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 mentioned in subsections (1) to (3) where – (a) the contract is a severable contract, (b) in relation to the final right to reject, the contract is a contract for the hire of goods, a hire-purchase agreement or a contract for transfer of goods, and (c) section 26(3) does not apply.

Again, the phrase ‘severable contract’ may not mean much to the average consumer.203 Section 20(20)(c) seems to suggest that the provision applies to contracts other than those to which s 26(3) applies; in other words, severable contracts other than contracts where delivery is made by instalments which are separately paid for. Yet if this is the case, why are sales contracts taken out of the scope of s 20(20) by s 20(20)(b)? Could it be that s 26 was, despite its wording, only intended to apply to sales contracts?

IV

CONTRACTS TO SUPPLY DIGITAL CONTENT TO CONSUMERS

(a) Introduction As noted above, there was, and indeed is, some uncertainty about the application of the Sale of Goods Act 1979 to the supply of digital content such as software.204 Part 1, Chapter 3 makes specific new provision in respect of contracts to supply digital content and at this point a number of points needs to be made in respect of these provisions. First, despite some possible arguments to the contrary, the provisions adopt a traditional contractual framework using, for example, what used to be called implied terms. Secondly, in terms of overlap with different Chapters in Part 1, s 1(4) makes it clear that more than one Chapter can apply to a particular contract if it is a ‘mixed contract’.205 Yet the demarcation is not entirely satisfactory. Take, for example, the case of bespoke software supplied to a consumer. This could arguably come within s 33(1) as a supply of digital content but it could also arguably come within s 48 as a contract to supply a service.206 If the former option is taken the digital content would, for example, need to meet the (strict liability) standard of satisfactory quality; whereas if the latter option is taken for the obligation the (qualified liability) standard of reasonable care and skill would instead be applied. Finally, it should be noted that Chapter 3 is not a complete code in relation to contracts to supply digital content as it does not, for

S 20(21) provides: ‘The consumer is entitled, depending on the terms of the contract and the circumstances of the case – (a) to reject the goods to which a severable obligation relates and treat that obligation as at an end (so that the entitlement to a refund relates only to what the consumer paid or transferred in relation to that obligation), or (b) to exercise any of the rights mentioned in subsections (1) to (3) in respect of the whole contract.’ 204 See Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd 1996 SLT 604. 205 See also s 16 providing that goods do not conform to the contract if those goods include digital content which does not conform to the contract under s 42(1). 206 Cf Saphena Computing Ltd v Allied Collection Agencies Ltd (unreported 3 May 1989). 203

The Consumer Rights Act 2015 and related reforms  279 example, make provision in respect of the passing of property (where property is to pass), frustration or instalment deliveries.207 (b) Obligations Sections 34–41 of the Act establish consumers’ statutory rights in respect of the supply of digital content.208 Some of these rights, which are expressed through the contract containing a term to that end, are familiar and effectively mirror some of the obligations in goods contracts under ss 9–18 of the Act.209 Thus the digital content must be of satisfactory quality,210 the digital content must be fit for purpose211 and the digital content must match any description.212 Similarly s 37 makes provision, similar to s 12, in respect of particular pre-contractual information.213 Section 41 deals with a trader’s right to supply digital content is also broadly familiar although, given that it is common for digital content to be merely licensed to the consumer, it uses the language of ‘right to supply’ rather than ‘right to sell’.214 Curiously, however, s 41 does not include terms about quiet enjoyment215 and it does not apply to free digital content. Other provisions are less familiar. For example, s 39 deals, in fairly technical language, with transmission and continued transmission. The focus of s 39 is on situations where the digital content is not supplied on a tangible medium (e.g. a disk or embedded in, for example, a washing machine216). Finally, under s 47 liability for breach of ss 34, 35, 36, 37 or 41 cannot be excluded or restricted. (c) Remedies Chapter 3 also sets out various remedies for situations where the trader fails to comply with the relevant statutory rights. Perhaps disappointingly from the point of view of clarity in respect of consumer rights, the remedies outlined in Chapter 3 represent only some of the remedies available; remedies such as damages, specific performance and the recovery of money where the consideration has failed are governed by the general law.217 On the other hand, it is not possible to treat a contract at an end for breach of ss 34, 35, 36, 37 and 41.218 This provision, which is linked to the practical difficulties around effectively returning digital content,219 means

207 Those matters are, of course, dealt with by the Sale of Goods Act 1979 but there is doubt whether that Act applies to all supplies of digital content. 208 Cf s 38. 209 Which, of course, raises the question of whether or not the consolidation aspect of the Act might have been more effective. 210 S 34. There are, however, some slight differences. Thus: s 34(4) refers to trail versions instead of, under s 9(4), samples. 211 S 35. 212 S 36. 213 See s 42 for remedies for breach of this term. 214 As under, for example, s 17(1)(b). 215 Cf Rubicon Computer Systems Ltd v United Paints Ltd (2000) 2 TCLR 454. 216 See Consumer Rights Act 2015: Explanatory Notes para 192. 217 S 42(7). 218 S 42(8). 219 See BIS, Enhancing Consumer Confidence by Clarifying Consumer Law (July 2012) para 7.138. On the other hand, the remedy of rejection continues to be available for breach of an express term of a contract to supply digital content.

280  Research handbook on remedies in private law that, in a sense, consumers of digital content are less protected than consumers of goods.220 Section 42(2) provides two levels of remedy when the digital content does not conform to the contract:221 (1) the right to repair or replacement, and (2) the right to a price reduction. The detail of the remedies of repair and replacement222 largely mirror the corresponding provisions in relation to goods contracts.223 The remedy of price reduction224 also resonates with the remedy of price reduction in relation to goods contracts although there are some noticeable differences.225 Chapter 3 also provides remedies in three other situations. First, in respect of breach of s 41 (right of trader to supply digital content), s 45 provides a consumer with a right to a refund226 which, presumably, is without reduction due to use. Secondly, for breach of s 37 (other pre-contractual information included in contract), s 42(4) provides a remedy of costs resulting from the breach (up to the amount of the price paid227). Finally, under s 46 a consumer is explicitly given remedies where: (a) a trader supplies digital content to a consumer under a contract, (b) the digital content causes damage to a device or to other digital content, (c) the device or digital content that is damaged belongs to the consumer, and (d) the damage is of a kind that would not have occurred if the trader had exercised reasonable care and skill.

The remedies are repair228 and compensation.229 The latter remedy is intriguing as, arguably, that remedy would be available for breach of the term in s 34 or s 35.230 Indeed a claim under s 34 or s 35 might be preferable on the ground of the strict liability nature of such a claim.231 The former remedy (repair) is innovative in that it seeks repair of damaged devices or digital content not supplied under the contract.232

Cf s16 (where digital content is provided on, for example, a disk). Conformity is judged by reference to ss 34–6 of the Act. On presumptions of non-conformity see s 42(9)–(10). 222 See s 43. 223 See s 23. 224 See s 44. 225 For example, under s 24(5) a consumer, in relation to a goods contract, may require a price reduction after one unsuccessful attempt at repair or replacement. Under Chapter 3 there is no such provision meaning that, subject to s 43(2) (repair or replacement to occur within a reasonable time and without significant inconvenience to the consumer), more than one attempt at repair or replacement may be possible before the right to price reduction becomes available. 226 Note s 45(2). 227 This includes s 33(3). 228 See s 46(3)–(4). 229 See s 46(5)–(6). 230 By analogy with, for example, H Parsons (Livestock) Ltd v Uttley Ingham Co Ltd [1978] QB 791. 231 Cf H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-523. 232 The nature of the ‘damages’ under s 46 is not clear. The Consumer Rights Act 2015: Explanatory Notes para 219 might be taken as suggesting the tortious measure. 220 221

The Consumer Rights Act 2015 and related reforms  281

V

CONTRACTS TO SUPPLY A SERVICE

(a) Introduction Part 1, Chapter 4 of the Consumer Rights Act deals with contracts ‘for a trader to supply a service to a consumer’.233 It makes, what might be termed, general provisions in relation to such contracts; leaving in place more specific provisions in particular service areas such as financial services;234 this is, of course, understandable given the highly specialised nature of some of those areas but it does result in a degree of fragmentation in relation to services and it may be necessary for the legislature to give further thought to the interactions in the (consumer) services legislative landscape. (b)

Terms of the Contract

Part 1, Chapter 4 makes a number of provisions in relation to the terms of a ‘contract to supply a service’.235 Some of these provisions are framed in fairly familiar terms: s 49 states that such contracts include a ‘term that the trader must perform the service with reasonable care and skill’; s 51 provides, in broad terms, that a reasonable price must be paid for a service where the price is not provided for by the contract; and s 52 provides for a term that a service must be provided in a reasonable time if the time is not provided for by the contract.236 Other provisions are less familiar. We have already mentioned the blurring of the distinction between terms and representations in s 50(1)–(2). In addition, s 50(3) provides: Without prejudice to subsection (1), any information provided[237] by the trader in accordance with Regulation 9, 10 or 13 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (SI 2013/3134) is to be treated as included as a term of the contract.

Moreover, it is not possible to exclude liability for breach of s 49 or s 50 of the Consumer Rights Act 2015.238 (c) Remedies The Act makes provision for breach of its statutory rights in relation to services contracts in ss 54–6. The remedies provided are, as in the case elsewhere in the Act not exhaustive. Thus, in addition to or instead of the remedies outlined in the Act,239 a consumer may, for example and where appropriate, claim damages, specific performance or termination of the contract.240 The framework of remedies provided by the Act in relation to services contracts is, perhaps,

S 48(1). See s 53. 235 Phrase used in s 48(4). 236 See previously the Supply of Goods and Services Act 1982, s 14. 237 Note that this seems to refer to any information which the trader has provided rather than should have provided to the consumer. 238 See s 57(1)–(2). 239 Note s 54(6) which provides that the consumer cannot claim twice for the same loss. 240 S 54(7). Note also s 54(1) on rights in the contract. 233 234

282  Research handbook on remedies in private law over-elaborate. Essentially where the service does not conform to the contract, two remedies are provided by the Act: the right to repeat performance241 and the right to a price reduction.242 Conformity with the contract means compliance with s 49 (reasonable care and skill) and ‘the service conforming to a term that section 50 requires to be treated as included in the contract and that relates to the performance of the service’.243 The relevant terms under s 50 include the term relating to things said and written by the trader as well as information to be provided by the trader under Regulations 9, 10 or 13 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. Thus, in relation to the latter information, reference has to be made to, for example, Regulation 9 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, which, in turn, refers onwards to Schedule 1 of the same Regulations! Moreover, it may be that there will be some debate as to whether some of the information which a trader is required to provide relates to ‘the performance of the service’. For example, would the trader’s complaint handling policy come within this provision?244 Indeed, more generally, how, if at all, does the remedy of repeat performance operate where there has been a failure to provide relevant information under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013? On one view, the remedy of repeat performance does not apply as s 50(3) seems limited to information actually provided.245 Yet, even if s 50(3) is so limited, how would the remedy of repeat performance apply to certain informational requirements such as the provision of incorrect information about, if applicable, a trader’s complaint handling policy? Is it sufficient that the correct information is subsequently provided (where, perhaps, the consumer wishes to complain, not about the service provided, but about the manner in which the price was fixed under s 51(1)(b))? Where there is a ‘breach of a term that section 50 requires to be treated as included in the contract but that does not relate to the service’246 or s 52 (performance in a reasonable time) then the sole remedy provided by the Act is a reduction in price (this is, of course, in addition to other remedies existing outside of the Act). Where, on account of the service not conforming with the contract, the consumer potentially has a right to repeat performance and a right to a reduction in price, those remedies operate in a hierarchical fashion with the second remedy only available where repeating performance is impossible247 or the trader has failed to repeat performance within a reasonable time and without significant inconvenience to the consumer.248 The (new) right to require repeat performance is explained in s 55(1): The right to require repeat performance is a right to require the trader to perform the service again, to the extent necessary to complete its performance in conformity with the contract.249 S 55. S 56. 243 S 54(2) (emphasis added). 244 Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, Schedule 1, para (f). 245 There may still, however, be a breach of contract, see Regulation 18 of the 2013 Regulations. 246 S 54(4) (emphasis added). 247 S 56(3)(a) referring to s 55(3). See also Consumer Rights Act 2015: Explanatory Notes at para 263: ‘A consumer cannot require re-performance if it is impossible, for example this might apply if the service was time specific.’ 248 S 56(3)(b) referring to s 55(2)(a). See also s 55(4). 249 Emphasis added. 241 242

The Consumer Rights Act 2015 and related reforms  283 Significantly there is requirement for it to be a proportionate remedy250 and so a consumer could, potentially, require repeat performance at a cost disproportionate to the benefit gained as a result of the repeat performance.251 It is not at all clear, given the deregulation agenda, that this has been an intended consequence of s 55. The right to a reduction in price (which can be a reduction amounting to the full price252) is outlined in s 56(1): The right to a price reduction is the right to require the trader to reduce the price to the consumer by an appropriate amount (including the right to receive a refund for anything already paid above the reduced amount).253

A refund under this section must be given without ‘undue delay’ and within 14 days of the trader agreeing that the consumer is entitled to a refund.254 The formulation of this provision, which relies on the trader’s agreement, is, perhaps, unfortunate for the point of view of certainty for consumers.

VI

UNFAIR TERMS

(a) Introduction Part 2 of the Consumer Rights Act 2015 sought to consolidate the regulation of unfair terms in consumer contracts. In broad terms, the Consumer Rights Act 2015 resulted in (1) consumer contracts being taken out of the scope of the Unfair Contract Terms Act 1977, and (2) the Unfair Terms in Consumer Contracts Regulations 1999 being revoked.255 The Act also takes the opportunity to attempt to ‘codify’ an aspect of ECJ/CJEU jurisprudence:256 under s 71 a ‘court must consider whether the term is fair even if none of the parties to the proceedings has raised that issue or indicated that it intends to raise it’.257 Subject to the discussion below, both of these developments help to streamline consumer law in this area (although, of course, the common law is still relevant to this area as are other statutory interventions258). Again, in common with the previous position, an unfair term is not binding on the consumer259 ‘and the contract continues, so far as practicable, to have effect in every other respect’.260

See H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-541. Quaere: when a court would order specific performance of this right (see s 58). 252 See s 56(2). 253 See s 56(5)–(6). 254 S 56(4). 255 See Schedule 4 which is subject to transitional provisions. 256 See, for example, Pannon GSM Zrt v Erzsé bet Sustikné Györfi C-2009/350 [2009] ECR I-4713. 257 This ‘does not apply unless the court considers that it has before it sufficient legal and factual material to enable it to consider the fairness of the term’ (s 71(3)). 258 See, for example, Consumer Rights (Payment Surcharges) Regulations 2012 and Consumer Protection from Unfair Trading Regulations 2008. 259 See s 67. 260 S 67. 250 251

284  Research handbook on remedies in private law (b) Application Part 2 of the Act applies to ‘a contract between a trader and a consumer’.261 We have already considered the definitions of a ‘consumer’ and a ‘trader’. Yet, for present purposes, there is a further particular significance to the move away from ‘seller or supplier’ under UTCCR 1999: it drives a coach and horses through the debate as to whether, in situations where it was actually the consumer who provides the service, the UTCCR 1999 (or successor) were applicable. This point can be illustrated by reference to the case law in England and Wales on the vexed question of (in effect) whether or not the UTCCR 1999 applied to non-professional surety transactions.262 From a formal perspective, a difficulty with applying the UTCCR 1999 to such transactions was that (assuming that the surety could be classified as a ‘consumer’ for the purposes of the Regulations) it is the non-professional surety who supplies the service; whereas the creditor, as beneficiary of the agreement, will usually be acting in the course of business.263 Therefore this question was part of the much wider debate as to whether or not, for the purposes of the UTCCR 1999, the consumer had to be the recipient of goods or services.264 In Barclays Bank Plc v Kufner265 Field J relied heavily on the Opinion of the European Court of Justice in Bayerische Hypothetken v Dietzinger266 to hold that surety transactions are not excluded from the scope of the Regulations.267 By contrast in Bank of Scotland v Singh268 Judge Kershaw QC, apparently operating closer to the actual wording of the UTCCR 1999, held that they did not apply to surety transactions. This is not the place to rehearse that debate. For present purposes, we need to think about the wider economic importance of contracts of suretyship.269 The key point is that the application of the successor to the UTCCR 1999 to surety transactions may significantly alter the balance of interests between the surety and the creditor.270 More specifically, increasing the level of protection vis-á-vis sureties or increasing the duties incumbent upon financial institutions may result in suretyship transactions becoming less attractive to banks and triggering a narrowing in access to credit; and this may have an impact on the economy and, ultimately, on consumers. (c)

The Test of Unfairness

The test of unfairness is set out, in reasonably familiar terms, in s 62(4): See s 61(1). See G McCormack, ‘Protection of Surety Guarantors in England – Prophylactics and Procedure’ in A Colombi Ciacchi (ed.), Protection of Non-Professional Sureties in Europe: Formal and Substantive Disparity (Nomos 2007) at 172–3. 263 See also J O’Donovan and J Phillips, The Modern Contract of Guarantee (Sweet and Maxwell 2003) 223. 264 Cf H Beale (ed.), Chitty on Contracts (31st edn, Sweet and Maxwell 2012) at para 15-034. 265 [2008] EWHC 2319 (Comm). 266 Case C-45/96, [1998] ECR I-1199. 267 At [28]. 268 (QBD, unreported, 17 June 2005). 269 Royal Bank of Scotland v Etridge (No. 2) [2001] UKHL 44 at [34]–[35] per Lord Nicholls. 270 See G Andrews and R Millett, The Law of Guarantees (4th edn, Sweet and Maxwell 2005), who argued (at 85) that ‘if the regulations are applied to bank guarantees, it will be seen that there is considerable scope for an interventionist judiciary to redress the balance between creditor and surety significantly’. 261 262

The Consumer Rights Act 2015 and related reforms  285 (4) A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.

Schedule 2 contains a non-exhaustive list of terms which may be regarded as unfair.271 The significance of this, so-called, grey list is not straightforward: it does not presume that such terms are prima facie unfair, but the (now) CJEU has stated that: If the content of the annex [to the Unfair Terms Directive] does not suffice in itself to establish automatically the unfair nature of a contested term, it is nevertheless an essential element on which the competent court may base its assessment as to the unfair nature of that term.272

For the sake of clarity (if not consumer protection!), it may have been better to frame this part of the Act in terms of a rebuttable presumption but that would, of course, have raised tensions with the de-regulation agenda. On the other hand, a number of terms are blacklisted as unfair; and, as we have noted above, certain exclusions and limitations are not permitted.273 A number of further points need to be made about the foregoing provisions. First, unlike the UTCCR 1999, the test of unfairness is not limited to, in effect, standard form contracts. The significance of this should not, however, be over-estimated: the Unfair Contract Terms Act 1977 applied to some situations not involving standard terms274 and, in any case, consumers will normally in fact be dealing on standard terms. Secondly, despite the clarity agenda,275 the test of unfairness, in line with the Unfair Terms Directive, still makes reference to a concept of ‘good faith’ the precise scope of which exercises lawyers, not to mention consumers! Thirdly, under the UTCCR 1999 there was evidence of some differences in approach by the courts in respect of the interrelationship between the constituent elements of the unfairness test;276 and indeed there was a question mark as to whether or not some of the approaches adopted were consistent with the case law of the (now) CJEU.277 Accordingly it is disappointing that the opportunity was not taken to further unpack the unfairness test. It is, of course, true that the Competition and Markets Authority (CMA) has provided guidance on the interplay between the constituent elements to the unfairness test but some guidance is rather general.278 Fourthly, how does the unfairness test interact with the transparency agenda? More specifically how does the unfairness test interact with s 68(1)279 and s 69(1)?280 If, as some passages in Office of Fair Trading v Abbey National Plc281 seem to suggest, the Unfair Terms Directive is focused See s 63(1)–(5). Nemzeti Fogyasztovedelmi Hatosag v Invitel Tavkozlesi Zrt (C-472/10) at [26]. 273 See s 62(8). See also s 65 (which essentially replicates s 2(1), Unfair Contract Terms Act 1977). 274 See, for example, s 3. 275 See above at 257. 276 See, for example, the differing nuances of Lord Bingham and Lord Steyn in Director General of Fair Trading v First National Bank Plc [2001] UKHL 52. 277 Cf Aziz v Caixa d'Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) C-2013/164 (2013) 3 CMLRev 5. 278 Cf CMA, Unfair Contract Terms Guidance: Guidance on the Unfair Terms Provisions in the Consumer Rights Act 2015 (July 2015) para 2.10. 279 ‘A trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is transparent.’ 280 ‘If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is most favourable to the consumer is to prevail.’ 281 [2009] UKSC 6. 271 272

286  Research handbook on remedies in private law on transparency, is it ever possible to characterise a term which satisfies s 68(1) as unfair? We shall return to this issue below, but for present purposes it is sufficient to note that such a view would seem to unduly curtail the scope of the Directive.282 Fifthly, what factors are to be taken into account in assessing whether or not a term is unfair and are any particular vulnerabilities on the part of the consumer potentially relevant to this assessment?283 Guidance is found in s 62(5) which provides (emphasis added): Whether a term is fair is to be determined – (a) taking into account the nature of the subject matter of the contract, and (b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.

This appears to be wide enough to include the vulnerabilities of particular consumers, at least where such vulnerabilities are known to the trader.284 Such an approach would appear to be in accordance with the direction of travel of the jurisprudence in the CJEU.285 (d)

The Unfair Terms Directive, Article 4(2)

As noted above, the UTCCR 1999 sought, and the Consumer Rights Act 2015 seeks, to transpose the (minimum harmonisation) EC Council Directive on Unfair Terms in Consumer Contracts (‘the Directive’).286 Article 4(2) of the Directive provides: Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language.

The previous transposition of Article 4(2) into UK Law by Regulation 6(2) UTCCR 1999287 was the subject of much discussion in Office of Fair Trading v Abbey National Plc,288 a case which generated much controversy.289 Before considering that case it is helpful to identify a number of issues which emanated from Regulation 6(2) and Article 4(2) of the Directive. First, what is the rationale behind Article 4(2)? One of the difficulties here is that the language employed by Article 4(2) and Recital (19) of the Directive is not particularly helpful in this

‘[O]penness is not enough on its own, since good faith relates to the content of terms as well as the way they are expressed.’ (CMA, Unfair Contract Terms Guidance: Guidance on the Unfair Terms Provisions in the Consumer Rights Act 2015 (July 2015) para 2.23ff). 283 Compare Directive 2005/29/EC concerning unfair business-to-consumer commercial practices [2005] OJ L149/22. 284 Or possibly reasonably foreseeable to the trader by analogy to the Unfair Commercial Practices Directive, Article 5(3). 285 See H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-268. 286 93/13/EEC. 287 ‘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.’ 288 [2009] UKSC 6. 289 See, for example, M Kenny 'Orchestrating Sub-Prime Consumer Protection in Retail Banking: Abbey National in the Context of Europeanised Private Law' (2011) 19 ERPL 43. 282

The Consumer Rights Act 2015 and related reforms  287 regard; indeed it is, perhaps, unsurprising that this should be so given that the legislative history of Article 4(2) reveals that it is essentially a, not entirely comfortable,290 compromise provision.291 Nevertheless, in general terms it seems that Article 4(2) owes its genesis to the distinction between core terms and ancillary terms found in the German Standard Contracts Act 1976;292 the essential idea broadly being that there is only real consent to core terms.293 The second issue related to the effect of Regulation 6(2). More specifically it was debatable whether Regulation 6(2), where applicable, prohibited any claim that the term in question is ‘unfair’ under the Regulations, or whether it only prohibited a claim that the term in question was ‘unfair’ under the Regulations on the ground that it was, in effect, substantively unfair. The former construction might be classified as an ‘excluded term’ approach, whereas the latter construction might be classified as an ‘excluded assessment’ approach.294 Here again the language employed by Article 4(2) and Recital (19) of the Directive, and Regulation 6(2), was not particularly helpful: Recital (19) arguably tends to the ‘excluded term’ construction whereas Article 4(2) (and consequently Regulation 6(2)) arguably tends to an ‘excluded assessment’ construction. Presumably, however, if the rationale suggested above for Regulation 6(2) is correct, then an ‘excluded assessment’ construction should be adopted on the basis there may not be true consent to terms which were, for example, procured, in effect, by procedural unconscionability.295 The third issue related to the effect of the introductory words of Regulation 6(2) (‘[i]n so far as it is in plain intelligible language…’): did this mean that if a term which would have normally been covered by the exception in Regulation 6(2) was not ‘in plain intelligible language’, the exception (whatever its parameters) provided by Regulation 6(2) ceased to be applicable? Again, presumably, if the rationale suggested above for Regulation 6(2) was correct, then it could have been argued that the exception found in Regulation 6(2) did not necessarily apply at all as there may not have been, or at least there was a risk that there would not have been, true consent.296 Indeed this is the result that the Supreme Court in Abbey297 tended towards when dealing with the problematic case of Office of Fair Trading v Foxtons.298 (e)

Office of Fair Trading v Abbey National Plc

Turning to Office of Fair Trading v Abbey National Plc, the backdrop to that case was, of course, a significant amount of public concern in the UK about the charges levied by banks Cf also T Hartley, ‘Five Forms of Uncertainty in European Community Law’ (1996) Cambridge Law Journal 265. 291 Cf H–W Micklitz, The Politics of Judicial Co-operation in the EU (Cambridge University Press 2005) at 360. 292 See the excellent discussion in C Willett, Fairness in Consumer Contracts: The Case of Unfair Terms (Ashgate Publishing Limited 2007) 245–53. 293 A de Moor, ‘Common and Civil Law Conceptions of Contract and a European Law of Contract: The Case of the Directive on Unfair Terms in Consumer Contracts’ (1995) 3 European Review of Private Law 257 at 268. 294 See Office of Fair Trading v Abbey National Plc [2009] UKSC 6 at [60]–[61] per Lord Phillips. 295 Cf C Willett, Fairness in Consumer Contracts: The Case of Unfair Terms (Ashgate Publishing Limited 2007) 245–53. 296 Ibid. 297 See Office of Fair Trading v Abbey National Plc [2009] UKSC 6 at [37]. 298 [2009] EWHC 1681. 290

288  Research handbook on remedies in private law on personal account holders in respect of unauthorised overdrafts (and similar charges).299 It quickly transpired that a key issue related to whether or not Regulation 6(2) circumscribed any claim that the charges were unfair for the purposes of the Regulations. At first instance, Andrew Smith J held that the relevant terms were not protected by Regulation 6(2) from being characterised as unfair under the Regulations; in particular the learned Judge, focusing on the wording of Regulation 6(2), felt that the charges were not paid in exchange for any services.300 The Court of Appeal dismissed the appeal301 although their reasoning did not entirely match the reasoning of the learned Judge. Essentially, the Court of Appeal, taking its lead from Director General of Fair Trading v First National Bank plc,302 made a distinction between core and ancillary terms, only the former of which come within Regulation 6(2);303 and held that the charges in question were ancillary terms and, hence, not covered by Regulation 6(2).304 Nevertheless, a further appeal by the banks was subsequently allowed by the Supreme Court,305 the immediate aftermath of which was that the Office of Fair Trading decided not to pursue its investigation into such terms under the Regulations. (f)

Exclusion from Assessment of Fairness

The Consumer Rights Act 2015, s 64 provides: (1) A term of a consumer contract may not be assessed for fairness under section 62 to the extent that – (a) it specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it. (2) Subsection (1) excludes a term from an assessment under section 62 only if it is transparent and prominent.

This provision is, of course, an evolution of the UTCCR 1999, Regulation 6(2). At this juncture our focus is on s 64(1)(b) which in, at least, two respects it appears to reinforce aspects of Office of Fair Trading v Abbey National Plc.306 First, s 64(1)(b) clearly inclines to Lord Walker’s view that only monetary payment terms are caught by Article 4(2) of the Directive.307 Secondly, s 64(2) states that ‘[s]ubsection (1) excludes a term from an assessment under section 62 only if it is transparent and prominent’ which chimes with the analysis of Office of Fair Trading v Foxtons308 by the Supreme Court in Office of Fair Trading v Abbey National Plc. Yet the bigger issue is whether the controversial reading of the exclusions from the test

See Office of Fair Trading, Personal Current Accounts in the UK: A Market Study (OFT 1005, July 2008). 300 See [2008] EWHC 875 (Comm) at [406]-[409]. 301 [2009] EWCA Civ 116. 302 [2001] UKHL 52. 303 [2009] EWCA Civ 116 at [69]. 304 [2009] EWCA Civ 116 at [104]. 305 [2009] UKSC 6. 306 [2009] UKSC 6. 307 S 64(1)(b) is framed in terms of: ‘the price payable under the contract…’ (emphasis added). 308 [2009] EWHC 1681. 299

The Consumer Rights Act 2015 and related reforms  289 of unfairness Article 4(2) of the Directive by the Supreme Court in Office of Fair Trading v Abbey National Plc should be used in relation to s 64(1)(b) of the Consumer Rights Act 2015. On the one hand, the legislative history of s 64 suggests an intention that such an approach should be retained.309 More specifically s 64 can be traced back to the Law Commission’s advice that the issues surrounding the impact of Office of Fair Trading v Abbey National Plc could be dealt with by the use of transparency and prominence requirements (rather than reverting to a previous interpretation of provisions transposing Article 4(2)). Leaving aside the concepts of transparency and prominence (which we shall return to below), this approach creates a number of problems. First, as the Law Commission recognised, it is far from clear that such an approach is in conformity with EU law. Indeed subsequent judgments of the CJEU have cast more suspicion on the appropriateness of the approach in Office of Fair Trading v Abbey National Plc. For example in Kásler v OTP Jelzálogbank Zrt310 the CJEU, in the context of a consumer credit agreement, held that a term which provided the exchange rate for the repayment of a loan in a foreign currency could be assessed for unfairness: in so far as it contains a pecuniary obligation for the consumer to pay, in repayment instalments of the loan, the difference between the selling rate of exchange and the buying rate of exchange of the foreign currency, cannot be considered as ‘remuneration’, the adequacy of which as consideration for a service supplied by the lender cannot be subject of an examination as regards unfairness under Article 4(2).311

Given the incomplete nature of the map left by the Supreme Court, it is not easy to compare the approach of the CJEU in Kásler v OTP Jelzálogbank Zrt with the approach in Office of Fair Trading v Abbey National Plc. Nevertheless, the approach of the CJEU does appear to be more nuanced than the rather more blunt focus on monetary terms by the Supreme Court. None of this is, of course, a vote of confidence in the streamlining and clarifying intentions of the Act! Moreover, although the advice of the Law Commission is clearly grounded in pragmatism, it does chime with the approach of the Supreme Court in Office of Fair Trading v Abbey National Plc on a more fundamental issue – the underpinning of the Directive and Article 4(2) – and, as such, is subject to many of the same criticisms.312 (g) Transparency As noted above, s 68(1) requires written terms in consumer contracts (and indeed written consumer notices) to be ‘transparent’.313 The concept of transparency in respect of contractual terms is mapped in s 64(3): ‘A term is transparent for the purposes of this Part if it is expressed in plain and intelligible language and (in the case of a written term) is legible.’ Unsurprisingly, given Article 5 of the Directive, this is similar to the former requirement under Regulation 7 of the UTCCR 1999. There is, however, an additional (express) legibility requirement in s 64(3),

Which was confirmed in Casehub Ltd v Wolf Cola Ltd [2017] EWHC 1169 (Ch). Case 2014/282 [2014] Bus LR 664. 311 Ibid, at [59]. 312 J Devenney, ‘Gordian Knots in Europeanised Private Law: Unfair Terms, Bank Charges and Political Compromises’ (2011) NILQ 33. 313 It seems that the CMA can take enforcement action on this ground alone: H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-385. 309 310

290  Research handbook on remedies in private law although that probably just reflects the implicit scope of the Directive.314 A number of points need to be made in connection with s 68. First, s 68 is complimented by s 69:315 ‘If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is most favourable to the consumer is to prevail.’316 Thus, in broad terms, (consumer) contract terms and notices should be both unambiguous and plain/intelligible/legible.317 These requirements, of course, overlap.318 In relation to ambiguity, the courts have already warned against a too legalistic approach: Any lawyer worth his salt can usually contrive possible alternative meanings of contractual words, and the fact that this can be done does not of itself make any given language insufficiently plain and intelligible. For that to result the alternative wording, or uncertain effect, must be one of substance or significance, and not merely of legal contrivance.319

This links to the second issue which needs to be explored, namely how (or by reference to whom) are these concepts benchmarked? This issue was not dealt with explicitly by the Act320 although, of course, it has been subjected to analysis by the (now) CJEU. Thus in RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV (C-92/11)321 the CJEU linked it to a notion of consumer choice (which seems to include some degree of understanding):322 Information, before concluding a contract, on the terms of the contract and the consequences of concluding it is of fundamental importance for a consumer. It is on the basis of that information in particular that he decides whether he wishes to be bound by the terms previously drawn up by the seller or supplier.323

Subsequently the CJEU in Kásler v OTP Jelzálogbank Zrt (C-26/13)324 linked the test to the ‘average consumer’.325 As these orientations are not necessarily clear from the requirements in ss 68 and 69, it would, perhaps, have been helpful to outline them in the Act itself as well as to provide guidance on, for example, whether particular vulnerabilities could be taken into account.

See, for example, Law Commission, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills (March 2013) para 4.17ff. 315 See also the common law contra proferentem rule and see Du Plessis v Fontgary Leisure Parks Ltd [2012] EWCA Civ 409 at [40]. 316 Note s 69(2): ‘Subsection (1) does not apply to the construction of a term or a notice in proceedings on an application for an injunction or interdict under paragraph 3 of Schedule 3.’ 317 ‘A term might be obscure and difficult to understand at all, but bear only one meaning for anyone who manages to fathom it’: Office of Fair Trading v Abbey National Plc (Bank Charges) [2008] EWHC 875 (Comm) at [87] per Andrew Smith J. 318 See AJ Building and Plastering Ltd v Turner [2013] EWHC 484 (QB) at [53]. 319 Office of Fair Trading v Foxtons Ltd [2009] EWHC 1681 (Ch) at [73] per Mann J. 320 Cf the prominence requirement under s 64. 321 C-2013/18) (2013) 3 CMLRev 10. 322 Cf H. Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-320. 323 Ibid, at [44]. 324 C-2014/282 [2014] Bus LR 664. 325 See [71]ff. 314

The Consumer Rights Act 2015 and related reforms  291 (h) Enforcement As noted above, in common with the previous position, the Act adopts a dual enforcement regime with both private law and public law dimensions. We have already considered the private law dimension to the regulation of unfair terms under the Act. Under the Act, the CMA (and other Regulators) are able to enforce Part 2 of the Act.326 The CMA, or other Regulator, is able to bring an application for an injunction (or interdict in Scotland) in relation to ‘the use, proposing or recommending’327 of a relevant term or notice.328 Significantly, however, this power extends to terms or notices which are prohibited without the need to assess fairness (which relate, in particular, to sections of the Act which broadly replicate some of the more consumer protection-focused provisions formerly found in UCTA 1977): A term or notice falls within this sub-paragraph if it purports to exclude or restrict liability of the kind mentioned in – (a) section 31 (exclusion of liability: goods contracts), (b) section 47 (exclusion of liability: digital content contracts), (c) section 57 (exclusion of liability: services contracts), or (d) section 65(1) (business liability for death or personal injury resulting from negligence).329

This power also now extends to individually negotiated terms and to consumer notices,330 neither of which was, at least clearly in relation to the latter, required by the Unfair Terms Directive. The public enforcement provisions in the Act are, in fact, part of the tapestry of public enforcement provisions relevant to the regulation of unfair terms. In addition to the provisions under the Act, it is possible to take public enforcement action under Part 8 of the Enterprise Act 2002 (which relates, in particular, to infringements of Community legislation)331 and under the CPUTR 2008. The later provisions, or more accurately the Directive which gave rise to those Regulations, cause some difficulty in respect of the new provisions under the Consumer Rights Act 2015. For present purposes the key point is that the use of ‘unfair terms’ might be regarded as an unfair commercial practice under the CPUTR 2008 and, therefore, attract the public enforcement regime under those Regulations.332 The difficulty is that the Unfair Commercial Practices Directive was a maximum harmonisation directive and, therefore within the scope of the Directive (and paying due regard to any exceptions in the Directive). Member States are not permitted to go beyond the protection provided by the Directive. Thus,

See s 70. In relation to investigatory powers see Schedule 5 which enhances the powers under the UTCCR 1999. 327 Schedule 3, para 3. 328 This power is significant in terms of the CMA or other Regulator obtaining ‘undertakings’ instead of seeking an injunction etc. – see Schedule 3, para 6. 329 Schedule 3, para 3(2). 330 Cf H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-392. 331 See s 212 of the Enterprise Act 2002. S 79 of the Consumer Rights Act 2015 enhances the measures that can be taken under Part 8 of the Enterprise Act 2002. 332 See, for example, Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch). 326

292  Research handbook on remedies in private law it is arguable333 that some of those aspects of the Consumer Rights Act 2015 which go beyond the scope of the Unfair Terms Directive with regard to public enforcement fall foul of the maximum harmonisation clause in the Unfair Commercial Practices Directive.334 For example, some terms (e.g. those mentioned in Schedule 3, para 3(2)) are always prohibited and made subject to public enforcement under the Consumer Rights Act 2015. This is so whether or not an unfair commercial practice has been established for the purposes of the CPUTR 2008. In other words the protection extends beyond both directives and, arguably, conflicts with the maximum harmonisation nature of the Unfair Commercial Practices Directive335 – an example, perhaps, of the unintended consequences of this consolidation.

VII CONCLUSION The Cameron-Clegg coalition (2010–2015) initiated a significant programme of reform in respect of core consumer law. That programme resulted, for example, in: a clearer separation of legislative provisions relating to consumer and commercial transactions; the consistent use of key concepts across a large part of core consumer law; a consolidation of the law on the supply of goods to consumers; the clarification of particular aspects of core consumer law (such as the amount of time a consumer has to reject faulty goods); specific new provision in respect of contracts to supply digital content; the creation of specific rights of private redress for unfair commercial practices; and a more integrated and coherent framework for the regulation of unfair terms. These reforms took place against the spectre of the global financial crisis. This can be seen, for example, in the (partial) privatisation of remedies for unfair commercial practices which, as we have seen, was driven by the weakness of the public purse. It can also be seen in the way in which the coalition adopted a largely market-driven approach to consumers; where consumer law and confident consumers were viewed as key ingredients to the efficient functioning of the market and the development of the economy. The key aims of this programme of reform were: to streamline consumer rights; to clarify aspects of consumer law; to modernise consumer law, particularly for the digital age; to deregulate for businesses; and to selectively enhance consumer protection in the UK. Yet, despite the inordinate length of time taken for the Consumer Rights Act 2015 to gain Royal Assent, this programme of reform was beset by drafting problems, omissions, seemingly unintentional results, internal inconsistencies and tensions with EU law (which, as noted above, will survive Brexit). Overall the resulting reforms suffer from five major deficiencies. First, there is a lack of clarity in terms of the policy or policies behind a number of the reforms; the retorts to notions of confident consumers, and its linkage with competition in the market, were vague and unsatisfying. Secondly, the reforms were often excessively complex; this is particularly so in relation to the remedies regime for both unfair commercial practices and the consumer supply contracts. Thirdly, whilst some consolidation occurred as a result of this programme of

333 Cf H Beale (ed.), Chitty on Contracts (32nd edn, Sweet and Maxwell 2015) para 38-393 for a possible contrary argument in relation to Directive 2009/22/EC on injunctions for the protection of consumers’ interests, [2009] OJ L110/30. 334 Article 4. 335 Unless it can be argued that the public enforcement regime in the Consumer Rights Act 2015 is contract law under Recital (9) of the Unfair Commercial Practices Directive.

The Consumer Rights Act 2015 and related reforms  293 reform, more fragmentation was created both within national law and with EU law. Fourthly, the reforms are tied to conceptual conservatism. For example, the Consumer Rights Act 2015 is built on a traditional contract model, which recognises the term-representation dichotomy. Yet non-contractual representations 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. Finally, the idea that a major piece of consumer legislation, even legislation which is better drafted than the Consumer Rights Act 2015 and which will almost inevitably contain detailed legal language, can without more make consumer rights more accessible is, with respect, misconceived. If consumers are to be more confident, then different strategies for distilling and disseminating consumer rights (such as the Law Commission’s recommendation in its 2005 report on Unfair Terms in Contracts to incorporate examples, which could then be extracted) need to be embraced.

16. Injunctions through the lens of nuisance Robert Palmer and Ben Pontin

Courts have jurisdiction to award injunctions at their discretion in a seemingly limitless variety of substantive fields, straddling private and public law. This chapter focuses on nuisance, where injunctions are the primary remedy. Most nuisance actions take the form of an ongoing interference with the enjoyment of land, which the perpetrator either refuses to recognise or to stop.1 For many years the legal position has been clear, namely, that an injunction preventing an actionable nuisance will be granted on the application of the victim as a matter of course, subject to narrow exceptions. That is the effect of the ‘good working rule’ of Smith LJ in the case of Shelfer,2 which has been followed for over a century. However, Shelfer is now in some doubt, given the criticisms directed at it and/or its rigid application by members of the Supreme Court in Coventry v Lawrence.3 ‘What is the law?’ is thus a legitimate focus of inquiry in this chapter, looking at doctrine and some evidence of the practical impact of injunctions. Another aspect to consider is the Law Commission’s draft Rights to Light (Injunctions) Bill, which contains proposals for altering the procedure by which victims of a nuisance (in the field of light) go about seeking an injunction, and also the criteria on which an injunction is awarded (or withheld).4 The analysis begins by situating current law in its historical context. Injunctions originated in medieval times, as a means of coercing powerful proprietors into complying speedily with property law at a time (during and after the ‘black death’) when the economy could not afford uncertainty in this area. They came to particular prominence in the setting of nuisance in the nineteenth century, during the industrial revolution. This was when civil procedure was reformed to make it possible for victims of nuisance to obtain both damages and injunctions in one court, rather than having to bring separate proceedings. Defendants who operated utilities and factories which caused nuisance without obvious practical remedy sought to persuade the courts to allow for the payment of future damages rather than putting an end to the activity through an injunction. The courts were generally unsympathetic, as encapsulated towards the close of the century in the Shelfer working rules. Opinion about the adequacy of the law at this time differs from commentator to commentator. As is explained, some are of the view that the law was unclear (or lacked consistency of application), whilst others take the view that it was too harsh on the defendants and the wider public whose interests benefited from the continuation of the activity at the centre of the nuisance. We consider that the courts generally Most, but not all. For pure past nuisance cases, see Thomas v Merthyrn Tydill Car Auction Ltd [2012] EWHC 2654 (QB) and Barr v Biffa Waste Services Ltd [2012] EWCA Civ 312. The level of damages is tiny compared to the costs of proceedings, as the courts acknowledged in each of these cases (questioning the failure to settle). 2 Shelfer v City of London Electric Lighting Co (1895) 1 Ch 287. 3 [2014] UKSC 13 (hereafter Coventry). 4 Law Commission, Rights to Light, Paper No. 356 (Stationery Office 2014) https:​/​/​s3​-eu​-west​ -2​.amazonaws​.com/​lawcom​-prod​-storage​-11jsxou24uy7q/​uploads/​2015/​03/​lc356​_rights​_to​_light​.pdf accessed 7 May 2019. 1

294

Injunctions through the lens of nuisance  295 struck the right balance, by awarding injunctions that facilitated the abatement of nuisance but on flexible terms that accommodated the interests of the defendant and the public at large. Next attention is given to Coventry and the nuisance cases in its aftermath. Shelfer in Coventry came in for radical criticism from Lord Sumption (with support from Lord Clarke), who saw the nineteenth-century reasoning as ‘unduly moralistic’ and imposing excessive costs on third parties. He proposed reversing the presumption in favour of an injunction to a position where damages instead of an injunction would become the norm. Lord Mance, on the other hand, considered Shelfer particularly appropriate in situations where the claimant was ‘defending’ a home, which is the case much of the time in a tort that concerns private interests in land. Lords Neuberger and Carnwath seemed more concerned with the danger of an overrigid application of nineteenth-century jurisprudence in recent times. Looking at the recent case law, the impression is that Shelfer and its wider Victorian era ethos of a presumption in favour of an injunction subject to unfettered discretion to substitute damages for an injunction remains the dominant approach. Consideration is then given to the Law Commission’s study of injunctions in regard to interference with the right to light. The Law Commission made some significant recommendations aimed at strengthening the hand of the defendant, including a new procedure that would protect the defendant from a claimant who used the opportunity to delay bringing proceedings in order to extort a higher settlement once a development has been completed. Another important proposal is the replacement of the Shelfer approach for awarding damages instead of an injunction with a criterion of proportionality. We do not agree with the premise that nuisance in the setting of light is significantly distinctive, such that reform to it can be made piecemeal, without regard to nuisance more generally. However, nor do we consider there to be a case for legislative reform, whether specific or more general, on the current evidence. The case law suggests that the position is clean enough and compelling, and injunctions not as harsh in practice as they may appear. Also the consultation underpinning the Law Commission’s recommendation was too narrow to support reform. It is concluded that injunctions are a fascinating and important case study of the workings of remedies in a ‘common law world’. Statute has played a part here and there, and a decisive one above all in the procedural reforms of the Victorian era. But substantive law regarding the exercise of discretion, shaped by case law, remains sound. If the government is minded to sponsor legislation to implement the Law Commission recommendations, or something more general that addresses remedies in relation to nuisance as a whole, it will need to consult more widely than the large property developer-oriented profile of consultees underlying the Law Commission report, and it will need evidence that there is a serious practical problem to address.

1

THE HISTORICAL DEVELOPMENT OF INJUNCTIONS

Injunctions originated in the fourteenth century, during a period of substantial innovation in all aspects of the law (and the institutions that supported the legal system which started with the centralisation of justice under Henry II in the twelfth-century).5 Much innovation was directed 5 See generally S F C Milsom, Historical Foundations of the Common Law (Butterworth & Co 1981) 11–36.

296  Research handbook on remedies in private law at preserving traditional society in the aftermath of the black plague, which accounted for the death (between 1348–1350) of something in the range of a third to a half of the population. Significantly, the death toll included a quarter of the country’s gentry, known as ‘tenants in chief’, who occupied the upper classes.6 Their deaths created uncertainty in the tenure of estates which, in turn, created economic uncertainty. In this moment of extraordinarily great need the courts devised injunctions that coerced the upper classes into enforcing property law.7 The use of injunctions in the context of the most powerful echelons, for whom financial penalties do not have much coercive effect, has continued to the present day. In terms of remedies for nuisance, early victims seeking to prevent wrongdoing could sue in the assizes or by the writ of quod permittat prosternere for abatement of the nuisance. However, these medieval actions fell into disuse in the early modern period, and were replaced by Action on the Case. Here the remedy was exclusively damages.8 The effect was that the victim of a nuisance proceeding by way of Case had to bring a separate action in the Court of Chancery if they sought abatement of the nuisance. Blackstone, in his Commentaries,9 thought that exemplary (punitive) damages filled the gap left by the absence of an injunction, but the essence of an injunction as it had then evolved in Britain was to coerce rather than punish – a consideration that resurfaces throughout the analysis below. Injunctions became available in the law courts in 1854 following the Second Common Law Procedure Act.10 However, it took time for claimants and practitioners (and judges) to become accustomed to the change. Claimants continued to use the dual system. When Mr Tipping won his case in St Helen's Smelting Co v Tipping11 he brought separate proceedings for an injunction. A second and complementary procedural reform was the Court of Chancery Amendment Act 1858, more commonly known as Lord Cairns’ Act, which allowed damages to be awarded by the Chancery Courts.12 Among the first to use the new procedure was Sir Charles Bowyer Adderley, who in Attorney General v Birmingham Corporation13 obtained from Vice Chancellor Page Wood a variety of remedies: damages for past nuisance, damages 6 R C Palmer, English Law in the Age of the Black Death (The University of North Carolina Press 1993) 59. See also W M Ormrod, The Reign of Edward II: Crown and Political Society in England, 1327–1377 (Yale University Press 1990) 77. 7 Palmer (n6) 60. Lower classes in contrast were coerced through punishment and penalty, rather than injunction. 8 For an interesting discussion regarding cases where self-help was utilised to abate nuisances on occasions see J R L Milton, ‘The Concept of Nuisance in English Law’ (unpublished doctoral thesis) 103-6. He cites a selection of cases during the seventeenth-century but it would seem owing to the decision by Coke CJ in Baten’s Case ((1610) 9 Co Rep 53b; 77 E R 810) that if the option of self-help to abate a nuisance was taken then an action on the case would not be available; thus neither would damages for the nuisance. 9 Blackstone stated: ‘Indeed every continuance of a nuisance is held to be a fresh one (2 Leon pl. 129; Cro. Eliz. 402); and therefore a fresh action will lie, and very exemplary damages will probably be given, if, after one verdict against him, the defendant has the hardiness to continue it’ (3 W Blackstone, Commentaries on the Laws of England (Oxford University Press 1765–9) ch 13, 220–2). 10 The Common Law Procedure Act, 1854 (2nd June) 17 Vict Ch 125; see 19th Century House of Commons Sessional Papers vol 1.473 in the House of Commons Parliamentary Papers (Bill 123 of 1854), particularly paras LXXX–LXXXIII, pages 18–19. Now governed by the Supreme Court Act 1981, Ch 54, section 37. 11 (1865) 11 HL Cas 642. 12 Now governed by the Supreme Court Act 1981, Ch 54, section 50. 13 (1858) 4 K & J 528.

Injunctions through the lens of nuisance  297 for future nuisance; an injunction preventing continuation of the nuisance, suspended for a period of time to enable the tortfeasor to devise a means of compliance. Injunctions in the cases above were awarded in favour of powerful landlords against powerful private (Tipping) and public (Birmingham Corporation) enterprises. Abating a nuisance in these circumstances, which is what the victims sought, could be very expensive, and defendants had a financial incentive to pay damages for continuing the nuisance rather than the alternatives. Defence counsel in Birmingham Corporation left little to the imagination in anticipating dire consequences: The evil that must ensue if the court should [find for the claimant on the injunction] would be incalculable. Birmingham will be converted into one vast cesspool … the deluge of filth will cause a plague, which will not be confined to the inhabitants of Birmingham, but will spread over the entire valley to become a national calamity.14

Nonetheless an injunction was granted, but on terms that allowed the town to continue to be drained whilst a cleaner infrastructure was invented (the injunction was suspended for five years). The courts were consistently unsympathetic to arguments that damages should be permanently awarded instead of an injunction, for reasons encapsulated towards the end of the century in Shelfer v City of London Electric Lighting Co. The claimant was a publican – not all cases were brought by the ‘upper orders’ – who commenced an action in private nuisance against an electricity company following vibrations from equipment in a power station causing structural damage to the house and discomfort to the occupier. In seeking payment of damages instead of an injunction, the defendant argued that there was no known means of these works operating so as not to cause a nuisance, and that the mischief to the public of the works’ closure would be considerable. The trial judge (Kekewich J) agreed, awarding damages for past loss and for future loss, instead of an injunction. The Court of Appeal overturned the decision and awarded the injunction. As Lindley LJ said: Ever since Lord Cairns’ Act was passed the Court of Chancery has repudiated the notion that the Legislature intended to turn that Court into a tribunal for legalising wrongful acts; or in other words, the Court has always protested against the notion that it ought to allow a wrong to continue simply because the wrongdoer is able and willing to pay for the injury he may inflict. Neither has the circumstance that the wrongdoer is in some sense a public benefactor (e.g. a gas or water company or a sewer authority) ever been considered a sufficient reason for refusing to protect by injunction an individual whose rights are being persistently infringed.15

Smith LJ echoed Lindley LJ’s remarks, before setting out what has become the influential ‘good working rule’.16 Assuming a case can be made out, or that a claimant has not disentitled himself to equitable relief,17 the appropriate remedy may be damages in lieu of an injunction

Quoted in B Pontin, Nuisance Law and Environmental Protection: A Study of Injunctions in Practice (Lawtext Publishing 2013) 42. 15 Shelfer (n2) 315–6. 16 Ibid. 17 Ibid. ‘There may also be cases in which, though the four above-mentioned requirements exist, the defendant by his conduct, as, for instance, hurrying up his buildings so as if possible to avoid an injunction, or otherwise acting with a reckless disregard to the plaintiff’s rights, has disentitled himself 14

298  Research handbook on remedies in private law when the injury to the claimant’s legal rights is (1) small; (2) capable of being estimated in money; (3) can be adequately compensated by a small money payment; and (4) that the granting of an injunction would be oppressive to the defendant. Smith LJ said this about the need for flexibility: It is impossible to lay down any rule as to what, under the differing circumstances of each case, constitutes either a small injury, or one that can be estimated in money, or what is a small money payment, or an adequate compensation, or what would be oppressive to the defendant.18

Even so, Smith LJ’s ‘good working rule’ had the clear message that damages instead of an injunction would not normally be awarded permanently. Some have doubted that the courts’ approach on this matter was as consistent as the dicta in Shelfer imply.19 However, the more pertinent criticism for present purposes is that the presumption in favour of an injunction was consistently harsh on the defendant and the wider public in its interest in the defendant’s land use. Horsey and Rackley comment critically on the injunction being awarded ‘even though doing so would inevitably deprive many people in the London area of electricity’.20 The injunction awarded in Shelfer required the defendant to abate the nuisance arising from excessive vibration. The level of acceptable vibration was not defined quantitatively. The injunction was suspended to allow the defendant time to work out the best way forward for it to comply with the victim’s entitlement. Thus the criticism makes a number of assumptions about what happened after the injunction was granted. Perhaps the enterprise did close down, yet the injunction did not require it to. The expectation of the judge was that the defendant would conduct research into a feasible vibration abatement technology, or it would acquire the claimant’s entitlement so that unmitigated vibration was no longer a nuisance, or some other mode of compliance falling short of the drastic option of outright closure (it might relocate to a more suitable site). The flexibility we suggest is embedded in nineteenth- and early twentieth-century practice based in part on what judges are reported as ordering (awarding injunctions abating nuisance rather than requiring outright cessation of the offending land use, and doing so on a suspended basis), together with empirical research into the actual consequences of superficially stark examples of judicial indifference to public misery. Among the cases of injunctions studied empirically are Birmingham Corporation and Farnworth v Manchester Corporation.21 In the first of these the injunction was granted to restrain nuisance from a large sewage undertaking, which has been described in the commentary as drastic.22 Yet it was suspended to allow for a period of time to research modes of sewage treatment system sufficient to comply with the victim’s entitlements. The suspension was periodically renewed to the point that a practical from asking that damages may be assessed in substitution for an injunction’ (per Smith LJ in Shelfer (n2), 323). Conversely delay in mounting proceedings may also adversely affect a plaintiff (The Imperial Gas Light and Coke Company v Broadbent (1859) House of Lords Cases (Clark’s) 600, 611 (also 11 ER 239)). 18 Shelfer (n2) 323. 19 J Brenner, ‘Nuisance Law and the Industrial Revolution’ (1974) 3 Journal of Legal Studies 403. 20 K Horsey and E Rackley, Tort Law (5th edn, Oxford University Press 2017) 553. On the meaning of ‘inevitable’ in a nuisance context, see M Wilde, ‘All the Queen’s Horses: Statutory Authority and HS2’ (2017) 37 Legal Studies 765. 21 [1930] AC 171; Pontin (n13) ch 4. 22 S Tromans, ‘Nuisance – Prevention or Payment’ (1982) 41 CLJ 87.

Injunctions through the lens of nuisance  299 remedy for the nuisance was invented, installed, operated and honed over a 37-year period. The costs to the wrongdoer were immense (circa £500,000), but its pockets were deep. Crucially, at no point was the town unable to be drained. Furthermore, the improvement in the quality of the river Tame brought with it positive externalities. The cleaner river provided a lasting amenity for large numbers of people, whilst there is also the matter of ‘technology transfer’ – other sewage undertakings learned from the Birmingham experience. In defending the injunction in this case, we acknowledge (as Lunney et al. point out23) that the positive slant on the case is controversial. What seems beyond doubt is that the catastrophe predicted by the defendant on being injuncted did not materialise. The harshness of the injunction was greatly exaggerated, if indeed it was harsh at all. In Manchester Corporation, the court in first awarding the injunction ‘said it would disregard the effect of the injunction on Manchester’s electricity supply’24 in deciding whether to exercise its discretion in favour of the victim. On the other hand, it did expect the injunction to place pressure on the wrongdoer to give thought to the victim’s entitlements and the scope for a cleaner mode of electricity generation that would work more respectfully alongside neighbours. In the event, the injunction was refined by the Law Lords to be subject to a condition in the defendant’s favour: the defendant could have it dissolved should the corporation establish (‘if it not be admitted’) that ‘they have exhausted all reasonable modes of preventing the mischief’.25 The case ended tragically for the victim, who died shortly after surrendering his tenancy to the Corporation for a large sum of money. But the Corporation also took some steps to mitigate pollution of the neighbourhood, in the knowledge that thousands of local residents had urged the claimant to bring the case and had wanted the air in the region cleaned up. Once again, an ostensibly harsh injunction from the perspective of the defendant and third parties on closer view appears flexible and positively so regarding the wider public. These affirmative stories of compliance with injunctions may or may not be typical. Only further empirical research will tell. Regardless, they can never capture the full picture, because sometimes nuisance law throws up disputes over land uses that are irreconcilable. In these cases the practical effect of an injunction is inevitably drastic, in the sense of bringing an end to the defendant’s interest in the site bar a Coaseian bargain. Damages instead of an injunction ought to be looked at by the court especially closely in these circumstances, whether within the narrow parameters of the Shelfer working rule or more broadly. And so it proves. This is illustrated by the cases of Miller v Jackson26 and Regan v Paul Properties.27 Beginning with Miller v Jackson, in this case about twice a year for the three years that the claimants had occupied a new build next to an old cricket ground, a cricket ball escaped causing serious distress to one of the residents and injuring the enjoyment of the residence (as well as some minor material injury to the house). The defendant took steps to minimise the risk of escape (erecting a very high fence), but the victims wanted the threat eliminated.

23 M Lunney, D Nolan and K Oliphant, Tort Law: Text and Materials (5th edn, Oxford University Press 2017) 698 (citing L Rosenthal, River Pollution Dilemma in Victorian England (Ashgate 2014), which questions the value for money of investment in sewage purification here and elsewhere. The money could have been better spent on other public goods, like affordable housing). 24 J Steele, Tort Law: Text Cases and Materials (3rd edn, Oxford University Press 2014) 641. 25 Manchester Corporation (n20) 185. 26 (1977) QB 966. 27 [2006] EWCA Civ 1391.

300  Research handbook on remedies in private law The injunction they sought was categorical and rigid: that ‘cricket shall not be played on this particular ground’.28 At first instance they got this. The Court of Appeal overturned the injunction in the exercise of discretion, pointing to the public interest. As Lord Denning said, in one of the most cited passages in common law history, the injunction would destroy the village: I suppose that the cricket ground will disappear. The cricket ground will be turned to some other use. I expect more houses or a factory. The young men will turn to other things instead of cricket. The whole village will be much the poorer.29

This is not so much a case of judicial fondness for cricket, as village life. Cumming Bruce LJ agreed with Denning, adding an authority for the public interest being a factor in the exercise of discretion to withhold an injunction.30 How can the judges identify a public interest? 31 Experience and intuition seem to be at work in this case. Yet our argument is that the public interest is, if not explicit, implicit in all the cases mentioned above and considered below. The courts are using injunctions to resolve situations of neighbours in conflict in a wider societal context, by framing them where possible (as in most cases) in flexible terms that reflect the law’s give and take ethic. Where (largely exceptionally) reconciliation is not realistic, the courts will look more closely at damages as a way of righting a wrong proportionally. The one area of nuisance where this is particularly apposite is interference with light. The Miller scenario of irreconcilable land uses comes into play quite commonly in this setting, although there is once again scope for the defendant to exaggerate the drastic impact of the established law. At common law a neighbour has a right to ‘necessary’ light, and sometimes this is provided for in terms of easements that spell out a specific entitlement between dominant and servient tenements. Either way, the exact practical content of the right is defined on a case-by-case basis, much as any other area of nuisance. Defendants have seemingly fewer opportunities to reorganise their affairs short of removing the physical fabric of the defendant enterprise (whether a storey or two or the whole building). In other words, they are in the position of the cricket club in Miller, being asked to do what they want to do (or have done) on a different site. In this situation the case law suggests that the defendant can expect greater sympathy in their application to pay equitable damages rather than be injuncted, all things being equal. An early example of the courts being prepared to grant damages instead of an injunction at the request of the defendant in regard to interference with light includes Colls v Colonial Store Ltd.32 In this case the defendant ultimately won on liability, but in Lord Mcnaghten’s opinion they would otherwise have succeeded in an application to compensate for the loss rather than being injuncted. He said that where the nuisance is marginal injury – and where the defendant has generally acted in a ‘neighbourly spirit’ (an important caveat): I am disposed to think that the Court ought to incline to damages rather than to an injunction. It is quite true that a man ought not to be compelled to part with his property against his will, or to have

Miller (n25) 973. Ibid, 976 (emphasis added). 30 Ibid. 31 See the concern of Lord Sumption in Coventry (n3) [160]. 32 [1904] AC 179. 28 29

Injunctions through the lens of nuisance  301 the value of his property diminished, without an Act of Parliament. On the other hand, the Court ought to be very careful not to allow an action for the protection of ancient lights to be used as a means of extorting money. Often a person who is engaged in a large building scheme has to pay money right and left in order to avoid litigation, which will put him to even greater expense by delaying his proceedings. As far as my own experience goes, there is quite as much oppression on the part of those who invoke the assistance of the Court to protect some ancient lights, which they have never before considered of any great value, as there is on the part of those who are improving the neighbourhood by the erection of buildings that must necessarily to some extent interfere with the light of adjoining premises.33

The reference to the judge’s personal experience is significant.34 Consider in this vein Regan. Here the loss of light was considered significant enough to establish liability, thus the case was the other side of the line to that in Colls. The trial judge found that the tortious loss of light caused depreciation in value of £5,500, making it small for purposes of Smith LJ in Shelfer. The defendant had been generous in offering to settle the claim without proceedings for £15,500. More importantly, the defendant had shown respect for their neighbour in the design and construction of the building, taking advice on light – including ways to mitigate any obstruction – and acting on it. There was nothing much more the defendant could do to the height and design of the offending penthouse apartment, which would have to go were an injunction granted. That would be oppressive. The trial judge thus considered the Shelfer exception to be satisfied and awarded damages instead of an injunction, which the Court of Appeal upheld. Yet not all right to light cases are zero sum, and sometimes they can be addressed much as other nuisances – by modifying defendant behaviour. This is illustrated by HKRUKII (CRC) Ltd v Heaney.35 Mr Heaney (unusually the defendant but also the victim of the loss of light) owned a grade II listed Victorian era bank that he acquired to renovate for offices and, on the upper floors, residential units. He had the benefit of an easement protecting the light of the building against neighbouring land recently acquired by HKRUKII (CRC) Ltd (the claimant). All parties were aware of the easement and that it would be infringed by the development, for which the owner of the servient land had obtained planning permission. Nevertheless, planning permission was implemented and the owner sought a declaration from the court that the actionable injury with the defendant’s right to light should be compensated by damages and not an injunction. They had a budget set aside for that. An injunction, it was reasoned, would be oppressive to the claimant, and all the other Shelfer criteria (small injury and so on) were engaged. The defendant counter-claimed, seeking an injunction requiring in effect that the offending two upper stories be rebuilt to a less intrusive design. The court found for the victim of nuisance, ruling that Shelfer was not engaged, and that there was no broad equitable reason for granting damages instead of an injunction. The injury was serious enough, held Langan J. Were he to be wrong, other things pointed in favour of a injunction. In particular, there was nothing oppressive about requiring a developer who had invested £35m in a development known to be actionable investing further sums in making it lawful.

Ibid, 193. We return to the factual basis on which a judge can identify the consequences of an injunction or its withholding briefly below, in Section 3. 35 [2010] EWHC 2245 Ch. 33 34

302  Research handbook on remedies in private law The claimant was not driven by necessity, but could have very easily, if somewhat less profitably, built sixth and seventh floors of reduced dimensions. In my judgment, it would be wholly wrong for the court effectively to sanction what has been done by compelling the defendant to take monetary compensation which he does not want.36

One lesson from this is that, whilst the courts are reluctant to grant injunctions that will end a defendant enterprise’s viable existence at a site, they will be willing to do so where it will elicit change that brings the land use into line with nuisance law. A different slant on this is the scenario where an injunction is withheld but with the prospect of one being granted in the future, with equitable damages being order in lieu. The closest illustration is Dennis v Ministry of Defence.37 There are a number of similarities with Birmingham Corporation, notably substantial injury to the victim; substantial public interest in the continuation of the defendant’s activity; no short-term fix but the possibility of a longterm one. In Dennis the nuisance concerned noise from a Royal Air Force site affecting the enjoyment of a large rural estate. The Ministry of Defence (MOD) had used its site for purposes of training fighter pilots since 1984, but had plans for a new use from 2012, when existing training provision would likely be moved to the United States. The new use could involve Future Carrier Borne Aircraft (FCBA), which was not a prospect the claimant welcomed. The trial judge (Buckley J) had this to say about the future: I … add, in the hope that it might assist the parties in the regulation of their affairs, that on the present evidence touching the noise of FCBA, I can easily envisage a court finding it literally intolerable for residents at Wittering [where the claimant resided] and probably others in the immediate locality. The argument that such a level of noise, which would cross the threshold of potential damage to hearing, should not be inflicted on residents anywhere, would be strong. To put it bluntly, the MOD would be well advised to train pilots for FCBA in the wide-open spaces the USA can provide or reconsider the location of training fields here.38

This appears an injunction in all but name, and as such it is a further illustration of the flexibility and nuance in the practice in the field of nuisance remedies. It is against this backdrop that the latest developments should be understood and evaluated.

2

MAKING SENSE OF INJUNCTIONS AND DAMAGES AFTER COVENTRY V LAWRENCE

The nuisance in Coventry concerned noise from the operation of a motor racing track near the claimants’ residence. It is a landmark case on matters of liability, because it was the first opportunity at the highest appellate level the judiciary has had to consider the modern application of nuisance taking the form of ‘sensible personal discomfort’ (now commonly known as ‘amenity nuisance’) as first recognised in the middle of the nineteenth century by Lord Westbury in Tipping. Most of the substantive issues centred on defences. Briefly, the Supreme Court ruled that coming to a nuisance in certain limited circumstances can provide a

Heaney (n34) [81]. Dennis v Ministry of Defence [2003] EWHC 793 (QB). 38 Ibid, [77]. 36 37

Injunctions through the lens of nuisance  303 defence (contrary to Tipping),39 but that planning consent does not change the character of the neighbourhood for purposes of nuisance law (contrary to Gillingham).40 The court also ruled that prescription encompasses noise – something that had until then been open. However, our focus is on the exercise of discretion in regard to an injunction, about which all the members of the Supreme Court had something to say. Lord Clarke thought this ‘the most important aspect of this case’.41 At first instance, Seymour J awarded damages for past nuisance (amounting to £20,000) and an injunction restraining the noise nuisance. The terms of the injunction, he said, would be left to the parties to agree. He took a paternalistic line on the claimants’ proposal to live with noisy activity at the site for 40 days. He advised against ‘[w]ooliness as to what level of noise is permitted, and on what precise days, [which] strikes me as a recipe for future problems’.42 Forty days of consecutive noise would surely be unacceptable, he pointed out. This is how the matter was left: Subject to the parties’ agreement on some other form of order, what I have in mind is to grant an injunction directed to each of Mr. David Coventry and Moto-Land restraining him or it, save with the express prior written consent of the claimants, from causing or permitting noise to be generated from activities at the Stadium or the Track, as the case may be, which generate a noise level, measured at the boundary of Fenland, which exceeds, between 08:00 and 20:00 hours, 45 dB LAeq15minutes or, between 20:01 and 7:59 hours, 37 dB LAeq15 minutes. A question which does arise, since Fenland is presently unoccupied and will remain unoccupied until the Bungalow is repaired, is as from what date any injunction should take effect.43

Throughout the subsequent appellate history of the case the bungalow remained unoccupied, the injunction was not ‘in effect’, and racing could continue within the framework of planning permission with noise subject to no additional abatement. The Court of Appeal found for the defendant on the basis that planning permission had changed the character of the neighbourhood and that the noise was reasonable against the background of that character. The issue of damages instead of an injunction did not arise until the Supreme Court hearing. Seeking to pay damages rather than change practice, the defendants reasoned that the racing activities were popular among many members of the local community, and that the activities were being adequately managed within a regulatory framework (planning law). The planning authority had carefully considered the balance between the costs of noise with the benefits of racing, and had reflected that in planning conditions. Finally the injury could be compensated in damages. The Court of Appeal in Watson v Croft, dealing with similar facts, was wrong to ignore these factors and approach Shelfer slavishly.44 The salient issue was defined by the Supreme Court thus:

Coventry (n3) [53] (per Lord Neuberger). Ibid, [89]–[99] (with respect to Gillingham BC v Medway Chatham Dock Ltd [1993] QB 343). 41 Ibid, [171]. 42 [2011] EWHC 360 QB [242]. 43 Ibid, [245] 44 Watson v Croft Promo Sports [2009] EWCA Civ 15. At first instance Simon J had withheld an injunction, awarding damages instead. 39 40

304  Research handbook on remedies in private law The approach to be adopted by the court when deciding whether to grant an injunction to restrain a nuisance being committed, or whether to award damages instead, and the relevance of planning permission to that issue.45

Before looking at the judgments, it is important to acknowledge that there is some debate about the extent to which the approach of the court arising from the judgment is clear. Some consider it is broadly speaking clear, for example Jenny Steele: To one degree or another, all members of the Supreme Court agreed the courts should approach the choice of injunction or damages in a far more flexible and open way than implied by the Shelfer case.46

Lunney, however, emphasises the differences of opinion in the case about what the law now is, what it was, and also the debate in the commentary about what it ought to be (including the merits of the Victorian era position).47 The impression is that Coventry is rather confusing. What, then, is the current position in a black letter law sense? This is a challenging question which is addressed below, in light of the main opinions expressed by the judges in Coventry, followed by consideration of the reception of Coventry within the very latest case law. A helpful starting point in discussing the opinions in Coventry is the judgment of Lord Sumption. Though by no means the longest, it is ostensibly the most radical. It proposes reversing the established presumption in favour of an injunction encapsulated in Shelfer and wider nineteenth-century practice, with the general effect that a victim would usually receive future damages instead of an injunction. Thus the injunction would become the exception. Lord Sumption thought there were three main problems with the established approach inherited from the Victorian era which his approach would overcome. These are discussed in turn. One is a version of criticism noted in the previous section that the courts have been indifferent to public misery. An injunction is a remedy with significant side effects beyond the parties and the issues in the proceedings. Most uses of land said to be objectionable cannot be restrained by injunction simply as between the owner of that land and his neighbour. If the use of a site for (say) moto cross is restrained by injunction, that prevents the activity as between the defendant and the whole world. Yet it may be a use which is in the interest of very many other people who derive enjoyment or economic benefits from it of precisely the kind with which the planning system is concerned.48

Coventry (n3) [6]. Steele (n23) 642. See too E Lees [2014] Conv 449,455 (‘Shelfer is no longer good law’). 47 Lunney et al. (n22) 698, citing Paul Davies, ‘Injunctions in Tort and Contract’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge University Press 2017) 127, 128 (‘Given the disparate judgments … and the disparagement of Shelfer without a clear replacement, it is unclear how predictable the resolution of the issues…is’). 48 Coventry (n3) [157]. He continues: ‘An injunction prohibiting the activity entirely will operate in practice in exactly the same way as a refusal of planning permission, but without regard to the factors which a planning authority would be bound to take into account. The obvious solution to this problem is to allow the activity to continue but to compensate the claimant financially for the loss of amenity and the diminished value of his property.’ 45 46

Injunctions through the lens of nuisance  305 The difficulty is that this does not support a change in approach. Though the Court of Appeal took an extremely rigid approach in Watson v Croft,49 and this may have deterred the defendants from requesting damages instead of an injunction earlier, the case is potentially an aberration. Generally, the courts already exercise considerable caution when asked by a proprietor to ‘prevent an activity’ of the neighbour that is valued within the wider world, and the terms on which injunctions are awarded reflect this. This is obvious from the cases noted in the previous section, where the courts drafted injunctions on terms as flexible as possible to allow for the continuation of the defendant enterprise at the site at hand (as in Coventry itself), or exploited the flexibility inherent in the discretion to award damages instead of an injunction where that was not feasible. Miller is the best example of last resort flexibility in withholding an injunction, whilst Regan is another, and Dennis a further one. A second reason for change adduced by Lord Sumption is that the courts are not equipped (whether with the research resources or ‘democratic’ legitimacy) to weigh the public interest in how the activity is to be performed. They should stick to awarding damages that internalise (from the defendant’s perspective) the costs of the nuisance, allowing them (the defendant) to pass on costs to third parties if they wish. Though this appears to represent liberal economic reasoning of the kind familiar in law and economics literature, Lord Sumption is in fact acknowledging – indeed prioritising – the role of regulatory law. His point is to internalise the costs and ‘let the market decide’ within the framework of the decisions of planners.50 However, as is apparent from some of the cases noted in the previous section, planners do not in practice weigh private interests or rights, nor do applicants for planning permission expect them to do so. This is best illustrated in the right to light cases touched on in the previous section (notably Heaney), where developers as a matter of course see compliance with public and private law as fundamentally discrete obligations. The third reason for change according to Lord Sumption is that Shelfer is ‘unduly moralistic’ in requiring a wrong to be remedied by desisting from it rather than compensating for it monetarily.51 As Lord Sumption rightly points out, Victorian England was ‘much less crowded’ and ‘comparatively few people owned property’ in land.52 Property in land had a sanctity which the presumption in favour of injunctions over damages reflected. Claimants in the past often had deep attachment to the specific piece of land, the enjoyment of which they were using nuisance law (and injunctions) to protect. Money was no object (and it was no substitute for the specific land at hand). This is true not only of elite proprietors such as Adderley, but also (moving into the twentieth century) the yearly tenant farmer behind the Manchester Corporation injunction. His action was funded by the National Farmers Union, but his family connection to the land went back many generations. Lord Sumption is implicitly suggesting that property in land is more of a commodity today, within a property market, including a property ladder, and to some extent it is. But is the change ‘complete’? This reason is the most original, and perhaps the strongest, of those advanced by Lord Sumption, and the opinion as a whole was endorsed by Lord Clarke. He too proposed a

49 In Watson (n43) the award of damages instead of an injunction was quashed because the trial judge ultimately did not ‘recognise the limitations on his discretion to withhold an injunction’ [47] (per Sir Andrew Moffitt, Chancellor). 50 Coventry (n3) [157]. 51 Ibid, [160]. 52 Ibid, [161].

306  Research handbook on remedies in private law radical overhaul of what he considered to be the Victorian era foundations of the law, for the reasons given by Lord Sumption. However, he stopped short of advocating the reversal of the presumption in favour of an injunction, preferring a case-by-case approach in which the onus could vary from party to party.53 Other judges cast doubt on the idea that land ownership lacks sentiment today, such that payment to move on (rather than invest greater sums in clean up) can legitimately become the new norm. Lord Mance strongly defended the Shelfer approach (or something like it) when it came to cases where the claim was a defence of a home: I would only add in relation to remedy that the right to enjoy one’s home without disturbance is one which I would believe that many, indeed most, people value for reasons largely if not entirely independent of money. With reference to Lord Sumption’s concluding paragraph, I would not therefore presently be persuaded by a view that ‘damages are ordinarily an adequate remedy for nuisance’.54

This covers the scenario in Coventry and a great many others. Lord Carnwath agreed, acknowledging ‘the special importance [that] should attach to the right to enjoy one’s home without disturbance, independently of financial considerations’.55 Ultimately, our view is that the Coventry ruling as a whole is not a rejection of Shelfer but some of its treatment in the case law. The specific case that came in for the most criticism is a very modern one, namely, Watson v Croft.56 The trial judge had interpreted Shelfer flexibly, such that damages instead of an injunction were appropriate. But the Court of Appeal ruled that Smith LJ’s working rule was rigid and binding. Even so, in criticising the approach of the Court of Appeal in Watson, the Supreme Court nevertheless ruled Seymour J’s disposal of Coventry as broadly sound. Lord Neuberger, who delivered the lead judgment, proposed a resolution of the appeal that upheld the approach of Seymour J. If the defendants wished to apply to discharge the injunction, with or without payment of equitable damages, they were at liberty to apply to the court to do so.57 Talk, then, of Shelfer being ‘shelved’58 and the like would appear premature. Not only is there enough support in the opinions of Lords Neuberger, Mance and Carnwath for the ‘Victorian fundamentals’ – including its moralism – but there is support for this approach in the commentary. For example, Paul Davies writes that ‘property rights should not be lightly taken owing to the courts, which is the practical effect of allowing the defendants to pay damages and thereby continue to commit the nuisance’.59 Maria Lee, though being the most consistent and cogent advocate of a flexible approach to remedies that marches with regulatory law developments, does not point to any injunction being wrongly awarded.60 Ibid, [170]. Ibid, [168]. 55 Ibid, [247]. 56 See ibid, Lord Neuberger [115] et seq. and Lord Carnwath [239] (Watson wrongly decided). 57 Coventry (n3) [149]. 58 D Holland, ‘Remedies after Coventry v Lawrence: Shelfer Sheleved? Landmark Chambers Working Paper (2014) https:​/​/​www​.landmarkchambers​.co​.uk/​wp​-content/​uploads/​2018/​07/​DMH​ -CovLawrence​.pdf . 59 Davies (n46) 136. 60 M Lee, ‘Tort Law and Regulation: Planning and Nuisance’ [2011] JPL 986; ‘Nuisance and Regulation in the Court of Appeal’ [2013] JPL 277; ‘Occupying the Field’ in J Steele and TT Arvind (eds), Tort Law and the Legislature (Hart Publishing 2014). 53 54

Injunctions through the lens of nuisance  307 This business-as-usual conclusion is reinforced by the continued support for Shelfer in the small handful of nuisance action reported post Coventry. For example, in Higson v Guenault61 the Court of Appeal noted the difference of opinion among Supreme Court justices in Coventry, yet held that the starting point in approaching the discretion to award an injunction remained Shelfer.62 Applying Smith LJ’s exception, this was not satisfied, nor was there any other ground for awarding damages instead of an injunction. Similarly, in Pieres v Bickerton Aerodromes Ltd,63 the tortfeasor aerodrome operator was required to reduce the exposure of the victim’s home to noise from helicopter training operations. This is notwithstanding that the aerodrome in that case had the benefit of planning permission.

3

INJUNCTIONS AND THE RIGHT TO LIGHT

In 2012 the Law Commission began consulting on reform to injunctions in relation to the right to light. The right to light is valuable, the Law Commission stated, because it gives landowners some certainty that natural light will continue to be enjoyed by property, notwithstanding the grant of planning permission.64 This reinforces the point above, that nuisance and planning co-exist to a substantial degree in parallel. However, the Law Commission was concerned that nuisance law in this area was too favourable to the defender of entitlements to light, at the expense of the developer. Initially the consultation focused the proposal of a statutory procedure by which a developer who risked obstructing a neighbour’s light could draw attention to this risk and bring issues of liability (and remedies) to a head early in the development process. The consultation was then modified midstream to address the potential uncertainties arising from Coventry concerning the law relating to the award of damages in lieu of an injunction. The draft Rights to Light (Injunctions) Bill contains a clause (clause 1 and the accompanying Schedule) which, at the initiative of the developer, would give a neighbour likely to suffer an interference with light a minimum of eight months’ notice of the proposed obstruction (a Notice of Proposed Obstruction or NPO), in which time they would be expected to bring nuisance proceedings seeking an injunction. If, after the expiring of the notice period, proceedings were commenced, the only remedy they could obtain for any actionable loss of light would be damages. This differs from the present position, whereby the onus is on the developer who is worried that their development will constitute a nuisance to seek a declaration from the court one way or another, including a declaration as to whether the interference lends itself to remedy by way of damages or an injunction. This happened in Heaney, but not to the advantage of the tortfeasor. In other words, the Bill was a response to the ‘problem’ of Heaney. Does it make sense to confine a proposal of this kind to light issues? Arguably not, insofar as it is conceiveable that a racing enterprise (or piggery or cricket club and so on) might wish to bring issues of liability and remedy to a head in the same way that developers might wish to under the Law Commission’s proposals with respect to light. That is one difficulty with the principle of the draft Bill. Continuing in this vein, if the problem is that the neighbour 63 64 61 62

[2015] EWCA Civ 703. Ibid, [51]. [2016] EWHC 560 (Ch). Law Commission (n4).

308  Research handbook on remedies in private law may use delaying tactics to extort a higher monetary settlement, is there any reason why that should apply more to a neighbour protecting light than tranquillity or fragrance? ‘If’ here is the operative term, because it is unclear that the Law Commission’s case rests on compelling empirical evidence that neighbours do tend to stand on extreme rights. The evidence that the Law Commission relies rather heavily on is the facts of Heaney, above, but that is weak. The judge exonerated the rights-holder of extortion or anything like it; it was the developer who may have been behaving oppressively.65 The second tranche of Law Commission proposals bears on replacing the Shelfer criteria to be applied in deciding whether to award damages instead of an injunction: The court must not grant an injunction if, in all the circumstances of the case, an injunction would be a disproportionate means of enforcing the claimant’s right to light.

The draft section goes on to specify eight factors the courts should take into account. These include ‘the impact of the injunction on the defendant’66 and ‘the public interest, so far as relevant’.67 Once again, the question arises as to whether light can be sensibly singled out for special treatment. In Coventry there was some doubt whether nuisance in the context of right to light does raise special issues for purposes of discretion in the award of damages or an injunction. Lord Carnwath noted that injunctions requiring the demolition of a property do crop up seemingly more commonly in a right to light setting than elsewhere,68 and that when they do, an injunction will be more drastic than would otherwise be the case (and the case of damages instead more cogent). However, other judges looked at nuisance within differentiation of this kind. Moreover, Carnwath does not seem to be suggesting that there is anything inherently drastic about a right to light injunction compared to other amenities. Sometimes the award of an injunction in ‘non-light’ settings would be drastic, as in Miller and Dennis, and sometimes in light settings there is a pragmatic accommodation where the developer respects their neighbour (as in Heaney, albeit that the claimant there sought more than the court was prepared to grant, not appreciating the defendant’s good faith offer of a higher sum settlement before proceedings were commenced). Whether the topic is light or something else, nuisance is about reciprocity. If this ethic is put into practice through sagacious judging, it can surely only be balanced. Judicial sagacity is, however, frequently tested by hard cases. One of the latest is the ongoing Chelsea stadium dispute, which currently stands with a neighbour holding an injunction prohibiting the implementation of planning permission for a new stand at the south London football club’s home ground.69 The proposed stand consists of, inter alia, 17,000 hospitality seats, and is materially higher than a new stand would be if it comprised the same number of ‘ordinary’ seats, that were less lucrative. Chelsea accept that the stand, if erected, would amount to a nuisance, but not that an injunction is the appropriate remedy. They are offering Heaney (n34). Clause 2(3)(f). 67 Clause 2(3) (g). 68 Coventry (n3) [247]. 69 ‘Chelsea forced into extra time as family’s fight for daylight blocks new £1bn stadium’, The Telegraph, 12 January 2018 http:​/​/​www​.telegraph​.co​.uk/​news/​2018/​01/​12/​no​-light​-end​-tunnel​-chelseas​ -new​-1​-billion​-stadium/​ accessed 7 May 2019. 65 66

Injunctions through the lens of nuisance  309 the Crosswaite family (the claimants) a six figure sum of compensation instead of submitting to the injunction. Other neighbours of the Crosswaites (there are about 50 properties in the terrace affected) are happy to accept damages instead of an injunction. The Crosswaites have no objection to the stadium redevelopment to accommodate 17,000 fans, but are aggrieved that this is being executed in a manner that is against the wishes of a family that had lived at its address for over half a century. Money cannot adequately compensate for loss of enjoyment of a home to which they have a deep sentimental attraction. It is interesting, and often illuminating, to consider the profile of the consultees to Law Commission enquiries.70 A look at the list of consultees in this instance suggests a balance tilted in favour of large developers and the city practitioners representing them.71 Though there are references to a residents association here and there, and the Council for Protection of Rural England and the National Trust, many of the ‘big players’ on the claimant side of nuisance litigation are conspicuous by their absence. This is particularly notable in connection with Richard Buxton,72 but also Client Earth, the Environmental Law Foundation and the United Kingdom Environmental Law Association. This is a significant body of stakeholder absentees, whose opinions might be expected to resist implementation of the Law Commission’s proposed reforms.

4 CONCLUSIONS In an influential study of Victorian era urbanisation, E P Hennock wrote of the ‘force’ that injunctions had in shaping the behaviour of private and public corporations, particularly in the field of nuisance.73 ‘Barons’ of industry and local government, he showed, planned infrastructure developments around property rights protected inter alia by nuisance. Our analysis suggests that they continue to do so, and that this is part of a broader history of injunctions coercing the most powerful economic forces in society going back to the medieval period. It is fascinating, as well as complex and challenging. The courts risk not only the wrath of the most powerful economic interests in society, but also ‘the world’ (per Lord Sumption in Coventry). The situation is dramatic and difficult, because courts cannot afford to get it wrong, nor can they fully please everybody. Against that backdrop, the current law is poised between a position in which the courts continue to be trusted (and to trust themselves) with discretion to award injunctions where appropriate, on terms which are appropriate, on the one hand, and the prospect of statutory reform on the other. Our analysis does not support statutory intervention as things stand, whether in local fields (notably light) or any more general pictures that may emerge in the near future. But that could change, particularly if the courts lose confidence in the current Victorian On the (controversial) politics of Law Commission reform in an adjacent field of remedies, see D Campbell, ‘The Heil v Rankin Approach to Law Making: Who Needs the Legislature’ (2016) 45 Common Law World Review 340. 71 Law Commission (n4) Appendix E. 72 See, in general, RC Palmer ‘Common law environmental protection: the future of private nuisance, Part II’ (2014) 6 (1/2) International Journal of Law in the Built Environment, 106–128 who represented claimants in a number of cases mentioned in this chapter, e.g. Dennis, Biffa Waste, Coventry. 73 E P Hennock, Fit and Proper Persons: Ideal and Reality in Nineteenth Century Urban Government (McGill-Queen’s University Press 1973) 107 (quoted in Pontin (n13) 47). 70

310  Research handbook on remedies in private law era foundations of the law, and attempt radical reform through obiter dictum, along the lines of Lord Sumption above in Coventry. More research is needed into how injunctions work in practice one way or another, so that less reliance is placed on untested assumptions about how the law actually operates, and there is more understanding of how many ‘problems’ are real.

17. Gain-based damages Katy Barnett1

1 INTRODUCTION First, the scope of this chapter is outlined with reference to the historical background. Secondly, the normative bases of gain-based relief are discussed, particularly the controversy over whether the account of profits is deterrent. Thirdly, the most prominent controversy in this area is discussed: the call for the extension of availability of gain-based damages for common law causes of action. Related to this, fourthly, the vexed position of ‘reasonable fee’ awards is canvassed, including the question whether these awards properly belong in the gain-based family at all. Finally, the issues of causation and remoteness, and the availability of allowances for skill and effort are covered. It will be seen that the law of gain-based damages has areas of great uncertainty and confusion, particularly in regard to the normative basis for disgorgement, the way in which gain-based damages have been extended to common law causes of action, and, finally, the nature of and distinction between awards which effect full disgorgement of profits and those which impose only a ‘reasonable fee’.

2

SCOPE OF THIS CHAPTER

Before discussing the normative bases for awards which will be discussed in this chapter, definitional issues must be canvassed. The title of the chapter is ‘Gain-based Damages’. The question then arises what is meant by this. The answer is that ‘gain-based’ means that the remedy operates to strip a profit, a proportion of a profit, or the value of a benefit from the defendant. There are two types of gains: either a ‘giving back’ of a benefit unjustly received at the claimant’s expense, or a ‘giving up’ of a benefit made because a wrong has been committed against the claimant.2 Restitution properly understood reverses transfers of value (although the word ‘restitution’ is sometimes unfortunately used to describe disgorgement). Restitution means that if the defendant has gained at the claimant’s expense, and been unjustly enriched as a result, he must give back what he gained (or the monetary value of his gain).3 Disgorgement strips the gain made by the defendant by reason of his breach of duty,4 but it is not necessary for the claimant

1 I am indebted to Elise Bant and David Campbell for very useful suggestions on an earlier draft of this chapter. All errors remain my own. 2 P Birks, An Introduction to the Law of Restitution (rev’d edn, Oxford University Press 1989) 12. Cf however, K Barker, ‘Riddles, Remedies, and Restitution: Quantifying Gain in Unjust Enrichment Law’ (2001) 54 Curr Leg Prob 256. 3 J Edelman and E Bant, Unjust Enrichment (2nd edn, Hart Publishing 2016) 32. 4 L Smith, ‘Disgorgement of the Profits of Breach of Contract: Property, Contract and “Efficient Breach”’ (1994) 24 Canadian Business LJ 121.

311

312  Research handbook on remedies in private law to have made a correlative loss for the gain to be stripped. Both restitution and disgorgement are distinct from compensation, which looks to the loss or damage suffered by the claimant as a result of the defendant’s breach of duty. Compensation does not look to gains on the part of the defendant, unless the gain provides the best measure of what the claimant has lost. The terminology in this area is confusing. Gain-based damages have sometimes been called ‘restitutionary damages’,5 but this has been described as an ‘unhappy expression’6 because ‘restitution’ is an ambiguous term with two mutually exclusive meanings. Historically, the main remedy to strip gains explicitly has been the account of profits.7 However, this chapter deals not only with accounts of profits, but a broader range of (potentially) gain-based damages. The term ‘account of profits’ is laden with historical baggage because it is generally awarded for equitable causes of action, and rarely for common law wrongs.8 The use of the term ‘damages’ in this context is also controversial, as damages have often been associated with common law wrongdoing and compensatory awards. Indeed, it has been held that accounts of profit should not be characterised as damages.9 However, it is suggested that ‘damages’ encompass any monetary award for a civil wrong, including gain-based relief.10 Because this chapter focuses on ‘damages’, it will not discuss proprietary remedies such as the constructive trust in any detail, although it should be observed that these are sometimes used to effect disgorgement.11 Nonetheless, it has recently been argued that constructive trusts are simply an order to convey property,12 and thus the boundary between personal remedies and proprietary remedies may be more permeable than it first appears. Certainly, courts sometimes award accounts of profit in lieu of a constructive trust.13 The relationship and division between gain-based proprietary relief and gain-based damages is an area which requires further exploration by the courts and academics. The historical background shapes the present law of gain-based damages. Because of the development of two separate court systems running in tandem (the Court of Chancery and 5 See e.g., D Friedmann, ‘Restitution of Benefits Obtained through the Appropriation of Property or the Commission of a Wrong’ (1980) 80 Colum L Rev 504, 515; G Jones ‘The Recovery of Benefits Gained from a Breach of Contract’ (1983) 99 LQR 443; P Birks, ‘Restitutionary Damages for Breach of Contract: Snepp and the Fusion of Law and Equity’ [1987] LMCLQ 421. 6 Attorney-General v Blake [2001] 1 AC 268, 284 (Lord Nicholls) (‘Blake’). 7 Blake [2001] 1 AC 268, 284 (Lord Nicholls); S Doyle and D Wright, ‘Restitutionary Damages – The Unnecessary Remedy?’ (2001) 25 MULR 1. The expression ‘disgorgement damages’ has also been used to describe accounts of profits: see e.g., J Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing 2002); K Barnett, Accounting for Profit for Breach of Contract: Theory and Practice (Hart Publishing 2012). 8 J Edelman, ‘The Measure of Restitution and the Future of Restitutionary Damages’ [2010] 18 RLR 1, 7. Cf Blake (n6) 284; Doyle and Wright (n7). 9 Watson v Holliday (1882) 20 Ch D 780 (aff’d Watson v Holliday (1882) 52 LJ Ch 543). 10 P Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 UWALR 1, 29; H McGregor (with M Spencer and J Picton), McGregor on Damages (19th edn, Sweet and Maxwell 2014) [1-001]. 11 See e.g., Attorney-General for Hong Kong v Reid [1994] 1 AC 324 (PC). 12 E Bant, ‘Trusts, Powers and Liens: An Exercise in Ground-clearing’ (2010) 4 J of Eq 286; W Swadling, ‘The Fiction of the Constructive Trust’ (2011) 64 Curr Leg Prob 399; E Bant and M Bryan, ‘Constructive Trusts and Equitable Proprietary Relief: Rethinking the Essentials’ (2011) 5 J of Eq 171; E Bant and M Bryan, ‘Specific Restitution without Trusts’ (2012) 6 J of Eq 1. 13 See e.g., Giumelli v Giumelli [1999] HCA 10, (1999) 196 CLR 101, [51]–[53].

Gain-based damages  313 the Common Law courts) there was typically a sharp division between the remedies which could be awarded for equitable causes of action, and the remedies which could be awarded for common law causes of action. Equitable remedies were typically readily awarded for equitable causes of action (equity’s original jurisdiction) but only exceptionally awarded (if at all) for common law causes of action (equity’s auxiliary jurisdiction), typically only if damages were inadequate. In the 17th century, the equitable account of profits became synonymous with equity and equitable wrongdoing.14 It therefore follows that accounts of profits continue to be available across the common law world for equitable wrongs.15 They are also available for intellectual property breaches, initially under the auxiliary jurisdiction of equity,16 but also bolstered by statute in many instances.17 Finally, the account of profits is available in equity’s auxiliary jurisdiction for the tort of passing off.18 Otherwise, accounts of profits have traditionally been unavailable for common law causes of action such as tort or breach of contract.19 During the twentieth century, restitutionary scholars gathered all remedies which could be seen as gain-based and attempted to categorise them.20 It was argued that some awards, including those involving accounts of profits for equitable breaches, were really cases of ‘restitution for wrongs’.21 Moreover, it was argued that claimants obtained gain-based damages by other means at common law, for example by using the assumpsit or the action for money had and received to strip defendants of the profits derived from the commission of proprietary torts, often where the defendant sold the claimant’s property without authority.22 Courts had

14 M McInnes, ‘Account of Profits for Common Law Wrongs’ in S Degeling and J Edelman (eds), Equity in Commercial Law (LBC 2005) 406–7; D Wright, Remedies (2nd edn, Federation Press 2014) 107; P Devonshire, Account of Profits (Thomson Reuters 2013) 5–8. This is despite the ironic fact that the account of profits was first developed at common law: McInnes; Wright; Devonshire, 3–4. 15 Breach of fiduciary duty: Warman International Ltd v Dwyer (1995) 182 CLR 544 (‘Warman’). Breach of trust: J D Heydon and M J Leeming, Jacob’s Law of Trusts in Australia (8th edn, Lexis Nexis 2016) [22-06]. Breach of confidence: Attorney-General v Observer Ltd [1990] 1 AC 109. Cf Vercoe v Rutland Fund Management Pty Ltd [2010] EWHC 424 (Ch), [2010] Bus LR 141, [341] (Sales J) (accounts of profit only available exceptionally for breach of confidence). 16 K Barnett and S Harder, Remedies in Australian Private Law (2nd edn, Cambridge University Press 2012) [16.32]. In Canada, accounts of profits for breach of patent are still available under the auxiliary jurisdiction rather than the legislation: see Teledyne Industries Inc v Lido Industrial Products Ltd [1982] FCJ No. 1024 (Federal Court). 17 For a small sample of such statutes, see e.g. Australia: Patents Act 1990 (Cth), s 122(1), Copyright Act 1968 (Cth), s 115(2); Designs Act 1906 (Cth), s 32B(1); Trade Marks Act 1995 (Cth), s 126; Circuit Layouts Act 1989 (Cth), s 27(2); Plant Breeder’s Rights Act 1994 (Cth), s 56(3). Canada: Integrated Circuit Topography Act (1990, c 37), s 9; Trademarks Act (1985, c T-13), 53.2(1); Copyright Act (1985, c C-42), s 34(1); Industrial Design Act (1985, c I-9), s 15.1. England and Wales: Patents Act 1977 (UK), s 61(1)(d), Copyright, Designs and Patents Act 1988 (UK), ss 96(2), 191I(2), 229(2). 18 My Kinda Town Ltd v Soll [1983] RPC 15. 19 Except for rare cases: Edwards v Lee’s Administrator, 96 SW 2d 1028 (Kentucky CA, 1936) (trespass); Adras Building Material v Harlow & Jones GmbH (1988) 42(1) PD 221, transl. in [1995) 3 RLR 235 (SC of Israel) (breach of contract). 20 See e.g., American Law Institute, Restatement of Restitution: Quasi-contract and Constructive Trusts (1936) and W A Seavey and A W Scott, ‘Restitution’ (1938) 54 LQR 29; R Goff and G Jones, The Law of Restitution (Sweet and Maxwell 1966); P Birks, An Introduction to the Law of Restitution (rev’d edn, Clarendon 1989). 21 Friedmann (n5); Birks (n20) 23–4, 313–15, 346–55. 22 Oughton v Seppings (1830) 1 B & Ad 241, 109 ER 776; Lamine v Dorrell (1706) 2 Ld Raym 1216, 92 ER 303.

314  Research handbook on remedies in private law historically allowed the claimant to maintain an action for money had and received over the proceeds of sale of the property on the basis of an ‘implied contract’ between the claimant and the defendant. This was known as ‘waiver of tort’,23 because the claimant chose to seek an action for money had and received rather than compensatory damages for tort. In addition, courts sometimes awarded a ‘reasonable fee’ to the claimant in trespass cases, particularly in the ‘wayleave’ cases (trespasses which did not deny the claimant possession)24 and the ‘mesne profit’ cases (when the defendant wrongfully withheld possession of the land from the claimant, typically after the expiry of a lease).25 Courts also sometimes awarded reasonable fee damages for tort in lieu of an injunction pursuant to Lord Cairns’ Act.26 These remedies across common law and equity were said by restitutionary scholars to be examples of gainbased damages. It was also argued that availability of gain-based remedies for wrongdoing should be consistent, regardless of the historical origin of either cause of action or remedy.27 Thus, for example, given that both trust and contract arose by consent, it followed that accounts of profit should be available for breaches in both causes of action, not just for breach of trust. In Attorney-General v Blake, a majority of the House of Lords heeded the call to extend gainbased damages to common law causes of action.28 In his leading speech, Lord Nicholls used the waiver of tort cases, the wayleave and mesne profit cases and the Lord Cairns’ Act cases (particularly Wrotham Park Estate Co Ltd v Parkside Homes Ltd29) to justify the availability of an account of profits for breach of contract.30 He characterised these cases as gain-based, although this remains contested, particularly with regard to the ‘reasonable fee’ cases.31 Thus, there are two (arguably) gain-based measures in the English cases: a ‘reasonable fee’ award, as in Wrotham Park, and a full account of profits. However, there is no clear guidance as to when courts will choose one or the other, particularly for common law causes of action. Moreover, in relation to the ‘reasonable fee’ awards, there is no judicial or academic consensus as to whether these awards are gain-based, loss-based or something else, or as to how they should be calculated. At present, despite the statements of Lord Nicholls in Blake mentioned above, the judicial consensus in several superior common law courts seems to be that such

See e.g., United Australia v Barclays Bank Ltd [1941] AC 1. Martin v Porter (1839) 5 M & W 351, 151 ER 149; Jegon v Vivian (1871) LR 6 Ch 742; Phillips v Homfray (1871) LR 6 Ch App 770; Whitwham v Westminster Brymbo Coal & Coke Company [1896] 2 Ch 538. 25 Elliott v Boynton [1924] 1 Ch 236; Wilson v Kelly [1957] VR 147; Swordheath Properties Ltd v Tabet [1979] 1 WLR 285; Ministry of Defence v Ashman [1993] 2 EGLR 102; Ministry of Defence v Thompson [1993] 2 EGLR 107; Lollis v Loulatzis [2007] VSC 547. 26 Bracewell v Appleby [1975] Ch 408; Jaggard v Sawyer [1995] 1 WLR 269. 27 A Burrows, ‘We Do This at Common Law But That in Equity’ (2002) 22 OJLS 1. 28 Blake [2001] 1 AC 268. D Campbell and D Harris, ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2002) 22 Legal Studies 208, 209, fn 6, point out that the House of Lords accepted the extension of restitution just as academics were backing away from some of the broader claims. 29 [1974] 1 WLR 798 (‘Wrotham Park’). See Blake [2001] 1 AC 268, 281. 30 Blake [2001] 1 AC 268, 278–80. 31 Also sometimes described as ‘restitutionary damages’, ‘Wrotham Park damages’, ‘reasonable fee awards’, ‘licence fee damages’, ‘user awards’ and ‘bargaining damages’, these encompass the waiver of tort cases, the mesne profit and wayleave cases, and the cases where damages are awarded in lieu of specific relief pursuant to Lord Cairns’ Act. 23 24

Gain-based damages  315 awards are compensatory, as indicated by the English Supreme Court in Morris Garner v One Step (Support) Ltd,32 and by the Singapore Court of Appeal in Turf Club Auto Emporium Pte Ltd v Yeo Boong Hua.33 And, as discussed next, even in the comparatively more settled area of accounts of profits, there remains controversy about why such awards are made. It is to the normative basis of gain-based relief that we now turn.

3

NORMATIVE BASIS OF GAIN-BASED RELIEF

As noted above, some forms of gain-based damages involve a ‘giving up’ of profit, and others involve a ‘giving back’ of profit. The normative basis for ‘giving back’ is reasonably straightforward. While there are arguments about whether certain awards, including ‘reasonable fee’ awards, are in fact restitutionary or not, the rationale for restitutionary awards per se is generally uncontroversial. Restitutionary awards are corrective in nature (return of the defendant’s gain at claimant’s expense) and seek to restore the value of what has been taken from the claimant to reverse the defendant’s unjust enrichment.34 The rationale of disgorgement or ‘giving up’, on the other hand, is controversial. Although the mainstream view is that such awards effect deterrence, others have identified a corrective or, alternatively, a punitive or quasi-punitive rationale to some awards. 3.1 Deterrence Many scholars35 and courts36 argue that disgorgement effects deterrence – the incentive to breach is removed by stripping the defendant of profit. Deterrence aims to influence decision making in the future.37 Some analyses concentrate on fiduciary obligations,38 but others have extended a deterrent analysis of gain-based remedies to non-fiduciary obligations, such as

[2018] UKSC 20 (‘Morris Garner’). [2018] SGCA 44 (‘Turf Club’). 34 Ernest Weinrib, ‘Restitutionary Damages as Corrective Justice’ (2001) 1 Theoretical Inquiries in Law 1; Edelman and Bant (n3) 32; Kingstreet Investments Ltd v New Brunswick (Finance) 2007 SCC 1, [2007] SCR 3 [32]. 35 R Cooter and B J Freedman, ‘The Fiduciary Relationship: Its Economic Character and Legal Consequences’ (1991) 66 NYULR 1045; S Worthington, ‘Reconsidering Disgorgement for Wrongs’ (1999) 62 Mod LR 218; Edelman (n7) 83–6; I Samet, ‘Guarding the Fiduciary’s Conscience – A Justification of a Stringent Profit-Stripping Rule’ (2008) 28 OJLS 763; M Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart Publishing 2010). 36 Warman (1995) 182 CLR 544, 557– 8; Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298, 369 (Heydon JA). Cf Murad v Al-Saraj [2005] EWCA Civ 959, [2005] All ER (D) 503 [82]–[83] (Arden LJ); [121] (Jonathan Parker LJ). 37 L Smith, ‘Deterrence, Prophylaxis and Punishment in Fiduciary Obligations’ (2013) 7 Journal of Equity 87, 89. 38 Cooter and Freedman (n35); Samet (n35); Conaglen (n35). 32 33

316  Research handbook on remedies in private law breach of contract or tort.39 Others argue that a deterrent analysis should be confined to custodial fiduciaries and breaches of trust.40 Deterrence has two aspects: specific deterrence, which seeks to deter that defendant from repeating the wrongful conduct, and general deterrence, which seeks to deter other would-be wrongdoers. It has also been argued that profit-stripping is prophylactic.41 Prophylaxis overlaps with deterrence, but is not the same: it operates where precautions are taken to avoid an undesirable outcome.42 Law and economists tend to favour a deterrent interpretation. Thus, Cooter and Freedman argue that disgorgement ensures that fiduciaries police their own behaviour and do not misappropriate trust property.43 The sanction equals the gain from wrongdoing.44 The laws operate harshly, because if beneficiaries had the burden of detecting and proving the fiduciary’s breach of duty, the sanction would not adequately deter the fiduciary.45 This analysis is amenable to extension to non-fiduciary duties.46 Scholars who extend it argue that there are certain private law breaches which we wish to deter, and when those breaches occur, courts are more willing to impose profit-stripping remedies to prevent future wrongdoing. Other arguments focus on deterrence as an incidence of gain-based remedies for breach of fiduciary duties. Conaglen argues that breach of fiduciary duty is prophylactic, and that the availability of disgorgement and rescission indicates this.47 The no-conflict and no-profit rules are said to avert breaches of non-fiduciary duties (such as a duty of care) by neutralising influences likely to sway fiduciaries away from performing those non-fiduciary duties. The fact that remedies are applied even where the fiduciary is well-intentioned shows the law’s prophylactic operation. 3.2

Corrective and Anti-deterrent Accounts

Lionel Smith has questioned deterrent theories of accounts of profit in the context of fiduciary obligations.48 First, he argues that disgorgement is not a sufficient deterrent and something more is required for a remedy to be truly deterrent, such as exemplary damages, fines or imprisonment.49 Secondly, he argues that the rationale of profit-stripping cannot be deterrence because the no-profit rule in fiduciary law operates without regard to conduct which is sought

See e.g., J Berryman, ‘The Case for Restitutionary Damages over Punitive Damages: Teaching the Wrongdoer That Tort Does Not Pay’ (1994) 73 Canadian Bar Rev 320; Worthington (n35); Edelman (n7) 83–6; S Thel and P Siegelman, ‘You Do Have to Keep Your Promises: A Disgorgement Theory of Contract Remedies’ (2011) 52 William and Mary Law Review 1181; Barnett (n7). 40 R Lee, ‘Disgorgement of Unauthorized Fiduciary Gains: An Exercise in Causation?’ (2017) 11(1) J of Eq 29, 38–40. 41 Conaglen (n35) 70–84. 42 Smith (n37) 89. 43 Cooter and Freedman (n35). 44 Ibid, 1052. 45 Ibid, 1052–3. 46 Thel and Siegelman (n39); Barnett (n7) 26–32. 47 Conaglen (n35) 70–75; Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298, 369 (Heydon JA). 48 Smith (n37); L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’ (2014) 130 LQR 608, 627. 49 Smith (n37) 91–93; Smith (n48) 627. Cf Samet (n35) 770. 39

Gain-based damages  317 to be deterred, namely harm to the beneficiary, misappropriation, or breach of a non-fiduciary duty.50 If the law does seek to do this, it unjustly punishes innocents.51 Conversely, Andrew Gold has argued that the imposition of disgorgement on honest fiduciaries may be an instance where it is just for the beneficiary to act in a way that is morally wrong.52 Smith concedes that the no-conflict rule in fiduciary law has a prophylactic aspect.53 However, in Smith’s view, the no-profit rule is not deterrent, but explicable as a primary rule of attribution, where profits and other benefits are allocated to the claimant as soon as they are obtained by the fiduciary.54 Smith’s analysis makes profit-stripping corrective in nature: the fiduciary is simply giving the principal the profit which belonged to her from the beginning. Paul Baron Miller has also argued that fiduciary remedies are explicable on the basis of the primary right arising from the fiduciary relationship, thus placing disgorgement in a corrective context.55 Corrective scholars tend to see disgorgement remedies as interwoven with the nature of the fiduciary obligation itself, and thus do not support its expansion to non-fiduciary causes of action, such as breach of contract.56 It follows, however, that corrective justice scholars do not have the same problem with restitutionary remedies (which are corrective by nature).57 3.3

Punitive Accounts

It is controversial to suggest that punishment can be a normative basis for disgorgement. Nonetheless, it has been argued that disgorgement sometimes has a punitive rationale,58 or a ‘quasi-punitive’ aspect.59 This argument is difficult to extend to fiduciary obligations, where the defendant’s good faith or bona fides will not prevent him from being forced to disgorge profit, but is easier to mount for common law breaches, where disgorgement is an exceptional remedy generally imposed for wrongdoing. Punishment is said to be inappropriate in private law, particularly by corrective justice scholars.60 However, other scholars have questioned this. Lee has questioned whether pun Smith (n37) 93–94; Smith (n48) 627. Smith (n37) 94. 52 A S Gold, ‘Justice, Redress and the Right to Do Wrong’ in S Degeling and J N E Varuhas, Equitable Compensation and Disgorgement of Profit (Hart Publishing 2017) 41. 53 Smith (n37) 96–100; Smith (n48) 623–5. 54 Smith (n37) 100–3; Smith (n48) 628–33. 55 P B Miller ‘Justifying Fiduciary Remedies’ (2013) 63 U Toronto L J 570. 56 E Weinrib, ‘Punishment and Disgorgement as Contract Remedies’ (2003) 78 Chicago-Kent L Rev 55. 57 E Weinrib, ‘Restitutionary Damages as Corrective Justice’ (2001) 1 Theoretical Inquiries in Law 1; Weinrib (n56). 58 D Friedmann, ‘Restitution for Wrongs: The Measure of Recovery’ (2001) 79 Texas Law Review 1879, 1887; Barnett (n7) 32–46; K Barnett, ‘Deterrence and Disgorging Profits for Breach of Contract’ [2009] 17 RLR 79, 80–1. 59 United Kingdom and Northern Ireland Law Commission, Aggravated, Exemplary and Restitutionary Damages (Law Com No. 247, 1997) para 7.18; P Jaffey, The Nature and Scope of Restitution (Hart Publishing 2000) 374–6; C Mitchell, ‘Remedial Inadequacy in Contract and the Role of Restitutionary Damages’ (1999) 15 JCL 1, 9–10. 60 Weinrib (n56) 86–7; A Beever, ‘The Structure of Aggravated and Exemplary Damages’ (2003) 23 OJLS 87; S Todd, ‘A New Zealand Perspective on Exemplary Damages’ (2004) 33 Common Law World Review 255. 50 51

318  Research handbook on remedies in private law ishment is incompatible with normative corrective justice in relation to punitive damages for breach of contract.61 Others have noted that punishment in these cases is narrower than in the criminal law, as it focuses on the infringement and vindication of a private right.62 Further, the argument that compensation is solely a function of private law and punishment is solely a function of criminal law does not ‘fit’ with what courts do.63 It is said that the true division is not between punishment and compensation, but between individual enforcement of rights and a public attribution of blame by the state.64 There is a separate controversy about whether equity allows for punishment, which is particularly relevant in Australia. Although some jurisdictions have accepted that equitable remedies (including the account of profits) may be punitive,65 in the Australian case, Harris v Digital Pulse Pty Ltd, Heydon JA suggested that equity did not permit penal remedies.66 It has also been argued by Peter Devonshire that accounts of profit cannot be punitive as equity is concerned with the conscience of the parties, seeks to balance the parties’ rights, and does not strip more than the gain.67 It is certainly true, as noted above, that it is difficult to argue that disgorgement is punitive for breaches of fiduciary duty, unless we accept that the innocent are justly punished.68 It is suggested that more research needs to be done into whether disgorgement is in fact punitive or deterrent, and whether it is perceived by parties to be punitive or deterrent. This leads us to the question of availability of gain-based relief outside the fiduciary and equitable context, because the normative basis of the award will influence any extension of availability.

4

AVAILABILITY OF ACCOUNTS OF PROFIT BEYOND EQUITY

As noted above, accounts of profits were traditionally unavailable for common law wrongs, but Blake has changed the law in England and Wales.69 The unusual nature of the facts in Blake bear consideration. George Blake was a ‘notorious traitor’ who breached his employment contract with the British Secret Intelligence Service by becoming a double-agent for the Soviets. His contract contained a continuing undertaking not to divulge information gained through his employment. Blake was eventually unmasked, and imprisoned, but he escaped after serving four years of his 42-year sentence, and fled to Moscow. Over 30 years later, he wrote an P-W Lee, ‘Contract Damages, Corrective Justice and Punishment’ (2007) 70 Mod LR 887. R Stevens, Torts and Rights (Oxford University Press 2007) 85. Cf Jaffey (n59) 376. 63 Edelman (n7) 19; R Cunnington, ‘Should Punitive Damages be Part of the Judicial Arsenal in Contract Cases?’ (2006) 26 Legal Studies 369, 380–1; Jaffey (n59) 378. 64 Cunnington (n63) 381. 65 Cook v Evatt (No. 2) [1992] 1 NZLR 676; Aquaculture Corp v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299; Norberg v Wynrib [1992] 2 SCR 226; Skids Programme Management Ltd v McNeill [2013] NZLR 1. 66 [2003] NSWCA 10, (2003) 56 NSWLR 298 [343]–[352] (Heydon JA). See also Vyse v Foster (1872) LR 8 Ch App 309, 333, aff’d (1874) LR 7 HL 318. Cf Mason P at [173], who dissented on this point. 67 Devonshire (n14) 59–63. 68 See Gold (n52). 69 Blake [2001] 1 AC 268. 61 62

Gain-based damages  319 autobiography, No Other Choice,70 without having sought permission. He had been paid about £60,000 of the moneys owing under the publishing contract, but a further £90,000 remained in the jurisdiction. A majority of the House of Lords found that Blake must disgorge his entire remaining profit to the British Government because of his breach of contract.71 Lord Nicholls, who delivered the principal speech, proposed what has become known as the ‘legitimate interest test’ to ascertain when a contract might attract a gain-based damages award: Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to a breach of contract. It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is sought. A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit.72

The consensus seems to be that the account of profits is a tertiary remedy in tort and contract, only available when compensatory damages are inadequate and specific relief is unavailable.73 Nonetheless, significant questions remain as to the way in which these awards operate. Some have suggested that accounts of profits should be viewed as operating in the auxiliary jurisdiction of equity, and should be subject to allowances, equitable defences and apportionment.74 There remains a question about whether such awards should be made. First, some academics have questioned whether accounts of profit or gain-based damages should be more widely available, particularly for causes of action such as breach of contract. Thus, for example, David Campbell and others have argued that the availability of gain-based relief for breach of contract might overly disincentivise parties from breach.75 Even Daniel Friedmann, an avowed champion of the performance interest, has argued that there are some times when the law should at least tolerate breach of contract.76 Secondly, Australian courts have repeatedly refused to apply Blake on the basis that it overextends principle,77 and does not fit the long-recognised categories of case where an account G Blake, No Other Choice (Jonathan Cape 1990). Blake [2001] 1 AC 268 (Lords Nicholls, Goff, Browne-Wilkinson and Steyn, Lord Hobhouse dissenting). 72 Ibid, 285. 73 Edelman (n7); R Cunnington, ‘The Measure and Availability of Gain-based Damages for Breach of Contract’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing 2008) 207; Barnett (n7). 74 Barnett (n7) ch 7. 75 Campbell and Harris (n28); D Campbell, ‘The Treatment of Teacher v Calder in AG v Blake’ (2002) 65 Modern Law Review 256; D Campbell and P Wylie, ‘Ain’t No Telling (Which Circumstances Are Exceptional’ (2003) 62 Cambridge Law Journal 605. See generally, D Harris, D Campbell and R Halson, Remedies in Contract and Tort (2nd edn, Butterworths 2002). 76 D Friedmann, ‘Economic Aspects of Damages and Specific Performance Compared’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing 2008) 65. 77 Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157, [155]– [159] (Hill and Finkelstein JJ); Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166, [82]–[85]; Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874, [232]–[235]; 70

71

320  Research handbook on remedies in private law of profits will be awarded.78 Australian courts, particularly those in New South Wales, are reluctant to commit to what has been called ‘fusion fallacy’. 79 In other words, it is said that the enactment of the Judicature Acts simply fused the administration of law and equity in the courts, but did not allow courts to award equitable remedies for a common law cause of action (or vice versa) where this was not possible before the Judicature Acts. Consequently, because courts did not award accounts of profit for breach of contract prior to the Judicature Acts, they are still not empowered do so. By contrast, courts in other jurisdictions have been cautiously willing to apply Blake.80 The caution stems from the ‘legitimate interest’ test, which has been described as ‘hopelessly ill-defined and difficult to apply’.81 Thus, the Singaporean Court of Appeal has observed that Blake leaves a ‘(very practical) issue as to the criteria which will enable the court to ascertain whether or not a given fact situation is indeed exceptional’.82 Campbell and Wylie have observed that very few cases will be exceptional if the current case trend continues.83 Barnett has suggested that most contract cases do not give rise to disgorgement, but it is only relevant in two classes of case, the second sale cases and the ‘agency problem’84 cases (typically involving a breach of a negative covenant).85 Courts have had particular difficulties in ‘agency problem’ cases86 where there is a negative covenant but no concurrent fiduciary duty (as in Blake itself). However, courts have even had difficulties in applying Blake in

Dalecoast Pty Ltd v Guardian International Pty Ltd [2003] WASCA 142, [103]–[107]; Short v Crawley [2005] NSWSC 928, [24]; Testel Australia Pty Ltd v Krg Electrics Pty Ltd [2013] SASC 91, [99]–[109]; Hydrofibre Pty Ltd v Australian Prime Fibre Pty Ltd [2013] QSC 163, [91]–[94]. Cf Deane J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 124–5, noted in Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166, [83]. 78 J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th edn, LexisNexis Butterworths 2015) [26-075]. 79 Principally Heydon et al. (n78) ch 2. 80 New Zealand: Attorney-General for England and Wales v R [2002] 2 NZLR 91, [112]–[113], [146]–[152]. Canada: Amartek Inc v Canadian Commercial Corp (2003) 229 DLR (4th) 419, 46 (Overruled in Amartek Inc v Canadian Commercial Corp (2005) 76 OR (3d) 241; 256 DLR (4th) 287 because no collateral contract); Smith v Landstar Properties Inc [2011] BCCA 44; NTI v Canada (Attorney-General) [2012] NUCJ 11, [306]–[334]. United States: American Law Institute, Restatement (Third) of Restitution and Unjust Enrichment (2011) § 39; Kansas v Nebraska 574 US ___ (2015). 81 Cunnington (n73) 235. 82 MFM Restaurants Pte Ltd v Fish & Co Restaurants Pte Ltd [2011] 1 SLR 150, [55] (emphasis original). 83 Campbell and Wylie (n75). 84 ‘Agency’ in this context refers not to the legal concept of agency, but the economic concept of principal – agent, which arises whenever one person, the principal (or promisee), seeks to persuade another person, the agent (or promisor), to act in the principal’s interests. Public policy considerations also have a particularly important role in this category. 85 Barnett (n7) 86. 86 E.g. Amec Developments Ltd v Jury’s Hotel Management (UK) Ltd [2000] EWHC Ch 454, [2001] 1 EGLR 81; Esso Petroleum Co Ltd v Niad Ltd [2001] EWHC Ch 458, [2001] All ER (D) 324; Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830; World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445; Lane v O’Brien Homes [2004] EWHC 303 (QB), [2004] All ER (D) 61; Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2011] 1 WLR 2370; Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [2010] Bus LR D141.

Gain-based damages  321 ‘second sale’ cases.87 In many cases, compensatory damages are inadequate, specific relief is unavailable and the defendant has made a profit, which suggests that, subject to discretionary considerations and allowances for skill and effort, a court should consider awarding full disgorgement.88 Nonetheless, courts have refused to make any gain-based award whatsoever,89 or have simply given the claimant a ‘reasonable fee’ award because the case was not as exceptional as Blake.90 The further complication is that there are two potentially gain-based measures of relief: full accounts of profit and ‘reasonable fees’. This raises a second issue: courts have found it hard to choose between full disgorgement or a ‘reasonable fee’, whether the cause of action is in contract, tort, breach of confidence or for breach of privacy. The most credible criteria for choosing between the two options have been outlined by Cunnington, who distinguishes between two situations: 1. where the court ‘will not’ order specific relief (for example, because of delay on the part of the plaintiff, hardship to the defendant or broader public policy considerations); and 2. where the court ‘cannot’ order specific relief (for example, because of impossibility or the need for constant supervision).91 Cunnington argues that in the first instance, courts should choose the lesser ‘reasonable fee’ award. In the second instance, where the defendant has deprived the claimant of specific relief, the courts should award full disgorgement damages. Unfortunately, courts have not adopted this analysis, and confusion continues to reign. This leads neatly into the next controversy. As noted earlier, Lord Nicholls in Blake identified the waiver of tort cases, the wayleave and mesne profit cases and the Lord Cairns’ Act cases (particularly Wrotham Park92) as being instances of gain-based damages in contract and tort.93 However, this characterisation has not been unanimously accepted. Indeed, there is intense confusion about what the rationale for these awards is, and how they should be calculated.

5

THE VEXED POSITION OF ‘REASONABLE FEE’ CASES

There are two issues with regard to ‘reasonable fee’ cases. First, there is no judicial or academic consensus on whether such awards are in fact gain-based. Moreover, to add to the confusion, the English Supreme Court has come down resoundingly in favour of a compensatory

AB Corp v CD Co (The Sine Nomine) [2002] 1 Lloyd’s Rep 805 correctly refused to award disgorgement for the second sale of a substitutable charter. Cf, however, Luxe Holding Ltd v Midland Resources Holding Ltd [2010] EWHC 1908 (Ch). 88 The situation is a little more complex in the agency problem cases: Barnett (n7) ch 5. 89 World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445; Luxe [2010] EWHC 1908 (Ch). 90 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830. 91 Cunnington (n73) 236. Also adopted in Barnett (n7) 161. 92 [1974] 1 WLR 798. See Blake [2001] 1 AC 268, 281. 93 Blake [2001] 1 AC 268, 272–81. 87

322  Research handbook on remedies in private law

Gain-based damages  323 approach in Morris Garner,94 seemingly backing away from Lord Nicholls’ use of the reasonable fee cases to support a gain-based analysis.95 So too has the Singapore Court of Appeal in Turf Club.96 Secondly, it is unclear how such awards are to be calculated, which relates back to the first issue. There are many different analyses of ‘reasonable fee’ awards. 5.1

Compensatory Analyses

Courts sometimes prefer to view ‘reasonable fee’ awards as compensatory,97 even though often no factual loss is suffered by the claimant. Many academics have attempted to situate ‘reasonable fees’ within a compensatory framework. Sharpe and Waddams argue that when a defendant wrongfully uses the claimant’s property without diminishing its value, the claimant has lost an opportunity to bargain.98 The ‘lost opportunity to bargain’ analysis has found favour with courts in some cases,99 but it has been soundly criticised by academics,100 and by some judges.101 First, it introduces a fictional ‘hypothetical bargain’, which presumes that the defendant would have agreed to ‘buy the right’ to break the contract or use the property. Secondly, there is a related assumption that the claimant would have agreed to ‘sell the right’.102 Both assumptions are often not borne out by Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 [30] (Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed), [114] (Lord Sumption). 95 Attorney-General v Blake [2001] 1 AC 268, 281–3. 96 [2018] SGCA 44. 97 Strand Electric & Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246, 256 (Romer LJ); Jaggard v Sawyer (n26) 291 (Millett LJ); Gafford v Graham (1999) 77 P & CR 73, 86 (Nourse LJ); Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 [45], [57] (Mance LJ); World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445 [58] (Chadwick LJ); Smith v Landstar Properties Inc [2011] BCCA 44; Bunnings Group Ltd v Chep Australia Ltd [2011] NSWCA 342, (2011) 82 NSWLR 420 [173] (Allsop P, with whom McFarlan JA agreed); Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 [30] (Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed), [114] (Lord Sumption). 98 R J Sharpe and S M Waddams, ‘Damages for Lost Opportunity to Bargain’ (1982) 2 OJLS 290. See also A Phang and P-W Lee, ‘Rationalising Restitutionary Damages in Contract Law – An Elusive or Illusory Quest?’ (2001) 17 JCL 240, 252–3. 99 Jaggard v Sawyer [1995] 1 WLR 269, 291 (Millett LJ); Gafford v Graham (1999) 77 P & CR 73, 86 (Nourse LJ); World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445 [29] (Chadwick LJ); Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 [115)–[123] (Lord Sumption). 100 P Birks, ‘Profits for Breach of Contract’ (1993) 109 LQR 518; A Burrows, The Law of Restitution (3rd edn, Oxford University Press 2011) 636–7; G Virgo, The Principles of the Law of Restitution (3rd edn, Oxford University Press 2015) 471–2; R Cunnington, ‘A Lost Opportunity to Clarify’ (2007) 122 LQR 47; A Burrows, ‘Are Damages on the “Wrotham Park Basis” Compensatory, Restitutionary or Neither?’ in D Saidov and Ralph Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart 2008) 169–71; R Cunnington, ‘The Assessment of Gain-based Damages for Breach of Contract’ (2008) 71 Mod LR 559, 562–3; Cunnington (n73) 220; S Harder, Measuring Damages in the Law of Obligations (Hart Publishing 2010) 180–1; Barnett (n7) 16–18. 101 Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361, 1369–70 (Steyn LJ); Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 [45] (Mance LJ), [57] (Peter Gibson LJ); Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 [30], [81] (Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed) cf [115]–[123] (Lord Sumption). 102 Burrows, ‘Damages on the “Wrotham Park Basis”’ (n100) 170. 94

324  Research handbook on remedies in private law the cases. Thus, the theory fails to explain those cases for which an explanation is most necessary.103 Waddams has conceded that this analysis cannot be the sole explanation, but argues that it is still relevant.104 Others argue that ‘reasonable fee’ awards effect ‘substitutive compensation’ (that is, they compensate the claimant for the loss of her right). McInnes argues that the proprietary tort cases compensate the claimant for the value of her lost right of dominium (the right to control access to and to use her property).105 Similarly, Benson and Botterell argue that disgorgement in contract represents ‘compensation for a lost right’.106 McInnes’s analysis has been criticised because it is difficult to understand what loss has occurred when a right has been infringed.107 In fact, she retains the same rights she had before the wrong was committed. However, McInnes’s argument was cited approvingly by the Singapore Court of Appeal in Turf Club.108 Kit Barker has argued instead that ‘reasonable fee’ awards instead compensate the claimant for the loss of legal power associated with the primary Hohfeldian claim-right: namely, the loss of the power to prevent an imminent breach by means of a quia timet injunction.109 Robert Stevens’s account posits that damages are awarded not to eradicate harm, but as a substitute, the ‘next best’ response the law can give instead of the primary right.110 Although substitutive damages may extend to gain-based damages, Stevens argues that reasonable fee awards are not gain-based, and instead vindicate the infringement of the claimant’s right.111 Damages are said to be calculated according to the value of the infringement of the right. However, as he concedes, it is difficult to isolate which infringements give rise to substitutive damages.112 Moreover, it is difficult to see how such rights could be valued, and how courts differentiate between different levels of infringement.113 Alvin See has criticised the broad use of the descriptor ‘compensation’ for a broad range of cases, and noted that it leaves important questions about proof, quantification and mitigation underexplored.114

C Rotherham, ‘“Wrotham Park Damages” and Accounts of Profits’ [2008] LMCLQ 25, 31; Cunnington, ‘The Assessment of Gain-based Damages’ (n100) 562–3. 104 S M Waddams, ‘Gains Derived from Breach of Contract: Historical and Conceptual Perspectives’ in R Cunnington and Dr Saidov (eds), Contract Damages: Domestic and International Perspectives (Hart 2008) 187, 192. 105 M McInnes, ‘Account of Profits for Common Law Wrongs’ in S Degeling and J Edelman (eds), Equity in Commercial Law (LBC 2004) 416–18; M McInnes, ‘Gain, Loss and the User Principle’ [2006] 14 RLR 76, 84–6. See also F Giglio, The Foundations of Restitution for Wrongs (Hart Publishing 2007). Cf Rotherham (n103) 45–52. 106 P Benson, ‘Disgorgement for Breach of Contract and Corrective Justice: An Analysis in Outline’ in J Neyers, M McInnes and S Pitel (eds), Understanding Unjust Enrichment (Hart 2004) 311; A Botterell, ‘Contractual Performance, Corrective Justice, and Disgorgement for Breach of Contract’ (2010) 16 Legal Theory 135. 107 Burrows, ‘Damages on the “Wrotham Park Basis”’ (n100) 173; Rotherham (n103) 44–5. 108 [2018] SGCA 44 [206]–[207]. 109 K Barker, ‘“Damages without Loss”: Can Hohfeld Help?’ (2014) 34 OJLS 631. 110 Stevens (n62) 60. 111 R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in J Neyers, R Bronagh and S Pitel (eds), Exploring Contract Law (Hart 2009) 192–3. 112 Stevens (n62) 329. 113 J N E Varuhas, ‘The Concept of “Vindication” in the Law of Torts: Rights, Interests and Damages’ (2014) 34 OJLS 253, 271–2. 114 A W-L See, ‘User damages and the Limits of Compensatory Reasoning’ [2017] LMCLQ 73. 103

Gain-based damages  325 The English Supreme Court’s analysis in Morris Garner v One Step (Support) Ltd leans towards a substitutive compensatory analysis.115 Lord Reed distinguishes between ‘user damages’ in tort and ‘negotiating damages’ in contract. He then states that user damages apply in tort where there is an unlawful use of property, and a loss of the right to use such property, such that the claimant loses ‘his right to obtain the economic value of the use in question, and [the defendant] should therefore compensate him for the consequent loss’.116 A similar principle is extended to contract in regard to ‘negotiating damages’. Wrotham Park is said to reflect the fact that ‘the refusal of an injunction had the effect of depriving the claimant of an asset which had an economic value’.117 Thus, cases such as Pell Frischman, Vercoe, Experience Hendrix and WWF118 were all seen as cases where negotiating damages calculated by reference to a hypothetical release fee were awarded reflect the loss suffered by the claimant.119 The analysis of the Singapore Court of Appeal in Turf Club is, as the unanimous court notes, in many ways similar to that in Morris Garner.120 The court analyses such damages as compensatory. They are held only to be available where orthodox compensatory damages and specific relief are unavailable and where there is a breach of a negative covenant, but such damages are not awarded where it would be irrational or unrealistic to expect the parties to bargain for a release, even on a hypothetical basis.121 However, Turf Club is not identical to Morris Garner. First, no importance is placed on whether such damages are called ‘negotiating damages’ or ‘Wrotham Park’ damages.122 Secondly, the Singapore Court of Appeal does not confine compensatory awards to economically valuable assets because the meaning of ‘asset’ is unclear.123 Thirdly, the Singapore Court of Appeal does not distinguish between Wrotham Park damages and damages available pursuant to Lord Cairns’ Act.124

[2018] UKSC 20. Morris Garner [2018] UKSC 20 [30] (Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed). 117 Ibid, [63]. 118 World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445; Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2011] 1 WLR 2370; Vercoe v Rutland Fund Management Pty Ltd [2010] EWHC 424 (Ch), [2010] Bus LR 141; Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830. 119 Morris Garner 2018] UKSC 20 [83]. 120 [2018] SGCA 44 [271]–[276]. 121 Ibid, [217]–[241]. 122 Ibid, [270]. 123 Ibid, [278]–[281]. 124 Ibid, [284]–[286]. 115 116

326  Research handbook on remedies in private law 5.2

Restitutionary Analyses

Some judges, particularly in cases which involve proprietary torts, have characterised such damages as restitutionary.125 Many academics have also done so.126 James Edelman’s approach is probably the most well known. He distinguishes between restitutionary damages (reasonable fee awards) and disgorgement damages (accounts of profits).127 Restitutionary damages are said to return to the claimant an ‘illegitimate transfer of value’ because of the defendant’s wrong, as measured by the objective receipt by the defendant. The reasonable fee represents the use value of a property or quasi-property right. By contrast, disgorgement damages strip a defendant of a profit made at the claimant’s expense, measured by the subjective value of the gain to the defendant. Edelman’s analysis has been criticised on the basis that it is difficult to see how many of the ‘reasonable fee’ cases involve an exchange of value from the claimant to the defendant in anything but a metaphysical sense.128 5.3

Restitutionary and Compensatory Analyses

Sometimes courts have argued that the award is both compensatory and restitutionary, as in Inverugie Investments Ltd v Hackett, where Lord Lloyd said that the reasonable fee ‘need not be characterised as exclusively compensatory or exclusively restitutionary: it combines elements of both’.129 Waddams has amended his lost opportunity to bargain theory to argue that awards may be both compensatory and restitutionary.130 Kelvin Low has argued that compensatory and restitutionary analyses can co-exist if the concept of loss and gain is sufficiently broad, but that ultimately a compensatory analysis is preferable.131 On the other hand, Kit Barker has suggested that awards cannot be simultaneously compensatory and restitutionary.132

125 See e.g., Strand Electric & Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246, 254–5 (Denning LJ); LJP Investments v Howard Chia Investments (1989) 24 NSWLR 499; Gaba Formwork Contractors Pty Ltd v Turner Corp Ltd (1991) 32 NSWLR 175 (Giles J); Ministry of Defence v Ashman [1993] 2 EGLR 102, 104, 105; Esso v Niad [2001] EWHC Ch 458, All ER (D) 324; Bunnings Group Ltd v Chep Australia Ltd [2011] NSWCA 342, (2011) 82 NSWLR 420 [194]–[199], [205] (Giles JA); Esperance Cattle Co Pty Ltd v Granite Hill Pty Ltd (2014) 47 WAR 318, [454]–[456]. 126 See e.g., J Beatson, ‘The Nature of Waver of Tort’ in J Beatson (ed.), The Use and Abuse of Unjust Enrichment (Clarendon Press 1991) 232; Worthington (n35); Edelman (n7). 127 Edelman (n7) 65–78. 128 C Rotherham, ‘The Conceptual Structure of Restitution for Wrongs’ (2007) 66 CLJ 172, 173; Barnett (n7) 151–4. 129 [1995] 1 WLR 713, 718. See Hampton v BHP Billiton Minerals Pty Ltd (No. 2) [2012] WASC 285 [355]–[359], [342]–[354] (Edelman J); ACES System Development Pte Ltd v Yenty Lily [2013] 4 SLR 1317 [38] (Phang JA). 130 Waddams (n104) 192. 131 K F K Low, ‘The User Principle: Rashomon Effect or Much Ado about Nothing’ (2016) 28 SAcLJ 984. 132 Barker (n109) 646.

Gain-based damages  327 5.4

Property or Exclusive Entitlement Analyses

Courts have linked awards of gain-based relief of various kinds to the law’s protection of property rights.133 Thus in Morris Garner v One Step (Support) Ltd, the English Supreme Court held that valuable rights such as property rights, intellectual property, rights of confidentiality or contractual rights were an important reason why reasonable fee awards are made, as a compensatory substitute for the right.134 Academics have also drawn this link. In one of the earliest pieces dealing with restitution for wrongdoing, Daniel Friedmann theorised that gain-based relief for tort and contract should be available where the claimant has appropriated a proprietary or quasi-proprietary interest, or alternatively, where deterrence of wrongdoing is necessary.135 Harder argues that gain-based damages should be reserved for situations where there is an unauthorised exploitation of an asset exclusively reserved for another person, or by the unauthorised use of an ‘exclusive entitlement’.136 Exclusive entitlements are of two kinds: (1) exclusive entitlements erga omnes (against the whole world – including property rights, reputational rights, rights to bodily integrity); and (2) exclusive entitlements inter partes (against the defendant only – for example, specifically enforceable contracts of sale of land or chattels). He argues that when a defendant makes an unauthorised use of an exclusive entitlement, the defendant’s primary gain is not the profit nor the licence fee the defendant has saved – it is the use of the claimant’s asset.137 Similarly, Jaffey distinguishes between ‘licence fee damages’ and disgorgement.138 He says that ‘licence fee damages’ are given only for cases involving proprietary rights, and reflect an agreement which is imputed to exist between the parties that the defendant would pay for the claimant’s exclusive right to use certain property. 5.5

Vindicatory Accounts

Varuhas has argued that reasonable fee awards in tort can be explained by the law’s desire to vindicate certain interests by awarding damages in the absence of factual loss.139 In this way, the law affirms and emphasizes the importance of certain inherent interests, generally those protected by torts actionable per se, such as trespass. Reasonable fee damages in the trespass to land cases are said to compensate for the normative damage to the plaintiff’s interest in exclusive possession of her land.140 The substitutive account of Stevens mentioned above also has a vindicatory aspect in that the substitutive damages awards he suggests are intended to vindicate the claimant’s rights.

133 See e.g., Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157, [167]– [168] (Emmett J, dissenting) drawing upon Friedmann (n5). 134 Morris Garner [2018] UKSC 20 [91]–[92] (Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed). 135 Friedmann (n5). 136 Harder (n100) 216. 137 Ibid, 217–18. 138 P Jaffey, ‘Licence Fee Damages’ [2011] RLR 95. 139 Varuhas (n113). 140 Varuhas (n113) 284–9.

328  Research handbook on remedies in private law 5.6

Partial Disgorgement Analyses

Some cases have characterised awards as partial disgorgement. For example, in Kansas v Nebraska,141 the United States Supreme Court awarded partial disgorgement of an actual profit made from breach of a settlement agreement, because the State of Nebraska had later tried to keep to the agreement.142 Similarly, in Marathon Asset Management LLP v Seddon, the trial judge interpreted Wrotham Park as allowing for partial disgorgement of a proportion of the profit made from the breach of negative covenant in that case.143 Barnett has argued that ‘reasonable fee’ damages in contract should be seen as partial disgorgement of profit. She argues that courts award the claimant a proportion of the profit the defendant made by infringing the claimant’s right. She argues that this best explains the relationship between the Lord Cairns’ Act cases (such as Wrotham Park) and the cases involving a full account of profits. Moreover, it explains the ‘skimped performance’ and ‘expense saved’ cases, and it helps explain the role of delay in reducing the amount of profit available.144 Barnett’s analysis has been criticised for downplaying the distinction between objective and subjective measures of relief.145 5.7

Methods of Calculation

The difficulty in establishing the normative basis for reasonable fee awards leads to an attendant confusion in how they should be calculated. It matters whether you are disgorging part of an actual profit, compensating for a right, or reversing unjust enrichment. Sometimes the restitutionary award may match a compensatory award, but sometimes it may not. The calculation of a reasonable fee appears to be objective (in that the fair market value of the right is often used as a benchmark) but questions as to the value to the defendant of the right may enter into the question.146 Inverugie Investments Ltd v Hackett is an example of a case where the normative basis of the award matters.147 The defendants owned a large hotel complex, in which the claimants occupied 30 apartments under a long-term lease. The defendants wrongfully ejected them and used the apartments for their own benefit. Because of the low occupancy rates (35–40 per cent) the defendants did not in fact profit from the trespass, but the Privy Council still awarded the claimant substantial ‘user damages’ calculated by reference to a reasonable rental value for all the apartments during the period the defendants had wrongfully occupied them.148 If one takes the view that the award compensates for factual losses, the claimants may not have suffered any loss at all. Alternatively, if one sees user damages as a substitute for the right, it does not matter that the award does not reflect factual losses or gains: it is simply a substitute for the Kansas v Nebraska, 574 US ___ (2015). Kansas v Nebraska, 574 U.S. ___ (2015), 17–20. 143 [2017] EWHC 300 (Comm), [192]–[202]. 144 See Barnett (n7) ch 6. Cf Morris Garner v One Step (Support) Ltd [2018] UKSC 20 [80] (Lord Reed with whom Lady Hale, Lord Wilson and Lord Carnwath agreed). 145 C Rotherham, ‘Book Review: Accounting for Profit for Breach of Contract’ [2012] LMCLQ 134, 136. 146 Barker (n2) 269–74. 147 [1995] 1 WLR 713. 148 Ibid, 718. 141 142

Gain-based damages  329 right.149 If one takes the view that such an award is restitutionary, then it can be argued that the user fee reflects the ‘transfer of value’ the defendant received as a result of the wrong, and should be calculated according to the objective market value.150 Under a proprietary analysis, the award reflects the defendant’s gain of the use of the claimant’s asset.151 Under a partial disgorgement analysis, it might be argued that no actual profit was made, and thus that no award would be available.152 However, it has been argued that profits include ‘negative profits’ (i.e. expenses saved), and accordingly, the defendants could be required to disgorge the fair rental they should have paid the claimants.153 There is no clarity in cases on which method of calculation is to be preferred, or when an objective measure is to be selected over a subjective measure, or even whether such relief is gain-based. Recently in Marathon Asset Management LLP v Seddon, 154 Leggatt J attempted to impose a general pattern on the calculation of reasonable fee awards, and proposed the following scheme: 1. If there was an alternative means by which the defendant could have obtained the benefit, the benefit will be valued according to market value.155 2. If the defendant could not have obtained the benefit from another source, it should be asked whether it was reasonable to expect the plaintiff to sell the benefit to the defendant for a reasonable fee. In this case, the benefit will be valued by the reasonable fee that the plaintiff could have charged.156 3. If the defendant could not have reasonably been expected to purchase the benefit from elsewhere or where it was not reasonable for the plaintiff to sell, the benefit should be assessed according to the amount of profit made by the wrongdoer which is fairly attributable to the breach (either through an account of profits and apportionment or through a percentage of profits through a licence fee).157 It is unclear how this scheme will be received because of the unsettled status of gain-based damages in England and Wales, particularly in light of the even more recent decision in Morris Garner v One Step (Support) Ltd.158 In Morris Garner, Lord Sumption seems to see a continuing role for gain-based relief in the area of reasonable fees,159 but the majority does not.160 Another factor which will affect the calculation of gain-based damages and the choice between a reasonable fee and a full disgorgement of profit is the limitations which apply: causation, remoteness, allowances for skill and effort and equitable defences.

151 152 153 154 155 156 157 158 159 160 149 150

E.g., Stevens (n62) E.g., Edelman (n7) 87. E.g., Harder (n100) 217–18. Stevens (n62) 81–82. E.g., Barnett (n7) 158. [2017] EWHC 300 (Comm). Ibid, [232]. Ibid, [233]. Ibid, [236]. [2018] UKSC 20. Ibid, [110]–[111] (Lord Sumption). Ibid, [64]–[79] (Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed).

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6

CAUSATION, REMOTENESS, ALLOWANCES AND EQUITABLE DEFENCES

It is axiomatic that for gain-based relief, a profit must be identified, and the profit must be in some way linked to the breach. However, there is uncertainty as to what causation, remoteness, and attribution principles apply (if any) in relation to gain-based damages. This also leads to questions as to how allowances for skill and effort and equitable defences operate, particularly in a common law context, and whether such limitations should also operate in relation to reasonable fee awards. 6.1

The Process of Taking an Account

Where disgorgement is concerned, the taking of an account of profits has two stages. In the first stage, the claimant is provided with an account of the defendant’s financial affairs insofar as they relate to her claim. Once a profit has been identified, it can be stripped. This is the second stage. Importantly, the profits are usually the defendant’s net profits, rather than the gross receipts.161 Generally, the defendant is not required to account for more profit than he has received.162 However, if it is impossible to work out whether the profit is the defendant’s or the claimant’s, or if the defendant’s conduct has been fraudulent, courts may not apportion the gain.163 Similarly, if a trustee makes a profit by misapplying trust money, it is likely that the claimant will be entitled to the entire profit.164 Calculation of profit can be difficult and expensive, and it has been noted in the context of intellectual property breaches and breach of confidence that claimants are reluctant to claim accounts of profit as a result.165 Courts have recognised these difficulties,166 and have noted that ‘mathematical exactitude is generally impossible’.167 As noted above at Section 5.7, the process of calculating a reasonable fee award is radically uncertain, and there seems no clear process for calculating such awards.

Patel v London Borough of Brent [2003] EWHC 3081, [2004] 3 PLR 1 [29]; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 154 (Lord Wright); O’Sullivan v Management Agencies & Music Ltd [1985] QB 428, 458 (Dunn LJ). See Devonshire (n14) 11. 162 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 108–9 (Mason J), citing Vyse v Foster (1872) LR 8 Ch App 309, 333 (James LJ). 163 Hospital Products (n162) 109–10 (Mason J). 164 Scott v Scott (1963) 109 CLR 649; Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSLWR 440. 165 M Gronow, ‘Restitution for Breach of Confidence’ (1996) 10 Intellectual Property Journal 219; T Aplin, L Bently, P Johnson and S Malynicz, Gurry on Breach of Confidence (2nd edn, Oxford University Press 2012) [20.13]. 166 Warman (1995) 182 CLR 544, 558; Colbeam Palmer Ltd v Stock Affiliates Ltd (1968) 122 CLR 25, 37 (Windeyer J); My Kinda Town Ltd v Soll [1983] RPC 15, 58. 167 Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101, 111 (Mason CJ, Deane, Dawson and Toohey JJ). 161

Gain-based damages  331 6.2

Causation and Remoteness

In breach of fiduciary duty cases where disgorgement is required, the causation test is liberal, and there is no need to make out the ‘but for’ test.168 The breach need only be ‘a cause’ of the gain, not the predominant cause.169 However, in CMS Dolphin Ltd v Simonet, Lawrence Collins J observed that there must be ‘some reasonable connection’ between the breach and the profits.170 The ‘but for’ test may be applied to fiduciaries where there is an antecedent profit-sharing agreement.171 Smith has argued that, in light of his theory of primary attribution, there is no need to establish causation or remoteness with respect to fiduciary gains.172 However, Lee has suggested that even if Smith’s approach is adopted, the case law shows the courts still need to apply causal and remoteness principles to gains made by a fiduciary.173 The causal test for gain-based damages for other wrongs is not well articulated. Paragraph 51(5) of the US Restatement proposes an holistic approach which merges factual causation with legal causation.174 Mark Gergen has suggested that a ‘but for’ approach is preferable in the US context.175 Similarly, Graham Virgo has suggested a ‘but for’ test in the English context.176 In other words, the courts should ask whether the defendant would have made the profit but for the breach. This is, however, an area which requires further investigation. The difficulties with calculating profits could be dealt with by applying the liberal causation rule from breach of fiduciary duty across the board, with an added requirement for other kinds of wrong such as breach of contract, tort, or breach of privacy that any breach be advertent and conscious. The burden of proof should then shift to the defendant to prove that the breach did not cause the gains in question, as the defendant will always possess better information about the gain than the claimant. The causal test for reasonable fee awards has not yet been explored in case law. It is likely it will be impossible to establish until the nature of the award itself becomes more settled. 6.3 Allowances Causation principles may have ramifications for allowances. In assessing net profit for disgorgement, courts make allowances for certain expenses incurred by the defendant.177 First, they sometimes allow specific disbursements, such as expenditures of money, as well as

See e.g., Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; Novoship (UK) Limited & ors v Nikitin & ors [2015] QB 599, [2014] EWCA Civ 908. 169 C Mitchell, ‘Causation, Remoteness, and Fiduciary Gains’ (2006) 17 KCLJ 325, 332; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No. 2) (1998) 29 ACSR 290, 297. 170 [2001] EWHC Ch 415 [97]. See also Maguire v Makaronis (1997) 188 CLR 449, 468. 171 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 [36] (Elias CJ), [54] (Gault J); Murad v Al-Saraj [2005] EWCA Civ 959, [2005] All ER (D) 503 [160] (Clarke LJ, dissenting). 172 Smith (n37) 103; Smith (n48) 630. 173 Lee (n40) 35–8. 174 American Law Institute, Restatement (Third) of Restitution and Unjust Enrichment (2011) §51(5). See M P Gergen, ‘Causation in Disgorgement’ (2012) 92 Boston University Law Review 827, 828. 175 Gergen (n174) 828. 176 Virgo (n100) 434. 177 M Harding, ‘Justifying Fiduciary Allowances’ in A Robertson and TH Wu (eds), The Goals of Private Law (Hart 2009) 346–7. 168

332  Research handbook on remedies in private law skilled labour by the defendant.178 Secondly, courts have credited the defendant with an allowance which is not specifically itemised, but more of an ‘all things considered’ allowance.179 In Warman International Ltd v Dwyer,180 the Australian High Court thought it would be inappropriate to compel a dishonest fiduciary disgorge his entire profit when some of the profits had been made by his own skill. There was some lack of clarity,181 but in the event, the court seemed to use causation to justify its conclusion, saying that ‘the relevant proportion of the increased profits is not the product or consequence of the plaintiff’s property but the product of the fiduciary’s skill, efforts, property and resources’.182 This was controversial because Dwyer was remunerated despite his dishonesty and his deliberate breach.183 Courts and commentators have endorsed the suggestion that allowances are made because the profit obtained by the defendant is insufficiently causally connected to the breach.184 It is certainly true that courts distinguish between profits which arise directly from the breach and profits which do not. But in some cases, allowances recognise the defendant’s skill and effort despite the fact that his acts caused the gain, and thus, this is a matter of apportionment rather than an allowance.185 Others have argued that remoteness justifies allowances; in other words, profits will not be awarded when they are too remote.186 However, Harding has suggested that remoteness ‘tells us nothing meaningful about how allowances may be justified’,187 because it does not provide clear criteria for when allowances will or will not be allowed. Another justification for allowances is desert – namely, that the defendant expended time and skilled labour and deserves some recognition of this. Because desert gives rise to a claim of propriety (that is, it is ‘proper’ in the circumstances), not to an entitlement (that is, a right), it seems to be a good explanation for a discretionary allowance.188 However, since desert is personal and specific, it seems appropriate that the defendant must justify to the plaintiff why he deserves an allowance against her. Consequently, it does not sit well with a case like Warman, where the defendant’s profits did not benefit the plaintiff. Moreover, a desert-based analysis does not address the more utilitarian concerns of law-and-economics scholars who seek to encourage entrepreneurial skills in society and ensure that accounts of profit are not

178 Brown v Litton (1711) 1 PWms 140, 24 ER 329; Yates v Finn (1880) 13 Ch D 839; Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433[153] (Tipping J). 179 Brown v De Tastet (1821) Jac 284; 37 ER 858; Featherstonhaugh v Turner (1858) 25 Beav 382, 53 ER 683; Lord Provost of Edinburgh v Lord Advocate (1879) 4 App Cas 823; Phipps v Boardman [1964] 1 WLR 993; O’Sullivan v Management Agencies & Music Ltd [1985] QB 428. 180 (1995) 182 CLR 544 (‘Warman’). 181 Devonshire (n14) 69. 182 Warman (1995) 182 CLR 544, 562 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ). 183 Cf Boardman v Phipps [1967] 2 AC 46, 104 (Lord Cohen), 112 (Lord Hodson); Guinness plc v Saunders [1990] 2 AC 663, 701 (Lord Goff). 184 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144–5 (Lord Russell), 153 (Lord Macmillan); Chan v Zacharia (1984) 154 CLR 178, 199 (Deane J); Warman (1995) 182 CLR 544, 562; Murad v Al-Saraj [2005] EWCA Civ 959, [2005] All ER (D) 503 [72]–[79] (Arden LJ). See also Edelman (n7) 104–5, 171–2; Virgo (n100) 509; G Virgo, ‘Restitutionary Remedies for Wrongs: Causation and Remoteness’ in C E F Rickett (ed.), Justifying Private Law Remedies (Hart 2008) 301, 309–10, 325–6; Devonshire (n14) 70. 185 Barnett and Harder (n16) 371. 186 Warman (1995) 182 CLR 544, 561. See also Burrows, The Law of Restitution (n100) 688–9. 187 Harding (n177) 349. 188 Ibid.

Gain-based damages  333 over-deterrent.189 It has also been suggested that allowances are intended to prevent unjust enrichment, rather similar to counter-restitution and principles of restitutio in integrum in rescission, such that the claimant is not unjustly enriched by certain services, and that this sits better with Warman.190 It is presently unclear to what extent allowances apply to accounts of profit awarded for tort and breach of contract. It is suggested that they should apply to accounts of profit awarded for tort and breach of contract. It appears that allowances may be awarded for reasonable fee awards for breach of contract.191 How this interacts with other areas of the law is unclear. 6.4

Bars to Relief

The availability of gain-based damages may also be limited by the presence of equitable discretionary factors and bars to relief (such as delay and acquiescence, lack of clean hands and hardship).192 These may prevent the award of accounts of profit in equitable causes of action such as breach of fiduciary duties. The position is less clear regarding accounts of profit for breaches of intellectual property rights. At the least, delay and acquiescence can lead a court to award a reasonable fee rather than account of profits for some intellectual property infringements, although it appears that there are many factors at play.193 The applicability of bars to relief to gain-based awards in the common law is uncertain and controversial unless such awards are made pursuant to Lord Cairns’ Act (such as those in Wrotham Park). However, it has been argued that courts effectively take such bars into account, and that, for example, delay is one reason for courts choosing a ‘reasonable fee measure’ for some common law awards that are (arguably) gain-based.194 Hence, referring again to Cunnington’s criteria for choosing between full disgorgement and a reasonable fee award, if discretionary considerations lead a court to decline to award full disgorgement, it may be appropriate to award a reasonable fee instead. This is particularly the case in relation to delay and acquiescence.195

7 CONCLUSION The law relating to gain-based damages is still in a state of confusion and flux. There are fertile grounds for further study and discussion in many areas, as well as areas upon which courts can offer clarification. In relation to the normative basis for disgorgement, it is suggested that more research needs to be done on whether disgorgement works in fact to deter, and how disgorgement is perceived See, e.g., F Easterbrook and D Fischel, ‘Contract and Fiduciary Duty’ (1993) 36 J L & Econ 425. E Bant and M Bryan, ‘Defences, Bars and Discretionary Factors’ in E Bant and M Bryan (eds), Principles of Proprietary Remedies (Thomson Reuters 2013) [11.140]. 191 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 [44] (Mance LJ). 192 Barnett and Harder (n16) 374–6. 193 D Brennan, Retransmission and US Compliance with TRIPS (Kluwer Law International 2003) 199. 194 Barnett (n7) 164. 195 Cf Cunnington, ‘The Assessment of Gain-based Damages’ (n100) 572–3. 189 190

334  Research handbook on remedies in private law by litigants and fiduciaries. The extension of gain-based damages to common law causes of action can be principled, but there remains much work to be done by the courts and academics until a more coherent body of law can be developed. In essence, the courts are still confused as to how to apply Lord Nicholls’ ‘legitimate interest’ test from Blake, and this confusion is understandable. It is difficult for courts to ascertain when to award different measures of gain, and even whether some awards, such as the ‘reasonable fee’ award, are restitutionary, compensatory or something else. Finally, more guidance needs to be given by courts and academics on how to measure gain-based awards, and how limitations on such awards work.

PART IV INSIGHTS FROM OTHER JURISDICTIONS

18. Remedies for breach of contract in Scots law Laura Macgregor

1 INTRODUCTION Certain parts of Scots law are characteristic of the common law tradition, whereas other parts are characteristic of the civilian tradition. Whilst arguably every legal system is ‘mixed’ to some degree, Scots law in particular is identified as a classic ‘mixed’ legal system,1 and has been likened to South African law in this respect. Views differ, however, on the respective strengths of the component parts and times at which English influence came to be felt most keenly.2 The Scots law of contract reflects this ‘mixed’ heritage. Amongst the parts most obviously influenced by English law one would identify rescission for breach given that Roman law did not contain a generalised remedy of termination for breach.3 Quantification of damages, and concepts such as mitigation or remoteness are very similar in both countries. English texts and cases are routinely used by practitioners and courts in these areas. Other parts of the law of contract in Scotland reflect its civilian heritage. It has no concept of consideration, allowing it to recognise enforceable unilateral promises.4 It possesses an ancient common law third party right or jus quaesitum tertio, recently placed onto a statutory footing.5 Other differences between the two legal systems are statutory in nature, relating to, for example

On the meaning of ‘mixed legal system’ see V V Palmer, ‘Mixed Jurisdictions’ in J M Smits (ed.), Elgar Encyclopaedia of Comparative Law (2nd edn, Edward Elgar 2012) 590. 2 The debates can be understood from the following sources: W D H Sellar, ‘Scots Law: Mixed From the Very Beginning? A Tale of Two Receptions’ (2000) 4 EdinLR 3; N Whitty, ‘The Civilian Tradition and Debates on Scots Law’ (1996) Tydskrif vir die Suid-Afrikaanse Reg 227, in particular at 230–3; H MacQueen and W D H Seller, ‘Unjust Enrichment in Scots Law’ in E J H Schrage (ed.), Unjust Enrichment, The Comparative Legal History of the law of Restitution (Duncker and Humbolt 1995) 289; H MacQueen ‘Scots law’ in J M Smits (ed.), Elgar Encyclopaedia of Comparative Law (2nd edn, Edward Elgar 2012) 789, 790; K Reid and R Zimmermann, ‘The Development of Legal Doctrine in a Mixed System’ in K Reid and R Zimmermann (eds), A History of Private Law in Scotland (Oxford University Press 2000) vol 1, 12–13. 3 T Naudé, ‘Termination for Breach of Contract’ in H MacQueen and R Zimmermann (eds), European Contract Law: Scots and South African Perspectives (Edinburgh University Press 2006) 280 at 281. 4 Writing is required for the constitution of a unilateral obligations relating to the creation, transfer, variation or extinction of a real right in land; and for unilateral gratuitous obligations, except those given in the course of a business, see Requirements of Writing (Scotland) Act 1995, s 1(2)(a)(i) and (ii). 5 Contract (Third Party Rights) (Scotland) Act 2017, available at http:​/​/​www​.legislation​.gov​.uk/​asp/​ 2017/​5/​contents/​enacted, accessed 17 May 2019. 1

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Remedies for breach of contract in Scots law  337 misrepresentation6 and rectification.7 Some of the statutory differences are relatively subtle, for example those impacting on unfair terms.8 Bearing in mind the focus of this book on English law, the aim of this chapter is to explore the most important parts of the Scots law of breach of contract which differ significantly from English law. Some of these areas are unclear or in need of development. Although there may be several possible reasons for this lack of clarity, a likely reason is the small number of cases decided by the courts from year to year. This reflects, of course, the small population of the country.9 Often the leading precedent on a particular issue may date from the nineteenth century and prove inappropriate for application in a modern context. Although the small number of reported cases presents a challenge to the development of the law, there are reasons for optimism. The Scottish Law Commission (SLC) has recently concluded its Project on Contract Law in light of the Draft Common Frame of Reference (DCFR).10 In the Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses,11 the SLC did not recommend a full statutory restatement of the law on breach of contract, an option considered in its earlier Discussion Paper.12 Rather, the SLC recommended reform of three parts of the law of breach of contract: the law of mutuality; restitution after rescission; and contributory negligence. The impact of the SLC’s (as yet unenacted) recommendations are considered below. The chapter is split into four sections. Following this introduction, in Section 2 the concept of mutuality is explained. This is a central concept which has implications for all of the issues discussed in the chapter. Section 3 explores the central role played by specific implement in Scots law. Somewhat controversially, this remedy is described as the ‘primary’ remedy for breach of contract. Section 4 focuses on the degree of importance which a breach has to reach in order to justify rescission by the innocent party. Scots law has not adopted the English classification of contract terms into conditions, warranties and intermediate terms. The important question for the Scots lawyer is, rather, whether the breach can be described as ‘material’. If so, the innocent party has the right to rescind and if not, that party is limited to an award of damages. Here Scots law may have been inspired by English law without slavishly following it. Section 4 also considers restitution following breach of contract.

The Misrepresentation Act 1967 does not apply in Scotland, meaning that damages are not available for innocent misrepresentation. For negligent misrepresentation in Scots law, see Law Reform (Miscellaneous Provisions) Scotland Act 1985, sections 10. 7 Law Reform (Miscellaneous Provisions) Scotland Act 1985, ss 8, 8A and 9. 8 Part 1 of the Unfair Contract Terms Act 1977 applies to England and Wales and Part II to Scotland. 9 The most recent data available from the National Records of Scotland suggests that it is 5,438,100, see https:​/​/​www​.nrscotland​.gov​.uk/​files/​/​statistics/​population​-estimates/​mid​-18/​mid​-year​-pop​-est​-18​ -pub​.pdf, accessed 17 May 2019. 10 https: ​ / ​ / ​ w ww ​ . scotlawcom​ . gov​ . uk/​ l aw​ - reform/​ l aw ​ - reform​ - projects/ ​ c ontract ​ - law ​ - light​ - draft​ -common​-frame​-reference​-dcf/​, accessed 17 May 2019. 11 Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses (Scot Law Com No. 252, March 2018). 12 Discussion Paper on Remedies for Breach of Contract (DP No. 163, July 2017): https:​/​/w ​ ww​ .scotlawcom​.gov​.uk/​files/​3114/​9968/​2972/​Discussion​_Paper​_on​_Remedies​_for​_Breach​_of​_Contract​ _DP​_No​_163​.pdf, accessed 17 May 2019. 6

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2 MUTUALITY A concept of central importance in the Scots law of contract,13 mutuality permeates all aspects of breach. Found in civilian systems,14 it is derived from the Roman exceptio non adimpleti contractus, or defence of the unperformed contract.15 Erskine, the Scottish institutional writer, explained: No party in a mutual contract, where the obligations of the parties are the causes of one another, can demand performance from the other, if he himself either cannot or will not perform the counterpart: for the mutual obligations are considered as conditional.16

The remedy of retention of performance is based on the broad concept of mutuality (mutuality being wider, and encompassing more than retention alone). Lord Drummond-Young explained that mutuality dictates that ‘the obligations of one party are regarded as the counterparts of the obligations of the other, and if one party fails to perform his obligations the other is relieved from his own obligations to perform’.17 Looking in more detail at the remedy of retention of performance, this allows a party faced with breach to retain or temporarily suspend her own performance, in order to encourage the party in breach to perform.18 The remedy appears, from the large number of decided cases, to be a popular one. As a self-help remedy it avoids the need for litigation. It is particularly useful in long-term contracts, or where the parties repeatedly contract with one another. By encouraging the parties to negotiate their way out of disputes in a ‘low key’ manner, the impact on their trading relationship may be minimal, and certainly less damaging than the other options available, namely damages or rescission. Retention operates only where the obligations are counterparts of one another. The test for deciding when obligations are counterparts of one another has historically been unclear. Clarity seemed to have been achieved following a Scottish appeal to the Supreme Court in 2010, Lord Hope confirming that all obligations on the one side of a contract are presumed to be the counterparts of all the obligations on the other side.19 This paved the way for wide use of retention as a remedy. More recently, Lord Drummond-Young has, in two Inner House judgments, differed from the Supreme Court’s authoritative statement. Eschewing the idea of a presumption, he has suggested instead that a new category of obligations exists, which he calls ‘substantive’ or

As recognised by Lord Drummond-Young in the Inner House case, McNeill v Aberdeen City Council [2013] CSIH 102, 2014 SC 335, para [20]. 14 In McNeill at para [21] Lord Drummond-Young described it as ‘a common feature of civil law systems’. 15 R Zimmermann, The Law of Obligations (Juta and Co 1990) 801, fn 133. 16 J Erskine, An Institute of the Law of Scotland (1st edn, 1773) III,iii,86. The works of the Scottish institutional writers are treated as a formal source of law. 17 McNeill v Aberdeen City Council [2013] CSIH 102, 2014 SC 335, para [21]. 18 W W McBryde, The Law of Contract in Scotland (3rd edn, Thomson/W Green 2007) paras 20-47, 20-62–20-87. 19 Inveresk plc v Tullis Russell Papermakers Ltd [2010] UKSC 19, [2010] SC(HL) 106, per Lord Hope at para [33], relying on McBryde (n18) para 20-70. Anyone seeking to prove that retention is not available bears the onus of proving that the obligations in question are not counterparts of one another. 13

Remedies for breach of contract in Scots law  339 ‘fundamental’ obligations.20 Only these obligations can be counterparts of one another, and, as a result, can be retained in the event of breach. It follows that retention is not available where the obligation breached is an incidental or ancillary one. This classification is entirely novel, not having appeared in Scots law before the case in question. Given that these dicta conflict with Supreme Court authority, strictly speaking, they would not bind a court considering the issue in a future case. Thus, there is ‘significant uncertainty’ in the law at present.21 In an Inner House case decided in 2018 the problems were compounded when the judges, although agreed on the disposal of the case, differed markedly in their analysis of retention.22 Given that an appeal to the Supreme Court is pending, clarity should soon be achieved. As already stated, retention of performance is only one aspect of mutuality. It is also said to form the basis of the remedy of rescission.23 In addition, it has historically been thought to exert a ‘barring’ effect, preventing or limiting a party in breach from enforcing performance of the obligations due to be performed by her contractual counter-party.24 A famous line of cases, for example, considered the extent to which a party in breach, through the operation of mutuality, would be prevented from recovering the full contract price which was otherwise due.25 Because of significant doubt over the ambit of this ‘barring’ effect, the SLC recently recommended that the law be clarified in a statutory statement. The proposed reform aims to abolish any rule of law to the effect that any party who is in breach of contract is thereby not entitled to exercise any right or pursue any remedy arising from a breach of contract by the other contracting party.26 The draft Contract (Scotland) Bill containing the relevant provisions has, at the time of writing, not yet been enacted by the Scottish Parliament.

3

SPECIFIC IMPLEMENT

(a) Introduction The remedy of specific performance (known in Scots law as specific implement) is a particularly important one in the Scottish scheme of remedies for breach of contract. Reflecting adherence to the principle of pacta sunt servanda, its existence in Scots law marks out that legal system as belonging, at least in part, to the civilian tradition.27 It has also attracted the 20 McNeill v Aberdeen City Council (No. 2) [2013] CSIH 102, 2014 SC 335, para [27]; JH & W Lamont of Heathfield Farm v Chattisham [2018] CSIH 33, para [30]. 21 Report on Review of Contract Law (n11) para 11.9. 22 JH & W Lamont of Heathfield Farm v Chattisham [2018] CSIH 33. For persuasive criticism of the case, see L Richardson, ‘The Scope and Limits of the Right to Retain Contractual Performance’ (2018) Jur Rev 209. 23 McNeill v Aberdeen City Council [2013] CSIH 102, 2014 SC 335, para [23]. 24 McBryde (n18) paras 20-48–20-52. 25 The law in this area is complex, and certain of the cases appear contradictory; see Ramsay v Brand (1898) 25R 1212; Steel v Young 1907 SC 360; Forrest v Scottish County Investment Co 1915 SC 115, 1916 SC (HL) 28; Graham v United Turkey Red Co Ltd 1922 SC 533. 26 Report on Review of Contract Law (n11) recommendation No. 31; Draft Contract (Scotland) Bill, ss 16(1) and 17, with notes. 27 For an excellent exploration of the history, see A Smith, ‘Specific Implement’ in K Reid and R Zimmermann (eds), A History of Private Law in Scotland (Oxford University Press 2000) vol II, Obligations, 195. For an analysis of the modern law by the current author see L Macgregor, ‘Specific

340  Research handbook on remedies in private law attention of scholars from outside Scotland.28 It is considered to be the innocent party’s ‘legal right’: the innocent party is not forced to opt for damages if the latter would provide an adequate remedy. To quote Lord Hope: It has never been the law in Scotland that a party can escape from the obligations that he has freely entered into simply because the performance of them has become oppressive or unduly burdensome.29

Its status nevertheless remains controversial: commentators differ on whether it is correct to describe it as a ‘legal right’, or an ‘ordinary’ or ‘primary’ remedy. Experience of commercial leasing litigation in the late 1990s illustrates that it can be a highly useful remedy, particularly in cases where it is extremely difficult to quantify a loss.30 In this part of the chapter these issues are explored, the analysis ending with discussion of a recent case in which the Inner House suggested that the innocent party can, in effect, ‘implement’ a payment obligation, and is not forced to claim damages instead.31 This provides further evidence of the high value placed on performance in Scots law. A contracting party faced with breach can ask the court to grant decree of specific implement, which is, in essence, a decree requiring the party in breach to perform her contractual obligations. The pursuer’s crave (or request to the court) to grant specific implement is usually coupled with a crave for damages in the alternative. This means that if the court refuses to grant specific implement through the exercise of its discretion (as discussed below) the court can award damages.32 Given that the effect of failure to comply with a decree of specific implement is akin to a contempt of court, it is not surprising that such failure attracts severe penalties. Although imprisonment for a maximum period of six months remains a possible sanction for wilful refusal to comply with an order,33 other alternatives are open to the court, such as an order for payment of a specific sum by the respondent to the applicant, or such other order as appears

Implement in Scots Law’ in J Smits, D Haas and G Hesen, Specific Performance in Contract Law: National and Other Perspectives (Intersentia 2008) 67. 28 E McKendrick, ‘Specific Implement and Specific Performance: A Comparison’ 1986 SLT (News) 249; S Herman, ‘Specific Performance: A Comparative Analysis’ (2003) 7 EdinLR 5 (Part 1) and 194 (Part 2); 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 Di Matteo, Q Zhou, S Saintier and K Rowley (eds), Commercial Contract Law: Transatlantic Perspectives (Cambridge University Press 2013) 466. 29 D Hope, ‘Specific Implement and Specific Performance: Are They Really Much The Same?’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters 2016) 313 at 321. 30 See the commercial leasing case, Douglas Shelf Seven Ltd v Co-operative Wholesale Society Ltd and Kwik Save Group plc [2007] CSOH 53. Lord Reed’s judgment, quantifying the loss, extends to 625 paragraphs. This illustrates how difficult it can be properly to quantify loss. Although there is no sign that the pursuer sought specific implement, certainly that route would have avoided the difficulties of quantification. 31 AMA (New Town) Ltd v Law [2013] CSIH 61, 2013 SC 608. 32 This is known as a ‘crave’. If proceedings are raised in the Sheriff Court. Proceedings can be raised in the Court of Session either on ‘petition’ where the order sought is referred to as the prayer, or by summons where the order sought is described as the ‘conclusion’. 33 Law Reform (Miscellaneous Provisions) (Scotland) Act 1940, s 1(1).

Remedies for breach of contract in Scots law  341 to the court to be just and equitable in the circumstances.34 The court may also, in the case of a decree for the delivery of goods, grant a warrant to sheriff officers35 to search premises, take possession of and deliver to the applicant any such goods found on the premises.36 Given the existence of alternative remedies, it seems unlikely that a modern Scottish court would seek to imprison a party in wilful breach of a decree of specific implement,37 and data recently obtained suggests that imprisonments on such grounds are not taking place.38 The background of imprisonment remains important, however, because it explains the need for precision39 in the drafting of the pursuer’s crave. The order granted by the court mirrors the terms of the crave very closely. The crave must therefore set out in detail exactly what the party in breach must do properly to perform the contract. Interestingly, a majority of those who responded to the recent SLC consultation were in favour of retaining imprisonment as the ultimate sanction for wilful refusal to comply with a decree.40 The SLC did not recommend any change in the law in the broad area of specific implement. (b)

The Status of Specific Implement as a ‘Primary’ Remedy

The high status of specific implement in Scots law has been asserted many times, both judicially and in academic commentary. The classic statement of the law was made by Lord Watson in the House of Lords case, Stewart v Kennedy, decided in 1890: But in Scotland the breach of a contract for the sale of a specific subject such as a landed estate gives the party aggrieved the legal right to sue for implement, and although he may elect to do so, he cannot be compelled to resort to the alternative of an action of damages unless implement is shown to be impossible...41

Law Reform (Miscellaneous Provisions) (Scotland) Act 1940, s 1(2). A sheriff officer is an officer of court who can carry out court processes through diligence, i.e. enforce the repayment of debt through legal processes. If the action is raised in the Court of Session, the relevant officer of court is a Messenger-at-Arms. 36 Law Reform (Miscellaneous Provisions) (Scotland) Act 1940, s 1(2). 37 The Scottish Law Commission recently reviewed the question whether Scots law on this issue complies with the European Convention on Human Rights (Article 5(1)(b) and Article 1 of Protocol 4), concluding that the position was uncertain, see Remedies for Breach of Contract (Scot Law Com DP No. 163, July 2017) paras 6.26 and 6.27. 38 The Scottish Government Justice Analytical Services advised the Scottish Law Commission that none of those civilly imprisoned between April 2011 and April 2015 were imprisoned as a result of wilful failure to comply with a decree of this type; see Remedies for Breach of Contract (DP No. 163, July 2017), para 6.29. A Scottish sheriff recently refused to imprison a debtor for failure to comply with a court order enforcing performance of a conditional sale agreement relating to a car, Moneybam No. 1 Ltd v Bell 2016 SLT (Sh Ct) 419. 39 The requirement of precision was fully analysed in Retail Parks Investments Ltd v The Royal Bank of Scotland plc (No. 2) 1996 SLT 669. It should not be overstated: the Inner House in this case was clearly suspicious of the tenant’s argument that the decree of specific implement lacked precision, Lord McCluskey commenting: ‘[t]he defenders have, for nearly 20 years used and occupied the premises as bank offices without their use or occupation having given rise to any apparent difficulty or misunderstanding. On the face of it there was no reason why that use and occupation should not have continued for the remaining years of the lease.’ This can be contrasted with Lord Hoffmann’s more strict approach in a House of Lords English appeal on very similar facts: Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] 3 All ER 297. These cases are explored further in Section 3(d). 40 Report on Review of Contract Law (n11) para 15.24. 41 (1890) 17 R (HL) 1, at 10, and see also Lord Herschell at 5 and Lord Macnaughten at 11. 34 35

342  Research handbook on remedies in private law This emphasis has continued in modern times, Lord President Rodger stating that in Scotland there is no doubt that specific implement is available ‘as a matter of right’.42 Others have described it instead as an ‘ordinary remedy’43 or the ‘ordinary means whereby performance of a positive obligation can be compelled’.44 The Scottish pursuer ‘is perfectly entitled to say, I do not choose to take damages – I prefer to insist for implement’.45 More recently a debate emerged between Scottish commentators on the accuracy of the description ‘primary’ remedy. McBryde, responding to the use of this description by MacQueen and Macgregor,46 considered the description to be misleading.47 He drew attention to the fact that a pursuer is not forced to use specific implement: she may choose to claim damages instead. McBryde highlighted the fact that the few reported cases suggest that most pursuers opt instead to claim damages. The court can, in the exercise of its discretion, withhold the remedy from the pursuer. In the next section this judicial discretion is explored. (c)

The Court’s Discretion to Refuse the Remedy

Lord Watson in Grahame v Magistrates of Kirkcaldy in 1881 provided the classic statement on the operation of the discretion: It appears to me that a superior Court, having equitable jurisdiction, must also have a discretion, in certain exceptional circumstances, to withhold from the parties applying for it that remedy to which, in ordinary circumstances, they would be entitled as a matter of course. In order to justify the exercise of such a discretionary power there must be some very cogent reason for depriving litigants of the ordinary means of enforcing their legal rights.48

Notably, Lord Watson described specific implement both as an ‘ordinary remedy’ and a ‘legal right’. The language he used is important – the court will withhold the remedy only very rarely: in ‘exceptional circumstances’ and where ‘cogent reasons’ exist. The defender thus bears the onus of proving that this is the case. These expressions have proved highly influential, and were emphasised in later cases.49 Whereas an English court in the exercise of its discretion may only exceptionally award specific performance where damages would provide an inadequate

Highland and Universal Stores Ltd v Safeway Properties Ltd 2000 SLT 414 at 422. Lord Herschell in Stewart v Kennedy (1890) 17 R (HL) 1 at 5 stated that in ‘Scotland, specific implement is one of the ordinary remedies to which a contracting party is entitled’. 44 T B Smith, Short Commentary on the Law of Scotland (W Green and Sons 1962), p. 854, citing J Dalrymple, Viscount Stair, Institutions of the Law of Scotland (2nd edn, 1693, reprinted by D M Walker, University Presses of Edinburgh and Glasgow 1981) I,17,16; Erskine (n16) III,3,86; and George Joseph Bell, Principles of the Law of Scotland (4th edn, Old Studies in Scots Law 1839) s 29. 45 Lord Justice-Clerk Hope in Seaforth’s Trustees v Macaulay (1844) 7 D 180 at 181. 46 See H MacQueen and L Macgregor, ‘Specific Implement, Interdict and Contractual Performance’ (1999) 3 EdinLR 239. 47 McBryde (n18) para 23-08. 48 (1882) 7 App Cas 547 at 557, quoted by Lord Reid in White & Carter (Councils) Ltd v McGregor 1960 SC 276, 1962 SC(HL) 1. 49 White & Carter (Councils) Ltd v McGregor 1960 SC 276, 1962 SC(HL) 1 per Lord Reid at 11; Mackay v Campbell 1966 SC 237; Stockton Park Leisure Ltd v Border Oats Ltd 1990 SC 209; Highland and Universal Stores Ltd v Safeway Properties Ltd 2000 SLT 414. 42 43

Remedies for breach of contract in Scots law  343 remedy,50 a Scottish court must award specific implement, unless very strong reasons exist which justify a refusal to do so. There is, it is suggested, significant difference in this area between the law of Scotland on the one hand and the law of England and Wales on the other.51 The discretion to refuse the remedy was introduced into Scots law relatively ‘late’, in case law from the second half of the nineteenth century.52 Judicial dicta suggest that the discretion is part of the court’s inherent ‘equitable jurisdiction’. The reference to equity may lead some to suppose that Scots law has been influenced by English law here (Scots law not having seen the same historic separation between the courts of equity and the common law as took place in England). Scots law has its own idea of equity, recently explored in detail by Carr.53 On the basis of current research there is no convincing reason to attribute the existence of the discretion in Scots law to English influence. In fact, in the cases in which the discretion emerged, the Scottish judges were at pains to emphasise the differences between Scots and English law. In Stewart v Kennedy, for example, the judges stated that English cases on the operation of the discretion are of no assistance to Scots law.54 This position has not changed: Lord Hope recently described English cases as ‘of no help and even perhaps as misleading…’.55 It can be seen, therefore, that the discretion operates in an entirely different way in Scotland as compared to England: the Scottish pursuer is much more likely to be awarded specific implement than the English claimant is to be awarded specific performance. It is true that the Scottish discretion has ‘hardened’ into categories in which specific implement will be refused. In 1877 Lord President Inglis (Scotland’s most senior judge at the time) suggested certain categories in which the remedy had, in the past, been withheld: where performance would be impossible; marriage contracts; and partnership contracts.56 He suggested that to grant specific implement in these cases would be inequitable or contrary to public policy. Drawing on the case law as a whole, it appears that specific implement will not be granted in the following situations, namely where: (1) performance would be inequitable or cause undue hardship; (2) performance would be impossible; (3) performance is readily available from another source; and (4) in contracts involving a personal relationship. The existence of these categories should not lead us to conclude that specific implement is routinely refused by the courts. Within the categories the Scottish courts are reluctant to refuse specific implement. ‘Impossibility’ is interpreted strictly, for example. A debtor’s difficulty in

H G Beale (ed.), Chitty on Contracts (33rd edn, Sweet and Maxwell 2018) vol I, paras 27-011–27-015. 51 On this point the author respectfully differs from the views of the editors of this volume expressed in Campbell and Halson (n28) 466, at 473–4 in particular. 52 As noted by Smith (n27) 195. 53 D J Carr, Ideas of Equity (Edinburgh Legal Education Trust 2017). 54 (1890)17 R (HL) 1, per Lord Herschell at 5: ‘I do not think it would be of any advantage to devote time to an analysis of the English decisions…’; Lord Watson at 9: ‘I do not think that upon this matter, any assistance can be derived from English decisions’; and Lord Macnaughten at 11: ‘if any such cases could be produced it would be no guide to the decision of the present question’. 55 Hope (n29) 313 at 316. 56 McArthur v Lawson (1877) 4 R 1134 at 1136. His views were obiter, the contract in this case containing such fundamental defects that no remedy whatsoever was available. 50

344  Research handbook on remedies in private law procuring signature of a deed by a third party has been treated as irrelevant,57 and a contracting party cannot argue that something is ‘impossible’ because she has entered into competing and inconsistent obligations to different people.58 In one case a court ordered a ship to be sold to a sub-buyer in order to avoid a prohibition on the sale of Spanish ships to foreigners.59 Here the court, in effect, suggested the use of a different contractual structure, facilitating the grant of specific implement by the court. Although it is unlikely that specific implement will be granted in the context of a contract for sale of generic goods, the existence of the consumer buyer’s right to claim either repair or replacement of goods renders this question practically less important (at least in consumer cases).60 Given the existence of these rights derived from a European Directive,61 there is no need for Scots law to develop specific implement to cover the same situation. Finally, even the prohibition against the use of specific implement in the employment context has been undermined. In Scottish cases employees have successfully obtained interdict to prevent their employer from following procedures which would have been in breach of the contract of employment which those parties had entered into.62 Here the employees overcame arguments that the use of interdict,63 in effect, compelled performance of the employment contract. In one of these case, Lord Penrose stated ‘there may be cause for a wider examination of the general rule’ against specific enforcement of employment contracts, continuing: ‘it may have become out-dated, and in a practical sense it may have been superseded by complex forms of employment contract which anticipate the situation which has arisen and provide for it’.64 This short review suggests that it would be wrong to read too much into the mere existence of categories in which specific implement can be refused. The way in which the courts decide cases within the categories requires to be examined: the class of cases in which specific implement is not available is circumscribed.65 (d)

The Commercial Leasing Litigation

The existence of a discretion to refuse specific performance/implement in English and Scots law might lead some to conclude that the position is not so different in the two legal systems. It might be thought that a pursuer/claimant in both legal systems is unlikely to ask for, and unlikely to get, specific implement/performance. A broadly similar view was expressed by McKendrick, writing in 1986.66 This was, however, before the decisions in two high level Purie v Lord Couper (1662) Mor 16, 583; Nisbet v Lord Balmerino (1673) Mor 459 and Milne v Gairden and Campbell (1697) 4 Brown’s Supp 402. 58 Plato v Newman 1950 SLT (Notes) 29. 59 Dampskibaktieselskapet Aurdal and ors v Compania de Navigacion le Estrella 1916 SC 882. 60 Consumer Rights Act 2015, ss 23, 43 and 55. 61 EU Directive 1999/44/EC on certain aspects of the sale of goods to consumers and associated guarantees, L 171/12, 7/7/99. 62 Anderson v Pringle of Scotland 1998 SLT 754 and Peace v City of Edinburgh Council 1999 SLT 712. 63 Interdict is the remedy which one obtains to prevent a party doing an act, and is, in effect, the mirror image of specific implement, which forces a party to perform an act. 64 1999 SLT 712 at 715. 65 A more detailed review of the categories in which specific implement can be refused is provided by the current author in Macgregor (n27). 66 ‘Specific Implement and Specific Performance: A Comparison’ 1986 SLT (News) 249. 57

Remedies for breach of contract in Scots law  345 cases, one Scottish and one English: Retail Parks Investments Ltd v The Royal Bank of Scotland plc (No. 2)67 and Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd.68 The legal issue in both was essentially the same: whether specific performance/implement was available against a tenant in breach of a continuous trading obligation or ‘keep-open’ clause in a commercial lease of a unit in a shopping mall. The decisions were handed down within a year of each other. On the basis of starkly contrasting reasoning, the Scottish Inner House granted specific implement whereas the House of Lords (in the English appeal) refused specific performance. This is not the context in which to examine these cases fully – this task has already been performed several times.69 Admittedly, the facts in the two cases were not entirely analogous: the tenant in the English case objecting to being forced to trade at a loss, whereas there was no evidence that the tenant in the Scottish case was trading at a loss. Nevertheless, the different outcomes suggest that Scots and English law indeed differ in this area. The House of Lords appeal is memorable not least for Lord Hoffmann’s comments comparing Scots and English law in this area.70 He grouped Scots law with civilian countries like France and Germany.71 He concluded: ‘[i]n practice, however, there is less difference between common law and civilian systems than these general statements might lead one to suppose’.72 Admitting that he had made no investigation of civilian systems, he nevertheless indicated that judges in both civilian and common law systems are likely to be motivated by the same factors in denying the remedy.73 These comments are, the author would respectfully suggest, misleading. The different outcomes in these cases point to real difference between Scots and English law. Retail Parks was not an isolated case:74 it was followed shortly afterwards by another Inner House case, Highland & Universal Properties Ltd v Safeway Properties Ltd,75 in which specific implement was again granted. To quote Lord Hope, Highland & Universal ‘has been followed without question in Scotland ever since’.76 Scottish solicitors are acutely conscious that specific implement is potentially available, and continue to use the remedy, particularly in the commercial leasing or property sectors.77 Lord Hope is surely correct to identify ‘fundamental difference’ between Scots and English law here, and to suggest that this position will continue.78 1996 SLT 669. [1997] 3 All ER 297. 69 MacQueen and Macgregor (n46); Macgregor (n27); Campbell and Halson (n28) 466; Hope (n29). 70 See Lord Hope’s discussion of points of disagreement between Lord Hoffmann, on the one hand, and the Scottish Law Lords, Lords Hope and Clyde, on the other, Hope (n29) at 318. 71 [1997] 3 All ER 297 at 301. 72 Ibid. 73 Ibid. 74 Campbell and Halson argue that Retail Parks ‘effected a marked change in the law’, see Campbell and Halson (n28) at 470. Again, the author respectfully differs from this view. 75 Highland & Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297; 2000 SLT 414. 76 Hope (n29) at 325 answering the question posed by his title with an emphatic ‘no’. 77 Campbell and Halson suggest that it is a ‘puzzle’ why any party would seek to use specific performance, Campbell and Halson (n28) at 479. In the author’s experience Scottish solicitors are well aware of it and of its possible use if this is what the client desires. Although there are few reported cases, this fact should be considered against a backdrop of (a) the small number of reported Scottish cases generally; and (b) the possibility of using the existence of specific implement as a bargaining tool when seeking to settle a case. It is particularly appropriate where losses are difficult to quantify; see Douglas Shelf Seven Ltd v Co-operative Wholesale Society Ltd and Kwik Save Group plc [2007] CSOH 53. 78 Hope (n29) at 331. Cf Campbell and Halson (n28) at 475. 67 68

346  Research handbook on remedies in private law (e)

Implement of a Payment Obligation?

AMA (New Town) Ltd v Law, a recent decision of an Extra Division of the Scottish Inner House, made a significant, and controversial, contribution to our understanding of contract remedies in Scots law.79 The dispute centred around settlement of the purchase of domestic houses under three sets of ‘missives’ (contracts for the sale of heritable property). The case is, in fact, three joined cases, the missives in each case being (apart from very minor differences) essentially the same. The purchaser in each case was the same person, a property developer. On the date of settlement, the purchaser failed to pay the purchase price under each set of missives. Normally, one would expect the seller, in response to this failure to pay, to accept non-payment as a material breach, rescind the missives, remarket the property, and claim damages. Those damages would be calculated by deducting the resale price plus the costs associated with the resale, from the contract price. The seller in this case did not do that. Rather, he sought to insist on payment of the contract price in each case. This set of facts engaged the mutuality principle, explained earlier in this chapter. Settlement of a conveyancing transaction involves a number of actions on both sides. The seller delivers the signed ‘disposition’ (the deed which, once registered in the Land Register, transfers title of the property to the purchaser) and other settlement documents to the purchaser, and gives vacant possession of the property. In exchange, the purchaser pays the price. Mutuality dictates that these obligations are reciprocal and are counterparts of one another. The missives in this case were unusual in that the date of entry, on which the price was to be paid, was triggered by a formula. Thus it appeared that the seller had an unqualified right to receive the purchase price as soon as the date of entry was triggered. This is a departure from the normal situation in which obligations on both sides would be counterparts of one another. At first instance the court decided against the seller, refusing to grant decree for payment of the price, the sheriff considering himself bound by another decision on the same facts by a Sheriff Principal.80 This result was welcomed by leading Scottish commentators, concerned that any other result would threaten the existing practice at settlement, where both parties are usually obliged to perform their obligations simultaneously.81 On appeal, however, the Inner House upheld the seller’s right to implement of the price. In reaching its decision, the Inner House drew in particular on White & Carter (Councils) Ltd v McGregor, a Scottish appeal to the House of Lords.82 Lady Dorrian, delivering the unanimous opinion of the court, emphasised the innocent party’s choice: she can either accept repudiation by the party in breach, rescind and seek damages, or refuse to accept repudiation, in which case the contract remains in full force and can be implemented. The party faced with breach may find it difficult to render a performance which is unwanted where the co-operation of the party in breach is required in order to allow the innocent party to render performance. The present case was, according to Lady Dorrian, not such a case: the only ‘co-operation’ required was to pay the price.83 Emphasising that the buyers sought to rely on their own unwill-

[2013] CSIH 61, 2013 SC 608. AMA (New Town) Ltd v McKenna 2011 SLT (Sh Ct) 73. 81 G Gretton and W W McBryde, ‘Sale of Heritable Property and Failure to Pay’ 2012 SLT 17; C Connal, ‘Sale of Heritable Property and Refusal to Pay: Continued’ 2012 SLT 53. 82 1962 SC (HL) 1. 83 2013 SC 608, para [51]. 79 80

Remedies for breach of contract in Scots law  347 ingness to meet their obligations,84 she was unmoved by references in argument to the usual practice in litigation of coupling a crave for specific implement with a crave for damages: this did not mean that the seller could be forced, in this situation, to resort to damages. The seller should, she concluded, be awarded decree for payment of the purchase price. There may have been reasons why the seller did not simply rescind and claim damages. The purchaser, as stated already, was a property developer. It seems that the seller suspected that the purchaser had the funds to pay the purchase price, a fact noted by Lady Dorrian.85 It had simply become inconvenient for the purchaser to settle the transactions and buy the properties. The seller may also have been concerned that, if he remarketed the properties, they would not sell at all. This would have impacted on his ability to quantify his loss: there would be no resale price to compare with the original contract price. There is a parallel here with specific implement (normally only available to enforce performance of a non-monetary breach). Specific implement and ‘implement’ come into their own where problems of quantification are acute. One of the unusual aspects of the decision is the appearance of the language of specific implement in the context of an action for payment of the price. Counsel for the sellers argued that the court could only refuse to grant an action for payment in ‘exceptional circumstances’ where ‘cogent grounds’ existed. Whilst Lady Dorrian did not use the exact same language, she accepted that this was the case.86 Prior to this case it had been generally agreed that specific implement is available to enforce performance of a non-monetary breach only. This case therefore suggests that the court’s equitable jurisdiction exists in the context of an action for payment, just as it does in an action for specific implement. This seems to be an extension of the law. Counsel for the sellers stated in court that he was not aware of any previous case in which the court had exercised its equitable jurisdiction in a payment action.87 Certain of Lady Dorrian’s statement seem to suggest that the court might refuse to implement a payment obligation where the price demanded was exorbitant.88 She did not expand on this point, however. To sum up the impact of this case, on a theoretical level, it underlines the high value traditionally given to performance in the Scots law of contract: that high value is now reflected in the context of payment obligations. The practical repercussions for Scottish conveyancers have already been explored in published scholarship.89 Arguably the Inner House failed fully to account for the principle of mutuality, and the reciprocity of the parties’ various obligations. The case may create problems for settlement of conveyancing transactions in the future. Whether courts will, in future, exercise this new-found equitable power in the context of payment obligations remains to be seen.

86 87 88 89 84 85

Ibid, para [47]. Ibid, para [48]. Ibid, para [54]. Ibid, para [25]. Ibid, para [57]. The practical problems are explored in the two articles already cited at note 81.

348  Research handbook on remedies in private law

4

MATERIAL BREACH AND RESCISSION

(a) Introduction In the modern law, McBryde classifies breaches into trivial, non-material and material.90 A trivial breach can give rise to an action for damages, although those damages will be nominal only. The more significant distinction lies between non-material and material breaches, and only where a breach is material will the innocent party have the right to rescind (in addition, potentially, to a right to damages given that remedies may, unless inconsistent, be cumulated). Exactly what amounts to a material breach is explored below. As already stated, Scots law has not adopted the English classification of contract terms into conditions, warranties and intermediate or innominate terms. (b)

Historical Development

Johnston’s exploration of the history of this area expertly illustrates the reasons why this part of Scots law is mixed in nature.91 He characterises the early Scots law as fragmented, typical of the civilian tradition of the ius commune.92 There was at this time in Scots law no general idea of breach of contract. Mora or delay, for example, was treated as a special type of breach, with its own specific remedies. He suggests that a shift took place between the mid-eighteenth and early nineteenth centuries, the fragmented approach being replaced by a general notion of breach of contract.93 He concludes that ‘it seems almost inevitable’ that this change was inspired by English law.94 Materiality of breach, an issue so crucial in the modern law, is not relevant in the early law: it is omitted from the works of the Scottish institutional writers.95 Its emergence can be traced to nineteenth-century case law,96 specifically Turnbull v McLean & Co.97 In that case, Lord Justice-Clerk Moncreiff stated, in the context of discussion of the innocent party’s right to retention of performance in response to breach by the other party: ‘where one party has refused or failed to perform his part of the contract in any material respect the other is entitled either to insist for implement, claiming damages for the breach, or to rescind the contract altogether, – except so far as it has been performed’.98

McBryde (n18) para 20-88. D Johnston, ‘Breach of Contract’ in K Reid and R Zimmermann (eds), A History of Private Law in Scotland (Oxford University Press 2000) vol II, 175. For other historical analysis see H L MacQueen, ‘Remedies for Breach of Contract: The Future Development of Scots Law in its European and International Context’ (1997) 1 EdinLR 200 and W W McBryde, ‘The Scots Law of Breach of Contract: A Mixed System in Operation’ (2002) 6 EdinLR 5. 92 Johnston (n91). 93 Ibid, 177. 94 Ibid, 178. 95 Ibid, 180. 96 McBryde (n18) para 20-88. 97 (1874) 1 R 730. 98 (1874) 1 R 730 at 738. 90 91

Remedies for breach of contract in Scots law  349 The Lord Justice-Clerk indicated that he considered that there was ‘no material difference in principle’ between Scots and English law on this point.99 It is generally agreed that there are no references to material breach in Scots law prior to Turnbull v McLean & Co.100 Once this idea had been introduced in the case, it quickly put down roots. In Wade v Waldon,101 treated as a leading case on the meaning of material breach, Lord President Dunedin, expressing a view which he considered both ‘familiar law’ and ‘quite well settled by decision’, stated: in any contract which contains multifarious stipulations there are some which go so to the root of the contract that a breach of those stipulations entitles the party pleading the breach to declare that the contract is at an end. There are others which do not go to the root of the contract, but which are part of the contract, and which would give rise, if broken, to an action of damages.102

Most of the authority cited in that case was English. (c)

The Modern Law

Although Scots law may have been inspired by English law in the introduction of an idea of material breach, it did not accept the English classification of terms into conditions and warranties, and, later, intermediate or innominate terms. This raises the question of whether this difference is superficial only, and whether the two legal systems are, in effect, similar. English law looks to the nature of the term in order to decide whether it is condition or a warranty. Is this the main or only question in Scots law? Lord Dunedin’s statement in Wade v Waldon quoted immediately above certainly suggests that the relevant issue in Scots law too is the nature of the contractual term. In the modern law, however, according to McBryde Scots law looks at the nature of the breach rather than the nature of the term.103 The consequences of the breach, although less relevant, may nevertheless illustrate materiality.104 Naudé agrees,105 and the SLC has cited a modern tendency to focus on the materiality of the breach rather than the term alone.106 The courts deploy a flexible approach to the question. According to Lord Dunpark ‘[i]n every case the question … is one of fact and degree’.107 Since the development of the intermediate or innominate term in English law, English courts are not forced to adhere to the rigid categorisation of condition or warranty.108 In both legal systems, therefore, the court may refer to factors other than the importance of the term itself in order to judge whether the innocent party has the right to rescind.

Ibid. Johnston (n91) at 183. 101 1909 SC 571. 102 1909 SC 571 at 576. In the later case, Graham & Co v United Turkey Red Co (1922 SC 533), the Lord Ordinary (Anderson) referred (at 536) to the breach going to ‘the root and substance of the contract’. Naudé, in her comparison of Scots and South African law, points out that both legal systems use the metaphor of a breach ‘going to the root’ of the contract, Naudé (n3) 280 at 285. 103 McBryde (n18) para 20-93. 104 McBryde (n18) para 20-94 referring to Scotmore Developments Ltd v Anderton 1996 SC 368. 105 Naudé (n3) 280 at 284, fn 26, relying on Macari v Celtic Football and Athletic Club Ltd 1990 SC 628 at 635–6 and Ghaznavi v BP Oil (UK) Ltd 1991 SLT 924 at 928 and 931. 106 Scot Law Com DP No. 109 (1999), para 2.9. 107 Blyth v Scottish Liberal Club 1982 SC 140, per Lord Dunpark at 148. 108 Hongkong Fir Shipping Ltd v Kawasaki Kissen Kaisha Ltd [1962] 2 QB 26. 99

100

350  Research handbook on remedies in private law Whilst flexibility can be an asset, it can also lead to difficulties.109 In a contract between A and B, where B has breached the contract, A may rescind believing that B’s breach is material. If A is wrong in that view and B’s breach was not material, by rescinding, A places herself in material breach. B may then rescind and potentially also claim damages.110 Contracting parties have tools to ‘manage’ breach and circumvent the uncertainty inherent in the concept of material breach. They may, by appropriate contract drafting, stipulate which breaches will be treated as material, potentially elevating what would normally be a non-material breach into a material one. Commercial parties in Scotland also routinely use the ultimatum procedure. Although McBryde notes some early Scottish cases involving ultimata, none of these involve the service of an extra-judicial ultimatum such as is common in the modern commercial cases.111 It seems likely therefore that the ultimatum procedure in Scots law is an importation from English law. The effect of this procedure is to make time of the essence in relation to performance of a contractual obligation, in effect rendering a breach in relation to the time of performance material in nature.112 Confusion has existed over whether Scots law contains a presumption that time is of the essence. In Visionhire Ltd v Britel Fund Trustees Ltd, Lord Coulsfield indicated that in Scots law there is no presumption that time is of the essence (and he contrasted Scots with English law in this respect).113 Rather, the question is one of interpretation only in Scots law. In a Scottish appeal to the House of Lords in 2008, Lord Neuberger, although recognising that the law in the two countries rests on different ‘jurisprudential bases’,114 suggested that Scots law applied a presumption.115 This was later relied on by Lord Glennie in the Outer House.116 The end result is confusion. This aptly illustrates the problems which are often caused in Scots law where an English concept bound up with the development of equity is imported into Scots law.117 The difference between the English and Scots law of breach of contract has not always been taken into account in the drafting of statutes applying to the UK as a whole. The Sale of Goods Act 1893 relied purely on English terminology to describe the buyer’s rights in relation to breach of contract, despite the fact that the Act applied to Scotland too.118 It was only as late as 1994 that suitable amendments were made to resolve this problem, introducing Scottish termi-

As noted in this context by MacQueen (n91) at 209. Naudé describes material breach in both Scots and South African law a vague test, Naudé (n3) 280 at 283. 110 See, for example, Wyman-Gordon Ltd v Proclad International Ltd [2010] CSIH 99, 2010 SC 338. 111 Of the early cases cited by McBryde (n18) footnote 438, p. 590, Black v Dick (1814) Hume’s Dec 699 and Gardiner v Lowe and ors 1921 1 SLT 44 concern rather judicial ultimata. Only in Burns v Garscadden 1900 8 SLT 321 is a notice served extra-judicially. 112 Roger (Builders) Ltd v Fawdry 1950 SC 483 and see generally McBryde (n18) para 20-128– 0-131. In Scots law there is no presumption against time being of the essence, see Visionhire Ltd v Britel Fund Trustees Ltd 1991 SLT 347, affirmed 1991 SLT 883. See also Persimmon Homes Ltd v Bellway Homes Ltd [2011] CSOH 149, [2012] CSOH 60. 113 1991 SLT 883 at 888, 1991 SLT 347. See also Persimmon Homes Ltd v Bellway Homes Ltd [2011] CSOH 149, [2012] CSOH 60. 114 Simmers v Innes [2008] UKHL 24, 2008 SC (HL) 137 per Lord Neuberger at para [23]. 115 Ibid, at para [26]. 116 East Dunbartonshire Council v Bett Homes Ltd (formerly Gladedale (Northern Division Ltd)) [2011] CSOH 56, at para [31], affirmed [2012] CSIH 1. 117 See J E Stannard, ‘In the Contractual Law Chance Saloon: Notices Making Time of the Essence’ (2004) LQR 137. 118 See ss 62(1) and 11(2). 109

Remedies for breach of contract in Scots law  351 nology.119 The implied term about quality or fitness for purpose imposed by s 14 is, by virtue of s 14(6), a condition in English law. Section 15B, applying only to Scotland, was added in 1994. Under s 15B(b) the buyer can, if the breach is material, reject the goods and treat the contract as repudiated. This pattern, of separate drafting for two different legal systems, is visible in other statutes offering similar protections through the use of implied terms.120 This is no longer a problem in consumer cases, the Consumer Rights Act 2015 applying to both legal systems the concept of ‘a final right to reject’ for breach of certain obligations.121 (d)

Restitution following Breach of Contract

In Scots law, where breach has occurred, the innocent party may claim restitution of the price, or part thereof.122 In the Inner House case, Connelly v Simpson, Lord Brand explained why this remedy is not particularly visible in reported cases: it seems to me to be no more than common sense that a vendor who has been fully paid but is unable to fulfil his obligation under the contract should be fully liable to make restitution of the price. The question will not normally arise because a claim for damages will generally be worth at least as much, if not more, than a claim for restitution.123

In other words, the remedy of damages is chosen because it will usually provide the innocent party with a larger award (compared to restitution of the price). This raises the question whether the party faced with breach may choose to seek restitution of the price rather than damages, where the former would result in a higher award. This is essentially the issue addressed in Connelly v Simpson, in which the pursuer had contracted to buy 33 shares in a company at a price of £16,000. After paying the price, he asked the seller not to transfer the shares to him. He wanted to delay the transfer allegedly because he was going through divorce proceedings and did not want the shares to fall within his assets for the purposes of the calculation of the divorce settlement. The shares were not transferred. The defender then increased the share capital of the company, and allotted shares to himself, diluting the pursuer’s percentage holding. The defender finally put the company into members’ voluntary liquidation. Both of these steps took place without the knowledge or consent of the pursuer, who was the only other director. Following liquidation, the pursuer was sent a cheque for £400, representing the value of his one third share in the company. The pursuer chose not to raise an action for damages for breach of contract, not surprisingly given that, by the time of breach, his asset (one third of the company) was virtually worthless. Rather, he sought restitution of the original price which he had paid, namely £16,000. In the Outer House, Lord Cowie found in the pursuer’s favour. This decision was overturned by the Inner House who held, in effect, that the pursuer’s only remedy was damages

The Sale and Supply of Goods Act 1994. Supply of Goods (Implied Terms) Act 1973, ss 10(7) and 12A; Supply of Goods and Services Act 1982, Part 1A (which applies to Scotland only). 121 Section 24. 122 George Joseph Bell, Commentaries on the Law of Scotland (7th edn, 1870, edited by Patrick Shaw) 1,478; W M Gloag, The Law of Contract (2nd edn, W Green 1929) 59–60; Stork Technical Services (RBG) Ltd v Marion Ross (Exr) [2015] CSOH 10A, [2015] CSOH 10A, paras [32] to [33]. 123 1993 SC 391 at 415. 119 120

352  Research handbook on remedies in private law for breach of contract. Lord Brandon delivered a powerful dissenting opinion. The ratio of the Inner House decision is difficult to identify, the two judges in the majority adopting different approaches. Lord McCluskey analysed authorities relating to the conditio causa data causa non secuta (part of Roman law which has been received into Scots law – essentially, a remedy available in circumstances in which a party seeks to recover a payment for a future purpose which has failed to materialise).124 He concluded that those authorities did not apply where the reason for the failure of consideration was breach of contract by the obligant.125 This led him to conclude that only damages and not restitution was available to recover an advance payment not met with reciprocal performance.126 Lord Sutherland, by contrast, concluded that a party who pays in advance cannot reclaim the payment where he ‘got what he paid for’ (leaving open the possibility, perhaps, that he could claim restitution where he did not get what he paid for).127 The case has been subject to extensive academic criticism and mixed views have been expressed.128 Even the central issue of whether the defender was treated as being in breach, and the pursuer treated as having rescinded, was left unclear in the judgments. The decision has led McBryde to conclude that damages only and not restitution are available following breach.129 This conclusion conflicts with authoritative statements made by the institutional writer, George Joseph Bell in Commentaries, and a leading contract author from the early twentieth century, Gloag, both of which confirm the availability of restitution following breach.130 More recently, in an Outer House case, Stork Technical Services (RBG) Ltd v Marion Ross (Exr), Lord Tyre, although bound by Connelly as Inner House authority, preferred Lord Brandon’s dissenting judgment.131 Connelly left unclear whether restitution following breach is part of the law of contract or the law of enrichment.132 Lord Tyre in Stork helpfully summarised the competing views.133 MacQueen, acknowledging the lack of clarity, suggested that the remedy is ‘something like

124 On the condictio causa data causa non secuta in Scots law, see Stair, Institutions (n44) I,7,7; Andrew McDouall, Lord Bankton, An Institute of the Law of Scotland (1751, Reprinted Stair Society 1993) I,8,21; Erskine (n16) III,1,10; Bell, Principles (n44) paras 28 and 530. On reception into the Scots law of contract, see Cantiere San Rocco SA v Clyde Shipbuilding & Engineering Co 1923 SC (HL) 105, and R Evans-Jones, ‘Unjust Enrichment, Contract and the Third Reception of Roman Law’ (1993) 109 LQR 663. 125 1993 SC 391 at 404. 126 Ibid, at 407. 127 Ibid, at 414. 128 W J Stewart, ‘Restitution, Non-Materialisation and Contract in Scotland’ 1993 Jur Rev 318; Evans-Jones (n124); J A Dieckmann and R Evans-Jones, ‘The Dark Side of Connelly v Simpson’ 1995 Jur Rev 90; H L MacQueen, ‘Unjustified Enrichment and Breach of Contract’ 1994 Jur Rev 137 and ‘Contract, Unjustified Enrichment and Concurrent Liability: A Scots Perspective’ (1997) Acta Juridica 176, reprinted in F Rose (ed.), Failure of Contracts (Hart 1997). 129 McBryde concludes from the case that damages and not restitution are available following breach, see ‘Remedies for Breach of Contract’ (1996) 6 EdinLR 43 at 69, and McBryde (n18) paras 20-142–20-143. 130 Bell, Commentaries (n122) I,478; Gloag (n122) 59–60. 131 Stork Technical Services (RBG) Ltd v Marion Ross (Exr) [2015] CSOH 10A, at para [35]. 132 A point noted by Lord Tyre in Stork at para [33]. 133 Stork at para [33] and see M Hogg, ‘Restitution following Termination of Contract: A Contractual or Enrichment Remedy?’ (2015) 19 Edin L R 269.

Remedies for breach of contract in Scots law  353 restitutio in integrum, a contractual remedy with some similarity to enrichment ones’.134 Elsewhere he explained: The remedy is restitutionary in nature rather than merely in effect compensatory damages, the significance of the contractual principle of mutuality being to explain why retention of the enrichment is not justified.135

Evans-Jones too identifies mutuality of contract as the underlying basis of restitution after breach,136 and, to Naudé, a contractual source is ‘the better view’.137 By contrast, McBryde cast doubt on whether restitution following breach is part of Scots law at all.138 Whilst in 1999 the SLC expressed a preference for characterisation of restitution as an enrichment remedy, in its recent Discussion Paper it did not offer a view, preferring not to add to the many already offered.139 Lord Tyre in Stork, observing that the law ‘is still in the course of development’, nevertheless concluded, albeit obiter, that restitution is available to the innocent party following breach and does not depend upon the application of the enrichment remedy, the condictio causa data causa non secuta.140 Following a recent consultation, the SLC recommended the creation of a ‘new remedy’ to apply in this situation.141 It is based largely on the remedy contained in the DCFR.142 If enacted, the effect will be to affirm reciprocal restitution as a default rule.143 Non-money benefits are to be returned unless to do so would be unreasonable or impracticable, in which case the value of the benefit is paid instead.144 Detailed provisions also provide for compensation for any reduction in value of a returned benefit, and payment for use or improvement of the benefit by the recipient.145 The SLC also confirmed that the new remedy can be cumulated with other remedies, provided that ‘their exercise together is compatible one with another’.146 The SLC specifically confirmed the ability of a contracting party to claim both restitution and damages for other losses caused by the breach of contract.147 Hoping, perhaps, that all necessary details are provided in the draft statutory provisions, the SLC continues its stance of refusing to characterise retention as either a contractual or an enrichment remedy.

H MacQueen, Unjustified Enrichment Law Basics (3rd edn, W Green 2013) 67. MacQueen, ‘Unjustified Enrichment and Breach of Contract’ (n128) at 148, quoted by Lord Tyre in Stork at para [33]. 136 Evans-Jones (n124); Dieckmann and Evans-Jones (n128) and see Lord Tyre in Stork at para [33]. 137 Naudé (n3) at 302. 138 McBryde (n18) paras 20-142–20-143. 139 Report on Remedies for Breach of Contract (No. 174, 1999) paras 7.23-7.24; Remedies for Breach of Contract (Scot Law Com DP No. 163, July 2017) para 4.33. 140 Stork at para [35]. 141 Report on Review of Contract Law (n11) recommendation Nos 32 and 33; Draft Contract (Scotland) Bill, ss 16(1) and 18–21, with notes. 142 DCFR III.-3:510–III.-3:514. 143 Draft Contract (Scotland) Bill, s 18(4). 144 Draft Contract (Scotland) Bill, s 18(5) and (6). 145 Draft Contract (Scotland) Bill, s 18(7) and (8). 146 Report on Review of Contract Law (n11) para 10.27. 147 Ibid. 134 135

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5 CONCLUSION The review carried out in this chapter has highlighted some significant differences from English law in the context of breach of contract. Whilst rescission is broadly similar, Scots law places a much greater emphasis on performance, this being reflected in its attitude to both specific implement and implement of a payment obligation. This protection of performance is, it is suggested, an asset of Scots law. It can be advantageous to insist on performance, even in commercial contexts. The court’s discretion to refuse the remedy protects against abuse. The chapter has also illustrated the fact that sometimes the process of mixing the civil law and the common law fails to achieve satisfactory results. The story is a familiar one: Scottish judges from the late nineteenth to the twentieth centuries, mindful of the need to facilitate the ‘codification’ of commercial law for the UK as a whole, have been apt to assert that Scots and English law are the same in principle and that it ‘was ever thus’, when neither proposition is correct.148 This was, of course, the period when statutes governing bills of exchange, partnership, sale and insurance, were enacted, all of which applied to the UK as a whole.149 Breach of contract in Scots law is likely to remain mixed in nature: there is little desire to assimilate completely with English law, even if that were possible. This fact is underlined by the SLC’s recent work. On the one hand the recent Contract Project subjected Scots law to a ‘health check’ by comparing it with a European initiative, the DCFR. On the other hand, English law, specifically the Contracts (Rights of Third Parties) Act 1999, was a significant point of reference for the SLC in its work to shape the new statutory third party right, enacted in the Contract (Third Party Rights) (Scotland) Act 2017. The SLC’s recent recommendations relating to breach of contract would, if enacted, do much to resolve the anomalies discussed in this chapter, and would significantly improve the law. There may, however, be cause for concern that there will be a lack of parliamentary time to consider the proposed contract reforms. The lengthy and important Moveable Transactions (Scotland) Bill is likely to take priority in the Scottish Parliament. One hopes that we do not have to wait too long to see legislative change in contract remedies in Scotland.

148 For a Scottish perspective on this period, see A Rodger, ‘The Codification of Commercial Law in Victorian Britain’ (1990) 108 LQR 570. 149 The Bills of Exchange Act 1882, Partnership Act 1890, Sale of Goods Act 1893 and Marine Insurance Act 1906.

19. Australian perspectives on contract damages Sirko Harder

I INTRODUCTION Even though this century is still relatively young, it has already seen some significant developments in the Australian law on contract damages. There are developments at common law and statutory interventions. This chapter discusses selected developments that have been controversial or presented problems yet to be resolved. Two common law developments will be discussed. One is the decision by the High Court of Australia in Clark v Macourt,1 which may give fresh impetus to some or all of the theories of substitutionary damages for breach of contract. This will be discussed in Section II. The other common law development, discussed in Section III, relates to the question of whether, in cases of defective building work, damages in the amount of rectification cost can be awarded where rectification cost not only exceeds diminution in value but is also out of proportion to the benefit that would be obtained from repair. This discussion involves a consideration of the decisions by the High Court of Australia in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd2 and by the South Australian Full Court in Stone v Chappel.3 The Australian legislatures have also been active. Some aspects of contractual liability were significantly affected by the civil liability reform, which occurred between 2002 and 2004 and aimed to restrict civil liability in order to combat a rise in liability insurance premiums.4 The focus of the reform was the law of negligence, and the reform is often called ‘tort law reform’.5 But the reform also affected contractual liability, which is sometimes neglected.6 Two aspects of the reform that are relevant to contractual liability will be discussed: the statutory regulation of damages for non-pecuniary loss (Section IV) and the statutory imposition of proportionate liability, as opposed to solidary liability, in certain circumstances (Section V).

[2013] HCA 56, (2013) 253 CLR 1. [2009] HCA 8, (2009) 236 CLR 272. 3 [2017] SASCFC 72, (2017) 128 SASR 165. Another development, which cannot be discussed, is the transformation of the rule against penalties in Andrews v ANZ [2012] HCA 30, (2012) 247 CLR 205 and Paciocco v ANZ [2016] HCA 28, (2016) 258 CLR 525. For a discussion of Andrews, see S Harder, ‘The Scope of the Rule against Contractual Penalties: A New Divergence’ in A Robertson and M Tilbury (eds), Divergences in Private Law (Hart 2016) 135. 4 For an overview of the statutory changes and their background, see L Skene and H Luntz, ‘Effects of Tort Law Reform on Medical Liability’ (2005) 79 Aust LJ 345. 5 Ibid. 6 For example, the civil liability reform is not mentioned in J W Carter, Carter’s Guide to Australian Contract Law (3rd edn, LexisNexis 2016). 1 2

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II

CLARK V MACOURT AND THE THEORIES OF SUBSTITUTIONARY DAMAGES

A significant development in Australian law on contract damages is the decision by the High Court of Australia in Clark v Macourt.7 The court reinstated an award of purportedly compensatory damages for breach of contract in circumstances in which it may be said that the breach caused no loss. A general application of the rule laid down by the court would require many orthodox rules to be reconsidered. The decision may give fresh impetus to the theories of substitutionary damages for breach of contract even though those theories were not mentioned. The theories will be examined after the discussion of Clark v Macourt. Dr Macourt, acting through St George Fertility Centre Pty Ltd (‘St George’), and Dr Clark each conducted a medical practice providing assisted reproductive technology, which involved the transfer of sperm via a catheter into the uterus. Dr Clark and St George entered into a deed under which certain of St George’s assets, including 3,513 straws of frozen donor sperm, were sold to Dr Clark for a sum to be calculated by reference to Dr Clark’s future income. Dr Macourt guaranteed the performance of St George’s obligations under the deed. Dr Clark could expect to use 2,500 straws.8 However, she used only 504 straws. The remaining straws could not be used as St George, in breach of a warranty given in the deed, had not conducted certain tasks required by the relevant Code of Practice.9 Since substitute donor sperm complying with the guidelines was not available in Australia, Dr Clark bought it from a supplier in the US. She recouped the cost from the patients for whose benefit the sperm was used. Ethical guidelines governing assisted reproductive technology permitted Dr Clark to recoup the cost of acquiring sperm but prohibited her from making any profit from the supply of sperm.10 Since the deed did not allocate a specific part of the purchase price to the sperm, she did not charge her patients for the 504 straws of the St George sperm that she used, and would not have charged for the 1,996 straws if she had been able to use them. St George sued Dr Clark for an outstanding amount ($219,950.91) of the purchase price ($386,950.91). Dr Clark cross-claimed against St George and Dr Macourt for damages for breach of warranty. The trial judge awarded her damages of over $1.2m, which was the cost of buying 1,996 straws of warranty-compliant sperm from the US supplier at the time of St George’s breach of contract. Dr Macourt appealed, arguing that any loss suffered by Dr Clark had been mitigated since that loss had been recouped from her patients. The NSW Court of Appeal allowed the appeal. On Dr Clark’s appeal, the High Court of Australia (Gageler J dissenting) reinstated the trial judge’s award. All the judges in the High Court subscribed to the principle that contractual damages aim to put the plaintiff in the position as if the contract had been performed,11 and all the judges agreed that the outcome did not depend upon whether the contract was characterised as one for the sale of goods or for the sale of a business.12 [2013] HCA 56, (2013) 253 CLR 1. The relevant Code of Practice limited to ten the number of children generated by any one donor. 9 Reproductive Technology Accreditation Committee, Code of Practice for Assisted Reproductive Technology Units. 10 National Health and Medical Research Council, Ethical Guidelines on Assisted Reproductive Technology (1996). 11 [2013] HCA 56, (2013) 253 CLR 1 [7] (Hayne J), [26] (Crennan and Bell JJ), [60] (Gageler J), [106] (Keane J). 12 Ibid, [13] (Hayne J), [30] (Crennan and Bell JJ), [68] (Gageler J), [108] (Keane J). 7 8

Australian perspectives on contract damages  357 The majority judges delivered three sets of reasons. Keane J identified and addressed two strands of reasoning in the Court of Appeal. The first was that the contract was for the sale of a business and not for the sale of goods, and since no part of the purchase price had been allocated to the sperm it could not be said that Dr Clark had paid anything for the sperm. Keane J said in response that Dr Clark’s loss ‘fell to be measured, not by reference to what she outlaid as compared with what she obtained from St George, but by reference to the value of what St George had promised to deliver to her but did not’.13 The second strand of reasoning of the Court of Appeal was that Dr Clark had suffered no loss as she had recouped the cost of acquiring substitute sperm from her patients. Keane J said in response that Dr Clark’s claim was not for the cost of acquiring the substitute sperm, but was for the value of the sperm that should have been delivered.14 The cost of the substitute sperm was merely evidence of that value.15 Crennan and Bell JJ expressed agreement with Keane J’s reasons,16 and made additional comments. They said that an award of damages for loss of a bargain protects ‘the plaintiff’s objectively determined expectation of recoupment of expenses’,17 which explains that the prima facie measure of damages in respect of a sale of goods is the market price of goods at the time of contractual delivery, less the contract price if not yet paid.18 While the second limb of Hadley v Baxendale19 in respect of indirect loss is frequently invoked by a buyer whose loss exceeds the normal measure of damages, it may also be invoked by a seller to show that the buyer’s loss is less than the prima facie measure of damages.20 By giving evidence on the cost of the substitute sperm, Dr Clark had discharged her onus to show the recoupment cost necessary to restore her to the position she would have been in absent the breach,21 and Dr Macourt had not sought to demonstrate that the cost of the substitute sperm was not an appropriate proxy for the value of the St George sperm.22 Hayne J said that he generally agreed with Keane J’s reasons,23 and he gave reasons of his own. He said that the value of what Dr Clark did not receive was the amount it would have cost to acquire 1,996 straws of sperm from the US supplier.24 In response to Dr Macourt’s argument that Dr Clark had mitigated her loss by recouping the cost of the substitute sperm from her patients, Hayne J said that Dr Clark’s purchase and use of the substitute sperm left her neither better nor worse off than she was prior to those transactions.25 In assessing the value of what should have been supplied under the contract, the consequences of Dr Clark’s use of the substitute sperm would have been relevant only if she had obtained some advantage from it, or if she had alleged additional, consequential loss.26

15 16 17 18 19 20 21 22 23 24 25 26 13 14

Ibid, [111]. Ibid, [128]. Ibid, [138]. Ibid, [24]. Ibid, [28]. Ibid, [28]. (1854) 9 Exch 341, 156 ER 145. [2013] HCA 56, (2013) 253 CLR 1 [29]. Ibid, [36]. Ibid, [39]. Ibid, [22]. Ibid, [12]. Ibid, [19]. Ibid, [20].

358  Research handbook on remedies in private law Gageler J, dissenting, said that the sperm that St George should have supplied was not a marketable commodity but was only for use in the treatment of patients in the normal course of practice.27 The supply of compliant sperm would have relieved Dr Clark of the need to source sperm from another source as and when she needed sperm to treat her patients.28 St George’s breach of contract left Dr Clark ‘worse off to the extent that later she was forced to incur, but was not able to recoup from her patients, the additional costs of sourcing 1996 straws of sperm from an alternative supplier’.29 The High Court’s decision in Clark v Macourt has been controversial. It cannot be criticised on the mere ground that the amount of damages awarded for defects in goods sold as part of a business was more than three times the price paid for the whole business. Even though this may seem unusual, it is a possible outcome, as the buyer’s damages are assessed by reference to loss suffered and not by reference to the purchase price. However, the proposition that Dr Clark suffered loss in excess of the purchase price is difficult to accept, for two reasons set out by Carter et al.30 First, since ethical guidelines prevented Dr Clark from selling the sperm promised by St George, the value of that sperm to her could not be greater than the price she paid for the sperm (or for the business as a whole since no amount was allocated to the sperm). Secondly, since the contract was for the sale of a business, the prima facie measure of damages was the amount by which the value of the business as a whole was affected by the non-compliance of the sperm. In the absence of evidence as to the value of the business sold, the trial judge was required to assume that it was equal to the contract price. The High Court’s decision in Clark v Macourt may potentially have a wide-ranging impact. Keane J, with whom the other majority judges agreed, said that a buyer of goods who has not received the promised performance is, regardless of the actual consequences of the breach, entitled to damages in the amount of the market value of compliant goods (less the contract price if not paid yet), and the market value is the cost of substitute goods in the absence of other evidence. This proposition was not based on any peculiarity of contracts for the sale of goods, and could be applied to all contracts where substitute performance is available. Clark v Macourt could thus be seen as permitting an award of damages in the amount of the market value of the promised performance (generally determined by reference to the cost of substitute performance) in every case of a breach of contract in which substitute performance is available, regardless of the actual consequences of the breach for the plaintiff. The rules on remoteness of damage and mitigation would be relevant only where the plaintiff claims damages in an amount exceeding the cost of substitute performance. So far, the courts have not derived such a wide-ranging rule from Clark v Macourt,31 and this rule would conflict with the traditional rule that damages for breach of contract aim to

Ibid, [69]–[70]. Ibid, [70]. 29 Ibid, [71]. 30 J W Carter, W Courtney and G J Tolhurst, ‘Issues of Principle in Assessing Contract Damages’ (2014) 31 J Cont L 171, 183, 190–1. Criticism has also been voiced by K E Barnett, ‘Contractual Expectations and Goods’ (2014) 130 LQR 387, 390–1; A Kramer, The Law of Contract Damages (Hart 2014) 142. 31 In FKP Commercial Developments Pty Ltd v Albion Mill FCP Pty Ltd [2017] QSC 322 [97]–[98], it was held that, in assessing the seller’s damages for breach by the buyer, Clark v Macourt does not require the court to ignore the effects of a re-sale of the goods to a third party. 27 28

Australian perspectives on contract damages  359 compensate the actual loss suffered by the plaintiff and not more.32 The High Court did not overrule that traditional rule, but found a loss on Dr Clark’s part by simply ignoring the fact that she had recouped the cost of the substitute sperm from her patients. Since it is difficult to accept the High Court’s view that Dr Clark suffered a loss in excess of the purchase price, the court’s decision in Clark v Macourt may give fresh impetus to all or some of the theories of substitutionary damages, at least as far as contract law is concerned. These theories, advanced by scholars for various types of civil wrong, differ in substance and terminology, but the common core is the separation from compensatory damages of a distinct species of damages, usually called substitutionary damages. While compensatory damages compensate for consequential loss caused by a civil wrong, substitutionary damages substitute for the fulfilment of the wrongdoer’s primary obligation and are not concerned with the compensation of loss. Crucially, substitutionary damages are available even if the wrong has caused no actual loss, and are not subject to the rules of remoteness and mitigation. Theories to that effect have been advanced for civil wrongs in general,33 and specifically for torts,34 for the misapplication of trust property,35 and for breach of contract. In contract, a distinction must be made between the theory of Robert Stevens on the one hand and the theories of Stephen Smith and David Winterton on the other. Robert Stevens argues that substitutionary damages represent the value of the infringed right to performance. Their measure is the difference in value between the performance contracted for and that provided.36 He relies (among others) on English cases in which an obligation to provide goods or services was breached (by defective performance, late performance or the failure to perform at all) and the recipient obtained damages in the difference between the market value of the performance promised and the market value of the performance received even though the actual loss suffered was lower.37 In those cases, which have been followed in Australia,38 the award was seen as compensating loss assessed objectively by ignoring certain loss-reducing measures of the recipient, rather than as being available irrespective of any loss suffered. While Robert Stevens sees difference in value as the measure of substitutionary damages, Stephen Smith and David Winterton see the cost of substitute performance as their general measure. Stephen Smith argues that damages in the amount of cost of cure, as opposed to diminution in value, do not compensate for loss suffered but constitute a form of substitute specific performance. They should be available for every breach of contract unless rectifica Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 82. J Edelman, ‘Gain-based Damages and Compensation’ in A Burrows and Lord Rodger (eds), Mapping the Law: Essays in Honour of Peter Birks (Oxford University Press 2006) 153–8 (for the infringement of a right not held for commercial purposes); M McInnes, ‘Gain, Loss and the User Principle’ [2006] 14 RLR 76. 34 R Stevens, Torts and Rights (Oxford University Press 2007) 59–79. 35 S B Elliott, ‘Remoteness Criteria in Equity’ (2002) 65 Mod LR 588, 590; S B Elliott and C Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 Mod LR 16, 23–34; J Edelman and S B Elliott, ‘Money Remedies against Trustees’ (2004) 18 TLI 116, 116–25; D Hayton, P Matthews and C Mitchell, Underhill and Hayton Law of Trusts and Trustees (19th edn, LexisNexis 2016) [87.11]–[87.15]. 36 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. 37 Rodocanachi, Sons & Co v Milburn Brothers (1886) 18 QBD 67; Williams Brothers v Ed T Agius Ltd [1914] AC 510; Slater v Hoyle & Smith Ltd [1920] 2 KB 11; Joyner v Weeks [1891] 2 QB 31. 38 Ailakis v Olivero [2014] WASCA 127, (2014) 100 ACSR 524 [130]; Pourzand v Telstra Corporation Ltd [2012] WASC 210 [204]. 32 33

360  Research handbook on remedies in private law tion will not be done, or the cost of repair is wholly disproportionate to the value of the loss, or the plaintiff is seeking the award in bad faith.39 David Winterton argues that substitutionary damages substitute not for the right to performance but for performance itself. Their measure is generally the minimum cost of substitute performance (repair or replacement) whether or not the plaintiff intends to cure the breach, but where that cost is unquantifiable or unreasonable, the price of release from further performance is the next-best substitute for performance.40 Winterton sees the award in Clark v Macourt, assessed by reference to the cost of substitute performance, as an example of substitutionary damages.41 In contract law, the theories of substitutionary damages have not received express judicial endorsement, and have faced criticism from other scholars. Andrew Burrows in particular has argued that Robert Stevens’ theory conflicts with the conventional understanding of damages, in particular the law on mitigation, and cannot account for nominal damages.42 The same may be said for the theories of Stephen Smith and David Winterton. Clark v Macourt may give fresh impetus to the debate. The two sides of the debate reflect two understandings of why the law uses the concept of a civil wrong. Traditionally, this concept was merely the basis for remedies addressing certain consequences of the event: compensatory damages for loss suffered by the plaintiff, gain-based relief for gains made by the defendant, etc. The theories of substitutionary damages support a court order (beyond nominal damages) in response to a civil wrong as such, regardless of its consequences. But the theories have so far failed to explain why such a court order is necessary. In the years to come, the debate needs to focus on whether it is justified to award substantial (as opposed to merely nominal) damages in respect of a wrong that has caused neither loss (in a real sense) to the plaintiff nor any gain to the defendant.

III

THE RECOVERABILITY OF RECTIFICATION COST IN EXCESS OF DIMINUTION IN VALUE

Where building work has been done defectively and the defect can be repaired, the owner’s loss can be measured in two different ways: by reference to the cost of rectifying the defect (rectification cost) or by reference to the difference between the value of the defective property and the value the property would have without the defect (diminution in value). Rectification cost usually exceeds diminution in value, often considerably. In those circumstances, the question arises whether rectification cost can be recovered even where it is disproportionate to the benefit the owner would obtain from a repair of the defect.

39 S A Smith, Contract Theory (Oxford University Press 2004) 420–3; S A Smith, ‘Substitutionary Damages’ in C E F Rickett (ed.), Justifying Private Law Remedies (Hart 2008) 100–5 (where the theory is advanced for the loss of property or services in general). 40 D Winterton, ‘Money Awards Substituting for Performance’ [2012] LMCLQ 446, 450–1; D Winterton, Money Awards in Contract Law (Hart 2015). 41 D Winterton, ‘Clark v Macourt: Defective Sperm and Performance Substitutes in the High Court of Australia’ (2014) 38 MULR 755. 42 A Burrows, ‘Are “Damages on the Wrotham Park Basis” Compensatory, Restitutionary or Neither?’ in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Hart 2008) 181–5.

Australian perspectives on contract damages  361 A negative answer was given by the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth,43 where a newly constructed swimming pool was shallower than specified in the contract but still suitable for diving. The House of Lords overturned an award of the cost of rebuilding the pool on the ground that it was out of all proportion to the benefit the owner would have obtained from the rebuilding. Lord Jauncey placed emphasis on the fact that the contractual objective had been substantially achieved in the instant case, and contrasted this with cases where the contract-breaker has entirely failed to achieve the contractual objective.44 The requirement of proportionality was adopted by lower Australian courts45 prior to the decision by the High Court of Australia in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd.46 In that case, the tenant of an office building undertook not to alter the premises without the landlord’s consent. The landlord had installed a new foyer made of expensive materials. The tenant made significant changes to the foyer without the landlord’s consent. These changes did not affect the value of the property except for the loss of some lettable space on the ground floor. The cost of restoring that space was $33,820. The cost of restoring the foyer to its former condition was $1.38m, consisting of $580,000 as the cost of the work and $800,000 as the loss of rental income while the work was being carried out. The High Court of Australia held that the landlord was entitled to an award of $1.38m. Referring to the ‘ruling principle’ set out by Parke B in Robinson v Harman,47 the High Court said that an award of diminution in value would not restore the landlord to the ‘same situation ... as if the contract had been performed’ because, as Oliver J had said in Radford v De Froberville,48 ‘the words “the same situation, with respect to damages, as if the contract had been performed” do not mean “as good a financial position as if the contract had been performed”’.49 The High Court reaffirmed50 what it had said in Bellgrove v Eldrige,51 namely that rectification cost cannot be awarded where remedial work is unreasonable, giving the example of a house erected with new bricks even though the contract specified second-hand bricks. The High Court in Tabcorp made no reference to the proportion between rectification cost and the benefit of repair. It referred to Forsyth, but regarded the facts of Forsyth as ‘plainly distinguishable’ from the facts of Tabcorp.52 The High Court’s failure to disapprove of Forsyth might be taken as an indication that it saw room for a cost-benefit analysis in determining the reasonableness of remedial work.53 However, the High Court said that the test of unreason-

[1996] AC 344. Ibid, 358. See also Sunrock Aircraft Corporation Ltd v Scandinavian Airlines System DenmarkNorway-Sweden [2007] EWCA Civ 882, [2007] 2 Lloyd’s Rep 612 [34]–[35]: US$139,800 cost of repairing scab patches on aircraft that did not affect its value could not be recovered as repair would be unreasonable. 45 South Parklands Hockey and Tennis Centre Inc v Brown Falconer Group Pty Ltd [2004] SASC 81 [90]; Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462 [120] (Ipp JA); Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2006] NSWCA 361 [89]. 46 [2009] HCA 8, (2009) 236 CLR 272. 47 (1848) 1 Ex 850, 855; 154 ER 363, 365. 48 [1977] 1 WLR 1262, 1273. 49 [2009] HCA 8, (2009) 236 CLR 272 [13] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ). 50 Ibid, [17]. 51 (1954) 90 CLR 613, 618. 52 [2009] HCA 8, (2009) 236 CLR 272 [18] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ). 53 This view was taken in Stone v Chappel [2017] SASCFC 72, (2017) 128 SASR 165 [261] (Doyle J). 43 44

362  Research handbook on remedies in private law ableness is satisfied only in ‘fairly exceptional circumstances’, namely where, in the words of Oliver J in Radford v De Froberville,54 the plaintiff is ‘merely using a technical breach to secure an uncovenanted profit’.55 Moreover, the actual decision in Tabcorp is at odds with a requirement of proportionality. An award of $1.38m can hardly be seen as proportionate to a purely aesthetic benefit of rectification.56 However, in Stone v Chappel,57 the South Australian Full Court saw disproportion as a key factor in determining the reasonableness of rectification. A contract for the construction of the shell and the framework of an apartment for $1.8m specified a ceiling height of 2700 mm. In accordance with construction practice, a departure of plus or minus 20 mm was acceptable. The ceiling was on average 48 mm too low. The cost of rectifying that defect was $331,188. The South Australian Full Court upheld the trial judge’s refusal to award rectification damages. Each member of the Full Court gave a separate judgment. Both Kourakis CJ and Doyle J said that the availability of rectification damages depends upon a number of factors, including the plaintiff’s performance interest (in particular whether the contractual specification was merely functional or a matter of aesthetic choice of amenity on the plaintiff’s part), the extent to which the defendant has achieved the contractual objective, a lack of proportionality between the cost of rectification work and the benefit of that work to the plaintiff, the plaintiff’s intention and ability to carry out the work, and the degree of the defendant’s culpability.58 For Kourakis CJ, disproportion ‘is at the core of the evaluative judgment’ as to the reasonableness of rectification.59 In the case at hand, he identified ‘a great disproportion between the cost of the rectification work and the contract price for the unit and its value’.60 However, this would not have prevented him from awarding rectification damages.61 Kourakis CJ’s key reason for denying such an award was the fact that rectification work was unlikely to be carried out and, if carried out, would create significant risks of damage to the property of other occupants of the building and be likely to trigger substantial collateral litigation between them, the plaintiffs and the defendants.62 For Doyle J, the key reasons for denying rectification damages were the fact that the functional objective of the contractual specification had been achieved and the amenity or aesthetic objective had been substantially achieved,63 and the fact that the cost of rectification was out of all proportion to the likely benefit of the work.64 Hinton J said that rectification work was unreasonable for the reasons given by Doyle J.65 The South Australian Full Court in Stone v Chappel thus held that the lack of proportionality between the cost of rectification and its benefits is a key factor in determining the reasonable-

[1977] 1 WLR 1262, 1270. [2009] HCA 8, (2009) 236 CLR 272 [17] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ). 56 A different view was taken in Stone v Chappel [2017] SASCFC 72, (2017) 128 SASR 165 [441] (Hinton J). 57 [2017] SASCFC 72, (2017) 128 SASR 165. 58 Ibid, [55]–[63] (Kourakis CJ), [256]–[265] (Doyle J). 59 Ibid, [61]. 60 Ibid, [69]. 61 Ibid, [72]. 62 Ibid, [72]. 63 Ibid, [286]. 64 Ibid, [288]. 65 Ibid, [447]–[453]. 54 55

Australian perspectives on contract damages  363 ness of rectification work.66 The court distinguished Tabcorp on the ground that the tenant in Tabcorp completely ignored the contractual prohibition of alterations to the foyer, whereas the defendants in Stone v Chappel had achieved the contractual objective to a significant extent.67 The court thus adopted the distinction made by Lord Jauncey in Forsyth. This could be defended on the ground that the reasonableness of repair may depend upon the extent to which the defendant deviated from the contractual specification.68 However, the High Court in Tabcorp placed no reliance on either the defendant’s culpability or the extent to which the actual performance deviated from the performance bargained for. Considering also that in both Stone v Chappel and Tabcorp the plaintiff’s interest was merely aesthetic and that the value of the property was not significantly affected by the breach, it is difficult to reconcile Stone v Chappel with Tabcorp.69 On principle, the requirement of proportionality may be defended with the argument that it prevents economic waste.70 On the other hand, the requirement involves a significant degree of uncertainty since reasonable minds (including those of judges) may differ on whether cost of cure is disproportionate in particular circumstances. This may discourage plaintiffs from seeking rectification damages and in turn reduce the incentive of contractors to comply with contractual specifications.71 The High Court of Australia will have to balance these factors if and when the issue comes before it. The recognition of a requirement of proportionality might give fresh impetus to the argument that in cases in which rectification damages are unavailable and diminution in value is nil the plaintiff should be entitled to claim any amount saved by the defendant through defective performance, or the amount of a reasonable fee for the relaxation of the defendant’s obligation, or a proportionate part of the contract price on the (yet to be recognised) ground of a partial failure of consideration.72

66 The same view was expressed in obiter dicta in Wheeler v Ecroplot Pty Ltd [2010] NSWCA 61 [81]. 67 [2017] SASCFC 72, (2017) 128 SASR 165 [259], [441], [452]. On similar grounds, the court (at [287], [452]) distinguished Willshee v Westcourt Ltd [2009] WASCA 87, where $250,000 was awarded as the cost of replacing aesthetically inferior limestone cladding with the contractually specified limestone cladding. 68 D Winterton, ‘Money Awards Substituting for Performance’ [2012] LMCLQ 446, 463. 69 In some cases, the principles laid down in Stone and Chappel have been described as guidance as to how the principles laid down in Bellgrove v Eldrige apply: Sunlight Nominees Pty Ltd v Zotti [2017] SASC 176 [98]; Woodward v DJ & TL Mellross Pty Ltd [2018] NSWCATAP 179 [55]. 70 A L Corbin, Corbin on Contracts: A Comprehensive Treatise on the Working Rules of Contract Law (West 1963) § 1089. 71 J O’Sullivan, ‘Loss and Gain at Greater Depth: The Implications of the Ruxley Decision’ in F D Rose (ed.), Failure of Contracts: Contractual, Restitutionary and Proprietary Consequences (Hart 1997) 11. 72 See ibid, 19–25.

364  Research handbook on remedies in private law

IV

STATUTORY RESTRICTIONS ON RECOVERY FOR NONPECUNIARY LOSS

With regard to the availability of contractual damages for non-pecuniary loss such as anxiety, distress and inconvenience, Australian common law is very similar to English common law.73 Damages are generally excluded, but they are available where the breach of contract has caused personal injury or physical inconvenience, or where it was a major object of the contract to provide enjoyment, relaxation or freedom from molestation.74 Loss of reputation may also be compensated.75 At least in New South Wales and Victoria, and possibly in all Australian jurisdictions, statute now restricts significantly the availability of contractual damages for non-pecuniary loss in cases not involving physical injury or a recognised psychiatric illness. The relevant statutory provisions were enacted in the course of the civil liability reform mentioned in the Introduction. The civil liability statutes of all Australian jurisdictions except the Australian Capital Territory regulate damages for non-pecuniary loss resulting from ‘personal injury’.76 The statutes differ significantly, but most of them impose a maximum amount and a threshold below which non-pecuniary loss may not be compensated.77 Since those provisions are concerned with ‘personal injury’, they might be considered inapplicable to non-pecuniary loss not resulting from physical injury or a recognised psychiatric illness. However, the definition of ‘personal injury’ in the statutes of New South Wales and Victoria has been interpreted so as to include distress (and the like), which thus constitutes both personal injury and non-pecuniary loss resulting from personal injury. The civil liability statute of New South Wales defines ‘personal injury’ as including the ‘impairment of a person’s physical or mental condition’.78 The NSW Court of Appeal has held that this phrase, while not including loss of reputation79 or loss of dignity or liberty,80 does include anxiety, disappointment, distress and inconvenience.81 This means that compensation for anxiety and the like is subject to s 16 of the Act, which applies to actions for breach of

73 For English law, see Watts v Morrow [1991] 1 WLR 1421, 1445; S Harder, Measuring Damages in the Law of Obligations: The Search for Harmonised Principles (Hart 2010) 90–103. 74 The leading Australian case is Baltic Shipping Co v Dillon (1993) 176 CLR 344. 75 Ibid, 371 (Brennan J). Australian common law is discussed by K Barnett and S Harder, Remedies in Australian Private Law (2nd edn, Cambridge University Press 2018) [5.74]–[5.81]. 76 The statute of the Australian Capital Territory does not regulate damages for non-pecuniary loss, but does regulate damages for ‘mental harm’: Civil Law (Wrongs) Act 2002 (ACT) pt 3.2. Distress may constitute ‘mental harm’ for that purpose, as explained in the main text below. 77 The various statutory regimes are discussed by K Barnett and S Harder, Remedies in Australian Private Law (2nd edn, Cambridge University Press 2018) [7.63]–[7.68]. 78 Civil Liability Act 2002 (NSW) s 11. 79 Insight Vacations Pty Ltd v Young [2010] NSWCA 137, (2010) 78 NSWLR 641 [125] (Basten JA). See also New South Wales v Williamson [2012] HCA 57, (2012) 248 CLR 417 [34], [45]. 80 New South Wales v Williamson [2011] NSWCA 183 [61]. See also New South Wales v Williamson [2012] HCA 57, (2012) 248 CLR 417 [34], [45]. 81 New South Wales v Ibbett [2005] NSWCA 445, (2005) 65 NSWLR 168 [124], [211]–[212]; New South Wales v Corby [2010] NSWCA 27, (2010) 76 NSWLR 439 [41]; Insight Vacations Pty Ltd v Young [2010] NSWCA 137, (2010) 78 NSWLR 641.

Australian perspectives on contract damages  365 contract with some minor exceptions.82 Section 16 excludes compensation for non-pecuniary loss unless the severity of the loss is at least 15 per cent of the most extreme case. This threshold will rarely be crossed in the absence of physical injury or a recognised psychiatric illness. For example, the threshold is not reached by distress and inconvenience resulting from construction noise at a holiday hotel,83 or resulting from significant changes to the itinerary of a river cruise.84 Furthermore, anxiety and the like constitutes ‘mental harm’ for the purposes of the New South Wales statute, which provides that there is no liability (in contract or otherwise) for ‘mental harm resulting from negligence’85 unless the mental harm is consequent on other personal injury or consists of a recognised psychiatric illness.86 This applies at least to the breach of a contractual duty of care, and may even apply to strict contractual liability where the defendant was careless. The latter approach was impliedly taken in Flight Centre Ltd v Louw.87 The plaintiffs booked flights and holiday accommodation at the Le Meridien Hotel on Tahiti with the defendant travel agent. Their holiday was ruined by severe construction noise in the hotel and other disturbances. The defendant thus breached the warranty that the holiday accommodation would meet the plaintiffs’ requirements and purpose.88 It was a case of strict contractual liability. An award of damages for distress and inconvenience was still quashed on the ground that it was excluded by the statutory provisions mentioned,89 as the plaintiffs had not suffered physical injury or a recognised psychiatric illness. It was found that the plaintiffs had sought the defendant’s advice on where to spend their holidays, and that the defendant, who should have known about the construction work at Le Meridien Hotel, had been careless in recommending that hotel. The civil liability statute of Victoria defines ‘injury’ as including a ‘psychological or psychiatric injury’.90 Anxiety, distress, fear and worry (but not inconvenience) have been held to constitute ‘injury’ for the purpose of the provisions that imposes a threshold on the recovery of damages for non-pecuniary loss.91 The civil liability statutes of the remaining states and the territories adopt either the New South Wales definition or the Victorian definition of ‘personal injury’,92 and may well be interpreted to the same effect. While the thresholds for the recovery of non-pecuniary loss differ between the jurisdictions, they will usually exclude non-pecuniary loss not resulting from physical injury or a recognised psychiatric illness. Many cases (such as spoilt holidays) in which contractual damages for non-pecuniary loss are available at common law will not cross the thresholds for recovery, and contractual expectations not to suffer

Civil Liability Act 2002 (NSW) ss 3B, 11A(2). Flight Centre Ltd v Louw [2011] NSWSC 132, (2011) 78 NSWLR 656 [41]. 84 Moore v Scenic Tours Pty Ltd (No. 2) [2017] NSWSC 733 [873]. 85 Section 27 defines ‘negligence’ as ‘failure to exercise reasonable care and skill’. 86 Civil Liability Act 2002 (NSW) ss 27, 28, 31. 87 [2011] NSWSC 132, (2011) 78 NSWLR 656. 88 Ibid, [39]. 89 Ibid, [40]. The award was also quashed on the ground that the plaintiff’s non-pecuniary loss did not cross the threshold of s 16: ibid, [41]. 90 Wrongs Act 1958 (Vic) ss 28B, 28LB, 28M. 91 Thomas v Powercor Australia Ltd [2011] VSC 586 [116]; Lakic v Prior [2016] VSC 293 [157]. 92 Civil Law (Wrongs) Act 2002 (ACT) s 32 (for ‘mental harm’); Personal Injuries (Liabilities and Damages) Act 2003 (NT) s 3; Civil Liability Act 2003 (Qld) sch 2; Civil Liability Act 1936 (SA) s 3(1); Civil Liability Act 2002 (Tas) s 3; Civil Liability Act 2002 (WA) s 3. 82 83

366  Research handbook on remedies in private law non-pecuniary loss are not sufficiently protected even where the provision of pleasure and the like is a major object of the contract.93

V

STATUTORY IMPOSITION OF PROPORTIONATE LIABILITY

Another statutory intervention in the area of contractual (as well as other) liability in Australia is the introduction of proportionate liability of wrongdoers who are liable for the same indivisible harm (concurrent wrongdoers). The common law imposes joint and several liability (or solidary liability) upon concurrent wrongdoers, and the plaintiff can claim full compensation from all or any of the wrongdoers, without recovering in total more than the loss suffered. Under that regime, a plaintiff will pursue the wrongdoer who is insured or otherwise has deep pockets. In the 1990s, there was growing concern in Australia that professionals, in particular auditors, had become the target of negligence actions for that reason, and that this was leading to a significant increase in premiums for liability insurance. An inquiry, chaired by Professor Jim Davis, was set up. It recommended the introduction of proportionate liability, under which each wrongdoer is liable for only a part of the loss, in cases of property damage and pure economic loss.94 Australian legislatures implemented the recommendation in the course of the civil liability reform mentioned in the Introduction.95 While the statutes of the various jurisdictions differ, each statute provides that, in the causes of action to which it applies, the liability for property damage or pure economic loss of a concurrent wrongdoer who did not intend to cause the loss is limited to a proportion of the loss reflecting that wrongdoer’s relative responsibility for the loss.96 Under this regime, a plaintiff will not receive full compensation unless all concurrent wrongdoers are pursued and all of them are solvent. This is not the place to discuss the merits of proportionate liability in general.97 The present interest lies in the impact of the Australian proportionate liability statutes on contractual liability. Problems exist in two respects: the applicability of some of the statutes to strict contractual liability and the impact of some of the statutes on contractual indemnities.

93 N Witzleb, E Bant, S Degeling and K Barker, Remedies: Commentary and Materials (6th edn, Lawbook Co 2015) [4.785]. 94 Federal and NSW Attorneys-General (conducted by Professor Jim Davis), Inquiry into the Law of Joint and Several Liability, Report of Stage One (1994) and Report of Stage Two (1995). The Report of Stage Two is available at http:​/​/​138​.25​.65​.17/​au/​journals/​AUConstrLawNlr/​1995/​26​.pdf (accessed 1 November 2017). 95 Civil Law (Wrongs) Act 2002 (ACT) ch 7A; Civil Liability Act 2002 (NSW) pt 4; Proportionate Liability Act 2005 (NT); Civil Liability Act 2003 (Qld) pt 2; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) pt 3; Civil Liability Act 2002 (Tas) pt 9A; Wrongs Act 1958 (Vic) pt IVAA; Civil Liability Act 2002 (WA) pt 1F. 96 Civil Law (Wrongs) Act 2002 (ACT) s 107D(2); Civil Liability Act 2002 (NSW) s 34(4); Proportionate Liability Act 2005 (NT) s 6(2); Civil Liability Act 2003 (Qld) s 30(2); Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) s 3(1); Civil Liability Act 2002 (Tas) s 43A(4); Wrongs Act 1958 (Vic) s 24AH(2); Civil Liability Act 2002 (WA) s 5AJ(1). 97 For such a discussion, see K Barker and J Steele, ‘Drifting towards Proportionate Liability: Ethics and Pragmatics’ (2015) 74 Camb LJ 49.

Australian perspectives on contract damages  367 For present purposes, two types of contractual obligation must be distinguished. One is an obligation to take reasonable care in a particular activity. Such an obligation can, by definition, be breached only by a failure to take reasonable care. The other, and more common, type of contractual obligation is an obligation to achieve a particular end result, for example the transfer of ownership and possession in particular goods. If the end result promised is not achieved (on time), the promisor will be liable for breach of contract even if the promisor cannot be said to have been at fault. Liability is strict. The proportionate liability statutes of all states and territories apply to the breach of a contractual duty of care. This is appropriate since the statutes apply to the breach of a tortious duty of care. Where a contractual duty of care goes hand in hand with a duty of care in tort, which is usually the case for professionals, the limitation of tortious liability to a proportion of the loss would be pointless if contractual liability were not so limited. Since, therefore, liability for the breach of a contractual duty of care should be limited where that duty is concurrent with a duty of care in tort, liability should also be limited where there is no concurrent duty in tort. Otherwise, wrongdoers sued for the breach of a contractual duty of care would seek to establish their concurrent liability in negligence whereas plaintiffs would seek to establish that the wrongdoers are not liable in negligence. This would be odd. None of the statutes applies to all cases of strict contractual liability. The statutes of Queensland and South Australia never apply to strict contractual liability as they apply to the breach of a ‘duty of care’.98 A duty to achieve a particular end result regardless of fault cannot be described as a ‘duty of care’.99 The statutes of the remaining states and the territories apply to an ‘action for damages’ (whether in contract, tort or otherwise) ‘arising from a failure to take reasonable care’.100 It may be said that an action for breach of contract is ‘arising from a failure to take reasonable care’ whenever the breach resulted from carelessness on the contract-breaker’s part in performing the obligation in question, even if that obligation is strict and the contract-breaker is liable irrespective of fault. Even under such a wide interpretation, the statutes in question do not apply to actions for a contractual debt,101 as the statutes apply only to an ‘action for damages’ and most of them define ‘damages’ as ‘any form of monetary compensation’.102 In actions for damages, judicial opinion is divided on whether the phrase ‘arising from a failure to take reasonable care’ includes cases of strict contractual liability where the breach 98 Civil Liability Act 2003 (Qld) s 28(1)(a); Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) s 4(1). 99 B McDonald and J W Carter, ‘The Lottery of Contractual Risk Allocation and Proportionate Liability’ (2009) 26 J Cont L 1, 12; V J Vann, ‘Equity and Proportionate Liability’ (2007) 1 J Eq 199, 203. 100 Civil Law (Wrongs) Act 2002 (ACT) s 107B(2)(a); Civil Liability Act 2002 (NSW) s 34(1)(a); Proportionate Liability Act 2005 (NT) s 4(2)(a); Civil Liability Act 2002 (Tas) s 43A(1)(a); Wrongs Act 1958 (Vic) s 24AF(1)(a); Civil Liability Act 2002 (WA) s 5AI. 101 Commonwealth Bank of Australia v Witherow [2006] VSCA 45 [10]; B McDonald and J W Carter, ‘The Lottery of Contractual Risk Allocation and Proportionate Liability’ (2009) 26 J Cont L 1, 4. Claims under liquidated damages clauses are considered apportionable by P Megens and B Cubitt, ‘Contract or Conflict? An Overview of the Proportionate Liability Regime and its Difficulties’ (2009) 23 CLQ 3, 7; A Stephenson, ‘Proportional Liability in Australia – the Death of Certainty in Risk Allocation in Contract’ (2005) 22 ICLR 64, 71. 102 Civil Liability Act 2002 (NSW) s 3; Proportionate Liability Act 2005 (NT) s 3; Civil Liability Act 2003 (Qld) sch 2; Civil Liability Act 2002 (Tas) s 3; Wrongs Act 1958 (Vic) s 24AE.

368  Research handbook on remedies in private law resulted from carelessness of the contract-breaker.103 Some commentators have argued that a wide interpretation of the phrase promotes the legislatures’ intention to combat a rise in liability insurance premiums, since liability insurances typically apply to any form of contractual liability, whether fault-based or strict.104 That may be true. But the wide interpretation has the effect that a limitation of liability for breach of a strict contractual obligation is enjoyed by a contract-breaker who caused the breach through carelessness but not by a contract-breaker who was not at fault. Being at fault leads to a reduction of liability. This is absurd.105 Another problem created by some of the proportionate liability statutes in Australia is that they fail to expressly preserve the enforceability of agreements in which parties allocate a certain risk, loss or liability as between them. This applies to agreements between a plaintiff and a wrongdoer and to agreements between wrongdoers. In the circumstances in which they apply, the proportionate liability statutes provide that the liability of a concurrent wrongdoer is limited to a part of the loss suffered by the plaintiff. None of the statutes expressly provides that this limitation of liability is subject to an agreement to the contrary between the plaintiff and that wrongdoer. However, the statutes of New South Wales, Tasmania and Western Australia expressly permit a contracting out of the proportionate liability provisions.106 A contracting out may be implied from the terms of the contract and does not require a reference to the proportionate liability statute.107 An agreement between the plaintiff and a concurrent wrongdoer in which the latter undertakes to completely indemnify the former against certain loss must be regarded as an implied contracting out of the proportionate liability statute.108 The Queensland statute prohibits a contracting out of its proportionate liability provisions,109 and the statutes of the remaining jurisdictions are silent in that respect, which has been interpreted as a tacit prohibition of contracting out.110 In these

In favour of proportionate liability: Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd [2007] FCA 1216, (2007) 164 FCR 450 [27]–[30]; Reinhold v NSW Lotteries Corporation (No. 2) [2008] NSWSC 187, (2008) 82 NSWLR 762 [19]–[30]; Solak v Bank of Western Australia Ltd [2009] VSC 82, [35] (rev’d on other grounds, leaving the present issue expressly open, in [2010] VSCA 355, (2010) 31 VR 46 [95]); Fulton Hogan Construction Pty Ltd v Grenadier Manufacturing Pty Ltd [2012] VSC 358 [389]; Perpetual Trustee Co Ltd v CTC Group Pty Ltd (No. 2) [2013] NSWCA 58 [42] (Barrett JA). Against proportionate liability: Serong v Dependable Developments Pty Ltd [2009] VCAT 760 [349]; Spiteri v Stonehenge Homes & Associates Pty Ltd [2011] VCAT 2267 [136]; Perpetual Trustee Co Ltd v CTC Group Pty Ltd (No. 2) [2013] NSWCA 58 [22]–[23] (Macfarlan JA). 104 O Hayford, ‘Proportionate Liability – its Impact on Contractual Risk Allocation’ (2010) 26 BCL 11, 17–9; A Stephenson, ‘Proportional Liability in Australia – the Death of Certainty in Risk Allocation in Contract’ (2005) 22 ICLR 64, 71–3. 105 B McDonald and J W Carter, ‘The Lottery of Contractual Risk Allocation and Proportionate Liability’ (2009) 26 J Cont L 1, 15, 18. 106 Civil Liability Act 2002 (NSW) s 3A(2); Civil Liability Act 2002 (Tas) s 3A(3); Civil Liability Act 2002 (WA) ss 4A, 5AJ(2)(b). 107 Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3, (2010) 20 Tas R 239 [15]–[17], [71], [111]. The possibility of an implied contracting out was not considered in Reinhold v NSW Lotteries Corporation (No. 2) [2008] NSWSC 187 [84]–[85]. 108 O Hayford, ‘Proportionate Liability – its Impact on Contractual Risk Allocation’ (2010) 26 BCL 11, 26. 109 Civil Liability Act 2003 (Qld) s 7(3). 110 Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355, (2010) 31 VR 46 [96], for the Wrongs Act 1958 (Vic); Bathurst Regional Council v Local Government Financial Services Pty Ltd (No. 5) [2012] FCA 1200 [3483]–[3484], for the Corporations Act 2001 (Cth). See also 103

Australian perspectives on contract damages  369 jurisdictions, the proportionate liability statute overrides indemnity agreements between a plaintiff and a concurrent wrongdoer. All the proportionate liability statutes provide that a concurrent wrongdoer whose liability is limited by the statute cannot be required to indemnify another concurrent wrongdoer or to contribute to the damages recovered from another concurrent wrongdoer.111 The statutes of the Northern Territory, Tasmania and Western Australia add that contractual agreements for contribution or indemnity remain unaffected.112 The omission of that latter provision in the statutes of the other jurisdiction does not necessarily indicate that the legislatures of those jurisdictions intended the proportionate liability regime to override liability agreements between wrongdoers.113 Such agreements should be considered enforceable in New South Wales because, as seen, a contracting out of the proportionate liability regime is permitted in that state and an agreement between concurrent wrongdoers on the allocation of liability as between them should be regarded as an implied contracting out of the proportionate liability regime.114 Commentators have suggested that the provisions under which a concurrent wrongdoer against whom a judgment was given under a proportionate liability statute cannot be required to indemnify another concurrent wrongdoer can be interpreted so as to preserve pre-existing indemnity agreements. Three interpretations have been suggested. First, the provisions, according to their wording, only prohibit indemnification after judgment and thus do not prevent a court, before judgment, from considering an indemnity agreement in allocating the liability shares.115 Secondly, the provisions only prevent a court from requiring a person to indemnify the other, but a contract that requires an indemnity can be enforced.116 Thirdly, the provisions apply only to common law rights of indemnity, but not to contractual rights of indemnity.117

O Hayford, ‘Proportionate Liability – Its Impact on Risk Allocation in Construction Contracts’ (2006) 22 BCL 322, 338. 111 Civil Law (Wrongs) Act 2002 (ACT) s 107H; Civil Liability Act 2002 (NSW) s 36; Proportionate Liability Act 2005 (NT) s 15(1); Civil Liability Act 2003 (Qld) s 32A; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) s 9; Civil Liability Act 2002 (Tas) s 43C(1); Wrongs Act 1958 (Vic) s 24AJ; Civil Liability Act 2002 (WA) s 5AL(1). In Queensland, a wrongdoer who has been sued by the plaintiff may seek contribution from a wrongdoer not party to that proceeding: Civil Liability Act 2003 (Qld) s 32H. 112 Proportionate Liability Act 2005 (NT) s 15(2); Civil Liability Act 2002 (Tas) s 43C(2); Civil Liability Act 2002 (WA) s 5AL(2). 113 B McDonald and J W Carter, ‘The Lottery of Contractual Risk Allocation and Proportionate Liability’ (2009) 26 J Cont L 1, 20–1. 114 See, in a different context and for the Tasmanian statute, Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3, (2010) 20 Tas R 239 [15]–[17], [71], [111]. The possibility of an implied contracting out was not considered in Reinhold v NSW Lotteries Corporation (No. 2) [2008] NSWSC 187 [84]–[85]. 115 J Watson, ‘From Contribution to Apportioned Contribution to Proportionate Liability’ (2004) 78 Aust LJ 126, 144. 116 B McDonald, ‘Proportionate Liability in Australia: The Devil in the Detail’ (2005) 26 Aus Bar Rev 29, 44. 117 O Hayford, ‘Proportionate Liability – its Impact on Contractual Risk Allocation’ (2010) 26 BCL 11, 22–3.

370  Research handbook on remedies in private law On principle, it is difficult to see why agreements on contribution or indemnity should not be enforceable where the parties dealt at arm’s length.118 Freedom of contract is a fundamental principle of Australian law (as well as other legal systems), and exceptions from that principle require good reason.119 The protection of insurers (in order to stem a rise in premiums) might constitute a good reason. But it is far from certain that the unenforceability of agreements on contribution or indemnity fosters that objective because it creates uncertainty, which may encourage litigation120 and may thus increase the overall amount of loss borne by insurers.

VI CONCLUSION While the Australian law on contract damages is to a large extent still identical or very similar to the law in other Commonwealth countries, the divergence is increasing. This century has seen a number of developments, both at common law and through statutory intervention, which take Australian law in a new direction. Divergences in the law between Commonwealth countries reduces the utility of cases from one jurisdiction for the development and understanding of the law of another jurisdiction. But it may also provide an impetus for change, through case law development or statutory reform. The civil liability reform in Australia not only increased the divergence between Australian law and the law of other Commonwealth countries, but also created divergence within Australia. A striking feature of the reform is the lack of uniformity between jurisdictions. In some areas, for example the availability and amount of damages for non-pecuniary loss, there are no two jurisdictions in Australia that have exactly the same law. Whatever the merits of the reform in principle, the lack of uniformity is highly undesirable. It creates the need for choiceof-law exercises and means that every jurisdiction needs to build up its own case law on the interpretation of the relevant statutory provisions. The Australian legislatures ought to come together and enact a uniform set of provisions.

118 Imbalances in bargaining power are to a large extent addressed by the unfair terms provisions in Part 3-2 of the Australian Consumer Law, which is in Schedule 2 of the Competition and Consumer Act 2010 (Cth). 119 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, (2005) 224 CLR 656 [32]. 120 O Hayford, ‘Proportionate Liability – its Impact on Contractual Risk Allocation’ (2010) 26 BCL 11, 23.

20. Canadian perspectives on contract remedies Jeff Berryman

INTRODUCTION To understand Canadian developments in contractual remedies requires an appreciation of the context in which this development has taken place. Common law provinces in Canada can all point to some legislation that adopted English law and states that any particular provincial superior court has the entire jurisdiction historically exercised by courts of common law and equity in England.1 This simple formulation brought with it common law principles and methodology. As is evident in other chapters of this book, there is a degree of stability in the theory, doctrines and principles that underpin the common law of contract, and which all form part of Canadian contract law. Canada has a federal constitutional structure, which places the Supreme Court of Canada at the apex of appellate courts. Decisions of the Supreme Court of Canada bind all lower provincial appellate and inferior courts regardless of the jurisdiction from which the appeal originated, and to the extent that the ruling under appeal is not dependent upon the application and interpretation of some particular or local provincial statute. The decisions of provincial appellate and other inferior courts are only binding within the province, although they can be persuasive, and this has led to a high degree of unity between provinces. The development of contract remedies by the Supreme Court of Canada and other provincial appellate courts can be characterised as episodic rather than transformational. The incidence of contact cases getting before the Supreme Court of Canada is relatively low. This may be partly explained because although a trading nation, Canada is not an international centre of shipping, insurance or banking, and therefore does not generate litigation justiciable within Canada on those issues. Over two-thirds of foreign trade is with the United States of America. This trade largely engages sophisticated supply chains, which place a higher value on nurturing an ongoing relationship rather than resorting to litigation to deal with contractual performance disputes. At a consumer level, every province has a different approach to consumer protection and citizens disputes. Generally, each province provides consumer protection through a variety of statutes that may identify particular classes of consumer contracts and then provides a statutory regime of remedies, or a broad exhortation to a court or tribunal to do what is fair and just in the circumstances.2 However, this is not to suggest that Canada is without its own distinctiveness in a number of areas. For example, Canadian courts have chartered a different course with respect to unjust enrichment.3 The Supreme Court of Canada has taken a different approach to the reasonable For example, in Ontario see Courts of Justice Act, RSO 1990, c C-43, s 11(2). For example, in British Columbia see the Business Practices and Consumer Protection Act, SBC 2004, c 2, in Alberta, Fair Trading Act, RSA 2000, c F-2, and in Ontario, Consumer Protection Act, 2002, SO 2002, c 30. 3 Garland v Consumers’ Gas Co [2004] 1 SCR 629, and Kerr v Baranow [2011] 1 SCR 267. 1 2

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372  Research handbook on remedies in private law expectations of parties to tendering and procurement contracts;4 to ways in which a third party can gain the benefits of a contract where it has not provided consideration;5 and to the introduction of a general duty of good faith contractual performance.6 With respect to contract remedies, and what will be explored below, the Supreme Court of Canada is something of an outlier with respect to punitive damages for breach of contract,7 and the availability of specific performance.8 It has also chartered a slightly different course from English law over damages for intangible losses,9 the granting of rectification,10 aspects of mitigation,11 alternative performance,12 and lower appellate courts have changed the law of betterment.13 This chapter has been organised in the following way. First, doctrines that change the quantification of contract damages assessment although the overarching principle of achieving just compensation is retained; second, specific heads of damages that seek to go beyond compensatory or pecuniary damages; and third, equitable remedies.

A

DISCRETE CHANGES IN DOCTRINE WHILE RETAINING THE COMPENSATION GOAL

1 Mitigation The concept of mitigation when applied to marketable goods is embodied in what is known as the market price rule; a rule that states in a case of breach of contract of marketable goods the claimant is entitled to the difference between the contract price and the market price at the date of breach, or as soon thereafter. A later date has been termed the date when the losses are ‘crystallised’ and represents the point when the claimant must reassume the risk of market fluctuations.14 Mitigation requires the plaintiff to be treated as if they have re-entered the market and purchased or sold like goods. The plaintiff does not actually have to purchase or sell like goods, although if that step has been taken, it will often become the best evidence of the market price, but they will be treated as if that act has taken place. The market price rule contemplates an operative market in which goods are either available, or in demand. Market failure will justify different steps in mitigation, often resulting in shifting the date of damage assessment, even as far as to the date of trial. In most common law jurisdictions, real property does not fit into the market price rule because it is treated as being unique and therefore generates a presumptive remedy of specific performance, which, even where damages are ultimately

R v Ron Engineering & Construction (Eastern) Ltd [1981] 1 SCR 111, and MJB enterprises Ltd v Defence Construction (1951) Ltd [1999] 1 SCR 619. 5 London Drugs Ltd v Kuehne & Nagel International Ltd [1992] 3 SCR 299, and Fraser River Pile & Dredge Ltd v Can-Drive Services Ltd [1999] 3 SCR 108. 6 Bhasin v Hrynew [2014] 3 SCR 494. 7 Whiten v Pilot Insurance Co [2002] 1 SCR 595. 8 Semelhago v Paramadevan [1996] 2 SCR 415. 9 Fidler v Sun Life Assurance Co of Canada [2006] 2 SCR 3. 10 Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd [2002] 1 SCR 678. 11 Southcott Estates Inc v Toronto Catholic District School Board [2012] 2 SCR 675. 12 Hamilton v Open Window Bakery Ltd [2004] 1 SCR 303. 13 Upper Lakes Shipping Ltd v St Lawrence Cement Inc (1992) 89 DLR (4th) 722 (Ont CA). 14 S Waddams, The Law of Damages (Canada Law Book 2012) paras 1-1480, 1-1730. 4

Canadian perspectives on contract remedies  373 awarded, allows for a shift in the assessment of the price of the contested property closer to the date of judgment. As is discussed below, this is not the position in common law Canada, where specific performance is no longer a presumptive remedy in sale of real property cases. The application of the market price rule and real property is central to the decision of the Supreme Court in Southcott Estates Inc v Toronto Catholic District School Board.15 But the case also raises the novel situation where a claimant property developer seeks to argue that they are a ‘volume buyer’, and therefore do not have to take the profit made on a sale of a subsequent purchase into account as an act of mitigation. The volume buyer is the obverse of the volume seller, who seeks to argue that because they have the capacity to meet every purchaser’s request, the breach by any one purchaser is the loss of the total profit on that sale, and should not be reduced by taking the subsequent profit made on the sale of the goods freed up by breach as an act of mitigation. In Southcott the plaintiff developer, a single purpose company, was a subsidiary of Ballantry Homes, a holding entity for a number of other single purpose companies that developed property in the wider metropolitan Toronto area. The plaintiff wished to purchase vacant land from the defendant School Board; land which was surplus to the Board’s needs, but which was first required to be severed through an appropriate planning application. The parties negotiated an agreement for sale and purchase which was conditional upon the Board obtaining the appropriate planning severance and which also gave the plaintiff a further 30 days in which to exercise due diligence to ensure that it could successfully develop the land into residential building lots. The Board was dilatory in making attempts to secure the planning consent. It was reluctant to go through this process while there was a possibility that the purchaser would be unable to secure consent to a viable residential development. In spite of a number of extensions of time, the Board never secured the planning severance and the plaintiff commenced suit for breach of contract claiming that the Board failed to use best efforts to secure the planning approval. Most of the trial judgment is devoted to determining whether the Board had in fact breached its contractual obligation to use best efforts to secure planning consent. The trial judge found for the plaintiff and held that the Board was deficient in numerous respects in failing to secure the planning severance. This established both breach of contract and causation, the Board’s breach giving rise to a consequential loss of profits on the potential development of the subject land.16 Although the plaintiff sought specific performance at trial, this was denied, leaving the claim for damages, not in lieu of specific performance but for breach of contract. The parties agreed that the value of the land had not increased between the time the contract had been formed, the date of breach, or the date of trial; the relevant period being effected by the global economic crisis during that period. The plaintiff claimed for consequential losses; those that flowed from the loss of profits envisaged from a successful residential development had the contract been performed. Because the eventual development was dependent upon securing planning consent, a matter that ultimately lay in the hands of a third party, the municipality, the assessment of damages engaged the loss of a chance, which was placed at 60 per cent of the expected profits. However, the defendant also challenged the assessment of damages claiming that the plaintiff had failed to avail itself of an opportunity to mitigate its losses. In particular, Southcott Estates (n11). The description of the facts and ruling in Southcott (n11) are taken from J Berryman, ‘Mitigation, Specific Performance, and the Property Developer: Southcott Estates Inc v Toronto Catholic District School Board’ (2013) 51 Alberta Law Rev 165. 15 16

374  Research handbook on remedies in private law the defendant claimed that following its breach, the plaintiff could have purchased similar development property and thus lessened the lost profits incurred. With the evidential burden being placed on the defendant to prove that the plaintiff did not avail itself of an opportunity to mitigate, the defendant adduced evidence that during the relevant period other companies in the Ballantry Group did purchase development property. In addition, the defendant provided evidence that some 81 parcels of land were available for development and that 49 properties were subdivided during the relevant period. The trial judge, Spiegel J did not accept the defendant’s submission on mitigation. The fact that other Ballantry companies purchased land was characterised as ‘collateral’ activity. Ballantry was always in the market for land; it had the financial resources to make those purchases regardless of its commitment to the transaction with the defendant, and thus, those subsequent dealings did not arise out of the consequences of the breach and were not steps made in mitigation. Spiegel J rejected the evidence of the availability of other properties on the basis that the evidence did not actually demonstrate that the properties were available to the plaintiff for sale or that they were capable of profitable development, only that they had been sold during the relevant period. The plaintiff was awarded $1,935,500 damages (60 per cent of $3,225,827). The defendant appealed claiming: (1) the trial judge had erred in finding the Board’s breach of duty was the proximate cause of the failure to secure severance consent; and, (2) the trial judge had failed to apply the doctrine of mitigation appropriately.17 On the first ground of appeal, the Court of Appeal affirmed the trial judge. On the second ground, the Court of Appeal found the trial judge had erred on the assessment of damages in that he failed to take proper account of the evidence concerning mitigation. The Court of Appeal accepted that the defendant’s evidence on the availability of other suitable vacant land sites did discharge the onus on the defendant to demonstrate that the plaintiff failed to take reasonable steps in mitigation. To require more of the defendant, as the trial judge had insisted, was to place too high a burden on the defendant. In fact, the Court of Appeal held that the simple assertion by the plaintiff during testimony that it had no intention of mitigating loss was sufficient to meet the onus on the defendant and to shift the evidentiary onus to the plaintiff to demonstrate that, even if it had taken steps in mitigation, it could not have done so. In addition, the fact that other Ballantry companies had made purchases proved that there was suitable development land available. The Court of Appeal awarded nominal damages of one dollar. The appeal to the Supreme Court of Canada was on the sole issue of mitigation, and, in particular, what obligation lay on a single purpose company to mitigate, and whether there was evidence of comparable properties available for mitigation. The Supreme Court, by a majority, affirmed the Court of Appeal’s decision. With respect to the obligation of a single purpose company to mitigate, Karakatsanis J, writing for the majority, quickly dismissed Southcott’s argument that because it was dependent upon funds to complete the deal flowing from its parent company, Ballantry, all that could be expected of it was to litigate expeditiously in bringing an action for specific performance. Of course, a claim for specific performance meant that Southcott had access to the resources to complete the sale, which, because of the breach, could now be applied to mitigation. In addition, factually, Southcott did not argue that it was impecunious nor lacked access to capital

(2010) 104 OR (3d) 784 (CA).

17

Canadian perspectives on contract remedies  375 or the ability to borrow at favourable rates. Finally, to distinguish single purpose companies from an obligation to mitigate would unfairly advantage this corporate structure and possibly impose higher damages on defendants who dealt with them. Southcott was also caught on its own petard. It argued that properties purchased by other Ballantry companies had to be treated as collateral because Ballantry was always in the market for land and thus it held no obligation to mitigate. Karakatsanis J responded, stating that Southcott cannot claim the benefits of maintaining a separate legal identity with respect to a claim for specific performance, but at the same time claim the benefits of Ballantry’s corporate structure in answer to why other comparable properties could not be purchased in mitigation. The sole question was whether the reasonableness of Southcott’s actions following breach had been sufficient to satisfy the obligation to mitigate. With respect to the evidentiary issue of what the defendant had to prove, the majority reiterated that the onus of proving a failure to mitigate lies on the defendant, and is satisfied only upon proof that the plaintiff, ‘failed to make reasonable efforts to mitigate and that mitigation was possible’.18 This approach rejected the Court of Appeal’s analysis that Southcott’s admission that it had no intention of ever mitigating had the effect of shifting the evidentiary onus on to Southcott to prove that even if it had taken steps to mitigate there were no comparable properties available. Rather, the onus always stayed with defendant, but the trial judge had made an ‘error in principle in failing to consider relevant evidence’, an error which ‘skewed his factual analysis of the issue of mitigation’.19 Combined, these errors constituted a ‘palpable and overriding error’ justifying appellate court intervention. Turning to the specific evidence before the Court, the majority concluded that the trial judge should have drawn a reasonable inference from the Board’s evidence concerning the sale of 81 properties of raw land and the 49 properties actually developed over the relevant time that suitable investment properties were available to Southcott. Similarly, a reasonable inference of profitability flowing from these developments could be drawn based on the fact that other experienced developers had completed the developments. Finally, the majority held that the trial judge had made an error in not accepting the evidence of other purchases made by Ballantry group of companies, of which there were seven developments, as evidence of ‘available comparable mitigation opportunities’.20 The Chief Justice dissented in Southcott. She defined the onus upon the defendant to show a failure to mitigate in slightly stronger language, opining that the defendant had to prove, ‘that opportunities to mitigate the loss were available to the plaintiff, and that the plaintiff had failed to pursue these opportunities’.21 The Board’s evidence was deficient to meet this test in that its expert witness did not give evidence that any of the properties which had been sold and developed were actually available for sale to the plaintiff, and that the proffered comparable properties were not actually that factually comparable in terms of size, location or profitability. The Chief Justice also accepted that other purchases by Ballantry companies should be treated as collateral and that Ballantry had the financial capacity to purchase as many good properties as it could find. In addition, none of the properties purchased by other Ballantry companies were factually comparable, nor was evidence provided that they had been offered to Southcott Southcott (n11) at [24] and [45]. Ibid, at [48]. 20 Ibid, at [55]. 21 Ibid, at [73]. 18 19

376  Research handbook on remedies in private law for purchase. If they had been offered to Southcott, that would have put Southcott in competition with other Ballantry companies and added an element of speculation on whether it would have been successful in acquiring a substitute property. In Southcott, the plaintiff did not seek damages measured as a difference in contract price and market price at the date of breach because there was none, but, rather, argued for consequential losses, the profit to be made from the contemplated successful development. As long as within the rules of remoteness and the contemplation of the parties at the time of contracting, these damages are recoverable, but subject to the obligation of mitigation. It is quite reasonable to expect a property developer to continue pursuing viable property development opportunities as an act of mitigation. The Chief Justice would require the defendant to prove that any subsequent development, in this case made by another of the Ballantry group of companies, presented a similar set of factual comparators to the land and planned development contemplated for the land the subject of the dispute. The argument about the volume buyer, if successful, would have taken courts into interesting issues of evidential proof on what a volume buyer would have to show in terms of both financial resources and capacity to undertake multiple property developments. While there is a symmetry between volume seller22 and volume buyer, accepting the volume buyer argument would undermine the utility of the mitigation principle and further complicate settlement negotiations, particularly where the property developer is likely to have the upper hand in any negotiations. 2 Betterment The concept of betterment describes the measure to which a plaintiff is placed in a better position than it held prior to the breach or wrongdoing that has damaged his or her property, owing to the fact that the only way to restore the plaintiff’s property is by using new material in place of the old. In this way, the plaintiff is said to be better off as a result of the harm suffered than if no breach had happened. The traditional approach to this argument brought by the defendant to reduce the damages to be paid has been that it does not lie in the mouth of the wrongdoer to complain about the funds necessary to restore the innocent party where there is no alternative but to replace new for old. In addition, to make such a betterment deduction would leave the innocent party with insufficient funds to affect the repairs, or require the innocent party to devote funds toward the repairs in advance of the time when the property damaged was normally going to be replaced. More often than not, any betterment was ignored and the plaintiff awarded the full cost of replacement unless the circumstances made the award unreasonable.23 The position in Canada has been influenced by two decisions of the Ontario Court of Appeal, James Street Hardware and Furniture Co Ltd v Spizziri,24 and Upper Lakes Shipping Ltd v St Lawrence Cement Inc.25 In the latter case, the plaintiff owned and operated a bulk ore The argument of volume seller has been successfully argued in Apeco of Canada Ltd v Windmill Place [1978] 2 SCR 385 concerning the partial leasing of warehouse and shopping mall. At the time of entering the lease, the premises were entirely vacant. Upon repudiating the lease, the plaintiff entered into another partial lease of a different part of the premises. This lease did not have to be brought in to an action against the tenant for repudiating their lease as an act of mitigation. 23 See the position in English law summarised in four principles by Cresswell J in Kuwait Airways Corp v Iraqi Airways Co (No. 6) [2004] EWHC 2603. 24 (1987) 62 OR (2d) 385 (CA). 25 (1992) 89 DLR (4th) 722 (Ont CA). 22

Canadian perspectives on contract remedies  377 carrier on the Great Lakes. In one shipment, it received a cargo of coal and coke breeze from the defendant that, unbeknown to the defendant, and in breach of contract, contained a piece of steel plate mixed with the coke. The plaintiff’s carrier unloaded through the use of a central conveyor belt in the hold of the ship. The steel plate cut the conveyor belt, necessitating its replacement. At the time of replacement, the life span of a conveyor belt was 15 years. The plaintiff’s damaged conveyor belt still had 12 years of useful life at the time of the accident. The cost to replace the belt was $231,460. The Court of Appeal allowed a betterment deduction, in essence allowing the defendant a deduction, but compensating the plaintiff for the fact that an expenditure of resources is being called for in advance of the usual time for replacing the damage property. The court’s new approach can be articulated in the following principles: (1) A betterment deduction is only justified where the court has agreed that the claimant is entitled to a replacement, cost of cure, or restoration cost damages assessment. The burden lies on the plaintiff to provide evidence of the cost of restoration. If the plaintiff has taken the opportunity to enhance the functionality of the property, or increased beyond mere replacement the damaged property, a betterment deduction should be made without resort to quantifying the carrying charges associated with the further enhancement. The plaintiff is responsible for all these additional expenditures. The defendant has not caused these to be incurred; rather the plaintiff is seizing a convenient opportunity to make these changes. (2) Where the plaintiff has restored property and is placed in a better position, i.e. replacing with new material for old, the defendant is entitled to claim a betterment deduction. The onus is upon the defendant to demonstrate and quantify the betterment. (3) To determine the betterment value, the court must be in a position to quantify the time period over which the betterment value would normally be realised. In the case of a chattel or wasting asset, evidence of the life span is required. Accounting records of depreciation may assist, but are not determinative. Often, depreciation in an accounting sense bears no relationship to the actual physical life span of a chattel, and simply reflects tax treatment. For real property, identifying a life span of a building can be problematic. The carrying charges over a long period for which the claimant will be entitled may outweigh any betterment deduction to the defendant. It may be easier to determine economic life spans of commercial buildings than for residential buildings. (4) Once the betterment deduction is proved, the claimant has the onus to quantify the carrying charges. The carrying charges result from the fact that the plaintiff has been required to expend, or to borrow money in advance of when such resources would normally have been expended, or borrowed, to replace the exhausted chattel of building. (5) The quantification of carrying charges is not just a straight multiplication of annual interest times the number of years over which the betterment has occurred. The interest (either as a foregone opportunity if the plaintiff expended his or her own money, or as interest if borrowed) must be brought back to present day value and amortized over the betterment period to reflect that interest earned, or incurred, in any one year would have only become available, or liable, in that particular year, and would not have been available at the time of judgment.26

J Berryman, ‘Betterment before Canadian Common Law Courts’ (1993) 72 Can Bar Rev 54.

26

378  Research handbook on remedies in private law This new approach does have its detractors,27 but it has won support across Canada and certainly is a more responsive and practical way to quantify betterment than simply ignoring it or leaving it to chance in some determination by a court of what is fair and reasonable. 3

Alternative Performance

The correct approach to the assessment of damages where a defendant has alternative modes of performance has been given new life in the Supreme Court of Canada’s decision in Hamilton v Open Window Bakery Ltd.28 The case involved a simple repudiation by the defendant of a 36-month agency contract in which the plaintiff was given the exclusive rights to represent the defendant in Japan for the purpose of selling frozen bagel dough. A clause in the contract provided that it could be terminated at any time without notice if the agent detrimentally acted against the principal’s interest. Another clause gave the right to unconditionally terminate following the eighteenth month, upon giving three months’ notice. The defendant gave notice in the sixteenth month, stating that the agent had acted detrimentally to the principal’s interests in that the agent had acted dishonestly in falsifying documents that described the ingredients on the defendant’s products leading to import problems with Japanese trade authorities. Subsequently, the defendant sent a further notice relying upon the right to terminate upon three months’ notice. At trial, the defendant was found to have improperly terminated the agency agreement in that it could provide no evidence of dishonesty or fraud by the plaintiff; at most she had acted negligently.29 For wrongful repudiation the trial judge assessed the damages as being the commissions to be earned on the remaining term of the agency agreement less a 25 per cent contingency for the possibility of an earlier termination. The trial judge found that the defendant was generally forgiving of mistakes and negligent conduct, and only took a hard line on matters of integrity. Had the defendant completed a proper investigation of the facts surrounding the plaintiff’s termination, and thus revealed the negligent conduct rather than dishonesty, they would not in all likelihood have terminated the agency agreement. Before a majority of the Court of Appeal30 and the Supreme Court of Canada the damages assessment was overturned. The applicable principle is that where a defendant has wrongfully repudiated a contract that provides for alternative modes of performance, damages are to be assessed using the mode of performance most advantageous to the defendant and least beneficial to the plaintiff. In this case, the plaintiff’s argument was seen to be analogous to a tortious approach to damages assessment. This was described by the Supreme Court as being an inappropriate analogy for the reason that tortious obligations are imposed when the plaintiff’s legally protected interests have been unduly compromised, whereas contractual duties are voluntarily undertaken. The object in tort is restorative of the position the plaintiff would have been in but for the commission of the wrong. In contract, the plaintiff is only entitled to be placed in the position they would have been in had the contract been performed, not the position they would have expected to be in had the repudiation not occurred. Applied in this case the damages were reduced to the earnings the plaintiff would have made on the basis 29 30 27 28

M Pratt, ‘Betterment’ (2017) 40 Dalhousie LJ 67. [2004] 1 SCR 303. [2000] OJ No. 5004 (QL). (2002) 58 OR (3d) 767 (CA).

Canadian perspectives on contract remedies  379 that the defendant could have terminated the contract on three months’ notice following the eighteenth month of the contract. This was the minimum level of performance prescribed by the contractual terms and thus became the upper level for damages assessment. The position enunciated by the Supreme Court is undoubtedly correct. In application, it allows for more expeditious settlement because it engages in less speculative inquiry on the plaintiff’s expected position had the contract not been breached; and is likely to shorten the prospective period over which the plaintiff’s actual losses will be determined following breach, as in Hamilton v Open Window Bakery Ltd. Criticism of the doctrine has been levelled because it does violence to the compensation principle; that a plaintiff is entitled to receive compensation for all its provable losses that flow from breach.31 In effect, if the plaintiff takes the evidential burden and proves that the defendant would have done more than it was contractually obliged to perform, and that gave rise to reasonable expectations in the plaintiff, why should the plaintiff be denied compensation for those unrealised expectations? This approach would abandon the pragmatism implicit in the doctrine’s application that avoids unnecessary speculative inquiry on the plaintiff’s expectations and the impact of breach. It should also be recalled that it is open for the parties to avoid the doctrine’s application through the simple expediency of not providing for alternative ways of performance. The doctrine of alternative performance is conditional upon there being alternative ways of performing the contract. Subsequent cases in Canada raising alternative performance often falter because they do not find in the contract explicit evidence of alternative ways of performing the contract and thus do not meet a prerequisite for its application. A recent novel attempt at avoiding the application of the principle occurred in Agribrands Purina Canada Inc v Kasamekas.32 The plaintiff sought to avoid the application of the doctrine by arguing that in addition to the wrongfully repudiation, the defendant had also breached the new doctrine requiring contracting parties to act honestly and in good faith when performing their contracts.33 The plaintiff argued that breach of the latter should result in denying the defendant the advantages of the alternative performance doctrine. The Ontario Court of Appeal rejected this approach, in effect demonstrating the paramountcy of the alternative performance doctrine. However, the court did allow the plaintiff punitive damages based upon the finding that breach of an obligation of honesty and good faith performance can amount to a separate actionable wrong.

B

BEYOND COMPENSATION AND PECUNIARY LOSS

1

Punitive Damages

Canada is something of an outlier with respect to allowing punitive damages for breach of contract, although this is consistent with an underlying value of Canadian common law that views private civil law litigation as an appropriate vehicle to regulate conduct. In other words, 31 M Pratt, ‘Damages for Breach of Contracts with Alternative Performance’ in J Berryman and R Bigwood (eds), The Law of Remedies: New Directions in the Common Law (Irwin Law 2010) ch 5. 32 (2011) 106 OR (3d) 427 (CA). 33 Bhasin (n6).

380  Research handbook on remedies in private law the private law of contract can be used for distributive justice ends and not be confined to corrective justice. The key development of this law in Canada is the Supreme Court’s judgment in Whiten v Pilot Insurance Company.34 The Whitens experienced a fire that totally destroyed their home. The fire happened at night in the dead of winter in minus eighteen degrees Celsius temperature. While saving themselves and going for help, Keith Whiten experienced frostbite requiring hospitalisation for a period. The Whitens secured rental accommodation in the vicinity of their home and sought to re-establish themselves. Their insurer, Pilot Insurance, initially provided a lump sum of $5,000, but then took an aggressive and hostile approach to further payouts, claiming that the Whitens had set fire to the home themselves. The fire chief who investigated the fire refuted this assertion, as did the defendant’s own experienced insurance adjustor, who clearly found the fire to be accidental. However, sustaining Pilot’s position was the fact that the Whitens were encountering financial difficulties at the time of the fire and had experienced a fire in a home they previously owned. Confronting a refusal to pay out, the Whitens commenced a claim for breach of contract. In a jury trial, the plaintiffs were awarded $318,000 compensatory damages and $1 million punitive damages. The trial judge noted that while the punitive damages amount was unprecedented, it was neither perverse nor unreasonable. Pilot had forced the plaintiffs to litigate while in financially difficult circumstances; to suffer an indignity of living in temporary rental accommodation when they had paid a premium insurance policy for ‘piece of mind’ insurance; and, against a background of Pilot mounting a defence to paying out, which had been specifically refuted by their own experts. Pilot Insurance immediately appealed. In the Ontario Court of Appeal, all three judges felt an award of punitive damages was justified; however, the majority believed that an award of a $1 million was excessive. There was no evidence of a corporate strategy to deny paying out or that Pilot had profited from wrongdoing; rather, this had been the isolated act of one manager and defence counsel. The majority would have reduced the punitive damages to $100,000. In the Supreme Court, the jury award was reinstated. Binnie J, for the majority, took the opportunity to fully expound the basis upon which an award could be made and the principles that guide quantification. Two issues dominated the judgment, the need to justify when private civil law could impose punishment and how to avoid an excessive quantum through the application of consistent principles. On the first issue, the goals of punitive damages are punishment (retribution), deterrence and denunciation. While the criminal law is the primary vehicle in pursuit of these goals, in civil law an award of punitive damages is warranted in ‘exceptional cases’ where there is a ‘rational connection’ between the award and the need for punishment, deterrence or denunciation. In contract law, there must be an actionable wrong independent of the simple breach itself that has caused injury to the claimant. In Whiten, that wrong was the implied duty of good faith and fair dealing imposed by law on an insurer. On the second issue, punitive damages are ‘not at large’, but must serve a rational purpose. Because compensatory damages already provide an element of punishment, deterrence and denunciation, the need for punitive damages must stem from the fact that the defendant’s conduct is so ‘outrageous’ or because it ‘offends the court’s sense of decency’ that more is required to register the appropriate level of punishment, deterrence and denunciation. The ‘rational connection’ test also applies to quantification and is made taking into account a number of factors demonstrating that the damages amount is a ‘proportionate response’.

Whiten (n7).

34

Canadian perspectives on contract remedies  381 Those factors are: the blameworthiness of the defendant’s conduct, the degree of vulnerability of the claimant, the level of harm specifically direct against the claimant, the need for deterrence, the need for an additional penalty after taking into account the compensatory damages awarded and/or any criminal penalties imposed, and, any advantage wrongfully obtained by the defendant through breach. On the facts before the Supreme Court in Whiten, had it been considering the case de novo, it would not have awarded $1 million punitive damages. Nevertheless, the jury’s award was within the boundaries of rational limits in which juries operate, and the Count of Appeal should have shown deference to the jury’s assessment as the minority judge below had done. There are over 1,600 subsequent decisions citing Whiten, and a good number that have generated appeals. Many of the appealed decisions raise the issue of the duty of good faith performance by an insurer as an independent wrongful act to support a punitive damages award. However, another set of cases raise the issue of excessive quantum of punitive damages. The standard of review is lower, or more ‘interventionist’ when considering appeals of punitive damages.35 These cases suggest a problem with the Supreme Court’s handling of punitive damages, and the decision in Pate Estate v Galway-Cavendish and Harvey (Township)36 is emblematic. The case involved a wrongful dismissal and malicious prosecution claim by a former employee of a municipality. In effect, the municipality had alleged that Mr Pate had misappropriated funds. At trial, it was revealed that the municipality had withheld information that would have been important to the police in their investigation. The information would have reinforced the view that Pate had not acted criminally. Without this evidence, the police had brought an unsuccessful criminal prosecution of him for misappropriation. At his first civil trial for wrongful dismissal, Pate was awarded $25,000. On appeal, a retrial was ordered. The parties agreed to try the second civil trial on the evidential record of the first trial. This time, the trial judge awarded $550,000 punitive damages. On appeal, a majority of the court ordered that the punitive damages be reduced to $450,000. The dissenting judge would have affirmed the lower court’s order. That there can be such swings in the assessment of punitive damages is indicative of certain instability in the application of the principles relating to punitive damages. I believe the root cause lies in the expressed rationale provided by the Supreme Court: punishment, deterrence and denunciation. Punishment is backwards looking and is concerned with retribution. Important in quantification is to determine the right proportion of retribution warranted, often looked at by comparing to other similar offences and factual settings. Deterrence is forward looking, and itself broken into specific or general deterrence. Specific deterrence will often look at the financial means of the defendant to determine the appropriate deterrence, while general deterrence looks at what amount will be needed to send the appropriate signal to similarly placed defendants to prove the wrong does not pay. Denunciation focuses upon the level of damages demanded by society to send a message of vindication and condemnation. The point being that pursuit of these three rationales leads to quite divergent awards of punitive damages. To ameliorate the potential for divergence, the Supreme Court has imposed its proportionality analysis which, for courts to apply, largely drives them to make comparisons to Whiten (n7) at [108], and Pate Estate v Galway-Cavendish and Harvey (Township) (2013) 117 OR (3d) 481 (CA) at [98], [146] and [202]. 36 Ibid. 35

382  Research handbook on remedies in private law similarly situated awards. Counsel will argue various bands of punitive damages, and whether the particular facts warrant breaking through to the $500,000 or $1 million award. Non-pecuniary Damages

2

Just as with punitive damages, there has been a key case of the Supreme Court of Canada, Fidler v Sun Life Assurance Co of Canada,37 that in respect of non-pecuniary damages for breach of contract makes Canadian law depart from English law, although arguably consistent with developments in New Zealand and Australia.38 Mrs Fidler was employed as a receptionist at a branch of the Royal Bank in British Columbia. Her employer held a long-term disability benefits group policy with Sun Life Assurance. In 1990, at the age of 36, Mrs. Fidler became ill with an acute kidney infection that resulted in her hospitalisation and continuing fatigue. She was eventually diagnosed as suffering from fibromyalgia. Under the disability policy, Fidler became eligible for long-term disability benefits if she was ‘Totally Disabled’, defined in the policy as being in a continuous state of incapacity that prevents her from engaging in any occupation for which she is or may become reasonably qualified. Under the policy, Fidler was entitled for a period of two years to get benefits if she could not do her own job, and after that, if she could not do any job. Fidler was paid benefits until 1997 when she was sent a letter indicating that her benefits were to be terminated because her activities were incompatible with the alleged disability. Sun Life made a surveillance video of Fidler that showed her getting in and out of a car, and shopping etc. Fidler maintained that her activities were consistent with her statement to Sun Life, made earlier in the year, that she could manage living by herself but not more. After the denial of benefits, there ensued two years of correspondence involving medical professionals, investigators and claims examiners. Fidler’s doctor confirmed that she was not capable of returning to work. An independent medical exam stated that she could ‘increasingly be able to consider returning to work’, and ‘prior to this being successful’ she would need a training programme. Each party focused upon that aspect of the report that supported their arguments. In 1999, Fidler commenced an action to reinstate her benefits. Immediately prior to the trial, Sun Life agreed to settle the action by reinstating her benefits and paying all outstanding amounts being $52,516. The trial continued only on the issue of whether Fidler was entitled to damages for mental distress39 and punitive damages. The trial judge found that because the contract of insurance was one that was designed to assure peace of mind, damages for mental distress of $20,000 were justified because she suffered significant additional distress and discomfort arising out of the loss of the disability coverage. The trial judge awarded no punitive damages because the defendant’s conduct, Fidler (n9). In the UK see Farley v Skinner 2001 UKHL 49, [2002] 2 AC 732, and Jonson v Gore Wood & Co [2002] 2 AC 1. In Australia see Baltic Shipping Co v Dillon (1993) 176 CLR 344 (HCA), and in New Zealand see Mouat v Clark Boyce [1992] 2 NZLR 559 (CA), [1993] 3 NZLR 641 (PC) (on another point of law). 39 The lower courts actually called these damages ‘aggravated damages’. This stems from a fundamental fallacy that sees aggravated damages as being synonymous with damages for metal distress. I have commented elsewhere on this false reasoning, ‘Re-conceptualizing Aggravated Damages: Recognizing the Dignitary Interest and Referential Loss’ (2004) 41 San Diego L Rev 1521. The Supreme Court sought to clean up the ambiguous use of aggravated damages at [51]. 37 38

Canadian perspectives on contract remedies  383 while zealous, was not in bad faith. The Court of Appeal affirmed the trial judge on the mental distress damages, but also, by a majority, awarded punitive damages of $100,000 to express the court’s condemnation of the defendant’s conduct that warranted denunciation and deterrence. In the Supreme Court, the punitive damages were set aside, and affirmed the trial judgment on damages for mental distress. Key to the Supreme Court’s judgment is the reconciliation of treatment of injuries causing mental distress with any other form of injury causing loss flowing from contract breach. The overarching principle is the rules relating to foreseeability and reasonable expectation as formulated in Hadley v Baxendale.40 The Supreme Court clearly recognised the policies pursued in other jurisdictions, which had imposed limits on damages for mental distress arising from breach of contract. The court saw a slow progression as evident in Addis v Gramophone Co,41 and justified on the idea that contracting parties approach their performance with a degree of stiff mental fortitude, to the creation of certain exceptions where the contract was for pleasure, relaxation, and peace of mind as the very object of the contract, to the point where peace of mind is a major or important object of the contract.42 Extrapolating from this movement it is consistent to fold injuries that generate mental distress into a general test of reasonable contemplation.43 However, this does not mean that these damages are readily available in all circumstances. The court indicates that it will still be rare to see such awards in commercial cases because the parties could not reasonably contemplate at the time of contract formation their incursion. While breach of a commercial contract may result in anger and frustration, these are not synonymous with mental distress. Before they can be awarded, the plaintiff would have to show that the contract promised to ensure a level of psychological benefit. Applied in Fidler, the essence of a disability insurance contract was peace of mind at a time when the insured felt most vulnerable; unable to return to work and suffering a disabling injury. The reason for entering into this form of insurance was seen as ensuring continued financial security when a disability made earning a wage impossible. The medical evidence supported that the level of mental distress experienced by Fidler was extensive. The impact of Fidler has been particularly felt in the area of damages for wrongful dismissal. At a similar time to the decision in Fidler, the Supreme Court ruled in Keays v Honda Canada Inc,44 a wrongful dismissal case. A damages remedy for wrongful employment has taken a rather crooked path in Canada. In Vorvis v Insurance Corp of British Columbia45 the approach was very reminiscent of Addis v Gramophone Co,46 and damages for mental distress could only be awarded if the plaintiff could identify an independent (meaning outside the contract and probably lying in one of the intentional torts) actionable wrong. In Wallace v United Grain Growers Ltd47 the Supreme Court gave substance to an implied contractual obligation within employment contracts that requires the employer to observe good faith and (1854) 9 Ex 341, 156 ER 145. [1909] AC 488 (HL). 42 Farley (n38). 43 This approach is premised on a point argued by John McCamus and accepted by the Court, that ‘peace of mind’ is a reflection or proxy for reasonable contemplation. See J McCamus, The Law of Contracts (Irwin Law 2005) at 877, and Fidler (n9) at [43]. 44 [2008] 2 SCR 362. 45 [1989] 1 SCR 1085. 46 Addis (n41). 47 [1997] 3 SCR 701. 40 41

384  Research handbook on remedies in private law fair dealing in the manner of dismissal of an employee. However, the remedy for breaching this obligation gave rise to a lengthening of the reasonable notice period, and for which the innocent employee was thus entitled to damages calculated as lost salary during the extended notice period. The extend period was itself subject to an obligation to mitigate loss where the plaintiff had actually obtained employment during the extended reasonable notice period for which the plaintiff was being granted pecuniary damages. Finally, in Keays, the Supreme Court took a different tack and accepted that the obligation of good faith dismissal satisfies the requirement that the manner of dismissal is within the reasonable contemplation of the parties at the time of contracting, and all that is required is for the employee to satisfy the evidentiary burden of proving that there is real mental distress attributable to the manner of dismissal. This is a difficult evidential burden to meet because it needs to parse the mental distress that flows from the fact of termination of employment, and which because the common law accords a right to employers to exercise upon giving reasonable notice does not amount to a wrong, and the manner of dismissal which does amount to an actionable wrong, but which, to generate damages for mental distress, must be of a manner that amounts to a legal infringement of the obligation, and also creates real evidence of mental distress.

C

EQUITABLE REMEDIES

1

Specific Performance

Throughout Commonwealth common law jurisdictions, the awarding of specific performance is viewed as a presumptive remedy in agreements concerning real property. This approach is supported by the concept of uniqueness, which regards real property that is the subject matter of a contract as imbued with unique characteristics and attributes such that damages are an inadequate remedy for breach; inadequacy of damages being the touchstone that justifies resort to discretionary equitable remedies. The concept of mutuality ensured vendors the same measure of relief. Up until 1996, one could safely have said a similar position prevailed in Canada, although there were some signs on the horizon that change was afoot.48 In 1996 the Supreme Court of Canada rendered its decision in Semelhago v Paramadevan.49 The appellant vendor refused to close a real estate transaction for the sale of his residential home. The respondent purchaser agreed to buy the vendor’s home for $205,000. The deal was to be financed by a cash payment of $75,000, and $130,000 raised on a mortgage of the purchaser’s existing home. The purchaser intended to sell his existing home within a six-month period of completion on his new home, and took an open mortgage over his existing home for this period. At the time of completion, October 1986, the purchaser’s existing home was worth $190,000. At the time of trial, November 1990, it was worth $300,000. The vendor’s home was worth $325,000 at the date of trial. At the trial, the purchaser elected to take damages rather than specific performance. The trial judge awarded the purchaser $120,000, being the difference in contract price and market value of the vendor’s home at the date of trial. Such

See J Berryman, The Law of Equitable Remedies (2nd edn, Irwin Law 2013) 351. Semelhago (n8). This factual summary s taken from Berryman (n48) at 349.

48 49

Canadian perspectives on contract remedies  385 an assessment was in keeping with the Ontario Court of Appeal’s decision in 306793 Ontario Ltd v Rimes.50 The vendor appealed. He argued that such an award amounted to a windfall. The purchaser not only received the increase in value of the property he was going to buy, but also kept the increase in value of the house that he already owned, but which was to be sold to finance the purchase of the new home. An alternative assessment proposed by the vendor, but rejected by the trial judge, would simply have computed the difference between the increase experienced by the vendor on his house and the increase experienced by the purchaser retaining his existing house. Another alternative, suggested by the purchaser, would have computed the increase in value on the vendor’s house and subtracted the costs incurred by the purchaser to achieve that increase. Thus, the carrying costs of the $130,000 mortgage between closing and trial dates, and the notional interest the purchaser would have made on investing the cash payment of $75,000 for the same period would have to be factored in. This would give damages as $80,810. The Court of Appeal accepted this last alternative. The vendor appealed to the Supreme Court of Canada. The issue before the Supreme Court was simply the appropriate damage assessment principle. The Supreme Court reluctantly affirmed the approach taken by the Court of Appeal. Semelhago has been turned into a case on the appropriateness of specific performance because Sopinka J made, what can only be considered as obiter dicta, remarks on the general availability of the remedy. The crux of his comments was: While at one time the common law regarded every piece of real estate to be unique, with the progress of modern real estate development this is no longer the case. Residential, business and industrial properties are all mass produced much in the same way as other consumer products. If a deal falls through for one property, another is frequently, though not always, readily available. It is no longer appropriate, therefore, to maintain a distinction in the approach to specific performance as between realty and personalty. It cannot be assumed that damages for breach of contract for the purchase and sale of real estate will be an inadequate remedy in all cases.

And the change wrought on the weight of these remarks: Specific performance, should, therefore not be granted as a matter of course absent evidence that the property is unique to the extent that its substitute would not be readily available.51

The immediate effect has been the elimination of any presumption concerning proof of uniqueness and the plaintiff must now adduce some evidence of uniqueness. This was also expressed by Sopinka J as a need for the plaintiff to show ‘some fair, real and substantial justification’ for specific performance;52 picking up the language of an earlier judgment of the Supreme Court of Canada in Asamera Oil Corp Ltd v Sea Oil & General Corp.53 For some courts, this is established by concentrating on the particular unique attributes of the property in question and how they fit with the communicated desires of the individual plaintiff.54 For other courts, the focus is upon the extent to which the plaintiff has shown that there are no readily available 52 53 54 50 51

(1979) 25 OR (2d) 79 (CA). Semelhago (n8) at [20–22]. Ibid, at [22]. [1979] 1 SCR 633. John E Dodge Holdings Ltd v 805062 Ontario Ltd (2003) 63 OR (3d) 304 (CA).

386  Research handbook on remedies in private law substitutes that meet the plaintiff’s desires.55 Yet other courts see in Sopinka J’s statement that it is a reminder that the plaintiff must establish how damages are inadequate in that primarily the plaintiff must demonstrate that damages alone will not compensate for many of the unique attributes which have attracted the plaintiff to acquire the property in question.56 That is, can the plaintiff demonstrate a high degree of subjective interest that will not be compensated in damages or which is difficult to accurately quantify? The impact of Semelhago on residential purchasers may simply be the need to provide evidence of uniqueness.57 However, for property investors and developers there is a new reality regarding the availability of specific performance. Because the primary motivation of a developer and investor is the acquisition of profit from their undertakings, it is difficult to argue that damages are not an adequate remedy.58 If the developer/investor is simply pursing specific performance to keep open the option to elect damages in lieu of specific performance, and thus avoid the date of breach rule on damages assessment and the obligation to mitigate damages, courts have signalled that they will not tolerate such a claim, characterising it as a vehicle for speculation and opportunism.59 Nevertheless, some developers have attempted to rise to the challenge to meet the new Semelhago rubric, and have argued that specific physical attributes of the property being acquired cannot be found in any potential comparable acquisition.60 These arguments have not met with much success. A decision of the Alberta Court of Appeal, and representative of other provincial courts, practically forecloses the argument for all intents and purposes. where uniqueness is in the context of a development property and any unique characteristics would be reflected in the sale price or the profits from the investment, damages are capable of calculation and therefore, there is no interest in land and no remedy of specific performance.61

Because there is always a market for real property, this approach makes it virtually impossible for an investor or property developer to argue that physical characteristics of a property alone make it unique to justify an order of specific performance. However, the close proximity to land already owned by the developer, coupled with the suggestion that the land is being acquired for consolidation for later development, will often meet the test of uniqueness.62 In other responses, developers have tried to argue inadequacy of damages where a development is intended to take place over an extended period of time, making the ability to quantify damages problematic, and thus an inadequate remedy. In Carttera Management Inc v Palm Holdings Canada Inc63 the plaintiff sought to purchase a hotel from the defendant and intended 1244034 Alberta Ltd v Walton International Group Inc (2007) 82 Alta LR (4th) 259 (CA). Raymond v Raymond Estates [2011] 9 WWR 247 (Sask. CA). 57 Rozon v Dolmat 2017 BCSC 2156. 58 0624708 BC Ltd v Wallace [2011] BC J No. 1925 (SC) at [23] describing the plaintiff who seeks to acquire properties simply as an investment as ‘doomed to fail’ with respect to specific performance. 59 Ryan in Trust v Kaukab 2011 ONSC 6826 at [202]. 60 Hundley v Granier 2011 BCSC 414, appeal dismissed on another point [2012] BCCA 199, granting damages in lieu of specific performance to a developer with a proven track record of developments because the property being acquired was within the plaintiff’s budget, near the hospital and transit and in close proximity to another apartment owned by the plaintiff. 61 365733 Alberta Ltd v Tiberio [2008] AJ No. 1097 (CA) at [10]. 62 Covlin v Minhas 2009 ABCA 404 at [14]. 63 2011 ONSC 4573. 55 56

Canadian perspectives on contract remedies  387 to apply for rezoning of the site to build condominiums. The plaintiff successfully adduced evidence that demonstrated that it would be highly speculative to determine what density levels would be allowed in any rezoning application, and thus, damage quantification would be made difficult to the point that damages would be an inadequate remedy. Yet another argument proffered by developers in support of specific performance is that the acquisition of the land in question is necessary so that they may maintain either market share or reputation as a reputable developer, and thus rendering damages an inadequate remedy.64 The change in Canada to the availability of specific performance reflects the reality that there is still a belief that land is not in short supply, at least to developers, and thus should be treated like any other marketable commodity. Although, most recently, one judge has sought to distinguish the heightened circumstances which surrounds the Greater Toronto Area (GTA) property market, and where there are frequent bidding wars amongst purchasers, as a reason to suggest that homes are in short supply in this area of the country, such that the burden of establishing uniqueness, even for the property developer/investor, should be lessened.65 2 Rectification The equitable doctrine of rectification, that allows parties to bring an action to correct written instruments so that they accorded with the actual intentions of the parties, has, in Canada, more often been invoked to correct documents that have mistaken the tax consequences the parties actually desired. The cases conform to two pattern types; (1) the parties intend to structure their affairs to minimise taxation and that is the primary reason for the transaction; and (2) the parties wish to restructure their affairs to obtain some other advantage, as in immunising a spouse from potential liability,66 or to devolve a family business to children,67 but to also minimise any taxation consequences resulting from the restructuring. Resort to rectification is made to realise that tax advantage. More often these suits have been successful, although of late, there appears to be a hardening by courts and plaintiffs are being rebuffed.68 Most of these cases should not be amenable to rectification because there is actually no doubt in the parties’ mind as to what they wished to achieve and how they recorded that intention. Their error lies in using the wrong legal instrument to affect their desire, and this error is often made after taking professional advice from either accountants or lawyers. In the area of contractual disputes, the Supreme Court of Canada has clarified much of the law in Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd.69 Bell, the owner of Sylvan Golf Course, held a right of first refusal to purchase the land upon which he ran his golf course. He exercised the right of first refusal to purchase, but in order to do so, he entered into a joint venture with O’Connor, the owner of Performance Industries. Under the joint venture, Bell would continue to run his golf course for five years, at which time the course would go to 410675 Alberta Ltd v Trail South Developments Inc 2001 ABCA 274, leave to appeal denied [2001] SCCA No. 602, at [18] argument made but not support on the evidence. The purchaser intended to pass the property onto another entity to undertake the development. 65 1954294 Ontario Ltd v Gracegreen Real Estate Development Ltd 2017 ONSC 6369 at [151]. 66 S & D International Group Inc v Canada (Attorney General) [2011] 7 WWR 822 (Alta QB). 67 Attorney General of Canada v Juliar (2000) 50 OR (3d) 728 (CA), leave to appeal refused [2000] SCCA No. 621. 68 Canada (Attorney General) v Fairmont Hotels Inc [2016] 2 SCR 720. 69 Performance Industries (n10). 64

388  Research handbook on remedies in private law O’Connor. However, Bell was interested in maintaining an option to develop a row of houses adjoining the 18th fairway. To this end, Bell insisted on having an option to purchase a strip of land adjoining the 18th fairway for a distance of 480 yards. Bell wished to build two rows of housing around a cul de sac because one row would be uneconomic, and in his own terms, ‘a waste of land’. O’Connor verbally agreed to this option, the price for the land being $400,000 if a third party was to do the subdivision and $200,000 if Bell did the subdivision. O’Connor arranged to have their verbal agreement documented. When the agreement was drafted the land was described as being 110 FEET by 480 yards, rather than 110 YARDS by 480 yards. The effect of this error meant that there would be insufficient land for a double row of houses, although there would be sufficient for a single row, but it would then be uneconomic. Bell did not read the agreement, nor did his solicitor realise the mistake because the dimensions of the land had not been brought to his attention. The agreement was duly signed. However, when Bell came to exercise the option the mistake was discovered. O’Connor refused to acknowledge the mistake and insisted that the document accurately recorded the terms of their agreement. Bell sought rectification of the agreement and damages for breach. The trial judge ordered rectification and calculated damages on the basis that Bell had lost the opportunity to create a housing development of building lots suitable for two rows of houses. In addition, the trial judge found O’Connor’s conduct amounted to being, ‘fraudulent, dishonest and deceitful’. The trial judge’s findings were upheld at both levels of appeal. The facts of the case provided a paradigmatic opportunity to clarify and correct a number of anomalies that had emerged in Canadian law. First, that the rectification doctrine is of limited scope. Where parties are using lawyers to draft documents and are of ‘reasonable sophistication’ there should be reluctance to interfere in the agreement simply because it has proved to be improvident from one party’s perspective. Second, it is for the plaintiff to establish the existence of a prior inconsistent oral contract. The need for an antecedent agreement, and not merely a common continuing intention, has been reaffirmed in Canada (Attorney General) v Fairmont Hotels Inc.70 Third, the plaintiff must show that the defendant knew, or ought to have reasonably known, of the oral mistake in reducing the terms to writing. This is a necessary ingredient of demonstrating a need for equitable intervention in that there is some form of unconscientious conduct by the defendant that attaches to his or her conscience, and which makes it fraudulent in the equitable sense for the defendant to keep the advantage now obtained under the contract. Fourth, the plaintiff must demonstrate with clarity how the document can be made to precisely conform to the earlier oral agreement. The court described the jurisdiction to rectify as ‘corrective’ not ‘speculative’.71 Fifth, the evidential burden of proof to demonstrate all of the above points is ‘convincing proof’ a burden which is lower than the criminal standard, beyond all reasonable doubt, but above the lowest level that barely passes the civil standard of ‘more probable than not’. However, in Canada (Attorney General) v Fairmont Hotels Inc the same court rejected this standard of proof in favour of one universal civil standard as being ‘balance of probabilities’.72 In reaffirming this universal standard, the court did admit to varying ways in which the standard can be met in terms of the quality of the evidence. In a rectification suit the evidence must exhibit a ‘high degree of clarity, persuasive Canada (Attorney General) (n68). Performance Industries (n10) at [31]. 72 This is in keeping with the Supreme Court of Canada’s position that there is only one standard of proof in all civil law proceedings. See FH v McDougall [2008] 3 SCR 41 at [40]. 70 71

Canadian perspectives on contract remedies  389 ness and cogency’.73 Finally, the Supreme Court rejected the suggestion made by the defendant that a lack of due diligence by the plaintiff should operate as a defence and prevent the plaintiff making resort to rectification. In Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd, Bell easily demonstrated that the simple substitute of the word YARD for FEET would correct the document. The defendant revealed in evidence that he had given his own lawyer, who was not called to give evidence, the wrong dimensions of the property for drafting purposes. The evidence also demonstrated that Bell had orally discussed with O’Connor the need for a cul de sac development to be economically viable and that this would require two rows of houses fronting onto a road, not one.

CONCLUSION The watchword for the Supreme Court is ‘incrementalism’. Development of common law principles is warranted only when domestic conditions warrant particular accommodations.74 The desire to exercise a form of regulatory practice over the activities of powerful insurance companies justifies punitive damages; the desire to protect a weaker bargaining party at the point of greatest vulnerability justifies developments in non-pecuniary damages; and the market conditions surrounding land and how that plays out in a country that has the second largest land mass in the world, and which underpins a changed relationship between specific performance and obligations to mitigate breach, motivate incremental development. These changes instantiate an emerging common law that is built upon the developments of appellate courts in common law Commonwealth nations. Canada’s Supreme Court comfortably draws support for its positions from Australian and New Zealand developments as much as it still pays regard to UK decisions.

Canada (Attorney General) (n68) at [36]. Bhasin (n6) at [34], Watkins v Olafson [1989] 2 SCR 750 at 760, and Fraser River (n5) at [43].

73 74

21. New Zealand perspectives on contract remedies Rick Bigwood

In New Zealand, contractual obligations are enforced through the usual raft of remedies available in other legal systems whose law of contract derives originally from that of England. There is nothing remarkable in this. New Zealand law students learn about specific performance, injunction and expectation damages (for example) in essentially the same manner as their counterparts in the United Kingdom, Australia and Canada (for example), and encounter them at an equivalent juncture in their legal educational journey. Granted, local cases are enlisted in the syllabus and assigned appropriate precedential weight over cognate decisions from overseas, although my sense from teaching contract law in New Zealand for 16 years up until the end of 2010 was that pronouncements from Her Majesty’s courts in the United Kingdom still wielded considerable influence over the New Zealand judicial mind, at least by comparison to the judges of Australia, for example, where I have been teaching contract law now since 2011.1 Indeed, for evidence of the enduring allure of ‘English’ contract law in New Zealand, one need search no further than the treatment that the subject receives in the leading local textbook: Burrows et al.’s Law of Contract in New Zealand, now in its fifth edition.2 This is not a criticism of that work (which is, in my opinion, a very good book), but rather an acknowledgement of the fact that New Zealand is, comparatively speaking, a small jurisdiction whose courts are, in virtue of that reality, often forced to look beyond their own geographical borders for inspiration in the maintenance and development of domestic private law. It is only natural, then, that that nation’s judges should look, in particular, to the traditions and contemporary practices of the United Kingdom as the first source. It follows from this, at least as I apprehend it, that it is not possible yet to assert that New Zealand displays, even to a tiny extent, a distinctively ‘indigenous’ unwritten law relating to contract (including contract remedies), which is not necessarily a bad thing. One would expect – certainly at least hope for – as much conceptual harmony and stability as is possible across legal systems whose traditions, democratic systems, social conditions and values are broadly similar.3 Of course, it is possible to report the occasional attempt made by individual

It bears noting, however, that although apparent pride is sometimes shown in the emergence of a distinctive ‘Australian’ law of contract (see the discussion in N Seddon and R Bigwood, Cheshire & Fifoot Law of Contract (11th Australian edn, LexisNexis 2017) para 27.1), we are also reminded that ‘[a] ll of the common law jurisdictions are rich sources of comparative law whose traditions are worthy of the highest respect, particularly those of the United Kingdom as the first source’: Paciocco v ANZ Banking Group Ltd [2016] HCA 28, (2016) 258 CLR 525 [10] (French CJ). 2 J Burrows, J Finn and S Todd, Law of Contract in New Zealand (5th edn, LexisNexis 2016). 3 As French CJ observed in Paciocco (n1) [10]: ‘No doubt in a global economy convergence, particularly in commercial law, is preferable to divergence even if harmonisation is beyond reach. The common law process will not always be the best way of achieving convergence between common law jurisdictions.’ 1

390

New Zealand perspectives on contract remedies  391 courts or judges of New Zealand, particularly, as it turns out, of a generation ago, to break free from the constraints of ‘traditional’ (English-sourced) doctrine, where it was perceived that domestic contract law might be enhanced as a result of the proposed innovation. To date, all such attempts, at least in relation to the non-statutory law of contract remedies, have failed to take hold. Famous examples of what I mention which spring to mind in the area of contract remedies include the attempt made by two members of the New Zealand Court of Appeal in McElroy Milne v Commercial Electronics Ltd4 to innovate in relation to the principles governing the question of remoteness of damages in contract. In that case, Cooke P explicitly ‘demur[red] to suggestions that Hadley v Baxendale … is a classic authority on remoteness of damages, except in the sense of being a ritual incantation in discussions of the subject’;5 and Hardie Boys J opined that Alderson B’s judgment in Hadley, while having ‘become hallowed by age and quotation’, must nevertheless ‘not be regarded as Holy Writ or statute’.6 Cooke P was explicit in his view that ‘whatever position, if ascertainable, may for the time being represent English law after the vagaries of nearly a century and a half since Hadley v Baxendale’, the approach to remoteness in that case ‘should not automatically be adopted in New Zealand’.7 Instead, the goal of the principles in this area was expressed to be the achievement of a ‘just balance’ between the parties, having regard to ‘a range of relevant circumstances’, the most important of which (usually) is the ‘degree of foreseeability’ (which was seen to be interchangeable with ‘contemplation’), but also including ‘directness, “naturalness” as distinct from freak combinations of foreseeable circumstances, even perhaps the magnitude of the claim and the degree of the defendant’s culpability’.8 Thankfully, perhaps,9 this approach to remoteness in contract, which at the time was subject to quite trenchant academic criticism,10 has not prospered and the two-limb Hadley v Baxendale test represents the approach principally taken by the New Zealand courts today.11 Another example, which hails from the same period as McElroy Milne, is the attempt made by Hammond J, in Butler v Countrywide Finance Ltd,12 to introduce a liberalised ‘basket-of-remedies’-type approach to the forms of redress available in response to the imposition of liability on a contract-breaker. That initiative was introduced on the back of his Honour’s earlier academic criticism of the traditional ‘hierarchy’ of private law remedies,13 in particular the view that common law remedies (such as damages) enjoy primacy over equitable reme-

[1993] 1 NZLR 39 (NZCA). Ibid, 42. 6 Ibid, 45. 7 Ibid, 43. 8 Ibid. 9 It is hard not to think that, according to this approach, loss is not ‘too remote’ when the court thinks that, all things considered, the defendant ought to pay! Compare L Fuller and W Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52 (Pt 1) 85. 10 For a strong defence of the Hadley v Baxendale rule in New Zealand, see R Ahdar, ‘Remoteness, “Ritual Incantation” and the Future of Hadley v Baxendale: Reflections from New Zealand’ (1994) 7 JCL 53. 11 See, e.g., Clarkson v Whangamata Metal Supplies Ltd [2007] NZCA 590, [2008] 3 NZLR 31. 12 [1993] 3 NZLR 623 (NZHC). 13 See G Hammond, ‘The Place of Damages in the Scheme of Remedies’ in P D Finn (ed.), Essays on Damages (LBC 1992) ch 9. 4 5

392  Research handbook on remedies in private law dies (such as specific performance, injunction and declaratory relief).14 Rather, his Honour opined, the law of civil remedies in New Zealand should be allowed to evolve ‘into a regime in which what is required of a Court is a context-specific evaluation of which remedy is most appropriate in the circumstances of a given case, rather than doctrinaire or a priori solutions. The problem then becomes one of informed remedial choice.’15 Starting with the overarching goal of ‘just compensation’, but shorn of the traditional baseline of whether damages are considered to be an ‘adequate’ remedy or not, the sort of factors that Hammond J had in mind in making the envisioned ‘informed’ judicial remedial selection included ‘plaintiff autonomy’, ‘economic efficiency’, the ‘relative severity of the remedy on the parties’, the ‘nature of the right being supported by the remedy’, the ‘moral view to be attached to the interests at stake’, the ‘effect of a given remedy on a third party (or the public)’, ‘difficulties of calculation’, the ‘practicability of enforcement’, and ‘the conduct of the parties’.16 Unsurprisingly, given its radicalness, Hammond J’s basket-of-remedies approach has not, at least so far, garnered general support and ‘tradition’ has continued to reign supreme in this area. Indeed, when it comes to the question of whether the court might exercise its discretion to grant a decree of specific performance in New Zealand, Lord Hoffmann’s ‘just and equitable’, factor-based approach in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd17 has generally found favour with the courts of the former colony.18 Reference might also be made to the decade-long window of chance when exemplary damages might have, at least to some extent, come to be seen as awardable for breach of contract in New Zealand, thus relaxing the established orthodoxy laid down by the House of Lords in Addis v Gramophone Co Ltd19 in 1909. Again, much of this owed its existence to the detailed cogitations of Hammond J in Tak & Co Ltd v AEL Corporation in 1995,20 but the prospect was finally snuffed out in 2006, when the New Zealand Court of Appeal, in Paper Reclaim Ltd v Aotearoa International Ltd,21 unequivocally rejected the possibility of a punitive damages award for pure breach of contract, thus aligning New Zealand law in this area with that of Australia22 and the United Kingdom,23 but obviously not Canada.24 Compare also Newmans Tours Ltd v Ranier Investments Ltd [1992] 2 NZLR 68 (NZHC), particularly at 96 (Fisher J), citing G Hammond, ‘Rethinking Remedies: The Changing Conception of the Relationship between Legal and Equitable Remedies’ in J Berryman (ed.), Remedies: Issues and Perspectives (Carswell 1991) 87. 15 Butler (n12) 631. 16 Ibid, 632–3. 17 [1998] AC 1 (HL). 18 See Attorney-General for England and Wales v R [2002] 2 NZLR 91 (NZCA) 120 (Tipping J) (remedy not in issue on appeal to the Privy Council at [2003] UKPC 22, [2004] 2 NZLR 577). 19 [1909] AC 488. 20 (1995) 5 NZBLC 99,357 (NZHC). 21 [2006] NZCA 27, [2006] 3 NZLR 188 (appeal on another point at [2007] NZSC 26, [2007] 3 NZLR 169). 22 Butler v Fairclough (1917) 23 CLR 78 (HCA) 89 (Griffith CJ); Whitfeld v De Lauret & Co Ltd (1920) 29 CLR 71 (HCA) 80 (Isaacs J); XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448 (HCA) 471 (Brennan J); Gray v Motor Accident Commission (1998) 196 CLR 1 (HCA) 6–7 (Gleeson CJ, McHugh, Gummow and Hayne JJ). 23 See J Beatson, A Burrows and J Cartwright, Anson’s Law of Contract (30th edn, Oxford University Press 2016) 564–5. 24 Royal Bank of Canada v W Got & Associates [1999] 3 SCR 408 (SCC); Whiten v Pilot Insurance Co 2002 SCC 18, [2002] 1 SCR 595; Fidler v Sun Life Assurance Co of Canada 2006 SCC 30, [2006] 2 SCR 3. 14

New Zealand perspectives on contract remedies  393 Addis, of course, also significantly limited the extent to which non-pecuniary damages could be recovered for breach of contract (i.e., compensation for injured feelings, disappointment, vexation, annoyance, stress, and such like, caused by the breach). There was obviously no problem in recovering such damages where the obligation that was breached had as its object (or at least a major or important part) the provision of enjoyment or prevention of distress, which is the standard position in both the United Kingdom25 and Australia;26 but for a time New Zealand courts appeared to trend toward the position that it might suffice for a non-pecuniary award that the mental distress (etc.) suffered was simply within the ‘reasonable contemplation’ of the parties at the moment of contract formation as a not-unlikely consequence of the breach, subject to a policy-based exclusion in the case of ‘ordinary commercial contracts’ – i.e., remoteness was seen to be the appropriate limiting principle.27 But as with the other examples mentioned above, the orthodoxy of the United Kingdom position was eventually reinstated by the New Zealand Court of Appeal in Bloxham v Robinson,28 but not without a lengthy dissenting judgment by Thomas J in that case on the deficiencies and problematics of Addis.

ON THE STATUTORY REFORM OF CONTRACT LAW IN NEW ZEALAND Although the unwritten law of New Zealand in relation to contract remedies has not achieved a status that could be described as ‘distinctive’ or ‘indigenous’, the same cannot be said for the written (i.e., statutory) law of New Zealand. For what is certainly unique to New Zealand, at least when compared to the United Kingdom, Australia29 and Canada, is the now decades-long employment of the so-called ‘codal’ device in relation to significant tracts of that nation’s domestic law of contract, including to some extent the law relating to contract remedies. While New Zealand, like other legal systems of the former British Commonwealth, adopted the nineteenth-century English commercial codes dealing with bills of exchange, sales of goods and partnership, its legislature has also significantly reformed distinct portions of general contract law30 via a series of statutes dedicated to that particular reform objective. This was

Jarvis v Swans Tours Ltd [1973] 2 QB 233; Hayes v Dodd [1990] 2 All ER 815 (CA); Watts v Morrow [1991] 4 All ER 937 (CA); Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732. 26 Baltic Shipping Co v Dillon (1993) 176 CLR 344 (HCA). 27 See, e.g., Whelan v Waitaki Meats Ltd [1991] 2 NZLR 74 (NZHC); Mouat v Clark Boyce [1992] 2 NZLR 559 (NZCA); Rowlands v Collow [1992] 1 NZLR 178 (NZHC). 28 (1996) 7 TCLR 122 (NZCA). 29 Although calls for the codification of contract law in Australia are not novel (see, e.g., J G Starke, ‘A Restatement of the Australian Law of Contract as a First Step Towards an Australian Uniform Contract Code’ (1978) 49 ALJ 234; M P Ellinghaus and E W Wright, An Australian Contract Code (Law Reform Commission of Victoria 1992), the most recent attempt to ignite debate in the field with a view to possible codal reform died with the departure of the Labor Government following the 2013 federal election in Australia; see Australian Attorney-General’s Department, Improving Australia’s Law and Justice Framework: A Discussion Paper to Explore the Scope for Reforming Australian Contract Law (2012). 30 Although other important statutes exist in New Zealand that affect specific kinds of contract (e.g., insurance, hire purchase, credit contracts, employment), they are not ‘codal’ statutes in the sense that the dedicated contract-law statutes are understood to be ‘codes’. 25

394  Research handbook on remedies in private law not with a view to implementing any overarching theory of, or approach to, contract law as such, but rather a piecemeal response to sundry areas of the law of contract that were perceived to be operating poorly. The aim of the statutes, we are told, was ‘not to weaken but rather to strengthen the institution of contract by liberalising the effect of the law in a limited number of areas where it could operate unfairly’.31 The reform statutes – which at best can be described as ‘partial codes’ rather than codes in some purer, full-blown ‘civilian’ sense32 – began with the Minors’ Contracts Act 1969,33 which was followed by the Illegal Contracts Act 1970, the Contractual Mistakes Act 1977, the Contractual Remedies Act 1979, and the Contracts (Privity) Act 1982.34 While the last-mentioned Act was informed by legislative developments that had occurred elsewhere in the Commonwealth, the middle three are distinctively novel and indigenous to New Zealand. A shared salient feature of those three statutes35 is the broad discretionary powers conferred upon the court to grant relief, or to authorise variation or discharge of a contract, in specified circumstances. Understandably, then, from their very inception the statutes attracted significant academic and professional disquiet, much of it directed at the feared consequences of Parliament conferring so much discretion upon the courts in an arena where liberty and sanctity of contract are still vigorously pursued as cogent legal policy objectives.36 However, writing in 1983, Professor Burrows opined that the new statutes were superior to the law they 31 B Coote, ‘The Contracts and Commercial Law Reform Committee and the Contract Statutes’ (1988) 13 NZULR 160, 188. Professor Coote was a long-serving member of the Contracts and Commercial Law Reform Committee, which was the primary framer of four of the five main reform statutes. 32 Although two of the Acts – the Minors’ Contracts Act and Contractual Mistakes Act – were expressed to be codes (s 15 and s 5, respectively (now s 115 and s 22 of the Contract and Commercial Law Act 2017, respectively)), and s 7 of the Contractual Remedies Act (now s 40 of the Contract and Commercial Law Act 2017) signifies that a significant portion of that Act is intended effectively to function as a code as well, it is possible that no conception of ‘codification’ within a common-law legal system would ever satisfy the civilian’s strict understanding of a ‘code’ based on experience or preconception, but that must very much depend on one’s operative conception of a code. I have discussed this problem elsewhere (see R Bigwood, ‘The Partial Codification of Contract Law: Lessons from New Zealand’ in M Keyes and T Wilson (eds), Codifying Contract Law: International and Consumer Law Perspectives (Ashgate 2014) 170–3); suffice it for present purposes to observe that the New Zealand contract statutes are ‘partial codes’ in the sense that they are both ‘non-comprehensive’ (i.e., they cover a mere subset of the core field) and ‘non-exhaustive’ (i.e., they do not abrogate entirely the prior law relating that subset). 33 The structure of the original Act was significantly amended in 2005: Minors’ Contracts Amendment Act 2005. 34 Generally, see F Dawson, ‘The New Zealand Contract Statutes’ [1985] LMCLQ 42; D W McLauchlan, ‘Contract and Commercial Law Reform in New Zealand’ (1984) 11 NZULR 36; B Coote, ‘The Contracts and Commercial Law Reform Committee and the Contract Statutes’ (1988) 13 NZULR 160. B Coote’s writings on the New Zealand contract statutes have recently been republished as a collection in J W Carter and J Ren, Coote on the New Zealand Contract Statutes (Thomson Reuters 2017). 35 The Contracts (Privity) Act 1982 (now the Contract and Commercial Law Act 2017, pt 2, sub-pt 3) is less about empowering the courts to dispense discretionary justice than about abrogating a rule of contract law that was perceived to be defective in practice. 36 See, e.g., Dawson (n34), especially at 43 (criticism that broad discretion alters the fundamental nature of contractual justice as residing in the state giving effect to the parties’ intentions, rather than altering them); G P Barton, ‘Wither Contract?’ [1981] NZLJ 369, 379 (fearing ‘the rise of palm tree justice administered by the Cadi who sat at the city gate in eastern countries’). See also McLauchlan (n34); G Barton, ‘The Effect of the Contract Statutes in New Zealand’ (2000) 16 JCL 233.

New Zealand perspectives on contract remedies  395 had replaced,37 and the New Zealand Law Commission, when reviewing the statutes in 1993, made very few recommendations for change.38 The Commission observed that ‘not only have the statutes by and large achieved their purpose, but also … any fears which might have been entertained for “sanctity of contract” because discretions were conferred on the courts have proved to have little if any foundation’.39 Although the statutes were seen to have ‘taken on a life of their own’, this was regarded as ‘a positive feature of the legislation and of the jurisdiction of the courts under it’.40 Fair enough. But none of the reform statutes were, or have subsequently become, perfect. Although the Contracts and Commercial Law Reform Committee (of the then Ministry of Justice) that was behind the three contract law partial codes was composed of senior scholars, lawyers and judges who clearly, judging by the quality of the reports produced in advance of each piece of legislation, had an excellent (and non-idiosyncratic) working comprehension of the law they were trying to reform, it was, after all, a ‘committee’, the members of which did not necessarily share the same conceptual or policy starting points. Compromises in settling the new law were thus inevitable from the start. Others were introduced during the legislative process as well.41 The end product, therefore, was never going to represent ‘ideal law’ (even if that were a measurable and attainable goal). Moreover, in terms of the level of generality or particularisation available to the draftsperson to effectuate the objectives of a ‘code’, the New Zealand Parliament elected for an approach that reflects the ‘general-and-simple rules’ end of the spectrum. Although the result of this has been to entrust the judiciary with considerable leeways of choice in the administration of the legislative provisions, essentially allowing for ‘individualised justice’ as the case requires,42 the reality has been that, by failing to define a number of key concepts within the statutes (and leaving them instead to be understood against the backdrop of their pre-Act meaning and significance), room was left for judicial exegesis

J F Burrows, ‘Contract Statutes: The New Zealand Experience’ (1983) Stat LR 76, 97. New Zealand Law Commission, Contracts Statutes Review (NZLC: R 25, 1993). Those recommendations that survived the legislative process were not enacted until 2001, through various amending Acts. 39 Ibid, 2 para 4. 40 Ibid, 2 para 5. 41 For the Contractual Mistakes Act, these are summarised by D McLauchlan, ‘Mistake as to Contractual Terms under the Contractual Mistakes Act 1977’ (1986) 12 NZULR 123, 149–51. The amendments were made apparently to restrict the availability for relief so as to preserve contractual certainty. 42 It has been suggested that ‘the most successful kind of reform is likely to be of the enabling variety, releasing the courts from self-imposed restrictions but leaving them as far as possible free to deal with unforeseen circumstances’: S M Waddams, ‘Codification, Law Reform and Judicial Development’ (1996) 9 JCL 192, 199. To be sure, the New Zealand contract statutes have been described as ‘not an enduring code, so much as a liberating device’: R Sutton, ‘Commentary on ‘Codification’, Law Reform and Judicial Development’ (1996) 9 JCL 200, 201. 37 38

396  Research handbook on remedies in private law of a ‘creative’ variety, with the attendant possibility – occasionally realised43 – of unintended ‘judicial reform by a side-wind’.44 Although all of the above-mentioned statutes have now been repealed by s 345(1) of the Contract and Commercial Law Act 2017 (CCLA), which came into force in New Zealand on 1 September 2017, each nevertheless continues in a substantially unamended form as a distinct subpart of Part 2 of that so-called ‘revision Act’.45 So, for example, the Contracts (Privity) Act 1982 now becomes Subpart 1 of Part 2 of the CCLA, entitled ‘Contractual privity’; the Contractual Mistakes Act 1977 is Subpart 2 (‘Contractual mistakes’); and the Contractual Remedies Act 1979 features as Subpart 3 (‘Contractual remedies’). To the extent that the original Act has not been amended by the CCLA, the provisions of the new Act have retrospective effect. So, for example, the CCLA provisions relating to contractual remedies in Subpart 3 of Part 2 are simply deemed to apply to any contract made on or after 1 April 1980,46 which was when the original Act commenced.47 It is to that subpart that I now turn.

THE CCLA, PART 2, SUBPART 3 – ‘CONTRACTUAL REMEDIES’ Given the title of this chapter, it would seem only natural that I should converge on (what I consider to be) the most interesting and important of the New Zealand contract law reform statutes: the Contractual Remedies Act 1979 (CRA), now Subpart 3 of Part 2 of the CCLA. But, as we shall see, that Act (new subpart) is rather misleadingly named, for it is largely not about ‘contractual’ remedies at all. Indeed, the primary remedy for breach of contract – damages – remains untouched by the statute,48 as does the law relating to specific performance

43 Famous examples include Conlon v Ozolins [1984] 1 NZLR 489 (NZCA) under the Contractual Mistakes Act, and Newmans Tours (n14) under the Contractual Remedies Act (discussed in the text following note 85 below). Of all of New Zealand’s contract-law statutes, the Contractual Mistakes Act (now the Contract and Commercial Law Act 2017, pt 2, sub-pt 3) has doubtless proven to be the most problematic. One distinguished local commentator has complained that so numerous are the interpretation and conceptual problems with that Act that it has become virtually impossible to provide a coherent account of the law on the subject, the statute being essentially ‘conceptually and philosophically bankrupt’: D W McLauchlan, ‘Analysing Mistake’ (1997) 3 NZBLQ 194, 194. See also Dawson (n34) 48; F M B Reynolds, ‘Contract: Codification, Legislation and Judicial Development’ (1995) 9 JCL 11, 22; J Finn, ‘The Contractual Mistakes Act 1977’ (1977) 8 NZULR 312, 320 (Act is ‘well-intentioned but ill-executed’). 44 B Coote, ‘Remedy and Relief under the Contractual Remedies Act 1979 (NZ)’ (1993) 6 JCL 141, 156. One also wonders whether the failure of the New Zealand Parliament to define key terms or concepts in the Contractual Mistakes Act and the Contractual Remedies Act, especially, has produced litigation that might otherwise have been avoided. 45 The CCLA is the first ‘revision Act’ introduced under the Legislation Act 2012. Section 35 of that Act provides that ‘[a] provision of a revision Act is not intended to change the effect of the law as expressed in the Acts or parts of Acts repealed by and incorporated in the revision Act’ unless that is expressly provided as the intention. The basic purpose of revision Acts, therefore, is not to reform the existing law, but rather merely to consolidate or systematically revise statutes, improve their presentation and accessibility, and the like: see CCLA, s 3. 46 CCLA, s 6 and sch 1, pt 1, item 4. 47 CRA, s 1(2). 48 CRA, s 10(1); CCLA, s 49.

New Zealand perspectives on contract remedies  397 and injunction.49 What the subpart does, rather, is significantly alter the prior law governing breach of contract and misrepresentation, which law the framers of the original Act regarded as anomalous and overly complex. The explanatory note to the Contractual Remedies Bill 1978 expressed the hope that the CRA would rationalise and simplify the law, primarily ‘by giving substantially the same remedies for misrepresentation inducing the making of a contract and for the repudiation or breach of a contract’.50 At the time of its enactment, the CRA aimed in general to: ●● provide new remedies for parties induced to enter into a contract by the misrepresentation of the other party, whether innocent, fraudulent or negligent; ●● define when an innocent party may ‘cancel’ (meaning discharge by unilateral act of termination) the contract for repudiation or a serious misrepresentation or a serious breach by the other party; and ●● provide for discretionary remedies or the adjustment of the parties’ interests in the event of cancellation of a contract under the Act. Although in contrast to the Contractual Mistakes Act (CCLA, pt 2, sub-pt 2), for example, which was (and still is) expressed to be a ‘code’ in its entirety, having ‘effect in place of the rules of the common law and of equity governing [the subject matter of the statute]’,51 the CRA (CCLA, pt 2, sub-pt 3) was never expressed to be a code quite so expansively. In fact, the word ‘code’ was nowhere to be found in the CRA; nor does it appear in the relevant subpart of the current CCLA. Still, s 40 of the CCLA (formerly CRA, s 7(1)) makes it clear that certain parts of the legislation – in particular, the cancellation rules under ss 36–9 of the CCLA – ‘shall’, except as otherwise expressly provided by the subpart, ‘have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation, repudiation, or breach’. The CRA’s core provisions, however, were never mandatory, and this has remained the position under the CCLA as well. Section 34 of the CCLA (formerly CRA, s 5) allows the contracting parties to expressly provide for remedies in relation to those legal liability events otherwise covered by ss 35–49 of the CCLA (formerly CRA, ss 6–10). When such express provision has been made, those sections will operate subject to it. Damages (the primary remedy) for pre-contractual misrepresentation, whether innocent or fraudulent, made by or on behalf of the other party to the contract are governed by s 35 of the CCLA (formerly CRA, s 6). Under the pre-CRA law, the remedy of damages was only available for tortious misrepresentation (fraud or negligent misstatement), and not for wholly innocent misrepresentation. However, s 35(1)(b) of the CCLA (formerly CRA, s 6(1)(b)) now provides that no tort action for misrepresentation can be brought by the misrepresentee against the other party to the contract;52 and s 35(1)(a) (formerly CRA, s 6(1)(a)) provides that

CRA, s 15(a); CCLA, s 59(1)(a). See generally J Burrows, ‘The Contractual Remedies Act 1979’ (1980) Canta LR 82; D McLauchlan, ‘Contract Law Reform in New Zealand: the Contractual Remedies Act 1979’ (1981) 1 OJLS 284. 51 Contractual Mistakes Act 1977, s 5; CCLA, s 22. Compare also Minors Contracts Act 1969, s 15; CCLA, s 115. 52 Non-party misrepresentors such as agents may still be sued in tort if fraud or negligence on their part can be established. 49 50

398  Research handbook on remedies in private law the misrepresentee’s damages are to be assessed ‘in the same manner and to the same extent as if the representation were a term of the contract that has been breached’, even for wholly innocent misrepresentation.53 Subject to contracting-out under s 34, then, the misrepresentee’s claim will be governed exclusively by the contract measure of damages, including the contract test for remoteness.54 This, obviously, effectuates a rather radical inversion of the statement-maker’s normal legal responsibility for false statements inducing contract, and one that introduces, at least by comparison to orthodoxy, a noticeably disjunctive relationship between the wrong inflicted by the false statement and the law’s corrective response to that wrong. To be sure, the relationship between ‘wrong’ and ‘corresponding remedy’ can no longer be seen as purely correlative, for the ‘wrong’ that triggers s 35 (s 6) liability is the defendant’s making of a false causative statement, whereas the ‘remedy’ under s 35 (s 6) suggests that it instead lies in his or her failing to honour it. Rather than merely prohibiting conduct, therefore, s 35(1) (s 6(1)) essentially functions to render a representation binding, and this is quite in the absence of an intention (objective or otherwise), on the part of the agency-responsible misrepresentor, to assume a legal promissory commitment in relation to his or her pre-contractual statement. As to the reason for this arresting transposal of the law’s normal responsibility practices, it turns out that the Contracts and Commercial Law Reform Committee, on whose 1978 Report and annexed draft bill the original CRA was based,55 was strongly opposed to the introduction of legal fault criteria as a precondition to liability for misrepresentation under the Act: ‘It seems to us that the proper as well as the traditional approach is to look not at whether there was any fault on the part of the representor but at the expectations of the representee that naturally arise from the undertaking.’56 One might be forgiven for regarding this statutory innovation as problematic. After all, as Holmes once famously observed, ‘even a dog distinguishes between being stumbled over and being kicked’.57 Although mitigated by the parties’ freedom to exit the statutory rules, the no-exceptions, strict-liability regime of s 35 nevertheless seems unnecessarily harsh (or at least unresponsive to normatively sensitive dimensions of human responsibility and moral objection), especially in relation to misrepresentations that are purely innocent. It is not hard to imagine situations where truly despicable misrepresentors – outright deceivers, no less – stand to achieve an undeserved windfall of reduced liability under s 35’s mandatory damages 53 Note that s 35(1)(a) does not actually elevate a misrepresentation into a contractual term (which would alter the proof criteria of those respective legal phenomena), but rather merely deems the former to be the legal equivalent of the latter for certain remedial purposes (the approach to awarding damages). It involves, therefore, a classic ‘legal’ fiction, but one which is of the ‘assumptive’ rather than ‘assertive’ variety. (As to the difference, see L Fuller, ‘Legal Fictions’ (1930–31) 25 Illinois L Rev 363, 390.) As Burrows et al. (n2) report, however, the courts have sometimes overlooked this and implied, quite wrongly, that the misrepresentation is actually a broken term of the contract: 369–70. 54 Difference in value will be the normal measure, but a cost-of-cure award is also possible (Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11, [2012] 2 NZLR 726), as is an award based on unachieved profit return (Ware v Johnson [1984] 2 NZLR 518 (NZHC); Herbison v Papakura Video Ltd (No. 2) [1987] 2 NZLR 720 (NZHC)). 55 See Contracts and Commercial Law Reform Committee, Misrepresentation and Breach of Contract: Report (1978). 56 See Contracts and Commercial Law Reform Committee, Misrepresentation and Breach of Contract: Report (1967) para 9.4.3 (incorporated into the 1978 Report, ibid). 57 O W Holmes, The Common Law (Macmillan 1882) 3.

New Zealand perspectives on contract remedies  399 model. Consider, for instance, the ‘bad bargain’ scenario: P agrees to buy widgets for $1000 on the strength of D’s fraudulent misrepresentation as to their quality. The widgets delivered are worth $500. Had D’s statement been true, the market value of the goods would have only been $750. Under s 35, P recovers $250 (the amount required to put P in the position she or he would have been in had D’s representation been true), whereas under regular tort law (resort to which is precluded by s 35(1)(b) of the CCLA), P would have recovered $500 in damages: the amount required to restore P to his or her pre-contract position.58 At the very least, one might have expected, within s 35, an option for the misrepresentee to elect for the tort measure of damages in cases where the contract measure produces an unjust result.59 Cancellation of a contract for misrepresentation is governed by s 37(1) and (2) of the CCLA (formerly CRA, s 7(3) and (4)), and in that regard the Act subjects misrepresentation to the same rules that apply to breach of contract and repudiation. The old rules of ‘rescission’ for misrepresentation are thus replaced by a legal power of ‘cancellation’, which operates prospectively and not, like rescission, retrospectively.60 Although the damages regime for misrepresentation applies across all contractual contexts, including sales of goods,61 contracts for the sale of goods are excluded from the CCLA cancellation regime.62 A separate regime also exists for contracts for the supply of consumer goods or services, under the Consumer Guarantees Act 1993, which unfortunately does little to mitigate the highly fragmented nature of the law relating to the termination of contracts for serious breach or repudiation in New Zealand.63 The preconditions for cancellation of a contract covered by the CCLA are perhaps best appreciated if the relevant provisions are set out in full: 36 Party may cancel contract if another[64] party repudiates it 58 See also the example provided by F Dawson and D McLauchlan, The Contractual Remedies Act 1979 (Sweet and Maxwell 1981) 31, based on the American Law Institute’s Restatement of Torts, Second, §549. 59 Compare the sentiments of F Dawson, ‘Contractual Remedies Act 1979: Commentary’ in New Zealand Law Commission, Contracts Statutes Review (NZLC: R 25, 1993) 101, 103 para 1.132, 109 para 1.150. The courts have acknowledged the potential problems but, doubtless rightly, taken the attitude that ‘[r]eform is up to Parliament’: Cygnet Farms Ltd v ANZ Bank New Zealand Ltd [2016] NZHC 2838, [2017] 2 NZLR 538 [100] (Palmer J). 60 Section 42(1) of the CCLA provides (subject to the rest of the subpart): ‘(1) When a contract is cancelled, the following provisions apply: (a) to the extent that the contract remains unperformed at the time of the cancellation, no party is obliged or entitled to perform it further: (b) to the extent that the contract has been performed at the time of the cancellation, no party is, by reason only of the cancellation, divested of any property transferred or money paid under the contract.’ A party wanting to recover property or money passing under the contract must apply for an order for relief under s 43; it does not happen automatically. 61 CCLA, s 35(2); CRA, s 6(2). 62 CCLA, s 201(2); CRA, s 15(d). The rules are governed instead by Part 3 of the CCLA (‘Sale of Goods’). 63 Under the CRA, s 15(ga), the Consumer Guarantees Act 1993 was expressly excluded from the CRA regime, as it contained its own rules relating to the termination of contracts falling within its purview. That exclusion continues by virtue of s 59(1)(g) of the CCLA. 64 The CCLA speaks of ‘another’ party to the contract rather than ‘the other’ party, although in the vast majority of cases the misrepresentation, breach or repudiation will be committed by the other party to the contract. If, however, cancellation is sought by a party who has substantially the same interest under the contract as the party who committed the repudiation, misrepresentation or breach, the leave of the court is required: CCLA, s 39.

400  Research handbook on remedies in private law (1) A party to a contract may cancel the contract if, by words or conduct, another party (B) repudiates the contract by making it clear that B does not intend to – (a) perform B’s obligations under the contract; or (b) complete the performance of B’s obligations under the contract. (2) This section is subject to the rest of this subpart.65 37 Party may cancel contract if induced to enter into it by misrepresentation or if term is or will be breached (1) A party to a contract may cancel it if – (a) the party has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to the contract; or (b) a term in the contract is breached by another party to the contract; or (c) it is clear that a term in the contract will be breached by another party to the contract. (2) If subsection (1)(a), (b), or (c) applies, a party may exercise the right to cancel the contract if, and only if, – (a) the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to the cancelling party; or (b) the effect of the misrepresentation or breach of the contract is, or, in the case of an anticipated breach, will be, – (i) substantially to reduce the benefit of the contract to the cancelling party; or (ii) substantially to increase the burden of the cancelling party under the contract; or (iii) in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for. (3) Subsection (1) is subject to the rest of this subpart, but does not limit section 36.66

Section 37(1) makes it clear that, when it comes to cancellation, the same rules apply to misrepresentation inducing contract as to breach of contract, and, in the case of the latter, regardless of whether the relevant breach is ‘actual’ or ‘anticipatory’ in nature. The main effect of s 37(2) is, within its scope of operation, to dispense with the need for a notionally ex ante analysis of contractual stipulations as ‘conditions’, ‘intermediate terms’ or ‘warranties’, which represents the tripartite classification of terms applied in the United Kingdom,67 and the approach of the majority of the High Court of Australia in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd,68 which followed the United Kingdom system of classifying performance obligations in that particular way. Nonetheless, s 37(2) is generally seen to absorb and codify the general law position on repudiation and breach as it was understood to operate immediately before the passing of original CRA.69 Obviously, regarding misrepresentation, s 37(2) significantly alters the prior law relating to ‘rescission’ of a contract for misrepresentation. It has been conceded that the tests in s 37(2) ‘are not easy

Compare s 7(2) of the former CRA. Compare CRA, s 7(3) and (4). 67 Famously introduced in Hongkong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26 (CA). 68 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 (HCA) (Gleeson CJ, Gummow, Heydon and Crennan JJ). Kirby J dissented and proposed a classification of terms that is consistent with s 7 of the CRA (CCLA, s 37). 69 Burrows et al. (n2) 689. Compare also Kumar v Station Properties Ltd [2016] 1 NZLR 99 (SC): ‘repudiation’ is to be understood against its common-law meaning. 65 66

New Zealand perspectives on contract remedies  401 to apply’,70 but that is no different than the common law tests that preceded them and which continue to govern in the United Kingdom and Australia today. If a contract is cancelled under s 37 of the CCLA, which cancellation, like the prior law, operates in futuro71 and generally takes effect only upon the misrepresentor, repudiator or serious contract-breaker learning of the innocent party’s intention to cancel,72 s 43(1) (formerly CRA, s 9(1)) confers upon the court extensive powers to grant, upon application, relief to either party affected by the cancellation ‘if it is just and practicable to do so’. Under s 43(2), a relief order may (on terms if necessary73): (a) direct a party to pay to any other party the sum that the court thinks just (subject to section 35): (b) direct a party to do or refrain from doing, in relation to any other party, any act or thing that the court thinks just: (c) vest the whole or any part of any relevant property in a party: (d) direct a party to transfer or assign the whole or any part of any relevant property to any other party: (e) direct a party to deliver the whole or any part of the possession of any relevant property to any other party.

Subject to the parties’ freedom to contract out under s 34, and various bona-fide-purchaser and change-of-position protections in ss 46 and 47 of the Act, relief under s 43 is entirely a matter for the discretion of the court. In exercising that discretion, s 45 requires the court to have regard to: (a) the terms of the contract; and (b) the extent to which any party to the contract was or would have been able to perform it in whole or in part; and (c) any expenditure incurred by a party in, or for the purpose of, performing the contract; and (d) the value, in the court’s opinion, of any work or services performed by a party in, or for the purpose of, performing the contract; and (e) any benefit or advantage obtained by a party because of anything done by another party in, or for the purpose of, performing the contract; and (f) any other matters that the court thinks proper.

Mention might finally be made of s 50 of the CCLA (formerly CRA, s 4(1)) (‘Statement, promise, or undertaking during negotiations’), which is an interesting innovation that limits the effectiveness of ‘acknowledgement’ clauses, ‘no-reliance’ clauses, ‘entire agreement’ clauses, ‘integration’ clauses, and the like – basically, any provision in a contract (or any other document) that purports to preclude a court from inquiring into or determining the question of: (a) whether a statement, promise, or undertaking was made or given, either in words or by conduct, in connection with or in the course of negotiations leading to the making of the contract; or (b) whether, if it was so made or given, it constituted a representation or a term of the contract; or

J F Burrows, ‘Contractual Remedies Act 1979’ in New Zealand Law Commission, Contracts Statutes Review (NZLC: R 25, 1993) 61, 71 para 1.33 (re CRA, s 7(3) and (4)). 71 CCLA, s 42(1). 72 CCLA, s 41. 73 CCLA, s 44. 70

402  Research handbook on remedies in private law

New Zealand perspectives on contract remedies  403 (c) whether, if it was a representation, it was relied on.74

Section 50 renders such clauses, which routinely feature as boilerplate in both commercial and consumer contracts, ineffective as against the court unless the enforcing party can satisfy the court that, having regard to such matters as the subject matter and value of the transaction, the relative bargaining strengths of the parties, the presence or otherwise of legal advice or representation, the manner of drafting (negotiated or boilerplate), it is ‘fair and reasonable’ that the clause should be treated as ‘conclusive’ between the parties. Section 50 affords quite a neat solution to the problem of boilerplate ‘entire agreement’ (etc.) clauses in signed contracts, which in Australia75 and the United Kingdom76 are generally considered binding and effective in accordance with their terms. It avoids unnecessary resort by counsel and the courts to circumventing machinations such as conventional77 and promissory78 estoppel, although there has been a lessening of the need for such artifices in connection with standard-form ‘consumer’ contracts in New Zealand (as in Australia and the United Kingdom before it) since the introduction of the ‘unfair contract terms’ provisions of the Fair Trading Act 1986 in 2013.79 Although Subpart 3 of Part 2 of the CCLA has not been without its critics – Francis Reynolds, for example, once remarked in relation to its predecessor that ‘[the CRA] seems

74 Section 50 applies only to statements made during negotiations for a contract where a term in the contract purports to deny that any pre-contractual statements were made, or, if they were, that they were terms of the contract, or that they were relied on by the other party. It does not affect contractual provisions that purport simply to exclude, limit or otherwise restrict liability for misrepresentation or breach of contract. See generally D W McLauchlan, ‘Merger and Acknowledgment Clauses under the Contractual Remedies Act 1979’ (1988) 19 VUWLR 311. See also, most recently, Cygnet Farms (n59). 75 Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190 (NSWSC) 196 (McLelland J, reviewing the authorities). See generally E Peden and J W Carter, ‘Entire Agreement – and Similar – Clauses’ (2006) 22 JCL 1. 76 AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133, [2011] CLC 312 [34], following Springwell Navigation Corp v J P Morgan Chase Bank [2010] EWCA Civ 12, [2010] CLC 705. This ignores the English Law Commission’s preference against the conclusiveness of such clauses: English Law Commission, The Parol Evidence Rule (Law Com No. 154, 1986) para 2.15. See generally D McLauchlan, ‘The Entire Agreement Clause: Conclusive or a Question of Weight?’ (2012) 128 LQR 521; M Barber, ‘The Limits of Entire Agreement Clauses’ [2012] JBL 486; I M Jackman, ‘Some Judicial Fallacies Concerning Entire Agreement Clauses’ (2015) 89 ALJ 791 (discussing various ‘judicial fallacies’ concerning such clauses). 77 Whittet v State Bank of New South Wales (1991) 24 NSWLR 146 (NSWSC). 78 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603 [34] (Allsop P), [554] (Campbell JA); Saleh v Romanous [2010] NSWCA 274, (2010) 79 NSWLR 453 [57] (Handley AJA, Giles JA and Sackville AJA agreeing); Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165 [73] (Bathurst CJ, McColl and Macfarlan JJA concurring). See generally, N Seddon, ‘Can Contract Trump Estoppel?’ (2003) 77 ALJ 126; K Lindgren, ‘Estoppel against Enforcing a Contract According to Its Correct Construction’ (2012) 6 J Eq 144. 79 The new provisions came into effect on 17 March 2015. Section 26A of the Fair Trading Act 1986 prohibits terms in a standard-form consumer contract (as defined in s 46J) that are declared ‘unfair’ under s 46I. Section 46M of the Act contains a non-exhaustive, indicative ‘grey-list’ of examples of types of terms that may be unfair, including ‘(l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract’. The relevant provisions of the Fair Trading Act are saved by virtue of the general saving in s 59(1)(h) of the CCLA: i.e., nothing in Subpart 3 of Part 2 of the CCLA affects ‘any other enactment to the extent that it prescribes or governs terms of contracts or remedies available in respect of contracts, or governs the enforcement of contracts’.

404  Research handbook on remedies in private law an interesting experiment, but not necessarily one to emulate’80 – for the most part it seems to have worked well, certainly by comparison with other reform statutes within the raft (the Contractual Mistakes Act (now CCLA, pt 2, sub-pt 2), especially).81 Still, unexpected consequences have followed from judicial interpretations of the Act’s (Subpart’s) provisions. It has not always been easy to predict whether, in relation to a particular dispute, a court will approach its task of applying those provisions liberally (progressively?) or conservatively. For sometimes the courts used Parliament’s prefatory statement in the CRA (now removed from the CCLA) – that it was ‘[a]n Act to reform the law relating to remedies for misrepresentation and breach of contract’82 – to ‘resist attempts to reintroduce into a reforming statute limitations associated with earlier principles of common law and equity’.83 On other occasions, however, the courts have resisted applying the apparently clear words of the Act because, ‘[i]f Parliament had intended to change the common law in [an] important respect, a clear statement to that effect could have been expected in the legislation’.84 A well-known example of the first kind of interpretation is Newmans Tours Ltd v Ranier Investments Ltd,85 where Fisher J used s 9 of the CRA (‘Power of court to grant relief’) – now CCLA, s 43 – to make an award in the nature of damages,86 when the framers of the Act (the Contracts and Commercial Law Reform Committee) merely had in contemplation restitution of money or reimbursement of services – that is, a judicial power merely to adjust the parties’ interests after cancellation – rather than conferral of the benefit promised by the terms of the contract itself.87 A former member of the Contracts and Commercial Law Reform Committee, Professor Coote,88 has forcefully (and in my view persuasively) criticised Fisher J’s reasoning in Newmans Tours. The intention of s 9 (s 43), Coote points out,89 was to enable the granting of relief – that is, a power to release a party either from the consequences that would ordinarily follow from enforcement or from some incident of the contract itself or the general law – rather than providing a new form of primary remedy for the enforcement of a contract (i.e., damages

Reynolds (n43) 22. In his paper on the Act appended to the New Zealand Law Commission 1993 Report (n38), Professor Burrows pointed out that the Act has ‘attracted a fair amount of criticism, on the ground that [its] rules were far too simple, indeed crude, to adequately replace the subtlety and complexity of the common law. Some feared that the law of breach of contract would be distorted by forcing it into such a simplistic framework. There were also fears that some of the Act’s rules were based on a misunderstanding of common law principle; and that the Act gave too much discretion in an area where certainty and predictability are important values.’ See Burrows (n70) 61 para 1.01. However, Professor Burrows went on immediately to conclude that ‘10 years of litigation have not thrown up as many problems as some have feared’: ibid, 61 para 1.02. But compare McLauchlan (n43). 82 Emphasis added. 83 Newmans Tours (n14) 90 (Fisher J). 84 Garratt v Ikeda [2002] 1 NZLR 577 (CA) 582 [15] (Tipping J). 85 Newmans Tours (n14). 86 And one that is guided, but not necessarily constrained, by the strict common-law principles applying to the award of damages for breach of contract! 87 See Contracts and Commercial Law Reform Committee (n55) 22. 88 Coote (n44). 89 Ibid, 147. Compare also B Coote, ‘The Changing New Zealand Law of Damages in Contract’ (1996) 9 JCL 159, 161: ‘From a relief provision designed to be of modest scope, the courts have fashioned a completely new discretionary remedy for enforcement, occupying the whole ground previously covered only by the common law of damages, but untrammelled by the constraints of the common law.’ 80 81

New Zealand perspectives on contract remedies  405 or debt).90 It scarcely makes sense, Coote continues, that Parliament would have intended the courts to have a discretion to award damages at large under s 9(2)(b) of the CRA (now CCLA, s 43(3)(a)) when it was at such pains, in s 10(1) of the Act (now CCLA, s 49(1) and (2)), to preserve damages at common law, which are recoverable as of right.91 Despite this, though, the New Zealand Court of Appeal has subsequently endorsed Fisher J’s views,92 producing what can only best be described as an ‘illustration of [the New Zealand courts’] … use of the contract statutes for the purpose of what might be characterised as judicial reform by a side-wind’.93 An interesting example of the second kind of interpretation is Garratt v Ikeda.94 There, Mr Garratt had agreed unconditionally to purchase Mr Ikeda’s residential property for $1.83 million. Under the agreement, a 10 per cent deposit was payable by way of three instalments. Although Garratt paid the first two instalments (totalling $50,000), he defaulted on the third of $130,000. Ikeda eventually cancelled the contract under s 7 of the CRA (now CCLA, s 37) and forfeited the $50,000 that had already been paid. He also resold the property for $400,000 more than Garratt had agreed to pay for it. Despite his good fortune, Ikeda sued Garratt for the unpaid deposit balance of $130,000. One argument that Garratt raised in his defence was that s 8(3)(a) of the CRA (now CCLA, s 42(1)(a)) meant that his obligation to pay had been extinguished by Ikeda’s cancellation. One might be excused for thinking that, on a literal reading of s 8(3)(a) (s 42(1)(a)), Garratt’s defence indeed had substance. Section 8(3)(a) of the CRA stated: (3) Subject to this Act, when a contract is cancelled the following provisions shall apply: (a) So far as the contract remains unperformed at the time of the cancellation, no party shall be obliged or entitled to perform it further: …

However, Tipping J (for the Court if Appeal) held that, correctly interpreted, s 8(3)(a) did not have the effect of divesting rights that had unconditionally accrued before cancellation. This was consistent with the pre-Act, general law position,95 and the Court stated that ‘the words of s 8(3)(a) are simply not strong enough to demonstrate a legislative intent to take away a right which already exists on an unconditional basis at the time of cancellation. … [Section] 8(3)(a) should not readily be construed in such a way as to take away rights which would have existed prior to its enactment’.96 Thus, s 8(3)(a) did not mean what, on a plain reading, it appeared to say and Ikeda was free to recover the balance of the deposit from Garratt.97

See also Coote (n34) 186. Coote (n44) 148. Space does not permit mention of the other arguments Coote provides to show why, within the scheme of the Act, Fisher J’s interpretation of s 9 is problematic: generally see ibid, 146–8. 92 See Thomson v Ranier [1993] 1 NZLR 408 (NZCA) 410 (Cooke P) and Coxhead v Newmans Tours Ltd (1993) 6 TCLR 1 (NZCA). 93 Coote (n44) 156. 94 Garratt v Ikeda [2002] 1 NZLR 577 (NZCA). 95 Reference was specifically made to McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 (HCA). 96 [2002] 1 NZLR 577, 584–5 [22]. 97 Garratt also claimed s 9 (now s 43) relief but lost on the basis that, by providing for a ‘deposit’, the parties had contracted out of s 9 (i.e., forfeiture of a deposit was an ‘express provision’ for a remedy falling within s 5 of the Act), and otherwise ‘justice’ did not require s 9 relief, as Garratt, by signing an unconditional contract before securing his finance, had simply taken a business risk and lost. The merits 90 91

406  Research handbook on remedies in private law Cases such as these illustrate how difficult it can be to predict how courts will respond to and interpret codal provisions, no matter how clear the drafting or apparent intentions of the original framers might be. Although this is, of course, a hazard with all legislation and not just with ‘codes’ in particular, codes do seem to attract an additional dimension of controversy over how far they ought to be seen as exclusive repositories of the authoritative law falling within their purview.98 It is possible that all codes – in common law legal systems, at least – are ‘partial’ in the sense that the pre-codal law must inevitably be consulted to flesh out gaps that appear, intentionally or otherwise, in the code, or to elucidate unclear or technical terms left undefined, again intentionally or otherwise, by the code’s drafters. Even when those occasions do not apply, courts might, when interpreting a code, simply be unable to resist the allure of the pre-existing common law. As one commentator has reminded us, ‘old habits die hard’!99 This has certainly been true of the New Zealand contract law codes, especially the CRA (CCLA, pt 2, sub-pt 3), which assumes rather than supplies the meaning of important legal concepts that fall within the scheme of the enactment.100 Hence, for example, it has been assumed that the common law meaning and criteria of actionable misrepresentation have not been affected by the Act,101 and that that meaning and those criteria continue to govern the threshold ‘liability’ questions in this area. Presumably, too, the concept of ‘affirmation’ as a bar to cancellation in s 7(5) of the CRA (now CCLA, s 38)102 bears its common law meaning, as it is not legislatively defined. This, however, does little to improve the accessibility, user-friendliness or predictability of the codal enactment, since as every contract lawyer will know, the concepts

of the decision in the case have been hotly debated between Professors McLauchlan and Watts: [2002] NZ Law Review 1–47. 98 See Bigwood (n32) 171–3. 99 Burrows (n70) 94 para 1.109. Burrows opines that such a practice by the courts is both ‘inevitable’ and, in the interests of consistency in the law, not ‘undesirable’ (ibid). 100 As mentioned earlier, the whole CRA (CCLA, pt 2, sub-pt 3), is premised on the unstated infrastructure of the common law. This is largely because key concepts within that Act, such as ‘repudiation’, ‘breach’, ‘misrepresentation’, ‘affirmation’ and ‘substantiality’, can only be understood against the backdrop of their common law meaning and significance; hence, such concepts underlie and inform the ‘code’, rendering it necessarily ‘partial’ in nature. (See generally see Dawson (n59) 106 para 1.141. The same is true for the Contractual Mistakes Act (CCLA, pt 2, sub-pt 2); see McLauchlan (n43) 195, text accompanying fn 5. 101 In other words, it has been assumed that the Act does not create legal sanctions for misrepresentation where none existed before. This is entirely consistent with the intention of the Committee that drafted the bill that became the CRA; see Contracts and Commercial Law Reform Committee (n55) 82 (‘In this context [s 6 of the Act] the terms “representation” and “misrepresentation” are intended to have their common law meanings’). The courts have also taken this view. See Ware v Johnson (n54) 537 (Prichard J); NZ Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 (NZHC) 593 (Barker J); King v Wilkinson (1994) 2 NZ Conv C 191,828 (NZHC) 191,832 (Holland J). The position is identical in relation to the Misrepresentation Act 1967 (UK), which also does not define ‘misrepresentation’ for its purposes; see André et Cie SA v Establissements Michel Blanc et Fils [1979] 2 Lloyd’s Rep 427 (CA) 435 (Geoffrey Lane LJ). In his paper on the Act appended to the New Zealand Law Commercial 1993 Report, Professor Burrows opined that ‘nothing is to be gained by codifying a definition of misrepresentation’: Burrows (n70) 66 para 1.13. 102 Section 38 of the CCLA now reads: ‘A party is not entitled to cancel the contract if, with full knowledge of the repudiation, misrepresentation, or breach, the party has affirmed the contract.’

New Zealand perspectives on contract remedies  407 of misrepresentation and affirmation can be highly normatively complex, and they continue today to attract various practical and theoretical uncertainties or problems.103 At times the CRA (CCLA, pt 2, sub-pt 3), while clearly intending to ‘codify’ the common law in the field, nevertheless comprehends a slightly modified meaning to fundamental terms or concepts employed under the pre-codal law while still omitting to define those terms or concepts. Again, this can make it hard to predict the outcomes of disputes under the Act (Subpart), especially when the courts have not themselves assumed responsibility for amplifying the key term or concept. An obvious example is the graded concept of ‘substantiality’, which is employed in both the Contractual Mistakes Act, s 6(1)(b) (now CCLA, s 24(1)(b)), in relation to the impact of a qualifying mistake upon the exchange values or the benefits or burdens relative to the associated consideration at the time of contract formation, and the CRA, s 7(4)(b) (now CCLA, s 37(2)(b)), in relation to the need for substantial reduction of benefit or increase in burden with respect to the cancelling party as a prerequisite for cancellation. Despite being central to triggering key powers under each Act (Subpart), neither Parliament nor the courts in their administration of the legislation have defined the concept of ‘substantiality’ or provided a precise test in relation to it. Although the idea of ‘substantial reduction of benefit’ under s 7(4)(b)(i) of the CRA (now CCLA, s 37(2)(b)(i)), for example,104 draws on the common law as set out in Hongkong Fir Shipping v Kawasaki Kisen Kaisha,105 it is likely that a less exacting standard is intended under the reform legislation.106 The courts, however, have refused to define the term ‘substantially’ with any greater precision than Parliament has.107 So we are told, for example, that the question of whether a breach or misrepresentation is ‘substantial’ for the purposes of the CRA (CCLA) ‘is a matter of fact, degree and impression’ and ‘incapable of any kind of arithmetical analysis’,108 that it ‘has the same flavour as “significantly” and “considerably”’109 but is ‘something more than trivial or minimal’,110 and that ‘[i]t calls for a robust value judgment which must in the end be somewhat arbitrary’.111 If this is the best that the courts can do – and that may well be the case – then obviously what remains is a lack of critical guidance to cancelling parties who, in the absence of agreement as to the essentiality of the Essentially, the common law required proof of (1) a positively made statement of past or existing fact (a ‘representation’, express or implied), that (2) was false or misleading, and (3) also induced entry into the contract in question. There are, of course, many potential issues underlying each of those criteria (such as materiality, intention to induce, the nature of ‘fact’, the correct test for causation and whether it should vary depending on representor culpability, etc.). As for the difficulties surrounding the ‘affirmation’ concept, see R Bigwood, ‘Fine-tuning Affirmation of Contract by Election’ [2010] NZ Law Review 37 (pt 1), 617­(pt 2); ‘Circumscribing Election: Reflections on the Taxonomization and Mental Componentry of Affirmation of a Contract by Election’ (2012) 30 UQLJ 235. 104 In Realty Services Holdings Ltd v Slater (2006) 6 NZCPR 657 (NZHC), the court applied to ‘substantiality’ under the Contractual Mistakes Act the observations of the court in MacIndoe v Mainzeal Group Ltd [1991] 3 NZLR 273 (NZCA) re ‘substantiality’ under the CRA. See note 107 below. 105 [1962] 2 QB 26 (CA). In its report, the Committee made it clear that its intention was not to depart radically from the law as set out in Hongkong Fir: (n67) para 18. 106 See Oxborough v North Harbour Builders Ltd [2002] 1 NZLR 145 (NZCA) 153 (statutory criteria possibly ‘a little less onerous’ than those in Hongkong Fir). 107 See Jolly v Palmer [1985] 1 NZLR 658 (NZHC) 662 (Hardie Boys J). 108 MacIndoe (n104) 284–5 (Richardson J). 109 Ibid. 110 Jolly v Palmer (n107) 662. 111 Betham v Margetts [1996] 2 NZLR 708 (NZHC) (Fisher J). This is a sale of goods case that should not have had the statutory tests applied to it. 103

408  Research handbook on remedies in private law misrepresentation or of the term breached, remain highly vulnerable to misjudging the effects of a breach or misrepresentation on their material interests under the contract, and hence to being in repudiation themselves if they in fact do so. Although the local textbook writers may well be right that ‘it is not easy to see how any legislative solution could do much better [than the common law, which gave rise to precisely the same difficulty]’,112 this underscores the limitation of codes as a universal corrective for inaccessibility and uncertainty in the common law; for even under codal provisions, rights-holders will often be heavily dependent on legal advisers who are sufficiently immersed in the (possibly titanic) corpus of jurisprudence generated under the code as to be sufficiently well placed to proffer sound guidance on the risks and decisional strategies relating to the exercise of rights and powers created by the code.

CONCLUSION Despite the occasional example of judicial agitation in the early-to-mid 1990s, the New Zealand perspective on contract remedies has remained largely conservative (hence ‘orthodox’). And it is a perspective that is noticeably aligned, self-consciously or otherwise, with the cognate law of the United Kingdom as the first source. When New Zealand contract law has departed from the English legal tradition, though, this has tended to be achieved through the national Parliament rather than the courts, and by implementation of the so-called ‘codal’ device in particular. Still, while interesting case studies in the own right, and in many respects innovatively radical, the New Zealand contract statutes have only affected the law of contract remedies in relatively minor and oblique ways. In fact, statutes such as the original Contractual Remedies Act (now CCLA, pt 2, sub-pt 3) and Contractual Mistakes Act (now CCLA, pt 2, sub-pt 2) have been concerned more with principles allowing parties to escape the normal consequences of (continuing) contractual obligations – i.e., ‘relief’ – than with facilitating the performance of such obligations – i.e., ‘enforcement’. The principal manifestations of state-assisted contract enforcement – the remedies of specific performance, injunction and damages – have, quite self-consciously, been left largely unmolested by legislative reform in New Zealand.

Burrows et al. (n2) 693.

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

An international perspective on remedies may take a number of different approaches. It could take the form of a country by country comparison of national laws in relation to remedies for breach of contract. An exercise of this kind is the essence of comparative law as it has been traditionally understood. This is not the approach adopted in this chapter. Rather, it will take as its focus international instruments that have aimed in various ways to harmonise (aspects of) the law of contract. Its principal focus will be on the Vienna Convention on Contracts for the International Sale of Goods (‘CISG’) and the UNIDROIT Principles of International Commercial Contracts (‘PICC’). To a lesser extent it will examine regional harmonisation measures such as the Principles of European Contract Law (‘PECL’) and the Draft Common Frame of Reference (‘DCFR’). It is not possible within the scope of a single chapter to discuss all aspects of the law of remedies to be found in these instruments. It is necessary to focus attention on specific issues. After dealing with two introductory issues, we will focus our attention on two issues of some importance in both practical and comparative terms, namely the availability of specific performance and the definition of fundamental breach.

1

THE DIFFERENT FORMS THAT INTERNATIONAL INSTRUMENTS MAY ASSUME

At the outset it should be pointed out that the CISG and the PICC are two very different types of instrument. The former is an international convention which is open for ratification by nation states. Where it is so ratified it has the force of law within that nation state. The PICC by contrast is not legally binding. A number of consequences flow from this essential difference. The most obvious one is that the CISG has the force of law within the jurisdiction of ratifying states and that, where it is applicable, it displaces rules of national law that are inconsistent with it. The PICC, by contrast, does not have the force of law and, at least within Europe, it cannot be adopted by contracting parties as the law that is to govern their contract.1 The parties must choose as the governing law the law of a nation state so that the PICC can only take effect as contractually incorporated rules which can therefore be displaced by mandatory rules of the applicable law. Given the inability of contracting parties in many jurisdictions to adopt the PICC as the governing law, the influence of the PICC can be seen more clearly in international arbitrations where arbitral rules frequently give to contracting parties and to arbitrators the ability to choose ‘rules of law’, such as the PICC, to govern their contract. The difference in legal form also has an impact upon the substantive content of the CISG and the PICC. In the case of the CISG it was necessary to secure the agreement of the delegates By virtue of Article 3 of Regulation (EC) No. 593/​2008 on the law applicable to contractual obligations (generally referred to as ‘Rome I’) which provides that a contract shall be governed by ‘the law’ chosen by the parties. 1

409

410  Research handbook on remedies in private law of the various nation states who attended the diplomatic conference in Vienna at which the text of the CISG was agreed. It proved to be difficult to secure that agreement on a number of issues, such as specific performance and interest, where there was a clash between, in the case of specific performance, common law and civilian jurisdictions, and, in the case of interest, western nations and Islamic countries (and also, to some extent, differences between developed and developing nations). In these instances the compromise necessary to secure the agreement of the nation states can be seen on the face of Article 28 (dealing with specific performance) and Article 78 (dealing with interest). In the case of the PICC, by contrast, there were fewer constraints upon the drafting process. Those responsible for the drafting sought to adopt the best solutions to the legal issues with which they were confronted and there was no need to obtain the consent of the UNIDROIT member states to the text. It was for the organising group itself to determine its content and then to secure the approval of the Governing Council of UNIDROIT.2 As a result, it was able to agree solutions on matters such as specific performance and interest which were simply not open to the drafters of the CISG. It is also important to note the chronology of these instruments as they tend to build upon one another. In the case of the CISG the drafters of that Convention were able to learn from the experience of those responsible for the drafting of two Hague Conventions, namely the Uniform Law on the International Sale of Goods and the Uniform Law on the Formation of Contracts for the International Sale of Goods.3 The drafters of the PICC in turn were able to take advantage of the work done in preparing the text of the CISG and there was also a degree of overlap with the work of the PECL. Finally, in the case of the DCFR, the drafters were able to take advantage of the experience gained from the CISG, PICC and PECL. There is thus emerging a developing body of scholarship and draftsmanship which is becoming increasingly refined in the light of experience and reflection. We are also witnessing the development of agreed terminology which is used to denote certain legal rules or events which have particular legal consequences. As we shall see, the development of this terminology is not a straightforward matter, particularly in relation to terms such as ‘fundamental breach’ which have particular meanings in domestic legal systems, but it is intended that the term develop an ‘autonomous’ meaning for the purpose of the international instrument in which it is contained.

2

A DEFINITION OF INTERNATIONAL

Before turning to our two chosen areas of study, it is perhaps worth considering further the definition of ‘international’. In the case of the CISG, Article 1 declares that it depends upon the place of business of the parties to the contract.4 In other words, what matters is the place 2 This was the case in respect of the second and third editions of the PICC. A rather different approach was adopted in the case of the first edition, on which see S Vogenauer (ed.), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, Oxford University Press 2015) Introduction, para 20 and, more generally, paras 14–31. 3 One of the weaknesses of the Uniform Sales Law was the perception that its solutions favoured parties from the developed world over those from the developing world. This was a matter that was present to the minds of those responsible for the drafting of the CISG. 4 The definition of ‘place of business’ is to be found in Article 10. Where a party has more than one place of business, the relevant place of business will be the place which has the closest relationship to the contract and its performance. This is likely to be the place from which a business activity is de

Remedies in international instruments  411 of business of the parties to the contract of sale and not whether the goods themselves have crossed international borders (although, as a matter of fact, where the parties have their places of business in different states the goods themselves will often also cross national borders). In the case of the PICC there is no attempt at a definition of ‘international’ albeit the Comment to the Preamble states that the assumption made by the drafters is that the concept of ‘international’ contracts ‘should be given the broadest possible interpretation, so as ultimately to exclude only those situations where no international element at all is involved, i.e. where all the relevant elements of the contract in question are connected with one country only’.5 For present purposes, it is not necessary for us to develop a particular definition of ‘international’ because our focus is on the instruments themselves rather than their particular sphere of application. As has been noted, the ‘international’ instruments which form the principal subject-matter of this chapter are the CISG, PICC, PECL and the DCFR.

3

SPECIFIC PERFORMANCE

The first substantive area to which we wish to draw attention is specific performance and here the traditional divide is between civilian legal systems which regard specific performance as a primary remedy for breach of contract and common law systems where specific performance has traditionally been conceived of as a secondary remedy that is only available when damages would not be an adequate remedy for the breach. The difficulty in securing agreement on the availability of specific performance when drafting international instruments can readily be seen in Article 28 of the CISG, which provides that a court is not bound to enter a judgment for specific performance unless the court would (not could) do so under its own law6 in respect of similar contracts of sale not governed by the CISG. Article 28 clearly represents a compromise and rather than seek to bridge the gap between common law and civilian systems it highlights the gap by leaving the resolution of the issue to national law. Given this failure to resolve the differences between national laws it is, perhaps, not surprising that Article 28 has had little impact in practice.7 A more promising attempt at resolution of the difference of view between common law and civilian systems is to be found in Article 7.2.2 of PICC which provides: Where a party who owes an obligation other than one to pay money does not per­form, the other party may require perform­ance, unless (a) performance is impossible in law or in fact; (b) performance or, where relevant, enforcement is unreasonably burdensome or expensive; (c) the party entitled to performance may reasonably obtain performance from an­other source; facto carried out, which activity requires a certain duration, stability, and degree of autonomy. In the case where a party does not have a place of business, the reference shall be made to that party’s habitual residence. 5 UNIDROIT Principles of International Commercial Contract, 2010, 2. 6 Its own law means the domestic law of the forum State, excluding the conflict of laws. 7 It has been cited in a handful of cases and has attracted relatively little attention from scholars. For an exception see S Herman ‘Specific Performance: A Comparative Analysis’ (2003) 7 Edinburgh Law Review 5 and 194. For a useful summary see UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (2016 edition) 122 (available at http:​/​/​www​ .uncitral​.org/​pdf/​english/​clout/​CISG​_Digest​_2016​.pdf, accessed 9 May 2019).

412  Research handbook on remedies in private law (d) performance is of an exclusively personal character; or (e) the party entitled to performance does not require performance within a reason­able time after it has, or ought to have, be­come aware of the non-performance.

A very similar provision to Article 7.2.2 is to be found in Article 9:102 of PECL and in Book III, Article 3:302 of the DCFR. There are common elements to these three provisions. First, their starting point is that the claimant has an entitlement to specific performance. In particular, the language that is used in the case of PECL and the DCFR is the language of ‘entitlement’ and not discretion. Second, the prima facie entitlement to specific performance is qualified by a number of exceptions, the exact scope of which varies between the PICC, PECL and DCFR. These exceptions are recognisable to common lawyers and reflect the types of situation in which courts in common law jurisdictions would traditionally refuse to grant specific performance. The exceptions may also have an influence on the development of the law in civilian legal systems. An example here is provided by Article 1221 of the revised contract provisions of the Code Civile which provides that: A creditor of an obligation may, having given notice to perform, seek performance in kind unless performance is impossible or if there is a manifest disproportion between its cost to the debtor and its interests for the creditor.

Dr Rowan has noted that this introduction of the ‘manifest disproportion’ qualification to the entitlement to specific performance ‘nudges French law closer to the approach taken in international contract law instruments’ and brings about ‘a modest rapprochement with English law’.8 To this extent Article 7.2.2 of the PICC and its counterpart provisions in PECL and the DCFR may be said to represent a ‘middle ground between the common law and civil law systems’.9 The latter proposition may be contested by some common lawyers who see in the primacy thus accorded to specific performance a substantial concession to the civil law tradition. As Dr Rowan has noted in the context of Article III 3:302 of the DCFR it may be said to represent ‘a giant stride away from the prevailing rules of English law’ which is likely to lead to specific performance being awarded ‘routinely’.10 However, she has also noted that the ‘unsettling effect on English law’ of Article III 3:302 could be mitigated by interpreting the various exceptions ‘very widely’11 such that they might be equated with the current English law bars to specific performance. In this way there is a risk that these provisions, to the extent that they represent a compromise between common law and civilian jurisdictions, may be interpreted by jurists and legal practitioners in different jurisdictions through the lens of their own domestic law. So, for example, an English lawyer reading Article 7.2.2 of the PICC may read it very differently from a French lawyer. This tendency, often referred to as ‘the homeward trend’,12 is an extremely difficult problem to resolve when seeking to interpret

S Rowan ‘The New French Law of Contract’ (2017) ICLQ 805, 822. S Vogenauer (n2) Article 7.2.2., 888, para 2. 10 S Rowan Remedies for Breach of Contract: A Comparative Analysis of the Protection of Performance (Oxford University Press 2012) 65–6. 11 Ibid. 12 See, for example, F Ferrari ‘Homeward Trend and Lex Forism Despite Uniform Sales Law’ 13 Vindobona Journal of International Commercial Law & Arbitration (2009) 15. 8 9



Remedies in international instruments  413 international instruments and it demonstrates that agreement on a single text does not necessarily result in an agreed interpretation and application of that text. Third, the emergence of a consensus in relation to the substantive content of the rules of contract law may require re-consideration of important rules of procedure. One reason for the restricted availability of specific performance as a matter of English law is that non-compliance with a specific performance order could result in the imprisonment of the contracting party for contempt of court. In contrast, the French courts use the astreinte to give the defaulting contracting party an additional period of time in which to perform, failing which it must pay a monetary penalty to its counterparty. The latter solution is to be found reflected in Article 7.2.4 of the PICC, which provides that ‘where the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order’, which sum shall be paid by that party ‘unless mandatory provisions of the law of the forum provide otherwise’. There is no equivalent provision in either PECL or the DCFR. As Dr Rowan notes ‘the DCFR does not deal with the procedural mechanisms by which remedies are put into effect, these mechanisms belonging to national law’.13 Article 7.2.4 of the PICC ventures into this area but this excursus is not without its difficulties, particularly in relation to its application to awards made by arbitrators and in the case where it is necessary to seek to enforce the judicial penalty in a country other than the forum state.14 Nevertheless it is a step forward in so far as it does at least seek to address the procedural implications of a decision to give to a claimant an initial entitlement to specific performance. It may, however, be doubted whether the existence of this initial entitlement to specific performance will translate itself into the widespread use of specific performance as a remedy in practice. A contracting party will often have strong practical incentives to go out into the market, obtain substitute performance and seek damages as compensation for the loss suffered by the breach rather than wait for a court or arbitral tribunal at some later point in time to order its contracting party to perform that which it contractually agreed to do. That said, the existence of a commitment to the availability of specific performance is important in the case where specific performance is the remedy of choice for the claimant. In such a case the effect of the PICC, PECL and DCFR is to strengthen the hand of the claimant in comparison with the current state of English law. But the practical application of these provisions has thus far proved to be extremely limited. Article 7.2.2 of the PICC has been invoked in a very small handful of arbitral awards15 and does not appear to have had any significant impact on the development of national laws. This being the case, we seem still to be some way from securing consensus between national legal systems as to the existence of an entitlement on the part of a claimant to seek specific performance, notwithstanding the existence of an apparent consensus at the level of international instruments dealing with contract law.

Rowan (n10) 66, note 315. A point acknowledged in the Official Comment to the PICC (Unidroit Principles of International Commercial Contracts, 2010) 247, para 7. 15 The Unilex database (http:​/​/​www​.unilex​.info/​, last accessed 14 May 2019) contains three arbitral awards in which Article 7.2.2. has been considered. Two of the awards were made by the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, while the other is an award issued by the ICC International Court of Arbitration. 13 14

414  Research handbook on remedies in private law

4

FUNDAMENTAL BREACH

Our second issue relates to the definition of ‘fundamental breach’ and the identification of the circumstances in which a breach by one contracting party will confer on the other contracting party a right to avoid or terminate the contract. At the centre of our analysis is Article 25 of the CISG which provides: A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.

It can be seen that, when deciding whether or not a breach is fundamental, the court or arbitral tribunal is directed by the text of Article 25 to consider the ‘detriment’ caused to the other party. The breach must substantially deprive the other party to the contract of what it was entitled to expect under the contract. The word ‘substantial’ is not defined so that it is left to the court (or the arbitrator) to carry out the evaluative exercise of deciding whether or not the effects of any breach are ‘substantial’. The result of the breach of contract must also have been foreseeable to the party in breach or to a reasonable person in that party’s position. The burden of proving that the result is unforeseeable rests on the party who is in breach. Given the vagueness inherent in the definition it is, perhaps, no surprise to find that the meaning of ‘fundamental’ breach has given rise to a considerable volume of case law.16 Cases can be found in which the courts have been reluctant to conclude that a breach is fundamental, particularly where the buyer can still use or resell the goods. Cases can, however, also be found in which the focus of attention has not been on the question whether the buyer can still use or resell the goods but on the nature and extent of the default by the seller. The equivalent to Article 25 in the CISG is to be found in Article 7.3.1 of the PICC where the term used is ‘fundamental non-performance’ and a more extensive but not exhaustive definition of the term is to be found in Article 7.3.1(2). The term ‘fundamental non-performance’ is also used in Article 8:103 of PECL and in Article III 3:502 of the DCFR. It should be noted that the word ‘fundamental’ is used in all these instruments but that the CISG differs from the others in that it employs the language of ‘breach’ rather than ‘non-performance.’ The latter point can be disposed of quickly. The word ‘breach’ in CISG encompasses not only an unexcused failure in performance (the sense in which English law uses the word breach) but any failure to perform, whether that failure to perform is excused or not.17 Thus the

16 See generally: F Ferrari, ‘Fundamental Breach of Contract under the UN Sales Convention – 25 Years of Article 25 CISG’ (2006) J L & Comm 489; L Graffi, ‘Case Law on the Concept of “Fundamental Breach” in the Vienna Sales Convention’ (2003) 3 Revue de droit des affaires internationales 338; A Mullis, ‘Avoidance for Breach under the Vienna Convention: A Critical Analysis of Some of the Early Cases’ in M Andenæs and N Jareborg (eds), Anglo-Swedish Studies in Law (Iustug Förlag 1999) 326; G Lubbe ‘Fundamental Breach under the CISG: A Source of Fundamentally Divergent Results’ (2004) 68 Rabels Zeitschrift für ausländisches und internationales Privatrecht 444. 17 The fact that the word breach is used in this wider sense becomes apparent from an examination of Article 79. See further M G Bridge The International Sale of Goods (4th edn, Oxford University Press 2017) para 12.01.

Remedies in international instruments  415 difference between the CISG and the other instruments turns out to be largely a difference of nomenclature rather than one of substance. The use of the word ‘fundamental’ in all of these instruments might suggest that it has a common meaning across all instruments. This proves not to be the case. The instruments differ in their willingness to define ‘fundamental’ and in the meaning which they ascribe to the term. Thus Article 25 of the CISG does not attempt a definition of ‘fundamental’, preferring to leave it to the courts, arbitrators and jurists to ascertain its meaning on a case-by-case basis. At the other end of the spectrum, the most expansive attempt at a non-exhaustive definition is to be found in Article 7.3.1(2) of the PICC. The PECL and the DCFR set out when non-performance ‘is’ fundamental, whereas the PICC lists factors which may be taken into account when deciding whether non-performance is, or is not, fundamental. In the case of the PICC, PECL and DCFR there are common elements to the various definitions. Thus all agree (albeit with some minor differences of wording) that a non-performance is or may be ‘fundamental’ where it substantially deprives the innocent party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen that result. But in other respects there are important differences. Thus the PICC and PECL include the case where strict compliance with the obligation which has not been performed is of the essence of the contract, but no such provision is to be found in the DCFR. The PICC regard intentional or reckless non-performance as fundamental, whereas PECL and the DCFR restrict the definition to intentional non-performance and combine it with a requirement that the non-performance must give to the innocent party reason to believe that it cannot rely on the other party’s future performance, a factor which is listed in the PICC as a separate ground on which non-performance may be classified as fundamental. The PICC also lists as a factor to be taken into account when deciding whether non-performance is fundamental the fact that the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated, a factor which is not identified in either PECL or the DCFR. At first sight the PICC seems to adopt a more expansive conception of fundamental non-performance than that to be found in the PECL or the DCFR but the apparently narrower definition in the latter two instruments may be attributable to the fact that, as has been noted, PECL and the DCFR purport to define what fundamental non-performance ‘is’ rather than identify the factors that a court or arbitral tribunal should take into account when deciding whether or not a particular non-performance is fundamental. It is also important to keep in mind that Article 25 of the CISG is not to be interpreted through the lens of domestic law. Thus it has been argued that it is ‘strictly inadmissible’18 to use domestic law as a ‘guide’ to the interpretation of Article 25 and that ‘great reluctance’ should also be exercised when ‘looking to parallel concepts … used in the PICC and PECL’. 19 But the reluctance does not work the other way; that is to say, there is no objection to Article 25 being taken into account in the interpretation of national law, given that such an approach may result in the further harmonisation of commercial contract law. Having briefly examined the text of the articles which deal with ‘fundamental’ breach or non-performance we now wish to turn to the way in which the word ‘fundamental’ has been interpreted in the courts. In doing so we shall concentrate on the decision of the Supreme I Schwenzer (ed.), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (4th edn, Oxford University Press 2016) 423. 19 Ibid. 18

416  Research handbook on remedies in private law People’s Court in China in the case of ThyssenKrupp Metallurgical Products GmbH v Sinochem International (Overseas) Pte Ltd.20 Our discussion will proceed in three stages. First, we shall examine the facts of the case and the judgments delivered by the courts who heard the case. Second, we shall consider why it was thought to be necessary for the buyers to submit that the sellers had committed a fundamental breach of contract. Finally, we shall examine the implications of the decision for the definition of Article 25 of the CISG and, albeit more briefly, for Chinese contract law and for the role of national courts in the interpretation of transnational instruments dealing with aspects of contract law. (a)

The Facts of the Case and the Judgments of the Courts

The parties entered into a contract on 11 April 2008 for the purchase of 25,000 tons of fuelgrade petroleum coke. The contract was a contract for sale of goods within the meaning of Article 1(1) of the CISG. ThyssenKrupp Metallurgical Products GmbH were the sellers while the buyers were a Singaporean company, Sinochem International (Overseas) Pte Ltd. The contract was stated to be governed by the law of New York State and the CISG was also held to be applicable to the contract.21 The contract required that the HGI (Hardgrove Grindability Index22) of the petroleum coke must be in the range of 36–46 and it provided for the independent inspection and testing of the coke at the point of dispatch and also gave to the buyers the right to examine the goods at the port of destination. The inspection carried out at the port of dispatch on 8 August 2008 revealed that the coke had an HGI of 32. Notwithstanding this, the buyers paid most of the price of the goods on 2 September 2008 and the remaining balance on 25 September. The total price paid by the buyers amounted to US $7,756,828.25 (at a price of US $301.56 per ton). The goods arrived at their destination on 8 September when they were inspected, although the inspection report itself, which confirmed that the petroleum coke had an HGI of 32, was not issued until 10 November. Meanwhile on 15 October the buyers’ parent company sent a letter to the sellers in which they pointed out that the HGI of the petroleum coke which had been delivered had seriously failed to meet the contract specification, that they did not accept the goods and that they were looking to the sellers for compensation. This was followed up by a further letter to the same effect sent by the buyers on 4 November. The sellers responded on 12 November, stating that an HGI of 32 did not amount to a ‘substantial breach’ of contract, being only slightly lower than the contract range. The parties failed to resolve their dispute and so the case came before the Jiangsu High People’s Court. During the course of that hearing, the buyers contacted the sellers to inform them of the existence of potential buyers of the petroleum coke. In particular, the buyers stated

Supreme People’s Court, 30 June 2014, (2013) Min Si Zhong Zi, No. 35, Civil Judgment. The SPC noted that the place of business of both parties (namely Germany and Singapore) was in a Contracting State for the purposes of the CISG and that the USA was also a Contracting State. It was also noted that the contracting parties had agreed to apply the CISG as the applicable law during the first instance trial (before the Jiangsu High People’s Court) and that the parties had not attempted to exclude the operation of the CISG. Therefore their choice of the law of New York State was held to supplement a choice of the CISG in relation to any matters arising in the litigation that were not regulated by the CISG, rather than exclude the application of the CISG. 22 The index is named after its developer, R M Hardgrove, and it provides a measure of coal’s resistance to crushing. The higher the HGI value, the softer is the coal. The lower the HGI, the harder is the coal texture and less grindable is the coal. 20 21

Remedies in international instruments  417 that their parent company had reached a preliminary agreement to sell the coke at a price which was ‘not lower than the reasonable market price’. The sellers declined to comment on this proposal given that in their view the coke had already been delivered to the buyers and so it was for the buyers to decide what to do with it. Accordingly, on 26 November 2009 the buyers, acting through the agency of their parent company, entered into a contract with Weihei Golden Monkey Import and Export Trading Co Ltd to sell the petroleum coke. It did so at a price of US$5,072,525.62 (roughly US $230.7 per ton). In addition, the buyers incurred additional expenditure of US$528,253.24 in effecting the resale. The Jiangsu High People’s Court held that the sellers had committed a fundamental breach of contract. In so concluding, the court relied upon expert evidence produced by the sellers that an HGI of 32 was low (and thus made the coke less grindable), but the coke still had some value for practical use. The fact that the HGI was so low would create considerable difficulties for the buyers in reselling the petroleum coke in the domestic (Chinese) market, which thus deprived the buyers of the benefit which they expected to obtain from entering into the contract. Further, the sellers as a professional trading company could not have failed to know the scale of losses its breach would likely cause to the buyers. The court further held that the buyers had not lost their right to rely on the lack of conformity under Article 39(1) of the CISG because they had notified the sellers of the defect within a reasonable time. The court therefore held that the contract between the parties had been avoided, that the sellers must return to the buyers US$2,684,302.9 (being the difference between the contract price and the amount obtained by the buyers on the resale of the coke) and provide compensation of US$520,339.77 within 30 days of the judgment being given, together with interest and costs. On appeal to the Supreme People’s Court it was held that the sellers had not committed a fundamental breach of contract. The court so concluded for three principal reasons. First, HGI was only one of the seven indexes required of the petroleum coke (and it complied with the other six indices) and the coke delivered was still ‘usable’, albeit its utility was ‘limited’ in the sense that it required more expensive machinery to process and was more difficult to resell. Second, during the trial of the action in the Jiangsu High People’s Court, the buyers had written to the sellers stating that they had resold the petroleum coke ‘at a price not lower than the reasonable market price’. Therefore the coke delivered could still be resold at a reasonable price. Third, the court had regard to the case law of other jurisdictions in relation to the definition of fundamental breach and stated that: having comprehensively considered the interpretation of the fundamental breach article under the CISG in other countries’ court judgments, non-conformity in quality only constitutes a non-fundamental breach of contract if there is no unreasonable difficulty for the buyer to use or resell the goods even with some discounts.23

The Supreme People’s Court therefore held that the buyers did not have the right to avoid the contract with the sellers. But the court did affirm that the sellers had breached the contract, albeit the breach was not a fundamental breach. Under the terms of the contract between the parties, the buyers had a right to claim compensation within 60 days after the delivery of non-conforming petroleum coke at the port of destination. The buyers had made their claim within that time limit and accordingly were entitled to be compensated for the loss which they

See note 20 above. Please note that Chinese court judgments are not numbered.

23

418  Research handbook on remedies in private law had suffered. It was held that the buyers had experienced delay in reselling the coke due to the seller’s breach and that the sellers were responsible for the buyers’ losses in reselling the coke for a reduced price and they were also responsible for the extra storage costs which had been incurred. However, the buyers were held to be responsible for the portion of their losses attributable to market risks alone. As a result, the court apportioned the total losses, with the buyers entitled to recover damages comprising, in total, 60 per cent of the drop in the market price of the coke (US$1,610,581.74) plus interest and 60 per cent of the storage costs (US$98,442.79). (b)

Why Was the Existence of a Fundamental Breach Important?

Why was it necessary for the buyers to claim that the sellers had committed a fundamental breach of contract? The existence of a fundamental breach is important for a number of reasons within the CISG. The following remedies are dependent upon the occurrence of a fundamental breach: (1) the right of the buyer to demand substitute goods if the goods delivered do not conform with the contract;24 (2) the right of one party to avoid the contract on the ground of non-performance by the other party25 and (3) the right of the buyer to avoid the contract for partial delivery.26 Fundamental breach is also relevant in relation to the transfer of risk.27 While the courts did not state in express terms why it was necessary for them to consider whether the sellers had committed a fundamental breach of contract, it is reasonably apparent that it was linked principally to the amount or quantum of damages to which the buyers were entitled. As has been noted, the Jiangsu High People’s Court held that the sellers had committed a fundamental breach of contract and that the buyers had not lost their right to declare the contract avoided because they had acted within a reasonable time. The precise date on which the buyers avoided the contract is not clearly identified by the court. Reference is made to the letter sent by the buyers’ parent company on 15 October and to subsequent correspondence between the parties but the buyers did not appear to express an intention to bring the contract to an end in such correspondence. Nevertheless, it would appear that the court concluded that a declaration of avoidance under Article 26 of the CISG had been made by the buyers to the sellers at the latest when they brought the present action in which they sought a declaration. The sellers submitted that the buyers had lost the right to avoid the contract under Article 82(1) as a result of the resale of the coke to the Weihei Golden Monkey Import and Export Trading Co Ltd in November 2009. In their submission it was impossible for the buyers to make restitution of the goods substantially in the condition in which they had received them. The court rejected this submission, relying upon Article 82(2)(a) which disapplies Article 82(1) if the impossibility of making restitution is not due to the act or omission of the buyers. The court held that the refusal of the sellers to co-operate with the buyers had the consequence that it was the sellers, not the buyers, who should take responsibility for the fact that the goods could not be returned in the form in which they were received. Accordingly, the buyers were held to be entitled to rely on Article 82(2)(a) so that they had not lost the right to avoid the contract. A

Article 46(2). Articles 49(1)(a), 64(1)(a), and 73(1). 26 Article 51(2). 27 Article 70 provides that if the seller has committed a fundamental breach of contract, Articles 67–9 (which deal with the passage of risk) do not impair the remedies available to the buyer on account of the breach. 24 25

Remedies in international instruments  419 shorter answer to the sellers’ submission, assuming that the buyers acquired a right to declare the contract avoided at the time of the breach (i.e., in August–September 2008) and that they had not lost that right, is that the subsequent sale of the goods by the buyers in November 2009 could not operate retroactively to cause them to lose their right to avoid the contract.28 The court also rejected the submission that the fact that the buyers had paid the price of the goods in September 2008 had the effect of depriving the buyers of their right to object to the quality of the goods supplied. According to the contract between the parties the buyers had a period of 60 days in which to raise objections to the goods and the fact that they had paid for the goods was held not to have deprived them of their right to raise an objection within the 60-day period.29 When assessing the damages to which the buyers were entitled the Jiangsu High People’s Court had regard to Articles 74, 77, 81 and 84 of the CISG. In awarding damages assessed by reference to the difference between the contract price and the price obtained by the buyers on the resale of the coke, it would seem that Article 84 was the critical provision. The important role played by Article 84 (which deals with the refund of the contract price) can be seen more clearly when regard is had to the decision of the Supreme People’s Court where, having concluded that the breach by the sellers was not fundamental, the court awarded damages by reference to Article 74 where the buyers were confined to the recovery of ‘a sum equal to the loss, including loss of profit, suffered’ by them ‘as a consequence of the breach’. Had the fundamental breach been established and Article 84 applied, the buyers would have obtained a full refund of the contract price plus interest, the effect of which would have been to shift all losses (i.e., the difference between the contract price and the resale price and additional expenses incurred to effect the resale) to the sellers. Since the Supreme Court held against the buyers on the fundamental breach point, it assessed the above sum as a much lower sum than that awarded by the Jiangsu High People’s Court. Having concluded that the buyers did not have the right to avoid the contract, Article 84 was no longer in play and so the buyers were confined to their claim for damages under Article 74. The court then apportioned the losses between them according to their respective share of responsibility. (c)

Article 25 and Comparative Reflections

One of the most interesting features of the decision of the Supreme People’s Court is the reference to the decisions of courts of other jurisdictions and the reference to the UNCITRAL Digest of case law on the CISG, where the court noted that, although the Digest was not part of the CISG and could not be applied as law, it ‘can be used as an apposite reference as to how the relevant provisions of the CISG are to accurately be interpreted’.30 This reference is an important one in so far as it reveals an acceptance of the international character of the Schwenzer (n18) 1994. A further potential complication was introduced by the fact that the buyers had sold the coke to their parent company at the original contract price prior to the onward sale to Weihei Golden Monkey Import and Export Trading Co Ltd, which had the consequence that the buyers did not suffer any loss. This submission was rejected by the court who held that the relationship between the buyers and their parent company was not that of seller and buyer but was rather a relationship of agency (‘entrusted sales’) so that the inter-position of the parent company did not alter the fact that the buyers had suffered a loss when the coke was sold to Weihei Golden Monkey Import and Export Trading Co Ltd. 30 ThyssenKrupp v Sinochem (n20). Translation from Q Liu and X Ren, ‘CISG in Chinese Courts: The Issue of Applicability’ (2017) 65(4) American Journal of Comparative Law 1–46, at 2. 28 29

420  Research handbook on remedies in private law CISG and demonstrates a willingness on the part of the Chinese courts to engage with case law from other jurisdictions.31 The case law was cited in support of the proposition that in the case where the buyer can use or resell the goods without unreasonable inconvenience, even at a discounted price, non-conformity in quality is not a fundamental breach. An example of a case which supports the approach taken by the Supreme People’s Court is provided by a German case where the sellers sold four different quantities of cobalt sulphate to the buyer, a German company.32 The parties agreed that the goods must be of British origin and it was also agreed that the sellers would supply a certificate of origin and a certificate of quality. After the sellers had tendered the documents, the buyer purported to avoid the contract on various grounds, including that the cobalt sulphate had been manufactured by a South African firm, that the certificate of origin was consequently inaccurate, and that the goods delivered were of an inferior quality when compared with the contractual specification. The sellers brought an action for payment of the price. The buyer resisted the claim and one of the grounds on which it sought to do so was that the sellers had committed a fundamental breach of contract in delivering goods of the wrong origin and of inferior quality. The Bundesgerichtshof held that the sellers had not committed a fundamental breach of contract. In reaching this conclusion the court attached considerable significance to the ability of the buyer to put the goods to ‘another reasonable use’. The significance of this factor was particularly apparent in relation to the buyer’s complaint concerning the origin of the goods. The buyer alleged that the difference between goods of British origin and goods of South African origin was important to it because it could not export goods of South African origin to its principal customers in India and South East Asia as a result of an embargo which then existed in these countries over goods of South African origin. The court rejected this submission on the facts and, more significantly, it stated that the buyer did not submit that a ‘disposal in Germany or an export to another country was not possible or only possible with unreasonable difficulties’. Perhaps the most significant aspect of the decision is the statement that ‘avoidance of contract is only supposed to be the [buyer’s] last resort to react to a breach of contract by the other party which is so grave that the [buyer’s] interest in the performance of the contract essentially ceases to exist’.33 However, it should not be thought that the cases in other jurisdictions are all to the same effect. A difference of emphasis can be detected in the case law. The reality is that the case law does not yet reveal an entirely consistent picture as to the circumstances in which a party to a contract of sale should be entitled to avoid the contract as a result of defective performance or non-performance by the other party to the contract.34 An example of a more liberal approach to the identification of a fundamental breach can be found in the decision of the US Court of Appeals Second Circuit in Delchi Carrier SpA v Rotorex Corp.35 The defendants, a New York

See more generally Qiao Liu and Xiang Ren ‘CISG in Chinese Courts: The First Look’ in Q Liu and W Shan (eds), China and International Commercial Dispute Resolution (Nijhoff 2016) 273. 32 Bundesgerichtshof, VIII ZR 51/95 (3 April 1996) http:​/​/​cisgw3​.law​.pace​.edu/​cases/​960403g1​ .html, last accessed 14 May 2019. See further P Huber, ‘Typically German? – Two Contentious German Contributions to the CISG’ (2011) Belgrade Law Review 150. See also the case law considered by Professor Bridge (n17) para 12.04. 33 See P Huber, ibid. 34 See, generally: CISG Advisory Opinion No. 5, ‘The buyer’s right to avoid the contract in case of non-conforming goods or documents’ http:​/​/​www​.cisg​.law​.pace​.edu/​cisg/​CISG​-AC​-op5​.html, last accessed 14 May 2019. 35 71 F 3d 1024 (US Ct of Apps (2nd Cir) 1995). 31

Remedies in international instruments  421 corporation, sold compressors for use in portable room air conditioners to the claimants, an Italian manufacturer of air conditioners. The compressors were found to be non-conforming and the claimant buyers terminated the contract. It was held that the buyers were entitled to avoid the contract. The compressors were rejected because they had lower cooling capacity and consumed more power than the sample which had been provided to the buyers. The court concluded that ‘because the cooling power and energy consumption of an air-conditioner compressor are important determinants of the product’s value, the district court’s conclusion that Rotorex was liable for a fundamental breach of contract under the Convention was proper’.36 The reasoning of the court on the point is brief and stated largely in the form of a conclusion. In reaching this conclusion it is important to note that the court did not consider whether the buyers could have made some alternative use of the goods. It simply inferred that the breach was fundamental from the importance of the term to the buyer. However, it may be that a critical factor in Delchi was that the compressors had been bought for use by the buyer and in these circumstances the court may be less inclined to insist that the buyer enter into the market and seek to sell the goods at a discounted price.37 Notwithstanding cases such as Delchi it would appear that the analysis of the Supreme People’s Court is consistent with the generally accepted approach to the interpretation of Article 25. Thus Professor Schwenzer has stated that ‘if the goods can be resold by the buyer, even at a giveaway price, no fundamental breach exists, and thus no contract avoidance … is allowed under the Convention’.38 This approach has not been to everyone’s taste. Thus Professor Bridge has criticised this ‘strict approach’ to the interpretation of Article 25 on the ground that ‘it pays scant regard to the wording of Article 25 and is an exercise in unconstrained judicial creativity’.39 Professor Bridge continues by pointing out that one consequence of this strict approach may be to ‘leave the buyer with additional expenses to bear in making use of or disposing of the goods, and the uncertain prospect of recovering those expenses from a distant and unco-operative seller’.40 But this is very much a minority view. The consensus is that, at least in the case of international sales,41 the implications for the seller of avoidance of the contract by the buyer are such that the law should be slow to require the sellers to retrieve and then have to resell the goods. The rationale of Article 25 has been stated to be ‘the avoidance of waste’42 and the need for a high threshold before a contract can be avoided for fundamental breach has been justified on the ground of the need to ‘prevent costly re-transfers of goods around the globe’.43 While within a single jurisdiction ‘rejected goods can be retrieved

Ibid, at 1029. See CISG Advisory Opinion No. 5, n 34, para 4.3. 38 Schwenzer (n18) 449. 39 Bridge (n17) para 12.04. 40 Ibid. 41 Matters may be different in the case of domestic sales, although in truth this does depend upon the size of the country and the cost of returning the goods to the possession of the buyer. 42 L A DiMatteo and J Wang ‘CCL and CISG: A Comparative Analysis of Formation, Performance, and Breach’ in L A DiMatteo and L Chen (eds), Chinese Contract Law: Civil and Common Law Perspectives (Cambridge University Press 2018) 491. 43 See, for example, I Schwenzer, P Hachem and C Kee, Global Sales and Contract Law (Oxford University Press 2012) para 47.129. 36 37

422  Research handbook on remedies in private law or transshipped to another party without creating much waste or additional costs’44 this is less likely to be so where the contract is international in nature. It is also noteworthy that both the Jiangsu High People’s Court and the Supreme People’s Court made limited references to Chinese law when reaching their conclusions. This is a not unimportant point given the ‘homeward trend’ to which we have referred in the interpretation of international instruments.45 The CISG has had a significant impact on the content of the Chinese Contract Law (CCL), although it does not employ the language of ‘fundamental breach’. However Article 94(4) of the CCL provides that parties may terminate the contract if either party delays its performance or is engaged in any other activities that makes the realisation of the aim or the purpose of the contract impossible. Although the two provisions are not identical it has been stated that ‘the CCL intended to adopt the system of fundamental breach found in the CISG’.46 It would seem that both the Jiangsu High People’s Court and the Supreme People’s Court succumbed to the above ‘homeward trend’ impetus to some extent. The Jiangsu Court, apparently under the influence of the buyers’ arguments, which were framed according to the CCL provision, identified the key issue to be determined on the basis of the evidence of expert witnesses and other evidence as being ‘whether petroleum coke with a HGI index of 32 was in conformity with the purpose of the contract’.47 Later in its reasoning the court switched to the language of Article 25 of the CISG and emphasised that the deviation from the agreed range of HGI index was rarely seen. It was in their judgment ‘very serious’ such that the non-conforming coke required special processing equipment and therefore had an ‘extremely’ limited market demand. The court then concluded that this would cause ‘great difficulties’ to the buyers’ resale of the coke and it satisfied the Article 25 test which was reproduced effectively word by word in the judgment. The Supreme People’s Court assessed the seriousness of the sellers’ breach in three respects, as explained above. However, none of the three reasons given by the Court made explicit reference to the test under Article 25 of the CISG. The language used by the Court did not evidence a direct application of that test but instead bore some resemblance to a prior decision of the Court which applied Article 94(4) of the CCL. In Xinjiang Yakun Commercial Trade Co Ltd v Xinjiang Jinghe Kangrui Cotton Processing Co Ltd,48 the sellers delivered cotton in a smaller amount and of a lower grade than contracted. The Supreme People’s Court held that this did not amount to a breach that entitled the buyers to terminate the contract under Article 94(4) of the CCL. Two reasons were given. The first was that the breach concerned only 8 per cent in value of all the goods sold under the contract and the buyers’ purpose in entering into the contract could still be fulfilled as they had not been substantially deprived of the opportunity to earn profits from the resale of the goods. The second reason was that the breach could be redressed by a reduction of the price or a partial refund. It might have been different had the buyers successfully persuaded the court to accept their argument that their purpose in entering into the contract was to process, not to resell, the cotton. Thus both in ThyssenKrupp v Sinochem and in Yakun v Jinghe the Supreme People’s Court relied upon the fact that the buyers could still resell the defective goods on the market. Admittedly, had a German court been called

46 47 48 44 45

DiMatteo and Wang (n42) 491. See note 12 above. DiMatteo and Wang (n42) 490. See note 20 above. (2006) Min Er Zhong Zi No. 111 Civil Judgment, 9 December 2006, SPC Gazette, Issue 11, 2006.

Remedies in international instruments  423 upon to decide ThyssenKrupp v Sinochem in accordance with the CISG, the outcome might not have been different given the reluctance of at least some German courts to conclude that the requirements of Article 25 have been satisfied and that the contract has been avoided.49 After all, the three factual reasons relied upon by the Supreme People’s Court could be equally used to support a conclusion that ThyssenKrupp’s breach did not satisfy the test under Article 25 of the CISG, namely that the breach ‘results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract’. However, unfortunately the Supreme People’s Court did not analyse the case using the terminology of Article 25. It would be demonstrably preferable if a Chinese court adheres strictly to the spirit and wording of the relevant CISG provision in writing its reasoning and conclusion. In this case the Supreme People’s Court should probably have been more explicit and clearer in applying Article 25 of the CISG. But it cannot be said that the Court was ignorant of the difference between the applicable CISG rules and Chinese law. One of the arguments advanced on behalf of the sellers was that the buyers had stated in their claim that the contract should be ‘terminated’ for breach and that it was therefore not for the court to decide whether the contract should be declared avoided under the CISG. The Supreme People’s Court rightly held that the declaration that the contract had been avoided under the CISG was equivalent to the termination of the contract under Chinese law and that the buyers’ true intention was to request the former. Hence it was legitimate for the court to treat the buyers’ claim as if they had sought a declaration to avoid the contract. In this way the court prevented what was a difference in form (terminology) from obscuring a matter of substance (principle).

5 CONCLUSION Two points can be made by way of conclusion. The first is that one can see a general consensus emerging from these international instruments as to the most appropriate rules to be applied to international commercial contracts. This can be seen most clearly in relation to the provisions that relate to specific performance where, given the differences that exist between common law and civilian systems, the texts reveal a surprising degree of consensus as to the initial entitlement of a claimant to specific performance and also to the circumstances in which the remedy should not be available. A similar picture emerges in relation to fundamental breach (or fundamental non-performance), although here the use of common terminology can conceal differences in view as to what amounts to a ‘fundamental’ breach. The emergence of consensus should not, however, be over-stated. Significant differences remain between different legal cultures and systems. But the degree of consensus that has emerged in the last 50 years or so is a significant achievement. The second is that consensus as to the applicable text does not guarantee identity of outcome given the possibility that domestic courts or arbitrators drawn from national jurisdictions may interpret the text through the lens of their own national law. But the availability of case law on line, together with substantial commentaries which compile and synthesise that case law, have made it much easier for national courts and for arbitrators to interpret and develop the law in the light of that emerging international case law. This can be seen most obviously in

See text to note 32 above.

49

424  Research handbook on remedies in private law the decision of the Supreme People’s Court in ThyssenKrupp Metallurgical Products GmbH v Sinochem International (Overseas) Pte Ltd where the court was careful to pay attention both to the UNCITRAL Digest and to the case law of other jurisdictions when seeking to interpret Article 25 of the CISG. A greater willingness on the part of national courts and arbitrators to follow this example should help to foster greater understanding of the differences that have existed between national legal systems and better enable courts and arbitrators to develop a common understanding of the content of legal rules that are applicable to international commercial contracts.

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

INTRODUCTION EU secondary law has, over the years, had an increasing impact on the national private law systems in the EU Member States; an impact which has increasingly come to be seen in terms of the ‘Europeanisation’ of private law and the emergence of a new body of law: EU Private Law.1 Yet, unsurprisingly perhaps, this ‘new’ body of law has proven unstable: the diverse body of sector-specific European directives and regulations combining, sometimes randomly, with the divergent national transpositions and judicial applications of EC/EU law. Precisely this instability, however, has also fuelled debate on the need for reform: for measures of horizontal and/or ‘full’ harmonisation; for codification and unification in a single ius commune.2 However, such proposals were inevitably controversial, going beyond the legal competence of the European institutions to complete the internal market.3 In this chapter I will survey what became of this gravity-defying initiative to address the Europeanisation of private law, and, specifically, the wreckage of the attempt at unification, and the more pragmatic measures which have emerged from the wreckage of the unification agenda.

EUROPEANISATION OF PRIVATE LAW Historically, it has been the concern that differences in national contract laws damage the overall efficiency of the internal market which has driven the unification initiative forward; such differences, as the 2010 Green Paper put it: ‘may entail additional transaction costs and legal uncertainty for businesses and lead to a lack of consumer confidence in the internal

1 EU Private or Gemeinschaftsprivatrecht: B Heiderhoff, Gemeinschaftsprivatrecht (Sellier 2005). Phenomenon seen in the foundation of new law journals: the ERPL (European Review of Private law) in 1992; the GPR (Zeitschrift für Gemeinschaftsprivatrecht) in 2003. See also Common Core of European Private law, Series editors M Bussani, U Mattei, R Sacco and R Schlesinger (Cambridge University Press) and ‘Ius Commune’ Casebooks (Hart Publishing). 2 C von Bar, ‘From Principles to Codification: Prospects for European Private law’ (2002) 8 Colum J Eur L 379; O Lando, ‘Does the European Union Need a Civil Code’ (2003) Recht der Internationalen Wirtschaft 1. 3 Article 114(1) TFEU ‘Parliament and … Council shall, acting in accordance with the ordinary legislative procedure and after consulting the [ECOSOC], adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.’

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426  Research handbook on remedies in private law market…’.4 Yet the search for ‘coherence’, whether through codification, consolidation or harmonisation, is a complex exercise; a complexity augmented by the Commission’s practice, seen in its apparent rejection of a European Civil Code in its 2004 Communication on European Contract Law (‘2004 Communication’), of keeping all of its vertical, horizontal, flexible and efficient options open.5 Meanwhile, though the proponents of a single, codified ius commune could always appeal to a single, unified vision of ‘coherence’, arguing the case for the competition of legal orders, or of strictly limiting harmonisation to areas of functional equivalence, is much more difficult. Precisely because of these issues, we now turn to examine the Europeanisation process in private law in greater detail; the process driving the unification initiatives. The Europeanisation process in private law began with the internal market programme and the passing of the Single European Act.6 Thereafter, and directly, in fields such as Consumer Protection and Company law, and indirectly, via, for example, the block exemption regulations in competition law,7 and in the EU policy fields,8 national private law was increasingly shaped by the incremental and progressive intervention of EU secondary law. Europeanisation was, however, not the whole of the story; for outside the EU competences set down in the Treaty, national law continued to apply, and national demarcations within the law (for example between contract, tort and property) held their divergent validities. Moreover, national courts remained responsible for the application of EU law within a framework which guaranteed national procedural autonomy. In such an environment, ‘uniform’ legal solutions were predictably rare, and EU measures were invariably accompanied by fragmentation.9 For example, horse-trading in the legislative process meant that regulations frequently failed to unify the relevant area of law, while ‘minimum harmonisation’10 directives allowed Member States to exceed the relevant European standards through ‘upward derogation’.11 As Twigg-Flesner

4 2010 Green Paper on Policy Options for Progress towards a European Contract Law, COM(2010)348 final, 2. 5 2004 Commission Communication on European Contract Law and the Revision of the Acquis: The Way Forward COM(2004) 651 final: the Commission not being bound by the findings: Point 3.2.1. at 12. 6 Single European Act [1987] OJ L169/1; UK: European Communities (Amendment) Act 1986. 7 Reg 461/2010 on categories of vertical agreements and concerted practices in the motor vehicle sector, [2010] OJ L129/52; Reg 333/2010 on categories of vertical agreements and concerted practices, [2010] OJ L102/1; Reg 316/2014 on categories of Technology Transfer Agreements, [2014] OJ L93/17; Reg 2658/2000 on categories of specialisation agreements, [2000] OJ L304/3; Reg 1217/2010 on categories of research and development agreements, [2010] OJ L335/36; Reg 1218/2010 on specialisation agreements, [2010] OJ L335/43; Reg 267/2010 on certain categories of agreements, decisions and concerted practices in the insurance sector, [2010] OJ L83/1. 8 Policy fields: Public Health: Title XIV, Article 168 TFEU; Environment: Title XX Articles 191–3 TFEU; Employment: Title IX, Articles 145–50 TFEU; Industrial Policy: Title XVII Article 173 TFEU; Economic and Social Cohesion: Title XVIII, Articles 174–8 TFEU; R&D: Title XIX, Article 179–90 TFEU. 9 J Devenney and M Kenny, ‘Unfair Terms and the Draft Common Frame of Reference: The Role of Non-legislative Harmonisation and Administrative Co-Operation?’ in J Devenney and M Kenny (eds), European Consumer Protection: Theory and Practice (Cambridge University Press 2012). 10 Article 114 TFEU; Article 193 TFEU on environmental protection; Article 169(4) TFEU on consumer protection. 11 2006 Green Paper on the Review of the Consumer Acquis, COM(2006)744 final, at 6: ‘the current directives allow Member States to adopt more stringent rules in their national laws...’.

Exploring the wreckage of the unification initiative in European private law  427 famously observed, rather than creating a coherent body of consumer law, harmonisation led to the emergence of: ‘[28] … national rules on doorstep selling, distance selling [etc.] ….’.12 Fragmentation was further aggravated by the legal base-dependent, sector-specific approach to European secondary law, which focused on particular types of contract (for example, consumer credit or package travel contracts); and on discrete areas of more horizontal contract law (such as unfair terms and consumer sales). Yet beyond this substantive ‘Europeanised’ fragmentation, at an even deeper, international level, fragmentation was increased by the communitarisation of European procedural law; ‘disengaging’ Member States from the Formulating Agencies’ initiatives.13 Simultaneously, increasing resort to the lex mercatoria and the ever broader engagement of arbitration meant that polycentricity now dominates in cross-border trade such that non-national legal instruments (EU law, lex mercatoria, CISG, UNIDROIT Principles and/or the 1980 EU Rome Convention) have become important sources of private law.

UNIFICATION INITIATIVES Given the fragmentation and polycentricity central to the Europeanisation of private law, calls for unification were strengthened; and were also reflected in more modest initiatives aimed at simplifying and/or improving the regulatory environment.14 Simultaneously, however, it was also becoming increasingly clear that codification itself could also produce a particular strain of fragmentation; the codifier’s choice, between liberalisation and regulation, always lending the law more of a ‘patchwork’ than any ‘uniform’ quality. Finally, with intensifying regulatory competition, the ad hoc judicial approximation of legal orders, was, in any case, becoming ever more prevalent; further eroding the case for exercises in broader, more formal codification.15 Given this background, this section of the chapter charts the stages of attempted (and partially successful) policy elaboration: from the 2001 Communication on European Contract Law, 2003 Action Plan, 2004 Communication on European Contract Law, 2007 Green Paper on the Consumer Acquis to the 2010 Draft Common Frame of Reference and the 2011 Common European Sales Law; and, finally, following the crash-landing of the Common European Sales Law, from such consolidation harmonisation instruments as the 2011 Consumer Rights Directive to the more targeted harmonisation proposals announced in the 2015 Digital Market Strategy (DSM) legislative package.

C Twigg-Flesner, ‘Good-bye Harmonisation by Directives, Hello Cross-border only Regulation? – A way forward for EU Consumer Contract Law’ (2011) 7 ERCL 235, 241. 13 B. Heß, ‘Die Integrationsfunktion des Europäischen Zivilverfahrensrechts’ (2001) IPrax 389, at 395. 14 European Governance – A White Paper (COM(2001) 428 final), [2001] OJ C287/1; SLIM Initiative (Simpler Legislation for the Internal Market): (COM(1996) 204 final); Review of SLIM (COM(2000) 104 final); Simplifying and Improving the Regulatory Environment (COM(2001) 726 final); European Governance – A White Paper [2001] OJ C287/1. 15 A I Ogus, ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative law’ (1999) ICLQ 405; N Reich, ‘Competition of Legal Orders – A New Paradigm of EC Law?’ (1992) 29 CMLRev 861. 12

428  Research handbook on remedies in private law The 2001 Communication on European Contract Law16 addressed the piecemeal development, divergent transposition and uneven operation of Europeanised contract law and sought to initiate debate on four options: first, whether to not intervene but rely, instead, on a competition of legal orders; second, whether to elaborate non-binding principles based on the Lando or UNIDROIT principles to guide the process of ‘Europeanisation’; third, whether to undertake a general evaluation, improvement and consolidation of the existing instruments of the acquis; and, finally, whether to introduce a new legal instrument(s) to consolidate the field of EU Private Law. Unsurprisingly, the 2003 Action Plan17 subsequently approved the 2001 Communication’s last three options (to take action) and rejected the first (relying on a competition of legal orders); and outlined three areas in which further work was required: Elaboration of the Common Frame of Reference (CFR)): the CFR was designed to improve the quality of the consumer contract acquis: to tackle the issue of divergent transpositions; and to provide clarification on questions of interpretation,18 the CFR was also to help overhaul fundamental concepts19 and identify areas requiring special treatment.20 Elaboration of EU-wide standard contract terms: the Action plan was involve testing the utility of the adoption of EU-wide standard contract terms, and to facilitate and supply guidelines for their introduction.21 Assessing the ‘opportuneness’ of (a) new optional instrument(s): the Action Plan underscored the need to conduct assessment of whether the time was ripe for the introduction of an optional instrument(s) in order to improve the horizontal coherence of ‘EU contract law’.22 The 2003 Action Plan was a paradoxical document: it appeared to retain the traditional, sector-specific approach to EU contract law while drawing attention to the horizontal implications (for example the need for a general overhaul of contract terms) and launching reflection on the opportuneness of optional instrument(s) at every stage of analysis. Meanwhile, many sensitive questions surrounding the envisaged instruments were simply left un-addressed: for example, on the form to be taken by the optional instrument(s) (Regulation or Recommendation?); on the form of relationship between the measures (for example, the precise relationship between the CFR and the optional instrument(s)?); and on the extent to which a choice of law would still prevail. Similarly, questions concerning the potential availability of the standard contract terms in purely ‘internal’ (national) transactions were not raised.23 The apparent refusal to flesh-out the proposals can be explained: in the absence of a clear legal base and given the restrictions placed in Tobacco Advertising on the use of the Article 100a EEC competence (now Article 114 TIEU) as a ‘gap-filler’, the Commission had to side-step such issues to

2001 Communication on European Contract Law (COM(2001) 398 final), [2001] OJ C255/1. 2003 Communication on a More Coherent Contract law – An Action Plan (COM(2003) 68 final), [2003] OJ C63/1; D Staudenmayer, ‘The Commission Action Plan on European Contract law’ (2003) 2 ERPL 113; M Kenny, ‘The 2003 Action Plan on European Contract Law: Is the Commission Running Wild?’ (2003) 28 ELRev 538. 18 Case C-168/00, Simone Leitner v TUI Deutschland GmbH & Co KG [2002] ECR I-2631. 19 2003 Action Plan (n17) paras 32, 33, 34, 35–6. 20 Ibid, paras 30–1, 47–8, 41–2, 43, 49–50, and 67 financial and insurance services, transfer and reservation of title, cabotage transport, factoring, consumer protection and tort law. 21 Ibid, paras 81–8 at pages 21–3. 22 Ibid, paras 89–97 at pages 23–4. 23 Ibid, pages 21–3. 16 17

Exploring the wreckage of the unification initiative in European private law  429 deflect from the question of whether it had the competence to initiate any of the legislation it was proposing.24 Greater caution appeared to have entered the debate with the 2004 Communication on European Contract law (‘2004 Communication’); Based having previously appealed for a 20–30 year timeframe to elaborate any (D)CFR-based instruments.25 The 2004 Communication proposed a much shorter timeframe for policy development: consisting of a research phase to prepare the CFR (2005–7);26 a subsequent drafting process (2008–9); and final CFR adoption by 2009.27 The 2004 Communication supplied greater detail on the proposed CFR measures: their possible ‘PECL’-based structure;28 and the ‘opportuneness’ of the optional instrument (Annex II). The most important aspect of the 2004 Communication was the elaboration of the CFR’s role, which was specified as being to improve the acquis by supplying definitions of terms, principles and model contract law rules.29 In particular, the Commission saw the need to deal with the differences caused by upward derogation.30 Furthermore, acquis simplification, the Commission argued, could extend to filling the gaps between the directives. In addition, the 2004 Communication identified insurance contracts, contracts of sale and services and aspects of property and commercial law as areas in which further sector-specific solutions might be required.31 The second key area of proposals related to EU-wide standard contract terms, where the Commission undertook to disseminate information on EU-wide standard terms and supply guidelines on their relationship, in particular, with the EU competition rules.32 Finally, in a third area of proposals, on the optional instrument, the 2004 Communication provided that the Commission was to supply guidance on assessing the opportuneness of an optional instrument (Annex II).33 The role assigned to the Study Group on the European Civil Code (SPEC) in elaborating the ‘non-Code’ was undoubtedly the defining paradox of the 2004 Communication; a competition of ideas between such groups as the Acquis Group, the Common Core Group, or the Private Law Forum was not promoted.34 The apparent denial of the horizontal implications 24 Case C-376/98, Germany v Parliament and Council (Tobacco Advertising) [2000] ECR I-8419 at [84]: ‘If a mere finding of disparities between national rules and of the abstract risk of obstacles to the exercise of fundamental freedoms or of distortions of competition liable to result therefrom were sufficient to justify the choice of Art.100a as a legal basis, judicial review of compliance with the proper legal basis might be rendered nugatory…’ 25 J Basedow, ‘Ein optimales Europäisches Vertragsgesetz – Opt-in, Opt-out, Wozu Überhaupt?’ (2004) 12 ZEuP 1, at 4. 26 2004 Communication (n5) at 13. 27 M Schmidt-Kessel, ‘Auf dem Weg zum Gemeinsamen Referenzrahmen’ (2005) 2 GPR 2, at 7. 28 2004 Communication (n5) Annex I, at 14–16. 29 Ibid, s 2.1.1. p. 3; s 3.1.3. p. 11: ‘principles and definitions … completed by model rules, forming the bulk of the CFR’. 30 Schmidt-Kessel (n27) 3 upward derogation as a source of impediments in the market: Case C-491/01, Ex p BAT (Investments) Ltd and Imperial Tobacco Ltd [2002] ECR I-11453; Case C-210/03, R v Secretary of State for Health (Swedish Match) [2000] ECR I-11893 on the compatibility of national transpositions of Directive 2001/37/EC. 31 2004 Communication (n5) at p. 9. 32 Ibid, 6–8. 33 Ibid, 17–22. 34 Ius Commune approach: C v Bar and U Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe (Sellier 2004). Working groups: DCGR Databas, www​.elsiuos​.de/​, last accessed 22 May 2019. The Commission on European Contract Law: See: K Riedl, ‘The Work of the Lando-

430  Research handbook on remedies in private law of the (D)CFR was also problematic, and not simply because any ‘spring-cleaning’ exercise in the contract law relevant aspects of EU law could be expected to have wider, horizontal implications. Similarly, it was always clear that the CFR would, if only partially, operate horizontally; particularly where abstract terms and principles were defined across different types of contract. Moreover, spill over effects were intended between the CFR measures: the CFR acting, supposedly, as the ‘tool-box’ for the optional instrument. Furthermore, the introduction of EU-wide standard contract terms was also bound to have horizontal effects. Beyond these caveats, the institutional approach to policy elaboration in this area appeared questionable: why had the European Council rubber-stamped the CFR in 200435 before the national experts (3 December 2004) and the CFR-Net (15 December 2004) had even met? Similarly, why had all of these steps predated the SPEC initiative? In all these aspects a policy orchestration – aiming at the adoption of a PECL-based CFR – appeared to be confirmed.36 The 2007 Green Paper on the Consumer Acquis (‘2007 Green Paper’)37 subsequently announced a further round of deliberation. Yet, as the 2007 Green Paper predated the 2006 Acquis Report,38 a crucial opportunity for communication between the initiatives was missed. The 2007 Green Paper presented a range of 31 questions (Annex 1) which, again, appeared to orchestrate rather than facilitate debate. Furthermore, the 2007 Green Paper was full of questions which appeared off-point: who would, for example, object to the harmonisation of cooling-off periods?39 Other questions were more exotic: for example, on the sales of second-hand goods at public auction;40 or, similarly, on whether an instrument should be passed to regulate the transferability of commercial guarantees.41 The preference which emerged was for a ‘mixed approach’ which was said to involve a ‘horizontal instrument combined, where necessary, with vertical action’.42 This position found support,43 notwithstanding the still unresolved issue of the lack of an appropriate legal base.44 However, despite the potential utility of the Framework Directive the acid questions remained: would protection ultimately

Commission from an Alternative Viewpoint’ (2000) 8 ERPL 71. Alternative approaches: Trento Group: Society of European Contract Law (‘SECOLA’): www​.secola​.org, last accessed 22 May 2019; European Private law Forum: www​.iue​.it, last accessed 22 May 2019; W Wurmnest, ‘Common Core, Grundregeln, Kodifikationsentwürfe, Acquis Grundsätze – Ansätze Internationaler Wissenschaftlergruppen zur Privatrechtsvereinheitlichung in Europa’ (2003) 11 ZEuP 714. 35 Schmidt-Kessel (n27); three alternative approaches were steamrollered by the Commission. 36 2004 Communication (n5) Point 3.2.1. page 12. 37 2007 Green Paper on the Consumer Acquis, COM(2006) 744 final, 8 February 2007. 38 EC Consumer Law Compendium – Comparative Analysis 2006 (H Schulte-Noelke (ed.)): http:​ /​/​ec. europa​.eu/​consumers/​cons​_int/​safe​_shop/​acquis/​comp​_analysis​_en​.pdf, last accessed 21 August 2014. 39 2007 Green Paper (n37) s 4.8.1, Question F1, pages 20–1. 40 Ibid, s 5.2, Question H2, pages 24–5. 41 Ibid, s 5.10.2, Question M2, at page 31. 42 Ibid, Option II, point 4.2 Option II: the mixed approach, pages 8–9. 43 2,784th Council meeting (Internal Market, Industry and Research) 19 February 2007. Press Release 6044/07, 12: www​.consilium​.europa​.eu/​ueDocs/​cms​_Data/​docs/​pressdata/​en/​intm/​92842​.pdf, last accessed 22 May 2019; and European Parliament Resolution, 23 March 2006 on European contract law and the revision of the acquis: the way forward (2005/2022(INI)). 44 Tobacco Advertising (n24); Swedish Match (n30) at [26], [30]–[32], [34] and [68]. S Weatherill, ‘Why Object to the Harmonisation of Private Law by the EC’ (2004) 12 ERPL 633 at 646.

Exploring the wreckage of the unification initiative in European private law  431 be further weakened given the resort to full harmonisation;45 and, if protection was to be enhanced, whether the EU had either the legal competence or the administrative capacity for such an initiative. Even at the time of its elaboration the scale of the 2010 Draft Common Frame of Reference (DCFR) exercise was daunting; involving a number of networks of stakeholders collaborating on ‘rules derived largely from the legal systems of the Member States and the over-arching Community law’.46 The DCFR comprised ten ‘books’ contained in six volumes and included provisions on: general contract law (Books II and III); specific sales contracts (Book IV, Part A) and contracts on personal security (Book IV, Part G); non-contractual obligations (Book VI); unjustified enrichment (Book VII); and trusts (Book X). Understandably, controversy surrounded the initiative: was it, as Vogenauer famously put it, an embryonic European Code, or simply intended to serve as a ‘tool-box’?47 As set out in the 2010 Green Paper on Policy Options,48 the optional instrument, described in terms of a ‘second regime’ of contract law, emerged as the most likely of all the options to be acted upon.49 Yet even here further open questions remained: would the optional instrument encompass B2B as well as B2C contracts; and what were its private international law implications? To address such issues, an Expert Group was subsequently formed to conduct a feasibility study on the various options.50 As the Commission itself had yet to adopt a formal position on the issues under scrutiny, the group was asked to draft a report tracking the options.51 In August 2011, a draft emerged which contained provisions: of ‘general’ contract law; on the obligations and remedies available in sales’ contracts or contracts for the supply of digital content; and on the obligations and remedies in a related service contract.52 The Commission proceeded to publish its proposal for an ‘optional instrument’ on a Common European Sales Law (CESL),53 adopting a similar structure to the August 2011 draft. Article 3 of the CESL stipulated that the parties themselves would be able to agree to adopt the instrument; that the CESL: ‘governs their cross-border contracts for the sale of goods, for the supply of digital content and for the provision of related services within the territorial, material and personal scope as set out in Articles 4 to 7’. Moreover, the Member States would have the power to extend the scope of the CESL, firstly, to contracts where the habitual residence of the traders or, in the case of a contract between a trader and a consumer, the habitual residence of

T Wilhelmsson, ‘Private Law in the EU: Harmonised or Fragmented Europeanisation?’ (2002) 10 ERPL 77 at 84. 46 C von Bar and E Clive, Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Oxford University Press 2010) 1. 47 S Vogenauer ‘Common Frame of Reference and UNIDROIT Principles of International Commercial Contracts: Coexistence, Competition, or Overkill of Soft Law?’ (2010) 6 ERCL 143. 48 2010 Green Paper (n4). 49 Devenney and Kenny (n9) (Options: European Contract Law Regulation (Option 6); European Civil Code Regulation (Option 7); European Contract Law Directive (Option 5); and an optional instrument (Option 4)). 50 Commission Decision 2010/233 [2010], OJ L105/109. 51 Expert Group’s Feasibility Study, 5: http:​/​/​ec​.europa​.eu/​justice/​contract/​expert​-group/​index​_en​ .htm, last accessed 22 May 2019. 52 At: http:​/​/​ec​.europa​.eu/​justice/​contract/​index​_en​.htm, last accessed 22 May 2019. 53 ‘Proposal for a Regulation on a Common European Sales Law’ COM(2011) 635 final, http:​/​/​ec​ .europa​.eu/​justice/​contract/​files/​common​_sales​_law/​regulation​_sales​_law​_en​.pdf, last accessed 22 May 2019. 45

432  Research handbook on remedies in private law the trader, the address indicated by the consumer and/or the delivery address for the goods and the billing address, are located in that Member State; and/or, secondly, to contracts where all the parties are traders but none of them is a small- or medium-sized enterprise (SME) within the meaning of Article 7(2).54 On 26 February 2014 the European Parliament endorsed the CESL, though in a revised form which limited it to online and distance contracts;55 the CESL was thus to constitute a free standing, opt-in contract law governing B2C, distance contracts applicable to the sale of goods and the supply of digital content and related services. The CESL provoked debate inter alia on the DCFR method;56 its lack of clarity;57 its coverage of distance sales;58 its underlying assumptions and private international law implications.59 From an English legal perspective, a significant omission appeared to be that the CESL had nothing to say on the issue of personal property,60 though when seen as a pragmatic compromise, this exclusion is perhaps less surprising. Yet, more generally, despite recognition of the potential role an optional instrument could play in establishing a type of ‘post-national’ law,61 a familiar scepticism emerged on whether the CESL could really improve the functioning of the internal market in a meaningful way.62

CRASH-LANDING: 2014 CESL WITHDRAWAL Though the subsequent withdrawal of the CESL from the Commission’s 2015 work programme was unexpected, it was not, given the many open questions which it still faced, inexplicable. The failure of the CESL can be attributed to a number of factors which eroded both the political support as well as the understanding of the necessity of the initiative: that the CESL was or would prove to be, fundamentally, of little practical utility; that other factors were more important in discouraging cross-border contracts; that the CESL failed to focus sufficiently on distance sales; that it failed the subsidiarity and proportionality tests; and that it, ultimately, failed to deliver sufficient consumer protection. Subsequently, on 6 May 2015, the Commission proposed a new initiative as part of its DSM consisting of more targeted measures, including: ‘harmonised EU rules on contracts and consumer protection when you

Ibid; originally Article 13. European Commission, MEMO/14/137. 56 J Smits, ‘The Draft Common Frame of Reference, Methodological Nationalism and the Way Forward’ (2008) 4 ERCL 270. 57 H Eidenmuller, N Jansen, E Kieninger, G Wagner and R Zimmermann, ‘The Proposal for a Regulation on a Common European Sales Law: Deficits of the Most Recent Textual Layer of European Contract Law’ (2012) 16 EdinLR 301; and S Whittaker, ‘The Proposed “Common European Sales Law”: Legal Framework and the Agreement of the Parties’ (2012) 75 MLR 578. 58 Law Commission, An Optional Common European Sales Law (November 2012), s 14, s 51–2. https:​/​/​www​.lawcom​.gov​.uk/​project/​common​-european​-sales​-law/​, last accessed 22 May 2019. 59 J Devenney, M Kenny and L Gillies, ‘The EU Optional Instrument: Absorbing the Private International Law Implications of a Common European Sales Law’ (2011) 13 Yearbook of Private International Law 315. 60 J Devenney and M Kenny, ‘The Omission of Personal Property from the Proposed CESL: The Hamlet Syndrome ... Without the Prince?’ (2015) JBL 607–19. 61 S Grundmann, ‘Costs and Benefits of an Optional European Sales Law (CESL)’ (2013) 50 CMLRev 225 at 225. 62 Ibid, at 240. 54 55

Exploring the wreckage of the unification initiative in European private law  433 buy online: whether it is physical goods like shoes or furniture; or digital content like e-books or apps...’.63 The irony, following the failure of the CESL, was that, notwithstanding the years of policy preparation and lobbying on the proposed new ‘ius commune’, a, by comparison, far more modest, dual-track approach was to emerge by default; an approach involving the ongoing, more traditional, fine-tuning and incremental consolidation of the EU consumer acquis; a process which had, in the interim, already produced the 2011 Consumer Rights Directive (CRD). Secondly, there was the notion of pursuing the ‘more targeted’ harmonisation measures mapped out in the 2015 Digital Single Market (DSM) consolidation package; a package which aimed at the (vertical?) harmonisation of rules relating to transactions in digital content and related services, and online and distance sales. In this chapter I will turn only briefly to the 2011 CRD, as a measure of consolidating harmonisation, which has been extensively commented upon elsewhere, before addressing the 2015 DSM proposals, as measures of targeted harmonisation.

CONSOLIDATING HARMONISATION: CONSUMER RIGHTS DIRECTIVE (CRD) The original ‘grand intent’ behind the 2011 CRD had been to consolidate the ‘wildly unsystematic’ body of law constituting the consumer acquis.64 Yet the controversy surrounding this measure of ‘full’ harmonisation meant that the Directive came to take the shape of a lowest common denominator reform. As Weatherill famously put it, the directive which finally emerged from the legislative process was a: ‘mouse of a directive’.65 Rather than addressing consumer rights holistically, across the consumer acquis, the Directive succeeded only in repealing and replacing two of the oldest ‘dinosaur’ directives: Directive 85/577/EEC on doorstep sales and Directive 97/7/EC on distance selling. Beyond this the Directive made minor amendments to the more horizontal directives: the Unfair Terms Directive (Directive 93/13 (UTD)) and Directive 1999/44 on consumer sales and associated guarantees (CSD). The

63 European Commission, Press release: ‘A Digital Single Market for Europe: Commission Sets Out 16 Initiatives to Make It Happen’ (6 May 2015, IP/15/4919)): http:​/​/e​ uropa​.eu/​rapid/​press​-release​_IP​-15​ -4919​_en​.htm, last accessed 22 May 2019. 64 S Weatherill, ‘The Consumer Rights Directive: How and Why a Quest for “Coherence” Has (Largely) Failed’ (2012) 49 CMLRev 1279 at 1280. Recitals 1 and 2 of the initial proposal for a directive on consumer rights (COM(2008) 614 final). Consumer Acquis: Directive 93/13 Unfair Terms in Consumer Contracts [1993] OJ L95/29; Directive 1999/44 Sale of Consumer Goods and Associated Guarantees [1999] OJ L171/12 (both amended by Directive 2011/83); Directive 85/577 Doorstep Sales [1985] OJ L372/31 Directive 97/7 Distance Sales [1997] OJ L144/19 (both replaced by Directive 2011/83), also: Directive 90/314 Package Travel [1990] OJ L158/59; Directive 2008/122 on Timeshares [2008] OJ L33/10; Directive 2008/48 on Consumer Credit [2008] OJ L133/66; Directive 2007/64 Cross Border Credit Transfer [2007] OJ L319/1; Directive 2000/31 E-Commerce [2000] OJ L178/1; Directive 2002/65 Distance Marketing of Consumer Financial Services [2002] OJ L 271/16; Directive 2005/29 on Unfair Commercial Practices [2005] OJ L 149/22; Directive 2006/114 Misleading and Comparative Advertising [2006] OJ L 376 /21; Directive 98/6 on Consumer Protection in the Indication of the Prices of Products Offered to Consumers, [1998] OJ L80/27; Directive 98/27 on Injunctions for the Protection of Consumer Interests, [1998] OJ L166/51. 65 Weatherill (n64) 1280.

434  Research handbook on remedies in private law Directive thus focused on information and cancellation rights and was subsequently implemented in the UK in the Consumer Rights Act 2015.

TARGETED HARMONISATION: 2015 DSM PACKAGE As described previously, in the wake of the failure of the CESL, the Commission once again took the initiative to propose ‘more targeted’ consolidation measures, but this time within the DSM programme;66 the DSM programme thus became the new ‘host’ of the EU consolidation efforts. The legislative proposals were seen as crucial in supporting the key DSM aims of promoting the European digital economy and doing more to facilitate online and distance access to products and services. As with both the DCFR and the CESL, the DSM proposals were justified in terms of addressing the barriers caused by the multiplicity of legal systems; and the advantages were seen in terms of further enhancing consumer rights and confidence, promoting trade, efficiency and leading to lower prices. Pursuing these goals, in December 2015, the Commission proposed a legislative package consisting of a directive on certain aspects concerning contracts for the supply of digital content (DCD)67 and a directive on certain aspects concerning contracts for the online and other distance sales of goods (OSD).68 The key differences between these proposals and the failed CESL are the narrower, sector-specific scope of the measures and the mandatory nature of the measures.69 Following in hot pursuit the adoption of the 2011 CRD, the adoption of the DSM proposals throughout the EU will require of national law-makers yet further legislative realignment, involving, in particular, adjustment of the national rules on digital content and online and distance sales. Draft Directive on the Supply of Digital Content and Services (DCD) Of the two proposals, the DCD is the most important and far-reaching. Aside from programs and apps, the proposed instrument covers: data produced and supplied in digital form (music, online video); digital services allowing for the creation, processing or storage of data (cloud computing); as well as social media services allowing for the sharing of data (Facebook, YouTube). From the DSM perspective, current national and EU regulation fails to deal with such digital goods and services sufficiently and, moreover, fails to address the more recent merger of the 66 ‘A Digital Market Strategy for Europe’ (COM (2015) 192 final)) Brussels, 06.05.2015: http:​//​​ eur​-lex​.europa​.eu/​legal​-content/​EN/​TXT/​HTML/​?uri​=​CELEX:​52015DC0192​&​from​=​EN, last accessed 22 May 2019. See: European Council Conclusions, October 2013: http:​//​​data​.consilium​.europa​.eu/​doc/​ document/​ST​-169​-2013​-INIT/​en/​pdf, last accessed 22 May 2019; European Council Conclusions, June 2014: http:​/​/​data​.consilium​.europa​.eu/​doc/​document/​ST​-79​-2014​-INIT/​en/​pdf, last accessed 22 May 2019; European Council Conclusions, December 2014: http:​/​/​data​.consilium​.europa​.eu/​doc/​document/​ ST​-237​-2014​-INIT/​en/​pdf, last accessed 22 May 2019. 67 2015 Proposal for a Directive of the European Parliament and of the Council on Certain Aspects Concerning Contracts for the Supply of Digital Content, Brussels, 9 December 2015, COM(2015) 634 final. 68 2015 Proposal for a Directive of the European Parliament and of the Council on Certain Aspects Concerning Contracts for the Online and Other Distance Sales of Goods, Brussels, 9.12.2015, COM(2015) 635 final. 69 DCD (n67) Article 19; OSD (n68) Article 18.

Exploring the wreckage of the unification initiative in European private law  435 digital and the analogue worlds.70 As a consequence, transactions in digital content and services are only partly covered by the UTD (banning pre-formulated, ‘non-core’ unfair terms); the ‘minimum harmonisation’ e-commerce directive71 (mandatory consumer information rights); and the ‘maximum harmonisation’ CRD. For present purposes, the most important aspect of the DCD relates to its scope; and while the DCD is more sectorally specific than either the CRD or the CESL,72 it addresses a wider range of digital content than the CRD has and the CESL would have covered: specifying that such content includes services allowing the creation, processing or storage of data where such data is provided by the consumer.73 Moreover, the scope of ‘digital content’ itself would be extended under the DCD to ‘any durable medium incorporating digital content where the durable medium has been used exclusively as carrier of digital content’.74 Crucially, and unlike the CRD, the DCD also contains express exclusions for financial services, healthcare,75 gambling services and electronic communications.76 Moreover, the DCD uses the narrower UTD consumer definition (natural person acting outside trade/business) rather than the broader CRD definition.77 Finally, under the DCD, the consumer’s counter-performance can take the form of access to the his/her personal data.78 Draft Directive on Contracts for the Online and Distance Sales of Goods (OSD) As the Council has prioritised work on the DCD, the OSD will only be briefly described. The scope of the OSD is even more sectoral than the CRD, and, again, adopts the narrower UTD consumer definition.79 The draft would replace the patchwork of national approaches on conformity, shift the burden of proof to the supplier and extend recourse to consumer rights to two years.80 For online purchases of second-hand goods, consumers would also be able to exercise their rights within a two-year period.81

EVALUATING THE DSM PACKAGE A key criticism of the proposals is of the DCD’s impact (or lack of impact) on consumer protection. This criticism has a number of aspects: above all, that the DCD simply specifies 70 G Spindler. ‘Contracts for the Supply of Digital Content – Scope of application and basic approach – Proposal of the Commission for a Directive on Contracts for the Supply of Digital Content’ (2016) 12 ERCL 183. 71 Directive 2000/31/EC on Certain Legal Aspects of Information Society Services, in Particular Electronic Commerce, in the Internal Market (E-Commerce Directive) [2000] OJ L178/1. 72 DCD (n67) Article 4. 73 Ibid, Article 2(1)(b) and (c). 74 Ibid, Article 3(3). 75 Healthcare, defined in Directive 2011/24/EU. 76 DCD (n67) Article 3(5)(c), (d), (e) and (b). Electronic communication services defined in Directive 2002/21/EC. 77 Ibid, Article 2(4). 78 Ibid, Article 3(1). 79 OSD (n68) Article 2(b). 80 Ibid, Article 8(3). 81 Ibid, Article 14.

436  Research handbook on remedies in private law minimum conformity standards: ‘[t]o the extent that the contract does not stipulate, where relevant, in a clear and comprehensive manner, the requirements for the digital content’.82 This provision would allow traders to set their own minimum standards, so long as they are clear and comprehensive; with the risk that they will insert standards lower than consumers would reasonably expect.83 Similarly, when digital content requires continuing support (updates or cloud services), the proposal should be more interventionist and specify that support be maintained for as long as the consumer may reasonably expect such support.84 The second area of criticism relates to the DCD’s poor coordination with the Consumer Sales Directive (CSD), the OSD and the General Data Protection Regulation.85 In this context, the failure to demarcate the DCD from the OSD, measures in the same package, is particularly striking: the DCD not appearing to apply to the supply of goods with embedded digital content (satnavs/smartphones), which appear to then fall, by default rather than design, under the OSD. As a consequence, the minimum conformity standards in the DCD would not apply to the embedded software! By extension, the subsequent delivery of updates/upgrades for the original embedded digital content would then appear to fall separately under the DCD! The same would then appear to apply to any digital content supplied under a separate contract for the functioning of the goods but stored externally (Cloud services). Clearly, determining which digital content causing a defect was either originally embedded, subsequently installed or stored in an external location is, to put it mildly, likely to be difficult.86 A final criticism of the DSM package, given the increasing complexity of digital transactions, relates to the need for further clarification, particularly on questions of mixed/linked contracts and issues concerning the trader’s identity. As far as mixed/linked contracts are concerned; a contract for the supply of digital content may be part of a ‘mixed’ contract (a contract including digital content and other elements outside the DCD), or a supply contract for digital content ‘linked’ with another contract (either a sales contract or another contract for the supply of digital content). The lack of clarity here is particularly problematic, given that the consumer may wish to terminate both parts of such transactions if either is defective.87 Meanwhile, as far as questions of identity are concerned, while a single supplier may be responsible for the overall ‘package’ of goods and services, the consumer may still need to obtain some content/ support under a separate contract with another trader, this renders the task of identifying the supplier/trader complex. Equally, digital content distribution may take many different forms, raising equally novel identity issues: is the online platform contracting with the consumer, or is it acting as the agent for another? Which ‘trader’ is to be regarded as ‘supplying’ the content in such circumstances?88

DCD (n67) Article 6(2). Statement of the European Law Institute (ELI) on the Commission’s Proposed Directive on the Supply of Digital Content to Consumers, at: http:​/​/​www​.europeanlawinstitute​.eu/​fileadmin/​user​_upload/​ p​_eli/​Publications/​ELI​_Statement​_on​_DCD​.pdf, last accessed 22 May 2019, amendment to Article 6 DCD. 84 Ibid, proposed new paragraphs 2B and 2C, Article 6 DCD. 85 Reg 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (General Data Protection Regulation), [2016] OJ L119/1. 86 ELI Statement (n83) proposed revision of Articles 3(6) and 9(1) DCD. 87 Ibid, amendment to Articles 3(9) and (10) DCD. 88 Ibid, revision of Articles 3(4), 3(9) and 6(2) DCD. 82 83

Exploring the wreckage of the unification initiative in European private law  437

CONCLUSIONS The ‘Europeanisation’ of private law has injected an instability into national private law systems which led to calls for some measure of unification; further harmonisation, consolidation and/or codification. As we have seen, while the DCFR and CESL ultimately failed, the inertia of these initiatives was redirected to more modest goals; thus, while the agenda of codification has crashed, a range of more pragmatic measures emerged from the wreckage: the 2011 CRD and the proposed 2015 DSM measures. In this sense, the process of ‘Europeanisation’ has proven resilient. The DSM proposals focus attention on the novel challenges arising in the post-national (post-Brexit?) digital economy. As we have seen, such transactions in digital ‘content’ and related services raise novel issues inter alia on the ‘embedded’ nature of such content; on installation, updates and upgrades; on the trader/supplier’s identity; and on mixed and linked contracts. In these areas the DSM proposals may assist the functioning of the internal market in a more targeted way than either CRD has succeeded in doing or the CESL could have done. However, both proposals specify ‘full’ harmonisation; precluding higher levels of national protection. Unsurprisingly, therefore, whether the DSM measures do enough to secure a high European level of protection, and whether mandatory EU law is appropriate, are hotly contested issues. Fundamentally, is ‘full’ harmonisation of such a limited range of vertical issues the best way forward?89 But can we go further? Would the DSM proposals themselves not ultimately accentuate fragmentation? For many traders the DSM package would require compliance with two different regimes: the DCD/OSD on digital contracts and online/distance sales; the CRD applying to offline sales. Moreover, would the bifurcation of the online/offline regimes, combined with the narrow scope of the DSM proposals ultimately (and inevitably?) serve as the stalking horse for wider consolidation and, ultimately, codification? Significantly, the Council has de-prioritised work on the OSD and is concentrating on promoting the DCD. While some prioritisation may have its merits, does the DCD, on its own, go far enough? Given the many demarcational problems uncovered, passing the DCD as it stands would be a recipe for chaos. Finally, in the context of ‘Brexit’, and for all the pre-referendum canvassing of ‘bonfires of regulation’,90 EU law will continue to have an impact in the UK post-Brexit. In fact, it is precisely in such areas as the digital marketplace that even measures as imperfect as the DCD can be expected to exert an ever increasing influence over English contract law: the Europeanisation of private law is a process whose effects cannot simply be stopped at the frontier of the EU.

Ibid. M Kenny ‘The UK and the EU: The Whinge in (and out of) the Willows’ (2016) 27 NZULR 463 at 469–70. 89 90

PART V THEORETICAL PERSPECTIVES

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

I INTRODUCTION This is a discussion of two different things that are often treated as if they were the same thing. Though the two things are related, they are sometimes, though less often, treated as if they had nothing in common. These things are tort law and the tort system. It is first necessary to explain what these are. ‘Tort law’ denotes a specific area of the law. It refers to the rules and principles that constitute the doctrine of that area of the law. It constitutes the chief subject matter of text books and introductory courses on tort law taught in law schools around the common law world – though those books and courses often also contain much more than this. It includes items such as the neighbour principle in the law negligence, the defence of qualified privilege in the law of defamation and the rule that the apprehension of an imminent battery is an assault. The ‘tort system’, on the other hand, refers to the institution that tort law partly creates as that institution exists in society. The tort system includes tort law, then, but is not so confined. In studying the tort system, one might examine the consequences of tort law as they relate to the efficiency and cost of the judicial system, or, what is more common, one might examine tort law’s effectiveness in providing a system of compensation for incapacity.1 This chapter has two aims. The first is to defend the notion that both tort law and the tort system are appropriate objects of study. That might seem to be a strange task. It might be thought obvious that, for lawyers and students of the law, tort law is a fitting object of investigation. One might suggest that study of this kind is the primary role of the law school.2 And it seems equally obvious that it is important, for lawyers and others, to study the way in which that law realises itself in society. Despite this, two noticeable features of the current intellectual landscape appear to be in tension with this view. First, it is not unusual to see the study of tort law denigrated on the basis that the results of that study are inconsistent with the tort system. Second, it is also far from rare to witness analysis of tort law that at least appears to operate on the highly questionable assumption that this study is directly informative about the nature of the tort system.

1 D Campbell, ‘The Damages System in Practice’ in D Harris, D Cambpell and R Halson (eds), Remedies in Tort and Contract (Cambridge University Press 2002). 2 This claim is made, for instance, in A Beever and C Rickett, ‘Interpretive Legal Theory and the Academic Lawyer’ (2005) 68 Modern Law Review 320, 335–6. The claim does not mean, however, as it is sometimes interpreted to mean, that this kind of scholarship is more important than other kinds, that all academic lawyers ought to focus on this kind of scholarship, or anything of the sort. It means only that the legal academy must, whatever else it does, conduct scholarship of this type as this is its most basic (not necessarily most important) mission.

439

440  Research handbook on remedies in private law As corrective justice theory is a prominent example of a theory of tort law, as it is (for reasons we will see) an exemplar of such a theory and because it is the most frequent target of the kind of criticism outlined above, it will be the subject of analysis here.3 At this point, it is also necessary to ask for the reader’s temporary indulgence. This is a handbook on remedies. It will, I fear, be very noticeable that the body of this chapter is not so focused, discussing tort law as a whole rather than concentrating on its remedial aspects. But this is not because remedies have been forgotten. Though this is not immediately obvious, it will become clear that remedies are in fact the central issue in this investigation. Part of the point of analysing tort law as a whole is to raise questions about the connection, or lack thereof, between that law and its presumed default response: compensation. This is the second and most important aim of this chapter. The suggestion will be that it is open to us to develop tort law in a way that would see it possess a quite different remedial structure in this regard.

II

THE THEORY OF TORT LAW

In an important study that we will examine in some detail below, Tom Baker asserts that ‘tort law in practice has only a tenuous link with the corrective justice theories propounded by legal theorists’.4 Similarly, in their more recent update of the state of the tort system in the United Kingdom, Richard Lewis and Annette Morris maintain that much tort theory ‘differ[s] from the reality of tort’.5 More forcefully, David Campbell has said that: The success of the philosophy of corrective justice has turned the disregard of how the personal injury system actually functions that has long characterised abstract tort jurisprudence almost into a principle. The undermining of that philosophy which would seem to follow from showing, yet again, that the personal injury system normally does not, because it cannot, effect the posited correction, is avoided in the theory of civil recourse’s claim that the possibility of bringing a tort action is a redress mechanism that can be justified because its mere availability enhances social solidarity.6

Many specific complaints can be extracted from these remarks and the positions of these authors are complex and multi-faceted, but in the present context one central claim is pertinent: no theory of tort law that ignores the tort system can be adequate. When one adds to this the fact – and we will see later in this chapter that it is a fact – that leading theories of tort law make claims that are inconsistent with the tort system, the conclusion appears to follow that these theories provide inadequate accounts of tort law. But why should one accept the premise of this argument? Why think that studying tort law has got anything to do with the tort system? The answer seems to be this. Tort law is a 3 ‘Corrective justice theory’ is here intended broadly to include, for instance, rights-based theories (which, in my view, are corrective justice theories). It does not, however, encompass civil recourse theory which, for the reasons enunciated by Campbell below (see text at note 6), cannot confine itself to the analysis of tort law. 4 T Baker, ‘Blood Money, New Money, and the Moral Economy of Tort Law in Action’ (2001) 35 Law and Society Review 275, 316. 5 R Lewis and A Morris, ‘Tort Law Culture: Image and Reality’ (2012) 39 Journal of Law and Society 562, 562. 6 D Campbell, ‘Interpersonal Justice and Actual Choice as Ways of Determining Personal Injury Law and Policy’ (2015) 35 Legal Studies 430, 431.

Tort law and the tort system: from vindictiveness to vindication  441 tool for realising certain social goals. Because of this, facts about the tort system are the key to understanding tort law as those goals are achieved through the operation of that system. According to this view, which has dominated the legal academy for roughly a century, the idea that tort law might be studied for its own sake appears to be at least strangely myopic. In order to assess this position, it will be useful to cash out the notion that the law is a tool and explore the significance of this for legal analysis. Hammers, of course, are tools. Imagine, then, someone studying a hammer by examining the shape of the head and claw of a hammer along with the grain of the wood of its handle. One might say that to focus in this way on the hammer is to miss its essence as a hammer. A hammer is a tool and thus understanding the object that it is requires understanding the purposes for which it is used. Thus, when viewing the object in this way, we understand that the shape of the head and claw is an important feature of the hammer whereas the precise pattern of the grain in the handle is not. On this approach, then, to truly comprehend a hammer for the object that it is (qua tool), we must first understand the purpose for which it exists so that we are able to recognise the role that those properties play in realising that purpose. From this point of view, it would seem bizarre for someone to insist that they will examine a hammer without saying anything about, say, banging in nails. Similarly, given the notion that tort law is a tool for realising social ends, it follows that tort law is to be understood in terms of those ends. As the head of a hammer is to be understood as a means for driving nails; the rules, principles and procedures of tort law are to be understood in the light of their contribution (or lack thereof) to the realisation of the law’s purposes. Hence, we have the familiar form of modern legal analysis.7 However, it is important not to exaggerate in any context the significance of the point of view just examined. An instrumental analysis of an object is never the solely correct one.8 Thus, while it is true that a hammer will not be understood qua the tool that it is without comprehending its purposes; this should not lead us to think that it is essential to understand those purposes in order to cognise the hammer at all. When one studies the shape of the head and claw of the hammer, the grain the wood of its handle, etc. for themselves, one does not come to terms with the hammer qua tool, but what one discovers is not false. Though the grain in the hammer’s handle is unimportant to the hammer qua tool, one nevertheless discovers something true about the hammer when one studies the grain. In short, truth is revealed when one studies even tools for their own sakes. There seems no reason to think that the study of law should be any different, even if law were a tool. Moreover, a great many objects have purposes in the sense that they are valuable (at least in part) for the things that they produce without being tools. Works of art are prime examples. Though we value works of art for the pleasure that they bring – if they did not bring such 7 This form of analysis is often applied to corrective justice theory by opponents of that theory; the idea being that the corrective justice theorist holds that corrective justice is a goal of tort law. We see this, for instance, in Campbell’s criticism above (see text at note 6). But, as we will have occasion to observe below, this is not how the corrective justice theorist understands her view. 8 So, for instance, Heidegger distinguished between the ready-to-hand and the present-at-hand and insisted (following Schopenhauer, e.g. A Schopenhauer, The World as Will and Representation, vol 2 (E F J Payne tr, Dover Publications 1966) 373) that the former possesses a primacy in our relationship to the world (M Heidegger, Being and Time (J Macquarrie and E Robinson trs, Basil Blackwell 1990) para 15), but none of that is to say that the present-at-hand is false or illusory. As Heidegger notes: ‘Yet only by reason of something present-at-hand is there anything ready-to-hand’ ibid.

442  Research handbook on remedies in private law pleasure then we would not make or attend to them – understanding them is not a matter of comprehending their effects. Hamlet, for instance, is studied in schools throughout the English-speaking world. But that study is not focused on the effects of viewing or reading the play – though that may occasionally be an object of investigation. Typical questions concerning Hamlet include ‘Why does Hamlet not act more decisively in avenging his father’s murder?’, ‘What role does the “play-within-the-play” play in the drama?’, ‘What is the relationship between the personal and the political in Hamlet?’ and so on. Asking these questions is part of an attempt to understand Hamlet for its own sake. Given the automatic hostility of sections of the legal academy to the notion that law can profitably be studied for its own sake (this is often derided as ‘formalism’), it is useful to remember at this point that other academic disciplines that deal with objects that are both human creations and are at least in part extrinsically valuable are so dedicated to their objects. Departments of English, of literary studies, of art history, of music, for instance, treat their subjects in this manner. So do disciplines such as sociology, anthropology and economics. In fact, though I will not argue the point here, one could suggest that it is characteristic of, perhaps definitive of, an academic discipline that it takes its subject matter to be worthy of study in its own right – even if it is, as it very often is, also valuable to study it from other perspectives. On this view, then, sociology is a discipline in part because it takes society as an object of study in its own right and treats that study as valuable for its own sake, even if it is also valuable for many other reasons. One could, of course, imagine individuals in, say, university music departments who study the effects of music. The psychology of music is yet another fruitful area of study. But the point to be made in this context is that the psychology of music is, as its name suggests, an aspect of the general discipline of psychology rather than of musicology, and this is because the psychologist of music treats psychology, and not music, as the subject worthy of study for its own sake. What is it that makes an object such as Hamlet reward study for the work’s own sake? The answer is a very long one, but part of that answer is that Hamlet is self-reflexive in the sense that it is to be understood as a whole.9 One could not understand the work if one held the view, for example, that Hamlet’s stabbing of Polonius was an event unrelated to Hamlet’s father’s ghost’s revelations. The play is meant to make sense as a unit. To put this another way, Hamlet rewards study for its own sake in part because it tells a story and part of the point of studying Hamlet for its own sake is to discover the story that it tells. In this regard, the law – especially the common law – much more closely resembles a play or novel than a tool. A judgment is not an isolated instance of adjudication or law making; it is rather a statement that is meant to say something in the context of an already existing body of law. In the simplest case, the judgment may be nothing more than an application of ideas contained in past case law. It might extend those ideas to new areas not covered by the existing case law. It might raise criticisms of existing law or suggest that future developments will create a new legal story unlike the contemporary one. And it may do many other things. The point is that the common law is self-reflexive. It is in that way, as Ronald Dworkin has said, like a chain novel.10 A judgment tells a story about the law that can be understood only as a 9 Note that this does not imply that it cannot be fruitful for our understanding of Hamlet to study, say, Shakespeare’s other tragedies or the works of Christopher Marlowe. The point, though, is that this study sheds light on the whole that is Hamlet. 10 R Dworkin, Law’s Empire (Belknap 1986) 229.

Tort law and the tort system: from vindictiveness to vindication  443 part of the wider story of that law and studying the law – both the individual judgment and the wider law – for its own sake is necessary to determine what that story is. If, to the functionalist, the formalist appears to be trying to study hammers without taking into account the fact that they are used to drive nails; to the formalist, the functionalist seems to be trying to understand the story of Hamlet by examining the effects of the play on its audience. Naturally, however, there are many disanalogies between artworks and law and many analogies between law and tools. The above has defended the notion that law can usefully be studied for its own sake, but it has done nothing to show that law is better studied that way than as a tool for the realisation of social goals. There is no way to settle this issue a priori. One can only compare the success of theories that study law for its own sake with those that study it as a tool. Once this is realised, however, I submit that we have, not a clear winner, but a clear leader in the race between modern, mainstream functionalist legal analysis11 and corrective justice theory. As noted above, the former view has dominated tort law scholarship for something like a century. No one could seriously claim that during this time our understanding of the rules and doctrines of the law – i.e. our understanding of tort law as opposed to the tort system, which is the issue now under investigation – has improved. On the contrary, if that understanding has not yet collapsed, its foundations are crumbling. Though that might sound controversial to some, the point is in fact widely accepted. Let us take just one striking example. The example is striking both because it reveals how utterly unsatisfactory the status quo is and because it occurs in an area of the law of great practical significance where lucidity is both desperately needed and shows no sign whatsoever of being forthcoming: the duty of care in the law of negligence. For purposes of illustration, we examine how one of the world’s leading textbooks in this area, Winfield and Jolowicz on Tort,12 deals with this concept. First, the most obvious feature to be noted is that Winfield and Jolowicz dedicates an entire chapter to discussion of the duty of care. This is because the subject has become so complicated that it is impossible to deal with it more concisely. In this regard, the second half of the chapter examines a number of areas in which the duty of care is treated by the courts in a way that appears to be unique to the particular area of concern in question: omissions, assumption of responsibility, pure economic loss, public authorities, lawyers and psychiatric injury. Here, there are rules to be learnt distinctive to each area and, while each rule has its own explanation, the explanations do not cohere and frequently enough compete with each other or with other rules and principles operative in the law of negligence. The first half of this chapter is given over to an examination of the duty of care as a general concept, but the authors of Winfield and Jolowicz are so dissatisfied with the current state of the law that they are compelled to present their understanding of the duty of care historically; the idea being that if one cannot make sense of what we have today, perhaps one can piece together some kind of understanding by examining the historical steps by which we arrived

11 Of the kind that we are familiar with in the Commonwealth. I mean especially to distinguish this view from law and economics, which holds that law is a tool but provides a sophisticated set of instruments with which to analyse that tool. For better or for worse, law and economics of the kind familiar in the United States have made little headway in the Commonwealth. 12 W E Peel and J Goudkamp, Winfield and Jolowicz on Tort (19th edn, Sweet and Maxwell 2014) ch 5.

444  Research handbook on remedies in private law here. And when they reach the present, they candidly state that the current position ‘suffers from overwhelming problems’,13 many of which they go on to discuss. On the other hand, corrective justice accounts of tort law have been extremely successful by comparison. These approaches have addressed the ‘overwhelming problems’ facing the modern law and have provided clear and remarkably simple answers to them. To examine the list just given, for instance, on the corrective justice model there are no serious outstanding problems relating to omissions, assumption of responsibility, pure economic loss, public authorities, lawyers or the like.14 One way to understand this success is to recall that as recently as around the turn of the century it was de rigueur to claim that there was no alternative to the mainstream, policy-based approach to tort law.15 One rarely hears this claim now, however. When one does, one can only wonder what year it was that the author stopped reading. Corrective justice is one, though certainly not the only, alternative. Now, corrective justice may be an often disliked or problematic alternative – more on this in a moment – but the claim that there is no alternative cannot now seriously be sustained. In fact, the greatest weakness of Winfield and Jolowicz’s treatment of the duty of care is that it makes just this tired assertion.16 None of this is to say that corrective justice theory must be correct. It may contain many flaws and there may be other alternatives – discovered or as yet undiscovered – that are preferable to it. However, though corrective justice theory may come to be shown to be mistaken, this could not constitute a defence of the mainstream view. Even if corrective justice provides faulty explanations of tort law, it is more than a few steps ahead of the mainstream view which provides no real explanation at all. The contest between corrective justice and the mainstream view is a one-horse race. When even the proponents of the mainstream view accept that it ‘suffers from overwhelming problems’,17 we know that – or we ought to know that – it is time to move on. It is a mark of just how extraordinarily and obstructively conservative and deferential to authority the study of law is that widespread recognition of the deplorable nature of the status quo can coexist with widespread hostility to the search for alternatives. In conclusion, we have no good reason to think that tort law cannot profitably be studied for its own sake. On the contrary, the success of recent attempts to do so relative to the failure of mainstream analysis gives us good reason to think that such study – whether based on corrective justice or alternative notions – will be rewarding. This is to say that tort law can and, given what we currently know, ought to be studied independently of the tort system.18 Against the above, however, one might object that one very significant difference between law and artworks is that laws have explicitly as their object ‘real world’ results whereas

Ibid, at 98. For these issues, see especially, R Stevens, Torts and Rights (Oxford University Press 2007); A Beever, Rediscovering the Law of Negligence (Hart 2007). Psychiatric injury remains an issue, but see M Alcock, ‘A Principled and Workable Approach to Cases of Negligently Inflicted Psychiatric Injury’ (PhD thesis, Queensland University of Technology 2018). 15 See, e.g., J Stapleton, ‘The Golden Thread at the Heart of Tort Law: Protection of the Vulnerable’ (2003) 24 Australian Bar Review 135; M Kirby, ‘Judicial Activism? A Ripost to the CounterReformation’ (2004) 24 Australian Bar Review 219. 16 Peel and Goudkamp (n12) 98–9. 17 Ibid, at 98. 18 Note that this is not to legislate against the study of tort law in the context of the tort system; i.e. the claim is not that tort law ought only to be studied independently of the tort system. 13 14

Tort law and the tort system: from vindictiveness to vindication  445 artworks do not have this. While Hamlet aims to give pleasure to the viewer or reader, this is not its explicit aim – Hamlet is about a prince in Denmark; it is not about the pleasure of the audience – but Donoghue v Stevenson, for example, is about realising justice in the circumstances of that case. Naturally, the corrective justice theorist does not deny this. Her position is that, not only is there is no contradiction between studying Donoghue v Stevenson for its own sake and studying the justice implemented in that case, in fact studying one is studying the other. More concretely, her claim is that tort law is an (imperfectly realised) system of corrective justice and that the justice promoted by Donoghue v Stevenson is part of the story of that case and of tort law more generally. Thus, this value is no more external to the law than revenge is a value external to Hamlet. Accordingly, studying the justice realised in Donoghue v Stevenson is, on this view, part of studying tort law for its own sake. It is useful to consider the following passage in this light. The mainstream approach to the duty of care, the authors of Winfield and Jolowicz complain: conceals judicial policy choices whereas it would be desirable if the relevance of policy were frankly acknowledged and the material policy considerations openly discussed. Policy choices (what Lord Goff described as ‘an educated reflex to facts’) is an inescapable part of the judicial process and it is better to recognise it as such rather than to cloud the issue by saying that, ‘policy need not be involved where reason and good sense … will point the way’, for these concepts are surely one and the same thing.19

What we must see is that this passage assumes that the ends of tort law are external to the story of that law. Given that this assumption may be false and given that it is the acceptance or rejection of this assumption that explains the division in thought on this issue, the passage takes us nowhere. It is, as so much writing unfortunately is in this area, merely a statement of the consequences of presumptions posing as an argument in favour of a position that stands or falls on the truth or falsity of those presumptions. One way to illustrate this is to note that, when taken at face value, the passage is committed to some very odd notions. When I see a car approaching me with speed, I jump out of the way. That is an ‘educated reflex to facts’. Does it follow that I am acting on policy choices? When I see that my son is unhappy, I give him a hug – another ‘educated reflex to facts’. Is this a policy decision? I would argue that reason and good sense show that Polonius was a pompous fool in opposition to my fifth form English teacher who insisted that Ophelia’s father was full of good advice. Is this a disagreement about policy? At the risk of being boorish, it is probably necessary to point out that it would be ludicrous to argue that ‘reason’ and ‘good sense’ are general synonyms for ‘policy’. I take it, however, that the claim is meant to be that, while these terms are not generally synonymous, they are as they are used in law; but the point is that this will appear to be so only if one has already accepted the functionalist view. The argument has no weight whatsoever against a view that begins with different assumptions.20

Peel and Goudkamp (n12) 98–9 (citations omitted). Quotations from Smith v Littlewoods Organisation Ltd [1987] 1 AC 241 (HL), 271; Home Office v Dorset Yacht Co Ltd [1970] AC 1004 (HL), 1039. 20 Such as the one found in Stevens (n14), against which the passage from Winfield and Jolowicz is partly directed. 19

446  Research handbook on remedies in private law Another remarkable feature about this passage is that it prescribes as a cure for the mess that constitutes the modern law the very cause of its illness. This, too, is an unfortunate side effect of the ‘no alternative’ approach. If there really were no alternative to consuming a food that made one sick, then I guess it is as rational as anything else to hope that increasing one’s consumption will provide the cure. But what really is irrational is failing to utilise the genuine alternatives that are available or seeking to find others. Perhaps, however, it might be suggested that law cannot be studied for its own sake because law’s value is extrinsic and thus law-makers, including judges, are required to tailor the law to the realisation of those values. This takes us away from an analysis of tort law per se to a wider focus on the tort system. But this argument is a non-sequitur. It is a perhaps curious feature of the human condition that the attempt to realise the value of an object or activity is often self-defeating. To continue with our literary example, part of the value of Hamlet lies in the pleasure that it brings. But if you attend to the play (or, rather, fail to attend to it) focused on the realisation of your own pleasure, you will fail. The way to get pleasure from Hamlet is to treat the play as valuable for its own sake, to attend to it for what it is, which allows one to obtain pleasure as a result. Other human activities are even themselves inconsistent with the attempt to realise some of their ends. Love and friendship are valuable at least in part because of the happiness that they bring, but if one were in a relationship with another for the sake of one’s happiness, then that relationship would lack the regard for the other required for it to be love or genuine friendship. Again, there is no reason for thinking that the law and its values could not be similar. In the field of economics, we have surely become used to the notion that the best way to achieve the good for everyone is not to get everyone to try to achieve the good for everyone. In fact, it is said, the social good is best achieved by having individuals try to realise something else.21 Again, we have no a priori reason to insist that the law cannot be similar. For example, it may well be that, even if the sole operative value in this context were efficiency, this would not be best achieved by judges trying to create rules that conduce to efficiency. It is readily arguable that what the market really requires from the law is not the kind of law and economics that we see in cases such as Canadian National Railway Co v Norsk Pacific Steamship Co Ltd,22 Bow Valley Husky (Bermuda) Ltd v Saint John Shipbuilding Ltd,23 and Hercules Managements v Ernst & Young,24 but rather almost any regime that is sufficiently certain so that economic actors can plan rationally. Here, efficiency is the result, not of courts adopting supposedly economically correct legal rules, but rather of the market being able to adjust to whatever rules the law produces.25 In this light, it is notable that one of the most powerful criticisms of the modern tort system is that, by imposing solutions on individuals by coercion, it prevents genuine markets from arising.26 21 This, of course, is a reference to the ‘invisible hand’. A Smith, The Wealth of Nations (Bantam Classic 2003) 11.9. 22 Canadian National Railway Co v Norsk Pacific Steamship Co Ltd [1992] 1 SCR 1021. 23 Bow Valley Husky (Bermuda) Ltd v Saint John Shipbuilding Ltd [1997] 3 SCR 1210. 24 Hercules Managements v Ernst & Young [1997] 2 SCR 165. 25 For arguments of this kind, see e.g. R Epstein, Simple Rules for a Complex World (Harvard University Press 1995); R Epstein, ‘Do Judges Need to Know any Economics?’ (1996) New Zealand Law Journal 235; D Rosenberg, ‘The Judicial Posner on Negligence Versus Strict Liability: Indiania Harbor Belt Railroad Co v American Cyanamix Co’ (2007) 120 Harvard Law Review 1210. 26 Campbell (n6).

Tort law and the tort system: from vindictiveness to vindication  447 In short, it may well be the case that the best way tort law can realise its extrinsic values (whether or not it also possesses intrinsic value) is to forget about them and to try to remain, as it were, true to itself. Whether that is so cannot be determined here, but in addition to the argument presented above the following decision of the Supreme Court of Canada surely gives food for thought. In Dobson v Dobson,27 the pregnant defendant, Cynthia Dobson, damaged the foetus she was carrying while driving negligently. The plaintiff was the defendant’s born alive child, Ryan Dobson, who suffered from cerebral palsy as a result of the accident. The plaintiff sued. One way of dealing with this case would have been to determine it in accordance with the rules and principles of tort law, here the law of negligence. This is what the dissenters in the case attempted to do. They argued that, as the ordinary principles of the law of negligence were satisfied in this case – the defendant was negligent, created a reasonably foreseeable risk of injury to the plaintiff (the born alive child, not the foetus), created a reasonably foreseeable risk of the injury that the plaintiff suffered and caused the plaintiff’s injury – the plaintiff should be liable. The dissenters did also hold that special considerations were relevant in this case as it involved the injury of a child injured in utero by its mother. They argued that the standard of care expected of the defendant could not exceed the level of care that the defendant owed to third parties.28 However, this special consideration was presented as part of, not as external to, the attempt to realise the principles of the law of negligence in this case. In short, the notion was that fairness between the parties in such circumstances required an adjustment to the normal standard of care. This occurs in other cases too, such as when the defendant is an expert or a child or when the plaintiff possesses a disability known to the defendant.29 This adjustment to the standard of care would not have prevented the defendant being liable. The majority took a different approach. They reached beyond the principles of the law of negligence and appealed to a number of policies to negate the defendant’s liability. They argued that the unique relationship between a mother and the foetus she carries provides reasons for denying a duty of care.30 Moreover, they insisted that a finding of liability may have serious psychological repercussions on the defendant31 and that liability would damage family harmony.32 Perhaps even more importantly, they argued that liability in such circumstances would interfere with women’s privacy33 and autonomy34 rights. Thus, the majority found for the defendant. The most notable feature of this case is that, in the hands of the majority, the rights and interests of the defendant were used to reach a result that the defendant surely did not want. The accident occurred in 1993. The trial, from which the appeal to the New Brunswick Court of Appeal and then the Supreme Court of Canada was taken, was held in 1997. The

Dobson v Dobson [1999] 2 SCR 753. Ibid, at 810. 29 For discussion, see Beever (n14) 87–96. 30 Dobson v Dobson (n27) 759, 769, 800. 31 Ibid, at 781. 32 Ibid. 33 Ibid, at 768, 771, 774 (Cory J) 800 (McLachlin J). 34 Ibid, at 768, 771–2, 779–81, 786–8 (Cory J) 799–801 (McLachlin J). Note that, unlike Cory J, McLachlin J based her arguments on the Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (UK) 1982 c 11. I ignore this in the following. 27 28

448  Research handbook on remedies in private law plaintiff was three years old. Obviously, he had made no decision to sue his mother. And what, one might ask, is the point of a three-year-old boy suing his mother in any case? The answer is that Cynthia Dobson was insured and the result of a successful case by Ryan against her would be that the family would obtain resources that they no doubt needed to care for Ryan. In this light, denying liability on the basis that it would be psychologically damaging for Cynthia Dobson, that it would upset the harmony of the Dobson family and that it would interfere with Cynthia Dobson’s privacy and autonomy rights was perverse. In fact, the majority in Dobson v Dobson used Cynthia Dobson’s rights and interests to protect the position of her insurance company against her interests and wishes. In this light, it is truly remarkable that this case has managed so successfully to present itself as a beacon for progressive legal thought. In this case, the dissenters focused narrowly on the law of negligence. Though they ignored that law’s extrinsic values, it is readily arguable that their decision would have served those values more faithfully than the decision of the majority. The majority departed from the principles of the law of negligence to focus on the law’s extrinsic values and other external concerns and in doing so almost certainly despoiled the values they were seeking to promote. Perhaps, however, the fault of the majority was not that they departed from the law but that they were timorous in doing so. Perhaps their failure was that they took some external concerns into account but failed to consider other important external issues. But this is an entirely radical response to the problem. If, for instance, the Court should have made its decision in the light not only of the considerations the majority in fact examined but also the defendant’s insurance position, her actual wishes, her family situation and any other matters that might be relevant, how much of this decision making could really be described as legal? This was a particularly pertinent issue in this case as the Court had (entirely unwisely in my view) already given the Canadian Abortion Rights Action League, the Evangelical Fellowship of Canada and the Catholic Group for Health, Justice and Life intervener status in the appeal. Was the appeal in Dobson v Dobson to descend into an argument about women’s reproductive rights, the right to life, abortion, and whatever else might have been thought significant? Dobson v Dobson gives us reason to believe that, at least in many cases, a functionalist law simply cannot function. Though naturally not decisive, this again gives us reason to think that the extrinsic values of the law may be best promoted by a legal analysis that ignored them. A different argument would be to maintain that tort law cannot be studied for its own sake because it has been influenced by external factors that must be taken into account in any adequate theory of law. According to Campbell: If it is claimed that ‘moral wrongdoing’ is ultimately identified by the views of common citizens,[35] then this is to ignore the shaping of tort liability by the institutional structure of the personal injury system. The identification of a solvent tortfeasor is essential to the claims process and, in a system dominated by liability insurance (as the personal injury system ultimately is bound to be unless insurance against negligence is forbidden, which would itself lead to the disappearance of the system), the incidence of solvency is largely a function of the market conduct of the insurer.36

As, famously, was claimed in Donoghue v Stevenson [1932] AC 562 (HL), 580. See also Lord Atkin, ‘Law as an Educational Subject’ (1932) Journal of the Society of Public Teachers of Law 27. 36 Campbell (n6) 434–5. 35

Tort law and the tort system: from vindictiveness to vindication  449 There are claims here to which we will return, but let us for the moment examine the often made allegation that tort law has been shaped by insurance and like concerns and so it is impossible to understand tort law without this fact in mind. Without more – and as we will see in important areas more can be provided – the argument is a non-sequitur. Even if it were true that the law of negligence, say, could not have developed as it has without the availability of insurance, it would not follow that the law can be understood only in the light of this fact. The development of the mobile phone was made possible only by that of quantum mechanics, but one can operate a mobile phone knowing nothing about modern physics. There is no reason to think that one must understand the social conditions that made the rules and doctrines of tort law possible to comprehend those rules and doctrines. Of course, if insurance made the law of negligence possible and if one were trying to comprehend the law historically, then one would have to take insurance into account, but that is another matter. Likewise, if Shakespeare wrote Hamlet to annoy his Danish cousin, then this is part of the history of that work. But it would not be part of Hamlet itself. This is not to deny that there may be areas of tort law that can be understood only in the light of insurance. One area in which Campbell seems undoubtedly right is vicarious liability. Only recently, the Supreme Court of the United Kingdom has held that the ability to pay damages is an important factor in determining whether vicarious liability will be imposed on a defendant.37 This ability will of course frequently turn on the defendant’s insurance status or ability to self-insure. The corrective justice theorist is not so easily defeated, however. She is not committed to the view that the extant positive law is a perfect instantiation of her theory.38 On the contrary, it is very frequently the case that what motivates her to write is the conviction that the positive law is often deficient in this regard. Thus, the corrective justice theorist is not forced to deny the influence of external concerns on the positive law or to turn a blind eye to that law; she merely regards the rules that result from such influence as distortions in the law created by courts giving inappropriate attention to these concerns. In just the same way, she treats the rule laid down in Canada by Dobson v Dobson as an error. There are two potential problems with this response, however. First, there may develop a tendency for theorists to treat such rules, not as distortions, but as legitimate elements of the phenomenon they seek to explain. When they do this, their theories will become distorted by attempting to capture the distorted rule in their theory. In my view, this has happened in some corrective justice explanations of the doctrine of consideration and the law of defamation. In short, the theorist should not, but may often find herself tempted to, defend the indefensible because she finds the indefensible embedded in the positive law. The second problem is more relevant here. It can be put in the form of a question. How much distortion can a system sustain before it is no longer the system that it was? The allegation, then, is that – whatever it might once have been or could have developed into – today’s tort law is so distorted by external factors that it cannot be understood in the absence of those factors.

Armes v Nottinghamshire County Council [2017] UKSC 60, [55]. Views which attribute this position to corrective justice (and other) theories – such as the one found in J Goudkamp and J Murphy, ‘Tort Statutes and Tort Theories’ (2015) 131 Law Quarterly Review 133 – unfortunately mislocate the goals of legal theory. Contrary to the views of such authors, ‘fit’ is not and could not be the overriding aim of legal theory. 37 38

450  Research handbook on remedies in private law Again, whether this is so is a matter for investigation. It cannot be determined a priori. In accordance with the argument made above, I would maintain that the evidence suggests that tort law’s liability doctrines are – though somewhat distorted – not so distorted as to prevent a clear system of liability being discerned.39 But things are quite different when one turns to the law’s remedies. And it is here, after all, that the critics of tort theory have rightly concentrated their energies.

III

THE THEORY OF TORT LAW AND THE TORT SYSTEM

Summarising Arthur Ripstein’s and Ernest Weinrib’s views of private law, Christopher Essert says that: They see private law as playing a special role in the realization of just relations between free and equal moral persons. At an abstract level, they see such relations as being governed by the overarching abstract idea that no person is naturally in charge of any other, which they take to be a characterization of the idea that persons are free and equal.40

This is a perfectly good summary, but I want to draw attention to an ambiguity in Essert’s claim. What is being said here? Is it that the doctrines of the private law are best understood in the light of the notion that they are attempts to realise just relations between free and equal moral persons; or is the claim that tort law actually achieves these relations so that people really are free and equal in the relevant way? Is the claim about tort law only or also about the tort system? This is important because, as we will see, if the claim is about the tort system, then it is not plausible. Ripstein’s Private Wrongs is a most significant contribution to the study of tort law.41 The eighth and ninth chapters of this book defend the common-sense notion that tort law’s responses are genuinely remedial against a list of well-known objections to that view. This discussion operates against natural seeming assumptions about the way that tort law functions. For example: If someone takes your means, the way to correct the wrong is by giving them back. If the means no longer exist, then in order for you to be given what is yours, you need to receive equivalent means. I probably can’t put your vase back together again, and even if I could, the most I could give you is a repaired vase, not an intact one. Your right is to have the means you had a right to all along. In cases in which one person accidentally injures another, the way to set things right is to focus on the injury. The injurer must repair the injury; that is, to use the language introduced earlier, the injurer must provide the injured party with means equivalent to those that were lost through the injury. If you can show that there are uses to which you would have put your body or property for earning money, I have deprived you of the further means that you would have acquired, had I not wronged you. As a result, those further means are part of what you already had.42

167. 41 42 39 40

As I have argued in A Beever, A Theory of Tort Liability (Hart 2016). C Essert, ‘Thinking Like a Private Lawyer’ (2018) 68 University of Toronto Law Journal 166, at A Ripstein, Private Wrongs (Harvard University Press 2016). Ibid, at 252–3.

Tort law and the tort system: from vindictiveness to vindication  451 This analysis, in common with the analysis to which it responds, takes for granted a picture according to which injured plaintiffs utilise tort law to seek and receive full compensation for their injuries from the person who caused those injuries. The problem is that this picture is of a largely imaginary world. Ripstein and his combatants are fighting over the correct conceptual understanding of a world that really does not exist.43 This is not the place to rehearse the argument for this conclusion. Suffice it now to state that the main issues (specifically as they arise in the UK) are that the evidence indicates (1) that litigation generally occurs only when the defendant is insured, regardless of the strength of the plaintiff’s position as a matter of law, and the damages are paid by the insurer; (2) that social welfare in fact plays a far more important role than tort law in compensating victims of torts; (3) that welfare plays so important an indirect role in funding tort litigation that those who do not receive welfare support are highly unlikely to receive any compensation through the law; (4) that the overwhelming proportion of tort damages are paid by insurance companies (94 per cent in the UK) and that almost all of the rest is paid by bodies that are self-insured, meaning that tortfeasors hardly ever pay tort damages; (5) that potential plaintiffs are normally determined to settle rather than pursue claims through the courts, even if the result is significant under-compensation; (6) and that most tort payments are in fact for minor injuries and that tort law appears to play only an insignificant role in providing compensation for major injuries.44 The claim here is not that tort theorists cannot respond to these difficulties. They can respond if their aim is to defend their theories qua theories of tort law.45 The point, though, is that tort theory can give the impression that the world is quite unlike the way that it actually is. As we have seen, much theory of damages proceeds on the basis that a wrongdoing defendant makes good her wrong by paying damages to an injured plaintiff. In fact, that hardly ever happens. In short, when tort theory remains about tort law only (as it often does), it is immune to these criticisms; but when it spills over to make or imply claims about the tort system (as it sometimes does), then it is vulnerable as these claims are often demonstrably false. For our purposes, the most important work has been carried out by Baker who studied the operation of the tort system in Connecticut and Florida.46 Baker’s central observation is that personal injury lawyers in those jurisdictions, both from the defendant’s and plaintiff’s bar, make a clear distinction between what they term ‘blood money’ and ‘insurance money’. Insurance money is obviously damages that would in fact be paid by an insurance company. Blood money, on the other hand, is damages that would be paid by the defendant, assuming that the defendant is a natural person. This category of damages reveals a point of such significance that it must be spelt out in detail. The payment of damages by the defendant to the plaintiff as a response to the defendant’s wrongful injuring of the plaintiff is treated by tort theorists, not only as ordinary and unremarkable, but as the paradigm example of the tort system in operation. It is in this payment that, it is said, we see most clearly the justice of the law in operation. The defendant must correct her

That does not mean that their fight is not worth having. Ripstein and his interlocutors are discussing what is conceptually possible in this area. That is valuable. The problem is that this is all too often taken to represent reality. 44 See Lewis and Morris (n5). 45 For a response to the point about insurance, e.g., see A Beever, ‘Corrective Justice and Personal Responsibility in Tort Law’ (2008) 28 Oxford Journal of Legal Studies 475, 493–7. 46 Baker (n4) 43

452  Research handbook on remedies in private law wrong to the injured plaintiff. Thus, the payment of such damages is thought to be the archetypical case upon which other types of payment are parasitic.47 It is utterly remarkable, then, that this same payment is in fact highly unusual and that it is highly unusual in part because, except in special cases, it is regarded by practitioners of the tort system as seriously iniquitous. As Baker puts it: Insurance money is something that all personal injury lawyers talk about. Blood money is a hidden subject that lawyers have to be pressed to talk about. When they do, most plaintiffs’ lawyers claim that they try not to go after blood money, and most defense lawyers back that claim up.48

Baker’s assessment was reached on the basis of a number of interviews that he conducted. The following excerpts from those interviews are illustrative. We don’t do it often [i.e. go after blood money]. And if you talk to every responsible plaintiffs’ lawyer in the state, I’ll bet it’s rare … I mean there’s a, what we used to call, an unwritten union rule that you take the [insurance] coverage and you go home. It really doesn’t happen too often. Guys will call and say, ‘What’s the [insurance] policy?’ That’s it, and then [they] go away. But we do have situations where they go out and put an attachment on the house … Not too often. It’s almost like an unwritten code of lawyers that you don’t go after those … But there’s no rule on that. It’s just sort of been something that I think I was taught by my bosses and you see it among the plaintiffs’ lawyers.49

Baker even documents that he was told by plaintiffs’ lawyers that they would refuse to represent clients who insisted on blood money.50 He tells another story of one defence lawyer who had a friend who sought blood money from one of his clients. The defence lawyer’s response: At first I thought it was a mistake, and I called him up and I said, ‘[name omitted] what, are you kidding? Fifty is fifty is fifty is fifty [this is a reference to the limit on the defendant’s insurance policy], that’s all we got! Take it and go away!’ And apparently since he was … out starting his own law firm, he had made a deal with the referring attorney that he would try the case, but he didn’t get a fee unless he got over the offer. So, the offer had been fifty. So my guy had to … ended up paying another $15,000 out of his own pocket to settle this case. And I’ve never spoken to him [the lawyer] since.51

Notice that it was accepted that the plaintiff’s lawyer had found himself in a difficult position and that the amount of blood money in this case was only $15,000, and yet the decision to seek this money was viewed in so negative a light that it provoked a great deal of hostility. There are exceptions to the rule against seeking blood money. The hesitancy to go after these damages evaporates when the defendant has been guilty of egregious wrongdoing such as sexual assault or drunk driving or when the defendant has wilfully underinsured herself.52

49 50 51 52 47 48

This, for instance, is the view presented in Beever (n45). Baker (n4) 281. Ibid, at 281–2 (Baker’s emphasis). Ibid, at 282. Ibid, at 291 (Baker’s emphasis). Ibid, at 288–97.

Tort law and the tort system: from vindictiveness to vindication  453 Moreover, the reluctance to go after blood money is in part – but only in part – explained by the difficulty of obtaining it.53 Nevertheless, as Baker summarises the position: Insurance systematically shapes tort litigation in a way that goes beyond simply spreading risk … As a result of a century’s experience with liability insurance, there is a norm among tort practitioners that tort litigation is supposed to be primarily about collecting insurance money, not blood money. Before liability insurance, all tort suits against individual defendants involved real money paid by real people. Surely some of that money might have been termed ‘blood money,’ with all the retributive overtones that term suggests, but not all. It is only against the liability insurance norm that tort damages paid by real people are regarded primarily as punishment, and only secondarily as compensation.54

For our purposes, the crucial point contained in this passage is reinforced by Baker’s observation that seeking blood money is believed to be vindictive.55 For the tort theorist, this produces the stark conclusion that we have already witnessed: the participants in the tort system often regard the pursuit of tort law’s justice as unjust. The morality of tort law is, in the eyes of tort law’s practitioners, immoral. This can hardly be dismissed as an interesting fact about the tort system irrelevant to tort law per se. It may help to think of the matter in this light. As suggested above, the corrective justice theorist sees the justice realised in Donoghue v Stevenson as part of the story about that case and the law as a whole. But part of that story was surely that this justice was meant to be actualised. It was meant to be implemented in the real world. It was not meant to be part of tort law alone but also to be part of the tort system. But the evidence is that if this justice is realised in the tort system at all, it is so only very imperfectly indeed. It is very easy to exaggerate the scope of this criticism. It is important to avoid this. First, no criticism whatsoever is being made of corrective justice theory qua theory of tort law. The observation that the tort system is not a system of corrective justice does nothing to show that corrective justice is not the proper basis upon which to analyse tort law. The criticism here, then, is not directed at corrective justice theory per se. The point is rather that, as an intellectual project, corrective justice theory cannot plausibly remain only a theory of tort law (or of other areas of law, e.g. the private law as a whole). It is required to take a stand on (and beyond) the tort system. No theory of tort law could ignore the fact that the justice in Donoghue v Stevenson was meant to be actualised in the tort system. After identifying that form of justice as corrective justice, the corrective justice theorist must be struck by the fact that this form of justice is not actualised in the tort system, at least not except in the most distorted fashion. That ought to prompt her to raise questions about this fact. Again, it is important to tread carefully – especially as we appear to work in a discipline that is absurdly unforgiving of allowing unanswered questions to remain open.56 It is perfectly legitimate for individual researchers to restrict themselves to a certain set of questions – to examine only tort law, for instance. However, as a research project, corrective justice theory must reach further. What is to be said about the tort system?

Ibid, at 282. Ibid, at 314 (emphasis added). 55 Ibid, at 285. 56 I have dealt with this issue in A Beever, ‘Criticism, Engagement and the Academic Lawyer’ (2017) 27 New Zealand Universities Law Review 79. 53 54

454  Research handbook on remedies in private law

IV QUESTIONS This discussion has raised many more questions than can be answered here. In fact, if these questions were to be taken up, they would be the beginnings of significant new research projects. The aim of the remainder of this chapter is to say a little about what these might look like. I wish to leave the reader with three questions among the many that might be asked. The first question is this: What is it about tort law and the modern world that make them incompatible? At its most abstract level, the answer seems to be that, given the shape of the modern world, corrective and distributive justice are themselves incompatible. Baker’s study provides evidence for this view. The problem is that the costs of injury can be so high that what would otherwise be a just claim can appear rather to be an unacceptable act of vindictiveness, an act at which even tort lawyers baulk. Acts of corrective justice frequently have consequences that would be so distributively unjust that they cannot be countenanced. In this light, it is worth noting how this tends to defeat the general presumption of academic tort lawyers that there is a natural fit between progressive and plaintiff-friendly views of tort law. As we can now see, the plaintiff-friendly views of so-called progressive legal academics are likely to encourage a law that would appear to those who utilise it to be highly vindictive. This leads to the second question: What does this incompatibility between tort law and the modern world tell us about how those things should be evaluated? When thinking about this question, it is vital that we do not fall into what is a very tempting error: the mistake of thinking that if a theory of tort law cannot be reconciled with the reality of the tort system, then this must constitute a criticism of that theory. On the contrary, if this reconciliation is impossible, it is just as likely that this constitutes a criticism of that reality. If tort law is a system of justice, and if tort law cannot be reconciled with the world in which we live, that might tell us that there is something seriously wrong with the world in which we live. Think of it this way. The notion that a person who wrongs another should make good that wrong is surely a basic moral principle. It is hardly contentious in the way that, say, redistributive taxation is.57 And yet we seem unable to implement this basic moral principle in the society in which we live. In fact, the attempt to implement the principle is often viewed as reprehensible by those with the ability to implement it. This appears to suggest that there is a serious moral problem with the modern world. Though it may be analysed differently, I would spell out the problem in this way. Tort law is an attempt to realise norms of interpersonal justice. It lays down standards of conduct that apply as between individuals. These standards are designed to recognise and acknowledge individuals as moral agents deserving of respect as such. As part of this, it stipulates remedial action that must be taken when these standards are not observed. However, as we have seen, we appear unable to implement this system. That seems to reveal that the modern world is such that it cannot allow us to relate to each other in a morally appropriate fashion. In this way, then, tort theory turns into criticism of the tort system and of the wider social context in which that system operates.

57 This is not to say that redistributive taxation is highly contentious. In fact, it is widely supported. The point is that even the justice of redistributive taxation is much more likely to be contested than the justice of making good one’s wrongdoing. Where, for instance, is the anti-corrective justice equivalent of R Nozick, Anarchy, State, and Utopia (Blackwell 1975)?

Tort law and the tort system: from vindictiveness to vindication  455 As it is an almost reflex in parts of the academic community to pigeonhole such arguments as the products of covert right-wing plots to undermine the welfare state, it is necessary here to point out that matters are much more complicated than this facile reaction suggests. As Baker’s study helps to reveal, the fundamental problem seems to be that injuries can be so costly that repairing them can ruin defendants. Perhaps, then, this problem ought to be alleviated by reducing those costs, and perhaps the welfare state ought to play the leading role here. After all, injuries that a person may suffer as the result of another’s wrong can typically be suffered by accident, thus revealing the vulnerability of modern life. Perhaps the deepest problem is this vulnerability. Perhaps the welfare state can help. All of these matters are open. The final question is part of the second. It is: in the light of the incompatibility between the modern world and tort law, can tort law really be defended? Many theorists have tended to assume that discovering a rational basis to the law’s rules and doctrines (e.g. corrective justice) is sufficient to justify that law. But that is clearly incorrect. Perhaps tort law is in this way similar to Roman law: a wonderful subject to study, but not a system that ought to be implemented today. In fact, if the rational basis for the law that the theorist discovers cannot be realised in society, then far from justifying tort law, theory has in fact raised a very deep question about the law’s viability. Theory discovers that law has a rational basis, but empirical enquiry shows that it is one that cannot be realised in the modern world. Theory then both grounds tort law and calls into question its continued existence. And if something is to replace tort law as it currently stands, what would that be? Of course, this is much gone over ground, but in the light of this investigation the question takes on a different cast than it has heretofore. The issue is not only how to ensure the best system of compensation for incapacity, important though that matter is. The issue is also how properly to recognise and implement interpersonal justice in the modern world. This is an enormous subject, but it is worth noting here that legal theory has the potential to uncouple tort law and compensation. It is perhaps still routine to find statements to the effect that compensation is what tort law is all about.58 This is odd, because we know that, as a description of tort law as a whole, this is flatly false. Injunctions and awards of restitutionary or disgorgement damages are two examples of responses that are not (in the relevant sense at least) compensatory. Moreover, though strongly grounded in past thinking about tort law, it is even myopic to think of tort law as a law of remedies let alone as a law of a particular remedy. As cases such as Re C,59 E (Mrs) v Eve60 and Re F (Mental Patient: Sterilisation)61 reveal, tort law defines the limits of the permissible in ways that are not directly related to remedies, even if the remedial aspect of the law is required in order to give the law teeth in this area. For the corrective justice theorist, tort law is about rights. This generates an explanation for compensation. When the defendant wrongs the plaintiff, he interferes with the plaintiff’s primary rights. In the relevant cases, this generates a secondary right to compensation to make good that right’s violation. Note that, as Weinrib made crystal clear,62 there is a normative and

58 E.g. S Todd, ‘Introduction’ in S Todd (ed.), The Law of Torts in New Zealand (7th edn, Brookers 2016) 2. 59 Re C [1994] 1 WLR 290. 60 E (Mrs) v Eve [1986] 2 SCR 388. 61 Re F (Mental Patient: Sterilisation) [1990] 2 AC 1 (HL). 62 E J Weinrib, The Idea of Private Law (Harvard University Press 1995) 115–20.

456  Research handbook on remedies in private law a factual aspect to this analysis. Liability follows because the defendant violated the plaintiff’s rights. This creates in the defendant an obligation to put things right – in the relevant cases, to pay damages. This is a normative issue. But the quantum of damages in these cases is determined by the extent to which the plaintiff was made worse off by the violation of her rights. This is a factual matter. And this, of course, is affected by the circumstances in which the plaintiff finds herself. As tort lawyers, we are used to this. If you damage my foot so that I can no longer run,63 you will face a significant award of damages; but this will be nothing compared to the damages bill that you would face were you to cause the same injury to an American Football quarterback (assuming that it is still necessary for these actually to run). But this works the other way as well, as it were. If I require surgery that will cost $100,000, then you will face a large bill; but if that same surgery is free, then you will be much less impacted. Thus, the extent of an injury is in part a consequence of the social context in which that injury occurs. This reveals that tort law is not essentially wedded to compensation, even in the areas in which it compensates. Compensation could be carried out via alternative mechanisms, as is the case regarding personal injury in New Zealand, for instance.64 The claim here is not that, in compensating, the alternative mechanism becomes a mechanism of corrective justice. That does not occur. The point is that, in the presence of such a mechanism, corrective justice loses its connection with compensation. In a world of this kind, the violation of the plaintiff’s right remains, but this would not generate a right to compensation as the plaintiff has been compensated. Would tort law have any work to do here? The answer may well be yes. Again, Baker’s work helps to reveal this. Baker’s discoveries may cause one to wonder how plaintiffs feel about their lawyers’ reluctance to go after blood money. After all, the consequence of this is that they fail to be fully compensated for a wrong that they have suffered. Perhaps surprisingly, the evidence is that, once the issues have been properly explained to them, they are usually content. This is in part because they come to accept that the attempt to gain blood money would be vindictive; but it is also, very importantly for our purposes, because they gain a different kind of satisfaction. The following is from an interview with a plaintiffs’ lawyer: my experience is that once having been through that crucible of fire [a trial and its precursors], they accept my advice. And they have their day in court and once they’ve had their day in court, the bitterness tends to leave. They’ve been vindicated.65

In the presence of alternative mechanisms for ensuring compensation, it is possible to imagine a law of tort in which the concept of vindication was to the fore and compensation was And you do this when I am not in New Zealand. Another alternative is suggested in Campbell (n6) 439 (citation omitted): ‘we should abolish the existing law of personal injury caused by negligence and leave it to those citizens to buy first-party insurance cover, above a floor of adequate social security, if they so wish’. In my view, if a decision to adopt such a scheme is taken acknowledging that it is replacing existing compensation mechanisms (including, of course, tort law’s), then this counts as a compensation mechanism. It is also important to note at this point that the factual question as to the extent of the compensation due can be settled publicly, e.g. by legislation. This, in fact, was often the practice of the common law at least before Heil v Rankin [2001] QB 272 (CA). For commentary on that case, see D Campbell, ‘The Heil v Rankin Approach to Law-Making: Who Needs a Legislature?’ (2016) 45 Common Law World Review 340. 65 Baker (n4) 283 (emphasis added). 63 64

Tort law and the tort system: from vindictiveness to vindication  457 forgotten, left to more effective and just means. That would remain a law consistent with corrective justice.66 This would, I suggest, be a law that succeeded in furthering the cause of human freedom rather than a law that failed to realise a just system for dealing with incapacity. It would, I submit, be a law that was actually true to itself and the only form of justice it is equipped to promote. To conclude, it is worth noting that if the thesis of this chapter is correct, then it has the significant consequence that tort law theorists and their presumed opponents are not the enemies they believe themselves to be. On the contrary, they are unknowingly allies. They are not foes, because they work in different spheres. The critic of the tort system thinks that the theorist is defending the system – and thereby attacking his criticism – when the theorist is in fact analysing only tort law. The theorist thinks that the critic is criticising her theory of tort law when in fact he is criticising only the tort system. We do not realise that we are, in fact, fighting over different toys. And we are concealed friends. Those who criticise tort law on the ground that it fails to provide an adequate social response to incapacity have their case strengthened by tort theory that shows that tort law is not structured to achieve this end. Those theorists show, not only that tort law is not a tool for that purpose as it is not a tool at all, they also show that even treated as if it were a tool it could only be a very poor tool for that purpose. The tort theorist helps the critic of the tort system. On the other hand, the critic helps to reveal the wider significance of the work of the tort theorist, taking that work beyond the confines of tort analysis and into the realms of political philosophy.67 We should be grateful for each other. How we should feel about tort law and the tort system, however, is another matter entirely, one that needs ongoing exploration. I hope that this chapter is a worthwhile contribution to that project.

Though we might want to relabel that notion. In A Beever, Forgotten Justice: A History of Political and Legal Theory (Oxford University Press 2013), I argue that ‘commutative’ is a better label than ‘corrective’ as the latter creates too many false impressions. 67 For what it is worth, I am delighted that my own work has been utilised in this fashion in, for example, Campbell (n6). 66

25. The structure of remedial law Stephen A Smith1

For much of the common law’s history, private law consisted largely of law about how to get before courts and about what courts would do for successful litigants. Much of this law was procedural in the modern sense, but, at its core, it was remedial law: it was law about what courts would do for citizens who came to them for assistance. Today, the common law follows the civil law in explaining private law primarily in terms of substantive rights, that is, in terms of rights that govern citizens’ day-to-day interactions with one another (e.g., rights to the performance of contracts, rights to physical integrity). However, remedial law remains central to the common law’s understanding of those rights. Even today, law students in common law faculties often begin their study of contract law by learning the remedies for breach of contract. In light of this history, it is somewhat surprising that remedial law itself has received little attention from common law writers. To be sure, writers have examined individual remedies at great length: there are entire treatises devoted to topics such as specific performance and punitive damages. However, writers have largely ignored remedial law as a general category or subject matter for study. The kinds of broad questions that writers regularly ask about the scope, nature, and aims of substantive law subjects such as contract and tort have not been asked about remedial law. This chapter addresses this gap. It explores four questions about the structure of remedial law: (1) What is a remedy? (2) Why does the law provide remedies? (3) When are remedies available? and (4) What kinds of remedies are available?

1

WHAT IS A REMEDY?

The first task of any study of remedial law is to define its subject matter. Linguistic usage does not provide a settled definition.2 Nearly every legal phenomenon has been described as a cure – a remedy – for a problem of one kind or another. Law in general is a cure for the problems that arise in a world without law. The breadth of the term ‘remedy’ has led some writers to conclude that it cannot serve a useful purpose.3 However, there is one definition that fits conventional usage (indeed it is probably the most common usage) and, at the same time, that identifies a distinctive and important legal phenomenon. According to this definition, a remedy is a judicial ruling, and a private law remedy – this chapter’s focus – is a legal ruling that resolves a private law dispute.4 In the typical case, private law remedies direct defendants

This chapter draws upon S Smith, ‘Rights-Threats, Wrongs and Injustices: The Common Law’s Causes of Action’ (2017) 27 NZULR 1033. 2 Peter Birks identified five meaning: P Birks, ‘Rights, Wrongs, and Remedies’ (2000) 20(1) OJLS 1. 3 Ibid. 4 Although many writers adopt this usage, Zakrzewski appears to be the first to have defended it explicitly: R Zakrzewski, Remedies Reclassified (Oxford University Press 2005) 43–8. 1

458

The structure of remedial law  459 to do things, for example, to pay money or cease an activity. Examples of such ‘directive’ rulings (‘orders’5) include specific performance orders, injunctions, orders to pay damages or a debt, restitutionary orders, and orders for the recovery of land or other property. The other main categories of private law remedies are declaratory rulings and constitutive or ‘self-executing’ rulings (such as divorce decrees). As mentioned, this definition lines up roughly with conventional usage.6 Textbooks on remedies invariably discuss the rules governing the availability of specific relief, and these rules are incontrovertibly rules about rulings. However, the main reason for adopting this definition is that rulings are a distinctive and important legal phenomenon. The law imposes itself on individuals in three main ways: (1) by law-makers announcing or recognising legal rules directed at individuals (‘substantive’ legal rules); (2) by legal officials imposing or authorising sanctions against individuals; and (3) by courts issuing rulings. Each method is distinct. Failing to comply with a private law ruling may lead to a sanction, but a private law ruling is not itself a sanction. A sanction is a physical interference with an individual’s person, property, or liberty; a private law ruling is just words.7 Nor is a private law ruling a rule. Rules, or at least the substantive legal rules that are my present focus, are declarations of the existence of legal duties (‘everyone has a duty to fulfil their contractual promises’) or descriptions of how individuals may create or alter legal relationships (‘a contract requires an offer and an acceptance’). Directive rulings are fundamentally commands.8 They command specific individuals to do specific things (‘it is ordered that the defendant pay the claimant $100’). Of course, the practice of issuing rulings is itself governed by rules. But these rules are also distinctive. The rules governing rulings (‘remedial law’) are directed at courts: remedial rules tell courts what they should do when citizens seek their assistance. For example, the common law contains a remedial rule stating, roughly, that ‘if the claimant establishes that the defendant has failed to pay a contractual debt, then (assuming no defence is available) the court should order the defendant to pay the debt’. In contrast, substantive law rules are fundamentally rules for citizens. As the previous paragraph’s examples illustrate, substantive rules tell individuals how they should treat one another in day-to-day life or how they can create or alter legal relationships with others. Like all legal rules, substantive rules are applied by courts. But unlike remedial rules, substantive rules are directed primarily at citizens. Understood in this way, remedies are distinctive legal phenomena, governed by distinctive rules. Indeed, this understanding suggests that remedial law is, in a sense, public law: remedial law is comprised of rules for state officials. Another way of making this point is that the 5 Until relatively recently, the only directive rulings that were expressed literally as ‘orders’ were those that originated in the Courts of Equity. Rulings from the Royal Courts were styled as abstract statements that (with some variations) ‘the claimant shall have and recover X’. However, today in England all directive rulings are expressed literally as orders. I discuss the language of rulings in S Smith, ‘Form and Substance in Equitable Remedies’ in A Robertson and M Tilbury (eds), Divergences in Private Law (Hart Publishing 2016). 6 See e.g., A Burrows, Remedies for Torts and Breach of Contract (3rd edn, Oxford University Press 2004); D B Dobbs and C L Roberts, Law of Remedies (3rd edn, West Academic Publishing 2017); D Rendleman and C L Roberts, Remedies: Cases and Materials (8th edn, Thomson West 2011). Exceptions include J B Berryman et al., Remedies: Cases and Materials (6th edn, Emond Montgomery 2016). 7 I discuss the difference between rulings and sanctions in more detail in the next section. 8 However, declaratory rulings are plausibly interpreted as the individualised counterpart of duty-imposing rules. As I explain below, the availability of such rulings is one reason to reject the suggestion that directive rulings are intended to specify substantive duties.

460  Research handbook on remedies in private law question of what should courts do when citizens seek their assistance (the subject of remedial law) is different from the question of how citizens should treat one another (the subject of substantive law). This difference explains why courts deciding remedial issues often take into account – to mention just one distinctive consideration – the cost, to the state, of issuing rulings. The difference explains, therefore, why courts consider whether their rulings are likely to lead to further litigation and whether, if defendants disobey their rulings, they will be costly to enforce. This definition has far-reaching implications for remedial law’s scope. On the one hand, the definition excludes rules that are discussed in many remedies textbooks – for example, it excludes the rules governing so-called ‘self-help remedies’ (such as recaption of property). Like other parts of substantive law, the rules governing self-help tell individuals what they may or must do in their everyday interactions with others, regardless of whether a court gets involved. On the other hand, the definition applies to rules that are ignored in many remedies textbooks. For example, significant parts of the law governing defences (such as those governing limitation periods, formalities, immunity, statutory non-actionability, abuse of process, res judicata, and illegality) belong partly or wholly within remedial law. In most cases, the only effect of these defences is to prevent individuals from bringing actions (leaving their substantive rights intact). Most significantly, if remedial law consists of rules about rulings, then it is at least arguable that the rules governing the assessment of damages fall outside this definition. Many courts and writers believe that wrongdoers have substantive duties, arising at the moment of the wrong, to pay damages to their victims. In what is probably the best-known judicial pronouncement on the issue, Lord Diplock stated explicitly that a breach of contract gives rise to a substantive duty to pay damages: Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach.9

The majority of writers who have addressed this issue hold a similar view with respect to damages generally.10 If this view accurately describes the common law, then the rules governing the assessment of damages are substantive law: these rules inform individuals what they should do if they have committed a legal wrong. In this view, an order to pay damages is similar to an order to pay a debt: the order merely rubber-stamps a substantive duty to pay a sum of money. It follows, in this view, that the rules on damages are no more a part of remedial law than are the rules that determine the existence and content of duties to pay debts.



Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 847. See e.g., P Birks, ‘Definition and Division: A Meditation on Institutes 3.13’ in P Birks (ed.), The Classification of Obligations (Oxford University Press 1997) 1, 24; A Ripstein, ‘As if it Had Never Happened’ (2007) 48(5) William and Mary LR 1957; E Weinrib, ‘Two Conceptions of Remedies’ in C Rickett (ed.), Justifying Private Law Remedies (Hart Publishing 2008); J Gardner, ‘What is Tort Law For? Part 1: The Place of Corrective Justice’ (2011) 30(1) Law and Philosophy 1; R Stevens, Torts and Rights (Oxford University Press 2007) 59–60. The most famous civilian codal article explicitly proclaims a duty to pay damages: ‘Any human deed whatsoever which causes harm to another creates an obligation in the person by whose fault it was caused to compensate it’: Article 1382 Code Civil (France). 9

10

The structure of remedial law  461 As it happens, my own view is that wrongdoers do not have duties to pay damages until a court orders them to pay.11 It follows, in my view, that the rules governing damages are properly a part of remedial law: they are rules instructing courts how to ‘assess’ damages. However, this conclusion certainly cannot be assumed without argument. Readers might therefore expect that one of the central questions addressed in textbooks on remedies is whether the rules on damages belong in these books. Yet with rare exceptions, remedies textbooks do not even raise this issue. They simply assume without comment that the law of damages is part of the law of remedies. A similar observation applies with respect to the law of restitution. Although many remedies texts discuss restitutionary awards in detail, the predominant view (though, again, not my view12) is that such awards merely rubber-stamp substantive duties to make restitution.13 If this view is correct, then the law of restitution is not remedial. Again, remedies texts almost never discuss this issue. In short, the suggestion that remedies are judicial rulings, if taken seriously, has significant implications for the scope of remedial law. More generally, the definition directs our attention to important questions. To determine whether the law of damages is remedial or substantive it is necessary to address directly the fundamental – but often ignored – question of whether there is a substantive duty to pay damages. Is paying damages like paying a contractual debt – something that defendants have substantive duties to do whether or not they end up in court? Or is paying damages like paying a fine or punitive damages – something that defendants must do only when, and because, courts have ordered them to do it? And to answer this question it is necessary to ask why damages should be paid at all. Similar questions arise every time we consider whether a rule is remedial or substantive. For example, to determine if the defence of illegality is substantive or remedial we need to ask whether illegality is a reason to deny or excuse the defendant’s wrongdoing or, instead, merely a reason for a court to refuse to assist the claimant.

2

WHY DOES THE LAW PROVIDE REMEDIES?

The second question about remedial law is why courts issue rulings. Although this question is not strictly about the structure of remedial law, it is difficult to say anything about that structure without some idea of why remedies exist at all. In particular, it is difficult to say anything about the structure of remedial law without some idea of why courts issue directive 11 See S Smith, ‘Duties, Liabilities, and Damages’ (2012) 125(7) HLR 1727; S Smith, ‘Remedies for Breach of Contract: One Principle or Two?’ in G Klass, G Letsas and P Saprai (eds), Philosophical Foundations of Contract Law (Oxford University Press 2014) 341. J Goldberg and B Zipursky defend a similar view: see e.g., J Goldberg and B Zipursky, ‘Rights and Responsibility in the Law of Torts’ in D Nolan and A Robertson (eds), Rights and Private Law (Hart Publishing 2011) 251; B Zipursky, ‘Civil Recourse, Not Corrective Justice’ (2003) 91(3) Georgetown LJ 695. The absence of a duty to pay damages explains, inter alia, why it is no defence to an action for damages that the defendant earlier offered to pay the claimant the sum awarded by the court or, indeed, actually paid the sum (unless the payment was made as part of a binding settlement): Edmunds v Lloyds Italico & l’Ancora Compagnia di Assicurazione e Riassicurazione SpA [1986] 1 WLR 492, 496. The historical roots of this rule, which go back to the common law’s origins, are discussed in S F C Milsom, Historical Foundations of the Common Law (2nd edn, Butterworths 1981) 243–4. 12 S Smith, ‘A Duty to Make Restitution?’ (2013) 26(1) CJLJ 157. 13 See e.g. P Birks, Unjust Enrichment (2nd edn, Oxford University Press 2005) 31.

462  Research handbook on remedies in private law rulings (such as injunctions, specific performance, damages, orders to pay sums due, restitutionary orders, and orders for the recovery of land or other property). Directive rulings are by far the most common and important category of private law rulings. Yet it is not clear why courts issue them. Enacting rules is an obvious way for authorities to guide behaviour and set standards for large numbers of people. Imposing sanctions, in turn, is an obvious way to help ensure compliance with rules, either by directly bringing about the outcomes they require (say by taking X’s money and giving it to Y) or by providing incentives for compliance. It is less obvious why courts issue orders. What is the purpose of telling defendants to do things when the law has, or could have, rules that tell individuals to do the same things and sanctions that it can impose when rules fail to motivate? As was true of the definitional question, this question has attracted little attention from legal scholars. There is an extensive literature on why defendants should do the things that particular orders require them to do (e.g., pay money, return property). There is also an extensive literature on the general nature of rules and sanctions. However, legal scholars have given little attention to orders themselves. Most writers appear to assume that orders are either a kind of mini-rule or a type of sanction. Neither assumption is plausible. As mentioned earlier, the substantive rules most closely related to orders are essentially propositions about the existence of general legal duties (for example, ‘everyone has a duty to perform their contractual promises’). The individualised counterparts to such rules are judicial declarations (‘it is declared that the defendant has a duty to pay the claimant $100’). Orders, however, are commands (‘it is ordered that the defendant pay the claimant $100’). For the same reason, orders are not sanctions. It is true that courts can order or authorise legal officials to impose sanctions. However, the private law orders under consideration are directed at citizens, not officials. It is also true that courts or other legal officials can impose sanctions on defendants who fail to comply with orders. But these sanctions are distinct from orders. The sanction for failing to comply with an order may be entirely different to the content of that order: for example, the typical sanction for failing to comply with an injunction is imprisonment. At one level, there is no mystery about why courts issue orders: they issue orders because they believe that defendants should perform the actions described in the orders. Nor is there any mystery, at least in general terms, about why courts consider orders an appropriate way of motivating such actions: courts presumably assume that when they issue orders they are providing defendants with a reason to do what the orders require. In other words, courts presume that they have the authority to issue binding orders. The mystery is the basis of this authority; more specifically, the mystery is how this authority differs from the authority that courts assert when they issue rules. If the authority is the same, orders are superfluous. Briefly – a complete answer would require an entire book – the rationale for orders lies in the distinctive reasons for action that they provide. As mentioned earlier, duty-imposing substantive rules declare the existence of general duties (‘everyone has a duty to pay their contractual debts’). By definition, duties are obligatory. Of course, the fact that the law has said that a duty exists does not mean that it actually exists – the law may be mistaken – but from the law’s perspective, legal duties are by definition binding. When the law affirms a duty-imposing rule, it therefore relies on its presumed ‘declaratory authority’ – the authority to declare that something is the case, in this instance that a particular duty exists. In contrast, judicial orders, as I noted earlier, are simply commands (‘the defendant is ordered to pay the claimant $100’). To be sure, courts presume that defendants have duties to do what they command them to do. However, the explanation of these duties is different

The structure of remedial law  463 from the explanation of rule-based duties. Insofar as defendants have duties to do what orders require, these duties arise not because courts have said that they exist, but because defendants have a general duty to obey courts – to do whatever courts command. The duty that arises from an order to pay the claimant $100 is therefore a derivative duty: it is derived from the defendant’s general duty to obey the court. When courts issue orders they are therefore relying on ‘directive authority’ – the authority to command obedience. Because declaratory authority and directive authority are different, the reasons for action provided by rules and orders are different. The question facing an individual subject to a duty-imposing rule is whether to accept that what the rule says is the case is indeed the case (namely, that such and such duty exists). In contrast, the question facing an individual subject to an order is not whether to accept the order but whether to obey it. Duty-imposing rules ask for acceptance; orders demand obedience. This distinction explains why individuals who refuse to accept the law’s declaratory authority may nonetheless accept its directive authority (and vice versa). Individuals who reject duties declared by legal rules are rejecting the law’s authority to tell them what duties they have. These individuals do not accept that they have the duties the law says they have. In contrast, individuals who reject orders are doing something very different: they are disobeying courts. The difference between declaratory and directive authority explains why it is common in both law and ordinary life for authorities to order individuals to do things that they already have rule-based duties to do. In my family, we have a rule against throwing food at the dinner table. When one of my children breaches this rule, my usual response is to order the offender to stop throwing food. Such orders often bring about the desired result because the offender realises that flaunting an order is different – and in certain ways more serious – than flaunting a rule. Flaunting a rule merely shows disagreement; flaunting an order is disobedience. These observations suggest that one reason for issuing judicial orders is to provide defendants with new reasons to do what substantive rules already require. As I explain in Section 3, many common orders are justified on this basis. However, the preceding observations also suggest a second possible reason for issuing orders: to motivate defendants to perform actions that are not appropriately the subject matter of substantive rules. If duty-imposing substantive rules are propositions about the existence of duties, then it is appropriate to employ them only where it is reasonable to assume that individuals have duties to perform the specified action. Some of the actions that courts order defendants to perform fall outside this category. The clearest examples are actions that courts command for the purpose of punishing defendants, for example, the payment of a fine. The justifications for punishment – retribution, deterrence, and so forth – are not justifications for imposing substantive duties on wrongdoers to punish themselves. They are justifications for the state inflicting punishments on wrongdoers. This feature of punishment explains why the law always imposes punishment by orders, not rules. Within private law, the obvious analogue to a fine is punitive damages. However, as I have argued elsewhere,14 damages awards generally, as well as many restitutionary awards, appear to share the same structure as punitive awards: they create new duties (‘creative’ awards), and they do this because their subject matter is not appropriate for a rule-based duty. Although it is not possible to defend this view here, I explore some of its implications below.

Smith, ‘Duties, Liabilities, and Damages’ (n11); Smith (n12).

14

464  Research handbook on remedies in private law

3

WHEN ARE REMEDIES AVAILABLE?

The third question – When are remedies available? – has also attracted little attention from legal scholars. To be sure, writers have discussed in detail the availability of particular types of remedies – for example, the availability of specific performance orders. But there appear to have been only two attempts to generalize from these discussions. Although neither generalization fits the law, each captures a part of the truth. The first generalization, often associated with Blackstone,15 supposes that remedies are always responses to wrongs. This view neatly fits the ordinary understanding of ‘remedy’. In that understanding, a remedy is a cure for a problem of some sort, and the most obvious kind of legal problem, it might be thought, is a legal wrong. Nonetheless, this suggestion cannot explain many ordinary orders. The most obvious counterexamples are quia timet (‘preventative’) orders. Quia timet orders are available against defendants who are likely to infringe the claimant’s rights in the future but who have not yet done so. For example, a court might issue a quia timet injunction to cease construction of a building that, if completed, would infringe the defendant’s right to light. Courts also issue remedies in cases where the defendant has not even threatened to commit a wrong. The clearest examples are legislative in origin. For instance, many common law jurisdictions have legislation authorising courts to issue orders dealing with maintenance and division of matrimonial property following a marriage breakdown. In England, the relevant legislation provides that courts may make ‘an order that either party to the marriage shall pay to the other such lump sum or sums as may be so specified’.16 There is no suggestion in the legislation that claimants must show that the defendant had a duty to do what the order requires prior to the order’s issuance, much less that the defendant breached this duty. To obtain an order the claimant must merely show that, broadly speaking, it would be fair in the circumstances to issue it. The second generalisation supposes that private law remedies are always responses to substantive rights. According to this view, if claimants prove that they enjoy a substantive right vis-à-vis the defendant, courts will uphold this right by ordering the defendant to comply with the correlative duty. For example, on proof that the defendant has a contractual duty to pay the claimant a sum of money, the court will order the defendant to fulfil this duty. In the common law, Peter Birks is the best-known contemporary defender of this view.17 The suggestion that courts would agree to issue orders merely on proof of the existence of a right is implausible on its face. Unless the claimant’s right has been infringed or is under threat, why should a court – a publicly funded institution – get involved? In any event, this suggestion also does not fit the law. Negative contractual duties are binding from the moment at which the parties have agreed that they come into force. Yet courts will not issue injunctions directing compliance with such duties (or issue any other kind of order) merely on proof that

15 W Blackstone, Commentaries on the Laws of England (A Facsimile of the First Edition of 1765–69, U of Chicago Press 1979) Book I 137, Book III 115–16. 16 Matrimonial Causes Act 1973, s 23(1)(c). 17 P Birks, ‘Introduction’ in P Birks (ed.), English Private Law (Oxford University Press 2000) xxxvi-xxli. Birks’ analysis of causes of action was not directed at demonstrating that remedies were given on proof of a substantive right – for Birks this proposition was axiomatic – but rather on the question of what claimants needed to prove to establish a substantive right. His answer was a contract, wrong, unjust enrichment, or other event.

The structure of remedial law  465 they exist. The same observation applies to the negative rights against trespasses, batteries, slanders, defamations, carelessly caused injuries, and so forth that lie at the heart of tort law. Courts only issue orders supporting these rights on proof that the right has been infringed or is about to be infringed. Nor can this suggestion explain the matrimonial property orders discussed above or the earlier example of orders to pay punitive damages. In neither case does the defendant have a duty to do what the order requires prior to its issuance, and thus in neither case can the order be a response to that duty’s existence. The positive law is more complex than Blackstone’s and Birks’ suggestions assume. In what follows, I argue that there are three main causes of action in the common law: rights-threats, wrongs, and injustices. The first two are related to the causes of action identified in Blackstone and Birks’ work, but the third cause of action – injustices – is not present in either writer’s work.18 Rights-threats I noted earlier that one reason to issue directive orders is to give defendants new reasons to perform actions required by substantive duties. It should not be surprising, then, to find that courts normally grant orders directing the defendant to comply with a substantive duty (‘replicative’ orders) on proof that the defendant appears likely to breach that duty in future – in other words, on proof that the claimant’s substantive rights are under ‘threat’ from the defendant. Indeed, it is difficult to think of any reason to issue replicative orders other than that the claimant’s rights are under threat. There is no point – and there is a significant waste of public resources – in issuing a replicative order if the defendant will in any event comply with the substantive duty that the order replicates (or if it is impossible for the defendant to comply). The only circumstances in which issuing a replicative order can possibly make a difference is where the defendant is able, but unwilling, to comply with the relevant substantive duty – in short, where the claimant’s rights are under threat.19 In the typical case, claimants establish rights-threats by proving that the defendant is currently infringing one of their rights, such as their right to exclusive possession of land or to the payment of a debt. Courts rightly regard an ongoing infringement as strong evidence that the defendant will not respect the claimant’s rights in future. Accordingly, courts normally order trespassers to cease trespassing and debtors to pay their debts. More generally, a rights-threat is the normal cause of action for orders that require defendants to perform their substantive duties (‘replicative orders’) or to perform close substitute for those duties. Examples include injunctions, specific performance orders, orders for a sum due, orders for the recovery of land or other property, and most orders to pay damages in lieu of specific relief.20 18 Remedial defences are outside this chapter’s scope, but it should be kept in mind that claimants who have satisfied the relevant cause of action may nonetheless be denied remedies if a remedial defence is established (for example, the expiry of a limitation period). 19 Individuals who are unwilling to comply with rule-based duties are frequently also unwilling to comply with judicial orders. It might be thought, then, that where a rights-threat is established courts should not bother making an order, but instead immediately authorise a sanction. However, while orders are not costless, they are significantly less costly and, importantly, significantly less intrusive than sanctions. Given that it is relatively straightforward to impose sanctions when orders fail, it is appropriate to reserve sanctions as a last resort. 20 I discuss exceptions in the next section.

466  Research handbook on remedies in private law By definition, defendants who are engaged in ongoing rights-infringements have committed wrongs. As I explain below, proof of a wrong is itself a cause of action. However, so far as the availability of replicative orders is concerned, proof of a wrong is merely evidence that the defendant is likely to continue infringing the claimant’s rights. It is because the courts’ focus is the threat, not the wrong, that (as discussed above in the discussion of quia timet orders) courts are willing to issue replicative orders even when an infringement has yet to happen.21 The focus on the threat also explains why courts refuse to issue replicative orders when there has been a past wrong, but no threat of a future wrong.22 For example, courts will not award specific relief if the wrong was a one-off accident. For similar reasons, courts also deny specific relief in cases where it is impossible for the defendant to comply with the order. For example, courts will not order defendants to deliver goods that they no longer own or possess. In all these cases, the defendant has committed a wrong, but there is no threat to which a replicative order can respond. Wrongs The second cause of action recognised in the common law is proof of a wrong. This proposition might be thought self-evident. Damages are typically defined as the law’s response to a wrong. However, the position defended here is that only a subset of damages awards are responses to wrongs – and even that subset is open to alternative interpretations. More generally, the theme of this section is that the classification of damages awards raises difficult issues. I mentioned earlier that many writers believe that wrongdoers have substantive duties, arising at the moment of their wrongdoing, to pay damages to their victims. If this view is correct, then from the perspective of remedial law an order to pay damages is the same as an order to pay a contractual debt: the order directs the defendant to pay a sum of money that, as a matter of substantive law, the defendant should have paid already. It further follows that the cause of action for both orders is the same. In the terminology adopted here, that cause of action is a rights-threat. The only reason to order defendants to do what they already have substantive duties to do is that they are unwilling to comply with those duties. My own view, as I also mentioned earlier, is that there is no substantive duty to pay damages in the common law. The most important implication of this view is that the law of damages is part of remedial law. It might be thought that a second implication is that the cause of action for all damages awards is a wrong. It is orthodox law that a claimant seeking damages must prove a wrong. Yet this conclusion may be too quick. To be sure, if there is no substantive duty to pay damages, it seems clear that proof of a wrong is the cause of action for many common damages awards (or parts of damages awards). An example is nominal damages. To obtain nominal damages claimants merely have to prove that the defendant wronged them – for example, by breaching a contractual promise or trespassing on their property. The breach need not have caused any loss. Another example is punitive damages: although claimants who are awarded punitive damages have typically suffered

By definition, it is not possible to obtain a quia timet order to pay a debt or to quit land. However, quia timet orders to specifically perform contractual obligations and not to commit trespasses are available (though for practical reasons the former are rare). 22 See generally, I C F Spry, The Principles of Equitable Remedies (9th edn, Thomson Reuters 2013) 405–7. 21

The structure of remedial law  467 losses, the punitive part of their award is a response to the egregiousness of the defendant’s wrongdoing, not the extent of the claimant’s loss. A third example, or more strictly a set of examples, is the many cases where courts award claimants the market value of property that was destroyed, lost, stolen, wrongly retained, or not delivered by the defendant.23 A vendor who fails to deliver contractually promised goods is liable to be ordered to pay damages set at the market price of the goods.24 Courts apply a similar principle where a vendor delivers defective goods: the vendor is liable to pay the difference in market value between the goods delivered and the goods promised.25 They also apply a similar principle in cases involving the wrongful use of the claimant’s property: the defendant is liable, on proof of the wrongful use, to an order to pay the claimant the market rental rate for the property.26 In all these cases, courts award the market rate simply on proof of the wrong, regardless of whether the claimant suffered an equivalent loss or indeed suffered a loss at all.27 If I use your apartment while you are away, I am a liable to pay you the market rental rate even if you were unaware of my trespass, had no desire to rent the apartment, and I left the premises in better condition than I found them.28 These examples are not exhaustive.29 But assuming that there is no substantive duty to pay damages, they are sufficient to demonstrate that some damages awards are responses to wrongs. The question is whether all damages awards fall into this category. In particular, the question is whether the main remaining category of damages – damages for consequential losses – are responses to wrong. I tentatively suggest that they are not. It is true that it is orthodox law that to obtain consequential damages the relevant consequences must flow from a wrong.30 Yet unlike the damages awards discussed in the previous paragraph, to obtain consequential damages claimants must also prove that they suffered a loss. The classification of consequential damages turns on the relationship between these two requirements. One possibility is that proof of loss is required because the extent of the loss characterises the nature of the wrongdoing. In this view, evidence of the loss is similar to evidence of the market rental rate in an action for direct damages for trespassing: it is one way (though not the only way) to put a monetary value on the infringed right. The other possibility is that proof of a wrong is required because the wrong characterises the nature of the loss. In this second view, the wrong is a reason – though not necessarily the only reason – for concluding that a particular loss should be borne by the defendant. 23 See generally, 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 Publishing 2009) 177. 24 See Sale of Goods Act 1979, s 53(3); Williams Bros v Ed T Agius Ltd [1914] AC 510. 25 See Slater v Hoyle & Smith Ltd [1920] 2 KB 11. 26 See Inverugie Investments Ltd v Hackett [1995] 3 All ER 84. The same principle is applied where a defendant wrongfully causes the claimant’s property to be unusable for period of time: The Mediana [1900] AC 113. 27 See Rodocanachi Sons & Co v Milburn Bros (1887) 18 QBD 67. Cases where damages are assessed at the sum that a reasonable person would have accepted to waive a negative duty owed to the plaintiff (‘Wrotham Park damages’: Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798) also fall within this category. The ‘reasonable’ sum is basically the amount that the plaintiff could have obtained in the market for waiving the relevant right. 28 See Whitwham v Westminster Brymbo Coal & Coke Co [1896] 2 Ch 538. 29 Further examples are discussed in Stevens (n23). 30 With the exception of equitable damages under s 50 of the Senior Courts Act 1981 (the modern-day equivalent of ‘Lord Cairns’ Act’) that are awarded in lieu of quia timet specific relief.

468  Research handbook on remedies in private law A variety of cases where consequential damages have been awarded for losses arising from actions that – notwithstanding the orthodox view – are not wrongs, or at least are not wrongs in the ordinary sense of the term support the second view. In one such group of cases (the ‘necessity cases’) the defendants damaged the claimant’s property to save themselves from serious injury or death. For example, in the famous American case of Vincent v Lake Erie Transportation Co,31 the defendant tied his ship without permission to the claimant’s dock in order to avoid the ship being destroyed in a violent storm. The court held that while the defendant acted perfectly reasonably, he must nonetheless compensate the claimant for damage that he caused to the dock. Scholars sometimes suggest that the liability in Vincent remains liability for a wrong, albeit a ‘justified’ wrong.32 No doubt there are situations where breaking the law is morally justified. However, the suggestion that the law itself can simultaneously hold that an action is a legal wrong and justified is perplexing. From the law’s perspective, legal duties are meant to be performed and a legal wrong is something that should not happen. The most straightforward explanation of Vincent is that the defendant was legally responsible for the injury notwithstanding that he committed no wrong. But even if it is insisted that the defendant committed a wrong, the wrong is qualitatively different from a normal, ‘unjustified’, wrong. The defendant’s action in Vincent does not merit condemnation in any sense. Thus, there is no reason for the law to respond to it as a wrong. A second situation in which courts award consequential damages for what they appear to regard as non-wrongful, or at least justified, actions arises in a subset of the cases where courts award damages in lieu of specific relief. In these cases, courts deny specific relief for ‘substantive’ reasons, that is, for reasons pertaining not to the form of relief but rather to the intrinsic desirability of the actions sought by the claimant. For example, when a court awards damages in lieu of ordering a factory to cease a nuisance33 or in lieu of ordering performance of a contractual duty to replant an island that has ceased to be habitable,34 the court’s concern is not the desirability of ordering the defendant to perform the relevant action. The court’s concern is the desirability of the action itself, regardless of why it is performed. The basic reason for refusing specific relief in cases of this kind is that the cost of performing the requested action is out of proportion to its benefit. This disproportion exists regardless of whether the action is performed because the defendant was motivated by a court order or motivated by a rule-based substantive duty. The courts’ reasons for denying specific relief in such cases presume that, as in Vincent, the defendant acted, or is at least now acting, reasonably. In other words, the court’s reasons are reasons for denying that the rights-threat alleged by the claimant actually exists. It follows that the damages awards in such cases are similar to the award in Vincent: they are compensation for losses that are a consequence of non-wrongs, or least a consequence of justified wrongs. The measure of damages in such cases confirms this interpretation: damages are determined by the extent of the claimant’s future losses, not the cost of purchasing substitute performance. Against this background, awards of consequential damages in cases where the defendant has committed a wrong appear less as responses to the wrong than as one instance of the law’s response to loss-causing actions generally. The question for the courts in such cases is how the 109 Minn 456 (1910). Gardner (n10) 43. 33 See Boomer v Atlantic Cement Co 257 NE 2d 870. 34 See Tito v Waddell (No. 2) [1977] Ch 106. 31 32

The structure of remedial law  469 law should respond to losses that one person causes another to suffer, wrongfully or otherwise. And that question, as I explain in the next section, is best understood as a matter of fairness or, more strictly, of justice. Assuming that the cause of action for at least some damages awards is a wrong, there remains the question of why the law recognises this cause of action at all. More to the point, why not simply impose on wrongdoers rule-based substantive duties to pay damages? Briefly, the reason appears to be the same reason that courts impose criminal punishment by orders: by imposing the duty through a judicial order, the law makes clear that the payment is redress for a wrong. Rule-based duties are neutral in their purpose; they are all variations of ‘anyone who is in such and such factual circumstances has a duty to do X’. A rule that requires trespassers to pay their victims sums of money is formally identical to a rule that requires contracting parties to perform their contractual obligations: ‘anyone who enters onto another’s land/enters into an agreement is under a duty to do X’.35 The wrongness of the duty-precipitating event is irrelevant. An order, standing alone, is also neutral in its purpose. However, where the cause of action for the order is proof of a wrong, it follows automatically that the order is a response to a wrong. More generally, when courts issue any of the damages awards described above, they can – and do – make clear that they are issuing the award because a wrong was committed. Injustices The term ‘injustice’ is sometimes understood to mean simply ‘bad’ or ‘undesirable’. Under this definition, both rights-threats and wrongs qualify as injustices. But it is more usual – and more helpful – to describe injuring, trespassing, breaking promises and so on (as well as threats to do these things) simply as wrongs. In its core meaning, we use the term injustice to refer to actions or states of affairs that are unfair, typically because an authority has allocated something unfairly.36 Individuals ask whether the tax system is just because they want to know whether it allocates the burden of taxation fairly. Understood in this way, the only issue of justice that arises in most litigated private law disputes is whether the court allocated responsibility to the right person and in the right amount. However, the cause of action for certain remedies is an injustice. The clearest examples are legislative in origin. I mentioned earlier that many common law jurisdictions, including England, have legislation providing that courts may (to use the language adopted in s 23(1)(c) of England’s Matrimonial Causes Act 1973) ‘make an order that either party to the marriage shall pay to the other such lump sum or sums as may be so specified’. There is no suggestion in the Act or elsewhere that claimants must show that the defendant had a substantive duty to do what the order requires, much less that the defendant breached (or threatened to breach) this duty or any other duty owed to the claimant. Instead, what claimants must show, broadly speaking, is that the ordinary rules governing the acquisition and passing of property have led 35 The purpose of a substantive rule to the effect that ‘anyone who commits a wrong has a duty to pay damages’ would be clear, but the rule would fail in its basic task of providing guidance because the amount of damages payable for a wrong varies according to the wrong. The rule could be rewritten as a series of the wrong-specific rules (e.g., ‘anyone who enters onto another’s land/defames another/injures another commits a wrong and, for that reason, must pay X$ to the owner’). But we never see legal rules in this form because the purpose-defining middle section (‘commits a wrong and, for that reason’) is superfluous. 36 See H L A Hart, The Concept of Law (Oxford University Press 1961) 157–8; Gardner (n10) 6–7.

470  Research handbook on remedies in private law to an unfair distribution of resources between the parties. The cause of action for such orders is an injustice.37 An injustice also appears to be the cause of action for at least two significant non-legislative remedies. The first is an order to make restitution, specifically an order to make restitution following a defective transfer, such as an order to return money paid by mistake or under duress (though other restitutionary orders may also belong in this category). As is true of damages awards, scholars sometime assume that restitutionary awards replicate substantive duties, in this case duties to make restitution immediately upon enrichment. If this assumption is correct, then the cause of action for orders to make restitution is the same as for other orders to perform substantive duties – in this chapter’s terminology, a rights-threat. As mentioned above, I do not share this view, though, again, I will not attempt to defend my position here.38 Instead, I will explore its implications for the questions addressed in this chapter. As in the parallel case of damages, the first implication is that the law governing restitution for defective transfers is squarely part of remedial law. The second implication is that the cause of action for orders to make restitution following a defective transfer is properly characterised as an injustice. Claimants seeking restitution are not required to prove that the defendant committed, or threatened to commit, a wrong. As with the matrimonial property orders, the claimant must prove that the distribution of resources that arose from operation of the substantive rules governing the acquisition and passing of property is unfair – that is to say, unjust – as between the claimant and the defendant. The main difference between the matrimonial cases and the restitution cases is that the courts apply a more tightly structured test for injustices in the latter cases. However, the test’s ultimate aim is the same: to determine if the distribution of resources that arises from the operation of the substantive rules of property is unjust. Consistent with this explanation, it is normal to describe the cause of action for a restitutionary order as proof of an ‘unjust’ enrichment. The other main non-legislative order for which the cause of action is an injustice is an order to pay damages for consequential losses. In the previous section, I argued that the question raised by consequential damages awards is how the law should respond to losses that one person causes another to suffer, wrongfully or otherwise. That question is fundamentally a matter of fairness or, more strictly, of justice. Of course, courts contemplating consequential damages do not usually ask explicitly whether it is ‘fair’ or ‘just’ to hold the defendant liable for the claimant’s loss (although courts sometimes ask this question when considering whether a particular loss is too remote or could have been avoided by the claimant or was offset by ancillary benefits). As in the parallel case of ‘unfair enrichments’, the law has complex tests for determining what counts as an ‘unfair loss’. Indeed, the rules governing liability for another’s losses appear to be the other side of the rules governing liability for one’s own gains. In each case, although the relevant loss or gain may be a consequence of a wrongful act, the law’s

A second legislative example is found in the Inheritance (Provision for Family and Dependants) Act 1975. Section 2(1) provides that a court may make orders directing that property or money be transferred or paid to an applicant dependent if the court is satisfied that the will does not make ‘reasonable financial provision for the applicant’. 38 I defend my view in S Smith, ‘The Restatement of Liabilities in Restitution’ in C Mitchell and W Swadling (eds), The Restatement Third, Restitution and Unjust Enrichment: Comparative and Critical Essays (Hart Publishing 2013) 227; Smith (n12). 37

The structure of remedial law  471 concern is not, fundamentally, the wrongfulness of the defendant’s behaviour: it is the fairness of the loss or the gain. There remains the difficult question of why the law imposes duties to correct injustices through court orders rather than rule-based substantive duties. Part of the answer is that individuals subject to such duties could not reasonably be expected to act on them. Courts contemplating the legislative orders discussed above are directed to take into account a wide range of circumstances and to ask directly whether the existing allocation of resources is fair. Individuals cannot reasonably be expected to act on the basis of similar considerations; they could never be certain that they had fulfilled the duty. The rules governing consequential damages and restitutionary awards are more precise. However, their operation still turns on facts that defendants cannot reasonably be expected to ascertain. The unjustness of an enrichment depends, inter alia, on the transferring party’s motive (for example, whether that party intended to make a gift) – a fact that can only be known with certainty by the transferring party. For their part, wrongdoers may be unaware that they have caused a wrong at all (for instance, where an injury is caused by a defective product), and, even if they are aware, they will almost certainly not know the extent of their victim’s losses. Potential claimants could inform potential defendants of the relevant facts, but this disclosure may not happen, and even if it does, it is not reasonable to require potential defendants to accept as true whatever potential claimants tell them. Potential defendants can reasonably demand evidence, an impartial assessor, and so forth – in other words, a trial. If these were the only objections to substantive duties to correct injustices, we might expect courts to respond by issuing declarations of the defendant’s duty. A declaration is the natural way to specify an inchoate or uncertain substantive duty. If the claimant establishes an injustice, the court could declare that the defendant has a substantive duty to pay consequential damages, make restitution, pay maintenance, and the like. Why do courts refuse to issue such declarations? The question is difficult. The most plausible explanation is that ‘correcting injustices’ is not an appropriate subject matter for a substantive duty. To say that someone has a duty to do X is roughly equivalent to saying that regardless of how costly or inconvenient it is to do X, X must be done. Duties are correlative to rights, and rights – to borrow Ronald Dworkin’s terminology – are trumps. Thus, individuals say (and the law confirms) that they have rights to physical integrity – and correlative duties to respect physical integrity – because they believe that, with rare exceptions, non-consensual interferences with another’s physical integrity are never permissible. Private law duties are basically duties not to interfere with others’ persons, property, or liberty, and duties to keep contractual promises. The actions required to correct injustices have a different orientation. A failure to compensate a loss or to reverse an enrichment is not an interference with the beneficiary’s person, property, or liberty; nor is it breaking a promise. It is simply a failure to correct an injustice. Correcting an injustice is valuable, but failing to do so is not a wrong or at least not a wrong in the sense that stealing, lying, or breaking a promise is a wrong.39 As a society, we regularly trade off the value of correcting injustices against other values. Criminals are often not brought to court (or not pursued at all) because courts and prosecutors are in short supply. Similarly, Acting unjustly (as opposed to failing to correct an injustice) might in principle qualify as a wrong, but the kinds of injustices that private individuals can commit (for example, distributing allowances unequally or allocating grades unfairly) are rarely the law’s concern. 39

472  Research handbook on remedies in private law private citizens are often unable to pursue justice in the courts because the state rations legal aid. No doubt it would be better, all things being equal, if there were an unlimited supply of courts and of legal aid. But all things would not be equal. If the state spends more money on courts and lawyers, it must spend less money on schools, hospitals, roads and so on (or increase taxes). Unsurprisingly, it has never been argued that the state should provide unlimited ‘justice services’. Yet if there were a duty to ‘correct injustices’ in the same way that there is a duty to ‘respect physical integrity’, such a programme would be mandated. Few people think it is permissible for the state to infringe citizens’ physical integrity even if the infringement frees up badly needed resources for more schools or hospitals. But most of us think it is permissible for the state to hire fewer judges – and so to provide fewer resources for correcting injustices – in order to hire more doctors and teachers. The conclusions to draw from these observations is that while correcting injustices may be a valuable goal for the state or for individuals, it is not an appropriate subject matter for a substantive legal duty. This conclusion does not deny that the state may institute procedures for correcting injustices, and that those procedures may in turn grant citizens’ rights to particular kinds of ‘justice services’, for example, rights to orders in cases where an individual has brought an action and satisfied the relevant cause of action. Like ordinary citizens, the state can assume duties to do things. And once a court orders a defendant to correct an injustice, the defendant has a duty to do what the court ordered. But absent the order, individuals do not have duties to correct injustices.

4

WHAT KINDS OF REMEDIES ARE AVAILABLE?

The final structural question about remedial law concerns the kinds of remedies available from the courts. Although remedies textbooks rarely address this question directly, it is indirectly answered by their tables of contents, which are typically organised according to different categories of remedies – a chapter on specific performance, a chapter on injunctions, and so on. Insofar as the authors intend such schemes to reflect deeper principles, these principles are usually historical. Thus, writers often distinguish between remedies that originated in the Royal Courts and those that originated in the Equity Courts. It is unsurprising that writers would focus on this distinction given its historical importance. But history aside, it has little to recommend it in a general textbook on remedies. For anyone with a general interest in remedial law, the most important things to know about remedies are (1) when are they awarded (the subject of the previous section), and (2) how they relate to the parties’ substantive rights and duties. The second question flows from the basic justification for studying remedial law. As discussed above, the core of that justification is that remedies are distinctive legal phenomena; in particular, they are distinct from the rules that make up substantive law. So far as the content of remedies is concerned, the primary and most general thing that we need to know is whether and how the actions they require differ from the actions required by substantive duties. Bluntly, do remedies rubber-stamp substantive duties, or do remedies have different functions? As should be evident from my previous arguments, the answer defended here is that while some remedies rubber-stamp substantive duties (‘replicative’ remedies), others create new duties (‘creative’ remedies). Further, some creative remedies are more creative than others.

The structure of remedial law  473 Replicative Remedies Replicative orders direct defendants to do things that they already had substantive duties to do. As discussed above, most of the orders that courts issue in response to rights-threats are replicative. Specific performance orders, injunctions, and orders to pay a sum due or for the recovery of land or other property are all replicative: the content of these orders replicates the content of the defendant’s substantive duty.40 An order directing a defendant trespasser to quit the plaintiff’s land replicates the defendant’s substantive duty not to trespass. It follows that the content of replicative orders is explained by the rules governing the associated substantive duty. Remedial law simply incorporates the rules governing those duties to determine the content of replicative orders. Creative Remedies Creative remedies bring new duties into existence – duties that differ from whatever substantive duties the defendant owed the claimant prior to the court’s order. Many writers regard creative orders as undesirable or even as conceptually impossible (‘for every remedy, a right’). However, as a matter of positive law it is clear that some remedies are creative. The question is how many orders are like this, and are they all creative in the same way. In what follows, I identify three kinds of creative orders in ascending order of ‘creativity’. Substitutionary orders Substitutionary orders direct defendants to perform close substitutes (invariably monetary substitutes) of still-valid substantive duties. Courts issue substitutionary orders in cases where the claimant proves a rights-threat, but where, for administrative or similar policy-type reasons,41 the court does not want to order direct compliance with the threatened right. Instead, the court orders a close substitute. An example is an order that directs a defendant who is in breach of a contractual duty to build a house to pay the claimant the cost of hiring a third party to build the house. This order is creative because, prior to its issuance, the defendant’s legal duty was to build the house: after the order, the duty is to pay a sum of money. However, the order is only mildly creative because its aim is the same as an order of specific performance: namely, to ensure that the defendant respects the claimant’s substantive rights. Substitutionary orders differ from replicative orders only with respect to how they pursue this aim. Further, the reasons for this difference have nothing to do with the desirability of the actions required by the defendant’s substantive duty. The reasons are grounded in concerns for, broadly, the efficient administration of justice.

It is not possible to perform a contractual obligation due on 1 January on that date after 1 January. But assuming that the contract is not terminated, the debtor’s substantive duty to pay remains alive. Late payment is still ‘payment’. Note also that quia timet and mandatory injunctions sometimes require defendants to do things that, while not strictly required by a substantive duty, are intended to prevent or cure the breach of such a duty. For example, a defendant may be ordered to stop dumping waste because the waste is likely to seep into a neighbour’s property. I have discussed such orders along with replicative orders (because they arise from rights threats and because their aim is to ensure compliance with substantive duties), but they are strictly speaking creative. 41 Such as that the order might lead to further litigation or be expensive to enforce. 40

474  Research handbook on remedies in private law To qualify as substitutionary, a damages award must plausibly be viewed as an alternative means of achieving the result contemplated by the defendant’s still-valid non-monetary duty. It follows that a damages award is not substitutionary if, at the time of trial, it is not possible for the defendant to perform the relevant substantive duty (for example, because the duty was terminated). It also follows that an award of damages set at an amount that is less than the cost of substitute performance is not substitutionary. As I explain below, such awards fall into the third category of creative orders. Wrong-responding orders The second category of creative orders – wrong-responding orders – is comprised of orders that impose new duties on wrongdoers and that are awarded because the defendant is a wrongdoer. I argued earlier that most (though not all) damages awards are wrong-responding, but for the purposes of this discussion it is sufficient to keep in mind the relatively uncontroversial examples of punitive and nominal damages. Unlike substitutionary orders, wrong-responding orders cannot realistically be regarded as a subcategory of replicative orders. Although courts only issue wrong-responding orders on proof that the defendant breached a duty owed to the claimant, their content is radically different in both form and substance from that of the breached duty. Wrong-responding orders are unique in that their cause of action does not determine their content. Just as fines and incarceration are not the only ways of responding to public wrongs, damages are not the only way of responding to private wrongs. As Peter Birks famously remarked, the courts would not be acting inconsistently if they responded to private wrongs by ordering wrongdoers’ ears to be cut off.42 However, as Birks also noted, whatever response the law adopts to wrongdoing, it should be predictable, proportionate, humane, and administratively practical. These considerations explain, in broad outline, why courts order wrongdoers to pay money to their victims and why there is a large body of law governing how courts issue these orders. Free-standing orders The most creative of creative orders are free-standing orders. This category is identical to the category of orders for which the cause of action is an injustice. For reasons explained earlier, it therefore includes a variety of legislatively authorised orders, as well as many restitutionary orders and orders to pay consequential damages (or so I have argued). These orders are ‘free-standing’ because, unlike the previous category, the new duties that they impose are not connected to substantive duties even in the limited sense of responding to their breach. However, there is one sense in which free-standing orders are less creative than wrong-responding orders. The content of free-standing orders, like the content of replicative and substitutionary orders, is determined (with one qualification) by their cause of action. The cause of action for free-standing orders (or at least for the most obvious examples) is an injustice, and what free-standing orders direct defendants to do is to correct the same injustice. For example, where the injustice is manifest in a monetary benefit or loss, the court directs the defendant to pay the claimant a sum equal to that benefit or loss. The qualification is that the courts’ preference for monetary over non-monetary remedies (discussed in connection with substitutionary 42 P Birks, ‘Misnomer’ in P Birks et al. (eds), Restitution, Past, Present and Future: Essays in Honour of Gareth Jones (Hart Publishing 1998) 1, 12.

The structure of remedial law  475 orders) is also evident in this area of the law. Thus, if the relevant injustice arises from the defendant obtaining specific, but fungible, property – for example, gold bars – the court will normally order the defendant to pay the monetary value of the property rather than to transfer the property itself.43

5 CONCLUSION This chapter defends four propositions about the structure of remedial law: (1) a remedy is a judicial ruling; (2) rulings provide defendants with distinctive reasons for action – reasons different than those provided by rules or sanctions; (3) directive rulings – the most important category of private law rulings – are responses to either rights-threats, wrongs, or injustices; and (4) the content of rulings issued in response to rights-threats replicates or is a close substitute for the content of the defendant’s substantive duty, while rulings issued in response to wrongs and injustices create entirely new duties. The chapter’s primary aim, however, has not been to convince readers of the truth of these propositions: its primary aim has been to convince readers that the questions to which they respond are important.

43 As mentioned earlier, damages for pain and suffering raise special issues. Although these awards are responses to the consequences of wrongs, pain and suffering is not a ‘loss’ and it is not clear that enduring pain and suffering is properly described as an injustice. It is perhaps unsurprising, then, that the content of these awards is not explained by their cause of action, or at least not explained in any straightforward sense. As was true of damages for wrongs, there is no obvious sum to award claimants who have endured pain and suffering.

26. Contract remedies as default rules Jonathan Morgan

1 INTRODUCTION All contract doctrines are excludable to varying degrees. One illuminating taxonomy would classify contract law’s rules according to how much party autonomy they allow. Some rules can be freely changed. At the other end of the spectrum, some are completely immutable. Others permit a qualified freedom to contract out. This question of mutability is an inherent one for contract law – and crucial for party autonomy. It should be considered by all contract lawyers. Lawyer-economists have extensively considered the regulator’s choice between ‘default rules’ (those that parties are free to change) and ‘mandatory rules’ (which deny such choice). This chapter introduces that approach. But, as noted, to observe that some contract doctrines are ‘defaults’ that the parties may displace by agreement should not be confined to committed believers in law and economics. Can contract remedies be analysed as ‘default rules’? The suggestion meets resistance. Many believe that remedies are such an intrinsic aspect of contractual obligation that they must be set by the law itself, not delegated to the parties. Certainly in England, the law is in places hostile to party freedom to agree remedies deviating from those provided by law. In contract scholarship, support for the immutability of remedies is more pronounced among those who conceive contractual obligation as a deonotological and ethical matter. Such moral objections to the ‘default rule approach’ are considered below. The chapter then proposes that we should not view remedies as immutable sanctified doctrine. For it would be inconsistent with contract law’s basis in party autonomy. What are the consequences for contract remedies? The regulatory challenges of devising optimal default rules are formidable (illustrated here by considering the central remedy, expectation damages). The expectation measure has often been defended as the ‘economically efficient default’. But the efficiency arguments are unconvincing. It is impossible to promulgate one remedy satisfactory in all cases. It is impossible to assert even that a rule is optimal in a majority of cases. The confident prescriptions of economic analysts are quite unwarranted – and indeed harmful. Once the tenuous nature of instrumental analysis is realised, and the moral approach given up, the case for treating contract remedies as freely modifiable defaults becomes stronger still. There is no strong reason to invest the background legal rules with greater value than party decisions to alter those rules. But can this ‘default’ approach be entrenched? Some commentators suggest that lawyers’ attachment to the familiar remedies is so deeply engrained that a radical new approach is needed. The aim would be to induce parties to ‘price’ breach in their contracts, and to ensure that courts upheld those choices. Whether or not such drastic reforms are required, understanding the default nature of contract remedies is an important challenge, practically as well as theoretically.

476

Contract remedies as default rules  477

2

DEFAULT RULES, MANDATORY RULES, AND RULES OF CHANGE

The foundation of the law of contract is freely agreed obligations. Yet ‘the law of contract’ consists of a large body of elaborate doctrine supplied by law. Any apparent contradiction between these two basic points is resolved by the mutability of the doctrine. Many (indeed most) of contract law’s rules can be displaced by contrary agreement. Thus much of ‘the law of contract’ consists of ‘default’ rules: i.e. ones that govern the contract unless the parties have agreed otherwise. (It is important to note that ‘default rules’ encompasses even fundamental ‘doctrines’ – i.e. not limited to the ‘terms implied by law’ judicially defined as ‘standardised … general default rules’.1) The ‘default rules’ concept invites a number of questions. Which rules should be alterable in this way, and which should be immune from party displacement (i.e. ‘immutable’ or ‘mandatory’)? How freely mutable should particular default rules be? Differing degrees of variability are possible, and so the necessary concomitant of every default rule is a ‘rule of change’ which specifies the method of change and any limits on choice.2 It should always be clear whether, and how, a given rule can be changed. Mandatory rules cannot be altered by party agreement. Their justification is always protective. Mandatory rules are imposed to prevent harm to the contracting parties themselves (misconduct/opportunism in the contracting process), or to third parties (including the public at large).3 The public policy doctrine (ex turpi causa) is for obvious reasons not subject to party displacement: it is an overt restriction upon freedom of contract for reasons of public interest. Nor can contracting parties exclude liability for their own fraud,4 nor for duress, undue influence, or unconscionable exploitation. These doctrines forbid deliberate misconduct. There would be little point in having them if they could be displaced by contrary ‘agreement’ (obtained through the same misconduct). Outside these narrow categories, contract doctrines are subject to contrary agreement. Why does the law supply such ‘default’ doctrines? The most modest answer is that some rule is needed about fundamental questions of contractual obligation: what is an enforceable contract, who can enforce it, what are the consequences of non-performance, etc. Some answer is necessary (even when a contract is silent), or it is hard to see that a law of contract could be in existence. Karl Llewellyn referred to the rules necessarily supplied by law as the ‘minimum decencies’ of contractual obligation.5 While vivid and in some ways quite true, Llewellyn’s remark is potentially misleading in that over time, contract doctrine expands. The nature of the common law brings ever-greater elaboration. Each fresh dispute has the potential to create a new refinement, or exception, or sub-rule, or gloss. This undeniable tendency for complex detailed rules to evolve casts doubt on a minimal conception of doctrines as mere placeholders, i.e. some rule being better than no rule (but beyond that, not mattering much). Moreover, the conventions of judicial reasoning (when

Equitable Life v Hyman [2002] 1 AC 408, 458 (Lord Steyn). I Ayres, ‘Regulating Opt Out: An Economic Theory of Altering Rules’ (2012) 121 Yale LJ 2032. 3 See generally M J Trebilcock, The Limits of Freedom of Contract (Harvard University Press 1993). 4 S Pearson & Son Ltd v Dublin Corporation [1907] AC 351. 5 K Llewellyn (1938-9) 52 Harvard LR 701, 703. 1 2

478  Research handbook on remedies in private law laying down such rules) contradict any supposed indifference about the rules’ content. Scholars have suggested more ambitious approaches to doctrinal rule-making. Popular alternatives are ‘majoritarian’ defaults (i.e. the rule that a majority of contractors want to govern their agreements), or by contrast ‘penalty’ defaults (i.e. deliberately unattractive rules which induce parties to contract around them). But each poses challenges. The ‘majoritarian’ approach has undeniable appeal. For if the law’s background rules replicate those that most contracting parties want and expect in their contracts, there is an obvious economic advantage. Such parties will be relieved of the expense of drafting contracts to govern their transactions, for the law anyway supplies the rules that they would wish to insert. Furthermore, the closer the default rules are to party expectations, the easier it is to reconcile those rules with contract’s nature as freely assumed obligations. Where the default rules closely track what contracting parties actually want, tacit consent can plausibly be assumed.6 Unfortunately, the majoritarian approach is unworkable in practice.7 It would require hard empirical evidence about the actual expectations of contracting parties. Such evidence does not exist and would be exceptionally difficult to collect. A diverse array of actual expectations obtains across the population of contracting parties. In the absence of evidence about the actual incidence of such expectations, the ‘majoritarian’ approach becomes a plea to formulate rules that most rational contracting parties may be taken to want. But that formulation (what the reasonable contractor ‘ought to want’) misleadingly draws on the rhetoric of actual party expectations (and thereby tacit consent). Such claims should be given up altogether. The so-called ‘majoritarian’ approach collapses into a straightforward search for the best rule, all things considered. Naturally, there are a number of different approaches to ‘superiority’ in this respect. Is the ultimate goal economic efficiency, egalitarianism, moral elevation, or some other master value? Space here precludes lengthy consideration of how different schools would define ‘the best rule’. Obviously, it is heavily contested. By contrast, the aim of ‘penalty defaults’ is to induce parties to contract around the ‘default’, thereby revealing their actual preferences, by setting out a deliberately unappealing default regime. When (as seen) the definition of ‘best rule’ is so contestable, it is a significant advantage to relieve the court or legislature from the task of setting one. Yet ‘penalty defaults’ are controversial too. Rules that are inappropriate (e.g. inefficient or unfair) by design will impose a heavy cost in situations where parties fail to contract around them. Many reasons could plausibly explain such unresponsiveness to the penalty default’s ‘inducement’, including inadvertence, unsophistication or opportunism. The success of ‘penalty defaults’ depends ultimately on evidence about the rate at which parties are, in fact, induced to contract around them. In the abstract, this is impossible to predict with confidence. But empirical data are wanting. The penalty defaults approach looks set to remain controversial. Shorn of such sophistications, the ‘default’ conception of contract doctrine has a common core. The law should supply workable rules as a starting point for common situations. To use the earlier metaphor (predating computer-era familiarity with ‘default settings’), ‘off-the-peg clothing’ which hopefully fits contract law’s average customer tolerably well. Those with 6 R E Barnett, ‘The Sound of Silence: Default Rules and Contractual Consent’ (1992) 78 Virginia LR 821. 7 S J Burton, ‘Collapsing Illusions: Standards for Setting Efficient Contract and Other Defaults’ (2016) 91 Indiana LJ 1063.

Contract remedies as default rules  479 atypical requirements and/or the resources to bespeak a made-to-measure ‘suit’ of terms are at liberty to do so. Douglas Baird sums up the rather modest ambition: ‘The value of contract law is not that it provides any particular set of terms, but that it provides some set of terms and that these, in the main, be sensible’.8 Inevitably that approach downgrades the importance of legal doctrine: as Baird says it invests ‘little magic into much of contract law’, which becomes merely a collection of ‘simply sensible terms’. Predictably the approach arouses hostility from traditionally minded and morally inclined contract lawyers. For them, contract doctrine has a much greater significance as a repository of right reason, or as moral exemplar. And nowhere is that attitude more prevalent (and the ‘default’ approach more controversial) than in the field of remedies.

3

CONTRACT REMEDIES: RESTRICTIONS ON PARTY CHOICE

Like other systems, English law places restrictions on party-agreed remedies. These are well known and will not be described in detail here. They include the inability to agree specific performance;9 judicial control over penalty clauses (which must be ‘proportionate’ to the promisee’s interest in performance, and not excessive in amount);10 and narrow, hostile (‘contra proferentem’) constructions of clauses capping the level of damages, or excluding consequential loss, etc. These restrictions on party autonomy lack the obvious protective justification for the mandatory rules against fraud, duress, etc. Thus many commentators have criticised these rules.11 But the condemnation is by no means universal. At a general level, many lawyers are uneasy with the suggestion that contract doctrine should be freely modifiable. This seems inconsistent with the conventions of common law reasoning, and difficult to reconcile with a regulatory vision of contract law. Turning specifically to remedies, some commentators view remedies as intrinsic to contractual obligation – the basis of which should be defined by law and not delegated to the parties. A particular concern is that parties could undermine the binding nature of contracts and the promissory morality on which contract is ultimately based. Most contract scholarship views legal doctrine as something that really matters. So, a fortiori, does judicial reasoning. Considerable intellectual energy is devoted to the development, explanation and critique of contract doctrine. The characteristic attitude of mainstream doctrinal lawyers is, accordingly, hard to reconcile with a view of doctrine as ‘simply sensible terms’ with ‘little magic’ attached – from which parties are entirely free to contract out. If doctrine results from the common law’s unique blend of legal reason and practical (dispute-oriented) experience, should it not be accorded more respect? Does it really apply only to the inadvertent or unwary (who fail to write detailed contracts, or otherwise contract out)? Cannot

8 D Baird, ‘Economics of Contract Law’ in F Parisi (ed.), Oxford Handbook of Law and Economics, Volume 2, Private and Commercial Law (Oxford University Press 2017) 13 (original emphasis). 9 Quadrant Visual Communications Ltd v Hutchison Telephone (UK) Ltd [1993] BCLC 442. 10 Cavendish Square Holding v Makdessi [2015] UKSC 67, [2016] AC 1172. 11 E.g. S Rowan, ‘For the Recognition of Remedial Terms Agreed Inter Partes’ (2010) 126 LQR 448.

480  Research handbook on remedies in private law the law serve values other than satisfying party preferences?12 Catherine Mitchell has, for these reasons, criticised the ‘interpretive turn’ in English law whereby contractual liability is increasingly justified by the parties’ implicit assumptions of responsibility13 – notably including core remedy doctrines on remoteness,14 and non-pecuniary loss.15 Of course this is not the only possible way to think about contract law. As early as 1897 Holmes looked forward to lawyers concentrating on ‘the ends sought to be attained and the reasons for desiring them’ rather than on historical consideration of doctrine (‘dogma’).16 Although Holmes’s dictum was recently cited in an English contract damages case,17 his prediction is far from being realised. Acceptance that doctrine is mostly made up of modifiable default rules would hasten the Holmesian attitude. Resistance to a ‘default’ vision shows the depth of attachment to common law doctrinal rules. Perhaps only a radical re-orientation of the remedies provided by law can eradicate it.18 For resistance to a ‘modifiable default’ understanding of contract rules is especially pronounced in the field of remedies. It is widely held that the nature of contractual obligation, and promissory morality, entails an immutable core. For example, expectation damages are said to protect the ‘performance interest’.19 Arguably they are the superior remedy for its protection, avoiding the threat to personal liberty inherent in the equitable remedies (enforceable by contempt of court).20 Thus is the central common law remedy typically justified by deontological reasoning – beginning from the premise that contracts create binding obligations. The same premise leads most contract lawyers to reject another of Holmes’s aphorisms out of hand, namely that a contract permits a free choice between performance or payment of damages (and does not create a duty to perform).21 Equally, to permit parties to expressly allow such a free choice would violate contract’s basic premises. These deontological arguments are typically supported by virtue ethics.22 That is, reflections about the rights created by contracts (and the remedies necessary for their vindication) are buttressed by concerns that contracts’ moral obligations should not be undermined by toleration of breach. Such ethical concerns cannot be sufficiently addressed by default rules. Allowing parties to contract out of the rules necessary for protection of promissory morality would just as surely lead to morally damaging breaches of contract; the damage would simply occur at an earlier stage (i.e. when designing the contract’s terms). The rules should be immutable because ‘optional morality’ would be an absurdity. Seana Valentine Shiffrin deploys both species of moral argument. Deontic reflection shows that contracts must be performed, that breach (non-performance) is accordingly a wrong, and

Cf Section 4B below. C Mitchell, ‘Obligations in Commercial Contracts: A Matter of Law or Interpretation?’ (2012) 65 CLP 455. 14 The Achilleas [2008] UKHL 48, [2009] 1 AC 61. 15 Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732. 16 O W Holmes, ‘The Path of Law’ (1897) 10 Harvard LR 457, 474. 17 Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 [2018] 2 WLR 1353 [103] (Lord Sumption). 18 Cf Section 5C below. 19 E.g. D Friedmann, ‘The Performance Interest in Damages’ (1995) 111 LQR 628. 20 D Kimel, ‘Remedial Rights and Substantive Rights in Contract law’ (2002) 8 Legal Theory 313. 21 Holmes (n16) 462. 22 E.g. A Katz, ‘Virtue Ethics and Efficient Breach’ (2012) 45 Suffolk Univ LR 777. 12 13

Contract remedies as default rules  481 that remedies for breach must condemn it. Damages are not merely the price of the promisor’s option not to perform. Legal condemnation of breach is necessary to encourage a virtuous culture of promise-keeping and contracting. Thus Shiffrin criticises the corrosive effect of ‘efficient breach’ theories (modern descendants of Holmes’s amoral account).23 That view of contract law fails to support a morally decent legal and social culture – and may actively undermine it.24 Shiffrin criticises limits on recoverable consequential loss as morally ‘quite strange’: the law fails ‘to use its distinctive powers and modes of expression to mark the judgment that breach is impermissible’. The mitigation doctrine is especially puzzling in this respect. It is ‘morally distasteful’ to expect the promisee, confronted with breach, to make the promisor’s wrongdoing ‘easier, simpler, more convenient, or less costly’.25 Shiffrin is similarly critical of modern attempts to rehabilitate Holmes’s argument that contractual obligations should be understood disjunctively – either to perform or pay damages, at the promisor’s option.26 Nor is Shiffrin persuaded by Steven Shavell’s argument that rational parties cannot have intended that the promisor must perform even when circumstances change (making the cost of that performance exceed its value to the promisee).27 For Shiffrin, such accounts ignore the fact that parties typically contract for performance, i.e. ‘goods and services are themselves the ends’, and do not make contracts as merely ‘a sophisticated, disguised way to exchange currency’ (people do not pay simply for a right to collect damages).28 Shiffrin is accordingly hostile to party-agreed remedies – the ‘overprivatisation’ of contract law.29 She deplores the increasing tendency to enforce agreed remedies, because such clauses ‘objectionably displace the judiciary’s role in providing fair and impartial judgments about the public significance of legal wrongs’. In determining the consequences of breach, the judiciary acts as ‘the community’s voice’. There is a public interest in the courts bringing their independent judgment to bear, and agreed remedies ‘usurp’ this function. Parties should not be free to impose stricter duties than those provided at law. Tellingly: ‘They are not free to change the nature of contract.’30 Moreover, enforcing the party’s chosen remedies ‘reinforce[s] the incorrect impression that breach is permissible so long as a price is paid (or that rights and remedies are in fact interchangeable)’.31 An agreed remedy entails ‘abrogation of a legal duty, which implicates the rule of law’. In conclusion, for Shiffrin, widespread enforcement of agreed remedies ‘further eviscerates the important role of the judiciary in vindicating the public interest in addressing legal wrongs fairly, impartially, and independently’. This is a powerful theoretical defence for the

Cf Section 5B below. S V Shiffrin, ‘The Divergence of Contract and Promise’ (2007) 120 Harvard LR 708. 25 Ibid, 725. 26 S V Shiffrin, ‘Must I Mean What You Think I Should Have Said?’ (2012) 98 Virginia LR 159 (criticising Markovits and Schwartz n43 below). 27 S Shavell, ‘Is Breach of Contract Immoral?’ (2006) 56 Emory LJ 439; ‘Why Breach of Contract May Not Be Immoral Given the Incompleteness of Contracts’ (2009) 107 Michigan LR 1569. 28 S V Shiffrin, ‘Could Breach of Contract Be Immoral?’ (2009) 107 Michigan LR 1551,1565. 29 S V Shiffrin, ‘Remedial Clauses: The Overprivatization of Private Law’ (2016) 67 Hastings LJ 407. 30 I R Macneil, ‘Power of Contract and Agreed Remedies’ (1962) 47 Cornell LQ 495, 502–3 (cited Shiffrin (n29) 420 n50). 31 Shiffrin (n29) 433. 23 24

482  Research handbook on remedies in private law common law’s restrictive attitude to party-agreed remedies. In the next section we consider why it should nonetheless be rejected, and freedom of contract reaffirmed through the ‘default’ approach to contract remedies.

4

WHY CONTRACT REMEDIES ARE BETTER UNDERSTOOD AS DEFAULT RULES

Notwithstanding the arguments considered in the previous section, contract remedies should be viewed as default rules. The theoretical appeal of ‘defaults’ is powerful and straightforward: they maximise party autonomy and freedom of contract. There is a place for mandatory (or immutable) rules, but it is a limited one. Their use against deliberate contractual misconduct, for example, is indispensable. But there is no obvious ‘protective’ justification for remedies to be mandatory as a class.32 Moreover no clear dividing line can be maintained between ‘obligation’ and ‘remedy’. This weakens the claim that remedies’ special status should displace the usual default rule analysis. Mandatory remedies also threaten practical disadvantages. Most commercial lawyers view contract law’s role as supporting and facilitating business agreements. While (as noted) that can involve regulation through mandatory rules, unduly widening the ‘mandatory’ category threatens the basic goal. Given the choice that sophisticated commercial parties can and do make between jurisdictions and legal systems, unwarranted departure from the facilitative ‘default’ approach could lead in extremis to contract law that did not apply to any actual contracts. When remedies are such a significant dimension of every bargain, this is no idle fear. There is also something odd about trying to enforce compulsory morality through a fundamentally optional department of the law – odd, or futile. Moreover, the specific moral claims made for existing contract remedies are questionable. The argument that promissory virtue is undermined by a permissive legal attitude to breach and agreed remedies is an assertion without evidence. The deontic argument that binding contractual obligations entail particular remedial consequences begs the question. For all these reasons, objections to a ‘default’ conception of remedies fail to convince. 4A

Linkage of ‘Obligation’ and ‘Remedy’

‘Remedies’ are an inherent part of any obligation’s definition.33 An obligation’s extent depends on the circumstances in which, and conditions upon which, it may not be performed.34 The more generous the remedy, the more onerous the obligation. To take a concrete example, the cost of a building contract will inevitably vary according to what the builder promises to do should the cost of the construction project rise significantly.35 If the builder has a free option to

There is no discussion of remedy doctrines in Trebilcock (n3). ‘[T]he rules governing such topics as remedies and excuses could effectively be treated as just a more complete definition of the exact obligation undertaken by the promisor’: R Craswell, ‘Contract Law, Default Rules, and the Philosophy of Promising’ (1989) 88 Michigan LR 489, 504. 34 As discussed in Section 5C below, express options for non-performance are not usually thought of as ‘remedies’ – which supports the point made here. 35 Katz (n22). 32 33

Contract remedies as default rules  483 withdraw, this creates a less onerous obligation (meaning a cheaper contact price) than if the builder undertakes, on withdrawing, to pay compensation on the ‘diminution in value’ basis. In turn, that is significantly less onerous (and the contract cheaper) than if the builder promises to pay for the work to be completed (‘cost of cure’) – ex hypothesi a high cost. Of course the builder’s hypothetical promises reflect a well-known controversy in the law of damages.36 The point is that express promises concerning non-performance delimit the obligation, and directly affect the cost of performing it. This is no less true of remedies provided by the law. If these are immutable it follows that parties can be forced to pay more for a more generous remedy (and more onerous obligation) than they would have preferred. Few would seek to defend direct legal regulation of contract prices. But imposition of mandatory remedies amounts indirectly to the same thing. Courts recognise the danger of unbalancing the price of a contract by rewriting its terms.37 Yet the law’s restrictions on agreed remedies amount to just such interference with the heart of freedom of contract. A sharp line between ‘remedy’ and ‘obligation’ cannot be maintained.38 Interference on either side of the line is in need of clear justification, but promissory morality does not justify a special immutable status for remedies. 4B

‘Optional Morality’?

A second reason to reject a ‘morally obligatory’ conception of contract remedies is the fundamentally optional nature of contract law. No parties are compelled to agree terms with each other. When in agreement, parties are not obliged to enter into legally binding contracts.39 Parties desiring legal obligation can choose which legal system (and so which contract law) will govern their contract. It is curious to permit complete freedom to decide whether to enter into a binding contract governed by English law (etc.), but to insist that those who choose to opt in are inexorably bound by an array of moral obligations. Compulsion at the second stage seems inconsistent with freedom of choice at the first. Perhaps those opposed to party-agreed remedies would also reject this ‘freedom of choice of law’ which undermines mandatory contract remedies. That is, they could argue that remedies are ‘super-mandatory’ rules, surviving even the parties’ choice of another applicable law, which would otherwise displace them. But in contrast with say the ex turpi causa doctrine,40 or other ‘lois de police’, there is no support for remedies being ‘super-mandatory’ in the current law. So such an argument would be a prospectus for reform, a call for additional new restrictions on contracting parties’ autonomy.

Cf Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344. E.g. Sir M Mustill, ‘Decision-making in Maritime Law’ [1985] LMCLQ 314, 323: ‘As soon as the courts begin to qualify the remedies … [one party] no longer receives the full consideration for his own promises. The shape of the bargain is distorted.’ 38 Consider the difficulty in classifying the crucial term as a ‘primary’ (price) or ‘secondary’ (damages) payment obligation in the leading penalty case: Cavendish [2015] UKSC 67 [13]–[15], [42]– [43], [73], [74], [83]; cf [280], [291]. 39 B Rudden, ‘The Gentleman’s Agreement in Legal Theory and in Modern Practice’ (1999) 7 Eur Rev Private L 199. 40 E.g. Lord Collins et al., Dicey, Morris and Collins on the Conflict of Laws (15th edn, Sweet and Maxwell 2012) §1-056. 36 37

484  Research handbook on remedies in private law Assuming free choice of law it seems futile to insist on the application of rules that contracting parties would reject (it seems inevitable that any legally supplied set of remedies will be unsuitable for a significant minority of contractors; since as will be seen below, it is impossible to devise rules that are optimal in every situation). Sophisticated commercial contractors will ceteris paribus decline to choose a law of contract with a significant number of unsuitable mandatory remedies for breach. Ultimately such a law could be left with no application to well-advised contractors. It would survive as a trap for the unwary and unsophisticated only. Imagine, in extremis, a morally stringent but commercially unworkable set of mandatory remedies (e.g. routine specific performance, disgorgement and exemplary damages – perhaps even criminal sanctions for deliberate breach). It would be an object of fascination for contract theorists, but would repel business contractors. This is, of course, a reductio ad absurdum. But the lesson remains. Unless contract law is to serve as a moral exemplar but also a dead letter (because no advertent contractor would choose to be governed by it), some degree of accommodating party preferences is necessary. In practice we find that such preference-satisfaction is a longstanding and prominent theme in English judicial reasoning,41 as well as official British government policy (i.e. an intrinsic part of its goal to attract international commercial litigation to London). Preference-satisfaction ultimately demands default rules, and readily modifiable defaults. The morally obligatory view of contract remedies is wholly inconsistent with that. Optional morality is oxymoronic. Contract law must choose between the two: morality should go, and party autonomy (i.e. optionality) be reaffirmed. 4C

Questionable Moral Claims about Contract Remedies

Even if we accept that morality has a role which could justify mandatory contract remedies, the actual arguments advanced fail. The assertion that contractual obligation (of its nature) requires performance-enforcing remedies is questionable. As is the asserted direct connection between contract doctrine and the morality of promising. On a plausible alternative account, parties may rationally prefer remedies which permit non-performance, release being conditional on payment of expectation damages (or some other sum set by the parties). Heretically for the moralist, this account conceives of ‘remedies’ as setting the price of the promisor’s option not to perform. It is plausible that many rational commercial parties do understand contractual obligation like this. Furthermore, it is unpersuasive to use everyday promissory morality to criticise such business attitudes. And even if social morality were the proper yardstick, it would arguably require less stringent obligations than the law currently provides. Emphasis on the moral obligation to keep promises overlooks countervailing moral norms, including co-operation, forgiveness, and flexibility when circumstances change. The ‘morally obligatory’ conception of contract remedies is either beside the point or, even in its own terms, dubious. The deontic approach claims that remedies should enforce the right to performance. Breach of obligation is a wrong that the law should condemn. Contractors should not be allowed to weaken this by agreeing permissive remedies. Yet does this stark account of rights and wrongs reflect the attitudes of contracting parties, which must be (at least) highly relevant? Very 41 E.g. Lord Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433.

Contract remedies as default rules  485 plausibly, many parties would not and do not share the deontic model’s basic premises. In particular, it is implausible that a rational promisee would always insist on performance when the promisor’s costs of performance increase so that they exceed the promisee’s expected benefit from that performance. For performance to continue here (instead of breach and payment of damages) would involve sheer waste, making the parties jointly worse off. Various modern commentators have elaborated the point that parties do not necessarily expect performance – particularly not when it would economically harm them both. Shavell notes that price increases are a common problem.42 In a hypothetical world containing perfect low-cost information, every contract would exhaustively detail when promisors were permitted to pay compensation in lieu of performance (i.e. when performance became uneconomic). But since in practice future contingencies (and their cost impact) are neither foreseeable nor definable with the requisite specificity, contractual obligations are actually left unqualified. Thus when costs rise to uneconomic levels, non-performance is ‘breach’ of the unqualified obligation (i.e. because there is no express excuse). But Shavell argues that such cost-saving breach is not immoral. On the contrary, it is exactly what the parties expected would happen and what (ex ante) both wanted to happen. Were parties able to draft contracts that exhaustively covered all contingencies, they would expressly excuse performance in such situations. Shavell concludes that unqualified contractual obligations should (morally, at least) be read subject to the implicit qualification that non-performance is permitted when performance cost exceeds the promisee’s benefit. The condition for non-performance (the cost of exercising the option not to perform) is paying expectation damages. This analysis is a considerable advance over Holmes’s observation that there is no obligation to perform a contract. Shavell explains why parties would not merely tolerate but welcome non-performance when costs of performance rise. Holmes’s celebration of amorality is incorrect, on Shavell’s account. Non-performance does not violate any moral obligation in circumstances when parties would have permitted it ex ante, had they been able to write an exhaustive contract. Markovits and Schwartz carry this point to its conclusion.43 Paying damages in the latter situation is not breach at all: it is performance of the alternative means of satisfying the contract. Their ‘dual obligation’ hypothesis takes seriously Holmes’s suggestion that contracts should be construed disjunctively, imposing alternative obligations either to perform the primary obligation or to pay compensation instead. For Markovits and Schwartz it is mischaracterisation to describe the second alternative as ‘remedying breach’. It is performance of another (implicit) term of the contract. Properly understood, contractual obligations permit the promisor to pay damages instead. Markovits and Schwartz stress that it is in both parties’ interests to permit payment in lieu of literal performance when costs rise. Promisees benefit from lower prices in the original contract, because ‘disjunctive’ obligations are less onerous. Promisees might rationally prefer such lower prices to binding obligations (which give them ex post power to extract part of the cost savings from breach from the promisor, as the cost of releasing the duty to perform). It is begging the question to say that promisees always bargain ‘for (literal) performance’ and not the right to sue for damages; and it is hyperbole to say that on Markovits and Schwartz’s ‘dual obligation’ approach, primary performance will never be Shavell (n27). D Markovits and A Schwartz, ‘The Myth of Efficient Breach: New Defenses of the Expectation Interest’ (2011) 97 Virginia LR 1939. 42 43

486  Research handbook on remedies in private law rendered (it frequently will be, and of course often is, i.e. when performing is cheaper than paying damages in lieu). As Markovits and Schwartz say, if their ‘dual’ understanding of contract duties is correct, there is no contradiction between promissory morality and payment of compensation. For that payment is promised alternative performance. Nor does it undermine solidarity between contracting parties. It does not unilaterally favour promisors (as Holmes’s famous dictum again wrongly implied). Promisees benefit equally from the reduction in joint costs, this being reflected in the lower prices charged by promisors for the same performance (ceteris paribus) in ‘dual obligation’ regimes. If correct, this ‘dual performance’ theory takes the wind from the sails of the deontic approach to contract remedies. But it is not universally accepted. Gregory Klass argues that Markovits and Schwartz move too quickly from a theoretical argument that this is how contracting parties should understand their agreements to the conclusion that this is how they do understand them.44 In particular, since sophisticated parties (with this understanding) could draft their contracts as expressly giving the option to perform or pay, why does this not happen in practice? Markovits and Schwartz respond, first, that they have modelled the plausible behaviour of a non-trivial slice of contracting parties, i.e. those which contract purely for economic gain rather than viewing performance as intrinsically important – which they say describes all business firms and some consumers too.45 As for the absence of express ‘permissions to breach’ (options to pay damages), these are not currently permitted at law (on Klass’s argument, rightly prohibited) – and it is hardly surprising that unenforceable clauses are not routinely written into contracts. ‘The analyst cannot predict how people who are in chains will behave when set free. To make that prediction requires a theoretical analysis of cases where those individuals have freedom.’46 So arguably a significant proportion of contracting parties understand contractual obligation as disjunctive – granting an option to pay compensation instead of rendering primary performance. This makes considerable economic sense in the (common enough) situation of costs of performance rising to a prohibitive level. It invalidates the fundamental assumption of the deontic critique of remedial autonomy – viz that all contractual obligation must be understood as conferring a correlative right to literal performance. Frequently this is not the case. Moreover, if damages are indeed simply the price of an option not to perform, this irresistibly suggests that parties should have freedom to agree their own price in place of the law’s usual ‘price’ of expectation damages. Just as contracting parties are free to set the headline price of performance, they should be able to decide the price of options of non-performance. Yet is not the conclusion in the last paragraph (and the ‘dual performance’ theory generally) inconsistent with basic notions of promising? Surely a promise ‘to do X’ usually means just that. We would not construe my promise to go to a friend’s birthday party as an obligation which can be equally well discharged either by attendance or paying compensation in lieu. Commodification is alien to such promises. Offering compensation would only compound the social wrong of non-attendance. Does the Holmesian argument (and its modern development) not corrode promissory morality?

G Klass, ‘To Perform or Pay Damages’ (2012) 98 Virginia LR 143. D Markovits and A Schwartz, ‘The Expectation Remedy Revisited’ (2012) 98 Virginia LR 1093. 46 Ibid, 1107. 44 45

Contract remedies as default rules  487 There is experimental evidence that people view breach of contract as morally wrong, even when the breacher has paid full expectation damages.47 The methodology of these surveys has been challenged, however – in particular by questioning whether the (typically, student volunteer) respondents’ attitudes would be shared by real-world business people.48 For it is strongly arguable that many businesses do view contractual undertakings as a commodity, a means to an end, not as valuable ends in themselves. As noted it is socially unacceptable to send cash instead of attending a party. But we should pause before translating rules from the personal domain into commercial contracting. Breaking an inter-personal promise is a moral violation causing a relational rift; but that need not be the case with the typical contract agreed purely for financial gain.49 As Markovits and Schwartz put it, the thick nexus of trust governing inter-personal relations is typically absent in commerce. Parties dealing at arm’s length for financial gain in an open cosmopolitan economy typically have ‘thinner’ relationships. That is all that is required. Just as it would be ‘a category mistake’ to offer cash instead of fulfilling a family or social obligation, to assimilate the morality of ‘widget production’ with such inter-personal promising would make the reverse mistake.50 Thus two responses to the ‘morally obligatory’ view of remedies are, first, that a strong interpretation of duty (‘perform come what may’) is implausible for many commercial contracts; secondly, that moral condemnation of promise-breaking is inappropriate in the commercial realm. Yet one can also meet the moral critique on its own terms. The approach exemplified by Shiffrin makes the moral duty to keep promises paramount. Yet are there not other virtues that the law of contract could properly encourage? Should we not (sometimes) forgive those who break their promises? Contract law, with its strict duties of performance and very narrow doctrine of excuse (frustration), is inhospitable to those that breach even without moral discredit. Is this morally satisfactory? Can it really be the case that morality always obliges a promisor confronted with unexpected increases in performance cost to perform, whatever the damaging consequences to the promisor? As David Howarth remarks, such stringency descends into ‘contractual sadism’.51 Emphasis on the immorality of breach leads to its condemnation by some contract lawyers, and the concomitant vindication of the right to performance. David Campbell argues robustly that this vindication mentality is unhelpful. In particular, it squeezes out the doctrine of mitigation.52 As seen already, for Shiffrin mitigation is a deeply suspect doctrinal limit on damages. But mitigation plays a valuable role, indeed a vital one. The rule can be defended on efficiency grounds but also – and importantly in the present context – defended morally.

47 E.g. T Wilkinson-Ryan and J Baron, ‘Moral Judgment and Moral Heuristics in Breach of Contract’ (2009) 6 J Empirical LS 405; D Lewinsohn-Zamir, ‘The Questionable Efficiency of the Efficient-Breach Doctrine’ (2012) 168 J Institutional and Theoretical Economics 5. 48 Cf A Schwartz (2012) 168 J Institutional and Theoretical Economics 27, 28 (responding to Lewinsohn-Zamir, Ibid): ‘It should be shown rather than implicitly assumed that corporate managers and twenty-three-year-old students have the same ethical beliefs, and that the managers would shirk their duty to shareholders – to maximize profits – in order to implement the managers’ private ethical views’. 49 Wilkinson-Ryan and Baron (n47) 421. 50 Markovits and Schwartz (n43) 1954. 51 D R Howarth, ‘Against Lumley v Gye’ (2005) 68 MLR 195. 52 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.

488  Research handbook on remedies in private law Mitigation is efficient because it leads to lower costs of performance and so lower prices; there is good reason to suppose that sophisticated parties (promisees as well as promisors) would insert a ‘duty’ to mitigate (or its functional equivalent, the market price rule), if the law did not already do so. Yet mitigation also has the morally attractive quality of encouraging co-operation between the parties after breach.53 For (e.g.) Shiffrin to dismiss such positive co-operation as promisors unilaterally imposing the costs of their wrongs on promisees ignores the fact that many breaches are forgivable (perhaps inevitable), and that a co-operative ethic when breach happens may help preserve business relations. Co-operation is vital both between the parties to the particular contract, and more generally as a stable environment for trade. It is by no means obvious that a performance-vindicating view of contract remedies is morally appealing in all cases, let alone so immune to criticism that parties should not be permitted to stipulate different remedies in their contract.

5

MAXIMISING CHOICE: REMEDIAL DEFAULTS

5A

‘Stickiness’: Regulatory Over-confidence, Limited Choice

Default rules vary in how much freedom they confer upon contracting parties, i.e. how easy they are to change. If party autonomy is to be maximised, a wide and permissive ‘rule of change’ is needed. What should be guarded against is ‘sticky’ defaults – i.e. those where the court is so strongly attached to their aptness that it is reluctant to accept that parties can really have meant to agree a different remedy. Any moral approach to contract law, proclaiming its remedies’ intrinsic moral value, will necessarily view rules as barely mutable (if not altogether mandatory). That is inevitable since moral obligation is not a matter of choice. We have argued above that this approach should be rejected. Yet instrumental approaches can also lead to considerable ‘stickiness’. For where a given default rule has been widely justified as optimal, courts will inevitably doubt whether parties can have meant to exclude it. Why would they act sub-optimally? This is dangerous. It is in fact unlikely in the extreme that any default rule is optimal for all contractors (or even the majority). Numerous well-known considerations show the need for caution. First, debates about the consequences of rival rules rarely end in consensus, because the empirical data necessary for outright victory are absent. Secondly, contracting parties are not the homogenous ‘rational actors’ portrayed in economic models, but a heterogeneous population with varying preferences, aims and responses. Thirdly (therefore) it is beyond the capacity of regulators (courts and legislatures) to come up with ‘optimal default rules’. These claims will be explored in the next section using the primary remedy, expectation damages. The inherent difficulties of identifying ‘optimality’ (once the relative certainties of moral right and duty are given up) have to be widely and freely acknowledged. If true wisdom lies in realising what one does not know, contract law is wise only if it acknowledges the likelihood that its default rules are not optimal for many (perhaps most) contracting parties. The conclusion is not so much pessimistic as realistic. Once the dubious nature of claimed ‘optimality’ is fully realised, the more important it becomes to view contract doctrines (including 53 Emphasised by D Campbell, ‘A Relational Critique of the Third Restatement of Restitution §39’ (2011) 68 Washington and Lee LR 1063.

Contract remedies as default rules  489 remedies) as defaults. The law needs to supply some remedies by default. But when parties have agreed a different approach, there is every reason to think that those chosen rules will be more appropriate than whatever the law would otherwise, by default, supply. 5B

Optimal Defaults? Expectation Damages

Expectation damages are the pillar-stone of contract remedies. At law they are available as of right for every breach of contract. They have been robustly defended in economic analysis of law as providing incentives for efficient behaviour. Yet those arguments are unpersuasive. The expectation approach cannot be shown as the optimal rule on quantum of damages. There are too many incommensurable goals that the optimal damages rule would need to satisfy (even limiting those goals to economic efficiency). It is highly likely that optimality is situation-specific, and cannot be satisfied by any general rule of contract law. The empirical data necessary to resolve the debates do not exist (i.e. hard data about context-specific balancing of incommensurable regulatory goals across a heterogeneous population of contractors). The instrumental analysis of these doctrines is probably sufficient to justify expectation damages as a ‘sensible enough’ rule, to provide a workable starting point for many contracting parties. But such a modest conclusion underscores the rule’s default, rebuttable nature. Claims of optimality are untenable and moreover dangerous, for they foster the attitude that the rule should be mandatory or, at least, a strong presumption against contracting out. The economic argument for quantifying damages by the promisee’s expected value of performance is well known. It plays an intrinsic part in the efficient breach theory:54 because the breaching promisor will have to pay expectation damages equivalent to the promisee’s foregone benefit, the promisor will breach only when the cost of performance would exceed its expected value to the promisee. Requiring compensation on the ‘expectation’ metric thus aligns the promisor’s and promisee’s interests when the promisor is considering whether to perform in light of unanticipated circumstances (paradigmatically, increased performance cost). Breach under these conditions is also a Pareto improvement: making the promisor better off (releasing it from onerous performance) while leaving the promisee no worse off (since damages are equivalent to its expected gain). Efficient breach therefore addresses the decision whether to perform or breach. According to the theory’s defenders, expectation damages provide efficient incentives for the promisor facing that decision.55 The great insight is that the remedy awarded ex post affects contracting decisions made ex ante. However, overall efficiency must address the incentives of both contracting parties. The promisor’s decision whether to perform is scarcely the only one where efficient incentives should be provided. For example, the law should incentivise promisees to invest to an optimal degree in the contractual relationship (e.g. expenditure in anticipation of performance). Some See D Campbell, Chapter 14 in this volume. This is highly contestable. In the ‘Coasian’ world of zero-transaction cost bargaining, the initial allocation of entitlements (and remedies for their infringement) is irrelevant for their ultimate distribution, since parties will trade to reach the overall-efficient outcome. But in the real world with positive transaction costs, choosing between damages and specific performance depends on actual levels of postbreach transaction costs, which are unknowable; so economists’ recommendations on remedies derive entirely from their ‘assumptions’ (i.e. predispositions): I R Macneil, ‘Efficient Breach: Circles in the Sky’ (1982) 68 Virginia Law Review 947. 54 55

490  Research handbook on remedies in private law degree of reliance is of course necessary and efficient; the basic purpose of the whole law of contract is to give assurance of performance (or a substitute remedy), and thereby permit reliance on promises. But since performance will not always happen in an uncertain world, the level of the promisee’s investment ought rationally to take into account the possibility of non-performance (e.g. by having contingency plans, should the promisor breach). Yet expectation damages, by guaranteeing the monetary equivalent of performance, removes the promisee’s incentive for self-protection. Such damages allow the promisee to treat either performance or its exact monetary equivalent as a certainty. Hence expectation damages induce (inefficient) ‘overreliance’ by the promisee.56 As Shavell observes, ‘optimal reliance requires a [promisee] to take into account that breach means that reliance involves waste’, but expectation damages ‘dull the effects of breach’.57 This problem of overreliance seems insoluble. Shavell, who first identified it, comments: There does not exist any damage measure that provides optimal incentives both to perform and to rely: only the expectation measure provides optimal incentives [for promisors] to perform, yet it does not provide proper incentives [for promisees] to rely.58

Shavell goes on to say that a ‘sophisticated’ expectation measure could in theory satisfy both requirements, but it would require the court to possess vast amounts of information to calculate it accurately (i.e. ‘the functional relationship between reliance and the value of performance and the entire probability distribution of production costs – everything about the contractual situation’).59 Clearly this is unrealistic, as Shavell seems to accept. He comments that contracting parties are more likely to have the necessary information, and to agree upon an efficient level of (liquidated) damages, than is the court. This conclusion is significant. Expectation damages can perhaps be defended as a good starting point, being efficient in many situations – but should not be immutable because ‘the efficient remedy often depends on the circumstances’ and so party choice of a different remedy should be respected.60 We have mentioned the ‘promisee’s overreliance’ problem as a complicating factor. Yet it is only one of many. As Klass observes, the simple theory of efficient breach mentioned above focuses exclusively on the decision to perform or breach, but remedies ‘provide incentives to act more or less efficiently across the whole of a transaction’ in addition to performing still further distinct functions (e.g. risk allocation and signalling).61 Having listed seven other relevant contracting ‘decisions’, Klass comments (indisputably) that: ‘No single remedial rule is likely to provide optimal incentives across all these many decisions’, compounded by the problem that ‘there is no reason to expect the remedy that provides the optimal incentives also to optimally allocate the risk of breach’.62 For Klass,

S Shavell, ‘Damage Measures for Breach of Contract’ (1980) 11 Bell J Economics 466. S Shavell, Foundations of Economic Analysis of Law (Harvard University Press 2004) 360. 58 Ibid, 360. 59 Ibid, 361; see similarly Baird (n8) 6. 60 A S Edlin, ‘Breach Remedies’ in P Newman (ed.), New Palgrave Dictionary of Economics and the Law: vol I (Macmillan 1998) 174. 61 G Klass, ‘Efficient Breach’ in G Klass, G Letsas and P Saprai (eds), Philosophical Foundations of Contract Law (Oxford University Press 2014) 370. 62 Ibid, 376–7, 378. 56 57

Contract remedies as default rules  491 therefore, ‘no serious economic thinker today propounds it [the simple theory of efficient breach]’.63 Contrary then to the confident predictions of law and economics’ best known contract theory, expectation damages cannot be demonstrated to be the optimal remedy for breach. Once the diverse functions of remedies are understood, it is plainly impossible to devise a single rule to perform them all with simultaneous optimality. Therefore when parties agree remedies, there should be an irrebuttable presumption that they have devised a superior scheme. The law’s attachment to its ‘default’ remedies gets things exactly wrong. Those legal remedies have at best shaky justifications when analysed instrumentally. But they are hard-wired into contract law – and contract lawyers. Perhaps a decisive break with the past is necessary to free parties from the shackles of the remedial ‘defaults’? 5C

Radical Realignment of Remedies to Maximise Optionality?

When deciding what obligations to assume to each other, contracting parties should decide the limits of those obligations. An exhaustive contract would specify not just what parties are required to do, but the circumstances and conditions under which they are free not to perform. The language of ‘breach’ and ‘remedy’ is misleading. Parties can and frequently do include, for example, clauses permitting cancellation of a long-term contract;64 or return of consumer goods when the customer changes her mind.65 Conditions usually attach. For example a notice period for termination, and/or the payment of a sum equivalent to (e.g.) a year’s expected profits. Consumer returns are usually time-limited and subject to goods remaining in an undamaged condition; the consumer may be required to pay the cost of return (or a cancellation fee, e.g. for airline tickets). It sounds odd to describe these as ‘remedies’ for ‘breach’ – rather they are the parties’ agreed alternatives to continued performance.66 Such express alternatives are very common, and although frequently they might resemble/reproduce the classical legal remedies (e.g. specific performance or damages), a ‘host of other [termination rights]’ do not.67 The law of course takes a unitary approach: expectation damages are available as of right when there is failure to perform. But the deep entrenchment of this rule, and its usual understanding as providing compensation for lost bargain, is fiercely criticised by Scott and Triantis.68 Its ubiquity and rationale disguise the vital role of options not to perform. Scott and Triantis argue that ‘expectation damages’ are no more than the law’s default price for such a non-performance option. (It has been said that economists tend to view remedies as ‘prices’ whereas lawyers see them as ‘sanctions’ (for bad behaviour); Cooter distinguishes the two concepts, but considers that contract damages should indeed be seen as a price.69)

Ibid, 370. Implied by the court in Staffordshire Area Health Authority v South Staffs Waterworks Co [1978] 1 WLR 1387. 65 A legal right for ‘distance or off-premises contracts’: Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, Part 3. 66 B Fried, ‘The Holmesian Bad Man Flubs His Entrance’ (2012) 45 Suffolk Univ LR 627, 631. 67 Ibid, 635–7. 68 R E Scott and G G Triantis, ‘Embedded Options and the Case against Compensation in Contract Law’ (2004) 104 Columbia LR 1428. 69 R Cooter, ‘Prices and Sanctions’ (1984) 84 Columbia LR 1523, 1543–4. 63 64

492  Research handbook on remedies in private law Rather than conceiving of damages as compensation, the right to breach and pay damages is better understood as a valuable option sold by the promisee to the promisor. Indeed, the right to breach is only a subset of a broader category of termination rights that gives one party an option to walk away from the contemplated exchange.70

Express options to purchase or sell (i.e. call or put options) are very common commercial devices overtly in this form. In the former, the buyer is free to walk away from the contemplated sale, being liable to pay only the option price. Scott and Triantis’s point is that every contractual option of non-performance has exactly the same commercial logic. The law’s overlay of ‘breach’ and ‘compensation’ serves to obscure this. The optimal pricing of non-performance options is highly variable and context-specific, so that ‘[i]t is unlikely that any given damages default will reflect the option price that most parties would adopt in their contracts’; and in particular ‘[o]nly in unusual circumstances will that option price reflect the ex post loss suffered by the seller if the option is exercised’.71 Thus another important reason to enforce ‘liquidated damages’ clauses (and not stigmatise them as ‘supra-compensatory penalties’ or ‘under-compensatory exclusions’) is that they represent the parties’ own pricing of the option not to perform the obligation in question. (Of course ‘liquidated damages’ becomes a misnomer, for on this argument they are not pricing loss (‘damages’) at all.) Such party pricing is much more likely to be accurate than any price set by the law (an elementary point for headline contract prices, but no less true for the ‘embedded’ price of non-performance options). Yet again, the ideal world would see parties expressly stipulating the price of options; the law’s default price of expectation damages can only be second best, considerably inferior. However, the current law actively discourages such a superior, agreement-based approach. So deep does the expectation damages principle run that Scott and Triantis suggest it should be scrapped altogether to make room for parties to adopt different pricing of their options not to perform. As seen in this chapter, expectation damages have been defended by both moral-promissory and economic-efficiency contract analyses. When the law’s longstanding central remedy doctrine is held both economically optimal and morally compelling, its salience in legal discourse is overwhelming. Can it be any wonder that parties at least purport to be ‘liquidating damages’ in their option pricing (i.e. pre-estimating losses from breach),72 and that courts historically view any other pricing approach with deep suspicion? This, though, amounts to ‘a pervasive bias among judges and even lawyers that impedes the full exploitation of risk management opportunities through termination rights’.73 To encourage parties to price such options properly, Scott and Triantis recommend a radically different regime. In commercial contracts, all obligations should by default be specifically enforceable. Parties would thereby be encouraged to insert express options for non-performance, expressing the conditions (i.e. prices) for their exercise. Scott and Triantis reject the less radical approach of abolishing the penalty clause rule and declaring that parties can stipulate any sum of ‘damages’ they please. The expectation damages rule has long been internalised by lawyers. It is so ‘sticky’ that it cannot be neutralised merely by declaring

72 73 70 71

Scott and Triantis (n68) 1429. Ibid, 1433, 1491. Although surely not in every case (consider fees for cancelling an airline ticket). Scott and Triantis (n68) 1481.

Contract remedies as default rules  493 its mutable ‘default rule’ status. The drastic shift to a general specific performance regime is needed to achieve that. Specific performance would be preferable to any damages-based remedy (even one that departed from the expectation measure) since its quantum would again risk ‘anchoring judicial interpretation and legal drafting [of option prices] at the default measure’ of damages.74 Because such a specific performance regime could be harsh for consumers, Scott and Triantis recommend a different information-forcing approach here. Consumers should simply be free to walk away from the contract at any time without payment (a free cancellation option). Business counter-parties would thereby be encouraged to contract away from this default by specifying the price for such consumer non-performance. Again, this would relieve the court of an extremely difficult pricing decision. Scott and Triantis pose an important challenge to the conventional understanding of contract remedies. Their argument about the widespread use and importance of non-performance options is hard to deny. To the extent that the award of expectation damages disguises this and (to some degree) precludes it by the very stickiness of the rule, a serious problem has been identified. Perhaps it can be overcome by a shift in contract drafting practice: by expressly including ‘non-performance options’ with the conditions (including prices) for their exercise, systematically throughout contracts.75 The law of contract remedies may not be entirely to blame for a failure in legal imagination among contracting parties and their legal advisers. Still, the historic refusal to conceive common law damages as a mere default has certainly contributed to a loss-focused conception of ‘liquidated damages’. Arguably the cautious weakening of the penalty doctrine in England will be insufficient to dethrone that paradigm.76 Perhaps after all a bold new approach is needed to encourage party-devised remedies. Once the questionable justification of even the expectation measure of damages has been exposed, and a moralist approach to contract remedies rejected, urgent measures to emphasise the default nature of the law’s remedies could well be justified. The weaknesses of arguments for the immutability of contract remedies have been suggested in this chapter. A renewed emphasis on freedom to choose contract remedies is overdue.

Ibid, 1486. Arguably, this would fall outside the English penalty clause jurisdiction (such option payments are on their face not payments for breach). 76 Compare Cavendish (n10) with Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 67. 74 75

27. A relational perspective on contract law’s default rules, with an emphasis on remedies William Whitford1

The goal of this chapter is to discuss what considerations law-makers should consider when formulating those doctrines of contract law that can be displaced by agreement between the parties. These doctrines are called default terms. I will use the law of contractual remedies for examples; most (though not all) remedial doctrines are capable of alteration by agreement and hence are default terms. And I will focus on American law. The law-makers who formulate contract law’s default terms in America could be judges, who create and interpret the common law, the private drafters of model legislation intended for legislative enactment (such as the Uniform Commercial Code, UCC), or elected legislators themselves.2 My philosophical perspective will be pragmatic, not moralistic. I want the rules of contract law to maximise social welfare. My notion of what contributes to increased welfare is broader than some,3 but the most important point is that I will not seek to justify doctrine on a moral philosophy basis. Breach may not often be efficient, but if it is, I do not advocate its punishment as an immoral act. Any welfare analysis of default terms should be concerned with how the doctrines affect the behaviour of judges, the parties to contract, and potentially others. I will focus almost exclusively on the behaviour of contractual parties. To the extent possible, I will draw on actual empirical studies about behaviour. This behaviour will focus on the behaviour of contractual parties (1) when they form contracts, and have an opportunity to agree on terms displacing default doctrines; (2) in the performance of contracts, including the informal settlement of any disputes that may arise; and (3) in the litigation or other form of dispute resolution, including informal settlement, that results after the contractual relationship terminates. Though the emphasis in this chapter will be on the impact of contract doctrine on the behaviour of contractual parties, a word should be said about the symbolic effect of debates about doctrine. In the words of my late friend and colleague, Jean Braucher, debates about the appropriate substantive content of doctrine can be about the ‘sacred’ – that is, about the principles that should govern human affairs in some utopian state where citizens have perfect

1 I am grateful for helpful comments on an even earlier draft from Matthew Jennejohn, Neil Komesar, Stewart Macaulay, Josh Whitford, and from the audience at the 4th annual Kidwell Memorial Contracts lecture (where this paper was presented) at Wisconsin Law School on 2 March 2018. It goes without saying that all errors and omissions are mine. 2 In this chapter, in keeping with the practice of most American scholars when writing about ‘contract theory’, I ignore issues of precedent. Despite the many important values underlying a system of precedent, which I respect, I will write as if even judges, as well as other law-makers, can act on a clean slate. The chapter is utopian in that respect. 3 In particular I believe that the distribution of property, and not simply its total value, is an important consideration in assessing overall societal welfare.

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A relational perspective on contract law’s default rules  495 rationality.4 Debates about contracts doctrine become intense in part because of doctrine’s role in anointing the governing principles that we should strive for in an ideal world, and doctrine can do that anointing in the eyes of many, even when actual behaviour of contractual parties in the world (often called the ‘real world’) will be little affected by whatever doctrinal alternative is adopted. So debates about morality – should efficient breach be punished just because breach is morally wrong? – or economic efficiency – which rule will enable informed parties to maximise their joint gain? – come to dominate doctrinal debate (depending on whether the author favours a moral or efficiency analysis in defining the ideal). I accept this characterisation of much doctrinal debate, and I do not mean to minimise its importance either. As Braucher emphasised, views about appropriate contract doctrine can influence views about the policy debates in the political world, even on matters quite unrelated to contract law, and hence debate about the former can affect the outcome of the latter.5 In other words, symbolism is not merely symbolic in its effects. However, in this chapter I will ignore that aspect of the analysis of what doctrinal rules should be adopted. It is impossible to discuss the behaviour of contractual parties in the formation and performance stages across all the different types of contractual behaviour governed by contract doctrine. There are just too many variations in behaviour between the parties in different contexts to make any kind of generalisations practical. For this reason I will concentrate my analysis on business-to-business contracts (hereinafter B2B) between large enterprises for goods and services, and within that category on supplier contracts with original equipment manufacturers (OEMs), sometimes called supply-side contracts, and on contracts between large enterprises for innovation (i.e., to develop a new product, such as a pharmaceutical drug or a new software). I have decided to focus on these related contexts for several reasons. First, there is now a great deal of empirical scholarship about these contractual relationships, much of it written by non-lawyer social scientists who believe that these contractual relationships are a key to understanding industrial organisation in the modern era. Notably, this literature hardly mentions contract law, and in particular its default rules, as an influence on the parties’ behaviour, a point to which I will return in my conclusion.6 Second, there is a body of contract scholarship written by legal academics, and self-styled as ‘contract theory’, that focuses particularly on how contract law’s default rules should be written for B2B contracts between sophisticated parties.7 This literature presumes a considerable influence on parties’ behaviour, particularly in the formation stage of contractual relationships. So there is a marked contrast, calling for 4 Braucher most clearly expressed this view in J Braucher, ‘The Sacred and the Profane Contracts Machine: The Complex Morality of Contract Law in Action’ (2012) 45 Suffolk U L Rev 667, 670 (‘[A] focus on the world of ... appellate decisions has a sacred quality ... [An] imagined moral order based on the law on the books ... serves a symbolic, totemic quality’). 5 See J Braucher, ‘Cowboy Contracts: The Arizona Supreme Court’s Grand Tradition of Transactional Fairness’ (2008) 50 Arizona LR 191, 226 (‘Judicial decisions operate symbolically and contribute to the societal store of norms, influencing ... people’s attitudes about what is socially acceptable and changing their behaviour independent of the sanctions that the law would impose if invoked’). 6 For a recent example of this literature, written by a law professor but based almost exclusively on the empirical work done of social scientists, see L E Bernstein, ‘Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts’ (2015) 7 J Legal Analysis 561. 7 E.g., A Schwartz and R E Scott, ‘The Common Law of Contract and the Default Rule Project’ (2016) 102 Va L Rev 1523 and sources cited therein. This literature relies principally on modeling, in the modern law and economics tradition, and does not rely much on empirical data.

496  Research handbook on remedies in private law exploration, between the two bodies of literature with regard to the importance of law. Third, I have long been a committed believer in the insights of leading relational contract scholars, like Ian Macneil and Stewart Macaulay, both of whom have been important mentors to me. I will be presenting that perspective, which I will call the relationist perspective, throughout this paper. While all contracts are relational in some respects, contractual behaviour in these contexts has probably been the subject of the most description and analysis from the relational perspective. I will conclude at the end of my analysis that at least in these contexts there is little evidence that default doctrines impact the parties’ behaviour at the formation stage in significant ways. Consequently, from a welfare analysis perspective, policy analyses about the desirable content of default doctrines should focus on the impact of those doctrines on other stages of contractual relationships. Default rules impact behaviour at the performance stage, and they likely play a very big role in the litigation stage. If debates about the desirable substantive content of default rules is based on their impacts or possible impacts in these latter stages, the familiar debates, pertaining to how much contextual analysis of the particular contract should be permitted (i.e., rules vs. standards), will still loom large. But the policy arguments in favour of the contending positions will be different.

THE FORMATION STAGE The body of literature sometimes denominated ‘contract theory’ points to the behaviour of parties in the formation stage as key to any welfare analysis of the most desirable default terms. Default terms are directly operative primarily in the litigation stage. The key assumption of these theorists is that the parties, in forming their contracts, are concerned about what will happen in the litigation stage and devote resources towards negotiating and drafting terms to include in the contract that will control or influence the outcome of any litigation. The usual argument of the contract theorists is that default terms should mimic what the usual contractual party or a majority of parties to contracts would want to happen in litigation (henceforth called a majoritarian approach).8 The goal of the majoritarian strategy is to avoid the costs that parties expend in negotiating and drafting litigation oriented terms, because they can safely rely on the default term to provide a desired outcome in litigation. The costs saved are most often called ‘specification’ costs.9 Other analysts have argued for contract default rules that they call ‘penalty defaults’ in some circumstances.10 Penalty defaults are deliberately designed to provide for litigation outcomes that few contractual parties would want. The strategy is to

Much ink has been spilled refining what I have called the majoritarian approach to defining default rules. A recent statement, pretty much summarizing these efforts is: ‘[T]he value of a (proposed) default depends on the probability that parties would have (hypothetically) consented to the provision if they had taken the time to consider the provision and the cost to the others of opting out.’ G Triantis, ‘Promissory Autonomy, Imperfect Courts, and Immorality of the Expectation Damages Default’ (2012) 45 Suffolk U L Rev 827, 830. See also R E Scott and J S Kraus, Contract Law and Theory (3rd edn, Carolina Academic Press 2002) 93–5. 9 A W Katz, ‘The Economics of Form and Substance in Contract Interpretation’ (2004) 104 Colum L Rev 496, 502–4 (reviewing and citing the relevant literature). 10 I Ayres and R Gertner, ‘Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules’ (1991) 101 Yale L J 729. 8

A relational perspective on contract law’s default rules  497 get the parties to negotiate alternative terms in the formation stage, to substitute for the penalty default term. The penalty default strategy could be welfare enhancing, despite the increased specification costs, if the negotiated term provides for a result that is more precisely designed to maximise welfare in the parties’ particular circumstances, as compared to a majoritarian default term.11 As with the contract theorists, a key assumption of penalty default proponents is that parties are concerned, at the formation stage, with default terms operative at the litigation stage and will devote resources (i.e., specification costs) to alter them. From the relationist perspective, it seems very unlikely that parties in these contexts (supply chain and innovation contracts) would be concerned about default terms when entering into a contractual relationship. To be concerned about default terms suggests a concern at the formation stage about the outcome of any future litigation. But parties entering into these contracts normally have done business before, and whether they have or not, they anticipate future dealings. A relationalist believes, as almost a fundamental tenet of the theory, that nothing destroys the possibility of a future business dealings between the parties like a lawsuit.12 Furthermore, contractual parties in this situation are aware that future conduct by either party that might lead to a lawsuit is unlikely when both parties to these contracts are members of industries with several participants and in which information flows about contractual behaviour. In this situation a party to a contract who causes litigation because it seems a more profitable course of action in the short term is much less likely to conclude future profitable business contracts with either the victimised party or with other members of the industry. A relationalist believes those consequences are normally sufficient to deter conduct that can foreseeably lead to litigation, even if default rules or express terms of the contract make litigation an attractive option in the short run. Furthermore, the direct costs of litigation are so high these days, that the profits to be gained from litigation would need to be high to make such a course profitable even in the short run.13 The bottom line, from a relationalist perspective, is that at the formation stage parties have few incentives to devote time and expense worrying about default terms and whether they need to be replaced in a contract, because default terms are only operative at the litigation stage, which almost never happens. A party who during the formation stage fears the possibility of

11 Alternatively the penalty default rule might force one party to disclose information at the formation stage that only it has, which will allow the other party to behave in performance in a more welfare enhancing way. The rule of Hadley v Baxendale, restricting damages for contingencies that the defendant could not foresee at the time of contracting, is often justified, for example, as providing an incentive for plaintiffs to fully disclose what they know at the time of contracting. This information can in turn prompt the defendants to take more care in performance, or to invest in insurance, when there is reason to fear that breach will cause large damages. 12 This assumption has not been thoroughly tested by systematic empirical studies, though there are many anecdotes. One attempt to test the hypothesis is L-W Lin and J Whitford, ‘Conflict and Collaboration in Business Organization: A Preliminary Study’ in J Braucher et al. (eds), Revisiting the Contracts Scholarship of Stewart Macaulay (Hart 2013) at 191–222. The results are not conclusive but generally consistent with the fundamental relationist assumption. The authors could find few examples of continued collaboration between parties after litigation between them in the globalised semi-conductor industry. 13 In the United States, unlike Britain, absent a contract provision or special statute to the contrary, each side bears its own attorney fees, even if victorious. See generally, H M Kritzer, ‘Lawyer Fees and Lawyer Behaviour in Litigation: What Does the Empirical Literature Really Say?’ (2002) 80 Tex L Rev 1943, 1946–61.

498  Research handbook on remedies in private law future litigation with the other party is likely not to enter the contract at all, rather than expend resources to draft a contract that will protect it in the event of litigation. To be sure it is possible that after formation default terms could become problematic to one or both parties, as the possibility of an inadvertent or intentional breach and subsequent litigation becomes more likely than first thought. But, to a relationist, even this possibility provides little reason for the parties to worry about, and possibly displace, default terms in the original contract, because a contract can always be, and is often, adjusted or modified during performance. Modifications occur for many reasons, including taking account of changed conditions, and can make the existing contract better for both parties. But they occur even when addressing the concerns of only one party, because both parties anticipate future business dealings and modifications build trust. Moreover, because modification is normal business behaviour when one or both parties encounter unexpected difficulties or express concerns with the original contract, a party refusing a reasonable modification request risks harm to its reputation with other potential contractual parties in the relevant industries or information networks. The prevalence of contractual modifications further reduces the incentives in the formation stage to pay detailed attention to default or other terms because of unforeseen difficulties or risks that they may be present during performance. The clashing accounts of the influence of default terms on the parties’ behaviour at the formation stage is based largely on assumptions about how contract parties behave. But there is a large body of empirical work about contractual behaviour in these contexts. What does it show? I will begin with a body of work about written contracts between large business enterprises by Professor Claire Hill. Her work is not limited to contracts in the supply chain and innovation contexts, but it certainly has implications for contracts in those areas. It supports the view that parties during the formation stage do not plan seriously for litigation when drafting these contracts. Professor Claire Hill’s work concerns the many mistakes made in the drafting of written contracts between large business entities, where large law firms assist and do much of the drafting. Hill shows that many avoidable drafting mistakes are made. A classic example is a very detailed, multiple page written contract containing warring ‘notwithstanding’ clauses. The first clause states that Rule A shall apply, ‘notwithstanding’ whatever else is stated in the contract. The second clause, perhaps removed from the first by a few pages, states that Rule B shall apply, ‘notwithstanding’ whatever else is stated in the contract. There are quite foreseeable circumstances where both Rule A and Rule B would appear to apply, yet they provide contrary directions for what should happen.14 It is easy to understand how such mistakes come into being. Many of the terms in detailed written contracts are borrowed from contracts prepared for other transactions, or from model contract ‘forms’ that are available for purchase by practising lawyers, and then making adjustments.15 A ‘notwithstanding’ clause is a way to make an adjustment so that a bargained term is included without carefully redrafting the entire contract. That such mistakes persist shows that litigation is very unlikely, so that the risk that a drafting mistake could adversely impact a

14 C A Hill, ‘What Mistakes Do Lawyers Make in Complex Business Contracts, and What Can and Should Be Done About Them? Some Preliminary Thoughts’ in J Braucher et al. (eds), Revisiting the Contracts Scholarship of Stewart Macaulay (Hart 2013), at 225 (‘[I]nconsistency ... may result from warring “notwithstanding” clauses – two different clauses, each of which say “notwithstanding any else in this agreement... to the contrary”’). 15 C A Hill, ‘Why Contracts Are Written in Legalese’ (2002) 77 Chi Kent L Rev 59, 62–70.

A relational perspective on contract law’s default rules  499 client in litigation is too small to justify the expense in carefully proofreading and redrafting all or much of a lengthy contract. Moreover, Hill suggests, if one party indicates to the other that it wants to devote resources fixing up detailed mistakes in a contract, it can signal to the other party a fear of future litigation, which in turn can cause distrust and perhaps raise doubts about entering the contract altogether. She even opines that knowingly entering into a contract with drafting mistakes and lacking terms about known contingencies can signal that future litigation is not anticipated, and in that way build trust between the parties.16 Turning to the empirical work about supply chain contracts, the studies that show written, complex contracts specific to the parties relationship do often exist, but not always. Sometimes, based perhaps on understandings from prior exchanges, parties proceed on the basis of informal communications. There are often exchanges of standard forms called something like purchase orders and acknowledgements of order. These documents contain transaction specific information with respect to price, quantity and delivery times for one or more deliveries, but other terms on these forms are generic boilerplate, not particularised to the circumstances of these deliveries. More important, many of the boilerplate terms of the two forms typically conflict and there is no attempt to negotiate a compromise provision. Problems that emerge during performance are generally worked out informally.17 Very often, however, at or near the beginning of a supply chain relationship the parties enter into a systematic written contract designed to govern all the deliveries that may be arranged over a given time period.18 Contemporary scholarship about the choices parties make in contract design refer to the decision to ‘formalise’ a transaction, as opposed to proceeding informally. By ‘formalising’ a transaction, these scholars usually mean embodying an agreement into a systematic written document with many terms. There are several implications that scholars writing about ‘formalising’ a contract sometimes make that I would like initially to identify and counter. The first is that until there is a writing there is no legal liability – there is only an informal relationship with problems to be worked out informally – and indeed one of the reasons for the writing is to create a legally enforceable relationship. The second implication is that once a signed written contract exists, it is the end to informality. With respect to the first implication, it is a mistake to assume either that there is no liability until there is a writing or that clearly establishing legally binding mutual commitments is an important reason for the existence of a systematic written contract. What is now called pre-contractual liability is American law. It is premised on the relational contract idea that there are negotiations and preliminary understandings, and reliances on them, well before

C A Hill, ‘Bargaining in the Shadow of the Lawsuit: A Social Norms Theory of Incomplete Contracts’ (2009) 34 Del J Corp L 191, 208 (‘the uncertainty (introduced by drafting mistakes and gaps) and the costs of litigation serve as a bond the parties give against precipitous recourse to litigation, aligning the parties’ incentives to resolve any disputes without formal resort to the court system’). 17 These transactions mostly fit the pattern described by Stewart Macaulay in his classic article, which is foundational to relational contracts theory: S Macaulay, ‘Non-Contractual Relations in Business’ (1963) 28 Am Soc Rev 1. 18 Juliet Kostritsky is working on an empirical project designed to determine when the parties in supply chain contexts decide to proceed without a systematic written contract, in the manner described in the preceding paragraph: J Kostritsky, ‘The Untold Story: Avoiding LTAs and the Continuing Problem of Opportunism’, unpublished draft on file with author. 16

500  Research handbook on remedies in private law there is a ‘closing’ on a written contract.19 As to why parties do enter into systematic written contracts, it is a topic that I will address shortly but I am not aware of empirical evidence that a desire for legal enforceability is an important reason. Parties are or should be well aware that legal enforceability exists even without a written contract, and relational contract theory suggests if the parties think that legal enforceability might be needed in the future, the usual course is to back out of the transaction completely.20 With regard to the second implication, that a writing marks the end to informal adjustment, I fundamentally disagree. First, it is well known that all contracts are incomplete, meaning that they do not provide for all future contingencies. And long term contracts between big businesses often intentionally leave terms essential to future performance to be worked out in the future. This is particularly true with respect to innovation contracts, since even the product to be developed is something that commonly needs to be worked out or refined as the contract is performed. When at the time of formation there is incompleteness with respect to essential terms, obviously there will be future adjustments to the contract made. And while sometimes contracts specify procedures by which these decisions will be made, informal interactions between the parties are necessarily part of the process.21 Second, even with respect to terms specified in the written contract, modification of a promised performance is commonplace in both supply chain and innovation contracts, whether or not a systematic written contract exists.22 Sometimes modifications occur because one or both parties find literal performance to be undesirable as the result of unanticipated circumstances. And in long term contracts unanticipated circumstances normally arise, often many times over. Moreover, modifications are not limited to the appearance of unanticipated circumstances. Modifications or adjustments can occur simply because one party has found that an assumed risk has put it in a difficult situation. In sum, if putting an agreement into the form of a written contract means that the relationship has been ‘formalised’, then formality and informal modifications can co-exist and usually do. As I like to put it, the number one expectation of a relational contract is that it will be adjusted or modified, usually several times over, before performance is completed. If written contracts are subject to modification, and obtaining legal enforceability is not an important reason for creating a systematic written contract, what does account for them? Ian Macneil, a founder of relational contract theory, emphasised that the most important accomplishment of the formation stage is mutual planning for a joint enterprise.23 There are three key concerns: (1) to eliminate or minimise misunderstandings between the parties about 19 The most famous American case upholding ‘pre-contract’ liability is probably Texaco v Pennzoil, 729 S.W.2d 768 (TX Ct.App., 1987), where the plaintiff recovered a judgment of $7.5 billion based on a preliminary oral agreement ‘breached’ before there was a closing on a written contract, even though a closing was clearly contemplated by both parties. See also Hoffman v Red Owl Stores, 26 Wis.2d 638, 133 N.W.2d 267 (19650); Cosgrove v Bartolotta, 150 F.3d 729 (7th Cir 1998). In both the Texaco and the Cosgrove cases, expectation damages were awarded. 20 See note 11 above and accompanying text. 21 For an excellent account of incompleteness in innovation contracts, see M Jennejohn, ‘Contract Adjudication in a Collaborative Economy’ (2010) 5 Va L and Bus Rev 173, 182–94. 22 See G Hadfield and I Bozavic, ‘Scaffolding: Using Formal Contracts to Build Informal Relations in Support of Innovation’ (2016) Wis L Rev 981, 1015, quoting a computer processor manufacturer: ‘The contract is a living document. When you have a multiyear contract you have to realize that things will be changed repeatedly.’ 23 See I Macneil, ‘A Primer of Contract Planning’ (1975) 48 S Cal L Rev 627.

A relational perspective on contract law’s default rules  501 performance will entail;24 (2) to preserve those understandings should there be a change in key personnel in the future;25 and (3) to provide instructions to the many employees of each party who do not participate in the negotiations but who will be charged with performing the contract. If the parties have entered into similar transactions previously, sometimes little time needs to be devoted to planning at the beginning of the next transaction. The mutual assumptions will be that matters will proceed as before, and often in these circumstances there will not be a systematic written contract.26 But if the parties are initiating a new business relationship, or if the subject matter of the contract is different from prior transactions, then oral or written exchanges about each parties’ desires and understandings for the relationship will be necessary, to define what the contemplated performance is, to protect against misunderstandings, and importantly to decide what aspects of future performance will be left for future specification at a time when more information will be available. Often these exchanges will take written form, if for no other reason than putting thoughts in writing is good discipline for showing gaps, inconsistencies or unstated assumptions in one or both parties’ thinking. These writings can take the form of a mutual exchange of memorandums, each individually drafted, but often it ultimately takes the form of writing to which each party ascribes, which we call a contract. The reasons why the planning documents take the form of a written contract have not been carefully explored.27 However, the existence of a systematic written contract does not detract from the conclusion that mutual planning for performance is the pre-eminent task during the formation stage. Nor, I believe, should we assume, without more concrete evidence, that the existence of a written contract means that the parties are devoting significant resources to planning for litigation or thinking about which default terms to displace. That may happen in some instances, and I will shortly discuss some terms commonly appearing in systematic written contracts that appear to have a planning for litigation reason for being. However, relational contract theory suggests that this is not the usual practice, and the available evidence is

Mutual misunderstandings can be corrected by subsequent modifications, and often are, but there are obvious advantages to avoiding the misunderstandings ab initio if that can be done at not too great a cost. Bernstein suggests that sometimes trust in the ability to work out problems in the future induces the parties to enter into very specific contracts, knowing that changes in specific details can be made if necessary: ‘[W]hen dealing with a trusted contracting partner, it is easier to access the operational benefits of clarity and specificity (benefits that arise both within and across the contracting firms) without the downside risk of inflexibility that is often associated with detailed provisions. If you trust your partner to be flexible in contexts where implementing precise provisions does not make business sense, you are more likely to use precise terms.’ Bernstein (n6) at 589–90 n98 (3rd para). 25 Ibid, at 589–90 n98 (2nd para). 26 See notes 17–18 above and accompanying text. 27 I have wondered whether path dependence is an important explanation for this tradition. Written contracts have been a traditional way to mark the end of the formation stage, and perhaps a good reason to change the practice has not become evident. Nonetheless I cannot help wondering whether from an efficiency perspective, lawyers are too often called upon to prepare the final written contract. The cost of the lawyers may often be more than the value added. Further, the lawyers, for reasons of their own and as an agency cost, load the contract with provisions on remote contingencies that the parties do not read or discuss, so as to avoid reputational loss to the lawyers if the contingency occurs and is unprovided for in the contract. For an account on how agency costs (i.e., lawyers acting in their own interest) impact the drafting of long written contracts between large entities, see Hill (n15) at 70–4 (stressing lawyers’ career motivations to avoid ‘bad outcomes’). For a different account for why parties negotiate formalised contracts and put them in writing, knowing ab initio that they will never be the subject of a lawsuit, see Hadfield and Bozavic (n22). 24

502  Research handbook on remedies in private law insufficient to convince me that we should assume to the contrary. Importantly for purposes of this chapter, unless the parties are devoting significant resources during the formation stage to planning for litigation or thinking about which default terms to replace, there will be little capacity to reduce specification costs by manipulating the substance of default rules. There are important exceptions to the statements I have made about the free availability and use of modifications. The most important concern Master Service Agreements (MSAs) between large manufacturers (hereinafter called OEMs) and their suppliers. MSAs are standard form contracts (‘SFKs’) drafted by OEMs, which their suppliers sign. Though some recent scholarship considers these contracts to be an innovation in contract design, large manufacturers have long used SFKs to help govern their relationships with both suppliers and buyers.28 Modern MSAs are very detailed, however, and much studied. There has emerged a veritable cottage industry of academics studying these agreements, both their written provisions and how they are administered. Two factors are key to understanding MSAs. First, they are SFKs entered into by a buyer with many suppliers. As with all SFKs, the multiple uses of the written contracts enable the cost of the contract’s drafting to be spread among many transactions, lowering the per transaction cost. This can make economical investments in specification costs for rare contingencies where such investments would not be sensible for a contract to be used only once or twice. Second, OEMs are very large organisations presenting significant problems of coordinating intra-firm planning among their many employees. Many of the supplier organisations for some of these large manufacturing enterprises are similarly very large. A MSA can guide future relations not only between the two entities but also among employees within the two entities. Put otherwise, part of the justification for an expensive investment in contract design/drafting, such as the MSAs, is that it substitutes for investments in intra-firm coordination that would need to take place in any event. It is not just a contract but an instruction manual to staff. Although modifications can and do happen with MSAs, they are less frequent, and there is much greater effort in the formation stage to establish rules that will guide performance throughout the length of the contract, and even to provide pre-agreed decision-making structures for reaching agreements about whatever modifications prove desirable. A key reason for the lesser frequency of modifications is that the OEM has the MSA signed by many suppliers, and not uncommonly the OEM has several suppliers providing the same parts. In these circumstances there are strong disincentives to reaching modification agreements with a single contractual party. If an OEM agrees to a modification favourable to a single supplier, there may be pressure to extend the benefit to similarly situated suppliers, making the modification more costly to the OEM. Furthermore, consistently with the idea that MSAs provide instructions to be followed by lower staff of both the OEM and suppliers (many of whom are large enterprises themselves), OEMs often hold training sessions for their own staff and the staffs of their suppliers/buyers to insure familiarity with the provisions of the MSAs.29 Modifications, particularly if individualised to particular customers, disrupt these efforts to rationalise the administration of the contract. Many of the efficiency benefits of standardisation may be lost. A second possible exception to my generalisations about the frequency and importance of modifications in the administration of systematic written contracts concern ‘written modifica See S Macaulay, ‘The Standardized Contracts of United States Automobile Manufacturers’ (1973) 7 Int’l Encyclopedia Comp L, ch 3, §§ 3-21 to 3-30. 29 Bernstein (n6) at 578–80. 28

A relational perspective on contract law’s default rules  503 tions only’ clauses. These clauses appear normally in MSAs and commonly in bespoke supply chain and innovation contracts as well. Written modification only clauses not only specify that any modifications must be written, but usually they also require that the modifications be approved in some specific way and/or by a particular, relatively high ranking, official in one or both of the parties’ staffs. Such clauses do not usually represent what I have called planning for litigation. Rather they represent planning for performance, specifying to members of staff for each party how they should approach decision-making respecting modifications of the original agreement, a normal and anticipated event. It may be important to require the participation of higher staff members in any modification agreement, because they are more likely to have an overall picture of the systematic written contract and how the proposed modification would effect it, and also because lower staff members may have perverse incentives. For example, a production foreman may be motivated to grant a particular supplier a modification30 because he wants to avoid a stop in production for lack of supplies. A higher official may be better situated to understand whether a modification for one supplier could lead to pressure to extend the same modification to other suppliers, increasing its costs. Though there are valid performance planning reasons for written modification only clauses, they do make modifications more burdensome and inhibit somewhat the informality which relational contract theorists postulate permeates contract administration. Precisely for that reason, it is well known that these clauses are often ignored in the performance of contracts. Faced with the need quickly to make some modification(s) if the joint enterprise is to be as successful as it can be, lower members of staff for each party orally agree to a modification(s), perhaps out of ignorance of the contractual requirement for written approval by senior officials and often out of impatience with the bureaucratic requirement. There are many contract cases involving this fact pattern, in which one party later reneges on the oral modification, claiming it is invalid because not in writing. The courts must then decide if the written modification only clause was waived or is ineffectual in the circumstances for some other reason.31 Much more commonly, of course, the parties honour the oral modification, precisely because they wish to continue doing business with each other and social norms within their industry frown on breach of an oral modification agreement entered into in good faith. There are many differences between MSAs prepared by OEMs. Most importantly, some are designed to be contracts between parties of very unequal bargaining power – where the suppliers to the OEM have little practical commercial choice but to agree to the buyer’s proposed terms – whereas others are designed for parties who have viable commercial alternatives if they find the contract too onerous. These differences are very important for many purposes, but they are not so relevant to the primary focus of the current discussion – whether contract law’s default rules influence contract drafting. MSAs do contain terms designed to impact litigation should it occur, some of which are intended to displace default terms. It does not follow, however, that there is much advantage to be gained by designing default terms with the goal of saving the drafters’ specification costs. Because these SFKs are used in many contracts, and are often designed to facilitate intra-firm communication about the contract, it is unlikely that the drafters will leave an important matter unstated, no matter what the default 30 For example, a prepayment for a shipment because the supplier is facing a cash liquidity problem which is hampering its performance. 31 E.g., Nanakuli Paving and Rock Co v Shell Oil Co, 664 F.2d 772 (9th Cir. 1981); Universal Builders v Moon Motor Lodge, 30 Pa. 550, 244 A. 2d 10 (1968).

504  Research handbook on remedies in private law rules provide. Default rules, which have to apply to so many different contracts in so many different contexts, are inevitably subject to some uncertainty about how they will be applied by courts. There is no reason to incur the costs of that uncertainty should litigation occur by leaving a term about a foreseeable risk unstated, when the specification costs per contract are as modest as they are for a SFK. Further, if the term is left unstated in the written contract, in deference to a contract law’s default terms, the instructional benefits of the written contract to members of each entities’ staffs may be less. One litigation oriented term contained in many MSAs, as well as some bespoke systematic written supply chain contracts, is a limitation of buyers’ remedies, most commonly limiting consequential damages. It is well known that default terms, and especially Article 2 of the UCC, are very generous in their provision of buyer’s consequential damages, more generous than the customary practices or informal understandings in many business contexts.32 However, the limitation of liability clause that displaces these default terms is now very standard fare, a form clause easily copied from other contracts. And it is usually done without effort to fine tune it to account for idiosyncrasies of the transaction into which it is inserted. In short, there is every reason to believe that the specification costs of including a limitation of liability clause in a supply chain contract are minimal. Perhaps it would be desirable to alter the underlying default rule allowing buyers such generous access to consequential damages,33 but it is highly unlikely that such a change would offer contractual parties significant specification cost savings at the formation stage. There is an important exception to these generalisations about clauses limiting buyers’ consequential damages. Many systematic written supply chain contracts will contain clauses specifically providing for consequential damages with respect to one type of sellers’ breach, sometimes called an ‘epidemic’ breach.34 In this context, epidemic breaches refer to a quality defect in a part provided by the supplier that leads to a product recall by the OEM, or in extreme cases exposes it to products liability to the ultimate consumers of its products. Product recalls, as well as products liability, can be extremely costly, and contracts frequently provide which party, the OEM or the supplier, will be responsible. Not uncommonly, the supplier is required to maintain insurance to cover at least a portion of the expense, should it occur. It is worth noting that default rules have no practicable ability to reduce specification costs with respect to epidemic clauses in these contracts. Even though contract default rules do allow a buyer (here the OEM) to collect consequential damages if not disclaimed, there are also default rule limitations related to the foreseeability of the loss, the buyer’s ability to mitigate the loss, and the necessity to prove the loss in court. And because the damages are large, there is also the question of the ability of the seller to pay any judgment and the risk it might resort to bankruptcy. Given the non-negligible risk of an epidemic breach, and these legal and practical uncertainties of collecting damages in litigation, no OEM is likely to rely on contract law’s See D Campbell, ‘Market Damages and the Invisible Hand’ in L DiMatteo and M Hogg (eds), Comparative Contract Law: British and American Perspectives (Oxford University Press 2016) at 297–312. 33 This is an issue that will be discussed more fully later. See notes 39–40 and 46–47 below and accompanying text. 34 See Bernstein (n6) at 568 n21 (‘Most MSAs require the supplier to insure against such events (i.e., epidemic breaches) and name the buyer as the beneficiary of the insurance policy’). See also Jennejohn (n21) 208–9 (discussing efforts by Lockheed and a supplier to structure their transaction so that Lockheed would not be liable for design errors in the manufacture of a component). 32

A relational perspective on contract law’s default rules  505 default rules, no matter what they provide, in order to save specification costs at the formation stage. Without specification, a possibility of epidemic breaches would present a financial risk so substantial as to make pricing difficult. Mathew Jennejohn has recently written cogently about the presence of termination clauses in written contracts for innovation.35 These clauses are similar in some respects to the cancellation for convenience clauses that for years have appeared in supply chain contracts, especially buyers’ purchase order forms used in the absence of a systematic written contract.36 Both clauses clearly alter default rules and limit a buyer’s liability upon termination to something less than expectation damages, and sometimes to very little or nothing. Termination clauses also function as a limitation of liability clause for sellers. Some termination clauses do more, including importantly the clauses in innovation contracts discussed by Jennejohn, by providing for ownership rights in whatever joint product has been produced before termination, especially respecting potentially valuable intellectual property rights. The first point to make about termination clauses is that they are not needed to facilitate a unilateral termination of a contractual relationship. Specific performance (or as the British would say, literal enforcement) is almost never granted in these contexts, making unilateral termination a practical option in almost all contracts. The legal relevance of these termination clauses, therefore, relates to their limitations on liability and to their provisions pertaining to division of property rights after termination. Another possible reason for many termination clauses may be to limit the reputational injury to the terminator that may stem from termination, by making clear to all concerned that behaviour which might otherwise be viewed as violating social norms was in this circumstance anticipated and provided for in a written contract at formation. Absent concern about reputational injury, termination clauses might be less frequent.37 Many termination clauses are clearly negotiated, especially in the innovation contracts discussed by Jennejohn. There are specification costs. But these are not costs that could reasonably be reduced by manipulating contract law’s default rules. First, we would never want to eliminate entirely the ability to collect damages for unexcused termination (i.e., breach) of a contract, because of the role that the potential to collect damages in litigation plays in limiting or deterring opportunistic behaviour during performance of the contract. This topic will be

M Jennejohn, ‘Disrupting Relational Contracts’, draft paper dated 6 June 2017, on file with author. Macaulay (n28) ch 3, §3-29, at n88: ‘Study of the contract documents typically used in other industries (than automobiles) and interviews with businessmen and their lawyers disclose that in many situations purchasers assume they may “cancel” their orders when a change in demand causes them to no longer need the items ordered ... At times the contract documents contain cancellation clauses, but even where they do not, the right to cancel is widely but not always assumed to exist. After cancellation, the key question is what the buyer must pay to the seller ... Many [purchasers] would limit cancellation charges to payment at the contract rate for items completed before cancellation plus payment for raw materials that cannot be salvaged in partially completed items. Thus the conventional measure of contract damages ... awards an aggrieved party more than many businessmen think appropriate.’ 37 Jennejohn writes about termination clauses in innovation contracts, not supply chain contracts. In an earlier paper Jennejohn observed that innovation-centred interfirm collaborations often do not occur between firms who are part of groups within which reputational information easily flows. See Jennejohn (n21) at 210 (‘Traditional self-enforcement theory fails because reputational information does not circulate easily ...’). See also M C Jennejohn, ‘The Private Order of Innovation Networks’ (2016) 69 Stan L Rev 281. To the extent this observation applies in the particular situation, a desire to avoid reputational injury may play little role in accounting for a termination clause. 35 36

506  Research handbook on remedies in private law discussed shortly. Second, Jennejohn says that termination clauses are most prevalent when there are potential intellectual property rights for innovations developed during the performance. These are potential assets of big value, and because after termination the parties may not anticipate doing business together in the future, the incentives for compromise after termination may be less. In these circumstances, it is hard to imagine a default rule that would save specification costs, given the variety of circumstances among different innovation contracts. And given the stakes, which usually far exceed specification costs of including a termination clause in the contract, it is hard to imagine that parties would rely on contract law’s default rules in any event. My conclusion is that it is hard to find evidence that it would be possible to reduce specification costs in supply chain and innovation contracts by manipulating contract law’s default rules. Perhaps a case could be made for further limiting buyers’ consequential damages in the default rules, since they are so frequently limited by explicit contract term. But as suggested above, the specification costs of these limitation of liability clauses must be minor, given the ubiquity of standard forms available for this purpose. It is possible that it is difficult to observe instances of specification costs that could be avoided if default rules were different because contract law’s default rules are already designed to minimise specification costs to the extent possible. If the default rules were different, perhaps we would observe many more avoidable specification costs. This counter-factual cannot be completely discounted, and it is certainly true that because the formation stage occurs in all contractual relationships and the litigation stage rarely occurs, costs savings in the formation stage have to loom large in any welfare analysis of default rules. Nonetheless, I believe that before almost exclusive focus is given to the formation stage in designing default rules, as contract theorists advocate, attention should be given to the potential impact of default rules in the performance and litigation stages. The impact of default rules on behaviour in these stages should not be ignored on the mere possibility of impact at the formation stage, absent almost any direct evidence that default rules can have an impact on specification costs.

CONTRACT DESIGN AND OPPORTUNISM Before turning to the performance and litigation stages, I want briefly to discuss drafting efforts in the formation stage to prevent or limit the consequences of opportunistic behaviour in the performance stage. These efforts have been the primary focus of what is sometimes called the contract design literature, and there is little doubt that there are considerable specification costs in this respect. For reasons to be explained, however, I believe that default rules could play at most a minor role in reducing these costs. There is no precise definition of ‘opportunism’38 but it is clear it relates to inequality in economic bargaining power. It does not usually refer to the exercise of superior bargaining power before formation. Bargaining power at that time may lead to a one-sided contract, deemed unfair by many, but that is not generally unlawful nor condemned by most social norms. It is capitalism operating as many think it should. Opportunism refers to post-formation behaviour, See D G Smith, ‘Doctrines of Last Resort’ in Jean Braucher et al. (eds), Revisiting the Contracts Scholarship of Stewart Macaulay (Hart 2013) 426, 430–3 (on the many, shifting conceptions of ‘opportunism’ over time). 38

A relational perspective on contract law’s default rules  507 when there has been a shift in the bargaining power held by the parties at formation, and the party who has gained relative bargaining power seeks to use it to obtain a modification that gives it a greater portion of the benefits of the joint endeavour. Such a shift in bargaining power can result for a variety of reasons, but a common one, much discussed in the literature, is asymmetric idiosyncratic investments by the parties during performance. If one party can exit a contract at little cost to itself, while leaving the other party with unrecoverable costs, it is in a position to demand a bounty, in the form of a greater portion than previously agreed of the joint profits of enterprise, as its price for continued performance. In most cases the party who gains a bargaining advantage past-formation will not seek to take advantage of it, because such conduct is frowned upon by the social norms of the business world and it would cause reputational injury. It may also make difficult or impossible future deals with the counterparty. When an opportunistic threat is nonetheless made, the other party could refuse the offer, in effect inviting the threatened breach, and rely on its contract law right to sue for contract damages to protect its expectations arising from the original deal. The possibility of litigation probably does deter some opportunistic threats, and for that reason contract law’s default rules should and do provide for expectation damages.39 But because litigation is so expensive, and recovery of any damages’ award is also problematic, in many circumstances a party who is threatened with an opportunistic breach will acquiesce and enter into a disadvantageous modification.40 Recognising the impracticality of litigation as a protection against opportunistic behaviour, parties do agree, at the formation stage, with various provisions that are designed to prevent substantial shifts in bargaining power from arising during performance and also to better enable the party disadvantaged by a bargaining power shift to resist a demand for an unfavourable modification. But these provisions have little to do with default rules. Perhaps most commonly, the parties bargain for an order of performances that insures that idiosyncratic investments are made more or less simultaneously. This is a common reason for a provision requiring the buyer to make periodic payments as the seller undertakes performance, rather than relying on a lump sum payment at the end. In the supply chain context, suppliers commonly have several buyers of their product, which protects them from opportunistic threats of termination by any one buyer.41 Another strategy is to provide for transparency about each party’s performances, so that any shirking (which can lead to unplanned asymmetric investments) can be detected early. Early detection permits the non-shirking party to stop making further investments into its performance.42 Still another strategy is to provide in the Contract law’s default rules could theoretically provide for even more than expectation damages, in an effort better to deter opportunistic breaches (or the threat thereof), but such rules could also deter or penalise breaches that are not opportunistic but ought to happen for a variety of efficiency reasons. See D Campbell, ‘The Relational Constitution of Remedy: Co-operation as the Second Implicit Principle of Remedies for Breach of Contract’ (2005) 11 Tex Wesleyan L Rev 455; D Markovitz and A Schwartz, ‘The Expectation Remedy and the Promissory Basis of Contract’ (2012) 45 Suffolk U L Rev 799. 40 Modifications in the face of opportunistic threats are still one more reason for written modification only clauses that require the signature of a relatively superior member of staff. If the modification is to reassign the division of joint profits, normally a party would want one of its higher ranked officials to be involved in any decision making. 41 See Bernstein (n6) at 585 (‘[OEMs] attempt to limit the price they pay for hold-up risk ... by refusing to contract if the amount they anticipate wanting to purchase is more than 20–30 percent of the supplier’s revenue’). 42 A well known example of this strategy is the information exchanging regime described in the famous ‘braiding’ article by Gilson, Sabel and Scott. In the pharmaceutical development contract 39

508  Research handbook on remedies in private law original contract that the party not making the initial idiosyncratic investments in performance (normally a buyer) post a bond of some type to guarantee future performance or payment of damages awarded by a court. If a party threatened with breach in a holdup situation can recover sufficient damages to cover anticipated losses, without facing difficult problems of proof, the possibility of litigation becomes a more effective counterweight to an opportunistic threat of breach.43 Of course, some combination of these strategies is possible and common.

THE PERFORMANCE STAGE Two distinguished relational contract scholars have argued that remedial default rules can impact the performance of a contract by holding out the possibility of recovering large damages in litigation.44 Recovery in litigation can then seem tempting to a party who is disappointed in the likely profits of the contractual endeavour, leading to what one scholar calls ‘strategic’ behaviour. Strategic behaviour involves most importantly refusing to agree to a reasonable modification request, in hopes that it will induce or force the other party to breach. In the words of one scholar, bad default rules can ‘crowd out’ an informal settlement (i.e., a contractual modification) that would keep the other party from performing the contract. Strategic behaviour can also include acting in ways designed to enhance or reduce recoverable damages in the event of breach. An example may help the reader understand the situations underlying the concern about strategic behaviour. Imagine a long term relationship between a manufacturer (M) and a supplier (S), with no systematic written contract but a firm commitment to a fixed term which has several years remaining. In this circumstance, default rules would loom large in litigation, as they have not been significantly replaced. Suppose S has been approached by potential new buyers of its products from a different industry, and that it hopes to be able to accept this new business by investing in new production capacity. Suppose further that development of the additional capacity has been delayed, perhaps because of difficulties with environmental regulators who are concerned about wetland remediation issues. Fearing loss of the new business opportunities because of the delay, S decides to initiate a business strategy that hopefully will

described in detail in that article, the parties established a joint committee to which each party was required to file quarterly reports, which could be verified by inspections by the committee of laboratories and records maintained by each party: R J Gilson, C F Sabel and R E Scott, ‘Braiding: The Interaction of Formal and Informal Contracting in Theory, Practice, and Doctrine’ (2010) 110 Colum L Rev 1377, 1405–6. 43 A contract can also provide explicitly for damages in excess of expectations – what are typically called penalties clauses – in order to deter opportunistic breaches. Contract law generally, though controversially, usually invalidates penalty clauses as against some (unspecified) public policy. See R Halson, Liquidated Damages and Penalty Clauses (Oxford University Press 2018). Discussion of this issue is beyond the scope of this chapter. But I do not think anybody could reasonably advocate for punitive damages as a default rule. 44 Campbell (n39); R E Scott, ‘A Theory of Self-Enforcing Indefinite Agreements’ (2003) 103 Colum L Rev 1641. For the same reasons many commentators have argued against default rules allowing courts to consult context when interpreting contracts in litigation. These commentators are concerned that such default rules can encourage strategic behaviour during performance, interfering with the otherwise normal informal adjustments made during this stage. E.g., O Ben-Shahar, ‘The Tentative Case Against Flexibility in Commercial Law’ (1999) 66 U Chi L Rev 781.

A relational perspective on contract law’s default rules  509 induce M to breach in a ‘material’ way, so that under standard contract law S is entitled to stop deliveries to M and redirect the production that would otherwise be committed to M. For some reason, perhaps because its products are of superior quality, S is confident that so long as it can avoid undue reputational injury by not technically breaching its contract, it can regain M’s business, or perhaps the business of a competitor to M, once it has successfully expanded its production capacity. To carry out this strategy S begins compiling information about minor imperfections in M’s performance – for example, a delay in payment, or in sending transportation to collect a delivery – in order to build a case for material breach. Certainly it refuses to make minor informal adjustments that M requests – henceforth, performance to the letter of the contract will be demanded. Simultaneously, S begins collecting (perhaps even creating) evidence that will enable it to take advantage of a very generous default rule for calculating seller’s damages that exists in most jurisdictions. This rule, called the lost volume seller rule, entitles a seller to collect lost profits even though it is able to redirect its production to profitable sales to new buyers.45 The legal theory is that the seller would have been able to meet the new business opportunities even while continuing deliveries to the original buyer, making profits from each. To operationalise that rule, however, S must avoid the conclusion that its new business opportunities were true mitigating sales, ones that it could not have made (because of lack of production capacity) in the absence of the breach. Obscuring evidence of its delays in completing expanded production facilities would thus be a strategy to take advantage of the lost volume seller rule. Scholars who have expressed concern about some default rules crowding out the informal settlements or modifications that are the normal behaviour in long term relationships have advocated avoidance of default rules that enable large damages’ recoveries in litigation.46 Though there is little empirical evidence that crowding out actually occurs, there is also little evidence that it does not occur.47 The economic incentive for strategic behaviour where breach is less costly for one party because of profitable alternatives is clear. But it is also undoubtedly the case that the party contemplating strategic behaviour normally risks reputational loss that overwhelms any possible gain, minimising the instances of strategic behaviour. Nonetheless, because it is likely that strategic behaviour, when it occurs, is socially unproductive, some concern may be appropriate, in drafting default rules, for disincentivising unco-operative behaviour in long term contracts during the performance stage. There is a certain irony in doing so by restricting expectation damages, however. The ability to go to court and collect damages is one protection against a kind of opportunistic behaviour discussed earlier in this chapter, one stemming from bargaining leverage generated by asymmetric idiosyncratic investments by contractual parties. Using the example above, suppose M, having available to it several alternative sources of supply, learns that S has made extensive investments in new production equipment without an alternative use for the investment if M A Kramer, The Law of Contract Damages (Hart 2014) § 5.2. Robert Scott has gone so far as to suggest non-enforcement for indefiniteness, even in circumstances where the intent to create a long term contract is clear. Scott (n44) at 1686–92. Scott would allow restitution recovery in these circumstances, however, so depending on how restitution is calculated, the practical impact of his suggestion may not be as radical as first appears. 47 For a recent view of the relevant literature, sharing my scepticism about the ability to contract damage rules to crowd out informal settlement, see J Kostritsky, ‘Framework Contracts: A TransactionCost Approach to Analyzing Arrangements for the Sale of Goods’ at 78–85 (unpublished manuscript on file with author). 45 46

510  Research handbook on remedies in private law were to terminate the contract before the end of its term. M might try to take advantage of S’s exposed position by demanding an unfavourable modification (e.g., a drop in the contract price) as a condition to its continued performance of the long term contract. S is somewhat protected from this behaviour if it has the option to let M breach and sue for substantial damages. In the United States, where even the winner of a contract breach lawsuit absorbs its own legal expenses, the availability of substantial damages is needed by S to offset M’s bargaining leverage. The remedy suggested to deter ‘crowding out’ in one circumstance could encourage opportunistic behaviour in another circumstance. It would seem some balance between these competing risks is called for in drafting default terms with attention to their impact on the performance stage.

THE LITIGATION STAGE Initially I must make clear what I mean by the litigation stage. In a relational contract, as I have repeatedly emphasised, it is common at the formation stage to leave important matters to be determined later. Sometimes contracts establish elaborate decision-making structures to reach these decisions, and these structures can even specify the use of outside mediators if the staff usually involved in administering contract performance have difficulty in reaching agreement. The literature sometimes refers to these structures as designed to resolve conflict. That description is accurate enough but it is not what I mean by the litigation stage. Because in the former circumstance, the decisions to be reached are forward looking and the relationship is expected to continue. I regard such decision-making as part of the performance stage, not different in kind from the modifications/adjustments that are common at that time. The litigation stage, as I use the term, occurs when the relationship terminates before the time originally contemplated, and one or both parties seek to require the other party to share or absorb losses that result from termination and might not have occurred otherwise. As has been observed previously, normally relational parties do not expect to do business again once they reach the litigation stage.48 The litigation stage can be conducted either within arbitration or in court, and for my purposes it matters little, but in subsequent discussion I presume judicial proceedings. The litigation stage is the one time over the course of the contract where default rules are likely to have major impact on behaviour. They are frequently not displaced at the formation stage, as previously discussed. When a judicial decision actually occurs in the litigation stage, and the default rules pertaining to whatever issues becoming controlling have not displaced, I will assume that they exert considerable influence on the court’s decision.49 They also

Note 12 above and accompanying text. I ignore for purposes of this chapter the many critiques of judicial decision-making in the realist tradition, to the effect that doctrine plays a lesser role in controlling judicial decisions than often assumed. The usual argument is a judge’s value preferences leads him/her to manipulate the doctrinal rules to reach an outcome consistent with those preferences. See, e.g., D Kennedy, ‘Freedom and Constraint in Adjudication: A Critical Phenomenology’ (1986) 36 J Legal Ed 518. I also ignore the impact of juries in those cases in which they make outcome determinative decisions in the litigation stage. Juries are also thought often to allow their value preferences, or perhaps even ethnic or religious prejudices, to control outcome, ignoring what they have been instructed about the relevant legal principles to apply. Both concerns suggest that the influence of default rules in judicial decisions is less than I assume in the text, though not irrelevant entirely. 48 49

A relational perspective on contract law’s default rules  511 influence the parties in their choices about how much to invest in discovery and other trial preparation. Far more important than the impact of default rules on judicial outcomes is their impact on settlement discussions during the litigation stage. It is well known that even after a complaint is filed and litigation initiated, few cases go to trial.50 It is commonly assumed nonetheless that the outcome of settlement discussions are heavily influenced by the legal rules, including default rules, that are expected to dominate a judicial outcome if one were to occur, and I will make that assumption as well in my subsequent analysis. But this key assumption depends on several other assumptions which are not always true. First, as noted, I assume that litigation settlements are not relational deals between parties who expect to do business in the future. This is usually true, and it excludes the possibility that the outcome of a litigation settlement negotiation could include a favourable future deal for one party. If the latter is a possibility, the anticipated judicial outcome were litigation to proceed may play a secondary role in influencing the settlement outcome. Second, if one party is particularly risk adverse, or needs to clear its books of a potential large liability in order to facilitate a future financing opportunity (e.g., a new offering of public bonds), the potential of a very large damages award can lead to a quick settlement irrespective of the anticipated judicial outcome were litigation to proceed.51 Third, in some circumstances, a party anticipating being involved in litigation stages in the future, involving other parties, may regard the litigation as an investment in securing a legal decision that will benefit it in these future litigations. In those circumstances its incentives to minimise litigation expenses will be less than those of its adversary, and this can impact settlement negotiations considerably. I ignore the latter two circumstances in the subsequent analysis, though they undoubtedly do sometimes occur. On these assumptions what policies does the undoubted influence of default rules on behaviour in the litigation stage suggest should be weighed in formulating these rules? Leaving aside distributional concerns, which maybe should play a role, I think the most important policies to be considered fall into two broad categories: (1) what I will call ex post efficiency – essentially minimising the joint costs of the parties in the litigation stage; and (2) what I will call protecting autonomy – replicating the result that during the formation stage the parties probably assumed would happen in these circumstances, or perhaps more likely, probably would have assumed if they had thought about it.52 From the perspective of ex post efficiency, my analysis proceeds on the assumption that expenses incurred in litigation by both parties are wasteful from a social welfare perspective. They are not expenditures searching for a co-operative win-win deal that will benefit both parties. They are rather expenditures designed primarily to assign as great a portion as possible of the losses resulting from a terminated relationship to the other party. And any expenditures made in the battle to divide the losses only add to those losses.53 So it is easy to make a policy See M Galanter, ‘The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts’ (2004) 1 J Empirical Studies 459. 51 or a detailed and excellent exposition of this possibility, see S Macaulay, ‘Renegotiations and Settlements: Dr. Pangloss’s Notes on the Margins of David Campbell’s Papers’ (2007) 29 Cardozo L Rev 261, 275–6. 52 My discussion here draws heavily from an earlier article of mine: W C Whitford, ‘Relational Contract and the New Formalism’ (2004) Wis L Rev 631, 639–42. 53 In a few instances the goal of incurring litigation expenditures is to prevent one party from forcing the other to share the proceeds of a profitable opportunity enabled by the contract termination. But this is 50

512  Research handbook on remedies in private law argument in favour of default rules that tend to limit the costs of litigation. It is usually argued that default rules that yield more predictable judicial outcomes – often called ‘rules’ as opposed to ‘standards’ – tend to reduce litigation expenses. The basic insight is that predictable legal rules will usually restrict the range of likely outcomes from the litigation if the dispute were adjudicated, and that restricting the range of likely outcomes increases the possibility that both parties will realise that settling the case somewhere within that range will save each party more litigation expenses than the gains they could possibly achieve through adjudication. When both parties come to that realisation, if each is motivated to act in its economic self-interest,54 a settlement cutting short the litigation process should result.55 But formulation of default rules will never turn solely on ex post efficiency concerns. The easiest way to restrict the range of likely litigation outcomes is to deny any damages recovery at all, unless the parties include an unambiguous agreed remedy clause in their contract. Then negotiated settlements turning on default rules would not be needed at all, just a motion to dismiss for failure to state a claim on which relief can be granted (in the absence of an agreed remedy clause in the contract). But such an outcome would reduce the bargaining leverages of parties facing threats of opportunistic defaults in the performance stage. As rare as litigation is in relational contract contexts, depriving contractual parties of the ability credibly to threaten litigation when faced with opportunistic threats would place even greater weight in the formation stage on the importance of trust and/or the negotiation of an agreed remedy clause at a time when all the circumstances cannot be fully foreseen. The result would no doubt be a deterrence of the making of some contracts that are now entered into, and in others one or both parties would demand a larger risk premium. As costly as litigation is, it is hard to believe the benefits of eliminating the availability of remedies as a default remedy would exceed its costs. Further, some consideration should be given to fairness in formulating remedies to be applied in the litigation stage. Fairness can mean many things. I have previously written about what I call protecting autonomy as a fairness policy to be pursued, by which I mean respect for what the parties’ assumptions, often tacit and unstated, were at contract formation about the remedies courts would apply.56 One might call this freedom of contract. Part of what we

a zero sum game as well. Success or failure does not impact the profitability of the opportunity enabled by breach. 54 It is possible that one or both litigants are motivated by revenge – inflicting as much harm on the other party as possible – or altruistic commitment to defending a legal principle in court. In either of these circumstances saving litigation costs may not be an important goal for one of the parties. 55 The usual citation for this analysis is G L Priest and B Klein, ‘The Selection of Disputes for Litigation’ (1984) 13 J Legal Studies 1, 4. The analysis does not account for the possibility that during settlement negotiations lawyers may not be fully faithful agents for their principals (i.e., their clients). Relatively indeterminate legal rules may enable the lawyers for both parties, acting in their own self-interest, to persuade their clients to settle by exaggerating the risk of a disadvantageous result – a large verdict against the defendant, or a very modest recovery (or a finding of no liability) for the plaintiff. As the rules make judicial results less predictable, the credibility of the lawyers’ predictions of adverse results (or the likelihood thereof) may increase. Both lawyers may have a greater preference than their clients for settlement, as opposed to adjudication, because both fear that an adverse result by judicial decision would be harmful to their reputation as lawyers. Settlement can be win-win for the lawyers, as each spins the result as preventing a dire consequence for his/her client. 56 Whitford (n52) at 640–2. For the classic justification of defending autonomy values in constructing remedial rules, see C Fried, Contract as Promise: A Theory of Contractual Obligation (Harvard University Press 1981).

A relational perspective on contract law’s default rules  513 consider individual freedom includes the ability to do with one’s property what one wishes, including trading it through barter or through forward looking contracts. An opportunistic threat of breach, yielding a one-sided modification, can be seen as a form of theft, accomplished through making and then credibly threatening to breach a contract. At least reliance remedies should be available to help parties resist threats of opportunistic breaches, and hence to protect their interest in being able to dispose of their property as they wish. If default rules about remedies should allow for a balancing of autonomy concerns with ex post efficiency concerns, then the question becomes how courts should be instructed to identify the autonomy interests at stake. That generally requires ascertaining at least the non-breacher’s implicit or explicit assumptions at formation and raises issues similar to what arise in other interpretation contexts. It is commonly argued that a court will ascertain these assumptions more accurately with a contextual approach – one that allows the court to consider a wide range of evidence, including evidence about the parties’ past practices and post-formation behaviour.57 This conclusion is disputed by neo-formalists, who for a variety of reasons advocate restricting the evidence considered by a court to any written documents mutually agreed to at formation, supplemented by other ‘objective’ evidence of assumptions not stated in those writings. A full consideration of these debates would require another chapter. It is an important debate for ascertaining the best approach to formulating default rules about remedies for one particularly important reason. Ex post efficiency concerns are commonly thought to point towards remedy rules that restrict the range of possible results in litigation. A neo-formalist approach is also thought to restrict a court’s discretion in interpreting the parties’ intentions, implicit or explicit, at the time of formation. A contextual approach, arguably the more accurate approach to understanding those intentions, may lead to greater uncertainty as to the outcome of litigation. Adopting a contextual approach may lead to conflicting implications for the two principal policy concerns – ex post efficiency and protecting autonomy – that I have suggested should guide the formulation of default rules governing remedies. An example may clarify this rather abstract discussion. One remedy rule specifies a buyer’s burden of proof respecting consequential damages, which usually require a judicial finding about a counter-factual – a finding of what profits the buyer would have made if there were no breach. Similarly, the lost volume profits rule for sellers, which was discussed above, requires specification of what burden of proof the seller must meet to establish that the breach cost the seller an extra sale, a finding also based on a counter-factual – how many sales the seller would have made in the absence of breach. It would normally be assumed a strict burden of proof in each instance would narrow the range of likely results in litigation, making settlement more likely. But arguably a contextual approach to interpretation will yield at least some cases where a more lenient burden of proof better matches the best guess about the parties’ implicit assumptions, and therefore will better serves autonomy goals. In the first part of my analysis about relational contracts between large business entities I have argued that it makes little sense to manipulate default rules in an effort to make contract

A W Katz, ‘The Economics of Form and Substance in Contract Interpretation’ (2004) 104 Colum L Rev 496, 519–20 (‘[I]f a tribunal interprets a contract ... without fully inquiring into the actual context out of which it arose, there is no guarantee that it will apply the contract as the parties subjectively intended ... [I]f the court does not inquire (into context), it is interpreting by its own lights, not the parties’). 57

514  Research handbook on remedies in private law formation more efficient, by reducing specification costs. The law reviews are full of articles advocating that approach, and arguing that the best way to do so is to form default rules that most contracting parties would want to govern their contract. This is sometimes called the majoritarian approach. It may seem ironic in that, having dismissed as useless any effort to minimise specification costs in this way, I return, in my discussion of designing default rules to optimise results in the litigation stage, to suggesting that courts attempt to ascertain or guess what the parties’ unstated assumptions were at formation. The inquiries are not quite the same. Under the majoritarian approach, the effort is to ascertain what the average contracting party would want as a default rule, with little attention given to the peculiar wishes of the parties in any given case. I am suggesting that default rules could permit courts to speculate, using the full advantage of hindsight in a contextualised approach to this task, what a particular party probably implicitly assumed. If the default rule, perhaps in an effort to accommodate the interests in ex post efficiency, were to require a more neo-formalist approach to this effort to reflect autonomy values, however, then there is more similarity in the two inquiries, even as the purpose of the inquiries – reduction in specification costs versus reduction in litigation costs – remains quite different.

CONCLUSION The most important conclusion that I have reached in this chapter is that default rules appear to have little impact in the formation stage of supply chain and innovation contracts. Those who advocate that the primary goal in drafting default rules should be to minimise specification costs in the formation stage should carry the burden of showing empirically, not just using models built on assumptions about human behaviour, that default rules have non-minimal impact at this stage. It is possible, though hardly proven, that remedial default doctrines play some role in the performance stage by incentivising what has been called strategic behaviour, but such cases are probably infrequent. For the most part, informal relational sanctions are sufficient to deter such behaviour. It is in the litigation stage that default rules play a large role because usually the parties do not displace them at the formation stage and as a consequence they impact substantially settlement outcomes. But in very few contracts do the parties get to the litigation stage. It occurs only if a contractual relationship terminates. The net result of this analysis is to make default rules seem important only in exceptional instances. This finding can help resolve a mystery with which I started this chapter.58 In the past few decades social scientists from several disciplines have discovered and studied relational contracting between large enterprises, especially in the manufacturing sector. These scholars of industrial organisation do empirical research and have described lots of ways in which enterprises organise much of their production and distribution through long term contracts, largely as a substitute for the production coordination that could be and previously was more commonly achieved through the command structure of a vertically integrated firm. In most of these studies by non-lawyers little or no attention is given to contract law in general and particularly to contract law’s default rules. The reason would appear to be that these rules

The earlier discussion is at notes 6–7 above and accompanying text.

58

A relational perspective on contract law’s default rules  515 are just not important in understanding why and how these contractual relationships develop and are structured. My conclusion is that the debates about the substance of remedial default rules should focus on their impact in the litigation stage. This focus will not necessarily change the issues that are debated. In particular, a primary issue will be to what extent default rules should be structured to restrict the range of likely litigation outcomes when it is a judge who decides the case. This debate is sometimes called the rules vs. standards debate. But eliminating concerns about the impact of default rules on the formation stage, and therefore on what some call ex ante efficiency, lowers the stakes of that debate. Lessoning the predictability of judicial outcomes can compromise ex post efficiency in the litigation stage, but those costs are surely less than the specification costs that some imagine unpredictable default rules would impose if parties did take account of default rules in the formation stage, because the formation stage occurs in almost all relational contracts and the litigation stage rarely occurs. Reducing the stakes in this way may lead many to place greater emphasis on respecting what I have called autonomy interests – or more generally fairness – in crafting remedial default rules. And that emphasis in turn may favour rules that permit or require a contextualised approach to ascertaining each parties’ explicit and implicit assumptions at formation, on the assumption that a contextualised approach will yield more accurate findings about those assumptions in those cases that are actually litigated to conclusion.59 In this chapter I have looked just at supply chain and innovation contracts between large entities. Contract law’s default rules apply to many other types of contracts as well. The contracts that I have studied are important ones in which the parties invest considerable resources at the formation stage. If default rules do not impact formation stage behaviour in these contracts, that would seem to raise real questions about the wisdom of focusing just on saving specification costs in designing default rules. But so long as contract law remains unitary, applying to many very different types of transactions, no final decision respecting default rules should be reached without in-depth inquiry about the role of default rules in other kinds of transactions. Those inquiries will have to be the subject of other papers.

Much has been written in recent years about the possibility of error if a court attempts a contextualised approach to ascertaining parties’ attention at formation. See R E Scott, ‘Contract Design and the Goldilocks Problem’ (2015) Spring Marquette Lawyer, at 30–47, and cites contained therein. Many innovative ideas have been expressed about how parties who are concerned, at the time of formation, about the risk of error in litigation can design their contracts to minimize that risk. Those ideas fall broadly into two categories: (1) expressing in the contract itself a desire that courts not inquire into context; and (2) putting in the contract information about the context, so that courts are more inclined to make findings consonant with parties’ intentions at formation. Courts should respect any clearly expressed preferences at the time of formation, including a preference that a court not consider context in deciding a dispute. In the absence of such expression, I do not believe that courts should avoid looking at context because the risk of error is too great. The risk of error is greater in some circumstances than others (e.g., when context evidence consists importantly on unverifiable and self-interested testimony of a party), but it is hard for me to believe that disinterested courts will more often than not get it wrong in virtually any inquiry into context. See S Macaulay and W C Whitford, ‘Do Courts Usually Get It Wrong?’ (2015) Spring Marquette Lawyer, at 46–7. 59

Index

2015 Digital Single Market (DSM) package contracts for online and distance sales of goods 431 evaluation of 431–2 supply of digital content and services 430–31 ABI see Association of British Insurers absent transfer, restitution 113–18 abuse of contract 27 accounting obligations accounts in common form 148–9 AIB v Mark Redler & Co 154–7 Target Holdings v Redferns 151–4 accounts of administration for wilful default 150–51 recent terminology 151 reparative equitable compensation 151 substitutive equitable compensation 151 account of profits agency problem cases 318 beyond equity 316–19 description of 309 fusion fallacy 318 Judicature Acts 318 second sale cases 319 action in debt, literal enforcement 188–9 Adderley, Sir Charles Bowyer 294 Addis v Gramophone Co 207–10, 380, 389 Administration of Justice Act (1925) 42 Administration of Justice Act (1933) 42 Admiralty Commissioners v Owners of the Steamship Valeria 39 ADR see alternative dispute resolution affirmation concept 402 after-the-event (ATE) insurance 52 A-G v Blake 122, 251 agency problem cases 318 Agribrands Purina Canada Inc v Kasamekas 376 AIB v Mark Redler & Co 147, 154–7 Alcock v Chief Constable of South Yorkshire Police 198

Aldington v Tolstoy Miloslavsky 202 Alfred McAlpine Construction Ltd v Panatown Ltd 137 allowances, gain-based damages 328–30 alternative dispute resolution (ADR) 63 amenity nuisance 300 American Law Institute 28 Anglia Television Ltd v Reed 101 Anglo-American law 17 Anglo-Australian law 130, 134, 146 Anglo-Canadian law 17 anticipatory breach 176–8 anti-deterrent accounts 314–15 apologies dilute deterrence 15 Appleby v Myers 228 Arcos Ltd v EA Ronaasen and Son 74 Asamera Oil Corp Ltd v Sea Oil & General Corp 382 assessment of fairness 286–7 Association of British Insurers (ABI) 50 Association of Personal Injury Lawyers 59 Attorney General v Birmingham Corporation 294 Attorney-General v Blake 27, 312 Atwal v Rochester 234 Australian law, contract damages Clark v Macourt 352–7 overview of 352 proportionate liability, statutory imposition of 363–7 recoverability of rectification cost, excess of diminution in value 357–60 statutory restrictions on recovery, nonpecuniary loss 361–3 theories of substitutionary damages 353–7 average consumer 288 avoidance mental distress 205–6 awards see gain-based awards; jury awards; reasonable fee awards bailees, literal enforcement 193–4 Bailey v Howard 44

517

518  Research handbook on remedies in private law Baird, Douglas 475 Baker, Tom 436 Bank of New Zealand v New Zealand Guardian Trust Co Ltd 158 Bank of Scotland v Singh 282 Barclays Bank Plc v Kufner 282 Barker, Kit 321, 323 barring effect 336 Bartlett v Barclays Bank 153 Bayerische Hypothetken v Dietzinger 282 behaviour of contractual parties 490 Behnke v Bede 247, 249, 250 Behnke v Bede Shipping Co Ltd 241 Bell, George Joseph 349 Bell v Lever Bros 220, 221 Bellgrove v Eldridge 141, 358 Bernstein, Lisa 70 Beswick v Beswick 252 betterment 373–5 Bingham, Sir Thomas 28 Birks, Peter 460, 470 Blake, George 316 blood money 447–8 Bloxham v Robinson 390 Bonnard v Perryman 34–5 Bow Valley Husky (Bermuda) Ltd v Saint John Shipbuilding Ltd 442 BP Exploration Co (Libya) Ltd v Hunt (No. 2) 229, 231, 233, 234 Braucher, Jean 490 breach of condition and fundamental breach 167–72 breach of contract commercial contracting 66–7 contract-breaker 25 contractual obligations 26 cost of performance 25 default measure of damages Fuller and Perdue’s challenge 132–3 Robinson v Harman principle 131–2 substitutionary analyses 134–5 gain-based awards 27–32 legal wrongs vs. 24–7 market damages general treatment of 238–43 within law of remedies 243–6

structure of remedies 246–52 non-contractual obligations 26 Scots law material breach and rescission 345–50 mutuality 335–6 overview of 333–4 specific implement 336–44 breach of contractual obligation 176 breach of trust, equitable remedies accounts in common form accounting obligations 148–9 AIB v Mark Redler & Co 154–7 Target Holdings v Redferns 151–4 accounts of administration for wilful default 150–51 balancing two approaches 157–61 recent terminology reparative equitable compensation 151 substitutive equitable compensation 151 Bridge, Michael 197, 210 Bristol & West BS v Mothew 150 British Transport Commission v Gourley 251 Bunge v Nidera 78 Bunge v Tradax 170 Burger King Corporation v Hungry Jack’s Pty Ltd 143 Burrows, Andrew 215, 357 Butler v Countrywide Finance Ltd 388 Buxton, Richard 307 Cairns v Modi 201, 202 Cameron-Clegg coalition 290 Cameron, David 62 Campbell, David 317, 436, 483 Canada (Attorney General) v Fairmont Hotels Inc 385 Canadian Abortion Rights Action League 444 Canadian law 17 Canadian National Railway Co v Norsk Pacific Steamship Co Ltd 442 Canadian perspectives, contract remedies beyond compensation and pecuniary loss non-pecuniary damages 379–81 punitive damages 376–8 discrete changes in doctrine alternative performance 375–6

Index  519 betterment 373–5 mitigation 369–73 equitable remedies rectification 384–6 specific performance 381–4 overview of 368–9 Canson Enterprises v Boughton & Co 152 Carttera Management Inc v Palm Holdings Canada Inc 383–4 Catholic Group for Health, Justice and Life 444 causal test, gain-based damages 328 CCC Films (London) Ltd v Impact Quadrant Films Ltd 91, 95 CCLA see Contract and Commercial Law Act 2017 CESL see Common European Sales Law CFAs see conditional fee agreements Chagger v Abbey National Plc 208 Chancery Amendment Act (1858) 34 Chandler v Webster 227, 229, 233 Chartbrook Ltd v Persimmon Homes Ltd 223 Charter v Sullivan 242, 243 civil justice framework accuracy over cost and efficiency 47–9 Civil Procedure Rules 1998 48–9 cost and efficiency description of 58–9 insurer agenda 60–61 privatisation of justice agenda 62–4 tort reform agenda 61–2 value for money agenda 59–60 cost reduction on access and accuracy 53–8 reinforcement of proportionality 49–53 direct rationing terms 49 indirect rationing terms 49 civil liability statute of Victoria 362 civilian systems vs. common law 17–18 CJEU see Court of Justice of the European Union Clark v Macourt 135, 142, 352–7 Clarke, Sir Anthony 50 Client Earth 307 CMA see Competition and Markets Authority CMS Dolphin Ltd v Simonet 328 Coase, Ronald 44 codification of commercial law 351 Colls v Colonial Store Ltd 298

commercial contractors contract management 72 default rules of public system of contract law 72 reputational sanctioning 71 commercial leasing litigation 341–2 commercial practice, definition of 267 commercial reality contract law deviations 79–82 contract law remedies as defaults 76–9 empirical studies 67–72 relational contract theory 72–6 Common European Sales Law (CESL) 427 withdrawal of 428–9 common law vs. civilian systems 17–18 supra-compensatory remedies 124 Common Law Procedure Act (1854) 190 common law property rights, literal enforcement 193–4 common mistake decription of 219–20 frustration vs. 219 rectification for 222 Commonwealth of Australia v Amann Aviation Pty Ltd (‘Amann Aviation’) 85, 251 Communication on European Contract Law (2001) 424 Communication on European Contract Law (2004) 425 compensation culture 62 compensation interests 105 compensatory analyses 320–22 Competition and Markets Authority (CMA) 283 conditional fee agreements (CFAs) 52 conditional transfer, restitution 119–22 Connelly v Simpson 348 consequential damages 463–4 consequential loss 138–40 consequential reliance 94–5 consumer average 288 definition of 282 Consumer Contracts Regulations 2013 266, 280 Consumer Guarantees Act (1993) 396 consumer law

520  Research handbook on remedies in private law clarification of 259–60 fragmentation of 258 modernisation 260 UK 258 Consumer Protection from Unfair Trading Regulations 2008 (CPUTR 2008) 267–8 Consumer Protection (Amendment) Regulations 1999 (CPAR 2014) 268–9, 275 Regulation 27A 269 Regulation 27E(8) 269 Regulation 27L(1) 269–70 Consumer Protection (Amendment) Regulations (2014) 256 consumer protection, selective enhancement of 261–2 Consumer Rights Act 2015 237 contracts to supply digital content to consumers obligations 277 overview of 276–7 remedies 277–8 contracts to supply goods to consumers application of 262–5 consumer rights 265–6 other rules 275–6 overview of 262 privatisation of remedies, unfair commercial practices 267–70 remedies under 270–72 right to price reduction and final right to reject 275 right(s) to reject 272–4 right to repair/replacement 274 contracts to supply service overview of 279 remedies 279–81 terms of contract 279 Department for Business, Innovation and Skills 259 House of Commons 255 overview of 255–6 policy aims clarification of consumer law 259–60 consumer law modernisation 260 deregulation for businesses 260–61 digital age 260

selective enhancement of consumer protection 261–2 streamlining consumer rights 256–9 term-representation dichotomy 259 Consumer Rights Directive 255, 429–30 Consumer Sales Directive 272–5 contract(s) negotiating damages 322 to supply digital content to consumers obligations 277 overview of 276–7 remedies 277–8 to supply goods to consumers application of 262–5 consumer rights 265–6 other rules 275–6 overview of 262 privatisation of remedies, unfair commercial practices 267–70 remedies under 270–72 right to price reduction and final right to reject 275 right(s) to reject 272–4 right to repair/replacement 274 to supply service overview of 279 remedies 279–81 terms of contract 279 Contract (Rights of Third Parties) Act (1999) 252 Contract (Third Party Rights) (Scotland) Act (2017) 351 Contract and Commercial Law Act 2017 (CCLA) 393–404 contract-based governance and enforcement 70 Contract (Scotland) Bill 336 contract damages, Australian law Clark v Macourt 352–7 overview of 352 proportionate liability, statutory imposition of 363–7 recoverability of rectification cost, excess of diminution in value 357–60 statutory restrictions on recovery, nonpecuniary loss 361–3 theories of substitutionary damages 353–7 contract design, contract law’s default rules 502–4

Index  521 contract law breach and pay 80 damages for non-pecuniary loss avoidance mental distress 205–6 loss of amenity 207 physical inconvenience 206–7 provision of pleasure 204–5 default rules contract design 502–4 ex post efficiency concerns 508–9 formation stage 492–502 litigation stage 506–10 opportunism 502–4 overview of 490–92 performance stage 504–6 deviations from commercial reality 79–82 foundation of 473 general principles of 238 non-performance of a contract 120 remedies as defaults 76–9 tort law vs. 197 contract remedies Canadian perspectives alternative performance 375–6 betterment 373–5 mitigation 369–73 non-pecuniary damages 379–81 punitive damages 376–8 rectification 384–6 specific performance 381–4 default rules concept of 473 dual performance theory 482 expectation damages 485–7 linkage of obligation and remedy 478–9 majoritarian approach 474 mandatory rules 473 moral objections to 472 optional morality 479–80 overview of 472 penalty defaults 474 questionable moral claims 480–84 radical realignment 487–9 remedial defaults 484–9 restrictions on party choice 475–8 simply sensible terms 475

stickiness 484–5 suggestions for 472 New Zealand perspectives CCLA and 393–404 overview of 387–90 statutory reform of 390–93 Contracts (Privity) Act (1982) 391 Contracts (Rights of Third Parties) Act (1999) 351 Contracts and Commercial Law Reform Committee 392, 395, 400 contracts for online and distance sales of goods (OSD) 431 contractual liability reform 352 Contractual Mistakes Act (1977) 391, 393 contractual obligations 26 contractual parties, behaviour of 490 contractual privity 393 Contractual Remedies Act (1979) 391, 393 Contractual Remedies Bill (1978) 394 contractual sadism 483 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd 31, 389 Cooper v Phibbs 220, 221 Coronation Cases 230 corrective accounts 314–15 corrective justice theory 436, 440, 445, 449 cost reduction on access and accuracy 53–8 reinforcement of proportionality 49–53 Court of Justice of the European Union (CJEU) 256 court-ordered remedy 10 Courts and Legal Services Act (1990) 201 Coventry v Lawrence 292, 300–305 CPAR 2014 see Consumer Protection (Amendment) Regulations 1999 CPUTR 2008 see Consumer Protection from Unfair Trading Regulations 2008 creative remedies 468–9 Cullinane v British ‘Rema’ Manufacturing Co Ltd 102 cynical breach 27 damages consequential 463–4 definition of 462 gain-based see gain-based damages

522  Research handbook on remedies in private law market see market damages for pecuniary loss 210 reliance see reliance damages to reputation 201–2 restitutionary 124–5 damages for non-pecuniary loss (DNPL) in contract avoidance mental distress 205–6 loss of amenity 207 physical inconvenience 206–7 provision of pleasure 204–5 damages for pecuniary loss vs. 210 purpose of 197 recovery of Addis v Gramophone Co Ltd 207–10 assumption of responsibility 216–17 can’t be quantified 210–11 extravagant damage awards 211–14 flood of claims 214–16 foreseeability concept 216 punishing defendant 214 in tort damage to reputation 201–2 mental distress 202–3 personal injury 198–201 physical inconvenience/physical discomfort 203 Daventry District Council v Daventry & District Housing Ltd 224 Davies, Paul 304 DCFR see Draft Common Frame of Reference DCS see digital content and services de minimis rule 212, 215 declaratory authority 459 defamation 201 Defamation Act (2013) 202 default measure of damages, contractual breach Fuller and Perdue’s challenge 132–3 Robinson v Harman principle 131–2 substitutionary analyses 134–5 default rules contract law contract design 502–4 ex post efficiency concerns 508–9 formation stage 492–502 litigation stage 506–10

opportunism 502–4 overview of 490–2 performance stage 504–6 contract remedies concept of 473 dual performance theory 482 expectation damages 485–7 linkage of obligation and remedy 478–9 majoritarian approach 474 mandatory rules 473 moral objections to 472 optional morality 479–80 overview of 472 penalty defaults 474 questionable moral claims 480–84 radical realignment 487–9 restrictions on party choice 475–8 simply sensible terms 475 stickiness 484–5 suggestions for 472 default terms 492 deficient transfer, restitution 113–18 Delchi Carrier SpA v Rotorex Corp 417 democratic legitimacy 303 Dennis v Ministry of Defence 300 deregulation for businesses 260–61 deterrence 313–14 Devonshire, Peter 316 difference in value measure 137 digital age 260 digital content to consumers, contracts to supply obligations 277 overview of 276–7 remedies 277–8 digital content and services (DCS) 430–31 direct rationing 49 direct reliance 94–5 directive authority 459 directive rulings 458, 471 Director General of Fair Trading v First National Bank plc 286 discretionary remedialism 12–13 disgorgement 123–4 displace principle 28 disproportion 359 DNPL see damages for non-pecuniary loss

Index  523 Dobson, Cynthia 443, 444 Dobson v Dobson 443, 444, 445 Dobson, Ryan 443, 444 Donoghue v Stevenson 441, 449 Draft Common Frame of Reference (DCFR) 18, 31, 334, 405, 427 dual performance theory 482 Dworkin, Ronald 438, 467 Eagleton, Terry 33 Eastwood v Magnox Electric plc, McCabe v Cornwall CC 209 Edelman, James 323 Ellison, Minter 159 empirical studies, contracting behaviour 67–72 commercial contractors contract management 72 default rules of public system of contract law 72 reputational sanctioning 71 contract-based governance and enforcement 70 formal legal contracts 68 self-help approach 71 enforcement 289–90 England’s Matrimonial Causes Act (1973) 465 English contract law 80–81, 218, 227, 235 doctrine of mistake 219 Enterprise and Regulatory Reform Act (2013) 62 Environmental Law Foundation 307 epidemic breach 500 Equality Act (2010) 203 equitable compensation reparative 151 substitutive 151 equitable defences 327–30 equitable remedies 5, 8 accounting obligations accounts in common form 148–9 accounts of administration for wilful default 150–51 recent terminology 151 balancing two approaches 157–61 rectification 384–6 specific performance 381–4 equity regards, literal enforcement 191–3 equity’s auxiliary jurisdiction 311

equity’s original jurisdiction 311 essential reliance 94, 96 Essert, Christopher 446 Esso Petroleum Co Ltd v Kingswood Motors (Addlestone) Ltd 185 Etherton, Sir Terrence 65 Europeanisation of private law 2014 CESL withdrawal 428–9 2015 DSM package contracts for online and distance sales of goods 431 evaluation of 431–2 supply of digital content and services 430–1 Consumer Rights Directive 429–30 oveview of 421–3 unification initiatives 423–8 Evangelical Fellowship of Canada 444 excluded assessment approach 285 excluded term approach 285 excluding interest 105 exclusive entitlement analyses 324 expectation damages 485–7 expectation interest 6 expectation measure 130 of damages 21 expression remedies 7, 123 Fair Trading Act (1986) 399 Farley v Skinner 204, 206, 210, 211, 212 Farnworth v Manchester Corporation 296 Fatal Accidents Act (1976) 203 FCBA see Future Carrier Borne Aircraft Fibrosa Spolka Akcyjina v Fairbairn, Lawson, Combe, Barbour Ltd 227 Fidler v Sun Life Assurance 208 Fidler v Sun Life Assurance Co of Canada 379 fiduciary law, no-profit rule 314–15 flexible mechanism approach 230 Flight Centre Ltd v Louw 362 Flint v Lovell 41 Foran v Wight 178 force majeure 182 Foreman v Williams 198 foreseeability concept 216 formal legal contracts 68

524  Research handbook on remedies in private law formalism 438 formation stage, contract law’s default rules 492–502 Foskett v McKeown 114 Fox v Fox 147 freedom of choice of law 479 free-standing orders 470–71 Friedmann, Daniel 317 frustration conferment of valuable benefit 232–5 description of 218 flexible mechanism approach 230 Law Reform Act 1943 228–30 mistake vs. 219 overview of 227–8 payment of money 230–32 functional approach of remedy 6 fundamental breach anticipatory breach 176–8 Article 25 and Comparative Reflections 415–19 breach of condition and 167–72 concept of 164–6 definition of 410 existence of 414–15 facts of case and judgments of courts 412–14 innominate/intermediate terms and 172–5 non-performance 410–12 fusion fallacy 318 Future Carrier Borne Aircraft (FCBA) 300 gain-based awards Attorney-General v Blake 27 conscientious accounting 30 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd 31 displace principle 28 Draft Common Frame of Reference 31 One Step (Support) Ltd v Morris-Garner 29–31 specific performances 31–2 see also awards gain-based damages account of profits 309 causation, remoteness, allowances and equitable defences allowances 328–30

bars to relief 330 causal test 328 process of taking accounts 327 remoteness 328 giving back 309 giving up 309 historical background 310–11 overview of 309–13 reasonable fee awards 312, 319–20 compensatory analyses 320–22 compensatory and restitutionary analyses 323 methods of calculation 325–6 partial disgorgement analyses 325 property/exclusive entitlement analyses 324 restitutionary analyses 323 vindicatory accounts 324 restitutionary damages 309 during twentieth century 311–12 gain-based relief, normative basis anti-deterrent accounts 314–15 corrective accounts 314–15 deterrence 313–14 punitive accounts 315–16 Gamerco SA v I.C.M./Fair Warning (Agency) Ltd 231, 232 Garratt v Ikeda 401 general deterrence 314 Gergen, Mark 328 Gilbert, Sir Jeffery 21 Girvan v Inverness Farmers Dairy 213 giving back of benefit 309 giving up of benefit 309 Gold, Andrew 315 Gore v Van der Lann 195 Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS 169 Grand China Logistics v Spar 171, 174 Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd 221 Green Paper on Policy Options (2010) 427 Green Paper on the Consumer Acquis (2007) 426 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd 169

Index  525 H Parsons (Livestock) Ltd v Uttley Ingham and Co Ltd 251 Hadley v Baxendale 21, 79, 216, 239, 251, 354, 380, 388 Hamilton Jones v David Snape 211 Hamilton v Open Window Bakery Ltd 375, 376 harmonisation 430–31 Harrington (Earl) v Derby Corp’n 186 Harris v Digital Pulse Pty Ltd 316 Hayton, David 158 Heil v Rankin 40, 200 Hennock, E P 307 Hercules Managements v Ernst & Young 442 Higson v Guenault 305 Hill, Claire 494 HKRUKII (CRC) Ltd v Heaney 299 Hobbs v London and South Western Rly C 206 Holmes, Oliver Wendell 10 Holroyd v Marshall 192 Honda Canada Inc v Keays 208 Hongkong Fir case 167, 172, 178 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd 166 Hongkong Fir Shipping v Kawasaki Kisen Kaisha 403 horizontal equity 212–13 Hounslow London Borough Council v Twickenham Garden Developments Ltd 194 House of Lords 24, 28, 38–9, 41, 44, 114, 117, 165, 170, 194, 206, 208, 209, 213, 223, 312 Howarth, David 483 Human Rights Act 34, 184 human rights, literal enforcement 184 Hurst v Picture Theatres Ltd 194 hypothetical bargain 320 Illegal Contracts Act (1970) 391 illegitimate transfer of value 323 impossibility jurisprudence 183 incidental reliance 94 incrementalism 386 indemnity interests 105 indirect rationing 49 individualised compensation 75 inflation of damage claims 211 injunctions, lens of nuisance

Coventry v Lawrence 300–305 historical development of 293–300 overview of 292–3 right to light 305–7 injustices, remedial law 465–8 innominate/intermediate terms 172–5 insolvency, literal enforcement 186–7 insurance money 447–8 insurer agenda 60–61 integrationist approach remedies substantive law vs. remedies 11 international instruments definition of international 406–7 forms of 405–6 fundamental breach Article 25 and Comparative Reflections 415–19 definition of 410 existence of 414–15 facts of case and judgments of courts 412–14 fundamental non-performance 410–12 overview of 405 specific performance 407–9 Introduction to the Law of Restitution (Birks) 108 Inverugie Investments Ltd v Hackett 323, 325 Jackson, Sir Rupert 200 Jacob, Sir Jack 47, 63 James Street Hardware and Furniture Co Ltd v Spizziri 373 Jarvis v Swans Tours 204, 205 Jennejohn, Mathew 501 Jiangsu High People’s Court 412–13, 418 Johnson v Gore Wood & Co 209–10, 212 Johnson v Unisys 209, 216 Josceleyne v Nissen 223 Judicature Acts 318 Judicial College 199 judicial remedies classification of 5–7 flexibility for money awards 8 for non-money awards 8 super-injunction 9

526  Research handbook on remedies in private law perspectives of 3–4 Juries Act (1918) 42 jury awards 42–3 Kahn-Freund, Otto 41 Kansas v Nebraska 325 Kásler v OTP Jelzálogbank Zrt 287, 288 Keays v Honda Canada Inc 380 Klass, Gregory 482 Knott v Cottee 149 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd 397 Koompahtoo v Sanpine 168, 173 Kostritsky, Juliet 495 Kramer, Adam 134 L Albert & Son v Armstrong Rubber Co 95, 98 land sale contracts 19 Landon, P A 36 LASPO see Legal Aid, Sentencing and Punishment of Offenders Act 2012 Lavarack v Woods of Colchester 251 Law Commission 214, 255, 291–3, 305–7 New Zealand 392 Scottish see Scottish Law Commission law of contract see contract law Law of Contract in New Zealand (Burrows) 387 Law of Property Act (1925) 191 Law Reform (Frustrated Contracts) Act (1943) 228–30, 235 law of restitution see restitution The Law of Restitution (Goff and Jones) 108 Law Revision Committee 228, 230, 233 law of tort see tort law Lee, Maria 304 Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) 51, 54 legal self-help, literal enforcement 195–6 legitimate interests 144, 248, 331 Lewis, Richard 47, 436 Libertarian Investments Ltd v Hall 148 licence fee damages 124–5, 324 licensees, literal enforcement 193–4 linkage of obligation and remedy 478–9 Lipkin Gorman v Karpnale 115–16 liquidated damages 488–9

literal enforcement of obligations action in debt 188–9 common law property rights, licensees and bailees 193–4 description of 180–81, 187–8 equity regards 191–3 legal self-help 195–6 physical self-help 195–6 promises not to sue 194–5 self-executing court orders 190–91 specific remedies human rights 184 impossibility 182–4 insolvency 186–7 specific performance 181–2 third party rights 185–6 litigation 64 commercial leasing 341–2 definition of 14 likelihood of 15 in remedies 13–14 stage, contract law’s default rules 506–10 Llewellyn, Karl 473 loss of amenity 138–40, 207 lost opportunity to bargain analysis 320 Low, Kelvin 323 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd 171 Macneil, Ian 72, 249, 496 Magnus v Queensland National Bank 149, 153, 159, 160 mainstream functionalist legal analysis 439, 441 majoritarian approach 474 Malik v Bank of Credit and Commerce International SA (in liquidation) 208 mandatory remedies 478 mandatory rules, contract remedies 473 Marathon Asset Management LLP v Seddon 325, 326 market damages general treatment of 238–43, 252 within law of remedies 243–6 positive law of 241–2, 244 prima facie rule of 241 regulatory success 250

Index  527 specific performance 251–2 structure of remedies 246–52 Master Service Agreements (MSAs) 498 material breach and rescission historical development of 345–6 modern law 346–8 overview of 345 restitution following breach of contract 348–50 mathematical exactitude 327 McElroy Milne v Commercial Electronics Ltd 388 McGregor, Harvey 197 McRae v Commonwealth Disposals Commission 90, 95 measurement of benefit, restitution 111–13 mental distress 202–3 avoidance 205–6 mental harm 362 Miller v Jackson 297 Miller, Paul Baron 315 Milner v Carnival plc 207, 213 Ministry of Defence (MOD) 300 Minors’ Contracts Act (1969) 391 Misrepresentation Act (1967) 268 Mitchell, Charles 155 mitigation 369–73, 484 mitigation principles 136 MOD see Ministry of Defence modern history of remedies breach of contract 24–7 expectation measure of damages 21 gain-based awards 27–32 money remedies, primacy of 17–20 remoteness principles defendant assumed responsibility 24 Hadley v Baxendale facts 21–4 modern history of tort remedies Admiralty Commissioners v Owners of the Steamship Valeria 39 Bailey v Howard 44 Bonnard v Perryman 34–5 constraining power 34 damages for loss of amenity 40–41 Flint v Lovell 41 Heil v Rankin 40 inter-related and overarching themes 33

jury awards 42–3 rationale of compensation 38–40 rationalism and irrationalism 33 Rookes v Barnard 37–8, 44 Shelfer v City of London Electric Lighting Company 34 Shepherd v Hunter 43 Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd 39 Wise v Kaye 40 workmen’s compensation system 36 workplace injury 35–6 modern law 346–8 money remedies, primacy of common law vs. civilian systems 17–18 Draft Common Frame of Reference 18 land sale contracts 19 traditional rule 19–20 uniqueness 19 Morris, Annette 436 Morris Garner v One Step (Support) Ltd 313, 322, 324 Moveable Transactions (Scotland) Bill 351 MSAs see Master Service Agreements multi-factorial assessment 173–4 mutuality 335–6 Nant-y-glo and Blaina Ironworks Ltd v Grave 149 National Grain and Feed Association arbitrations 71 Nestle v NatWest Bank 150 New Zealand Law Commission 392 New Zealand perspectives, contract remedies CCLA and 393–404 overview of 387–90 statutory reform of 390–93 Newmans Tours Ltd v Ranier Investments Ltd 400 Nobahar-Cookson and others v The Hut Group Ltd 78 non-contractual obligations 26 non-contractual wrongs 24 non-pecuniary damages 379–81 non-pecuniary loss 361–3 Notice of Proposed Obstruction (NPO) 305 notwithstanding clause 494 NPO see Notice of Proposed Obstruction Nurse v Barns 94

528  Research handbook on remedies in private law Office of Fair Trading v Abbey National Plc 260, 283, 285–7 Office of Fair Trading v Foxtons 285, 286 Ogus, Anthony 17 Omak Maritime Ltd v Mamola Challenger Shipping Co (`The Mamola Challenger’) 87 On Demand Information Plc (in Administrative Receivership) v Michael Gerson (Finance) Plc 194 One Step (Support) Ltd v Morris-Garner 29–31 306793 Ontario Ltd v Rimes 382 opportunism 502–4 opportunistic breach 27 optimal default rules 485–7 optional morality 479–80 ordinary commercial contracts 390 OSD see contracts for online and distance sales of goods Paper Reclaim Ltd v Aotearoa International Ltd 389 partial disgorgement analyses 325 Pate Estate v Galway-Cavendish and Harvey (Township) 378 Pearson Commission 201 PECL see Principles of European Contract Law penalty defaults 474, 492–3 Penner, James 160 Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd 384, 386 performance interests 7, 67, 79 conceptions loss in contract law 135–6 loss of amenity/consequential loss 138–40 substitutionary analysis 136–8 default measure of damages Fuller and Perdue’s challenge 132–3 Robinson v Harman principle 131–2 substitutionary analyses 134–5 reasonableness restriction, substitutionary claims cost of repairs 141–2 cost of replacement 142–3 cost of substitute performance 140 lack of good faith 143–5

performance stage, contract law’s default rules 504–6 personal injury 198–201, 361 physical inconvenience/physical discomfort non-pecuniary loss in contract 206–7 non-pecuniary loss in tort 203 physical self-help, literal enforcement 195–6 PICC see UNIDROIT Principles of International Commercial Contracts Pieres v Bickerton Aerodromes Ltd 305 Pilkington v Wood 251 policy-based unjust factor 128 Pollock, Frederick 36 Pollock, Sir Frederic 207 Pourzand v Telstra 141 principle of substantive law 12 Principles of European Contract Law (PECL) 405 Private Wrongs (Ripstein) 446 privatisation of justice agenda 62–4 of remedies, unfair commercial practices 267–70 Privy Council 325 profits of wrongdoing, restitution 122–4 progressive legal academics 450 property/exclusive entitlement analyses 324 proportionate liability, statutory imposition of 363–7 proprietary remedy 122–3 The Province of the Law of Tort (Winfield) 36 provision of pleasure in contract 204–5 psychiatric injury 362 see personal injury psychological injury 362 punitive accounts 315–16 punitive damages 376–8 qualified transfer, restitution 119–22 quantum meruit 111, 121, 126, 128, 129, 228, 234 The Quantum of Damages in Personal Injury Claims (Kemp and Kemp) 41 quantum valebat 234 quasi-punitive measures 124 questionable moral claims 480–84 quia timet orders 460, 462 R & B Customs Brokers v United Dominions Trust Ltd 263

Index  529 R v X Ltd 267 Radford v De Froberville 358, 359 radical realignment, remedial defaults 487–9 range of tenable views 98 Raphael Wiseman v Virgin Atlantic Airways Ltd 208 rational connection test 377–8 reasonable fee awards 312, 319–20 compensatory analyses 320–22 compensatory and restitutionary analyses 323 methods of calculation 325–6 partial disgorgement analyses 325 property/exclusive entitlement analyses 324 restitutionary analyses 323 vindicatory accounts 324 see also awards rebuttal of presumption benefits 92–4 recoupment presumption 90–92 recovery of damages for non-pecuniary loss Addis v Gramophone Co Ltd 207–10 assumption of responsibility 216–17 can’t be quantified 210–11 extravagant damage awards 211–14 flood of claims 214–16 foreseeability concept 216 punishing defendant 214 rectification 221–7 for common mistake 222 equitable remedies 384–6 equitable remedy 227 overview of 221–2 requirements for 222–3 reflective remedies 6 Regan v Paul Properties 297 reinforcement of proportionality 49–53 relational contract theory 72–6 individualised compensation 75 market insensitive and sensitive goods 75–6 relational norm of reciprocity 74 Sale of Goods Act (1979) 74, 75 simple efficient breach fallacy 73 UN Convention on the International Sale of Goods (1980) 75 relational norm of reciprocity 74 reliance damages acceptance of expectation cap 85–6 Amann Aviation case 88–9

claiming 101–6 Commonwealth of Australia v Amann Aviation Pty Ltd 85 description of 84–5 loss-making transaction 86 Omak Maritime Ltd v Mamola Challenger Shipping Co 87 presumption of recoupment 90–92 range of tenable views 98 rebuttal of presumption benefits 92–4 relevance of contingencies 100–101 reliance terminology 86–7 Robinson v Harman 85–7 wasted expenditure 94–100 reliance interest 6 reliance loss damages 84 reliance measure 130 remedial defaults expectation damages 485–7 radical realignment 487–9 stickiness 484–5 remedial law availability of 460–68 injustice 465–8 rights-threats 461–2 wrongs 462–5 definition of 454–7 kinds of remedies 468–71 creative remedies 468–9 free-standing orders 470–71 replicative remedies 468–9 wrong-responding orders 470 legal phenomenon 455 overview of 454 provision of 457–9 structure of 471 substantive law vs. 456 remedialism, discretionary 12–13 remedies definition of 218 description of 2–3 as discrete subject 3 integrationist approach 2 litigation and 13–16 notion of 218 for nuisance 294

530  Research handbook on remedies in private law part of legal process 13–16 substantive law and 10–13 varieties classifying judicial remedies 5–7 court orders 3–5 remoteness gain-based damages 328 principles defendant assumed responsibility 24 Hadley v Baxendale facts 21–4 renunciatory breach 176 reparative equitable compensation 151 replicative orders 461 replicative remedies 6, 468–9 reputational sanctioning 71 rescission for mistake 220–21 restitution 309 absent/deficient transfer 113–18 central case of 108 definition of 108 material breach and rescission 348–50 measurement of benefit 111–13 qualified or conditional transfers 119–22 transfers on basis that fails 119–22 unjust enrichment theory attraction of 110 conditions 109–10 objections to 125–8 policy-based unjust factor 128 for wrongs damages 124–5 profits of wrongdoing 122–4 restitution interests 6, 105 restitution/unjust enrichment 12 restitutionary analyses 323 restitutionary awards 313 restitutionary damages 124–5 gain-based damage 309 restitutionary remedy 11, 123 see also restitution restoration interest 7 revision Act see Contract and Commercial Law Act 2017 (CCLA) Rights to Light (Injunctions) Bill 292 right to price reduction and final right to reject 275 right(s) to reject 272–4

right to repair/replacement 274 rights-threats, remedial law 461–2 Ripstein, Arthur 446 The Rise and Fall of Freedom of Contract (Atiyah) 21 Robinson v Harman 239, 251, 358 principle 85–7, 131–2, 136 Rookes v Barnard 37–8, 44 Rowlands v Collow 208 ruling principle 358 Ruxley Electronics and Construction Ltd v Forsyth 247, 358 Ruxley Electronics v Forsyth 137, 207, 251 RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV 288 Sale and Supply of Goods Regulations (2002) 262 Sale and Supply of Goods to Consumers Regulations 2002 274 Sale of Goods Act 237, 240 Sale of Goods Act (1893) 102, 347 Sale of Goods Act (1979) 74, 75, 258–60, 265, 270, 272–4 sales of goods, market damages general treatment of 238–43 hypothetical example 238–9 within law of remedies 243–6 structure of remedies 246–52 Scots law of contract material breach and rescission historical development of 345–6 modern law 346–8 overview of 345 restitution following breach of contract 348–50 mutuality 335–6 overview of 333–4 specific implement commercial leasing litigation 341–2 court’s discretion to refuse remedy 339–41 implement of payment obligation 343–4 overview of 336–8 status as primary remedy 338–9 Scott Carver Pty Ltd v SAS Trustee Corporation 141 Scottish Law Commission (SLC) 210, 215, 237, 334

Index  531 Second Common Law Procedure Act 294 See, Alvin 321 self-executing court orders 190–91 self-help 4, 5 approach 71 remedies 456 Semelhago v Paramadevan 19, 381 Senior Courts Act (1981) 190 sensible personal discomfort (amenity nuisance) 300 severable contracts 276 SFKs see standard form contracts Shelfer v City of London Electric Lighting Co 34, 295 Shepherd v Hunter 43 short-term right of rejection 273 Simmons v Castle 200 simple efficient breach fallacy 73 Sinel, Zoe 160 Slaughter, Andy 61 SLC see Scottish Law Commission Smith, Lionel 314 Smith v Hughes 224, 226 Smith v Manchester 198 Smith, Stephen 356, 357 Solle v Butcher 220, 221 Southcott Estates Inc v Toronto Catholic District School Board 370 SPEC see Study Group on the European Civil Code specific deterrence 314 specific implement commercial leasing litigation 341–2 court’s discretion to refuse remedy 339–41 implement of payment obligation 343–4 overview of 336–8 status as primary remedy 338–9 specific performance equitable remedies 381–4 international instruments 407–9 specific remedies, literal enforcement human rights 184 impossibility 182–4 insolvency 186–7 specific performance 181–2 third party rights 185–6 specification costs 492

St Albans City and DC v International Computers Ltd 260 Standard Bank London Ltd v Apostolakis 264, 265 standard form contracts (SFKs) 498 statutory reform, New Zealand perspectives 390–93 Steele, Jenny 302 Stevens, Robert 321, 356, 357 St Helen’s Smelting Co v Tipping 294 stickiness, remedial defaults 484–5 stigma compensation 208–9 stigma damages 208 Stone v Chappel 352, 359, 360 Stork Technical Services (RBG) Ltd v Marion Ross (Exr) 349 Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd 39 Study Group on the European Civil Code (SPEC) 425 substantiality concept 403 substantive law principle of 12 remedial law vs. 456 remedies and 10–13 substitutionary analysis conceptions 136–8 default measure of damages 134–5 reasonableness restriction claim for cost of repairs 141–2 claim for cost of replacement 142–3 claim for cost of substitute performance 140 lack of good faith 143–5 substitutionary claims 131 substitutionary damages, theories of 353–7 substitutionary orders 469–70 substitutive equitable compensation 151 sufficiently serious breach 167–72 super-mandatory rules 479 Supply of Goods (Implied Terms) Act (1973) 262 Supply of Goods and Services Act (1982) 262 Supreme Court of Canada 19 Swainland Builders Limited v Freehold Properties Limited 222

532  Research handbook on remedies in private law Tabcorp Holdings Ltd v Bowen Investments Pty Ltd 141, 352, 358 Tak & Co Ltd v AEL Corporation 389 Tandrin Aviation Holdings Ltd v Aero Toy Store LLC 191 Tanwar Enterprises Pty Ltd v Cauchi 171 Target Holdings, Lloyds TSB v Markandan & Uddin 153 Target Holdings v Redferns 147, 151–4 technology transfer 297 termination clauses 501–2 termination of contract fundamental breach anticipatory breach 176–8 breach of condition and 167–72 concept of 164–6 innominate/intermediate terms and 172–5 multi-factorial assessment 173–4 terms of contract 279 test of unfairness 282–4 Thanakharn Kasikhorn Thai Chamkat v Akai Holdings 161 theories of substitutionary damages 353–7 theory of efficient breach 214 theory of tort law corrective justice theory 436, 440, 445, 449 description of 446–50 tort system 446–50 third party rights, literal enforcement 185–6 ThyssenKrupp Metallurgical Products GmbH v Sinochem International (Overseas) Pte Ltd 412, 418–20 Ti Leaf Productions Ltd v Baikie 96 Tito v Waddell (No. 2) 144 tort law Bridge and 197 compensation 453 corrective justice accounts 440 damages for non-pecuniary loss damage to reputation 201–2 mental distress 202–3 personal injury 198–201 physical inconvenience/physical discomfort 203 definition of 435, 451 implementation of 46

interpersonal justice 450 law of contract vs. 197 liability doctrines 446 mainstream functionalist legal analysis 439, 441 no alternative approach 442 overview of 435–6 questions of 450–53 theory of 436–46 tort law reform 352 tort reform agenda 61–2 tort system definition of 435 overview of 435–6 questions of 450–53 theory of tort law 446–50 tort, user damages 322 Totham, Eva Rose 201 trader, definition of 263, 282 transformative remedies 6 transparency 287–8 Trustee Act 156 Turf Club Auto Emporium Pte Ltd v Yeo Boong Hua 313 Turnbull v McLean & Co 345, 346 Twinsectra v Yardley 160 UCC see Uniform Commercial Code UK consumer law 258 UK Supreme Court 27, 29 UN Convention on the International Sale of Goods (1980) 75 undeniably unsatisfactory judgment 233 Unfair Commercial Practices Directive 289, 290 unfair commercial practices, privatisation of remedies 267–70 Unfair Contract Terms Act (1977) 256, 263, 281, 283 unfair terms application of 282 enforcement 289–90 exclusion from assessment of fairness 286–7 Office of Fair Trading v Abbey National Plc 285–6 overview of 281 test of unfairness 282–4

Index  533 transparency 287–8 Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999) 256, 282 Unfair Terms Directive (UTD) 429 Article 4(2) 284–5 unhappy expression 309 UNIDROIT Principles of International Commercial Contracts (PICC) 165, 405 Uniform Commercial Code (UCC) 240 Uniform Law on the Formation of Contracts for the International Sale of Goods 406 Uniform Law on the International Sale of Goods 406 United Kingdom Environmental Law Association 307 United Nations Convention on Contracts for the International Sale of Goods 165, 175 unjust enrichment 12 unjust enrichment theory attraction of 110 conditions 109–10 objections to 125–8 policy-based unjust factor 128 Upper Lakes Shipping Ltd v St Lawrence Cement Inc 373 UTD see Unfair Terms Directive Valilas v Januzaj 173, 175 value for money agenda 59–60 Vento v Chief Constable of West Yorkshire Police 203 Vienna Convention on Contracts for the International Sale of Goods 405 Vincent v Lake Erie Transportation Co 464 vindicatory accounts 324 Virgo, Graham 328 Visionhire Ltd v Britel Fund Trustees Ltd 347 Vorvis v Insurance Corp of British Columbia 208, 380 Vyse v Foster 149 Wade v Waldon 346 waiver of tort 312 Wallace v United Grain Growers Ltd 380

Warman International Ltd v Dwyer 329 warranted vs. actual value 102 wasted expenditure 94–100 Watson v Croft 301, 303, 304 Watts v Morrow 216 Weinrib, Ernest 446 Westdeutsche Landesbank Girozentrale v Islington LBC 117 Whelan v Waitaki 208 Whincup v Hughes 228, 231 ‘whiplash’ injury 200 White & Carter (Councils) Ltd v McGregor 81, 160, 189 Whiten, Keith 377 Whiten v Pilot Insurance Company 377 wilful default, accounts of administration 150–51 William Bros v Ed T Agius Ltd 240 Williams, Glanville 230 Williamson, Oliver 249 Winfield, P H 36 Winter Garden Theatre (London) Ltd v Millennium Productions Ltd 194 Winterton, David 356, 357 Wise v Kaye 40 Withers v Reynolds 173 WL Thompson Ltd v Robinson (Gunmakers) Ltd 242, 243 wrong-responding orders 470 wrongs, remedial law 462–5 Wroth v Tyler 183 Wrotham Park Estate Co Ltd v Parkside Homes Ltd 312 Wrotham Park remedy 11 Xinjiang Yakun Commercial Trade Co Ltd v Xinjiang Jinghe Kangrui Cotton Processing Co Ltd 418 Yakun v Jinghe 418 Yam Seng PTE Ltd v International Trade Corpn Ltd 95, 99 Youyang Pty Ltd v Minter Ellison Morris Fletcher 159