Research Handbook on Remedies in Private Law 1786431262, 9781786431264

The purpose and doctrinal structure of private law remedies has undergone fundamental questioning over the last 25 years

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Research Handbook on Remedies in Private Law
 1786431262, 9781786431264

Table of contents :
Contents
Contributors
Foreword • Stewart Macaulay
Preface • Roger Halson and David Campbell
PART I GENERAL ISSUES
1. Is ‘remedies’ a subject? • Steve Hedley
2. The modern history of remedies for breach of contract • Stephen Waddams
3. The modern history of tort remedies in England and Wales • Paul Mitchell
4. Personal injury compensation and civil justice paradigms • Annette Morris
5. Remedies and reality in the law of contract • Catherine Mitchell
PART II THE PROTECTED INTEREST
6. The limitations on ‘reliance’ damages for breach of contract • David McLauchlan
7. Restitution • Peter Jaffey
8. Two conceptions of the ‘performance interest’ in contract damages • David Winterton
9. Equitable remedies for breach of trust • Duncan Sheehan
PART III SPECIFIC ISSUES
10. Termination of contract for fundamental breach • Qiao Liu
11. Literal enforcement of obligations • Andrew Tettenborn
12. The recovery of damages for non-pecuniary loss in contract and tort; a unified approach • Roger Halson
13. Remedies for common mistake and frustration • Catharine MacMillan
14. Market damages in sales of goods and their relationship to the general principles of remedies for breach of contract • David Campbell
15. The Consumer Rights Act 2015 and related reforms: an epic disappointment? • James Devenney
16. Injunctions through the lens of nuisance • Robert Palmer and Ben Pontin
17. Gain-based damages • Katy Barnett
PART IV INSIGHTS FROM OTHER JURISDICTIONS
18. Remedies for breach of contract in Scots law • Laura Macgregor
19. Australian perspectives on contract damages • Sirko Harder
20. Canadian perspectives on contract remedies • Jeff Berryman
21. New Zealand perspectives on contract remedies • Rick Bigwood
22. Remedies in international instruments • Ewan McKendrick, Qiao Liu and Xiang Ren
23. Those magnificent men in their unifying machines: exploring the wreckage of the unification initiative in European private law • Mel Kenny
PART V THEORETICAL PERSPECTIVES
24. Tort law and the tort system: from vindictiveness to vindication • Allan Beever
25. The structure of remedial law • Stephen A Smith
26. Contract remedies as default rules • Jonathan Morgan
27. A relational perspective on contract law’s default rules, with an emphasis on remedies • William Whitford
Index

Citation preview

RESEARCH HANDBOOK ON REMEDIES IN PRIVATE LAW

RESEARCH HANDBOOKS IN PRIVATE AND COMMERCIAL LAW The Research Handbooks in Private and Commercial Law series is a forum for Research Handbooks covering both the traditional private law topics, such as torts, contracts, equity and unjust enrichment, as well as more commercial topics such as the sale of goods, corporate restructuring, commercial contracts and taxation, among others. Reflecting the approach of the wider Elgar Research Handbooks programme they are unrivalled in their blend of critical, substantive analysis and synthesis of contemporary research. Each Research Handbook stands alone as an invaluable source of reference for all scholars interested in private and commercial law. Whether used as an information resource on key topics or as a platform for advanced study, volumes in this series will become definitive scholarly reference works in the field. Titles in the series include: Research Handbook on Maritime Law and Regulation Edited by Jason Chuah Research Handbook on International and Comparative Sale of Goods Law Edited by Djakhongir Saidov Research Handbook on Remedies in Private Law Edited by Roger Halson and David Campbell

Research Handbook on Remedies in Private Law Edited by

Roger Halson School of Law, University of Leeds, UK

David Campbell Lancaster University Law School, UK

RESEARCH HANDBOOKS IN PRIVATE AND COMMERCIAL LAW

Cheltenham, UK • Northampton, MA, USA

© The Editors and Contributors Severally 2019

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2019948959 This book is available electronically in the Law subject collection DOI 10.4337/9781786431271

02

ISBN 978 1 78643 126 4 (cased) ISBN 978 1 78643 127 1 (eBook)

Contents

Contributorsviii Forewordx Stewart Macaulay Prefacexii Roger Halson and David Campbell PART I

GENERAL ISSUES

1.

Is ‘remedies’ a subject? Steve Hedley

2.

The modern history of remedies for breach of contract Stephen Waddams

17

3.

The modern history of tort remedies in England and Wales Paul Mitchell

33

4.

Personal injury compensation and civil justice paradigms Annette Morris

47

5.

Remedies and reality in the law of contract Catherine Mitchell

68

PART II 6.

2

THE PROTECTED INTEREST

The limitations on ‘reliance’ damages for breach of contract David McLauchlan

86

7. Restitution Peter Jaffey

110

8.

Two conceptions of the ‘performance interest’ in contract damages David Winterton

132

9.

Equitable remedies for breach of trust Duncan Sheehan

149

PART III SPECIFIC ISSUES 10.

Termination of contract for fundamental breach Qiao Liu

166

11.

Literal enforcement of obligations Andrew Tettenborn

182 v

vi  Research handbook on remedies in private law 12.

The recovery of damages for non-pecuniary loss in contract and tort; a unified approach Roger Halson

13.

Remedies for common mistake and frustration Catharine MacMillan

14.

Market damages in sales of goods and their relationship to the general principles of remedies for breach of contract David Campbell

15.

The Consumer Rights Act 2015 and related reforms: an epic disappointment? James Devenney

257

16.

Injunctions through the lens of nuisance Robert Palmer and Ben Pontin

294

17.

Gain-based damages Katy Barnett

311

199 220

239

PART IV INSIGHTS FROM OTHER JURISDICTIONS 18.

Remedies for breach of contract in Scots law Laura Macgregor

336

19.

Australian perspectives on contract damages Sirko Harder

355

20.

Canadian perspectives on contract remedies Jeff Berryman

371

21.

New Zealand perspectives on contract remedies Rick Bigwood

390

22.

Remedies in international instruments Ewan McKendrick, Qiao Liu and Xiang Ren

409

23.

Those magnificent men in their unifying machines: exploring the wreckage of the unification initiative in European private law Mel Kenny

PART V

425

THEORETICAL PERSPECTIVES

24.

Tort law and the tort system: from vindictiveness to vindication Allan Beever

439

25.

The structure of remedial law Stephen A Smith

458

26.

Contract remedies as default rules Jonathan Morgan

476

Contents  vii 27.

A relational perspective on contract law’s default rules, with an emphasis on remedies William Whitford

494

Index517

Contributors

Katy Barnett is an associate professor at the University of Melbourne, Australia. Allan Beever is a professor of law and director of research at Auckland University of Technology, New Zealand. Jeff Berryman is an associate vice-president academic, distinguished university professor and professor of law at the University of Windsor, Canada. Rick Bigwood is a professor of law at the University of Queensland, Australia. David Campbell is a professor of law at the Lancaster University Law School, UK. James Devenney is a professor of transnational commercial law at the University of Reading, UK, and the McCann FitzGerald Chair of International Law and Business at University College Dublin, Ireland. Roger Halson is a professor of contract and commercial law at the University of Leeds, UK. Sirko Harder is a reader in law at the University of Sussex, UK. Steve Hedley is a professor of law at University College Cork, Ireland. Peter Jaffey is a professor of law at the University of Leicester, UK. Mel Kenny is a senior lecturer in law at the University of Strathclyde, UK. Qiao Liu is an associate professor at the University of Queensland, Australia. Stewart Macaulay is an emeritus professor of law at the University of Wisconsin, USA. Laura MacGregor is a professor of commercial contract law at the University of Edinburgh, UK. Catharine Macmillan is a professor of law at Kings College London, UK. Ewan McKendrick is a professor of English private law and a fellow of Lady Margaret Hall at the University of Oxford, UK. David McLauchlan is professor of law at the University of Wellington, New Zealand. Catherine Mitchell is a reader in private law at the University of Birmingham, UK. Paul Mitchell is a professor of law at University College London, UK. Jonathan Morgan is a senior lecturer at the University of Cambridge, UK. Annette Morris is a reader in law and director of postgraduate research at Cardiff University, UK. Robert Palmer is a lecturer in law at the Open University, UK. Ben Pontin is a professor in law at Cardiff University, UK. Xiang Ren is a PhD student at the Xi’an Jiaotong University, China. viii

Contributors  ix Duncan Sheehan is a professor of business law at the University of Leeds, UK. Stephen A Smith is a James McGill Professor at McGill University, Canada. Andrew Tettenborn is a professor of commercial law at Swansea University, UK. Stephen Waddams is a professor and Goodman/Schipper Chair at the University of Toronto, Canada. William Whitford is an emeritus professor of law at the University of Wisconsin, USA. David Winterton is a professor of law at the University of New South Wales, Australia.

Foreword

Stewart Macaulay Miles Davis’ Kind of Blue is one of the great jazz recordings. The first selection on the album is called ‘So What’. It poses the basic question dealt with in a Research Handbook on Remedies in Private Law. It is a major triumph to establish that a defendant’s negligent conduct was the proximate cause of the plaintiff’s injury. It is not easy to show that there was a binding contract that the defendant’s attempted performance materially breached. Yet as Davis’ title reminds us, once the. plaintiff has done all this work, So What? What can or will the legal system do to respond to the plaintiff’s injury? This first sends us to the remedial rules. There is a great deal to learn here. These remedial rules can significantly affect the actual consequences of the substantive law. If we neglect them, we may assume a state of the law that doesn’t exist. However, if we really want to know So What, we have to look at all that is involved beyond the rules before the injured plaintiff receives any response as a result of her or his bringing a law suit. It is too easy to forget that law is not free. An injured plaintiff has to decide to bring a law suit. She must consider what this will cost as compared to the amount of the judgment she might gain. Some of the costs are directly financial. Lawyers and expert witnesses cost money. Other costs involve such things as injury to reputation or the risk of losing a beneficial long-term relationship. Those who bring lawsuits are not always applauded by friends, family, business associates and others who count. In at least some long-term continuing relationships, there may be a norm that buyers and sellers should help the other party who faces major problems in performing a contract. We can ask whether a family member or a neighbour should sue if a loss is not covered by insurance. Making the choice even harder, in all but a few situations, a potential plaintiff must make a judgment about the likelihood that she will win and how much. Many of the rules in both torts and contracts call for qualitative normative judgments. While application of these rules may produce fairly certain results in extreme situations, often attempts to predict how they will be applied to facts that are less than certain only will yield imprecise judgments or wild guesses. Ideally, the plaintiff will be helped by a lawyer devoted to her interests. Those who have studied lawyer-client relationships remind us that at least some times, the lawyer’s and the client’s interests are not entirely the same. There is a growing literature in the United States that often is labelled The Vanishing Trial. Despite a growing population, the number of trials has declined. It is not entirely clear why this is so. To some extent, the world may be a nicer place and we may have fewer injuries that could spawn litigation. On the other hand, the costs of litigation and the difficulties in predicting what courts will do, might provoke more settlements. Some American judges are proud of their ability to persuade parties to settle and avoid time-consuming and costly trials. Of course, settlements may be one sided and reflect differences in wealth or they may arrive at the best possible result in a bad situation. In other instances, people may have discovered that they cannot afford the investment demanded to assert rights when the outcome is so uncertain. They find that they cannot assert what they believe are their rights. Some will discover that the defendant is unlikely to be able to pay a judgment. One reason why people default on performing contracts, after all, is that they ran into financial trouble. A person who commits a tort may have no accident insurance because he cannot afford it. All filing a law suit may accomplish is to provoke bankruptcy or a similar proceeding. Some situations that might x

Foreword  xi once have prompted individual litigation are now institutionalised. Insurance adjusters, for example, confront an organised plaintiffs’ bar. What we know suggests that this works well in ordinary cases where the losses are not huge. When the damages soar, the results of organised bureaucracies often lead to criticism. Finally, Galanter has pointed out the advantages held by repeat players. Large organisations draft standard form contracts designed to ward off litigation and to gain advantages if any takes place. A seller’s document, for example, will disclaim consequential damages; a buyer’s document will give it the right to cancel the deal ‘for convenience’. Some cases that formerly would have gone to court might have been removed to arbitration. At the minimum, this usually helps control any negative publicity that litigation before the public courts might create. The editors of this handbook, and the authors of the chapters included, are aware of all this and deal with such matters in their own writing. They know all too well that if we want to respond to Miles Davis’ question So What, we need some sense of the law in action. The questions dealt with in this book are not easy to answer, but this doesn’t undercut their vital importance. I welcome this handbook.

Preface

Roger Halson and David Campbell We have been very pleased to accept Edward Elgar’s invitation to edit a Research Handbook on Remedies in Private Law because it seemed to us that such a book would be useful for two particular reasons. First, doctrinal innovation has been a marked feature of a number of areas of the private law over the last quarter century or more, and much of this has focused on remedies. Whilst we have not been able to obtain discussions of every aspect of these interesting innovations that we would have wished, we trust the Handbook’s coverage is sufficiently comprehensive to convey a general impression of the extent of that innovation. Perhaps the most striking case, certainly to the current editors whose main interest is in the law of contract, has been the partial displacement of formerly axiomatic assumptions about the compensatory purpose of damages and the growth of remedies, originally derived from restitution, seeking to effect disgorgement of gains. This growth has involved a profound questioning of the very purpose of damages and therefore of contract as such. Such a development obviously gives rise to great opportunities for, indeed to the necessity of, academic comment which seeks to explain and evaluate that development, to which this Handbook seeks to make a contribution. But at this point the second reason such a Handbook might be welcome comes to mind. Except towards the extremes of political belief and political philosophical reflection, it is accepted that mutual security within industrial society rests on the ultimately coercive power of the state. This, fundamentally, is Hobbes’ social contract argument, but the particular claim to legitimacy of liberal democracy runs strongly counter to the authoritarianism of Hobbes’ Leviathan. That legitimacy rests on the degree to which the exercise of state coercion is subject to the rule of law and, even more than this, the degree to which coercion is not exercised but is latent. Liberal democracy has been a political system of unprecedented and incomparable freedom fundamentally because of the extent to which the state has not directly ordered the lives of citizens, though the state has an indispensable role in making it possible that those lives have an order at all. One very important aspect of this is the way that citizens lives are governed, not by public law, but by private law. The private law undoubtedly necessarily rests on a public constitutional foundation ultimately backed by criminal sanction. But it does not stipulate the courses of conduct citizens should pursue. It rather provides a framework in which they themselves choose those courses. Walter Lippmann has attractively expressed the claim we are trying to identify in this way: ‘in a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs.’ In our view, it is currently unquestionable that this claim to legitimacy is under severe strain in liberal democracies in which the state is playing an ever larger role in the direction of citizens’ lives, and as an important part of this shows ever diminishing respect for the boundaries of the private sphere. The main changes, of course, have been the extent that the liberal values of the private law have been displaced by government, legislation and adjudication that seeks to promote social justice, and is readily prepared to subsume private values to the public good. But the most interesting aspect of this shift in the relationship between citizen and state for the readers of this Handbook is the way that changes to core doctrines of the private law of remedies are increasingly being made in order to mandate outcomes rather than provide the framework for choice. The preoccupation of appellate judiciaries across the common law xii

Preface  xiii world with considerations of social justice poses questions for the integrity of the private law which are just as difficult as those posed by welfarist intervention by means of legislation. It is hoped that this Handbook will assist both the recognition of what is happening and the evaluation of this important shift in the nature of liberal democracy. This Handbook contains five parts, the first two of which are of a general nature. Part I attempts to provide a thematic introduction to the subject, a history of contract and tort and a general view of the current empirical operation of these laws. The introduction (Chapter 1: Steve Hedley) is followed by chapters on the history of contract remedies (Chapter 2: Stephen Waddams), tort remedies (Chapter 3: Paul Mitchell), the operation of accident compensation systems (Chapter 4: Annette Morris) and the function of contract in the commercial world (Chapter 5: Catherine Mitchell). Part II examines the interests protected by private law remedies, with chapters on expectation and reliance (Chapter 6: David McLauchlan), on restitution (Chapter 7: Peter Jaffey), on the performance interest (Chapter 8: David Winterton) and on breach of trust (Chapter 9: Duncan Sheehan). Parts III and IV are more narrowly focused. Part III has chapters on the specific issues of termination (Chapter 10: Qiao Liu), literal enforcement (Chapter 11: Andrew Tettenborn), non-pecuniary loss (Chapter 12: Roger Halson), common mistake and frustration (Chapter 13: Catharine Macmillan), market damages (Chapter 14: David Campbell), consumer law with a focus on the Consumer Rights Act 2015 (Chapter 15: James Devenney), injunctions (Chapter 16: Robert Palmer and Ben Pontin) and gain-based damages (Chapter 17: Katy Barnett). Part IV looks at the laws of jurisdictions other than England and Wales, with chapters on Scotland (Chapter 18: Laura MacGregor), Australia (Chapter 19: Sirko Harder), Canada (Chapter 20: Jeff Berryman), New Zealand (Chapter 21: Rick Bigwood), certain international laws (Chapter 22: Ewan McKendrick, Qiao Liu and Xiang Ren) and on European contract harmonisation (Chapter 23: Mel Kenny). Part V returns to a general view, containing four chapters on theoretical perspectives on the subject from which the preceding material can be evaluated. There are chapters on the general theory of tort law (Chapter 24: Allan Beever), the basic structure of remedial law (Chapter 25: Stephen Smith), on default rules (Chapter 26: Jonathan Morgan) and on relational theory (Chapter 27: William Whitford). The editors would like to conclude by thanking the publisher for the invitation to compile this Handbook, the contributors for their work, and Professor Stewart Macaulay for his foreword. Roger Halson and David Campbell November 2018

PART I GENERAL ISSUES

1. Is ‘remedies’ a subject? Steve Hedley

Why study private law remedies? And if we do, what precisely are we studying? Do these remedies constitute a subject in their own right, or merely an extended footnote to substantive legal principles?

1 ‘REMEDIES’ What we make of ‘remedies’ has always depended on what is happening elsewhere in private law scholarship. On the assumption that there are solid and serious studies of Contract, Tort and Property, then traditionally ‘Remedies’ sought to fill in the gaps left in the study of private law. So for many years, the staples of Remedies courses were damages, restitution and equity. But in time, both the equity lawyers and the restitution lawyers began to argue that their topics merited distinct treatment as disciplines in their own right, though these claims have not been universally accepted. And an increasingly diverse scholarship – whether using doctrinal analysis or other methodologies – has meant that there are many other aspects of remedies clamouring for attention. These and other factors mean that today there is actually considerable diversity in what ‘remedies’ is taken to comprise.1 Indeed not everyone accepts that ‘remedies’ has its own unique subject-matter. Many prefer to tie remedies to the substantive principles of liability that trigger them. So remedies for torts are, on this view, best dealt with alongside principles of the law of torts, and so forth. From this ‘integrationist’ standpoint, it is not obvious that there is a distinct legal topic of ‘remedies’ at all. On this view, while there would be considerable point to a deep and rigorous study of procedure (filling a major gap in common law academia), ‘remedies’ simply marks the intersection of procedure and doctrine, and we should not necessarily expect any kind of coherent doctrine or theme to emerge there. Others disagree, holding that this ‘integrationist’ approach gives an extremely misleading picture of how the legal system actually operates. The law of remedies involves many matters which qualify or cut across the concerns of substantive law. Substantive legal studies tend to look at the issues from the perspective of a judge ruling between competing arguments; but the motor of civil litigation is not the judge but the litigating parties, and understanding what those litigants want out of the process is arguably at least as important as what principles the judge will ultimately apply (if, indeed, parties ultimately leave it up to the judge, rather than settling). Focusing on remedies reveals issues and problems that are invisible if we take the substantive law as our starting-point and main focus.

For a partial intellectual history of the subject see D Rendleman, ‘Remedies: A Guide for the Perplexed’ (2013) 57 St Louis ULJ 567. See also D Laycock, ‘How Remedies became a Field: A History’ (2008) 27 Review of Litigation 161. 1

2

Is ‘remedies’ a subject?  3 To date, most remedies scholarship has taken the form of doctrinal analysis of one sort or another. However, other approaches, including empirical work on the frequency and the effect of remedies, are becoming more common. Some particular issues in remedies have long been studied from an economic perspective – particularly the issue of efficient breach of contract.2 More might have been expected on this front, however, especially given that remedies and law-and-economics share a focus on ‘the bottom line’ to a degree that mere doctrinalism does not.3 A more systematic engagement between the disciplines may now be emerging.4 Ultimately, what we make of ‘remedies’ as a discrete subject, and to what extent we use ‘integrationist’ arguments to absorb remedies into our understanding of the substantive law, is a matter of perspective. Each of the various angles from which we can view ‘remedies’ tells us something about the legal system; this chapter is one long meditation on the differences between these different viewpoints. Section 2 examines what a ‘remedy’ is taken to be, and the various ways in which remedies can be classified. Section 3 considers the relation between remedies and the substantive law. And Section 4 examines civil legal process from the point of view of remedies, and the different questions that emerge when we think in terms of remedies rather than merely of substantive law.

2

WHAT ARE REMEDIES?

There are many shades of meaning that may be involved when considering ‘remedies’, much as there are when considering ‘rights’, with which remedies are often contrasted. There have been a number of attempts to define ‘remedies’.5 While at their worst these exercises simply illustrate (sometimes at unnecessary length) that the word ‘remedies’ is used in a variety of ways, for the most part they are of value in indicating the reach of the subject, and the difficulty of reducing it to any one simple formula. a

Are Remedies Simply Court Orders?

Usually when we talk of remedies the focus is on the courts. If a contract is broken by one party and the court awards damages to the other party, we would say that the claimant has been awarded a remedy in damages. Some confine ‘remedies’ to this situation: a ‘remedy’ is a court order, a judicial remedy.6 Others take a broader view: a remedy is any means by which a claimant may secure redress. So an action for damages is indeed a ‘remedy’, but so also is a right to terminate a contract for breach or to have it declared frustrated, or to exercise any

2 On this concept see G Klass, ‘Efficient Breach’ in G Klass, G Letsas and P Saprai (eds), Philosophical Foundations of Contract Law (Oxford University Press 2014) ch 18. For a more general survey see A Porat, ‘Economics of Remedies’ in F Parisi (ed.), The Oxford Handbook of Law and Economics, Volume 2: Private and Commercial Law (Oxford University Press 2017) ch 13. 3 S Bray, ‘Remedies, Meet Economics; Economics, Meet Remedies’ (2018) 38 OJLS 71, 72. 4 See Bray (n3). 5 For a useful summary of a range of views see R Zakrzewski, Remedies Reclassified (Oxford University Press 2005) ch 3. 6 E.g. Zakrzewski (n5) 44–8. Zakrzewski excludes orders which merely assist in preparation for a trial (such as interrogatories), or in preparation for a future order (such as contempt orders) (ibid, 45).

4  Research handbook on remedies in private law sort of self-help.7 On this wide view, the availability of a court order is often an important circumstance, but the focus is on what the claimant can do in response to the other party’s objectionable behaviour, whether that response involves a court or not. Court orders are on this view an important remedy, but only part of the picture. There is no very obvious way of resolving this kind of disagreement. Birks even argued that the word ‘remedy’ should be ‘eliminated from our analytical vocabulary’,8 its ambiguity being so extreme: it has a core sense of ‘a cure for something nasty’,9 but beyond that our only hope for clarity would be to get agreement on some artificially precise technical sense of the word.10 And at one level, disputes over how we should use the word ‘remedy’ are often illuminating, particularly as to the range of different circumstances over which the law has something to say, or should have something to say. Are they at root, however, merely semantic disputes with no right answer? Should we not simply accept that ‘remedy’ is used in more than one way, and move on? Perhaps we should. But we should not neglect the issue buried within this semantic dispute, of the perspective from which we are viewing the matter. If we are looking from the judges’ point of view, it makes sense to confine ‘remedy’ to some order the court is asked to grant, and to seek some sort of rationality in the panoply of possible orders and the sort of grounds relevant to granting them. If we are looking from the point of view of the disputing parties, a different and more varied picture emerges, in which we ask what the owner of a right can lawfully do if that right is infringed. From this very different perspective, it makes sense to think of self-help and court action as alternative remedies; or even to think of court action as one species of self-help (because generally speaking the court will only act if one party asks it to). And, as Porat remarks, if we are interested in the real-world impact of the legal system then ‘[a]nalyzing the substantive law without its remedial part is almost meaningless … Indeed, it is hard to imagine the creation of the substantive law, either by legislatures or courts, without careful consideration of the remedial consequences of its breach.’11 This difference of approach becomes even more pronounced when we note that most victims of breaches of rights do not obtain any kind of judicial remedy, or even formally ask for one. Even if they decide to make an issue of the matter at all, they may find other and better means of redress than going to a court of law; even if legal process is commenced, it will usually turn out to be more convenient for all concerned if there is a mutually agreed settlement before a court is ever asked to make an order.12 It has been true for most of human history that legal proceedings are slow and expensive; and in modern legal systems it is actual official policy that parties should be encouraged to settle unless a full trial serves some demonstrable

E.g. D Harris, D Campbell and R Halson, Remedies in Contract and Tort (2nd edn, Cambridge University Press 2005) chs 3 and 21. 8 P Birks, ‘Rights, Wrongs and Remedies’ (2000) 20 OJLS 1, 3. 9 Ibid, 9. 10 Birks’s detailed suggestions are discussed in S Smith, ‘Rights, Remedies, and Causes of Action’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law (Hart Publishing 2008) ch 20 and M Tilbury, ‘Remedy as Right’, ibid, ch 21. 11 Ariel Porat, ‘Economics of Remedies’ in F Parisi (ed.), The Oxford Handbook of Law and Economics, Volume 2: Private and Commercial Law (Oxford University Press 2017) 308. 12 E.g. H Genn, Paths to Justice: What People Do and Think about Going to Law (Hart Publishing 1999). 7

Is ‘remedies’ a subject?  5 purpose.13 The image of the judge making a formal ruling on the merits of the dispute is a powerful cultural icon, but it is not in fact how most disputes end – nor could it be. So self-help is a vital part of the remedies picture. Yet there must be limits. The notion that a claimant should, in principle, have to come to court for redress, rather than forcibly taking back what they say is theirs, is an important principle of civil peace, with a very long history.14 b

How Do We Classify Judicial Remedies?

‘Theoretically, almost every legal question could be posed in terms of remedies, but this would give the word so wide a meaning as to be useless.’15 Clearly some deeper classification is needed. Classification tends to be a rather dry exercise. It does, however, serve a number of purposes. Significantly, it reminds us of the wide range of different remedies that there are, and the corresponding difficulty of making sensible generalisations about them. And most classifications are made with a purpose: the classifier is not usually arguing merely that their favoured classification can logically be made, but that making it tells us something significant about the remedies so classified. Firstly, some classifications are historical, or (what in practice is rather similar) relate to the source of the law which authorises the remedy. So equitable remedies are sometimes thought of as different from common law remedies, and both as distinct from remedies granted by statute. Does the history matter? Some argue not: legal historians need to know that law and equity were, in earlier centuries, dispensed in different courts, and that statutory remedies were introduced to fill gaps which law and equity had left; but modern lawyers do not need to know this, and should be trying to develop a single integrated legal way of thinking rather than perpetuating outdated distinctions.16 Others respond that, outdated or not, there are still important differences in this regard, and need attention accordingly. Equitable remedies are markedly different from common law remedies, and this is a difference in the here-and-now, not merely the past.17 And certainly the traditional role of equity – to smooth the rougher edges

13 E.g. Civil Procedure Rules (for courts of England and Wales), where the ‘overriding objective of enabling the court to deal with cases justly and at proportionate cost’ is stated to include ‘encouraging the parties to co-operate with each other in the conduct of the proceedings’ (1.4.2(a)), ‘deciding promptly which issues need full investigation and trial’ (1.4.2(c)) and ‘helping the parties to settle the whole or part of the case’ (1.4.2(f)). 14 Note especially the Statute of Marlborough 1267 (52 Henry 3), s 1, by which an aggrieved claimant must seek a remedy in a court of law, rather than taking ‘Revenge or Distress of his own Authority’. At the time of writing, this is the oldest unrepealed statute in the UK; the Law Commissions have recently decided against repeal, arguing that despite its age the section ‘appear[s] to have continuing value’ (Law Commission and Scottish Law Commission, Statute Law Repeals: Twentieth Report (Cm 9059, 2015) para 6.37). 15 S Waddams, ‘Remedies as a Legal Subject’ (1983) 3 OJLS 113, 113. 16 E.g. A Burrows, ‘We Do This at Common Law But That in Equity’ (2002) 22 OJLS 1; S Smith, ‘Form and Substance in Equitable Remedies’ in A Robertson and M Tilbury (eds), Divergences in Private Law (Hart Publishing 2016) ch 16. 17 E.g. K Barnett and S Harder, Remedies in Australian Private Law (Cambridge University Press 2014) 12; P Ridge, ‘Modern Equity: Revolution or Renewal from Within?’ in S Worthington, A Robertson and G Virgo (eds), Revolution and Evolution in Private Law (Hart Publishing 2018) ch 12.

6  Research handbook on remedies in private law of the law, and to prevent law’s rules from being abused by those who know them better than their victims do – still seems a necessary one.18 Secondly, some classify remedies according to the sort of behaviour the court requires of the defendant: to pay money (whether a ‘liquidated’ sum specified in the claim, or an ‘unliquidated’ sum assessed by the court), or to do some other act, or to refrain from acting in a certain way; or again, some orders have implications for the defendant’s rights without directly requiring anything, as when the court declares what the parties’ rights already are, or will be for the future (as where a court pronounces that the parties are now divorced from one another). The most obvious point this classification brings out is the extent to which a court, asked to make an order, will prioritise administrative convenience over other considerations, and accordingly strongly prefer simple declarations or orders to pay money over more complicated remedies, compliance with which may be hard to monitor. A third way to classify remedies is to ask whether the remedy attempts merely to restore to a claimant what was taken from them (‘replicative’ remedies), or whether it tries to give the claimant something new (‘transformative’ remedies).19 In itself this is not a very useful distinction. Genuinely ‘replicative’ remedies certainly exist – many injunctions can be so classified – but they are only a small part of the picture. Most remedies turn out to be in an intermediate (‘reflective’) category: the court cannot give claimants precisely what they have lost, but can give them something which somehow reflects or represents it, such as a sum of money calculated to be somehow equivalent. To many, therefore, this does not seem a very useful classification. However, it can be valuable, as it forces us to ask precisely what the court is doing and why. If my negligence permanently loses you the use of your leg, then a truly ‘replicative’ remedy is out of the question; but some ‘reflective’ remedies (such as a sum based on the value of what you have lost) are more like replication than others (such as punitive awards to censure my behaviour). Or again, compensation for damaging property may be ‘reflective’ in very different ways, either by estimating its reduced value or by calculating the cost of repair.20 Different views are held on whether (say) damages for injured feelings or bruised dignity can really be said to be ‘reflective’ or must be justified on some other ground, and if so, what. Fourthly, some classify remedies according to function, or (what is similar in practice) according to the interest the remedy protects. The classic example is Fuller and Perdue’s classification of damages in contract as representing what the claimant would have received had the contract been performed (‘expectation interest’), or resources the claimant wasted on the false assumption that performance would take place (‘reliance interest’), or the gain the defendant made by failing to perform (‘restitution interest’).21 This ‘functional’ approach is now an accepted part of remedies discourse, and a standard question to ask on any damages award is what interest or measure it embodies. However, the precise function of remedies is

H Smith, ‘Fusing the Equitable Function in Private Law’ in K Barker, K Fairweather and R Grantham (eds), Private Law in the 21st century (Hart Publishing 2017) ch 9. 19 See especially Zakrzewski (n5) ch 13. 20 See S Smith, ‘Substitutionary Damages’ in C Rickett (ed.), Justifying Private Law Remedies (Hart Publishing 2008) ch 5. 21 L Fuller and W Perdue Jr, ‘The Reliance Interest in Contract Damages' (1936) 46 Yale Law Journal 52 and 373. 18

Is ‘remedies’ a subject?  7 often open to dispute.22 For example, a common view is that Fuller and Perdue’s ‘expectation interest’ fails to distinguish between cases where the court is merely seeking to compensate for a performance which is now rendered impossible, and cases where the court can and does achieve something pretty close to performance (‘the performance interest’).23 In relation to tort, various additional or more specialised interests have been proposed, including a ‘restoration interest’,24 an interest in vindication,25 and an interest in autonomy.26 Various different accounts can be given of the functions or interests remedies further; some reject this general approach to remedies precisely because of its inherent uncertainty. Finally, some writers attempt to define a special category of ‘expressive’ remedies, where the court appears not merely to be resolving the immediate dispute between the parties but to communicate some broader meaning or message.27 For example, granting a remedy may signal that the defendant has behaved wrongly; an award of exemplary or punitive damages may do this with particular emphasis.28 Yet it is probably not right to delineate a distinct category of ‘expressive’ remedies; all remedies send some sort of message. But the expressive dimension of remedies often needs distinct consideration, not least because in some instances it may be inappropriate. Not everyone accepts that a court ruling should as a rule be about sending messages to the wider community; some do not think it ever should be, unless that message is that the court will do justice to the immediate parties. Issues over the availability of ‘expressive’ damages therefore raise fundamental questions over what litigation is for.29

For criticism see R Craswell, ‘Against Fuller and Perdue’ (2000) 67 University of Chicago Law Review 99; M Chetwin, ‘Fuller and Perdue’s limitations’ in J Berryman and R Bigwood, The Law of Remedies – New Directions in the Common Law (Irwin Law 2010) ch 3; S Smith, ‘“The Reliance Interest in Contract Damages” and the Morality of Contract Law’ (2001) 1 Issues in Legal Scholarship 1 https:​/​/​ ssrn​.com/​abstract​=​2695243. 23 See C Webb, ‘Performance Damages’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 9; D Winterton, Money Awards in Contract Law (Hart Publishing 2015). 24 E.g. O Ben-Shahar and A Porat, ‘The Restoration Remedy in Private Law: A Novel Approach to Compensation for Emotional Harm’ (24 October 2017) https:​/​/​ssrn​.com/​abstract​=​3058186. 25 J Varuhas, ‘The Concept of “Vindication” in the Law of Torts: Rights, Interests and Damages’ (2014) 34 OJLS 253; for a contrasting view see K Barker, ‘Private and Public: The Mixed Concept of Vindication in Torts and Private Law’ in S Pitel, J Neyers and E Chamberlain (eds), Tort Law: Challenging Orthodoxy (Hart Publishing 2013) ch 3. 26 T Keren-Paz, ‘Compensating Injury to Autonomy: A Conceptual and Normative Analysis’ in K Barker, K Fairweather and R Grantham (eds), Private Law in the 21st Century (Hart Publishing 2017) ch 20. 27 For discussion see A Gold, ‘Expressive Remedies in Private Law’ (26 November 2013) https:​ /​/s​srn​.com/​abstract​=​2360219. Note also the (related, but distinct) argument that tort as a whole can be regarded as an expressive institution: S Hershovitz, ‘Treating Wrongs as Wrongs: An Expressive Argument for Tort Law’ (2018) 10 Journal of Tort Law (2) https:​/​/​ssrn​.com/​abstract​=3​ 054163. 28 On which, see generally J Goudkamp and E Katsampouka, ‘An Empirical Study of Punitive Damages’ (2018) 38 OJLS 90. 29 For some of the issues see J Edelman, ‘In Defence of Exemplary Damages’ in C Rickett (ed.), Justifying Private Law Remedies (Hart Publishing 2008) ch 10; A Beever, ‘Justice and Punishment in Tort: A Comparative Theoretical Analysis’, ibid, ch 11; D Rendleman, ‘Common Law Punitive Damages: Something for Everyone?’ (2010) 7 University of St Thomas Law Review 1; J Goudkamp, ‘Exemplary Damages’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 14. 22

8  Research handbook on remedies in private law No classification of remedies is perfect; on the contrary, such exercises often highlight the great variety to be found in relation to remedies, and the difficulty of making valid generalisations about them. c

Flexibility in Judicial Remedies

That the law of remedies shows considerable diversity is not in doubt; and while broad principles can often be stated, their application is often far from obvious. Historical explanations can be given for this: such as the persistence of juries through most of the common law’s history, as well as a vigorous equity tradition that stressed the need for a relaxation of the rigidities of pure common law. But flexibility is not the same thing as unpredictability, and it would be inaccurate to suggest that litigants approach the remedies stage of their dispute with no idea of what a court might do. In the case of money awards, it is in most cases pretty clear at least what the court is trying to do (functional/interest analysis is particularly useful here) and the uncertainty, while real, has at least a predictable focus. Where the complaint is that the claimant has been deprived of money or something otherwise of commercial value, argument will focus on how to quantify the precise value lost. Where what was lost is clearly very hard to reduce to money (such as a complaint of injury to feeling or lost dignity) there is frequently a dispute over whether the law will recognise this injury at all, and if so, what precise sum amounts to appropriate recognition. Issues of the defendant’s responsibility, which are typical of the liability issue, frequently continue into remedy issues as well: which losses can be said to have been caused by the defendant; which are too remote from the defendant’s conduct and so not fairly blamed on him/her; whether the claimant should share the blame. Considerations of responsibility often prompt unusual damages measures: where the defendant has behaved outrageously but nonetheless caused minimal loss, some sort of punitive award may be considered. Punitive awards are often considered to be random, unpredictable and often excessive, though a counter-view is that this merely reflects lack of serious attention to them, and that properly understood they are less objectionable. In some situations it matters how the claimant intends to use any money awarded.30 In limited contexts, statute introduces what are by any standard discretionary money awards – discretionary both in how the award is calculated, and whether they are available at all.31 For non-money awards, a similar or perhaps even greater degree of flexibility is exercised, though always against the background of the twin difficulties of defining precisely what should be done, and whether it has in fact been done. Such awards are rare, and often reflect quite specific objects of the law.32 Equitable remedies are traditionally stated to be ‘discretionary’, though that blanket term in fact covers a range of different situations, in some of which

30 E.g. S Rowan, ‘Cost of Cure Damages and the Relevance of the Injured Promisee’s Intention to Cure’ (2017) 76 CLJ 616. 31 E.g. Law Reform (Frustrated Contracts) Act 1943 s 1(3). 32 This is a neglected area of the scholarship. For some of the issues, see A Goymour, ‘Remedies for Vindicating Ownership Rights in Real Property’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 8.

Is ‘remedies’ a subject?  9 a court does indeed have great freedom of choice; in others the relevant criteria are so well established that they can for practical purposes be stated in the form of rules.33 As will be obvious enough, judicial decisions as to remedies frequently involve value-judgements of one sort or another: as to responsibility, as to the value of particular objects or activities, as to the seriousness of the injustice that would result if no remedy were awarded. Putting a value on a life lost or a reputation lost is never a simple matter, nor can it be value-free. This is where the argument about which interests remedies protect has an influence: which interest the court is seeking to protect defines what it tries to do. The values revealed in such cases do not always attract praise: the behaviour of the courts in relation to remedies may often be criticised, either for displaying inappropriate values,34 or as showing a level of judicial creativity best left to legislatures.35 A recent and controversial example is the so-called ‘super-injunction’ granted to protect certain privacy interests, which potentially could lead to criminal proceedings against any person seeking to reveal its existence.36 Recent decades have seen a number of attempts to standardise remedies, usually in the belief (not always borne out by events) that this will result in more predictable rulings. Jury discretion in damages has come under closer control, and in all UK jurisdictions the very existence of civil juries is becoming tenuous. And there have been various attempts to standardise damages awards, so that the amount a court may award may be specified in advance – or at least a narrow range within which the award will fall will be so specified. Calculations of earnings lost over a lifetime lost may now be aided by official tables,37 and the range of likely pain and suffering awards aided by a published list of ranges.38 Damages for breach of privacy may be evolving in the direction of standardisation, or at least greater consistency.39 There have even been suggestions that the law of remedies should be codified,40 though whether this will lead to greater certainty is debatable. Attempts to allow parties themselves to standardise

For further discussion, see Zakrzewski (n5) ch 6. E.g. G Grant, ‘Judging Gender in Tort Thresholds’ (2016) 25 Griffith Law Review 104; R Avraham and K Yuracko, ‘Valuing Black Lives: A Constitutional Challenge to the Use of Race-Based Tables in Calculating Tort Damages’ (19 April 2017) https:​/​/s​ srn​.com/​abstract​=​2955165. 35 D Campbell, ‘The Heil v Rankin Approach to Law-Making: Who Needs a Legislature?’ (2016) 45 Common Law World Review 340. 36 On which see e.g. Report of the Committee on Super-Injunctions: Super-Injunctions, Anonymised Injunctions and Open Justice (the Neuberger Report) (20 May 2011) https:​/​/​www​.judiciary​.uk/​wp​ -content/​uploads/​JCO/​Documents/​Reports/​super​-injunction​-report​-20052011​.pdf (accessed 27 April 2019). 37 See especially the ‘Ogden Tables’ (officially the ‘Actuarial Tables with explanatory notes for use in Personal Injury and Fatal Accident Cases’, judicial use of which is authorised by Civil Evidence Act 1995 s 10). 38 E.g. Judicial College, ‘Guidelines for the Assessment of General Damages in Personal Injury Cases’ (14th edn, Oxford University Press 2017). 39 See in particular Gulati v MGN [2015] EWHC 1482 (Ch) (appeal refused [2015] EWCA Civ 1291). See also B van der Sloot, ‘Where is the Harm in a Privacy Violation? Calculating the Damages Afforded in Privacy Cases by the European Court of Human Rights’ (2017) 8 JIPITEC 4 https:​/​/​www​ .jipitec​.eu/​issues/​jipitec​-8​-4​-2017/​4641, accessed 8 May 2019. 40 E.g. N Andrews, ‘Codification of Remedies for Breach of Commercial Contracts: A Blueprint’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 23. 33 34

10  Research handbook on remedies in private law damages by providing in advance for damages levels are usually seen as desirable, though there is still the traditional fear that this will lead to the imposition of illegitimate ‘penalties’.41

3

HOW DO REMEDIES RELATE TO THE SUBSTANTIVE LAW?

This is perhaps the most fraught of all the theoretical issues concerning remedies. Courts do not dispense remedies merely on a whim or because it seems just to do so: a court-ordered remedy will issue only when substantive law indicates that a remedy of some sort is available. (For example, damages in contract flow only where the contract has been broken, which is a matter of substantive law.) What implications does this have for the content of the remedy? For some (the integrationists) the substantive law dictates the remedy, or at least goes a long way towards defining it. For others the connection is looser: a number of factors can and should influence the court, and the reasoning which establishes the entitlement to a remedy may not feature very strongly when determining what that remedy should consist of. Flexibility and sensitivity in remedies may indeed be seen as the antidote to the rigidity often to be found in the substantive law. At root, as Samuel notes, ‘[i]t is really a question of where one starts’: with abstract rights, or with the remedy actually asked for.42 It is important not to focus unduly on the more extreme positions taken in this debate. All agree that there must be some connection between the remedy and the actual circumstances which led to a remedy being available. Equally, all agree that there are some matters of remedies that are not reducible to individual areas of substantive law but cut across them all.43 Nonetheless, there is a real difference of emphasis here. In its origins, common law was all about remedies, and the substantive law was barely noticeable: ‘So great is the ascendency of the Law of Actions in the infancy of Courts of Justice, that substantive law has at first the look of being gradually secreted in the interstices of procedure ….’44 The pendulum has now swung far the other way, but how far? For some, it is obvious that any remedies available should follow the substantive law, and the contrary would mean that the tail was wagging the dog. (It makes no sense to say that the remedy is for a wrong, if the remedy does not reflect the nature of the wrong.) For others, it is obvious that we should look first to the remedy, and view the substantive law in that light. (If no legal remedy is available, or the remedy is one that no claimant would ever want, it makes little sense to say that substantive law regards a defendant as a wrongdoer.) These different perspectives have long been summed up in the competing common law maxims ubi ius ibi remedium (‘where there’s a right, there’s a remedy’) and ubi remedium ibi ius (‘where there’s a remedy, there’s a right’).

On which see e.g. S Worthington, ‘Penalty Clauses’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 16. 42 G Samuel, A Short Introduction to Judging and to Legal Reasoning (Edward Elgar 2016) ch 3, the quoted sentence is at 77. 43 Indeed, it has even been suggested that remedies should be treated as one aspect of a ‘general part’ of obligations law, rather than dividing remedies up between the ‘special parts’ such as contract and tort: S Smith, ‘The Limits of Contract’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart Publishing 2009) ch 1. 44 H Maine, Dissertations on Early Law and Custom (Murray Albemarle 1883) 389. 41

Is ‘remedies’ a subject?  11 The most famous talking-point here is usually (though not always accurately) attributed to Oliver Wendell Holmes,45 using contract as an example. If a contract is broken, certain remedial consequences follow – usually an award of damages. Some read this as exemplifying the primacy of substantive law. People who make contracts should keep them, or the law will remedy the situation: the substantive law insists on performance, and remedies are the law’s tool for achieve this. Holmes, and many others, read it differently. In most such situations the only remedy is damages, often on a limited measure; and if the breach is not considered to have caused actionable loss, damages may be nominal only. From that perspective, it is too crude to say that the law ‘insists on performance’. In reality there is no duty to perform; rather, the law grants the contract-breaker an option either to perform or to pay damages. Clearly, there is a considerable gap between the idealism implicit in the morality of promising, and the mundane reality that the contract-breaker is merely made to pay a sum of money. It gives a profound importance to common law’s general emphasis on compensatory remedies, and its treatment of literal orders to perform as exceptional remedies. Views differ on whether this is a regrettable, if unavoidable, failure of the law to enforce its own morality, or on the contrary that it shows that the law in fact espouses different, and possibly less exalted, values entirely.46 The integrationist view, demanding consistency between substantive law and the remedies it triggers, is perhaps at its most convincing when the defendant can clearly be labelled as a wrongdoer, and the remedy is a response to that wrong. In that context, it clearly makes sense to insist that the remedy should reflect the wrong done, and in that sense many of the rules on remedies can be said to flow directly from the substantive law. Even that case, however, is not so simple, as there could be many possible responses that could be said to reflect the wrong, particularly as the court is usually confined to awarding a sum of money. How is a non-monetary loss to be reflected in a monetary award? Can the courts award a sum to reflect the claimant’s injured feelings, or must they confine themselves to provable money losses? Can they award a sum as a punishment, and if so how do they calculate it? And can the sum awarded reflect a gain the defendant made through their wrong? These and related questions are always cropping up, and cannot be answered merely by reiterating that the defendant is a wrongdoer; the court will have to choose how to respond to the wrong, out of the many possibilities. The integrationist view is still weaker where the defendant cannot fairly be described as a ‘wrongdoer’ in the first place. This is true in many cases of contract and tort (where the duty is often strict), and is also true in most instances of restitution. The classic example of a restitutionary remedy – the action for the return of a payment mistakenly made – does not depend on showing that the defendant was in any way at fault. In such cases, the supposed division between substantive law and remedies seems to break down, absent some drastic re-writing of what we take the substantive law to be (such as by postulating that there is a duty to refund the mistaken payment, which the defendant has broken47). Again, the so-called Wrotham Park

On what Holmes actually meant see J Perillo, ‘Misreading Oliver Wendell Holmes on Efficient Breach and Tortious Interference’ (2000) 68 Fordham Law Review 1085. 46 See e.g. M Chen-Wishart, ‘Specific Performance and Change of Mind’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 5. 47 For discussion see S Smith, ‘A Duty to Make Restitution?’ (2013) 26 Canadian Journal of Law and Jurisprudence 157; F Wilmot-Smith, ‘Should the Payee Pay?’ (2017) 37 OJLS 844. 45

12  Research handbook on remedies in private law remedy (where the claimant is awarded the amount s/he would have demanded if the defendant had asked permission to do the act complained of48) is hard to make sense of in terms of ‘wrongdoing’. And the discretionary language of equitable remedies, which considers many factors to determine which remedy is appropriate, is clearly taking into account matters beyond merely whether a wrong was done or how serious it was. So while there are some situations where the integrationist view makes sense – the substantive law defines the claimant’s rights, the remedy is designed to give that right teeth – there are others where it makes no sense at all. Considerations of this sort have led some to doubt the credentials of ‘restitution’/‘unjust enrichment’ as a substantive legal topic, as distinct from a matter of remedies. A principle that ‘the defendant must not be unjustly enriched at the claimant’s expense’ has a straightforward, untechnical appeal when referring to remedies: it makes sense as a reference to the ‘bottom line’ after substantive matters have been resolved. As a principle of substantive law, it makes less sense. The law has no dislike for enrichment as such (rather the reverse); and the suggested principle seems unnecessary if it is referring to acquisition of enrichment by unjust means, as those unjust means will already have been defined and addressed by other, better established legal principles. The success of ‘unjust enrichment’ as a matter of substantive law therefore turns on how successfully it can identify a class of claims where retention of an enrichment is unjust even though no identifiable injustice was involved in its acquisition: a category which has no very obvious support in morality or practical considerations, and which clearly has difficulties of definition. The main motivation for the integrationist approach seems to be to keep the law of remedies under some sort of control; to confine it, or at least to constrain its ability to develop novel solutions. From this perspective, the law’s bête noire would be complete judicial freedom in remedying breaches of the substantive law, subject to no intelligible constraint. This prospect – the prospect of ‘discretionary remedialism’ – is regarded by some with alarm. Birks defined discretionary remedialism as the notion that the judge: must behave like a doctor faced with a sick patient. The doctor exercises a clinical judgment and comes up with what he believes to be the best possible cure. Similarly, on this new view, judges must exercise a strong discretion to apply the remedy which they consider to be most appropriate in the circumstances. Here ‘strong’ denotes a discretion which must not be bedded down by precedent. It must be kept fresh from case to case, albeit guided by a list of criteria of appropriateness …49

‘Discretionary remedialism’ implies that judges should have a very wide menu of choices, and considerable freedom between them. Birks regarded this as objectionable on a number of grounds: that it was an unjustified break from the past, that it made litigation less predictable, and that it would undermine respect for the rule of law.

48 These awards are named for Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798. Their precise basis has long been controversial; see e.g. A Burrows, ‘Are “Damages on the Wrotham Park Basis” Compensatory, Restitutionary, or Neither?’ in D Saidov and R Cunnington (eds), Current Themes in the Law of Contract Damages (Hart Publishing 2008) 165 https:​/​/​ssrn​.com/​abstract​=​2280322. 49 P Birks, ‘Three Kinds of Objection to Discretionary Remedialism’ (2000) 29 Western Australia Law Review 1, 3.

Is ‘remedies’ a subject?  13 The suggestion that ‘discretionary remedialism’ is both a real phenomenon, and an undesirable one, has attracted a good deal of commentary.50 The most obvious response to it is that the issue is not a simple binary one: there is a wide spectrum of views on how discretionary the law of remedies should be, and labelling one part of that spectrum as ‘strong discretion’ is a much vaguer exercise than Birks seems to have assumed. And it is rather naïve to assume that making remedial rules more precise leads to more predictability in litigation; on the contrary, greater precision might increase the number of technical points on which advocates may take different views, and therefore have the reverse effect. But the debate is useful, as pointing the way to an important question: just how flexible are remedies, and what are the benefits and costs that flow from this flexibility? It has to be said, however, that much of the heat in the debate was generated by the view that certain trust remedies were highly discretionary and unpredictable; as that perception has faded,51 so too has the temperature of the arguments over ‘discretionary remedialism’.

4

REMEDIES AS PART OF LEGAL PROCESS

Models of the legal system which emphasise substantive law tend to paint a simple view of legal process. Viewed in this perspective, the parties set out their different views of the facts in the form of pleadings; the court determines the true facts, applies the law to them, and in the light of that determines the appropriate remedy. Obviously this is more than a little simplistic, and no-one suggests otherwise: litigants (and potential litigants) will often have been thinking from the first about what remedy may result from the legal process, and so the law of remedies is an influence at every stage of the legal process. Features which seem to require emphasis from a remedial standpoint include the following: ●● Much potential litigation is anticipated well before it actually happens. Contracting parties will be aware of the more likely sources of mutual dissatisfaction and the remedies that might be sought in consequence, and may anticipate these problems by taking security or a deposit, bargaining for express termination clauses, arranging for insurance, or otherwise. Some argue that the law does not make it easy enough for the parties to plan ahead in this way.52 Many potential tort defendants (employers, landowners, vehicle owners) can anticipate the more likely actions against them well in advance, and take steps to reduce their risk or to protect themselves with insurance; indeed, very often this is actually required by law. Automatic means may be used to anticipate and forestall certain types of legal wrongdoing.53 Potential defendants may seek to channel any dispute towards an arbitrator, who will typically have more limited remedial powers than would a judge. In all these ways, the

E.g. D Jensen, ‘The Rights and Wrongs of Discretionary Remedialism’ [2003] Singapore Journal of Legal Studies 178; S Evans, ‘Defending Discretionary Remedialism’ (2001) 23 Sydney Law Review 463. 51 See Y Liew, ‘Reanalysing Institutional and Remedial Constructive Trusts’ (2016) 75 CLJ 528; C Webb, ‘The Myth of the Remedial Constructive Trust’ (2016) 69 CLP 353. 52 E.g. N Andrews, ‘Breach of Contract: A Plea for Clarity and Discipline’ (2018) 134 LQR 117. 53 See e.g. G Smith, ‘Towards a Filtered Internet: The European Commission’s Automated Prior Restraint Machine’ (25 October 2017) https:​/​/​www​.cyberleagle​.com/​2017/​10/​towards​-filtered​-internet​ -european​.html (accessed 27 April 2019). 50

14  Research handbook on remedies in private law existence of legal remedies, and the form they are likely to take, have an influence on the parties’ behaviour considerably before any legal remedy is explicitly sought. ●● A claimant whose rights have been infringed may very often have potential legal actions against a number of different defendants. Which the claimant acts against will very probably reflect the remedies available against each. Or again, the immediate victim of a wrong might receive help from some benefactor and so no longer seeks the law’s help, but the benefactor in turn might seek a remedy (perhaps by way of subrogation) against the wrongdoer. Often, indeed, any actual litigation over the wrong does not involve the actual parties to the wrong: what appears on the surface to be the victim claiming from the wrongdoer is in reality the victim’s insurer seeking to recoup themselves from the defendant’s insurer. Consideration of the remedies available may often be a clue to identifying who the dispute is really between; who the parties are, their motivations, and their fortitude in handling the rigours of litigation are all vital to what happens next. ●● Actually commencing legal process is a decision with considerable financial implications; what the claimant can expect to obtain from it, and how much it will cost to do so, are obviously vital considerations. Indeed, a claimant with a clear case may nonetheless find action unaffordable, or might not wish to jeopardise an otherwise profitable commercial relationship with the defendant, or for other reasons may decide that legal process is not the way to go.54 It is in this context that extra-judicial remedies may come to the fore: for example, a claimant is unlikely to consider suing on a broken contract if s/he can obtain almost as much by simply repudiating that contract.55 The attractiveness or practical availability of remedies may depend on a number of factors that are much more about procedure than they are about the substantive law: such as the current regime of legal costs, and what methods of litigation financing are currently available. Collective concerns may in practice dominate. On the claimant side, an otherwise unaffordable claim may be financially viable if part of some mass action or other coalition of claims with similar complaints: whether the action can proceed will depend on the extent to which actions can be joined in this way.56 On the defence side, many defendants are ‘repeat players’, engaged in multiple disputes, and so very probably viewing each claim largely by reference to how it will affect their overall budget and resources; such a defendant is likely to treat individual claims rather differently from the way they would if that claim stood alone.57 ●● Litigation is a process largely conducted and managed by the parties themselves, who are of course very much focused on where the process is going, and to what remedy it might lead.58 This is none the less so because of the involvement of court administrators, or because key steps in the process are under judicial supervision, or indeed because the process may be considerably lengthened by the need to wait for a judge to become available. Rather than waiting for a court to ultimately grant a remedy, most litigants are looking See especially D Engel, The Myth of the Litigious Society: Why We Don’t Sue (University of Chicago Press 2016). 55 E.g. J O’Sullivan, ‘Repudiation: Keeping the Contract Alive’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) ch 3. 56 See e.g. R Mulheron, ‘The UK’s New Opt-Out Class Action’ (2017) 37 OJLS 814. 57 On this concept, see M Galanter, ‘Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change’ (1974) 9 Law and Society Review 95. 58 E.g. R Lewis, ‘Humanity in Tort: Does Personality Affect Personal Injury Litigation?’ (2018) 71 Current Legal Problems 245. 54

Is ‘remedies’ a subject?  15 for some quicker and cheaper solution, such as a settlement, ‘alternative dispute resolution’ or some judicial remedy which (while technically merely ‘interim’) will in practice resolve the dispute. In some situations at least, the theoretical availability of some remedy, should the case proceed that far, is a useful bargaining chip, leading to an advantageous settlement without actually receiving the remedy.59 In recent decades, there has been a noticeable shift in official rhetoric, whereby settlement before trial has become not merely something that may happen, but something that should be officially encouraged to happen, and indeed in a well-run legal system should be the norm. Indeed, some reforms of court process seem designed to ensure that a court can order remedies that traditionally have only been available through settlement.60 When considering whether the legal system is currently fit for purpose, it is never enough to ask merely whether the substantive rules are fair; remedies are key. This is particularly so when asking whether current procedures give the victims of wrongdoing a result they can be satisfied with. Questions arise, such as whether current rules for calculating personal injury damages (which make certain rough-and-ready assumptions about victims’ future financial needs) correspond to the realities of victims’ lives.61 More broadly, it might be questioned whether the remedy the law provides is of the right type, or whether the law’s emphasis on money damages is really appropriate. Many victims of defamation might prefer a correction or open statement in court rather than damages; many victims of personal injury torts might prefer an explanation of how the accident happened, or a credible guarantee that it will not happen in the future. While popular attitudes often condemn litigants as gold-diggers, it should not be forgotten that the choice to provide for damages rather than any other remedy was not the litigants’. The character of a legal system depends not simply on what it recognises as grounds for action, but also on what remedies those actions lead to. A recurrent issue here is whether the legal system should do more to encourage apologies as an important aspect of settlement. The issue is a complex one. Strong points can be made in favour of apologies, in certain circumstances at least.62 Apologies are what a lot of claimants want (or, at least, consistently say they want); some suggest that they encourage early settlement. But others question what an emphasis on apologies would mean in practice. Some suggest that apologies actually increase the likelihood of litigation.63 The sincerity of any

59 E.g. Y Arbel, ‘Contract Remedies in Action: Specific Performance’ (2015) 118 West Virginia Law Review 100 https:​/​/​ssrn​.com/​abstract​=​1641438. 60 See e.g. Courts Act 2003 s 100 (power to order periodical payments of damages). An older example is the introduction of a formal power to apportion responsibility between claimant and defendant, which traditionally was not a course open to a court but which had nonetheless often been achieved through settlement. On the history of this statute, see J Steele, ‘Law Reform (Contributory Negligence) Act 1945: Collisions of a Different Sort’ in T T Arvind and J Steele (eds), Tort Law and the Legislature (Hart Publishing 2013) ch 8. 61 E.g. P Vines, M Butt and G Grant, ‘When Lump Sum Compensation Runs Out’ in K Barker, K Fairweather and R Grantham (eds), Private law in the 21st century (Hart Publishing 2017) ch 15. 62 P Vines, ‘The Apology in Civil Liability: Underused and Undervalued?’ (6 June 2013) https:​/​/​ssrn​ .com/​abstract​=​2275208; A Allan and R Carroll, ‘Apologies in a Legal Setting: Insights from Research into Injured Parties’ Experiences of Apologies after an Adverse Event’ (2017) 24 Psychiatry, Psychology and Law 10. 63 B McMichael, R Van Horn and K Viscusi, ‘Sorry Is Never Enough: How State Apology Laws Fail to Reduce Medical Malpractice Liability Risk’ (2019) 71 Stanford Law Review 341. https:​/​/​ssrn​.com/​ abstract​=​2883693.

16  Research handbook on remedies in private law particular apology will often be in doubt, at least if it is given largely to avoid adverse legal consequences: will victims care about this, or will apparently insincere apologies nonetheless provide adequate recognition that a wrong has been done?64 And what effect will apologies have in relation to other remedies? Some even argue that apologies entice claimants to accept less generous settlements, and that this reduces the cumulative deterrent effect of liability – ‘apologies dilute deterrence’.65 Much of the recent scholarship urges caution, and that the law’s solution here may need to be carefully nuanced.66 These issues raise fundamental questions about appropriate methods of dispute resolution, as does the related question of settlements by non-disclosure agreement, whereby a victim agrees to accept money but also to co-operate in the concealment of the wrong for which the settlement is the remedy.67

5 CONCLUSION Ultimately, a focus on remedies is simply one viewpoint from which to study the legal system. While there is much to see from this standpoint – much, indeed, that is hard to discern from any other – the need for multiple viewpoints must always be stressed.

G van Dijck, ‘The Ordered Apology’ (2017) 37 OJLS 562. Y Arbel and Y Kaplan, ‘Tort Reform through the Back Door: A Critique of Law and Apologies’ (2017) 90 Southern California Law Review 1199, 1201. 66 See e.g. R Carroll and J Berryman, ‘Making Amends by Apologising for Defamatory Publications: Developments in the 21st Century’ in K Barker, K Fairweather and R Grantham (eds), Private Law in the 21st Century (Hart Publishing 2017) ch 23; P Vines and R Carroll (eds), ‘The Place of Apology in Law’ (2017) 7 Oñati Socio-Legal Series (3) http:​/​/​opo​.iisj​.net/​index​.php/​osls/​issue/​view/​65, accessed 8 May 2019. 67 See e.g. R Philip, ‘Silence at Our Expense: Balancing Safety and Secrecy in Non-Disclosure Agreements’ (2003) 33 Seton Hall Law Review 845; S Levmore and F Fagan, ‘Semi-Confidential Settlements in Civil, Criminal, and Sexual Assault Cases’ (2018) 103 Cornell Law Review 311. 64 65

2. The modern history of remedies for breach of contract Stephen Waddams

THE PRIMACY OF MONEY REMEDIES Anglo-Canadian law has leaned towards a preference for money compensation as a remedy for breach of contract. This preference is not quite so strong as is sometimes suggested: in land sale contracts, specific performance is available as, of course, in English law, though not now in Canadian law,1 and in some other classes of case specific performance has quite readily been granted. Nevertheless it remains true to say that money damages are available as of right, whereas specific performance is not. Before 1875 a decree of specific performance or an injunction was available only from the Chancery court, and that court intervened only when satisfied that the common law remedy was inadequate. The topic of specific performance has been much debated by twentieth-century writers, different writers invoking the idea of ‘principle’ in support of opposite conclusions. Everything depends on what is taken by a writer to be ‘the principle’, or the conceptual starting point. If the principle is, as Atiyah suggested,2 that only reliance should be protected, specific performance would very rarely be available. On the other hand some have deduced from the proposition that damages are normally measured by the value of performance a ‘principle’ that the object of the law is to put the claimant so far as possible in the position that he or she would have occupied if the contract had been performed, from which it is deduced that specific performance should always be available if the claimant chooses it.3 Anglo-American law has not favoured either of these extreme views: the generally accepted approach has been that damages (on the expectation measure)4 are available as of right, but that specific performance is an exceptional remedy. It has been suggested that civil law systems accept a principle that gives an unfettered right to specific performance, but a ready comparison is difficult, because civil law systems may have general residual fetters on the exercise of rights, such as the doctrines of good faith and abuse of rights, and because most civil law systems do not enforce specific orders by contempt of court sanctions, which, in systems derived from English law, include instant imprisonment for disobedience. Comparing common law and civilian systems, Anthony Ogus wrote, in an essay published in 1989:

Semelhago v Paramadevan [1996] 2 SCR 415. P S Atiyah, ‘Contract, Promises, and the Law of Obligations’ (1978) 94 LQR 193, rep in Atiyah, Essays on Contract (Clarendon Press 1986) 142; P S Atiyah, Promises, Morals, and Law (Clarendon Press 1981). 3 E A Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70 Col LR 1145; A Schwartz, ‘The Case for Specific Performance’ (1979) 89 Yale LJ 271. 4 Robinson v Harman (1848) 1 Ex 850, 855 (Parke, B). 1 2

17

18  Research handbook on remedies in private law the latter [civilian systems] view the specific enforcement of agreements as a primary remedy, while the former accord it only secondary status, regarding it as appropriate only where the monetary equivalent of performance is ‘inadequate’. At the same time, there is evidence that in practice the systems converge to some extent, that the types of contract which are specifically enforced in both systems share common characteristics.5

This view is confirmed by the Draft Common Frame of Reference, which proposed the following rule: III 3:302: Non-monetary obligations (1) The creditor is entitled to enforce specific performance of an obligation other than one to pay money... (3) Specific performance cannot, however, be enforced where: (a) performance would be unlawful or impossible; (b) performance would be unreasonably burdensome or expensive; or (c) performance would be of such a personal character that it would be unreasonable to enforce it. (4) The creditor loses the right to enforce specific performance if performance is not requested within a reasonable time after the creditor has become, or could reasonably be expected to have become, aware of the non-performance. (5) The creditor cannot recover damages for loss or a stipulated payment for non-performance to the extent that the creditor has increased the loss or the amount of the payment by insisting unreasonably on specific performance in circumstances where the creditor could have made a reasonable substitute transaction without significant effort or expense.6

The conceptual starting point here is the civilian idea of a right to performance, but the openended nature of the exceptions is likely often to lead to results very similar to those reached in practice (though with an opposite conceptual starting point) by English law. The comment to this Article, having noted the opposite conceptual starting points, adds that ‘there is reason to believe, however, that results in practice are rather similar under both theories’.7 The wording suggests an element of uncertainty or variation among the civilian jurisdictions referred to. Nevertheless, the comment is significant, as tending to exclude an easy supposition that specific performance is available as of right and without qualification in all civilian jurisdictions. That an apparent right to specific performance in civilian systems may be restrained by concepts such as good faith or abuse of rights is suggested by another comment headed ‘Limitation on abuse of remedy’,8 referring to ‘good faith and fair dealing’, and to unreasonable insistence by a creditor on specific performance. Even where, as in civilian systems, a right to performance is taken as the conceptual starting point, there are many instances, as the exceptions included in the Draft Common Frame of Reference show, which cannot be precisely defined or enumerated, where specific performance would be inappropri A Ogus, ‘Remedies 1: English Report’ in D Harris and D Tallon (eds), Contract Law Today: Anglo-French Comparisons (Clarendon Press 1989) 243. See S Waddams, ‘The Draft Common Frame of Reference in Relation to English Contract Law’ in J Deveney and M Kenny (eds), The Transformation of European Private Law: Harmonisation, Consolidation, Codification or Chaos? (Cambridge University Press 2013) 1. 6 C von Bar et al. (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (Sellier 2009) art II – 7:201(1)(b). 7 Ibid, comment B, vol 1, 829. 8 Ibid, comment J, vol 1, 833–4. 5

The modern history of remedies for breach of contract  19 ate, unjust, and oppressive, particularly where enforced, as in Anglo-American systems, by the Draconian sanctions for contempt of court. The traditional rule (and still the rule in every common law jurisdiction outside Canada, and the usual rule in civil law jurisdictions also) was that specific performance is ordinarily available to a purchaser of land. In Semelhago v Paramadevan9 the majority of the Supreme Court of Canada announced that the traditional rule should be revised, and that the purchaser of land should only be entitled to specific performance on proof that the land was unique. This holding was not necessary for the decision of the case, and the point was not argued in those terms. The case for change was based on the supposition that the only argument in favour of specific performance was that every piece of land was presumed to be unique, and that, since many pieces of land in modern times were very similar, the rule rested on a kind of factual falsity, and that a change in the traditional rule was required by principle. But this approach does not do justice to the arguments in favour of the traditional rule, which may be supported on several grounds other than that every piece of land is unique. Specific performance of land sale contracts, in contrast to many other kinds of contract, is usually very practicable, and for two principal reasons: (1) the court itself can implement the decree directly, if necessary, very cheaply and effectively, by the stroke of a pen (i.e., there are no supervision problems); and (2) performance is unlikely in most cases to be unduly oppressive to the promisor. These are practical reasons for favouring specific performance in land sale cases that do not depend directly on proof of uniqueness, though uniqueness might become relevant where the traditional equitable defences are in issue, such as laches (is the plaintiff speculating unreasonably at the defendant’s expense?), hardship (would the decree cause unreasonable hardship to the defendant or to a third party, considering the legitimate interests of the claimant?) or clean hands. The traditional rule did not give an absolute right to specific performance: specific performance was available as of course (not ‘as of right’); i.e. under the traditional rule the remedy remained ‘discretionary’ in the sense in which equity understands this concept, and this supplied a built-in protection against oppressive or unfair use of the remedy. The traditional rule thus facilitated reliance by a purchaser on the contract as soon as it was made: the purchaser could say immediately, and accurately, ‘I have bought a house’. The new rule has created uncertainty with (I would suggest) little compensating advantage. ‘Uniqueness’ is not a question of empirical fact: in one sense every piece of land is indeed unique; in another sense it may not be, in that a substitute might be acceptable to many purchasers. But to make this question crucial means that the ordinary purchaser can no longer, as a practical matter, seek specific performance, and the consequence is that in many cases no practical remedy at all is available. On anticipatory breach by the vendor, an individual private purchaser will almost always be advised to purchase a substitute house, because litigation is uncertain and expensive, a claim of ‘uniqueness’ can never be sure of success, and if a claim to specific performance fails, the purchaser will be found, on a rising market, to have failed to mitigate damages. The advice will be to purchase a substitute and then consider an action against the vendor for damages. But the action for damages will rarely be worth pursuing, because in fact land is in one sense unique, and it will usually be difficult or impossible for the purchaser to prove that a more expensive substitute was precisely comparable with the



9

Semelhago (n1).

20  Research handbook on remedies in private law land agreed to be sold. The presumption that common law damages were inadequate may have been justified not only because the purchaser could not buy an exact equivalent, but also for the slightly less obvious reason that, where a substitute was purchased, it was, in practice, difficult for the purchaser to prove a precise money loss. Ironically, it has been commercial purchasers, not individual purchasers, who have, in several Canadian cases, succeeded in actions for specific performance by showing that land has special business advantages, and therefore that it is commercially unique.10 But, where specific performance is refused, even a commercial purchaser will be left without an effective remedy in the absence of convincing proof of a difference between contract price and market value at the date of the breach,11 proof that will often be impossible to make because of the inherent difficulty of calculating precise land values: where the dates of contract and of closing are fairly close together, the defendant will often be able to find an expert to say that the best evidence of the value of the land at the date of breach is the price that was agreed in the disputed contract itself. One member of the seven-judge court in Semelhago, La Forest J, though he agreed with the result, saw, as the other six judges did not, that abolition of the traditional rule was a complex question that required argument and deliberation. He said: I have had the advantage of reading the reasons of my colleague, Justice Sopinka, and I agree with his proposed disposition in the circumstances of this case. However, given the assumption under which the case was argued, I prefer not to deal with the circumstances giving rise to entitlement to specific performance or generally the interpretation that should be given to the legislation authorizing the award of damages in lieu of specific performance. In considering modification to existing law, both these interdependent factors may well require examination, and the arguments in this case were not made in those terms.12

These are the wise words of an experienced judge, who appreciated the importance in legal reasoning of pragmatic as well as theoretical considerations, who understood the history and practical operation of the equitable remedy of specific performance, and who was aware that a legal rule may be supported by a variety of reasons, and should not be too quickly abandoned simply because one reason in support of the rule may seem to be insufficient. Two law reform bodies have recommended legislation to restore the pre-Semelhago state of the law.13

See John E. Dodge Holdings Ltd v 805062 Ontario Ltd (2001) 223 DLR (4th) 541 (Ont CA) and other cases cited in R Sharpe, Injunctions and Specific Performance (Canada Law Book, looseleaf) 8.60. These cases may, however, be in doubt after Southcott Estates Inc v Toronto Catholic School Board 2012 SCC 51, [2012] 2 SCR 675, where, at [41], the majority, though obiter, suggests that a purchaser ‘engaged in a commercial transaction for the purpose of making a profit’ has no claim to specific performance. 11 See Southcott Estates (n10). 12 Semelhago (n1) 418. See S Waddams, ‘The Contribution to Private Law of Justice La Forest’ (2013) 53 Can Bus LJ 205. 13 Alberta Law Reform Institute, Contracts for the Sale and Purchase of Land: Purchasers’ Remedies, Final Report No. 97, 2009 (revised 2011); Manitoba Law Reform Commission, The Remedy of Specific Performance and the Uniqueness of Land in Manitoba, Informal Report No. 26, 2010 (revised, 2011). 10

The modern history of remedies for breach of contract  21

THE BASIC MEASURE OF DAMAGES It was stated in 1848: the rule of the common law is, that where a party sustains a loss by reason of a breach contract, he is, so far as money can do it, to be placed in the same situation with respect to damages, as if the contract had been performed.14

This rule was not new in 1848, and it was formulated then only for the purpose of finding that an exception to it did not apply. Sir Jeffery Gilbert, writing in the early eighteenth century, assumed that contracts, when enforceable, were enforceable to the full extent of the value promised.15 This principle, which has been called the expectation measure of damages, though questioned by Professor Atiyah in The Rise and Fall of Freedom of Contract, and elsewhere,16 has generally been accepted in English and Canadian law,17 subject to limitations represented by principles of remoteness and mitigation.

REMOTENESS The principle of full compensation according to the expectation measure, if ‘relentlessly pursued’, would make the contract-breaker liable for all losses caused by breach, ‘however improbable, however unpredictable’.18 The leading case on this topic is the decision of the Exchequer Court in 1854 in Hadley v Baxendale,19 where the plaintiff, who operated a grist mill, claimed damages for loss of profits caused by delay in delivering a mill shaft. The case has given rise to several difficulties, one of which is a dispute as to what actually were the facts of the case. (i)

What Were the Facts in Hadley v Baxendale?

Many commentators have been puzzled by a discrepancy between the facts apparently established at the trial in Hadley v Baxendale, and those assumed by Baron Alderson. The report states that ‘it appeared at the trial’ that the defendant’s clerk was told that the mill was stopped and that the shaft must be delivered immediately,20 but, in his judgment, Alderson B said ‘we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill’.21 McCormick supposed that Alderson B

Robinson v Harman (n4) (Parke, B). J Gilbert, Of Contracts (manuscript, BL Hargrave 265, c. 1711). 16 P Atiyah, The Rise and Fall of Freedom of Contract (Oxford University Press 1979); P Atiyah, ‘Contract, Promises and the Law of Obligations’ (n2). 17 Wertheim v Chicoutimi Pulp Co [1911] AC 301 (PC). 18 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539 (CA) (Asquith, LJ). 19 Hadley v Baxendale (1854) 9 Ex 341, 156 ER 145. 20 Ibid, 344. 21 Ibid, 355. 14 15

22  Research handbook on remedies in private law accepted as a fact that the clerk had been informed, commenting sarcastically that ‘in Hadley v Baxendale itself, the carrier was told of the use to which the broken shaft was to be put and that the mill was shut down, but it was held that this was not enough, since it was not told that another shaft was not available!’,22 and McCormick’s comment was quoted, with apparent approval, by Fuller and Perdue in their well-known article on contract damages.23 But it seems that Alderson B, in formulating his principle, must have assumed that no notice had been given. Judges also have been confused by the apparent discrepancy: in Victoria Laundry v Newman Asquith LJ referred to it, and concluded that the reporter’s statement was ‘misleading’ because, if accurate, the case should, it would seem, have been decided ‘the other way round’.24 Richard Danzig, in his often-cited study of the case, adduces convincing evidence that, as a matter of historical fact, it is probable that the defendant’s clerk did know that the mill was stopped.25 This may well have been true, but it was not pleaded in the plaintiff’s declaration, probably, as Danzig suggests, because of uncertainty as to whether, as a matter of law, notice to an agent or clerk could in itself be effective to enlarge the defendant’s liability. As Danzig shows, the defendant’s business was a huge national enterprise, and Baxendale, who was being sued as sole proprietor, could not have had personal knowledge of the circumstances of particular transactions. Introduction into the declaration of an allegation that notice had been given to the defendant would probably have complicated and prolonged the proceedings by inviting objections on the ground that notice to the defendant’s clerk was insufficient to affect Baxendale. The first count of the declaration alleged a special contract to deliver the shaft by a certain time. This count was not proceeded with. The second count, the only one in issue, though very wordy, contained no reference to the defendant’s knowledge of the consequences of delay.26 The report continues by stating: the defendants pleaded non assumpserunt to the first count, and to the second payment of 25l into Court in satisfaction of the plaintiffs’ claim under that count. The plaintiffs entered a nolle prosequi as to the first count, and as to the second plea, they replied that the sum paid into Court was not enough to satisfy the plaintiffs’ claim in respect thereof; upon which replication issue was joined.

It is important to observe that the only question in dispute, in either court, was the amount of the damages, and only the facts as alleged in the second count were conceded by the defendant. Baxendale, in response to the second count, had paid £25 into court, not a very large amount, but by no means a trivial sum. The only question in issue by the time of the trial was whether this sum was sufficient, and, by the time of the Exchequer Court hearing, whether, on the admitted facts, the larger sum awarded by the jury was excessive. There was no factual finding, and, as the case developed, there could have been no factual finding, in either court,

C T McCormick, Handbook on the Law of Damages (West Publishing Co 1935) 573. L Fuller and W Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52, 85, note. 24 [1949] 2 KB 528, 537 (CA). 25 R Danzig, ‘Hadley v Baxendale: A Study in the Industrialization of the Law’ (1975) 4 JLS 249, 262. James Oldham draws the same conclusion: ‘Detecting Non-fiction: Sleuthing among Manuscript Case Reports for What Was Really Said’ in C Stebbings (ed.), Law Reporting in Britain (Hambledon Press 1995) 133, 140. 26 The second count (370 words) is set out in 9 Ex 342–3. 22 23

The modern history of remedies for breach of contract  23 as to the clerk’s or the defendant’s knowledge. The explanation of the apparent discrepancy between the reporter’s statement and that of Baron Alderson would seem to be, therefore, that Alderson B was not expressing an opinion about the actual facts (fact-finding not being part of the function of the court sitting in banc on a motion for a new trial) but was testing the reliability of the jury award (an additional £25 beyond the amount paid into court) on the assumption that the facts proved were those, and only those, stated in the second count of the declaration and admitted. Alderson B’s statement that ‘we find that the only circumstances here communicated ...’ is not, on this view, to be read as a finding of actual fact but as shorthand (either Alderson’s shorthand or the reporter’s) for some such statement as ‘we find that the only circumstances here pleaded and admitted to have been communicated’, or ‘the only circumstances that we can take into account for present purposes as here communicated were [those stated in the second count of the declaration, i.e.,] that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill’. The case was treated by the Exchequer Court as presenting an opportunity to lay down a new rule that was to govern all future cases of contract damages. For these purposes an admitted set of facts that clearly acknowledged the breach of contract while excluding any special knowledge was very suitable for the enunciation of the main principle formulated by the court, i.e., that, in the absence of special knowledge, there could be no liability. The Law Times report of the application for the rule nisi shows that the application was made specifically on the basis that the case offered an opportunity to declare such a general rule in respect of a common carrier’s liability in a case where no special notice had been given: Wheatley [sic] QC moved to set aside the plaintiff’s verdict for 25l, obtained at the trial at Gloucester before Crompton J, on the ground of misdirection; 25l had been paid into court, and the verdict was for 25l more. The question was upon the liability of the defendants as carriers, they having no notice of the special value (a shaft belonging to the mill of the plaintiff) intrusted to them to be carried.27

The report in The Times of the judgment of the Exchequer Court three months later also suggests that the case was specifically decided by the court only on the facts admitted in the declaration, and that the reporter understood the case in this way, possibly because Alderson B made some preliminary statement to this effect, or possibly because a knowledgeable informant had told the reporter that this was the way in which the judgment was to be understood: The plaintiffs are large steam millers at Glocester [sic], and it appeared that, an accident having happened to the shaft of their engine, they delivered it to the defendants ... to be carried to Greenwich, to be there repaired, without making any special communication. The defendants delayed the delivery of this article so much that the works of the plaintiff were impeded some days, and the question on which the rule was granted and argued was whether the plaintiffs were entitled to recover as damages for such delay the loss of profits of trade, which the learned judge told the jury might be included.28

It seems probable, therefore, that the Exchequer Court accepted and considered the case on the basis of the facts admitted in the second count, and on that basis alone. It may well be, as the reporter in the Exchequer Reports says, that there was evidence at the trial that the clerk knew

22 LTR 91 (5 November 1853) (emphasis added). Counsel’s name was Whateley. The Times, 24 February 1854, 9d (emphasis added).

27 28

24  Research handbook on remedies in private law that the mill was stopped – probably the whole of Gloucester knew – but this was irrelevant to the issue as framed by the court. (ii)

Must the Claimant Show That the Defendant Assumed Responsibility?

In The Achilleas29 the charterer of a ship was late by nine days in redelivering the ship to the owner’s disposition. The owner had meanwhile made a very profitable contract to charter the ship to another charterer to follow on at the end of the defendant’s charter. The consequence of the delay was that the second charterer became entitled to cancel its contract because the ship was not available on the agreed date, and, freight rates having declined in the meantime, the owner lost the benefit of the very profitable follow-on contract. The House of Lords held, reversing the decisions of the arbitrators and of the lower courts, that this profit was not recoverable. Lord Hoffmann said that ‘all contractual liability is voluntarily undertaken’ and that ‘it must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken’.30 Many other cases had held, however, that damages for breach of contract do not depend on the parties’ intentions, and Baroness Hale in a (virtually dissenting) speech in The Achilleas, pointed to the danger of a test of intention operating as a kind of ‘deus ex machina’, by which she meant an unreasoned and unpredictable device for denying liability in any case in which the court had an unarticulated impression that imposition of liability would be excessive. The difficulty in treating damages as a matter of contractual interpretation is that there is almost never evidence from which an actual contract could be inferred to adopt a particular rule of damage assessment, whereas any rule based on the intentions of hypothetical reasonable parties tends to collapse into a rule framed by the court itself. In 1860 Wilde B had said, presciently, in what might sound like a counsel of despair: I think that, although an excellent attempt was made in Hadley v Baxendale to lay down a rule on the subject, it will be found that the rule is not capable of meeting all cases; and when the matter comes to be further considered, it will probably turn out that there is no such thing as a rule as to the legal measure of damages applicable in all cases.31

HOW DOES BREACH OF CONTRACT DIFFER FROM OTHER LEGAL WRONGS? It may seem an attractive simplification to treat the wrong of breach of contract precisely like any other legal wrong, with precisely the same consequences. As a matter of past English law, there have been important differences between the treatment of breaches of contract and other wrongs. Non-contractual wrongs may often be restrained by judicial order (injunction); they may be abated where practicable by self-help; benefits derived from the threat of a wrong must be restored; persuading or assisting another to commit a wrong is itself a wrong; they may be

Transfield Shipping Inc v Mercator Shipping Inc (‘The Achilleas’) [2008] UKHL 48, [2009] AC

29

61.

Ibid, [12]. Gee v Lancashire & Yorkshire Railway Co (1860) 6 H&N 211, 221, 158 ER 87.

30 31

The modern history of remedies for breach of contract  25 punished by awards of exemplary damages; they generally attract moral disapprobation; and gains derived from non-contractual wrongs must usually be given up. The law (past and present) has not attached all these consequences to all breaches of contract, and few would argue that it should do so. Let us consider the case of a contract for routine personal services followed by a breach because the employee finds a more profitable use for her time (e.g. a contract by a student to paint a house during the whole of October, followed by breach because the student receives and accepts an unexpected opportunity to attend law school). The contract-breaker is liable for damages, but if the house-owner can find a professional painter for the contract price or less there will be no substantial damages. It is plain that in this instance the house-owner is not (as a matter of past or present law) entitled to a decree of specific performance, nor to an injunction to prevent the student from attending law school, nor to exemplary damages, nor (it is safe to say) to an account of the gains derived by the student from pursuing a legal career. The reasons for this set of inter-related conclusions may be summarised by saying that the house-owner is amply compensated by damages, has no special interest (more than an economic interest) in the actual personal services of the student, ought not to have anything like a proprietary interest in the student or in her services, and that there is a public as well as a private interest in freedom of action on the part of the defendant, and on the part of potential defendants. The student is enriched in this example by the breach of contract, but by no means is the enrichment unjust, nor is it made ‘at the expense of’ the house-owner. On the contrary, if the law should compel the student to pay over to the houseowner the full present value of her future legal career most observers would say that the law would have exacted an unjust confiscation and would have conferred an undeserved windfall on the house-owner. Another way of putting the matter would be to say that the house-owner has no legitimate interest in recovering more than the extra cost (if any) of doing the work. As the example just discussed shows – and many others could readily be given32 – there are circumstances in which all may find themselves from time to time where it is reasonable to break a contract on payment of compensatory damages to the other party. The situation just discussed is where a more profitable opportunity arises for the plaintiff’s time or other resources. Another common situation is where the cost of performance greatly exceeds the economic benefit of it, as in the case of a promise to restore damaged land, where the cost of restoration may greatly exceed the economic benefit of doing the work.33 In these cases, unless the plaintiff has a not unreasonable non-economic interest, and is likely actually to carry out the work, the courts have generally refused damages based on the cost of performance. These are cases in which the defendant might be said, in a sense, to benefit from the breach, because the defendant saves the cost of actual performance on payment of a lesser sum of compensatory damages. Another very simple and everyday example would be cancellation of a hotel or restaurant reservation because of the customer’s change of plans. The customer might (perhaps, and at the most) be liable for the hotel or restaurant’s loss of profit, but no one would seriously contemplate specific performance to compel the customer to stay at the hotel or to

32 Daniel Friedmann, ‘Economic Aspects of Damages and Specific Performance Compared’ in D Saidov and R Cunnington (eds), Contract Damages (Bloomsbury Publishing 2008) 65, 74–82, gives examples of losing contracts and wasteful performance, usefully suggesting the term ‘tolerated’ (rather than ‘efficient’) breach to signify the law’s unwillingness to award more than compensatory damages. 33 Peevyhouse v Garland Coal & Mining Co 382 P2d 109 (Okla SC, 1962); Tito v Waddell [1977] Ch 106; Ruxley Electronics and Construction Ltd v Forsyth [1995] UKHL 8, [1996] 1 AC 344.

26  Research handbook on remedies in private law dine at the restaurant, or an injunction to prevent the change of plans, or exemplary damages, or requiring the giving up of gains made through the change of plans. It may seem an advance in elegance, logic and simplicity to treat breaches of contracts in the same way as torts, but though there are close analogies between contractual and non-contractual obligations, there are also important differences.34 Contractual obligations are defined by the parties with practically no restrictions. Thus, a contractual obligation may turn out to be extremely onerous, even ruinous, to the promisor, and performance of contractual obligations may have the effect of very greatly enriching the promisee. The exchange of a few words, casually spoken or written, may easily create an obligation that exceeds the defendant’s total wealth. These features are absent from most non-contractual obligations, where the burden on the defendant is defined and limited by the general law. The reasonable person may usually avoid committing torts without suffering very heavy burdens, and the failure to commit torts does not usually in itself enrich others, whereas the strict observance of contractual obligations often causes enrichments. Tort liability often requires proof of fault, whereas liability for breach of contract is strict, and a contract may be made and broken entirely without blame. No moral opprobrium therefore attaches to a breach of contract in itself. Breach of contract is often tolerated, both as a matter of business morality and in law, and has been said by many commentators, and by some courts, sometimes to be ‘efficient’.35 The law does not always attach the same consequences to a breach of contract as to a tort. Thus a court will not usually order specific performance of contracts, or issue an injunction to restrain breach. Neither exemplary damages nor profits derived from breach are usually available for breach of contract.36 Threatening to break a contract is not in itself wrongful. Another aspect of the matter is that there is usually an independent public interest in encouraging observance of tort law, but the acts or omissions that constitute breaches of contract are not in themselves inherently objectionable: usually they are considered simply as actions or omissions, harmless, being wrongful only in the sense that a private agreement has made them so. A further important consideration is that the anticipated cost of breach affects the contract price. It is often in the interest of both parties to limit liability for breach of contract in exchange for a reduced price, and it may often be in the interest of consumers generally for the liability of those supplying goods or services useful to the community to be limited in exchange for a low price. These considerations lie behind the widespread use of limitation of liability clauses, and statutory restrictions on liability of carriers and warehousers. Insurance is also an important factor: it is often more beneficial for both parties for the owner of property to insure against loss, than for a carrier or warehouser to insure against liability while adding the cost of insurance to the contract price. Cumulatively these are cogent reasons for making a distinction between contractual and non-contractual obligations. The law may be said to treat the contractual promisee quite generously in allowing the full measure of expectation damages, as Fuller and Perdue

See S Waddams, ‘Breach of Contract and the Concept of Wrongdoing’ (2000) 12 Supreme Court Law Review (Second series) 1. 35 Bank of America Canada v Mutual Trust Co 2002 SCC 43, [2002] 2 SCR 601; Hillspring Farms Ltd v Walton (Leland) & Sons Ltd 2007 NBCA 7, 312 NBR (2d) 109; Delphinium Ltee v 512842 N.B. Inc 2008 NBCA 56, 296 DLR (4th) 770, [51]. 36 But the Supreme Court of Canada allowed punitive damages against an insurer in Whiten v Pilot Ins Co 2008 SCC 18, [2008] 1 SCR 595. 34

The modern history of remedies for breach of contract  27 suggested in their article;37 it is not very surprising that, where the claimant’s interest is only economic, this has usually been the limit of the defendant’s obligation.

GAIN-BASED AWARDS In some cases awards have been made based on the gain derived from breach of contract. One such case is Attorney-General v Blake38 where a former secret service agent published his memoirs without official permission. The British government was held to be entitled to the royalties payable to Blake by the publisher. The reasons that tended to support the result in that case were cumulative: the government had more than a purely economic interest in preventing the publication; the information, in a sense, belonged to the government; publication of it was closely akin to a breach of fiduciary duty; an injunction might have been obtained to restrain publication at an earlier date when the information was still confidential; the government had a legitimate interest in preventing publication of such memoirs independent of its interest in receiving Blake’s services; and Blake’s conduct was reprehensible, and contrary to the public interest. The features just mentioned do not accompany every contract, but they do, in whole or in part, accompany some contracts. Therefore, no simple rule is available that treats all breaches of contract alike, and the search for a simple or single rule on the question of gain-based awards for breach of contract, so far from representing an advance in clarity or precision, is likely to obscure important distinctions that are necessary to the attainment of justice and to the articulation of sustainable principles. Several possible principles have been suggested to govern the question of gains derived from breach of contract. The simplest, impliedly suggested by some writers though usually not made fully explicit, is that the plaintiff should have an unfettered right to recover all such gains from the contract-breaker. The instances of the student painter and the case where the cost of performance is extravagant in relation to the economic benefit show that no such principle has been acceptable. Any such principle has now been firmly rejected by the UK Supreme Court.39 The opposite view, that a contract-breaker is never accountable for gains made from breach of contract, is also unacceptable, and does not correspond with past law. Therefore some additional factor, other than breach of contract, must be required. It has been suggested that recovery of gains should be available where there is an ‘abuse of contract’40 or a ‘cynical’41 or ‘opportunistic’42 breach, or where performance is ‘skimped’,43 or where the gain is derived

Fuller and Perdue (n23). [2001] UKHL 45, [2001] 1 AC 268. 39 One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [2018] 2 WLR 1353. 40 E A Farnsworth, ‘Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract’ (1985) 94 Yale LJ 1339. 41 P Birks, ‘Restitutionary Damages from Breach of Contract’ [1987] Lloyd’s M&CLQ 421; see also P Birks, An Introduction to the Law of Restitution (Oxford University Press 1985) 334–5 (favouring recovery in case of deliberate exploitation). For a fuller discussion, see S Waddams, ‘Profits Derived from Breach of Contract: Damages or Restitution?’ (1997) 11 Journal of Contract Law 115. 42 The American Law Institute, Restatement of the Law, Third: Restitution and Unjust Enrichment (American Law Institute 2011) s 39. 43 Attorney General v Blake (n38). 37 38

28  Research handbook on remedies in private law from doing what the defendant promised not to do.44 All these raise difficulties, and none was accepted as a principle by the House of Lords in the Blake case. Lord Nicholls reaffirmed that the general rule was not to require an accounting of gains made by breach of contract, but he accepted that in exceptional circumstances an accounting would be appropriate. He was, in view of earlier unsuccessful attempts, including those of the Court of Appeal in the Blake case itself, understandably reluctant to lay down a precise rule as to what those exceptional circumstances were, suggesting ‘as a useful general guide, although not exhaustive’ the test of ‘whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit’, adding immediately that ‘it would be difficult and unwise to attempt to be more specific’.45 This test has attracted some criticism on the ground that it lacks substance, and leaves the matter too much in the discretion of the court. Lord Hobhouse, dissenting, considered that there was no principled basis for a decision in favour of the Attorney-General and that the majority had wrongly allowed policy considerations to displace principle: The policy which is being enforced is that which requires Blake to be punished by depriving him of any benefit from anything connected with his past deplorable criminal conduct. Your lordships consider that this policy can be given effect to without a departure from principle. I must venture to disagree.46

In defence of the majority decision it may be suggested that principle need not exclude all elements of uncertainty and that there are dangers in attempting to be over-precise, as the earlier unsuccessful attempts to formulate a principle on this question have shown. The concept of ‘legitimate interest in preventing the defendant’s profit-making activity’ signifies activities likely to cause damage to the government (memoir-writing, for example) independent of what would have been caused by simple neglect of contractual duties (unauthorised absences to pursue landscape painting, for example). Such independent damage is likely to occur in precisely those cases where the plaintiff suffers a loss of opportunity to bargain; where damages measured by the plaintiff’s loss will seem inadequate; where the obligation is likely to be, or to have been at some point in time, specifically enforceable;47 where the defendant can be said to have infringed a proprietary or quasi-proprietary interest; where the defendant is unjustly enriched; and where there is a public policy in preventing the breach. Not all these factors have been present in every case, nor can they be considered in isolation from each other, for they tend to be mutually inter-dependent. One dimension of the question is the argument that in many of the cases the claimant has suffered a real loss, though one that is difficult to quantify, by being deprived of an opportunity to bargain with the wrongdoer for a rent, licence charge, or fee.48 This consideration might in some cases, though not in all, support a substantial award on purely compensatory principles. But, even where it does not, it has not been wholly irrelevant because, as Sir Thomas Bingham

Ibid. Ibid, 285. 46 Ibid, 299. 47 The American Law Institute comments that ‘important parallels between specific performance and disgorgement make this a helpful test, but it cannot be an exclusive one. Disgorgement will be appropriate in many cases where specific performance would not have been available.’ See note 42 above, 651. 48 R Sharpe and S Waddams, ‘Damages for Lost Opportunity to Bargain’ (1982) 2 OJLS 290. 44 45

The modern history of remedies for breach of contract  29 put it, of ‘the obvious relationship between the profits earned by the defendants and the sum which the defendants would reasonably have been willing to pay to secure release from the covenant’.49 This is not an alternative analysis that seeks to displace ideas of property, wrongdoing, and unjust enrichment. On the contrary, it is another way of looking at the same question that incorporates those ideas and supplies an additional reason in many cases (not in all) in support of a substantial money award. Compensation cannot supply the sole explanation of the cases, but neither has the idea of compensation been wholly irrelevant. To put the point at its lowest, the idea that the claimant has suffered an actual loss, though one that is difficult to quantify, has tended to strengthen the claim to a substantial money award, and, together with other considerations, has been influential in supporting awards based in some degree on gains derived by the defendant. Lord Lloyd said that ‘the principle [supporting a substantial award] need not be characterised as exclusively compensatory, or exclusively restitutionary; it combines elements of both’.50 Not all breaches of contract involve a loss of bargaining power, because, where the claimant has no property interest that the court will protect in advance, and where the contract is not specifically enforceable (as in the example of the student painter) the claimant never had effective power to prevent the breach of contract in the first place. Thus, if the student painter announced in advance her intention to break the contract in order to attend law school, the house-owner would not have been in any stronger position: the most he could effectively have said would have been that he would hold the defendant responsible for payment of any damages. No injunction or decree of specific performance would have been available. But where the contract-breaker infringes a property right, or a quasi-proprietary right that the court would have protected, or defeats a right to specific performance or an injunction, the claimant can often be said to suffer a loss, and the defendant to have taken something of value that belonged to the claimant. The UK Supreme Court, in One Step (Support) Ltd v Morris-Garner, recognised that contractual rights differed from other legal rights, saying that ‘it is not surprising that damages for breach of contract are generally considered differently from damages for the invasion of a property right, since the rights and obligations are generally of a different character’.51 The court also recognised that contractual rights are not all alike, supporting use of the concept of a hypothetical bargain as ‘a tool for arriving at [the appropriate compensatory] value … [where] the loss for which compensation is due is the economic value of the right which has been breached, considered as an asset’, saying that this was ‘something which is true of some contractual rights, such as the right to control the use of land, intellectual property or confidential information, but by no means of all’.52 A hypothetical price for relaxation of the claimant’s rights, called in the One Step case ‘negotiating damages’ could thus properly be considered in order to put a value on a contractual right ‘considered as an asset,’ or as an aid to measuring ‘the financial loss which the claimant has actually sustained’. The court added that ‘such a

Jaggard v Sawyer [1995] 1 WLR 269, 282. Inverugie Investments Ltd v Hackett [1995] 1 WLR 713, 718 (PC). Lord Denning spoke to the same effect in Strand Electric Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246, 255 (CA). 51 One Step (n39) [76]. 52 Ibid, [91], [93]. 49

50

30  Research handbook on remedies in private law fee is not in itself the measure of the claimant’s loss’.53 The net effect of the case is to affirm that damages for breach of contract are generally compensatory, but that considerations of a hypothetical bargain may sometimes be relevant in assessing the measure of compensation. In measuring the value of what the defendant has taken, the profit derived by the defendant from the breach is related to a hypothetical release fee ‘because of the obvious relationship between the profits earned by the defendants and the sum which the defendants would reasonably have been willing to pay to secure release from the covenant’.54 There is nothing fictitious in the observation that the net profit to be derived from doing something is closely related to, and often identical with, the price that a reasonable person would pay for permission to do it. The assessment of a reasonable licence fee, and the accounting of profits are alternative ways of doing justice between the parties by setting a value on what the defendant has taken. The concept of a hypothetical bargain is sometimes useful, but it is not a panacea, as shown by the One Step case, where very elaborate expert evidence was adduced. As the court said: the assessment of a hypothetical release fee is itself a difficult and uncertain exercise … Such imaginary negotiations have become increasingly elaborate, and a host of questions can emerge as to the basis on which they should be hypothesised.55

In many cases the measures will converge. A conscientious accounting is often complex, and frequently less beneficial to a claimant than at first appears likely. It is sometimes legitimate for a court, in seeking to minimise the expense of litigation and to do practical justice to both parties, to adopt a somewhat rough and ready or ‘broad brush’ assessment of what, in the circumstances, would have been a reasonable licence fee, in order to avoid a lengthy, expensive, and possibly inconclusive accounting. As Dr Lushington said in another context: The true principle is, not to adopt that system which, in special cases, may best arrive at the truth, regardless of delay and expense, but to choose that course which, on the whole, will best administer justice with a due regard to the means of those who seek it.56

Awards of gain-based damages have been linked by some writers with punitive and deterrent considerations. It is true that, in some cases, such as Blake, considerations of public policy have been prominent. But it should be remembered that breach of contract, infringement of property rights, and unjust enrichment may all occur without any fault on the part of the defendant. It is not desirable, therefore, to subordinate gain-based awards to punitive considerations. It is understandable that, in a case like Blake, the court was not inclined to be very diligent, in the process of accounting, to seek out items to enter to the credit of the defendant. But in many other cases the breach of contract, together with the concomitant infringement of proprietary right and the unjust enrichment, will be entirely or largely without fault, and in

Ibid, [95], [100]. Jaggard v Sawyer (n49) See also Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323; WWF – World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445; S Waddams, ‘Gains Derived from Breach of Contract: Historical and Conceptual Perspectives’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart 2008) 187, 202–4. 55 One Step (n39) [74]. 56 The Resultatet (1853) 17 Jur 353, 354. 53 54

The modern history of remedies for breach of contract  31 such cases the defendant is in justice entitled to insist on satisfactory proof of the amount of the profit alleged to have been derived from the wrong. The Draft Common Frame of Reference omits any provision for gain-based awards, and the drafters’ brief note shows that the omission was deliberate: The legal systems seem to agree that damages are not awarded if there has been a gain for the defaulting debtor but no loss to the creditor.57

English law is noted as exceptional on this point. The absence from civilian systems of any principle supporting the recovery of gain-based damages for breach of contract lends support to Lord Nicholls’ cautious approach to the formulation of a principle in the Blake case, and to the approach of the court in One Step.58 It is common in judicial reasoning for a matter to be determined by a number of factors, all relevant, but none on its own conclusive. An example, very closely related to gain-based awards, is the power of the court to decree specific performance of contracts. In Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd, Lord Hoffmann, having mentioned various factors that tended to make courts reluctant to decree specific performance, said: The cumulative effect of these various reasons, none of which would necessarily be sufficient on its own, seems to me to show that the settled practice [i.e. of refusing specific performance] is based upon sound sense.59

One of the main reasons given by Lord Hoffmann for refusing specific performance in that case was that a decree would give the claimant power to extract from the defendant the gains to be derived from breach, in other words to obtain the equivalent of a gain-based award.60 It was, in large part, because Lord Hoffmann judged that result to be unjust that he refused specific performance. The ideas are inter-related and inter-dependent: where specific performance is appropriate, a gain-based award is likely also to be appropriate; looking at the matter from the other direction, if it is first judged that a gain-based award would not be appropriate, this is itself a reason for refusing specific performance. This line of thinking shows also the significance in this context of the idea of lost opportunity to bargain: where specific enforcement is available the claimant has a valuable bargaining power, and can often be said to suffer a loss if deprived of it, but where specific enforcement would never have been contemplated (as in a routine contract for personal services), the claimant had no bargaining power, and has no legitimate claim to profits made by the defendant. The availability of specific performance and the recovery of profits made in breach of contract are closely connected61 because the availability of specific performance is inter-related with the question of whether the defendant has infringed a proprietary right, and this in turn is inter-related with the question of whether the defendant’s gain has been made at the claimant’s expense. As Lord Hoffmann’s comment shows, the availability of specific performance itself depends on multiple cumulative factors,

Draft Common Frame of Reference (n6), vol 1, 927. There was a hint that Blake might possibly be open to reconsideration on a future occasion: One Step (n39) [82] (‘The soundness of that decision is not an issue in this appeal’). 59 [1998] AC 1, 16 (emphasis added). 60 [1998] AC 1, 15. 61 See note 47 above. 57 58

32  Research handbook on remedies in private law and many of the same factors, particularly those just mentioned, are likely to be relevant also to the determination of when a gain-based award is appropriate.

3. The modern history of tort remedies in England and Wales Paul Mitchell

I The modern history of tort remedies, which – for the purposes of this chapter – stretches from the final decade of the nineteenth century to the beginning of the twenty-first, has been much studied. Or, rather, aspects of it have been much studied. For the law of torts is such a miscellaneous and variegated category of wrongs that generalisations about its remedies have not appealed to legal researchers. Judges, as we shall see, have not always been so cautious. But the fact remains that, examined as a whole, the modern history of tort remedies has attracted relatively little attention. This chapter aims to stimulate new interest in the subject, by proposing that illuminating general insights into the modern history of tort remedies can be obtained by paying attention to three inter-related and overarching themes. The first is the role of history in shaping, constraining, defining and – occasionally – suppressing modern developments in tort remedies. The second is the extraordinary significance of legal categories at multiple levels, ranging from the distinctions between different heads of damages to the distinctions between different torts and, ultimately, between tort and non-tort. These categories, it should be emphasised, are not mere convenient repositories for organising information, they have invited and encouraged distinctive patterns of legal development. Finally there is the tension between rationalism and irrationalism. As Terry Eagleton has put it, ‘[t]he modern age has been continually divided between a sober but rather bloodless rationalism on the one hand, and a number of enticing but dangerous forms of irrationalism on the other’.1 This, as we shall see, is an uncannily accurate description of the modern history of tort remedies, from an author who had very different subjects in mind.2 In the discussion which follows, particularly striking examples of history, categories and rationalism are identified and analysed. As readers will quickly realise, these factors often support and reinforce each other, or happen to apply simultaneously, or conflict with each other – indeed, their interactions frequently offer the most interesting case studies. This makes it difficult to single out particular instances of legal development as illustrations of only one factor at work, but the broad theme of the discussion is to move from relatively simple examples to more complex and multifaceted ones.



1 2

T Eagleton, How to Read a Poem (Blackwell 2007) 21. The passage continues: ‘Poetry, however, offers to bridge this gap’.

33

34  Research handbook on remedies in private law

II The constraining power of history can be seen most clearly when an opportunity to make a new start is deliberately spurned. This was the case in Shelfer v City of London Electric Lighting Company,3 where the Court of Appeal laid down guidelines concerning the courts’ exercise of their discretion to award damages in lieu of an injunction in nuisance cases. The discretion had been conferred by a relatively recent statute, the Chancery Amendment Act 1858 (Lord Cairns’ Act), but the Court of Appeal was not tempted to innovate. Drawing heavily on historical assumptions about the role of the Court of Chancery in nuisance cases, the Court of Appeal defined the circumstances in which it would award damages in lieu of an injunction very restrictively, using the following formula:4 it may be stated as a good working rule that – (1) If the injury to the claimant’s legal rights is small, (2) And is one which is capable of being estimated in money, (3) And is one which can be adequately compensated by a small money payment, (4) And the case is one in which it would be oppressive to the defendant to grant an injunction: – then damages in substitution for an injunction may be given.

The prominence of, and corresponding emphasis on, the conjunctions at the start of factors (2)–(4) gives a sharp sense of the Court’s determination to constrain the potential play of the discretion. The Shelfer decision also illustrates the force of history in a different sense, for, although the Court of Appeal presented itself as merely offering guidance (‘a good working rule’) to later courts, its advice quickly took on the texture of a mandatory precondition. Twentieth-century courts applied the Shelfer criteria in an increasingly dogmatic way,5 until, eventually, the Supreme Court was driven to order moderation.6 What had been expressed as a broad statutory discretion had been encumbered with a non-negotiable prerequisite. A similar judicial commitment to a particular approach to granting injunctions could also be seen in defamation cases. The leading case of Bonnard v Perryman7 was decided only a couple of years after Shelfer, and, as with Shelfer, what the Court of Appeal laid down as guidance quickly acquired the status of a rule. Indeed, the ‘rule’ in Bonnard v Perryman has proved more resilient even than the rule from Shelfer’s case, having survived a recent attempt to limit its universal application.8 But where the decision in Bonnard v Perryman is rather different to Shelfer’s case is that it emphasises a default position of refusing an injunction for a threatened tort. In terms that were extraordinarily prescient, the Court of Appeal said that ‘[t]he right of free speech is one which it is for the public interest that individuals should possess, and, indeed, that they should exercise without impediment, so long as no wrongful act is done’.9 The Human Rights Act was still over a century away.

[1895] 1 Ch 287. Ibid, 322–3. 5 E.g. Watson v Croft Promo-Sport Ltd [2009] EWCA Civ 15. 6 Lawrence v Fen Tigers Ltd [2014] UKSC 13, [2014] AC 822. 7 [1891] 2 Ch 269. 8 Greene v Associated Newspapers Ltd [2004] EWCA Civ 1462, [2005] QB 972. 9 Ibid, 284. 3 4

The modern history of tort remedies in England and Wales  35

III For the purposes of this chapter the historical roots and longevity of Bonnard v Perryman are, of course, significant. But the case also illustrates the importance of categories. For, when the Court of Appeal invoked the ‘public interest’ to support its decision, it drew on a value with the potential to shape and inform other aspects of tort remedies. It might have been thought, for instance, that potential defamation defendants could be inhibited from publication by the prospect of unlimited, unpredictable damages awards, and that, surely, suggested a role for ideas about the public interest in the way that damages were assessed.10 There is no hint of this in the Court of Appeal’s decision in Bonnard v Perryman or in later cases applying the Bonnard rule. Nor does the importance of the public interest seem to have unsettled the approach to injunctions for other torts. No one, it seems, was immediately troubled by the lack of a public interest criterion in the Shelfer formula: it would not be until the 1970s, in an analysis that was deliberately designed to break with the past, that Lord Denning would take up the significance of the public interest in such cases.11 This kind of highly fragmented legal development is only maintainable where the distinctions between categories are regarded as so firm, inevitable – natural, even – that they automatically invalidate attempts to make comparisons or to draw contrasts.

IV At the highest level of generality, the logical consequence of a commitment to the inevitability and naturalness of categorical divisions is that comparisons or contrasts between tort and other remedial mechanisms are strictly irrelevant, and can be disregarded. This attitude can be seen particularly vividly in the emergence and operation of a workmen’s compensation system which, despite having obvious aims in common with tort, had essentially no influence on tort principles. It was not as if the compensation system had been created without regard to the existing tort remedies. On the contrary, it was the very limited availability of tort damages for workplace injury which had created the rationale for the compensation scheme.12 The particular problem was the defence of common employment, which eliminated an employer’s liability for injury caused tortiously by one workman to a fellow workman. Nineteenth-century reform initiatives sought to curtail, or abolish completely, the common employment doctrine. The expansion of the electoral franchise in the final third of the nineteenth century, absorbing large numbers of working men, gave the issue political urgency, but the eventual solution R Pound, ‘Equitable Relief against Defamation and Injuries to Personality’ (1915–1916) 29 Harvard Law Review 640, 650–1. 11 Miller v Jackson [1977] 3 All ER 338. Note especially the headings at 342 and 343: ‘The law in the 19th century’, ‘The law in the 20th century’. 12 On the emergence of the workmen’s compensation system see P W J Bartrip and S B Burman, The Wounded Soldiers of Industry; Industrial Compensation Policy 1833–1897 (Clarendon 1983); W R Cornish and G de N Clark, Law and Society in England 1750–1950 (Sweet and Maxwell 1989) ch 7; V Markham Lester, ‘The Employers’ Liability/Workmen’s Compensation Debate of the 1890s Revisited’ (2001) 44(2) The Historical Journal 471; P Bartrip ‘The Impact of Institutions and Professions on Compensation for Occupational Injury in England’ in P Mitchell (ed.), The Impact of Institutions and Professions on Legal Development (Cambridge University Press 2012) 36. 10

36  Research handbook on remedies in private law was not a simple reform of the common law. Instead, employers became liable to compensate injured employees irrespective of fault on the part of the injurer – which was a significant advantage for claimants over the fault requirement in tort. But this advantage was rather offset by the fact that the level of compensation was lower than in tort, and that payments were made periodically, rather than as a lump sum. Experience of the workmen’s compensation system in action showed that it was a less than perfect solution. The lengthy legislation spawned complex case law; and the large quantity of litigation between workmen and their employers seems to have contributed to poisoning industrial relations. But the fact remained that the workmen’s compensation system represented an entirely new and radical approach to providing compensation for personal injuries; such an approach, one might have thought, could offer a critical perspective on the operation of tort remedies. That it did not do so is testament to the power of legal categories. A writer as wide-ranging and intellectually curious as Frederick Pollock told readers of his tort treatise that workmen’s compensation cases ‘throw no light on any principle of the law of torts’.13 The same authorial assumption could also be seen in P H Winfield’s The Province of the Law of Tort, which was a more self-consciously theoretical investigation of tort liability.14 The omission of workmen’s compensation caught the eye of P A Landon, who, in a review of the book, commented disapprovingly:15 it is obvious that everyone intending to practise in common law cases must know [workmen’s compensation] thoroughly, and it is so intimately bound up with the question of the employer’s liability to his employee that it is most fittingly set out … as part of the law of tort.

Winfield’s response was to admit that practitioners did, indeed, need a thorough knowledge of workmen’s compensation. But, for Winfield, it was impracticable to provide that thorough knowledge in a tort book. ‘May one remind Mr Landon’, he wrote, ‘that in about ten years there were 1,200 decisions in appellate courts alone on these Acts?’16 What is particularly noticeable about this exchange is its utterly pragmatic basis. Landon wanted expositions of tort law to include expositions of workmen’s compensation because practitioners had to be able to navigate both systems, not because the workmen’s compensation scheme prompted critical reflection on the tort system. Winfield accepted Landon’s assessment of practitioners’ needs, but the only worthwhile treatment of workmen’s compensation that he could imagine was one in which the 1,200 appellate decisions were accounted for, and that was beyond the scope of a tort book.17 It would take another 40 years and – in Patrick Atiyah – a writer of extraordinary originality and brilliance, before the compensation system perspective would be used to construct a comprehensive critique of tort doctrines.18

F Pollock, The Law of Torts (10th edn, Stevens 1916) 114. F P[ollock], review of Winfield, The Province of the Law of Tort (1931) 47 LQR 588 noted the theoretical emphasis with distaste. 15 P A Landon, ‘The Province of the Law of Tort’ (1931) 8 Bell Yard 19, 31. 16 P Winfield, ‘The Province of the Law of Tort: A Reply’ (1932) 9 Bell Yard 32, 38 (emphasis original). 17 For further discussion of Winfield’s ideas, including his debate with Landon, see P Mitchell, A History of Tort Law 1900–1950 (Cambridge University Press 2015) 19–32. 18 P S Atiyah, Accidents, Compensation and the Law (Weidenfeld and Nicolson 1970). 13 14

The modern history of tort remedies in England and Wales  37

V History and categories featured prominently in the single most important judicial pronouncement on tort remedies in the modern era – Lord Devlin’s speech in Rookes v Barnard.19 Here, in a rare judicial foray into the universal principles of tort remedies, Lord Devlin laid down the two situations in which tort damages punishing a defendant could legitimately be awarded.20 These were, first, where there had been oppressive, arbitrary or unconstitutional action by the servants of the government; and, second, where the defendant had calculated that by committing the tort he would make a profit exceeding any damages liability. As Lord Devlin frankly acknowledged, these two situations were significantly narrower than the circumstances in which exemplary damages had previously been awarded. Indeed, the sense is that his Lordship would have preferred to go further, and to eliminate the availability of exemplary damages from tort altogether. The weight of precedent, however, persuaded Lord Devlin to stop short of total abolition. What lay behind this new approach to exemplary damages was the desire to rationalise. The function of tort was to compensate; punishment was a matter for the criminal law; and tort principles punishing defendants were, therefore, unsightly anomalies. In this analysis we should notice the particular kind of rationality in play: it is a rationality derived entirely from the categories of tort and criminal law. The argument is circular, because it is the existence of the criminal law which, in and of itself, is relied on as making punitive elements in tort foreign: there is no attempt to assess whether the numerous earlier (cited) cases on exemplary damages in tort reflect, and justify, a conception of tort remedies that goes beyond the merely compensatory. It is also important to notice the implicit appeal to purity: because tort is compensatory, any punitive doctrine is a contaminant, and must, therefore, be removed. The logic of the metaphor of purity leaves no room for arguments about whether doctrinal ‘impurity’ is a price worth paying for any societal benefits (such as deterrence) that might flow from allowing tortious punitive damages to be awarded: the combination of categories and rationalism provides a categorical answer. Finally, we might note the interaction between history and categories in Lord Devlin’s reasoning. As we have seen, Lord Devlin felt inhibited about abolishing exemplary damages altogether because of the weight of precedent; but he felt justified in his decision to scale back exemplary damages because many of those earlier cases, he suggested, could be ‘more easily justified’ as compensatory awards.21 The key point here was the idea of aggravated damages, i.e. damages reflecting the additional aggravation of the harm suffered by the claimant – for instance, the additional distress suffered by defamation claimants when a false allegation is insisted to be true right up to the start of the trial, at which point the defendant abruptly abandons the defence. Using this concept of aggravated damages, the outcomes in several cases, though not the judicial language used to support them, could be seen as acceptably compensatory – history could be rewritten to reinforce the logic of legal categorisation.

[1964] AC 1129. Ibid, 1126. 21 Ibid, 1229. 19 20

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VI The rationale of compensation, which was so powerful in Rookes v Barnard, dominated judicial thinking about tort damages throughout the twentieth century. But, as we shall now see, what judges understood as being entailed by that commitment to compensation varied very significantly. The central difficulty was over the relationship between compensation and loss; and the question could be expressed in two, equally problematic, forms. First, what counted as a loss for the purposes of compensation?; second, was all such identifiable loss to be compensated? One of the earliest, and most eloquent, analyses of the question in its first form was provided by Lord Halsbury LC in The Mediana.22 There the defendants had negligently collided their vessel with a lightship owned by the claimants, the Mersey Docks and Harbour Board. The lightship sank. The claimants deployed their standby vessel, which they maintained for just such emergencies. As part of their claim for damages they sought to recover for ‘the loss of use of the [sunken] lightship, or hire of the services of the [standby] lightship’.23 The defendants challenged this head of claim, emphasising that the claimants had incurred no additional expense in using the standby. The House of Lords unanimously upheld the claimants’ entitlement to damages on this head. For the Earl of Halsbury LC, the key point was that the claimants had been deprived of their vessel:24 When I say deprived of their vessel, I will not use the phrase ‘the use of the vessel’. What right has a wrongdoer to consider what use you are going to make of your vessel? ... Supposing a person took away a chair out of my room and kept it for twelve months, could anybody say you had a right to diminish the damages by showing that I did not usually sit in that chair, or that there were plenty of other chairs in the room? The proposition so nakedly stated appears to me to be absurd; but a jury have very often a very difficult task to perform in ascertaining what should be the amount of damages of that sort. I know very well that as a matter of common sense what an arbitrator or a jury very often do is to take a perfectly artificial hypothesis and say, ‘Well, if you wanted to hire a chair, what would you have to give for it, for the period’; and in that way they come to a rough sort of conclusion as to what damages ought to be paid for the unjust and unlawful withdrawal of it from the owner. Here … the broad principle seems to me to be quite independent of the particular use the plaintiffs were going to make of the thing that was taken, except – and this I think has been the fallacy running through the arguments at the bar – when you are endeavouring to establish the specific loss of profit, or of something that you otherwise would have got which the law recognises as special damage. In that case you must shew it …

This principle, he made clear, applied generally – it did not depend on the particular form of action involved. Here, then, was an important general statement about the difference between compensation, loss and expenditure in cases of deprivation of property. ‘Loss’ did not mean ‘financial loss’; expenditure was recoverable as ‘special damage’; and, more subtly, the valuation of a deprivation was not to be discounted (or, presumably, inflated) by arguments about how the claimant might have used the asset.

[1900] AC 113. Ibid, 114. 24 Ibid, 117. 22 23

The modern history of tort remedies in England and Wales  39 By the end of the twentieth century all of these propositions had been abandoned or heavily qualified. The proposition that ‘loss’ did not mean ‘financial loss’ lasted just over twenty years: in Admiralty Commissioners v Owners of the Steamship Valeria25 the House of Lords held that the decision in The Mediana applied only to vessels that were not profit-earning. The loss of an ordinary commercial ship was to be equated with the loss of profit (if any) during the period of deprivation. Next to go was the claim that the statements in The Mediana applied regardless of the form of action: in Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd26 the Court of Appeal declined to apply The Mediana to a claim for detinue. The claim concerned a commercial chattel, but the Court did not mimic the House of Lords’ approach in The Valeria and limit recovery to proved loss of profit. Instead, it emphasised that the defendants had made use of the chattels, and that the damages award should, therefore, reflect the defendants’ gain. For Denning LJ, ‘[i]t [was] an action against [the defendant] because he has had the benefit of the goods. It resembles, therefore, an action for restitution rather than an action of tort.’27 Denning LJ’s colleagues were not quite so outspoken, but it is now recognised (and accepted) that, for some torts – mainly involving property rights – gain-based awards are available.28 In one sense, of course, this reflects the power of legal categories to shape legal content – it is not at all obvious, for instance, why the victim of an intentional tort to the person such as battery or false imprisonment should not have the option of a gain-based award. But, in another sense, the emergence of gain-based damages for proprietary torts demonstrates that the insistence on legal categories was less than systematic: for it could be argued that, just as Rookes v Barnard showed that punitive damages were the proper province of criminal law, so gain-based awards should have been the province of the law of unjust enrichment. The courts, however, have not acceded to such arguments. Perhaps the main explanation lies in history – no one in the modern era could doubt the existence and basic shape of criminal law, but the history of unjust enrichment is rather different. The very existence of a distinct law of restitution was not authoritatively established until the early 1990s,29 and its basic shape is still being settled. Even the name of the category has evolved recently, with ‘unjust enrichment’ being preferred as a more accurate indication of its contents (‘restitution’ unhelpfully denotes both claims in unjust enrichment and gain-based awards for wrongs).30 So the argument that gain-based damages should not be available in tort because that was a matter for unjust enrichment would have had none of the immediate appeal and force that the parallel argument against exemplary damages had. Lord Halsbury’s point about the irrelevance of the claimant’s potential use of the asset during the period he was deprived of it was, of course, curtailed by the House of Lords’ decision in The Valeria that the loss of a commercial vessel was to be valued by the profit it would have earned. But it was also undermined, in a broader way, by the courts’ approach to the assessment of loss of amenity in personal injury cases. The loss of amenity award was con-

[1922] 2 AC 242 [1952] 2 QB 246. 27 Ibid, 255. 28 H Beale (gen ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) 29–148. 29 Lipkin Gorman (A Firm) Ltd v Karpnale [1991] 2 AC 548. 30 C Mitchell, P Mitchell and S Watterson (eds), Goff and Jones on the Law of Unjust Enrichment (9th edn, Sweet and Maxwell 2016) 1-01–1-04. 25 26

40  Research handbook on remedies in private law ceived as compensating the claimant for the fact that, as a result of this injury, certain activities were either impossible or significantly curtailed. In fixing the amount of the award, the court would have regard to the likelihood of the claimant having engaged in those activities. Thus, as Diplock LJ explained in Wise v Kaye,31 an active young man would receive a higher loss of amenity award for the loss of his leg than ‘a young man of the same age but of scholarly tastes who spends his leisure hours reading or listening to music’.32

VII Diplock LJ’s explanation of damages for loss of amenity in Wise v Kaye occurred in the course of a judgment that argued that such awards were misconceived. For Diplock LJ the underlying purpose of the non-pecuniary element in a personal injury award was to provide the claimant with the means to attain happiness in future. Thus, it made sense to offer the active young man more than the scholarly young man for losing a leg, but only because the active young man’s happiness was more dependent on his physical fitness than the scholarly man’s. If, however, the claimant had no prospect of using the award to attain happiness – as was the case in Wise v Kaye, where the claimant was in a coma – an award of damages served no purpose, and should not be made. Diplock LJ, however, was in the minority, and his argument that loss of amenity damages should be denied to claimants who were not able to make use of them have not been taken up by later judges. Loss of amenity continues to be compensated on the basis of the claimant’s deprivation of function. Indeed, the most recent pronouncement on this issue, by the Court of Appeal in Heil v Rankin,33 reaffirmed the centrality of the compensatory approach to non-pecuniary damages and endorsed a significant increase in their amount so as to ensure that they were ‘not … out of accord with what society as a whole would perceive as being reasonable’.34 In taking this approach the Court was not only invoking the twentieth-century tenet that tort damages awards must compensate for loss; it was also obeying an imperative that had come to be associated with that tenet, namely, that judges must set out to measure that loss as precisely as possible. The best illustration of this imperative at work is in claims for future pecuniary loss (typically lost earnings and the cost of medical treatment) in personal injury cases. Over the course of the twentieth century the law moved from a position of impressionistic assessment to one in which actuarial tables were used for life expectancy, and the House of Lords was called on to decide how, precisely, it should be assumed that a claimant would invest a damages award.35 But, seductive as the rationale of precise compensation was, tort damages could not completely embrace it. Non-pecuniary damages did their best, but judges also had to acknowledge that it was impossible to put a value on pain, suffering and loss of amenity with anything

[1962] 1 QB 638. Ibid, 665. 33 [2000] EWCA Civ 187, [2001] QB 272. 34 Ibid, [27]. 35 Actuarial Tables with Explanatory Notes for Use in Personal Injury and Fatal Accident Cases (HMSO 1984) (the ‘Ogden tables’); Wells v Wells [1999] 1 AC 345. 31 32

The modern history of tort remedies in England and Wales  41 like scientific precision.36 The solution was to rely on earlier judicial awards to achieve at least some measure of consistency, and the courts were undoubtedly helped in this task by the appearance of reports of quantum awards in Current Law and Kemp and Kemp’s The Quantum of Damages in Personal Injury Claims from the mid-century onwards.37 Later the Judicial Studies Board published Guidelines in which the accountancy ideal was nearly reached: for each type of injury a range of figures (derived from previous awards) was provided.38 The result is a kind of faux rationalism, in which the figures’ real authority is derived from nothing more exalted than ‘safety in numbers’. The compensatory rationale also had its dangers. For if it was true that personal injury damages compensated for losses, new heads of damage could be identified by ingenious advocates, and it was difficult to say why they should not be recoverable. Perhaps the best illustration is the emergence of damages for loss of expectation of life, which were first awarded in Flint v Lovell in 1934.39 The basic idea was simple enough: the victim of an accident who has either been killed, or has suffered a reduction in life expectancy as a result of his injuries, has been deprived of life, and this is a loss for which the defendant should pay compensation. Within six years, however, this formulation had proved so disastrously unworkable that the House of Lords intervened.40 They recast the award as being for loss of future happiness; awards should thenceforth be more modest, but required ‘the Court to be satisfied that the circumstances of the individual life were calculated to lead, on balance, to a positive measure of happiness, of which the victim has been deprived by the defendant’s negligence’.41 It might, perhaps, be possible to detect a note of valiant rationalism in this exhortation to draw up a balance sheet of the claimant’s prospects of pleasure and pain. But it is difficult to avoid the sense, so well expressed by Otto Kahn-Freund, that the House of Lords had ‘resort[ed] to what one is almost tempted to call the subterfuge of laying down a theory of valuation which involves in effect the complete jettisoning of all standards of rational assessment’.42 Finally, we should notice that the desire for tort damages to be itemised with the precision of a balance sheet was not felt universally. Some torts did not even require a claimant to prove any loss: having established the elements of liability for these torts, claimants then left it to the courts to assess their damages ‘at large’. The most significant example was libel. In the final decade of the twentieth century pressure would grow for libel awards to be more moderate and to have (broad) regard to non-pecuniary personal injury damages, but there is still no requirement to account for the final figure in any detail.43 The insistence on rationalism had its limits, it seems.

E.g. Heil (n33) [23], [25]. D Kemp and S Kemp, The Quantum of Damages in Personal Injury Claims (Sweet and Maxwell 1954). The value of the book (and some of its shortcomings) are highlighted in a review by G Ellenbogen (1955) 18 MLR 642. 38 Judicial Studies Board, Guidelines for the Assessment of Damages in Personal Injury Cases (Blackstone 1992); the most recent edition is: Judicial College, Guidelines for the Assessment of Damages in Personal Injury Cases (Oxford University Press 2017). 39 [1935] 1 KB 354. 40 Benham v Gambling [1941] AC 157. 41 Ibid, 166–7 (Lord Simon LC). 42 O Kahn-Freund, ‘Expectation of Happiness’ (1941–1942) 5 MLR 81. 43 Moderation: Sutcliffe v Pressdram Ltd [1991] 1 QB 153; Gorman v Mudd (CA Civ Div 15 October 1992); Rantzen v Mirror Group Newspapers (1986) Ltd [1994] QB 670. Regard to personal injury 36 37

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VIII The main reason why late twentieth-century impressionistic libel awards could co-exist with late twentieth-century personal injury assessments was that libel awards were often made by juries, while personal injury awards were left to judges alone. It had not always been that way. Until the early twentieth century actions for defamation, negligence and many other torts were decided by juries, and it was only the critical shortage of manpower caused by the First World War which forced a change.44 By the Juries Act 1918 all matters before the High Court were to be tried without a jury, except claims for fraud, libel, slander, malicious prosecution, false imprisonment, seduction and breach of promise of marriage. The Administration of Justice Act 1925 abolished these restrictions; but the Administration of Justice (Miscellaneous Provisions) Act 1933 reintroduced similar controls. Claims for fraud, libel, slander etc. remained matters for jury trial; in other cases the court had an unfettered discretion to decide how the action should be tried.45 Judges were deeply respectful of jury awards, and would venture to interfere with them only if the amount was out of all proportion to the wrong.46 This was not merely a point of procedural etiquette. As Atkin LJ put it, in a case decided in 1922 (when the Juries Act 1918 restrictions still applied): ‘Trial by jury … is an essential principle of our law. It has been the bulwark of liberty, the shield of the poor from the oppression of the rich and powerful.’47 Bankes LJ, in the same case, called for the immediate reinstatement of trial by jury, claiming that ‘the standard of much that is valuable in the life of the community has been set by juries in civil cases’.48 Even as late as 1954, when jury trials for personal injury were very much the exception, the Court of Appeal would observe that ‘it has been said more than once that a judge sitting by himself is not in as good a position to assess damages as are twelve members of a jury’.49 At least part of the attraction of jury trials for judges was that a jury’s verdict relieved judges of the obligation to rationalise or justify the court’s conclusion. The jury simply announced its figure and that was that. Where the award included elements that could not be rationally accounted for, the jury’s role was particularly warmly appreciated. As the Earl of Halsbury LC put it in The Mediana:50 Of course the whole region of inquiry into damages is one of extreme difficulty. You very often cannot even lay down any principle upon which you can give damages; nevertheless, it is remitted to the jury, or those who stand in place of the jury, to consider what compensation in money shall be given for what is a wrongful act. Take the most familiar and ordinary case: how is anyone to measure pain and suffering in moneys counted? Nobody can suggest that you can by any arithmetical calculation establish what is the exact amount of money which would represent such a thing as the pain and damages: John v MGN Ltd [1997] QB 586; Kiam v MGN Ltd [2002] EWCA Civ 43, [2003] QB 281; The Gleaner Co Ltd v Abrahams [2003] UKPC 55, [2004] 1 AC 628. 44 R M Jackson, ‘The Incidence of Jury Trial during the Past Century’ (1937) 1 MLR 132. 45 Hope v Great Western Railway Company [1937] 2 KB 130. 46 Praed v Graham (1889) 24 QBD 53. 47 Ford v Blurton (1922) 38 TLR 801, 805. 48 Ibid, 803. Note, however, Scrutton LJ’s markedly less rousing comments about jury trial on the same page. 49 Bocock v Enfield Rolling Mills Ld [1954] 1 WLR 1303. 50 [1900] AC 113, 116–17.

The modern history of tort remedies in England and Wales  43 suffering which a person has undergone by reason of an accident. In truth, I think it would be very arguable to say that a person would be entitled to no damages for such things. What manly mind cares about pain and suffering that is past? But nevertheless the law recognises that as a topic upon which damages may be given.

It is worth pausing for a moment over this quotation, for it perfectly encapsulates the division between rationalism and irrationalism which is such a key feature of the modern history of tort remedies. The rationalistic commitment to compensate all losses (including pain and suffering) requires an award to be made; but no rational basis exists for the quantification of the award. Fortunately, however, the question can be left to the jury; and, although their decision-making is both arbitrary and secret, this irrational method allows the compensatory rationale to be respected. Irrationality comes to the rescue of rationality. But the rescue comes at a price, because the jury’s convenient involvement allows the deeper, more troubling question hinted at in the penultimate sentence – namely whether pain and suffering should be compensated at all – to be evaded.

IX Judges’ grateful reliance on juries for the assessment of damages would be tested to its limits in a flurry of cases concerned with loss of expectation of life. As explained above, the basis of this head of damage was that a victim of a fatal accident, or a claimant with reduced life expectancy as a result of the tort, had lost a valuable asset in the form of a longer life. The courts accepted that this loss was in principle recoverable. But then it became necessary to quantify the loss, and that was when the trouble started. Judges sitting alone at first instance quickly realised that they were out of their depth. Almost immediately, questions of theology raised their heads, with Hawke J acknowledging that ‘[t]here are people who think, or say they think, that they must be better off in Heaven than they would be in this life’.51 One judge cautioned himself against ‘over-analysis’,52 and another bravely sought comfort in Lord Wright’s comment that, although the measure of damages could not be ascertained with ‘any accuracy’, ‘that is no reason to say that it cannot be done and an effort has to be made to do it’.53 If ever there was a situation where juries’ help was urgently needed, this was surely it. But when juries did become involved, it turned out that they too would struggle to value lost expectations of life. One vivid example concerned three-year-old children. In Shepherd v Hunter54 the jury’s award for loss of expectation of life was £90, a figure which the Court of Appeal found so shockingly low as to be ‘clearly erroneous’.55 The decision was particularly notable for Slesser LJ’s indignant rejection of the defendant’s argument ‘that the local consideration that this infant lived in Lancashire and that this was a Manchester jury might have

Dransfield v British Insulated Cables Ltd [1937] 4 All ER 382, 389. The Aizkarai Mendi [1938] P 263, 275 (Langton J). 53 Feay v Barnwell [1938] 1 All ER 31, 34 (Singleton J), paraphrasing Lord Wright in Rose v Ford [1937] AC 826, 849–50. 54 [1938] 2 All ER 587. 55 Ibid, 589 (Greer LJ). 51 52

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The modern history of tort remedies in England and Wales  45 brought about this result’.56 The possibility that the jury might have made an all too accurate assessment was not to be tolerated. In Bailey v Howard,57 by contrast, a jury awarded £1,000, which the Court of Appeal said could not be challenged. MacKinnon LJ hinted at the difficulties that the law had got itself into, when he observed that ‘I really have no view whether I think it too much or too little, because I am perfectly incapable of forming any estimate of what is the proper amount to be awarded’.58 Scott LJ pinned his hopes on ‘the gradual working out, chiefly through the common sense of juries, of the sort of figures that in English civilization of to-day are to be regarded as reasonable for damages under that particular head’.59 As we have seen above, the House of Lords would soon curtail such a gradual working out by redefining the claim as one for lost happiness. What the loss of expectation of life episode shows is that juries’ common sense assessments could quickly degenerate into randomness, to an extent that the law – despite its acceptance of some degree of irrationality – found unbearable. It also hints at the difficulties which leaving questions to a jury would often conceal. There was simply no coherent way, for instance, to reconcile the Manchester jury’s valuation of the lost life of a three-year-old with the Middlesex jury’s valuation of the same loss at £1,000.60 The law simply could not be open to these differences.

X The powerful influence of history, traditional legal categories and a rationalistic commitment to compensation also tended to close off the law of tort remedies from wholesale reform. Statutory initiatives have tended to affirm and reinforce the basic model, rather than challenging it,61 with more radical proposals never reaching the statute book.62 The failures of those more ambitious proposals offer object lessons in the political priorities and special interests at stake in this area, as well as highlighting some brilliantly effective lobbying. Attempts at radical judicial reform have also tended to stutter – the notable exception being Lord Devlin’s speech in Rookes v Barnard – and academic writing seems to have had less impact than in other areas. Perhaps the best illustration of this latter point comes from the area with which we began this chapter – injunctions for nuisance. In 1960 Ronald Coase published one of the most important law review articles of the twentieth century, in which, taking injunctions for nuisance as his central example, he showed how powerful and suggestive economic critiques Ibid, 591. [1939] 1 KB 453. 58 Ibid, 459. 59 Ibid, 458. For further exploration of these cases, in the context of tort’s treatment of children, see P Mitchell, A History of Tort Law 1900–1950 (Cambridge University Press 2015) 128–33. 60 The reports of Bailey v Howard in the Law Reports and the All England Reports ([1939] 1 KB 453 and [1938] 4 All ER 827) do not specify the venue of the trial. The report in The Times (15 December 1938), however, gives the location of the accident as being Greenford, Middlesex. 61 For a notable exception see Damages Act 1996, s 2 (right to award periodical payments in certain circumstances). 62 E.g. in respect of compensation for injury arising from road traffic accidents: P Bartrip, ‘Pedestrians, Motorists and No-Fault Compensation for Road Accidents in 1930s Britain’ (2010) 31 Journal of Legal History 45; P Bartrip, ‘No-Fault Compensation on the Roads in Twentieth Century Britain’ [2010] CLJ 263. 56 57

46  Research handbook on remedies in private law of legal doctrines could be.63 Yet no reader of English twentieth-century law reports could have the slightest idea that Coase’s work existed.64 A large part of the explanation for this situation probably lies outside the law of remedies – in conventions of citation, the historically low status of academic writing, scepticism about the value of comparative materials, etc.65 In that sense the non-influence of Coase exemplifies many of the most interesting unanswered questions in the modern history of tort remedies. It is instructive, worthwhile and sometimes even fascinating to map the roles of history, categories and rationalism. But to understand why these factors and ideals held such sway, the researcher inevitably has to travel beyond the law of remedies, and engage with questions about the operation of the legal system as a whole, and about the priorities, values and assumptions of its most influential participants.

R Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics 1. A Westlaw search for ‘Coase’ gives no relevant results in the twentieth century. 65 N Duxbury, Jurists and Judges (Hart 2001). 63 64

4. Personal injury compensation and civil justice paradigms Annette Morris

It is well established that there is a distinction between what tort law offers in principle and what it delivers in practice, as tortious legal principles are mediated through complex institutional arrangements involving liability insurance, legal services and the civil justice system. In combination, these arrangements affect the extent to which the injured are able and willing to seek tort compensation and what they, both individually and collectively, are able to achieve through the pursuit of tort actions. This chapter focuses on the relationship between tort law and the civil justice system and, more specifically, highlights that much depends on how the competing interests of ‘cost’, ‘access’ and ‘accuracy’ are balanced within that system. Whilst access to the system and the accuracy of case outcomes (i.e. the extent to which final outcomes reflect substantive legal rights and entitlements) are each important to the implementation of tort law, they are in direct tension with the cost of resolving claims. High costs may preclude, whilst low costs may facilitate, access. Likewise, in allowing for detailed investigation, preparation and consideration of claims, high legal costs may facilitate, whilst low legal costs may constrain, accuracy. As such, difficult decisions need to be made about where the appropriate balance should lie between cost, access and accuracy and these decisions are controversial, not just because they affect the level of lawyers’ earnings, but because they tap into differing views on: the appropriate scope, nature and role of tort law; the value it brings to injured individuals and broader society and the government’s responsibility towards its administration. It is important, therefore, for researchers to expose how and why cost, access and accuracy are balanced in a particular way because this acts as a window on both the operation of tort and the policy underlying it as a system of personal injury compensation. Proponents of tort argue that it plays an important political, social and economic role for injured individuals and broader society and so, in terms of the balance to be achieved, the system should pull clearly in favour of access and accuracy. Claiming not only realises legal entitlements to compensation from wrongdoers, but also brings broader benefits to society which, though intangible, should be considered in determining the level of costs to be allocated to the administration of tort.1 In giving voice to ‘have nots’ that might otherwise be ignored, tort is presented as an empowering medium, which also provides ‘the kind of moral satisfaction that ordinary people desperately need when victimized by powerful interests’.2 In addition, allowing the negligently injured to recover compensation from wrongdoers is said to be ‘one way our social order can help to promote their dignity and their ability to be social

See, e.g., T Koenig and M Rustad, In Defense of Tort Law (New York University Press 2001). S Sugarman, ‘Ideological Flip-Flop: American Liberals Are Now the Primary Supporters of Tort Law’ in H Tiberg Essays on Tort, Law and Society in Honour of Bill W Dufwa (Jure Forlag AB 2006) 1117. 1 2

47

48  Research handbook on remedies in private law equals’.3 Tort is also said to have a deterrent effect and so to have an important regulatory function. Overall, for some, tort is situated within a social justice ethic and, whilst defendants may often be individuals, in reality ‘one-shotter’ claimants are usually pitched against ‘repeat player’ insurers.4 From this viewpoint, diluting access and accuracy too much undesirably blunts tort’s political, social and economic role.5 However, the direction of travel in recent years has been to pull firmly in favour of reduced costs and increased efficiency. This chapter seeks to understand that trend and to reflect on how it is affecting the scope, nature and role of tort. In doing so, it draws on a series of interviews undertaken with practitioners in 2013–2014 as part of a broader comparative project on personal injury claims.6

SHIFTING PRIORITIES IN ENGLAND AND WALES: FROM ACCURACY TO COST AND EFFICIENCY The civil justice framework traditionally prioritised higher levels of accuracy over cost and efficiency considerations because it was tied to the notion of substantive justice, i.e. the determination of claims on their legal merit through trial.7 Access to justice at this time was equated with the ability of individuals to secure their legal rights and entitlements. As Sir Jack Jacob, a leading civil proceduralist of his generation, stated: On the one hand, the system of civil procedural law breathes life into the substantive law of the land, gives it reality and effectiveness and brings it into being … and on the other hand, the members of the community are enabled to have their substantive legal rights recognised and transformed into actual judicial remedies, without which their theoretical legal rights would be diminished or denuded of any real value and would be but a snare and a delusion.8

This is not to say that cost and efficiency considerations were irrelevant. A fault-based, individuated and adversarial system of compensation tied to accuracy was inherently slow and expensive and this caused much concern.9 Nevertheless, efforts to tackle these issues were pursued within a substantive justice model.

3 L Bender, ‘Tort Law’s Role as a Tool for Social Justice Struggle’ (1998) 37 Washburn Law Journal 249. 4 M Galanter, ‘Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change’ (1974) 9 Law and Society Review 95. 5 For further discussion, see L Kaplow, ‘The Value of Accuracy in Adjudication: An Economic Analysis’ (1994) 23 Journal of Legal Studies 307. 6 29 semi-structured interviews were undertaken with personal injury practitioners in England and Wales between December 2013 and April 2014. Of the 29 people interviewed, 13 were claimant solicitors, one was a claimant legal executive, nine were defendant solicitors, five were barristers and one was an insurer. These interviews, undertaken in conjunction with Richard Lewis, contributed to a larger socio-legal analysis of personal injury claims in three European countries. The project was led by Ken Oliphant and funded through the European Centre for Tort and Insurance Law. 7 See further, J Sorabji, English Civil Justice after the Woolf and Jackson Reforms (Cambridge University Press 2014) ch 2. 8 Sir J Jacob, ‘The Administration of Civil Justice’ in Sir J Jacob, The Reform of Civil Procedural Law and Other Essays in Civil Procedure (Sweet and Maxwell 1982) 59–60. 9 By the mid-1990s, there had already been over 60 reviews of the civil justice: Lord Woolf, Access to Justice: Interim Report (1995) ch 2, para 2.

Personal injury compensation and civil justice paradigms  49 However, by the 1990s, views on the appropriate balance between cost, access and accuracy had changed. As is now well known, the ideal of substantive justice was not achieved in practice. The expense and uncertainty of trial meant that the majority of claims settled outside court and, as Genn’s research from the 1980s revealed, these settlements did not simply anticipate the outcome at trial.10 Settlements were not, as had been assumed, a pragmatic response to the disadvantages of formal adjudication but instead reflected a system riddled with risk and inequality of bargaining power. Whilst the cost and delay of substantive justice may well have secured high levels of accuracy for some, it reduced access for others by deterring them from bringing or defending claims or forcing them to accept settlements for sums lower than could have been achieved at trial. As was once said, ‘justice [was] open to all, like the Ritz hotel’.11 Through Lord Woolf’s review of civil justice, a strong view emerged that it would be better to ration process than access.12 In other words, that it would be preferable for more people to have access to a less accurate system than for just a few to have access to a ‘gold standard’.13 As a result, civil justice policy now prioritises cost and efficiency considerations over accuracy. This is not to say that accuracy is unimportant but rather that the civil justice framework now openly accepts lower levels of accuracy in exchange for reduced cost and increased efficiency.14 This rebalancing also represented a pragmatic response to the declining investment in civil justice from public funds and presented a means of distributing limited resources available for civil justice and the administration of tort fairly. As Lord Dyson MR stated: Dealing with a case justly does not simply mean ensuring that a decision is reached on the merits. It is a mistake to assume that it does … The court has to consider three things: the claimant’s perspective, the defendant’s perspective and, importantly, the perspective of other court-users. It is not enough to consider the need to secure justice between the parties … Doing the proper administration of justice goes beyond the immediate parties to litigation. It requires the court to consider the needs of all litigants, of all court-users.15

As such, civil justice has moved from a model based on substantive justice to a model based on distributive justice with the result that ‘access’ now focuses on access to dispute resolution procedures rather than to law and speed and inexpense have become central to notions of ‘justice’.16 Since the implementation of the Woolf reforms through the Civil Procedure Rules 1998 (CPR), the system has been designed around the concept of proportionality – the idea that the

10 H Genn, Hard Bargaining: Out of Court Settlements in Personal Injury Cases (Clarendon Press 1987). 11 This quote is attributed to Sir James Matthews, an Irish judge in the late Victorian era. 12 Woolf (n9) and Lord Woolf, Access to Justice: Final Report (1996). For a critique of these reforms, see: A A S Zuckerman and R Cranston (eds), Reform of Civil Procedure: Essays on ‘Access to Justice’ (Clarendon Press 1995); A Ogus, ‘Some Reflections on the Woolf Interim Report’ [1996] 1 Web Journal of Current Legal Issues; and A A S Zuckerman, ‘Lord Woolf’s Access to Justice: Plus ça change…’ (1996) 59 Modern Law Review 773. 13 For a discussion of procedural rationing, see Sorabji (n7) chs 5–6 and A Zuckerman, ‘A Reform of Civil Procedure – Rationing Procedure Rather than Access to Justice’ (1995) 22 JLS 155. 14 See further, Sorabji (n7) chs 4–6. 15 The Application of the Amendments to the Civil Procedure Rules, 18th Lecture in the Implementation Programme, District Judges’ Annual Seminar (22 March 2013). 16 For further discussion, see Sorabji (n7) chs 5–6.

50  Research handbook on remedies in private law cost of resolving claims should be proportionate to their complexity and value in damages.17 Lord Woolf had found that litigation was too often seen as a ‘battlefield’ where no rules applied and where questions of expense and delay had only low priority. Whilst the majority of claims settled, they did so often after the issue of proceedings, if not at the door of the court, and after much expense had been incurred. Parties controlled the conduct and pace of litigation and pursued their claims and defences in isolation, using partisan experts who only added to the problem. He sought to achieve proportionality by reducing adversarialism and by rationing procedure through both direct and indirect means. In terms of direct rationing, parties are discouraged from using litigation as a bargaining tool in negotiations, or as a means of resolving claims. Instead, they are expected to settle their claims at the earliest possible stage and preferably without the issue of legal proceedings. If claims cannot settle, then they proceed to litigation but access to procedure is constrained. Cases are allocated to one of three tracks deemed proportionate to their value and complexity, as follows: ●● Claims with a personal injury element worth less than £1,000 are allocated to the ‘small claims’ track, where claims usually proceed to a quick, informal hearing at which the parties represent themselves, as there are no provisions in place for the recovery of legal costs;18 ●● Claims valued between £1,000 and £25,000 are generally allocated to the ‘fast track’. Such claims are subject to judicial case management but generally involve standardised directions. For example, parties are expected to use single joint experts and are subject to fixed timetables;19 ●● Claims valued above £25,000 are allocated to the ‘multi-track’. As these claims tend to be more complex, they are afforded access to a greater level of procedure and flexibility although they remain subject to judicial case management in relation to the number of experts the parties can rely on and the appropriate timetable for the case.20 In terms of indirect rationing, successful parties are only able to recover proportionate legal costs from their opponent. This means that unless lawyers charge clients directly, limits are placed on the amount of work that can be undertaken profitably to progress a claim.

THE FURTHER REDUCTION OF COSTS THROUGH THE REINFORCEMENT OF PROPORTIONALITY Despite the radical nature of the Woolf reforms, concerns about the cost of resolving claims continued and, indeed, costs were described as a ‘central failing’ of Woolf.21 From the early-

17 For a discussion of proportionality in Canada, see C Hanycz, ‘More Access to Less Justice: Efficiency, Proportionality and Costs in Canadian Civil Justice Reform’ (2008) 27(1) Civil Justice Quarterly 98. 18 CPR Part 27. 19 CPR Part 28. 20 CPR Part 29. 21 Sir Anthony Clarke, ‘The Woolf Reforms: A Singular Event or an Ongoing Process?’ (Speech delivered at the British Academy, London, 2 December 2008).

Personal injury compensation and civil justice paradigms  51 to-mid-2000s onwards, the Association of British Insurers (ABI) complained that the claims process was ‘riddled’22 with ‘excessive’23 legal costs. As outlined above, Woolf had introduced pre-action protocols to reduce adversarialism and encourage early settlement through the early exchange of information and pre-action investigation on both sides. However, there were concerns that this simply led to the front-loading of costs, i.e. to parties on both sides incurring unnecessary cost in cases that would have settled in any event.24 This led insurers to campaign for the introduction of a streamlined procedure for settling claims pre-action, which would allow them an opportunity to settle claims quickly and cheaply before much work was undertaken on either side. The then Labour Government agreed to introduce such a scheme in 2010.25 It utilises an electronic portal and involves three stages.26 First, the claimant submits only basic information about the claim. Second, the defendant must respond on liability within a very limited timeframe and, if liability is admitted, the claimant sends the defendant a settlement pack including the medical report and evidence of pecuniary losses. Finally, if damages cannot be agreed within a short period, then the claim proceeds to a short hearing. If the claim involves issues of limitation, if liability is denied or contributory negligence is alleged, the claim falls into the fast track and proceeds in the normal way. There was much controversy about the extent to which this streamlined procedure should apply. Many argued that it was unsuitable for higher-value and more complex claims and so it was initially limited to road traffic accident (RTA) claims of up to £10,000. However, as such claims constitute the majority, this reform nevertheless had a significant impact on the market, especially as the level of recoverable costs for each stage was fixed. This shift from hourly rates to fixed costs reduced the profitability of claims settled through the portal. Nevertheless, concerns about the cost of resolving claims escalated. The ABI continued to complain that the system was ‘dysfunctional’,27 ‘broken’28 and ‘in urgent need of fixing’.29 Sir Anthony Clarke, then Master of the Rolls, asked Lord Justice Jackson to undertake a review of how best to achieve ‘access to justice at proportionate cost’ and he published his report in late 2009.30 In May 2010, the Coalition Government was formed which made reform of the claims process a priority. It expressed its concern that legal costs were ‘spiralling’.31 Profits, it said, were being ploughed into generating large numbers of weak, spurious and fraudulent

Association of British Insurers (ABI) news release, ‘Calls grow for the Government to act now on reforming personal injury compensation’ (25 March 2008). 23 ABI news release, ‘Dysfunctional and Disproportionate – ABI reveals how motorist are being taken for a ride by high legal costs’ (27 October 2010). 24 See further, T Goriely, P Abrams and R Moorhead, More Civil Justice? The Impact of the Woolf Reforms on Pre-Action Behaviour (Law Society/Civil Justice Council 2002). 25 See further, J McQuater, ‘The RTA Claims Process’ [2010] Journal of Personal Injury Law 103 and R Hill, ‘The New RTA Protocol’ (2010) 107(12) Law Society Gazette 29. 26 The claims portal is a stakeholder-led secure electronic communication tool for processing low value personal injury claims: http:​/​/​www​.claimsportal​.org​.uk/​en/​. 27 ABI news release, ‘ABI comments on Government response to Transport Select Committee Inquiry into cost of motor insurance’ (9 September 2011). 28 ABI, Improving the System for All (2011). 29 ABI (n22). 30 Jackson LJ, Review of Civil Litigation Costs: Final Report (December 2009). 31 Ministry of Justice (MoJ) press release, ‘Clarke stamping out compensation culture fears’ (29 March 2011). 22

52  Research handbook on remedies in private law claims and defendants were said to be held to ransom by high legal costs. ‘It cannot be right’, stated the Ministry of Justice ‘that, regardless of the extreme weakness of a claim, the sensible thing for the defendant to do is settle, and get out before legal costs start running up. This is precisely what has happened and it is one of the worst instances of this country’s compensation culture.’32 In privileging the interests of claimants and their lawyers above the interests of defendants and wider society, the system was said to be ‘out of kilter’.33 Reform was necessary, it said, to ‘turn[…] the tide on the compensation culture’.34 As a result, the Coalition introduced the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) alongside various amendments to the CPR. These were based on Jackson’s recommendations though went further in some respects.35 The reforms were wide-ranging and pursued the policy of proportionality with renewed rigour by tightening the screw on both the rationing of procedure and the recovery of legal costs.36 To reflect this, the overriding objective of the CPR was amended to emphasise that the rules are to enable the court to deal with cases not only justly but also at proportionate cost.37 In terms of direct rationing, the streamlined portal procedure in place for RTA claims up to £10,000 was extended. It now applies to employers’ liability, public liability and RTA claims up to £25,000 and so captures the vast majority of all personal injury claims going through the system.38 Claims valued above £25,000 are still allocated to the multi-track but the reforms have imposed further rationing of the use of both factual and expert evidence.39 Parties seeking permission to rely on expert evidence must provide an estimate of the costs involved and a summary of the issues to be addressed to allow the court to undertake a cost benefit analysis.40 In addition, the reforms have fortified judicial case management. The rules provide for tougher

32 MoJ, Reforming Civil Litigation Funding and Costs in England and Wales – Implementation of Lord Justice Jackson’s Recommendations: The Government Response (March 2011) 3. 33 Ministry of Justice (MoJ) press release (n31). 34 Ministry of Justice news release, ‘Action on compensation claims for slips and trips’ (31 July 2013). On the compensation culture generally, see: K Williams, ‘State of Fear: Britain’s “Compensation Culture” Reviewed’ (2005) 25 Legal Studies 499; R Lewis, A Morris and K Oliphant, ‘Tort Personal Injury Statistics: Is There a Compensation Culture in the UK?’ (2006) 14 Torts Law Journal 158; R Mullender, ‘Negligence Law and Blame Culture: A Critical Response to a Possible Problem’ (2006) 22 Journal of Professional Negligence 2; A Morris, ‘Spiralling or Stabilising? The Compensation Culture and our Propensity to Claim Damages for Personal Injury’ (2007) Modern Law Review 349; J Hand, ‘The Compensation Culture: Cliché or Cause for Concern?’ (2010) 37 Journal of Law and Society 569; R Lewis and A Morris, ‘Tort Law Culture: Image and Reality’ (2012) 39 Journal of Law and Society 562; and R Lewis, ‘Compensation Culture Reviewed: Incentives to Claim and Damages Levels’ (2014) 4 Journal of Personal Injury Law 209. 35 See further A Zuckerman, ‘The Jackson Final Report on Costs: Plastering the Cracks to Shore Up a Dysfunctional System’ (2010) 29 Civil Justice Quarterly 263; C McIvor, ‘The Impact of the Jackson Reforms on Access to Justice in Personal Injury Litigation’ (2011) 30 Civil Justice Quarterly 411; and ‘Special Issue: The Implementation of Sir Rupert Jackson’s Review of Civil Litigation Costs’ (2013) 32(2) Civil Justice Quarterly 109–312. 36 J Sorabji, ‘Prospects or Proportionality: Jackson Implementation’ (2013) 2 Civil Justice Quarterly 213. 37 CPR 1.1. 38 Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents and PreAction Protocol for Low Value Personal Injury (Employers’ Liability and Public Liability) Claims. 39 CPR 32.3(3) and CPR 35.4. 40 CPR 35.4.

Personal injury compensation and civil justice paradigms  53 enforcement of rules, practice directions and orders41 and case management has been fused with cost management.42 The court must now approve a cost budget at the outset of litigation, which then forms the basis for the assessment of costs at the end of the claim. This is to allow judges to ensure that costs remain proportionate and, whilst parties can seek to revise their budget during the case, they must convince the judge that this is justified.43 In addition, there has been a significant reduction in the level of legal costs successful parties – or rather their lawyers – are able to recover from their opponent.44 The extension of the streamlined portal procedure means that fixed costs now apply in the majority of cases and the fixed costs that had previously been in place for RTA claims within the portal were significantly reduced. Claims that fall out of the portal onto the fast track are also now subject to fixed rather than hourly fees. In relation to the multi-track, hourly fees still apply but the assessment of recoverable legal costs is now different. Previously, lawyers could recover costs disproportionate to damages if they were deemed to be necessary and reasonable.45 However, now, having assessed each item in relation to reasonableness, judges must consider whether the global figure of costs claimed is proportionate to the damages and reduce appropriately if not.46 The result is that lawyers may not be able to recover the actual costs they have incurred in preparing and advancing a claim, even if those costs are reasonably or necessarily incurred. Conditional fee agreements (CFAs) were also reformed. When the Labour Government withdrew legal aid for the majority of personal injury claims in 2000 on the assumption that they could be funded through the CFA market instead, they introduced the concept of recoverability as a corollary, which operated in conjunction with the ‘loser pays’ principle.47 Unsuccessful claimants paid their own lawyer ‘no-fee’ and used after-the-event (ATE) insurance to pay the other side’s legal costs, whilst successful claimants could recover from insurers the success fee payable under the CFA and the cost of their ATE policy in addition to their normal legal costs. In allowing claimants to obtain legal assistance regardless of their financial capacity on a no-win no-fee, no-risk basis, recoverability was ‘an interesting attempt to squeeze public provision into a private model approach’.48 It effectively transferred the costs of claiming from claimants and/or the state to the market or rather, as the majority of personal injury claims are successful, to insurers. Lawyers were permitted to charge success fees of up to 100 per cent of the normal legal costs, which theoretically made CFA work economically very attractive, although recoverability was subject to a test of reasonableness. The idea was that the success fee should be commensurate to the risk of losing and operate on a swings-and-roundabouts basis – allowing the cost of losing cases to be absorbed by the costs recovered in winning cases.

CPR 3.9. For discussion, see A A S Zuckerman, ‘The Revised CPR 3.9: A Coded Message Demanding Articulation’ (2013) 2 Civil Justice Quarterly 123 and I Levy, ‘Lightening the Overload of CPR Rule 3.9’ (2013) 2 Civil Justice Quarterly 139. 42 CPR 3.12–3.21. See also Practice Direction 3E – Costs Management. 43 P Hurst, ‘The New Costs Rules and Practice Directions’ (2013) 2 Civil Justice Quarterly 153. 44 CPR Part 45. 45 Lownds v Home Office [2002] EWCA Civ 365. 46 CPR 44.3. 47 Access to Justice Act 1999. 48 R Moorhead, ‘CFAs: A Weightless Reform of Legal Aid?’ (2002) 55 Northern Ireland Legal Quarterly 153. 41

54  Research handbook on remedies in private law After some disquiet from insurers and a spate of satellite litigation, success fees were fixed, though only in low-value RTA and employers’ liability claims.49 Nevertheless, lawyers continued to be accused of using CFAs to ‘ramp […] up their fees’ to ‘scandalous’ proportions.50 As a result, the concept of recoverability was abolished.51 The new regime now operates in conjunction with ‘qualified one-way costs shifting’.52 Unsuccessful claimants do not have to pay the defendants’ legal costs, except in exceptional circumstances. This is intended to remove the need for ATE insurance in the majority of claims. Those wanting ATE insurance must now pay for it themselves. Whilst successful claimants can still recover their legal costs from insurers, they can no longer recover the success fee. This must instead be met directly by claimants, usually from their damages, although, to ameliorate the effects of this reform, damages for pain, suffering and loss of amenity were increased by 10 per cent.53 Also, whilst lawyers are still permitted to charge success fees of up to 100 per cent, they are not permitted to recover success fees in excess of 25 per cent of claimants’ damages, excluding damages for future care and loss.54 The result is that the reforms have led to a substantial reduction in returns for CFA work.

THE IMPACT OF REDUCED COSTS ON ACCESS AND ACCURACY In sum, there has been a significant drive over the last 20 years to embed cost and efficiency drivers within the personal injury claims process, and civil justice more generally, through both direct and indirect rationing of procedure. Access to procedure is now strictly controlled and the conduct of settlement, as well as litigation, is now heavily regulated. In addition, there has been downward pressure on recoverable legal costs. The Jackson reforms, in particular, cut a swathe through the profitability of personal injury claims and led unsurprisingly to a significant reorganisation of the market, with many law firms forced to reassess their business models. Firms were advised to ‘get big, get niche or get out’ and the reforms certainly encouraged both consolidation and stratification within the market.55 A number of mergers and takeovers took place and some firms went out of business, closed their personal injury department or withdrew from certain areas of personal injury work.56

See further M Zander, ‘Where Are We Now on Conditional Fees? – or Why This Emperor is Wearing Few, If Any, Clothes’ (2002) 65 Modern Law Review 919; M Zander, ‘Where Are We Heading with the Funding of Civil Litigation?’ (2003) 22 Civil Justice Quarterly 23; S Kalish, ‘The English Costs War, 2000–2003, and a Moment of Repose’ (2004) 83 Nebraska Law Review 114; and A Morris, ‘Conditional Fee Agreements in Northern Ireland: Gimmick or Godsend?’ (2005) 56 Northern Ireland Legal Quarterly 38. 50 N Watt, ‘Straw Vows to Act against “Scandalous” “No Win, No Fee” Lawyers’ theguardian.com (21 September 2008). 51 LASPO ss 44 and 46. 52 CPR 44.13; A Higgins, ‘A Defence of Qualified One Way Costs Shifting’ (2013) 2 Civil Justice Quarterly 198. 53 Simmons v Castle [2012] EWCA Civ 1039. 54 Conditional Fee Agreements Order 2013, Article 5. 55 ‘“Get big, get niche or get out”, Marshall Tells Personal Injury Firms’ (2013) Solicitors Journal 16 October 2013; J Hyde, ‘Slater Chief Predicts Rapid Consolidation in PI Market’, Law Society Gazette (1 May 2014). 56 APIL, The Impact of the Jackson Reforms on Costs and Case Management (2014). 49

Personal injury compensation and civil justice paradigms  55 However, it is very difficult to undertake a detailed study tracking the impact of reduced cost on access and accuracy over time. This is partly because data are in short supply – very little empirical research has been undertaken on tort – but also because costs have reduced alongside a number of other changes within personal injury practice, such as the specialisation of claimant personal injury lawyers, technological advances and funding reforms, making it difficult to isolate cause and effect.57 However, it is possible to make a number of important observations. Access In terms of access, the most recent wave of proportionality reforms do seem to have had a significant impact. Since the 1980s, a specialised claims market has developed, which actively encourages the injured to claim. Unsurprisingly, this has contributed to a significant increase in claiming – from an estimated 250,000 claims in 1973 to over a million in 2011/2012.58 Despite perceptions, the expansion of CFAs in 2000 did not lead to an unrestrained culture of claiming, though claims did start to increase from 2006 onwards.59 However, downward pressure on costs since LASPO does seem to have contributed to a 19 per cent reduction in the number of claims over the past five years.60 The relationship between cost and access is complex in the context of personal injury. Reducing costs can make the system more accessible by making claims resolution procedures more affordable. However, because CFA lawyers fund their cases until their conclusion, reducing the profitability of personal injury can also impede the market’s ability to invest in new claims. Accuracy As noted above, it is important to note that whilst the formal civil justice system has moved away from accuracy in favour of reduced costs and increased efficiency in recent years, the shift in practice has not been so stark. Substantive justice was rarely achieved and so the partial implementation of tort law has moved from the shadows into official civil justice policy and been reorganised. A central aspect of this reorganisation has been the emergence of a more process-driven and less individuated system of compensation. 57 For a discussion of how the claims market and process has changed over time, see R Abel, English Lawyers between Market and State: The Politics of Professionalism (Oxford University Press 2003); H Kritzer, ‘The Fracturing Legal Profession: The Case of Plaintiffs’ Personal Injury Lawyers’ (2001) 8 International Journal of the Legal Profession 225; Boleat Consulting, The Claims Standards Council (December 2005); and A Morris, ‘Tort and Neo-liberalism’ in K Barker, K Fairweather and R Grantham (eds), Private Law in the Twenty First Century (Hart 2016). 58 The 1973 estimate is taken from the Pearson Commission report: Report of the Royal Commission on Compensation for Personal Injury (1978) vol 2, para 59. The more recent figures are available from the Compensation Recovery Unit (CRU). All claims, whether settled or litigated, successful or unsuccessful must be reported to CRU for the purpose of the recovery of benefits scheme: The Social Security (Recovery of Benefits) Act 1997, the Road Traffic (NHS Charges) Act 1999 and The Health and Social Care (Community Health and Standards) Act 2003. 59 See further, A Morris, ‘Spiralling or Stabilising? The Compensation Culture and our Propensity to Claim Damages for Personal Injury’ (2007) Modern Law Review 349. 60 This is likely to be in combination with increased efforts to regulate the claims market. See further, Morris (n57).

56  Research handbook on remedies in private law Table 4.1

Number of personal injury claims pursued Clinical negligence

Employers’ liability

Road traffic

Public liability

Total

accidents 2012/2013

16,006

91,115

818,334

102,984

1,048,309

2013/2014

18,499

105,291

772,843

103,578

1,016,801

2014/2015

18,258

103,401

761,878

100,072

998,359

2015/2016

17,895

86,495

770,791

92,709

981,324

2016/2017

17,894

73,355

780,324

85,504

978,816

2017/2018

17,400

69,230

650,019

96,067

853,615

Note: These figures are available from the Compensation Recovery Unit, see note 58.

Genn’s research on the settlement process in the 1980s revealed a system that was relatively individuated – the approach taken on liability and quantum generally appeared to be tailored to each individual case.61 RTAs tended not to involve questions of law and decisions on liability were made rapidly in relation to common sense knowledge about a range of factual situations, such as rear end collisions and right hand turns, and these were regarded as relatively clear-cut in so far as liability was concerned. The system was not, however, as routinised, simplified or as bureaucratic as Ross had found during his study of RTA settlements in the United States.62 During a series of interviews with practitioners in 2013–2014, those working on higher-value claims continued to report that they tend to investigate claims in detail and to have high levels of client contact. However, much has changed in relation to lower-value claims in terms of: the level of work undertaken; the level of personnel deployed used to resolve them; and the processes in place to support claims handling.63 As noted above, there has been a significant increase in claims over the last 40 years and this is largely attributable to an increase in RTA claims.64 It is estimated that there were just over 100,000 such claims in 1973 but by 2000/2001 they had grown to just over 400,000 and by 2012/2013 further still to over 800,000. RTA claims now constitute around 76 per cent of all personal injury claims and the majority of these are low-value whiplash claims.65 Indeed, 90 per cent of claims are said to be below £5,000.66 This significant increase in lower-value claims has encouraged insurers to reassess their business models – there has been much consolidation in the market resulting in fewer but larger claims centres throughout the country.67 The increase also led insurers to reassess their approach to claims handling. Genn had found Genn (n10). H L Ross, Settled Out of Court: The Social Process of Insurance Claims Adjustment (Aldine Transaction 1980). 63 For some discussion of this trend, see R Lewis, ‘Humanity in Tort: Does Personality Affect Personal Injury Litigation’ (2018) Current Legal Problems 70. 64 For discussion of the causes of the underlying the significant increase in RTA claims, see R Lewis and A Morris, ‘Tort Law Culture: Image and Reality’ (2012) 39 Journal of Law and Society 562. 65 It is estimated that 87 per cent of RTA claims arise from injuries to the neck area (including whiplash injuries): Transport Committee, Cost of Motor Insurance: Whiplash: Further Government Response to the Committee’s Fourth Report of Session 2013–2014, Eleventh Special Report (2013–2014) HC 902, 4. 66 ABI, Improving the Small Claims Track (2006). 67 For further discussion of trends within the insurance market, see R Lewis, ‘Insurance and the Tort System’ (2005) 25(1) Legal Studies 85; R Lewis, ‘Insurers and Personal Injury Litigation: Acknowledging The Elephant in the Living Room’ (2005) 1 Journal of Personal Injury law 1; and R 61 62

Personal injury compensation and civil justice paradigms  57 that in order to avoid or minimise expenditure on claims, insurers would use delay as a tactic to discourage claimants and put pressure on them to settle.68 However, by the early 2000s, a study by Goriely et al. suggested that insurers’ mind sets had changed so that speed was now of the essence: a quick claim was a cheap claim.69 Their focus had shifted to operational efficiency. In relation to lower-value claims, the response was to move to a less individuated and more routinised and standardised approach to resolving claims in bulk, utilising claims management software administered by cheap in-house non-legally qualified claims personnel.70 Software programmes are used not only to facilitate the efficient progress of a claim but also to help assess damages.71 The claims system for lower-value claims on the defendant side is now heavily process-driven. Insurers pay out in the vast majority of cases and accuracy of case outcomes plays second fiddle to cost.72 Defendant lawyers report that insurers are heavily driven by cost considerations when handling lower-value claims and focus on ‘achieving the lowest possible indemnity spend’ rather than on the merits of claims. This leads them to be more concerned about performance across profiles of cases than with the outcome of any individual claim: If you ask the insurance industry, they will say they are looking at process, they’re not looking at individual claims, they’re not worried about liability, they’re looking at the process. Getting a decent result on one individual file or two individual files at the lower end of the scale, they’re not interested in. [EW02, defendant lawyer] It comes back to distinguishing, let’s say, the volume claims which are very much viewed in the round by our clients … I’m not suggesting for a minute that individual outcomes aren’t important to them, but in volume claims they are far less important – be that a win or a loss – it’s about getting the right outcome over a large portfolio of claims…. [EW18, defendant lawyer]

Insurers suggest that there is no dispute on liability in about 90 per cent of RTA claims and 80 per cent of employers’ liability claims and so, in practice, the system is probably more liberal than the law at the lower end when it comes to establishing liability. Whether the reduced costs of defending claims flowing from recent reforms will make a difference to insurers’ approach is a moot point. However, what is clear is that the proportionality reforms have encouraged a more process-driven approach to handling lower-value claims on the claimant side too and also increased the value of claims to which such an approach is applied. Aided by developments in information technology, lawyers have increasingly adopted standardised and routinised procedures over the years to handle low-value claims. The economics of personal injury practice has Lewis, ‘Compensation Culture Reviewed: Incentives to Claim and Damages Levels’ (2014) 4 Journal of Personal Injury Law 209. 68 Genn (n10). 69 Goriely (n24) 33–4. 70 Ibid, 35–7. A recent study has also revealed that local authorities in Scotland adopt a routinised, simplistic and bureaucratic approach to handling claims made against them: S Halliday, J Ilan and C Scott, ‘Street-level Tort Law: The Bureaucratic Justice of Liability Decision Making’ (2012) 75 Modern Law Review 347. 71 J Pendle, ‘Quantum Assessment Tools – Encouraging Collaboration and Transparency’ (2012) 1 Journal of Personal Injury Law 32. 72 Insurers suggest that there is no dispute on liability in about 90 per cent of RTA claims and 80 per cent of employers’ liability claims: Lord Justice Jackson, Review of Civil Litigation Costs: Preliminary Report (vol 1) (2009) para 8.4.

58  Research handbook on remedies in private law encouraged firms to handle such claims in high volume in order to achieve economies of scale. However, as the profit margins for these claims tend to be low, firms were in turn encouraged to adopt more efficient approaches to claims handling – a trend accelerated with the introduction of the claims portal for low-value RTA claims in 2010. The extension of the portal and the introduction of fixed costs for claims worth between £1,000 and £25,000 have now embedded this approach. Lawyers report that the extension of fixed costs has forced them to reassess their business models and encouraged both deskilling and commoditisation. In order to maintain profitability, work has increasingly been pushed down to non-legally qualified personnel, supervised by experienced lawyers. In discussing fixed costs, one interviewee stated: ‘the only way you can make those numbers work is to cut something out and that, in many cases, has been qualified solicitors’. This was frequently referred to as the ‘dumbing down’ of personal injury work and led another interviewee to conclude: It’s now split. There’s a two tier legal profession. The volume stuff is not dealt with by lawyers at all, it’s accident management … And then you get what I regard as proper lawyers dealing with it from mid-range up.

Maintaining profitability within fixed costs also requires efficient and cost-effective claims handling procedures, and interviewees reported that the reforms had encouraged increased reliance upon case management systems involving scripting and standardised letters and documents. The drive towards the bulk-processing of lower-value claims by less experienced, non-legally qualified staff was also seen to have accentuated the need for a more process-driven, mechanistic approach. One interviewee explained that, if staff are insufficiently experienced or qualified, the ‘only way … to get them to perform … is via quite a narrow corridor of “this is what you do … if they do that, you do this”’. Whilst some noted that lower-value claims are sufficiently simplistic to lend themselves well to ‘processing’, others talked disdainfully about the development of ‘sausage factories’ and ‘factory lines’ ‘where information is input at one end and a result comes out at the other’.73 The impact on damages is as yet unclear but the indications are that the proportionality reforms are exerting downward pressure in this area because only a certain amount of work can be undertaken profitably.74 A review of the streamlined procedure introduced for RTA claims between £1,000 and £10,000 in 2010 revealed a small, but statistically significant reduction in mean general damages of around 6 per cent.75 Lawyers report that fixed costs: [g]ive an incentive to lawyers to want to settle because they don’t want to spend the time negotiating that higher offer because they’re not going to get anything for it. [EW21, claimant legal executive]

Similar concerns have been expressed in relation to higher-value claims:

73 Engstrom calls firms adopting such approaches ‘settlement mills’ in the US: N Engstrom, ‘Sunlight and Settlement Mills’ (2011) 86 New York University Law Review 805 and ‘Run-of-the-mill Justice’ (2009) 22 Georgetown Journal of Legal Ethics 1485. 74 For an initial review of the Jackson reforms, see: J Peysner, Impact of the Jackson Reforms: Some Emerging Themes (Civil Justice Council 2014). 75 P Fenn, Evaluating the Low Value RTA Process (Ministry of Justice 2012).

Personal injury compensation and civil justice paradigms  59 Then I think in the other cases you’re going to get people with good claims but they’re complicated, difficult claims, and lawyers because of their costs restraints are not going to run those cases, or they might say to the client, ‘well, if we really ran this, it’s going to be a lot of work, a lot of hassle, a lot of cost, but you can take the first offer they’ve given you now’ and so people might settle for that reason. There’s definitely under-settlement and I think there’s going to be more and more under-settlement maybe in the more difficult middle band cases … That’s the worry. [EW07, claimant lawyer]

The related concern is that this will lead to inequality of bargaining power during negotiations: Proportionality – [insurers are] going to know that there’s going to be a limited amount of money that can be spent on a case and they’ll take advantage of that. And if they know that solicitors aren’t going to earn as much money out of a case as they did previously, then again, I think that they will come away with settling the cases for less ... So damages will come down as a result of depressing the amount that you can get by way of costs. [EW09, claimant lawyer]

UNDERSTANDING THE DRIVE FOR COST AND EFFICIENCY Whilst the reinforcement of proportionality following the introduction of the Woolf reforms was apparently based on evidence of spiralling legal costs, the reality is more complex. It was true that costs had increased rather than reduced in some respects following the Woolf reforms, although the streamlined procedure for low-value RTA claims was introduced in 2010 to ameliorate this.76 During his review of civil litigation costs, Jackson did uncover many instances of legal costs far outstripping damages. In CFA cases featured in the surveys on which he relied, claimant costs ranged between 158 per cent and 203 per cent of the damages awarded.77 However, he attached much importance to judicial statistics which, as Genn noted, is problematic because ‘using these figures to make assumptions about average costs is rather like generalizing about war from the most bloody and hard fought battles’.78 Nevertheless, he ultimately concluded: A fair overall summary of civil litigation in 2007 may run as follows: approximately 2.1 million civil cases were launched of which at least 95% were brought in the county courts. Approximately 90% of all civil cases were concluded without any prolonged contest and at costs proportionate to the issues at stake. The remaining 10% of cases were contested (whether or not settled before trial) and potentially gave rise to significant costs liabilities.79

To the extent that costs were disproportionate, claimant lawyers argued that this was either because claims involve an irreducible amount of work regardless of their value, or due to insurers’ unreasonable behaviour in responding to claims. A working party of academics concluded that Jackson’s report provided ‘a misleading and partial account of the problems

Goriely (n24) 172–82 and P Fenn, N Rickman and D Vencappa, The Impact of the Woolf Reforms on Cost and Delay, CRIS Discussion Paper Series – 2009.I (2009). 77 C McIvor, ‘The Impact of the Jackson Reforms on Access to Justice in Personal Injury Litigation’ (2011) 30 Civil Justice Quarterly 411, 423. 78 H Genn, ‘Preliminary Analysis of Costs Data’ presented at Review of Civil Litigation Costs Seminar, Birmingham, 26 June 2009, 2. 79 Jackson (n30) 53. 76

60  Research handbook on remedies in private law requiring solutions because it too frequently treats anecdote and opinion as if it were fact, and systematically prefers the evidence of the defence lobby over that favouring injured persons’.80 In view of the above, recent reforms to reduce the cost of resolving claims certainly appear both disproportionate to the extent of the problem and indiscriminate in their target, applying to all claims rather than to defined problematic areas. However, the reality is that whilst evidence plays a role, policymaking is largely the struggle over competing ideas, interests and values played out through the rhetorical use of language.81 The job of the researcher is to unpick that rhetoric to reveal the underlying motivating factors, which in this context are: the ‘value for money’ agenda, the insurer agenda, the tort reform agenda and the privatisation of justice agenda.82 The ‘Value for Money’ Agenda Whilst proportionality is seen as a means of distributing limited resources fairly, it is also seen as a justifiable end in itself because it represents value for money. During the Woolf reforms, the Association of Personal Injury Lawyers had sought to argue that many of the access to justice arguments advanced in favour of proportionality did not apply in the context of personal injury claims. As most such claims are successful, the majority of claims costs are met by insurers. In this sense, personal injury claims are not subject to a fixed budget and so the pressure to ration procedure rather than access is not the same as in other areas. However, Lord Woolf noted that ‘even where the individual litigants received back the full cost of achieving their compensation, that cost had to be borne in the first place by the insurers, in the second place by the insured and in the third place by society generally’.83 He argued that it was ‘incorrect to assume that high costs are not a problem merely because they are met out of a relatively deep pocket or are passed on in insignificant amounts to individual consumers. Unnecessary costs to the economy as a whole are not acceptable, however they are distributed.’84 In addition, he stated that a system which usually paid those who litigated cases as much as, and sometimes more than, the victims received in compensation simply failed to command public confidence.85 More recently, in discussing recoverable costs, Lord Justice Jackson stated: Most civil litigation is a form of business project in which the parties invest substantial sums in order to achieve a just outcome. Even justice must have a price. It is not rational to spend £1,000 to recover a £100 debt, however strong or virtuous your claim. Outside litigation, no normal business project is conducted on an open-ended basis, with costs simply being added up at the end. The time has now come to apply sensible budgetary control to the recoverable costs of litigation.86

K Oliphant et al., On a Slippery Slope – A Response to the Jackson Report (2011). J Russell, T Greenhalgh, E Byrne and J McDonnell, ‘Recognizing Rhetoric in Health Care Policy Analysis’ (2008) 13 Journal of Health Services Research Policy 40. 82 For further discussion of the problematisation of disproportionate legal costs, see A Morris, ‘Deconstructing Policy on Costs and the Compensation Culture’ in E Quill and R Friel (eds), Damages and Compensation Culture: Comparative Perspectives (Hart Publishing 2016). 83 Woolf (1996) (n12) ch 25. 84 Ibid, para 2. 85 Ibid. 86 Lord Justice Jackson’s paper for the Civil Justice Council conference on 21 March 2014, p 8. 80 81

Personal injury compensation and civil justice paradigms  61 In justifying his proposal that disproportionate costs should not be assumed to be recoverable simply because they were necessarily incurred, he further noted: The policy which underlies the proposed new rule is that cost benefit analysis has a part to play, even in the realm of civil justice. If parties wish to pursue claims or defences at disproportionate cost, they must do so, at least in part, at their own expense.87

These statements reflect the view that it is simply undesirable to expend, or rather to expect society to expend, disproportionate amounts of money on processing claims. Whether disproportionate costs are widespread or not, a system that allows them is inherently problematic. Reduced cost and increased efficiency add more value to society than higher levels of accuracy and so, in this sense, law and legal services are not seen to have ‘special’ status. The value that substantive justice might bring to individuals and to wider society in the form of accountability, the exposure of wrongdoing and the regulation of behaviour is either doubted or not seen as a priority. The priority instead is to force the rationalisation of legal services to ensure that they deliver value for money. The Insurer Agenda Liability insurers are the ‘real’ defendant in the majority of claims and, given they are responsible for 94 per cent of tort compensation for personal injury, are the ‘paymasters’ of the system.88 Insurers clearly have an interest in reducing the cost of resolving claims. Whilst costs can be passed on to consumers and wider society, reducing the costs of claims handling can increase profitability and help keep premiums both affordable and competitive, especially if there is a downturn in investment income and an increase in the cost of reinsurance. However, insurers’ interest in cost is not simply about reduction but also about management. The more predictable the claims process, the more insurers are able to set appropriate claims reserves and also manage risk, which is obviously central to their success. As noted above, insurers’ philosophy on claims handling has changed from using delay as a negotiating tactic to focusing on operational efficiency. However, insurers’ efforts to reduce cost and increase efficiency internally are hampered by the involvement of claimant lawyers on the other side as they decrease predictability and increase both the time and cost of resolving claims. As a result, insurers have lobbied long and hard to shape the civil justice system around their commercial needs and demands.89 In doing so, they pursued avenues of reform to remove, or at least reduce claimant lawyers’ involvement, in the process.90 They have campaigned for an increase in the small claims limit for personal injury cases and a crackdown

Jackson (n30) 38. Lewis and Morris (n64) 567. 89 For evidenced and detailed discussion of insurers’ lobbying efforts, see Morris (n82) 135–40. 90 R Rothwell, ‘Collision Course’ Law Society Gazette (17 November 2011) quoting Tim Oliver, President of Forum of Insurance Lawyers: ‘What the insurers want is less unnecessary solicitor involvement in cases where it doesn’t really need it. If insurers had their way, they would have much greater direct involvement with the claimant’. 87 88

62  Research handbook on remedies in private law

Personal injury compensation and civil justice paradigms  63 on whiplash claims.91 One insurer states that lawyers are unnecessary in 70 per cent of injury claims, whilst another states: Does access to justice have anything to do with personal injury claims or is it simply a commoditised service? In my opinion, the majority of personal injury claims are a commodity needing little legal input. Arguably customer service skills are as important as technical skills and legal knowledge at the low end of the market. That does not mean to say that lawyers should be taken out of the market but any involvement has to be proportionate in terms of cost and time.92

They also campaigned for the streamlined portal procedure that now applies to the majority of all claims. In requiring claimant lawyers to provide early notification of claims, insurers can decide how best to proceed before many costs are incurred. This gives them more control over the conduct of the claim and helps to keep claimant lawyers’ work to a minimum. Finally, insurers have campaigned for the abolition of CFA recoverability and the implementation of fixed costs for claimant lawyers, which they increasingly use themselves to remunerate defendant lawyers. The fact that policy has moved in the direction sought by insurers suggests that their instrumental efforts have played an important role. Under Labour, insurers were effective not only in ensuring that costs hit the political agenda but, just as importantly, in shaping the policy response. Under the Coalition, there was a meeting of minds with insurers being told that they were ‘pushing an open door on costs’.93 The Tort Reform Agenda The desire to constrain tort, both in terms of the number and cost of claims, was also driven by Conservative ideology. On the one hand, the fault-based tort system of personal injury compensation strikes a chord with those on the ‘right wing’ because it promotes individual responsibility in relation to defendants and guards them from liability without wrongdoing. In addition, with liability insurers as the ‘lifeblood’94 of the system, tort is essentially a private source of compensation for accident, illness and disease that relies on individual initiation. However, tort also poses risks. The more it is used and the more it costs, the more it creates economic and regulatory burdens.95 In the run up to the 2010 general election, the Conservatives expressed their concern that the UK had ‘become simultaneously and dangerously under-regulated in some areas (particularly

91 See further discussion of whiplash claims: K Oliphant, ‘“The Whiplash Capital of the World”: Genealogy of a Compensation Myth’ in E Quill and R Friel (eds), Damages and Compensation Culture: Comparative Perspectives (Hart Publishing 2016). 92 D Fisher, ‘The Future of Personal Injury: An Insurers Perspective’ (2008) 2 Journal of Personal Injury Law 164, 165. 93 Freedom of information documents obtained by shadow justice minister Andy Slaughter revealed meetings between insurers and the MoJ, in which insurers were allegedly told they were ‘pushing at an open door’ over civil justice reforms: Rothwell (n90). For a detailed discussion of how the Labour and Coalition governments responded to insurers’ lobbying efforts on costs, see A Morris, ‘The “Compensation Culture” and the Politics of Tort’ in T T Arvind and J Steele (eds), Tort Law and the Legislature: Common Law, Statute and the Dynamics of Legal Change (Hart 2013) 74. 94 R Lewis, ‘Insurance and the Tort System’ (2005) 25 Legal Studies 85. 95 For a discussion of how neo-liberal policy has affected the personal injury claims process, see Morris (2016) (n57).

64  Research handbook on remedies in private law systemic risks in the banking sector) but chronically over-regulated elsewhere’.96 They promised to ‘sweep away Labour’s ineffective system of bureaucracy’.97 Tort was seen as a major culprit. In what was described as a bid to ‘win back traditional Tory voters’, David Cameron seized on ‘compensation culture’ as a rhetorical tool.98 He complained that businesses were operating ‘under the shadow of the worst case scenario … everyone’s so worried about being sued that they invent lots of their own rules on top of the regulations that already exist’.99 This was said to be stifling both innovation and growth. It was time, he stated, to ‘bring common sense to the laws on compensation’.100 Lord Young, who had been commissioned to examine the so-called compensation culture, similarly noted that it was time to ‘free businesses from unnecessary bureaucratic burdens and the fear of having to pay out unjustified claims and legal fees’.101 As Sugarman notes in relation to the US, ‘conservative political entrepreneurs simultaneously seek both to reduce and stabilise the exposure faced by their business and insurer allies whilst remaining committed to the basic idea of private law as society’s core mechanism for accident regulation and victim compensation’.102 To some extent, the Coalition focused on reducing and stabilising that exposure through the reform of tort law. Most notably, section 69 of the Enterprise and Regulatory Reform Act 2013 reinforced the fault principle in the context of employers’ liability by removing the strict liability that had previously been in place for breach of some health and safety regulations.103 However, efforts have largely focused on reforming tort ‘through the back door’ – maintaining tort, but containing it through civil justice reform.104 The aim has been not only to constrain levels of claiming, but, moreover, to minimise disruption where claims are pursued by ensuring that they are resolved quickly and cheaply. In this sense, recent reforms reflect one mode of deregulation politics. As Carrington has noted, ‘[m]uch hoopla about litigation costs may be traceable to those whose real complaint is that they or their clients are exposed to liabilities that they would prefer to avoid’.105 The Privatisation of Justice Agenda Recent reforms have not simply reflected views on tort but have also reflected views on law and the legal system more generally. The Coalition argued that its efforts to reduce legal costs

Conservative Party Green Paper, Regulation in the Post-Bureaucratic Age: How to get Rid of Red Tape and Reform Quangos – Policy Paper on Better Regulation (2009) 5. 97 Ibid. 98 C Brown, ‘Compensation Culture Targeted in Shift to Right’ The Independent (London, 1 October 2007). 99 David Cameron MP, ‘Reducing the Burden and Impact of Health and Safety’ speech at Policy Exchange, 1 December 2009. 100 Ibid. 101 Lord Young, Common Sense Common Safety (HM Government 2010) 19. 102 Sugarman (n2). 103 Enterprise and Regulatory Reform Act 2013, s 69. 104 J B Weinstein, ‘Procedural Reform as a Surrogate for Substantive Law Revision’ (1993) 59 Brooklyn Law Review 827 and D S Reda, ‘The Cost-and-Delay Narrative in Civil Justice Reform: Its Fallacies and Functions’ (2012) 90 Oregon Law Review 1085. 105 P D Carrington, ‘Renovating Discovery’ (1997) 49 Alabama Law Review 51, 53. See also by the same author, ‘Politics and Civil Procedure Rulemaking: Reflections on Experience’ (2010) 60 Duke Law Journal 597. 96

Personal injury compensation and civil justice paradigms  65 were part of a wider package of legal system reforms.106 These included a significant reduction in the availability of state-funded legal aid, making legal representation inaccessible to large sections of society, and the promotion of alternative dispute resolution (ADR), particularly mediation.107 These policies were not new. Governments have sought for some time to reduce the cost of legal aid.108 In addition, the ADR movement has gathered apace in recent years. Since the implementation of the Woolf reforms, both litigants and judges have been expected to consider mediation as an alternative to court.109 Academics have expressed their concern about the resulting privatisation of justice and the state’s withdrawal from the civil justice system, both of which are seen to mark a declining commitment to private law and civil justice.110 Damaska’s work demonstrates the link between procedural arrangements and political ideology.111 He contrasts active states whose procedural rules focus on implementing policy (i.e. giving effect to the letter of the law) with reactive states whose procedural rules focus on conflict resolution. In 1979, Sir Jack Jacob stated that the administration of civil justice ‘manifests the political will of the State that … civil wrongs … be made good, so far as practicable, by compensation and satisfaction …’.112 Whilst the expense of litigation meant that this was not a reality for many individuals, the political will to implement policy underlying the law has also dwindled because of the expense to the state of providing a court-based civil justice system. England and Wales have, therefore, drifted further towards a privatised model of conflict resolution, involving settlement and ADR, which prioritises compromise of legal rights over substantive justice. However, recent reforms have pursued the privatised conflict resolution model with deliberate and renewed vigour. The Coalition argued that the reforms were united by an: ambition to equip people with the knowledge and tools required to enable them to resolve their own disputes, by working problems through in a non-adversarial manner ... What we are ultimately aiming for is a shift in culture where we look to the law to resolve conflicts to one where we take more responsibility for addressing them ourselves in the first instance.113

Ministry of Justice, Solving Disputes in the County Courts: Creating a Simpler, Quicker and More Proportionate System – A Consultation on Reforming Civil Justice in England Wales (2011) 6. 107 The legal aid reforms were implemented by LASPO 2012. Legal aid has, for example, been removed from family cases (except those involving domestic violence, forced marriage or child abduction) and from areas of immigration, employment, education, debt and housing law. For a discussion of current policy on mediation, see: H Genn, Judging Civil Justice: The Hamlyn Lectures 2008 (Cambridge University Press 2010). 108 Ibid, 38–45. 109 CPR 1.4(2)(e). 110 Genn (n109); R Dingwall and E Cloatre, ‘Vanishing Trials: An English Perspective’ (2006) 1 Journal of Dispute Resolution Article 7; E Thornberg, ‘Reaping What We Sow: Anti-litigation Rhetoric, Limited Budgets, and Declining Support for Civil Courts’ (2011) 30 Civil Justice Quarterly 74 and T Farrow, Civil Justice, Privatization and Democracy (University of Toronto Press 2014) 298–306. 111 M R Damaska, The Faces of Justice and State Authority: A Comparative Approach to the Legal Process (Yale University Press 1986). See also, K E Scott, ‘Two Models of the Civil Process’ (1975) 27 Stanford Law Review 937. Scott contrasts what he calls the ‘conflict resolution model’ with the ‘behaviour modification model’. 112 Jacob (n8) 1. 113 Ministry of Justice (n106) 6. 106

66  Research handbook on remedies in private law The system is to focus on ‘dispute resolution … for the majority of its users rather than the loftier ideals of justice that cause many to pursue their cases beyond the point that it is economic to do so’.114 The reforms seek not only to control legal behaviour, but to change expectations and demands of law. Citizens are expected to resolve disputes quickly and cheaply rather than assert their rights and pursue legal entitlements. A system that elevates process over substance in this way is less concerned with the quality of outcomes and ‘portrays law as just another way of ordering private relations rather than as embodying and articulating public values, values that have determinable meanings’.115 In this context, claims for tort compensation are largely construed as economic transactions, rather than as a means of achieving substantive justice, accountability or the regulation of behaviour. It is not about preventing the abuse of private power or redressing the imbalance of power between vulnerable individuals and rich corporations, as some personal injury lawyers and academics would argue.116 Litigation is seen not only to create regulatory burdens, but also to undermine personal responsibility and to damage the broader social fabric.117 Whilst legal frameworks are necessary for the ordering of affairs, too much law jeopardises rather than enhances social and economic relations. Recent reforms, therefore, mark a broader ‘turn against law’.118

CONCLUSION The basic premise underlying this chapter is that it is important to look beyond tort law to examine the institutional arrangements through which that law is mediated because these arrangements dictate what the law is able to achieve. In the context of the civil justice system, the key is to understand how the competing interests of cost, access and accuracy are balanced. Whilst access to the tort system and the legal accuracy of case outcomes are each important to the implementation of tort law, they are in direct tension with the cost of resolving claims. As such, a decision has to be made on how that tension should be resolved and this decision will turn on underlying views about: the appropriate scope, nature and role of tort law in society; the value it brings to injured individuals and broader society and the government’s responsibility towards its administration. Whilst the system traditionally purported to prioritise accuracy, civil justice policy in recent years has pulled firmly in favour of reducing cost and increasing efficiency. This chapter has sought to expose the dynamics underlying that policy and to explain how it has affected tort as a system of personal injury compensation. Policy debates can rarely be taken at face value because policymaking is a political rather than rational process. Arguments for reducing Ibid, 7. S Silbey and A Sarat, ‘Dispute Processing in Law and Legal Scholarship: From Institutional Critique to the Reconstruction of the Juridical Subject’ (1989) 66 Denver University Law Review 437. 116 West argues that the rule of law is important not just in constraining the abuse of state power but also in preventing the abuse of private power: R West, ‘The Limits of Process’ in J E Fleming, Getting to the Rule of Law (New York University Press 2011). 117 For further discussion of claiming as deviance, see J Ilan, ‘The Commodification of Compensation? Personal Injury Claims in an Age of Consumption’ (2011) 20 Social and Legal Studies 39. 118 M Galanter, ‘The Turn against Law: The Recoil against Expanding Accountability’ (2002) 81 Texas Law Review 285. 114 115

Personal injury compensation and civil justice paradigms  67 the cost of resolving claims based on evidence and rhetoric have masked the real drivers of reform: the value for money agenda; the insurer agenda; the tort reform agenda and the privatisation of justice agenda. As such, politically and commercially motivated ideas, interests and values have combined in recent years to shape civil justice policy and, in turn, policy on tort as a system of personal injury compensation. The indications are that the drive to reduce the cost of resolving claims is leading to reduced access to tort compensation. It has also led to the stratification of higher- and lower-value claims. The handling of lower-value claims, which constitute the majority, is becoming increasingly process-driven. This, in turn, is leading to a much less individuated system of compensation than the typical tort textbook would suggest. These trends, and their broader implications, need further investigation. However, the balance between cost, access and accuracy is an ever-moving feast. At the time of writing, there is ongoing discussion about: introducing a redress scheme for those with birth injuries;119 extending the use of fixed costs;120 increasing the small claims limit and limiting compensation for those with whiplash injuries.121 As Sir Terrence Etherton has stated, ‘civil justice reform is … a subject that never rests’.122

Department of Health, A Rapid Resolution and Redress Scheme for Severe Avoidable Birth Injury: A Consultation (March 2017). 120 See further: Lord Justice Jackson, ‘Fixed Costs – the Time Has Come’ Annual Insolvency Practitioners Association Lecture, 28 January 2016 and Department of Health, Introducing Fixed Recoverable Costs in Lower Value Clinical Negligence Claims: A Consultation (January 2017). 121 For further discussion of how the market might respond and how this could affect levels of claiming, see Ministry of Justice, Civil Liability Bill – Reforming the Soft Tissue Injury (‘Whiplash’) Claims Process (Impact Assessment, March 2018). 122 Sir Terence Etherton, ‘Civil Justice after Jackson’ Conkerton Memorial Lecture (March 2018). 119

5. Remedies and reality in the law of contract Catherine Mitchell1

INTRODUCTION The academic literature on remedies for breach of contract is noted more for the richness of its theoretical scholarship than its engagement with the reality of commercial contracting. What happens on the ground appears to be of little interest to both those theorists seeking enlightenment about contract remedies from the starting point of the morality of promising,2 and those focusing instead on the incentive effects created by the rules amongst rational and self-interested participants in a market.3 This lack of overt connection between the lived world of contracts and contract theory is understandable. The extent to which there is, or should be, any alignment between contract law and commercial contracting behaviour is a difficult and contested issue. It may well be better to direct efforts towards drawing out the underlying coherence, or lack of it, between the distinctive form of obligation and right voluntarily created through contract and the law’s remedies for breach. Even for the more pragmatic contract law scholar, for whom the disconnect between law and commercial expectations may be more problematic, it may not much matter how far the gap between the legal rules and commercial practice extends. Sophisticated and properly advised commercial parties will contract into their preferred scheme of remedies through express terms. All that is required from contract law is to facilitate these efficient choices through a commitment to freedom of contract, well-designed defaults and some mandatory rules to curb the worst excesses of self-interested behaviour.4 We might expect more engagement with commercial reality from empirical work on contract. Yet few empirical theorists have made the operation of contract law remedies the sole focus of their study, although insights can be derived from empirical research with a broader scope. The precise reasons for this comparative neglect of remedies in empirical scholarship is unclear. A likely reason is that it is impossible to model any general theory of what contract law remedies should look like from snapshots of behaviour from within particular industries and markets. Even if we have empirical data demonstrating the misalignment between law and practice, it is not clear what lawyers should do about it. The common law tends towards constancy. While this is its most positive virtue for some,5 it does mean wholesale legal reform is difficult to perpetrate through traditional common law method. Contract law development depends on the vagaries of litigation.

Thanks to Erika Rackley for helpful comments on an earlier draft. C Fried, Contract as Promise (Harvard University Press 1981); SA Smith, ‘Performance, Punishment and the Nature of Contractual Obligations’ (1997) 60 MLR 360. 3 R A Posner, Economic Analysis of Law (9th edn, Walters Kluwer 2014) ch 4. 4 J Morgan, Contract Law Minimalism (Cambridge University Press 2013) ch 6. 5 J Gava, ‘Dixonian Strict Legalism: Wilson v Darling Island Stevedoring and Contracting in the Real World’ (2010) 30 OJLS 519. 1 2

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Remedies and reality in the law of contract  69 In full awareness of the various limitations on the endeavour, this chapter considers what we know, and what it might be useful to know, about the congruence between contract law remedies for breach and commercial reality. Of course, it is not necessarily the case that the legal remedies for breach are only justifiable to the extent that they track commercial contractors’ actual responses to breach, or mirror the contractual and other normative frameworks used to manage non-performance. There may be very good institutional, economic and moral reasons why legal remedies should not reflect commercial behaviour. In addition, the lack of penetration of existing empirical findings into contract law might lead us to question the point of gaining insight into the ‘reality’. One response is to say that examining reality can help us decide if the often-expressed judicial opinion that contract law should conform with commercial expectations is a genuine commitment or just empty rhetoric. On a more functional note, a law of contract that proceeds without any reference at all to commercial expectations risks losing its competitive edge in the market for law and legal services.6 Commercial contractors constitute the main audience for, and users of, contract rules.7 In an environment where commercial contractors enjoy a large measure of freedom over choice of law, jurisdiction and forum for their agreements, contract law’s sensitivity to commercial reality is a factor in judging law’s effectiveness in facilitating economic exchange. Any enquiry into reality and remedies requires a window into commercial reality. Needless to say, this poses challenges. The approach to commercial reality adopted here is necessarily very general. Some understanding can be gained from the findings of empirical work. Plausible inferences can also be drawn from general theoretical accounts of the relationship between law and commercial behaviour. Contract case law can also be useful, to an extent. With this in mind, commercial reality is examined and identified from three perspectives: first, empirical studies; second, relational contract theory, broadly conceived; third, contract remedies as default rules. Given constraints of space, the analysis here does not claim comprehensiveness. Nor is it possible to justify fully the choice of these three perspectives as representing commercial reality. They are, at best, approximations. Although their precise focus differs, all are concerned to a greater or lesser degree with how law affects and influences contractors on the ground. After exploring these three perspectives on legal remedies and commercial reality, we examine how contract law supports, and deviates from, the perspectives presented. Here, the particular focus is on the ‘performance interest’ in contact remedies. Throughout the chapter, productive lines for further research are identified.

COMMERCIAL REALITY 1: EMPIRICAL STUDIES It is natural to begin the enquiry into commercial reality with empirical studies of contracting behaviour. Empirical insights into the use of legal remedies for breach of contract, or the

English contract law remains the law of choice for the international contracting community, although this does not necessarily indicate positive approval of its substantive rules: see G Cuniberti, ‘The International Market for Contracts: The Most Attractive Contract Laws’ (2014) 34 Northwestern Journal of International Law and Business 455, 475ff. 7 J Morgan, ‘On the Nature and Function of Remedies for Breach of Contract’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) 23. 6

70  Research handbook on remedies in private law extent of contracting out, are lacking. Eigen, in his survey of empirical studies of contract, noted that questions surrounding contract terms, performance and breach, were relatively underexplored.8 Some reasons for the dearth of empirical evidence in this area immediately suggest themselves. Neither contract law scholars nor empiricists may harbour much interest in investigating how remedies for breach of contract influence or frame actual behaviour. The former because it is irrelevant to their more theoretical-legal scholarship, and the latter because it may be an unfruitful area for original enquiry. Research specifically into remedies may not yield any additional insights beyond the already notorious finding of lack of use. It seems a little premature, however, to assume that there is nothing to investigate here, since the attitudes of participants in particular markets towards breach and legal remedies would surely be of interest to contract law scholars researching those markets where law traditionally enjoys a greater sphere of influence (shipping; international commodity sales). An alternative and productive line of empirical enquiry may come from examining the kind of remedial scheme that parties contract into via express terms and model contracts. Whether contract terms are a reliable indicator of commercial parties’ expectations may be questioned however, given the well-rehearsed critiques of contract documents. There is justified scepticism that express terms detailing the remedies for breach will genuinely reflect the parties’ preferences. Formal legal contracts dealing with performance, breach, and so on, may draw more on the disciplining and symbolic power of the written document than its actual legal effect.9 A further problem is that contract terms stipulating remedies may be boilerplate provisions imposed without meaningful negotiation by the economically stronger party.10 In addition, party inertia in retaining what is familiar in express terms, over what is efficient, is well documented.11 Efficiency here means retaining the same terms, even in the wake of unfavourable interpretations by courts. Constant rewrites in response to an unstable legal rule would largely defeat the economic purpose of a ‘standard form’. Even if parties identify a problem (such as the possible insolvency of a contracting party) and formulate express terms to deal with it, the terms may not work in the way the parties expect, due to exogenous factors such as the influence of lawyers, the balance of power in negotiations following the occurrence of the anticipated event, and so on.12 Nevertheless, contract devices such as termination rights, liquidated damages and forfeiture clauses, are well-known and utilised in commercial contracting, although their precise function is unclear. Are these included following conscious reflection? Are they a form of insurance, an encouragement to perform, or an acknowledgement that breach is a high probability, the effects of which must be dealt with in advance? It

8 Z J Eigen, ‘Empirical Studies of Contract’ (2012) 8 Annual Review of Law and Social Science 291, 301. 9 D Yates, Exclusion Clauses in Contracts (2nd edn, Sweet and Maxwell 1982) 19, 30; T WilkinsonRyan, ‘Do Liquidated Damages Encourage Breach? A Psychological Experiment’ (2010) 108 Michigan Law Review 633. Stewart Macaulay noted that business people were unconcerned when told that their ‘requirements’ stipulations were unenforceable: ‘Non-Contractual Relations in Business: A Preliminary Study’ (1963) 28 American Sociological Review 55, 60. 10 O Ben-Shahar and J J White, ‘Boilerplate and Economic Power in Auto-Manufacturing Contracts’ in O Ben-Shahar (ed.), Boilerplate: The Foundation of Market Contracts (Cambridge University Press 2007) 29, 30ff. 11 M Gulati and R E Scott, The 3½ Minute Transaction (University of Chicago Press 2013) 33ff. 12 S Wheeler, Reservation of Title Clauses (Oxford University Press 1991) ch 5.

Remedies and reality in the law of contract  71 is likely that such terms fulfil a range of legal and non-legal objectives. More precise research confirming the ex ante role of such provisions would be valuable. The largely ambivalent attitude that commercial contractors display towards breach and legal remedies is revealed in some famous empirical studies. Macaulay’s seminal 1963 study of business people’s perceptions of contracts and contract law had relatively little to say about the effect that legal sanctions for breach had upon commercial contractors. The study is more famous for revealing social norms and enforcement, such as reputational sanctioning, pressure on the other party, or withholding future business, as the usual responses to breach.13 Macaulay found that legal enforcement and sanctions were avoided for their inflexibility and their tendency to undermine trust.14 He noted that planning was more likely in relation to descriptions of performance than legal sanctions for default.15 The extent to which these findings are still pertinent today in more complex contracting environments, where contract paperwork is multi-faceted and multi-functional, would be a promising line of enquiry.16 Macaulay’s findings about attitudes towards breach are also instructive. While there is a business norm that ‘one does not welsh on a deal’,17 there is also a general tolerance towards the possibility of breach (‘cancelling the order’18), with the expectation that compensation extends only to reimbursing wasted expenditure, not any element of lost profit.19 Negotiation in the event of problems, rather than rushing to implement legal sanctions, was also an expectation.20 Contract remedies were feared to be inadequate, and not worth the trouble and expense of pursuing on grounds of mere principle.21 Litigation is likely only when the relationship has ended, such as when termination rights have been triggered.22 These findings are replicated to an extent in the Beale and Dugdale 1975 study. Even if remedies featured in the express terms (as with termination, liquidated damages or forfeiture) these were likely to be limited to those that could be pursued or implemented without a court order.23 Their study also indicated the importance of tacit understandings (‘it was generally

13 Macaulay (n9). See also B Burchell and F Wilkinson, ‘Trust, Business Relationships and the Contractual Environment’ (1997) 21 Cambridge Journal of Economics 217, 225–6; L Bernstein ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’ (1992) 21 Journal of Legal Studies 115; T Dietz and H Nieswandt, ‘The Emergence of Transnational Cooperation in the Software Industry’ in V Gessner (ed.), Contractual Certainty in International Trade (Hart 2009) 87, 99–101. 14 Macaulay (n9) 63. 15 Ibid, 60. 16 J P Esser’s update on Macaulay’s study, noting the increasing importance of long-term agreements to govern exchange, is now over 20 years old: ‘Institutionalizing Industry: The Changing Forms of Contract’ (1996) 21 Law and Social Enquiry 593. 17 Macaulay (n9) 63. 18 Ibid, 61. 19 Ibid, 61. See also L Bernstein, ‘Merchant Law in a Merchant Court: Rethinking the Code’s Search for Immanent Business Norms’ (1996) 144 University of Pennsylvania Law Review 1765. Bernstein regarded payment of reliance losses as a ‘relationship preserving norm’ and expectation loss as an ‘endgame norm’, 1798–9 and fn 114. 20 Macaulay (n9) 65. 21 Ibid, 65. 22 Ibid, 65–6. 23 H Beale and T Dugdale, ‘Contracts between Businessmen: Planning and the Use of Contractual Remedies’ (1975) 2 British Journal of Law and Society 45, 45.

72  Research handbook on remedies in private law accepted that the seller would not compensate the buyer for certain losses’24). Legal remedies might be pursued for disputes about payment, where the debt was easy to prove and relatively straightforward to recover through court proceedings. Beale and Dugdale did find evidence that commercial reactions to breach tracked the law on compensation and mitigation to a certain degree. If a buyer cancelled before work had started on manufacturing a product, or the asset specificity of the product was low, a seller would rarely seek a remedy. If production of goods with a high level of asset specificity had begun, a cancellation charge would be sought to cover wasted costs. Cancelling buyers expected to have to pay it, including an element of lost profit.25 Consequential losses, on the other hand, ‘were seldom claimed and almost never paid’.26 Liquidated damages clauses were found only in negotiated contracts, not standard forms, and could work in the interest of either party. The seller could stipulate what they were willing to pay in the event of, say, late delivery, to avoid full liability where the buyer was unlikely to accept a complete exclusion. For the buyer, liquidated damages provided a sanction in the event of breach, but also encouraged information-sharing about the possibility and extent of likely delays in performance.27 In some respects, these findings may no longer be reliable. In a study of the timber industry, Konradi noted sanctions of ‘blacklisting’ or exclusion from the trade association were possible, but rarely utilised. Contract-based governance and enforcement, particularly in cross-border trades, were favoured instead.28 Evidently the effectiveness of any sanction is an important consideration. Depending on the industry, a reputational sanction against a trader based in another country may lack bite. Alternatively, formalisation may be regarded as a way of preventing trouble further down the line. Arrighetti et al., examined the relationship between formal contracting and legal enforcement. They found that use of formal contracts tended to result in reduced reliance on courts to enforce agreements.29 Their argument derives from comparing the highly formalised contracts used by German firms, but the relatively low recourse to courts and legal action amongst those firms, with the looser commitments favoured by British firms, but with greater reliance on courts to enforce payment.30 This more complex picture of the use of formal enforcement is borne out in Lisa Bernstein’s empirical work. In line with earlier findings, she discovered that business people prefer not to rely on law and legal sanctions in response to breach, but instead utilise their own industry-mandated dispute resolution regimes, supplemented by informal measures (reputation and gossip) that govern day-to-day trading. Her work enriches and complicates the debate about the interrelationship between formal and non-formal sanctions for breach. In particular, it is not clear that contractors want the norms that govern their working relationship to be applied during formal arbitration. In her study of the grain and feed trade, she noted that the ‘split the difference’ remedy, made in a spirit of compromise between parties in an effort to preserve Beale and Dugdale (n23) 47. Ibid, 53. 26 Ibid, 54. 27 Ibid, 55. 28 W Konradi, ‘The Role of Lex Mercatoria in Supporting Globalized Transactions: An Empirical Insight into the Governance Structure of the Timber Industry’ in V Gessner (ed.), Contractual Certainty in International Trade (Hart 2009) 49, 65–6. 29 A Arrighetti, R Bachmann and S Deakin, ‘Contract Law, Social Norms and Inter-firm Co-operation’ (1997) 21 Cambridge Journal of Economics 171, 187–8. 30 Arrighetti, et al. (n29) 187. 24 25

Remedies and reality in the law of contract  73 their relationship, is not replicated in National Grain and Feed Association arbitrations.31 In her 2001 study of the cotton industry, Bernstein pointed to the dangers of courts attempting to resolve disputes using informal norms of the trade. She notes that parties prefer performance to a payment for non-performance (‘breach and pay … is not done’32), but the legal remedy of market damages tends to under-compensate, due to the high levels of consequential loss resulting from breach. Although market damages do not discourage breach, it is nevertheless kept in check by non-legal measures, such as developing close relationships with contracting partners, motivated by the desire to engage in repeat trading and to maintain reputation.33 Importantly, these two schemes – under-compensatory market damages and non-legal sanctions – complement each other. If the law were to assume influence over the ‘breach or perform’ decision by offering full compensation, would parties more readily go to law to enforce contractual rights? Bernstein thinks this is unlikely for two main reasons. First, the non-legal sanctions require less information than full compensation awards, which in turn results in quicker settlement. Second, the non-legal sanctions allow the innocent party to maintain the confidentiality of sensitive business information that would have to be disclosed in court to prove loss.34 Thus the regime of under-compensatory market damages, supplemented by non-legal sanctions, is cheaper to enforce than a right to full compensation. Legal remedies that attempt to replicate the relationship-preserving measures developed by the parties are unlikely to be as effective in controlling breach. What conclusions can be drawn from these empirical studies? If we are seeking evidence to support the proposition that breach of contract is an abstract wrong that should attract substantive damages, regardless of the actual financial losses it inflicts, it is not to be found here. However, the ‘breach and pay’ proposition is not supported either. Commercial contractors enter into contracts clearly expecting performance, but ‘cancellation’ is faced with equanimity provided there is a good reason, and the non-breaching party’s costs are paid. Similarly, under-compensation from the courts may appear problematic to the contract theorist calling for greater recognition of the ‘performance interest’ in damages awards, but in the reality of commercial dealing, this risk is ameliorated to an extent by non-legal sanctions. More generally, we can detect at least three normative frameworks which shape commercial contractors’ responses to breach.35 The first is reputational sanctioning. This self-help approach needs no recourse to law or legal institutions. However, depending on factors such as ‘insularity’, locality and whether reliable means exist to transmit information around participants,36 reputational sanctioning may be declining in importance in the face of contract complexity and globalisation. Informal sanctioning may be a significant supplement to more formal legal remedies, but one suspects it is unlikely to be the sole means of managing breach or other forms of opportunistic behaviour. Whether and why reputational sanctioning is declining is an issue worthy of further study.

Bernstein (n19) 1798–9. L Bernstein, ‘Private Commercial Law in the Cotton Industry: Creating Co-operation through Rules, Norms and Institutions’ (2001) 99 Michigan Law Review 1724, 1755. 33 Bernstein (n32) 1745. 34 Ibid, 1756. 35 Compare H Collins, Regulating Contracts (Oxford University Press 1999) 128–32. 36 A B Badawi, ‘Interpretative Preferences and the Limits of the New Formalism’ (2009) 6 Berkeley Business Law Journal 1, 12. 31 32

74  Research handbook on remedies in private law The second is contract management, where remedies are set out in express contract terms. This includes remedies incorporated within formal trade rules, or in suites of model contracts promulgated by the governing association of a particular industry or market.37 The relevant industry body, rather than the national legal system, has a significant role in enforcement (through arbitration, for example). These are essentially private legal systems.38 Useful work could be done here on the features of the contracting environment that prompts this sort of governance by contract, and its accompanying remedies.39 Further insight into remedies could be gained by examining the rules promulgated within private legal regimes operating in specific markets. However, a strong underpinning justification would be needed before we could take the evidence from either express terms or specialist regimes as a reliable indicator of commercial expectations in any more general sense. Neither is it clear that these private regimes, developed within highly specific contracting contexts, could be a model or basis for a scheme of public legal rules. The third and final system is the remedies offered through the default rules of a public system of contract law enforced by national courts. As we have seen, except for payment disputes (which admittedly may form the vast bulk of commercial contracting problems) this would seem to be the least significant framework, either in terms of direct use or as the ‘shadow’ background rules that the parties bargain around. Legal remedies may be utilised where no other form of enforcement (reputational, contract management) is available, or where this has broken down.40 Future research could usefully be conducted here on the interrelationship between these three remedial structures; when they operate as complements or substitutes; the features that make party reliance on one framework more likely than another; and when the parties will switch between them, as when reputational sanctioning is abandoned in favour of legal enforcement and remedies. In relation to the latter, it seems superficial to say this will occur when the relationship is over, since there are many disincentives to pursue legal remedies even where there is no expectation of future trading between the disputants. One would also expect factors such as amount in dispute, and perceived strength of the legal case, to be important factors in triggering the shift to legal enforcement and remedies. Empirical research here may help to confirm this.

COMMERCIAL REALITY 2: RELATIONAL CONTRACT THEORY The most complete relational contract theory was developed by Ian Macneil.41 Comprehensive though the theory is, attention to contract law remedies, as opposed to, say, the circumstances

Bernstein (n32). Consider for example the ISDA Master Agreement or UCP 600 on documentary credits as examples of standard terms developed by industry participants to facilitate trading. 38 R Canavan, ‘English Commercial Law and Private Legal Systems’ in C Twigg-Flesner and G Villalta Puig (eds), Boundaries of Commercial and Trade Law (Sellier 2011) 153; Bernstein (n32). 39 Number of participants in the market (‘thickness’) and levels of uncertainty have been suggested as factors: R J Gilson, C F Sabel and R E Scott, ‘Contract and Innovation: The Limited Role of Generalist Courts in the Evolution of Novel Contractual Forms’ (2013) 88 New York University Law Review 170, 173. 40 See, for example, Collins (n35) 326. 41 See generally, I Macneil, The Relational Theory of Contract: Selected Works of Ian Macneil, edited by D Campbell (Sweet and Maxwell 2001). 37

Remedies and reality in the law of contract  75 and justification for breach, appears minimal. This could be because Macneil recognised that few commercial contract disputes end up being resolved by courts. Litigated cases which yield common law rules are aberrations from the normatively rich, dynamic and co-operative relationships that stimulate the interest of the relational theorist.42 Even though it may be possible to speculate over what a scheme of relationally sensitive remedies might look like, it is likely that the preferred remedial response to a breach in a relational contract is reputational sanctions or a negotiated settlement, not legal sanctions imposed through court proceedings.43 Nevertheless, in formulating relational theory, Macneil was attentive to the actual process of exchange. Given this, it is pertinent to ask what general insights for legal remedies we might derive from relational theory, and what might be a useful focus for future investigation. Relational theory does not provide an easy answer to the question of what the law of contract remedies should look like, since it eschews the tendency to model remedies on a single philosophy, or in abstract ‘either-or’ terms that admit of only two possibilities (performance or damages). The individual social context of an agreement matters. This can only be revealed by a complicated and multi-layered normative enquiry that is unlikely to yield generalisable outcomes.44 As a result, Macneil is probably better known for his critiques of existing theories of remedies, rather than his positive contributions to remedies scholarship. Rational choice theory came under particularly close scrutiny, exposing the fallacy of ‘simple efficient breach’. The theory of efficient breach seeks to explain why compensatory damages, rather than specific performance, is the presumptive remedy for breach of contract. The law is disinclined to support an absolute right to performance of a contract in order not to interfere with a defendant’s decision to breach and pay damages when he calculates that he can make a net profit by doing so. For Macneil, this deceptively simple idea ignored the reality of both legal and non-legal incentives that encourage performance rather than breach.45 In short, ‘the short-term benefit … would be more than offset by the long-term reputational sanction’.46 The problem of transaction costs also helps us understand why specific performance is not the primary remedy for breach. Supporters of specific relief as the default remedy argue that the parties will bargain around it. The defendant can seek a release from the obligation to perform, affording the claimant an opportunity to negotiate their own price for the breach, rather than risk under-compensation from a court. However, real parties will not necessarily act rationally in the attempt to negotiate the terms of breach. In reality, the costs of reaching such an agreement are prohibitive. It is also likely that the defendant will expect some premium ex ante in return for this exposure to liability to provide actual performance.47 Given these considerations, the lack of a presumptive remedy of specific performance is ‘a response to the pragmatic concern … to avoid the waste of economic resources implicit in any inflexible rule which require[s] the parties to go through the motions of performing a contract which [is] for practical purposes dead’.48 The insight of relational theory here is that abstract and simple models of the optimum I Macneil, ‘A Primer of Contract Planning’ (1975) 48 Southern California Law Review 627, 692. S Macaulay, ‘The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules’ (2003) 66 MLR 44, 67ff. 44 I Macneil, ‘Reflections on Relational Contract Theory after a Neo-Classical Seminar’ in D Campbell, H Collins and J Wightman (eds), Implicit Dimensions of Contracts (Hart 2003) 207. 45 I Macneil, ‘Efficient Breach, Circles in the Sky’ (1982) 68 Virginia Law Review 947, 957–8. 46 Ben-Shahar and White (n10) 40. 47 See discussion below at notes 78–80. 48 Per Lord Sumption, Bunge SA v Nidera BV [2015] UKSC 43, [2015] 2 Lloyd's Rep 469 [12]. 42 43

76  Research handbook on remedies in private law response to breach, that take no account of transaction costs, are of doubtful real world value either as descriptions or predictions of actual behaviour and attitudes. Macneil’s realism about the limits of non-relational theories of contract is borne out by empirical studies that indicate that parties may be equivocal between breach and performance. Performance and co-operation are expected, but it is recognised that breach may be a legitimate response to difficulties, rather than an abstract wrong that should always invite censure.49 Nor are the insights of relational theory confined to long-term or co-operative commercial agreements. Even the most discrete contracts have a relational basis in the sense of reflecting, in one sense or another, Macneil’s common contract norms. Campbell demonstrates this with his analysis of the seemingly anti-co-operative and pro-opportunist outcome in Arcos Ltd v EA Ronaasen and Son.50 Campbell agrees that Arcos is wrongly decided according to relational theory, but not because it allows bad faith reliance on a technical breach in order to take advantage of a falling market.51 The classical law would not allow the purchaser to reject the timber for lack of correspondence with the contract description in circumstances where the timber was fit for the buyer’s purpose of making barrels (the cheaper obligation) unless the buyer had paid for such a privilege.52 By holding the seller to the more onerous obligation of correspondence with description as a default, the court awarded the buyer a benefit which he did not pay for.53 This interpretation of the seller’s obligation demonstrates Macneil’s relational norm of reciprocity: ‘getting something back for something that is given’.54 The more onerous obligation should not be imposed through an implied term, but only by way of an unequivocal express term.55 It is difficult to draw hard and fast conclusions about how relational contract theory informs legal remedies, but it is probably the case that a relationally sensitive law would take its cue from the expectations and practices generated within particular markets. Contract law already does this to an extent. For example, Bridge notes that the market price rule of damages for non-acceptance and non-delivery, enshrined in the Sale of Goods Act 1979,56 is an abstract measure of damages assessment that does not take into account whether the innocent party has effected a resale or a substitute purchase (‘cover’), provided there is an available market for the goods.57 While this rule has been criticised for awarding a windfall on the basis of the price of

49 D Harris, D Campbell and R Halson, Remedies in Contract and Tort (2nd edn, Butterworths 2002) 272–3. 50 [1933] AC 470 (HL). 51 D Campbell, ‘Arcos v Ronaasen as a Relational Contract’ in D Campbell, L Mulcahy and S Wheeler (eds), Changing Concepts of Contract: Essays in Honour of Ian Macneil (Palgrave Macmillan 2013) 138. 52 Campbell (n51) 155. 53 Ibid, 159. 54 Ibid, 162, quoting I Macneil, ‘Values in Contract: Internal and External’ (1983) 78 Northwestern University Law Review 340, 347. 55 Campbell (n51) 152. 56 Section 50(3) and 51(3) respectively. 57 M Bridge, ‘Markets and Damages in Sale of Goods Cases’ (2016) 132 LQR 405, 407. Contra see R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J W Neyers, R Bronaugh and S G A Pitel (eds), Exploring Contract Law (Hart 2009) 171, 178, pointing out the rule is inconsistently applied.

Remedies and reality in the law of contract  77 an alternative contract which may not in fact be made,58 Bridge argues that this remedy makes perfect sense in commodity trades where intermediate buyers and sellers have little interest in the underlying goods (generally represented by documents) but only in the profit they can secure through price speculation.59 The market damages remedy is well known in the market, easy to administer and applied with little deviation, although there are inevitable disputes as to the date when market price should be determined. The rule essentially comprehends and facilitates the economic purpose of the trade – money profit – even if actual losses do not transpire at all. This identification of the underlying economic purpose and rationality of the exchange militates against ‘individualised compensation’.60 The rule is aligned with its commercial and contracting environment, judged according to the expectations of participants in the market. If there is evidence that the rules facilitate trading, then courts should be slow to interfere with their operation, such as by making assessments of actual loss where participants contract on the basis of a hypothetical liability. The wider ramification here is that scholarly and judicial concern over whether, as a general matter, primacy should be accorded to certainty in the damages liability rules, or the identification and compensation of actual losses suffered, is in danger of missing the point in some contracting contexts.61 A finding that a legal regime should broadly mirror what commercial contracting parties in a particular market would bargain for does not mandate a universal scheme. There would be no expectation in relational theory that what works well in one market would be effective in a different one. Consider, for example, some of the remedies set out under the UN Convention on the International Sale of Goods 1980. The Convention is designed to reflect commercial usage and trade norms and it generally seeks to implement relationship-preserving measures.62 In contrast with the Sale of Goods Act 1979, remedies under the Convention are broadly concerned with identifying actual losses. The Convention also includes various performance-based remedies for breach, including rights of cure,63 provision for extra time for performance,64 and specific performance (although this is subject to the local rules operating in the jurisdiction where the case is brought).65 Bridge points out that this remedial scheme is more suited to ‘market insensitive’ goods (for example, bespoke products and heavy machinery) rather than ‘market sensitive’ goods such as commodities.66 As we have seen, English sales law appears the more appropriate default here. Although further more detailed research

D Campbell, ‘Market Damages and the Invisible Hand’ in L A DiMatteo and M Hogg (eds), Comparative Contract Law: British and American Perspectives (Oxford University Press 2016) 297, 308–9. 59 Bridge (n57) 408. 60 Ibid, 412. 61 Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353. 62 UNCITRAL Digest of Case Law on the United Nations Convention of Contracts for the International Sale of Goods (United Nations 2016) xi. 63 United Nations Convention on Contracts for the International Sale of Goods (UNCISG) Art 37 and Art 48. 64 UNCISG Art 47 and Art 63. 65 UNCISG Art 46(1). 66 M Bridge, ‘A Law for International Sales’ (2007) 37 HKLJ 17, 18; see also Q Zhou, ‘The CISG and English Sales Law: An Unfair Competition’ in L A DiMatteo (ed.), International Sales Law: A Global Challenge (Cambridge University Press 2014) 669, 676; A W Katz, ‘Remedies for Breach of Contract under the CISG’ (2006) 25 International Review of Law and Economics 378. 58

78  Research handbook on remedies in private law on this would be welcome, it seems safe to assume that different markets and contracting environments will give rise to different expectations about remedies for breach, as relational theory would predict. Given the wide range of contract law regimes that are available to commercial contracting parties, they should be able to opt into the scheme that best meets their needs, as is generally the case. However, this tells us nothing about what the default rules should be in any one jurisdiction. This consideration takes us on to our final perspective on commercial reality.

COMMERCIAL REALITY 3: CONTRACT LAW REMEDIES AS DEFAULTS Commercial contractors enjoy extensive freedom to contract around the general rules of contract law. This freedom applies as much to remedies for breach as to any other form of contractual obligation.67 Familiar clauses in this respect, at least insofar as contract case law is our guide, are express rights to terminate a contract on breach or on notice, limitations on damages payable (through exclusions of liability for consequential loss, for example) and liquidated damages provisions. There has been some recent liberalisation of the rules on the latter, allowing that a contracted-for damages payment may exceed the claimant’s loss, provided the claimant is seeking to protect a legitimate interest in performance, and the amount sought is proportionate to that interest.68 Similarly, courts appear increasingly reluctant to interfere with the exercise of express termination rights.69 Other forms of contracted-for remedy have been subject to less intense judicial scrutiny. Contracting for the long-term provision of services, or the delivery of complex infrastructure projects, is characterised by detailed paperwork setting out quality procedures, monitoring, and enforcement mechanisms. These contractual arrangements mandate the outcomes for poor or non-performance, usually by stipulating scaled deductions from contract payments, or other forms of direct enforcement. The usual vocabulary of breach, loss and compensation is absent. These performance-governance techniques are of great practical significance, but are largely overlooked in the general contract literature. As far as case law is concerned, while the implementation and effect of these contractual arrangements is frequently the subject of a dispute, this is usually over the interpretation to be placed on these terms, not their legal enforceability.70 Contract law, aside from providing background legal enforcement, seemingly contributes little to the operation of these schemes. It may be assumed that contracted-for remedies are better aligned with commercial reality and commercial expectations than the legal defaults; otherwise the parties would have contracted for a different set of remedies, or nothing at all. Whether this assumption is justified is an issue worthy of further investigation. Much of the general scholarship on contract law remedies has been concerned with whether specific performance or compensatory damages should be the primary remedy for breach. This

See, for example, Morgan (n7) 25. Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, [2016] AC 1172. 69 See for example, TSG Building Services plc v South Anglia Housing Ltd [2013] EWHC 1151, 148 Con LR 228; Total Gas Marketing v Arco British [1998] 2 Lloyd’s Rep 209 (HL). 70 Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200; Sutton Housing Partnership Ltd v Rydon Maintenance Ltd [2017] EWCA Civ 359. 67 68

Remedies and reality in the law of contract  79 debate usually proceeds with little attention to the actual preferences of commercial contracting parties.71 This is unsurprising. Determining these preferences is no easy matter. Whether parties would prefer money compensation, and on what basis of assessment, or other more performance-enhancing forms of relief depends on many variables, probably not all of which can reliably be identified. Given this limitation, the analysis usually proceeds either by reference to arguments supporting the ‘performance interest’ of contractors, or by identifying the optimum default for the law to adopt. We return to the idea of the protection of the performance interest of contractors in the final section. In what follows here, we assess the likelihood of business people contracting around the default remedies provided by law. Theories of default rules generally assert that one of two positions could be taken on the design of the default: (1) the default should reflect the majority preference, assuming that negotiating for this explicitly in the contract would be expensive (‘majoritarian’ default); or (2) the default should be what the majority would not choose,72 if it would be relatively inexpensive for the majority to substitute their own preferred outcome (‘penalty’ default).73 Morgan argues that the default should be what commercial parties want, rather than what they do not want, although he concedes that it is difficult to identify the majority preference in abstract terms.74 It has already been noted that contracts often contain complex and quite sophisticated remedial structures as part of their performance management strategy. No doubt such systems are expensive to negotiate and formulate, but no set of general remedies for breach could, nor should, seek to reproduce these bespoke systems by way of default rules. Rather than the law undertaking the difficult task of identifying specific preferences of contractors, it may be more important to ensure that the parties know what the legal rules are. This is so they do not waste limited resources replicating in the express terms of their contracts the rules that would apply in any case if they chose to remain silent. Stability in the rules is also important, so parties are not burdened with the costs of constantly contracting around a poor, or fluctuating, default rule (although given the points made earlier, it is legitimate to ask whether they would contract out).75 It might be surmised that since commercial contractors form the main audience for contract law rules, and a default of specific performance is likely to raise costs, compensatory damages, limited according to the rules of causation, remoteness and mitigation, should be the legal default. In which case the existing law reflects commercial reality, at least in general terms. In some contracting contexts, it appears the compensatory damages default works well enough. For example, in sales contracts, a buyer may be indifferent between performance by the seller and compensatory damages that allow purchase of substitute goods after a breach,

For an exception see Harris et al. (n49). I Ayres and R Gertner, ‘Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules’ (1989) 99 Yale Law Journal 87, 91. 73 Katz (n66) 382; D Campbell and D Harris, ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2002) 22 Legal Studies 208. They describe the ‘minimisation of transaction costs’ as the purpose of default rules: 233. 74 Morgan (n7) 31. 75 D Campbell and R Halson, ‘The Irrelevance of the Performance Interest: A Comparative Analysis of “Keep-Open” Covenants in Scotland and England’ in L A DiMatteo, Q Zhou, S Saintier and K Rowley (eds), Commercial Contract Law: Transatlantic Perspectives (Cambridge University Press 2013) 466. They write ‘[a]n evaluation of a default law usually will, in large part, turn on how often parties have to oust that law, a bad law being one that has to be continually ousted’: 501. 71 72

80  Research handbook on remedies in private law provided the buyer can enter into the substitute contract without incurring additional costs. The rule that makes a non-performing seller pay the difference between the contract price and price of the substitute mirrors this expectation.76 Campbell regards this as the invisible hand in operation since the rule also benefits a seller who may save on delivery costs to the original buyer.77 He argues that cover is the cheaper remedy since any other performance-based remedy will only increase the seller’s costs, and hence the price.78 Buyers are unlikely to favour specific performance in sales of generic goods since sources of alternative supply are readily available in the market. On this account, a legal rule requiring literal performance is in the interest of neither buyer nor seller, since ‘a failure to deliver generic goods causes few problems for commercial parties’.79 Campbell concedes that the market damages rule does not work well for non-generic goods, which by definition do not have ready substitutes. However, parties should stipulate for their own performance-based remedy to avoid the problem of uncompensated loss in this case.80 It would be illuminating to know how far commercial parties contract around these default rules. Although not perfect, given the limitations in documents discussed above, this could be tested by examining how far industry model terms in particular markets (for example, in certain commodity trades) are content to accept the legal default or contract around it, and if so, for what alternative? It is clear that the law’s default rules (on consequential loss and remoteness of damage) are frequently ousted in favour of terms specifying the losses a party will and will not be responsible for. But the circumstances in which commercial parties may contract for ‘performance-based’ remedies, such as specific performance, restitutionary damages and so on, remains opaque. Chief amongst the issues here are, first, the interrelationship between the contracting environment and the design of the contracted-for remedies, and second, the appropriate legal response to these bespoke regimes. Judges often appear reluctant to sanction opting out of the general remedies for breach provided by law, at least insofar as express terms attempt to reduce the remedies available. For example in Nobahar-Cookson and others v The Hut Group Ltd the judge remarked, ‘[t]he parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect’.81 Similarly in Bunge v Nidera, Lord Sumption asserted that, ‘it is a question of construction whether the mere fact that [a term] deals with damages means that it must have been intended to do so exhaustively, thereby impliedly excluding any considerations which it has not expressly addressed’.82 This indicates the level of certainty and care needed if parties are contracting for their own remedies. Morgan has noted this judicial reluctance to countenance contracting out of the defaults,83 compounded by the retreat from Lord Hoffmann’s attempt, in The Achilleas,84 to liberate the courts from the

78 79 80 81 82 83 84 61. 76 77

Campbell (n58) 298–9, 312. Ibid, 301. Campbell and Halson (n75) 483. Campbell (n58) 300. Ibid, 302. [2016] EWCA Civ 128 [18]. [2015] UKSC 43, [2015] 2 Lloyd's Rep 469 [26–27]. Morgan (n7) 29. Transfield Shipping Inc v Mercator Shipping Inc (‘The Achilleas’) [2008] UKHL 48, [2009] 1 AC

Remedies and reality in the law of contract  81 Hadley v Baxendale85 approach to remoteness of loss. Lord Hoffmann’s context-led method of determining whether the parties had, in their agreement, assumed responsibility for the loss appears out of favour, largely because of fears it creates too much uncertainty.86 It is a matter of concern if commercial parties desiring to implement an alternative remedial regime in their contract are not given judicial guidance on how they can effectively do so. Research here could examine the reasons for this legal reticence, and how it might be overcome.

CONTRACT LAW DEVIATIONS FROM COMMERCIAL REALITY From these three perspectives it can be argued that contract law remedies in some respects track commercial expectations, most notably in according primacy to the remedy of compensatory damages over specific performance. What are the most notable deviations? Despite generating considerable scholarly interest, it is not clear whether a contract law aligned with commercial reality would develop remedies that aim to deter breach and protect the performance interest of commercial contractors. The ‘performance interest’ is both an expression of the idea that the right created by a contract is to performance of the promise,87 and a reaction against the alternative view that contracts always offer the defendant a choice between performance and the payment of damages for breach.88 The various limitations on full protection of the expectation interest (mitigation, remoteness), difficulty of recovery for non-pecuniary losses, and some notorious decisions where quite flagrant breaches of contract have attracted no substantive legal remedy because the claimant is judged not to have suffered a financial loss, have all contributed to the criticism that contract damages are far too generous to those who break their promises. Despite misgivings concerning the mischief that they may cause in the commercial sphere,89 courts have responded to the performance interest critique of contract compensation by acknowledging alternative remedies for breach, notably an account of the defendant’s profits from breach,90 and hypothetical release (or ‘negotiating’) damages.91 Both of these are ostensibly concerned with ensuring the claimant has some substantial remedy when the usual ways of determining financial loss from breach are problematic. The scope of these remedies – the precise principles of their assessment, whether they compensate the claimant’s loss or respond to the conduct of the defendant, their relationship to specific performance and injunction – has remained unclear over a number of decisions.92 As a general reme-

Hadley v Baxendale (1854) 9 Exch 341. Morgan (n4) 249. 87 For example, see Stevens (n57). 88 Sometimes referred to as the ‘Holmesian choice’, see Campbell and Halson (n75) 467. 89 Harris et al. (n49) ch 17; Lord Hobhouse’s dissent in Attorney General v Blake [2000] UKHL 45, [2001] 1 AC 268; Morgan (n4) 250. 90 Attorney General v Blake (n89). 91 Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 789 (ChD); Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] EMLR 25; Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20. 92 In Morris-Garner (n91) Lord Reed (Lady Hale, Lord Wilson and Lord Carnwath agreeing) regarded negotiating damages as compensatory, justified when the defendant had taken something for free in circumstances when the claimant was entitled to ask for payment [95]. 85 86

82  Research handbook on remedies in private law dial response to supposed wrongdoing, these developments have been criticised as rendering liability for breach unpredictable, an anathema to the commercial contractor.93 The protection of the performance interest as an abstract principle of contract law remedies fails to account for the largely pragmatic attitude that commercial contractors may take to towards breach. Proponents of the performance interest rail against breach of contract as an instrument of gain and the principles of compensatory damages that do little to discourage this.94 This perceived remedial inadequacy is compounded by lack of specific relief, which is either unavailable or unwanted.95 When judged against commercial reality, the performance interest critique of compensatory damages appears to miss the mark. Campbell and Harris have pointed out that breach usually occurs not to realise a gain (as we have seen, reputational costs usually militate against this) but to avoid a loss. They argue that, for commercial contractors, the law of contract is functional, not essential. The essential thing is the surplus from exchange.96 When no surplus will be realised, then ‘breach is a legitimate legal institution, governing a rational economic response to the limitations of bounded rationality, which it is the function of compensatory damages to allow’.97 On this understanding, breach, if governed by the legal rules, operates almost as a doctrine of contract law, not an aberration of the right to performance. Elsewhere, the idea of a performance interest has been castigated as entirely irrelevant to commercial contractors,98 or as rhetoric that bears little relation to how courts actually respond to breach.99 It is clear from the material presented in this chapter, that it is controversial, from a practical perspective, to assert that one of the purposes of contract law is to encourage commercial contractors to perform their contracts. It is possible to argue that more contract law rules support ‘breach and pay’ than support a claimant’s right to performance. On this basis it forms no part of the defendant’s agreement to ‘guarantee literal performance of the primary obligation’.100 The commercial contractor can rarely recover non-pecuniary losses resulting from breach. Damages may be ‘inadequate’ in the sense that an admitted breach attracts only a nominal award since the claimant may mitigate his loss entirely, or may not have suffered any wasted expenditure in reliance on the agreement, or the cost of a substitute performance may not have increased from the contract price. Admitted losses may go uncompensated, as with some consequential losses that are not recovered because speculative, difficult to prove, the contract was anticipated to be a lengthy one, and so on. English contract law refuses to interrogate the motives for a breach, insisting

93 In Marathon Asset Management v Seddon and ors [2017] EWHC 300, estimates from expert accountants of damages payable on a ‘licence fee’ or ‘hypothetical release’ basis ranged from US$200,000 to £39.4m [153]. 94 P Birks, ‘Restitutionary Damages for Breach of Contract: Snepp and the Fusion of Law and Equity’ [1987] LMCLQ 421, 423. 95 Perhaps the most notorious example is Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361 (CA). 96 Campbell and Harris (n73) 220. 97 Ibid, 221 (emphasis original). The authors point out that changes in liability will lead to changes in the price: 230. 98 Campbell and Halson (n75) describe ‘commercial uniqueness’ as ‘an oxymoron’, 481. 99 K Barnett, ‘Great Expectations: A Dissection of Expectation Damages in Contract in Australia and England’ (2016) 33 Journal of Contract Law 163, 165. 100 Campbell and Halson (n75) 483.

Remedies and reality in the law of contract  83 that ‘a deliberate contract-breaker is guilty of no more than a breach of contract’.101 Exemplary damages are generally unavailable and the law is conscientious in avoiding windfalls and gratuitous benefits through damages awards.102 There are contra-indications however, demonstrating that ultimately the law is ambivalent over the existence of a performance interest. Relaxation of the rules on liquidated damages indicates the law’s willingness to recognise that a claimant may have a legitimate interest in encouraging performance. Stevens points out that the most common remedy for a breach of contract (the action for an agreed sum) supports the proposition that breach of contract is a wrong and the claimant’s right is to performance. He also points out that performance and payment of damages are not regarded as alternative primary obligations in contract law. Performance of the promise is the primary obligation, while the obligation to furnish a remedy after breach is secondary.103 The difficult decision in White & Carter (Councils) Ltd v McGregor104 is authority for the principle that a party can refuse to accept a repudiation, perform a contract and then seek to recover the contract price, rather than accepting the repudiation and suing immediately for expectation damages. Is such a course of action justifiable? In White & Carter it was suggested that the claimant may not be able to take this course if he had ‘no legitimate interest … in performing the contract rather than claiming damages’.105 The burden of proof is therefore on the defendant to show that the claimant has no such interest. The prima facie position is that the claimant has the right to continue with performance provided they gain some benefit, however small, from doing so.106 In O’Sullivan’s view, the difficulty of assessing damages gives the claimant a legitimate interest in performance, ‘because it is invariably advantageous not to have to mitigate and worry about quantum and remoteness’.107 The possibility of refusing a repudiation may of course be a reasonable response if damages will be difficult to assess, but then one might expect some express term to allow for a different set of remedies, and the defendant to be given the opportunity to price the obligation accordingly.108 As we have seen from empirical studies, commercial contractors may not be neutral between performance and compensatory damages for breach ex ante. This does not mean the law should provide performance-based remedies as a default and considerable harm may result if courts seek to interfere in the balance between legal and non-legal enforcement of contracts. That said, there appears to be no reason why claimants should not seek to protect their performance interest, if they reckon they have one, through express terms. We have noted that courts seem reluctant to allow contract terms to cut back the available remedies, but what about terms seeking to expand the range of remedies beyond what the law would normally allow? Excepting remedies that specify cure as the primary remedy (repair/replacement), one suspects this would not be the norm because the premium demanded from a (rational) defendant

Per May LJ Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1990] 1 QB 818, 894 (CA). 102 Radford v DeFroberville [1977] 1 WLR 1262 (ChD). 103 Stevens (n57) 172; Barnett (n99) 166. 104 [1962] AC 413 (HL). 105 Ibid, 431. 106 See discussion by J O’Sullivan, ‘Repudiation: Keeping the Contract Alive’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) 51, 59. 107 O’Sullivan (n106) 60. 108 Morgan (n4) 247–8. 101

84  Research handbook on remedies in private law to agree to such a liability would be prohibitively high. However, within certain contracting contexts these remedies may be attractive. We might speculate that parties may expressly contract for damages assessed on a ‘gain-based’ measure, or for literal enforcement, depending on the goods (not readily substitutable or fungible), perceived inadequacies in compensation, the defendant’s motivation for breach, the costs of negotiating for literal enforcement of the contract terms, the price the defendant might charge to accept such a liability, and so on. Presumably, there may be some defendants willing to agree to this, provided it does not lead to unpredictable or burdensome liability. It would be illuminating to know more precisely the circumstances in which commercial parties might contract for such remedies, if ever.

CONCLUSION Theoretical accounts of contract law remedies usually rely on models or ideal typical constructions of commercial contractors. Whether the rules that result from the theories correspond with commercial expectations and commercial reality may be neither here nor there. After all, it can be argued that contract law rules are not, nor are required to be, based on descriptively accurate accounts of how contractors make, perform and breach contracts. At the very least, the rules derived from the chosen theoretical perspective can be assumed to meet the expectations of either the business person for whom promise-keeping is a moral imperative, or the rational economic actor navigating through perfectly competitive markets armed with complete information about all future states and unburdened by transaction costs. What the real, equivocal and boundedly-rational commercial contractor actually thinks about the rules on remedies for breach of contract, the extent to which the rules uphold their expectations, and the implications of any mismatch between contract remedies and commercial reality, appear neglected issues in contract law scholarship. Whether we should be worried about this neglect is a difficult question to answer. Empirical investigations may not yield evidence from which reliable or generalisable conclusions can be drawn. Nor is it clear how this sort of evidence might help us improve the general law of contract remedies, at least to the extent that ‘improvement’ entails achieving some correspondence between the announced rules and what happens in the real world of contract performance and breach. Even if commercial parties may excuse a contracting partner’s breach, or accept less by way of a ‘cancellation charge’ than their strict entitlement in compensatory damages, it is not clear that the law should mimic what reasonable contractors might do to maintain a business relationship. A further issue here is that contract law remedies are a set of defaults that can, to a greater or lesser degree, be modified or excluded by express contract terms. To the extent that reality matters to law, this is probably where our future research efforts should be directed. In the light of the increasing use of contracts to create essentially private legal systems with bespoke and complex remedial regimes, are the legal default remedies for breach of contract simply redundant? If so, then the contract law response to this, whether facilitation or regulation, must be carefully considered. This is not an issue confined to remedies, however, but poses a major challenge for all aspects of our commercial contract law in the years ahead.

PART II THE PROTECTED INTEREST

6. The limitations on ‘reliance’ damages for breach of contract David McLauchlan

INTRODUCTION It is well established at common law that where, in an action for breach of contract, it is impossible or too difficult for the claimants to establish the value of the promised performance the courts will allow recovery in respect of expenditure wasted as a result of the breach (plus, where appropriate, any breach-related costs caused by the breach), and in doing so they will, sometimes implicitly, give the claimants the benefit of an assumption that full performance by the defendant would at least have resulted in recoupment of the expenditure. However, where it is found that a bad bargain was made so that full performance would have resulted in a net loss, the claimants will only recover to the extent that the expenditure exceeds that loss and, if there is no such excess, only nominal damages will be awarded.1 Awards of damages for wasted expenditure are often referred to as ‘reliance damages’ or damages for ‘reliance loss’. It is said that the claimant can ‘elect’ to claim such damages instead of the more usual ‘expectation damages’, the object being to restore the claimants to the position they would have occupied if they had not entered into the contract. The award protects the claimant’s ‘reliance interest’. This reliance terminology, which originated in Fuller and Perdue’s famous article, ‘The Reliance Interest in Contract Damages’2 has become ‘part of the vocabulary of the courts’3 when addressing issues concerning the assessment of damages for breach of contract. However, the English cases4 that have regularly been cited over the years as establishing that victims of breach of contract have a reliance interest, and can therefore elect to claim damages that will restore them to their pre-contract position, have been shown on analysis not to provide unequivocal support for any such proposition.5 Furthermore, as I have

Bowlay Logging Ltd v Domtar Ltd (1978) 87 DLR (3d) 325, aff’d (1982) 135 DLR (3d) 179 (BCCA); C & P Haulage (a firm) v Middleton [1983] 1 WLR 1461 (CA); CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985] QB 16 (QBD); and Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64. 2 L L Fuller and William R Perdue Jr, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52 and 373. 3 Amann Aviation (n1) 134 (Toohey J). See, to take just one example, Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 [182], where the New Zealand Court of Appeal said that ‘[c] ontractual remedies now available in appropriate cases include expectation damages [and] reliance damages …’. 4 Cullinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292 (CA); Anglia Television Ltd v Reed [1972] 1 QB 60 (CA); and CCC Films (n1). 5 D McLauchlan, ‘Reliance Damages for Breach of Contract’ [2007] NZ Law Rev 417, 424−7 (reprinted in J Berryman and R Bigwood (eds), The Law of Remedies: New Directions in the Common Law (Irwin Law 2010) 33, 41−4). 1

86

The limitations on ‘reliance’ damages for breach of contract  87 argued elsewhere,6 the reliance terminology ought to be abandoned because it is misleading and a hindrance to endeavours to provide a readily comprehensible account of the law. There are several reasons why this is so. First, as Gaudron J pointed out in the leading Australian case of Commonwealth of Australia v Amann Aviation Pty Ltd (‘Amann Aviation’):7 The expression ‘reliance damages’ is apt to give the erroneous impression that damages are to be awarded on some basis other than compensation for the loss of contractual rights or, which is often the same thing in practice, for loss of profits. It may suggest that compensation is to be awarded on the basis that the plaintiff is to be put in the position in which he or she would have been if the contract had not been made.

As her Honour suggested, the victims of breach of contract have no entitlement to damages that will restore them to their pre-contract position and hence, despite frequent suggestions to the contrary, they do not have a reliance interest. The primary purpose of contract damages is to put the claimants ‘in the same situation … as if the contract had been performed’.8 Thus, subject to the rules on remoteness and mitigation of damage, they are entitled to recover in respect of their loss of bargain or, as we say nowadays, their expectation or performance interest. This principle, usually referred to as the Robinson v Harman9 principle, is invariably reaffirmed whenever an issue concerning contract damages comes before the highest appellate courts.10 Secondly, it is universally accepted that, as mentioned earlier, recovery of so-called reliance damages must be denied to the extent that it is proved that a bad bargain was made and hence all or part of the expenditure claimed would not have been recovered if the contract had been performed. As a result, the reliance interest that some commentators continue to embrace is simply redundant. Since it is limited by an expectation cap it not only yields the same recovery as the expectation measure but, because its focus is loss caused by the breach, it is the expectation measure. ‘The reliance interest cannot assimilate the expectation view of causation without becoming the expectation interest …’11 Thirdly, implicit in acceptance of the expectation cap is recognition that giving a claimant a right to choose between reliance and expectation recovery is conceptually unsustainable. When a binding contract has been formed that creates mutual rights and obligations to perform according to the agreed terms there cannot in principle be any question of a return to the status quo when the promisor later breaches. The promisee cannot say: ‘But for your breach of contract I would not have entered into the contract.’ Formation must occur before there can be a

6 McLauchlan (n5) and D McLauchlan, ‘The Redundant Reliance Interest in Contract Damages’ (2011) 127 LQR 23. 7 Amann Aviation (n1) 154. 8 Robinson v Harman (1848) 1 Ex 850, 855, (1848) 154 ER 363, 365 (Parke B). 9 Ibid. 10 Examples from the House of Lords and the UK Supreme Court include: Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344, 355 and 365; Attorney-General v Blake [2000] UKHL 45, [2001] 1 AC 268, 282; Alfred McAlpine Construction Ltd v Panatown Ltd [2000] UKHL 43, [2001] 1 AC 518, 538, 562, 580; Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732, [76]; Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353, [29]; and Bunge SA v Nidera BV [2015] UKSC 43, [2015] 2 Lloyd’s Rep 469, [14]. 11 M B Kelly, ‘The Phantom Reliance Interest in Contract Damages’ [1992] Wis L Rev 1755, 1804.

88  Research handbook on remedies in private law breach, even if the gap may only be a scintilla temporis in the case of a broken term. The right infringed is the promisee’s right to the promised performance, and compensatory damages must necessarily seek to provide a monetary substitute for that performance. The promisee must, so far as money can do so, be put in the position he or she would have occupied if the wrong (the breach of an admitted contract) had not been committed. It is therefore difficult to envisage any circumstances in which a claimant whose sole cause of action is breach of contract could justify an entitlement to be placed in the same position as if the contract had not been entered into. The obligation on the defendant is to perform the contract. The wrong is the breach of contract – the failure, without legal excuse, to provide the promised performance. On this view, there is no such thing as a ‘reliance interest’ in the context of damages for breach of contract.12 Fourthly, although it is acceptable to describe a remedy as being for ‘reliance loss’ or ‘reliance damages’ in cases where a loss-making transaction is entered into by the claimants in reliance on advice provided in breach of a contractual duty of care, the award of damages for wasted expenditure is perfectly consistent with the Robinson v Harman principle and therefore it is unnecessary to attach a different legal label to the claim. Since the defendant’s obligation is to exercise reasonable care, not a warranty as to the accuracy of the advice, the award in respect of loss suffered through acting on the advice places the claimants in the position they would have occupied if the contract had been performed. As Mason CJ and Dawson J pointed out in Amann Aviation,13 ‘[t]he amount of wasted expenditure will be the appropriate measure of damages in such a [professional negligence] situation because, it having been established that the client would not have entered into the subsequent contract if proper advice had been given, it is not sensible to speak of loss of profits’. Fifthly, reliance terminology can result in irrelevant conceptual objections to recovery of heads of damage that ought in principle to be recoverable. Thus, if the justification for allowing damages for wasted expenditure were the need to protect the claimant’s reliance interest, no award could be made in respect of pre-contract expenditure because, ex hypothesi, such expenditure is not incurred in reliance on the contract, so that to allow recovery would put the claimant in a better position than if the contract had not been entered into. However, if one simply applies first principles of the law of damages and asks whether loss that was within the reasonable contemplation of the parties was caused by the breach, the award may well be justified.14 Certainly, the expenditure was not caused by the making of the contract or its

It is noteworthy too that so-called reliance losses are usually confined to wasted out-of-pocket expenditure. If claimants truly had a reliance interest, in theory an award might extend to lost opportunities for gain under alternative contracts. So far as I am aware, such claims are only made in professional negligence cases where the claimant, who has entered into a loss-making transaction in reliance on advice or information provided in breach of a contractual duty of care, is entitled to restoration of the status quo prior to the wrong. Perhaps this is due to recognition of the logical difficulties inherent in an argument that, in effect, says: ‘But for your breach of contract I would not have entered into the contract with you: instead I would have entered into this other contract with a third party.’ In the USA ‘[m] odern contract theorists, courts, and the Restatement typically refer to the reliance interest as including expenses incurred rather than the profits associated with opportunities forgone’: D W Barnes and D Zalesne, ‘A Unifying Theory of Contract Damage Rules’ (2005) 55 Syracuse L Rev 495, 503 n31. 13 Amann Aviation (n1) 82. 14 As in Anglia Television Ltd v Reed (n4) and CCC Films (n1). 12

The limitations on ‘reliance’ damages for breach of contract  89 breach, but the real question is whether the loss, the wasting of the expenditure, was caused by the breach.15 Although it is true that the courts continue to employ reliance terminology when dealing with claims for wasted expenditure, the substance of the above objections is reflected in recent authoritative accounts of the principles governing such claims. Thus, in Omak Maritime Ltd v Mamola Challenger Shipping Co (‘The Mamola Challenger’),16 Teare J delivered a ‘masterly’17 judgment containing a comprehensive review of the authorities in which he overturned an arbitral tribunal’s award of ‘reliance damages’ for wasted expenditure because it had the effect, contrary to the Robinson v Harman principle, of putting the claimants in a better position than they would have occupied if the contract had been performed. His Lordship held that no different principle applies where claimants seek to recover for wasted expenditure rather than lost profits18 and, in so ruling, he endorsed19 the views of Mason CJ and Dawson J in Amann Aviation.20 In that case their Honours regarded awards of damages for lost profits and awards for wasted expenditure as ‘simply two manifestations of the general principle enunciated in Robinson v Harman’.21 They are not ‘discrete and truly alternative measures of damages’ that the plaintiff may choose between.22 The ‘language of election’ and ‘the notion that alternative ways are open to a plaintiff in which to frame a claim for relief’ are inappropriate.23 An award of damages for wasted expenditure may have the effect of restoring the plaintiff to the position it would have been in if the contract had not been entered into, but that is a ‘coincidence’ not the object of the award.24 Their Honours acknowledged that damages for wasted expenditure will usually be claimed where the outcome of the contract had it been fully performed is impossible or too difficult to determine and that therefore ‘it is not possible as a matter of strict logic to assess damages in accordance with the principle in Robinson v Harman’,25 however the court does its best to do so; and for this purpose it will assume, until the defendant establishes otherwise, that expenditure reasonably incurred by the plaintiff in performing, or preparing to perform, its obligations would at least have been recovered. In other words, the goal is to award the best approximation of expectation recovery in the circumstances. This account of the law is consistent with the majority of academic opinion.26 Nevertheless, there are some issues on which there is disagreement or the law is arguably uncertain. The

For further explanation see McLauchlan (n5) 441−6. [2010] EWHC 2026 (Comm), [2011] 1 Lloyd’s Rep 47. See McLauchlan (2011) (n6) and A Tettenborn, ‘Of Damages, Expenses and Unprofitable Charterparties’ [2011] LMCLQ 1. 17 Yam Seng PTE Ltd v International Trade Corpn Ltd [2013] EWHC 111 (QB), [2013] 1 Lloyd’s Rep 526 [186] (Leggatt J). 18 [2010] EWHC 2026 (Comm), [2011] 1 Lloyd’s Rep 47 [42] (‘the weight of authority strongly suggests that reliance losses are a species of expectation losses and that they are neither … “fundamentally different” nor awarded on a different “juridical basis of claim”’). 19 [2010] EWHC 2026 (Comm), [2011] 1 Lloyd’s Rep 47 [34] and [53]. 20 Amann Aviation (n1). 21 Ibid, 85. 22 Ibid, 82. 23 Ibid, 85. 24 Ibid, 86. 25 Ibid. 26 See, e.g., D W Barnes, ‘The Net Expectation Interest in Contract Damages’ (1999) 48 Emory LJ 1137, 1153. (‘The law’s interest in placing the injured party in the position she would have occupied had the other not breached does not suddenly change. Rather, the injured party simply has failed to prove the 15 16

90  Research handbook on remedies in private law main purpose of this chapter is to highlight these issues. They include the following.27 First, does the commonly expressed ‘presumption’ that expenditure incurred in performing, or preparing to perform, the contract impose the full legal burden of proof on the defendant or is it a mere ‘evidential’ burden requiring the defendant to produce evidence of facts that prima facie support a finding that the expenditure would not have been recouped, either in whole or in part? Secondly, assuming that there is a legal presumption of recoupment, should the ability of the defendant to rebut the presumption be affected by the existence of, perhaps speculative, consequential benefits that the claimant expected or hoped to gain from performance of the contract? Thirdly, again assuming that there is a legal presumption of recoupment, does it extend to all types of expenditure incurred by the claimant in reliance on the contract that is breached? Is a distinction to be drawn between what Fuller and Perdue referred to as ‘essential’ and ‘incidental’ reliance, with the presumption of recoupment only applying to the former? Fourthly, should account be taken of contingencies that, if they had eventuated, would have enabled the defendant to escape or reduce liability in damages? Fifthly, are damages for both wasted expenditure and loss profits recoverable in a case where the claimant is able to establish that the contract was not prima facie a losing one because the defendant’s performance would have resulted in a net gain? Since all of these issues require at least some reference to the decision of the High Court of Australia in Amann Aviation,28 it is first necessary to outline what happened in that case. Although the court was divided the judgments contain the most thorough analysis by a Commonwealth court of the principles applying to so-called reliance damages claims.

THE AMANN AVIATION CASE The case concerned a contract entered into in 1987 under which Amann was to provide the Commonwealth with aerial surveillance services for a term of three years. The latter wrongfully repudiated the contract on the very first day of operations. Amann accepted the repudiation and sued for damages. Two obstacles stood in the way of a successful claim. First, there was a chance that the contract would have been validly terminated in any event. Clause 2.24 of the contract entitled the Secretary of Transport to cancel the contract if Amann (who was in breach at the time of the repudiation) failed after due notice to show cause why it should not be so cancelled. Secondly, and most importantly, the contract contained no right of renewal and on full amount of her loss. The law’s goal is to get as close as possible to the award of net expectancy consistent with its standards of proof. The award [of wasted expenditure] … is simply the closest provable approximation of the net expectancy amount.’) 27 The question has also been raised whether, in cases where both parties are at fault to some extent, the loss arising from wasted expenditure should be apportioned between the parties. See N Seddon, ‘Contract Damages Where Both Parties Are at Fault’ (2000) 15 JCL 207 and D Winterton, ‘Commonwealth v Amann Aviation Pty Ltd Twenty Five Years On: Re-examining the Problem of Pre-breach Expenditure in Contract Law’ in S Degeling, J Edelman and J Goudkamp, Contract in Commercial Law (Thomson Reuters 2016) 333. In agreement with Seddon, Winterton argues (at 356) that ‘a court should be able to apportion the promisee’s reasonable wasted expenditure between the two parties in circumstances where it is not possible to determine with sufficient certainty what profits or losses the promisee would eventually have made “but for” in the relevant breach and it can be said that both parties have contributed to the contract’s early termination’. This issue will not be discussed. 28 Amann Aviation (n1).

The limitations on ‘reliance’ damages for breach of contract  91 the surface it was a losing one. At the time of the repudiation Amann had spent $5,281,521 on the purchase of aircraft that had a remainder value of only $917,329 when no longer required for coastal surveillance, as well as pre-operational expenditure of $854,943 – a net wasted expenditure of $5,219,135. In addition, the company had paid a security deposit of $113,000 and, after cancellation of the contract, it was required to make termination payments to employees totalling $143,049. Unfortunately, Amann’s total receipts from performance of the contract would have been only $17,107,462 and, in order to earn that, it had to spend a further $15,801,899. Therefore, the total expenditure required to earn $17,107,462 was $21,021,034, making a prima facie loss if the contract had been fully performed of $3,913,572. On the basis of these figures, assuming that the Commonwealth’s payments represented the only benefit to which Amann was entitled under the contract and ignoring contingencies (importantly, the chance that the Commonwealth would have validly cancelled in any event), the sum required to put Amann in the position it would have been if the contract had been performed was $1,561,612, calculated as follows: $5,219,135 (the net amount of wasted expenditure incurred in preparing to perform) less $3,913,572 (the amount of expenditure that would not have been recouped if the contract had gone ahead) plus $113,000 (return of forfeited security deposit) plus $143,049 (consequential loss from termination payments). Nevertheless, the High Court, by a majority of 4:3, upheld the award by the Full Court of the Federal Court of $5,475,184 (plus interest). This sum represented a full reimbursement of the net wasted expenditure, the security deposit and the termination payments. Essentially, the Commonwealth had failed to discharge the onus placed on them of proving on the balance of probabilities that the net value of the benefits to Amann from the contract, which included the prospect of renewal,29 would not have covered the expenditure incurred by the latter prior to the cancellation. Six lengthy judgments were delivered, three by the minority judges who each made different awards and three by the majority (including a joint judgment by Mason CJ and Dawson J), which, although agreeing in the eventual outcome, contained differences of opinion on some important points of principle.

The significance of the prospect of renewal appears to have been misunderstood by some commentators. Thus, H Davis, ‘The Problems with Amann: Would an Agreement-Centred Approach to Remoteness Benefit Australian Jurisprudence?’ (2017) 42(2) Univ of Western Australia L Rev 1, 10 suggests that ‘the Court found that the defendant, having repudiated the contract, was liable for the loss suffered by Amann based on the possibility the contract might otherwise have been renewed’ so that ‘a party to a contract can be liable for the consequences of its not doing what it was not required to do, merely because they are not otherwise unforeseeable’. See also A Tettenborn, ‘Hadley v Baxendale Foreseeability: A Principle Beyond Its Sell-by Date?’ (2007) 23 JCL 120, 136 n 84 (‘A defendant, having repudiated an ongoing contract, was held liable for losses based on the prospect that the contract might otherwise have been renewed, despite the fact that it was under no obligation to renew it at all, on the ground that those losses were foreseeable.’). In fact it was common ground that Amann had no claim in respect of losses incurred through not getting a renewal, precisely because no promise of renewal had been made. What the majority held was that the prospect of renewal was a valuable commercial advantage that had to be taken into account in determining whether the presumption of recoupment had been rebutted by the defendant. 29

92  Research handbook on remedies in private law

A PRESUMPTION OF RECOUPMENT? As mentioned at the beginning of this chapter, there is substantial authority at common law for the propositions that (a) claimants in an action for damages who cannot substantiate with sufficient certainty the amount of their lost expectation, or indeed whether any such loss was suffered at all, may seek to recover the expenditure that was reasonably incurred in reliance on the contract and that was wasted as a result of the defendants’ breach, and that (b) for this purpose the claimants have the benefit of a presumption of recoupment so that the onus shifts to the defendants to prove that the expenditure would have been wasted, either in whole or in part, even if they had performed their side of the contract.30 It will be necessary to consider in a later section of this chapter whether the presumption extends to all types of expenditure incurred in reliance on the contract, so for the moment we will confine our attention to uncontentious situations, such as that in Amann Aviation, where the expenditure was in preparation for performance or actual performance of the claimants’ obligations to the defendants. It has been suggested that the law in Australia is not settled concerning the presumption of recoupment because there is not unequivocal majority support for it among the seven judges who decided Amann Aviation.31 The argument rests on the following points. First, two of the judges, Toohey and Gaudron JJ, held that the defendant was under an evidentiary onus only and a third, McHugh J, rejected the presumption outright. Secondly, three judges, Mason CJ and Dawson J (in their joint judgment) and Deane J did accept that the presumption does arise where, as a result of the defendant’s breach, it is either too difficult or impossible for the claimant to establish the value of the benefits that would have been received if the contract had remained on foot. Thirdly, however, Brennan J insisted that the presumption only arises where it is impossible for the claimant to establish the value it would have received, the classical illustration being McRae v Commonwealth Disposals Commission32 where it was impossible to put a value on the non-existent tanker that the defendant had warranted as lying on Jourmaund Reef. Fourthly, although Brennan J did allow Amann to recover the full amount of its wasted expenditure and ruled that ‘[w]hat justifies the reversal of the onus is the defendant’s repudiation or breach which denies, prevents or precludes the existence of circumstances which would have determined the value of the plaintiff’s contractual benefits’,33 the difficulty was not in fact created by the defendant’s repudiation because, ‘had “it been attempted before the breach to predict the plaintiff’s chances of profit, it would have been just as difficult as it was afterwards”’.34 The latter argument has recently been described as ‘utterly persuasive’.35 However, it seems to overlook that Brennan J was comparing the difficulty of determining the value of the plaintiff’s contractual benefits at the time of breach with the entirely different position if the contract had remained on foot and run its course, where circumstances would have existed that

30 See, e.g., Bowlay Logging (n1); C & P Haulage (n1); CCC Films (n1); The Mamola Challenger (n16). 31 Winterton (n27) and H K Lücke, ‘The So-called Reliance Interest in the High Court’ (1994) 6 CBLJ 117. 32 (1951) 84 CLR 377. 33 Amann Aviation (n1) 106−7. 34 Winterton (n27) 353 (citing Lücke (n31) 147). 35 Ibid.

The limitations on ‘reliance’ damages for breach of contract  93 would have enabled a reliable determination of the value of those benefits.36 In other words, he was not comparing the pre-breach and post-breach difficulties. In my view the alleged uncertainty in Australia is based on too literal a reading of the judgment of Brennan J. When the judgment is read as a whole, it is difficult to accept that he was saying anything all that different from what was said by Mason CJ and Dawson J and Deane J. Before explaining why, it is necessary to note some of the relevant points made by the latter judges. According to Mason CJ and Dawson J the presumption arises ‘both in the case of a contract which would not have been profitable and in the case of a contract where the outcome of the contract, if it had been fully performed, cannot be demonstrated, whether at all or with any certainty’.37 They acknowledged that ‘[t]he present case differs from McRae in that it was not impossible, as a matter of theory, for Amann to establish what its profits (if any) would have been had the Commonwealth not repudiated the contract’38 – in McRae it was impossible to put a value on a non-existent tanker – but in their view it sufficed that ‘the difficulties attending that undertaking were legion’.39 Likewise, Deane J held that the presumption arose because it was ‘impossible or difficult’40 to ascertain the value of the benefits that Amann would have received from its performance. Turning to the judgment of Brennan J, it is true that his Honour said that the reason it is just to shift the onus of proof to the defendant is that the breach ‘has made it impossible for the plaintiff to prove that the net value of his contractual benefits … exceeds the wasted expenditure incurred in reliance on the defendant’s promise prior to rescission’.41 However, on my reading of the judgment (and indeed the judgment in CCC Films (London) Ltd v Impact Quadrant Films Ltd,42 which his Honour cited), he was referring to the practical impossibility of proving the value of those benefits in the manner ordinarily required for an award of expectation damages. His essential conclusion was that the defendant’s repudiation precluded ‘the occurrence of the events which would have permitted in due time a true assessment of the value of the commercial advantage lost by reason of the repudiation’ and therefore Amann was ‘entitled to an assessment of its damages as reliance damages and to cast upon the Commonwealth the onus of showing that, had the contract been performed, Amann would not have been entitled to benefits of sufficient net value to cover any part of the expenditure it had incurred prior to rescission’.43 This is further borne out by his earlier observation that since Amann’s commercial advantage in tendering for a new contract, though ‘substantial’, could not ‘be quantified with any degree of accuracy’, it followed that it was ‘impossible to say whether or not the value of all the benefits to which Amann would have been entitled had

As his Honour observed (1991) 174 CLR 64, 113: ‘The value of the commercial advantage [in tendering for the next contract] that Amann would have acquired and could have exploited when the contract had been performed could be ascertained only at or near the end of the contract period and only in the light of the history of Amann’s performance of the contract.’ 37 Amann Aviation (n1) 87−8. It seems that their Honours’ reference to ‘a contract which would not have been profitable’ means a contract where ‘no net profit would have been generated’ but ‘nevertheless recovering costs incurred in the course of performing contractual obligations’ (p 81). 38 Ibid, 89. 39 Ibid. 40 Ibid, 126 (emphasis added). 41 Ibid, 105. 42 CCC Films (n1) 40. 43 Amann Aviation (n1) 113. 36

94  Research handbook on remedies in private law the contract been performed … would have exceeded the cost of performance by Amann’.44 In my view, therefore, there is no difference of substance between Brennan J and the other three judges concerning the circumstances in which the presumption of recoupment arises.

THE BENEFITS RELEVANT TO REBUTTAL OF THE PRESUMPTION It has been argued45 that the only benefits that should be taken into account in determining whether the presumption of recoupment might be capable of rebuttal by the defendant are those that the latter has expressly or impliedly promised to provide. Consequential benefits that the claimant expected to derive from the defendant’s performance, but which were not the subject of a promise, should not be considered. As a result, strong exception is taken to the ruling by Mason CJ and Dawson J, Brennan J, and Deane J46 in Amann Aviation that the prospect of renewal of the surveillance contract was a significant commercial advantage that had been lost as a result of the Commonwealth’s repudiation and that, since the value of that advantage could not be accurately quantified, the Commonwealth could not discharge the onus of proving that the benefits accruing to Amann were less valuable than the expenditure incurred. It did not suffice, as Mason CJ and Dawson J held, that the benefit was within the reasonable contemplation of the parties. If this is correct, the case was wrongly decided because only Brennan J found that the prospect of renewal was the subject of an implied promise. It ought to have been held that the presumption of recoupment had been rebutted since the only other benefit of the contract to Amann was the remuneration payable by the Commonwealth and this was less than the total of the expenditure that had been incurred and remained to be incurred. In my view, however, it should suffice that the prospect of renewal was judged to be a valuable benefit, in fact, that would have accrued to Amann if the contract had been performed. One might argue that the commercial advantage was not as substantial as some of the judges suggested, but that is beside the point. In determining whether a presumption of recoupment has been rebutted the court is surely entitled to have regard to all benefits of financial value that would have resulted from performance by the defendant of its obligations. It is interesting in this context to consider the reasoning of Brennan J. It is true that his Honour referred at various stages to an implied promise of the commercial advantage. For example, he said:47 The Commonwealth’s promise to engage Amann to provide the service for three years carried with it the promise that Amann, by performing the contract, could work itself into a secure position as an equipped and established provider of the service and could thereby acquire a most substantial advantage in tendering for any succeeding contract. This was not an incidental benefit flowing merely from a trader’s reputation as a successful contractor; it was a benefit which was implicit in Amann’s right to perform the particular contract, having regard to the nature of the work, the capital and equipment

Ibid, 112. Winterton (n27) 339−43. 46 Deane J also referred to the prospect that the aeroplanes would be worth much more than the remainder value at the end of the three-year term. See further note 50 below. 47 Amann Aviation (n1) 111−12 (emphasis added). 44 45

The limitations on ‘reliance’ damages for breach of contract  95 required to perform it, the Commonwealth’s practice of letting tenders for the work and the limited competition among tenderers to do it.

However, he also said:48 The relevant principle is that when performance of a contract by a defendant (including the permitting of the plaintiff to perform his obligations under the contract) would have resulted in the plaintiff’s acquiring a particular commercial advantage but the advantage is lost by reason of the defendant's breach, the loss of the advantage is compensable and its value is to be taken into account in assessing a plaintiff's damages.

And earlier he said:49 In evaluating a plaintiff’s benefits under a contract, the court does not look solely at the express terms of the contract but evaluates the plaintiff’s rights to benefits of any kind, whether those benefits are expressed by the terms of the contract or are ascertainable by reference to circumstances extrinsic to those terms. Thus a hairdresser’s assistant who was wrongfully dismissed was held entitled to recover not only damages for lost wages but also a sum representing the tips which he would have received, and an artist’s opportunity of gaining fame and reputation by performing a theatrical engagement must be evaluated in assessing damages when the engagement is wrongfully terminated … In cases of this kind, the contract is found to contain by implication a promise to give the plaintiff an opportunity to acquire the unexpressed benefit … and damages are awarded for breach of that promise.

What the judge is saying, in effect, is that where performance of a contract will result in the promisee acquiring a particular (one would assume, reasonably foreseeable) unexpressed benefit, a term will be implied that obliges the promisor to give the promisee the opportunity to acquire that benefit. This seems to be an overly elaborate way of saying that anticipated, but unexpressed, benefits of a contract that are lost as a result of the defendant’s non-performance may be the subject of a damages award.50 The reality is that, in the two examples referred to in the last quoted passage, damages are awarded for the foreseeable consequential losses resulting from the wrongful termination, not for breach of the posited implied term. And, if that is correct, the value of the benefits must, in principle, be brought into account in determining whether, in circumstances where the claimant is seeking damages for wasted expenditure, the defendant has rebutted the presumption of recoupment. A much more important question,

Ibid, 104 (emphasis added). Ibid, 102. 50 The judgment of Deane J is more transparent and convincing in this respect. In his view it sufficed that the Commonwealth’s breach of contract deprived Amann of either the chance of obtaining a renewal or the chance of selling their aeroplanes to a new provider at a price higher than the written-down book or remainder value. It was essentially a consequential loss. And in the context of Amann’s claim for wasted expenditure the chance of renewal was a consequential benefit of the contract that had to be brought into account in determining whether the Commonwealth had rebutted the presumption of recoupment. Cf the judgment of Gaudron J, who was the fourth member of the majority despite holding that that there was only a practical or evidentiary onus on the Commonwealth. In her view, it was impossible to say that the contract would have been unprofitable, principally because it was likely that the aeroplanes would have been worth much more than their written-down book value at the end of the contract period. This benefit could not have been the subject of a promise by the Commonwealth yet, if valid (see Winterton (n27) 346), it was clearly a factual benefit that would have to be accounted for in determining whether the contract was a losing one. 48 49

96  Research handbook on remedies in private law however, as we shall see in the next section, is: what kinds of expenditure are covered by the presumption in the first place?

WHAT TYPES OF WASTED EXPENDITURE ARE COVERED BY THE PRESUMPTION? Various categories of wasted expenditure have been distinguished in the academic literature, albeit mainly in the context of determining whether recovery is subject to a ‘contract price’ ceiling (i.e., recovery is limited by reference to the value of the return performance by the defendant). For example, Fuller and Perdue51 distinguished between expenditure incurred in performing or preparing to perform obligations under the contract (‘essential reliance’) and other expenditure incurred in reliance (‘incidental reliance’), with only recovery of the former being subject to the ‘contract price’ ceiling. Thus, according to the authors, if I agree to manufacture a machine for $10,000 and performance will cost me, say, $15,000, the ‘objective’ value of the expectancy (here $10,000) operates as a ceiling on recovery. If the buyer should repudiate the contract after I have spent $12,000, the maximum I can recover is $10,000. On the other hand if, as in the old case of Nurse v Barns,52 I agree to rent premises from the defendant for a term of six months at the market rent of £10 and I buy in a stock of goods for £500 which is wasted when the defendant repudiates, my recovery is limited, not by the ‘objective’ value of the contract, but ‘by the expectation interest measured “subjectively”, that is, with reference to the profit or loss reasonably to be anticipated from the contemplated business’.53 Hence an award of £500, which was allowed in Nurse v Barns, may well be justified. The essential/incidental reliance distinction has been criticised on the ground that ‘two distinctions, rather than one, lurk in this terminology’ and it is unclear which Fuller and Perdue had in mind.54 The first is the distinction between reliance that is required to comply with a contractual obligation owed to the defendant, and reliance that is not so required. The former would include ‘expenditures by a contractor in preparation to perform, and in performance of, the services called for by the contract’, as in Amann Aviation, and ‘expenditures by a franchisee to rent a store, hire salesmen, and promote sales of the franchised product, under a franchise contract that requires the franchisee to do so’.55 Examples of the latter would be ‘expenditures by a purchaser of a retail store for a stock of goods he intends to sell in the store’, as in Nurse v Barns, and ‘expenditures by a buyer of industrial machines for other equipment and furnishings needed to make profitable use of the purchased machines’.56 The second distinction is that between direct reliance and consequential reliance. This arises out of the need to distinguish the two sources of the value from which reliance expenditure may be recouped. The first is the value arising directly from receipt of the promised performance by the party later in breach: for example, the price to be paid for Amann’s services by the Commonwealth. Here it is prima facie natural to speak of the ‘contract price’ operating as

Fuller and Perdue (n2) 78. (1664) T Raym 77, 83 ER 43. 53 Fuller and Perdue (n2) 78. 54 R A Hudec, ‘Restating the “Reliance Interest”’ (1982) 67 Cornell L Rev 704, 724. 55 Ibid. 56 Ibid. 51 52

The limitations on ‘reliance’ damages for breach of contract  97 a ceiling upon recovery. The other is the value to be received from collateral or consequential transactions undertaken on the basis of the defendant’s promised performance: for example, where the purchaser of a retail store intends to recoup the cost of buying in stock from sales at the premises. Here it is not sensible to speak of the ‘contract price’ as a ceiling upon recovery. The only ceiling can be the expected revenue from the collateral transactions. Commonly, as in Amann Aviation, reliance that is essential will also be direct. But sometimes essential reliance will be consequential, as in the franchise example mentioned above. In this situation:57 The return performance by the franchisor is merely the granting of the franchise rights. The franchisee’s expenditures may be a contractual obligation, necessary to earn the legal right to the franchisor’s return performance, but the expenses are actually an investment in a transaction that is consequential to granting the franchise, namely the expected revenues from the sale of the franchised product to the public. It is the revenue from sales, not the abstract value of the franchise right, that would have covered these reliance expenditures. In this case it would not be proper to use the contract price (the fair market value of the franchise right) as a ceiling on the amount of expenditures that could be recovered as reliance damages.

In my view, however, the real issue that the above examples give rise to is not so much, when does the contract price operate as a ceiling on recovery, but rather when does a presumption of recoupment arise? In other words, what precisely are the circumstances in which the onus is on the defendant to prove that the contract was a losing one and hence that some or all of the expenditure would not have been recouped? It may be that, as (arguably) a majority in Amann Aviation concluded, there is a strong case for placing a formal or strict onus on the defendant in the case of expenditure that is both obligatory and direct reliance, whereas, in the case of expenditure that is consequential reliance (whether obligatory or non-obligatory), the defendant should at most, with one possible exception, be subject to an evidential onus only. Thus, in the latter class of case, the question should be, has the claimant established that the defendant’s breach caused the expenditure to be wasted. The exception might be cases such as McRae v Commonwealth Disposals Commission,58 CCC Films (London) Ltd v Impact Quadrant Films Ltd59 and Yam Seng PTE Ltd v International Trade Corpn Ltd,60 where the major part of the expenditure, though strictly speaking consequential reliance, was incurred in order to acquire and/or exploit the property or right granted by the defendant and from which, if all went well, the expenditure would have been recouped and profits made. These were not cases where the particular expenditure claimed was incurred in relation to separate or collateral transactions with third parties. However, even the scope of this exception is by no means clear-cut, as is illustrated by the well-known decision of Learned Hand CJ in L Albert & Son v Armstrong Rubber Co.61 In this case the buyers of rubber reconditioning machines alleged that late delivery of the machines caused the collapse of their rubber recycling department. They claimed damages in respect of the unsalvageable expenditures of $118,478 on other equipment to be used in the business, $27,555 on rubber scrap, and $3,000 on laying a foundation to support the machines. The first two items, which were plainly exam Ibid, 725−6. (1951) 84 CLR 377 (where the plaintiff recovered the cost of acquiring and attempting to salvage the promised, but non-existent, oil tanker). 59 CCC Films (n1). 60 Yam Seng (n17). 61 178 F 2d 182 (2d Cir, 1949). 57 58

98  Research handbook on remedies in private law ples of alleged consequential reliance, were disallowed on the ground that the buyer had failed to prove that the delay in delivery caused the collapse of the business. However, the third item was allowed. This was treated as an expense ‘necessary to prepare for the performance’ of the contract by the sellers62 and hence, in the terminology of Fuller and Perdue, ‘essential reliance’. This conclusion is difficult to fathom. Indeed, it has been described as ‘simply wrong’,63 there being no economic or legal basis for treating the three items of expenditure differently. Be that as it may,64 the significant feature of the case for present purposes is that Learned Hand CJ spoke of reversing the onus only in relation to this item of so-called ‘essential reliance’.65 It was in this context that he concluded that in principle ‘the promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed’.66 The difficulties and uncertainty in this area are further illustrated by the New Zealand case of Ti Leaf Productions Ltd v Baikie.67 Here the trial judge accepted, and the Court of Appeal seriously entertained, the remarkable proposition that in all cases of consequential reliance expenditure the onus is on the defendant to prove that the expenditure would not have been recovered if the contract had been performed. The Court of Appeal engaged in a lengthy review of the leading authorities on the recoverability of damages for wasted expenditure in an action for breach of contract but much of the discussion was quite unnecessary because, properly analysed, the case at heart involved a run-of-the-mill claim for consequential losses that were only recoverable if the appellant company could satisfy the usual requirements of causation and remoteness. Nevertheless, because the company faced considerable evidential difficulties in establishing that the losses would not have been sustained if the defendants had performed their contract, its counsel framed the claim as one for wasted expenditure and then sought to persuade the Court that the defendants bore the onus of proving that the losses were not caused by their breach. The appellant, Ti Leaf, was an overseas company formed to make a feature martial arts film. The company entered into an agreement to rent part of a farm owned by the respondents (‘the Baikies’). The farm was to be the location for the film. Despite numerous problems and a series of somewhat bizarre disputes between the parties, an extension of the tenancy was later agreed. One of the terms was that the parties would not ‘make any negative comment about the other or their dealings with each other, to the media, representatives of government agencies, and any member of the public’. The Baikies breached this term and this led, or so it was found, to Ti Leaf’s three main investors withdrawing their financial support for the film. The project was abandoned and Ti Leaf sought to recover damages of more than $1m in respect of the costs of pre-production work for the film. The trial judge, Panckhurst J,68 dismissed the claim and awarded nominal damages of $500 for the breach of contract. Although it was reasonably foreseeable by the Baikies that their Ibid, 189. Hudec (n54) 729. 64 Query whether, in relation to this one item, the expenditure was closely enough related to the acquisition of the machines to warrant reversal of the onus of proof, at least according to the principle applied by Hutchison J in CCC Films (n1). 65 L Albert & Son (n61) 191. 66 Ibid, 189 (emphasis added). 67 (2001) 7 NZBLC 103,464 (Gault, Thomas and Keith JJ). 68 Ti Leaf Productions Ltd v Baikie 3/10/2000, HC Christchurch CP9/97. 62 63

The limitations on ‘reliance’ damages for breach of contract  99 breach would put Ti Leaf’s expenditure at risk, the breach had not caused the expenditure to be wasted. The expenditure would not have been recouped even if the contract had been performed because at the time of the breach ‘Ti Leaf had lost its way’69 and the probability was that the company would never have completed and marketed the film. However, importantly for present purposes, the judge accepted counsel’s argument that, on the basis of the modern authorities, ‘it was for the Baikies to establish that Ti Leaf would not have recouped its expenditure in whole or in part’.70 He noted that ‘the rationale for the imposition of a reverse onus is that where, through the default of the defendant, the plaintiff is denied the opportunity to demonstrate whether and to what extent the contract would have been profitable it is appropriate that the defendant should carry the burden of demonstrating that reliance costs would not have been recouped’.71 This observation might be acceptable as a statement of very general principle but, even so, its adoption as the basis for imposing on the Baikies the onus of proving that Ti Leaf’s many and varied costs would have been wasted regardless of their breach seems misconceived. When the stated rationale refers to the defendant’s breach denying the plaintiff the opportunity to demonstrate whether ‘the contract would have been profitable’, its focus is surely the particular contract with the defendant – the contract in relation to which the expenditure was incurred. In Ti Leaf, most of the expenditure was not incurred in performing or preparing to perform the original tenancy agreement let alone the extended tenancy agreement. Therefore there was no question of that agreement being a bad bargain and the Baikies contending that Ti Leaf’s losses really flowed from its decision to enter into that agreement, not from the Baikies’ breach of that agreement. In the Court of Appeal, counsel for Ti Leaf, in addition to challenging the primary factual finding concerning causation of the losses claimed, sought to persuade the Court of Appeal that the judge erred ‘in applying a standard of proof on the balance of probabilities for the discharge by the Baikies of the onus of proving that the expenditure lost would not have been recovered in any event’.72 They argued that ‘where it is the breach of contract by the defendant that has rendered it impossible for the plaintiff to establish that the expenditure would have been recouped, the plaintiff is entitled to judgment for the wasted expenditure and the defendant is, in effect, estopped from showing that the loss would have occurred even if there had been no breach’.73 Thankfully, this startling argument, as well as the alternative argument that the onus of proof on the defendants was higher than the balance of probabilities, was rejected. However, on the question whether any onus at all rested on the defendants, the Court was able to avoid giving a definitive ruling since it was satisfied that there was no basis for interfering with Panckhurst J’s conclusion that the film would never have been completed and hence Ti Leaf would not have recouped the expenditure claimed.74 The Court, in a judgment delivered by Gault J, was content to conclude its discussion of the question with the following tentative observations:75

Ibid, [119]. Ibid, [122]. 71 Ibid, [123]. 72 Ti Leaf CA (n67) [28]. 73 Ibid, [34]. 74 Indeed, the Court went further than the Judge and suggested (at [68]) that ‘a reading of the evidence indicates not so much that the project had lost its way but rather that it was never on a clear path’. 75 Ti Leaf CA (n67) [49]. 69 70

100  Research handbook on remedies in private law The shift in the burden of proof has its source in the United States and was justified by Learned Hand CJ [in L Albert & Son v Armstrong Rubber Co 178 F 2d 182 (2d Cir, 1949)] as a ‘common expedient’. Its adoption for all cases in which there is an issue of whether loss flowing from a breach of contract would have been suffered even without the breach would run counter to the primary rule that it is for a plaintiff to prove his or her loss. Just when, and in what circumstances the burden should shift – whether as a matter of law or as simply as an evidential burden – are broad questions. It may be one thing to consider recovery of expenditure incurred in partly performing a contract that is subsequently breached. Then it may be reasonable to require the party in breach to show why the innocent party would not have received from performance of the contract value at least equal to the part performance. It may be quite different, however, where in reliance on a contract expenditure is incurred for a separate and highly speculative venture. The members of the High Court in [Amann Aviation] demonstrate a range of tenable views.

The reasoning in this passage, despite implying a degree of discomfort with the notion that the Baikies had to prove that Ti Leaf would not have recouped its expenditure, is, for several reasons, unsatisfactory. First, some careful thought after close analysis of the cases referred to would have revealed that nowhere is it suggested that the burden of proof shifts to the defendant in ‘all cases in which there is an issue of whether loss flowing from a breach of contract would have been suffered even without the breach’. Secondly, although the Court was right to refer to the judgment of Learned Hand CJ in L Albert & Son v Armstrong Rubber Co76 as the source of the shift in the burden of proof, there is nothing in the latter case that would support reversal of the onus of proof on the kind of facts before the Court in Ti Leaf. The expenditure claimed could not possibly be regarded as ‘essential reliance’. Thirdly, there is also nothing in the judgments of the High Court of Australia in Amann Aviation to suggest that any of the Judges would have entertained the idea of imposing on the defendants in a case like Ti Leaf the burden of proving that the claimed losses would have been suffered even if they had not breached the contract. The so-called ‘range of tenable views’ allegedly demonstrated by the judgments were not expressed in relation to the Court of Appeal’s ‘broad’ question as to whether the burden of proof shifts in all cases where a causation issue arises. The High Court was concerned with a classical wasted expenditure claim. The Commonwealth had repudiated the contract under which Amann was to provide the aerial surveillance services after the latter had incurred considerable expenditure in preparing to perform its obligations under that contract and there was a question as to whether the value of the benefits that Amann would have received from the Commonwealth would have exceeded the total detriment it had to sustain in performing its side of the contract. Finally, all of the previous leading cases in which the court held that the onus shifted essentially involved one or other of two situations. First, the expenditure was incurred in performing or preparing to perform obligations assumed under a contract with the defendant and in anticipation of it being recouped from performance by the defendant of its obligations.77 In other words, in the language of Fuller and Perdue, it was ‘essential reliance’. Secondly, the expenditure was incurred in order to acquire and exploit the property or right that was the subject of a contract with the defendant and from which, if all went well, the expenditure would be directly recouped and profits made.78 These were situations where the defendant’s L Albert & Son (n61). Bowlay Logging (n1) and Amann Aviation (n1). 78 McRae (n32) and CCC Films (n1). 76 77

The limitations on ‘reliance’ damages for breach of contract  101 breach denied the plaintiff the opportunity to put to the test whether the particular expenditure, incurred in relation to the subject matter of the contract with the defendant, would have been recouped from the exploitation of that subject matter, and this arguably made it not unfair to award damages in respect of the wasted expenditure unless the defendant could prove that it would not have been recouped in any event. Ti Leaf, on the other hand, involved a standard claim for consequential loss where the case for a presumption of recoupment in favour of the plaintiff was very much weaker.79 There should have been no question that, in accordance with the usual position, the onus was on the plaintiff to establish the likelihood that the film would have been completed and its expenditure recouped (or at least that there was a measurable chance of these events occurring).80 The above distinction might appear to be an overly fine one because cases in the second category are also cases of consequential reliance. What, it might be asked, is the difference between the facts in Ti Leaf and the facts in the more recent case of Yam Seng PTE Ltd v International Trade Corpn Ltd81 where the presumption of recoupment was applied? In the latter case the defendant breached a distribution agreement that granted the claimant the exclusive right to market and sell certain products in named territories. Damages were awarded for the expenditure in marketing the products that was wasted as a result of the defendant’s failure to honour its delivery obligations. Instinctively, this appears to be a more appropriate case for application of the presumption than Ti Leaf, but it is not easy to articulate precise reasons why. Perhaps the best that can be said is that in Yam Seng the contract with the defendant was the anticipated profit-earning venture. The claimant anticipated that the defendant’s performance of its obligations would enable it to market the products successfully. In other words, the expenditure was an investment that would be directly recouped from sales of the products. In Ti Leaf, on the other hand, the tenancy agreement with the defendants was not the profit-earning venture. It was, so to speak, some steps removed therefrom. Of course, the making of the film required the company to secure a location but the securing of the tenancy was merely one aspect of a large and complex operation. The film was, in the words of the Court of Appeal, ‘a This view is supported by cases rejecting application of the presumption of recoupment where damages for wasted expenditure were sought in professional negligence claims. In Parker v SJ Berwin & Co [2008] EWHC 3017 (QB) the claimants alleged, inter alia, that they had lost the opportunity to take over a football club as a result of their solicitors’ negligence. Hamblen J rejected their claim that they were entitled to the benefit of a presumption of recoupment in respect of expenditure incurred in preparing the bid. There was no unfairness in requiring them to establish in the usual way that ‘there was a real and substantial chance of the expenditure being recovered’. In his Lordship’s view, the CCC Films principle was confined to ‘loss of bargain cases’, i.e. cases ‘where the plaintiff has been deprived of the contracted for subject matter of the contract’ (at [74]). The defendant solicitors were ‘not agreeing or warranting that any particular result will be achieved’, but rather undertaking ‘to exercise reasonable care in carrying out the services contracted for’ (at [76]). See also, to like effect, NRMA Ltd v Morgan [1999] NSWSC 407 [1361] and Roach v Page (No. 37) [2004] NSWSC 1048 [502]–[503] (McRae and Amann ‘establish the following principle. Where, in consequence of breach by the defendant of a contract between the parties, the plaintiff is deprived of the prospect of benefit arising from performance of the contract, the onus is on the defendant to show that expenditure by the plaintiff for the purposes of the contract would not have been recouped out of such prospective benefits. The principle has no application to the present case. The expenditure in the present case was not incurred for the purposes of a contract with the defendants.’). 80 The Court of Appeal noted (at [44]) that ‘at no stage has the case for Ti Leaf been advanced on the basis of loss of a chance’. 81 Yam Seng (n17). 79

102  Research handbook on remedies in private law separate and highly speculative venture’. If all had gone well, the company would, in ordinary parlance, say that it made a profit from the film, not the tenancy agreement, whereas in Yam Seng it would say that it made a profit from the distribution agreement.

THE RELEVANCE OF CONTINGENCIES In addition to the different views concerning the presumption of recoupment, the judgments in Amann Aviation contain even more remarkable differences of opinion concerning how contingencies that, if they came to pass, would have enabled the defendant to escape liability in damages altogether, impact on a claim for wasted expenditure. The most important of these contingencies was that the contract might have been terminated pursuant to cl 2.24, which entitled the Secretary of Transport to cancel the contract if Amann, who, as mentioned earlier, was in serious (but not repudiatory82) breach at the time of the Commonwealth’s repudiation, failed after due notice to show cause why it should not be so cancelled. That risk, which the Full Court of the Federal Court had assessed at 20 per cent, was disregarded by the majority of the High Court and Amann was awarded the full amount of its wasted expenditure. This seems wrong in principle because just as damages for breach of contract may in appropriate cases be awarded in respect of the lost chance of obtaining benefits, so too they should be reduced, or perhaps even eliminated, where there is a real and measurable chance that if the contract had remained on foot an event would have occurred that would have deprived the claimant of any rights under the contract. Mason CJ and Dawson J, with whom Gaudron J agreed in this respect, held that the damages for wasted expenditure should not be discounted by reference to the prospect of a valid termination pursuant to cl 2.24. The ‘show cause’ procedure under that clause meant that the Secretary could not act solely in the interests of the Commonwealth and this, coupled with the uncertainty over continued availability of the previous provider of the service, justified the Full Court’s assessment of the possibility of cancellation at 20 per cent. It was concluded that Amann’s damages should not be discounted on account of an event that was unlikely to happen. Brennan J reached the same conclusion but for different reasons. Unlike Mason CJ and Dawson J, his Honour treated the 20 per cent chance of a valid termination as ‘relevant to the value of Amann’s contractual benefits’.83 However, that did not enable the Commonwealth to discharge its onus. It was unable to establish that even 80 per cent of the net benefits was less than the expenditure incurred by Amann. Deane J applied essentially the same principles as Mason CJ and Dawson J and Brennan J, but he parted company with the majority, and Brennan J in particular, in that he did not regard the chance of a valid cancellation as solely relevant to a determination of the net value of Amann’s benefits. That chance was ‘a superimposed risk which would have flowed not from performance of the contract but from Amann’s own breach of the contract’.84 In his view, the

The trial judge found that it was probable Amann would have been able to comply fully with its surveillance obligations within two months. In other words, it was likely that Amann would have been ready and able to perform for 34 of the 36 months of the contract term. 83 Amann Aviation (n1) 114. 84 Ibid, 131. 82

The limitations on ‘reliance’ damages for breach of contract  103 combined effect of the presumption of recoupment and the risk of cancellation was that ‘what Amann lost by reason of the Commonwealth’s repudiation was an 80% chance of recovering its wasted expenditure’. Therefore, his Honour would have reduced Amann’s recovery by 20 per cent. Toohey J, also dissenting, disagreed with Mason CJ and Dawson J, Brennan J and Deane J in holding that the Commonwealth was under a mere evidentiary onus, an onus that was clearly satisfied given that the contract was prima facie a losing one. His Honour thought that, in adjudicating upon Amann’s claim for wasted expenditure, the task of the Court was to determine fair compensation in the light of the significant contingencies concerning the prospect of valid termination and the prospect of renewal of the contract. His conclusion was that the damages awarded by the Full Court should be reduced by 50 per cent. The final judge, McHugh J, who rejected the presumption of recoupment and ruled that damages were to be assessed according to the orthodox loss of bargain approach, held, consistently with the approach of Deane J (and also what would have been the approach of Brennan J if Amann had ‘borne the onus of proving its damages as expectation damages’85), that there must be a deduction for the 20 per cent chance of valid cancellation pursuant to cl 2.24. Surprisingly, however, his Honour thought that one of the items of the loss claimed, namely, the termination payments to employees, were immune from this discount. Perhaps he thought that the payments should be awarded in full because they were a consequential loss caused by the breach but, even so, the refusal to discount this part of the claim seems wrong because, if the chance of valid termination had materialised, the termination payments, no less than other expenses, would have to have been borne by Amann.86 In my view, the majority overcompensated Amann by disregarding the contingency. Deane J was, in principle, right to hold that the chance of early termination did not just affect the value of Amann’s benefits but was a ‘superimposed risk’ which meant that what Amann lost was an 80 per cent chance of recouping its expenditure. Furthermore, the approach of Mason CJ and Dawson J and Brennan J seems internally inconsistent because, on the one hand, they in effect augmented Amann’s damages by taking into account the chance of renewal but, on the other hand, they rejected the chance of valid termination as a basis for reducing recovery.87

CLAIMING BOTH RELIANCE AND EXPECTATION DAMAGES It remains to consider an issue that has historically been contentious but is perhaps less so now: can a claimant obtain damages in contract for both wasted expenditure and lost profits? In Anglia Television Ltd v Reed Lord Denning MR said that the answer is no. A plaintiff who is suing for damages for breach of contract:88 Ibid, 114. Cf Winterton (n27) 348, who argues that ‘this different treatment of the employee termination payments and the security deposit appears to be defensible on the basis that, while the liability to pay the employee termination payments was a financial loss that arose consequent upon acceptance of the Commonwealth’s repudiation, the forfeiture of the security deposit arose from a term of the contract itself’. I disagree, for the reason stated in the text. 87 See Winterton (n27) 341–2 who agrees that ‘their Honours’ analysis lacks internal consistency’ in this respect. 88 Anglia Television (n4) 63–4. 85 86

104  Research handbook on remedies in private law has an election: he can either claim for loss of profits; or for his wasted expenditure. But he must elect between them. He cannot claim both.

His Lordship cited in support dicta to the same effect in Cullinane v British ‘Rema’ Manufacturing Co Ltd.89 However, the reasoning in that case has been shown to be so confused or otherwise unsatisfactory that no principles of general application can safely be salvaged from it.90 In any event, it is not entirely clear that their Lordships meant what they appeared to say. Thus, Lord Evershed MR said that the purchaser of a machine that did not operate at the warranted capacity could, instead of claiming lost profits, recover the capital cost incurred less residual value, thereby putting himself ‘in the same position as though he had never made the contract at all’.91 His Lordship did not, however, say that this was the object of the award. Indeed, he had earlier noted that the prima facie measure of damages for breach of a warranty of quality under s 53(3) of the Sale of Goods Act 1893 was the difference between warranted value and actual value. He also said that the overarching principle was ‘that the plaintiff, who got a machine that in the event failed to live up to the performance warranted, should be put in the same position (so far as that can be done by money) as he would have been in if the machine had been as warranted’.92 In these circumstances, and given further the likely understanding that the warranted value of the machine was presumptively the price paid, it is quite possible that Lord Evershed only meant that the effect, not the object, of a net capital cost award was to restore the plaintiff to his pre-contract position. His Lordship may therefore have been intending to contrast two truly alternative measures of ‘expectation’ loss, namely, diminution in value (the difference between warranted value and actual value) and loss of profits. Much the same might be said in relation to the relevant observations of Jenkins LJ, the other majority judge. Indeed, it is arguably clearer that his Lordship viewed damages for lost profits and ‘damages based on the difference between the value to [the plaintiff] of the article actually supplied and the contract price of the article’ as alternative means of measuring damages for loss of bargain.93 This is only explicable on the basis that he was equating warranted value with the contract price.94

Cullinane (n4). See T C Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130, 138–42. See also, e.g., H Street, Principles of the Law of Damages (Sweet and Maxwell 1962) 243–5; J K Macleod, ‘Damages: Reliance or Expectancy Interest’ [1970] JBL 19, 37 (‘The bold solution’ is to say ‘that the case has so many unsatisfactory features that it should be ignored’); H McGregor, McGregor on Damages (19th edn, Sweet and Maxwell 2014) 4−048 (‘it would be best if in future Cullinane could be put to one side for it only serves to confuse’); M G Baer, Comment (1973) 51 Can Bar Rev 490, 493–500; and M Owen, ‘Some Aspects of the Recovery of Reliance Damages in the Law of Contract’ (1984) 4 OJLS 393, 395−8. 91 Cullinane (n4) 303. 92 Ibid, 301−2. 93 Ibid, 308. 94 One can only speculate, however, as to what both majority Judges were thinking. Indeed, an important source of the difficulties arising out of their judgments is their failure to acknowledge that the true choice open to the plaintiff was to claim either loss of capital value or loss of profits, not wasted expenditure or loss of profits. The High Court of Australia did not make the same mistake in T C Industrial Plant (n90). The Court recognised that loss of capital value and loss of profits are alternative methods of calculating expectation loss, and it went on to hold (at 141) in relation to the latter method that it is permissible to add wasted expenditure to lost net profits. 89 90

The limitations on ‘reliance’ damages for breach of contract  105 It would now be generally accepted that the statements in Anglia Television and Cullinane that one cannot claim both wasted expenditure and loss profits, which are still being cited in the English courts as if they are axiomatic,95 can only be correct if by ‘profits’ is meant ‘gross profits’ not ‘net profits’. A claimant cannot recover wasted expenditure in addition to damages based on the gross profits or revenue that were not received as a result of the breach of contract because the expenditure had to be incurred to earn the profits. To award both would amount to double recovery. However, where the claim is based on net profit, a refusal to add wasted expenditure will result in under-compensation.96 In the ordinary case where the claimants are able to establish that performance by the defendant would have resulted in a profit or improvement in their position, expenditure wasted as a result of the breach will simply be one component in the damages calculation. The task of the court is to put the claimants in the position they would have been if the contract had been performed. Expenditure incurred will be accounted for differently depending on which of various calculation methods is chosen. First, there is what I would call ‘long’ way. This involves computing separately the claimants’ ‘promised’ position and their actual position, and then awarding the difference between the two.97 Their promised position involves a determination of the total revenue or benefits that would have resulted from full performance less the expenditure that would have to be incurred to earn the revenue or benefits. Their actual position will be (a) the sum of pre-breach expenditure already incurred (whether that be expenditure in performing or preparing to perform obligations assumed under the contract or in exploiting the anticipated benefits of the contract) and additional costs caused by the breach, but reduced by (b) offsetting benefits derived from, for example, the claimants’ part performance and any salvage values or mitigation efforts. Alternatively, and sometimes more simply (depending on the complexity of the facts),98 the damages prima facie recoverable may be calculated in one or other of the following ways: first, as the difference between the total revenue or benefits that would have resulted from full performance and the expenditure that remained to be incurred;99 or secondly, as the amount of wasted expenditure plus the net profit that would have resulted from full performance. In each instance, however, there may have to be a deduction for the value of any part performance by the defendant and an addition of costs caused by the breach. These alternatives can be neatly illustrated by taking the facts of Amann Aviation and adding three variations. First, the remuneration payable to the plaintiff was $5m more (i.e., $22,107,462), so that the contract was no longer prima facie a losing one and Amann would 95 See, e.g., Filobake Ltd v Rondo Ltd [2005] EWCA Civ 563 [60]; J P Morgan Chase Bank v Springwell Navigation Corpn [2006] EWCA Civ 161 [8]; 4 Eng Ltd v Harper [2008] EWHC 915 (Ch), [2009] Ch 91 [48]; Watson Farley & Williams v Ostrovizky [2014] EWHC 160 (QB) [330]. But cf Bridge UK.Com Ltd v Abbey Pynford Plc [2007] EWHC 728 (TCC) [132]. 96 J Cassels and E Adjin-Tettey, Remedies: The Law of Damages (2nd edn, Irwin Law 2008) 50−2. See also Ticketnet Corpn v Air Canada (1997) 154 DLR (4th) 271 [164]−[170] (Ont CA) and H G Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) 26−029. 97 This has been called ‘the surplus-based approach’ to contract damages because ‘it recognizes an injured party’s entitlement to the difference between the surplus he or she would have realised had the other performed as promised and the actual surplus obtained’: Barnes and Zalesne (n12) 497. 98 Including, e.g., the presence of additional breach-related costs and/or offsetting gains. 99 On this approach, expenditure actually incurred and wasted as a result of the breach is only relevant indirectly to the computation; i.e., it will determine which part of the total expenditure required to earn the total benefits still remained to be incurred.

106  Research handbook on remedies in private law be suing in the ordinary way for lost profits. Secondly, the only relevant benefit to which the plaintiff was entitled by performing the contract was the stipulated remuneration.100 Thirdly, for the sake of simplicity, there was no measurable chance of valid termination by the Commonwealth.101 Each of the calculation methods noted earlier of quantifying loss of bargain damages is recognised in the judgments. Thus, Mason CJ and Dawson J said:102 Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. The second amount is the net profit.

On the other hand, McHugh J said:103 Where the breach of contract occurs after the plaintiff has incurred expense in preparing or performing the contract, the plaintiff’s loss is ordinarily the difference between the value of the benefits which it would have received under the contract, as and from the date of breach, and the expense which the plaintiff would have incurred, as and from that date, in performing its own contractual obligations. In the ordinary case of repudiation, any expense which the plaintiff has incurred in preparing to perform or in performing the contract prior to breach is irrelevant to the assessment of the damages to be awarded …

In fact, as will already be apparent, and indeed as was recognised by Brennan J, there is no real inconsistency here. The explanation lies in the different available methods of achieving the common goal of working out the amount required to put the plaintiff in the position it would have been in if the contract had been performed. Under the method adopted by Mason CJ and Dawson J, expenditure incurred is an express component of the calculation of the damages award. Under the method favoured by McHugh and Brennan JJ, it is merely a factor in determining the amount that remained to be spent in order to earn the contractual benefit.104 But they both lead to the same result. McHugh J also recognised the long way of working out loss of bargain damages, albeit as a useful means of checking the correctness of the result achieved by his preferred method. As explained, this involves the making of separate calculations for the plaintiff’s position if

100 This enables us to avoid the question whether the court would have awarded a further sum to compensate for loss of the chance to obtain an even more lucrative renewal of the contract. In any event, it seems that the answer is no: McHugh J said (at 169−70) that ‘[s]ince it is common ground that, in the circumstances of the case, damages for loss of the chance are impossible to assess, Amann concedes that it could not obtain any expectation damages for that loss of chance’. 101 It is likely that, if Amann had been suing in the ordinary way for the loss of a profitable bargain, a majority of the Court would have discounted the award to reflect the 20% chance that the Commonwealth would have validly terminated the contract pursuant to cl 2.24. Thus, Brennan J said (at 114), and in principle this must be correct: ‘Had Amann borne the onus of proving its damages as expectation damages, the assessment would have had to allow for the possibility that the power to terminate under cl 2.24 would have been exercised. That possibility, assessed at 20% by the Full Court, would have reduced those damages’. 102 Amann Aviation (n1) 81. 103 Ibid, 161(emphasis added). 104 That is, total expenditure required to earn the benefit less expenditure already incurred = expenditure remaining to be incurred.

The limitations on ‘reliance’ damages for breach of contract  107 Table 6.1 Revenue

$22,107,462

Less Expenditure incurred on aircraft and establishment costs (less salvage value) Further expenditure required Total expenditure Profit=

$5,219,135 $15,801,899 $21,021,034 $1,086,428

Table 6.2 Expenditure incurred on aircraft and establishment costs (less salvage value)

$5,219,135

Termination payments to employees

$143,049

Security deposit

$113,000

Loss=

$5,475,184

the contract had been performed and for its actual position without an award of damages, the difference between the two necessarily being the damages award. Let us then work out the plaintiff's damages award (excluding interest) on the varied facts of Amann Aviation by applying each of the three methods. First, applying the ‘long’ method (and assuming, as apparently did all of the judges except McHugh J that the borrowing costs of $3,390,000 had not already been incurred), Amann’s position if the contract had been performed would have been a profit of $1,086,428, calculated in Table 6.1. Amann’s actual position without damages was that it was out of pocket by $5,475,184, calculated in Table 6.2. The difference between Amann’s position if the contract had been performed (a profit of $1,086,428) and its actual position (a loss of $5,475,184) is $6,561,612. (This is the amount of $1,561, 612 that the majority would have awarded on the actual facts if Amann had borne the onus of proof plus the extra $5m in remuneration provided for in my variation.) The second and shorter method of calculating the same damages preferred by both McHugh and Brennan JJ leaves wasted expenditure out of account. This involves awarding Amann the net benefit of the contract plus consequential losses (the forfeited deposit and the termination payments). The net benefit of the contract is the amount of the benefits that would have been received by the plaintiff less the further expenditure that remained to be incurred in order to perform the contract. On the varied facts, that is: $22,107,462 less $15,801,899, which equals $6,305,563. Once the security deposit and termination payments are added the total is again $6,561,612. Of course, the other method, endorsed by Mason CJ and Dawson J, also leads to the same award, although it may in practice be a little more cumbersome because it involves calculating net profit (or loss) and then adding back wasted expenditure. On the other hand, it does usefully draw attention to the fact that the ultimate award of $6,561,612 incorporates all of the plaintiff’s so-called compensation interests, namely, the ‘expectation’ (in the sense of net expectation), ‘reliance’ (in the sense of expenditure wasted as a result of the breach), ‘restitution’ and ‘indemnity’ interests (Table 6.3).

108  Research handbook on remedies in private law Table 6.3 Expectation interest

$1,086,428

Reliance interest

$5,219,135

Restitution interesta Indemnity interestb

$113,000 $143,049 $6,561,612

Notes: a This might also be classified as part of the reliance interest. See Fuller and Perdue (n2) 54–5. b The term used by A I Ogus, The Law of Damages (Butterworths 1973) 18 and D Harris, D Campbell and R Halson, Remedies in Contract and Tort (2nd edn, Butterworths 2002) 122 to refer to losses that arose after and as a result of the breach.

It will be noted, however, that the four interests are here represented simply as ‘components of the accounting of damages rather than distinct concerns’.105

CONCLUSION It is now widely accepted that awarding damages for wasted expenditure does not involve making an exception to the normal object of awarding damages for breach of contract. Such an award simply represents the best approximation of expectation recovery in the circumstances. As Professor Kelly has astutely pointed out:106 In order to put the plaintiff in the position she would have occupied if the defendant had performed, courts must at least award expenditures. Their inability to calculate the profit does not change the nature of the enterprise from expectation to reliance. It merely admits a pragmatic limitation upon the theoretically preferred expectation recovery. Instead of measuring expectation precisely, we come as close as possible given the evidence available and the other substantive rules limiting recovery.

Furthermore, the answers to the questions discussed in this chapter on which different views have been expressed are also fairly clear. First, the presumption of recoupment imposes the full legal burden, not a mere evidential burden, on the defendant of proving on the balance of probabilities that expenditure incurred in performing, or preparing to perform, the contract would not have been recovered by the claimant, and this view commands majority support in the leading case of Amann Aviation. Secondly, in determining whether the presumption has been rebutted, foreseeable consequential benefits that the claimant expected to gain from the defendant’s performance should be taken into account even though they were not the subject of an express or implied promise by the defendant. Thirdly, the presumption of recoupment should not extend to all types of expenditure incurred by the claimant in reliance on the contract that is breached. Although this limitation is difficult to define there is no basis for extending it to situations where the expenditure was incurred in, for want of a better term, collateral transactions, as in the Ti Leaf case where the trial judge’s decision that the defendants had the

105 Barnes (n26) 1139. The author argues that the four interests are (at 1151) ‘accounting categories’ or (at 1140) ‘functional components of a process designed to ensure that the injured party realizes the benefits of her contracting’. 106 Kelly (n11).

The limitations on ‘reliance’ damages for breach of contract  109 burden of establishing that the plaintiff’s expenditure would not have been recovered could easily have resulted in their being visited with an unfair and ruinous damages bill of more than $1m. Fourthly, where the presumption of recoupment does apply and is not rebutted, it would be contrary to principle to ignore contingencies that would have enabled the defendant to escape liability in damages, or reduce the amount thereof, if they had materialised. It is therefore difficult to accept the decision in Amann Aviation that the plaintiff’s recovery should not be reduced on account of the 20 per cent chance of early termination of the contract. Finally, in cases where the claimant is able to establish that performance by the defendant would have resulted in a net gain, there can be no objection to recovery of both wasted expenditure and loss profits provided the damages are calculated in accordance with one of the methods I have discussed so as to avoid the possibility of double recovery.

7. Restitution Peter Jaffey1

INTRODUCTION Restitution The central case of restitution is the return of a transfer or payment, for example where the claimant has made a payment by mistake or under the influence of some other ‘vitiating factor’. This is apparently straightforward, but it has been at the centre of potentially far-reaching developments in English law over recent years. There is a large and often contentious literature, the starting point for which was Goff and Jones’s The Law of Restitution2 and Birks’s Introduction to the Law of Restitution.3 Restitution as the reversal of a transfer restores the claimant transferor C’s loss by returning the original money or property transferred or replacing it with money or property of equivalent value. It differs from compensation in contract and tort in that the loss was not caused by the recipient defendant D and instead D’s liability arises from the fact that D received the transfer.4 It might be helpful to use the expression restitution only for this type of case, referring to the reversal of a transfer. However, a wider usage of restitution has become established, extending beyond this to encompass the removal of or payment for a benefit received by D, including payment for services provided by C, payment for the unauthorised use of C’s property, and the removal of a benefit obtained by D through wrongdoing,5 where the effect is not to reverse a transfer and restore a loss. This wider usage is due to the influence of the theory of unjust enrichment.

I am grateful to Duncan Sheehan for his comments. The first edition was in 1966. The latest edition is C Mitchell et al., Goff & Jones: The Law of Unjust Enrichment (9th edn, Sweet and Maxwell 2016). 3 P B H Birks, Introduction to the Law of Restitution (Clarendon Press, rev edn, Oxford University Press 1989). See also, for example, P Birks, Unjust Enrichment (2nd edn, Oxford University Press 2005); G Virgo, The Principles of the Law of Restitution (3rd edn, Oxford University Press 2015); A Burrows, The Law of Restitution (3rd edn, Oxford University Press 2011); J Beatson, The Use and Abuse of Unjust Enrichment (Clarendon Press 1991); A Tettenborn, The Law of Restitution in England and Ireland (3rd edn, Cavendish 2002); J Gordley, Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment (Oxford University Press 2006); K Mason, J Carter and G Tolhurst, Restitution Law in Australia (3rd edn, Lexis Nexis Australia 2016); R Grantham and C Rickett, Enrichment and Restitution in New Zealand (Hart 2000); M McInnes, The Canadian Law of Unjust Enrichment and Restitution (Lexisnexis Canada 2014); J Edelman and E Bant, Unjust Enrichment (Hart 2016); P D Maddaugh and J D McCamus, The Law of Restitution (Thomson Reuters Looseleaf edn). 4 ‘Restitution’ was occasionally used at one time to refer to compensation in the ordinary sense: see e.g. Nocton v Lord Ashburton [1914] AC 932, 952. 5 Restitutionary remedies are sometimes said to be a group of associated remedies: see e.g. Virgo (n3) ch 1. See also F Giglio, ‘Gain-Related Recovery’ (2008) 28 OJLS 50; P Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 UWALR 1. 1 2

110

Restitution  111 In considering restitution and its relationship with unjust enrichment, it is important to make the distinction between a body of remedial law like the law of compensation, and a body of what one might call substantive or primary law concerned with a particular category of claim or cause of action, such as contract or negligence or other torts, which comprise the rules that determine when a claim arises.6 Restitution is a remedy (whether understood as the return of a transfer or more broadly as the removal of a benefit) and the orthodox view nowadays is that the cause of action in the case of restitution of a mistaken or otherwise vitiated payment, and in general with respect to claims for restitution, is unjust enrichment.7 According to the theory of unjust enrichment, we should recognise a primary body of law concerned with the conditions for a claim to arise in unjust enrichment, i.e. from the enrichment of D at C’s expense, the appropriate remedy for C’s claim being in general restitution.8 Historically the claim to recover a mistaken payment took the form of a claim for money had and received in quasi-contract, based on a fictional implied contract. As the implied contract fiction was abandoned,9 the law of restitution was initially taken to refer to both a body of remedial law and a body of primary law governing the conditions for the cause of action to arise, before the recognition of unjust enrichment as the cause of action. The most basic and far-reaching issues in the restitution literature are to do with the relationship of restitution to other areas of law and possible causes of action, including unjust enrichment, contract and property. The Unjust Enrichment Approach There are said to be three conditions for a claim in unjust enrichment:10 (1) a benefit has been conferred on the defendant D, now generally said to be a transfer from C to D; (2) the benefit was conferred ‘at the expense’ of the claimant C; and (3) there is an ‘unjust factor’,11

The distinction is sometimes said to be between ‘event’ and ‘response’: see P Birks, ‘Misnomer’ in W Cornish, R Nolan, J O’Sullivan and G Virgo (eds), Restitution: Past, Present and Future (Hart 1998). The distinction stated in the text is more usual. 7 Lipkin Gorman v Karpnale [1991] 2 AC 548; Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669; Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 153; Sempra Metals Ltd v IRC [2007] UKHL 34; Benedetti v Sawiris [2013] UKSC 50. The Australian courts have retreated from the theory of unjust enrichment in favour of an approach based on unconscionability: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14. 8 At one time Birks proposed the quadration thesis, according to which all claims arising from unjust enrichment are claims for restitution, and vice versa: see A Burrows, ‘Quadrating Restitution and Unjust Enrichment: A Matter of Principle?’ [2000] RLR 257. 9 It was rejected in Lipkin Gorman v Karpnale [1991] 2 AC 548; Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669. 10 For general overviews, see A Burrows, A Restatement of the English Law of Unjust Enrichment (Oxford University Press 2012); C Mitchell, ‘Unjust Enrichment’ in Andrew Burrows (ed.), English Private Law (3rd edn, Oxford University Press 2013). 11 See e.g. Burrows (n10) 25; Lipkin Gorman v Karpnale [1991] 2 AC 548; Banque Financiere de la Cite v Parc (Battersea) [1999] 1 AC 221. Canada follows the civil law ‘absence of basis’ approach rather than the unjust factor approach: see generally D Sheehan, ‘Unjust Factors, Absence of Juristic Reason and the Development of Canadian Unjust(ified) Enrichment Law’ (2016) 49 UBCLR 619. It is not apparent whether the two approaches differ from each other in a fundamental way. See generally S Meier, ‘Unjust Factors and Legal Grounds’ in D Johnson and R Zimmermann (eds), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge University Press 2002); R Stevens, ‘The New Birksian 6

112  Research handbook on remedies in private law or ‘ground for restitution’12 by virtue of which it would be unjust for D to retain the benefit or be free of any liability to pay for it or surrender it or its value. The claim to recover a mistaken payment is sometimes said to be the paradigm case of restitution for unjust enrichment:13 the benefit conferred is the money received by D; the benefit is at C’s expense, because the payment came from him; and the unjust factor, which provides the justification for the claim, is the mistake. Other unjust enrichment claims can involve other unjust factors, for example where a payment is made under duress or undue influence, or is made without authority or on a basis that has failed; or they can involve different types of benefit, that is to say goods or services instead of money; or possibly they can be at C’s expense in a different sense.14 It is said that in these ways unjust enrichment forms a broader category of claims analogous to and exemplified by the mistaken payment claim.15 One attraction of the unjust enrichment approach is no doubt that it has no need for the historical requirement of a fictional agreement in quasi-contract. Another may be that it makes clear that restitution is a remedy and not a category of claim or cause of action. It will also count in its favour for some that it does not treat the division between law and equity as significant. In addition, whatever the merits of the theory of unjust enrichment, its popularity and influence have had a galvanising effect on scholarly work on aspects of the law that were historically marginalised. More generally, the unjust enrichment project is said to be a project of rationalisation, and a unifying and harmonising project,16 comparable to the earlier developments in the common law by which unified bodies of contract law and negligence law were developed.17 This is why the transformation of private law to give effect to the theory of unjust enrichment is taken to be justified. But, although the cause of action in unjust enrichment is now well established in English law, it is very much open to question, as many commentators have argued, whether the theory can be justified on this basis.18 Furthermore, even amongst proponents of the theory,

Approach to Unjust Enrichment’ (2005) OUCLJ 141; D Sheehan, ‘Unjust Factors or Restitution of Transfers Sine Causa’ (2008) Oxford University Comparative Law Forum 1; K Barker, ‘Responsibility for Gain: Unjust Factors or Absence of Legal Ground? Starting Points in Unjust Enrichment Law’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law (Hart 2008); M Chen-Wishart, ‘In Defence of Unjust Factors: A Study of Rescission for Duress, Fraud and Exploitation’ in D Johnson and R Zimmermann (eds), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge University Press 2002). 12 Burrows (n10) 31. 13 P Birks, Unjust Enrichment (n3) 3; Burrows (n10) 64. 14 This condition was at one time understood to mark the difference between restitution for unjust enrichment by subtraction or transfer and restitution for unjust enrichment by wrongdoing: see below at note 86. 15 Birks, Unjust Enrichment (n3) 3; Mitchell (n10) 18.04. 16 A Burrows, ‘Restitution: Where Do We Go From Here?’ in A Burrows, Understanding the Law of Obligations: Essays on Contract, Tort and Restitution (Hart 1988); D Laycock, ‘The Scope and Significance of Restitution’ (1989) 67 Texas LR 1277; E L Sherwin, ‘Restitution and Equity’ (2001) 79 Texas Law Review 2083; K Barker, ‘Theorising Unjust Enrichment Law’ (2006) 26 OJLS 609. 17 D Ibbetson, A Historical Introduction to the Law of Obligations (Oxford University Press 1999) 287ff. 18 Many commentators have been critical of the unjust enrichment approach: see e.g. S Stoljar, The Law of Quasi-Contract (2nd edn, The Law Book Co 1989); P S Atiyah, Essays on Contract (Clarendon Press 1986); J Dietrich, Restitution: A New Perspective (Federation Press 1998); I M Jackman, The Varieties of Restitution (2nd edn, The Federation Press 2017); P Jaffey, The Nature and Scope of

Restitution  113 there is continuing disagreement over when a claim for restitution is based on unjust enrichment rather than some other cause of action.

DIFFERENT TYPES OF BENEFIT: ‘MEASUREMENT OF BENEFIT’ Historically a claim to recover a mistaken payment was treated differently from a claim for reasonable payment for mistakenly provided goods or services. The remedy in the former case was money had and received, and in the latter case a quantum valebat or quantum meruit. According to the theory of unjust enrichment, however, these different remedies should now be understood as variants of the same remedy of restitution to reverse a transfer from C to D based on D’s unjust enrichment.19 The difference between the two cases, it is said, is only that different types of benefit are transferred, which means that the value of the benefit has to be measured differently for the purposes of determining the measure of restitution. For money, the value of the benefit is simply the amount of the money paid, whereas for services the value of the benefit to D has to be translated into a monetary amount and may differ according to D’s circumstances and tastes. (I shall not treat goods separately.20) More particularly, it is said that although services have an ‘objective value’, which is said to be their market value, they do not necessarily have this value to D. They may be worth less than this to D, and D should be liable only in the measure of the subjective value of the benefit, the benefit to him, as he values it, which is sometimes expressed by saying that D is entitled to rely on the ‘subjective devaluation’ of the benefit.21 It is true that, unlike money, services can have a different monetary value to different people. But is it really correct to say that reasonable payment for services provided is essentially the same as the reversal of a money payment, the only difference lying in the practical problem of measuring the value of the benefit? This is very difficult to accept. It is in the nature of money, Restitution (Hart 2000); P Jaffey, Private Law and Property Claims (Hart 2007); S Hedley, Restitution: Its Division and Ordering (Sweet and Maxwell 2001); S Hedley, A Critical Introduction to Restitution (Butterworths 2001); C T Wonnell, ‘Replacing the Unitary Principle of Unjust Enrichment’ (1996) 45 Emory Law Journal 153; G H L Fridman, ‘Unjust Enrichment (Dis)Contented’ in J W Nyers et al. (eds), Understanding Unjust Enrichment (Hart 2004). For an unorthodox if not sceptical approach, see C Webb, Reason and Restitution: A Theory of Unjust Enrichment (Oxford University Press 2016); P Watts, ‘Restitution – A Property Principle and a Services Principle’ [1995] RLR 49; A Botterell, ‘Property, Corrective Justice and the Nature of the Cause of Action in Unjust Enrichment’ (2007) 20 Canadian Journal of Law and Jurisprudence 275; D Priel, ‘The Justice in Unjust Enrichment’ (2014) 51 Osgoode Hall Law Journal 813. See also C Saiman, ‘Restitution in America: Why the US Refuses to Join the Global Restitution Party’ (2008) 28 OJLS 99. 19 I.e. a ‘monetary restitutionary award’: Burrows (n10) 37–8; Mitchell (n10) 18.27–36. This approach seems to be implicit in Benedetti v Sawiris [2013] UKSC 50. 20 Goods can, of course, sometimes be returned but may be supplied and used up in a supply of services. 21 See Burrows (n10) 41–3; Mitchell (n10) 18.27–36. As to ‘subjective devaluation’, see Birks, Introduction (n3) 109–10). There is a substantial literature on how to value the benefit: see e.g. A Lodder, Enrichment in the Law of Unjust Enrichment and Restitution (Hart 2012); P Birks, ‘In Defence of Free Acceptance’ in A Burrows (ed.), Essays on the Law of Restitution (Clarendon 1991); A Burrows, ‘Free Acceptance and the Law of Restitution’ (1998) LQR 576; M Garner, ‘The Role of Subjective Benefit in the Law of Unjust Enrichment’ (1990) OJLS 42; M McInnes, ‘Enrichment Revisited’ in Nyers et al. (n18).

114  Research handbook on remedies in private law and property more generally, that it is concerned with a thing or ‘object of property’ owned by C which can in principle be transferred to D and the transfer reversed. Restitution in the core sense is the reversal of such a transfer by the return of the same property or equivalent property or money out of D’s general assets.22 By contrast, services can only be provided and paid for. The provision of services is not the transfer of a thing or object of property and the remedy is not the reversal of such a transfer.23 The idea that services have an objective value that can be subjectively devalued in a particular case may give the impression that the provision of a service is the transfer of a thing whose value is subjective, but it is surely clear that this is not the case. With respect to services, one should really distinguish between: (1) the loss incurred by C in providing the service; (2) the value to D of the benefit conferred through the provision of the service; and (3) a reasonable measure of payment for the service. The effect of the remedy is not to reverse a transfer but to complete an exchange of payment for a service, and the crucial question is what it is reasonable for D to pay in the light of the cost incurred by C and the benefit accruing to D. Generally a reasonable payment will be more than C’s cost and less than the value of the benefit to D. By adopting a single concept of restitution as the reversal of a transfer, the unjust enrichment approach obscures these crucial issues concerning reasonable payment for services. Sometimes the services are said to have their objective value to D, meaning in general their market value. It is said that, where D has agreed to pay for the benefit, or requested it, or accepted it when he could have rejected it, or taken it without permission, the circumstances demonstrate that D values the benefit at its market value, so that this is the correct measure of restitution.24 But these factors do not actually show that the value of the benefit to D is its market value. Even if D knew that in the circumstances he was liable to pay the market rate, one cannot infer that he thought that the benefit was worth at least this to him, since he may have thought he could avoid payment; and, in any case, the benefit may turn out not to have the value to him that he expected, because of a change of circumstances or a misjudgement. This does not necessarily mean he should not have to pay for the benefit at the market rate. The significance of these supposed tests or measures of benefit is not that they show that the benefit is actually worth the market rate to D for the purposes of a claim in unjust enrichment, but that they may provide reasons why D should pay the market rate irrespective of the actual value of the benefit to him (the implication being that the claim is not in unjust enrichment).25 There is another important point to make about services. As a general rule, D incurs no liability to pay for a benefit that C chose to confer without a prior agreement.26 The purpose of this requirement is that the agreement can establish terms on which the exchange of a benefit

One view of the ‘at the expense of’ condition is that it is necessary for the benefit to come from C but not for there to be a transfer from C: Burrows (n10) 45. 23 See e.g. Stoljar (n18) 197–9; S Hedley, ‘Unjust Enrichment as the Basis of Restitution – an Overworked Concept’ (1985) 5 Legal Studies 56; Jaffey, Nature and Scope (n18) 10. 24 Burrows (n10) 41–3; Mitchell (n10) 18.27–39. There may be an ‘incontrovertible benefit’, where no reasonable person would deny that a benefit has been received. 25 Just as in contract, the agreement binds a contractor to pay what was agreed, expressly or impliedly, irrespective of whether the benefit received actually had the value expected. See also P Jaffey, ‘Unjust Enrichment and Contract’ (2014) 77 MLR 983. 26 Falcke v Scottish Imperial Insurance (1886) 34 Ch D 234; Owen v Tate [1976] QB 402; E W Hope, ‘Officiousness’ (1929) Cornell LQ 25. 22

Restitution  115 for payment is mutually beneficial.27 Sometimes it makes sense for C to be able to confer a benefit by the provision of services without having first made an agreement with D, and still be entitled to be paid. This is the case with respect to ‘necessitous intervention’, where D is saved from a loss by the provision of a service by C in circumstances when an agreement was not feasible – a rescue for example.28 The issue in this type of case is not that there has been a transfer from C to D that should be reversed. The issue is whether by awarding payment the law should complete an exchange initiated by C with D without a prior agreement, and no doubt there is good reason why it should do so in the case of necessitous intervention. This issue does not arise with respect to money payments, where the claim is to recover a transfer. Equating a liability to pay for a benefit received with the reversal of a transfer obscures the issues that arise in this type of case.29 For these reasons, it seems to me misguided to treat reasonable payment for the provision of goods or services as equivalent to the reversal of a transfer under a single concept of restitution, as the theory of unjust enrichment requires us to do.

WHERE C’S INTENTION TO MAKE A TRANSFER IS ABSENT OR DEFICIENT Mistake is traditionally said to vitiate a payment so as to generate a claim for restitution. Similar vitiating factors are duress and undue influence.30 They are said to fall into one of the categories of unjust factor, where the intention to make the transfer is absent or deficient.31 It seems clear that such vitiating factors justify a claim for restitution, but there has been some controversy over how to define the scope of the vitiating factor and how to understand its effect.32 However, I shall focus on what seems to me the most significant theoretical issue concerning the nature of this type of claim, that is to say its relationship to property law.33 In the case of the claim for restitution of a mistaken payment, it seems that C starts with ownership of the money paid to D.34 The effect of the payment is that title to the money passes to D, and since C has lost his right of ownership it seems that the claim for restitution cannot be an assertion by C of his continuing ownership of the money and must instead be based

Whether a certain exchange is beneficial to D also depends on what other opportunities were open to him. One might prefer to say that what is important is that D determines how to use his money and property, irrespective of whether his judgement is sound, but it is not necessary to pursue this point for present purposes. 28 See generally Burrows (n10) 9; Mitchell (n10) 18.119–125. The traditional example is maritime salvage. See also F D Rose, ‘Restitution for the Rescuer’ (1989) 9 OJLS 167. 29 Burrows (n10) 154. The point applies with respect to services generally. 30 See e.g. Burrows (n10) 31–2; Mitchell (n10) 18.46–73. 31 One approach is to distinguish between cases of (1) absent or deficient intention, (2) qualified or conditional intention (considered below), and (3) policy-factors for restitution: see e.g. Mitchell (n10) 18.10–15. 32 For an analysis of mistake in terms of ‘conditional intention’, see Webb (n18) ch 5. See also D Sheehan, ‘What is a Mistake?’ (2000) 20 Legal Studies 538. 33 This is concerned with mistaken transfers, as opposed to the mistaken provision of services. 34 In the case of money in a bank account, this may not be clear, though it is always assumed in equity. The point is considered in P Jaffey, ‘Explaining the Trust’ (2015) 131 LQR 377, but will not be pursued here. 27

116  Research handbook on remedies in private law on unjust enrichment. The unjust enrichment claim is thus distinguished from a continuing ownership claim, which arises where C’s property has come into D’s hands but C retains ownership.35 In both types of case, one can reasonably refer to the remedy as restitution.36 In making sense of this distinction between two types of restitutionary claim, it is helpful to consider the different ways that the law has found to protect property with respect to transfers. In equity, when property beneficially owned by C as a beneficiary under a trust is transferred by the trustee acting in breach of trust – that is to say beyond his authority under the trust instrument – legal title passes to the recipient, but the beneficiary retains his equitable interest, which is a right of beneficial ownership of the trust property. This is C’s equitable proprietary claim. It is a restitutionary claim based on C’s continuing (beneficial) ownership and it is proprietary rather than personal.37 The equitable proprietary claim may attach to traceable proceeds instead of the original trust property under the tracing rules. It is said that this claim must be an unjust enrichment claim, because there cannot be a claim of continuing ownership with respect to new property.38 However, this was not the view taken in Foskett v McKeown,39 where the House of Lords insisted that the equitable proprietary claim is simply a matter of vindicating or enforcing the original right of beneficial ownership, even with respect to traceable proceeds. There is no generally accepted account in the literature of why it is that a property right in one asset is transmitted to another asset under the law of tracing, and a number of different approaches have been suggested.40 At common law, where C’s goods come into D’s hands without a valid transfer of ownership, under the law of conversion in tort C has a personal claim for compensation for loss caused by D’s wrongful disposal or destruction or withholding of the property.41 This is a claim based on continuing ownership – it depends on C’s retention of title – but, because the claim arises in tort, C’s ownership is lost when the remedy of compensation is awarded. There is also a discretion to order the return of the asset, sometimes referred to as specific restitution.42 In this situation, it is said that there can be an unjust enrichment claim in the alternative,43 though it seems fair to say that this is argued in a revisionary spirit and is supported by the general Burrows (n10) 28; cf Virgo (n3) 11, referring to restitutionary claims to vindicate property rights. It seems that at one time the usage was that only the claim based on unjust enrichment was described as restitutionary, but this was presumably attributable to the residual influence of the idea of restitution as a cause of action. 37 This is the orthodox understanding of the beneficiary’s claim, but some commentators argue that a beneficiary does not have a property right in the trust property: see B McFarlane, The Structure of Property Law (Hart 2008). For objections to this, see Jaffey (n34). 38 E.g. Burrows (n10) 57–8; A S Burrows, ‘Proprietary Restitution: Unmasking Unjust Enrichment’ (2001) 117 LQR 412. 39 [1997] 3 All ER 392. 40 See e.g. Lionel Smith, ‘Philosophical Foundations of Proprietary Remedies’ in R Chambers, C Mitchell and J Penner (eds), The Philosophical Foundations of the Law of Unjust Enrichment (Oxford University Press 2009); J Penner, ‘Value, Property, and Unjust Enrichment: Trusts of Traceable Proceeds’ in Chambers et al., ibid; S Evans ‘Rethinking Tracing and the Law of Restitution’ (1999) 115 LQR 469; P Birks, ‘Mixing and Tracing: Property and Restitution’ (1992) CLP 69. Cf P Jaffey, ‘Proprietary Claims to Recover Mistaken or Unauthorised Payments’ in P Devonshire and R Havelock (eds), The Impact of Equity and Restitution in Commerce (Hart 2018). 41 See generally, D Sheehan, The Principles of Personal Property Law (Hart 2011) ch8. 42 Torts (Interference with Goods) Act 1977, s 3(2). 43 Burrows (n10) 93–4. 35 36

Restitution  117 approach to unjust enrichment in the literature rather than any specific authority. If we do look at the law in this area in a revisionary spirit, it would seem more important to recognise that the claim in conversion is not always genuinely based on a wrong – i.e. on the fact that D has failed to act as he was required to act by law – and that in reality the claim is sometimes based simply on the absence of a valid transfer and not a wrong. This suggests that a distinction should be made between a personal claim in tort for compensation for loss, genuinely based on a wrongful disposal or destruction, and a continuing ownership claim for restitution based on D’s receipt and retention of the property in the absence of a valid transfer, which in principle should be proprietary.44 The basic weakness in the law would seem to be not the failure to recognise a claim in unjust enrichment, but the failure to recognise the proprietary claim for restitution, and distinguish it from the claim for compensation for a wrong. Returning to the mistaken payment claim, where title to the money passes to D, it is commonly said that there is a valid transfer as a matter of property law, but the transfer is nevertheless vitiated so as to give rise to an unjust enrichment claim.45 However, if C as owner made a valid transfer of ownership of the money, there is no reason why there should be any claim at all.46 If C does have a claim because of the mistake, it must be because the mistake vitiated the exercise of C’s power of transfer as owner, rendering the transfer of property invalid. The reason why D acquires title is not that the transfer was valid, but that D must inevitably acquire title if the specific asset transferred can no longer be separately identified amongst his general assets, or, with respect to money as currency, by virtue of a rule that title passes with possession or control to protect the interest of third parties in relying on the money as currency.47 On this understanding, the claim does arise from the fact that there was no valid transfer of the property, and so one might think that it is explicable as a matter of property law, though it does not appear to be simply an assertion of continuing ownership.48 This point is even clearer in the case of a money payment made by an agent without authority, or where the money is lost and found or simply taken by a stranger without permission. Although there cannot be a valid transfer of title, ownership of the money is acquired by D for the same reason as in the case of mistaken payment, and the legal treatment of the case appears indistinguishable. Lipkin Gorman v Karpnale, which is regarded as the seminal case on unjust enrichment, is a case of this type.49 Thus, under all these approaches, it would seem that the

The absence of any recognition of this distinction in the law of tort is lamented by Weir: T Weir, An Introduction to Tort Law (2nd edn, Oxford University Press 2006) 166–7. 45 See P Birks, ‘Property and Unjust Enrichment: Categorical Truths’ [1997] NZLR 623; cf R Grantham and C Rickett, ‘Property and Unjust Enrichment: Categorical Truths or Unnecessary Complexity?’ [1997] NZLR 668. 46 Jaffey, Nature and Scope (n18) 275–9; Webb (n18) 80–1. 47 See generally D Fox, ‘The Transfer of Legal Title to Money’ [2006] RLR 60; D Fox, Property Rights in Money (Oxford University Press 2008). 48 The unjust factor is sometimes said to be ‘ignorance’ or ‘powerlessness’; Burrows (n10) 92–6. Even on an unjust enrichment approach ‘lack of authority’ seems preferable: see Jaffey, Nature and Scope (n18) 160–2; see also R Chambers and J Penner, ‘Ignorance’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (Thomson Reuters 2008). 49 [1991] 2 AC 548. Some would say this case is like conversion and is not an unjust enrichment claim like the mistaken payment case, because there was no valid transfer. See generally W J Swadling, ‘A Claim in Restitution’ [1996] LMCLQ 63; W Swadling, ‘Ignorance and Unjust Enrichment: The Problem of Title’ (2008) 28 OJLS 627; R B Grantham and C E F Rickett, ‘Property and Unjust Enrichment: Categorical Truths or Unnecessary Complexity?’ [1997] NZLR 668. 44

118  Research handbook on remedies in private law claim for restitution arises from an invalid transfer of property, in the sense that there was no valid exercise of a power of transfer of property. A vitiating factor can only be understood as a factor that renders the exercise of this power invalid. Looking (in a revisionary spirit) at these different approaches, it is reasonable to ask whether there is not a single optimal framework for dealing with invalid transfers, which one might say best captures the justice of the situation, and what the place of restitution and unjust enrichment would be in such a framework. One might then identify the following types of claim. First, there is the claim for restitution of the original property transferred, on the basis of continuing ownership, which should be a proprietary claim. Secondly, there is the claim for compensation for the loss of property that has been destroyed or consumed or disposed of, which should be a personal claim. Thirdly, one might identify what can be described as a restitutionary claim to the ‘surviving value’ of the transfer. This is the measure of recovery for the unjust enrichment claim at common law. The measure is the enrichment of D, that is to say the value of the transfer, less any ‘disenrichment’ by way of any loss from D’s general assets that would not have occurred in the absence of the receipt of the transfer.50 The restitutionary claim to surviving value at common law is a personal claim, but in fact this enrichment, though not necessarily corresponding to a specific asset, is a well-defined, abstract part of D’s general assets, and it would be possible in theory to have a proprietary claim to this part of D’s general assets: the part, abstractly defined, that is due to the receipt and would not be there but for the invalid transfer.51 On this analysis, the restitutionary claim to surviving value is really a right of continuing ownership arising from the invalidity of the transfer. To say that D is unjustly enriched is just to say that C has a continuing claim to a part of D’s estate, abstractly defined. This would also provide a possible account of tracing in terms of continuing ownership. One can think of tracing as a process of identifying an asset whose value corresponds to this abstract part of D’s general assets, the surviving value of the transfer. It is conventionally understood in terms of the transmission of a right from one specific asset to another because the assumption has always been that a proprietary claim must attach to a specific asset, but there is no logical objection to a proprietary claim in the form suggested. A claim in this form could only take effect with the assistance of equity, however, because legal title is associated with possession or control and necessarily attaches to a specific asset, whereas an equitable interest can in principle attach to an abstract part of D’s general assets.52 50 This reflects a particular view of change of position, according to which it corresponds to disenrichment: see e.g. P Birks, ‘Change of Position and Surviving Value’ in W Swadling (ed.), The Limits of Restitutionary Claims: A Comparative Analysis (UK National Committee of Comparative Law 1997) 41; P Birks, ‘Change of Position: The Nature of the Defence and Its Relationship to other Restitutionary Defences’ in M P McInnes (ed.), Restitution: Developments in Unjust Enrichment (LBC Information Services 1996). As to change of position in general, see E Bant, The Change of Position Defence (Hart 2009). 51 For this approach, see further Jaffey (n40); Jaffey, Nature and Scope (n18) ch9; Jaffey, Private Law and Property Claims (n18) ch3. There are other versions of the proprietary theory of restitution, including Stoljar (n18); Webb (n18). Other recent approaches to the claim are found in J Nadler, ‘What Right Does Unjust Enrichment Law Protect?’ (2008) 28 OJLS 245; F Wilmot-Smith, ‘Should the Payee Pay?’ (2017) 37 OJLS 844; J Penner, ‘We All Make Mistakes: A “Duty of Virtue” Theory of Restitutionary Liability for Mistaken Payments’ (2018) 81 MLR 222; P Watts, ‘Unjust Enrichment – the Potion that Induces Well-meaning Sloppiness of Thought’ (2016) 69 CLP 289. 52 See Jaffey (n40). The orthodox view is that a proprietary right must attach to a specific asset, which supports the distinction between ‘rights’ and ‘value’ as types of enrichment: see Robert Chambers,

Restitution  119 The implication is that all that is needed in principle for the optimal framework is the restitutionary claim based on continuing ownership, which should be proprietary, and can in principle attach to surviving value, and the personal claim for compensation for loss of property transferred. There is no need for an additional restitutionary claim based on unjust enrichment. This is a possible interpretation of a controversial area. It draws out what seems to me the most fundamental question, which is whether it is necessary to invoke a concept of unjust enrichment in order to explain restitutionary claims to recover vitiated or unauthorised transfers of money, or whether instead it is sufficient to treat the restitutionary claim in this context as always being simply an aspect of the remedial part of property law.53 On this suggested approach, the restitutionary claim at common law to recover an unauthorised or vitiated transfer should in principle be proprietary. There has been controversy over whether there should be a proprietary claim at common law.54 The question is understood to be whether the equitable proprietary claim should be confined to its traditional role in equity, where it arises with respect to a transfer of trust property in breach of trust or fiduciary duty, or extended to be available for all unauthorised or vitiated transfers in parallel to the common law claim. In Westdeutsche Landesbank Girozentrale v Islington LBC,55 the House of Lords declined to extend the claim more widely.56 However, in recent cases in the Supreme Court where the availability of a proprietary claim was discussed no reference was made to the requirement for a breach of trust or fiduciary duty.57

‘Two Kinds of Enrichment’ in Chambers et al. (n40); see also Lodder (n21). But value in this context really means an abstract part of D’s estate, to which a proprietary right can in principle attach. 53 Restitution in this sense encompasses common law restitution and the equitable proprietary claim, the latter including cases where the claim takes effect by way of an equitable charge or subrogation and also rescission. See generally as to these Virgo (n3) 18–21. For some objections, see D Sheehan, ‘The Property Principle and the Structure of Unjust Enrichment’ [2011] RLR 138. The Australian High Court has departed from the unjust enrichment approach in favour of an approach based on unconscionability: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14. 54 This is understood to refer to the possibility of a proprietary claim as an alternative to the personal claim. It has been argued that the availability of a proprietary claim at common law is justified by application of the doctrine of resulting trust: see P Birks, ‘Restitution and Resulting Trusts’ in S Goldstein (ed.), Equity and Contemporary Legal Developments (Hebrew University of Jerusalem 1992); R Chambers, Resulting Trusts (Oxford University Press 1997); P Birks, ‘Trusts Raised to Reverse Unjust Enrichment: The Westdeutsche Case’ [1996] RLR 3. The expression resulting trust is not inappropriate but the approach in the text draws on the equitable proprietary claim which is traditionally regarded as, or associated with, the constructive trust that arises from a transfer in breach of trust. 55 [1996] AC 669. 56 Chase Manhattan Bank v Israel-British Bank (London) Ltd [1981] Ch 105. 57 See Bailey v Angove’s PTY Ltd [2016] UKSC47 and Tax Commissioners v Investment Trust [2017] UKSC 29. In the literature on restitution and unjust enrichment there is a debate over whether a restitutionary claim based on unjust enrichment should have priority in insolvency as a proprietary claim, which is sometimes considered to be a matter of policy: see generally, E L Sherwin, ‘Constructive Trusts in Bankruptcy’ (1989) University of Illinois Law Rev 297; B Hacker ‘Proprietary Restitution after Impaired Consent Transfers: A Generalised Power Model’ (2009) 32 OJLS 467; W Swadling, ‘Rescission, Property, and the Common Law’ (2005) 121 LQR 123; W Swadling, ‘Policy Arguments for Proprietary Restitution’ (2008) 28 Legal Studies 506; C Rotherham, Proprietary Remedies in Context (Oxford University Press 2002); H Dagan, The Law and Ethics of Restitution (Cambridge University Press 2004); D Salmons, ‘The Availability of Proprietary Restitution in Cases of Mistaken Payments’ (2015) 74 Cambridge Law Journal 534; A Kull, ‘Restitution in Bankruptcy: Reclamation and Constructive Trust’ (1998) 72 American Bankruptcy Law Journal 265; E Sherwin, ‘Constructive Trusts in Bankruptcy’

120  Research handbook on remedies in private law Alongside the equitable proprietary claim in equity there is the claim for knowing receipt, under which the recipient D is personally liable for the value of the trust property received if the knowledge or fault requirement is satisfied.58 It has been controversial whether this claim should be understood as a personal restitutionary claim to return the surviving value of the transfer, or alternatively as a compensatory claim in respect of trust property that has been disposed of or consumed. If it is a restitutionary claim, it should in principle be a strict liability claim in the measure of surviving value, without a knowledge or fault requirement, like the common law claim for restitution.59 By contrast, if it is a compensatory claim, which makes D rather than C liable for the loss of trust property and, unlike a claim to surviving value, leaves or may leave D with a net loss, there is good reason for it to be fault-based and subject to a knowledge requirement. As the law stands, knowing receipt can in different situations operate, in effect, as either a restitutionary claim or a compensatory claim (or as both in combination).60 In principle, the knowledge or fault requirement is appropriate only with respect to the recovery of compensation for loss and not the recovery of surviving value. If the equitable proprietary claim were understood to attach to surviving value, as suggested above, knowing receipt would be necessary only as a compensatory claim with respect to property lost and the knowledge or fault requirement would always be appropriate. Under the existing tracing rules, however, D can be left with surviving value that is not captured by the equitable proprietary claim, and the claim for knowing receipt provides a restitutionary claim to this surviving value. Here in principle there should be no knowledge or fault requirement.61 The most basic question with respect to restitution of unauthorised and vitiated payments is whether the concept of unjust enrichment and the modern cause of action in unjust enrichment contribute anything to a satisfactory account, or whether the best account treats restitution in this context as simply the remedial part of property law.

(1998) University of Illinois Law Review 297; D M Paciocco, ‘The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors’ (1989) 68 Canadian Bar Review 315; C Rotherham, ‘Policy and Proprietary Remedies: Are We All Formalists Now?’ (2012) 65 CLP 529. 58 I.e. such as to render it unconscionable for D to retain the benefit: BCCI v Akindele [2001] Ch 437. 59 D Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in Cornish et al. (n6) ch 15; P Birks, ‘Receipt’ in P Birks and A Pretto-Sakmann (eds), Breach of Trust (Hart 2002) 213–40. 60 The difference would be relevant to a claim by D to contribution by C under the Civil Liability (Contribution) Act 1978: see City Index v Gawler [2007] EWCA Civ 1382. 61 There is a longstanding controversy over the nature of knowing receipt and the knowledge and fault requirement: see e.g. M Bryan, ‘Recovering Misdirected Money from Banks: Ministerial Receipt at Law and in Equity’ in F Rose (ed.), Restitution and Banking Law (Mansfield Press 1998) 182; R Havelock, ‘The Transformation of Knowing Receipt’ [2014] RLR 1; S Gardner, ‘Moment of Truth for Knowing Receipt’ (2009) 125 LQR 20; D Sheehan, ‘Disentangling Equitable Personal Liability for Receipt and Assistance’ [2008] RLR 41; K Low, ‘Recipient Liability in Equity: Resisting the Siren’s Lure’ [2008] RLR 96; J Dietrich and P Ridge, ‘The Receipt of What? Questions Concerning Third Party Recipient Liability in Equity and Unjust Enrichment’ (2007) 31 MULR 47.

Restitution  121

QUALIFIED OR CONDITIONAL TRANSFERS, OR TRANSFERS ON A BASIS THAT FAILS It is said that there is a claim for restitution to reverse an unjust enrichment when a benefit is conferred on a ‘basis that fails’, or, in other words, the benefit is conferred conditionally.62 The obvious way in which C can make a payment conditionally is for him to make it under a contract with D, by which D agrees that the payment will be repayable if a specified condition is fulfilled or not fulfilled. Here the cause of action would, of course, be in contract. However, failure of basis is said to be non-contractual and to operate independently of contract as an unjust factor in unjust enrichment. The implication appears to be that C has a power to make a payment subject to a condition that binds the recipient D, independently of any contract between them. (With respect to services, it does not make sense to say that they are conferred conditionally in the same sense, since they cannot be returned – the difference is ignored in the law of unjust enrichment, as discussed above – but presumably D would incur a liability to pay for them.) Consider the so-called pre-contractual claim.63 Typically, here C has made a payment to D or has done work for D before a contract has been concluded between them, often while negotiations are underway. Sometimes it has seemed right that C should have a claim for payment in these circumstances.64 However, the usual understanding seems to be that, for D to be liable to pay, C must have intended to be paid, and D must have accepted this.65 This suggests that the liability to return or pay for a benefit arising from a failure of basis is in the nature of an agreement-based or at least a voluntarily assumed liability, where the recognised conditions for a contract are not met, for example because of uncertainty or lack of consideration. In these pre-contractual cases, there could be a collateral agreement or a preliminary version of the main agreement that was not actually concluded. There would seem to be good reason why such a claim ought in principle to be agreement-based. As mentioned above, it would ensure that the exchange of benefit for payment is mutually beneficial, so that D does not have to pay for a benefit that he does not value at the price he has to pay (here normally the market price). Furthermore, without such a limitation, entering negotiations or embarking on preliminary or exploratory dealings with potential contractors would be fraught with the risk that liability may be incurred before any agreement is made.

62 This is taken to be how we should understand ‘failure of consideration’, where it is used to refer to a ground for restitution of a payment made under a contract. The doctrine is attributed to Fibrosa Spolka Akcjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32: see for example, Burrows (n10) 87; Mitchell (n10) 18.77. See generally T A Baloch, Unjust Enrichment and Contract (Hart 2009); A Skelton, Restitution and Contract (Mansfield Press 1998). It would seem that here (by contrast with the type of case considered above) the payment is valid, in the sense that there is a valid exercise of a power of transfer, but the payment is qualified or conditional, so that if a certain event occurs, C is entitled to restitution of the payment. 63 See e.g. R Havelock, ‘Anticipated Contracts That Do Not Materialise’ [2011] RLR 72; S Hedley, ‘Work Done in Anticipation of a Contract Which Does Not Materialise: A Response’ in Cornish et al. (n6); P Jaffey, ‘Unjust Enrichment and Contract’ (2014) 77 MLR 983. 64 William Lacey (Hounslow) Ltd v Davis [1957] 1 WLR 932; British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504; Benedetti v Sawiris [2013] UKSC 50. 65 Though as for contract this is determined objectively: Burrows (n10) 88; Mitchell (n10) 18.84.

122  Research handbook on remedies in private law Would the claim based on failure of basis not then be better understood as a contractual claim, applying relaxed conditions for contractual liability? One might object that it is not open to the courts to modify the settled law of contract, whereas it remains open to them to develop the newer and less settled law of unjust enrichment. But, in the end, one would think that this question should turn on the nature of the liability. If liability is based on giving legal effect to an agreement, it should be treated as contractual, however it may be expressed, and it ought to be dealt with through the development of the law of contract. The idea of failure of basis as an unjust factor raises another problem for the law of contract. Sometimes there is a claim to recover a contractual prepayment, or a claim for a quantum meruit for work done under a contract, arising on the termination of a contract, whether for breach or frustration.66 Where such a claim is available, it is said to be a restitutionary claim to reverse unjust enrichment, failure of basis being the unjust factor. The basis is the contractually agreed performance, and it fails when the contract is not fully performed.67 But can the legal consequences of non-performance of a contract be determined outside contract law in this way? One might think that it is necessarily the exclusive role of contract law to determine the legal effect of the non-performance of a contract. It seems that the reason why it is thought that such claims cannot be contractual is that, on the orthodox understanding of contract law,68 a contractual agreement takes the form of an exchange of promises that generate duties of performance. On this understanding, non-performance of a contract is a breach of duty and its legal effect must be to generate a claim for expectation damages or specific performance, which serve to correct the breach by securing performance of the duty of performance or an equivalent benefit in damages. By contrast, it would seem that a remedy in the form of the return of a contractual prepayment or payment for work done under the contract does not give effect to or protect the contractual duty of performance, and so cannot be based on the contract. To explain the availability of these ‘restitutionary remedies in the contractual context’69 it would seem necessary to invoke a non-contractual ground for the claim, even if this ground is actually the non-performance of the contract, characterised differently as failure of basis. But this approach is very questionable. The issue is fundamentally what rights, duties and liabilities arise from the parties’ agreement, and, in the light of these, what legal consequences arise from its non-performance. This must in principle be a matter for contract law. In principle, there cannot be a legal relationship in contract arising from the agreement and at the same time a separate and inconsistent legal relationship arising from the same agreement outside

The traditional rule is that a prepayment is recoverable only on a complete failure of consideration: see Mitchell (n10) 18.89. 67 This approach is widely adopted in the contract textbooks as well as the restitution and unjust enrichment textbooks. See generally, P Birks, ‘Restitution and the Freedom of Contract’ (1983) CLP 141; J Beatson, ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in W Swadling and G Jones (eds), The Search for Principle (Oxford University Press 1997); C Webb, ‘Unjust Enrichment and Contract’ (2010) 126 LQR 337; A Kull, ‘Restitution as a Remedy for Breach of Contract’ (1994) 67 Southern California Law Review 1465; J Goodwin, ‘Failure of Basis in the Contractual Context’ [2013] RLR 24. 68 As explained, for example, in D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628; C Fried, Contract as Promise (Harvard University Press 1981). 69 The expression is used in Baloch (n62); see also J Perillo, ‘Restitution in a Contractual Context’ (1973) 73 Colum L Rev 1208. 66

Restitution  123 contract law. This problem is recognised in the unjust enrichment literature, because it is said that the restitutionary remedies of recovery of a prepayment and payment for work done are available only after the termination of the contract, to avoid inconsistency with it.70 However, if these remedies are indeed inconsistent with the contract, they remain so after termination,71 since termination of the contract does not nullify it but merely triggers the operation of the remedial part of contract law. One way to avoid the difficulty would be to deny that there can be any remedies in contract law other than the standard contract remedies of expectation damages and specific performance to enforce primary duties of performance.72 However, it is very well established that a right to recover a prepayment or be paid a quantum meruit arises in at least some situations.73 Another approach would be to depart from the standard understanding of contract in terms of duties of performance arising from promises of performance. As various commentators have suggested,74 it may be possible to understand an agreement and its effect in contract law differently, in such a way that it can account for a broader range of contractual remedies, including the restitutionary remedies. For example, it might be that rather than generating duties to provide the performance specified, the legal effect of an agreement in contract law is to protect the parties in the sense of giving them a return for what they have done so far in providing the agreed performance, which would generate a contractual right to recover prepayments and to be paid for work done if the contract is not completed. This debate has important practical implications for contract law. It is said to be an advantage of the unjust enrichment approach that it allows C to escape from a bad bargain in the event of a breach of contract, by giving C a remedy that is not available in contract, such as the recovery of a prepayment.75 With respect to work done under the contract, it appears to justify a quantum meruit that is measured independently of the contract and so provides C with a measure of payment that exceeds what he might have received under the contract.76 But, again, it is not clear why the legal consequences of the non-performance of a contract should not rightly be governed by contract law, including the question whether in the circumstances C should be allowed to escape from the bargain. There is no reason why the form of the remedy for which a claim is made should determine whether the claim is governed by contract law.77

Mitchell (n10) 18.78; Virgo (n3) 314. See P Jaffey, ‘Restitutionary Remedies in the Contractual Context’ (2013) 76 MLR 429; cf S Hedley, ‘Implied Contract and Restitution’ (2004) 63 Cambridge Law Journal 435; D Priel, ‘In Defence of Quasi-Contract’ (2012) 75 MLR 54. 72 See e.g. D Campbell and D Harris, ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2002) Legal Studies 208; D Campbell, ‘Expectation and Reliance: One Principle or Two?‘ (2015) 32 JCL 231. 73 Though subject to the traditional requirement of complete failure. 74 P S Atiyah, The Rise and Fall of Freedom of Contract (Clarendon Press 1979) 208–16; J Raz, ‘Promises in Morality in Law’ (1982) 95 Harvard Law Review 916; Jaffey (n71). The objection liable to be directed at these approaches is that they might descend into the ‘death of contract’ approach: G Gilmore, The Death of Contract (Ohio State University Press 1974). 75 See e.g. Burrows (n10) 89. 76 I.e. meaning that the contractual price does not determine what payment is due for the work done under the contract: see e.g. Burrows (n10). 77 Where the parties perform in accordance with an agreement that they take to be a valid contract, but the contract is actually void, there can be no claim in contract, but there may be good grounds for a claim to recover payments made under the void contract, or for payment for work done under it. The 70 71

124  Research handbook on remedies in private law The problem with failure of basis as an unjust factor generating a liability in restitution is that it is difficult to see how it can be understood as other than an essentially agreement-based or voluntarily assumed liability; and, if this is indeed how it should be understood, it makes no sense to treat the non-performance of a contract as an unjust factor that gives rise to a non-contractual claim for a remedy that is not available in contract law.

‘RESTITUTION FOR WRONGS’ Removing the Profits of Wrongdoing ‘Restitution for wrongs’ is the expression now widely used for the removal from D, to be passed to C, of a benefit obtained by D through a wrong against C.78 This measure has always been available in equity, for example for breach of trust or fiduciary duty,79 breach of confidence,80 and the infringement of intellectual property rights.81 Some cases explicitly rely on the principle that D should not be allowed to profit from a wrong as the basis for the remedy.82 The measure was not traditionally available at common law. The closest equivalent was exemplary damages awarded where D committed a wrong having cynically calculated that it would be profitable to do so.83 However, in A-G v Blake84 it was held that restitution for wrongs can be awarded for breach of contract in some circumstances. The remedy in equity is found in the form of either a personal remedy, an account of profits, or a proprietary remedy, a constructive trust. It has been controversial whether the proprietary form should be available.85 A proprietary remedy appears to have the advantage that it can

ground for such claims is again said to be failure of basis: see e.g. Burrows (n10) 87. But it is difficult to see why in the case of a void contract the basis for a claim should be the legal effect of the agreement. 78 P Birks, ‘Restitution and Wrongs’ (1982) 35 CLP 53. 79 Attorney-General for Hong Kong v Reid [1994] 1 AC 324. 80 Attorney-General v Guardian Newspapers (No. 2) (Spycatcher) [1990] 1 AC 109. 81 My Kinda Town v Soll [1982] FSR 147. 82 A-G v Guardian Newspapers Ltd (No. 2) (Spycatcher) [1990] 1 AC 109 and A-G for Hong Kong v Reid [1994] 1 AC 324 make this rationale very clear. In the case of fiduciaries the liability to surrender profits applies where the fiduciary has profited in a position of conflict of interest: see e.g. Boardman v Phipps [1964] 1 WLR 993. This is easier to explain in terms of deterrence or at least removing an incentive for profit. 83 Rookes v Barnard [1970] AC 652; Broome v Cassell [1972] AC 1027. Some commentators regard ‘waiver of tort’ cases such as United Australia Ltd v Barclays Bank Ltd [1941] AC 1 as examples of restitution for wrongs: see e.g. Birks, Introduction (n3) 314. In waiver of tort cases generally D has procured a transfer from C through a tort and C can either sue on the tort or waive the tort and sue to recover the transfer based on its invalidity, i.e. the fact that it was vitiated or unauthorised. The better interpretation is to treat the claim in tort as a compensation claim rather than a claim for restitution for wrongs: see Jaffey, Nature and Scope (n18) 367–74. On waiver of tort, see generally S Hedley, ‘The Myth of “Waiver of Tort”’ (1984) LQR 653. 84 [2001] 1 AC 268. See generally, K Barnett, Accounting for Breach of Contract (Hart 2012). 85 See generally, S Worthington, ‘Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae’ (2013) 72 Cambridge Law Journal 720; T Etherton, ‘The Legitimacy of Proprietary Relief’ (1914) 2 Birkbeck Law Review 59; M Conaglen, ‘Proprietary Remedies for Breach of Fiduciary Duty’ (2014) 73 Cambridge Law Journal 490; P Devonshire, Account of Profits (Thomson Reuters 2013) ch 3.

Restitution  125 ensure that all the benefit of the wrong is removed, including consequential benefits, but it is not clear that C’s right to secure the removal of the benefit should prevail over the rights of creditors in D’s bankruptcy. This issue appears now to have been settled in English law in favour of the general availability of the proprietary remedy.86 The expression ‘restitution for wrongs’ is not obviously apt. As discussed above, the core case of restitution is the reversal of a transfer, but in a case of restitution for wrongs the benefit received by D has not necessarily reached D by way of a transfer from C (or the provision of services by C), and the remedy does not restore to C something that he has lost or give him payment for services provided. The expression appears to have come into use because it was said at one time that, under the theory of unjust enrichment, D could be enriched ‘at C’s expense’ in two senses, first where the enrichment was ‘by subtraction’ from C, and secondly where the enrichment arose from a wrong against C, the remedy in the latter case being restitution for wrongs.87 It appears that more recently proponents of the theory of unjust enrichment have largely abandoned the idea that enrichment received through a wrong is governed by the law of unjust enrichment, on the ground that the relevant cause of action is the cause of action associated with the particular wrong in question (whether tort or contract or an equitable wrong), not unjust enrichment.88 Unfortunately the expression ‘restitution for wrongs’, and more generally ‘restitutionary remedy’ or ‘restitution’, to refer to the removal of a benefit acquired through a wrong has survived. Below I shall use an alternative expression, favoured by some, ‘disgorgement’.89 In an important sense, disgorgement is not actually a remedy. The expression ‘remedy’ is often used to refer to any measure dispensed by a court at the conclusion of civil proceedings, but it is sometimes helpful to use it more narrowly to refer to a measure that serves to satisfy or fulfil the claimant’s primary right.90 For example, as considered earlier in connection with restitution in contract, where C has a primary right correlated with a primary duty owed by D to C, a remedy in this sense would serve to secure the performance of the duty or give C the pecuniary equivalent of its performance. Punishment – for example, exemplary damages in civil proceedings – is not a remedy in this sense. Its rationale is not to fulfil or satisfy the primary right, but to serve the public interest in inflicting harm on the wrongdoer in order to deter other wrongdoers, or simply to inflict the harm because the wrongdoer deserves to suffer it. It follows that, if exemplary damages are allowed, C receives a windfall relative to his primary right. Similarly, disgorgement is not a remedy in the strict sense. Its rationale is FHR European Ventures v Cedar Capital Partners [2014] UKSC 45. According to the High Court of Australia, the remedy should not necessarily be proprietary, for example where the defendant is insolvent: see Grimaldi v Chameleon Mining NL (No. 2) [2012] FCAFC 6. 87 Birks, Introduction (n3) 313. 88 See Burrows (n10) 27; Mitchell (n10) 18.09. 89 See L D Smith ‘The Province of the Law of Restitution’ (1992) 71 Can Bar Rev 672; P Jaffey, ‘Restitutionary Damages and Disgorgement’ [1995] RLR 30; S Worthington, ‘Reconsidering Disgorgement for Wrongs’ (1999) 62 MLR 218; J Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Hart 2002). 90 This reflects the idea of consistency with or continuity from the primary right: see further, for example, M Tilbury, ‘Remedies and the Classification of Obligations’ in A Robertson (ed.), The Law of Obligations: Connections and Boundaries (UCL Press 2004); E J Weinrib, Corrective Justice (Oxford University Press 2012) ch 3; J Gardner, ‘What is Tort Law For? Part 1: The Place of Corrective Justice’ (2011) 30 Law and Philosophy 1, 33–4; E Voyiakis, Private Law and the Value of Choice (Hart Publishing 2017) ch 1; Jaffey (n34). 86

126  Research handbook on remedies in private law to prevent the wrongdoer D from profiting through his wrong, and to remove the incentive to commit the wrong, not to secure to C the performance of the primary duty or its pecuniary value.91 As noted above, traditionally disgorgement was available in equity but not at common law. It is difficult to see any justification for this difference in the treatment of wrongdoers. The origin of the difference seems to lie in the different attitudes at common law and in equity to measures that are not remedies in the strict sense. The common law has generally been hostile to supra-compensatory remedies, including exemplary damages as well as disgorgement. Equity’s more accommodating approach may be derived from the particular importance it attached to the protection of fiduciaries in the context of the fiduciary no-conflict rule. The characterisation of disgorgement as not strictly speaking a remedy also casts light on the controversy over whether it should be personal or proprietary. If its rationale is to remove the benefit of the wrong, it should capture all the benefits of the wrong, including the consequential benefits. However, this rationale does not imply that C has a prior right to this property, simply that D should not retain it, which suggests that it is not strictly speaking a proprietary claim. It would seem to be a personal claim, though not an ordinary private law claim, because it is not a right to a remedy to protect C’s primary right; one might describe it as an instrumental right to remove the benefit from D by way of confiscation.92 Restitutionary Damages Another difficulty with the standard treatment of the law in this area is the conflation of disgorgement with a distinct type of case.93 This is where D has made unauthorised use of C’s property and is liable to pay C a sum representing what might reasonably have been agreed as a licence fee for the use he has made. This measure of recovery is sometimes called restitutionary damages or ‘licence fee damages’. It is very well established for land, goods and intellectual property.94 This measure relates to D’s benefit, but it is only a part and not necessarily the full value of the benefit. It is sometimes suggested that licence fee damages are simply a milder version of disgorgement, which the court has the power to award, where appropriate, in place of the full

This is aptly described as ‘quasi-punitive’. The expression is used in the Law Commission report, Aggravated, Exemplary and Restitutionary Damages (Law Com 247, HMSO 1997) para 7.18. Arguably quasi-punitive measures should be subject to special procedures: see Jaffey, Nature and Scope (n18) ch 11. Some would argue that they should not be allowed at all in civil proceedings: see e.g. A Beever, ‘The Structure of Aggravated and Exemplary Damages’ (2003) 23 OJLS 87; E J Weinrib, Corrective Justice (Oxford University Press 2012) ch 3. 92 Cf Worthington (n89). Birks suggested the possibility of a personal claim encompassing consequential profits: see Birks (n2) 394. 93 Various commentators have pointed to this distinction: see e.g. D Friedmann ‘Restitution of Benefits Obtained through the Appropriation of Property or the Commission of a Wrong’ (1980) 80 Columbia L Rev 504; P Jaffey ‘Restitutionary Damages and Disgorgement’ [1995] RLR 30; Edelman (n89). 94 Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd’s Rep 359; Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246. See I M Jackman, ‘Restitution for Wrongs’ (1989) 48 Cambridge Law Journal 302. The expression ‘restitutionary damages’ is also sometimes used more generally for restitution for wrongs generally: see e.g. P Birks, ‘Restitutionary Damages for Breach of Contract: Snepp and the Fusion of Law and Equity’ [1987] LMCLQ 421. 91

Restitution  127 measure.95 But if the measure is a variant of disgorgement, its rationale must also be to remove the profits of wrongdoing, and this surely cannot be the rationale of a measure that allows D to retain some of the profits of wrongdoing. Some commentators have argued that licence fee damages are actually a measure of compensation for loss. However, the licence fee measure certainly cannot be explained as compensation for loss if the loss is measured relative to C’s right against unauthorised interference or intrusion or use by D.96 C is entitled to the licence fee measure where he has suffered no loss in this sense, where there is no damage to the property, and C would not himself have made use of the property or licensed it for use to anyone else.97 The claim for licence fee damages is best understood as designed to give C the value of the benefit derived by D from the property, C being entitled, as owner, to all the benefit of the property, including the benefit derived from using it.98 The licence fee measure is appropriate to allocate to C that part of the full benefit obtained by D that is attributable to C as owner of the property, the remainder being attributable to D by virtue of his actions in using the property. On this understanding the claim arises from C’s right of ownership, as a result of D’s unauthorised use. This explains why the claim has always been available only for the unauthorised use of property, and why it is also known as a use claim or claim under the user principle.99 On this understanding, there is no reason why it should be generally available as a remedy for wrongs, as an alternative to compensation, as has been advocated.100

OBJECTIONS TO THE UNJUST ENRICHMENT APPROACH TO RESTITUTION The theory of unjust enrichment has had a powerful influence on the standard understanding of restitution. Most (if not all) cases of restitution are now treated in English law, or at least in the leading commentaries and textbooks, as arising from unjust enrichment, ostensibly under a common set of rules for unjust enrichment claims, and restitution has a wide sense that reflects its role as a remedy for unjust enrichment. However, as suggested above, there are good reasons to doubt the soundness of this approach.

See e.g. A Burrows, ‘Are “Damages on the Wrotham Park Basis” Compensatory, Restitutionary or Neither?’ in D Saidov and R Cunnington (eds), Contract Damages (Hart 2008). 96 It is the appropriate measure if D had a duty to use the property and take a licence to do so, but this is not in fact D’s duty. ‘Negotiating damages’ for breach of a restive covenant were recently considered by the Supreme Court in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20. 97 The seminal article was S Waddams and R Sharpe, ‘Damages for Lost Opportunity to Bargain’ (1982) 2 OJLS 290. See also Beatson (n3) 232; F Giglio, ‘Restitution for Wrongs: A Structural Analysis’ (2007) 20 Canadian Journal of Law and Jurisprudence 5; M McInnes, ‘Gain, Loss and the User Principle’ [2006] RLR 76. Edelman (n89) 70 argues that they should be understood as a transfer from C to D. See also C Rotherham, ‘The Conceptual Structure of Restitution for Wrongs’ (2007) 66 Cambridge Law Journal 172; D Pearce and R Halson, ‘Damages for Breach of Contract: Compensation, Restitution and Vindication’ (2008) 28 OJLS 73; P Jaffey, ‘Disgorgement and “Licence Fee Damages” in Contract’ (2004) 20 JCL 57. 98 See P Jaffey, ‘Licence Fee Damages’ [2011] Restitution Law Review 95. See also E J Weinrib, ‘Restitutionary Damages as Corrective Justice’ (2000) 1 Theoretical Inquiries in Law 1. 99 See e.g. Stoke City Council v Wass [1988] 3 All ER 394, 402, per Nicholls LJ. 100 J Edelman, ‘The Measure of Restitution and the Future of Restitutionary Damages’ [2010] RLR 1. 95

128  Research handbook on remedies in private law According to the theory of unjust enrichment there should be a common body of rules subsuming what were historically distinct ‘doctrinal fragments’ or pockets of law,101 thought of as separate from each other, for example claims to recover mistaken and otherwise vitiated payments, equitable proprietary tracing claims, contractual and non-contractual quantum meruit claims, and claims arising from necessitous intervention. This development amounts to recognising a new cause of action in unjust enrichment. As mentioned above, the rationale of this project is to make the law in some sense more rational or coherent, but there is no generally accepted account of how it does this.102 For some commentators, the recognition of a new cause of action is purely cosmetic or presentational and does not affect the law itself. This view makes sense if we understand the common law simply as a fixed and largely complete body of rules. On this understanding, it seems that a cause of action must be simply a label for a set of rules, relevant only for convenience in exposition, and having no effect on the content of the rules. The introduction of a new cause of action is then essentially a renaming exercise with no substantive effect on the law.103 This understanding may be quite apt for ordinary practical purposes, because run of the mill cases are indeed simply about identifying and applying established rules. But it is not true generally, because the common law is dynamic and constantly under development. Normally the law develops incrementally, as the courts extend existing rules by analogy in new situations, or qualify rules that ostensibly apply by distinguishing previous decisions. Although this may not always be openly acknowledged, this characteristic form of legal reasoning involves the exercise of moral judgement. When a cause of action emerges through this process, it represents the implicit recognition of a governing moral principle or principle of justice behind a common body of rules.104 Existing causes of action impose a framework within which the 101 E J Weinrib, ‘Correctively Unjust Enrichment’ in Chambers et al. (n40) 31; P Birks, An Introduction to the Law of Restitution (rev edn, Clarendon Press 1989). 102 See in particular, Birks, Introduction (n3) 22–5. The controversy has generated a debate about classification and taxonomy in private law. See for example Birks, Unjust Enrichment (n3); H Dagan, ‘Legal Realism and the Taxonomy of Private Law’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law: Essays for Peter Birks (Oxford University Press 2008); Jaffey, Private Law and Property Claims (n18) ch 1; E Sherwin, ‘Legal Taxonomy’ (2009) 15 Legal Theory 25; S Hedley, ‘The Taxonomic Approach to Restitution’ in A Hudson (ed.), New Perspectives on Property Law, Obligations and Restitution (Cavendish 2004); P Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 Western Australia Law Review 1; A Burrows, ‘Contract, Tort and Restitution – A Satisfactory Division or Not?’ (1983) LQR 217; P Birks, ‘Definition and Division: A Meditation on Institutes 3.13’ in P Birks (ed.), The Classification of Obligations (Clarendon Press 1997); K Low, ‘The Use and Abuse of Taxonomy’ (2009) 29 Legal Studies 355; P Jaffey, ‘The Unjust Enrichment Fallacy and Private Law’ (2013) XXVI Canadian Journal of Law and Jurisprudence 115; K Barker, ‘Understanding the Unjust Enrichment Principle in Private Law: A Study of the Concept and Its Reasons’ in Nyers et al. (n18); A Beever and C Rickett, ‘Interpretive Legal Theory and the Academic Lawyer’ (2005) 68 MLR 320; S Waddams, Dimensions of Private Law Categories and Concepts in Anglo-American Reasoning (Cambridge University Press 2003). 103 There are suggestions of this line of thought, and also the objection that any type of classification is liable to distort or oversimply the law in, for example, E McKendrick, ‘Taxonomy: Does it Matter?’ in D Johnson and R Zimmermann (eds), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge University Press 2002); S Hedley, ‘Unjust Enrichment as the Basis of Restitution – an Overworked Concept’ (1985) 5 Legal Studies 56; Waddams (n102). 104 P Jaffey, ‘The Unjust Enrichment Fallacy and Private Law’ (n102); see also H Dagan, ‘Legal Realism and the Taxonomy of Private Law’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law: Essays for Peter Birks (Hart 2008) 147. See also J M Nadler, ‘What Right

Restitution  129 law ordinarily develops incrementally, by way of elaboration of the conditions for the claim. The introduction of a new cause of action involves a more radical departure from existing law because it changes the way in which the law can develop in the future. This is not just a matter of the exposition or presentation of the law. This understanding explains why the recognition of a new cause of action does have a genuine effect on the law. This understanding is consistent with the argument that a new cause of action in unjust enrichment should be introduced because unjust enrichment claims are a body of claims developed by analogy with a core case.105 The crucial question is whether the claims brought together in this way are genuinely analogous, that is to say whether they are indeed based on a common principle. However, there does not seem to have been any concerted effort to identify or formulate such a principle and certainly there is no consensus on this issue. It seems very doubtful whether there is a principle capable of uniting the claims now said to be based on unjust enrichment.106 According to Burrows,107 we should think of unjust enrichment as ‘a cause of action rather than a principle or concept’, but there can be no reason for recognising unjust enrichment as a cause of action if there is no such principle. Although Burrows appears to deny that there is a principle of unjust enrichment, he nevertheless insists that the concept of unjust enrichment has ‘explanatory force’, by which he presumably means that it can provide guidance as to how to understand and develop the law. For example, he suggests that it has explanatory force with respect to tracing.108 But explanatory force in this sense can come only from a principle that contributes to the justification for legal rules. Burrows also says that if unjust enrichment is a cause of action it is a cause of action ‘in a very general sense’, by which he means, as others have also suggested, that unjust enrichment might be a category more like tort than contract,109 contract being based on a single common principle and tort encompassing a number of different torts based on different principles. But it seems very doubtful whether one should, strictly speaking, refer to tort in general as a cause of action, as opposed to particular torts such as negligence, assault or defamation, for the very reason that there is no common body of rules laying down a set of conditions for liability in

Does Unjust Enrichment Protect?’ (2008) 28 OJLS 245. As to objections to ‘top-down’ reasoning, see Lumbers v W Cook Builders Pty Ltd (2008) 232 CLR 635, paras 75–8. 105 See above note 14. This is consistent with saying that the principle of unjust enrichment is a ‘unifying legal concept’ which, for the purposes of deciding cases and developing the law, ‘explains why the law recognises, in a variety of distinct categories of case, an obligation … to make … restitution’: Pavey and Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256–7. See also Mitchell (n10) 18.05. The approach is justified only if there is a moral principle to support the unifying legal concept. 106 It is also said that unjust enrichment is merely a descriptive or organising or formulaic principle. This presumably implies that the role of the principle is in exposition and not guidance or development. See e.g. Burrows (n3) 4; Virgo (n3) ch3. It is difficult to see that a principle can be understood in this way and in any case it would not justify the recognition of a new cause of action. According to Burrows, by employing the principle one can, for the purposes of exposition, bring together cases that are similar and separate out cases that are not, but cases can be similar or dissimilar in many different ways, and for the purposes of developing the law the issue is whether they are similar or dissimilar on moral criteria so as to justify common treatment. 107 Burrows (n10) 26. 108 Above note 9, 58. 109 Burrows (n10) 26; Mitchell (n10) 18.05; S Smith, ‘Unjust Enrichment: Nearer to Tort than Contract’ in Chambers et al. (n40).

130  Research handbook on remedies in private law tort in general. The analogy with tort cannot provide support for the recognition of a cause of action in unjust enrichment based on a common set of conditions for liability. This sceptical conclusion about the theory of unjust enrichment is consistent with the earlier discussion. With respect to property, there is no reason to think that unjust enrichment provides a distinct basis for a claim for restitution arising from an unauthorised or vitiated payment. It seems more plausible to think that such a claim is a variant of the claim for restitution of an invalid transfer of property, and is explicable as a matter of property law. Similarly, in the contractual context, it is difficult to see how the claim arising from ‘failure of basis’, meaning the non-performance of an agreement, can fall into a different category of claim from contractual claims arising from the non-performance of an agreement. The unjust enrichment approach seems to involve hiving off these remedial parts of contract and property and bringing them together for common treatment, and it is not apparent why this should be thought to represent an advance in rationality or coherence. If this is indeed mistaken, the origin of the error seems to be the mistaken assumption that all claims for a benefit-based remedy arising from the receipt of a benefit should be governed by a common body of rules under a single cause of action. One area mentioned by Burrows as a controversial example of unjust enrichment is necessitous intervention, which was mentioned earlier. On one view, this is an unjust enrichment claim based on the unjust factor of ‘necessity’, which is said to be a ‘policy-based’ unjust factor,110 but some commentators deny that this is really an unjust enrichment claim. Burrows suggests that the crucial question is whether the remedy is restitution or compensation.111 The remedy is certainly not restitution in the sense of the reversal of a transfer, nor is this a case where D’s benefit was wrongfully obtained. A compensatory measure of recovery confined to out of pocket expenses or other losses would be a possible measure, but the most appropriate remedy would seem to be reasonable payment for services provided (encompassing expenses).112 But the crucial issue is to determine the cause of action, which will guide the development of the law, including the remedy, and the question here is what the rationale for the claim is – is it a principle of unjust enrichment? As suggested above, the rationale appears to lie in the fact that a mutually beneficial exchange was possible and that in the circumstances it was not possible for the parties to make an agreement in advance, and this does not appear to involve the application of a general principle of unjust enrichment that also governs the other claims said to fall in the category of unjust enrichment, such as the claim for a quantum meruit on contractual termination, or the claim to recover a mistaken payment.

CONCLUSION The law of restitution has developed under the influence of the theory of unjust enrichment. This has led to a wide sense of restitution that disregards the differences between different types of remedy. It might be helpful if the expression ‘restitution’ were confined to the recovery of transfers, in particular the recovery of unauthorised or vitiated – i.e. invalid – transfers of property, including money, and the recovery of contractual prepayments. It does not seem There are other so-called ‘policy-based unjust factors’: see Mitchell (n10) 18.105–45. Burrows (n10) 105. 112 A distinction is made between remuneration and reward: see Rose (n28). 110 111

Restitution  131 to be helpful to treat reasonable payment for services, reasonable payment for the unauthorised use of property, and the disgorgement of wrongful profits, as variants of the same remedy. Although most or many claims for restitution are understood to be based on unjust enrichment, and governed by the three-part framework for unjust enrichment, it has not been demonstrated that in principle there is a distinct category of claim in unjust enrichment, having a distinct basis, for which a common set of rules is appropriate. In particular, it is open to doubt whether the unjust enrichment approach is the right way to explain restitution of a prepayment or a quantum meruit on the termination of a contract, or restitution of a vitiated or unauthorised transfer of property or money.

8. Two conceptions of the ‘performance interest’ in contract damages David Winterton

I INTRODUCTION Probably the most significant and controversial topic of debate in the law of contract damages over the past century has been that of the appropriate measure of damages in the ordinary case of breach. On this question, Fuller and Perdue famously argued that, rather than seeking to put an innocent promisee into the position he or she would have been in had the contract been performed (the ‘expectation measure’), an award of damages for breach of contract should ordinarily aim to place this party into the position he or she would have been in had the contract not been made (the ‘reliance measure’).1 But despite its academic notoriety, Fuller and Perdue’s thesis has had little influence on judicial decisions,2 with judges generally adhering to Parke B’s famous directive to put the non-breaching party to the contract into ‘the same situation … as if the contract had been performed’.3 It is also arguable that Fuller and Perdue’s thesis has actually impeded our understanding of contract damages due both to the confusing and unhelpful terminology it established,4 and because it skewed academic focus away from the more important question that arises in this context: precisely what Parke B’s famous statement of principle really entails. In answering this question, the critical choice is between an interpretation of Parke B’s words that focuses on the non-breaching party’s hypothetical financial (or balance sheet) position following breach, and one that instead focuses on enforcing this party’s legal right to performance more directly via some sort of monetary substitute for performance; the availability of which does not depend on the promisee’s eventual balance sheet position. Choosing between these two interpretations is perhaps the most central question in the law of contract damages and I have previously argued that, despite the competing claims of various eminent scholars, Anglo-Australian law is more consistent with the second.5 The present chapter is not, however, concerned with reprosecuting this claim, focusing instead on the division of opinion amongst adherents to the second interpretation of Parke B’s famous dictum in regard to the

1 L Fuller and W Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law Journal 52. Of course, those authors also argued that, at least for ‘bargain’ promises, use of the ‘expectation measure’ was ultimately justified because it constitutes a good ‘proxy’ for difficult to quantify reliance losses and encourages the valuable practice of bargaining by ensuring that contracting parties obtain the benefits of their bargains. 2 For discussion, see D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 11 LQR 628. 3 Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 at 365. 4 Again, this point was first made by Friedmann (n2). 5 See generally, D Winterton, Money Awards in Contract Law (Hart 2015) in particular ch 5.

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Two conceptions of the ‘performance interest’ in contract damages  133 precise basis upon which the innocent promisee’s monetary entitlement should be quantified under a ‘substitutionary’ approach. On this question the crucial choice is between, on the one hand, the view that the appropriate basis for assessment is a sum reflecting the market value of that aspect of the performance denied by the relevant breach and, on the other hand, the opposing view that the promisee’s award should be quantified by reference to the cost of obtaining substitute performance from elsewhere. I have also previously defended a particular version of the second of these views.6 Again, however, the objective of this chapter is not to settle this debate, but rather to explain, through the use of some key examples in the case law, the main differences between these two ‘substitutionary’ analyses and to explore the implications of adopting one or other approach. The essence of the argument advanced is that the distinction between these two ‘substitutionary’ theories is significant, both because the different approaches lead to differences in quantum in particular cases and because of its implications for the kinds of restrictions that are (and should be) available in relation to ‘substitutionary’ claims.

II

DEBATES ABOUT THE APPROPRIATE MEASURE OF DAMAGES FOR BREACH OF CONTRACT

This section briefly describes the central debates that have occurred in relation to the appropriate default measure of damages in the ordinary case of contractual breach. It commences by observing the indeterminacy present in Parke B’s classic statement of principle in Robinson v Harman. Following this, Fuller and Perdue’s famous critique of the ‘expectation’ measure is explained. Professor Friedmann’s forceful reply to this critique and the subsequent reassertion of the ‘performance interest’ in the assessment of contract damages is then outlined. Finally, the discussion concludes by noting the ambiguity present in the ‘performance interest’ concept, which forms the focus of the remainder of the chapter. a

The Starting Point: Robinson v Harman and Its Indeterminacy

As is well known, the principle generally understood to govern the assessment of contractual damages awards in Anglo-Australian law was propounded by Parke B in Robinson v Harman. There his Honour explained that: The rule of the common law is that, where a party sustains loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.7

This ‘Robinson v Harman principle’ is conventionally understood to define the appropriate measure of financial ‘loss’ for which the promisee is entitled to seek damages in an action for breach of contract against the promisor;8 recovery for non-financial loss only being possible in See ibid. (1848) 1 Exch 850 at 855; 154 ER 363 at 365. 8 See, for example, Viscount Haldane’s observation in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL) 689, that the ‘fundamental basis [for awarding damages for breach of contract] is ... compensation for pecuniary 6 7

134  Research handbook on remedies in private law certain exceptional circumstances.9 This interpretation of the Robinson v Harman principle as a measure of ‘loss’ has understandably led many to assume that damages awards for breach of contract are to be quantified by comparing the innocent party’s hypothetical financial position following performance with the financial position this party now occupies due to breach, subject to the restrictions on recovery imposed by the applicable principles of ‘remoteness’ and ‘mitigation’.10 This interpretation of the Robinson v Harman principle is understandable given that Parke B expressly used the term ‘loss’ in his famous formulation. But simply assuming that this interpretation is correct is problematic since the meaning of the word ‘loss’ in this context is ambiguous. Even leaving aside the possible non-pecuniary consequences of a breach, there are two quite distinct phenomena that the term could refer to. One phenomena, hereafter described as ‘consequential loss’, is the extent to which the promisee can show his final balance sheet position has deteriorated due to the breach. The other phenomena, hereafter described as ‘direct loss’, is the deprivation in performance necessarily entailed by the breach itself irrespective of what consequences eventually accrue to the promisee.11 A failure to distinguish between these two different senses of ‘loss’ seems to underpin many disagreements in the law of contract damages. But this issue is not the central concern of the present chapter, which instead focuses principally on explaining the two different ways that the law might respond to a ‘direct loss’. b

Fuller and Perdue’s Challenge

The most famous challenge to this conventional picture was articulated by Fuller and Perdue in their seminal article in the Yale Law Review.12 Those authors there labelled the promisee’s interest in being placed in the position identified by the Robinson v Harman principle as the ‘expectation interest’,13 and went on to describe this measure of ‘loss’ as ‘a queer kind of compensation’ because it gives the claimant ‘something he never had’.14 There are two different things that Fuller and Perdue could have meant by this observation. First, they might have been merely observing the ‘peculiar’ fact that the expectation measure assumes the existence of a factual position that the claimant never actually occupied. An alternative interpretation of their statement is that it was advancing the more fundamental claim that, whatever legal entitlement is created by the formation of a valid contract, it is not one to performance. To explain this further, it might be thought that what is ‘queer’ about the Robinson v Harman principle is that it adopts a hypothetical, future factual position as the relevant starting loss naturally flowing from the breach’, cited with approval in Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 at 366 per Lord Lloyd and in The Golden Victory [2007] UKHL 12; [2007] 2 AC 353 at [9] per Lord Bingham. 9 See Baltic Shipping v Dillon (1993) 176 CLR 344 and Farley v Skinner [2001] UKHL 49; [2002] 2 AC 73. 10 This, for example, is also the basic approach to quantification advocated in A Kramer, The Law of Contract Damages (Hart 2014). Debates about the content of these restrictive doctrines can, for present purposes, be put aside. 11 This distinction essentially replicates the well-known philosophical distinction between the results of an action and its consequences. See G von Wright, Norm and Action (Routledge and Kegan Paul 1961) at 39ff. See also A Kenny, Will, Freedom and Power (Blackwell 1975) at 54ff. 12 See Fuller and Perdue (n1). 13 Ibid, 56. 14 Ibid, 53.

Two conceptions of the ‘performance interest’ in contract damages  135 point in the assessment of damages. But this cannot be the true concern because whenever a court is called upon to award compensation for loss in response to a civil wrong it must, to the extent possible, compare the claimant’s current position to the hypothetical position this party would have occupied had the wrong not occurred. This hypothetical, counterfactual position may differ from the innocent party’s position at the time of breach by, for example, including the value of a lost opportunity to profit from the other party’s fulfilment of the relevant legal obligation that was breached. Thus, the peculiar aspect of the expectation measure is not the fact that it entails a counterfactual analysis but instead that it assumes the promisee’s legal entitlement to be put into that future position. In substance, therefore, Fuller and Perdue sought to challenge the very existence of a legal right to performance. Although a satisfying explanation for why the formation of a valid contract creates reciprocal legal entitlements to performance has arguably proved elusive,15 there is nevertheless substantial doctrinal support for the view that it does.16 But the fact that the Robinson v Harman principle assumes the existence of a legal right to performance does highlight the fundamental indeterminacy that exists with regard to the purpose of this principle. In essence, it is not clear whether Parke B’s famous directive is concerned only with comparing the differences in the promisee’s balance sheet position with and without breach, or with using money to enforce this party’s legal entitlement to performance, irrespective of what financial position the promisee eventually occupies following the breach. This indeterminacy was overlooked by Fuller and Perdue in their seminal critique of the accepted legal orthodoxy of the time. The authors’ response to the puzzle they purported to identify was to argue that contractual awards must be fundamentally concerned with making good any detrimental financial consequences that the promisee has incurred in reliance upon the contract’s existence. Fuller and Perdue nevertheless claimed that, at least for ‘bargain’ promises, adherence to the Robinson v Harman principle could be justified by reference to two distinct ‘policy’ considerations. The first was that the expectation measure is a good ‘proxy’ for difficult to quantify reliance losses or ‘wasted expenditure’.17 The second was that quantifying awards by reference to the Robinson v Harman principle encourages the valuable practice of bargaining by making it more likely that contracting parties obtain the benefits of their bargains.18

15 In the present author’s view, the most convincing account yet provided is that developed in D Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart 2003), where the author distinguishes between two different ways in which contract law contributes to the realisation of valuable personal autonomy by its participants. These are: (1) allowing parties to co-ordinate for the achievement of a mutually beneficial future outcome, and (2) enabling parties to achieve such co-ordination in the absence of the interpersonal trust that otherwise normally is necessary for joint endeavours to succeed. 16 For detailed support, see Winterton (n5) ch 4. 17 Professor McLauchlan (and others) have convincingly argued that use of the word ‘reliance’ here is unhelpful and that it would be preferable to describe such awards as for ‘wasted expenditure’. See D McLauchlan, ‘Reliance Damages for Breach of Contract’ [2007] NZLR 417. 18 Fuller and Perdue (n1) 60. A similar, but not identical, view is expressed in J Raz, ‘Book Review: Promises in Morality and Law’ (1982) 95 Harvard Law Review 916.

136  Research handbook on remedies in private law c

The Significance of the ‘Performance Interest’ and the Rise of ‘Substitutionary’ Analyses of Contract Damages

More than 50 years after the publication of Fuller and Perdue’s article, Professor Friedmann wrote a powerful reply, criticising the authors’ argument as well as the unhelpful terminology they established, and reasserting the primacy of the ‘performance interest’.19 Friedmann’s arguments appear to have won the day given that, despite the proliferation of academic commentary Fuller and Perdue’s thesis has spawned, its influence on the courts has been ‘meagre’,20 at least in the United Kingdom and Australia. Exceptional circumstances aside, Anglo-Australian law quantifies damages awards for breach of contract by reference to the position the promisee would have occupied had the contract been performed rather than the position this party would have occupied had the contract not been entered into.21 Moreover, the exceptional cases in which awards are measured by reference to wasted expenditure are best explained by evidential difficulties in calculating the position the promisee would have occupied had the contract been performed.22 Rather than – as Fuller and Perdue suggested – the ‘expectation’ measure constituting a ‘proxy’ for difficult to quantify ‘reliance’ losses, it is in fact the ‘reliance’ measure that in such cases operates as a proxy for the ‘expectation’ measure. Significantly, however, by framing the key question in this area as that of choosing between the ‘reliance’ and ‘expectation’ measures of ‘loss’, Fuller and Perdue diverted attention away from the equally – if not more – important question of precisely what is meant by Parke B’s directive to place the promisee into ‘the same situation … as if the contract had been performed’. As noted earlier, the critical choice here is between a focus on the ‘consequential loss’ that the promisee suffers as a result of the breach, and that of ‘vindicating’ the promisee’s interest in performance directly by awarding a monetary substitute for that aspect of the promisee’s legal entitlement to performance denied by the breach, irrespective of what good or bad consequences eventually accrue to this party as a result. In this regard, there are unsurprisingly two main views. In one camp are commentators like Professor Burrows, Professor McLauchlan and Adam Kramer who believe that, apart from certain exceptional cases, the legally relevant ‘situation’ into which courts should be concerned with putting the promisee is the financial (or balance sheet) position this party would have occupied ‘but for’ the breach, subject to the limits imposed by principles of ‘remoteness’ and ‘mitigation’.23 This position might be described as one concerned with an indirect protection of the promisee’s legal right to performance. In the other camp are those who hold that the aim of at least some contractual damages awards is to protect the promisee’s right to perfor-

Friedmann (n2). Ibid, 628. 21 It is, of course, recognised that Fuller and Perdue argued that upholding the Robinson v Harman principle could ultimately be justified by reference to the two ‘policy’ considerations outlined above, but the overall thrust of their thesis was that the promisee’s interest in performance is in some sense secondary to this party’s ‘reliance interest’. 22 See Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (HCA) and Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026 (Comm); [2011] Bus LR 212. 23 See A Burrows, Remedies for Torts and Breach of Contract (3rd edn, Oxford University Press 2004); D McLauchlan, ‘Expectation Damages: Avoided Loss, Offsetting Gains and Subsequent Events’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart 2008) 349–88 and Kramer (n10). 19 20

Two conceptions of the ‘performance interest’ in contract damages  137 mance more directly by giving this party the monetary equivalent of the performance promised irrespective of how the breach has negatively affected this party’s balance sheet position. The focus of the present chapter, however, is the internal disagreement amongst those holding the second view regarding precisely what is entailed in vindicating a promisee’s legal right to performance. On one view, probably most prominently associated with Professor Stevens,24 this is achieved by awarding this party the market value of the performance that the promisor has failed to provide. On the competing ‘substitutionary’ approach advanced in various different forms by Professor Coote,25 Professor Smith,26 Dr Webb,27 and myself,28 the aim is to provide the promisee with that sum of money necessary to obtain a close substitute for the promised performance from elsewhere, which – at least in the particular form I have advocated for – might alternatively be called an award of the monetary equivalent of specific performance. Notably, however, all of these different ‘substitutionary’ approaches also recognise the necessity of making good certain detrimental consequences of non-performance not made good by the relevant primary award.

III

TWO CONCEPTIONS OF THE ‘PERFORMANCE INTEREST’

The previous section concluded by outlining the key point of difference amongst scholars regarding the meaning of the Robinson v Harman principle, as well as noting the existence of a more localised disagreement amongst proponents of ‘substitutionary’ analyses in relation to the appropriate basis for the quantification of a ‘substitutionary’ award. The purpose of the current section is to explain more fully each of these points of disagreement via the use of some key examples in the case law. After first outlining the two different senses in which the term ‘loss’ is used in the law of contract damages, the distinction between the two different ‘substitutionary’ approaches is detailed. As will be seen, while in many cases these two approaches produce the same quantum, sometimes they diverge. a

Two Different Meanings of ‘Loss’ in Contract Law

As noted earlier, Parke B’s famous formulation in Robinson v Harman does not make clear whether it is the immediate result of the breach or how matters eventually turn out for the promisee that is of central importance when assessing an award of contractual damages. The difference between these two approaches is starkly illustrated by the High Court of Australia’s decision in Clark v Macourt.29 There the purchaser of a fertility clinic by deed was awarded

See R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Hart 2009) 171. For a similar, but perhaps not identical, view, see F Reynolds, ‘The Golden Victory – A Misguided Decision’ (2008) 38 Hong Kong University Law Journal 333. 25 B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56 CLJ 537. 26 S Smith, ‘Substitutionary Damages’ in C Rickett (ed.), Justifying Private Law Remedies (Hart 2008) 93. 27 C Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) 26 OJLS 41. 28 Winterton (n5). 29 (2013) 253 CLR 1; [2013] HCA 56. 24

138  Research handbook on remedies in private law the full cost of replacing, as at the date of breach, the worthless donor sperm provided to her by the vendor as part of the assets of that business even though she recouped from her patients most of the costs she incurred in acquiring contractually compliant sperm to replace the defective sperm she received, and, as a registered medical practitioner, she was ethically bound by certain guidelines prohibiting her from profiting from the sale of donor sperm. The High Court’s decision has been the subject of strident criticism, principally on the basis that the majority wrongly characterised the transaction,30 and failed properly to take into account Clark’s ‘mitigation’ of her losses by substantially passing on the costs of purchasing replacement sperm to her customers.31 In my view such criticisms (and others)32 are ultimately misconceived. The essential reason for this is that, as Keane J recognised in his leading judgment,33 these objections tend to conflate two crucially distinct claims that are available to a disappointed promisee in these circumstances: one to enforce the promisee’s right to performance directly; the other aiming simply to make good certain detrimental financial consequences of non-performance. Principles of ‘mitigation’, as well as those of ‘remoteness’, are concerned only with limiting a claim of the latter kind (i.e. for ‘consequential loss’) and are inapplicable to a claim for ‘direct loss’. In any event and regardless of one’s view of Clark, of present importance is simply an appreciation of the two distinct conceptions of ‘loss’ that its facts reveal and recognition that Parke B’s famous formulation does not make clear which one was intended. Significantly, however, Professor Coote has noted that Parke B himself appeared to prefer the performance-oriented interpretation.34 Thus, while an exclusively consequence-focused interpretation of the Robinson v Harman principle is sometimes assumed, this principle is, as many commentators have observed – and Clark itself demonstrates – also open to a quite distinct interpretation according to which the primary aim of an award giving effect to this principle might be described as ‘vindicating’ the promisee’s right to performance directly rather than merely making good the detrimental financial consequences of non-performance that eventually accrues to this party. Notably, it is the former interpretation that the High Court has also consistently favoured.35 b

The Two Kinds of ‘Substitutionary’ Analysis

As foreshadowed above, however, there is also a division amongst proponents of a performance-oriented interpretation of the Robinson v Harman principle in regard to precisely what

See J Carter, G Tolhurst and W Courtney, ‘Issues of Principle in the Assessment of Damages’ (2014) 31 JCL 171, at 185–97. 31 See ibid, at 200–4 and K Barnett, ‘Contractual Expectations and Goods’ (2014) 130 LQR 387. 32 Carter, Courtney and Tolhurst also argue that the decision ‘involved upholding an assessment based on questionable evidence of market value’, which effectively enabled the claimant, rather than the court, to choose the basis for quantifying her award, and that produced a result contrary to the parties’ intentions at contract formation: (n30) at 177. For detailed discussion, see D. Winterton ‘Claims for the Value of the Lost Contractual Performance’ (2019) 45 UWALR 75. 33 Clark (n29) [128]. 34 See Coote (n25) 540, citing Thornton v Place (1832) 1 Mood & R 217 at 219 and Pell v Shearman (1855) 10 Ex 766 at 769. 35 See Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13] and Clark (n29). 30

Two conceptions of the ‘performance interest’ in contract damages  139 ‘vindicating’ the promisee’s legal right to performance in the aftermath of breach entails. According to Professor Stevens,36 the normal objective of an award of contractual damages is to provide the promisee with a sum reflecting the market value of that aspect of the performance denied by the relevant breach. The main competing ‘substitutionary’ approach views the fundamental objective of awards upholding the Robinson v Harman principle as, at least upon the satisfaction of certain conditions, to provide the promisee with that sum of money necessary to obtain a close substitute for the promised performance from elsewhere.37 In the standard case of the breach of a contract for the sale of goods these two approaches produce identical results. A disappointed buyer, on either view, will receive the difference between the market price of the goods promised and the market price of the goods received (the ‘difference in value’ measure), as well as an award aiming to make good any further deleterious consequences attributable to this breach falling within the scope of recovery defined by the applicable rules of ‘remoteness’ and ‘mitigation’.38 Thus, in a case like Clark, the result will be the same regardless of which approach is preferred because the difference in market value between the sperm promised and the sperm provided is the same as the sum required to purchase replacement sperm on the market. Significantly, this is also true when the defective goods provided are not completely valueless because ‘the cost of substitute performance’ measure assumes a sale of the defective goods received at their market price. The most important situation where the two approaches diverge is when the promisee claims the cost of repairing, rather than replacing, the defective performance received. According to Stevens, the ‘difference in value’ measure is again appropriate, of course accompanied by an award designed to make good any further recoverable ‘consequential loss’. For him, an award of the cost of repairs should only be made when it is established on the balance of probabilities that the work will be (or has already been) done and that undertaking this work was a ‘reasonable’ way to mitigate the detrimental financial (or non-financial) consequences accruing to the promisee as a result of the breach. On the competing ‘substitutionary’ approach outlined above, directly enforcing the promisee’s right to performance requires awarding the monetary equivalent of specific performance, at least where repairing the breach is objectively ‘reasonable’ in the circumstances.39 Notably, on this view, the test of ‘reasonableness’ is not equivalent to that denoted by the use of this term in the ‘mitigation’ context, as indeed Lord Goff observed in Alfred McAlpine Construction Ltd v Panatown Ltd.40 The well-known English case of Ruxley Electronics v Forsyth starkly illustrates the difference between the two main ‘substitutionary’ approaches.41 There a swimming pool was built to a depth of six feet, nine inches, rather than to the contractually specified depth of seven feet, six inches. Forsyth, the home owner, refused to pay Ruxley, the contractor, the balance due

See, for example Stevens (n24). For different versions of this view, see Coote (n25), Smith (n26), Webb (n27) and Winterton (n5). 38 Note, however, that as Professor Stevens explains, a ‘plaintiff cannot recover both the difference in value between what it was promised and what it received, and the expense it in fact incurs in making good the defective performance. Recovering the former means that the latter loss is, to that extent, not incurred’ (emphasis in original). See above Stevens (n24) at 181. 39 See, for example, Bellgrove and Tabcorp (n35). 40 (2001) 1 AC 518 (HL) 550. For a more recent (and somewhat inconclusive) discussion of this issue, see Aikenhead J’s judgment in Linklaters Business Services v Sir Robert McAlpine Ltd, Sir Robert McAlpine (Holdings) Ltd [2010] EWHC 2931 (TCC) at [125]. 41 [1996] AC 344 (HL) 366. 36 37

140  Research handbook on remedies in private law under the contract and the latter brought an action to recover this sum. Ruxley succeeded at first instance with a counter-claim by Forsyth for the cost of demolishing and rebuilding the pool in accordance with the contract specifications dismissed on the basis that it was ‘unreasonable’ in the circumstances. In reaching this conclusion, the trial judge placed weight on the fact that the pool as built was safe for diving, and that Forsyth had no intention to demolish the pool and rebuild it. Judge Diamond QC also held that the shallower depth did not affect the market value of the property, meaning Forsyth suffered no financial loss. His Honour did, however, accept that Forsyth had suffered a ‘loss of amenity’, awarding him £2,500 in recognition thereof. Following a successful visit to the Court of Appeal, where Forsyth was awarded the cost of demolishing and rebuilding the pool to the specified depth,42 a further appeal by Ruxley to the House of Lords was successful and the trial judge’s decision reinstated. This ruling is a continuing source of controversy and has been much discussed in the relevant academic literature. Of present consequence, however, is simply to note the two distinct ways that Forsyth’s ‘performance interest’ might have been ‘vindicated’. Awarding the monetary equivalent of specific performance would obviously entail providing Forsyth, as the Court of Appeal did, with the sum required to demolish and rebuild the pool to the correct depth. But, to reiterate, for Professor Stevens such an award should only be made to make good proven ‘consequential loss’, so that the availability of such a sum depends both upon the work having been done (or an intention to do this work in the future being established) and the reasonableness of undertaking the work as a way to ‘mitigate’ the detrimental (financial or non-financial) consequences suffered by the promisee as a result of the defective performance.43 Moreover, according to Stevens, such a promisee also has available an alternative claim to ‘vindicate’ his ‘performance interest’ directly. The appropriate measure for such an award is the difference in market value between the performance promised and that provided. But notably in a case like Ruxley there appear to be two different ways this measure could be assessed. One way – apparently the only one considered by those judges hearing the case – is to measure the difference between the market value of the property with the pool as built and the (hypothetical) market value of the property had the pool been built as specified. One of Ruxley’s more unusual features is that no such difference was found to exist. Significantly, however, an alternative (and in my view more principled) way to quantify the measure advocated by Stevens would be via the difference in market price of the pool contracted for and the one actually built. It may be that there was also no such difference in Ruxley, but presumably shallower pools are generally cheaper than deeper pools, so there would usually be some, even though perhaps minimal, sum that would be awarded to the promisee in such cases. The Possibility of a Third Way to ‘Vindicate’ the ‘Performance Interest’?

c

A final question arising from Ruxley is the basis for the £2,500 eventually awarded to Forsyth. Taking the comments of the trial judge at face value suggests that this award was simply one designed to put a pecuniary value on the non-pecuniary lost enjoyment of the use of his swimming pool that Forsyth himself incurred as a result of having to live with a pool that was nine [1994] 1 WLR 650 (CA). Thus, according to Stevens (n24) 191, the meaning of the word ‘reasonable’ in this context is the same as that denoted by its use in the mitigation context. 42 43

Two conceptions of the ‘performance interest’ in contract damages  141 inches shallower than what he was promised.44 This is indeed how Lord Mustill appeared to conceptualise the award, describing it as one for Forsyth’s lost ‘consumer surplus’.45 Another possibility is that the sum was an objectively assessed award of compensation for Forsyth’s lost enjoyment or disappointed expectations, which seems to reflect Lord Lloyd’s rationalisation of the award.46 Clearly, these two approaches will converge as the hypothetical reasonable person is imbued with more of the particular promisee’s idiosyncratic attributes. Most significantly in the context of the present chapter, a third possible explanation for the ‘loss of amenity’ award in Ruxley is that it was not in fact an award for ‘consequential loss’ at all, but rather an attempt to vindicate Forsyth’s ‘performance interest’ directly in circumstances where awarding the cost of repairs was ‘unreasonable’ and there was no difference in market value between the performance promised and that provided. While neither Lord Mustill nor Lord Lloyd explained the award explicitly in these terms, it is at least arguable that some support for this understanding exists in each of their Lordships’ speeches. Although Lord Mustill spoke in terms of a subjective loss of ‘consumer surplus’, his Lordship also appeared to recognise that the award was in some sense a substitute for performance.47 Lord Lloyd, on the other hand, specifically adverted to the possibility of awards that substitute for a deficiency in performance, but seemed to leave open the question of whether English law should recognise such awards.48 If this final explanation of Forsyth’s ‘loss of amenity’ award is correct, there would appear to be a third way to ‘vindicate’ a promisee’s ‘performance interest’ following the promisor’s breach. If so, the question arises as to precisely how this kind of award should be quantified. Perhaps the most obvious suggestion, and one which has in fact been adopted in certain cases,49 is via an estimation of what a reasonable person in the promisee’s position would accept at the time of breach to release the promisor from further performance (‘the reasonable price of release’). This measure has traditionally only been used in cases where the breach was of an irreversible kind such as one of an undertaking of exclusivity,50 or confidentiality,51 where it is simply not possible to quantify the cost of obtaining substitute performance from elsewhere.52 Any such attempt is by definition imprecise assuming the incommensurability of money and non-pecuniary damage. But if specific performance is not ordered, awarding damages is all that can be done. 45 See Ruxley (n8) 360. 46 Ibid, 374. 47 Ibid, 360, where his Lordship appeared to view the £2,500 award as a third alternative when both the ‘cost of cure’ and ‘difference in value’ measure are inappropriate and accurate performance constitutes ‘a personal, subjective and non-monetary gain’. 48 Ibid, 374, where after observing that there may be cases where skimped performance does not produce any difference in value between the performance promised and the performance provided and the contract is not one for the provision of a pleasurable amenity, his Lordship stated that there is no reason why in such cases the law should not award some ‘modest sum,... to compensate the buyer for his disappointed expectations’. 49 See, most famously, Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (Ch) and, perhaps most instructively, Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45; [2010] BLR (PC). 50 See Pell Frischmann (n49). 51 See Vercoe v Rutland [2010] EWHC 424 (Ch); [2010] Bus LR D141. 52 Notably, in Wrotham Park itself the breach was technically reversible but the court decided that the houses built in breach of a restrictive covenant should not be torn down because this would constitute a waste of valuable public housing. 44

142  Research handbook on remedies in private law I have previously argued that an award of the reasonable price of release constitutes the appropriate (next-best) substitute for performance when the cost of substitute performance cannot be quantified because the breach is irreversible, and perhaps also when awarding the cost of substitute performance is ‘unreasonable’ in the Ruxley sense.53 However, of present interest is simply the extent to which this measure is distinct from Professor Stevens’ basic ‘substitutionary’ measure of the difference in market value between the performance promised and that provided. Stevens himself may claim that there is no difference between these two measures since he cites Wrotham Park as a paradigm case supporting his overall thesis.54 But one possible interpretation of Ruxley is that there are situations where these two approaches diverge, indicating that they may not in fact be identical.

IV

RESTRICTIONS ON ‘SUBSTITUTIONARY’ AWARDS

Having explored the precise difference between the two distinct ‘substitutionary’ approaches to the assessment of contractual damages so far identified, this final section of the chapter considers what restrictions might limit the availability of such awards. On Professor Stevens’ account, it would appear, at least prima facie, that there are no such restrictions. By contrast, on the alternative ‘substitutionary’ analysis discussed above, the availability of such awards is necessarily subject to at least one restriction, which is that the breach can be reversed so that the cost of rectification can be quantified. A second restriction on the availability of such awards that the common law has adopted is that curing the breach is objectively ‘reasonable’ in the circumstances. This restriction constitutes the principal focus of what follows, with the discussion concluding by considering the possibility of yet a further restriction on the availability of ‘substitutionary’ awards under either of the two conceptions of the ‘performance interest’ considered here; that the promisee’s enforcement of his or entitlement to performance be in ‘good faith’. a

The ‘Reasonableness’ Restriction on ‘Substitutionary’ Claims for the Cost of Substitute Performance

It is generally accepted in English law that claims for the cost of repairing contractual performance defectively provided, commonly arising in the context of construction contracts, are normally available subject to the qualification that undertaking the repairs is ‘reasonable’ in the relevant circumstances.55 On the conception of ‘substitutionary’ awards that competes with Stevens’ approach, the existence of this restriction in the repair context necessarily appears to raise the question of whether it might also be invoked to deny (or limit) a claim for the cost of replacement. The discussion that follows considers this possibility. It is concluded that, at least according to this conception of ‘substitutionary’ awards, such a restriction must theoretically be available to limit claims for the cost of replacement, but the circumstances required to render the restriction operative in this context will in practice be exceedingly rare. See Winterton (n5) ch 5. See Stevens (n24). 55 As discussed further below, the discussion of Ruxley by the High Court of Australia in Tabcorp (n35) suggests that the Australian position may be slightly more favourable to the promisee. 53 54

Two conceptions of the ‘performance interest’ in contract damages  143 (1)

The nature and content of the ‘reasonableness’ restriction on claims for the cost of repairs While the existence of some kind of limit on the availability of claims for the cost of repairs, usually expressed in terms of the need for them to be ‘reasonable’ in the circumstances, is generally accepted, precisely what ‘reasonableness’ means in this context is far from clear. The nature and meaning of this restriction was considered in Ruxley,56 where the House of Lords interpreted it as encapsulating an objective inquiry into whether ‘the cost of remedying the defect is disproportionate to the end to be attained’ by doing so.57 Applying this test, and overturning a divided Court of Appeal, the House concluded that Mr Forsyth’s claim for the cost of demolishing and rebuilding the too shallow but ‘perfectly serviceable swimming pool’ built by Ruxley should be denied.58 Subsequently, in the Australian case of Scott Carver Pty Ltd v SAS Trustee Corporation, Ipp JA expressed support for this approach, observing that: In my view, the qualification expressed in Bellgrove v Eldridge at 618 (namely, that the rectification work must be a reasonable course to adopt), is aimed at determining whether the cost of remedying the defect is out of proportion to the achievement of the contractual objective.59

The decision in Ruxley is nevertheless controversial and it may be that a different conception of ‘disproportion’ prevails in Australia than in England. More recently, in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd, the Australian High Court appeared to marginalise Ruxley’s significance, describing its facts as ‘exceptional’ and ‘plainly distinguishable from those in the present appeal’.60 Significantly, Tabcorp also might suggest that the relevant inquiry here is into the disproportionality between the cost of cure and the nature and severity of the breach (rather than the achievement of the contractual objective),61 but this has not been decisively settled. In view of Tabcorp, and other recent Australian decisions like Pourzand v Telstra,62 it might be said that the ‘reasonableness’ restriction on claims for the cost of repairs precludes [1996] AC 344 (HOL). Ibid (Lord Jauncey), 356 and 365–72 (Lord Lloyd), with both judges referring to the House of Lords’ decision in White & Carter Councils v McGregor [1962] AC 413 (HL). Also see Lord Mustill, describing the test as whether ‘the cost of reinstatement would be “wholly disproportionate” to the benefit to be obtained. This might be thought to raise an ‘incommensurability’ problem because the ‘disproportionality’ inquiry involves comparing the cost of substitute performance to the benefit to be obtained from such performance. However, because an important part of this inquiry involves a comparison of the cost of substitute performance to the original cost of performance (i.e. the contract price), it actually seems not to raise the problem of ‘incommensurability’, at least in its strongest and most direct form. 58 Ruxley (n56) 358 (Lord Jauncey). Note, however, that the effect of this ruling was to reinstate the trial judge’s award of £2,500 for ‘loss of amenity’. 59 [2005] NSWCA 462 at [120]. This statement was also referred to with approval by Tobias JA in Brewarrina Shire Council v Beckhaus Civil Pty Ltd & Anor [2006] NSWCA 361, [88] (Giles and McColl JAA agreeing). 60 [2009] HCA 8; (2009) 236 CLR 272, [18]. 61 See Ibid, [17], where the Court said that the cases tend: ‘to indicate that the test of “unreasonableness” is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is “merely using a technical breach to secure an uncovenanted profit”.’ 62 [2012] WASC 210. There Edelman J observed that, at least in regard to a tenant’s promise to keep leased premises in good repair, if specific performance or a mandatory injunction is not ordered as a 56 57

144  Research handbook on remedies in private law recovery in a narrower range of circumstances in Australia than in England. However, apart from observing that the starting position in Australia in all cases of defective building work now seems to be that the recovery of rectification costs is prima facie ‘reasonable’,63 whereas in England this may not be so,64 any such difference in meaning is difficult to identify. (2)

Could the ‘reasonableness’ restriction apply to a claim for the cost of replacement? On the conception of ‘substitutionary’ awards that I and others have previously advocated, the existence of the ‘reasonableness’ restriction in the repair context necessarily raises the question of whether it might also be invoked to deny (or limit) a claim for the cost of replacement. Clearly, though, considerably more would be required to establish the ‘unreasonableness’ of claiming the cost of replacing completely valueless goods or services as compared to the cost of repairing goods or services provided in purported performance of the contract which at least satisfy a threshold of functionality even if the performance proffered does not conform precisely to the promised contractual specifications. On this basis one may even claim that it can never be ‘unreasonable’ to seek to recover the cost of replacement when the performance provided is worthless, such as when one has paid for seriously defective or undelivered goods. But it is less clear that this is the case when various different assets are sold under a contract and just one of these assets is so defective as to be utterly devoid of value. In a case such as this, of which Clark v Macourt itself may be an example, it is arguable that it should be open to the promisor to show that the main contractual objective has been achieved without the provision of the promised asset and, accordingly, that it would be ‘unreasonable’ to award the cost of replacement where this cost is so high as to make its award sufficiently ‘disproportionate’ to the achievement of this objective.65 That being said, the degree of disproportion required for this to be true under Australian law may be so great as to make it exceedingly unlikely to occur in practice. It is nevertheless clear that there are certain features of Clark that demonstrate the possibility that, in exceptional circumstances, replacement costs might be ‘unreasonable’ on this view. Suppose, for example, that the cost of purchasing replacement sperm had been $10 million or more and it was also clear that acquiring this sperm was objectively not an important reason for Clark’s entry into the contract. Such facts may be rare, but the approach suggested here does at least allow for the possibility that in circumstances like these a claim for the cost of substitute performance may be denied without needing to adopt the unprincipled position that a promisee’s recovery of a

response to breach, ‘the plaintiff is ordinarily entitled to the reasonable cost of obtaining the promised performance as a substitute for obtaining that performance’, [203]. 63 Keane thus observes that ‘[s]ince Tabcorp, the onus then falls on the defendant to prove the “unreasonableness” of paying damages’. See K Keane, ‘Storm in a Tabcorp’ (2012) 28 BCL 4, 12. 64 See, for example, Pageler Ltd v Wang (UK) Ltd (2000) 70 Con LR 68; [2000] EWHC 137, [94] and [228]. 65 The point made here is not that this should necessarily determine the matter, but rather that, like in Ruxley, where the depth of the pool was found not to be a matter of great importance to Mr Forsyth, evidence indicating that the provision of the sperm was not an important objective of the transaction (assessed objectively), might be a factor relevant in concluding that it was not ‘reasonable’ for the promisee to insist upon performance where the cost of replacement is also significantly higher than the market price of the business.

Two conceptions of the ‘performance interest’ in contract damages  145 substantial award following the promisor’s non-performance depends solely upon how matters eventually (and contingently) turn out for the promisee.66 b

Restriction for Lack of ‘Good Faith’?

A further possible restriction on the availability of ‘substitutionary’ awards – one that, at least in theory, could also be available on Stevens’ conception of the nature of ‘substitutionary’ claims – is the need for the promisee to enforce his or her contractual rights (or powers) in ‘good faith’. The extent to which either Australian or English law presently recognises an implied duty of ‘good faith’ in relation to the exercise of contractual rights or powers is far from clear. Taking Australia as a case study for present purposes, while the existence of a generalised duty of good faith in contractual performance has been judicially recognised in both Federal and State appellate courts,67 the nature and scope of any such duty remain largely undefined,68 and more recently courts have distanced themselves from generalised statements of this kind.69 To the extent that any consensus on the matter has been reached under Australian law, it may be simply that in certain kinds of cases the ability of a contracting party to exercise rights or powers bestowed upon him by the contract without due regard for the interests of the other party is not completely unrestrained. Arguably one area where the status of any alleged implied duty of ‘good faith’ in contract performance is more secure, at least in Australia, is in relation to the exercise of contractual powers. In Burger King Corporation v Hungry Jack’s Pty Ltd,70 the New South Wales Court of Appeal held that, in exercising its discretion in relation to the granting of development approval under a franchise agreement, the franchisor was subject to an implied duty to exercise this power in ‘good faith’. Relevantly, this implied duty precluded the franchisor from exercising its discretion for a purpose that was extraneous to the contract. Moreover, on the facts of the case it was held that this duty was breached because the franchisor’s refusal was found not to be based on the factors specified in the parties’ agreement but rather with a view to preventing the franchisee from performing its obligations under the franchise agreement.71 It is arguable that the lack of any clear statement of, or consensus in regard to, what it means to say that a contracting party has an implied duty to act in ‘good faith’ when performing a contract or exercising powers under it creates a significant barrier to extending this concept 66 This is not to suggest that the claim in Clark was in fact ‘unreasonable’. The point was not argued in the High Court or below so no judicial opinion was expressed on the matter. But it is suggested that on the facts as found Clark’s claim was ‘reasonable’ in the relevant sense. First, it is unclear whether provision of the promised sperm was an important objective of the overall transaction and, in the absence of such proof, the court should not assume that it was not. Secondly, the cost of purchasing replacement sperm from Xytex, though clearly high, was not so great as to raise the possibility of ‘disproportion’ between it and achievement of the contractual objective, at least absent evidence that providing this asset was not an objectively important reason for Clark’s entry into the contract. 67 See, for example, Alcatel Australia v Scarcella (1998) 44 NSWLR 349, 366 (Sheller JA) and Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151, 193 (Finn J). 68 Notably, for example, the High Court of Australia is yet to express a definitive opinion on either the existence or scope of this (alleged) duty. 69 See, for example, CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 193 [131]–[134]. 70 [2001] NSWCA 187. 71 Ibid, [223]–[368].

146  Research handbook on remedies in private law further so as to operate as an additional constraint upon the enforcement, at the remedial stage, of accrued contractual rights. While this is acknowledged, the point made here is simply that the possibility of employing this concept as an additional constraint upon the post-breach enforcement, rather than pre-breach exercise, of contractual rights or powers72 should at least be considered because acceptance of the existence of such a limit upon a contracting party’s freedom strictly to enforce her contractual rights prior to breach creates the need to explain why this constraint no longer applies following a ‘breach’.73 One possible objection to this suggestion is that the function fulfilled by the ‘reasonableness’ restriction on claims for the cost of substitute performance is precisely the same as that fulfilled by the ‘good faith’ constraint upon the exercise of contractual rights or powers. This is certainly plausible, particularly since the meaning of ‘good faith’ in this context is sometimes equated with a ‘reasonableness’ standard,74 or alternatively, and notably, with the ‘legitimate interest’ concept.75 But at least if, as earlier suggested, the meaning of ‘reasonableness’ in the context of a claim for the cost of repairs focuses upon whether this cost is ‘disproportionate’ to achievement of the overriding contractual objective, in comparison to the nature and severity of the breach, there would appear to be a distinction of substance here since the focus of any ‘good faith’ restriction on contract performance is on making sure that the relevant party’s exercise of its strict contractual rights or powers is for a proper purpose.76 On this understanding of these two restrictions, a notable case in which their operation may diverge is Tito v Waddell (No. 2).77 There the defendant mining company breached its contractual undertaking to the former inhabitants of the Island of Banaba to restore the island to its previous state and relocate them there after the company finished mining for phosphate. After mining operations ceased, but before replanting commenced, the island was extensively bombed in World War II, significantly increasing the cost of restoration. The islanders were also by then living on another island, 1,500 miles away, but nevertheless sought an award of the cost of restoration and relocation (in the alternative to an unsuccessful claim for specific performance). While the islanders clearly had a ‘legitimate interest’ in the contract’s performance and there was no suggestion that they were acting in bad faith, their claim was nevertheless denied on the basis that it was ‘unreasonable’, albeit arguably unjustifiably so, in view of the very substantial cost of restoration in combination with their failure to prove an intention actually to undertake the work. On the other hand, it has been suggested that the overriding concern, at least in the Australian cases considering the existence and scope of any implied duty to exercise one’s contractual rights or powers in ‘good faith’, is that the constraint ‘qualifies the decision of a

72 It may be that one consequence of a ‘breach’ is to given the innocent party a new legal ‘power’ to obtain (a court order for) substitute performance or its monetary equivalent. 73 The distinction between enforcing one’s (accrued) primary right via an award of the cost of substitute performance and enforcing a ‘secondary’ right (or power) to an award designed to make good certain financial detriment causally attributable to the promisor’s breach is critical here. If the strict enforcement of a primary right is constrained by notions of ‘good faith’ prior to breach, one must explain why this restriction no longer applies to a claim to enforce the same right after the breach. 74 See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 263 (Priestley JA). 75 See Alcatel Australia v Scarcella (1998) 44 NSWLR 349, 368 (Sheller JA). 76 See, for example, Burger King Corporation (n70). 77 [1977] Ch 106 (Megarry VC).

Two conceptions of the ‘performance interest’ in contract damages  147 party to exercise his or her contractual powers in order to ensure some level of consideration for the interests of the other party’.78 When expressed at this level of generality, it is possible to see this constraint as concerned to address the same basic concern targeted by the ‘reasonableness’ restriction on claims for the cost of substitute performance, even if the latter concept is understood strictly in terms of the disproportionality inquiry referred to earlier. This essential aim might be expressed in terms of a concern to prevent a promisee from using his or her strict legal rights as a means by which to punish the promisor for his breach; a concern which might alternatively be described in terms of preventing an ‘abuse of rights’.79

V CONCLUSION In Robinson v Harman, Parke B famously declared that ‘where a party sustains loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed’.80 Almost 90 years later, Fuller and Perdue questioned both the normative justification and descriptive accuracy of this claim, arguing instead that an award of damages for contractual breach should, and ordinarily does, aim to place the innocent promisee into the position this party would have been in had the contract not been made.81 So commenced almost 60 years of misdirected focus in contract scholarship, as the ‘reliance interest’ came to dominate academic discussion, until Professor Friedmann reasserted the primacy of the ‘performance interest’ and highlighted the minimal influence of Fuller and Perdue’s thesis on judicial decisions. Although it could not now be said that all had been clarified, one could perhaps claim that the right questions were at least being asked. Chief amongst these questions was the precise meaning of Parke B’s famous directive. However, as this chapter sought to demonstrate, there are really two questions to answer here. The first, and most fundamental, is whether the legally relevant ‘situation’ into which courts should be concerned with placing the promisee when awarding damages is the financial (or balance sheet) position this party would have occupied ‘but for’ the breach, subject to the limits imposed by principles of ‘remoteness’ and ‘mitigation’, or whether, by contrast, the primary aim of certain contractual damages awards is to ‘vindicate’ the promisee’s primary right more directly by providing an appropriate monetary substitute for performance, irrespective of what negative consequences can ultimately be attributed to the breach. Depending on which of these two approaches one favours, a second question may then arise: that of precisely what is entailed in vindicating a promisee’s legal right to performance. Exploring the differences between the two main answers that have been offered to this question, as well as the implications thereof, was the principal aim of this chapter. As explained, Professor Stevens’ view is that vindicating a promisee’s right to performance requires awarding this party the market value of the performance that was promised but not provided. The

78 See J Paterson, A Robertson and A Duke, Principles of Contract Law (4th edn, Lawbook Co 2012) 346. 79 A similar suggestion is considered in S Smith, Contract Theory (Oxford University Press 2004) 420–5. 80 (1848) 1 Exch 850 at 855; 154 ER 363 at 365. 81 See Fuller and Perdue (n1).

148  Research handbook on remedies in private law main competing view is that the aim of a ‘substitutionary’ award is to provide the promisee with that sum of money necessary to obtain from another source a close substitute for the performance that was promised but not provided. The distinction between these approaches is easily overlooked due to the many cases where they produce the same quantum. The distinction is nonetheless significant, not only because it leads to occasional differences in quantum, but also due to the distinct grounds upon which such awards might be restricted. This final observation probably provides the most novel contribution of this chapter, which advanced two controversial propositions in this regard. The first was that, if the second of the two ‘substitutionary’ approaches averted to above is preferred, the ‘reasonableness’ restriction limiting claims for the cost of repairs should, at least in principle, also be available to limit claims for the cost of replacement even if the cases in which any such restriction will operate are likely to be very rare. The second was that, on either of the conceptions of ‘substitutionary’ claims outlined above, there is scope for a further limit on their availability: that the promisee’s enforcement of his or her contractual right be in ‘good faith’. Whether Anglo-Australian law should indeed incorporate such a restriction on recovery is a matter to be considered another time.

9. Equitable remedies for breach of trust Duncan Sheehan1

Imagine that a trustee (A) misapplies trust property that he holds on behalf of the beneficiary (B). It might, for example, be paid away to C in circumstances where A had no authority to make the payment. B may of course have a remedy against C, either a proprietary claim contingent on tracing or a knowing receipt claim. Those two claims are not the focus of this chapter. The focus here will be on claims that B has against A in cases where A commits a breach of trust: this could be by way of misappropriating or misapplying trust assets. Before that point, as in Fox v Fox,2 we would expect that if the trustee proposed a distribution that was in breach of trust a prohibitory injunction would be available. We also look at reparative claims for negligence in investing trust assets. Currently a debate exists over the principles by which courts determine the quantum of equitable compensation in those cases where the trustee goes ahead with the misapplication of funds. Traditionally the approach has been through rules of accounting, whereby the trustee was obliged to account for his stewardship. Depending on the type of alleged breach this might take the form of falsifying the account, or surcharging it – terms we examine in detail later. English law in particular has appeared to move away from those rules after the decision in Target Holdings v Redferns3 and AIB v Mark Redler & Co4 towards a more causal approach. This has implications for the interest we think is being protected under a trust and the degree to which it is akin to the interest protected in contract law, or alternatively a strict custodianship interest. There are three main sections to this chapter. The first section examines the accounting proceedings and explains the difference between the accounts of administration. The second section examines the decisions mentioned, and the third section what interests the action is protecting, the requirements of corrective justice and how we might provide a rationalisation of the cases.

1

ACCOUNTING OBLIGATIONS

There are three forms of account. These are account of profits, account for wilful default and the common account. Account of profits relates to specific gains after equitable wrongdoing and the principles behind it are uncontroversial. The latter two forms of account are accounts of administration on which we focus.

This chapter was presented at the Trusts and Wealth Management II Conference at Singapore Management University in July 2017. Many thanks to James Penner for comments on a later draft – particularly for his views on my views on his views – and also to Adam Baker and Michael Cardwell for checking it all made at least some sense. All errors remain my own. 2 (1870) LR 11 Eq 142. 3 [1996] AC 421. 4 [2014] UKSC 58, [2015] AC 1503. 1

149

150  Research handbook on remedies in private law A

Accounts of Administration in Common Form

Common accounts, or accounts in common form are available as of right to enforce the beneficiary’s right to the provision of information.5 In Libertarian Investments Ltd v Hall6 X transferred funds to a trust account set up by D with a solicitors firm. Approximately £5.5m was used to purchase shares in C. However, D had fraudulently transferred sums to his own account, including approximately £5.4m he claimed to use to buy the shares. Lord Millett, sitting as a non-permanent justice of the Hong Kong Court of Final Appeal, said that there was no need to prove a breach of trust to obtain an account.7 All the beneficiary needs to do is request an account of the stewardship of the property. In essence the language of ‘account’ is entirely appropriate in the colloquial sense. The beneficiary asks for an account or a story in the prescribed form of how the trust assets have been used. The beneficiary is then in a position to object to entries in the accounts that he dislikes, and an ancillary order to pay any amount found to be due on completion of the account can be made.8 He is not, however, entitled to object to anything and everything. It may be that trust assets are destroyed, and a factual failure to keep the assets safe has taken place, but no breach has taken place as no reasonable trustee would have insured that type of loss.9 If, however, the assets are disbursed without authority, the account is falsified.10 Since the disbursement never took place (or we pretend it never took place) the original assets from the trust fund are taken to still be in the trust fund and any expenditure is treated as if it were the trustee’s own; only if specific restoration is absolutely impossible is a money obligation substituted.11 This is a purely personal remedy.12 Consequently the beneficiary is now unable to assert a claim over the original asset in the hands of the transferee. This is because the beneficiary cannot both adopt the transaction and disaffirm it.13 Lord Millett therefore comments in Libertarian that should the beneficiary discover an unauthorised investment which is profitable, he can choose to adopt or ratify the transaction and demand the proceeds be paid into the trust.14 It would also be possible for the asset to be sold and authorised investments purchased.

Re Dartnell [1895] 1 Ch 474; if matters can be dealt with more expeditiously without an order to account, an account will not be ordered Campbell v Gillespie [1900] 1 Ch 225. We should distinguish an account of administration in common form from an order for the execution of the trust which is more general and less focused. R Zakrzewski, Remedies Reclassified (Oxford University Press 2004) 145. 6 (2013) 16 HKCFAR 681. 7 Ibid, [167]; Partington v Reynolds (1858) 4 Drew 253, 62 ER 98; Angullia v Estates & Trusts (1927) Ltd [1938] AC 621 (PC) 637–8. 8 R Chambers, ‘Liability’ in P B H Birks and A Pretto (eds), Breach of Trust (Hart 2002) 1, 8; Zakrzewski (n5) 131–2. 9 Chambers (n8) 9; J Glister, ‘Equitable Compensation’ in J Glister and P Ridge (eds), Fault Lines in Equity (Hart 2012) 143, 145; Morley v Morley (1678) 2 Ch Cas 2, 22 ER 817. 10 Pitt v Cholmondeley (1754) 2 Ves Sen 565, 28 ER 360. 11 Agricultural Land Management Ltd v Jackson (No. 2) [2014] WASC 102, [335–6]; J Penner, ‘Duty and Liability in Respect of Funds’ in J Lowry and L Mistelis (eds), Commercial Law: Perspectives and Practice (Sweet and Maxwell 2006) 212, 216–17. 12 Jackson v Dickinson [1903] 1 Ch 947; Wright v Morgan [1923] AC 788 (PC) 799; Head v Gould [1898] 2 Ch 250. 13 D Fox, ‘Overreaching’ in A Pretto and P B H Birks (eds), Breach of Trust (Hart 2002) 95, 105. 14 Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, [169] (Millet NPJ). 5

Equitable remedies for breach of trust  151 Causation is irrelevant. Magnus v Queensland National Bank15 is a good example. The bank held trust property, aware that it was the security for a loan. They released it incorrectly to Goldschmit. He was engaged in a fraud and disappeared. The bank in defence to the claim argued that Goldschmit would have succeeded in his fraud anyway; he had effective control over the other trustees and would have bent them to his will in getting hold of the property. That was irrelevant. The beneficiary should not take the risk of the trustee failing to keep the property safe and secure from the third party’s fraud. However, quantum is assessed with the full benefit of hindsight. In Re Dawson16 Street J said that the obligation to make restitution in specie must be measured in the light of fluctuations since the breach.17 In Nant-y-glo and Blaina Ironworks Ltd v Grave18 Grave had acted as director of the company and had had a number of shares transferred to him for no consideration to induce him to agree to the directorship. He acted as a director for three years and the shares were worth £80 per share at one point. In 1877 when they were worth £1 the company sued, arguing that he was a trustee of the shares or their value. The company received the highest intermediate value of the assets as equitable compensation. In effect we assume in that case that the misapplied assets would have been sold at the top of the market. While Glister has argued that this is an account of profits case,19 it has not been consistently treated as such; Ribeiro PJ treated it as a common account in Libertarian Investments.20 The flipside can be illustrated by Vyse v Foster.21 A defaulting trustee was allowed a credit for money earned for the trust through unauthorised use of trust money and in Knott v Cottee22 the trustee had improperly bought exchequer bills and sold them at a loss; she was ordered to repay the money subject to a credit for the sale price of the bills. On the facts of Libertarian the trustee had falsely informed the beneficiary that monies had been used to acquire shares (when they ought to have been), but in fact the funds were misappropriated. The beneficiary requested the profits that would have been made had the shares been obtained. The common account does not allow beneficiaries to argue that the trustee ought to have received more than he did, although a surcharge may allow a party to treat assets actually acquired by the trustee to be included in trust accounts.23 This did not apply in Libertarian itself where the trustee was precluded from setting up a scenario in which he had not purchased the shares, when he said he had.24 Consequently the court would treat the shares as having been acquired, and that some of those shares would have been sold on at a profit, which could be awarded on a wilful default basis.

(1888) 37 Ch D 466; Cocker v Quayle (1830) 1 Russ & My 535, 39 ER 206; British Elevator Company v Bank of British North America [1919] AC 658. 16 [1966] 2 NSWR 211. 17 Shepherd v Mouls (1845) 4 Hare 500, 67 ER 746. 18 (1878) 12 Ch D 738; Eden v Ridsdale Railway Lamp & Lighting Co Ltd (1889) 23 QBD 365. 19 J Glister, ‘Breach of Trust and Conversion in a Falling Market’ [2014] LMCLQ 511, 530. 20 Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681, [88] (Ribeiro PJ). 21 (1872) LR 8 Ch App 309. 22 (1852) 16 Beav 77, 51 ER 705. 23 Re Fish [1893] 2 Ch 413. 24 Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, [121–6] (Ribeiro PJ). 15

152  Research handbook on remedies in private law B

Accounts of Administration for Wilful Default

Wilful default is an alternative form of account of administration, which does allow for an argument that the trustee ought to have received more than he in fact had received,25 and enables a claim for lost profit where a trustee invested the assets less well than he should have done. Despite the name therefore this type of account does not require ‘wilfulness’, but there must be a specific breach of trust alleged; it cannot simply be tacked onto an account in common form,26 although it can be used as a way of discovering further breaches if past conduct suggests a reasonable possibility of further breaches being found.27 It is not often fully appreciated that both falsification and surcharging the account also apply to accounts of administration for wilful default. Admittedly there is no substantive difference in how falsification is approached. If the trustee cannot explain the entry, it is disallowed. An example might be found, as Conaglen has pointed out,28 in some negligence cases. If the disbursement to buy stock on the Elbonian stock market was permitted, but ridiculously foolish, it can be falsified. The beneficiary has a choice here, and the option he chooses will obviously depend on how he thinks a prudent trustee would have acted. If losses would have been made anyway, falsification (resetting to the start) is more advantageous, and reflects the beneficiary’s ability to elect whatever outcome is the most advantageous for him. The trustee cannot object to this because the nature of the obligation he owes is to use the money for the best advantage of the principal, and so whichever (with the benefit of hindsight) course of action that turns out to have been must be what he should have done. Only where the account is sought to be surcharged is there a procedural difference. We might surcharge the account if property is in fact obtained and has not been accounted for or treated as a trust asset. Here, as we have seen, we add something to the common account that would not otherwise be there.29 On a wilful default basis matters are slightly different, allowing a party to surcharge the account not merely for assets received, but not accounted for, but also for assets wrongfully not received. Damage or loss caused to the trust fund is measured and valued at the date of judgment.30 In Nestle v NatWest Bank31 the argument was that due to a negligent failure to review the investments of the trust on a regular basis, the trust was worth less than it otherwise would have been, and the beneficiaries recovered on that basis. The claim in modern terms would be for lost profits. This requires an assessment of what the prudent trustee would have done and the investment performance he would have received. A causal analysis is vital in a way it is not vital in common form accounts. In Bristol & West BS v Mothew32 Millett LJ, as he then was, considered the difference and said that there was in

A J McGhee (ed.), Snell’s Equity (31st edn, Sweet and Maxwell 2015) para 20.25. Massey v Massey (1862) 2 J&H 728, 70 ER 1252; Partington v Reynolds (1858) 4 Drew 253, 62 ER 98; Re Stevens [1897] 1 Ch 422. 27 Re Tebbs [1976] 1 WLR 924. 28 M Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (2016) 40 Melbourne UL Rev 126, 142. 29 Libertarian Investments v Hall (2013) 16 HKCFAR 680, [170]; Agricultural Land Management Ltd v Jackson (No. 2) [2014] WASC 102. 30 Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, [91]. 31 [1993] 1 WLR 1260; Ultraframe Ltd v Fielding [2005] EWHC 1638 (Ch), [1513] (Lewison J). 32 [1996] Ch 1; Cia de Seguros Imperio v Heath (RBEX) Ltd [2001] 1 WLR 112; BSM Marketing Ltd v Take Ltd [2009] EWCA Civ 45. 25 26

Equitable remedies for breach of trust  153 reparative cases, ‘no reason in principle why the common law rules of causation, remoteness of damage and measure of damage should not be applied by analogy’. More Recent Terminology

C

In more recent terminology we have spoken of substitutive equitable compensation which maps onto falsification of the account in common form, and reparative compensation which maps onto wilful default cases, where the account is surcharged.33 Substitutive equitable compensation therefore aims to have the trustee replace assets that ought to be there, but are not. Essentially the trust is treated as if the assets were never removed and so the trustee is obliged to provide substitute assets or money and pay into the trust. Causation and remoteness play no role – although quantum is assessed with the benefit of hindsight. Reparative equitable compensation by contrast does exactly the same job as damages. Put differently, an award of substitutive equitable compensation directly enforces a primary right of the beneficiary to the money in the fund; an award of reparative equitable compensation (or surcharge) in the context of an account for wilful default represents a secondary right to compensation.

2

THE ENGLISH CASES: DEPARTING FROM THE ACCOUNT IN COMMON FORM

There are two major English appellate decisions on this topic. In this section we will discuss them each in turn. The main point to remember is that the outcome of the two decisions is, in their language at least, a turn away from the accounting process above. Each talks in terms of a causal connection between breach and loss, whereas falsification of an account in common form has not required any causal elements. The view that no causal elements are ever required, I will call the absolutist approach, protecting a custodianship interest; the other view, the flexible approach, protects an interest more akin to contract. A

Target Holdings v Redferns

In Target Holdings v Redferns,34 Target had agreed to provide a mortgage for £1.5m over the property on the basis of its having been valued at £2m. This was a fraudulent valuation; the purchaser, Crowngate, was only buying the property for £775,000. Redferns, the solicitors, received the mortgage monies from Target, but in breach of trust paid it out too early before the property had been purchased and mortgaged. Indeed not only was the money paid out too early, but to the wrong party – a dummy sub-seller in the fraudulent chain of transactions. However, despite this the solicitors did regularise the position later in that the mortgage documents were received (from the correct party) several days later. In essence the breach can be (crudely) characterised as the lender being unsecured for a period of a few days. Ultimately, the borrower defaulted, the financiers exercised their power of sale, but the property only sold

S Elliott and J Edelman, ‘Money Remedies against Trustees’ (2004) 18 TLI 195. [1996] AC 421.

33 34

154  Research handbook on remedies in private law for £500,000, causing a loss to Target by reason of the fraudulent valuation and consequent inadequate security. Target wanted £1m. They received nothing. The traditional approach to such a case would be to say that the beneficiaries of the trust – Target – were entitled to falsify the account. As suggested earlier, this in effect means pretending the payment out had never happened. Because the payment never happened, Redferns must still have the £1.5m and must pay it to Target. Obviously they do not actually have the money on trust, so must use their own money to satisfy their obligation. It is irrelevant on this view whether the money would have been lost anyway. Lord Browne-Wilkinson, who gave the leading judgment, however, began by contrasting traditional and commercial trusts and said only in the former would orders to restore the trust estate be made.35 The difficulty is the contrast with commercial trusts; that is not a term of art and therefore it is very difficult to understand what counts as traditional and what counts as commercial. What he is really trying to get at though is quite simple, which is that we should not compel trustees to put a trust back together again when it is no longer on foot,36 or intended to be so. He said: The depositing of the money with the solicitor is but one aspect of the arrangements, such arrangements being for the most part contractual … I have no doubt that, until the underlying commercial transaction has been completed, the solicitor can be required to restore to client account moneys wrongly paid away. But to import into such trust an obligation to restore the trust fund once the transaction has been completed would be entirely artificial … flies in the face of common sense and is in direct conflict with the basic principles of equitable compensation.37

He went on a few pages later to explain what those basic principles are:38 Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.

Lord Browne-Wilkinson gets to the position he does, relying heavily on the Canadian case of Canson Enterprises v Boughton & Co39 and in particular on the judgment of McLachlin J. She said that an award of equitable compensation for breach of fiduciary duty seeks to restore losses which were, on a common sense view, caused by the breach.40 McLachlin J was in fact making an analogy between falsification of the account in common form and compensation for breach of fiduciary duty; because those two things are rather different, she ended with something of a hybrid.41 The wrong in Canson was failure to disclose to the plaintiff the defendant’s conflicting fiduciary duties to different clients. This is a non-custodial fiduciary duty.42 The duty on the trustee in Target Holdings was a custodial duty – one to hold the money [1996] AC 421 (HL) 436. Knight v Haynes Duffell Kentish & Co [2003] EWCA Civ 223, [38]; by contrast HHJ Seymour argued that there was no limitation and the enquiry was a simple causal one in Hulbert v Avens [2003] EWHC 76, [56]. 37 [1996] AC 421 (HL) 436. 38 Ibid, 439. 39 [1991] 3 SCR 534. 40 Ibid, 555. 41 C Mitchell, ‘Equitable Compensation for Breach of Fiduciary Duty’ [2013] CLP 307, 325. 42 On the distinction between custodial and non-custodial duties, see Bairstow v Queens Moat Houses [2001] EWCA Civ 712, [53] (Robert Walker LJ). 35 36

Equitable remedies for breach of trust  155 for particular purposes. The different types of duty have different rationales. The rationale for a remedy in custodial duty cases is, as we know, simple; the money that should be there is not identifiable as being there. As Conaglen puts it, the case law on non-custodial client-client conflicts is inconclusive, but the basic rationale is to protect the principal by providing compensation in cases where the fiduciary’s choice of one client over the other causes loss.43 Indeed its being a fiduciary duty means that compensation might even be available in cases of potential conflicts where the principal may have lost the opportunity to acquire alternative un-conflicted representation.44 Lord Browne-Wilkinson also relied on decisions such as Bartlett v Barclays Bank.45 That decision (like Nestle v Natwest46 above) involved negligent investment and the question of whether reparative compensation included lost profits – i.e. gains that would have been made had reasonable investment competency been assumed. That would be an account for wilful default, not an account in common form. Lord Browne-Wilkinson confuses two different sorts of account; consequently he makes a substitutive claim into a reparative one. The end result was that Lord Browne-Wilkinson said no loss had been caused and so no compensation awarded. The fraud was the real cause of the loss – and it was not Redferns’ fraud. As will be remembered, this is on its face directly contradictory to the decision in Magnus v Queensland National Bank.47 Subsequent to Target Holdings, Lloyds TSB v Markandan & Uddin48 decided that a trustee who was innocently duped by a fraudster into releasing money to a transaction that was a total nullity was nonetheless prima facie liable. That seems right. The beneficiary should not take the risk of fraud when avoiding it is the trustee’s responsibility. However, as Conaglen points out,49 it is possible to render Target Holdings consistent with the usual rules. Remember that the mortgage documents were received a few days later (they were not in Markandan & Uddin50). For Conaglen this heals the original breach with the solicitors acting as the clients’ agents in accepting the mortgage and there are cases allowing for no action where the transaction has been corrected.51 In ex Parte Pelly52 for example the directors made a resolution, never written down, to pay one of their number £3,000. In return he advanced £2,600 to the company, secured by debentures and spent £400 on advertisements. The payment was a breach of the directors’ duties and ‘the directors who authorized the payment and who made the payment are liable to replace the money as being guilty of a breach of trust unless they can shew that the money has been otherwise repaid to the company’.53 Repayment then cures the breach. In Target Holdings the breach was paying out without the mortgage being executed. At that point it was incumbent on Redferns to do one of two things:

M Conaglen, ‘Remedial Ramifications of Conflicts between a Fiduciary’s Duties’ (2010) 123 LQR 72, 89. 44 Ibid, 92–5. 45 [1980] Ch 515. 46 [1993] 1 WLR 1260. 47 (1888) 37 Ch D 466. 48 [2012] EWCA 65, [2012] PNLR 20; Davisons Solicitors v Nationwide BS [2012] EWCA Civ 1626, [2013] PNLR 12. 49 M Conaglen, ‘Explaining Target Holdings’ (2010) 4 Journal of Equity 288. 50 [2012] EWCA 65, [2012] PNLR 20. 51 Ibid, 290. 52 (1882) 21 Ch D 492. 53 Ibid, 501. 43

156  Research handbook on remedies in private law first recover the money, and Lord Browne-Wilkinson accepts that they could have been made to do so,54 or secondly to get in the mortgage documents. This has the same effect. What Target wanted was to have paid out and have a valid mortgage in return. Once both were in place there was simply no breach to compensate. One kink in this is the question whether the financier would be entitled to refuse to accept the mortgage and demand compensation. Edelman argues yes and further that Target did not elect this option.55 Glister by contrast suggests that the trustee was able to remedy the breach unilaterally by getting in the security without worrying about the beneficiary’s election.56 Whichever we prefer, however, it only explains the result and not the reasoning. Lord Browne-Wilkinson may have recognised the possibility of making the breach right but, as Glister points out,57 his reasoning is squarely directed at causation not performance. B

AIB v Mark Redler & Co

AIB v Mark Redler & Co58 cannot be rescued in the same way.59 The facts were almost, but not quite, identical to Target. The claimant bank transferred funds (£3.3m) to a solicitor to be used in a re-mortgage; the prior mortgage owed to Barclays (£1.5m) was be redeemed before completion of the re-mortgage and the remaining £1.8m paid to the mortgagors, the Sondhis. In other words AIB wanted no competition for funds, no priority competition with Barclays. The solicitor paid the money away in breach of trust, the breach being that there was approximately £300,000 of outstanding debt left owing to Barclays after the payments were made (and a corresponding overpayment to the borrowers, who received £2.1m) and AIB’s own charge was executed. In other words there was never the opportunity to say that the money was laid out as required by the trust instrument – AIB never got the first ranking charge it insisted on. Ultimately the property sold for £1.2m and claimant received approximately £900,000 – i.e. the sale price minus what Barclays got. The claimant sought the remaining outstanding sum of £2.4m from the solicitors. The Supreme Court suggested there was no intention to depart from the normal rule of reconstitution,60 but nonetheless, as Lord Toulson put it, where the trust is no longer on foot the normal order would be for payment directly to the beneficiary of the amount he would have received minus what he did receive.61 Along the same lines, Lord Reed said that compensation was limited to what the bank would have recovered had Barclays been paid off – i.e. compensation was to place the claimant in the position he would have been in had the obligation been carried out,62 and equitable compensation was the pecuniary equivalent of the performance of the trust. On that basis it was limited to £300,000.63 Although some have suggested the general

[1996] AC 421 (HL) 437. J Edelman, ‘Money Awards of the Cost of Performance’ (2010) 4 Journal of Equity 122. 56 Glister (n9) 155. 57 Ibid, 154; Lord Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 227. 58 [2014] UKSC 58, [2015] AC 1503. 59 A Shaw-Mellor, ‘Equitable Compensation for Breach of Trust: Still Missing the Target’ [2015] JBL 165, 170. 60 [2014] UKSC 58, [2015] AC 1503, [116]. 61 Ibid, [31]. 62 Ibid, [93]. 63 Lord Millett, ‘The Common Lawyer and the Equity Practitioner’ (2015) 6 UKSCY 193, 199. 54 55

Equitable remedies for breach of trust  157 tenor of the judgments in AIB v Mark Redler is that the traditional/commercial distinction should not apply,64 the ongoing/closed trust distinction remains in that Lord Toulson implies that if the trust were still ‘on foot’ quantum of compensation might be differently worked out. This is not reflected in the critique of the Court of Appeal65 made by Charles Mitchell, writing prior to the Supreme Court decision. For Mitchell the solicitors should have been liable for the full amount – £2.4m, that is the advance of £3.3m minus the £900,000 received from Barclays.66 On the falsification of the account, we simply assume that the full amount is still present in the account. If that seems unfair, he argues, the trustees should fall back on section 61 Trustee Act 1925, which allows a court to relieve a trustee of liability if he acted reasonably – albeit in breach of trust.67 It might be thought that relying on a statutory provision as some sort of deus ex machina is unsatisfactory and this was precisely Lord Reed’s objection. By contrast, he said that the remedy given should ‘compensate the beneficiary for the diminution in the value of the trust fund which was caused by the breach of trust, to the extent of the beneficiary’s interest. The measure of compensation is therefore the same as would be payable on an accounting.’68 This, however, rather misses that an account is a procedural step. An account is taken and on the basis of the account equitable compensation is sought.69 More importantly, Lord Millett argues that the solicitors had paid the money to the bank to discharge the mortgage. This is what they were asked to do. The bank could disallow the £300,000 that left the mortgage undischarged, but the rest was paid correctly because of the pro tanto reduction in the charge and its replacement with a charge owed to AIB.70 In other words the wrongful payment of £1.2m to Barclays is offset by the credit to discharge the mortgage, but nothing offsets the wrongful payment to the Sondhis. This is how Lord Millett rationalises the case, and it arguably requires us to believe that the breach is divisible, so that all but £300,000 (i.e. £3m) was correctly paid and not in breach; the only breach was the payment of £300,000. The Court of Appeal decision that £3.3m was paid in breach of trust was not challenged on appeal, although there is a hint that Lord Reed was amenable to the divisible breach argument.71 Lord Millett says it makes no difference to the trust account. All you do is work out the deficit.72 There is again a kink.73 Let us change the fact scenario and imagine that the charge that AIB was to have received was for £800,000. The mistaken overpayment to the Sondhis remains £300,000. In this case with a sale price of £1.2m AIB would have received the full amount. Barclays would have taken £300,000, leaving £900,000 from which AIB could have been paid in full. It seems difficult to believe on the causal analysis that AIB would P Turner, ‘The New Fundamental Norm of Recovery for Losses in Express Trusts’ (2015) CLJ 188. 65 [2013] EWCA Civ 45. 66 C Mitchell, ‘Stewardship of Property and Liability to Account’ [2014] Conv 215, 227. 67 Ibid, 227–8. 68 [2014] UKSC 58, [2015] AC 1503, [91]. 69 Libertarian Investment Holdings v Hall (2013) 16 HKCFAR 681, [98–9] (Ribeiro PJ). 70 Lord Millett (n63) 204; L Ho, ‘Equitable Compensation on the Road to Damascus?’ (2015) 131 LQR 213. 71 AIB v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503, [140]. It is also how HHJ Cooke argued the case at first instance. [2012] PNLR 16, [24]; see G J Virgo, The Principles of Equity and Trusts (2nd edn, Oxford University Press 2016) 603. 72 Lord Millet (n63) 205. 73 D Whayman, The Decline of the Axiomatic Method in Equity (Newcastle PhD Thesis 2016) 118–19. 64

158  Research handbook on remedies in private law have received any compensation at all. Yet Lord Millett may be forced to say that AIB would in both these cases be entitled to £300,000 (subject to application of the Trustee Act) which is the unauthorised payment to the Sondhis. On the particular facts, the answer in AIB turns out to be the same as would be payable under an account for wilful default, where the trustee in breach of trust failed to obtain something that would otherwise have been obtained.74 Here the trustee failed to obtain full discharge of the first mortgage. There is some similarity to the case of Re Brogden.75 In that case Brogden covenanted for the transfer of £10,000 to trustees as part of a marriage settlement. Two of the three trustees were his sons, who ran the family business, from which the money was to come, after his death. The daughter’s husband repeatedly pressed for payment and ultimately the daughter sued but recovered nothing because of the firm’s bankruptcy. The third, independent, trustee, Budgett, argued that attempts to recover the money earlier from the sons would have failed. The sons were, as partners in the business, liable themselves to pay and Budgett’s obligation was to demand payment and take steps to enforce payment. However, Budgett was obliged to prove what he would have recovered had he tried to do so if he was to reduce his liability.76 In AIB it is absolutely clear what the claimants would have recovered had the defendants done their duty: £300,000. The trustee is therefore able to discharge his burden of proof in reducing the liability. The effect is therefore not merely to prioritise reparative over substitutive awards, but to marginalise falsification of account in common form and prioritise an account for wilful default. Penner puts it slightly differently. He argues that the ratio of the decision is that a beneficiary is disentitled from falsifying the account, but the unauthorised payment is a wrong sufficient to allow the surcharging of the account as if the correct asset (a first mortgage) had been obtained, but he also points out that it is far from clear in what circumstances a beneficiary might be so disentitled.77 Lord Toulson in fact takes a different tack from either rationalisation of the case. He accepts that the argument in Magnus that the fraud would have happened anyway was a bad one,78 and therefore that there are limits to the causation argument. Yet the scenario in AIB was entirely different from Magnus because the bank took the risk of the borrowers’ default. The beneficiaries in AIB had already accepted that loss might be caused to them by the security being inadequate. In Magnus the trustees are treated as insurers,79 and they are not treated as such in AIB. On the facts, this is because AIB accepted the wrongful disbursement,80 and agreed with Barclays a deed of postponement acknowledging the primacy of the Barclays charge in return for which Barclays consented to the registration of the appellant bank's charge as a second charge. As a result they adopted the £1.2m payment to Barclays and cannot complain about it. Indeed Penner goes rather further and argues that AIB should recover nothing because they accepted the disbursements. It is a composite transaction and so the beneficiary cannot adopt one payment (the £1.2m to Barclays) and falsify (at least part of) the other (the £2.1m to the

Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146, 163. (1888) 36 Ch D 546. 76 Ibid, 568. 77 J Penner, The Law of Trusts (10th edn, Oxford University Press 2016) para 11.42. 78 [2014] UKSC 58, [2015] AC 1503, [58]. 79 Conaglen (n28) 139. 80 Penner (n77) paras 11.43–11.44; AIB Group v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503, [6] (Lord Toulson). 74 75

Equitable remedies for breach of trust  159 Sondhis).81 Obviously this depends on how far we wish to go with a composite transaction, but the truth of the case seems to be that there are two payments which can be treated separately. The extra £300,000 paid to the Sondhis by mistake cannot be split from the £300,000 not paid to Barclays, but it can be split from the money in fact paid to Barclays. Lord Toulson characterised the alternative view that the solicitors must pay the whole sum82 as requiring the obligation to be in the way of debt. There are, of course, cases that describe it thus,83 but Lord Toulson could not see the purpose of an equitable debt imposed where even if the obligations had been carried out properly there would have been a loss.84 Yet unless we wish to effectively prioritise surcharges for wilful default over falsification, or turn falsification into just another way of saying breach of trust,85 a distinction between AIB and cases like Magnus needs to be found. This brings us to the final section.

3

BALANCING THE TWO APPROACHES

Those who defend the absolutist approach tend to argue that the account in common form is enforcement of the trustees’ custodianship and amounts to a kind of substitute performance,86 or equitable debt.87 As such causation and remoteness are always irrelevant. This is where the dilemma explored in AIB seems to emerge. The most extreme version of the flexible approach is that any losses counterfactually caused by the breach are recoverable and any losses not so caused are not. This view is under-inclusive. The logic is that the beneficiary can obtain no compensation in Penner’s Hatton Gardens example.88 Yet this is not the law – and nobody argues it ought to be. In that example the defaulting trustee removes jewellery subject to the trust from the vault, but enterprising burglars then drill their way in and take everything. The trustee cannot argue that the necklace would have been taken anyway and the beneficiary must stand the loss, and that seems right. It is also over-inclusive. It raises an issue around consequential losses and when it is appropriate for those to be available in equity.89 We usually require consequential losses to be foreseeable, but Lord Reed acknowledged the general irrelevance of foreseeability in the context of breach of trust.90 In this he follows the position taken by both LaForest J and McLachlin J in Canson. Both judges indicate that compensation for breach of fiduciary duty will not be limited by foreseeability.91 Although Lord Reed is right that foreseeability is irrelevant, the reason in the breach of trust case is different from the non-custodial fiduciary duty context. When McLachlin J states that foreseeability is irrelevant Penner (n77) paras 11.44, 11.48. [2014] UKSC 58, [2015] AC 1503, [50]. 83 Ex p Adamson; In re Collie (1878) 8 Ch D 807. 84 [2014] UKSC 58, [2015] AC 1503, [62]. 85 J Glister and J Lee (eds), Hanbury and Martin: Modern Equity (20th edn, Sweet and Maxwell 2015) para 24.012. 86 LD Smith, ‘Measurement of Compensation Claims against Trustees and Fiduciaries’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge University Press 2010) 363, 372–3. 87 Re Collie, ex p Adamson (1878) 8 Ch D 807. 88 Penner (n77) para 11.46. 89 P Davies, ‘Compensatory Remedies for Breach of Trust’ (2016) 2 Canadian Journal of Contemporary Comparative Law 65, 78. 90 [2014] UKSC 58, [2015] AC 1503 [135]. 91 [1991] 3 SCR 534, 545. 81 82

160  Research handbook on remedies in private law she suggests the considerations applicable in respect to breach of fiduciary duty are more analogous to deceit than breach of contract. A fraudster does not get to mitigate the impact of his fraud.92 Neither by the nature of the duty does a fiduciary;93 the reasoning behind this is that a fiduciary is by the nature of the obligation he took on obliged to act in the best interests of his principal. Those best interests mean compensating him for any and all losses caused by a failure to do so in the first place. This reflects a rather different rationale to that in the case of equitable compensation for breach of trust where the account is retrospectively falsified and the trust estate reconstituted. There foreseeability is irrelevant because quantum is already limited by the amount paid out.94 Liability is limited because the trustee does not take responsibility for the further risk of the effect of mismanagement on the beneficiary’s wider affairs.95 Barnett points out that this approximates to the contractual position,96 and it does once again raise the question of what losses the trustee takes responsibility for. Might we balance the two approaches by assimilating contract damages and equitable compensation? Lord Toulson for one does attempt to equate equitable compensation and contract damages97 in at least some cases. This is a suggestion he derived from David Hayton.98 However, Hayton is only suggesting that to the extent the claimant is seeking consequential losses that common law principles should be applied and the logic of looking to contractual principles actually excludes liability for consequential loss. The argument for assimilating them, however, is this. The relationship between the lender and the solicitors is essentially governed by the contract between them; the trust on this view is merely ancillary, a mechanism for carrying out the contract and so the remedies between contract and trusts law ought to be consistent. Trusts law on this view is protecting an interest akin to the contractual performance interest. This is not a new view. In Bank of New Zealand v New Zealand Guardian Trust Co Ltd99 Tipping J argued that where the wrong amounted in substance to a breach of contract the rationale for the stricter approach did not apply.100 Man Yip and James Lee have argued recently that the implication (perhaps unintended) of the speeches in AIB is that different rules might apply where the trust is accompanied by a contract or when not.101 That type of bifurcated approach cannot be appropriate; it risks treating like trusts cases differently because of the presence or absence of an entirely different legal mechanism – the contract. We need therefore to find another way to reconcile the cases. Let us look at matters the other way and take seriously the idea that the trustee must account for his custodianship of the assets to the beneficiary. The sanctity and special nature of the trust relationship appears at the heart Doyle v Olby [1969] 2 QB 158. Collins v Brebner [2000] Lloyd’s Rep PN 587; S Elliott, ‘Remoteness Criteria in Equity’ (2002) 65 MLR 588, 592, but contrast Swindle v Harrison [1997] 4 All ER 705 (CA) 717 (Evans LJ). 94 Robinson v Robinson (1851) 1 De GM & G 247, 42 ER 547. 95 J Glister, ‘Breach of Trust and Consequential Losses’ (2014) 8 Journal of Equity 235. 96 K Barnett, ‘Equitable Compensation and Remoteness: Not so Remote from the Common Law After All’ (2014) 38 UWALR 48, 68–9; D Whayman, ‘More Clues as to the Nature of the Remedy for Breach of Trust’ [2017] Conv 139, 140. 97 [2014] UKSC 58, [2015] AC 1503 [71]. 98 D Hayton, ‘Unique Rules for the Unique Institution: The Trust’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lexis 2005) 279, 304–6. 99 [1999] 1 NZLR 664. 100 Ibid, 688. 101 M Yip and J Lee, ‘The Commercialisation of Equity’ (2017) 37 Legal Studies 647; see also Purrunsing v A’Court & Co [2016] EWHC 789, [42]. 92 93

Equitable remedies for breach of trust  161 of the High Court of Australia’s approach to equitable compensation in Youyang Pty Ltd v Minter Ellison Morris Fletcher,102 and a comparison with AIB might assist. Youyang agreed to invest A$500,000 in ECCCL, and entered an agreement with them to that effect. Youyang paid the money to Minter Ellison, who subsequently paid it out in breach of trust; the first payment was not secured properly, and the second payment (A$220,000) to ECCCL as working capital could only be made on security being obtained in the form of a negotiable bearer certificate which it had not been. ECCCL went bankrupt and Youyang received nothing. The High Court suggested: However, there must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that the precept that trustees are to be kept by courts of equity up to their duty has an application limited to the observance by trustees of some only of their duties to beneficiaries in dealing with trust funds.103

We can distinguish Youyang and Target on the basis the breach was not cured in Youyang;104 the required negotiable bearer certificate was never acquired. It is less clear that Youyang and AIB are compatible,105 precisely because in neither case were the correct documents acquired. The causal analysis adopted in Target Holdings and the lower courts in Youyang would, according to Conaglen, require that Youyang only receive interest once its entitlement to the A$500,000 crystallised in 2003. Interest in fact ran, it was decided, from the date of the unauthorised payment in 1993. Conaglen therefore argues that Youyang is only consistent with the traditional view of falsification of the account.106 As we have seen, ECCCL went bankrupt and so even if the bearer bonds were received Youyang would have received nothing; importantly the High Court cited Magnus v Queensland National Bank for the proposition that the fact the money would have been lost anyway did not matter.107 The loss occurred as soon as the wrongful disbursement was made. The logic of the Australian Court’s position is that in AIB the trustee’s liability is the value of the mistaken payment when made no matter if the loss is in point of fact lower. It was a condition of both payments in Youyang that a negotiable bearer certificate be obtained. In AIB it was a condition of both payments (to Barclays and the Sondhis) that the prior mortgage be discharged. At the very least that requires liability of £1.8m (the amount that was paid to the Sondhis) and quite possibly – to be consistent with Youyang – the whole £3.3m. Lord Millett, however, as we have seen, argues that the net value – reduced with the benefit of hindsight – of the breach in AIB was £300,000.108 The question becomes the extent of the relevance of hindsight. In AIB,109 for example, we are told that the commercial purpose of the trust is complete. ‘Complete’ cannot mean performed perfectly, but rather that there are no further active obligations to perform, arguably

104 105 106 107 108 109 102 103

[2003] HCA 15, (2003) 196 ALR 482. Ibid, [69]. Conaglen (n49) 293–4. P S Davies, ‘Remedies for Breach of Trust’ (2015) 78 MLR 672, 690. Conaglen (n28) 163. (2003) 212 CLR 498, [63]. Libertarian Investments v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681, [168] (Lord Millett). [2014] UKSC 58, [2015] AC 1503, [74] (Lord Toulson).

162  Research handbook on remedies in private law also true of Youyang. This could be key. In White & Carter v MacGregor110 it is said that the party who seeks to keep the contract on foot in the face of anticipatory breach of contract rather than accepting and terminating cannot do so if he has no legitimate interest111 in the contract remaining on foot. The idea is slightly different in this context, but it is hard to see why a beneficiary has an interest in keeping a trust on foot – i.e. resetting it – when its commercial purpose is complete. That provides the distinction with cases such as where a gemstone kept in Hatton Gardens is sold by the trustee but would have been stolen the following day anyway. The purpose of the ‘Hatton Gardens trust’ is not complete. The actual remedy fashioned in AIB also neatly satisfies the requirements of corrective justice. Zoe Sinel112 argues that corrective justice simply provides reasons for allocating back. The original obligation to do something – or not do it – is separate from the remedial obligation, but the explanation for the remedy must lie in an understanding of the original obligation.113 That is important, because for Sinel the original reason for the obligation remains even after failure to conform. The remedy should be the next best thing and in our context the remedy in AIB is the next best thing. It renders Mark Redler & Co a guarantor for the unsecured part of the loan and thus provides next best conformity to AIB’s being fully secured given that performance was not in fact forthcoming.114 It also satisfies any performance interest by giving the claimant what he would have had in the absence of any breach. If the trust is ongoing, the remedial obligation to reset makes sense. It remains possible to make it as if the breach had never happened in the first place, but if the trust is not ongoing to try to reset the world goes further than the requirements of corrective justice and the performance interest by potentially giving the claimant something better than performance. James Penner points out a number of cases which seem inconsistent with an expansive understanding of AIB.115 He is right to say that they are inconsistent with the expansive view, but they are not inconsistent with this more restrictive interpretation. Indeed given Lord Toulson’s acceptance that Magnus v Queensland National Bank, where the trust was still on foot, is correct, the expansive view may be inconsistent with AIB itself. Two of Penner’s counter-examples we have already seen – the Hatton Gardens example and consequential losses (e.g. loss of a profitable investment opportunity). We examine another three. Penner’s approach is similar in all these cases. Essentially he looks at the counterfactual. What would the result have been had there been no breach of trust? In each the counterfactual suggests a loss of zero. He raises116 firstly Twinsectra v Yardley.117 In that case the first solicitor had been unwilling to provide a guarantee to the lender to cover a loan for the purchase of land. A second solicitor, who subsequently went bankrupt, did give that undertaking and that the loan would only be used for the purchase of property. He released the money to the first solicitor, who on the instructions of the client used it for other purposes. This was a bare trust, much as [1962] AC 413. Ibid, 431; E Peel (ed.), Treitel’s Law of Contract (14th edn, Sweet and Maxwell 2015) para 21-012. 112 Z Sinel, ‘Concerns about Corrective Justice’ (2013) 26 CJLJ 137. 113 Ibid, 138, 148. 114 Ibid, 153–4. 115 J Penner, ‘Falsifying the Trust Account and Compensatory Equitable Compensation’ in S Degeling and J Varuhas (eds), Equitable Compensation and Disgorgement of Profits (Hart 2016) 143. 116 Ibid, 151–2. 117 [2002] 2 AC 164. 110 111

Equitable remedies for breach of trust  163 was the trust in AIB v Mark Redler. The second solicitor – the trustee – being bankrupt, the lender sued the first solicitors arguing that they had notice of the terms of the trust and were dishonest assistants. The first solicitors were held not to have been dishonest, but critically no decision on dishonest assistance would have been necessary except on the view that there was liability for breach of trust on the part of the second solicitor. Irrespective of the breach, the loss, according to Penner, was caused by the solicitor’s insolvency. The loss would have happened anyway and no compensation should be payable. The answer to Penner is that it is only in cases where the commercial purpose of the transaction is complete that AIB operates. By failing to take steps to ensure the proper application of the funds, the solicitors failed to ensure this so the two cases are not inconsistent. In other words the difference is that in Target and AIB the money was used to buy the property (although deficiently); here it was not used to buy the property. A second decision Penner points to118 is Thanakharn Kasikhorn Thai Chamkat v Akai Holdings.119 There Ting, who did not act with the authority of the Akai board, entered into a loan transaction, secured on the pledge of shares. The loan moneys were used to discharge a loan to Singer in which Ting had an interest. Akai defaulted and the bank sold the shares. Lord Neuberger accepted that Akai was better off because of the bank’s sale of the shares.120 The bank was liable not merely for conversion, but also knowing receipt, because it should have known Ting had no authority. Again Penner examines the counterfactual. What would have happened had there been no breach? The answer is the bank would have hung onto worthless shares and the loss would have been caused anyway. No compensation should have been payable. The answer is that no consent to Ting’s ever entering the transaction was ever given. Consequently there was – unlike in AIB – never any authorised commercial purpose, and so the authorised transaction could never have been completed deficiently or otherwise. Penner may well object that these are fine distinctions; perhaps he will object that they are unworkable distinctions without differences. On this therefore turns whether AIB is defensible – if factually complex to apply – or indefensibly impossible to apply except in an unacceptably expansive fashion. Finally, Penner raises the example of a trustee selling trust shares, paying off £100,000 of his own debts, and then buying back the shares when they have fallen in value.121 The beneficiaries are in the position they would have been in had he not sold the shares; according to the counterfactual scenario loss is zero. As Penner correctly points out, this clearly cannot matter. We do not and should not leave the beneficiary without a remedy. For Penner the beneficiary adopts the sale of the shares, falsifies the account, and asks for the £100,000 plus interest. That remains the correct answer. The trust is ongoing. Resetting is appropriate. That said, the same result can be arrived at by taking the misapplication as a breach of trust – not a breach of fiduciary duty122 – and asking for an account of profits to strip the trustee of the unauthorised gains. There seems little reason after all not to allow an account of profits where the trustee has made a profit in such a way as to cause the trust no loss.

120 121 122 118 119

Penner (n115) 152–3. [2010] HKCFA 64, (2010) 13 HKCFAR 479. Ibid, [154]. Penner (n115) 153–4. This is a possibility Penner discusses, ibid, 154.

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4 CONCLUSION The position that we have reached therefore is that the trustee should not be taken to be responsible because he has never accepted responsibility, once the transaction is complete and its authorised commercial purpose ended, for losses out of his control and which would have been suffered anyway. He can be held responsible where there is no effectively completed and authorised transaction. While we always hold fiduciaries and trustees to extra-high standards and we require the trustee to prove the loss was inevitable, we do not ignore reality, risks knowingly taken on by the beneficiary and the importance of the closed/ongoing trust dichotomy. The argument must revolve now around whether this suggested more restrictive interpretation of the English decisions is workable.

PART III SPECIFIC ISSUES

10. Termination of contract for fundamental breach Qiao Liu

1 INTRODUCTION It is trite that unlike an event that frustrates a contract, a breach of contract will not automatically bring the contract to an end.1 Some, but not all, breaches of contract entitle the victim to terminate (or discharge) the contract, in the sense of bringing it to an end prospectively only. The victim exercises the right to terminate the contract by serving a notice which takes effect when it is communicated to the party in breach. Generations of lawyers have attempted to grapple with the issue in what circumstances a breach of contract has the effect of entitling the victim to terminate the contract and then in consequence, to claim (if any) loss of bargain damages. The classic answer given by English law is that for a breach to have such an effect it must be either a breach of condition, a sufficiently serious breach of an innominate/intermediate term or a repudiation of the contract. This classification is not wholly satisfactory. The third category is particularly prone to misunderstanding since it has been described and interpreted inconsistently in different contexts. The borderline between the second category and the third category is far from clear. So is the relationship between a repudiation and an anticipatory breach. More generally, there is a perennial issue as to how the seriousness of a breach of contract should be understood and whether, and if so to what extent, it should be taken into account in resolving the above issue, irrespective of which category the breach in question falls into. The purpose of this chapter is to consider the meaning of the seriousness of a breach of contract and its role in determining the victim’s entitlement to terminate the contract and claim loss of bargain damages.

2

THE CONCEPT OF FUNDAMENTAL BREACH

In this chapter the term ‘fundamental breach’ is used to denote a breach of contract that is ‘sufficiently serious’2 to entitle the victim to terminate the contract and claim loss of bargain

1 Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361. This is true even the breach is classified as a ‘fundamental breach’: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. For the relationship between the tests employed respectively to determine a ‘fundamental breach’ and a ‘frustrating event’, see text to note 12 below. 2 K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters Subscribing to Policy No. 25T 105487 (‘The Mercandian Continent’) [2001] 2 Lloyd’s Rep 563 (CA) 569 (Longmore LJ, Robert Walker LJ and Carnwath J agreeing); Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61, (2007) 233 CLR 115, 138 [49] (Gleeson CJ, Gummow, Heydon and Crennan JJ).

166

Termination of contract for fundamental breach  167 damages. The term is but a label (other labels used by the courts include ‘material breach’3) used to catch in an abbreviated form the seriousness required of a breach to produce the above effect. The main reason for adopting it here is the fact that it is employed in major international unifying instruments such as the United Nations Convention on Contracts for the International Sale of Goods and UNIDROIT Principles of International Commercial Contracts. This choice of label should not be taken to suggest that English law should interpret and apply the concept of fundamental breach in the same way as laws in other jurisdictions. It may well be that English law assesses the requisite seriousness differently and gives the concept a more limited role than other jurisdictions.4 The adoption of the term ‘fundamental breach’ ensures not only that consistent terminology is used within the whole legal system, but also that the inquiry is focused on the seriousness of breach of contract.5 It must be noted that the term ‘fundamental breach’ has traditionally been used by English courts for a different purpose, namely to determine the effectiveness of an exemption clause. The concept of ‘fundamental breach’ is associated with what is known as the rule of law approach, which asserts that, as a matter of principle, an exemption clause is ineffective where the liability sought to be excluded or limited arises from a fundamental breach. This approach was once recognised in England but has subsequently been laid to rest by the House of Lords.6 It is now overshadowed by a rule of construction approach which sees the presence of a ‘fundamental breach’ as merely something to be considered in an exercise aimed at ascertaining the intention of the parties with respect to the scope of the exemption clause.7 Under either approach, the exercise has been perplexed by the ‘seemingly imprecise character’ of a fundamental breach.8 A fundamental breach in this context was held to encompass a breach falling outside the ‘four corners’ of the contract, such as a deviation from the contracted route in a contract for carriage of goods by sea or road which altered the risks of the entire adventure by ‘[vitiating] the goods owner’s insurances’,9 and a total failure to perform or a performance so defective as to defeat the main object of the contract.10 However, no general test seems to emerge from the case law to define the essential qualities of a fundamental breach or to carve out its outer boundaries. Further, perhaps more importantly, these cases are concerned with the question whether a breach of contract is so serious that it can be presumed that the parties do not intend the party in breach to be protected by an exemption clause. This body of case law

E.g. Phoenix Media Ltd v Cobweb Information, unreported, 16 May 2000, EWHC (Neuberger J), adopted in, for example, VLM Holdings Ltd v Ravensworth Digital Services Ltd [2013] EWHC 228 (Ch). 4 E.g., CISG-AC Opinion No. 5, The buyer’s right to avoid the contract in case of non-conforming goods or documents, 7 May 2005, Badenweiler (Germany). Rapporteur: Professor Dr Ingeborg Schwenzer, [2.1]–[2.2]. 5 For this reason it is not objectionable to employ another expression, such as ‘serious breach’, to refer to the same type of breach. 6 Photo Production v Securicor (n1). 7 See, for example, B Coote, ‘The Rise and Fall of Fundamental Breach’ (1967) 40 Australian Law Journal 336 and ‘The Second Rise and Fall of Fundamental Breach’ in (1981) 55 Australian Law Journal 788. 8 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd 380 (Windeyer J). 9 Ibid. Also, this type of breach was described as ‘not doing the thing contracted for in the way contracted for’: Gibaud v Great Eastern Railway Co [1921] 2 KB 426, 435 (Scrutton LJ). 10 E.g., Nissho Iwai Australia Ltd v Malaysian International Shipping Corp, Berhad (1989) 167 CLR 219. 3

168  Research handbook on remedies in private law is thus unhelpful in illuminating the seriousness required for rendering the contract terminable at the victim’s option. Given that an exemption clause survives a termination of the contract, it cannot be said that a fundamental breach rendering the contract terminable must necessarily abrogate an exemption clause. Conceivably, the seriousness of breach required for abrogating an exemption clause is different from that required for rendering the contract terminable. The test of seriousness under English law for a fundamental breach described in the latter sense was stated by Diplock LJ in his well-known judgment in the landmark case Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd:11 does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?

The above passage, as other similar statements in Diplock LJ’s judgment, shows that the test is concerned with the seriousness of the breach. However, the passage raises three notable points, some of which are not as clearly observable in other statements. First, speaking of ‘the occurrence of the event’, Diplock LJ took the view that the same test applied whether or not the event resulted from a breach of contract, thus implying that the effect of the event should be such as to frustrate the contract.12 However, it is evidently not the case that the ‘deprivation of substantially the whole benefit’ test and the apparently more restricted test dominating modern frustration cases can be applied interchangeably. After all, a frustrating event automatically brings a contract to an end, while a breach of contract merely renders it terminable at the victim’s option. This difference in legal consequence means that the legal tests should also differ. In other words, it is less daunting for a party to allege that the other party’s breach has deprived it of substantially the whole benefit than alleging that the contract is frustrated. Second, the above quotation shows most clearly that the benefit deprived of must be intended as ‘the consideration for performing’ the victim’s outstanding obligations under the contract. Therefore, the victim is not obliged to establish the deprivation of substantially the whole benefit to be received under the contract where it has performed part of the contract. Third, by comparison to ‘substantially the whole benefit’, a different formulation was adopted in a subsequent case where it was held necessary to establish the deprivation of ‘a substantial part of the benefit to which [the injured party] is entitled under the contract’.13 However, as Lord Wilberforce noted, the difference in wording is not decisive and both formulations require the breach to ‘go to the root of the contract’.14 As will be seen, however, this metaphoric expression conveys that the breach must be very serious, but does not spell out the degree of seriousness required or how it is to be assessed.

[1962] 2 QB 26 (CA) 66. Ibid, 66–9 (Diplock LJ), 64 (Upjohn LJ). Also, Telford Homes (Creekside) Ltd v Ampurius Nu Home Holdings [2013] EWCA Civ 577, [48] (Lewison LJ, Longmore LJ agreeing). 13 Decro-Wall (n1) 368 (Buckley LJ). 14 Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (‘The Nanfri’) [1979] AC 757 (HL) 779. 11 12

Termination of contract for fundamental breach  169

3

FUNDAMENTAL BREACH AND BREACH OF CONDITION

A fundamental breach, or a sufficiently serious breach, is conceptually linked to an innominate term, and distinguished from a breach of condition in the following terms: Where a term is innominate, the question as to whether the contract can be terminated turns on the seriousness of the consequences of the breach (judged at the time of the termination taking into account what has happened and is likely to happen …) rather than on the importance of the term broken…15

So a distinction is drawn between a test focused on the importance of the contract term breached (breach of a condition) and a test focused on the seriousness of the consequences of the breach (breach of an innominate term). It is notable that the latter test is said to be centred on the seriousness of the consequences of the breach, not just the seriousness of the breach. The contrast may be one of timing: the importance of the contract term breached is a matter of the parties’ expressed or presumed intention assessed as at the time of contracting, whereas the consequences of the breach are objective facts that transpire after the breach has occurred and are assessed as at the time when the victim purports to terminate the contract.16 However, closer scrutiny reveals that the distinction between a breach of condition and a fundamental breach is not as clear-cut as commonly suggested. A contract term may be classified as a condition by statutes, courts or contracting parties themselves. For our purpose we will focus on the latter two. In the case of a condition classified by courts, Diplock LJ in his seminal analysis in the Hongkong Fir case defined it as one of: many simple contractual undertakings, sometimes express but more often because of their very simplicity (‘It goes without saying’) to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract.17

This definition demonstrates that the test at common law of classifying a contract term as a condition is whether ‘every breach’ of it will, judged at the time of contracting, ‘deprive the party not in default of substantially the whole benefit’. This test is sometimes expressed as one of essentiality, assessing ‘the common intention of the parties, expressed in the language of their contract, understood in the context of the relationship established by that contract and … the commercial purpose it serve[s]’.18 Therefore it is accepted that: The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial

A Burrows, A Restatement of the English Law of Contract (Oxford University Press 2016) 114. Also, E McKendrick, Contract Law (Palgrave Macmillan 2016) [10.4]. 16 Hongkong Fir (n11) 72 (Diplock LJ); Telford v Ampurius (n12) [44]. 17 Hongkong Fir (n11) 69. 18 Koompahtoo v Sanpine (n2) [48] (Gleeson CJ, Gummow, Heydon and Crennan JJ), [99] (Kirby J). 15

170  Research handbook on remedies in private law performance of the promise, as the case may be, and that this ought to have been apparent to the promisor.19

In Koompahtoo v Sanpine, the above formulation was criticised by Kirby J as introducing ‘an artificial criterion’ and importing ‘subjective considerations’.20 It was further suggested that the correct test should rest upon ‘the objective significance of breach of the term in question for the parties in all the circumstances’. However, to say that a term is important to the promisee is to acknowledge the seriousness of a breach of it to the promisee. The significance of a term to the promisee lies precisely in whether, and if so how, it is performed. For this reason, there is no meaningful difference between the above formulation and Diplock LJ’s ‘predicated deprivation of benefit’ test. Where a term is so important to the promisee that he ‘would not have entered into the contract’ without being ‘assured of a strict or a substantial performance of the promise’, its performance must constitute a substantial part of ‘the whole benefit which it was intended that he should obtain from the contract’. Conversely, if ‘it can be predicated that every breach of’ a term ‘will deprive the party not in default of substantially the whole benefit’, the term must necessarily pass the test of essentiality. Hence, the phrase ‘importance of the term broken’ is used as a shorthand description of a test centred at the seriousness of breach as predicated at the time of contracting. In other words, the circumstances at the time of contracting must support a conclusion that even the slightest breach of the term will deprive the victim of substantially the whole benefit. The future effect or consequence of the breach is predicated and no proof of its actual occurrence or magnitude is required. However, it seems impossible to rule out the possibility that a court may interpret the circumstances at the time of contracting in the light of any subsequently transpired effect or consequence of a breach of the term. The most important circumstance at the time of contracting that a court must take into account is the parties’ own classification of the contract term. The parties may state expressly that a term is a condition. However, the mere use of the word ‘condition’ is ‘an indication – even a strong indication’, but far from ‘conclusive’ evidence, that the parties intend to use it in its technical sense.21 In fact, a court would less likely impute such an intention into the parties if to do so would be unreasonable in the circumstances of the case.22 In principle, the parties are free to attach to an otherwise unimportant term of the contract a value sufficiently great to turn it into a condition.23 To state it differently, the predicated seriousness of the slightest breach of the term depends very much on how the parties subjectively valuate each other’s performance at the entry into the contract. However, whatever importance the parties agree to Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 641–2 (Jordan CJ), adopted in Associated Newspapers Ltd v Bancks (1951) 83 CLR 322, 337. Also, DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 430–1 (Stephen, Mason and Jacobs JJ); cf 436 (Murphy J); Koompahtoo v Sanpine (n2) [47] (Gleeson CJ, Gummow, Heydon and Crennan JJ); cf [100]–[101] (Kirby J). 20 Koompahtoo v Sanpine (n2) [101] (Kirby J). 21 Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL) 251 (Lord Reid). 22 Ibid. In Australia, this has been accepted as a general principle of contract construction: e.g. Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14], [17] (Fraser JA, Margaret McMurdo P and White JA agreeing); Waterways Authority of New South Wales v Coal & Allied (Operations) Pty Ltd [2007] NSWCA 276, [216] (McColl JA). 23 Lombard North Central plc v Butterworth [1987] QB 527; Shevill v Builders Licensing Board (1982) 149 CLR 620, 627 (Gibbs CJ, Murphy and Brennan JJ agreeing). 19

Termination of contract for fundamental breach  171 attach to a term, this may not automatically be accepted by a court as an effective classification of the term as a condition. It will be so accepted only if the court is satisfied that it passes the common law test of essentiality, namely Lord Diplock’s ‘predicated deprivation of benefit’ test, in the light of the parties’ express provision. The safer approach is for the parties to spell out the legal consequences of a breach of the term. In this respect it is important to note that, to evade the uncertainty of the above common law test, the parties need to state explicitly that a breach of the term gives rise not only to a right of termination, but also an entitlement to loss of bargain damages. Thus, in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd,24 a contract for the lease of some premises in a shopping centre stated in clause 7.1 of the agreement that it was of the essence of the contract that the lessee should pay each instalment promptly. Clause 16 further provided that in the event of default the lessee was liable to compensate the lessor for its loss of rent ‘for the full term’. The lessee failed to pay certain instalments promptly, whereupon the lessor re-entered the premises (that is, terminated the lease contract) and sued the lessee for damages. The High Court of Australia held that clause 7.1 making punctual payment of the essence of the contract gave the lessor a right to terminate the contract upon the failure to pay a single instalment. However, given that punctual payment did not satisfy the test of essentiality and the right of termination arose merely by virtue of the parties’ own classification, and that the lessee’s breach did not amount to a repudiation or a fundamental breach, the lessee would normally be confined to recovery in respect of arrears as at the date of termination only. Clause 16 made the difference by providing, in ‘very clear words’, that the lessee was able to recover loss of bargain damages, namely the loss of future instalments (subject to a discount for accelerated receipt of the future rentals), whenever it exercised the right of termination conferred by the contract.25 Therefore, clause 7.1 is classified as a ‘condition’ only in the sense that it gives rise to a right to terminate the contract, but as we have seen, a condition should be understood in the sense that Diplock LJ ascribed to it, being a contract term any breach of which the parties predicate will deprive substantially the whole benefit and will hence give rise also to a right to claim loss of bargain damages. Consequently, to create a condition the parties should provide by clear language for both the right of termination and the right to claim loss of bargain damages. In a recent case, Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS,26 the Court of Appeal considered the issue whether a clause in a time charterparty requiring punctual payment of hires should be characterised as a condition so as to entitle the shipowners not only to terminate the charterparty but also to claim damages for the loss of profit over the duration of the contract. The clause provided that the charterers were obliged to make regular and punctual payment of hires and, failing that, the shipowners were at liberty to withdraw the vessel. Prior to the decision of the Court of Appeal, such a clause had been differently classified in a separate case decided by the High Court27 and at the trial stage of the present case.28 Gross LJ, with whom Hamblen LJ and Sir Terence Etherton MR concurred, held that

(2008) 234 CLR 237. Ibid, 257–8, citing Gibbs CJ in Shevill v Builders Licensing Board (n23) 628. 26 [2016] EWCA Civ 982. 27 The Astra [2013] EWHC 865 (Comm), [2013] 2 All ER (Comm) 689 (Flaux J: a condition). 28 Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718 (Comm), [2015] 1 All ER (Comm) 879 (Popplewell J: not a condition). 24 25

172  Research handbook on remedies in private law the punctual payment obligation was not a condition. In reaching that conclusion Gross LJ observed that (1) the clause contained an express contractual option to withdraw, which was distinguishable from a condition in that the express option did not carry with it an entitlement to loss of bargain damages. The clause did not without more create a condition at common law; (2) notwithstanding the commercial importance of punctual and advance payment of hires in time charterparties, no clear intention to make the clause a condition could be discerned on the true construction of the contract. Relevantly, the House of Lords had cautioned against too readily finding a condition;29 (3) no presumption as to time being of the essence in commercial contracts applied to the time of payment with respect to hires payable under time charterparties; (4) the clause was supplemented by an anti-technicality mechanism designed to give the charterers a ‘Grace Period’ of three days in cases of obvious errors, but this mechanism did not make time for paying hires of the essence of the contract; (5) the desirability of certainty should be balanced against the ‘commercial common sense’ that no termination of contract should be allowed for trivial breaches, with the consequence that the clause was best treated as a contractual withdrawal option only; (6) market reactions were generally against treating the clause as a condition. The above reasoning thus indicates that a modern court will be slow to characterise even a term of great commercial importance as a condition30 and that a condition should be found only in cases where the victim may justifiably terminate the contract for the slightest breach of the term and then claim damages for (if any) the resulting loss of bargain. Gross LJ in his judgment distinguished Bunge v Tradax on the ground that in the latter case, the buyers’ performance of their obligation to give 15 days’ loading notice was ‘a condition precedent’ to the sellers’ performance of their obligation to nominate the loading port and ship the goods.31 By contrast, in Spar, it was held not the case that ‘any failure to pay hire punctually in advance, no matter how trivial, would derail [the shipowners’] performance under the charterparties’.32 However, it would not be easy to justify the decision in Bunge v Tradax if it could not be predicated at the time of contracting that any breach of the notice obligation would deprive the sellers of substantially the whole benefit which it was intended that they would obtain from the contract. As explained earlier, this is not the same as requiring the sellers to establish that such was the actual consequence of the buyers’ breach. The greatest advantage of subjecting the determination of a condition to the ‘predicated deprivation of benefit’ test is that it promotes justice and coherency by aligning the legal test with its legal consequences. This would help to redress the apparent injustice in cases where a party seizes upon a trivial breach by the other party to terminate what has turned out to be a bad bargain, particularly where termination is not a legal consequence expressly and unequivocally agreed upon by the parties.33 A right of termination arises only when it can be predicated at the time of contracting that every breach of the term will deprive the victim of substantially the whole benefit. In such a case termination of the contract is justified even though the breach Bunge Corp v Tradax Export SA [1981] 1 WLR 711. See also, The Hansa Nord [1976] QB 44 (CA) 71 (Roskill LJ); Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 (HCA) 556–7 (Mason ACJ, Wilson, Brennan and Dawson JJ). 31 Grand China Logistics v Spar Shipping (n26) [53]–[54]. 32 Ibid, [54] (emphasis in original). 33 Cf Arcos Ltd v E A Ronaasen & Son [1933] AC 470; Metal Roofing and Cladding Pty Ltd v Amcor Trading Pty Ltd [1999] QCA 472, [20] (McPherson JA). 29 30

Termination of contract for fundamental breach  173 that eventuates does not actually have the predicated serious consequences. The victim is also entitled to loss of bargain damages, but such damages are recoverable only to the extent of any loss of bargain proved. In Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd,34 an advertising firm contracted to display boards advertising a company’s amusement business on tram-cars ‘at least eight hours per day’ throughout a certain season but the boards were not displayed for at least eight hours on each and every day. The display time term was held to satisfy the test of essentiality and hence constitute a condition, a breach of which entitled the company to terminate the contract. However, as the boards had been displayed more than eight hours per day on average, the company was unable to prove any loss sustained as a result of that breach and was awarded nominal damages only. Nevertheless, the company was able to terminate the contract for a breach which turns out to be of trivial consequence. It is in this sense that the decision could be said to serve the need for certainty in commercial transactions. However, certainty is best preserved for parties who draft a contract clause that sets out clearly the legal consequences of a breach. In Tanwar Enterprises Pty Ltd v Cauchi,35 the two parties to three contracts for the sale of land, having extended the date for completion several times, agreed to fix it on a new date and to make that new date of the essence of each contract. The vendors, facing a rising market and knowing that the purchaser would be one day late in completing the contracts due to a delay in obtaining finance, served notices of termination when the purchaser failed to pay on the date appointed for completion. The High Court of Australia unanimously rejected the purchaser’s claim for relief against forfeiture of the deposit paid and its application for specific performance of the contracts, holding that it was not unconscientious, that is, against conscience, for the vendors to exercise the right to terminate the contracts which arose out of the purchaser’s breach of a condition. This decision is justifiable in so far as the parties have by clear words agreed to allow immediate termination of the contract for any further delay, however slight it might be. Subject to any control over the fairness of contract terms, the express right of termination is exercisable irrespectively of the vendors’ motives in exercising that right. However, since the parties have not agreed upon the recovery of loss of bargain damages following the termination of the contract and the ‘predicated deprivation of benefit’ test was apparently not satisfied on the facts, consequently, the timely payment obligation should not be classified as a condition and the vendors should not be awarded damages for their loss of bargain. Certainty is also promoted by precedents which bind a court to hold that a term is a condition, particularly where it is a standard term that affects all contracts of a particular type or in a particular industry. Thus, a stipulation in a voyage charterparty relating to the time at which the vessel is expected ready to load is generally treated as a condition.36 In Grand China Logistics v Spar discussed above, the Court of Appeal had a free hand in deciding the condition issue because there was no prior binding authority but only two High Court decisions that decided the issue as ratio, not dicta.37 A long standing precedent will undoubtedly create a stabilising effect, but this does not mean that it is immune from a review. When a future opportunity arises, the Supreme Court should reinvigorate the ‘predicated deprivation

36 37 34 35

(1938) 61 CLR 286. [2003] HCA 57, (2003) 217 CLR 315. The Mihalis Angelos [1971] 1 QB 164. The Brimnes [1973] 1 WLR 386; The Astra (n27).

174  Research handbook on remedies in private law of benefit’ test; by doing so this area of law can be clarified and a degree of certainty can be attained in commercial transactions.

4

FUNDAMENTAL BREACH AND BREACH OF AN INNOMINATE TERM

The category of innominate or intermediate terms was first recognised in the judgment of Diplock LJ in the Hong Kong Fir case where he said: There are many … contractual undertakings … which cannot be categorised as being ‘conditions’ or ‘warranties’ … Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain.38

Since a warranty is relatively rare, the trend in modern cases is that a contract term is an innominate term unless established to be a condition. Compared to breach of a condition, the seriousness of breach has long assumed a central role in determining the availability of a right to terminate the contract following a breach of an innominate term. Diplock LJ thus made it clear that the breach complained of should, as a matter of fact rather than predication, deprive its victim of ‘substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing [his] undertakings’.39 In essence this test requires the breach to be sufficiently serious so as to justify its victim terminating the contract, but the seriousness has been expressed in different, sometimes inconsistent, ways.40 A most commonly seen description of a breach sufficiently serious to give rise to a right of termination is that the breach ‘goes to the root of the contract’.41 This description has been criticised as a ‘metaphorical term’ with uncertain meaning42 and not ‘particularly helpful’,43 and has been said to be ‘just a label’ for the real test ‘whether the cumulative effect of the breaches of contract complained of is so serious as to justify the innocent party in bringing the contract to an end’.44 More substantially, a majority of the High Court of Australia has stated in a joint judgment that the expression is: a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party. Since the corollary of a conclusion that there is no right of termination is likely to be that

Hongkong Fir (n11) 70. Ibid. 40 E.g., The Mercandian Continent (n2): the breach rendered its victim ‘seriously prejudiced’. 41 The Nanfri (n14) 779 (Lord Wilberforce); Decro-Wall (n1) 368; Shevill v Builders Licensing Board (n23) 626. 42 Telford v Ampurius (n12) [50]. 43 Ioannis Valilas v Valdet Januzaj [2014] EWCA Civ 436, [31] (Underhill LJ). 44 Rice v Great Yarmouth Borough Council [2001] LGLR 41, [35] (Hale LJ). 38 39

Termination of contract for fundamental breach  175 the party not in default is left to rely upon a right to damages, the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.45

This multi-factorial assessment, which involves the ‘consequences of the breach’ as but one of the relevant factors, was approved and applied as the correct legal test of the seriousness of breach in Valilas v Januzaj.46 Two dentists entered into a contract under which the claimant would use the facilities and services provided by the defendant’s practice and in return would pay the defendant 50 per cent of his receipts each month. After some time their relationship went sour and the claimant was concerned that he might have to refund some of his receipts to a major client and, when he was called upon to do so, he would have difficulties in getting the defendant to refund the equivalent proportion of what the defendant had received. Therefore the claimant stopped the monthly payment to the defendant. Three months later the defendant purported to terminate the contract, upon which the claimant sued for damages. The trial judge held that the claimant had not ‘repudiated’ the contract (here the word ‘repudiate’ bore the same meaning as ‘fundamental breach’ defined earlier in the chapter). This decision was upheld by the Court of Appeal, which, by a majority of two to one, held that the claimant’s failure to make the monthly payment was not a sufficiently serious breach. All three judges were agreed that the correct legal test to be applied was the multi-factorial test enunciated in Koompahtoo v Sanpine, but they reached different conclusions by applying the test to the particular facts of the case. In applying the test, the majority essentially upheld the trial judge’s finding that the breach committed by the claimant consisted in delayed payment rather than non-payment and caused only loss of interests.47 Floyd LJ added that since the contract in the case was a commercial contract not an employment contract, the breach did not deprive the defendant of the only source of income or cause ‘significant harm’.48 Arden LJ emphasised that the trial judge was justified in taking into account all the relevant circumstances, particularly ‘the parties’ knowledge about the likely effect of the breach’, and the defendant’s knowledge of the unlikelihood that he would ‘be deprived of substantially the whole of the benefit of the contract … will without more lend substantial weight to’ denying the claimant a right to terminate the contract.49 By contrast, the dissenting Lord Justice (Underhill LJ) attached importance to the fact that the claimant made ‘a deliberate choice’ to depart from the contractual arrangement which conferred on the defendant the benefit of being paid ‘on a regular upfront basis’.50 However, this reasoning, and the analogy his Lordship drew with Withers v Reynolds,51 was consistent only with a decision that the time of payment constituted a condition,52 and ran counter to his prior finding that the time of payment was an ‘innominate term’.53 The critical factor in determining the existence of a fundamental breach of an innominate term is thus not

Koompahtoo v Sanpine (n2) [54] (Gleeson CJ, Gummow, Heydon and Crennan JJ). Cited with approval in Telford v Ampurius (n12) [50], compare Grand China Logistics v Spar Shipping (n26) [76]. 46 Above note 43, at [31] (Underhill LJ), [53] (Floyd LJ), [60] (Arden LJ). 47 Ibid, [43] (Floyd LJ), [69] (Arden LJ). 48 Ibid, [55]. 49 Ibid, [64]. 50 Ibid, [33], [35]. 51 (1831) 2 B & Ad 882. 52 It was on this basis that Withers v Reynolds was distinguished in Decro-Wall (n1) 368 (Salmon LJ), 380 (Buckley LJ). 53 Valilas v Januzaj (n43) [29]. 45

176  Research handbook on remedies in private law the parties’ predication at the time of contracting that every breach will deprive the victim of substantially the whole benefit, but a finding that the breach complained of has such an actual effect. However, this should not be given a narrow reading so as to exclude from consideration factors other than the ‘consequences of the breach’. Therefore, in deciding whether or not the breach was of sufficient seriousness the courts will have regard to all the relevant circumstances of the case and, unlike in their determination of a condition, they will have to look to events that occur well after the contract is made. The question is not one of ‘discretion’ but is ‘fact-sensitive’.54 Very often, the ‘consequences of the breach’ will be central to this multi-factorial assessment. So Neuberger J (as he then was) adopted the following list of factors when deciding the ‘materiality’ of breach of contract: the actual breaches, the consequence of the breaches to [the victim]; [the party in breach’s] explanation for the breaches; the breaches in the context of [the] Agreement; the consequence of holding [the] Agreement determined and the consequences of holding [it] continuing.55

However, even such a list should not be understood to focus exclusively on the seriousness of the consequences of the breach complained of. Nor should it be seen as denying the ‘importance of the term broken’ any significance in the exercise, given particularly the emphasis placed on considering ‘the breaches in the context of [the] Agreement’. In the above-cited statement of the High Court of Australia in Koompahtoo v Sanpine, a more conspicuous reference is made to ‘the nature of the term’.56 It is true that where the term broken is found to be a condition, there will hardly be any need to consider the actual consequences of the breach complained of. However, since the test of seriousness focuses on whether the breach deprives the victim of ‘substantially the whole benefit’ under the contract, the ‘starting point’ is always ‘to consider what benefit the injured party was intended to obtain from performance of the contract’.57 The relevant cases display three ways in which the parties’ predication may be taken into account. First, while a term may not be so important that every breach of it is predicated to deprive the victim of substantially the whole benefit, it may nevertheless be important enough to support a finding that the breach complained of actually has that effect. In Grand China Logistics v Spar, therefore, in upholding the trial judge’s decision that the charterers’ words and conduct amounted to a ‘renunciation’ of the contract, Gross LJ (Hamblen LJ and Sir Terence Etherton MR concurring) relied principally upon the commercial importance of punctual and advance payment of hires in time charterparties.58 While such importance was held insufficient to turn the obligation to make every payment timeously into a condition, it dictated that the bargain was in nature ‘a contract for payment in advance’, which was ‘unilaterally convert[ed]’ by the charterers’ past and future delays in payment of hires into ‘a

Ibid, [60] (Arden LJ). Phoenix Media Ltd v Cobweb Information, unreported, 16 May 2000, EWHC, approved as ‘a useful checklist’ and applied in VLM Holdings Ltd v Ravensworth Digital Services Ltd [2013] EWHC 228 (Ch), at [83] (Mann J). 56 Cited in VLM. Quoted text to note 45 above. 57 Telford v Ampurius (n12) [51], cited with approval in Grand China Logistics v Spar Shipping (n26) [77]. Also, Koompahtoo v Sanpine (n2) [55]. 58 Grand China Logistics v Spar (n26) [83]–[84]. 54 55

Termination of contract for fundamental breach  177 transaction for unsecured credit and without any provision for the payment of interests’.59 The general importance accorded to the term by the parties, and indeed by all market participants, is hence pivotal to the Court’s conclusion on the seriousness of the breach(es). Second, strong evidence is required to show that the parties attach special importance to a term which is not normally regarded as important in the type of contracts concerned. On the facts of Ampurius, for example, under a lease contract four building blocks were to be completed and delivered in two equal instalments with an interval of nine months. The developer was late in delivering the first two blocks and suspended the work on the remaining two blocks for some six months. Shortly after the developer resumed work the investor purported to terminate the contract and subsequently sought to justify the termination on the ground that the suspension of work interfered with the planned marketing of the building blocks. The Court of Appeal allowed the appeal from the trial judge’s decision and held that the breach had not deprived the investor of a substantial part of its benefit, which, on proper construction of the contract, was simply ‘the right to possession of those units for 999 years’ and ‘the right for a like period to exploitation of the rents and profits to be derived from them’.60 The investor failed to show that the parties intended timely commencement and completion of the last two blocks to be a significant benefit to the investor for marketing reasons. The purported termination was thus wrongful. Third, where the parties can reasonably predicate at the time of contracting that a particular breach of a term will deprive the victim of substantially the whole benefit, this must be a strong, if not decisive, indicator that the breach does have that effect. That this is the case can be inferred from Arden LJ’s reliance upon the parties’ knowledge of the effect of the breach complained of in Valilas v Januzaj,61 even though in that case the knowledge was formed after the conclusion of the contract and was relied upon to rebut the seriousness of the breach. It seems logical that the parties’ knowledge at the time of contracting should be allowed to support positively a conclusion that the breach is sufficiently serious. The above approach, which takes into account the parties’ predication of the seriousness of any breach on a term, finds its counterpart in many other jurisdictions that endorse a similar concept of fundamental breach and, in particular, the UN Conventions on Contracts for the International Sale of Goods. It is thus explicitly proposed in the CISG Advisory Council Opinion No. 5 that ‘in determining whether there is a fundamental beach … regard is to be given to the terms of the contract’ and, where the contract does not make it clear, ‘the purpose for which the goods are bought’.62 Consequently several courts have found a fundamental breach under Article 25 of the CISG where the parties explicitly stipulated ‘what they consider to be of the essence of the contract’.63 In such a case the party in breach (the seller) cannot be heard to argue that ‘he did not foresee the detriment to the buyer’.64

Ibid, [87](i). Ibid, [51] (Lewison LJ). Also, at [74] (Tomlinson LJ) said it was not established that the delay had frustrated the contract. Longmore LJ agreed with both judgments. 61 Above note 43, [64]. 62 Above note 4, items 1 and 2. 63 Ibid, [4.2]. 64 Ibid. 59 60

178  Research handbook on remedies in private law

5

FUNDAMENTAL BREACH AND ANTICIPATORY BREACH

Whether there is a breach of a condition or a breach of an innominate term, the preceding discussion has been primarily concerned with an ‘actual’ breach, namely a breach of a contractual obligation which has already fallen due to be performed. Where, however, a party seeks to justify a termination of the contract on the basis of an anticipatory breach, namely a breach of a contractual obligation which has not fallen due to be performed at the time of the termination, a question arises as to whether the breach must still meet the same or some other criterion of seriousness. The concept of anticipatory breach originates from a rather extreme form of breach, an outright refusal to perform any part of one’s contract.65 Consequently an anticipatory breach is often (mis)understood as being tantamount to such an outright refusal or a variant of it. As a result of this rigid conceptualisation, anticipatory breach is still today known as renunciation or ‘renunciatory’ breach. However, the meaning of ‘renunciation’ has been extended to include not only an outright refusal to perform, but also an anticipatory breach of a condition and an anticipatory fundamental breach of an innominate term.66 It is immediately clear that these three categories of ‘renunciation’ are not mutually exclusive to each other. An outright refusal to perform the contract may point to any term yet to be performed, which can be a condition or an innominate term. I have therefore suggested elsewhere that there are two distinct components to an anticipatory breach:67 present words or conduct foreshadowing a future breach and the seriousness of the future breach foreshadowed. An outright refusal poses questions relating to the first component and is a form of present words or conduct pointing unequivocally to the (inevitable) occurrence of one or more future breaches. The presence of such unequivocal words or conduct is, of course, insufficient of itself to constitute an anticipatory breach. A refusal in the strongest terms may be concerned solely with a trivial obligation to be performed in the future and is thus not immediately actionable. Equally, it would be overly simplistic and restrictive to insist that only a refusal to perform all outstanding obligations constitutes an anticipatory breach. Therefore, a disablement from performance, which does not evince an unwillingness to perform, is a common form of present words or conduct foreshadowing a future breach. Further, a franchisee may be in anticipatory breach of its obligation of co-operation by indicating that it will ‘no longer participate in any [of the franchisor’s] activities until the dispute is resolved’.68 Such an utterance is, in fact, not couched in the language of an absolute refusal. Nevertheless, ‘a suspension of performance until the terms of the contract are changed’ or a proposal ‘to perform part of the contract in a manner not permitted by the contract’ ‘is capable of being a repudiation’.69 This is plainly right, but the only issue addressed here is whether a certain future breach can be inferred from a party’s present words and conduct and how likely the breach is to occur. In order to determine the See, for example, the well-known dictum of Lord Blackburn in Mersey Steel & Iron Co v Naylor, Benzon and Co (1884) LR 9 App Cas 434, 442–3 (referring to renunciation in its purest form: ‘I will not perform the contract’), cited with approval by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (New Zealand) [2002] UKPC 50, [58] (Lord Browne-Wilkinson). 66 E.g., Grand China Logistics v Spar Shipping (n26) [21] (iii) (Gross LJ, Hamblen LJ and Sir Terrence Etherton MR agreeing). 67 Q Liu, Anticipatory Breach (Hart Publishing 2011) ch 4, particularly 73 et seq. 68 Dymocks v Todd (n65). 69 Ibid, [59], [60]. 65

Termination of contract for fundamental breach  179 existence of an anticipatory breach, it is essential to inquire further into the seriousness of the breach. Unfortunately, the traditional English approach, which constructs the doctrine of anticipatory breach around renunciation, tends to ignore or obscure this second inquiry. This is so even though a requirement of seriousness may be implied from the rule that for an anticipatory breach to be actionable, the victim must ‘accept’ it as bringing an end to the contract. Such a common law right to ‘accept’ an anticipatory breach, by terminating the contract, arises only when the breach is sufficiently serious. The test for the seriousness of breach is, as above stated, Diplock LJ’s ‘deprivation of benefit’ test. This test has been recognised as applying to both actual breach and anticipatory breach.70 But its essentiality to anticipatory breach was most strongly, and famously, advocated by Lord Diplock himself, who forcibly stated in The Afovos that ‘it is to fundamental breaches alone that the doctrine of anticipatory breach is applicable’ and in anticipatory breach cases ‘the resulting non-performance’ or ‘[t]he non-performance threatened must itself satisfy the criteria of a fundamental breach’.71 This statement gives rise to an issue whether the law should recognise an anticipatory breach of a condition. Different views have been expressed on this issue. On one hand, The Afovos itself seems to suggest that an anticipatory breach cannot possibly arise in anticipation of a future breach of a ‘condition’, which falls short of a ‘fundamental’ breach. In a previous work I supported this as the correct view.72 On the other hand, Andrew Phang Boon Leong JA, when delivering the grounds of decision of the Singapore Court of Appeal, explicitly rejected this view as a matter of Singaporean law,73 citing with approval Popplewell J’s view in a recent English case.74 The High Court of Australia has also acknowledged, by dictum, that there might exist an ‘anticipatory breach of an essential term’.75 However, it may be that these two divergent views reflect a difference in terminology or concept, not principle. In The Afovos, a clause under a time charter entitled the owners to serve a 48-hour notice to withdraw the vessel whenever the charterers failed to pay any instalment of hire punctually. The owners served such a notice at 16.40 hours when one instalment of hire was due at midnight (24.00 hours) on the same day. The owners argued that by the time they served the notice the charterers had been disabled from paying the instalment on time, since their money had been diverted elsewhere due to a mistake of their bank and there was not enough time to arrange another payment. Lord Diplock roundly rejected this argument on the ground that the anticipated breach, namely, the charterers’ failure to make timely payment, being merely a breach of an express term rather than a fundamental breach, could not E.g., Decro-Wall (n1) 380 (Buckley LJ: the test quoted in text to note 13 above was stated to apply to ‘the threatened breach’); The Nanfri (n14) 779 (Lord Wilberforce); Grand China Logistics v Spar Shipping (n26) [74], [75], [78] (Gross LJ: ‘the test for renunciation is, mutatis mutandis, essentially similar to that for repudiation’), [102] (Sir Terence Etherton MR); Valilas v Januzaj (n43) [59] (Arden LJ). 71 Afovos Shipping Co SA v Romano Pagnan and Pietro Pagnan (Trading as R Pagnan & F.lli) (‘The Afovos’) [1983] 1 WLR 195 (HL) 203. 72 Liu (n67). 73 The ‘STX Mumbai’ [2015] SGCA 35, [2016] 1 Lloyd’s Rep 157, [71], [74] (‘I do not agree that the only test (as Prof Liu has suggested) is that embodied within Situation 3(b) of RDC Concrete (viz, the “Hongkong Fir approach”)’). 74 Geden Operations Ltd v Dry Bulk Handy Holdings Inc (‘The Bulk Uruguay’) [2014] 2 Lloyd’s Rep 66, [15]. 75 Foran v Wight [1989] HCA 51, (1989) 168 CLR 385, 395 (Mason CJ), 416 (Brennan J), 432 (Deane J), 441 (Dawson J). 70

180  Research handbook on remedies in private law constitute an anticipatory breach. It thus appears that a distinction should be drawn between an express contractual right of termination and a condition arising under common law. What Lord Diplock stated in the case is in effect that the former right could not be exercised before it accrues pursuant to the parties’ agreement. His Lordship apparently did not regard the express provision as a condition which is, by his own definition, a term any breach of which the parties predicate at the time of contracting will deprive substantially the whole benefit of the victim under the contract. A breach of a condition in this sense falls to be a species of what Lord Diplock calls ‘fundamental breach’. One cause for the above conceptual confusion is the fact that the difference between a breach of a condition and a sufficiently serious breach of an intermediate term is sometimes pushed too far. It is often forgotten that these two types of breach are both based on the same core test of deprivation of benefit, albeit one focused on predicated, the other on actual, effects. For this reason both can be regarded as a species of ‘fundamental breach’, namely a breach sufficiently serious to give rise to a right of termination at common law. A breach of a fundamental or ‘essential term’ such as the one envisaged in Foran v Wight is in substance of the same nature.76 In the franchise case discussed above, the prospective breach of the obligation of co-operation was held to be a ‘fundamental breach of the basic principles underlying the contract’ irrespective of the seriousness of its actual consequence, thus implying that the obligation was treated as a condition under a joint venture like a franchise.77 By contrast, when Phang JA endorsed an anticipatory breach of a condition, he stressed that there could be no anticipatory breach of an express contractual option to terminate.78 However, there is a danger to confuse the latter contractual option with an express condition. Consequently, it is necessary to emphasise that the true rule is that there can be no anticipatory breach where no deprivation of benefit, whether predicated or actual, arises on the facts of the case.

6 CONCLUSION In this chapter, I have attempted to give the concept of ‘fundamental breach’ a clearer meaning and a central role in determining the availability of a common law right to terminate the contract. In a sense, this concept is just a label to denote the centrality of the seriousness of breach in such an exercise, but the word ‘fundamental’ does signal the high degree of seriousness required for acquiring the right of termination. However, the seriousness of breach is a broader notion than the seriousness of the consequences of breach. It is measured by the ‘deprivation of benefit’ test formulated by Diplock LJ in the Hongkong Fir case, which has two different applications: for a breach of a condition, the test is centred on the parties’ predication at the time of contracting; for a breach of an intermediate term, the test involves a multi-factorial assessment at the time of the purported termination of, inter alia, the actual and prospective effect of breach. The principal difference lies in the primacy given to the parties’ subjective valuation of each other’s performance in the former application, whereas such valuation is only a relevant factor in the latter application. Despite the different applications, the test has 76 The essential term in that case was the time of completion under a contract for the sale of land, but there was no detailed analysis of this aspect of the case. 77 Dymocks v Todd (n65) [63]. 78 The ‘STX Mumbai’ (n73) [65], [77].

Termination of contract for fundamental breach  181 a common core in the deprivation of a party of substantially the whole benefit that it should obtain as the consideration for the relevant performance. Since the same test applies across the board to both actual breach and anticipatory breach cases, the seriousness of breach in this sense can be said to be essential to the availability of a common law right of termination. Indeed, it is this notion of a sufficiently serious breach that provides the justification for not only a right to terminate the contract, but also a right to claim loss of bargain damages.

11. Literal enforcement of obligations Andrew Tettenborn

1 INTRODUCTION Among the many differences between the common law and civil law mindsets, one of the most noticeable is the attitude taken to the question of what to do about unfulfilled obligations.1 The first reaction of the civil lawyer is that the law must take steps to get the obligation performed, a process normally beginning with a court warning the defendant to get on with the job (or in the case of a negative obligation, to desist from doing whatever he is bound not to do). This is then to be followed by further action if the desired result is not achieved, including, where the claimant wishes it,2 not only coercive measures against the defendant but very possibly in respect of the subject-matter of the obligation too (more of this below). The common lawyer’s idea, by contrast, is very different. Simple money obligations aside, he starts with the idea that if an obligation ought to have been performed but has not been, the duty to perform as such is best regarded as water under the bridge. What matters at this stage is not so much looking to a performance that probably will not materialise, as picking up the pieces and making good the prejudice suffered by the claimant who has been denied what he was entitled to get. This difference in approach is famously reflected in the fact that in the common law the primary remedy in all cases of breach of obligations is damages; injunctions, orders of specific performance and other analogous orders of the court backed by penal sanctions are discretionary, available only if damages are an inadequate remedy and in practice (at least in the case of specific performance) rather sparingly given. Nevertheless the literal enforcement of obligations – that is, remedies aimed at giving an obligee as near as possible what he was actually entitled to rather than some pecuniary or other surrogate for it – remains an important topic in English law.3 It forms the subject of this chapter, which will be divided into three parts. The first covers specific remedies – orders of specific performance of contracts, injunctions and a few other similar orders, such as specific

A useful general civil law coverage accessible in English is H Kupelyants, ‘Specific Performance in the Draft Common Frame of Reference’ (2012) 1 UCL J L&J 15. See too S Rowan, ‘The New French Law of Contract’ (2017) 66 ICLQ 805, 821; and R Zimmermann, ‘Remedies for Non-performance: The Revised German Law Of Obligations, Viewed against the Background of the Principles of European Contract Law’ (2002) 6 Edin L Rev 271. 2 In civil law systems the claimant may, of course, share his common-law cousin’s preference for hard cash rather than coerced performance and abandon the latter. Anecdotal evidence suggests that this is very often the case. 3 Oddly enough, ‘literal’ enforcement is a term not often used in this connection. But it does feature, fittingly, in an article by one of the editors of this book: see D Campbell and D Harris, ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2002) 22 Legal Studies 208. See too P Jaffey, ‘Efficiency, Disgorgement and Reliance in Contract: A Comment on Campbell and Harris’ (2002) 22 Legal Studies 570. 1

182

Literal enforcement of obligations  183 delivery in the case of goods.4 The second deals with a literal remedy often forgotten, the action in debt to enforce a duty to pay a fixed sum of money. Thirdly, we will describe a number of other miscellaneous remedies, some curial and some given through other means, which also allow a person to obtain directly what someone else is obliged to give or do for him. These will include, for example, the power of a court to perform an obligation on behalf of a defendant so as to bind the latter, the right to plead a contractual obligation by way of defence to a claim, the important rule that equity regards as done that which ought to be done, and – last but not least – the right to self-help.

2

SPECIFIC REMEDIES

A great deal has been written about the principles informing the decision whether to grant specific remedies: specific performance, injunctions and analogous remedies such as orders for the specific restitution of chattels.5 Although the jurisdiction to give such orders is, subject to very few exceptions,6 universal,7 the grant of them is highly discretionary. This reflects two principles. First, in line with the approach to them as a secondary and discretionary,8 rather than a primary, response to non-fulfilment of an obligation, there must always be some reason to regard damages as an inadequate remedy.9 As Lord Hoffmann put it in connection with specific performance: Specific performance is traditionally regarded in English law as an exceptional remedy, as opposed to the common law damages to which a successful plaintiff is entitled as of right. There may have been

4 Available originally as an equitable remedy, but now governed by the Torts (Interference with Goods) Act 1977, s 3(2)(a). 5 For example, I Spry, Equitable Remedies (9th edn, TLR Australia 2013) chs 4–6; G Jones and W Goodhart, Specific Performance (2nd edn, Tottel 1996). On the chattels remedy, see Clerk & Lindsell on Torts (22nd edn, Sweet and Maxwell 2017) paras 17-89–17-90. 6 Some are statutory, for example the bar on specific performance orders against employees (Trade Union and Labour Relations (Consolidation) Act 1992 s 236) or state bodies (State Immunity Act 1978 s 13(2)(a)). Apart from these, however, it seems such remedies can be excluded by contract: see Mills v Sportsdirect.com Retail Ltd [2010] EWHC 1072 (Ch), [2010] 2 BCLC 143 and earlier dicta in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1996] Ch 286, 294. 7 It is sometimes suggested, in the context of specific performance, that there is no jurisdiction at all to grant the remedy if damages are adequate. But the better view is that this is a matter of discretion, not jurisdiction: e.g. Dalgety Wine Estates Pty Ltd v Rizzon (1979) 141 CLR 552, 560 (Gibbs J), 573–4 (Mason J). 8 ‘The court’s power to award damages in lieu of an injunction involves a classic exercise of discretion, which should not, as a matter of principle, be fettered’ (Lord Neuberger in Coventry v Lawrence [2014] UKSC 13, [2014] AC 822 at [120]: also Lord Clarke at [170]). 9 Statements are legion. See e.g. Adderley v Dixon (1824) 1 Sim & St 607, 610 (‘Courts of Equity decree the specific performance of contracts ... because damages at law may not, in the particular case, afford a complete remedy’ – Sir John Leach); Wilson v Northampton & Banbury Junction Ry Co (1874) LR 9 Ch App 279, 284 (‘the Court gives specific performance instead of damages, only when it can by that means do more perfect and complete justice’ – Lord Selborne); Beswick v Beswick [1968] AC 58, 100 (Lord Upjohn); Société des Industries Metallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyd’s Rep 465, 468 (Lord Edmund-Davies); and Araci v Fallon [2011] EWCA Civ 668, [2011] LLR 440 at [42]. See too E Macdonald, ‘The Inadequacy of Adequacy: The Granting of Specific Performance’ (1987) 38 NILQ 244.

184  Research handbook on remedies in private law some element of later rationalisation of an untidier history, but by the 19th century it was orthodox doctrine that the power to decree specific performance was part of the discretionary jurisdiction of the Court of Chancery to do justice in cases in which the remedies available at common law were inadequate. This is the basis of the general principle that specific performance will not be ordered when damages are an adequate remedy.10

Secondly, quite apart from the overarching requirement that damages be inadequate, there are a number of particular factors regarded as particularly relevant to the decision of courts whether to grant the remedy in the specific case before it.11 There is no need to repeat these principles here in any detail.12 What it is proposed to do, however, is to refer to a number of bars to specific enforcement that arise not so much from the fact that as a matter of English law these remedies are discretionary, as from their very nature, and which as a result may tell us something about the difference between them and other remedies in the law of obligations.13 (a) Impossibility The first of these bars is impossibility, something of particular importance in connection with specific remedies in contract. We are often told that one of the peculiarities of English law is its teaching that a person must perform his contracts come what may. In contrast to many civil law systems, lack of fault on a contractor’s part, or even supervening force majeure, are generally irrelevant to liability. But as soon as one looks at specific remedies, this becomes less of a point of principle than a very partial truth: impossibility is irrelevant to liability in damages. Elsewhere, specific enforcement is not surprisingly unavailable in so far as the obligation is one the defendant cannot perform.14 Moreover, it makes no difference in this connection whether or not the impossibility is his fault.15 So a defendant will not be ordered to allot shares already allotted by him to someone else;16 a seller to convey a property he does not own;17 nor a buyer to take and pay for a property which he has no chance of being able to afford.18 And the

Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 11. For details see M Clarke et al., Contractual Duties: Performance, Breach, Termination and Remedies (2nd edn, ThomsonReuters 2017), paras 27-046 et seq. and 28-12 et seq. 12 Chapter 16 by Robert Palmer and Ben Pontin in this volume gives a detailed analysis of one particular area, namely injunctions against nuisance after Coventry v Lawrence [2014] UKSC 13, [2014] AC 822. 13 A useful reference here comes in V Mak, Performance-oriented Remedies in European Sale of Goods Law (Hart 2009) 96–102. 14 ‘[T]he Court will never enjoin a defendant unless it is satisfied that the party enjoined can obey the order’ – Buckley J in Harrington (Earl) v Derby Corp’n [1905] 1 Ch 205, 220. 15 Thus making the English law of contract more similar than it might care to admit to German law, which now provides for an unqualified general defence of impossibility but then makes the defendant liable in damages for non-performance in the event of either fault or an undertaking of risk. See BGB, § 275.1 and 281 and the commentary at Palandt, Bürgerliches Gesetzbuch: BGB (77 edn, Beck 2017), § 275. 16 Ferguson v Wilson (1866) LR 2 Ch App 77. 17 Watts v Spence [1976] Ch 165 (jointly-owned matrimonial home: refusal by wife after marriage breakdown to co-operate in disposal). 18 See Clarke J in the Irish decision in Aranbel Ltd v Darcy [2010] IEHC 272 (‘as a matter of principle, where a purchaser demonstrates that ... the purchaser concerned does not have the assets or 10 11

Literal enforcement of obligations  185 same thing applies to injunctions: there can be no order to demolish houses built in breach of covenant if the defendant has sold them,19 or to prevent a water authority discharging sewage into the claimant’s system if there is no way of distinguishing between that which it is, and that which it is not, entitled to discharge.20 Indeed, a certain amount of ‘impossibility jurisprudence’ has grown up around specific enforcement. Cases of complete impossibility are actually rather rare. In practice the discussion tends to turn around relative possibility: that is, situations where performance may or may not be possible according to circumstances (for example, where it depends on the action of a third party). Here an order to use best endeavours is normally regarded as appropriate, thus creating what is in effect a modified fault standard.21 So, for example, the buyer of an asset whose transfer requires the consent of a third party will be ordered to take all reasonable steps to obtain that consent.22 What amounts to best endeavours will, of course, vary. At one end of the spectrum are cases where performance depends on the act of a third party who is the defendant’s catspaw or a company controlled by him: in that case a court will have no compunction in ordering the defendant to procure that the third party do all that is necessary.23 On the other hand, there may be cases where it is inappropriate to make any order at all. One instance arose in Wroth v Tyler.24 In that case, a divorcing husband agreed to sell the matrimonial home, but the wife refused to move. Despite the fact that the wife had no right of residence, the court refused to order the husband to ensure completion of the contract by engaging in litigation to evict her and obtain vacant possession. As Megarry V-C put it: A vendor must do his best to obtain any necessary consent to the sale; if he has sold with vacant possession he must, if necessary, take proceedings to obtain possession from any person in possession who has no right to be there or whose right is determinable by the vendor, at all events if the vendor’s right to possession is reasonably clear; but I do not think that the vendor will usually be required to embark upon difficult or uncertain litigation in order to secure any requisite consent or obtain vacant possession. Where the outcome of any litigation depends upon disputed facts, difficult questions of law, or the exercise of a discretionary jurisdiction, then I think the court would be slow

borrowing capacity sufficient to allow them to purchase the property concerned at the contracted price, then a court should not make an order for specific performance for such an order would be in vain’); and also Titanic Quarter Ltd v Rowe [2010] NICh 14. The matter is discussed in A Dowling, ‘Vendors’ Application for Specific Performance’ [2011] Conv 208. 19 E.g. Burrows Investments Ltd v Ward Homes Ltd [2017] EWCA Civ 1577. 20 Harrington (Earl) v Derby Corp’n [1905] 1 Ch 205, esp at 220. 21 E.g. the specific performance case of Liberty Mercian Ltd v Cuddy Civil Engineering Ltd [2013] EWHC 4110 (TCC), [2014] CILL 3469. In League against Cruel Sports Ltd v Scott [1986] QB 240, 253, Park J clearly thought appropriate an undertaking by a staghunt (equivalent to an injunction against it) to use their best endeavours to keep their hounds off the property of the League. See too, as regards sales of assets which can only be transferred. 22 For an example, see the Australian decision in Kennedy v Vercoe (1960) 105 CLR 521 (lease and consent to assignment). Similarly where a contract of sale is subject to the consent of a government body: McWilliam v McWilliams Wines Pty Ltd (1964) 114 CLR 656, and Mount Kennett Investment Ltd v O’Mara [2007] IEHC 420. 23 Jones v Lipman [1962] 1 WLR 832 (vendor’s unsuccessful attempt to stymie specific performance by selling to controlled company: company characterised as ‘a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity’ and specific performance granted). The case was approved by Lord Sumption in Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 at [30]. 24 [1974] 1 Ch 30.

186  Research handbook on remedies in private law to make a decree of specific performance against the vendor which would require him to undertake such litigation.25

(b)

Human Rights

It is unlikely (though not completely impossible26) that a money claim in private law will raise a human rights dimension. But whatever the situation as regards money claims, specific enforcement is a different matter: affecting as it does physical events, the grant of this may well impact a defendant’s human rights. Indeed, it has been long recognised that considerations of liberty or decency must bound literal enforcement. This has always been natural to civil lawyers, where specific enforcement is the norm:27 but it equally informs rules such as the statutory prohibition on specific performance of contracts of employment,28 or the refusal of the court to allow invocation of specific performance to turn a seriously ill widow out of her home.29 However since the burgeoning of human rights jurisprudence from the 1980s on, this process has gone a good deal further. Thus Article 8 of the Convention, which protects the home, constrains public authorities’ private law rights in respect of properties they own;30 something that may be very relevant where, for example, injunctions are sought to enforce terms of residential tenancies.31 Again, it seems clear that free speech may be relevant. Under s 12 of the Human Rights Act a court deciding on relief that might affect the defendant’s rights to freedom of speech must take into account the public interest in allowing freedom of expression.32 And independently of this, the right to artistic freedom may limit the right of, say, performers to enforce specifically certain terms of their contracts with a theatre or similar organisation.33

[1974] 1 Ch 30, 50. See too Mean Machines Ltd v Blackheath Leisure (Carousel) Ltd (1999) 78 P & CR D36, another case where this issue arose. Those who like comparisons with German law might also compare BGB, § 275.II, allowing refusal of specific performance where it would involve entirely disproportionate expenditure. 26 For a rare example of a money claim that did, see Tolstoy-Miloslavsky v United Kingdom (18139/91) (1995) 20 EHRR 442 (excessive libel damages and Art 10 ECHR). 27 So much so that the general good faith obligation under § 242 of the BGB has been pressed into service in Germany to prevent the grant of a remedy (here forced removal of a satellite dish) that would infringe the right to freedom of information: BVerfGE 90, 27 (9.2.1994). 28 Trade Union and Labour Relations (Consolidation) Act 1992, s 236, referred to above. 29 Patel v Ali [1984] Ch 283. 30 See Manchester City Council v Pinnock [2010] UKSC 45; [2010] 3 WLR 1441. On the effect of the ECHR on private landlords’ rights, which is more questionable, see McDonald v McDonald [2016] UKSC 28, [2016] 3 WLR 45. 31 A possibility accepted, for example, in Swan Housing Association v Gill [2013] EWCA Civ 1566, [2014] HLR 18. 32 See London Regional Transport v Mayor of London [2001] EWCA Civ 1491, [2003] EMLR 4 at [45]–[46] (Robert Walker LJ); Monckton v BBC, unreported 31 January 2011 QBD; Ineos Upstream Ltd v Persons Unknown [2017] EWHC 2945 (Ch). But there might be more willingness to accept contractual restrictions here: cf HRH Prince of Wales v Associated Newspapers Ltd [2006] EWCA Civ 1776, [2008] Ch 57 at [28]–[30] (Lord Phillips). 33 Ashworth v Royal National Theatre [2014] EWHC 1176 (QB), [2014] 4 All ER 238 (specific order to engage musicians would infringe, so not made). Cf the Australian decision in Summertime Holdings Pty Ltd v Environmental Defender’s Office Ltd (1985) 45 NSWLR 291, refusing specific enforcement of a promise to make an apology on free speech grounds. 25

Literal enforcement of obligations  187 (c)

The Problem of Third Party Rights

Similarly, while ordering a defendant to pay an abstract sum of money can only affect third parties very indirectly, specific enforcement can bring the rights of third parties into sharp relief. Where a defendant owes conflicting duties to two different claimants A and B, for example by agreeing to sell the same asset to both, there is nothing inconsistent in making him liable in damages to whoever does not receive it (or if neither does, to both). On the other hand, it is quite another thing to enforce A’s right literally when it is clear that the effect of doing this will be to deprive B of his. In such a case it may well be appropriate to refuse literal enforcement to A, at least where (i) B’s right arose before A’s, and (ii) B’s right is itself specifically enforceable, or a property right. So it seems there will be no specific performance of a contract of sale that would infringe a third party’s right of ownership,34 or under a sale35 or pre-emption,36 or a contract to lease premises that would be contrary to a stipulation in a lender's charge.37 Again, a contract by a lessee to sublet38 or assign39 will not be specifically enforced where such subletting would be contrary to the terms of the headlease and would set at nought the rights of the head landlord.40 Similarly, where a sale by a person in a fiduciary position would possibly amount to a breach of trust prejudicing a beneficiary, the practice is to leave the purchaser to his rights at law against the fiduciary and refuse specific relief.41 Indeed, the court is prepared to go further in cases of this kind. Where the transaction with A is actually carried out, and at the time A knew of B’s right, the court has jurisdiction to intervene with what has come to be known as an ‘undoing order’42 and enforce B’s right against A by ordering the unscrambling of transactions between A and the defendant, at least where A knew that in carrying out the transaction he was causing B’s rights to be infringed.43 Thus in Esso Petroleum Co Ltd v Kingswood Motors (Addlestone) Ltd,44 a petrol station owner bound by a contractual tie to Esso sought to defeat it by selling the premises to a collusive person who was not a party to the arrangement. Esso successfully obtained an injunction requiring the restoration of the premises to the original owner.

Implicit in Law Debenture Trust Corporation v Ural Caspian Oil Corporation Ltd [1995] Ch 152. Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1985] Ch 103, 122 (reversed on other grounds, [1986] AC 207); Jones and Goodhart (n5) 123. 36 Manchester Ship Canal Co v Manchester Racecourse Co [1901] 2 Ch 37, 50–1 (Vaughan Williams LJ). 37 Bower Terrace Student Accommodation Ltd v Space Student Living Ltd [2012] EWHC 2206 (Ch). 38 Warmington v Miller [1973] QB 877. 39 Willmott v Barber (1880) LR 15 ChD 96. 40 Though presumably this is only a prima facie rule. It is suggested that things might be different if (say) the third party stood by and acquiesced in the new contract. 41 As where a single executor sells at what seems an undervalue: see Sneesby v Thorne (1855) 7 De G M & G 399, and compare the more recent Australian decision Colyton Investments Pty Ltd v McSorley (1962) 107 CLR 177, esp at 185. 42 A neat term first used in BI Group Plc v Yaslou Properties Ltd, unrep, ChD, 8 March 2002. 43 Esso Petroleum Co Ltd v Kingswood Motors (Addlestone) Ltd [1974] 1 QB 142; Hemingway Securities Limited v Dunraven Ltd (1996) 71 P & CR 30; see too the CA decision in Law Debenture Trust Corporation v Ural Caspian Oil Corporation Ltd [1995] Ch 152, accepting the correctness of the former authority. 44 [1974] 1 QB 142. 34 35

188  Research handbook on remedies in private law Nor is the impact of third party rights limited to inconsistent obligations. In Harrington (Earl) v Derby Corp’n45 a local authority had the right to discharge into a river effluent in its sewers emanating from some, but not other, sources. An injunction had to be denied to prevent the discharge of effluent from the forbidden sources, for the simple reason that it was impossible to prevent this without also infringing the rights of those who were entitled to discharge their effluent into the relevant pipes. (d) Insolvency Money claims, including damages, fit naturally into any insolvency scheme: in so far as a defendant’s assets fall to be distributed pari passu, they naturally abate or vanish, as the case may be. Specific remedies, by contrast, are more difficult. Faced with an insolvent defendant, the law has to make up its mind how to treat an order addressed to that defendant to do or not to do something, or to transfer an asset in specie. It can uphold it, or suppress it; but it cannot enforce it in part. In the case of obligations to sell assets, the answer is straightforward (or, more accurately, the problem is hidden). This is owing to the rule that a specifically enforceable duty to transfer is regarded as not only creating an obligation but constituting the vendor as constructive trustee for the purchaser,46 there being clear authority that this trust prevails against a liquidator or similar officer.47 What about other obligations? One thing is clear: if an obligation would not normally be susceptible to a specific remedy, the position of English law48 is that the defendant’s insolvency does not make damages an inadequate remedy so as to justify ordering specific relief.49 This is understandable: if a contractor has elected not to take security for performance, there is no need to give him an assurance he never bargained for. As Goulding J put it in a 1985 case, any other answer would create ‘unjust hazards’ in commercial law.50 But is the converse true: should a specific remedy be denied and a claimant left to a claim in damages, if the result of enforcing it in specie would be to upset the order of things in insolvency? Although there is little authority, it seems that the answer is Yes, and that the courts will

[1905] 1 Ch 205. ‘It must, therefore, be considered to be established that the vendor is a constructive trustee for the purchaser of the estate from the moment the contract is entered into.’ Lysaght v Edwards (1876) 2 ChD 499, 510 (Jessel MR). See too Shaw v Foster (1872) LR 5 HL 321, 333, 338, 349 (Lords Chelmsford, Cairns and O’Hagan). For the detailed nature of this trusteeship, which need not concern us here, see Jones and Goodhart (n5) 17 et seq.; I Spry, The Principles of Equitable Remedies (8th edn, Thomson Reuters 2010) 664–5. 47 See Re Scheibler (1874) LR 9 Ch App 722; Re Bastable [1901] 2 KB 518; and more recently Re A/Wear UK Ltd (In Administration) [2013] EWCA Civ 1626, [2014] 1 P & CR DG15 (agreement for company now insolvent to surrender lease and pay sum to landlord: landlord granted specific performance of agreement to surrender in order to trigger liability to pay). 48 Contrast the prevailing view in the US: Restatement 2d of Contracts para 360(c) (1981); also cases such as Roberts v Brewer 371 SW2d 424 (Texas 1963). 49 See The Golfstraum [1985] 2 All ER 669, 674 (Goulding J); AMEC Properties Ltd v Planning Research & Systems plc [1992] BCLC 1149, 1152 (Balcombe LJ); Park Lane Ventures Ltd v Locke [2006] EWHC 1578 (Ch) at [119]. The apparent contrary suggestion in The Oakworth [1975] 1 Lloyd’s Rep 581, 583 seems, with respect, heterodox. 50 See The Golfstraum [1985] 2 All ER 669, 674. 45 46

Literal enforcement of obligations  189 incline against relief in so far as it might subvert pari passu distribution.51 Furthermore, there are a number of other considerations that are likely in any case to militate against the making of an order. For one thing, the court’s permission is needed to proceed against an insolvent defendant,52 and may be refused in so far as any such proceedings might subvert orderly distribution. Further, in both corporate and personal insolvency, it must be remembered that there is a general power to disclaim onerous obligations and instead leave the obligee to prove in the insolvency.53 Outside contracts of sale where the purchaser has an equitable interest which cannot be divested,54 this power allows release from almost all other specifically enforceable obligations, including agreements to buy property,55 or to carry out work.56 On the other hand, where the making of an order for specific relief will not amount to a reduction in the insolvent’s assets available for distribution, then there seems no objection to allowing the remedy to proceed. For example, there seems no reason to refuse enforcement of a non-competition covenant or non-disclosure agreement against an ex-employee, merely because the latter happens to be insolvent. Again, the Court of Appeal had no objection to compelling a penniless and insolvent lessee formally to execute a lease with a view to activating a third party guarantee of the rent.57

3

OTHER LITERAL ENFORCEMENT

So far this chapter, as do most treatments of literal enforcement, has dealt with the specific remedies traditionally available in English law: injunctions and the like. A moment’s thought, however, will show that they cover only part of the field, and indeed provide only a partial remedy. On its own an order of specific performance, or an equivalent remedy such as an order for specific restitution of chattels, does not literally give the claimant what he had a right to. Technically it operates, and operates only, in personam: it threatens to punish the defendant unless he makes good on his obligation. If the person to whom the order is addressed is obstinate enough, he can still defeat the claim. Now, this limitation is inevitable in some situations: notably negative obligations, and obligations, such as duties to provide information, which can be performed personally by the defendant and nobody else. Whether the defendant is a natural person or a corporation, he or it cannot be physically constrained to comply with obligations of that sort. But what is interest For instance, once insolvency has set in it is too late to compel creation of a retention fund in the hands of a bankrupt building employer, rights having crystallised on insolvency: see MacJordan Construction Ltd v Brookmount Erostin Ltd [1994] CLC 581, 588, approving Re Jartray Developments Ltd (1982) 22 BLR 134. Note too s 127 of the Insolvency Act 1986, invalidating dispositions of an insolvent company’s profits: although the court has a dispensing power it is very ungenerously exercised (see e.g. Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1 WLR 4783). 52 Insolvency Act 1986 ss 126, 285. See I Fletcher, Law of Insolvency (5th edn, Sweet and Maxwell 2017) paras 8–137, 26-005. 53 Insolvency Act 1986 ss 178 (corporate), 315 (personal). 54 See Re Bastable [1901] 2 KB 518. 55 Holloway v York (1877) 25 WR 627. 56 Re Gough (1927) 96 LJ Ch 239. 57 AMEC Properties Ltd v Planning Research and Systems plc [1992] BCLC 1149. But where there is no good reason, there will be no decree of specific performance against a penniless purchaser, since equity will not act in vain. See the Irish decision in Aranbel Ltd v Darcy [2010] IEHC 272. 51

190  Research handbook on remedies in private law ing is that the English law of specific remedies often declines to constrain performance even where it would be perfectly possible. Suppose an art dealer sells a Rembrandt and then in clear breach of contract declines to deliver it to the buyer. Or alternatively, suppose the same dealer is simply in possession of the picture unlawfully, having bought it from a thief. These are both cases where specific relief is obviously appropriate in favour of buyer or owner, as the case may be. It would be entirely possible for the court to send in an official to seize the picture, if necessary by force, and hand it to the buyer or owner. Indeed, French and German lawyers regard it as axiomatic that the court must have exactly this power, as an integral part of its jurisdiction to ensure that obligations are performed and that the picture ends up in the hands of the person who has a right to get it.58 By contrast, except in the case of land it has never struck English lawyers that such an obvious solution is even contemplable: the most that can be done is the giving of a stern warning to the defendant that unless he hands over the picture he will go to prison. A court cannot even, it seems, take the abstract step of declaring the buyer the legal owner of the picture, so as to give him at least some of the legal rights to it that he would have had if the defendant had fulfilled his duty by delivering it. Nevertheless, this is not always the case. In a few situations, even in England, the law of obligations does provide what could be called ‘literal’ enforcement: that is, facilities to make sure the claimant obtains precisely what he is entitled to. These cases, although rarely referred to as such, are worth at least a brief discussion. (a)

The Action in Debt

One of the simplest forms of such literal enforcement is the action in debt. In the context of contract, an action in debt is a claim for a sum of money due, whether under an express or implied promise by the defendant to pay it or otherwise.59 Straightforward examples are a claim for the price of goods or services supplied, or an abstract payment undertaking or similar claim, as where a bank issues a bond payable on demand or a letter of credit.60 Others include money due on the happening of some event, as where an employer agrees to make a payment to a dismissed employee in lieu of notice.61 But it is not limited to contract claims: also classified as debts are claims in restitution,62 claims on a foreign judgment,63 or claims by public authorities or utilities exercising statutory powers to recoup expenses incurred by them from

58 For a useful summary in English of the position see G Dannemann and S Vogenauer (eds), The Common European Sales Law in Context: Interactions with English and German Law (Oxford University Press 2013) ch 18. In German law, for example, the relevant (and simple) provisions can be found in the Civil Procedure Code: see ZPO, §§ 833 et seq. 59 Essentially it comprises any case of ‘sums of money subject to an obligation, however arising, to repay them’ (Longstaff J in R (Kemp) v Denbighshire Local Health Board [2006] EWHC 181 (Admin), [2007] 1 WLR 639). 60 See Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382, [2016] QB 1. 61 See Abrahams v Performing Rights Society Ltd [1995] ICR 1028 and more recently Geys v Société Générale [2012] UKSC 63, [2013] 1 AC 523. 62 See Rimer J in Hope v Premierpace (Europe) Ltd [1999] BPIR 695, and cf Woolwich Equitable Building Society v Inland Revenue Com’rs [1993] AC 70 (where the point was accepted). 63 Godard v Gray (1870) LR 6 QB 139, 147 (Blackburn J); also Rubin v Eurofinance SA [2012] UKSC 46, [2013] BCC 1 at [9] (Lord Collins).

Literal enforcement of obligations  191 whoever occasioned the expense.64 But all these have one thing in common. The creditor is entitled to an abstract sum of money, and the court in enforcing his claim makes sure he gets just that (assuming that the defendant either obeys the court’s order to pay or has sufficient tangible or intangible assets to be seized and encashed). Little need be said in this context about the specific rules relating to claims in debt.65 Where a debt is contractual, enforcing it invariably involves enforcing a primary contractual duty rather than a secondary obligation arising on breach. In contrast to a damages claim, enforcement of a liability in debt therefore involves no questions of loss suffered by the claimant. Thus where an employer agrees to pay salary for a period in lieu of notice, the employee can claim this sum despite the fact that he could have, or even has, immediately obtained alternative employment.66 The fact that this may result in clear over-compensation of the victim of a breach of contract is irrelevant.67 Moreover, in contrast to specific remedies, the remedy in debt is available as of right where the conditions of payability are satisfied,68 and indeed there is no bar as such on abusive claims (save for a shadowy defence of uncertain ambit that the claimant has no legitimate interest to protect). The point is comprehensively illustrated by the House of Lords’ decision in White & Carter (Councils) Ltd v McGregor.69 There, claimants sued for their agreed fee, having carried out a contract to advertise a garage business. The House of Lords roundly dismissed a plea by the owners of the business that – as was the case – they had countermanded the order before anything had been done, and hence continued performance was unjustified. The claim, it was pointed out, was for payment of a debt; this being so, the only question was whether the claimants had satisfied the conditions for its eligibility. It might be thought odd that while enforcement in specie of non-money obligations is discretionary the right to claim a debt arises as of right.70 But this is, with respect, a specious point. The distinction is entirely explicable on the basis that the former is far more intrusive than the latter, and hence any need to ring specific enforcement of it with restrictions does not apply to the recovery of simple debts.

64 Examples are legion. See e.g. the Harbours, Docks and Piers Clauses Act 1847, s 74 (liability of owners of vessels causing damage to harbour works), s 56 (costs of raising wrecks); New Roads and Street Works Act 1991, s 82 (cost of making good damage to utilities in roads); Water Resources Act 1991, s 161(3) (water pollution clean-up costs). 65 The subject is dealt with in detail in Clarke et al. (n11) ch 19. 66 See Abrahams v Performing Rights Society Ltd [1995] ICR 1028. 67 Suppose, for example, A agrees to build a ship for B and B agrees to pay the first instalment of the price when the keel is laid. If B repudiates after that moment, A can claim payment of the instalment, without having to show that he cannot dispose of the part-built vessel elsewhere. See Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129 and Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574. 68 See White & Carter (Councils) Ltd v McGregor [1962] AC 413, 445 (Lord Hodson, decrying any suggestion that the action in debt was a ‘discretionary remedy’); also Reichman v Beveridge [2006] EWCA Civ 1659, [2007] 1 P & CR 20 and The Aquafaith [2012] EWHC 1077 (Comm), [2012] 1 CLC 899 at [42]–[43] and D Winterton, ‘Reconsidering White & Carter v McGregor’ [2013] LMCLQ 5. 69 [1962] AC 413. 70 A point made not infrequently. See in White & Carter itself the dissenting opinion of Lord Morton at [1962] AC 413, 432–3; also The Puerto Buitrago [1976] 1 Lloyd’s Rep 250, 254–5 (Lord Denning MR) and Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2016] AC 1172 at [29]–[30] (Lords Neuberger and Sumption).

192  Research handbook on remedies in private law (b)

Self-executing Court Orders

It is true that on principle specific remedies, as pointed out above, are effective only in personam. They do not themselves change the legal or factual position; instead, they merely tell a defendant to do something under threat of punishment for contempt of court, leaving it technically in his option whether the court order is fulfilled or not. Nevertheless, there are a surprising number of exceptional cases where orders of this kind can also have an in rem, or ‘self-executing’, effect. The most important of these, dating from the Common Law Procedure Act 1854, arises where a defendant’s obedience to an order of the court would involve the execution by him of a ‘conveyance, contract or other document’. Before 1854 there was nothing special about this: an order to execute, say, a conveyance or lease could be frustrated by a sufficiently recalcitrant defendant prepared to refuse to put pen to paper. Today, however, the court has an important power (now contained in s 39 of the Senior Courts Act 1981) to execute the necessary paperwork in the defendant’s name so as to bind the latter. This facility is most significant in the case of contracts concerning land. The order of specific performance is given; the court executes the necessary transfer of ownership; and once the buyer is indeed proprietor, then (assuming he has bought with vacant possession71) the power of the state will in the last resort be employed to put him into occupation. But the power under s 39 ranges wider than one might think: so much so, that to refer to it as ‘exceptional’ at all may be a misnomer. The range of documents covered by it is extremely extensive. They include, for instance, written contracts, thus allowing literal enforcement of a promise by a company buying a business to employ the latter’s erstwhile managing director.72 And so too with the seller of development land who agrees to sign a local authority planning agreement,73 or a construction company agreeing to provide a collateral warranty.74 They have also been held to include a document to be provided by a defendant in order to allow the claimant to operate a banker’s commercial credit;75 a surrender of a lease76 and indeed a lease itself.77 The jurisdiction would no doubt also extend to the giving of a consent in writing.78 In all these cases there is no reason why if necessary the document cannot be executed by the court and thus the contract literally enforced. Indeed, it seems clear that the matter goes even further than the authorities so far suggest. It should be remembered that almost any contract to create or transfer an intangible right over property, such as a mortgage or charge, is essentially a contract to do something that can be done by executing a document. It follows that a court order to perform such an obligation is equally an order to execute a document and thus susceptible to curial execution without the

If he has bought, say, a reversion on leasehold property, there is no need for anything more than the transfer of title anyway. 72 CH Giles & Co Ltd v Morris [1972] 1 WLR 307. 73 Redrow Homes Ltd v Martin Dawn (Leckhampton) Ltd [2016] EWHC 934 (Ch). 74 Northern & Shell plc v John Laing Construction Ltd, unreported 4 October 2002 QBD at [9]. 75 The Messiniaki Tolmi (No. 2) [1983] 2 AC 787; see too Hyundai Heavy Industries Co Ltd v K/S Norjarl A/S (a Norwegian limited partnership), unreported 29 April 1987 CA. 76 Re A/Wear UK Ltd (In Administration) [2013] EWCA Civ 1626, [2014] 1 P & CR DG15. 77 AMEC Properties Ltd v Planning Research and Systems plc [1992] BCLC 1149. 78 A fortiori from Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 66 (order to stakeholder to consent, tout court). 71

Literal enforcement of obligations  193 defendant having to co-operate at all.79 And the same goes for virtually any contract to transfer an intangible. Things in action generally are transferable by written instrument under s 136 of the Law of Property Act 1925; company bonds or other securities by similar means;80 and so too with other specific intangibles, many of which have their specialist instruments of transfer.81 In short, what looks like the exception is in practice the rule: in the vast majority of obligations specifically enforceable by court order, the order will be potentially self-executing. It is only in a minority of cases, in particular those involving the transfer of chattels or the carrying out of work such as construction, that the supposed general rule applies. The power of a court to execute a document in lieu of the defendant and so as to bind the latter is statutory. This, however, raises a further question: what happens where the statutory power does not apply? Imagine, for example, that performance of an obligation involves giving a formal consent or notice, but that there is no requirement of writing.82 In such a case can the consent or notice be validly given by the court itself? It would be odd, to say the least, if a written consent could be provided by the court in lieu of the defendant, but an oral one could not. Admittedly, the logic of the rule that specific remedies operate in personam suggests that this is indeed the case.83 But, interestingly, a 2010 decision suggests that this view might be open to reconsideration. In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC,84 would-be aircraft buyers paid a $3 million deposit to a third party, on terms that the deposit was to be released to the seller only with their consent. Having declared the buyers in breach and the deposit forfeit, Hamblen J proceeded to give judgment not only against the buyers, but also against the stakeholder for the amount of the deposit; the buyer being clearly bound to consent to the release but not having done so, he was prepared essentially to give it on its behalf. This could well be a significant development. Although the reason given – that equity regarded as done that which ought to have been done85 – seems somewhat self-serving, there is much to be said for a general rule that an order requiring a mere formal act by a defendant of this kind should equally be self-executing. It is to be hoped that, at least in terms of purely formal consents, the tentative development suggested by Hamblen J in Tandrin Aviation will be confirmed in future decisions. (c)

‘Equity Regards as Done That Which Ought to be Done’

We referred briefly above to the maxim ‘Equity regards as done that which ought to be done’. Although we were sceptical about its proper relevance to the effect of court orders, there is

See e.g. Bank of Scotland Plc v Waugh (No. 2) [2014] EWHC 2835 (Ch) (court execution of deed necessary to turn equitable mortgage into legal charge). 80 In the case of UK company securities there is a requirement for an ‘instrument’, but subject to the company’s articles nothing more is specified: Companies Act 2006, s 770. The commonest one in use is Stock Transfer Form J30. 81 Such as insurance contracts: see the Policies of Assurance Act 1867. 82 True, in such a case the consent could be given in writing: but this would not be sufficient to invoke s 39, since there would be no power in the court to order it to be so given. 83 See too Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55, 60 (Lord Denning MR), emphasising that injunctions amounting to what are now called ‘search orders’ merely order a property owner to admit the claimant and do not themselves dispense with the need for consent. 84 [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 668. 85 See [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 668 at [64]–[67]. 79

194  Research handbook on remedies in private law no doubt that it has large potential as a means of literal enforcement of obligations generally. Its very nature, indeed, is to bypass the need to seek legal remedies to enforce the obligation involved by deeming it already performed. One manifestation of it is the rule that a specifically enforceable contract to transfer an interest in land or other property makes the vendor a constructive trustee for the purchaser,86 though the enforcement here is only partial (the buyer gets merely the equitable interest in the property, and not the legal interest promised under the contract). Nevertheless, the maxim can in certain cases go further. For instance, where a specifically enforceable agreement is made by A to transfer an equitable interest to B, then B does automatically become an equitable owner (or other interest holder).87 In some cases he does so directly, in others under a subtrust; but the distinction is not enormously important in this context.88 What matters is that, to all intents and purposes, the agreement here is regarded as self-executing. Most cases involving the application of this maxim are not enormously important. It is always envisaged that the contract will be performed, and the question raising the issue is very often a rather technical one.89 Some cases, however, matter rather more. Two are worth mentioning here. The first is the effect of agreements to create security, for instance where a borrower agrees to grant a lender security over some present or future asset. These are essentially self-enforcing under the rule in Holroyd v Marshall,90 the theoretical basis being that as soon as there is an indebtedness to be secured, the agreement to secure it becomes specifically enforceable and hence from that moment onwards equity regards as granted the security the borrower agreed to grant.91 Most such cases deal with promises to mortgage or charge property, whether or not the debt is owed to that person:92 but the principle applies fairly generally to perfect the claimant’s agreed security, for example where a debtor agrees to provide a creditor with security by using a particular asset or fund to pay him.93 The second is the related topic of promises to assign things in action. Again, in practice this nearly always operates in favour of a creditor, though it is worth mentioning that it can London & South Western Ry Co v Gomm (1882) 20 ChD 562, 581 (Sir George Jessel MR); Singh v Anand [2007] EWHC 3346 (Ch); Jones and Goodhart (n5) 17 et seq. 87 See Oughtred v Inland Revenue Commissioners [1960] AC 206 and Neville v Wilson [1997] Ch 144; also the Australian Halloran v National Parks Minister [2006] HCA 3, (2006) 80 ALJR 519. 88 For discussion see P Milne, ‘Oughtred Revisited’ (1997) 113 LQR 213 and C Tham, ‘Exploding the Myth That Bare Sub-trustees “Drop Out”’ (2017) 31 Tru L Int 76. 89 For example, enforceability in insolvency (see Re Scheibler (1874) LR 9 Ch App 722 or Re Bastable [1901] 2 KB 518), or the destination of proceeds where a house in the process of being sold is sold to a third party (Lake v Bayliss [1974] 1 WLR 1073). 90 (1862) 10 HL Cas 191. 91 See (1862) 10 HL Cas 191, 211 (Lord Westbury; also Joseph v Lyons (1884) 15 QBD 280, 285 (Cotton LJ). If, very exceptionally, there is a good reason to refuse specific performance, then the security may be ineffective. See Thames Guaranty Ltd v Campbell [1985] QB 210; also e.g. Re Clarke (1887) 36 ChD 348, 352 (Collins LJ); J Keeler, ‘Some Reflections on Holroyd v Marshall’ (1969) 3 Adelaide Law Review 360, 364 et seq. 92 It may be owed to an associated company: Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch), [2014] 2 BCLC 295. 93 Palmer v Carey [1926] AC 703, 706–7 (Lord Wrenbury); Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548 (reversed on the facts, on a finding of no relevant agreement, at [1982] AC 584). For another example of the application of this principle, see The Golfstraum [1985] 2 All ER 669 (agreement to sell property and use proceeds to secure claim). 86

Literal enforcement of obligations  195 protect any assignee. There is no doubt that, provided the relevant promise is made for good consideration,94 its effect is to bring about the very thing promised. That is, any thing in action covered by the terms of the promise stands automatically assigned in equity,95 immediately if already in existence and otherwise as soon as it comes into existence,96 with the debtor who has notice of the agreement bound and entitled to pay the promisee to the exclusion of the promisor.97 Although this is sometimes said to be based on the premise that the agreement to assign is specifically enforceable, the better view is that this is not so, and that the promise alone is sufficient.98 (d)

Common Law Property Rights, Licensees and Bailees

Obligations to deal with one’s property in a particular way, even if enforceable specifically by injunction,99 are not normally literally enforced in the extended sense now referred to. For example, if you leave your jewellery in my car I am obliged to admit you to collect it, to the extent that if I refuse I am liable in damages, and indeed an injunction may well issue ordering me to let you in.100 Nevertheless that is the limit of your rights. You cannot barge into my car to collect the stones without my consent: if you do, you are, at least technically, a trespasser.101 Again, if I contract that I will admit you to my premises but then refuse to do so I may be liable to damages, and again in suitable cases to an injunction;102 but you are still it seems a trespasser if you take the law into your own hands and insist on entering nevertheless.103 It seems, however, that there are two major exceptions to the principle just stated. They arise where, under the provisions of a subsisting contract, a person (X) is actually in possession of personalty or occupation of land belonging to someone else. In both cases it seems that the contract is self-enforcing; unless and until the right under the contract is terminated, X cannot be dispossessed or expelled, either physically or by legal process. As regards personalty, imagine you hire a car to me for a month, and (to save argument) I pay the hire in advance. Two weeks later, you change your mind and demand the car back. In such a case the law of conversion makes it clear, not only that you are in breach of contract,

This is essential: see e.g. Re McArdle [1951] Ch 669. See M Smith, The Law of Assignment (2nd edn, Oxford University Press 2015) ch 15. 96 Tailby v Official Receiver (1888) 13 App Cas 523, 547 (Lord M’Naghten); see too Elders Pastoral v Bank of New Zealand (No. 2) [1990] 1 WLR 1478; Re Spectrum Plus Ltd (in liquidation) [2005] UKHL 41, [2005] 2 AC 680 at [102] (Lord Scott). 97 William Brandt’s Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454. 98 See Smith (n95) para 15.05. 99 A straightforward example is Lauritzencool AB v Lady Navigation Inc [2005] EWCA Civ 579, [2005] 1 WLR 3686 (injunction against owner of ship preventing use except in accordance with charter). 100 Cf Howard E Perry & Co Ltd v British Railways Board [1980] 1 WLR 1375. 101 See Webb v Beavan (1844) 6 M & G 1055, 1056 (Littlejohn J); Clerk & Lindsell on Torts (n5) para 30-14. 102 Verrall v Great Yarmouth Borough Council [1981] QB 202. 103 This is by inference from Verrall v Great Yarmouth Borough Council [1981] QB 202 above. It was said there that the grant of an order of specific performance was discretionary: it seems to follow that, unless and until such an order is made, the ordinary rules of trespass apply. See too Lord Denning MR at 216: ‘once a man has entered under his contract of licence, he cannot be turned out’ (italics supplied). But cf Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173, 188, where Lord Simon suggested that a licence to enter upon land or to use it was ipso facto irrevocable. 94 95

196  Research handbook on remedies in private law but that I can refuse to let you have it back; even though it is your car, I have a defence to any action until the month is up.104 Nor, it seems, can you yourself take the car back; if you do, you will yourself be liable in trespass or conversion.105 As Robert Walker LJ suggested, in the context of a finance lease, in On Demand Information Plc (in Administrative Receivership) v Michael Gerson (Finance) Plc:106 ‘Contractual rights which entitle the hirer to indefinite possession of chattels so long as the hire payments are duly made, and which qualify and limit the owner’s general property in the chattels, cannot aptly be described as purely contractual rights.’ Concerning land, a series of decisions on contractual licences shows an interesting parallel development.107 In Hurst v Picture Theatres Ltd108 the Court of Appeal held that a contract to admit someone to a cinema gave that person a right to remain there sufficient to support a claim for assault if he was forcibly turned out during the performance. Although the case was long controversial,109 it was approved by the House of Lords in Winter Garden Theatre (London) Ltd v Millennium Productions Ltd.110 There, the House held, in essence, that a contractual licence to use a theatre for a fixed period gave the licensee a right to stay until the licence was validly revoked; an earlier revocation would not make the licensee a trespasser or allow him to be ejected. Similarly, in the later Hounslow London Borough Council v Twickenham Garden Developments Ltd111 Megarry J held that so long as a builder held a contractual licence to occupy the site he could not be turned off, even (apparently) if the original contract was not itself specifically enforceable.112 In other words, an agreement that someone on land has a right to stay there seems to have the same effect as an agreement to leave a hirer in possession of goods: it amounts to a surrender of the owner’s right that would otherwise exist to use the land as he thinks fit and if necessary to turn off interlopers. (e)

Promises Not to Sue

It is easy to forget that promises not to sue are another variety of self-enforcing obligation,113 at least as regards proceedings in England. In the same way as Roman law allowed a pactum Burton v Hughes (1824) 2 Bing 173 CA. See e.g. Indian Herbs (UK) Ltd v Hadley & Ottoway Ltd unreported 21 January 1999 (bailee under retention of title sale entitled to sue in conversion when goods repossessed before expiry of contractual period of bailment). 106 [2001] 1 WLR 155, 171 (reversed in the House of Lords on unrelated grounds: On Demand Information Plc (in Administrative Receivership) v Michael Gerson (Finance) Plc [2002] UKHL 13, [2003] 1 AC 368). 107 On which see generally J Hill, ‘The Termination of Bare Licences’ (2001) 60 CLJ 89. 108 Hurst v Picture Theatres Ltd [1915] 1 KB 1. Not surprisingly most such institutions nowadays attempt to exclude this rule by contract. 109 In particular owing to the decision in Thompson v Park [1944] KB 408. It has also had a bumpy ride in Australia: compare Cowell v Rosehill Racecourse Co Ltd (1937) 56 CLR 605 with Munday v Australian Capital Territory (No. 2) (1998) 146 FLR 17. 110 Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173. See too Chandler v Kerley [1978] 1 WLR 693. 111 [1971] Ch 233. 112 See [1971] Ch 233, 244–55. 113 That such promises create an obligation in the ordinary sense that sounds in damages is clear from cases such as Union Discount Co v Zoller [2001] EWCA Civ 1755, [2002] 1 WLR 1517 and National Westminster Bank plc v Rabobank Nederland (No. 2) [2007] EWHC 3163 (Comm), [2008] 1 Lloyd’s 104 105

Literal enforcement of obligations  197 de non petendo to be pleaded directly as a defence to a claim and thus enforced it in specie,114 England does exactly the same: it will simply dismiss an action brought by a claimant who has previously made a valid promise not to sue the defendant. Moreover, the courts are prepared to go further than this; quite apart from the rule that an exception clause can benefit a third party115, they will on occasion give effect to such a promise not to sue even when not given to the now defendant himself but to some third party with an interest in the former not being held liable. The classic instance is where A promises B that he will not sue C, C being B’s employee or subcontractor, and B would have to hold C harmless were he sued. In such a situation the court will enforce this promise to the extent of allowing B to intervene in the action and call for the proceedings to be dismissed as an abuse of process. This principle was accepted in the case of an ordinary employee by the decision in Gore v Van der Lann,116 and applied in the commercial context of a Himalaya clause in The Elbe Maru,117 where it was shown that the carrier to whom the promise had been made would have had to indemnify the third party in question, and therefore had a very real interest in suppressing the proceedings against the latter. (f)

Physical and Legal Self-help

Last but not least, it is worth remembering another incontrovertible instance of literal enforcement: namely, physical and legal self-help. Physical self-help is often deprecated and relegated to a few pages at the end of any discussion of remedies. Nevertheless your entitlement to use reasonable force in defending yourself against an assault by me, successfully and lawfully exercised, is a very effective remedy against assault; indeed, it is if anything more effective in practice than any court injunction. And, of course, the same argument applies to the right of defence of property as regards trespass to land or goods (using force to exclude intruders from one’s garden or car), and the undoubted right of recaption of chattels, at least where this does not involve forcible entry onto the land or property of the person wrongfully in possession of them.118 But self-help is not limited to crude cases like this. There can equally be cases of ‘legal’ self-help. Admittedly England has never embraced this whole-heartedly as a general principle of law. It could have done so, and thus followed the example of civil law jurisdictions such as Germany and Scotland, where at least in the contractual context it is regarded as obvious that a contractor owed money by a co-contractor must be allowed to recoup his loss by refusing to perform further unless and until paid.119 But outside a few special cases referred to below imaginative thinking of that sort was beyond its capacity. Tellingly, the Court of Appeal in

Rep 16. So too with breach of an agreement to arbitrate: West Tankers Inc v Allianz SpA [2012] EWHC 854 (Comm), [2012] 2 Lloyd’s Rep 103. 114 W Buckland, A Textbook of Roman Law (3rd edn, Oxford University Press 1963) 573. 115 Contracts (Rights of Third Parties) Act 1999, s 1(6). 116 [1967] 2 QB 31. 117 [1978] 1 Lloyd’s Rep 206. For another commercial case where the principle was applied, see Snelling v John G. Snelling Ltd [1973] QB 87; also Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch), [2007] BCC 500. 118 For a useful coverage, see Clerk & Lindsell on Torts (n5) ch 30. 119 On the extent of this principle in England and elsewhere in Europe, see A Tettenborn, ‘“I'll Perform If and When You Do”: Non-Performance and the Suspension of Contractual Duties’ in K Barker, K Fairweather and R Grantham (eds), Private Law in the 21st Century (Bloomsbury 2017).

198  Research handbook on remedies in private law 2015 flatly rejected an argument by an unpaid supplier of computing services that it could secure payment by cutting off services until the debt was settled, without even seeing that there was an important point of principle involved.120 Nevertheless, in certain areas legal self-help is well-accepted. One example is the right of an agent as regards money received on behalf of his principal. Although generally speaking he is under a duty to account to the principal for all such money, in so far as his fees or commission or his right of indemnity are unsatisfied, he has the right to pay himself directly out of these funds and only account for the balance, if any.121 Another, less obscure but apt to be overlooked, form of literal enforcement is the common law possessory lien given to sellers, artificers, lawyers and others.122 The lien creditor’s right to retain the goods while unpaid (and his concomitant defence in the interim to any action in conversion for their return), coupled with the right to encash them to cover the debt, is a selfhelp remedy giving him precisely the money he was entitled to to start with. Moreover, the lien can be used in more sophisticated ways too, for example by insisting on carrying out a contractual obligation to carry goods in order to obtain a lien and with it a right to sell them to pay all debts owing to oneself.123

4 CONCLUSION This chapter is entitled ‘literal enforcement of obligations’. Its starting-point has been specific remedies available in English law, and certain features of them that, quite apart from any discretionary element, make them different from pecuniary remedies. But it has also made another important point. Literal enforcement of obligations goes a good deal beyond mere court orders backed up by the threat of sanctions. It covers a number of cases where, whatever the defendant does or does not do, the claimant gets his entitlement wholly or partly by operation of law. In this chapter I have argued that this latter kind of literal enforcement is both more common than commonly thought and a subject worth studying in its own right. Moreover, the distinction between the two kinds of literal enforcement is one which is important and has been missed by most commentators. After all, if one asked the beneficiary of an obligation which he preferred – the right to go to court to obtain an order that the defendant satisfy his rights, or a process under which he received his rights essentially automatically, it is not difficult to see what a rational person would prefer.

See Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281, [2015] QB 41. The argument in that case turned purely on the technical point that one could not have a possessory lien over something that could not be possessed. 121 Bowstead & Reynolds on Agency (19th edn, Sweet and Maxwell 2010) paras 7-70–7-98. 122 See e.g., D Sheehan, The Principles of Personal Property Law (2nd edn, Bloomsbury 2017) 304 et seq. 123 George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462. 120

12. The recovery of damages for non-pecuniary loss in contract and tort; a unified approach Roger Halson

INTRODUCTION In this chapter I will present an argument that the law of contract and tort should be brought into closer alignment with regard to the recovery of damages in respect of non-pecuniary losses (DNPL). For this purpose it will be necessary to examine the current categories of recovery in contract and tort. However, the emphasis of this chapter is not upon the detailed description of the current law which is exhaustively catalogued in the standard works1 but upon the arguments of principle said to support and justify the current fragmented approach and the less generous availability of DNPL in contract compared to tort. In this way it is hoped to remedy what one commentator examining actions for breach of contract described as the ‘absence of structure and the conceptual underdevelopment of the subject’ before adding that ‘[t]ort law cannot be looked to for conceptual assistance, since the absence of structural unity is just as much evident here as in contract law’.2 The law of tort, in contrast to the law of contract, often regulates non-consensual dealings between parties. In this respect it is suffused with the view that such interactions will often result in ‘harms’, sometimes called the normal vicissitudes3 of life that the victim is expected to bear without complaint, or at least, without compensation. As Michael Bridge explains the law of tort exhibits:4 a strong sentiment that emotional bruises are an inevitable consequence of human existence and that a certain degree of personal robustness should be cultivated.

Nonetheless the law of tort is at present more receptive to claims for compensation in respect of non-pecuniary losses than the law of contract. In his usual economic prose the late Harvey McGregor summarised the position: ‘in tort they are the rule, in contract the exception’.5 In the E.g. W E Peel (ed.), Treitel Law of Contract (14th edn, Sweet and Maxwell 2015); H G Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015); E Peel and J Goudkamp (eds), Winfield and Jolowicz on Tort (19th edn, Sweet and Maxwell 2014); M Jones (ed.), Clerk and Lindsell on Torts (22nd edn, Sweet and Maxwell 2018) and J Edelman (ed.), McGregor on Damages (20th edn, Sweet and Maxwell 2017). 2 M G Bridge, ‘Contractual Damages for Intangible Loss: A Comparative Analysis’ [1984] 62 Canadian Bar Review 323, at respectively 327 and 328. See also more recently R Holmes ‘Mental Distress Damages for Breach of Contract’ (2004) 35 VUWLR 687, 709: ‘The law relating to mental distress damages remains in a chaotic and uncertain state.’ 3 Harvey McGregor preferred the phrase ‘contingencies of life’, McGregor on Damages (n1) para 40-128. 4 Bridge (n2) 323, 329. 5 McGregor on Damages (n1) para 5-001. 1

199

200  Research handbook on remedies in private law next two sections I will briefly examine the availability of DNPL in contract and tort and ascertain whether McGregor’s description is accurate and, perhaps more significantly, if any trend towards greater or reduced availability for such losses is evident and should be supported. It is perhaps surprising that few accounts of the law in this area begin with a definition of non-pecuniary loss.6 Here I will adopt a broad definition to include the infliction of any harm that is not directly economic in the way in which a loss of profit is perceived. So defined damages for non-pecuniary loss extend beyond the infliction of pain and suffering, mental distress and disappointment and reputational harm to include the failure to provide satisfaction/ happiness or a particular amenity.

NON-PECUNIARY LOSS IN TORT Personal Injury Claims for personal, including psychiatric injury,7 may arise in tort or contract, for example respectively as a result of a car driver’s negligence or the breach by an employer of her contractual duty to provide an employee with a safe working environment. Without exception or convincing explanation such claims are inevitably described in textbooks on the law of tort rather than contract. Such claims are given under two distinct heads of loss: damages for ‘pain and suffering’ and ‘damages for loss of amenity’.8 Originally ‘pain’ was regarded as the impact of the injury, felt immediately, upon the nervous system and brain and ‘suffering’ referred to any indirect distress that results.9 ‘Pain and suffering’ is now used as a single phrase with no differentiation. The size of the award is mainly influenced by the intensity and duration of the pain but must be more than de minimis for any award to be made.10 The claim will survive a victim’s death for the benefit of his estate. 6 See for contract: Treitel Law of Contract (n1) para 20-005: ‘the law of damages for breach of contract lacks a clear conceptual basis of what constitutes “loss”’ and for tort: Winfield and Jolowicz Tort (n1) ch 23, where the distinction between pecuniary and non pecuniary losses is not defined beyond the different heads of damages traditionally recognised as belonging to each aggregative category. 7 Use of the phrase ‘nervous shock’ has been criticised by Bingham LJ in Attia v British Gas [1988] QB 304, 317, preferring ‘psychiatric harm’, which was also endorsed by the Law Commission in the title of their Liability for Psychiatric Illness Law Com No. 249 (1998).The recovery of damages for psychiatric injury by so called ‘secondary’ victims is limited by a line of cases following Alcock v Chief Constable of South Yorkshire Police [1992] 1 AC 310. For more recent applications of the distinction between ‘primary’ and ‘secondary’ victims see Taylor v Novo [2013] EWCA Civ 194 and Wild v Southend Hospital NHS Trust [2014] EWHC 4053 (QB). 8 Other heads of non-pecuniary loss that have occasionally been recognised include: loss of congenial employment or marriage prospects, marriage breakdown and loss of leisure where the claimant must work longer hours to achieve the same income. The most significant of these ‘minor’ heads of damage is residual disadvantage in the labour market if, in the future, the claimant became unemployed. This head has become known as ‘Smith v Manchester’ damages. For a recent example see Foreman v Williams [2017] EWHC 3370 (QB), where one year’s loss of earnings £23K was awarded under this head constituting more than a third of the total award for non-pecuniary loss. 9 The analysis is attributed to McCormick Damages (1938) by Edelman, McGregor on Damages (n1) para 5-004. 10 Hicks v Chief Constable of S Yorks Police [1992] 2 All ER 65 – no damages were awarded when the victim lost consciousness only a few seconds after the injury began and died within five minutes.

The recovery of damages for non-pecuniary loss in contract and tort  201 Tortious claims for damages in respect of pain and suffering most commonly arise from claims in negligence but could also form part of a claim in nuisance, for example where invasive noise and fumes11 occur and damage to health is compensable. Where the claimant suffers physical injury, damages for loss of amenity refer to the victim’s inability to do the things which before the accident he was able to do. It is an award for the inability to fully participate in normal activities.12 Damages under this head, as opposed to damages for pain and suffering, are assessed objectively; the award is not dependent upon an awareness of deprivation. For this reason under English law an unconscious claimant is entitled to damages for loss of amenity but not for pain and suffering.13 Where damages are awarded in the tort of false imprisonment (i.e., for the direct and intentional imprisonment of the claimant14) they may be better regarded as damages for loss of amenity than as damages for pain and suffering, as the restriction of freedom is of the essence of the tort. The Court of Appeal15 has effectively introduced a judicial compensation tariff for actions against the police in torts such as false imprisonment and malicious prosecution. For false imprisonment ‘basic’ awards start at about £500 (not adjusted for subsequent inflation) for the first hour, £3,000 for the first day with a reducing rate thereafter for continued detention.16 Exceptionally very large awards have resulted from false imprisonment in particularly horrific circumstances.17 In most18 personal injury cases the pain and suffering and loss of amenity heads of damage are aggregated into a single award termed general damages or ‘PSLA’. These damages are derived from an official tariff outlined in Guidelines for the Assessment of General Damages in Personal Injury Actions (the Guidelines), now in its fourteenth edition of 2017, published by the Judicial College.19 This slim volume of under 100 pages provides guidance for virtually every medical condition20 ranging from tetraplegia, very severe brain damage or total blind-

11 Halsey v Esso [1961] 1 WLR 683, 702–3 (noise, smells and vibration from an oil distribution facility); Anslow v Norton Aluminium Ltd [2012] EWHC 2610 QB (smells coming from aluminium factory). 12 And so is based upon victim’s post accident life expectancy: Nutbrown v Sheffield Health Authority (1993) 4 Med LR 188 (claimant, 72 with a life expectancy of 82 received £25,000 damages – Judge said claimant would have received twice as much if he was 30). 13 Lim Poh Choo v Camden and Islington AHA [1980] AC 174. 14 See R (on the application of Lumba) v Sec State for the Home Department [2011] UKSC 12 at [65]. 15 Thompson v Metropolitan Police Commissioner [1998] QB 498. 16 Sometimes ‘global’ awards are still used: Takitota v A-G [2009] UKPC 11, where PC remitted to CA Bahamas for re-assessment an award in respect of 8 years’ confinement in poor conditions which had been calculated on a per day basis; R (on the application of Mehari) v Sec State for the Home Department (£4k award to asylum seeker of good character for 7 days’ wrongful detention). 17 Lawson v Glaves-Smith [2006] EWHC 2865 QB (£78,500 awarded to multiple rape victim who was confined by violent threats for 3 days, award focusing mainly on sexual assault); AT,NT,ML,AK v Dulghieru [2009] EWHC 225 QB (women who were deceived into coming to the UK and then separated, confined and forced into frequent unwanted sexual activity for over 2 months received awards of £82k–£125k). 18 An exception is the case of the permanently unconscious claimant considered above. 19 Formerly the Judicial Studies Board. The first edition was published in 1992. 20 Litigation occasionally throws up a condition or context that has not been provided for: Woodward v Leeds Teaching Hospitals Trust [2012] EWHC 2167 QB (‘acromelagic gigantism’) ABB v Milton Keynes Council [2011] EWHC 2745 QB (childhood sexual abuse).

202  Research handbook on remedies in private law ness and deafness for which an award up to £354k is made, to orthopaedic injuries with full recovery within three months for which up to £2,145 is payable.21 The level of awards recorded in the latest edition of the Guidelines has increased significantly in recent years especially as a result of the exercise by the Court of Appeal of its general jurisdiction to set22 and maintain23 appropriate levels of damages in cases of personal injury. In Heil v Rankin24 a specially constituted five strong Court of Appeal endorsed a ‘tapered’ increase in the level of general damages in personal injury actions which had the effect of increasing a previous award of £100k by approximately one fifth.25 Subsequently in Simmons v Castle the same court applied a 10 per cent uplift to all damages for non-pecuniary loss,26 implementing a proposal made in Sir Rupert Jackson’s Final Review on Civil Litigation Costs27 to compensate claimants for the removal of the right to recover from defendants the ‘success fee’ payable to a solicitor under a conditional fee (i.e., ‘no win no fee’) arrangement.28 Finally, widespread reliance upon the Guidelines and their republication every two years with indicative awards increased in line with the Retail Prices Index has assisted claimants by ‘remov[ing] some of the uncertainty that traditionally clouds the negotiation process’29 and so has further contributed to the increase in the level of awards and settlements in respect of non-pecuniary loss. Plans to introduce fixed compensation for so called ‘whiplash’ injury, which were due to be implemented in October 2018, have been postponed until at least April 2020 see: https:​ /​ /​ assets​.publishing​.service​.gov​.uk/​government/​uploads/​system/​uploads/​attachment​_data/​file/​725157/​ Govt​_Resp​_to​_Justice​_Committee​_s​_Report on Small_Claims_Limit_for_Personal_Injury_print_.pdf accessed 24/07/2018. 22 ‘[W]ith its considerable caseload of appeals in personal injury actions … [the Court of Appeal is] generally speaking, the tribunal best qualified to set guidelines for judges trying such actions, particularly as respects non-economic loss’ per Lord Diplock in Wright v British Railways Board [1983] 2 AC 773, 78 A-B. 23 ‘It is clear that Lord Diplock also intended the Court of Appeal to have the responsibility for keeping guidelines up to date’ per Lord Woolf MR in Heil v Rankin [2001] QB 272. 24 [2001] QB 272. For a critique of the decision and also of the Law Commission’s proposals, see Damages for Personal Injury: Non-Pecuniary Loss Law Com No. 257 (1999); see R Halson ‘The Recovery of Damages for Non-pecuniary Loss in the UK’ (2015) Chinese Journal of Comparative Law 1–23. 25 The Court of Appeal was influenced by the increasing cost to the National Health Service of claims for medical negligence. NHS spending on clinical negligence claims has risen from £11M in 1996–7 to £400M in 2006–7 and was £1.6 billion in 2016–7. 26 [2012] EWCA Civ 1288. 27 December 2009, described by its author in the Foreword as ‘a coherent package of interlocking reforms, designed to control costs and promote access to justice’ to address the problem that ‘[i]n some areas of civil litigation costs are disproportionate and impede access to justice.’ 28 In addition to the ‘procedural’ justification in the text above the uplift was first justified by reference to a general sense that the previous level of damages was too low, see paras [10] and [20], and second as a necessary response to other proposed procedural changes introduced by the Legal Aid, Sentencing and Punishment of Offenders Act 2012, particularly the removal of the former entitlement of successful claimants to recover from defendants an extra ‘success fee’ (of up to 100%) which the claimant became liable to pay to his lawyer under a conditional fee (known as a ‘no win, no fee’) arrangement. For an explanation of the background to these reforms and the insurance products utilised by parties to litigate, see Peterborough & Stamford Hospitals NHS Trust v McMenemy [2017] EWCA Civ 1941 and Eurides Pereira De Souza v Vinci Construction (UK) Ltd [2017] EWCA Civ 879 at [16]. 29 R Lewis, ‘Compensation Culture Reviewed: Incentives to Claim and Damages Levels’ (2014) Journal of Personal Injury Law 209, 222. 21

The recovery of damages for non-pecuniary loss in contract and tort  203 In the most serious cases of personal injury the size of the award made in respect of non-pecuniary loss though itself substantial is a relatively small element of the overall award. In the case of Eva Rose Totham in 2015 involving serious brain injuries the damages awarded for pain and suffering and loss of amenity constituted only £275k of a £10.135M award.30 However, cases of catastrophic injuries are not representative of the majority of tort claims for personal injury, which involve awards of less than £5,00031 where the claimant suffers little, if any, pecuniary loss. The Pearson Commission32 found that over 66 per cent of total damages awarded by the tort system are damages for non-pecuniary loss. This figure is roughly in line with that in the United States.33 Damage to Reputation Where damage to reputation is at issue it is difficult to distinguish between the pecuniary and non-pecuniary effects of the wrong. To the extent that the loss for which compensation is sought is the financial consequences of a damaged reputation, the claim is pecuniary; to the extent that damages are claimed for the loss of reputation per se, the claim is for non-pecuniary loss. However as Lord Nicholls has acknowledged this distinction is often difficult to apply: ‘Sometimes, in practice, the distinction between damage to reputation and financial loss can become blurred.’34 Defamation is the tort which most obviously seeks to protect reputation,35 where the successful claimant is entitled by way of compensation to:36 That sum [which will] compensate him for the damage to his reputation; vindicate his good name; and take account of the distress, hurt and humiliation which the defamatory publication has caused.

The Court of Appeal in Cairns v Modi,37 in the course of a major review of the tort, acknowledged its three purposes of reputational reparation, vindication and compensation for distress would be relevant in all cases but further noted that ‘the emphasis to be placed on each will vary from case to case’. In the recent past there was a concern that awards of damages in defamation cases were excessive. Consequently the Courts and Legal Services Act 1990, s 8 empowered the Court of Appeal to substitute an award of damages where the amount awarded by a jury was excessive (or inadequate). Comparison with damage awards for non-pecuniary loss in personal injury Miss Eva Rose Totham v King’s College Hospital NHS Foundation Trust [2015] EWHC 97 (B). Insight Delivery Consultancy, No Win No Fee Usage in the UK, Appendix 5 of the Access to Justice Action Group, Comments on reforming Civil Litigation http:​//​w ​ ww​.accesstojusticeactiongroup​ .co​.uk/​home/​wp​-content/​uploads/​2011/​05/​NWNF​-research​.pdf accessed 24/7/2018. 32 Report of the Royal Commission on Civil Liability and Compensation for Personal Injury (1978) Cmnd 7054, vol 2, Table 107. 33 W Viscusi, Reforming Products Liability (Harvard University Press 1991) 102–4, discussed by S Croley and J Hanson, ‘The Nonpecuniary Costs of Accidents: Pain-and-Suffering Damages in Tort Law’ (1995) 108 Harvard Law Rev 1785, at 1789. 34 Malik v BCCI [1997] 3 All ER 1 at 10, HL per Lord Nicholls. 35 In Lonrho v Fayed (No. 5) [1993] 1 WLR 1489 CA at 1504E, Stuart Smith LJ impliedly seemed to rule out recovery outside the torts listed here. 36 John v MGN [1997] QB 586 at 607 per Sir Thomas Bingham MR. 37 [2012] EWCA Civ 1382 at [22]. 30 31

204  Research handbook on remedies in private law cases suggested that reputation was being given greater legal recognition and protection than bodily security. In Aldington v Tolstoy Miloslavsky38 an award of £1.5M for accusations that the claimant was knowingly involved in sending to certain death by order of Stalin very large numbers of Yugoslavians who had fought for Germany was subsequently declared excessive by the European Court of Human Rights.39 Two significant recent developments will, in combination, ensure that awards for defamation are even more consistent and proportionate. In Cairns v Modi40 the Court of Appeal said that the ceiling upon awards will be the upper limit of damages for pain and suffering and loss of amenity which at that time was approximately £275k. Consistency is in turn assured by s 11(1) of the Defamation Act 2013, which requires defamation cases to be heard without a jury unless the court orders otherwise. In effect this signals the end of jury involvement in the law of defamation.41 Other torts may also, though less directly, operate to protect reputation. Awards of damages in the torts of false imprisonment and malicious prosecution may reflect social discredit and damage to reputation. It has been said that ‘false imprisonment does not merely affect a man’s liberty; it also affects his reputation’42 and in the classic authority on malicious prosecution that one of the three types of damage that might result is ‘damage to a man’s fame as if the matter wherof he is accused be scandalous…’.43 Mental Distress In the tort of negligence it is unclear whether mental distress that falls short of psychiatric injury compensable as personal injury (see above) will be compensable generally. Lord Hoffman has denied such recovery, saying that ‘the law of negligence’ affords ‘no remedy for discomfort or distress’ that does not cause ‘bodily or psychiatric illness’.44 However this statement is contradicted45 by awards of damages in a number of cases brought by purchasers of defective property in reliance upon the negligent advice of solicitors46 or surveyors.47 Damages awarded in the torts of false imprisonment and malicious prosecution described in the preceding section could also be regarded as damages awarded for mental distress. Such

[1995] 20 EHRR 442. See also Rantzen v Mirror Newspapers [1993] EWCA Civ 16 (£110k for newspaper allegation that famous broadcaster who promoted the protection of minors had herself protected a child abuser reduced by CA from £250k), and John v MGN [1997] QB 586, ‘£25k for newspaper allegation that singer followed unusual practices to control weight, reduced on appeal from £75k’. There was a further award of £50k exemplary damages, itself reduced from £275K. 40 [2012] EWCA Civ 1382 at [25]. 41 See also the Defamation Act 2013, s 1(1) (a statement is not defamatory unless its publication ‘has caused or is likely to cause serious harm to the reputation of the claimant’). 42 Per Lawrence LJ in Walter v Alltools (1944) 61 TLR 39, CA, at 40. 43 Per Lord Holt in Saville v Roberts (1699) 1 Ld Rayn 374 at 378. 44 Hunter v Canary Wharf Ltd [1997] AC 655, 707. 45 Harder discusses whether this contradiction is explicable on the basis of a desire to avoid different liabilities arising in contract and tort in cases of concurrent liability, see S Harder, Measuring Damages in the Law of Obligations (Hart 2010) at 88–9. 46 Buckley v Lane, Herdman & Co [1977] CLY 3143. 47 Perry v Sidney Phillips & Son [1982] 1 WLR 1297. 38 39

The recovery of damages for non-pecuniary loss in contract and tort  205 damages may also be awarded in the torts of deceit48 and battery.49 The Equality Act 2010 brought together the ‘statutory torts’ based on discrimination which previously derived from separate regimes dealing with sex, race and age discrimination. Section 119(4) provides that damages for discrimination ‘may include compensation for injured feelings’, and following guidelines laid down in Vento v Chief Constable of West Yorkshire Police50 £15,000–£20,00051 was regarded as the appropriate range in statutory claims for injured feelings caused by lengthy campaigns of discriminatory racial or sexual harassment. Outside these categories it has been held that mental distress alone is not actionable.52 The statutory claim for bereavement damages is a separate and specific departure from the common law rule53 that damages are not awarded for the sorrow or distress caused by a person’s death. Bereavement damages54 under Fatal Accidents Act 1976, s 1A are available to the spouse, civil partner and, more limitedly, parent of a dead person55 where the death was caused by a ‘wrongful act’. Physical Inconvenience The terms ‘physical inconvenience’ or ‘physical discomfort’ are used more often in claims arising in contract than in tort.56 However, in the torts of false imprisonment and nuisance physical inconvenience may describe the effect of the tort upon the claimant but would seem to overlap with pain and suffering and loss of amenity which have already been examined above.57 Damages for physical inconvenience were also awarded in an action in deceit brought by a tenant against his landlord who had induced him to give up ‘protected’ premises and status.58

Archer v Brown [1985] QB 401 and East v Maurer [1991] 1 WLR 461, 464. Wainwright v Home Office [2002] QB 1334. 50 [2002] EWCA Civ 1871, [2003] IRLR 102 at [50] per Mummery LJ. 51 These are 2002 figures. In Da Bell v NSPCC UKEAT/62271 they were updated to £18–30k. The question whether these figures should be increased by 10% as a result of the decision in Simmons v Castle [2012] EWCA Civ 1039 discussed above was resolved affirmatively in Eurides Pereira De Souza v Vinci Construction (UK) Ltd [2017] EWCA Civ 879 at [16]. 52 Rothwell v Chemical & Insulating Co Ltd [2008] AC 281 (compensation denied to patients exhibiting ‘pleural plaques’, i.e., symptomless scarring of the lungs which is nonetheless associated with malignant mesothelioma). 53 Hinz v Berry [1970] 2 QB 40, 42. 54 Currently £12,980. 55 In Smith v Lancashire Teaching Hospitals NHS Foundation Trust & Ors [2017] EWCA Civ 1916 the denial of bereavement damages under the Fatal Accidents Act 1976 to a cohabiting, but unmarried, partner of the deceased was declared to be incompatible with Article 8 of the European Convention on Human Rights. 56 See the discussion of Hobbs v London and South Western Rly C (1875) LR 10 QB 111 (claimants were forced to walk over four miles to their home when the train failed to follow the advertised route). 57 See respectively Kuchenmeister v Home Office [1958] 1 QB 548, 579 and Halsey v Esso Petroleum [1961] 1 WLR 683. 58 Mafo v Adams [1970] 1 QB 548. 48 49

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NON-PECUNIARY LOSS IN CONTRACT The Provision of Pleasure Is an Important Object of the Contract Departing from earlier authority, the Court of Appeal in Jarvis v Swans Tours59 awarded modest damages (at the level of about 50 per cent of the contract price60) for disappointment and mental distress in respect of the breach of a contract to provide a ‘package’ holiday. According to Lord Denning, such damages may be awarded for the breach of a ‘contract to provide entertainment and enjoyment’.61 The availability of such damages in relation to contracts to provide holidays is now well settled.62 Similar damages have been awarded against those who have contracted to provide transport,63 photographic services,64 entertainment,65 clothing,66 or accommodation67 for weddings.68 A higher level of award is given in cases involving the disruption of wedding arrangements than those concerning ‘only’ ruined holidays.69 This head of recovery of DNPL was examined by the House of Lords in Farley v Skinner. Lord Steyn said that damages for disappointment and mental distress were available when it was ‘a major or important object of the contract to give pleasure, relaxation or peace of mind’;70 Lord Hutton endorsed a similar, though perhaps broader, principle.71 and Lord Scott said that such damages would be awarded where the claimant ‘was deprived of the contractual benefit

[1973] QB 233, CA. £125 (contract price £63.45). 61 [1973] QB 233 at 238, CA. 62 Jackson v Horizon Holidays [1975] 3 All ER 92, [1975] 1 WLR 1468, CA; Newell v Canadian Pacific Airlines Ltd (1976) 74 DLR (3d) 574; Kemp v Intasun Holidays Ltd [1987] 2 FTLR 234, CA; The Mikhail Lermontov [1991] 2 Lloyd’s Rep 155 (Supreme Court of New South Wales); Keppel-Palmer v Exus Travel [2003] EWHC 3529; Milner v Carnival plc [2010] EWCA Civ 389, [2011] 1 Lloyd’s Rep 374. 63 Chande v East African Airways Corpn [1964] EA 78, and Cole v Rana [1993] CLY 1364. 64 Diesen v Samson 1971 SLT 49 (Sheriff Court of Lanark at Glasgow – recovery was apparently only restrained by principles of remoteness); Wilson v Sooter Studios (1989) 55 DLR (4th) 303. 65 Dunn v Disc Jockey Unlimited Co Ltd (1978) 87 DLR (3d) 408. 66 Hardy v Losner Formals [1997] CLY 1749. 67 Morris v Britannia Hotels Ltd [1997] CLY 1748. 68 Cases in Canada have allowed recovery in a wider range of circumstances, e.g. La Fleur v Cornelis (1979) 28 NBR (2d) 569 (failed cosmetic surgery). 69 Morris v Britannia Hotels Ltd [1997] CLY 1748 confirming Cole v Rana [1993] CLY 1364, see Milner v Carnival plc [2010] EWCA Civ 389, [2011] 1 Lloyd’s Rep 374 [37], where a 106-day cruise was held out as ‘a legendary experience’ where the passengers were guaranteed ‘star treatment’ and total damages for non-pecuniary loss of £8,500 awarded to two claimants. 70 [2001] UKHL 49 at [24], [2002] 2 AC 732, [2001] 3 WLR 899 at 910 per Lord Steyn, Lord Browne-Wilkinson agreeing, and at para 39 (‘damages for disappointment’) per Lord Clyde. Cf Cowden v British Airways plc [2009] 2 Lloyd's Rep 653 at [21], which states the requirement more strictly as that ‘the relevant contract has its main purpose the provision of … pleasure’ (emphasis added), and is to that extent wrongly decided (Farley v Skinner was not considered). For a succinct, but obiter, summary of this evolution see Jonathan Yearworth v North Bristol NHS Trust [2009] EWCA Civ 37, [2010] QB 1 (discussing action in tort and bailment against sperm bank which caused loss of donors’ samples). 71 [2001] UKHL 49 at [51], [2002] 2 AC 732, [2001] 3 WLR 899 at 920. 59 60

The recovery of damages for non-pecuniary loss in contract and tort  207 to which he was entitled’.72 Notwithstanding the different formulations it is clear that damages under this head of recovery are not only available where the provision of an amenity, however defined, is the sole object of the contract. In Farley a decision to this effect, relied upon by the Court of Appeal was overruled73 and a case where non-pecuniary damages were awarded to the purchaser of a car whose holiday was ruined when it broke down was approved.74 As a car may be used for many and mixed purposes this case was recognised as proceeding upon a more generous test of recovery than that propounded in Jarvis v Swan Tours. Nonetheless damages for loss of enjoyment will continue to be inappropriate for purely commercial contracts and have been refused in actions against solicitors retained to: convey business premises,75 to advise on economic matters76 or ancillary relief in matrimonial proceedings,77 and also in cases involving the sale of dental78 and physiotherapy79 practices. The Avoidance Mental Distress Is an Important Object of the Contract Where it is a major or important part of a contractual undertaking that the claimant thereby secures peace of mind or freedom from distress the breach of that contract may be compensated by an award of DNPL.80 Contracts which fall within this category include the employment of a surveyor;81 the retention of a solicitor to obtain a non-molestation order82 or to obtain orders prohibiting the removal of children from the claimant's care,83 or to advise on criminal proceedings;84 a contract to provide disability85 or other insurance;86 contracts to provide

72 [2001] UKHL 49 at [106], [2002] 2 AC 732, [2001] 3 WLR 899 at 931, Lord Browne-Wilkinson agreeing. 73 Knott v Bolton (1955) 11 Const LJ 375. 74 Jackson v Chrysler Acceptances [1978] RTR 474. The claimant had specifically informed the vendor that he intended to take the car abroad on holiday. See to similar effect Bernstein v Pamson Motors (Golders Green) Ltd [1987] 2 All ER 220 (new car broke down on motorway after 140 miles), which was not referred to by the House of Lords. See also the Canadian case of Wharton v Tom Harris Chevrolet Oldsmobile Cadillac Ltd [2002] 3 WWR 629. 75 Hayes v James & Charles Dodd [1990] 2 All ER 815, CA approved by Lord Scott in Farley v Skinner. 76 Clare v Buckle Mellows [2005] EWCA Civ 1611, [2005] All ER (D) 331 (Dec). 77 Channon v Lindley Johnstone (a firm) [2002] EWCA Civ 353, [2002] Lloyd’s Rep PN 342, [2002] All ER (D) 310 (Mar). 78 Bloxham v Robinson [1996] 2 NZLR 664n. 79 Anderson v Davies [1997] NZLR 616. 80 Watts v Morrow [1991] 1 WLR 1421, CA, as interpreted in Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732, and applied in Voaden v Champion [2002] EWCA Civ 89, [2002] 1 Lloyd’s Rep 623. Cf Hamilton Jones v David & Snape (a firm) [2003] EWHC 3147 (Ch), [2004] 1 All ER 657 at [57] where Neuberger J appeared to favour a lower threshold test. 81 Watts v Morrow [1991] 4 All ER 937, [1991] 1 WLR 1421, CA; Farley v Skinner [2001] UKHL 49, [2001] 4 All ER 801. 82 Heywood v Wellers [1976] QB 446, CA. 83 Hamilton Jones v David & Snape (a firm) [2003] EWHC 3147 (Ch), [2004] 1 All ER 657. 84 Boudreau v Benaiah (1999) 182 DLR (4th) 569. 85 Warrington v Great-West Life Assurance Co (1996) 139 DLR (4th) 18. 86 Beaird v Westinghouse Canada Inc (1999) 171 DLR (4th) 279.

208  Research handbook on remedies in private law burial services;87 a contract with an airline when baggage was delayed;88 a contract to use the claimant's house as a film location;89 and a bailment of semen to a sperm bank.90 Contracts for the provision of enjoyment are clearly related to contracts for peace of mind or freedom from distress; the former are concerned with the provision of pleasure, and the latter with the avoidance of displeasure. Would anyone describe a contract with a lawyer or a cemetery as a contract for the provision of pleasure or enjoyment? Physical Inconvenience In Hobbs v London and South Western Rly C91 the claimants were forced to walk over four miles to their home when a train failed to follow the advertised route. The DNPL awarded were described as compensation for: ‘personal inconvenience’, ‘inconvenience’, ‘real physical inconvenience’ and ‘not … mere vexation, but … physical inconvenience’. Analogous awards have been made in cases including92 an action by a sailor93 who, as a consequence of a breach of contract alighted from a vessel, a passenger who experienced an uncomfortable and distressing voyage,94 as well as actions against: contractors employed to refurbish a home95 and install damp-proofing,96 a landlord in breach of a covenant to maintain premises,97 a travel agency which booked inferior accommodation,98 a solicitor who failed to recover possession of his client's home,99 a film company who damaged a property being used as a location,100 an airline that lost baggage,101 and numerous claims against surveyors whose negligence has resulted in the inconvenience of repairs being carried out.102 In 2001 Hobbs was applied by the House of Lords in Farley v Skinner, an action by the purchaser of a large house near to an airport who had specifically asked the surveyor to investigate the risk of excessive aircraft noise. The property was purchased in reliance upon the surveyor’s negligent assurance that it was not affected by intrusive noise levels when the house was in fact situated beneath an area where aircraft circled while awaiting permission to land. Damages for inconvenience was supported as a second and alternative justification for upholding the judge's award of £10,000

87 Lamm v Shingleton 55 SE 2d 810 (1949); Mason v Westside Cemeteries (1996) 135 DLR (4th) 361; and Raw v Croydon LBC [2002] CLY 941. 88 Haysman (Glen) v Mrs Rogers Films Ltd [2008] EWHC 2494 (QB), [2008] All ER (D) 271 (Oct). 89 O'Carroll v Ryanair (2009) SCLR 125. 90 Jonathan Yearworth v North Bristol NHS Trust [2009] EWCA Civ 37, [2010] QB 1 at [56]–[57] applying contractual principles. 91 (1875) LR 10 QB 111, respectively at 115 per Cockburn CJ, at 120 per Blackburn J, at 122 per Mellor J and at 124 per Archibald J. 92 See generally M Furmston (ed.), Law of Contract (5th edn, Lexis Nexis 2015) paras 8.68–8.69. 93 Burton v Pinkerton (1867) LR 2 Exch 340. 94 Milner v Carnival plc [2010] EWCA Civ 389, [2011] 1 Lloyd’s Rep 374. 95 Piatkus v Harris [1997] CLY 1747. 96 Rawlings v Rentokil Laboratories [1972] EGD 744. 97 Southwark London Borough Council v Bente [1998] CLY 2986. 98 Stedman v Swan’s Tours (1951) 95 SJ 727 99 Bailey v Bullock (1950) 66 TLR (Pt 2) 791; Woolfson v Gibbons [2002] All ER (D) 69 (Jan). 100 Haysman (Glen) v Mrs Rogers Films [2008] EWHC 2494 (QB), [2008] All ER (D) 271 (Oct). 101 O'Carroll v Ryanair (2009) SCLR 125. 102 E.g. Perry v Sidney Phillips & Son [1982] 3 All ER 705, [1982] 1 WLR 1297, CA; Patel v Hooper & Jackson [1999] 1 All ER 992, [1999] 1 WLR 1792, CA.

The recovery of damages for non-pecuniary loss in contract and tort  209 damages for non-pecuniary loss.103 To recover damages there must be more than mere annoyance at the failure of the other party to honour his contractual undertaking: ‘“disappointment” would serve as a sufficient label for those mental reactions which in general the policy of the law will exclude’.104 In Farley the House of Lords, and in Milner v Carnival plc 105 the Court of Appeal, did not draw a distinction between damages for physical inconvenience and compensation for consequent mental distress. Consequently it seems that the latter, previously distinct head of claim,106 may have been subsumed by the expansion of the former.107 Loss of Amenity In a small number of cases damages for loss of amenity have been awarded in actions for breach of contract not involving personal injury: for a builder’s defective tiling108 and a landlord’s failure to provide leisure facilities to tenants of a block of flats.109 Loss of amenity was suggested by Lord Lloyd as a possible alternative explanation of the award made by the trial judge and left in place by the House of Lords in Ruxley Electronics v Forsyth,110 where a swimming pool was constructed nine inches shallower than the contractual specification.

POLICIES JUSTIFYING RESTRICTIONS ON RECOVERY OF DAMAGES FOR NON-PECUNIARY LOSS The Troublesome Old Case of Addis v Gramophone Co Ltd In the first sentence of the first judgment in Addis111 the Lord Chancellor described the case as ‘most unfortunate litigation’ that with ‘[a] little common sense [the parties] would have settled all these differences in a few minutes’.112 This instinct that Addis would be a troublesome case has proven correct as its proper interpretation has been debated by Judges and commentators for over a century. The decision was heavily criticised by Sir Frederic Pollock in a contem-

103 [2001] UKHL 49 [2002] 2 AC 732 at [30], per Lord Steyn, Lord Browne-Wilkinson agreeing, at [38]–[39] per Lord Clyde, at [57] per Lord Hutton, and at [106] per Lord Scott. 104 [2001] UKHL 49 at [2002] 2 AC 732, at [35] per Lord Clyde, [58] per Lord Hutton and [85] per Lord Scott. See also Hobbs v London and South Western Rly Co (1875) LR 10 QB 111 at 122 excluding a ‘purely sentimental’ reaction per Mellor J, at 124 per Archibald J quoted above; Bailey v Bullock [1950] 2 All ER 1167 at 1170–1171 per Barry J; and Wapshott v Davis Donovan & Co [1996] PNLR 361 at 378 per Beldam LJ. 105 [2010] EWCA Civ 389, [2011] 1 Lloyd’s Rep 374. 106 E.g. Cross v David Martin and Mortimer [1989] 1 EGLR 154; Bigg v Howard Son & Gooch [1990] 1 EGLR 173; Watts v Morrow [1991] 1 WLR 1421. 107 Cf Channon v Lindley Johnstone [2002] EWCA Civ 353, [2002] Lloyd’s Rep PN 342, [2002] All ER (D) 310 (Mar) (damages for non-pecuniary loss refused in action against solicitor acting in divorce proceedings). 108 G W Atkins Ltd v Scott (1980) 7 Const LJ 215. 109 Newman v Framewood Manor Management Co [2012] EWCA Civ 159. 110 [1995] 3 All ER 268 at 289–290, HL. 111 [1909] AC 488, HL. 112 Ibid, 489.

210  Research handbook on remedies in private law porary case note113 and over 90 years later Lord Steyn questioned whether even the headnote was correct.114 The question that was before the House of Lords was simple: was an employee who recovered damages for loss of salary and commission in an action for breach of contract against his employer entitled to further DNPL because of the ‘harsh and humiliating’115 way in which he was dismissed? By a majority this question was answered negatively. However, the proper interpretation of this refusal to allow recovery beyond the financial losses has been the subject of considerable disagreement. It has been argued that the issue in Addis was not whether DNPL are recoverable in an action for breach of contract but rather whether a clamant in such an action could recover damages for loss flowing, not from the breach itself, but from the manner of dismissal and this interpretation has support in the case.116 According to this view Addis was ‘about the source (rather than the kind) of the loss’.117 Nonetheless the same commentator did concede that ‘when closely examined’ there are at least ‘hints’ in Addis of a general prohibition upon the recovery of DNPL in an action for breach of contract.118 Similarly, another commentator noted that the case ‘hardly purports to go beyond unlawful dismissal’ and contains ‘no clear and general statement that the law of contract protects only tangible interests’ while acknowledging that there is no positive statement that DNPL fall to be assessed in the same way as damages for pecuniary losses.119 It is, however, clear that few120 commentators or courts would now support a strict prohibitory interpretation of Addis, but the case has not formally been overruled. Hence the approach of subsequent cases has been to interpret it narrowly. A typical example is Malik v Bank of Credit and Commerce International SA (in liquidation),121 which concerned a novel claim for so called ‘stigma compensation’ when an employer engaged in fraudulent activity to the (1910) 26 LQR 1. Johnson v Unisys Ltd [2001] UKHL 13, [2001] 2 WLR 1076 [3]. 115 Ibid, 493. 116 Ibid, at 501 per Lord Gorell. 117 N Enonchong, ‘Breach of Contract and Damages for Mental Distress’ (1996) 16 OJLS 617 at 622, 623. 118 The prohibitory interpretation of Addis is supported by decisions overseas: see in New Zealand Whelan v Waitaki [1991] 2 NZLR 74 at 83, where it was said that the majority in Addis declined to allow the recovery of any ‘damages beyond the actual monetary loss’ (see also 88); and in Canada, Vorvis v Insurance Corp of British Columbia (1999) 58 DLR (4th) 193 at 212, referring to the ‘absolute rule’ of Addis that damages for breach of contract do not extend to compensation for mental suffering. In each jurisdiction the approach of the courts is now in practice more accommodating to claims for DNPL; see in New Zealand: Rowlands v Collow [1992] 1 NZLR 178, 206 (Addis described as an ‘ailing authority’); and in Canada Fidler v Sun Life Assurance [2006] 2 SCR 3 and Honda Canada Inc v Keays [2008] SCC 39. 119 Bridge (n2) 323, 344. 120 Hints of the older more restrictive approach occasionally surface, e.g. Raphael Wiseman v Virgin Atlantic Airways Ltd [2006] EWHC 1566 (QB) at [16], [2006] All ER (D) 344 (Jun): ‘compensation for [non pecuniary loss] is not recoverable in a claim for breach of contract, save in very exceptional circumstances’ (emphasis added). 121 [1997] 3 All ER 1. The case proceeded upon the basis of an agreed set of facts. However, the liquidators did not admit the accuracy of these facts: see at 4, HL, per Lord Nicholls. For further recognition in different circumstances of the availability in principle of so called ‘stigma’ damages, see Chagger v Abbey National Plc [2009] EWCA Civ 1202 at [98], [2010] ICR 397, [2010] IRLR 47 (employee may be entitled to damages against employer who unfairly dismissed him for unlawful stigmatisation by future employers who are unwilling to employ person who sued his former employer). 113 114

The recovery of damages for non-pecuniary loss in contract and tort  211 extent that senior employees of the company who were not involved in any illegality might through association with the company, later suffer a disadvantage in the labour market when seeking re-employment. The Malik case was not strictly a case about the recovery of DNPL as the appellants sought compensation for continuing financial losses.122 However, a number of restrictions upon the availability of DNPL, including the decision in Addis, were considered which was interpreted narrowly.123 The House of Lords held that the recovery of so-called ‘stigma compensation’ was to ‘be assessed in accordance with ordinary contractual principles’.124 This rejection of old categories and restrictions in relation to a novel claim for financial loss combined with a restrictive interpretation of the Addis case suggested a willingness to base the recovery of damages for non-pecuniary losses upon broader principles. The House of Lords have subsequently considered directly the award of DNPL for breach of contract in a small number of cases and re-assessed the status and ambit of the supposed prohibition laid down in Addis. These cases include Johnson v Unisys,125 where Lord Steyn emphasised that the decision in Johnson did not endorse or expand the restrictive approach of Addis: ‘The reasoning of the majority in Johnson did not reinvigorate the corpse of Addis.’126 In Eastwood v Magnox Electric plc, McCabe v Cornwall CC127 Lord Nicholls noted that the Addis case had ‘cast a long shadow over the common law’128 and held that it did not operate to exclude129 actions in respect of employee’s rights that accrued prior to dismissal.130 Similarly in Johnson v

Per Lord Nicholls at 7 and per Lord Steyn at 19, Lords Goff, Mackay and Musill agreeing. Per Lord Nicholls at 9 and per Lord Steyn at 19–20, Lords Goff, Mackay and Mustill agreeing. 124 Per Lord Nicholls at 9 and per Lord Steyn at 21 and 22, Lords Goff, Mackay and Mustill agreeing. 125 [2001] UKHL 13, [2003] 1 AC 518, [2001] 2 WLR 1076, Lord Steyn dissenting. An employee who recovered the maximum allowable damages under the statutory scheme for unfair dismissal (then £11,600) sought further DNPL of £400k in an action for wrongful dismissal because the manner of his dismissal amounted to a separate breach of an implied term of the contract of employment. The House of Lords held that the policy of the limited statutory scheme should not be subverted by a parallel unlimited action at common law. See further Dunnachie v Kingston-upon-Hull CC [2004] UKHL 36. 126 At [48]. Lord Steyn concurred in the result but not the reasoning of the majority. He held that the employer’s breach of his implied duty of trust and confidence gave rise to a cause of action against him but that the losses claimed by the employee were too remote a consequence of that breach to be recoverable: [2001] UKHL 13, [2003] 1 AC 518, [2001] 2 WLR 1076 at [29]. 127 [2004] UKHL 35, [2005] 1 AC 503 per Lord Nicholls at [1]. Applied in Sean Fryers v Belfast Health and Social Care Trust [2008] NIQB 123 and Triggs v GAB Robins (UK) Ltd [2008] EWCA Civ 17, [2008] IRLR 317. 128 Eastwood v Magnox Electric plc, McCabe v Cornwall CC [2004] UKHL 35, [2005] 1 AC 503 per Lord Nicholls at [1]. 129 Such actions are said to fall outside the ‘Johnson exclusion area’. See generally the discussion of Lord Nicholls in Eastwood v Magnox Electric plc, McCabe v Cornwall CC [2004] UKHL 35, [2005] 1 AC 503 at [27]–[32] and also the Supreme Court’s recent discussion in Edwards v Chesterfield Royal Hospital NHS Foundation Trust [2011] UKSC 58, [2012] 2 AC 22. 130 E.g. where the employer was in breach of an implied term to refrain from conduct likely to destroy or seriously damage the trust and confidence with his employee by, in Eastwood, a campaign to demoralise the defendant prior to dismissal or, in McCabe, failing to investigate or inform a suspended employee about allegations made against him. See also the Court of Appeal's decision in Gogay v Hertfordshire County Council [2000] IRLR 703, CA (suspended employee recovered £9,000 general damages and £4,800 for private psychotherapy); King v University Court of the University of St Andrews [2002] IRLR 252, Ct of Sess; and GAAB Robins (UK) Ltd v Triggs [2008] EWCA Civ 17. 122 123

212  Research handbook on remedies in private law Gore Wood & Co (No. 1)131 Lord Goff noted a ‘softening of this principle in certain respects’132 and in a dissenting judgment Lord Cooke questioned the ‘permanence’ of Addis in English law.133 Addis may be even more short-lived as a feature of Scottish law following the Scottish Law Commission’s recent Discussion Paper, which noted the difficulty of stating clearly the law in this area134 as a result of the decision in Addis and asked consultees whether DNPL should be subject to any special restrictions at all.135 Non-pecuniary Losses Cannot Be Quantified When asked to justify an award of $400 for mental distress and physical inconvenience against an electrician who refused to complete contracted works the magistrate reportedly replied: ‘Pick a number.’136 As Michael Bridge observed in a survey of Canadian law, ‘[t]he “I am doing the best I can” theme is rife in these cases’.137 These judicial reactions perhaps reflect a view that non-pecuniary losses cannot be quantified with precision. However, it is a principle running through the law138 relating to the assessment of damages that the difficulty of assessment does not relieve the court from the necessity of attempting that calculation.139 As Lord Scott observed in Farley v Skinner140 although ‘[q]uantification of that value will in many cases be difficult and may often seem arbitrary’ nonetheless ‘if there is no other way of compensating the injured party, the injured party should be compensated in damages to the extent of that value’. Indeed the implicit comparison to the assessment of damages for financial loss, which are considered easier to assess, is not convincing. In a personal injury action there are two broad categories of loss: pecuniary and non-pecuniary. In the case of a catastrophic injury with life-long consequences it has been noted above that the major part of the global award will be the damages for pecuniary, as opposed to non-pecuniary, losses. However, the calculation of future pecuniary loss is very difficult involving consideration of questions like: How long would the claimant’s working life have been? What salary would he have earned? Would there have been any interruptions to the employment? What provision would have been made for retirement, etc.? These difficulties of computation become even more challenging when the

131 [2002] 2 AC 1, [2001] 2 WLR 72, HL (property developer alleged his solicitor’s negligence was ‘such as to injure his pride and dignity’). 132 [2002] 2 AC 1, [2001] 2 WLR 72 at 101, HL, but cf 97 where Lord Bingham’s approach is endorsed. 133 [2002] 2 AC 1, [2001] 2 WLR 72 at 107–9, HL. 134 DNPL are referred to as ‘non-patrimonial loss’ in civil law systems. 135 Scottish Law Commission, Discussion Paper on Remedies for Breach of Contract No. 163 (2017) at respectively paras 7.23 (see also 7.28) and para 7.35. 136 Falcko v James McEwan & Co [1977] VR 447. 137 Bridge (n2) 323, 364. 138 An early statement is ‘the fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract’ in Chaplin v Hicks [1911] 2 KB 786, 792. 139 Fink v Fink (1947) 74 CLR 127, 143. E.g. in the context of liquidated damages and penalties it is said to be ‘no obstacle’ to a liquidated damages clause being enforced that ‘precise pre-estimation [was] almost an impossibility’. Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79, 86 per Lord Dunedin. 140 [2001] UKHL 49, [2001] 3 WLR 899 at [79].

The recovery of damages for non-pecuniary loss in contract and tort  213 claimant is a child, when speculation as to what employment he would, but for the accident, have gone on to undertake seems close to the idea of ‘just picking a number’ when courts have speculated that the infant claimant would have followed a parental profession141 or earned the average national wage.142 A related point is that if it is accepted that DNPL are capable of assessment their award should be resisted because they are not susceptible to objective proof. Where the extent of a loss is in this sense subjective, the argument presumably runs, it is easily falsifiable. However, the response to such concerns must be that the alternative is to award nothing in respect of a genuine loss, the existence, as opposed to the extent, of which is not in dispute. To do this would exacerbate the effect of all the traditional limits (i.e., remoteness, mitigation, causation etc.) which cumulatively ensure that the actual damages awarded rarely reflect the full extent of the claimant’s loss.143 Once it is accepted that some award should be made then the problem of exaggeration can be met by the normal requirements of proof144 and the risk of error minimised by the low level of awards given. Extravagant Damage Awards In Addis Lord Shaw referred to the possibility of the ‘inflation’ of damage claims145 while Lord Atkinson referred more specifically to the danger of overcompensation when DNPL are awarded to ‘punish’ a party in breach of contract.146 The awards of £10k in Farley v Skinner147 and £20k in Hamilton Jones v David Snape148 represent the upper limits of recovery of DNPL; most awards in an action for breach of contract have been very modest.149 Damages are not only modest but are predictably so with ‘quasi tariffs’ in operation with regard to some types of loss. In cases involving physical inconvenience damage awards tend to be conventional, with £750 described as ‘the norm’ in 2003.150 Reported decisions such as the relatively large

Conolly v Cambden AHA [1981] 3 All ER 250. Croke v Wiseman [1982] 1 WLR 71. 143 J Sebert, ‘Punitive and Nonpecuniary Damages in Actions Based upon Contract: Toward Achieving the Objective of Full Compensation’ 33 UCLA L Rev 1565, 1578: ‘The cumulative effect of traditional contract remedy principles would be almost certain undercompensation.’ 144 ‘The credibility of the parties will be assessed by their testimony, and their greed will be tempered accordingly’; J P Tomain ‘Contract Compensation in Nonmarket Transactions’ (1985) 46 U Pitt L Rev 867, 899 quoted by Harder (n45) at 114. 145 [1909] AC 488, 505. 146 Ibid, at 495, quoting Lord Blackburn in Sykes v Wild (1861) 1 B & S 587, 594. 147 [2001] UKHL 49. 148 Hamilton Jones v David & Snape [2004] 1 WLR 924. 149 The level of awards in the common category of ruined holidays are helpfully reviewed by the Court of Appeal in Miner v Carnival Plc [2010] EWCA Civ 389 at [37]; Boynton v Willers [2003] EWCA Civ 904, [2003] All ER (D) 61 (Jul) at [34] per Potter LJ; Eiles v Southwark London Borough Council [2006] EWHC 1411 (TCC), [2006] All ER (D) 237 (Jun) (£1,000 award for inconvenience of five years’ occupancy of house with cracks in the walls); Iggleden v Fairview New Homes [2007] EWHC 1573 (DCC) (£750 pa awarded for continuing inconvenience of ‘snagging’ defects in interior and driveway of house); and Haysman (Glen) v Mrs Rogers Films Ltd [2008] EWHC 2494 (QB), [2008] All ER (D) 271 (Oct) per Sweeting QC (sitting as deputy judge) at [31]–[33] (non-pecuniary damages of £1,000 awarded for anxiety and distress arising from the poor condition a film company left his house in). 150 Watts v Morrow [1991] 4 All ER 937, [1991] 1 WLR 1421, CA, per Ralph Gibson LJ at 1442 and per Bingham LJ at 1445, Sir Stephen Brown agreeing; Boynton v Willers [2003] EWCA Civ 904 at [34] 141 142

214  Research handbook on remedies in private law awards in Farley and Hamilton Jones are well known but exceptional; much smaller awards are routinely made in unreported proceedings. Lord Steyn in Farley v Skinner referred to ‘the real life of our lower courts’ where modest DNPL are ‘regularly awarded’.151 In the US most of the traditional exceptions where damages for emotional distress are permitted also involve small awards.152 Further it seems that a de minimis rule operates such that nothing will be awarded at all in respect of trivial disturbances.153 The common sense of this rule was clearly expressed by Mason CJ in an Australian case:154 while the innocent party to a contract will generally be disappointed if the defendant does not perform the contract, the innocent party’s disappointment and distress are seldom so significant as to attract an award of damages on that score.

In Farley Lord Clyde put the same point more concisely noting that: 155 disappointment merely at the fact that the contract has been breached is not a proper ground for an award.

In the same case Lord Scott distinguished between what he termed ‘mere annoyance or disappointment at the failure of the other’ to perform his contract and ‘actual physical inconvenience and discomfort’ caused by that breach.156 As Lord Cooke noted in Johnson v Gore Wood & Co contract breaking is regarded as a normal ‘incident of commercial life’ and consequently something that ‘players in the game’ must bear ‘with mental fortitude’.157 Whatever the difficulties of ensuring that the proper amount is awarded in respect of a particular incidence of, for example, mental suffering justice further demands that like cases are treated the same to maintain what may be called ‘horizontal equity’.158 Such consistency is easier to achieve in a jurisdiction like England and Wales, where the assessment of damages is a judicial, rather than a jury, function.159 The situation is different in the US where damages are assessed by a jury:

(evidence of inconvenience suffered was described at para 37 as ‘fragmented and unreliable’ so only £500 was awarded); Woolfson v Gibbons [2002] All ER (D) 69 (Jan) (£750 each damages for inconvenience awarded to wife, husband and child for surveyor’s failure to note defects in house they purchased). 151 Farley v Skinner [2001] UKHL 29 at [20] per Lord Steyn. 152 Sebert (n143) 1590, noting that ‘[t]he funeral, casket, death message, and ejection from public places cases all fit this mold’. 153 Michael Bridge provides an interesting miscellany of trivial claims: Christmas toys that do not work, ‘corked’ wine at an anniversary celebration, customers upset by an abusive petrol pump attendant and the recipients of disappointing meals or poor hair cuts; see Bridge (n2) 360. 154 Baltic Shipping Co v Dillon [1992–3] 176 CLR 344, 365. 155 [2001] UKHL 29 at [40]. 156 Ibid, [58]. 157 [2001] 2 WLR 72, 108 endorsed by Lord Hurtton in Farley v Skinner [2001] UKHL 29 at [47]. 158 For a discussion of horizontal equity in the context of tortious awards of damages for pain and suffering, see R Avraham ‘Putting a Price on Pain-and-Suffering Damages: A Critique of the Current Approaches and a Preliminary Proposal for Change’ (2006) 100 NW U L Rev 87, 92. 159 For a discussion of the inconsistency of jury awards for ‘pain and suffering’ damages in the US, see B Bovbjerg, F Sloan and J Blumstein, ‘Valuing Life and Limb in Tort: Scheduling “Pain and Suffering”’ (2006) 83 NW U L Rev 908, 920.

The recovery of damages for non-pecuniary loss in contract and tort  215 When a petit jury in a civil action awards damages for pain and suffering, it does not award damages that compensate … the injured party … Damages that are awarded for pain and suffering are probably intended as a pecuniary bonus or gift…160

If the award of DNPL are so perceived by juries awarding them, a lack of consistency is inevitable.161 Similar concerns have emerged about awards of damages by juries in Scotland. In Girvan v Inverness Farmers Dairy162 a jury awarded damages of £120k as ‘solatium’.163 On appeal this award was set aside and the case remitted to a second jury, who reduced the award to £95k. Exceptionally this was again challenged and then, seemingly reluctantly, upheld by the House of Lords. Lord Hope referred to:164 a feeling of unease among practitioners in Scotland … about the relationship between awards of solatium made by juries and those made by judges.

Indeed it was the desire for consistent and moderate levels of award in the UK which prompted the abolition of the assessment of damages by juries in breach of contract cases165 and later, as has already been noted, the end of jury assessment in defamation cases.166 Horizontal equity between recipients of DNPL is further fostered by the use of ‘tariffs’ whereby a particular severity of injury is recompensed with a fixed sum or an award within a defined band. This is the approach taken in the UK to awards of ‘general damages’ in personal injury cases since the courts began to rely upon the Guidelines now in its fourteenth edition of 2017.167 Tariff based awards, also discussed above, are also used in the tort of false imprisonment168 and such awards may be regarded as comparable to awards for loss of amenity made in contract cases. More recent cases considering the award of damages for mental distress in actions for breach of contract have tried to relate the level of these awards to analogous categories of recovery. For example in Milner v Carnival Plc169 the Court of Appeal reduced the trial judge’s award of £7,500 for distress and inconvenience to the claimants who had embarked on, but later had to abandon because of noise and movement in the cabin structure, a £60k world cruise. The Court of Appeal awarded the claimant and his wife, respectively, £4k and £4,500, justifying these figures by reference to Guidelines awards in personal injury actions as well

160 R Rabin, ‘Pain and Suffering and Beyond: Some Thoughts on Recovery for Intangible Loss’ (2005-6) 55 DePaul L Rev 359, 359. 161 Such inconsistency in the US has long been recognised. Sedgwick on the Measure of Damages (8th edn, 1891) noted that juries were ‘as arbitrary judges of the amount of the damages as of the facts’, quoted by Lord Collins in Addis v Gramophone Co [1909] AC 488, 497. 162 1998 SC (HL) 1, 1998 SLT 21. 163 ‘solatium’ is the term used in Scots law to describe an award of damages in delictual (tortious) actions for pain and suffering and similar awards in actions for breach of contract. 164 1998 SC (HL) 1, 4. 165 Senior Courts Act 1981, s 69. 166 Defamation Act 2013, s 11(1). 167 See above note 19 and associated text. 168 Thompson v Metropolitan Police Commissioner [1998] QB 498. For false imprisonment ‘basic’ awards start at about £500 (not adjusted for subsequent inflation) for the first hour, £3,000 for the first day with a reducing rate thereafter for continued detention. See further the discussion above. 169 [2010] EWCA Civ 389.

216  Research handbook on remedies in private law as actions for sexual and racial discrimination where damages included compensation for ‘an affront to one’s feelings’.170 Where the level of DNPL in an action for breach of contract are discussed judicially, at all levels the cases contain frequent exhortations that any awards made should be modest.171 This is the case even in relatively high value contracts such as the luxury world cruise in Milner above, where the Court of Appeal emphatically rejected the claimants’ initial claim for £50k DNPL, which was ostensibly justified by the high contract price.172 Contractual Damages Should Never ‘Punish’ the Defendant A theme running through Addis is that the damages in dispute in that case would, if awarded, have the effect of ‘punishing’ the defendant, which is not at all a function of the law of contract.173 In contrast to the position in Canada174 it remains the law in the UK175 that contractual damages do not extend beyond com­pensation to punitive or admonitory functions. The Law Commission recently examined the law relating to punitive, or as they are more frequently now described, exemplary damages and concluded that it was ‘unprincipled and illogical’.176 However, its recommendations did not include any reform of the law in relation to the availability of exemplary damages for pure breach of contract.177 The maintenance of the status quo was justified by:178 the difficulties of expressing the limits of any expansion and the associated uncertainty; the fact that commercial rather than personal interests are involved; economic theory;179 and the proper compensatory protection already offered by awards of damages for disappointment and mental distress. It is now clear that the situations where DNPL are available in an action for breach of contract are implementing a compensatory purpose only. A ‘Flood’ of Claims Will Result When an expansion of civil liability is proposed a familiar counter argument is that it would open the ‘floodgates’ to a multiplicity of claims,180 summarised in part of a famous statement

Ibid, [38]–[39]. See in the High Court: Keppel-Palmer v Exus Travel [2003] EWHC 3529 at [44] and Woolfson v Gibbons [2002] All ER (D) 69 (Jan) at [89]; in the Court of Appeal: Milner v Carnival Plc [2010] EWCA Civ 389 at [35] and in the House of Lords: Farley v Skinner [2001] UKHL 49 at 28 ‘restrained and modest’ per Lord Steyn. 172 Milner v Carnival Plc [2010] EWCA Civ 389 at [59]. 173 See especially Lord Atkinson [1909] AC 488, 494: ‘I have always understood that damages for breach of contract were in the nature of compensation, not punishment…’. 174 Vorvis v Insurance Corp of British Columbia (1989) 58 DLR (4th) 193 (Canada); Royal Bank of Canada v W. Got & Associates Electric Ltd (2000) 178 DLR (4th) 385. 175 Reed v Madon [1989] Ch 408 and Ruxley Electronics v Forsyth [1995] 3 All ER 268 at 270e per Lord Bridge and at 282b–c per Lord Lloyd. 176 Consultation Paper No. 132 (1993) at 6 and Report No. 247 (1997) at 101. 177 Ibid, 139. 178 Ibid, 138–9. 179 The so-called theory of efficient breach maintains that efficiency is encouraged when resources gravitate to their most highly valued uses, even if this inevitably involves a breach of contract by the promisor and the re-sale of the performance to a second promisee. 180 Ultramares Corp v Touche 174 NE 441 at 444 (1931). 170 171

The recovery of damages for non-pecuniary loss in contract and tort  217 by Cardozo J’s as the risk of liability for ‘an indeterminate time to an indeterminate class’. This argument is most frequently encountered when a new head of tortious liability is being considered such as that which preoccupied Cardozo J, i.e., liability in negligence for economic loss. However the same risk is sometimes identified in contract cases. In one case Staughton LJ said that he would ‘not view with enthusiasm’ the prospect that a ship owner who recovered liquidated damages from a charterer who was responsible for delaying a voyage could also claim ‘damages for mental distress while waiting for his money’.181 Andrew Burrows has suggested that Staughton LJ was acting upon ‘a widely held fear’ that, unless heavily restricted, mental distress damages would feature in almost every award of contractual damages.182 The particular concern that Staughton LJ adverts to, i.e., that a claim for DNPL would become an inevitable part of every commercial claim, has been avoided by the specification of the circumstances in which DNPL are available in an action for breach of contract. The exception to non-recovery that allows the award of DNPL when the provision of pleasure was an important, though not necessarily the sole, object of a contract (examined above) necessarily excludes recovery in purely commercial dealings.183 In a charterparty concluded between two business entities the main object of the contract is financial profit and not the provision of pleasure or satisfaction and so will fall outside the ‘main object’ exception.184 It will inevitably be difficult to characterise some contracts as one of these two types185 but that does not render the distinction unworkable in polar cases. At a more general level the floodgates argument adds nothing to the policy debate that should precede it. If considerations of policy support the recovery of DNPL in a particular context it should not alone be an objection that if the action existed it would be utilised.186 The Scottish Law Commission expressly addressed the floodgates argument when considering the reform of the availability of DNPL. While acknowledging that reform of the law may result in some further claims being made they felt sure that this was not likely to happen on ‘an industrial scale’.187 The instinct of the Scottish Law Commission is surely correct for a number of related reasons. As has been observed in the previous section awards in this area are typically modest and subject to a de minimis rule. The prospect of such modest recovery would alone suggest that the fear of a flood of litigation may be more imagined than real. Further,

Hayes v James & Charles Dodd [1990] 2 All ER 815, 823. A Burrows, Remedies for Torts and Breach of Contract (3rd edn, Oxford University Press 2004)

181 182

330.

Cf the argument of Sebert (n143) 1589, who rejects the ‘personal/commercial dichotomy’. The characterisation in the text above of the principal motivation of respectively commercial and non-commercial contractors seems sound (subject only to the boundary difficulties inherent in any such bright line distinction) and so a sufficient justification for the distinction. 184 Burrows (n182) 333 points out that the risk of claims for DNPL being added to all commercial actions is greatly mitigated by the fact that many such actions are brought by corporate bodies which cannot experience mental distress. 185 Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732 [98] per Lord Scott: ‘the distinction between commercial contracts and other contracts is too imprecise to be satisfactory’. Cf Johnson v Unisys Ltd [2001] UKHL 13, [2001] 2 WLR 1076 [70] per Lord Millett: ‘the general rule [as to the irrecoverability of DNPL] would seem to be a sound one, at least in relation to ordinary commercial contracts entered into by both parties with a view to profit’. 186 Soh ‘Anguish, Forseeability and Policy’ (1989) 105 LQR 43, 45, referred to by Harder (n45) at 110. 187 Discussion Paper on Remedies for Breach of Contract (n135) at respectively para 7.32. 183

218  Research handbook on remedies in private law when prospective litigators weigh such potentially small awards against the undoubted costs and risks of litigation this will likely dissuade many from proceeding with a claim at all. It Was Not Foreseeable In Addis Lord Gorell188 appeared to proceed on the basis of the application of the familiar principles of remoteness of loss laid down in Hadley v Baxendale.189 He expressly said that the latter branch of the rule ‘is inapplicable’ to the facts as consequential loss was not in issue190 and concurred with the majority that the sum claimed for injured feelings was not recoverable. It must therefore follow that Lord Gorell held that sum not to fall within the first part of the rule in Hadley. However, the idea that such loss is not a foreseeable consequence of breach flies in the face of common sense. Is it really arguable that an employer who dismisses an employee in a humiliating way will not realise that some distress will result? This was recognised by Bingham LJ in Watts v Morrow.191 A contract breaker is not in general liable for any distress … which his breach of contract may cause to the innocent party. The rule is not, I think, founded on the assumption that such reactions are not foreseeable (emphasis added).

It is therefore clear that a restrictive approach to the availability of DNPL cannot be justified by reference to the concept of foreseeability. Assumption of Responsibility An argument has been made which is the diametric opposite of that just considered. It can be said that the disappointment of the promisee if a contractual performance is not delivered is so obvious that it must be something which the promisee has anticipated and which he has thereby assumed responsibility for. As Lord Millett explains in Johnson v Unisys Ltd:192 The ordinary feelings of anxiety, frustration and disappointment caused by any breach of contract … are so commonly a consequence of a breach of contract that the parties must be regarded as not only having foreseen it but as having agreed to take the risk of its occurrence.

Harder points out that the inference of such an assumption of responsibility or waiver of compensation is inconsistent with the background assumption that they will receive full compensation for contractual losses.193 This compensatory aim of an award of contract damages has been described as the ‘general principle’, ‘fundamental basis’ or ‘bedrock’ of our law of contract194 and should not be regarded as displaced in this way. Indeed, the speciousness of this argument is exposed by Burrows, who notes that if responsibility for losses resulting from [1909] AC 488. (1854) 9 Ex 341. 190 [1909] AC 488, 501. 191 [1991] 1 WLR 1421, 1445. 192 [2001] UKHL 13, [2001] 2 WLR 1076 [70]. 193 Harder (n45) at 107. 194 See, respectively, A-G v Blake [2000] 3 WLR 625 at 632 per Lord Nicholls; British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Rlys Co of London Ltd [1912] AC 673 at 689 188 189

The recovery of damages for non-pecuniary loss in contract and tort  219 breach of contract was always assumed by the promisee, no damages, pecuniary or non-pecuniary, would be payable.195

CONCLUSION Having examined in detail the different arguments of policy that have been said to support the more restrictive availability of DNPL in breach of contract cases none were found, singly or even collectively, to be convincing. The lack of consensus about what proposition of law the old case of Addis actually stands for is itself sufficient reason to disregard it as a workable limit upon the recovery of damages. It is suggested that by legislation or precedent the case should be overruled or the law restated in a way that does not recognise any special prohibition upon the availability of DNPL in a contractual action. Claims for non-pecuniary loss could then become assimilated to the protection of the usual expectation and reliance interests in the law of contract damages. So viewed, the current exceptions to non-recovery of DNPL on the basis that the provision of pleasure or peace of mind was an important object of the contract would form part of the protection of the claimant’s expectation interest as they would form part of a claim, so far as money can, to be put in the position the claimant would have been in if the contract had been performed. The same is true of any claim to damages for loss of amenity. In contrast, damages for physical inconvenience are at base a claim to be restored to the position the claimant was in before the contract was entered into, and so would form part of the protection of the claimant’s reliance interest. Claims of either kind would in the manner of analogous claims to damages for pecuniary loss be subject to all the usual general principles of proof and the limits upon recovery implemented by the general doctrines of remoteness, mitigation and where applicable contributory negligence. The more general availability of DNPL in actions for breach of contract would bring the law of contract into closer alignment with the law of tort in this respect. This proposal would restate the law in a principled way, free of the arbitrary concepts and distinctions that define the current ‘pockets’ of recovery. Such recovery would, however, be modest and restrained by the familiar limiting doctrines which are also applied to damages awarded in respect of pecuniary losses.

per Viscount Haldane LC; and Rowley v Cerberus Software Ltd [2001] EWCA Civ 78, at [27] per Sedley LJ. 195 Burrows (n182) 333.

13. Remedies for common mistake and frustration Catharine MacMillan

INTRODUCTION This chapter considers the remedies available for common mistake and frustration in English law. A word of caution is needed with respect to this topic. Lord Wilberforce observed that ‘typically, English law fastens not on principles but on remedies’;1 what this chapter does, though, is to focus upon the atypical situations of mistake and frustration where English law is more concerned with principles than remedies.2 There are several reasons for this state; first, the remedial response in cases where either doctrine is involved are often regarded as part of the substantive doctrine; second, many of the ‘remedies’ associated with these areas are themselves atypical and more closely associated with unjust enrichment than contract; and, third, in the case of frustration, the remedial consequences are largely determined by legislation rather than case law. What does a ‘remedy’ mean? Professor Lawson considered that ‘the notion of “remedy” is not easily defined’3 but thought it best ‘to associate remedies not with rights but with wrongs’.4 A ‘wrong’ denotes some form of culpable misfeasance that engenders a legal response in attempting to redress the situation. With the most common remedy of contract law, an award of damages for breach, the court is attempting to place the party who has suffered from the breach in the position she would be in had the contract been performed. The wrong is the act of breach. English contract law is well suited to providing remedies where a wrong occurs as a result of the deliberate or negligent act of one of the parties. It is less well suited, however, to provide redress in absence of wrong. While mistake and frustration are in one sense concerned with fundamentally different instances in law (mistake with the formation of a contract, frustration with the discharge of a contract) both involve instances where performance becomes radically different from that anticipated. It may even become impossible to perform the contract due to an initial or subsequent impossibility. Each doctrine exists just beyond the boundaries of a similar doctrine which provides clear remedies where a wrong has been committed. If we compare misrepresentation with mistake, a misrepresentation is a mistake the responsibility for which the law allocates to one of the parties and awards damages against that party for the harm occasioned by the wrong of the misrepresentation made negligently or fraudulently. A similar comparison exists for frustration and breach. Frustration operates when a contract is discharged without the fault of either party, for if there is a sufficiently serious fault on the part of a party which entitles the injured party to terminate the contract this is a Davy v Spelthorne BC [1984] 1 AC 262 at 276 (HL). As Waddams has observed, English law generally considers rescission and rectification for mistake as matters of substantive law rather than as remedies: S M Waddams, ‘Remedies as a Legal Subject’ (1983) 3 OJLS 113, 117. 3 F H Lawson, Remedies in English Law (Penguin Books 1972) 10. 4 Ibid, 14. 1 2

220

Remedies for common mistake and frustration  221 breach of contract for which the law allows the injured party the ability to terminate the contract and to seek damages. The injured party’s remedies for breach are provided in response to the wrong suffered by the act of the other party. In contrast mistake and frustration arise where, by definition, no wrong has been occasioned. There is, thus, strictly speaking no remedy available according to the analysis considered above. Indeed, in the case of mistake, no contract has ever been formed because ‘[i] f mistake operates at all it operates so as to negative or in some cases to nullify consent’.5 Absent a contract there is no wrong occasioned when a party refuses to perform that which is not binding. In the case of frustration, a contract has existed; however a subsequent impossibility has prevented contractual performance. No remedy is given, though, for ‘frustration of a contract [only] takes place when there supervenes an event ... without default of either party’.6 While Professor Eisenberg has argued that ‘the problems presented by un-expected circumstances cases should be viewed in significant part through a remedial lens’,7 he does so with the acknowledgement that this is not the usual approach to such instances of non-performance. While a remedy in the traditional sense of recompense for a wrong is not available in cases of either mistake or frustration, there are forms of redress available. It is also the case that restitution may lie for an unjust enrichment which arises when a contract is avoided by mistake or discharged by frustration.

COMMON MISTAKE A consideration of the possible remedies for common mistake raises the uneasy relationship between mistake at common law and mistake in equity. Most modern lawyers would prefer to amalgamate the two into a legal doctrine. Such an amalgamation has neither a basis in the precedents8 nor a desirability in principle or practice. The doctrine of mistake in English contract law was a Victorian invention which arose from the efforts of treatise writers to organise contract law around the will theory of civilian jurists. The result was a common law doctrine which operated to render an apparent contract void because the misapprehension operated to remove the consent necessary to contract. To provide a basis for this new doctrine they borrowed equitable mistake cases. These were cases, though, decided on the basis of principles concerned with conscience rather than consent. The courts of equity recognised that a misapprehension on the part of one or more parties could make it unconscientious to allow such an agreement to be enforced at common law and could rescind the contract, possibly on terms.9

5 Bell v Lever Brothers, Ltd [1932] 1 AC 161, 217 per Lord Atkin. The case does not stand for the propositions it is generally thought to: see C MacMillan, ‘How Temptation Led to Mistake: An Explanation of Bell v Lever Bros’ (2003) 19 LQR 625 and C MacMillan, Mistakes in Contract Law (Hart 2010) ch 9. 6 National Carriers v Panalpina, Ltd [1981] AC 675, 700 per Lord Simon. Note Lord Radcliffe: ‘frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed’ (Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, 729). 7 M A Eisenberg, ‘Impossibility, Impracticability and Frustration’ (2009) 1 J Legal Analysis 207, 258. 8 Mistakes in Contract Law (n5). 9 Ibid, ch 3.

222  Research handbook on remedies in private law Re-explained by the treatise writers these came to be instances of contracts described as void for want of consent and this mistaken approach formed the basis of Lord Atkin’s decision in Bell v Lever Bros.10 While this new doctrine of mistake at common law provided no remedy, simply finding that the contract was void,11 courts of equity had three responses where the contract was written. The first was that equity would refuse to order specific performance where the contract was based upon a mistake. Because this operates as a defence it will not be considered here. The other two responses did act as a form of redress: the rescission of a contract (possibly on terms) and the rectification of a contract.

RESCISSION FOR MISTAKE Courts of equity had the power to rescind a contract for mistake.12 A court of equity could order up the delivery and cancellation of agreements, deeds and other instruments on the basis that it was against conscience for a party to employ an instrument at law where there was a good defence to it in equity. Rescission was used sparingly as it was a drastic response which prevented a party from any remedy at law. Even more occasionally, a contract would be rescinded on terms in order to prevent injustice to the other party as the House of Lords’ decision in Cooper v Phibbs13 clearly demonstrates. This decision was not, however, considered in any detail in the judgments of the leading case on common mistake,14 Bell v Lever Bros, undoubtedly because the treatises upon which their Lordships relied made no such distinction.15 Contemporaries viewed Bell v Lever Bros as unsatisfactory for several reasons.16 A central problem was that it was difficult to ascertain when, if ever, a sufficiently fundamental mistake occurred. And if it had occurred, the consequences of finding a sufficiently fundamental common mistake rendered the contract void. This removes all judicial flexibility and discretion in ameliorating the harshness of the result. The situation was worsened by the lack of a body of law concerned with unjust enrichment. If a court were to find a contract void it had little ability to attempt to restore the parties to their original positions or to prevent an unjust enrichment of one party at the expense of another. The situation was even worse where a third party had acted detrimentally in reliance upon the void contract. It was for these reasons that Lord Denning gave the judgment he did in Solle v Butcher.17 The case was concerned with a landlord and tenant who had entered into a lease with the common mistake that the flat was not subject to the Rent Acts. The mistake altered dramatically the rent that could be charged.

Ibid, ch 9. Leaving a possible claim in unjust enrichment for any benefits conferred pursuant to the apparent contract. 12 Mistakes in Contract Law (n5) 61–2. 13 (1867) LR 2 HL 149; P Matthews, ‘A Note on Cooper v Phibbs’ (1989) 105 LQR 599. 14 Referred to as mutual mistake. 15 Mistakes in Contract Law (n5) 275–7. 16 See, for example, R Champness, Mistake in the Law of Contract (Stevens and Sons Limited 1933); H A E, ‘Contracts-Mistake in Formation’ (1932) 4 CLJ 370; H C G, ‘Notes Bell v Lever Brothers, Ltd’ (1932) 48 LQR 148; and P A Landon, ‘Bell v Lever’ (1935) 51 LQR 650. 17 [1950] 1 KB 671 (CA); C MacMillan, ‘Solle v Butcher (1949)’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Restitution (Hart Publishing 2006). 10 11

Remedies for common mistake and frustration  223 Lord Denning recognised the paramountcy of Bell v Lever Bros but also held that courts of equity had found contracts to be voidable which were good at law. ‘A contract’, he stated, ‘is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.’18 As this was one such instance, Lord Denning set aside the contract in equity and upon terms (namely that the tenant could remain in the flat as a licensee until a new lease was executed). Jenkins LJ dissented and Bucknill LJ agreed with Lord Denning but on the narrower basis that the case was within Cooper v Phibbs. The result of the decision was to allow an ambit of operation for common mistake in equity and Solle v Butcher was followed or accepted in a number of later cases.19 The effect of the operation of the doctrine in equity was to allow a form of remedy for cases of common mistake. At the option of the injured party, the contract could be rescinded with the possibility that terms could be given to apportion loss and to otherwise ameliorate the harsh results presented at common law.20 The difficulty was that the distinction between Solle v Butcher and Bell v Lever Bros was viewed with suspicion. It admitted too much judicial discretion into the determination and resolution of common mistake for many lawyers. In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd,21 the Court of Appeal upheld the decision of Toulson J,22 following his reasoning that there was no separate doctrine of common mistake in equity. ‘[I]f coherence is to be restored to this area of our law’, stated Lord Phillips MR, ‘it can only be by declaring that there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law.’23 While the case was decided per incuriam,24 leaving it open to a later court to decline to follow it, The Great Peace has subsequently been described by the Supreme Court as effectively overruling Solle v Butcher.25 While this description was made in obiter dicta, the force of such a description effectively precludes the existence at present of an equitable doctrine of common mistake in England and Wales. In so doing it removed, in English law, the only remaining avenue available for the development of a workable doctrine of common mistake.

RECTIFICATION While the equitable remedy of rescission for mistake has been effectively removed, the remedy of rectification has recently undergone startling changes, a development attended

MacMillan (n17) 693. Magee v Pennine Insurance [1969] 2 QB 507 (CA); Grist v Bailey [1967] Ch 532 (ChD); Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255 (QB); and Clarion Ltd v National Provident Institution [2000] 1 WLR 1888 (ChD). 20 D Harris, D Campbell and R Halson, Remedies in Contract and Tort (2nd edn, Butterworths 2002). 21 [2002] EWCA Civ 1407. 22 [2001] EWHC 529. 23 Great Peace Shipping (n21) [157]. 24 S B Midwinter, ‘The Great Peace and precedent’ (2003) 119 LQR 180, 182, relying upon Young v Bristol Aeroplane [1944] KB 718 (CA). 25 Pitt v Holt [2013] UKSC 26 at [115] per Lord Walker of Gestingthorpe. 18 19

224  Research handbook on remedies in private law with criticism. Rectification is available when a written document does not accord with the actual (prior) agreement between the parties, for ‘rectification is concerned with contracts and documents, not with intentions’.26 Rectification is granted ‘not for the purpose of altering the terms of an agreement ... but for that of correcting a written instrument which, by a mistake in verbal expression, does not accurately reflect their true agreement’.27 Where it is granted rectification is effected by the order of the court and it is retrospective in its application. Specific performance of an agreement which has been rectified can be sought.28 Recent cases indicate that while rectification is concerned with the correction of the document it is a remedy which can be sought in cases where the real difficulty is something in the nature of a common mistake. That these cases are brought seeking rectification indicates the sterility of common mistake in English law following the Great Peace, a decision which not only removed the possibility of equitable relief for common mistake but sought also to transform mistake into a doctrine of initial impossibility, akin to the subsequent impossibility required to frustrate a contract.29 It is suggested that there is substantial motivation for parties to seek the rectification of a contract in instances where the parties are effectively at cross-purposes or have a substantive common mistake but wish to preserve a form of contract.30 Rectification can thus work to provide some form of remedy where the alternative is no contract by reason of a mistake in formation. In Swainland Builders Limited v Freehold Properties Limited Peter Gibson LJ enumerated the requirements to be met by a party seeking rectification for a common mistake. As claimant, she must establish that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake the instrument did not reflect that common intention.’31

In establishing these requirements a claim for rectification allows the claimant to produce parole evidence. This ability distinguishes rectification from simple construction,32 in which a

Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450, 461 per Denning

26

LJ.

Agip SpA v Navigazione Alta Italia SpA (‘The Nai Genova and Nai Superba’) [1984] 1 Lloyd’s Rep 353 (CA), 359 per Slade LJ. 28 United States of America v Motor Trucks [1924] AC 196 (PC). 29 Lord Phillips MR drew expressly from an older frustration case to establish the criteria necessary for a common mistake to avoid a contract and one of these criteria was that ‘the non-existence of the state of affairs must render performance of the contract impossible’: Great Peace Shipping (n21) [76]. 30 See Lord Toulson’s description of Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561 (CA) as one where ‘the defendants sought to finesse the fact that there was no common mistake as to the substantive contents of the formal contract’: Lord Toulson, ‘Does Rectification require Rectifying?’, https:​/​ /​www​.supremecourt​.uk/​docs/​speech​-131031​.pdf accessed 23 February 2018, 8. 31 Swainland Builders Limited v Freehold Properties Limited [2002] EWCA Civ 560, [33] per Peter Gibson LJ, accepted by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [48]. 32 Clowes v Higginson (1813) 35 ER 204 (Ch), Lovell and Christmas Ltd v Wall (1911) 104 L T 85, and Chartbrook, ibid, [47]. 27

Remedies for common mistake and frustration  225 document may be construed in such a way as to overcome some problems of common mistake. Rectification, it will be remembered, was a remedy unique to the courts of equity and it was made possible, in large part, by the powers of these courts to admit evidence that could not be admitted in courts of law. As will be observed below, the rules of evidence are thus of significance in relation to rectification. The second and fourth requirements enumerated in Swainland Builders have not given rise to significant controversy. The second requirement, that there be an outward expression of accord, has come to be seen ‘more as an evidential factor rather than a strict legal requirement’.33 Etherton LJ, however, viewed it as a part of the common continuing intention ‘since an uncommunicated inward intention is irrelevant’.34 The two requirements which have given rise to the greatest problems are the first (that the parties had a common continuing intention) and the third (that the intention continued to execution). Both requirements have seen recent developments. A critical problem is: should an objective or subjective standard prevail in order to determine the prior common intention and its continuance to the point of contract? The point had been in some dispute since Josceleyne v Nissen.35 These recent developments begin with House of Lords’ decision in Chartbrook Ltd v Persimmon Homes Ltd.36 The case concerned a dispute between two parties as to how to calculate the payment due under a land development contract where there existed different possible sums calculated under the payment mechanism stipulated. While the House of Lords decided the case on the basis of construction, Lord Hoffmann made significant observations in obiter dicta on rectification. For the House of Lords the remedy was available ‘when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified’.37 This common continuing intention was something less than a concluded antecedent contract. Importantly, this common continuing intention was determined on what was outwardly manifested on an objective basis: ‘what an objective observer would have thought the intentions of the parties to be’.38 In this formulation the question of what a party or parties subjectively (or inwardly) intended is irrelevant. While such a formulation presents the advantages of reducing the evidence required to establish the remedy while simultaneously aligning the remedy of rectification with the general contractual requirement that objectivity rather than subjectivity prevails, there are certain problems presented by this objective formulation. One is that because the parties’ actual intentions are to be disregarded unless they are objectively manifested the parties may be bound to a contract which neither intended. As Professor McLauchlan has observed, there is something ‘seriously amiss’ in such a situation.39 Another problem is that rectification will frequently be advanced in addition to arguments regarding the construction of the contract, for the plea of rectification allows evi Munt v Beasley [2006] EWCA Civ 370, [36] per Mummery LJ. Daventry DC v Daventry and District Housing Ltd [2011] EWCA Civ 1153, [80]. 35 [1970] 2 QB 86 (CA). An early rejection of the ‘outward expression of accord’ was given by L Bromley, ‘Rectification in Equity’ (1971) 87 LQR 532; M Smith, ‘Rectification of Contracts for Common Mistake, Joscelyne v Nissen, and Subjective States of Mind’ (2007) 123 LQR 116. 36 [2009] UKHL 38. 37 Ibid, [60]. 38 Ibid. 39 D McLauchlan, ‘Refining Rectification’ (2014) LQR 83, 91; D McLauchlan, ‘The Contract That Neither Party Intends’ (2012) 29 JCL 26. 33 34

226  Research handbook on remedies in private law dence to be led of prior negotiations that would otherwise be excluded in considering the construction of the contract.40 This has the effect of muddling the processes of construction with the granting of rectification. A third problem is that the case appears to stretch the notion of a common mistake.41 While each of the parties in this case laboured under a mistake, each had their own mistake. A fourth problem is, as Lord Justice Patten observed extra-judicially, that ‘the purely objective test … imports an inherent lack of reality by relying on at least one and possibly two layers of abstraction’.42 First the court employs an objective exercise, removed from the parties’ actual intentions, to construct the words used to record the accord. The court then conducts a superficial analysis of the situation based upon the exchanges between the parties, an exercise almost impossible without evidence of the parties’ actual intent. Taken together these problems raise questions about the correctness of Chartbrook with regard to rectification. Some of the problems posed by Chartbrook were considered by the Court of Appeal in Daventry District Council v Daventry & District Housing Ltd.43 The facts of this case were unusual for a rectification claim. The case concerned the sale and transfer of the claimant local authority’s housing stock and staff to the defendant, a specially formed registered social landlord. Of critical importance in this sale was the outstanding pension deficit of the claimant’s staff. The claimant’s chief negotiator, Mr Bruno, proposed a particular formula to the defendant’s chief negotiator, Mr Roebuck. While Bruno had intended to split the deficit, Roebuck seized upon an ambiguity in the formula to present to the defendant’s board an interpretation which had the claimant pay the deficit. Roebuck was ‘disingenuous’44 in his dealings with not only Bruno but also with his own board. In successive discussions and documents, the defendant proceeded on the basis that the claimant would pay the deficit; Bruno proceeded, carelessly, without realising this different interpretation of his formula. A critical issue was whether or not there was a common continuing intention as to the payment of the deficit and that this continued until the contract was executed. The issue arose because of a clause added late in drafting which clearly provided that the deficit fell upon the claimant. The executed contract provided that the claimant would pay the deficit although this was not realised by the claimant until after the contract had been executed. The problems with the rigidity imposed upon mistake in Great Peace Shipping are apparent in Daventry. It is arguable that there was no contract at all in Daventry by reason of Smith v Hughes:45 the defendant was aware, through Roebuck, that the claimant misapprehended the defendant’s promise. The ‘success’, however, of such an argument would be a finding that the contract was void and the claimant thus framed its case as one for rectification. The point is that the current state of the English doctrine of mistake is such that parties will frame their action to seek a remedy in rectification for what is a mistake in the formation of the contract, for the latter is difficult to prove and avails itself of no remedy.

R Buxton, ‘“Construction” and Rectification after Chartbrook’, (2010) CLJ 253, 261. H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) 3-080. 42 Lord Justice Patten, ‘Does the Law Need to Be Rectified? Chartbrook Revisited’, http:​/​/​ www​.chba​.org​.uk/​for​-members/​library/​annual​-lectures/​does​-the​-law​-need​-to​-be​-rectified​-chartbrook​ -revisited accessed 23 February 2018, 26. 43 [2011] EWCA Civ 1153. 44 The description of Toulson LJ, ibid, [117]. 45 (1870–71) LR 6 QB 597, 608 per Hannen J. Note the discussion of Toulson LJ, ibid, [178]. 40 41

Remedies for common mistake and frustration  227 Given this context it is unsurprising that the members of the Court of Appeal divided on the issue of rectification. While all three sought to apply the objective test outlined in Chartbrook, they disagreed on the correctness of the test. For Toulson LJ there was ‘a question mark whether the principle adopted in this decision was right’.46 The particular difficulty before him was whether or not there could be said to be a common continuing intention or whether this was removed in a subsequent draft of the agreement. Despite his reservations about the correctness of Chartbrook, Toulson LJ applied it to find that the claimant was entitled to rectification.47 Lord Neuberger MR agreed with this result. Considering ‘what a hypothetical reasonable objective observer, aware of all the relevant facts known to both parties, would conclude’,48 Lord Neuberger held that such an observer would not have concluded that the defendant was intending a departure from the prior accord when a later clause was introduced into the contract.49 Etherton LJ dissented. Lord Neuberger, however, agreed with his analysis of the law of rectification,50 although he expressed no view on whether it would be appropriate for the court to depart from Lord Hoffmann’s objective approach.51 Contained within Etherton LJ’s reasoning was an approval of the ‘objective accord … over subjective belief and intention in cases of rectification for mutual mistake’.52 The result preserves the problem of whether the standard is objective or subjective, Intriguingly, both Etherton LJ and Lord Toulson have written about rectification extra-judicially,53 a matter indicative of the current problems in this area of law. Etherton LJ acknowledges the attraction of a policy which permitted rectification of a term which both parties actually intended, ‘albeit uncommunicated’, and which was mistakenly omitted from the written contract.54 This attraction was outweighed, though, by pragmatic considerations of ‘the cost, complexity and time consuming consequences of disclosure in commercial litigation’,55 factors necessarily presented by the need to prove anything other than an objective agreement. These factors were not only time consuming but also facilitated speculative litigation. In contrast, Lord Toulson agreed with Professor McLauchlan’s criticisms of Chartbrook and rejected an entirely objective approach in entering into the contract as one which was necessarily inconsistent with the maintenance of the earlier intention.56 Academic commentators, after the decision in Daventry, have been critical of the objective approach and some have sought a return to an earlier subjective approach to establish common

Ibid, [157]. Ibid, [181]–[182] Toulson LJ observed that although the point was in obiter dicta, it was a unanimous opinion of the House of Lords which had been argued; that the Court of Appeal in the case before them had not heard argument on the correctness of the decision; and an application of Chartbrook to the case before him led to a just result. 48 Ibid, [197]. 49 Ibid, [213]. 50 Ibid, [227]. 51 Ibid, [196]. 52 Ibid, [89]. 53 T Etherton, ‘Contract Formation and the Fog of Rectification’, https:​//​​www​.judiciary​.gov​.uk/​wp​ -content/​uploads/​2015/​04/​contract​-formation​-and​-the​-fog​-of​-rectification​-for​-delivery​.pdf accessed 2 May 2019; Lord Toulson (n30). 54 Etherton (n53) 17. 55 Ibid, 18. 56 Ibid, 19. 46 47

228  Research handbook on remedies in private law intention.57 Others have indicated some support for the objective approach but noted that determining the agreement between the parties is more complex than applying a simple objective test.58 The better view appears to be that while the approach is usually objective, there are instances when a subjective approach is required. As Professor Cartwright observed where the parties are subjectively in agreement as to their contract and its terms, their subjective agreement determines the matter. Only where this subjective agreement is lacking does it become necessary to employ an objective test to determine, from the communications passing between the parties, as to what a reasonable person would conclude had been agreed. The objective test can never entirely override the subjective and the purpose of the objective test is to protect the party who reasonably relies on what he believes the other party has intended.59 Like Cartwright, McLauchlan, in a series of criticisms of the objective approach to rectification,60 also relies on the decision in Smith v Hughes for his argument. McLauchlan’s argument is that rectification can only serve the purpose of ensuring that the written contract corresponds with the true agreement between the parties and that this is to be assessed through an application of the ordinary principles of contract formation, particularly Smith v Hughes. While generally an objective approach should be adopted to working out these common intentions, in some circumstances it will be necessary to consider the actual knowledge and beliefs of the parties. McLauchlan thus advocates a form of ‘promisee objectivity’ espoused by Blackburn J in Smith v Hughes over the ‘detached objectivity’ of Lord Hoffmann in Chartbrook. He advocates this because it promotes security of transactions without the ‘sometimes absurd consequences’ of detached objectivity and because it fits with the way contract formation is usually expressed and applied.61 The employment of Smith v Hughes is an interesting one. The case is based on an unattributed borrowing from Benjamin on Sale, from an instance in which Benjamin sought to introduce the civilian subjective doctrine of mistake into an objective common law.62 It had nothing to do with the equitable remedy of rectification. Yet McLauchlan’s proposal has merit in that it is only through the sometimes subjective examination of intent that one can discern whether or not rectification is required to prevent unconscientious behaviour, which lies at the core of the original equitable remedy.63 In considering any future directions by courts, in addition to the criticisms of the objective interpretation set out above, it is important to remember that rectification is an equitable and not a legal remedy. It is a remedy fashioned specifically to prevent injustice and unconsciona-

P S Davies, ‘Rectifying the Course of Rectification’ (2012) 75 MLR 412. Another approach has been suggested extra-judicially by Lord Justice Patten (n42), namely that rectification is only available to conform ‘contracts to the terms and effect of a prior contractual accord’ (rather than a common continuing intention)’: 29. 58 Chitty on Contracts (n41) 3-082, 3-086. 59 J Cartwright, Misrepresentation, Mistake and Non-disclosure (4th edn, Sweet and Maxwell 2017) 484–8. 60 McLauchlan, ‘Refining Rectification’ (n39). See, also, McLauchlan, ‘The Contract That Neither Party Intends’ (n39) and ‘The “drastic” Remedy of Rectification for Unilateral Mistake’ (2008) LQR 608. 61 McLauchlan, ‘Refining Rectification’ (n39) 88. 62 Mistakes in Contract Law (n5) 130–1. 63 Ibid, 38–9, 54–6. 57

Remedies for common mistake and frustration  229 bility. Courts of equity were concerned with the actual intention of those concerned,64 and the difficulties of ascertaining intention have long bedevilled courts of equity.65 Where it is available, rectification is an equitable remedy exercised at the discretion of the court. As Lord Neuberger MR observed, ‘its origins lie in conscience and fair dealing’.66 Mere carelessness is unlikely to justify the refusal of rectification although the claimant cannot be allowed to rely on its own carelessness in failing to observe that the defendant no longer objectively adhered to the prior common intention.67 While a mere lapse of time does not bar the remedy,68 delay in pursuing the remedy renders it practically unjust to give it.69 The intervention of a bona fide third party who has given value may also be a bar to rectification.70 The parties must also be capable of being restored to their original positions although this requirement does not mean that there must be an exact restoration.71 English contract law now provides little by way of remedy where a contract has been entered into under a common mistake. The decision in Great Peace Shipping has effectively removed (for now) any equitable relief possible through rescission or rescission on terms. One result of the unsatisfactory consequence that now gives rise to a void contract has been to encourage mistake cases to be pled as rectification cases. While this allows the possibility of a remedy, the claim is an uncertain one and does the structure of the law no credit. Turning from mistake to frustration it is argued that the situation is little better.

FRUSTRATION Frustration discharges a contract as a matter of law and without wrong by any party to the contract. The remedial consequences are less than satisfactory. At common law, rights accrued before frustration remain enforceable. In Chandler v Webster72 the defendant remained liable for money payable at the time the contract was frustrated. While this inequity was partially ameliorated by the decision in Fibrosa Spolka Akcyjina v Fairbairn, Lawson, Combe, Barbour Ltd,73 by allowing the recovery of money paid where there had been a total failure of consideration, the Fibrosa case itself illuminates another problem.74 While the payor may recover money paid (or cease to be liable for money payable), the payee has no ability to set off or recover any of the expenses incurred to perform a contract which has now been I C F Spry, Equitable Remedies (8th edn, Sweet and Maxwell 2010) 611. Irnham v Child (1781) 28 ER 1006 (Ch); Marquis of Townshend v Stangroom (1801) 31 ER 1076 (Ch); Fowler v Fowler (1859) 45 ER 97 (Ch). 66 Daventry (n34), [194]. 67 Ibid, per Etherton LJ, [84], with whom Lord Neuberger MR agreed. 68 Re Garnett (1885) 31 Ch D 1(Ch). 69 Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221. 70 Smith v Jones [1954] 1 WLR 1089 (Ch), although rectification may be allowed where it deprives a third party of an unexpected windfall, Equity Syndicate Management Ltd v Glaxosmithkline Plc [2015] EWHC 2163 (Comm), [47]. 71 Earl of Beauchamp v Winn (1873) LR 6 HL 223 (HL). 72 [1904] 1 KB 493 (CA). 73 [1943] AC 32 (HL). 74 It has been argued that the case was wrongly decided upon its facts: P Mitchell, ‘Fibrosa Spolka Akcyjna v Fairburn Lawson Combe Barbour (1942)’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Restitution (Hart Publishing 2006) 271–2. 64 65

230  Research handbook on remedies in private law discharged. The decision in Whincup v Hughes75 limits the application of the Fibrosa case to those instances in which the consideration has wholly failed. If there is only a partial failure of consideration, there can be no recovery at all. In addition, at common law rights not yet accrued at the time of the frustration are no longer enforceable. The result is that where a party performs part of a contract which stipulates payment upon completion (or at a point after performance and the eventual discharge by frustration) this party cannot recover anything by way of a quantum meruit for her partial performance. In Appleby v Myers76 the plaintiff was, inter alia, to make and install machinery in the defendant’s factory. After part of the machinery had been installed the factory was destroyed by fire. The plaintiff was unable to recover anything on the basis that ‘the plaintiffs, having contracted to do an entire work for a specific sum, can recover nothing unless the work be done’.77 It should be remembered that the remedial consequences at common law were devised before English law recognised unjust enrichment as a separate body of obligations. A consideration of the position with a developed law of unjust enrichment would likely have resulted in different outcomes; and, indeed, might now generate different outcomes where the common law is still applicable. The Law Reform (Frustrated Contracts) Act 1943 In an attempt to resolve the defects in the remedial consequences presented at common law, the Law Reform (Frustrated Contracts) Act 194378 was passed, following the recommendations of the Law Revision Committee.79 The Act is concerned not with what consists of a frustrating event, a matter determined at common law, but with the remedial consequences following a frustrated contract. Because most contracts governed by English law will be within the ambit of the 1943 Act the balance of this chapter is concerned to examine the application of its provisions rather than the common law position.80 While the Act resolved the defects presented by the case law existing at the time it was passed it provides a less than satisfactory approach to the consequences of frustration. The doctrine of frustration was, in 1943, still of tender years81 and the recognition of unjust enrichment as a distinct body of obligations decades away. Nevertheless, the Act has been criticised as ‘so poorly drafted that it has given (1871) LR 6 CP 78 (CP). (1867) LR 2 CP 651. 77 Ibid, per Blackburn J, 661. 78 6 & 7 Geo. 6, c. 40. 79 Law Revision Committee, Seventh Interim Report (Rule in Chandler v Webster) (Cmd. 6009/1939). P Mitchell (n74) has argued that there was a continuity of purpose and personnel behind the Act, the Law Revision Committee’s consideration and the Fibrosa case. 80 Section 2(5) provides limited exclusion from the Act. The common law position is considered in depth in G L Williams, The Law Reform (Frustrated Contracts) Act, 1943 (Stevens and Sons 1944) and R G McElroy, Impossibility of Performance (Cambridge University Press 1941). See, also, M N Howard QC, ‘Frustration and Shipping Law – Old Problems, New Contexts’ in E McKendrick (ed.), Force Majeure and Frustration of Contract (2nd edn, Lloyd’s of London Press 1995). 81 ‘The sense in which the word “frustration”’, McNair cautiously observed at the time, ‘is used is now changing and widening and cannot yet be said to be uniform’: A McNair, ‘The Law Reform (Frustrated Contracts) Act 1943’ (1944) 60 LQR 160, 162. I have argued elsewhere that the English doctrine of frustration was developed as a response to the way in which Britain fought the Great War: C 75 76

Remedies for common mistake and frustration  231 rise to problems of interpretation all out of proportion to its short length, and has brought very limited improvement to the common law’.82 There are, it will be argued, three principal weaknesses presented by the Act. The first is to be found in the overall scheme of the Act which, while trying to ameliorate possible unjust enrichments, does so in accordance with the terms of the particular contract. There is an in-built haphazardness to this approach. The second is to be found in the particular approach of the Act which distinguishes between monetary and valuable benefits. And the third are those instances which are omitted from any consideration at all, that is to say, by the existence of a legislative lacuna. It is probably because of these three inter-locking problems that there are so few cases concerned with the application of the Act. Contracting parties, it would appear, choose to avoid the uncertainty and difficulties of these provisions by making express contractual provision for what sort of events will discharge their contract and the remedial consequences which attend this discharge. It is also likely that commercial parties proceed to arbitrate these issues rather than litigate them. The Act, by its own provisions, does not apply where the parties have made such provision.83 The resulting lack of case law does little to help predict the application of the Act or to consider the particular problems presented by it. The Act is concerned with three particular forms of loss and unjust enrichment. The first is money paid or payable to a party at the time the contract is discharged by frustration, the Chandler v Webster problem. Subsection 1(2) provides that such sums shall be recoverable if paid and in the case of sums payable, cease to be payable. The second is with the conferment of a valuable benefit. Subsection 1(3) allows a court to award a sum it considers just where one party has conferred a valuable benefit upon another. The third is a form of reliance loss, the instance where a party has expended sums in reliance of the contract later discharged by frustration. Both of the above subsections allow the court the ability for the party upon whom the money or benefit was conferred to effectively ‘set off’ monies paid by way of expenses in performance of the (now discharged) contract. Because slightly different considerations attend these reliance losses in relation to s 1(2) and (3) we will consider them together with the kind of benefit conferred. Professor Birks recognised that an unjust enrichment is an enrichment which has no basis. In cases of frustrated contracts, a contractual obligation is valid when the enrichment was received but is subsequently invalidated when the contract is discharged through frustration as the basis has been removed.84 Almost uniquely in English law, the 1943 Act provides a statutory basis upon which to deal with unjust enrichment. The leading case concerned with the Act, and the field is a small one, is BP Exploration Co (Libya) Ltd v Hunt (No. 2).85 The parties were engaged in the exploitation of a Libyan oil field which required the plaintiff to provide the initial funding to develop a concession granted to the defendant. After the production of oil had commenced the Libyan government expropriated the interests of the plaintiff and then the

MacMillan ‘English Contract Law and the Great War: The Development of a Doctrine of Frustration’ (2014) 2 Comparative Legal History 278. 82 Harris et al. (n20) 252. 83 Section 2(3). On the operation and effect of such provisions, see E McKendrick, ‘The Consequences of Frustration – The Law Reform (Frustrated Contracts) Act 1943’ in E McKendrick (ed.), Force Majeure and Frustration of Contract (2nd edn, Lloyd’s of London Press 1995) 228. 84 P Birks, Unjust Enrichment (2nd edn, Oxford University Press 2005) 140. 85 BP v Hunt 1 WLR 783. Substantially affirmed [1981] 1 WLR 236 (CA), [1983] 2 AC 352 (HL).

232  Research handbook on remedies in private law defendant. Robert Goff J held that this was a frustrating event and his judgment establishes the approach to interpreting the 1943 Act generally and s 1(3) in particular.86 He began his consideration of the law by describing the Act: ‘it creates statutory remedies, enabling the court to award restitution in respect of benefits conferred under contracts thereafter frustrated’.87 The fundamental purpose underlying the Act ‘is prevention of unjust enrichment of either party to the contract at the other’s expense’.88 Lawton LJ in the Court of Appeal was concerned not to go beyond the words of the statute,89 a situation which has led some to challenge the basis set out by Robert Goff J on the ground that the real basis of the Act is to provide a flexible mechanism for the adjustment of loss.90 The more convincing view of Professor McKendrick is to reject this ‘flexible mechanism’ approach.91 While McKendrick does this by comparison to the statutes of jurisdictions which specifically apportion loss, such as British Columbia,92 further support can be found in the original considerations of the Law Revision Committee which expressly rejected a principle of loss sharing. Glanville Williams, a contemporary, was particularly critical of this rejection.93 A particular weakness of the Act is that the focus upon the prevention of unjust enrichment by means of the conferment of a monetary benefit or a valuable benefit is that it omits to deal with payments in kind. If the parties have arranged an exchange of things other than money, the Act is unable to provide relief from unjust enrichment. Such a situation is unlikely to reach litigation, though, for the barter of valuable items is likely to be done by contract and thus subject to contractual provisions which will probably include a clause concerned with such a problem. The barter of less valuable items is likely to render the litigation too expensive to be prosecuted. Should, however, litigation result it is likely that the common law result in the twenty-first century, after the recognition of an obligation of unjust enrichment, will produce more satisfactory results than those instances where courts first discharged contracts for frustration, the so-called ‘Coronation Cases’. Payment of Money, s 1(2) The recovery of money paid is dealt with in s 1(3):

86 The contract in question had no choice of law clause. The parties adopted a Texan form of contract, undoubtedly one with which the Texan oilman Hunt was familiar, which would have covered the expropriation within its force majeure clause. In short, the leading English case may owe its existence to a series of unintended consequences: V P Goldberg, ‘After Frustration: Three Cheers for Chandler v Webster’ (2011) 68 Wash & Lee Rev 1133, 1150. 87 BP v Hunt (n85) 796. 88 Ibid, 799. 89 BP v Hunt (n85) 243. 90 A M Haycroft and D M Waksman, ‘Restitution and Frustration’ [1984] JBL 207, 225. 91 McKendrick (n83) 228. 92 Frustrated Contract Act [RSBC 1996] c 166, s 2(4). British Columbia initially failed to enact a form of the 1943 Act in 1959 and when the Law Reform Commission returned to the issue in 1971 thought that there was room for improvement upon the English Act, particularly with regard to the apportionment of loss: Report on the Need for Frustrated Contracts Legislation in British Columbia (Project No. 8), LRC 3, 1971, 4, 41–2. For a detailed comparison and analysis of the various frustrated contracts statutes in Commonwealth common law jurisdictions, see A Stewart and J W Carter, ‘Frustrated Contracts and Statutory Adjustment: The Case for a Reappraisal’ (1992) 51 CLJ 66. 93 Williams (n80) 37.

Remedies for common mistake and frustration  233 All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged … “the time of discharge” … shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable. (emphasis added)

The provision is thus concerned only with money paid or payable pursuant to the contract and done so before the time of discharge. Money payable after discharge does, of course, cease as an obligation when the contract is discharged by the frustration. Where a party pays money after the time of discharge she might wish to seek it back by way of a restitutionary remedy at common law but the Act provides her no relief. In addition, the wording of the provision also excludes any pre-contractual payments since these would not be undertaken ‘in pursuance of the contract’. It is these considerations, coupled with the limitation that the sums are paid or payable pursuant to the contract which work to diminish the truly restitutionary nature of the Act. Section 1(2) allows the recovery of sums paid pursuant to the contract which is later discharged. This is permitted even when the payor may have obtained some benefit, in other words, where there has not been a total failure of consideration94 as there was in Whincup v Hughes. This has led Professor Treitel to suggest that the wording of ‘all sums paid’ is unfortunate in situations where the payor has obtained some benefit.95 In situations where there has been the conferment of a benefit upon the payor, the action of the payee will lie under s 1(3) to obtain recompense for this benefit. In the only major case to consider the subsection, Gamerco SA v I.C.M./Fair Warning (Agency) Ltd,96 the issue of whether a sum was paid or payable did not arise and little guidance is given on what these terms mean. It appears that this is largely envisioned as a mechanical point of accounting, raising possible evidentiary issues but not substantive ones. Robert Goff J observed in obiter dicta in BP v Hunt that the sum could not include a component which compensated for the time value of money which may have been paid years before the frustrating event.97 Once the sum paid or payable has been established on a balance of probabilities by the claimant, the defendant is given an opportunity to effectively ‘set off’ the expenses they have incurred ‘before the time of discharge, in or for the purpose of, the performance of the contract’ where the court considers it just having regard to all the circumstances of the case to allow such retention or to allow him to recover the whole or part of any moneys payable. Robert Goff J described the provision as best rationalised as statutory recognition of the change of position defence.98 In truth, the provisions provide a rather crude mechanism for apportioning loss, crude because it depends upon the contractual provisions of the parties. Thus if the claimant pays £10,000 in partial payment for the delivery of a particular car and the defendant expends £12,000 in partial performance of this obligation, the defendant is out of pocket £2,000, the claimant £10,000. Neither is likely to think the result just. If, however, the claimant had only paid £1,000 and the defendant expended £50, the claimant recovers £950 and the defendant is not out of pocket. Each party may see some justice in the result. The difference between these BP v Hunt (n85) 800. Sir Guenter Treitel, Frustration and Force Majeure (3rd edn, Sweet and Maxwell 2014) 597. 96 [1995] 1 WLR 1226. 97 BP v Hunt (n85) 800. He did find that it was within the power of the Court to order interest from the point of the date of the accrual of the cause of action, i.e., the frustration: 845–9. 98 BP v Hunt (n85) 800. 94 95

234  Research handbook on remedies in private law two outcomes turns, however, on how the parties structured the relevant obligations under their contract and the nature of the contract itself – was it one where the defendant was likely to expend large or small sums in partial performance? Given that these are parties who have not provided in their contract for the frustrating event, and possibly have not even thought of it, the crudeness of the mechanism and its potential for injustice are apparent. Some guidance to the meaning of the provision is provided in Gamerco SA v I.C.M. /Fair Warning Agency.99 The case was concerned with promoters who had paid the corporate persona of the rock group Guns N’ Roses to run their Madrid concert in the expectation of later profit from the concert. The contract was discharged by frustration when the stadium in which the concert was to be held was found to be unsafe by the authorities and no suitable replacement found. The promoters claimed their payment back under s 1(2) and Guns N’ Roses sought to set off their expenses. At one level, the case displays the importance of evidence, both primary and expert, for Guns N’ Roses struggled to prove that they had incurred expenses in relation to the performance of the particular contract.100 At a more substantive level, Garland J considered what the court should consider in relation to the just sum to be awarded. He rejected both total retention and equal division, settling upon a broad discretion to be exercised by the court. The task of the court ‘is to do justice in a situation which the parties had neither contemplated nor provided for and to mitigate the possible harshness of allowing all loss to lie where it has fallen’.101 The difficulty we are left with is what guides the exercise of this attempt to do justice? While one has sympathy for a judge who did not find his task an easy one, one wonders what principles such a broad discretion should be exercised with. Conferment of a Valuable Benefit, s 1(3) The other form of possible unjust enrichment identified in the 1943 Act is the conferment of a valuable benefit. Where a party (the benefited party) has received a valuable benefit, other than the payment of money, the court can award the other party (the performing party) ‘such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all of the circumstances’.102 Similar to s 1(2), the court is given the power to allow the benefited party a form of reliance loss, as s 1(3)(a) allows the court to consider in calculating the award under the subjection to consider the amount of any expenses incurred before the time of discharge by the benefited party in or for the purpose of contractual performance, and this includes any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under s 1(2). An interesting anomaly between s 1(2) and s 1(3) is, as Professor Treitel observed, that while money payable ceases to be payable by reason of s 1(2), s 1(3) contains no such similar provision.103 The result would appear to be that obligations to transfer non-monetary benefits prior to the time of frustration remain binding, the non-performance of which sounds in damages rather than in accordance with the 1943 Act. As Goff and Jones observe, ‘this seems

[1995] 1 WLR 1226. Ibid, 1235. 101 Ibid, 1237. 102 Section 1(3). 103 Treitel (n95) 15-066. 99

100

Remedies for common mistake and frustration  235 to be an unfortunate oversight in the legislative scheme’.104 The lacuna likely arises because the Law Revision Committee was charged with considering the rule regarding sums payable in Chandler v Webster. There was, thus, no consideration of non-pecuniary benefits.105 It is suggested that, in the circumstances, it would be preferable for a court faced with such a challenge to fill the lacuna by treating the non-monetary benefit in the same manner as a monetary benefit under s 1(2). The calculation of a valuable benefit has proven more troublesome than calculation of moneys paid or payable. This is to be expected, for while money is always considered a benefit, a non-monetary conferment raises particular difficulties in assessing whether or not it benefits the recipient. Unfortunately, the 1943 Act makes no attempt to define a ‘valuable benefit’.106 As with the anomaly noted above, this is unsurprising given the remit of the Law Revision Committee. The result is that the subsection fails to explore fully the possibilities of non-pecuniary benefits and, in what it does consider, is poorly drafted. In BP Exploration (Libya) v Hunt, Robert Goff J took great care in setting out an approach to the calculation of a valuable benefit and the award of a just sum.107 His approach has attracted criticism as bristling with difficulties and going beyond what was strictly necessary to decide the case108 and producing an ‘undeniably unsatisfactory judgment’.109 In fairness, though, the provisions of the legislation brought many of these problems about. The starting point is that the valuable benefit is the end product of the services and, in the case before him, there was an end product in the form of oil which had flowed prior to the frustration. If the recipient receives no end product, there is no recovery even in an instance where there has been an expenditure of money and effort by the performing party.110 Equally, if the end product is destroyed by the frustrating event, there is no valuable benefit.111 It appears less than satisfactory to allow the party who has incurred expenditure to lose any right of recovery or restitution on the basis that their expenditure had provided the other with no benefit. That such a situation arises is a result, once again, of the attempt to base the remedial consequences upon the provisions of a contract which the law has discharged. The importance of the valuable benefit is that it sets a ceiling upon the court’s award.112 A further difficulty which flows from this is that where the valuable benefit is worth less than the cost of conferring the benefit, the benefitor will necessarily be out of pocket. Robert Goff J identified two steps to the application of s 1(3). The first is the identification of the valuable benefit conferred before the time of discharge; the second is that the court must determine the just sum to be awarded.113 In the identification of the benefited party’s benefit

C Mitchell, P Mitchell and S Watterson, Goff and Jones: The Law of Unjust Enrichment (9th edn Sweet and Maxwell 2016) 15–30. 105 P Mitchell (n74), 231. 106 In contrast, the British Columbia Frustrated Contract Act makes clear that the ‘benefit’ is something done in fulfilment of the contract, whether or not the person for whose benefit it was undertaken received the benefit: s 5(1). 107 Note, for example, that he drafted the headnote to the case himself: BP v Hunt (n85) 786. 108 Mitchell et al. (n104) 15–34. 109 Harris et al. (n20) 251. 110 BP v Hunt (n85) 802. 111 Ibid, 801. 112 Ibid, 802. 113 Ibid, 801. 104

236  Research handbook on remedies in private law the question to be asked is ‘what benefit has the defendant obtained by reason of the plaintiff’s contractual performance?’114 This benefit, as noted, is the end product of the services and forms an upper limit on the possible award. The benefit is the end product of the services at the time of the frustration. The second step is the calculation of the just sum. Where the services have been requested, as under a contractual obligation, this is based upon a quantum meruit or quantum valebat, the reasonable value of the services or goods. In calculating this reasonable value, the consideration provided under the contract is relevant and this consideration, or a rateable part of it, may provide a limit to the sum awarded. So, for example, where a poor householder has contracted for a service to be performed at a lower than market price, this should be considered in the calculation of the just sum.115 It would, in any event, be unjust to impose restitution at a higher rate than that set by the contract.116 The award necessarily precludes an element best described as a benefit flowing from performance. Thus where the recipient party has made use of the benefit received, the other party is not entitled to payment representing a sum attributable to this use. The court is to consider certain matters in calculating the just sum. It is required to take into consideration ‘the amount of any expenses incurred before the time of discharge by the benefited party in or for the purposes of performance’ including sums within s 1(2). Robert Goff J was of the view that this was a statutory recognition of the change of position defence.117 It is also required to take into consideration the frustration event itself. For Robert Goff J this involved the assessment of the value itself, making the frustrating event a mandatory rather than a discretionary element in the conferment of the just sum. This has the effect of limiting the court’s discretion to a greater extent than the statute seems to require. It is also the case that the approach adopted by Robert Goff J had the effect of conflating the valuation of the benefit with the award of the just sum. Happily, in the case before him the just sum was less than the statutorily imposed ceiling of the reasonable value of the benefit although this situation might not necessarily prevail in other cases. Lawton LJ, in the Court of Appeal, agreed with the assessment of Robert Goff J but appeared to reject the basis upon which he had assessed it: ‘what is just is what the trial judge thinks is just’.118 The result, as McKendrick has observed, is that it is ‘extremely difficult to give advice with any degree of certainty’119 as to the assessment of the just sum. A simpler form of calculating the benefit to be awarded under s 1(3) was undertaken in the decision in Atwal v Rochester.120 The case concerned a builder who had undertaken work on the Atwal’s house, at a considerably lower price than his competitors. After he had completed some work he suffered a heart attack and was unable to continue with the work. The court assessed the sum to be awarded to the builder as the value of the materials used in carrying out the work, the value of his labour and a profit element.121 The judge, however, does not seem to have considered the analysis set out in BP Exploration (Libya) v Hunt and, for that reason, this may not be truly considered viable as an alternative approach. Ibid, 802. Ibid, 806. 116 Ibid. 117 Ibid, 804. 118 [1981] 1 WLR 232, 238. 119 McKendrick (n83) 238. 120 [2010] EWHC 2338 (TCC). 121 Ibid, [37]. 114 115

Remedies for common mistake and frustration  237 There is an interesting interaction between s 1(2) and (3) in relation to the conferment of a valuable benefit. Where one party, A, has paid money to another, B, and B has expended sums but has not conferred any valuable benefit upon A, B will not be able to seek the just sum under s 1(3). However, if A seeks to recover the sum paid to B pursuant to s 1(2), B may seek to retain these sums under the subsection. This diminishes A’s motivation to seek such a recovery. And the result is, in any event, likely to prove less than satisfactory as the original contractual provisions are used as a basis for recovery in circumstances in which the parties were unlikely to have envisioned the discharge of the contract at that particular point. As can be seen from the above discussion, a central problem regarding the application of the 1943 Act is that it does not allow a truly restitutionary basis for the readjustment of the parties’ liabilities following the frustration of their contract. So, for example, the remedial consequences available under both s 1(2) and s 1(3) are dependent upon the terms of the contract itself. This is less than acceptable given that the contract was frustrated because the parties were unable to provide for this event. It seems unlikely that they designed their payments in such a fashion had they considered the possible consequences upon frustration. Because commercially sophisticated parties will make the necessary provisions either to modify their obligations to continue with a form of performance122 or to discharge further performance and allocate liabilities accordingly this means that only unsophisticated parties will receive remedial consequences in accordance with the 1943 Act. It seems preferable, therefore, to have a statute which provides truly more restitutionary consequences upon discharge by frustration. While some have called for a complete repeal of the statute,123 it seems preferable to replace it with legislation which allows a court to exercise its discretion beyond the perimeters of what the parties had originally provided in their contract to prevent an unjust enrichment of one party at the expense of another.

CONCLUSIONS That English contract law struggles to provide remedies in absence of a clear wrong can be seen in the remedial consequences attending both common mistake and frustration. In both of these areas the contract cannot be performed as anticipated, or at all, and courts cannot enforce the reasonable expectations of the parties. The absence of a contract in either area may lead the parties to seek restitutionary claims. In the case of common mistake, English contract law has rejected the equitable form of the doctrine which would have allowed a court the discretion to decide both whether to avoid a particular contract and on what terms. The result contributes substantially to a situation in which there is, effectively, no remedy for mistake. This has resulted in a knock-on effect with regard to the remedy of rectification. Although its equitable design was intended to remedy the agreement defectively recorded rather than formed it is now employed to provide a remedy in situations that look suspiciously like a substantive mistake. The remedial consequences attending the discharge of a contract through frustration are somewhat better. The common law consequences are unsatisfactory but will rarely apply. The Law Reform (Frustrated Contracts) Act 1943 ameliorates many of the difficulties presented in 122 123

Harris et al. (n20) 252–3. McKendrick (n83) 112.

238  Research handbook on remedies in private law the case of a monetary benefit but struggles to adequately remedy the expenditures associated with a non-monetary benefit. The 1943 Act presents some surprising lacunae in its provisions. The greatest problem with the Act, though, is that it is dependent upon the terms of the original contract to re-allocate the losses and expenditures which arise upon frustration. The unsatisfactory state of the remedial consequences which arise in both these instances are such that parties are best advised to make remedial provision for these instances in the terms of their contract. The paucity of case law in both common mistake and frustration indicates that parties do all they can to avoid these areas.

14. Market damages in sales of goods and their relationship to the general principles of remedies for breach of contract David Campbell

INTRODUCTION So central has the Sale of Goods Act been to UK consumer and commercial law, and therefore to the UK economy, since its original enactment1 that it has repeatedly been subject to the closest and most extensive examination by, as it were, official bodies and scholarly researchers.2 The body of such work attending the 1979 re-enactment, which was intended to be ‘a pure consolidation measure’,3 was, however, limited. It was far exceeded in size by the discussion,4 perforce embracing issues of the technique of EU and domestic law-making as well as the substance of the law of sales, which led to the 1979 Act’s being ‘replaced’5 as the law governing business to consumer contracts by pt 1, ch 2 of the Consumer Rights Act 2015. The process of examination of course continues, with, for example, the Scottish Law Commission’s, as this chapter is being drafted, recently closed consultation on contract remedies seeking information and opinion on whether the price reduction remedy under s 24 of the 2015 Act6 should be extended to non-consumer contracts,7 with obvious potential implications for the architecture of remedies under the 1979 Act. Rather than attempt to review this immense literature, this chapter will discuss the role of the legal remedies provided under pt V of the 1893 Act (pt VI of the 1979 Act) in facilitating commercial contracting in the market economy, the discussion of which has, of course, itself been very extensive, in order to ground an exploration of what market damages tell us of the general principles of remedies for breach of contract. Whilst the law and practice of market damages as a remedy for breaches of sales contracts has hardly been without its difficulties, that law and practice constitutes an outstanding regulatory success, one of the most important Sale of Goods Act 1893 (56 and 57 Vict c 71). Perhaps the centrepiece was a work which straddled the official and scholarly, Chalmers’ own commentary on the sale of goods, which was conterminous with the life of the 1893 Act. The first edition was published prior to the 1893 Act and the last just after the 1979 Act: M D S Chalmers, The Sale of Goods (W Clowes and Sons 1890) and M Mark and J Mance, Chalmers’ Sale of Goods Act 1979 (18th edn, Butterworths 1981). 3 R M Goode, Commercial Law (1st edn, Penguin 1982) 149. See now E McKendrick, Goode on Commercial Law (5th edn, Penguin 2017) para 7.02. 4 Law Commission, Unfair Terms in Contracts (Report) [2005] EWLC 292 and Law Commission, Consumer Remedies for Faulty Goods (Report) [2009) EWLC 317. 5 Explanatory Notes to the Consumer Rights Act 2015, para 24. 6 See also Consumer Rights Act 2015 ss 44, 56. 7 Scottish Law Commission, Discussion Paper on Remedies for Breach of Contract [2017] SLC 163 (DP) para 5.7. 1 2

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240  Research handbook on remedies in private law such successes in the history of commercial law. The nature of that success is, however, but poorly theoretically understood, and this chapter will try to explain it in order to contrast this success to the much more uneven performance of the other remedies which together constitute the general principles of remedies for breach.

THE GENERAL TREATMENT OF MARKET DAMAGES In order to assess our doctrinal and theoretical understanding of market damages, it is necessary to step back from discussions of those damages in works focused specifically on sales and look at the way they typically feature in discussions of the general principles of the law of contract, which is regrettably weak. Though I am obliged to illustrate this claim, it is awkward to single out a particular work, so let the one I do single out be Professor Furmston’s recent new edition of what is now Cheshire, Fifoot and Furmston, for nothing said here can affect the status this book enjoys in Commonwealth contract scholarship. The chapter on remedies was the chapter that Furmston thoroughly revised in the first edition in which his name was included in the title of Cheshire, Fifoot and Furmston,8 and this revision remains the framework of the recent edition.9 The discussion of market damages in sales of goods is based on a hypothetical example of breach of a sale of coal which I shall quote at length: If the seller … promised to deliver 100 tons of coal of a specified quality at £20 a ton upon 1 January at Oxford and fails to do so, the injury to the buyer is that he lacks possession of 100 tons of coal for which he would have paid £2,000. This loss of value, if the seller had no actual or constructive knowledge of further exceptional circumstances, is the only natural result of the breach, the only kind of damage that ensues in the usual course of things. Every other kind of loss, though actually and directly suffered by the buyer, is in the eye of the law abnormal, not within the reasonable contemplation of the buyer in ordinary circumstances, and therefore too remote. Thus, to take one common example, a subcontract loss is usually too remote … In order to recover for this exceptional loss [the buyer] must prove that at the time of contract the seller knew of special circumstances that signalled the probable resale of the goods. To turn now to the measure of damages, we must recall that the principle here is to effect a restitutio in integrum so far as the actionable damage is concerned. The actionable damage, namely, that which occurs in the usual course of things, is, as we have seen, the loss of the goods at the time and place of delivery, diminished by the price. The buyer, therefore, must be placed in the position that he would have occupied had he received 100 tons of coal of the specified quality in Oxford on 1 January after paying for it at the rate of £20 a ton. All that is required to put him in this position is sufficient money to enable him to buy similar coal in the open market … The actual sum payable by way of damages for the actionable damage depends, therefore, upon the difference between the market and contract prices upon the day appointed for delivery. If, for instance, the market price is higher by £2 a ton than that fixed by the contract the buyer is entitled to £200, but if it is less than the contract price he will receive only nominal damages … section [51(3)] of the Sale of Goods Act … dealing with damages for non-delivery, provides [for this.] A difficulty in estimating what sum suffices for the purchase of similar goods arises when there is no available market. In this case the value of the goods must be otherwise ascertained. If, for example, the buyer has agreed to resell the goods, it is generally accepted that their resale price may be taken

8 G C Cheshire et al., Law of Contract (11th edn, Butterworths 1986) v. Furmston had, even by 1986, been connected with this work for 21 years. The first edition was published in 1945. 9 M Furmston, Cheshire, Fifoot and Furmston’s Law of Contract (17th edn, Oxford University Press 2017) ch 21.

Market damages in sales of goods  241 as representing their value, and the seller will be required to pay the difference between the sale and the resale prices even though he had no notice of the subcontract.10

The first explanation of market damages, made with reference to a preceding discussion11 of Hadley v Baxendale,12 is that the loss they compensate ‘is the only natural result of the breach, the only kind of damage that ensues in the usual course of things’, and so is proximate. Without Hadley v Baxendale notice, subsales are remote. Though it is, of course, the case that pt V of the 1893 Act was a codification of Hadley, this explanation is, with respect, a mere tautology. We should go on to ask why, ‘in the eye of the law’, are market damages natural? The difficulties attendant upon a failure to ask, much less answer, this question could not be made more clear than emerges at the end of the account, for there we are told that, in the absence of an available market, damages based on loss of a subsale will be awarded even without the seller having given notice, by which is meant notice under the second limb of Hadley. This is flatly contradictory. Nor does the second explanation advance us much further. Market damages ‘effect a restiutio in integrum’. This principle had earlier been described thus: ‘If the plaintiff has suffered damage that is not too remote, he must, so far as money can do it, be restored to the position he would have been in had that particular damage not occurred’. Amongst the authorities given for this is Robinson v Harman.13 But what is now known throughout the Commonwealth as ‘the rule in Robinson v Harman’ was stated by Parke B as ‘where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed’.14 There is an element of futurity in Parke B’s statement of principle that allows it to capture the essential function of the law of contract: protection of the expectation, as opposed to protection of only the reliance, interest. This element of futurity is absent from Furmston’s statement of the restitutio principle, which much more naturally connotes protection of reliance by restoring the claimant to the position it was in prior to the agreement; although it might, of course, be said that one can read futurity in if one takes ‘restored to the position’ to include restored to the position of having the possibility of realising a future expectation. But even if we do read protection of expectation into restitutio, this does not explain market damages. We can recall Furmston claiming that, if the hypothetical coal is not delivered, ‘all that is required … is sufficient money to enable [the buyer] to buy similar coal in the open market’.15 But there is an implication of this that, with respect, Furmston’s account cannot accommodate. Let us say that the buyer gave notice of a subsale of the coal. If there was an available market and market damages are less than the lost profits from the subsale, then, subject to a very important qualification to be discussed at the conclusion of this chapter, damages would still be limited to market damages even though the subsale was not remote.16 The result will indeed be that the buyer is compensated, but not because of the award of damages alone but Ibid, 760–1. Ibid, 743, 751. 12 (1854) 9 Exch 341 (Ex Ct). 13 (1856) 1 Exch 850 (Ex Ct). 14 Ibid, 855. 15 See the quotation at note 10. 16 McKendrick (n3) para 14.21: ‘The market-price principle is in no way displaced by the fact that a resale by the buyer was within the knowledge or reasonable contemplation of the seller; for the buyer can 10 11

242  Research handbook on remedies in private law because that award enables the buyer to obtain substitute coal at, in effect, the contract price and then resell it. Why do we not just give damages based on the profits of the subsale, which would satisfy both Furmston’s proximity and restitutio conditions? Why do we require the buying of the substitute, the buying to be done by the claimant? This, and market damages in general, can be explained only by reference to a consideration Furmston does not explicitly consider at this point, reserving that consideration for later separate treatment:17 mitigation. Section 51 of the 1893 Act, re-enacted all but verbatim in the 1979 Act, after providing under subsection (1) that damages may be obtained for non-delivery, provides under subsection (2) that ‘[t]he measure of damages is the estimated loss directly and naturally resulting’, and then under subsection (3) that ‘[w]here there is an available market … the measure of damages is prima facie to be ascertained by the difference between the contract price and the market … price’. The essential characteristic of market damages is that they in this way internalise mitigation to the quantification of market damages with a result that was described in a most perceptive way in William Bros v Ed T Agius Ltd:18 the buyer … is entitled to recover the expense of putting himself into the position of having those goods, and this he can do by going into the market and purchasing them at the market price. To do so he must pay a sum which is larger than that which he would have had to pay under the contract by the difference between the two prices. This difference is, therefore, the true measure of his loss from the breach, for it is that which it will cost him to put himself in the same position as if the contract had been fulfilled.19

The crucial phrases are, it is submitted, those emphasised. For what they make clear is that the remedy in market damages cases is, not so much the damages themselves, but, though it is not formally known to the Sale of Goods Act, ‘cure’ by the claimant buyer.20 Cure is, of course, expressly provided for in the Uniform Commercial Code (UCC),21 where it is defined as ‘making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitute for those due from the seller’.22 Section 51(3) market damages, which are paralleled by the damages the UCC provides explicitly to support cover,23 will bring about cover, without which, subject to the important qualification to be discussed at the conclusion of this chapter, they make no sense.24 Though for reasons of space I cannot go into this in detail, though the Act makes no express provision for other remedies expressly provided by the UCC such as redelivery,25 market damages under the Act will also in other circumstances bring about rational responses to a seller’s breach such as the seller itself providing a substi-

cover the subcontract by buying in the market, and his duty to mitigate the loss in this way is unaffected by the seller’s knowledge of the subcontract.’ 17 Furmston (n9) 775–81. 18 [1914] AC 510 (HL) (emphases added). 19 Ibid, 530–1 (emphases in original). 20 UCC § 2-711(2). The equivalent to seller’s damages under s 50(3) of the 1979 Act is UCC § 2-711(1). 21 UCC § 2-711(1)(a). 22 UCC § 2-712(1). 23 UCC § 2-712(2). 24 ‘Cure’ is remedy (i)(b)(i) (with possible damages under (i)(b)(iii)) identified in McKendrick (n3) para 14.16. 25 UCC § 2-508. The language of the UCC is ‘cure by seller’ or ‘replacement’.

Market damages in sales of goods  243 tute, or effecting repair when market damages under s 53(3) could otherwise arise for breach of warranty of quality, etc. The prima facie rule of market damages may of course be ousted by successful argument for specific performance under s 52 or special damages under s 54. But the point is that doing so indeed requires argument, a necessary if not sufficient part of which is that mitigation had not been possible. In Behnke v Bede Shipping Co Ltd,26 a very important case in the development of the doctrine of ‘commercial uniqueness’, specific performance of the sale of a ship to be used for commercial carriage of cargo was awarded because the ship ‘was of peculiar and practically unique value’ to the claimant.27 This award depended on the court finding that the ship was wanted for ‘immediate use’ and that there was ‘only one other comparable ship [which] may now have been sold’.28 I shall return to such s 52 cases in which the possibility or otherwise of mitigation was central, and relate them to s 54 cases.29 Understanding market damages requires us to understand why mitigation is in this way integral to those damages. This simply cannot emerge from any amount of discussion of the interests of only the claimant, which is the approach Furmston, entirely typically of course, exclusively takes, for it depends on the interests of the defendant. Consider again the hypothetical breach of the sale of coal when a subsale is proximate. If we assume incidental costs are negligible,30 the claimant should be indifferent whether damages based on the profit from the subsale or market damages are awarded, for, as we have seen, the award of the latter will amount to the effective award of the former after the substitute is bought and sold. Any relaxation of the assumption that incidental costs are negligible could only incline the claimant towards damages based on the profit from the subsale even if those costs could in theory be compensated under s 54. We could even go beyond this and allow, for the purposes of argument, that any such relaxation should incline the claimant, which should be indifferent between specific performance and market damages, to prefer the former. And yet the positive law is that the remedy prima facie is market damages. The positive law of market damages can be explained only if we see that those damages, by internalising mitigation, internalise not only the interests of the claimant, but also the interests of the defendant.31 All thinking here should acknowledge the influence of Goetz and Scott’s seminal analysis of mitigation,32 but the precise point I am trying to make is more squarely addressed by Andersen’s also seminal claim that remedies for breach of contract ‘attempt to

26 Behnke v Bede [1927] 1 KB 649 (KBD). This case is not mentioned in the very brief and I am afraid to say superficial discussion of s 52 in Furmston (n9) 803–4. 27 Behnke v Bede (n26) 660. 28 Ibid, 661. 29 See the text accompanying note 55 below. 30 By incidental costs I mean e.g. the administrative costs of arranging to buy a substitute, i.e. the costs incidental to mitigation, as opposed to consequential losses. Buyer’s incidental and consequential damages are explicitly distinguished in UCC § 2-715. Both are recoverable as special damages under s 54(1). 31 The remainder of this section of this chapter is an application to market damages of views generally set out in D Campbell, ‘The Relational Constitution of Remedy: Co-operation as the Implicit Second Principle of Remedies for Breach of Contract’ (2005) 11 Texas Wesleyan Law Review 455, 466. 32 C J Goetz and R E Scott, ‘The Mitigation Principle: Toward a General Theory of Contractual Obligation’ (1983) 69 Virginia Law Review 967.

244  Research handbook on remedies in private law accommodate two competing goals’.33 It is one purpose of this chapter to argue that the law does not equally succeed in this in all cases,34 but it is submitted that understanding the positive law of remedies depends on recognising that, though the fundamental aim of the law is to protect the claimant’s expectation, it attempts do this at least cost to the defendant. It is a highly interesting aspect of Furmston’s account that, as we have seen,35 it acknowledges the possibility that if, in the hypothetical coal sale, the market price of substitute coal is less than (and we might add or is equal to) the contract price, damages will be nominal. Turning from non-delivery to non-payment under s 50, Furmston contrasts Charter v Sullivan36 with WL Thompson Ltd v Robinson (Gunmakers) Ltd,37 two cases of wrongful repudiation of an obligation to buy a car with apparently contradictory outcomes. The former case is, it is submitted, a paradigm of what will happen following buyer’s breach of a commercial sale. Mitigation by sale to another buyer at the contract price38 meant that loss was zero and damages nominal. In the latter case, damages were substantial, but this is because mitigation was not possible, though this was not obvious because the problem was not an inability to return the particular car to the suppliers, for it was returned, but a loss of volume of sales in a market in which supply exceeded demand.39 Whatever the merits of the specific ‘lost volume’ argument,40 the background concern with the possibility of mitigation central to these cases is exemplary. Furmston’s explanation of Thompson v Robinson is that: In such a case, what ensues from the breach in the usual course of things is that the plaintiff loses the profit he would have made had the sale to the particular buyer been completed, and he is entitled to be recompensed for that loss. It is no answer to say that he has sold, or may readily resell, the goods to another person, for even if he has been successful the fact remains that he has profited from one sale instead of two.41

With respect, this cannot be right, because in Charter v Sullivan it was an answer ‘to say that he has sold the goods to another person’, and, the significance of this is that it will normally be such an answer. Profit is lost only if resale realising the lost profit is not possible, but it will normally be possible and it will normally adequately compensate. Indeed, to award the profits from two sales in this circumstance would be to overcompensate, and so this is what we normally do not do. It is only when mitigation which compensates lost profit is impossible, of which the lost volume case is taken to be an instance, that we exceptionally, as it were, take two sales into account. Furmston is, with respect, quite wrong to say that lost volume is ‘in the usual course of things’, and the most questionable aspect of Thompson v Robinson was the inadequate attention given to whether a loss caused by lost volume could be said to be in the E G Andersen, ‘Good Faith in the Enforcement of Contracts’ (1988) 73 Iowa Law Review 299, 306. 34 See the text accompanying note 70 below. 35 See the quotation at note 10. 36 [1957] 2 QB 117 (CA). 37 [1955] Ch 177 (ChD). 38 Charter v Sullivan (n36) 118. 39 Thompson v Robinson (n37) 187. 40 J M Breen, ‘The Lost Volume Seller and Lost Profits under UCC 2-708(2)’ (1996) 50 University of Miami Law Review 779. 41 Furmston (n9) 762. 33

Market damages in sales of goods  245 reasonable contemplation of the buyer.42 It is suggested that it will normally be contemplated that resale which mitigates is possible, and that notice should have been given of the possibility of lost volume. The general point of importance, however, is that the apparently contradictory outcomes of Charter v Sullivan and Thompson v Robinson Ltd cannot be explained if we exclusively focus on the interest of the claimant, for in both cases the expectation interest was protected, but in two different ways. Mitigation, and behind this the interest of the defendant, are essential to any such explanation.

THE PLACE OF MARKET DAMAGES WITHIN THE LAW OF REMEDIES FOR BREACH OF CONTRACT If it is believed that the proper function of remedies is to prevent breach, then the very existence of market damages is a puzzling scandal. Those damages are a principal institutionalisation of the core feature of remedies for breach of contract: the positive law is a default position of the Holmesian choice which allows a party prepared to pay damages normally to breach.43 And how acute does the scandal become in a case such as Charter v Sullivan? The price of breach is zero in such a case! What could better express the horror contained in Farnsworth’s summing up of the lesson of his magisterial survey of remedies: ‘[it] has shown a marked solicitude for men who do not keep their promises’.44 The concern to protect the ‘performance interest’, and to develop remedies based on literal enforcement or on damages which effect disgorgement, restitution, unjust enrichment or whatever in support of that interest, which has been so influential in recent Commonwealth scholarship and unarguably has had important effects on the decided law,45 has to face the fact, though I am unaware of any convincing attempt to do so, that this concern involves the claim that the positive law of remedies is, not merely defective, a point beyond dispute, but is fundamentally wrongheaded. This in turn involves root and branch criticism of the commercial law basis of the historically unprecedented prosperity of market society, and sets at little or nought the wisdom of commercial practice on which that law is itself based, for the 1893 Act was very largely, as the Lord Chancellor and its draftsman intended, a codification of the common law.46 Surely the question which should be asked is

Thompson v Robinson (n37) 184: ‘The plaintiffs, as the defendants must have known, are in business as dealers in motor-cars and make their profit in buying and selling motor-cars, and what they have lost is their profit on the sale of this [car]’. With respect, the liability for the loss described in the second clause of this sentence is not entailed in the description of what is embraced in the reasonable contemplation of motor dealers in the first clause. 43 O W Holmes, The Common Law (Little Brown 1881) 301. 44 E A Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70 Columbia Law Review 1145, 1216. The principal way in which these issues have been taken up in modern scholarship is through the concept of efficient breach, a summary of my views on the aspects of which relevant to our concerns here may be found in Campbell (n31) 477–80. 45 These effects are approvingly reviewed in D Winterton, Money Damages for Breach of Contract (Hart 2015). 46 M D C Chalmers, The Sale of Goods Act 1893 (2nd edn, W Clowes and Sons 1894) iv-v tells us that, ‘following Lord Herschell’s advice’, the Bill Chalmers drafted ‘endeavoured to reproduce as exactly as possible the existing law’, and that ‘the conscious changes’ introduced in the course of extensive Parliamentary debate were only ‘very slight’. The common law of market damages was to be found in e.g. Leigh v Paterson (1818) 8 Taunt 540, 129 ER 493. 42

246  Research handbook on remedies in private law whether there is a justification for the common law codified in the Sale of Goods Act, or, to put it in this way, does the Holmesian choice in general and market damages in particular have a legitimate purpose other than prevention of breach? If their purpose is prevention, then they are singularly unfit for it; in fact they are laughable. But do they have a different purpose?47 The key to understanding the purpose that actually informs the positive law of remedies for breach of contract, and indeed contract generally, is to recognise that the legal contract is by no means the most important aspect of a contractual relationship. Contracts are entered into in order to carry out an economic exchange, and the legal contract must be understood as a device for facilitating that exchange, and evaluated on the basis of how well it does this. The positive law institutionalising the Holmesian choice does not even attempt to prevent breach. In the paradigm case in which market damages are the remedy, the law facilitates breach, allowing it, but regulating its terms, combining, as we have seen, protection of the claimant’s expectation with minimisation of the cost of doing so. But why facilitate breach? The answer, a complete puzzle if one focuses only on the legal contract, emerges if one considers the economic exchange. As the transaction costs of exchange (or any form of economic allocation) are always positive, economic actors always contract with bounded rationality and error is inevitable. It is therefore impossible that exchanges, or in legal terms primary obligations, will always be performed unproblematically or indeed at all. It is wrong in principle to try to ensure that they will, because transaction costs, bounded rationality, and error are ineliminable. All can, of course, be reduced, but this requires expenditure, and determining what is called in Cooter’s seminal analysis the ‘efficient level of precaution’48 requires the benefits of reducing error to be balanced against the costs of its reduction. Attempting to reduce the possibility of error to zero, and so doing all that is possible to prevent breach, can be cost effective only in the unusual circumstances, starkly exemplified by the construction of the safety critical parts of a nuclear installation. This is a long way away from the efficient level of precaution in a contract to make timely delivery of tins of baked beans at a supermarket’s depot. In these circumstances, breach allows an invaluable, indeed indispensable, flexibility into economic allocation through exchange. Exchanges entered into in error can be abandoned when carrying them out imposes greater costs than their abandonment. Variants of argument for the performance interest have little or no understanding of or regard for this vital economic role of breach, and indeed they are possible only because of this. It is this that makes them unable to grasp the true virtue of market damages or realise how fruitless their general criticism of them must be. As one whose professional life is largely occupied with the now preponderantly dismal science of regulation, I am heartened that an account of market damages is one of an extraordinary regulatory success.49 When there is a substitute, the claimant obtains it and, if necessary seeks market damages, liability for which the defendant will normally unproblematically 47 The following two paragraphs are a synopsis of the argument in Campbell (n31) and D Campbell, ‘A Relational Critique of the Restatement (Third) of Restitution § 39’ (2011) 68 Washington and Lee Law Review 1063. 48 R Cooter, ‘Unity in Tort, Contract, and Property: The Model of Precaution’ (1985) 73 California Law Review 1, 7. The particularly relevant analysis of contract is at ibid, 11–19. 49 The following two paragraphs are a synopsis of the argument in D Campbell, ‘What Do We Mean By the Non-use of Contract?’ in J Braucher et al. (eds), Revisiting the Contracts Scholarship of Stewart Macaulay (Hart 2013) 159, 177–81.

Market damages in sales of goods  247 acknowledge (or provide a substitute, or make a repair, etc.). As there is little dispute and even smaller recourse to (the threat of) litigation, this looks like the paradigm of Macaulay’s non-use of contract;50 but it is not.51 It is that the rules are working so well that, in a paradigm case of the legal facilitation of market exchange, the parties’ economic action seems to be, and in a partial but nevertheless extremely important sense actually is, spontaneous. The parties’ co-operate out of their own self-interest because the interests of both are united by the legal framework. The claimant’s expectation is protected, and the defendant’s interests are united with the claimant’s as the protection is secured at least cost to the defendant. Of course, in any one instance the defendant would prefer simply to walk away, but walking away is inconsistent with maintenance of the law of contract as a system for facilitating contractual exchange and so is morally inconsistent with the defendant’s participation in that system. As their being a mere codification of Victorian commercial practice evidences, market damages are, in fact, the product of the voluntary agreement of the claimant and the defendant, as can be demonstrated by returning to Furmston’s hypothetical breach of a sale of coal. It will be recalled that,52 at the start of the hypothetical at least, Furmston says that the loss that would be compensated by market damages ‘is the only natural result of the breach, the only kind of damage that ensues in the usual course of things’. I have tried to argue that properly understanding this requires an explicit reference to mitigation absent from Furmston’s explanation of his example. Nevertheless, Furmston is right in the sense that contemplating that the remedy for breach would in the usual course of things be market damages is the basis on which commercial parties do contract. But let us imagine that, during the negotiations, the buyer wished to explore the possibility of having a different remedy, one which sought directly to protect the performance interest in the delivery of the coal, say specific performance or disgorgement damages which would remove any incentive the defendant had to breach. If we ignore the legal obstacles to doing this, such as the court’s unwillingness to relinquish its equitable jurisdiction over specific performance, the parties could agree this. This would make delivery of the coal more likely, but would do so only at greater cost because the defendant would not be able to avail itself of the way that market damages minimise the costs of protection of the claimant’s expectation. The coal the seller could offer on these terms would be more expensive than otherwise identical consignments of ‘100 tons of coal of a specified quality’ offered by competitors on the ‘usual’ terms. The question is, which coal would the buyer choose? If, as one assumes, the coal was generic, then the buyer would choose the cheaper coal. Ex hypothesi, the more expensive terms would make delivery by the seller more likely, but, if the coal was generic, the buyer would gain no benefit from this, and gaining no benefit, would not pay the extra cost. For the security of supply that is the buyer’s concern is provided by the coal being available on the market, and this is exactly what being generic means. The absolutely S Macaulay, ‘The Use and Non-use of Contracts in the Manufacturing Industry’ (1963) 9 Practical Lawyer 13. See also S Macaulay, ‘Non-contractual Relations in Business: A Preliminary Study’ (1963) 38 American Sociological Review 55. 51 My thought on this point has been heavily influenced by conversations with Professor Hugh Beale, inter alia the co-author of one of the best empirical studies following in Macaulay’s footsteps, that his study was not evidence of non-use but of action formed ‘in the shadow of the law’: H Beale and T Dugdale, ‘Contracts between Businessmen: Planning and Use of Contractual Remedies’ (1975) 2 British Journal of Law and Society 45. 52 See the quotation at note 10. 50

248  Research handbook on remedies in private law vital point – it is the key to understanding remedies for breach of contract and their legitimacy – is that, though we have noted that it seems in the first instance that the default rules of remedies are generous to the defendant, as indeed they are, this is not imposed on the claimant but is the choice of the claimant, who prefers the Holmesian choice when the goods are generic. The claimant would indeed be irrational if it did otherwise, because it gets the goods at a lower price than it would on terms which sought to protect the performance interest. A great deal of discussion of these issues is conducted on the express or implied basis that the issue is imposing an optimal, perhaps optimally efficient, mandatory rule on the parties. This is not the case. What is efficient is what is freely chosen by the parties, for the efficiency of the market economy does not consist in the technically adroit production of a set of socially valued goods in socially valued, i.e. substantively fair, ways, but in the production of economic goods being determined by the preferences, including their preferences about substantive fairness, of economic actors. The Holmesian choice is legitimate because it is chosen by parties who find it to be to their mutual advantage. It exemplifies the ‘Pareto optimal’ exchange that is the core of the legitimacy of the market economy.

MARKET DAMAGES AND THE ‘STRUCTURE’ OF REMEDIES FOR BREACH OF CONTRACT It has been argued that market damages are so excellent a legal device for dealing with misallocations in the commercial sale of generic goods that the law in a sense disappears. The spontaneous actions of the parties seem to be an example of Macaulay’s non-use, but it is not because the appearance of non-use is the result of those actions being facilitated by a law the parties accept so fully that it normally enforces itself. I must repeat that this is a sort of regulatory utopia as rare as it is fine. It depends, however, on two conditions: the parties’ interests must be commercial and the goods must be generic. The general principles of the law of contract (and the historically preceding laws) have from time immemorial recognised that a claimant may have a non-commercial interest in the defendant’s performance of its primary obligation, and that an award of damages will necessarily be an inadequate remedy for breach, in the sense that money awards are simply not relevant to the nature of the loss caused, for which specific performance (or injunction effectively leading to specific performance) therefore is the proper remedy.53 I have, of course, spoken too broadly when I have said that money awards are simply not relevant. There are cases where a non-commercial interest can be protected by an award of damages, but these are, of course, damages which are not compensatory in the normal sense but which seek to effect literal enforcement of the defendant’s primary obligations in a way which makes these damages more akin to specific performance than to market damages. The award of cost to complete damages, as opposed to damages quantified on the diminution in value measure, when ‘the assumption that each contracting party’s interest in the bargain was purely com-

Though it actually is an intriguing case in which the claimant’s interest may well have been commercial, the holding in Falcke v Gray (1859) 4 Drew 651, 62 ER 250 (Chancery Ct) 252 that specific performance would be awarded when ‘the contract is for the purchase of articles of unusual beauty, rarity and distinction, so that damages would not be adequate compensation for non-performance’ accurately stated the law. 53

Market damages in sales of goods  249 mercial’ is inappropriate which was considered in Ruxley Electronics and Construction Ltd v Forsyth54 is a paradigm example. I do not want to dwell on non-commercial interest cases because I want to focus upon the significantly different issues involved when a commercial party pursues specific performance, as has been considered above in the commercial uniqueness case of Behnke v Bede,55 or another form of literal enforcement, for, of course, a commercial party should in principle always find damages adequate and ‘commercial uniqueness’ is an oxymoron. To understand this curious notion, one must first consider, not s 52, but ‘special damages’ under s 54(1). These damages embrace consequential losses which arise when mitigation by obtaining a substitute is not possible.56 The conceptual framework for awards of damages for consequential loss under s 54(1)57 is, as we have noted in the case of all of pt V of the 1893 Act, derived from Hadley, but merely saying this instantly leads to the possibility of the claimant encountering difficulty with a s 54 consequential loss claim. If the consequential loss can be compensated, then the claimant will find special damages adequate. But, of course, of its nature consequential loss is prone to problems of quantification, and a claimant may be in a position where its claim fails because it is speculative58 or remote,59 or has to be settled at a substantial discount because of these issues.60 However, that a loss is speculative or remote does not mean that it has not taken place, and it is fear of uncompensated loss that, it is submitted, is the key to commercial uniqueness and the relationship of s 52 to ss 50 and 51. Behnke v Bede could arise only because the unavailability of a substitute meant that market damages were not a possible remedy. But why, then, was no s 54 claim made for consequential loss representing the profits of the cargo business lost by not having either the ship which had been bought or a substitute available? The reported case does not make this clear but it is submitted it must have been because, such lost business surely being within reasonable contemplation under the first limb of Hadley, the extent of that business could not be proven. If, for example, the claimant had on its books agreed contracts with shippers, it is impossible to understand why it would not have brought a s 54 claim rather than a s 52 claim for, even leaving aside the difficulties it had to overcome to make the s 52 claim successfully, damages which

[1996] AC 344 (HL) 353C. See the text accompanying note 26 above. 56 The issues canvassed in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA) arose because ‘no similar article could be bought in the market’: ibid, 535. 57 Bostock and Co Ltd v Nicolson and Sons [1904] 1 KB 725 (KBD), 735–6. 58 In the instructive case of J Leavey and Co Ltd v George H Hirst and Co Ltd [1944] KB 24 (CA), the claimant was allowed to claim consequential loss of profits (reversing a refusal of such a claim by a lower court which had been drawn into the confusions over available market which will be addressed in the conclusion of this chapter). But a dispute over the size of the lost profit was resolved in the defendant’s favour so that the claimant was able to recover only circa 50% of the loss it believed itself to have suffered: ibid, 29. 59 The trial in Victoria Laundry (n56) was halted whilst evidence of the claimant’s lost profits was being given in order to determine whether such profits were remote: ibid, 535. After the Court of Appeal reversed the finding that all the damages claimed were remote, quantification of the lost profits was referred back to an official referee in light of it having been made clear that a distinction should be drawn between general loss of business and the ‘special contracts’: ibid, 543. 60 It is also entirely possible but of much less practical significance that the actual causal link between the breach and the loss may fail an analogy to the but-for test in tort: Borealis AB v Georgias Trading SA [2010] EWHC 2789 (Comm), [2011] 1 Lloyd’s Rep 482, [43]–[47]. 54 55

250  Research handbook on remedies in private law actually compensated it for lost profits would be at least as good a practical remedy as specific performance. The s 52 claim, and the argument about commercial uniqueness which was needed to make specific performance available to a commercial party which could in principle have been compensated by damages, lies in the claimant’s fear that an award of damages would not, in fact, compensate the loss suffered. The problem is one of fear of uncompensated loss. I have argued elsewhere that all attempts by commercial parties to seek a form of literal enforcement of the defendant’s primary obligations turn on this problem.61 In addition to specific performance (and injunction effectively leading to specific performance62), these include actions for the total contract price after affirmation of a repudiated contract63 and commercial uses of cost to complete damages.64 It is impossible to overestimate the significance of the issues which arise here. If my argument about uncompensated loss is accepted, then surely it is quite wrong that what is at root a single problem should be addressed in numerous different ways because empirically different circumstances have, as a matter of legal history, received different treatments. My previously expressed belief that consolidation of the various laws of literal enforcement should be considered65 has been only increased by much subsequent case law in which the doctrine of the ‘legitimate interest’, which is the common theme running through these cases, has been left insufficiently clear or even made more obscure.66 But I have also come more fully to appreciate a more fundamental issue which must be addressed first. What I have tried to claim is the smooth functioning of market damages depends on certain conditions which are exploited to beneficial effect by the doctrine of mitigation integral to those damages. If, for reasons of brevity, we function on seller’s breach, then these conditions boil down to there being substitute goods available in competitive supply, a supply which includes a margin of excess capacity of which the buyer can take advantage to obtain the substitute. But that goods are available in this way is a characteristic, historically unique feature of the developed market economies, which are in this precise sense – which is not the sense that scarcity has been abolished – economies of abundance.67 A buyer entering into a standard sale D Harris et al., Remedies in Contract and Tort (Cambridge University Press 2005) pt 3. An injunction of this sort would appear to have been sought in Behnke v Bede (n26) but it is not possible to be clear about its terms from the report. The issues were more thoroughly canvassed in Société des Industries Metallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyd’s Rep 465 (CA). 63 White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL). 64 East Ham Corp v Bernard Sunley and Sons Ltd [1966] AC 406 (HL) 434E–35A. 65 Harris et al. (n61) ch 15. 66 It is highly disappointing that recent decisions indicate that the understanding, if this is the right word, of the fundamental issues raised by White & Carter has in some ways reverted to that prior to Lord Reid’s raising the legitimate interest point in that case: J Morgan, ‘Smuggling Mitigation into White & Carter v McGregor: Time to Come Clean?’ [2015] Lloyd’s Maritime and Commercial Law Quarterly 575. It would appear that comparable US law is intrinsically clearer than that of the UK: D Campbell, ‘Reply to Mark P Gergen, “The Right to Perform on Repudiation and Recover the Contract Price in Anglo-American Law”’ in L A DiMatteo and M Hogg (eds), Comparative Contract Law: British and American Perspectives (Oxford University Press 2016) 338. 67 One of the founding works of what is now called economics (D Ricardo, On the Principles of Political Economy and Taxation, in Collected Works, vol 1 (Cambridge University Press 1951) 12) begins by telling us that goods of which there truly ‘is a very limited quantity’ such as ‘Some … statues … pictures, books and coins’: ‘form a very small part of the mass of commodities daily exchanged in the market. By far the greatest part are of those goods which are the objects of desire … may be multiplied, not in one country alone, but in many, almost without assignable limit, if we are disposed to bestow the labour necessary to obtain them.’ 61 62

Market damages in sales of goods  251 of goods finds true security for its reliance on its contractual commitments in this abundance, and so will not, as has been argued,68 pay for the extra security of performance by the defendant which would be provided by contracting on terms which oust the default Holmesian choice. But, of course, it is entirely different when the possibility of securing a substitute is not available. This possibility is far from confined to cases in which uniqueness arises from the claimant’s non-commercial interest. Whenever a commercial party contracts in a situation in which the expectation to be realised through the other party’s performance of its primary obligations cannot be readily obtained by securing a substitute, then that party is at a risk which is not covered in the way that contracting when a substitute is available is covered. Though there certainly will be additional difficulties involved in any legal proceedings, it has been noted that this risk may be satisfactorily covered if any consequential losses are provable and proximate and so fully compensatable,69 but it will not be covered when the losses are of such a nature that a problem of potential uncompensated loss arises.70 Cases like Behnke v Bede show that this problem can arise even when the subject matter of the contract is a good which prima facie is not unique, but the situations which have been most thoroughly analysed are those complex contracts, such as large construction projects, which Ian Macneil called ‘relational’,71 in which potential losses are necessarily, to use the term which Oliver Williamson in particular has given great currency in the discussion of contracting in institutional economics, ‘idiosyncratic’.72 Macneil’s injunction to parties faced with this problem, set out in the best paper he ever wrote, which unfortunately has remained relatively obscure,73 was to plan a specific strategy for managing it, for, crucially, the same general default rules giving rise to market damages which work well in the simple cases, which Macneil called discrete, will not work well in complex, relational cases. The narrowing of the issues which allows the ready quantification of loss by requiring that it be relatively easily provable, proximate and not avoidable by mitigation (there are numerous minor doctrines to similar effect) which makes market damages cases appear to be cases of non-use will, by contrast, tends to lead to disputes and legal proceedings which result in uncompensated loss in idiosyncratic cases. It is of great interest why commercial parties fail to plan in this way when they should do so, and why so much recent performance interest scholarship has sought to give such parties a remedy when the claimant has failed to secure the ouster of the default rules in order to provide such a remedy for itself. When the issues are seen in proper focus, saving parties from the consequences of their negotiating failures is hardly the unproblematic improvement on remedies based on expectation which it typically is assumed to be in the

See the text accompanying note 52 above. See the text accompanying note 58 above. 70 The next two paragraphs are a synopsis of the argument in Campbell (n49) 168–77, 182–3 and Campbell (n47) 1114–30. 71 I R Macneil, ‘Economic Analysis of Contractual Relations: Its Shortfalls and the Need for a “Rich Classificatory Apparatus”’ (1981) 75 Northwestern University Law Review 1018. 72 O E Williamson, The Economic Institutions of Capitalism (Free Press 1986) ch 3. 73 I R Macneil, ‘A Primer of Contract Planning’ (1975) 48 Southern California Law Review 627. This paper is the framework of the second part of Macneil’s American casebook: I R Macneil, Contracts: Exchange Transactions and Relations (3rd edn, Foundation Press 2001) pt 2. 68 69

252  Research handbook on remedies in private law performance interest scholarship. Rather, as a general approach, it is a wholly questionable departure from enforcing the intentions of the parties expressed in their contract.74 One of the things that the performance interest scholarship certainly can plead in its support is that it builds on those cases, such as the claim for specific performance in Behnke v Bede, in which commercial parties have attempted to secure forms of literal enforcement in order to avoid the uncompensated loss which they fear would follow from quantification based on the default rules. I have spoken of a fundamental question which precedes the, in itself unarguable, necessity of unifying the various grounds on which these forms of literal enforcement will be awarded. This question is whether allowing these departures from the default rules in cases in which the parties have made no express provision for them is a sensible policy, for the perceived problem is caused, not by the default rules of remedies failing to work, but by their working in just the way they should. As, by not making express provision the parties have contracted on the default terms, it is surely controversial, and I believe it is certainly unjust, to force ‘the promisor to compensate for the non-fulfilment of a goal for which the promisor had never assumed responsibility’.75 Market damages are, I repeat, an outstanding regulatory success; these other remedies are much less so, embracing, as they do, cases of quantifiable consequential loss in which they work relatively well and cases of idiosyncratic loss in which they can do quite the other thing. In the cases in which market damages work well, the rules unite the interests of the parties. But in idiosyncratic cases in which an uncompensated loss will be sustained, one of the parties will have to bear this loss. It will be the claimant if it is confined to compensatory damages, and it will be the defendant if the loss is transferred because a form of literal enforcement is granted. It would be foolish to say other than that the English law of remedies has hardly ever got this problem in proper focus,76 and it is not the purpose of this chapter to enter into a policy discussion of how it might do so. Whatever one’s opinion of the remedies for breach of contract, what productively emerges from considering them together is that a, if I may use a term which is not entirely apposite, structure to the general principles emerges from the contrast of market damages with other remedies. A failure to place market damages at the foundation of an account of the general principles of remedies robs that account of any such structure, with the unfortunate result that most such accounts, which I am arguing do not give nearly enough attention to market damages, are incoherent. Again in the sure confidence that nothing said here can diminish Cheshire, Fifoot and Furmston’s status, it is very instructive to follow the conventional presentation of the subject in its chapter on remedies. This presentation begins, as we have

An admittedly extreme, but for that reason instructive, example is the reading in, against a statutory prohibition against doing so, of a term into a conveyance which, when unsurprisingly breached, had to be compensated by a form of disgorgement damages in Lane v O’Brien Homes Ltd [2004] EWHC 303 (QB). See further D Campbell, ‘The Extinguishing of Contract’ (2004) 67 Modern Law Review 817. 75 A Kramer, ‘An Agreement-centred Approach to Remoteness and Damages’ in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Hart 2005) 249, 284. 76 A brilliant exception is the dissent of Millett LJ in Co-operative Insurance Society Ltd v Argyll Stores (Holdings)Ltd [1996] Ch 286 (CA) 299F–306D. See further D Campbell and R Halson, ‘The Irrelevance of the Performance Interest: A Comparative Study of Keep Open Covenants in Scotland and England’ in L A DiMatteo et al. (eds), Commercial Contract Law: Transatlantic Perspectives (Cambridge University Press 2013) 466, 486–9. 74

Market damages in sales of goods  253 seen,77 with brief reference remoteness in Hadley v Baxendale and the restitutio principle which is associated with Robinson v Harman. It then successively moves to the possibility of disgorgement associated with A-G v Blake,78 the choice of expectation or reliance measures in bad bargain cases associated with Commonwealth of Australia v Amann Aviation Pty Ltd,79 the breach-date rule as it has been, what shall one say, developed in The Golden Victory,80 and then the minimum legal obligation rule associated with Lavarack v Woods of Colchester,81 before returning to a much more substantial discussion of remoteness under Hadley v Baxendale. It is only as an incident of considering a number of the difficulties of the remoteness doctrine, such as those encountered in The Heron II82 and H Parsons (Livestock) Ltd v Uttley Ingham and Co Ltd,83 which have now been put on a different scale by The Achilleas,84 that Cheshire, Fifoot and Furmston now 19 pages into the discussion, spends five pages on market damages in sales.85 The discussion resumes with the diminution of value measure in conveyances of property associated with Pilkington v Wood,86 loss of a chance associated with Chaplin v Hicks,87 non-pecuniary loss associated with Farley v Skinner,88 and cost to complete associated with Ruxley Electronics v Forsyth.89 All this is actually preliminary to a section of the chapter on ‘Some special problems’ such as liability to tax associated with British Transport Commission v Gourley.90 Whatever the merits of the approach taken in Cheshire, Fifoot and Furmston, it does merely include market damages amongst something of an omnium gatherum of damages awards, and the centrality of those damages, to the sale of goods and to the general principles of contract, does not emerge. The point which I wish to make here, however, is that, as an equally important consequence of this, it also does not emerge that other important forms of damages are shaped by their addressing situations in which the economic assumptions on which mitigation and therefore market damages work so well do not obtain. The discussion of specific performance which follows that of damages begins, however, very promisingly: specific performance … originated in the realisation that there are many cases in which the remedy available at common law is not adequate. The normal remedy for breach of contract is the recovery of damages at common law. In most cases this affords adequate reparation as, for example, where the

See the quotation at note 10. [2001] 1 AC 268 (HL). 79 [1991] 174 CLR 74 (HCA). 80 Golden Strait Corporation v Nippon Yusen Kubishka Kaisha, ‘The Golden Victory’ [2007] UKHL 12, [2007] 2 AC 353. 81 [1967] 2 QB 278 (CA). 82 Koufos v C Czarnikow Ltd, ‘The Heron II’ [1969] 1 AC 350 (HL). 83 [1978] QB 791 (CA). 84 Transfield Shipping of Panama v Mercator Shipping Inc, ‘The Achilleas’ [2009] UKHL 48, [2009] 1 AC 61. 85 Furmston (n9) 760–4. 86 [1953] Ch 770 (ChD). 87 [1911] 2 KB 786 (CA). 88 [2001] UKHL 49, [2002] 2 AC 732. 89 [1996] 1 AC 344 (HL). 90 [1956] AC 185 (HL). 77 78

254  Research handbook on remedies in private law contract is for the sale of goods easily procurable elsewhere but in many cases … a mere award of damages would defeat the just and reasonable expectations of the plaintiff.91

But this promise is not, with respect, realised, as the reasons why the ‘normal remedy’ might not (or indeed ever might) provide ‘adequate reparation’ slide away into the vague language of, after ‘just and reasonable’, the ‘more perfect and complete justice’,92 in which specific performance is usually discussed. It is significant that the first case which receives sustained treatment is Beswick v Beswick,93 from which nothing of sense about the law of specific performance can be gained.94 As it is not even necessary or even correct after the passage of the Contract (Rights of Third Parties) Act 199995 to hang an account of the positive law on this absurd case, to accord it such prominent treatment is a sign of the absence of a grasp of the underlying structure of the law.

CONCLUSION I have tried to argue that understanding how market damages work and how they work so very well in the cases to which they are appropriate is the key to understanding the general principles of the law of remedies for breach of contract, including commercial cases in which market damages would lead to uncompensated loss and in which a claimant may well try to avoid the general principles of quantification by applying for a form of literal enforcement. Even if my argument is broadly accepted, the reader conversant with the sale of goods will immediately think that so benign a picture has been able to be drawn of market damages only by the studious avoidance of discussion of the concept which preoccupies the appellate law and commentary on market damages (and which we have seen played a minor but significant role in Cheshire, Fifoot and Furmston):96 the ‘available market’. Market damages obviously require the determination of the difference between the contract price and price at which a substitute sale may be made, and this will be essentially unproblematic if a substitute is acquired. But if a claimant which does not acquire a substitute nevertheless makes a market damages claim, i.e. the claim is not for consequential loss sustained because a claimant which would have acquired a substitute if it could was unable to do so, a court which does not simply rule out such a claim, which after all is for a loss not actually suffered, must determine the price which would have been obtained in a sale which is purely hypothetical. As it has over91 Furmston (n9) 795–6. The final clause of this passage runs in full: ‘where the contract is for the sale of goods easily procurable elsewhere but in many cases, and especially when a vendor refuses to convey the land sold, a mere award of damages would defeat the just and reasonable expectations of the plaintiff’. But the automatic, or even default, grant of specific performance, even when confined to breach by the vendor is wholly suspect, and it is unarguable that there are many commercial cases in which damages would be adequate: Harris et al. (n61) 174–6. 92 Furmston (n9) 796 quoting Wilson v Northampton and Banbury Junction Railway Co (1874) 9 Ch App 279, 284 (Lord Selbourne) (HL). 93 [1968] AC 58 (HL). The case had previously been discussed at length in connection with privity: ibid, 564–6. 94 G H Treitel, Some Landmarks of Twentieth Century Contract Law (Clarendon Press 2002) 82–105. 95 c 31. 96 See the quotation at note 10.

Market damages in sales of goods  255 whelmingly been the position, not only in the UK but in all common law countries, almost all of which, including the US, derive their law from the 1893 Act, to in principle allow market damages in these circumstances, the result, which in essence boils down to, in the famous words of Bailhachie J, the court ‘doing the best it can’,97 has been a convoluted and, to be frank, often tantamount to senseless case law of the spectacle of attempts to identify prices on a purely hypothetical market. This law presents a sorry contrast to the claim of smooth working I have made for market damages. This chapter does not require a sustained discussion of this issue, though it is one which, in itself, could hardly be of more importance. I have argued elsewhere that the correct response to these problems is not to award market damages when a substitute sale is not actually made.98 When a substitute sale is made, the buyer’s costs or seller’s proceeds are a matter of fact and the market damages claim becomes a liquidated sum. Even leaving aside fraud and civil procedural difficulties, this will by no means be completely without difficulty because whether the substitute sale was made in an optimal way will be open to question. The typical problem is delay in obtaining a substitute so that the difference between contract and market price is greater than it might have been. But this is a problem which is merely one form of the question about whether a step taken in mitigation was optimal which can arise in all money claims, and, indeed, without at all wishing to seem to minimise the difficulties, I would submit that the case law on market damages would be much improved if this were more widely recognised to be the case.99 But the reason a more sustained discussion of the available market problem is not required here is that the assumption on which this chapter is based, that a sale has the ultimate purpose of transferring possession to the buyer, and by extension that the general principles of the law of contract contemplate an ultimate purpose of the parties obtaining use of the economic goods exchanged, does not capture what the 1893 Act sought to do. It sought to accommodate, not only sales in the sense I have just mentioned, but sales in which transfer of possession is a remote or entirely irrelevant concern to the parties to the contract, for they are engaged in trade in the goods as an end in itself, and their interest is in price differences – recalling that this is the language of ss 50(3) and 51(3) – not in actually obtaining a substitute.100 I am currently engaged in research which seeks to analyse the consequences of this, the only result of which that I am now confidently able to report is that the attempt to accommodate what I have called the ‘sales perspective’ and the ‘trading perspective’101 within one rule was bound to lead to the Melachrino v Nickoll and Knight [1920] 1 KB 693 (Comm Ct), 699. The remainder of this paragraph and the next paragraph are a synopsis of the argument in D Campbell, ‘Market Damages and the Invisible Hand’ in L A DiMatteo and M Hogg (eds), Comparative Contract Law: British and American Perspectives (Oxford University Press 2016) 297. 99 I put to one side the revision of one’s views about this that must now be made in light of The Golden Victory (n80). Such revisions in regard of market damages are considered in M Bridge, ‘Markets and Damages in Sale of Goods Cases’ (2016) 132 Law Quarterly Review 405, 421–5. 100 In the paper to which I have just referred, Professor Bridge (ibid, 408) describes the position thus: ‘the sale of goods contract is recharacterised at the point of damages assessment as a market differences contract. The English approach to market damages bears the imprint of a system of law used to dealing with forward sales as speculative vehicles concluded by intermediate traders who may well have no interest at all in the physical cargo. The forward delivery market in commodities, in addition, flows almost uninterruptedly into the futures market for the same commodity or for a closely related commodity that moves sympathetically in the market with it.’ 101 Campbell (n98) 309. 97 98

256  Research handbook on remedies in private law difficulties the law of market damages has encountered.102 (What really gives one most food for thought, not merely about the law of contract but about the operation of the invisible hand in general, is that a law with this defect at its heart could enhance welfare to the extent pt V of the 1893 Act has.) But this fundamental issue about market damages can, I believe, be put to one side for, in a consideration of the significance of market damages for the general principles of remedies for breach of contract, it is legitimate to focus on the trading perspective of the general principles of the law of contract, in which market damages represent the principal institutionalisation of the doctrine of mitigation. Seen from this perspective, it is regrettable that the importance of market damages in themselves does not normally emerge from conventional treatments of remedies, and that, this being the case, the way other remedies are shaped by their being a response to contracting in circumstances in which market damages will not work well also cannot emerge. The recent great interest in the performance interest and related concepts is, I am afraid, a move in exactly the wrong direction.

102 Nor is the problem resolved by having two market damages rules unless their relationship is clearly understood. Professor Bridge is not, with respect, entirely clear in the paper to which I have referred (n99) when he contrasts the speculative approach in the Sale of Goods Act to a cover approach in the UCC. For, just to focus on the buyer, cover under § 2-711(1)(a) and § 2-712 is followed by a separate provision for market damages under § 2-713. Professor Bridge is, of course, perfectly well aware of § 2-713, but does not convey the way in which it was conceived as ‘a remedy which is completely alternative to cover’ (UCC § 2-713 comment 5), nor the difficulty the US law has had in handling the concept of ‘completely alternative’. These are discussed in Campbell (n98).

15. The Consumer Rights Act 2015 and related reforms: an epic disappointment? James Devenney

I INTRODUCTION In recent years, there has been an attempt at ‘fundamental’ reform of core consumer law in the UK.1 These reforms were partly driven by EU legislation,2 particularly the Consumer Rights Directive, which was adopted by the EU in 2011.3 Other factors were more native to the UK. Thus, against the backdrop of the global financial crisis and a desire to strengthen the UK economy, this programme of reform was fuelled by a market-driven approach to consumer law.4 More specifically, consumer law and confident consumers were viewed as key ingredients to the efficient functioning of the market and the development of the economy.5 The centrepiece of the resulting reforms is, undoubtedly, the Consumer Rights Act 2015 (‘the Act’) which, eventually, gained Royal Assent after an epic6 passage through Parliament and, before its introduction into Parliament, a huge consultation process.7 Indeed the length of the passage through Parliament attracted negative comment in the House of Commons: I am glad I have woken the hon. Gentleman from his slumbers … The Government have had a year in which to get the Bill through, yet they have had to argue for an extension to finish the process for this … legislation. They cannot hide behind the argument that there has not been enough time to consider the Bill; there has been plenty of time … During this Parliament, we have seen some very badly drafted Bills. They have not only needed amendment in the other place but come back to this House, at which point the Government themselves have had to table reams and reams of amendments. That is about bad drafting of legislation. It says exactly the opposite to what the hon. Gentleman suggests…8

Unfortunately, as subsequently noted by the Court of Appeal,9 the spectre of these drafting issues haunts the Act; and the Law Commission have already called for a significant amend See Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 3. 2 See, generally, Consumer Rights Act 2015: Explanatory Notes 2–5. 3 Directive 2011/83/EU [2011] OJ L 304/64. 4 See, for example, Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 9. 5 Cf B Heiderhoff and M Kenny, ‘The Commission’s 2007 Green Paper on the Consumer Acquis: Deliberate Deliberation?’ (2007) ELR 740 at 742. 6 The Consumer Rights Bill was introduced into Parliament in the 2013–14 Parliamentary session and gained Royal Assent, on 26 March 2015, in the following Parliamentary session. 7 See, for example, BIS, Enhancing Consumer Confidence by Clarifying Consumer Law: Consultation on the Supply of Goods, Services and Digital Content (BIS/12/937, 2012); BIS, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, 2013). 8 Hansard HC vol 590 col 684–5 (12 January 2015) per Kevan Jones MP (emphasis added). 9 Salt v Stratstone Specialist Limited [2015] EWCA Civ 745 at [49] per Roth J. 1

257

258  Research handbook on remedies in private law ment to the Act.10 This chapter, which focuses primarily on Parts 1 and 2 of the Act, will explore these criticisms, highlighting the (unnecessary) complexity created by the Act. It will also explore the policy aims of the Act, arguing that whilst many of the stated policy aims undoubtedly make good political sound bites, some of them were formulated with insufficient precision, depth or appreciation of existing nuances in the law. Indeed, this chapter will question the extent to which the strategies adopted by the Act have, or indeed could have, achieved the stated policy aims. In particular, it will lament the continued (conservative with a small ‘c’) use of particular concepts and understandings. Significantly, the chapter will also place the Act in the context of other developments in consumer law, including the privatisation of remedies for unfair commercial practices under the Consumer Protection (Amendment) Regulations 201411 and relevant case law of the Court of Justice of the European Union (CJEU). It will argue, on the one hand, that there is dissonance between the Act and some of these other developments and, on the other hand, that aspects of the Act sit uncomfortably with EU law (which will, it seems, continue to be relevant even after Brexit).12 Despite some welcome developments, this chapter will argue that overall the Act, which had such an epic passage through Parliament, is an epic disappointment.

II

POLICY AIMS

(a)

Streamlining of Consumer Rights13

One of the drivers for reform was the view that UK consumer law had become ‘unnecessarily complex’.14 There are, of course, a number of reasons why this may have been the case. To give just one example: the way in which the UK has often implemented EU directives by merely copying them into secondary legislation,15 with little attempt to integrate them into existing frameworks, has sometimes done little to aid the coherence of consumer law (such as with the previously overlapping, yet contrasting, provisions of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999).16 Yet a spring clean of the statute books is not a panacea; much more needs to be, for example, done in terms of disseminating information about consumer rights and remedies before it can be claimed (with real force) that ‘[the Consumer Rights Act 2015] streamline[s] key consumer rights so that See Law Commission, Consumer Prepayments on Retailer Insolvency Law Com No. 368 (2016) at 114: ‘We recommend that section 4 of the Consumer Rights Act 2015 should be amended to include new rules about when a buyer acquires ownership of goods…’ 11 SI 2014/870. 12 See the Department for Exiting the European Union, Legislating for the United Kingdom’s withdrawal from the European Union (Cm 9446, updated May 2017) at 2.14: ‘for as long as EU-derived law remains on the UK statute book, it is essential that there is a common understanding of what that law means … To maximise certainty … any question as to the meaning of EU-derived law will be determined in the UK courts by reference to the CJEU’s case law as it exists on the day we leave the EU.’ 13 See Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 5. 14 Ibid. 15 See HM Treasury, Davidson Review: Implementation of EU Legislation (2006). 16 See, for example, Law Commission, Unfair Terms in Contracts (Law Com No. 2929 (2005), Cm 6464) at [3]. 10

The Consumer Rights Act 2015 and related reforms  259 people can access what they need to know more easily and effectively’.17 Moreover, there are also risks with such spring cleaning exercises. First, there is a danger that the streamlining will go too far and the resultant law will be sanitised to such an extent that important intricacies, nuances or safeguards will be lost.18 We shall return to this point below when we consider the definition of a consumer in the Consumer Rights Act 2015. Secondly, and this is linked to the fact that interpretation does not take place in a vacuum,19 there is a risk that spring cleaning will result in a conflation of differing policy aims. To give an obvious example, some of the relevant provisions of the Consumer Rights Act 2015 emanate from EU legislation20 and all that this entails in terms of interpretation etc.;21 and whilst, as we shall note below, it may be that UK and EU consumer law are converging on a market orientated approach to consumer law where consumers are regarded as significant actors, it needs to be borne in mind that national and EU approaches to consumer policy may have different drivers.22 This is, of course, linked to a more general point: there needs to be clarity and transparency about the objective or, more likely, objectives of relevant areas of consumer law; and this needs to be balanced against the policy aim of accessible consumer rights.23 It may be that a better way of balancing these two competing aims would have been to supplement the statute, which will almost inevitably contain detailed legal language, with documents written for consumers and which distil consumer rights etc.24

See Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 4. 18 For example, s 14(2), Sale of Goods Act 1979 previously provided: ‘Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality’ (emphasis added). This wording, which was introduced into the Sale of Goods Act 1893 in 1973, clearly included packaging etc. as well as goods which should not have been supplied under the contract. Previously the wording had merely been ‘the goods’ but, relying on the preamble, which referred to ‘goods supplied under the contract’, the courts had interpreted widely: see Wilson and Another v Rickett Cockerell & Co LD [1954] 1 QB 598. Interestingly s 9, Consumer Rights Act 2015 reverts back to the initial wording. Will the courts interpret this phase widely along the lines of Wilson? 19 Cf Bank of England v Vagliano Bros [1891] AC 107. 20 This is, of course, the case with, for example, the Sale of Goods Act 1979, which is often referred to as a codifying statute with all that this entails for interpretation. This is broadly true but, as is well known, the Sale of Goods Act 1979 has been amended on a number of occasions for various reasons including the implementation of EU legislation. 21 See, generally, J Devenney and M Kenny, ‘Unfair Terms, Surety Transactions and European Harmonisation: A Crucible of Europeanised Private Law?’ (2009) The Conveyancer and Property Lawyer 295–309. 22 Cf B Heiderhoff and M Kenny, ‘The Commission’s 2007 Green Paper on the Consumer Acquis: Deliberate Deliberation?’ (2007) ELR 740 at 742. 23 See Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 4. 24 Cf Law Commission, Unfair Terms in Contracts (Law Com No. 2929 (2005), Cm 6464) at [2.53]: ‘The Consultation Draft included examples of the kind of term that amounts to an exclusion or restriction of liability within the meaning of the legislation or that fall within our replacement for the UTCCR’s Indicative List of terms that may be regarded as unfair. While many consultees welcomed this, it was put to us that previous experience of using examples in legislation has not always been happy: the examples may quickly become out of date and may turn out to be incorrect … On reflection, we have concluded that it would be more appropriate for the examples to be in the Explanatory Notes.’ 17

260  Research handbook on remedies in private law The Explanatory Notes also highlight the fragmentation of consumer law prior to the Consumer Rights Act 2015.25 Fragmentation has, of course, been a concern in relation to the interaction between EU law and national law.26 Yet there has also been fragmentation within UK consumer law, as a result, for example, of the patchwork27 of relevant provisions. The Consumer Rights Act 2015 does attempt to consolidate some of UK consumer law but, in so doing, creates different fault lines. For example, in relation to the sale of goods, the rules relating to the passing of property in goods are not consolidated in the Consumer Rights Act 2015.28 This is not the place to rehearse the importance of the passing of property in relation to sale of goods contracts29 and the Act does deal with issues of risk;30 however, other issues remain which raise issues about consumer protection, and ultimately consumer confidence, in the event of the seller’s insolvency.31 Similarly, as we shall note below, issues around digital content overlap enormously with intellectual property rights, which are currently found in a different branch of the law, and this is another source of fragmentation.32 One further example is the traditional distinction in the Law of England and Wales between terms and representations. The Act, as we shall see, provides that certain terms (for example, that the ‘quality of the goods is satisfactory’33) are included in, for example, contracts to supply goods. The factors identified as being relevant to whether or not the quality of the goods is satisfactory have, in the context of s 14(2) of the Sale of Goods Act 1979, been developed in an iterative fashion34 and have eroded the term-representation dichotomy by, to some extent, giving contractual relevance to statements which might previously have been regarded as representations.35 Take, for example, the former s 14(2D) of the Sale of Goods Act 1979 (which can be traced to the EU Directive on certain aspects of the sale of goods and associated guarantees36 and which has evolved into s 9(4)–(5) of the Consumer Rights Act 2015): (2D) If the buyer deals as consumer or, in Scotland, if a contract of sale is a consumer contract, the relevant circumstances mentioned in subsection (2A) above include any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling.

Consumer Rights Act 2015: Explanatory Notes 2. See J Devenney and M Kenny (eds), The Transformation of European Private Law: Consolidation, Codification or Chaos? (Cambridge University Press 2013). 27 See, for example, J Devenney, ‘Private Redress Mechanisms in England and Wales for Unfair Commercial Practices’ (2016) 5 EuCML 100. 28 There are a number of provisions of the Sale of Goods Act 1979 which will continue to apply to consumers: see Consumer Rights Act 2015: Explanatory Notes 24, which helpfully summarised these provisions. 29 See J Devenney and M Kenny, ‘Omission of Personal Property from the Proposed CESL: The Hamlet Syndrome ... Without the Prince?’ (2015) JBL 607. 30 Consumer Rights Act 2015, s 29. 31 See R Bradgate, Commercial Law (3rd edn, Oxford University Press 2000) 391. 32 This was recognised by the European Commission in its reworking of the CESL: see European Commission, ‘A Digital Single Market for Europe: Commission Sets Out 16 Initiatives to Make It Happen, 6th May 2015’ (IP/15/4919). See also Consumer Rights Act 2015: Explanatory Notes 69. 33 S 9(1), Consumer Rights Act 2015. 34 See M Furmston and J Chuah (eds), Commercial Law (2nd edn, Pearson 2013) at 195ff. 35 For example, Beale v Taylor [1967] 1 WLR 1193. 36 Directive 99/44/EC. 25 26

The Consumer Rights Act 2015 and related reforms  261 This amendment to the Sale of Goods Act 1979, in the context of particular public statements, blurred (or, perhaps, formalised a blurring of37) the distinction between terms and representations by rendering such statements part of the contractual landscape. Section 13 of the Sale of Goods Act 1979 (which was a forerunner of s 11 Consumer Rights Act 2015) might have blurred the distinction even further by rendering all descriptive statements contractually binding38 although the courts, ultimately,39 construed s 13 restrictively. This blurring on the term-representation dichotomy is continued by the Consumer Rights Act 2015, which, for example, includes a provision, subject to s 50(2), making certain pre-contractual information binding: 50(1) Every contract to supply a service is to be treated as including as a term of the contract anything that is said or written to the consumer, by or on behalf of the trader, about the trader or the service, if – (a) it is taken into account by the consumer when deciding to enter into the contract, or (b) it is taken into account by the consumer when making any decision about the service after entering into the contract.

The key point for present purposes is that non-contractual representation may, in reality, shape a consumer’s expectations as much as a contractual statement and, whilst the line between terms and representations continues to be blurred, there is fragmentation by the absence of the full treatment of representations in the Act.40 The Department for Business, Innovation and Skills also described the right ‘to get what you pay for’ as a core consumer right.41 Looking at the other core consumer rights set out by the Department for Business, Innovation and Skills, this seems to be referring to more than the former statutory implied terms in particular sales and supply contracts; this may herald giving greater prominence42 to the price in shaping, and perhaps limiting, consumer expectations. (b)

Clarification of Aspects of Consumer Law43

A second driver for reform was the perceived need to clarify particular aspects of consumer law.44 Again, a number of examples could be mentioned but, for present purposes, we will limit

37 See C Willett, M Morgan-Taylor and A Naidoo, ‘The Sale and Supply of Goods to Consumers Regulations’ (2004) JBL 94, 111. 38 A potential criticism of the case of Beale v Taylor [1967] 1 WLR 1193. 39 See Ashington Piggeries v Christopher Hill Ltd [1972] AC 441. 40 See J Devenney and G Howells, ‘Integrating Remedies for Misrepresentation: Co-Ordinating a Coherent and Principled Framework’ in R Merkin and J Devenney (eds), Essays in Memory of Jill Poole: Coherence, Modernisation and Integration in Contract, Commercial and Corporate Laws (Routledge 2018). 41 Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) at 2. 42 Although cf Sale of Goods Act 1979, s 14(2A): ‘goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances’ (emphasis added). 43 Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 5. 44 See, for example, Law Commission, Consumer Remedies for Faulty Goods ((2009) Law Com No. 317) at 1.21: ‘Consultees told us that the problem with the right to reject is uncertainty over how long it lasts.’

262  Research handbook on remedies in private law ourselves to two examples. First, the uncertainty surrounding the scope of Regulation 6(2)45 of the Unfair Terms in Consumer Contracts Regulations 1999, which provided for important limitations on the reach of those Regulations, in the light of the decision of the Supreme Court in Office of Fair Trading v Abbey National Plc.46 Secondly, where applicable, the uncertainty surrounding the length of time a consumer has to reject faulty goods.47 The Consumer Rights Act 2015 at least attempts to tackle both of these issues. Yet other areas of uncertainty are not tackled by the Consumer Rights Act 2015;48 whilst others are only clarified in the accompanying Explanatory Notes;49 and some fresh uncertainties are created.50 (c)

Modernisation of Consumer Law, Particularly for the Digital Age51

A further driver for reform was the need for modernisation, or at least updating, of the law particularly in a digital age. Various examples could be given but we will limit ourselves to one at this point: the vexed question of whether the sale of computer software comes within the Sale of Goods Act 1979 which, following St Albans City and DC v International Computers Ltd,52 seemed to depend on whether the software was transferred on a physical medium (such as a disk) or downloaded across the internet.53 The Consumer Rights Act 2015 makes specific new provision in respect of contracts to supply digital content. (d)

Deregulation for Businesses54

Deregulation can result in efficiency savings for businesses.55 In terms of costs for businesses thought also needs to be given to the costs associated with differences in consumer law 45 Regulation 6(2) provides: ‘In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.’ 46 [2009] UKSC 6. 47 Cf Law Commission, Consumer Remedies for Faulty Goods ((2009) Law Com 317). 48 For example, in relation to the provisions on unfair terms (Part 2) the relevant standard to apply to some of the provisions. 49 For example, how a reduction in price under s 24 should be assessed which is discussed on p. 36 of the Consumer Rights Act 2015: Explanatory Notes: ‘It is intended that the reduction in price should reflect the difference in value between what the consumer paid for and the value of what they actually receive, and could be as much as a full refund or the full amount already paid.’ 50 For example, the measure of damages for breach of contract to supply goods to consumers: see below at 268. 51 Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) at 5. 52 [1997] FSR 251. 53 Ibid, at 265–6 per Sir Iain Glidewell. Cf R Bradgate, ‘Consumer Rights in Digital Products: A Research Report Prepared for the UK Department for Business, Innovation and Skills’ (2010) at 4–5: ‘It is therefore generally reckoned that to be effective consumer law must be clear, accessible and comprehensible. The law relating to digital products currently satisfies none of these criteria … In addition the case law seems to draw illogical distinctions between equivalent transactions so that like claims are not treated alike.’ 54 Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) at 5. 55 See the claim in Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 5: ‘The reforms

The Consumer Rights Act 2015 and related reforms  263 regimes both within the UK56 and elsewhere;57 yet caution also needs to be exercised in connection with harmonisation in not stifling innovation of entrepreneurship.58 Deregulation can, of course, also positively impact on consumers in lowering prices.59 (e)

Selective Enhancement of Consumer Protection60

Although one aim of the Act was selective enhancement of consumer protection, much more focus is on notions of confident consumers and consumers as economic actors.61 This is, of course, consistent with recent trends;62 yet retorts to notions of confident consumers, and its linkage with competition in the market, can often be vague and unsatisfying.63 For example, stating that ‘clearer consumer rights … will help to promote confident consumers’64 has a certain seductiveness about it but, as noted above and in addition to the nature65 of those consumer rights, we must be careful not to view this as a panacea; much will depend on, for example, dissemination of information on rights to consumers, consumer education and redress mechanisms and assistance.66 Indeed, as lawyers, we need to be careful not to over-estimate the direct impact of consumer rights on consumer decision-making.67 One, related, theme that emerged from the legislative process was the centrality of ‘clear and honest

taken together are estimated to be worth over £4 billion to the UK economy over 10 years in quantified net benefits.’ 56 On the impact of devolution see Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 7. 57 In relation to the EU Internal Market, see EU Commission, Green Paper on policy options for progress towards a European Contract Law for consumers and businesses (COM(2010) 348 final) at 2. 58 See N Reich, ‘Competition of Legal Orders: A New Paradigm of EC Law?’ (1992) 29 CMLRev 861. 59 See V Goldberg, ‘Institutional Change and the Quasi-Invisible Hand’ (1974) 17 Journal of Law and Economics 461. 60 Ibid. Cf ‘Benchmarking the performance of the UK framework supporting consumer empowerment through comparison against relevant international comparator countries: A report prepared for BERR by the ESRC Centre for Competition Policy University of East Anglia Norwich’ (2008) at 21. 61 See Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 4. 62 See J Devenney, ‘Conceptualising Consumers in the Law of England and Wales’ in F Klinck and K Riesenhuber (eds), Verbraucherleitbilder: Interdisziplinare und Europaische Perspektiven (De Gruyer 2015) 164. 63 Cf Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 4: ‘Confident consumers are vital to building a stronger economy. High levels of consumer confidence means people experiment and shop around which encourages new businesses, boosts competition and creates growth.’ 64 Ibid. 65 Cf Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 15, where it is stated that the reforms will result in ‘more effective consumer rights’ (emphasis added). 66 On the landscape of consumer enforcement bodies: see Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 9 and 15. 67 Cf, for example, S Della Vigna and U Malmendier, ‘Contract Design and Self-Control: Theory and Evidence’ (2004) CXIX Quarterly Journal of Economics 353.

264  Research handbook on remedies in private law information’68 to these reforms. Again, in terms of consumer protection, care must be taken to recognise the limits on the extent to which the provision of information can cure the many varied and complex disadvantages under which different consumers may be operating.69

III

CONTRACTS TO SUPPLY GOODS TO CONSUMERS

(a) Introduction Prior to the Consumer Rights Act 2015 contracts to supply goods to consumers were regulated by a variety of statutes such as the Sale of Goods Act 1979 (contracts of sale of goods), Supply of Goods and Services Act 1982 (contracts to hire goods, contracts of barter, and contracts for work and materials) and the Supply of Goods (Implied Terms) Act 1973 (hire-purchase contracts). Some of the relevant provisions resonated across these statutes (such as the requirement that the goods needed to be of satisfactory quality70). There was, therefore, an argument to consolidate some of these provisions under the umbrella of contracts to supply goods,71 which would avoid (or perhaps largely avoid) the need to sometimes make fine distinctions between the different contracts72 especially where some legally very different transactions are, from the point of view of a consumer, functionally identical.73 This is broadly the approach which the Consumer Rights Act 2015 (Part 1, Chapter 2) adopts, at least in respect of provisions relating to the rights and remedies of consumers under a ‘contract to supply goods’.74 One consequence of this consolidation of contracts to supply goods is that the ‘additional’ remedies introduced by the Sale and Supply of Goods Regulations 200275 to transpose the Consumer Sales Directive76 are extended to hire and hire-purchase contracts.77 (b) Application Section 1(1) of the Act states that Part 1 ‘applies where there is an agreement between a trader and a consumer for the trader to supply goods, digital content or services, if the agreement is a

68 See Department for Business, Innovation and Skills, Draft Consumer Rights Bill: Government Response to Consultations on Consumer Rights (BIS/13/916, June 2013) 2 and 15. 69 See, generally, J Devenney, ‘Conceptualising Consumers in the Law of England and Wales’ in F Klinck and K Riesenhuber (eds), Verbraucherleitbilder: Interdisziplinare und Europaische Perspektiven (De Gruyer 2015). 70 Cf R Bradgate, Remedying the Unfit Fitted Kitchen (2004) 120 LQR 558. 71 See, generally, Department for Business, Innovation and Skills, Consolidation and Simplification of UK Consumer Law (November 2010). 72 Cf Robinson v Graves [1935] 1 KB 579 and Lee v Griffin (1861) 1 B & S 272. 73 For example, the distinction between a hire-purchase contract and a conditional sale contract where the price is payable in instalments: see Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 90. The functional equivalence has, to some degree, been recognised by the legislature: see s 9, Sale of Goods Act 1979 and s 27, Hire Purchase Act 1964. Cf s 5(3) and s 7 of the Consumer Rights Act 2015. 74 S 3(4). 75 SI 2002/3045. 76 Directive 99/44/EC on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L171/7. 77 Cf Law Commission, Consumer Remedies for Faulty Goods ((2009) Law Com) 2.48–2.49.

The Consumer Rights Act 2015 and related reforms  265 contract’. Central to the operation of this part of the Act is the term ‘trader’ which is defined, by s 2(2), in the following terms: a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader's name or on the trader's behalf.

Thus if, for example, the seller of goods does not come within this definition, particular statutory rights under ss 9–18 of the Act will not be applicable. Under s 14(2) and (3) of the Sale of Goods Act 1979 the implied terms that the goods are of satisfactory quality and fit for purpose only apply where the seller sold the goods in the ‘course of a business’. Thus, to this extent, the Act reduces the reach of the protective provisions contained in such provisions although the extent of the problem with non-trader dealers is not clear78 and it may be that the common law will reach the same result anyway in some cases. Much will also depend on the interpretation of s 2(2). At one stage it was assumed, as a result of R & B Customs Brokers v United Dominions Trust Ltd,79 that a restrictive interpretation of the phrase ‘in the course of a business’ would be taken, thus curtailing the reach of ss 14(2)–(3). That case involved the phrase ‘deals as consumer’ under s 12 of the Unfair Contract Terms Act 1977. Ultimately, Dillon LJ was of the opinion that for these purposes a transaction would only be ‘in the course of a business’ if it was either an integral part of the business or carried out with sufficient regularity.80 However the phrase ‘in the course of a business’ was interpreted differently by the Court of Appeal in Stevenson v Rogers81 directly in the context of the Sale of Goods Act 1979. In that case a fisherman sold his boat and the question for the court was whether or not the Sale of Goods Act 1979, s 14(2) implied a term into this contract which, in turn, depended on whether or not the sale was ‘in the course’ of the fisherman’s business. The Court of Appeal, acknowledging the different interpretation under the pre-Consumer Rights Act 2015 version of the Unfair Contract Terms Act 1977,82 held that the sale was ‘in the course of a business’ and therefore the Sale of Goods Act 1979, s 14(2) applied.83 At one level, of course, different interpretations of the phrase ‘in the course of a business’ under different statutes need not be problematic.84 Yet, in the current context, the situation was more complicated and not only by the fact that the Sale of Goods Act 1979 and the Unfair Contract Terms Act 1977 were, to some extent at least, complementary statutes. More specifically the additional remedies provided, at that time, under s 48A of the Sale of Goods Act 1979, only applied where ‘(a) the buyer deals as consumer or, in Scotland, there is a consumer contract in which the buyer is a consumer’, and s 61 of the Sale of Goods Act 1979 defined ‘deals as consumer’ ‘in accordance with Part I of the Unfair Contract Terms Act 1977; and, for the purposes of this Act, it is for a seller claiming that the buyer does not deal as consumer to show that he does not’. Presumably, therefore, the R & B Customs Brokers v United Dominions Trust Ltd case was to be applied to that part of the Sale of Goods Act 1979! Although consider the increased use of platforms such as eBay. [1988] 1 WLR 321. 80 [1988] 1 WLR 321 at 330. 81 [1999] QB 1028. 82 [1999] QB 1028 at 1041 per Potter LJ. 83 See I Brown, ‘Sales of Goods in the Course of a Business’ (1999) 115 LQR 384. 84 Cf Feldarol Foundry Plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747 at [18] per Tuckey LJ. 78 79

266  Research handbook on remedies in private law This, of course, goes someway to demonstrating the need, discussed above, to streamline consumer law; and there was a desire85 to align with definitions in the Consumer Rights Directive.86 Yet care needs to be taken: the different interpretations, to some extent, increased protection for consumers; the wide interpretation in s 14 maximising the reach of those provisions with the restrictive interpretation of s 12 curtailing, subject to the interplay between s 12(1)(a) and 12(1)(b), the circumstances in which a seller could exclude or limit liability. We shall return to this discussion below when we discuss the definition of a ‘consumer’ but, at this stage, it is important to make two points. First, in any spring clean it is important to have an awareness of the impact it may have on these types of nuances. Secondly, should a wide or narrow lens be used in determining whether or not ‘a person [is] acting for purposes relating to that person’s trade, business, craft or profession’? The point might be illustrated further by reference to Standard Bank London Ltd v Apostolakis,87 which actually involved the converse definition, that of a consumer. In that case the defendants (a lawyer and civil engineer) used their personal wealth to enter into a foreign exchange contract with a bank in Greece. One of the questions for the court was whether or not they acted as ‘consumers’ under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999). Longmore J held that the defendants were consumers for the purposes of the UTCCR 1999: It is certainly not part of a person's trade as a civil engineer or a lawyer … to enter into foreign exchange contracts. They were using the money in a way which they hoped would be profitable but merely to use money in a way which they hoped would be profitable is not enough … to be engaging in trade.88

Interestingly, it seems that the Greek courts adopted a different view.89 Parts 1 and 2 also only apply where the other party is a ‘consumer’ a term which has various meaning throughout the Law of England and Wales.90 For the purposes of the Act a ‘consumer’ is defined as ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’.91 A number of observations need to be made in respect of this provision. First, under the Act only natural persons can be consumers. This is in contrast to the former position under s 12 of UCTA 1977 (discussed above).92 This engages the debate about whether, for example, small enterprises should be given (some of) the same protection as consumers,93 especially where the corporate veil merely masks the economic reality.94 Secondly, there are doubts about whether or not the CJEU would define

See Consumer Rights Act 2015: Explanatory Notes 14. Directive 2011/83/EU [2011] OJ L 304/64. 87 [2002] CLC 933. 88 [2002] CLC 933 at 936. 89 See Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] EWHC 257 (Comm) at [209] per Andrew Smith J. 90 See J Devenney, ‘Conceptualising Consumers in the Law of England and Wales’ in F Klinck and K Riesenhuber (eds), Verbraucherleitbilder: Interdisziplinare und Europaische Perspektiven (De Gruyer 2015). 91 See s 2(3). 92 R & B Customs Brokers v United Dominions Trust Ltd [1988] 1 WLR 321. 93 Law Commission, Unfair Terms in Contracts (Law Com. No. 292 (2005)) at [5.5]ff. 94 Law Commission, Unfair Terms in Contracts (Law Com. No. 292 (2005)) at [5.14]. 85 86

The Consumer Rights Act 2015 and related reforms  267 a ‘consumer’ in the same way95 and the consequent issues of fragmentation.96 Thirdly, as we noted in relation to our discussion around Standard Bank London Ltd v Apostolakis,97 such a definition can be viewed, with differing results, through a wide or a narrow lens. Moreover, the question of whether or not ‘an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession’98 is a matter of degree. So to what extent, if at all, might perceptions of the vulnerability, or otherwise, of the party in question impact on this decision? Certainly there are cases which provide some suggestion that this judgment may be affected by perceptions of vulnerability.99 (c)

Consumer Rights under a Contract to Supply Goods

Part 1, Chapter 2 of the Consumer Rights Act 2015 sets out various statutory rights in respect of contracts to supply goods. These statutory rights are formulated by ‘including a term’ in the contract that, for example, the ‘quality of the goods is satisfactory’.100 Such a technique, where Parliament supplements the terms of a contract to supply goods, is, of course, well known. However, there are two notable features of the overall approach of the Consumer Right Act 2015 in this regard. First, there is a subtle shift away from the language of an implied term to merely ‘including a term’ in the relevant contract. Presumably this shift was made on the ground that the new language is clearer to consumers although it is difficult to envisage that this will have any more than a marginal gain in this respect. Secondly, and more importantly, unlike under, for example, the Sale of Goods Act 1979 such terms are not classified as conditions or warranties with the associated impact on available remedies. Instead, as we shall see below, the Consumer Rights Act 2015 expressly sets out the remedies for breach of these statutory terms. At one level this, as was the intention,101 simplifies this area of law: there is no need for businesses or consumers to understand the significance of the distinction between conditions and warranties.102 Yet any such gains need to be set against the complexity of the (partial103) remedial framework under the Act. A number of the terms now included, by virtue of the Consumer Rights Act 2015, into relevant contracts are familiar: for example the goods must be of satisfactory quality (s 9), the goods must be fit for a particular purpose (s 10), the goods must correspond with the sample (s 13)104 and the trader must have the right to supply the goods etc. (s 17).105 Therefore, the previous case law under, for example, s 14, Sale of Goods Act 1979 will be relevant although See H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-040. Ibid. 97 [2002] CLC 933. 98 Emphasis added. 99 Barclays Bank Plc v Kufner [2008] EWHC 2319 (Comm) especially at [31] and Heifer International Inc v Christiansen [2007] EWHC 3015 (TCC) especially at [304]. 100 S 9(1). 101 See Department for Business, Innovation and Skills, Consolidation and Simplification of UK Consumer Law (November 2010) at 7.32: ‘Classifying terms as either conditions or warranties, whilst not problematic for those legally trained, is likely to mean very little to the ordinary consumer.’ 102 Although it may be necessary for other purposes such as breach of an express term: cf s 19(11)(e). 103 See, for example, s 19(11) on remedies not consolidated in the Act. 104 S 13 actually uses the phrase ‘match the sample’. 105 Presumably, although not stated, this provision will be interpreted widely as in Niblett v Confectioners’ Materials Co [1921] 3 KB 387. 95 96

268  Research handbook on remedies in private law care should be taken to recognise the purely consumer context of the new regime.106 Section 11(1) (‘Every contract to supply goods by description is to be treated as including a term that the goods will match the description’107) resonates with, for example, s 13 of the Sale of Goods Act 1979. Moreover s 11(4) provides: Any information that is provided by the trader about the goods and is information mentioned in paragraph (a) of Schedule 1 or 2 to the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 … (main characteristics of goods) is to be treated as included as a term of the contract.

The ‘main characteristics’ of the goods is arguably wider than words which ‘identify the kind of goods’. There are also some new terms under the Act, in particular s 14 (‘[g]oods to match a model seen or examined’108) and s 12 (‘[o]ther pre-contract information included in contract’): (1) This section applies to any contract to supply goods. (2) Where Regulation 9, 10 or 13 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 … required the trader to provide information to the consumer before the contract became binding, any of that information that was provided by the trader other than information about the goods and mentioned in paragraph (a) of Schedule 1 or 2 to the Regulations (main characteristics of goods) is to be treated as included as a term of the contract.

This provision is not straightforward, not least as s 12(1) states that it ‘applies to any contract to supply goods’ whereas the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 sometimes limit a particular information requirement to a particular type of contract (for example a sales contract109).110 Moreover, it is not always clear exactly how some of these terms, emanating from the provision of particular information, are to operate,111 particularly when read with s 12(3) of the Consumer Rights Act 2015.112 For example, Schedule 1, paragraph (b) refers to ‘the identity of the trader (such as the trader’s trading name), the geographical address at which the trader is established and the trader’s telephone number…’. Presumably this does not mean that, for example, the trader cannot change telephone number or cannot change it without the agreement of the consumer (or all relevant consumers!)? Is the relevant requirement to somehow make available changes to a telephone number? These terms are fortified by s 31, which provides that ss 9–17 cannot be excluded or restricted.

See H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-462. Note also s 2(5)–(6) for application in relation to public auctions. 108 See Consumer Rights Act 2015: Explanatory Notes para 77. 109 Defined by Regulation 5. 110 See, for example, Schedule 2, para (p). 111 See also Regulation 18. 112 ‘A change to any of that information, made before entering into the contract or later, is not effective unless expressly agreed between the consumer and the trader.’ 106 107

The Consumer Rights Act 2015 and related reforms  269 (d)

The Privatisation of Remedies for Unfair Commercial Practices

Before we move on to consider remedies for breach of the foregoing statutory rights, we need to consider, briefly, recent statutory developments in relation to unfair commercial practices. As is well known, the Consumer Protection from Unfair Trading Regulations 2008 (CPUTR 2008)113 largely transpose the Unfair Commercial Practices Directive114 into the UK. The CPUTR 2008, which replaced 23 earlier enactments, closely follow the wording of the Directive.115 A commercial practice is defined widely as: any act, omission, course of conduct, representation or commercial communication (including advertising and marketing) by a trader, which is directly connected with the promotion, sale or supply of a product to or from consumers, whether occurring before, during or after a commercial transaction (if any) in relation to a product.116

Furthermore in R v X Ltd117 the Court of Appeal confirmed that isolated incidents can constitute a commercial practice. We shall return to the meaning of an unfair commercial practice below but for present purposes it suffices to note that it can include misleading actions and omissions.118 There is, therefore, an overlap with the general law of misrepresentation. This is pertinent to the current discussion for at least two reasons. First, as argued above, non-contractual representations can certainly shape consumer expectations and, therefore, the term-representation dichotomy creates a fragmentation; a fragmentation which, although in places eroded, is generally maintained by the Consumer Rights Act 2015. Secondly, despite the theoretical distinction between terms and representations,119 it is clear that these two concepts are contextually closely related – indeed the distinction is often a fine one120 and a particular statement may even be both a term and a representation.121 Moreover, an oddity of the current position is that damages, under the general law of misrepresentation, for pre-contractual statements which were, in a general sense, not important enough to form part of the contract can sometimes, depending on the precise facts, exceed in quantum the damages which would have been payable had the statement in question been a contractual term.122 The key point, of course, is that by excluding remedies for misrepresentation from the Consumer Rights Act 2015 this fragmentation is further entrenched and – an Act which sought, for example, to streamline – only paints a partial picture of the relevant landscape.

SI 2008/1277. Directive 2005/29/EC, OJ L149/22. 115 See, generally, H G Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-145ff. 116 Regulation 2. 117 [2013] EWCA Crim 818. 118 See Regulation 3(4). 119 See, for example, E Peel, Treitel: The Law of Contract (14th edn, Sweet and Maxwell 2015) ch 9. 120 Cf Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 2 All ER 65. 121 On the possibility that a particular statement is both a representation and a contractual term see Misrepresentation Act 1967, s 1 and Pritchard v Cook (unreported 4 June 1998). 122 See J Devenney, ‘Re-Examining Damages for Fraudulent Misrepresentation: Towards a More Measured Response to Compensation and Deterrence’ in L Di Matteo, K Rowley, Q Zhou and S Santier (eds), Current Issues in Commercial Contracts: Transatlantic Perspectives (Cambridge University Press 2013). 113 114

270  Research handbook on remedies in private law The CPUTR 2008 originally relied on a dual system of enforcement consisting of (1) criminal sanctions and (2) administrative sanctions. Thus initially the CPUTR 2008 did not give consumers specific rights of private redress; a position buttressed by the original version of Regulation 28, which provided that ‘[a]n agreement shall not be void or unenforceable by reason only of a breach of these Regulations’.123 Instead a consumer wanting private redress from an unfair commercial practice had to fashion a remedy from pre-existing doctrines.124 Yet such an exercise was not always straightforward.125 To some extent this was the result of the law of misrepresentation being an amalgam of (1) common law, equity and statute (e.g. Misrepresentation Act 1967) and (2) tort and contract law.126 However, there were wider issues. First, the concept of a misleading action under CPUTR is not necessarily the same as under the general law of misrepresentation.127 Secondly, there are limited remedies for misleading omissions under the general law of misrepresentation.128 Thirdly, there are particular limitations on the right to rescind including (1) the general unavailability of a right of partial rescission129 and (2) uncertainty on how long a right of rescission lasts.130 Fourthly, there are difficulties in the assessment of damages for misrepresentation131 including possibly the types of losses a consumer might be able to claim.132 Finally, there are issues surrounding the ability and willingness of a consumer to bring an action.133 The foregoing resulted in calls for reform, especially against the backdrop of the strain on the public purse post-financial crisis.134 The Consumer Protection (Amendment) Regulations 1999 (CPAR 2014) inserted a new Part 4A into CPUTR 2008 giving consumers specific private rights of redress in relation to the CPUTR 2008: the remedies are the unwinding of a contract, a discount and damages. Consumers are given these private redress rights in relation to misleading actions and aggres-

See also Recital (9) of the Directive. Law Commission, Consumer Redress for Misleading and Aggressive Practices (Cm 8328 (2012)) viii (referring to the original Regulations). 125 ‘This is problematic: the law of misrepresentation is complex and uncertain…’ (Law Commission, Consumer Redress for Misleading and Aggressive Practices (Cm 8328 (2012)) viii). 126 See J Devenney, ‘Re-Examining Damages for Fraudulent Misrepresentation: Towards a More Measured Response to Compensation and Deterrence’ in L Di Matteo, K Rowley, Q Zhou and S Santier (eds), Current Issues in Commercial Contracts: Transatlantic Perspectives (Cambridge University Press 2013) especially at 417–18. 127 See OFT v Purely Creative Ltd [2011] EWHC 106 (Ch), where Briggs J thought that the causation test was higher under the CPUTR 2008 than under the general law of misrepresentation. 128 See Turner v Green [1895] 2 Ch 205. 129 See J Poole and A Keyser, Justifying Partial Rescission in English Law (2005) 121 LQR 273. 130 Cf also Law Commission, Consumer Remedies for Faulty Goods ((2009) Law Com 317). 131 See J Poole and J Devenney, ‘Reforming Damages for Misrepresentation: The Case for Coherent Aims and Principles’ (2007) JBL 269–305. 132 Generally damages for disappointment and distress are not available in the Contract Law of England and Wales. Cf misrepresentation: see Archer v Brown [1985] QB 401. 133 Similarly, a consumer who has been subject to aggressive practices under the CPUTR 2008 might be able to fashion a private remedy from, for example, the general law of duress and/or undue influence (usually rescission). Yet these doctrines were/are not unproblematic in this context: see Law Commission, Consumer Redress for Misleading and Aggressive Practices (Cm 8328 (2012)) at 3.51. 134 Law Commission, Consumer Redress for Misleading and Aggressive Practices (Cm 8328 (2012)) viii. 123 124

The Consumer Rights Act 2015 and related reforms  271 sive practices but not specifically misleading omissions.135 Generally, and subject to rules on double recovery, these remedies operate in addition to existing possibilities for private redress under the general law.136 Unfortunately, the CPAR 2014 is not a model of clarity in drafting. Regulation 27A is the gateway into the new provisions, setting out three preliminary conditions for the rights in Part 4A to be engaged. First, there must be a particular transaction involving a consumer. The relevant transactions are set out in Regulation 27A(2): (a) the consumer enters into a contract with a trader for the sale or supply of a product by the trader (a ‘business to consumer contract’), (b) the consumer enters into a contract with a trader for the sale of goods to the trader (a ‘consumer to business contract’), or (c) the consumer makes a payment to a trader for the supply of a product (a ‘consumer payment’).

The second condition is that the trader (or possibly the producer) engages in a prohibited practice (viz., for these purposes, a misleading action or aggressive practice). The third condition is that the prohibited practice is a ‘significant factor’ in the consumer entering the contract or making the relevant payment.137 The remedy of unwinding is contained in the (amended) CPUTR 2008, Regulations 27E–H, with Regulations 27E–F dealing with business to consumer contracts.138 The consequences of unwinding are that the contract comes to an end, the trader may have to give the consumer a refund and the goods must be made available for collection by the trader.139 Under 27E(1) unwinding is available ‘if the consumer indicates to the trader that the consumer rejects the product, and does so (a) within the relevant period [90 days], and (b) at a time when the product is capable of being rejected.’ Regulation 27E(8) provides: a product remains capable of being rejected only if – (a) the goods have not been fully consumed, (b) the service has not been fully performed, (c) the digital content has not been fully consumed, (d) the lease has not expired, or (e) the right has not been fully exercised…

Significantly a consumer is generally not required to account for use of the product:140 In terms of the remedy of a discount Regulation 27L(1) provides: A consumer has the right to a discount in respect of a business to consumer contract if – (a) the consumer has made one or more payments for the product to the trader or one or more payments under

CPUTR 2008, Regulation 27B. See CPUTR 2008, Regulation 27L but cf Misrepresentation Act 1967 s 2(4). 137 Regulation 27A(6). 138 See above: ‘a contract with a trader for the sale or supply of a product by the trader’. Regulations 27G and 27H deal respectively with the unwinding of a consumer to business contract and a consumer payment. 139 Regulation 27F(1). 140 Cf Regulation 27F(7) in relation to, for example, continuous contracts such as some utility contracts. 135 136

272  Research handbook on remedies in private law the contract have not been made, and (b) the consumer has not exercised the right to unwind in respect of the contract.

The (amended) CPUTR 2008 also provide a, fairly crude, sliding scale of the quantum of discounts.141 In terms of damages, which is of course an established remedy for misrepresentation in England and Wales,142 significantly a consumer is given the right to claim damages for ‘alarm, distress or physical inconvenience or discomfort’ subject to a remoteness test.143 Unlike the other remedies, there is a due diligence defence (s 27J(5)(b): ‘the trader took all reasonable precautions and exercised all due diligence to avoid the occurrence of the prohibited practice’). (e)

Remedies under the Consumer Rights Act 2015, Part 1, Chapter 2 – Overview

Sections 19–24 of the Consumer Rights Act 2015 make provision in respect of remedies for breach of the statutory rights discussed above and a number of points need to be made about the scheme in the Act. First, the remedial scheme adopted by the Act is not exhaustive; as is recognised by s 19(9)–(11) a consumer may have additional144 remedies not covered by the Act including damages, specific performance and termination.145 This is, perhaps, unfortunate given that one of the aims of the Act was to streamline this area of law. Interestingly, the Act provides146 that s 51 (damages for non-delivery) and s 53 (damages for defective goods) of the Sale of Goods Act 1979 no longer apply to consumers. Presumably, however, a claim for damages by a consumer will still be assessed by analogy to, for example, the s 53, Sale of Goods Act 1979?147 If so, presumably a consumer will still face difficulties in obtaining compensation for non-pecuniary losses such as anxiety, distress and upset;148 which makes an interesting contrast with the position for misrepresentation under the CPAR 2014. On the other hand, a number of the remedies of the seller are still governed by, for example, the Sale of Goods Act 1979.149 Again, it might have been thought helpful to include such important remedies into the new Act.150

Regulation 27I (4): ‘Subject to paragraph (6), the relevant percentage is as follows – (a) if the prohibited practice is more than minor, it is 25%, (b) if the prohibited practice is significant, it is 50%, (c) if the prohibited practice is serious, it is 75%, and (d) if the prohibited practice is very serious, it is 100%.’ Regulation 27I(6) concerns products where the contract price exceeds £5,000. 142 There is some authority that damages (or a similar remedy) may be awarded for undue influence and/or duress: see Mahoney v Purnell [1996] 3 All ER 61. 143 Regulation 27J (2)–(3): ‘(2) The right to damages is the right to be paid damages by the trader for the loss or the alarm, distress or physical inconvenience or discomfort in question; (3) The right to be paid damages for financial loss does not include the right to be paid damages in respect of the difference between the market price of a product and the amount payable for it under a contract.’ 144 Note s 19(10): ‘Those other remedies may be ones – (a) in addition to a remedy referred to in subsections (3) to (6) (but not so as to recover twice for the same loss), or (b) instead of such a remedy, or (c) where no such remedy is provided for’ (emphasis added). See also s 28(13). 145 Note s 19(12). 146 See Schedule 1, paras 28–30. 147 Which, of course, is broadly a consolidation of the common law on damages. 148 Compare, for example, Farley v Skinner (No. 2) [2001] UKHL 49. 149 See, for example, s 49, Sale of Goods Act 1979 (action for the price). 150 Cf s 19(11)(d). 141

The Consumer Rights Act 2015 and related reforms  273 Secondly, the Act adopts a rather elaborate151 framework for remedies, which is, perhaps, unfortunate given the streamlining and clarifying objectives of the Act. At the start of the relevant remedies section of the Act, s 19(1) outlines when goods conform to the contract:152 essentially where the express terms as well as ss 9 (satisfactory quality), 10 (fitness for a particular purpose), 11 (match description), 13 (match model), 14 (match sample), 15 (situations where installation forms part of the contract) and 16 (link with digital content) are complied with.153 Given that these sections already signpost the relevant remedies154 it seems over-complicated to have this further layer between rights and remedies.155 Section 19(3) then goes on to specify the remedies for breach of all except two (namely express terms and s 15) of the requirements mentioned in s 19(1): (a) the short-term right to reject (sections 20 and 22); (b) the right to repair or replacement (section 23); and (c) the right to a price reduction or the final right to reject (sections 20 and 24).

Section 19(4) provides that the right to ‘repair or replacement’ and the ‘right to price reduction or the final right to reject’ are available for breach of an express term of breach of s 15; whereas, under s 19(6), breach of s 17(1) (right to supply etc.) gives rise to a ‘right to reject’. By contrast, where s 12 is breached: the consumer has the right to recover from the trader the amount of any costs incurred by the consumer as a result of the breach, up to the amount of the price paid or the value of other consideration given for the goods.156

One can, of course, appreciate that, despite the move away from the traditional condition– warranty dichotomy, different terms may merit different remedies;157 yet surely there is a less cumbersome way of so doing than is found in the Act? Moreover, what are the remedies for breach of s 17(2) (freedom from charges and encumbrances as well as quiet enjoyment)? Would price reduction not be an appropriate remedy?158 The third, overall point to make relates to the remedy of specific performance (which, as we have seen is available to consumers although not specifically dealt with by the Act). As is well known, the courts in England and Wales have traditionally tended not to grant specific performance where damages would be an adequate/appropriate remedy. A consumer would need to show, for example, that the goods were unique in some way in order to obtain an order See H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-477. Cf s 19(2) (materials supplied by the consumer). 153 The language used in s 19(1) might be clearer: for example, ‘the goods not failing to conform’ in (b). 154 See, for example, s 15(2). 155 Perhaps there is a concern that this, or something akin to it, is necessary in order to demonstrate compliance with Article 2 of Directive 99/44/EC on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L171/7? If so, a better place to demonstrate compliance would, perhaps, be in the transposition section of the relevant explanatory notes. 156 S 19(5). 157 Cf Department for Business, Innovation and Skills, Consolidation and Simplification of UK Consumer Law (November 2010) ch 7. 158 Under s 12(2), Sale of Goods Act 1979, where the equivalent of this term was classified as a warranty, rejection would not have been possible: see s 12(5A). 151 152

274  Research handbook on remedies in private law for specific performance.159 Given the performance-based nature of some of the remedies in the Act, might this change?160 Similar issues were mooted following the introduction, as a result of the Consumer Sales Directive, of the additional remedies for consumers in the Sale of Goods Act 1979 back in 2003.161 There appears to be no clear evidence of such a shift at the moment. On the other hand, we must remember the EU origin of these provisions162 and s 58 of the Act provides that a court has power to order specific performance of the remedy of repair or replacement. (f)

Right(s) to Reject

Traditionally, a consumer buyer, faced with, for example, a breach of one of the statutory implied terms under the Sale of Goods Act 1979, could prima facie reject the goods. This was potentially a powerful self-help remedy for a consumer, which also allowed the consumer to reclaim the price paid (if any) and claim damages for non-delivery.163 By contrast Article 3(2) of the Consumer Sales Directive required a different set of remedies (albeit with some overlap164): In the case of a lack of conformity, the consumer shall be entitled to have the goods brought into conformity free of charge by repair or replacement, in accordance with paragraph 3, or to have an appropriate reduction made in the price or the contract rescinded with regard to those goods, in accordance with paragraphs 5 and 6.

The remedy of rescission might be regarded as a longer term right to reject goods but the remedies required under the Directive were to operate in a hierarchical fashion meaning that rescission (under Article 3) was not available immediately.165 This caused some concern in the debates about how to transpose the Directive.166 Ultimately, however, the remedies required under the Directive were transposed in addition to existing remedies, meaning the right of rejection, in its traditional form, was preserved. Yet some uncertainty surrounded this traditional right of rejection. For example, where the property has passed to the buyer what was meant by an act inconsistent with the ownership of the seller?167 What was meant by a reasonable time? The Consumer Rights Act 2015 amends s 35 of the Sale of Goods Act 1979 so as to remove consumer cases for its ambit.168 It also provides for two rights of rejection: a short-term right

See, for example, Behnke v Bede Shipping Co Ltd [1927] 1 KB 649. Note also that s 52, Sale of Goods Act 1979 no longer applies to consumers (s 52(5)). 161 Sale and Supply of Goods to Consumers Regulations 2002. See C Willett, M Morgan-Taylor and A Naidoo, ‘The Sale and Supply of Goods to Consumers Regulations’ (2004) JBL 94, 111. 162 See, generally, H MacQueen, B Dauner-Lieb and P Tettinger, ‘Specific Performance and the Right to Cure’ in G Dannemann and S Vogenauer, The Common Frame of Reference for European Contract Law and its Interaction with English and German Law (Oxford University Press 2013). 163 Under s 51. 164 See R Bradgate, Commercial Law (3rd edn, Oxford University Press 2000) 337–9. 165 See Article 3(5). 166 Cf C Twigg-Flesner and R Bradgate, ‘The E.C. Directive On Certain Aspects of the Sale of Consumer Goods and Associated Guarantees – All Talk and No Do?’ (2000) 2 Web JCLI. 167 See Fiat Auto Financial Services v Connelly 2007 SLT (Sh. Ct) 111. 168 Schedule 1, paragraph 24. 159 160

The Consumer Rights Act 2015 and related reforms  275 under s 22 and a final right of rejection under s 24 (this is, of course, in addition to the new right of unwinding introduced for misrepresentation by the CPAR 2014!). In broad terms the short-term right of rejection is a curtailed form of the traditional right of rejection and the final right of rejection is the right of rescission required under the Consumer Sales Directive. Section 20 makes provision common to both forms of rejection:169 the consumer can reject by indicating to the trader that he/she is rejecting the goods and ‘treating the contract as at an end’;170 the consumer is entitled to a refund following rejection;171 the consumer must make goods available for collection ‘or (if there is an agreement for the consumer to return rejected goods) to return them as agreed’.172 This last provision is a development on s 36, Sale of Goods Act 1979, which merely provided: ‘Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right to do so, he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses to accept them.’ Section 36 of the Sale of Goods Act 1979 was sometimes thought to be harsh on the seller given that the risk is on them. Leaving aside questions of how and when the agreement to return the goods mentioned in s 20(7)(b) is formed, this may be a situation where the Sale of Goods Act 1979 is more generous to buyers than the new Act!173 Section 20(15) helpfully provides that the refund must be given within 14 days; although, less helpfully from a consumer perspective, the clock starts ticking when the ‘trader agrees that the consumer is entitled to a refund’.174 The time limit for the short-term right to reject is set out in s 22. Essentially a consumer has 30 days175 in which to exercise the short-term right of rejection: beginning with the first day after these have all happened – (a) ownership or (in the case of a contract for the hire of goods, a hire-purchase agreement or a conditional sales contract) possession of the goods has been transferred to the consumer, (b) the goods have been delivered, and (c) where the contract requires the trader to install the goods or take other action to enable the consumer to use them, the trader has notified the consumer that the action has been taken.

The virtue of this provision is that it gives a clear (or, perhaps, fairly clear given the fact that there are exceptions176 and the clock starts ticking once, amongst others things, ownership has passed which, as this is based on the intention of the parties,177 which can, sometimes, give rise

See also s 25(5)–(6) in relation to delivery of the wrong quantity. Interestingly, the Act refers to rejecting the goods and treating the contract as at an end (see, for example, s 20(4)). Does this mean that rejection and termination are now regarded as joined? Cf A Apps, ‘The Right to Cure Defective Performance’ [1994] LMCLQ 525. Cf s 25(4) (delivery of the wrong quantity) where a clear distinction is drawn between rejection and termination. 171 S 20(7)(a). 172 S 20(7)(b). See also s 21(5)–(13) in relation to partial rejection of goods. 173 Note s 20(8) on costs, which seems to state that the trader must pay reasonable costs for the consumer to return the goods regardless of what is agreed in the above mentioned agreement. 174 On the means of refund see s 20(16)–(17). 175 Note that this can be extended, but not reduced, by agreement: see s 22(1)–(2). Quaere: is there scope for the doctrine of waiver? On the other hand, the clock can be stopped. See s 22(6): ‘If the consumer requests or agrees to the repair or replacement of goods, the period mentioned in subsection (3) or (4) stops running for the length of the waiting period.’ This, broadly, corresponds to the position reached under s 35, Sale of Goods Act 1979: see Truk (UK) v Tokmakidis [2000] 1 LL Rep 543. 176 See s 20(4). 177 See s 18, Sale of Goods Act 1979. 169 170

276  Research handbook on remedies in private law to difficulties178) period in which to reject the goods; and the period seems, broadly, to accord with the expectations of consumers.179 Yet, on the other hand, it does seem, in broad terms, to reverse the general direction of travel in respect of the time in which rejection had to be exercised under s 35 of the Sale of Goods Act 1979;180 and it makes an interesting contrast with the 90 day ‘unwinding period’ under the CPAR 2014! Moreover, it is not clear that 30 days is enough for some, more complex, goods.181 There is, of course, the final right of rejection which is further mapped out in s 24 and will be discussed further below. (g)

Right to Repair or Replacement

As noted above, the remedies specifically required under the Consumer Sales Directive operate in a hierarchical fashion. Under the first level of remedies required by the Directive are the remedies of repair and replacement. These two remedies may, of course, have been, at least, informally offered to consumers prior to the Directive but, prior to the transposition of the Directive, they were not generally part of the formal menu remedies available to consumers. The Sale and Supply of Goods to Consumers Regulations 2002, which largely transposed the Directive in the UK, provided for these remedies by, for example, inserting a (then) new Part 5A into the Sale of Goods Act 1979. The former provisions on repair and replacement in the Sale of Goods Act 1979 are largely carried through to s 23 of the Consumer Rights Act 2015. Thus the trader must repair or replace the goods ‘within a reasonable time and without causing significant inconvenience to the consumer’;182 the trader must bear the costs of the repair or replacement (including, for example, postage);183 neither of these remedies can be exercised if it is impossible or disproportionate to the other of these remedies;184 and a consumer who requires or agrees the repair or replacement of goods cannot exercise the (now) short-term right of rejection or the other remedy (of repair or replacement as the case might be) without giving the trader a reasonable time to repair or replace as the case might be.185 The Act adds a basic definition of repair.186 On the other hand, there is still some uncertainty over the proportionate test (particularly when dealing with low value goods) and the test for significant inconvenience;187 and this uncertainty may, given potential underlying inequalities in bargaining power, work to a trader’s advantage when seeking to resist a claim for repair or replacement.188

Cf Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69. See Law Commission, Consumer Remedies for Faulty Goods ((2009) Law Com No. 317) at 3.52. 180 See, for example, Clegg v Anderson [2003] EWCA Civ 320. 181 Cf Law Commission, Consumer Remedies for Faulty Goods ((2009) Law Com No. 317) at 3.66ff. 182 S 23(2)(a). 183 S 23(2)(b). 184 S 23(3). Note under s 48B(3), Sale of Goods Act 1979 there was a further limitation: namely if ‘disproportionate in comparison to an appropriate reduction in the purchase price under paragraph (a), or rescission under paragraph (b), of s 48C(1)…’. 185 See s 23(6)–(7). 186 S 23(8). 187 Defined s 23(4)–(5). 188 Quaere: the burden of proof in relation to these limitations. 178 179

The Consumer Rights Act 2015 and related reforms  277 (h)

Right to Price Reduction and Final Right to Reject

The second level of remedies (price reduction or final right of rejection189) envisaged under the Consumer Sales Directive are provided for by s 24 of the Consumer Rights Act 2015. As second level remedies they are only available where: a repair or replacement has not been successful;190 repair and replacement are impossible;191 or, following a request to repair or replace the goods, the trader breaches s 23(2)(a) (obligation to repair or replace within a reasonable time and without significant inconvenience on consumer).192 The remedy of price reduction requires a trader to reduce (and return if already paid or transferred193) some or all194 of the price (or other consideration) under the contract.195 Unlike under the CPAR 2014, where there is a (fairly crude) sliding scale of reductions, under the Act the price (or other consideration) is only stated as needing to be reduced by ‘an appropriate amount’.196 Again, this uncertainty may, given potential underlying inequalities in bargaining power, work to a trader’s advantage when seeking to resist a claim for a certain amount of reduction. Under the final right of rejection, any refund to the consumer may be reduced on account of the consumer’s use of the goods197 although this is subject to qualifications.198 (i)

Other Rules

Section 26 makes provision in relation to delivery by instalments. Section 26(1) provides (as did s 31 of the Sale of Goods Act 1979) that, unless otherwise agreed, the consumer is not obliged to accept delivery by instalments. Where delivery by instalments has been agreed and one or more of the instalments delivered is defective, can the consumer reject the totality of the goods and/or terminate the whole contract? Traditionally this would, at least in part, depend on whether or not the delivery obligation was divisible or indivisible, a distinction which was far from straightforward,199 and, indeed, on the doctrine of acceptance.200 The latter is gone in relation to consumer sales but s 26 is premised on the latter (applying to divisible contracts).201 This is, perhaps, unfortunate from a consumer clarity perspective, not least as nowhere in the Act is the distinction between divisible and indivisible obligations mentioned or explained.202

S 24(5) makes it clear that these remedies operate as alternatives, not cumulatively. S 24(5)(a). 191 S 24(5)(b). 192 S 24(5)(c). 193 S 24(1). 194 S 24(2). Quaere: what adjustments, if any, need to be made for use in such a situation? 195 Note s 24(4). 196 S 24(7). 197 S 24(8). 198 See s 24(9)–(10). 199 Ibid. See also Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148. 200 Certainly prior to the reform made to the Sale of Goods Act 1979 in 1995. 201 S 26 applied ‘if the contract provides for the goods to be delivered by stated instalments, which are to be separately paid for’ (emphasis added). 202 S 26(3)–(4) merely states that the ability to reject the totality of the goods depends on the ‘circumstances of the case’! 189 190

278  Research handbook on remedies in private law The position is further complicated by curious provisions in s 20(20)–(21). Section 20(20) provides: (20) Subsection (21) qualifies the application in relation to England and Wales and Northern Ireland of the rights me