produces a result which does not diminish to any or any significant extent the appearance, life or utility of the building, and when there is also a vast difference in the cost of such work and the cost of meticulous restoration.’125
Applying this, the lower cost of non-meticulous repair was awarded and there was no appeal against this. So, in other words, while generally repair or reinstatement means to produce as close a restoration to the original condition as is reasonably possible, it will mean a lesser restoration where this will serve the claimant’s purposes just as well and will cost far less.
What happens where repairs (or reinstatement) have been carried out but a third party has paid for them? This raises the issue of how compensating advantages are dealt with.126 In line with the general approach adopted in personal injury cases, the coherent position is that, assuming the compensating advantage is sufficiently direct, it should prima facie be deducted. But there are two well-recognised exceptions to this, namely benevolence and insurance.127 The issue arose in the context of tortious damage to real property in Jones v Stroud BC.128 The cost of repairs to a house, consequent on a local authority’s negligent inspection, was awarded to the claimant even though he had not paid for the repairs. Rather the repairs had been paid for by the claimant’s company which had not invoiced him for them. Neill LJ made a sweeping statement to the effect that who paid for the repairs was irrelevant.129 With respect, that is too wide. But the actual decision may have been justified on the ground that the third party here was in effect acting out of benevolence in not invoicing the claimant and therefore fell within one of the two recognised exceptions to deduction. This was in line with Neill LJ’s reliance on the statement in The Endeavour,130 a damaged ship case, where it was said, ‘If somebody out of kindness were to repair the injury and make no charge for it, the wrongdoer would not be entitled to refuse to pay as part of the damages the cost of the repairs to the owner.’
(p. 209) Finally, in addition to the diminution in value or cost of cure, all other pecuniary losses resulting from the property damage should be recoverable subject to the usual limiting principles, such as remoteness and mitigation. So, for example, in Grosvenor Hotel Co v Hamilton,131 the claimants’ expenses in moving their hotel business from the damaged property were recovered; in the Dodd Properties case132 the claimants were awarded the potential loss of profits on their car business for the time during which the repairs would be carried out; and in Network Rail Infrastructure Ltd v Conarken Group Ltd133 the claimant was awarded damages not only for the cost of repairing its rail tracks damaged by the defendants’ negligent driving but also the payments it became legally liable to make under contracts with the train-operating companies who could not use the tracks.
(2) Damage to goods
As in relation to damage to real property there is a basic choice between, on the one hand, awarding the diminution in value of the property—normally the market selling price of the goods as undamaged minus, if the goods are still in existence, their market selling price as damaged—and, on the other hand, the cost of cure, comprising the cost of replacing or, if possible, repairing the goods.134
But damage to goods does differ from damage to land or buildings in that here the cost of replacement is often a realistic cost of cure measure. Indeed it is convenient to distinguish between the destruction of goods (including ‘constructive total loss’) where the cost of replacement is the cost of cure measure, repair being out of the question, and mere damage to goods, where both cost of replacement and cost of repair are potential cost of cure measures. Although most of the cases concern ships, it has been said on several occasions that the same principles of assessment apply to all goods.135
(a) Destruction of goods
Although the measure of damages chosen has sometimes been obscured by the courts’ ambiguous references to damages being assessed according to the value of the chattel, early cases generally seemed to prefer the market selling price (ie diminution in value), while more modern cases have generally preferred the market replacement cost (ie cost of cure). In either case, if anything is left of the chattel, its salvage value (ie market selling price in its present condition) must be deducted.136
Illustrative of the earlier cases is The Clyde,137 in which the market selling price was applied. In Dr Lushington’s words, ‘It is the market price which the Court looks to, and nothing else, as the value of the property. It is an old saying, “the worth of a thing is the price it will bring.” ’138 But for goods owned for use rather than sale (such as ships) this is generally a less appropriate measure than the market replacement cost, which was awarded in The Liesbosch.139 There the claimants were using their dredger ‘The Liesbosch’ to carry out (p. 210) work at Patras harbour, when it was sunk owing to the defendants’ negligence. The claimants were awarded, inter alia, the market price of a replacement dredger, and the costs of adapting it for their use and of transporting it to Patras.
It is now clear, however, that whatever has been the historical preference, the choice between the market selling price and the market replacement cost turns, in relation to the tortious destruction of goods, on the same factors that we have looked at in relation to, for example, damage to real property and breach of a building contract. Relevant factors therefore include the claimant’s duty to mitigate (and hence the reasonableness of a claim for the higher sum), whether the claimant intends to replace the goods, and for what purpose the goods were owned.
So in The Maersk Colombo,140 where the claimants’ crane had been demolished by the defendants’ negligence, it was decided by the Court of Appeal that the claimants were entitled as damages to the resale value of the crane (£665,000) and not its replacement value (£2,359,484). The replacement value was so much higher because a second-hand crane would have had to be modified in the US and transported from there to Southampton. The crucial factor in determining that that higher sum should not be awarded was that the claimants, prior to the accident, had already ordered a larger crane to replace the one demolished and therefore had no intention, after the accident, of buying another crane to replace the demolished one. In an excellent leading judgment, Clarke LJ analysed the main contract and tort cases on the question of difference in value or cost of care and explained that, in deciding between them, the important factors included reasonableness and intention. In rejecting an argument that there are distinct rules applying to tortious destruction of goods, he said, ‘In my opinion a similar approach applies to the measure of damages for the tortious destruction of chattels as it applies to the measure of damages for both the tortious destruction of real property and for breach of contract in circumstances such as those in Ruxley.’141
Where damages are based on the chattel’s market selling price at the time of destruction, additional damages for loss of use should not be recoverable: this theory of assessment rests on the assumption that the claimant could have otherwise sold his chattel at the time of destruction and clearly he could not both have sold it and used it. As Lord Wright said in The Liesbosch:
‘The value of prospective freights cannot simply be added to the market value but ought to be taken into account in order to ascertain the total value for purposes of assessing the damage, since if it is merely added to the market value of a free ship, the owner will be getting pro tanto his damages twice over. The vessel cannot be earning in the open market, while fulfilling the pending charter or charters.’142
However, these principles have not always been correctly adhered to and in some cases loss of profit on the voyage the ship was on,143 or even on all other engagements already (p. 211) fixed,144 has been awarded in addition to the market selling price at the date of the destruction.
On the other hand, where damages are based on the cost of replacement, damages for loss of use during the period until use could be made of the replacement are and should be recoverable subject to the usual limiting principles. As Street wrote, ‘The rationale of … claims for loss of profits is that they are allowable for that period which would elapse before a replacement is procurable.’145 So in The Liesbosch146 the House of Lords held that additional damages should be awarded for the loss of user profit for the period between the dredger’s sinking and the time at which the substitute dredger could reasonably have been available for use in Patras. In Lord Wright’s words, ‘The true rule seems to be that the measure of damages in such cases is the value of the ship to her owner as a going concern at the time and place of loss.’147 He then regarded the combination of replacement costs and loss of user profit, as opposed to the market selling price, as representing that value.
The other most obvious consequential losses that are prima facie recoverable are the reasonable hiring charges of a substitute chattel in the interim period before the replacement chattel can be used.148 These costs will often mitigate any loss of use and, indeed, where they ought to have been incurred to mitigate such loss of use, they will presumably be awarded instead of damages for loss of use.
(b) Mere damage to goods
No case has been traced in which diminution in value (ie market selling price as undamaged minus market selling price as damaged) has here been awarded although if the goods were owned for sale rather than use and the repair or replacement costs are a lot higher, the diminution in selling price should be the preferred measure.149
Under the cost of cure, there is a decision to be made here between awarding the replacement cost (minus the market selling price of the damaged chattel) and the cost of repairs.150 Two pairs of cases may be contrasted to illustrate the courts’ approach.
In O’Grady v Westminster Scaffolding Ltd,151 the claimant’s MG car was damaged by the defendant’s admitted negligence. The claimant repaired the car at a cost of £253 and also incurred costs of about £208 in hiring a substitute car in the interim. The defendant argued that the claimant should have written the car off and replaced it which, according to the defendant, would have cost him about £145, ie market price of replacement (£180) minus scrap value of MG (£35). But Edmund Davies J held that the claimant was entitled to damages based on the cost of repair (plus hiring charges) because he had acted reasonably in (p. 212) carrying out the repairs; this was particularly because the car, lovingly named ‘Hortensia’ by the claimant, was his pride and joy, which he had spent a lot of time and effort maintaining and it could not really be replaced.
On the other hand in Darbishire v Warran152 the claimant, who had repaired his car for £192 (plus hiring charges) preferring to keep a car he knew to be reliable and suitable for his needs, was restricted to damages based on the market cost of a replacement, namely £85 (plus hiring charges). The Court of Appeal held that the claimant had failed to take reasonable steps to mitigate his loss by buying a replacement and O’Grady v Westminster Scaffolding was distinguished on the ground that there, unlike here, the car in question was unique.
Another contrasting pair of cases concerns damaged ships. In Italian State Rlys v Minnehaha153 the claimants’ ship was damaged. They had it repaired for about £37,000 (and had also incurred some relatively minor consequential expenses during the repairing period). It was decided that the value of the ship when repaired, which it was assumed equalled the market cost of replacement, was £53,000. Its value, that is its market selling price, in its damaged condition had been £20,000. The Court of Appeal held that the claimants were only entitled to the replacement cost minus market selling price, which equalled £33,000. It had been unreasonable to incur the greater expense of repair, for the claimants had failed to establish that there was anything particularly special about the ship. Instead they should have sold it off in its damaged state. Lord Sterndale MR said, ‘… unless there is some circumstance to justify him the shipowner does not act reasonably in repairing the ship if the repaired value is very much less than the cost of repairing her.’154
In contrast in Algeiba v Australind,155 the cost of repairing the ship was awarded which, including lost profits during repair, amounted to £31,000. This was so even though this exceeded the cost of a replacement (£30,000) minus the selling price as damaged (£6,000), amounting to £24,000. It was held to have been reasonable to repair because it was not easy to obtain a replacement at that time and the ship was particularly well equipped for the claimant’s work.
These pairs of cases show that the duty to mitigate dictates that whichever is the cheaper of the cost of repair and the replacement cost (also taking into account consequential loss) will generally be preferred. However, if the claimant has chosen to repair and there is good reason for him to have done so—because of the special value to him of the chattel and the difficulty of replacing it—the repair cost will be awarded even if well in excess of the replacement cost. There must, however, be some limit to the discrepancy between repair and replacement cost that will be tolerated. Admittedly, in O’Grady v Westminster Scaffolding the cost of repairs and consequential loss was three times the replacement cost, but this was still only a matter of hundreds and not thousands of pounds.
In the light of the above cases The London Corpn,156 which is often cited for there being a general rule that the cost of repairs will be awarded, must be approached with caution. There the damaged ship had been sold off and not repaired yet the cost of repairs was awarded. Greer LJ said, ‘Prima facie, the damage occasioned to a vessel is the cost of repairs.’157 But assuming that a replacement had been bought, or was intended to be, the measure should have been the replacement cost, unless the cost of repairs was cheaper.
In Burdis v Livsey158 the question at issue was whether damages for the cost of repairs to a car, damaged by the defendant’s negligence, should be awarded where the claimant had (p. 213) not itself incurred those costs because they had been paid for under what, it transpired, was an unenforceable consumer credit agreement. In other words, could the claimant recover damages for the cost of repairs where a third party had paid for those repairs (and had done so neither benevolently nor in accordance with a valid insurance contract which are the two recognised exceptions to the general principle that compensating advantages are deducted)? The Court of Appeal held that the claimant was entitled to recover damages for the cost of repairs. Jones v Stroud District Council,159 where the cost of repairing real property was awarded, even though it had been paid for by a third party, was applied; and it was thought that one could distinguish the decisions of the House of Lords in Dimond v Lovell,160 where damages for hire costs that would not be incurred were held irrecoverable, and Hunt v Severs,161 where the costs of nursing services were only recoverable as a loss to the third party who provided them. This was said to be because those cases dealt with consequential or potential future loss whereas one was here concerned with direct loss. That is, the damage to the car, causing a diminution in value, was a direct loss which was measured by the cost of repairs.
It is submitted, with respect, that this reasoning and decision are incorrect. The Court of Appeal invoked a novel approach to the long-debated issue of how to deal with compensating advantages which has no support in authority or principle or policy (ie that there is a different treatment of compensating advantages dependent on whether one is concerned with direct loss or consequential loss).162 In truth the hire costs in Dimond v Lovell could not be validly distinguished and that House of Lords’ decision should have directly dictated the deduction of the repair costs in this case.
Furthermore, it was misleading to say, as the Court of Appeal said, that the claimant suffers a diminution in value when her car is damaged and that the prima facie measure of damages for that diminution is the cost of repairs. The true approach is that the cause of action accrues when the claimant’s car is damaged. The claimant’s pecuniary loss as a consequence of that damage may comprise either the diminution in value of her car (ie the difference in its value before and after the damage) or the cost of repairs (or indeed the cost of replacement minus the car’s present value). In addition to the cost of repairs the claimant may be entitled to compensation for loss of use or hire charges incurred while the damaged car is awaiting repair or being repaired. The distinction between the difference in value measure and the cost of repair/replacement measure is to be found throughout the law of damages (whether one is dealing with personal or real property and indeed whether the claim is in contract or tort). The central concepts in deciding whether the courts will award the difference in value or the cost of repair are whether the claimant has had the repairs carried out—or whether the claimant intends to do so—and reasonableness. But where it is known that the claimant has not, and will not, incur the costs of repair (or has not, and will not, incur hire charges) those costs do not constitute a loss to the claimant. It is a fiction to pretend that the claimant has suffered such a loss.
On the facts of the case, the payment by the third party of the repair costs was not too indirect—on the contrary, it was in direct response to the tort—and did not fall within the benevolence and insurance exceptions to the deduction of compensating advantages. This was because the third party was not acting out of benevolence; and it paid for the repairs under an unenforceable consumer credit agreement with the claimant (and not a valid insurance contract). Moreover, as Gray J stressed at first instance, there was no good specific (p. 214) policy reason to ignore the compensating advantage provided by the third party in this situation. Finally, as we have seen,163 while the wide reasoning in Jones v Stroud DC cannot be supported, the actual decision may have been correct because the facts may have fallen within the well-established benevolence exception to non-deduction: the claimant’s own company had incurred the expense but had not invoiced him for it.
Despite these criticisms, there was subsequent support in Coles v Hetherton164 for the approach taken in Burdis. It was there held that, where it is reasonable to repair a damaged car, a claimant is entitled to damages for the reasonable cost of repairing the car even though the actual cost of the repairs, whether incurred by the claimant or his insurer, are lower. The Court of Appeal’s reasoning was that the reasonable cost of repair represents the diminution in value of the car; and that while the duty to mitigate applies to a consequential loss, it is irrelevant to that direct loss (the diminution in the value of the car), which is suffered as soon as the car is damaged and cannot be mitigated. Again this can be criticised and is controversial because the decision appears to be awarding damages to the claimant for more than the loss suffered.
In addition to the cost of repair or replacement, all other pecuniary losses resulting from the property damage are recoverable, subject to the usual limiting principles like remoteness and mitigation. For example, in Aerospace Publishing Ltd v Thames Water Utilities Ltd,165 where the claimant’s archive had been damaged by flooding caused by the defendant’s breach of statutory duty, the claimant was held able to recover for payments made to staff to deal with the consequences of the flood in addition to the cost of reinstatement of the archive. And, as already briefly mentioned, in O’Grady v Westminster Scaffolding Ltd,166 damages were awarded for the charges of hiring a car while the claimant’s car was being repaired, as they were in Darbishire v Warran167—although this was presumably on the basis that the claimant would have had to incur such charges even if he had bought a replacement.
But are reasonable hiring charges, during the period of repair, recoverable by the claimant even where a hire car has been supplied without any cost to the claimant? For example, the car may have been supplied by the claimant’s insurers under an unenforceable insurance contract or by a company providing replacement cars under what transpire to be unenforceable consumer credit agreements. In these situations, the claimant has no legal liability to pay for the hire car. Initially the view taken in McAll v Brooks168 was that the reasonable hiring costs were still recoverable. Just as in the personal injury case of Donnelly v Joyce169 the claimant could recover the costs of nursing care even though gratuitously rendered by a third party, so the claimant could recover the costs of hire even though those costs were borne by a third party. But that approach was departed from by the House of Lords in (p. 215) Dimond v Lovell.170 The earlier approach was said to be based on an approach in personal injury cases that had been departed from in Hunt v Severs171 where the House of Lords recognised that the loss was the third party’s and not the claimant’s. To ignore the fact that the costs were being borne by the third party and not the claimant could only be justified if there was an exception to the deduction of compensating advantages. But neither of the well-recognised exceptions (of benevolence or insurance) applied here. In Lord Hoffmann’s words, ‘The only way … in which Mrs Dimond could recover damages for the notional cost of hiring a car which she actually had for free is if your Lordships were willing to create another exception to the rule against double recovery. I can see no basis for doing so.’172 As we have seen, it is difficult to understand how the later decision of the Court of Appeal in Burdis v Livsey173 (dealing with repair, rather than hire, costs) can be reconciled with their Lordships’ decision in Dimond v Lovell.
In contrast to Dimond v Lovell, in Bee v Jensen174 hire costs incurred by the claimant’s insurer175 were held recoverable by the claimant from the tortfeasor because they were reasonable costs for a car that had been reasonably hired. This was so even though some of those costs included payments which went beyond the strict hire costs and included a sum paid by the hiring company to an affiliated company of the insurer. In another of the ‘credit hire’ cases, Stevens v Equity Syndicate Management Ltd,176 it was held that a claimant who is not impecunious is entitled only to the basic hire rate (ie the locally available rate for cars in the same group as the claimant’s car) and not a higher rate, which confers additional benefits, charged by a credit hire company.
Loss of user profit for the period while the goods are being repaired or replaced is also recoverable.177 But if the chattel would have been operating at a loss during that period no such damages should be awarded.178
As regards the duty to mitigate, it was held in Beechwood Birmingham Ltd v Hoyer Group UK Ltd179 that the claimant company should have mitigated its loss by replacing the damaged car from its stock, rather than hiring in a replacement, during the period while the car was being repaired. But while the cost of hire could not therefore be recovered, damages for loss of use were awarded and these were to be measured by the interest on the capital value of a car of the type damaged, plus depreciation, over the repair period.
Similarly, in West Midlands Travel Ltd v Aviva Insurance UK Ltd,180 where a bus company was able to replace the damaged bus, during the repair period, from its spare capacity (ie it operated its buses in such a way that a damaged bus could be replaced), it was held that (p. 216) damages for loss of use should be assessed during the repair period according to the capital tied up in the damaged bus, the wasted expenses, and depreciation.
Particularly interesting are the cases allowing damages for loss of use where non-profit-earning ships have been damaged. In The Greta Holme,181 for example, the damage was to a dredging boat owned by a harbour authority for removing silt from the sea bed and in The Mediana182 the damage was to a harbour authority’s lightship. In addition to the cost of repairing these service ships the claimants were held entitled to damages for the loss of their use. In the latter case, this was held to be so even though the claimants always maintained a substitute lightship as cover in the event of damage to the main ship. The justification for such damages for loss of use is not at all obvious. In The Mediana Lord Halsbury LC drew an analogy with tortious misappropriation: ‘… supposing a person took away a chair out of my room and kept it for 12 months, could anybody say you had a right to diminish the damages by showing I did not usually sit on that chair, or that there were plenty of other chairs in the room?’183 That analogy is misleading. In misappropriation cases, ‘negotiating damages’ can be awarded and the justification for those damages can be said to be either compensatory (that they compensate for, for example, the loss of the fee that the claimant would have charged if it had been approached by the defendant) or, more controversially, restitutionary (in that they reverse the defendant’s wrongful gains).184 But in the case of damage to chattels, negotiating damages and those justifications are not in play. Furthermore, even though the claimants would have been entitled to damages to compensate for the additional costs of hiring a temporary replacement if incurred, they could not be said to have suffered that loss where not incurred. Nor had the claimants suffered a loss in terms of the depreciation of the ships or the costs incurred (for example, the crew’s wages) during repair or replacement, because there would have been that depreciation and those costs would have been incurred even if the ships had not been damaged.
Reflecting these problems of justification is the difficulty of how to assess damages for loss of use in this type of case. In The Marpessa185 the House of Lords held that damages should be assessed according to the costs of working and maintaining the dredger that would have been incurred, plus its depreciation, during the period of repairs. In The Hebridean Coast186 the House of Lords awarded a reasonable rate of interest on the value of the ship, as if it had been invested as capital money for the repair period, plus a sum of depreciation. A further possibility would be to award what it would have cost to hire a temporary replacement.187
Overall, however, the approach of the courts to loss of use in these ‘damage to non-profit-earning ship’ cases is difficult to justify. The truth may be that no pecuniary loss had been suffered by the claimants. This was particularly clear in The Mediana where there was a cover ship. Might it be said that, even if there was no pecuniary loss, there was a non-pecuniary loss that was being compensated? One might argue, for example, that the loss suffered by the harbour authority in The Mediana was the upsetting of its peace of mind because in having to use the spare lightship it no longer had the security of there being a spare in the event that that lightship was damaged.188 The background facts indicated that (p. 217) damage to lightships was not an unusual occurrence and it was precisely for that reason that a spare was maintained. Moreover, if we do think in terms of ‘peace of mind’ one can understand why the parties applied the cost of maintaining the spare as the way to measure the damages. That was precisely what the harbour authority was paying for its ‘peace of mind’. However, the main difficulty with that analysis is that the traditional view is that a non-human person, such as a company or public authority, is incapable of incurring non-pecuniary loss.189 The logic is that non-pecuniary loss, which is not a loss of wealth, is ultimately concerned with the claimant’s mental distress or loss of happiness and that is not something that a non-human person can experience. But this restriction may be thought unsatisfactory given that a public authority and many private companies are concerned with the pursuit of non-profit-making goals. These include, as in The Mediana, the safety of the public.
In so far as a compensatory analysis fails, no damages should have been awarded for loss of use in these ‘damage to non-profit-earning ship’ cases and the claimants should have been confined to recovering the cost of repair or replacement.
(3) The betterment question
The courts have sometimes been criticised190 for purportedly leaving the claimant overcompensated by not deducting from the full repair or replacement cost of property damaged or destroyed by the defendant’s tort or breach of contract an amount for ‘betterment’; that is, for the fact that the replacement or repaired property is in a better condition than the property before it was damaged or destroyed. So, for example, in The Gazelle191 the claimant’s ship was damaged in a collision with the defendant’s ship caused by the defendant’s negligence. In the claimant’s action for damages for the costs of repairing his ship and replacing items destroyed, the assessors of the damages had deducted one-third from those costs because the claimant was getting new for old. But Dr Lushington overruled this. He said, ‘… if that party derives incidentally a greater benefit than mere indemnification, it arises only from the impossibility of otherwise effecting such indemnification without exposing him to some loss of burden, which the law will not place upon him.’192 Again, in Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd,193 where the claimants’ factory was burnt down as a result of the defendants’ breach of contract, it was held that the claimants were entitled to the cost of building and equipping a new factory and that no deduction would be made for the fact that the new factory would be better than the old one. Similarly, in Bacon v Cooper (Metals) Ltd,194 where the defendants were in breach of contract in supplying the claimants with the wrong kind of scrap metal which then broke the rotor of the claimants’ fragmentiser, the claimants were held entitled to the hire-purchase cost of a new rotor and no deduction was made for the fact that the new rotor (p. 218) had an expected life of seven years, whereas the old rotor had had only three and three-quarter years’ expected life left.
But it is submitted that these cases do not contradict the compensatory principle because it is not at all clear that the betterment represented a real benefit to the claimant. In The Gazelle and Harbutt’s Plasticine the claimant would only realise a gain from the betterment if the ship and factory respectively were to be sold, and there was little likelihood of that. Similarly, in Bacon v Cooper there was no certainty that having a new rotor would benefit the claimant more than the old one since by the time the old rotor would have worn out, the fragmentiser itself might have become outmoded. So these cases should not be read as an unjustifiable commitment to not deducting for a true benefit; and where the claimant has clearly benefited from the new for old—and it should probably be for the defendant to show this—an appropriate deduction should be made. That this will be so is supported by Cantley J’s view in Bacon v Cooper that it would be absurd to allow the full cost of replacing a rotor that had only a few days of useful life left.
This principled approach derives strong support from the Court of Appeal in Voaden v Champion, The Baltic Surveyor.195 The claimant’s pontoon had been sunk and lost by reason of the defendant’s negligence. At first instance Colman J had awarded £16,000 in respect of the pontoon on the basis that a replacement would have cost £60,000 and had a life of 30 years but the old pontoon only had eight years of life left in it. He therefore awarded 8/30ths of £60,000. That deduction for ‘betterment’ was upheld by the Court of Appeal as being correct in principle (albeit that Colman J’s view that this approach only applied to where one was concerned with replacement rather than repair was doubted). Provided the new for old constituted a true (pecuniary) benefit to the claimant, it should be deducted. Having examined cases such as The Gazelle, Harbutt’s Plasticine, and Bacon v Cooper, Rix LJ said:196
‘I suspect … that the true principle is that in the relevant cases197 the betterment has conferred no corresponding advantage on the claimant. Take the ordinary case of the repair of some part of a machine. Where only a new part can be fitted or is available, the betterment is likely to be purely nominal: for unless it can be posited that the machine will outlast the life left in the damaged part just before it was damaged, the betterment gives the claimant no advantage; and in most cases any such benefit is likely to be entirely speculative. So in the case of replacement buildings: the building may be new, but buildings are such potentially long-lived objects that the mere newness of a building may be entirely by the way … Even where the replacement is of a moderately bigger size … in the absence of any reason for thinking that the bigger size is of direct benefit to the claimant, he has merely mitigated as best he can. If, however, it were to be shown that the bigger size (or some other aspect of betterment) were of real pecuniary advantage to the claimant, as where, for instance, he was able to sublet the 20 per cent extra floor space he had obtained in his replacement building, I do not see why that should not have to be taken into account. It is after all a basic principle that where mitigation has brought measurable benefits to a claimant, he must give credit for them …’
In aiming to put the claimant into as good a position as it would have been in if no misappropriation or loss had occurred, as the general compensatory aim dictates, then where the goods have been permanently misappropriated or lost the courts are generally content to say simply that damages are assessed according to the value of the goods.200 But this is a rather ambiguous phrase. For example, even if there is a market for the goods there may be a variation between the market selling and buying prices. Indeed there is often a basic choice between directly awarding the claimant its lost financial advantage from not having the goods (diminution in value) and, on the other hand, awarding it the costs of acquiring substitute goods (cost of cure). This choice is analogous to that presented in assessing compensation for damage to goods and in assessing basic pecuniary loss for breach of contract (the lost property corresponds to a deprivation of the contractual benefit).
It is also noteworthy that in some of the leading cases the defendant had contracted to deliver the goods in question to the claimant, and the claimant’s action in conversion (property in the goods having passed) was therefore alternative to that for breach of contract for non-delivery. Subject to differences in limiting principles, like remoteness and contributory negligence, the damages do not differ according to which action is chosen.
So the claimant’s duty to mitigate means that normally the value of the goods is the market buying price of replacements. However, if there is no such market and if the claimant’s purpose in having the goods was to sell them, the goods’ value will be represented by the profit that would have been made on sale, ie by the market selling price or the actual resale price. The market selling price was awarded in The Arpad.201 There the claimants had bought a quantity of wheat and had resold it at 36s 6d a quarter. The market price had since fallen considerably. The defendant shipowners failed to deliver some 47 tons. In an action for conversion (and breach of contract) the claimants were awarded damages only for the market selling price of the 47 tons at the time fixed for delivery, ie 23s 6d per ton, on the ground that the actual resale price was too remote. On the other hand, in France v Gaudet202 the actual resale price was awarded in a situation where the defendant had failed to deliver champagne. It is submitted that the latter decision is to be preferred since if there is no market for buying replacements, as in these two cases, an award of the actual resale price puts the claimant more closely into the position it would have been in if the goods had not been (p. 220) misappropriated or lost; moreover it is hard to see why the resale loss was regarded as too remote in The Arpad.203 Significantly, Scrutton LJ dissented in that case although it appears that his willingness to take account of the actual resale price was confined to where, as on these facts, there was no available market at the port of discharge.
Where the claimant’s purpose in having the goods was for use, and there is no market for buying replacements, the claimant is likely to be awarded the cost of manufacturing a replacement plus adaptation costs. This was awarded, for example, in J and E Hall Ltd v Barclay,204 where the defendant converted the claimant’s machinery and there was no market for buying such machinery. Where the claimant cannot even mitigate by replacement manufacture he will presumably be awarded his lost user profits.
In addition to the diminution in value or cost of cure, all other pecuniary losses resulting from the misappropriation or loss of the goods should be recoverable, subject to the usual limiting principles. So, most obviously, where the claimant is having replacement goods manufactured, any loss of interim user profit or any charge reasonably incurred in hiring a temporary replacement should be recoverable.
Where the claimant gets its goods back it will still be entitled to some damages for having been temporarily deprived of them. So, for example, in Hillesden Securities Ltd v Ryjak Ltd,205 where the claimant’s car had been returned at the commencement of the trial, the claimant was awarded damages under the Torts (Interference with Goods) Act 1977, s 3 for the temporary loss of use based on the commercial hire fee that it would otherwise have gained during the weeks between the date of the conversion and the date of the car’s return. Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd206 was followed. There the defendants had wrongfully detained the claimants’ electrical theatrical equipment. In a detinue action, the defendants were ordered to return the goods or pay their value (at the time of judgment) and additionally the claimants were awarded damages assessed according to a reasonable hiring charge for the period until judgment. The trial judge found, however, that the claimants would not themselves have realised the full hire during that period. Therefore the decision may be best viewed as compensating the claimants for loss of the fee that they would have charged the defendants for legitimate use of their goods or, as Denning LJ but not the majority preferred, as reversing the defendants’ wrongful enrichment rather than compensating the claimants’ loss of use.207 A compensatory analysis of these ‘negotiating damages’ has been preferred by the Supreme Court in Morris-Garner v One Step (Support) Ltd.208
In Saleslease Ltd v Davis209 the claimant recovered an MOT testing machine that had been wrongfully detained by the defendant. On its return, the claimant sold the machine for its market value. But during the period of wrongful detention, the claimant had lost an unusual opportunity to lease the machine to a third party. That lease would have allegedly given the claimant £8,194 more than the market selling price of the machine. The majority of the Court of Appeal (Walker and Butler-Sloss LJJ) held that, applying The Arpad210 and The Wagon Mound211 tests of remoteness, that loss could not have been reasonably anticipated by the defendant and was too remote. Nominal damages only could be recovered for the tortious conversion. Schiemann LJ, dissenting, thought that the defendant had been put on notice by the claimant of the potential unusual loss if it persisted with the detention and (p. 221) that the loss claimed was, therefore, not too remote and was recoverable. It is submitted that Schiemann LJ’s dissenting judgment is to be preferred. Applying The Wagon Mound, the claimant had given the defendant clear notice of the particular loss that it would suffer by a continuation of the conversion. But, in any event, one might argue that the continued conversion was dishonest and that, applying the enlightened view of Lord Nicholls in Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 & 5),212 the relevant remoteness test should have been that of directness rather than reasonable foreseeability.
Wrongful interference with land is mainly covered by the torts of trespass and nuisance. Normally a claimant is concerned with a temporary loss of use of his land, either because of wrongful occupation or use (and here the damages are often referred to as ‘mesne profits’)213 or because the defendant’s activities off the land have prevented the claimant using the land as desired.
Damages for the temporary loss of use of land attempt to compensate the claimant’s lost user profit (a diminution in value measure). This will often comprise the rent or fee which would have been obtained if the defendant had not wrongfully interfered. For example, in Hall & Co Ltd v Pearlberg,214 where the defendant had wrongfully occupied the claimants’ two farms, the claimants were awarded, inter alia, £650 damages for trespass, representing the one year’s rent that they would otherwise have been able to charge an incoming tenant. In other cases damages have been given for the loss of custom caused by the defendant’s wrongful interference. For example, in Fritz v Hobson215 damages were awarded for the claimant’s loss of custom caused by the defendant’s nuisance in carrying on building operations which prevented free access along a public passage to the claimant’s shop. Similarly, in Andreae v Selfridge & Co Ltd216 damages were awarded, inter alia, for the claimant’s loss of hotel custom attributable to those building operations of the defendant which constituted a nuisance. Of course the loss of user profit is only recoverable to the extent that it does not infringe limiting principles, like remoteness and the duty to mitigate.
Sometimes, however, damages are based on what is regarded as a reasonable rent or fee irrespective of whether the claimant would have otherwise acquired that sum by letting to a third party.217 Those damages can be straightforwardly regarded as compensating loss of use if it is realistic to think that the claimant would have charged the defendant that sum for legitimate use of the land. Alternatively, those damages might be viewed as restitutionary, reversing the defendant’s wrongful enrichment. The Supreme Court in Morris-Garner v One Step (Support) Ltd218 has taken the view that such ‘negotiating damages’ are best analysed as compensatory not restitutionary.
Where a claimant has been and will be prevented from using his land or using it as desired (that is, the deprivation is permanent)—for example, where no injunction is granted to restrain smells or noise or to remove buildings blocking lights—equitable damages (in lieu of an injunction) will normally be measured by the diminution in the market selling price of the land.219 (p. 222) But in Bracewell v Appleby,220 Carr-Saunders v Dick McNeil Associates Ltd,221 and Jaggard v Sawyer222 the courts have assessed damages according to what would have been a fair sum for the claimants to have accepted for granting the defendants, in the first and third case, a right of way and, in the second case, a right to obstruct light. In the first two cases the judges spoke of the damages being awarded for the claimant’s ‘loss of amenity’.223 But in Bracewell v Appleby Graham J’s emphasis on the profits the defendant had made from building his home (which was accessible only by using the claimant’s road) might be thought to make it preferable to regard the damages in that case as restitutionary, reversing the defendant’s wrongful enrichment.224 But again, all this must now be read in the light of Morris-Garner v One Step (Support) Ltd225 in which the Supreme Court has taken the view that such ‘negotiating damages’ are compensatory not restitutionary.
The term ‘pure economic loss’ is well-known in the realm of tortious negligence where it refers to economic loss that is not consequent on physical damage. Physical damage most obviously comprises personal injury or property damage but its ‘spirit’ also includes death, damage to reputation, and wrongful interference with goods or land (apart from property damage). Hence, for our purposes, pure economic loss will be taken to comprise economic loss not consequent on any of the above kinds of ‘physical damage’.
In looking at compensatory damages for pure economic loss it is convenient to divide between four general heads of tortious liability: misrepresentation, wrongful infringement of intellectual property rights, wrongful interference with business or contract, and acts or omissions under the tort of negligence.
It is important to realise that the recovery of damages for pure economic loss was, until 40 years ago, severely restricted in that, other than for infringement of intellectual property rights, there was no liability for negligently inflicted pure economic loss; deceit and the torts concerning interference with contract or business require intentional or reckless conduct. But this restriction has been eased, initially by the development of the tort of negligent misrepresentation allowing the recovery of pure economic loss in Hedley Byrne & Co Ltd v Heller & Partners Ltd226 and later by the recognition that, in some limited situations, a defendant can be liable in the tort of negligence for acts or omissions causing pure economic loss.
A misrepresentation is the basis of a cause of action in tort where made fraudulently, as in the tort of deceit, or negligently, as in the tort of negligent misrepresentation. Similarly a negligent misrepresentation inducing the making of a contract between the parties is a statutory tort under s 2(1) of the Misrepresentation Act 1967.
(a) What is the aim of the damages?
Most discussion regarding damages for tortious misrepresentation has centred on what the compensatory principle here requires. As the tort consists of fraudulently or negligently making a false statement misleading the claimant, the aim should be to put the claimant into as good a position as if no statement misleading it had been made. Although the contrary has sometimes been suggested,227 the aim is not and should not be to put the claimant into as good a position as it would have been in if the statement had been true, for this would go beyond the essence of the tort. The claimant’s reliance, and not expectation, interest is therefore being protected.228
Damages for tortious misrepresentation are therefore fundamentally distinct from damages for breach of contract, where the claimant’s expectations are fulfilled by putting it into as good a position as if the contract had been performed. At a deeper level the distinction between the two rests on the difference between lying and breaking one’s promise, with the latter, unlike the former, generally comprising the breaking of a positive rather than a negative obligation. It is hence essential to distinguish between mere representations, where the sole action is for tortious misrepresentation, and warranties, where the claimant can sue for breach of contract; or, to put it another way, between statements merely inducing the making of a contract and the terms of the contract.
A number of cases show that the aim of damages for tortious misrepresentation is indeed to put the claimant into as good a position as if no statement had been made, rather than as if the statement had been true. For fraudulent misrepresentation an important case is Doyle v Olby (Ironmongers) Ltd.229 The claimant had bought a business from the defendant company. He was induced to do so by various fraudulent misrepresentations. The critical one was that the trade of the business was ‘all over the counter’, when in fact half of it was obtained by a traveller going out to canvass customers. The judges, particularly Lord Denning, indicated that there is a difference between damages for the tort of deceit and for breach of contract. Lord Denning said:
‘It appears therefore that the plaintiff’s counsel submitted and the judge accepted that the proper measure of damages was the “cost of making good the representation” or what came to the same thing, “the reduction in value of the goodwill” due to the misrepresentation. In so doing, he treated the misrepresentation as if it were a contractual promise, that is, as if there were a contractual term to the effect, “The trade is all over the counter. There is no need to employ a traveller.” I think it was the wrong measure. Damages for fraud and conspiracy are assessed differently from damages for breach of contract … On principle, the distinction seems to be this: in contract, the defendant has made a promise and broken it. The object of damages is to put the (p. 224) plaintiff in as good a position as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all the loss he has suffered, so far again, as money can do it.’230
Winn and Sachs LJJ agreed with Lord Denning, and Winn LJ specifically approved the passages in the 12th edition of Mayne and McGregor on Damages231 which emphasised that damages for deceit aim to put the claimant into the position he would have been in if no statement had been made. The author there relied, as Lord Denning did in Doyle v Olby, on cases such as McConnel v Wright232 and Clark v Urquhart233 which had established that, when the claimant is induced to buy shares by a fraudulent misrepresentation, the measure of damages is not the value of the shares if the representation had been true less their actual value but rather the purchase price paid less their actual value.
Doyle v Olby was approved and applied in the leading case of Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd.234 The claimant bought shares in F Inc that were pledged to the defendant bank. In reliance on false representations by representatives of the bank that there were rival bids close to the price offered by the claimant, the claimant went ahead and bought the shares at 82.25p per share at a total price of £23,141. A couple of months later, F Inc revealed that it had been the victim of a massive fraud and its share price dropped dramatically. The claimant sold the shares over several months at prices of between 30p and 40p for £11,788 (at a loss of £11,353). In an action for the tort of deceit, it was held by the House of Lords, approving Doyle v Olby, that the claimant was entitled to be put into as good a position as if no false representations had been made; that the claimant was not restricted to the loss as assessed at the date of the transaction; and that all direct consequential loss, even if not reasonably foreseeable, was recoverable. The claimant was therefore held entitled to damages for the difference between the contract price and the amount actually realised by the sale of the shares (ie its full loss of £11,353).
Doyle v Olby was also applied but, it is submitted, the wrong result reached on the particular peculiar facts in the earlier case of Smith Kline & French Laboratories Ltd v Long.235 The claimant was induced by the deceit of the defendant, the managing director of Swift Exports Ltd, to sell to Swift 16,800 packs of tablets at a price of £56.66 per pack. The fraudulent misrepresentation was to the effect that Swift would sell the tablets in Central Africa. In fact they were sold in Holland. Swift paid all but £157,028 of the agreed contract price but then became insolvent. Whitford J dismissed the claim on the ground that the claimant had suffered no loss as a result of the fraud. The Court of Appeal reversed that decision and awarded £157,028.
Subject to any argument that fraud overrides normal rules as to mitigation of loss,236 that award would only have been correct if the claimant would have sold the tablets at the same price to someone else had it not been induced to sell to Swift. Yet the claimant conceded that it could have supplied whatever quantity of tablets was needed to meet demand (and that it could be assumed that the tablets had cost nothing to produce). It should have followed that the contract with Swift could not be treated as having deprived the claimant of the (p. 225) opportunity to sell those tablets (at the same price) to someone else: and that there was no true analogy with cases on wrongful interference with goods which have awarded damages based on the value of the goods.237
Moving on to the tort of negligent misrepresentation, as established in Hedley Byrne & Co v Heller & Partners Ltd,238 Esso Petroleum Co Ltd v Mardon239 shows the application of the same principle. Here a tenant was induced to take a lease of a petrol station from an oil company by a statement made by an experienced salesman on the company’s behalf, as to the potential throughput of petrol at that station. The Court of Appeal held that the defendant was liable, inter alia, for its salesman’s pre-contractual negligent misrepresentation. As regards the damages, Lord Denning said:
‘Mr Mardon is not to be compensated for “loss of a bargain”. He was given no bargain that the throughput would amount to 200,000 gallons a year. He is only to be compensated for having been induced to enter into a contract which turned out to be disastrous for him. Whether it be called breach of warranty or negligent misstatement, its effect was not to warrant the throughput, but only to induce him to enter into the contract. So the damages in either case are to be measured by the loss he suffered … It is to be measured in a similar way as the loss due to a personal injury. You should look into the future so as to forecast what would have been likely to happen if he had never entered into the contract; and contrast it with his position as it now is, as a result of entering into it.’240
Shaw LJ agreed with Lord Denning over these principles, and while Ormrod LJ did not clearly adopt this approach his comments on the computation of damages are consistent with it.
Similarly in Box v Midland Bank Ltd,241 which concerned a negligent misrepresentation made by a bank’s employee regarding the claimant’s chances of getting a large loan from the bank, Lloyd J had the following to say on the question of how to assess the damages:
‘The damages claimed amount to just under £250,000 but a very large part of that represents the gains that the plaintiff would have made if the Manitoban contract had been successfully carried through and the Churchman Newton group saved. Once the claim in contract had been abandoned, Mr Box could not hope to recover for loss of his bargain and [his counsel] rightly abandoned that part of the claim. Instead he says that Mr Box is entitled to be put in the position he would have been in if the negligent misstatement had not been made. That always involves questions of the greatest difficulty. It was difficult in Doyle v Olby; it was difficult in Esso v Mardon; it is even more difficult here.’242
Applying this principle Lloyd J ultimately assessed damages at £5,000.
With regard to statutory liability under the Misrepresentation Act 1967, s 2(1), it is also now clear (contrary to early cases suggesting that the claimant should be put into as good a position as if the representation had been true)243 that the basic principle is to put the claimant into the position it would have been in if no statement has been made. In F & B Entertainments Ltd v Leisure Enterprises Ltd,244 Walton J ordered an inquiry as to damages under s 2(1) saying that, ‘The measure of damages, quite clearly, is the same as those in an action for damages for deceit’.245 In André & Cie SA v Ets Michel Blanc & Fils246 Ackner J (p. 226) similarly said of s 2(1), ‘To my mind, the subsection puts the victim of the innocent misrepresentation in the same position, relative to his claim for damages, as the victim of the fraudulent misrepresentation. To his claim, the measure of damages appropriate to claims in tort has to be applied.’247 In McNally v Welltrade International Ltd248 Sir Douglas Franks QC, in assessing damages under s 2(1), applied Doyle v Olby and said, ‘The plaintiff’s position before the inducement should be compared with his position at the end of the transaction.’249 And in Cemp Properties (UK) Ltd v Dentsply Research & Development Corpn,250 in which the Court of Appeal awarded damages under s 2(1) to a purchaser of land, Bingham LJ regarded it as ‘the cardinal rule of damages in this field that the plaintiff should be put in the same financial position as if the misrepresentation had not been made’. Furthermore Balcombe LJ in Royscot Trust Ltd v Rogerson251 expressly disapproved the early cases describing them as ‘initial aberrations’ and said, ‘[I]t is difficult to see how the measure of damages under [s 2(1)] could be other than the tortious measure and … that is now generally accepted.’
This must be correct. As has been explained above, it follows from the very nature of the wrong of misrepresentation. Moreover, it would be irrational to award the claimant the expectation measure under the Misrepresentation Act 1967, s 2(1) when it is confined to being put into as good a position as if no statement had been made under the very similar tort of negligent misrepresentation and under the more blameworthy tort of deceit.
It follows from the above reasoning that damages that can be awarded for even a purely innocent misrepresentation in lieu of rescission under the Misrepresentation Act 1967, s 2(2)252 should not go beyond putting the claimant into as good a position as if no statement had been made.253
(b) Expenses caused and gains forgone
To put the claimant into as good a position as if no representation had been made it can recover damages for all the expenses caused by and gains forgone because of the misrepresentation, subject to the usual limiting principles.
Dealing first with expenses caused, a useful example is Richardson v Silvester.254 The defendant inserted in a newspaper an advert for the letting of a farm which, as he knew, he had no power to let. In reliance on the advert the claimant incurred expenses by himself inspecting the property and in employing other persons to inspect and value it. It was held that the claimant had an action for deceit enabling him to recover his expenses.
Where the expenses take the form of a contract price paid under a contract induced by a misrepresentation, the damages are assessed according to the contract price paid minus (p. 227) the value of what has been received under the contract. This is well illustrated by cases where the misrepresentation induced the purchase of shares. So, for example, in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd,255 as we have seen, the claimant was awarded damages of the difference between the price paid for shares (£23,141) and the price at which they were sold (£11,788). And in the earlier case of Archer v Brown256 the purchase price of £30,000 was recovered as damages because the claimant received no shares in return, the defendant having already sold them to someone else. The claimant also received damages of £13,528 in respect of the interest payable on a bank loan taken out to buy the shares. Similarly in Naughton v O’Callaghan,257 in which the claimants had been induced to buy a horse by a negligent misrepresentation as to its true pedigree, the damages awarded were the difference between the price paid (26,000 guineas) and the horse’s value nearly two years later when the misrepresentation was discovered and the horse had proved a failure on the racecourse (£1,500); plus £9,820 expenses incurred in training and keeping the horse.
A more complex illustration of damages based on expenses caused minus benefits accruing is provided by Doyle v Olby.258 The expenses amounted to £12,500, and comprised the purchase of business and stock (£9,500) and interest on a loan and overdraft plus rates (£3,000). The benefits amounted to £7,000 and comprised the sale of the business and stock (£4,300) and salary and living accommodation (£2,700). The damages awarded were therefore £5,500 (£12,500 minus £7,000).
Turning to gains forgone, in Burrows v Rhodes259 the claimant joined a private army invading the South African Republic in reliance on the defendant’s fraudulent misrepresentations that protection was needed for women and children, that the invasion would be reinforced by other lawful troops, and that the plan had the sanction of HM Government. It was held that the claimant had a good action in deceit enabling him to recover, inter alia, his loss of earnings while involved in the invasion. Another example is East v Maurer,260 in which the claimant had been induced to buy a hair salon by the vendor’s fraudulent misrepresentation that he would not be continuing to run a competing salon. In an action for deceit, the claimant was awarded not only the price paid minus the selling price, plus the trading losses, plus the expenses incurred in buying and selling and carrying out improvements, but also £10,000 for profits forgone. It was explained by the Court of Appeal (in reducing the sum that had been awarded under the last head by the trial judge) that the recoverable profits forgone were what the claimant might have been expected to make in another similar hairdressing business and not the profits that would have been made in this particular business had the vendor’s representation been true. The latter could only have been justified in an action for breach of a contractual warranty. East v Maurer was followed in 4 Eng Ltd v Harper.261 Here the claimant company had been induced to buy a company (Ironfirm Ltd) from the defendants by fraudulent misrepresentations made by the defendants. In an action for the tort of deceit, the damages awarded covered not only the purchase price paid for Ironfirm, and costs incurred in the purchase, but also the loss of the chance of making profit from purchasing another company which the claimants would have purchased had they not bought Ironfirm. Again, in Parabola Investments Ltd v Browallia Cal Ltd262 the deceit had resulted in the claimant having a reduced fund with which to trade in stocks, shares, and derivatives. It was held that the claimant was entitled to damages in (p. 228) the tort of deceit for the loss of investment opportunity (ie the loss of profit) which was a loss that continued after discovery of the fraud. A final and particularly interesting example of the recovery of gains forgone is provided by Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd.263 The claimant had entered into two profitable distributorship contracts with the defendant. The defendant had induced the claimant to agree to the particular terms by a fraudulent misrepresentation. Had that fraudulent misrepresentation not been made, the claimant would have entered into the contracts with the defendant on more favourable terms and would have made greater profits than it in fact did make. In an action for deceit, it was held by the Court of Appeal that the claimant was entitled to those gains forgone (that is, the greater profits lost). It was no bar to awarding damages for those lost profits that the claimant had still entered into profitable, rather than loss-making, contracts with the defendant.
(2) Wrongful infringement of intellectual property rights264
The torts concerned with the wrongful infringement of intellectual property rights265 are the infringement of a trade mark, patent, design, performer’s property right, or copyright and passing-off.266 To put the claimant into as good a position as if there had been no wrongful infringement it can recover damages for all the expenses caused by and gains forgone because of the infringement, subject to the usual limiting principles.
There are no clear examples of cases in which expenses caused by the defendant’s infringement of the claimant’s intellectual property rights have been compensated. However, in A-G Spalding Bros v AW Gamage Ltd267 the defendants had sold some of the claimants’ old and discarded footballs as their new goods and in a passing-off action the claimants were awarded damages, inter alia, for what it would have cost to counter-advertise. It clearly follows that if they had incurred expenses in counter-advertising these would have been recoverable.
In contrast there have been numerous cases compensating for the claimant’s lost profits. The profits that have most commonly been lost have been from the reduction in sales of goods or materials as a result of the defendant’s unlawful competition.268 The assessment (p. 229) of those lost profits is often very difficult and the courts frequently resort to rough estimation. Certainly it cannot simply be assumed that the sales made by the defendant from selling infringing goods or materials correspond to the claimant’s lost sales, that is, that there is equivalence between the diversion of customers from the claimant and the customers buying from the defendant.269 In particular one is concerned only with profits lost from (that is, factually caused by) the infringement and not the profit that would in any event have been lost because of lawful competition. Furthermore, the defendant’s profits may have resulted from special exertions which the claimant would not have undertaken.
Some lost sale profits may also have been the result of the claimant lowering its prices to counter the defendant’s unlawful competition. Damages for such losses were awarded in the patent infringement case of American Braided Wire Co v Thomson,270 but were denied in United Horse-Shoe and Nail Co Ltd v Stewart271 on the ground that the claimants would have lowered their prices irrespective of the patent infringement.
However, the claimant may not have lost sales profits; rather it may have lost the profits from licensing its intellectual property. This loss is assessed by determining the lump sum or royalties the claimant would have received for granting a licence to the defendant. A detailed examination of the assessment of such damages was made by the House of Lords in General Tire Co v Firestone Tyre Co Ltd,272 an infringement of patent case. Ultimately damages were assessed on the basis of a royalty rate of 3/8th of a US cent, the Lords holding that there was sufficient evidence indicating that this ‘going rate’ (that is the rate at which other licences for the patent had been granted) was the rate for which the claimants would have granted the patent licence to the defendants. Lord Wilberforce did, however, stress that:
‘Before a “going rate” of royalty can be taken as the basis on which an infringer should be held liable, it must be shown that the circumstances in which the going rate was paid are the same as or at least comparable with those in which the patentee and the infringer are assumed to strike their bargain.’273
Lord Wilberforce went on to say:
‘Given that the respondents were not claiming an account of profits, the consequence of departing from the conception of loss can only be to discover a tertium quid defined, it seems, by reference to what the infringer ought fairly to have paid. But there is no warrant for this on authority or principle.’274
However, in the earlier case of Watson, Laidlaw & Co v Pott, Cassels & Williamson,275 an infringement of patent case, Lord Shaw suggested that even where the claimant can show neither loss of sales profit, because, for example, it could not have sold patented machines in the particular area where the defendant has sold them, nor loss of licensing profit, because it would not have granted a patent licence, it can still recover substantial damages. Lord (p. 230) Shaw drew an analogy with taking someone’s horse, using it and returning it in the same condition, and said:
‘Each of the infringements was an actionable wrong, and although it may have been committed in a range of business or of territory which the patentee might not have reached, he is entitled to hire or royalty in respect of each unauthorised use of his property. Otherwise, the remedy might fall unjustly short of the wrong.’276
One might argue that it is difficult to view this approach as being concerned to put the claimant into as good a position as if no tort had been committed, and it looks rather as if it is restitutionary based on reversing the defendant’s wrongful enrichment, with the royalties representing either the expense the defendant saved in not having to acquire an equivalent patent licence or a fair proportion of the defendant’s profits.277 But all this must now be read in the light of Morris-Garner v One Step (Support) Ltd278 in which the Supreme Court has taken the view that such ‘negotiating damages’ are compensatory not restitutionary.
Wrongful interference with the claimant’s business or contract is the basis of several torts, for example, inducing breach of contract, intimidation, interference by unlawful means, conspiracy, and injurious falsehood. To put the claimant into as good a position as if there had been no such interference it can recover damages for all the expenses caused by and gains forgone because of the interference, subject to the usual limiting principles.
As regards expenses caused, British Motor Trade Association v Salvadori279 provides a good example. The claimant trade association, in an attempt to keep down the price of certain cars, required all purchasers of those cars to covenant not to resell within 12 months. The defendants with the intention of breaking the system induced certain purchasers to break the covenant. In an action for inducing breach of contract and conspiracy Roxburgh J held that the claimants could recover, inter alia, the expenses incurred in ‘unravelling and detecting the unlawful machinations of the defendants’.280
But where the defendant has interfered with the claimant’s business or contract, the claimant is usually primarily concerned to recover damages for the profit lost as a result of such interference. So, for example, in Goldsoll v Goldman281 the defendant induced an employee of the claimant to break his contract with the claimant by setting up a rival jewellery business close to the claimant’s. In an action for inducing breach of contract damages were awarded for the claimant’s general loss of business.
Less commonly the gains forgone may comprise a loss of earnings. In Morgan v Fry282 the claimant lockman had been dismissed by his employers under pressure from the defendant. (p. 231) In an action for intimidation the claimant was at first instance awarded the earnings he would have made as a lockman (and it was assumed that he would not have continued in that job for more than another five years) minus his present wages working in a different job.
It should be noted that damages awarded for tortious interference with contract will not necessarily be the same as for breach of that contract. In particular, principles like remoteness and contributory negligence do not apply in the same way.
The courts over the last 50 or so years have struggled to decide on the extent to which pure economic loss caused by negligent acts or omissions is recoverable in the tort of negligence. In general, a narrow approach to liability in this area has been taken with the courts traditionally fearing an indeterminate liability to an indeterminate number and undermining contractual terms.283 Various concepts have been utilised by the courts in trying to draw a coherent boundary of liability, for example, ‘assumption of responsibility’, ‘reliance’, ‘proximity’, and whether imposition of a duty of care is ‘fair and reasonable’. But in truth these concepts give relatively little guidance and one tends to be forced back to incremental reasoning from the facts of past decisions.284
In looking at how damages should be assessed for negligently caused pure economic loss, it seems helpful to divide between (a) negligent interference with contract or business and (b) negligent performance of services beneficial to the claimant.285
No English case has yet allowed the recovery of damages for pure economic loss caused by a negligent interference with contract or business. The situation is exemplified by the pure economic loss claim in Spartan Steel and Alloys v Martin & Co (Contractors) Ltd.286 In that case, the defendants had negligently damaged an electricity cable, thereby cutting off the electricity supply to the claimants’ factory for 14 hours. As a result the ‘melt’ then in the furnace was damaged. The claimants were able to recover damages for the damaged melt (£368) and the loss of profit that would have been made on that melt (£400), but not for the profit on four further melts (£1,767) that would have been put through the furnace if the electricity supply had not been cut off. The last head was denied because it amounted to pure economic loss.
As regards the assessment of damages, the important point is that if negligently caused pure economic loss were to be recoverable in English law in this situation, it should be seen alongside the earlier section on wrongful (intentional) interference with business or contract and damages should be assessed in basically the same way; ie in aiming to put the claimant into as good a position as if the defendant had not negligently interfered, expenses (p. 232) caused,287 and particularly gains forgone, as claimed for in Spartan Steel, should be compensated in so far as not ruled out by limiting principles such as remoteness. In the same vein, it should be added that this aspect of pure economic loss recovery for tortious negligence does not raise problems for the distinction between tort and contract because it is within traditional tort reasoning in imposing a negative obligation, not to interfere making someone worse off, rather than imposing a positive obligation to confer a benefit.
Most of the cases on negligently inflicted pure economic loss have so far been concerned with this situation. It occurs, for example, where a professional person, such as a solicitor,288 surveyor,289 or an engineer,290 fails to advise a client properly. The client has an action against the professional defendant in the tort of negligence to compensate for the pure economic loss caused. Similarly in Henderson v Merrett Syndicates Ltd291 Names at Lloyd’s were held entitled to damages for pure economic loss in the tort of negligence against the managing agents of syndicates of which they were members.
The client will also almost always have a prima facie concurrent claim for breach of the professional’s contractual duty of care292 although in several cases the tortious claim was relied on because the contractual action was time-barred. Subject to differences in limiting principles, such as remoteness, the assessment of damages will be the same for breach of the tortious as for the breach of the contractual duty of care with the basic aim being to put the claimant into as good a position as if the defendant had performed the services using reasonable care. For example, in Perry v Sidney Phillips & Son,293 if the survey had been properly carried out, the purchaser would not have bought the house or at least would not have paid more for it than its true market value. Hence damages for both breach of contract and the tort of negligence were assessed according to the purchase price of the house minus its actual market value (difference in value measure); and Lord Denning, having said that the aim of damages for breach of contract is ‘to put the plaintiff in the same position as he would have been in if the contract had been properly performed’ continued, ‘Even if the claim be laid in tort against the surveyor, the damages should be on the same basis.’294 It is important to realise that while one can see this as being in line with the usual compensatory aim of putting the claimant into as good a position as if no tort had been committed, the tortious obligation here is a positive one to benefit the claimant by performing the services non-negligently.
(p. 233) But the tortious action may also be available where the defendant is performing the services under a contract with a party other than the claimant, so that (subject to an exception applying) privity prevents the claimant suing for breach of contract.295 The best example is White v Jones.296 Here delay by a solicitor in carrying out his client’s instructions to draw up a new will meant that the client died without that new will having been executed. It was held (Lord Keith and Mustill dissenting) that a duty of care was owed by the solicitor to the claimants who would have benefited under the new will. Lord Goff based his reasoning on the concept of an ‘assumption of responsibility’ and on there being no other satisfactory way of filling the gap whereby the person who had suffered the loss could not otherwise sue and the person who could sue had suffered no loss. Note also that the claimants were a small number of identified people and there would otherwise have been no sanction in respect of the solicitor’s breach of professional duty. Assuming that a defendant is held tortiously liable (and in a book on remedies this is the starting point) then, as where the parties are in a contractual relationship, the damages should be assessed according to the position the claimant would have been in if the services had been performed non-negligently. In other words, subject to differences in limiting principles, the approach should be the same as for contractual pecuniary loss. For example, in White v Jones the claimants were held entitled to the £9,000 each that they would have received under the amended will had the solicitor carried out his instructions properly.
1 This is similar to Farnsworth’s analysis in A Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70 Col LR 1145, 1160–1175. See also the distinction between basic or normal, and consequential, pecuniary loss drawn in J Edelman, McGregor on Damages (20th edn, Sweet & Maxwell 2018) paras 3-008–3-012, 4-002–4-023, 4-050–4-062.
2 Other examples of such pecuniary loss are the expenses of gaining release from a false imprisonment in Prichet v Boevey (1833) 1 Cr & M 775, and the legal costs of defending a malicious prosecution in Savile v Roberts (1699) 1 Ld Raym 374 and Berry v British Transport Commission  1 QB 306.
3 A specialised issue, which is not discussed below, is whether a company and a shareholder in that company can both recover for economic loss caused by a breach of duty (whether in contract or tort) to both the company and the shareholder See, generally, C Mitchell, ‘Shareholders’ Claims for Reflective Loss’ (2004) 120 LQR 457; R Lee, ‘Creditors’ Claims for Reflective Loss’  JBL 479; S Griffin, ‘Shareholder Remedies and the No Reflective Loss Principle’  JBL 529. Leading cases include Prudential Assurance v Newman Industries (No 2)  1 Ch 204; Johnson v Gore Wood & Co  2 AC 1; Carlos Sevilleja Garcia v Marex Financial Ltd  EWCA Civ 1468,  QB 173 (in which the ‘no reflective loss’ rule was extended to creditors of the company).
7 Above, pp 117–127.
10 B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’  CLJ 537. For somewhat similar views to those of Coote, see C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 41; S Smith, ‘Substitutionary Damages’ in Justifying Private Law Remedies (ed C Rickett, Hart Publishing 2008) 93; and D Winterton, Money Awards in Contract Law (Hart Publishing 2015). See further above, pp 48–50.
11 D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628: see above, p 37.
14 ibid, 547, 569–570.
15 ibid, 563, 570. See also S Rowan, ‘Cost of Cure Damages and the Relevance of the Injured Promisee’s Intention to Cure’  CLJ 616.
17  1 AC 518: see below, pp 202–203.
18 E McKendrick, ‘The Common Law at Work: The Saga of Alfred McAlpine Construction Ltd v Panatown Ltd’ (2003) 3 OUCLJ 145, 175, agrees that the intention to cure is a critical factor. But, with respect, intention to cure shows the need for (an actual or anticipated) financial loss which contradicts McKendrick’s general argument (on which see also E McKendrick, ‘Breach of Contract and the Meaning of Loss’ (1999) 52 CLP 37) similar to Coote’s, that the courts should not be so concerned about financial loss.
19 For the same analysis, see above, p 50. As there explained, the latter approach is that advocated by Andrew Summers.
20 Analogous rules apply in relation to contracts for the carriage of goods. See, eg, Rodocanachi v Milburn (1886) 18 QBD 67; Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2), The Marine Star (No 2)  2 Lloyd’s Rep 629 (non-delivery of goods by carrier); The Heron II  1 AC 350; The Pegase  1 Lloyd’s Rep 175 (late delivery of goods by carrier). Note also White Arrow Express Ltd v Lamey’s Distribution Ltd (1995) 15 Tr LR 69 in which an inferior delivery service was provided than that contracted for: it was held that the claimant was entitled as damages to the difference between the market value of the services it had contracted for minus the market value of the services obtained but, as the claimant had produced no evidence of that difference in value (nor evidence of any other loss), nominal damages only were awarded.
22  AC 510. In relation to carriage contracts, the classic case laying down that one should ignore resale prices, whether higher or lower than the market price, is Rodocanachi v Milburn (1886) 18 QBD 67. Lord Esher MR said, at 77, ‘[T]he value is to be taken independently of any circumstances peculiar to the plaintiff.’
23 Eg S Waddams, The Law of Damages (6th edn, Thomson Reuters 2017) paras 1.30–1.40, 1.1940, and more generally D Simon and G Novack, ‘Limiting the Buyers’ Market Damages to Lost Profits: A Challenge to the Enforceability of Market Contracts’ (1979) 92 Harv LR 1395.
25 This is the approach advocated by Andrew Summers: see above, p 50.
26 (1928) 139 LT 50. However, Viscount Haldane’s judgment is misleading on remoteness; see E McKendrick, Goode on Commercial Law (5th edn, Penguin 2016) 415–416. See also Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2), The Marine Star (No 2)  2 Lloyd’s Rep 629 (lost resale profits awarded as damages for breach of contract of carriage by carrier’s non-delivery where no available market).
27 See, by analogy, Hall Ltd v Barclay  3 All ER 620; below, p 220.
36  2 KB 11: above, p 192.
37  QB 87. See also J Edelman, McGregor on Damages (20th edn, Sweet & Maxwell 2018), paras 9-179, 25-069. For the contrary view, that the majority in the Bence case was incorrect, see G Treitel, ‘Damages for Breach of Warranty of Quality’ (1997) 113 LQR 188.
40 The claimant also claimed damages for some of his wasted expenses. The majority (Morris LJ dissenting) refused these. But this seems wrong since the profits awarded were not gross; see A Ogus, The Law of Damages (Butterworths 1973) 352–354; J Macleod, ‘Damages: Reliance or Expectancy Interest’  JBL 19.
50  2 KB 11: above, p 192.
52  Ch 177. Above, p 147.
59 See also, eg, Dean v Ainley  1 WLR 1729; Alfred McAlpine Construction Ltd v Panatown Ltd  1 AC 518 (per Lords Goff and Millett), discussed below, at pp 227–228. There has been much academic discussion of this situation: eg A Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70 Col LR 1145, 1167–1175; A Tettenborn, ‘Damages for Breach of Positive Covenants’ (1978) 42 Conv 366; D Harris, A Ogus and J Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) 95 LQR 581, 589–594, 601–603; P Marschall, ‘Wilfulness: A Crucial Factor in Choosing Remedies for Breach of Contract’ (1982) 24 Ariz LR 733; T Muris, ‘Cost of Completion or Diminution in Market Value: the Relevance of Subjective Value’ (1983) 12 J Legal Studies 379; S Rowan, ‘Cost of Cure Damages and the Relevance of the Injured Promisee’s Intention to Cure’  CLJ 616; H Beale, Remedies for Breach of Contract (Sweet & Maxwell 1980) 173–177. See also the articles and book referred to above, p 189 n 10.
62 Cf above, p 168.
63  AC 344. See below, pp 198–199.
65  1 WLR 1262, at 1284. In Minscombe Properties Ltd v Sir Alfred McAlpine & Son Ltd (1986) 279 Estates Gazette 759 an intention to effect the cure was held sufficient even though it was conditional on obtaining planning permission.
67 See J O’Sullivan, ‘Loss and Gain at Greater Depth: The Implications of the Ruxley Decision’ in Failure of Contracts (ed F Rose, Hart Publishing 1997) 1, 14–16; A Burrows and E Peel, ‘Compensatory Damages: Review of Discussion’ in Commercial Remedies (ed A Burrows and E Peel, OUP 2003) 25.
68 This was clearly Lord Lloyd’s approach: see  AC 344, at 363, 373–374. Staughton LJ’s judgment in the Court of Appeal sets out the judge’s indication that Mr Forsyth’s pleasure in diving was affected: see  1 WLR 650, at 654. See below, p 278.
69 This derives strong support from Lord Lloyd’s speech:  AC 344, at 372–373. But note that one interpretation of the minority’s reasoning in Alfred McAlpine Construction Ltd v Panatown Ltd  1 AC 518 is that intention is downplayed and a higher cost of cure is presumptively to be awarded unless that is unreasonable: see below, p 203. Note also the views at first instance, in analogous services cases, in De Beers UK Ltd v Atos Origin IT Services UK Ltd  EWHC 3276, at  (per Edwards-Stuart J) and Van der Garde BV v Force India Formula One Team  EWHC 2373 (QB), at  (per Stadlen J), that the cost of replacement services can be awarded if reasonable even though that cost has not been incurred and there is no intention to do so.
70 This was a statutory departure from the rule at common law, as laid down in Joyner v Weeks  2 QB 31, that the prima facie measure of damages for the tenant’s breach was the cost of repair (irrespective of any intention by the landlord to carry out the repair). Joyner v Weeks was relied on in the important Australian case of Tabcorp Holdings Ltd v Bowen Investments Pty Ltd  HCA 8, (2009) 236 CLR 272 in which a commercial tenant had cynically broken its covenant not to make alterations to the property without the landlord’s consent: the very much higher cost of cure was awarded ($1.38m) rather than the difference in value ($34,820) because it would be reasonable to effect the cure (and the High Court of Australia did not mention as important whether the landlord intended to effect the cure or not).
76 Above, pp 48–50.
77 See, eg, A Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70 Columbia LR 1145, 1175, advocating the award of the reasonable fee. A variation on this is to focus on the alteration to the price that, at the time of contracting, the claimant would have reasonably accepted for the relevant contractual obligation to have been omitted: see H Beale, Remedies for Breach of Contract (Sweet & Maxwell 1980) 177.
78 See below, ch 18.
79  UKSC 20,  2 WLR 1353. It is an interesting question whether the facts of Ruxley would fall within the limited range of cases in which the Supreme Court in Morris-Garner would allow negotiating damages to be awarded.
80 Below, pp 352–359.
81 For an analogous example, outside the building context, see Western Web Offset Printers Ltd v Independent Media Ltd  37 LS Gaz R 24. In breach of contract, the owners of a newspaper cancelled an order for printing with the claimants which had 48 weeks still to run. The claimants were, reasonably, unable to find other orders to fill that gap. They were held entitled to the gross profits lost on the contract minus the costs of paper and printing which had been saved. Overhead costs were not deducted because these had not been saved.
84 Woodar Investment Development Ltd v Wimpey Construction UK Ltd  1 WLR 277. See also Coulls v Bagot’s Executor and Trustee Co Ltd  ALR 385, at 410–411 (per Windeyer J); Beswick v Beswick  AC 58; White v Jones  2 AC 207.
85 As was ordered in Beswick v Beswick  AC 58: see below, p 410.
86 See the first two cases cited above in n 84; and Lord Pearce’s judgment in Beswick v Beswick  AC 58.
87 This leaves aside the additional possibility of mental distress damages being awarded on the ground that an important object of the contract is the claimant’s mental satisfaction: below, pp 277–279. One rationalisation of Jackson given in Woodar was that the damages were purely for the claimant’s mental distress.
88 See, eg, above, pp 197–199.
90 Another exception is that a ‘trustee’ (B) suing for breach of a contract by A to create a trust in favour of a ‘beneficiary’ (C), can recover substantial damages as C’s loss. In St Albans City and District Council v International Computers Ltd  4 All ER 481, the Court of Appeal drew an analogy between a local authority, recovering contractual damages for the loss suffered by its inhabitants, and a trustee.
98 This interpretation is consistent with the approach of B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’  CLJ 537 which appeared to be especially influential on Lord Goff. See above, pp 189–190.
99 See also above, p 190. For somewhat similar (but more detailed) criticisms of the reasoning of Lords Goff and Millett, see H Unberath, Transferred Loss (Hart Publishing 2003) 59–82. For views supporting, or sympathetic to, the reasoning of Lords Goff and Millett, see B Coote, ‘The Performance Interest, Panatown and the Problem of Loss’ (2001) 117 LQR 81; and E McKendrick, ‘The Common Law at Work: The Saga of Alfred McAlpine Construction Ltd v Panatown Ltd’ (2003) 3 OUCLJ 145 (although McKendrick ultimately regards the ‘intention to cure’ as critical: see above, p 190 n 18). See also above, p 50 n 61.
103 Above, p 201.
105 Contracts (Rights of Third Parties) Act 1999, s 1(5), reads: ‘For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly).’
107 Below, pp 206–218.
108 One can regard expenses wasted because of breach as an additional loss. But in directly protecting the expectation interest (as opposed to the reliance interest—above, ch 6) such expenses are only recoverable if the basic measure has been calculated according to net rather than gross difference in value. Since the basic measure can always therefore take wasted expenses into account it seems unnecessarily complex to consider them separately here. But for claims framed in this way, see Hydraulic Engineering Co Ltd v McHaffie, Goslett & Co (1878) 4 QBD 670; Cullinane v British Rema Manufacturing Co Ltd  1 QB 292.
109  2 AC 31. See also Re Hall Ltd and Pim (1928) 139 LT 50. As made clear in, eg, Total Liban SA v Vitol Energy SA  QB 643 (where defective gasoline was being sold to, and sub-sold by, the claimant) the seller is liable in damages even before the buyer has paid compensation to the sub-buyer: the incurring of a legal liability (to the sub-buyer) is itself a compensatable loss.
111 In respect of goods the relevant torts come within the Torts (Interference with Goods) Act 1977. Liability under the Consumer Protection Act 1987, Pt I extends, under s 5, to property damage subject to restrictions (eg that the property is for private use and that the damages exceed £275).
112 Above, p 205.
115 An exception, on unusual facts, was Ward v Cannock Chase District Council  3 All ER 537, at 561–563. See also Dominion Mosaics and Tile Co Ltd v Trafalgar Trucking Co Ltd  2 All ER 246.
118  1 Lloyd’s Rep 38. See also Heath v Keys, The Times, 28 May 1984. Analogously, an owner of land is entitled to damages for the cost of abating a nuisance: Delaware Mansions Ltd v Westminster City Council  UKHL 55,  1 AC 321; Abbahall Ltd v Smee  EWCA Civ 1831,  1 WLR 1472.
121 Above, n 115. The issue was being tried as a preliminary question of law: had Scott J been awarding damages he could not have left open the question of planning permission because of the rule that damages must be awarded unconditionally (above, p 168).
123  1 WLR 659. See also Jones v Gooday (1841) 8 M & W 146; Moss v Christchurch RDC  2 KB 750; Munnelly v Calcon Ltd  IR 387; Farmer Giles Ltd v Wessex Water Authority  2 EGLR 189.
126 See, generally, above, ch 8.
127 See above, pp 158–160.
128  1 WLR 1141. See also below, pp 213–214.
134 For what is meant by replacement or repair, see above, p 208.
139  AC 449. See also Clyde Navigation Trustees v Bowring SS (1929) 34 Ll L Rep 319; Jones v Port of London Authority  1 Lloyd’s Rep 489; Dominion Mosaics and Tile Co Ltd v Trafalgar Trucking Co Ltd  2 All ER 246 (paternoster machines).
140  EWCA Civ 717,  2 Lloyd’s Rep 275. This was followed in Ali Reza-Delta Transport Co Ltd v United Arab Shipping Co  EWCA Civ 86,  2 Lloyd’s Rep 450: damages were based on the market selling price (of similar goods in Saudi Arabia where they had been tortiously destroyed) rather than the replacement costs; there was no evidence that the claimants had replaced, or would replace, the destroyed goods. In Aerospace Publishing Ltd v Thames Water Utilities  EWCA Civ 3,  NPC 5, the principles in The Maersk Colombo were applied, albeit that a different conclusion was reached, in holding that, following the destruction of a photographic archive by flood water, damages should be awarded based on the cost of reinstating the archive rather than its diminution in value.
144 The Philadelphia  P 101; The Fortunity  1 WLR 351 (cf A Hudson, ‘Money Claims for Misuse of Chattels’ in Interests in Goods (eds N Palmer and E McKendrick, 2nd edn, LLP 1998) 839, fn 16 who appears to construe the latter case as having awarded the cost of replacement rather than the market selling price).
145 H Street, Principles of the Law of Damages (Sweet & Maxwell 1962) 195. See, generally, J Knott, ‘Loss of Profit Caused by the Total Loss of a Ship: its Relationship to Value and Interest’  LMCLQ 502.
148 But such costs were held not recoverable in The Liesbosch because they flowed from impecuniosity—see above, pp 144–146. See also Moore v DER Ltd  3 All ER 517, where no replacement cost was being awarded.
149 At first sight, it might be thought that Derby Resources AG v Blue Corinth Marine Co Ltd, The Athenian Harmony  2 Lloyd’s Rep 410 is such an example. But on closer inspection—see especially at 417, 419—the market value of sound (ie uncontaminated) kerosene was regarded as the market buying price of such kerosene so that the damages (against a carrier for negligent damage to goods) were assessed using a replacement cost (ie cost of cure) measure.
150 For what is meant by replacement or repair, see above, p 208.
159  1 WLR 1141. See above, p 208.
160  1 AC 384. See below, p 215.
161  2 AC 350. See below, pp 240–241.
162 For the approach to compensating advantages generally, see above, ch 8.
163 Above, p 208.
166  2 Lloyd’s Rep 238. See also Giles v Thompson  1 AC 142 (claimant able to recover because legally liable to pay hire costs albeit not yet paid). In Dimond v Lovell  1 AC 384, at 402–403 there were obiter dicta to the effect that, if the hiring charges had been recoverable (it was decided that they were not) one should deduct the cost of additional services, over and above the hiring of the car, that were provided as part of the hiring package. In other words, the ‘spot rate’ of hire and not the higher costs of an accident-hire scheme were recoverable. But in Lagden v O’Connor  UKHL 64,  1 AC 1067, it was decided that an impecunious claimant could recover those higher costs: see above, p 146. In Burdis v Livsey  EWCA Civ 510,  QB 36, it was clarified that the claimant could only recover for the costs of hiring (a Vauxhall Vectra) actually incurred even though higher hire charges (for a replacement sports car) might reasonably have been incurred. For the position where, without the claimant being at fault, the period of hiring is extended see above, p 130 n 250.
169  QB 454. See below, p 240.
171  2 AC 350. See below, pp 240–241.
173  EWCA Civ 510,  QB 36. See above, pp 212–214.
174  EWCA Civ 923,  4 All ER 791. In Copley v Lawn  EWCA Civ 580,  PIQR P21 it was controversially (and with respect incorrectly) held that claimants, whose cars had been negligently damaged and had been supplied with temporary replacement cars by their insurers, did not fail in their duty to mitigate by refusing or ignoring the offer of replacement cars from the defendants’ insurers. Even more controversially it was said in obiter dicta that, even if this did constitute a failure in their duty to mitigate, they would still be entitled as damages to the cost of hire of those replacement cars. Perhaps not surprisingly the trial judge (the highly respected Judge Charles Harris QC) in Sayce v TNT (UK) Ltd  EWCA Civ 1583,  1 WLR 1261, refused to follow Copley v Lawn although he was strongly criticised for departing from precedent by the Court of Appeal in that case (a criticism which he could perhaps have avoided by arguing that the reasoning was inconsistent with House of Lords authority and was therefore per incuriam).
175 Applying the normal approach to insurance, established in Bradburn v Great Western Ry (1874) LR 10 Ex1, the fact that it was the insurer, rather than the claimant, who bore the hire costs was irrelevant to the assessment of the damages.
184 Below, ch 18. In the leading case of Morris-Garner v One Step (Support) Ltd  UKSC 20,  2 WLR 1353, it was reasoned that negotiating damages are compensatory not restitutionary.
188 For a similar analysis—which focuses on the ‘undesired’ non-pecuniary consequence of the damage to the lightship—see J Edelman, ‘The Meaning of Loss and Enrichment’ in Philosophical Foundations of the Law of Unjust Enrichment (eds R Chambers, C Mitchell, and J Penner, OUP 2009) 211, esp 215–218.
189 See below, p 288. Where the owner is an individual, there is in principle no difficulty in regarding the damages for loss of use as compensating for non-pecuniary loss, ie physical inconvenience or mental distress. In Alexander v Rolls Royce Motor Cars Ltd  RTR 95, damages for loss of use of a Rolls Royce car were refused because the claimant had other cars and there was no evidence of inconvenience or loss of enjoyment while repairs to the car were being carried out (or awaited).
200 Eg Re Simms  Ch 1; Caxton Publishing Co Ltd v Sutherland Publishing Co  AC 178, at 192 (per Lord Roche). The relevant date for assessing the value has been in issue in several conversion cases: see above, pp 172, 175–176. For the damages recoverable by those with a limited interest in the goods, see J Edelman, McGregor on Damages (20th edn, Sweet & Maxwell 2018) paras 38-050–33-065; eg the creditor under a hire-purchase agreement is restricted to the unpaid instalments if lower than the goods’ value: Wickham Holdings Ltd v Brooke House Motors Ltd  1 WLR 295; Chubb Cash Ltd v John Crilley & Son  1 WLR 599.
203 But the analogous decisions ignoring resales in William Bros Ltd v Agius  AC 510 and Rodocanachi v Milburn (1886) 18 QBD 67 were applied: see above, pp 191–192.
207 Below, pp 324–325.
208  UKSC 20,  2 WLR 1353. See, generally, ch 18.
212  UKHL 19,  2 AC 883. See above, p 90.
218  UKSC 20,  2 WLR 1353. Below, ch 18.
219 Eg Griffith v Clay & Sons Ltd  2 Ch 291. For equitable damages, see below, ch 17.
222  1 WLR 269. See also Severn Trent Water Ltd v Barnes  EWCA Civ 570 where damages of £610 were upheld as compensating the claimant’s loss of opportunity to negotiate compensation in a case where the defendant had trespassed under a corner of the claimant’s land by laying a water pipe. Of particular interest was the CA’s rejection of the trial judge’s additional award of £1,560 ‘restitutionary damages’, based on the gains made by the defendant in using the pipe, on the reasoning that that overlapped with, or was inconsistent with, the compensatory award. For an analysis of the quantum of equitable damages in trespass (and breach of restrictive covenant) cases, in which the author tends to assume a compensatory rather than a restitutionary approach, see D Halpern, ‘Damages in Lieu of an Injunction: How Much?’  Conv 453.
225  UKSC 20,  2 WLR 1353. Below, ch 18.
226  AC 465. In Caparo Industries Plc v Dickman  2 AC 605 it was held that no duty of care was owed by auditors of a company to investors in that company who had relied on the auditors’ accounts in making their investments. It was stressed by the House of Lords that liability for misrepresentation under Hedley Byrne required the representation to be claimant-specific and purpose-specific. See similarly Banca Nazional del Lavoro SpA v Playboy Club London Ltd  UKSC 43,  1 WLR 4041 (no duty of care, as regards reference as to credit-worthiness, owed to undisclosed principal of the company asking for the reference).
227 As we have seen above, at pp 117–127, the SAAMCO principle is flawed in its insistence that damages for breach of an obligation to use reasonable care in making a statement should be restricted by the position the claimant would have been in had the statement been true.
229  2 QB 158. See also East v Maurer  1 WLR 461, below, p 227.
235  1 WLR 1. In the Smith New Court case  AC 254, 283, Lord Steyn referred to this criticism of the Smith Kline decision but left open whether he regarded this criticism as correct. See also Inter Export LLC v Lasytsya  EWCA Civ 2068, at –.
236 An analogy might be drawn with, eg, remoteness where a special more extensive ‘directness’ rule applies to the tort of deceit: see above, p 90.
237 Above, pp 219–221.
251  2 QB 297, at 304–305. See also Chesneau v Interhome Ltd  CLY 988; Sharneyford Supplies Ltd v Edge  Ch 305, at 323 (per Balcombe LJ); Naughton v O’Callaghan  3 All ER 191, at 196–198; Gran Gelato Ltd v Richcliff (Group) Ltd  Ch 560, at 574–575.
252 The discretion to award damages in lieu of rescission is dependent on rescission otherwise being available and not being barred by one of the standard bars to rescission, such as restitutio in integrum being impossible: Salt v Stratstone Specialist Ltd  EWCA Civ 745,  RTR 285. This is because the purpose of the Misrepresentation Act 1967, s 2(2) is not to add to the misrepresentee’s remedies but to give the courts a discretion to cut back the remedy of rescission where the misrepresentation has been trivial and rescission would cause undue hardship to the misrepresentor.
253 See generally William Sindall plc v Cambridgeshire CC  1 WLR 1016: in obiter dicta the Court of Appeal indicated that, whether recoverable under the Misrepresentation Act 1967, s 2(1) or not, loss due to the sharp fall in the market value of the land subsequent to its purchase by the claimant could not be included within damages under the Misrepresentation Act 1967, s 2(2).
257  3 All ER 191. See also above, pp 174–175.
265 Alongside these intellectual property torts, a claimant whose intellectual property rights have been infringed can claim damages under regulation 3 of the Intellectual Property (Enforcement etc) Regulations 2006 which gives effect to Article 13 of the Intellectual Property Rights Enforcement Directive, 2004/24/EC. For discussion, see Hollister Inc v Medik Ostomy Supplies Ltd  EWCA Civ 1419,  Bus LR 428; C Waelde et al., Contemporary Intellectual Property (OUP 2016) 976–978.
266 A non-negligent wrongdoer is not liable for damages (but may be subject to an injunction) for infringement of a patent or copyright or performers’ property right or primary infringement of a design right: see the Patents Act 1977, s 62(1); the Copyright, Designs and Patents Act 1988, ss 97(1), 191J(1), 233(1). In contrast, damages (and an injunction) may be awarded for the common law torts of infringement of a trade mark and passing off on a strict liability basis: Gillette UK Ltd v Edenwest Ltd  RPC 279. The standard of liability applied in respect of an account of profits for the intellectual property torts is even more inconsistent as between the different torts: see below, pp 342–343. Under regulation 17 of the Copyright and Related Rights Regulations 1996 (SI 1996/2967) and regulation 23 of the Copyright and Rights in Databases Regulations 1997 (SI 1997/3032), a person with, respectively, a publication right and a database right has the same rights and remedies as a copyright owner under, eg, ss 96–98 of the Copyright, Designs and Patents Act 1998.
268 United Horse-Shoe and Nail Co Ltd v Stewart & Co (1888) 13 App Cas 401 (patent infringement); Draper v Trist  3 All ER 513 (passing-off); Aktiebolaget Manus v Fullwood & Bland Ltd (1954) 71 RPC 243, at 250 (infringement of trademark); Catnic Components Ltd v Hill & Smith Ltd  FSR 512 (patent infringement); Gerber Garment Technology Inc v Lectra Systems Ltd  RPC 443 (patent infringement). In Sutherland Publishing Co Ltd v Caxton Publishing Co Ltd  Ch 323, at 336, Lord Wright said that for copyright infringement, ‘The measure of damages is the depreciation caused by the infringement to the value of the copyright, as a chose in action.’ Taking this approach the lost sale profits represent the depreciation in value.
272  1 WLR 819. Meters Ltd v Metropolitan Gas Meters Ltd (1911) 28 RPC 157, at 164–165 (patent infringement); Scovin-Bradford v Valpoint Properties Ltd  Ch 1007 (infringement of copyright); Catnic Components Ltd v Hill & Smith Ltd  FSR 512 (patent infringement); Irvine v Talksport Ltd  EWCA Civ 423,  2 All ER (Comm) 141 (passing-off).
277 Below, pp 324–326.
278  UKSC 20,  2 WLR 1353. Below, ch 18.
280 ibid, at 569. This case was distinguished in Admiral Management Services Ltd v Para-Protect Ltd [2002 EWHC 233 (Ch),  1 WLR 2722, where no extra expenses had been incurred by the claimant in investigating the torts; rather the employees carrying out the investigation work had simply been paid the salaries that the claimant would have paid them in any event.
281  2 Ch 603. See also Admiral Management Services Ltd v Para-Protect Ltd  EWHC 233 (Ch),  1 WLR 2722: loss of revenue recoverable in principle but no evidence of this provided. Stanley Burnton J also indicated (and see further, in support of this, Pearson v Sanders Witherspoon  PNLR 110, a solicitor’s negligence case, and Standard Chartered Bank v Pakistan National Shipping Corpn  EWCA Civ 55,  1 All ER (Comm) 822, at –, a deceit case) that ‘damages for management time’, caused by the tort, accepted in principle by Forbes J in Tate & Lyle Food and Distribution Ltd v Greater London Council  1 WLR 149, were recoverable only if there was a loss of revenue (or, presumably, extra expenditure).
283 Important cases denying a duty of care in respect of negligent acts or omissions causing pure economic loss include Candlewood Navigation Corpn Ltd v Mitsui OSK Lines Ltd  AC 1; Muirhead v Industrial Tank Specialities Ltd  QB 507; Leigh and Sillavan Ltd v Aliakmon Shipping Co Ltd  AC 785; Murphy v Brentwood District Council  1 AC 398; Customs and Excise Commissioners v Barclays Bank plc  UKHL 28,  1 AC 181.
287 An example of damages compensating for expenses caused in this context is provided by the Australian case of Caltex Oil (Australia) Pty Ltd v Dredge ‘Willemstad’ (1976) 136 CLR 529: the claimants were awarded damages compensating for the costs of transporting oil by other means when the defendants’ dredger negligently damaged an underwater pipeline used, but not owned, by the claimants.
291  2 AC 145. See above, p 7. See also Spring v Guardian Assurance Plc  2 AC 296 (duty of care owed to one’s former employee in writing a reference that was an essential requirement for the claimant’s employment by a new employer).
292 Above, pp 6–8. In so far as the basis of the tort liability is breach of promise, it is strongly arguable that the use of tort is a pragmatic, not a principled, development designed to evade deficiencies in contract: see above, p 9.
293  1 WLR 1297. See also, eg, Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2)  1 WLR 1627; Tiuta International Ltd v De Villiers Surveyors Ltd  UKSC 77,  1 WLR 4627.
295 In so far as the basis of the tort liability is breach of promise, it is strongly arguable that the use of tort is here a pragmatic, not a principled, development designed to evade an excessively restrictive privity doctrine in contract: see above, p 9.
296  2 AC 207. This decision approved Ross v Caunters  Ch 297. See also the claims of the indirect names in Henderson v Merrett Syndicates Ltd  2 AC 145; and Gorham v British Telecommunications plc  1 WLR 2129 (duty of care owed to dependants in their own right for defendant’s negligent failure to advise the deceased who had opted out of a better pension scheme than the one he had opted into).