#7302 - Causation And Remoteness Mitigation - Contracts 2

Stuart v Condor Commercial Insulation Pty Limited [2006] NSWCA 334

Relevant Facts: Stuart (S) was a construction company who contracted with the Commonwealth to replace insulation in a number of residential Sydney properties under the SANIP. The appellant then sub-contracted this work to the respondents (C) with each property subject to a separate agreement. SANIP cancelled its contract with S after a fire broke out in one of the properties due to C’s negligence (in not boxing the down lights). S brought proceedings against C, claiming damages for the loss of profits that followed its termination of contract with SANIP and consequent inability to secure contracts for future houses under the program.

Issue: What is the approach to remoteness under the second limb of the test in Hadley v Baxendale

Decision: Under the second limb the following matters require determination:

1) Whether it could be said that the loss was within the reasonable contemplation of the parties which in part relates to;

2) whether the respondent was aware of the special circumstances such as to enable a court to conclude that it would have been in the reasonable contemplation of both parties

Ratio (Beazley JA):

• His honour began by reciting the test in Hadley v Baxendale. He then resolved of authorities for some propositions:

  • The crucial question is whether, on the information available to the defendant when the contract is made, the reasonable man in his position would have realised that loss of that kind would have been within his contemplation – C Czarnikow Ltd v Koufous [1969]

  • It may also be relevant that the event causing damage was “not unlikely” (R & H Hall Ltd v WH Pim (Junior) & Co Ltd [1982] All ER) – cited by Lord Morris in Czarnikow, Lord Hodson preferred “serious possibility or real danger”

• He concluded that it was unnecessary for the parties to have contemplated the precise loss/damage or the way it came about but it was necessary for the parties to contemplate both the type of damage suffered and the manner in which it occurred.

• Specifically in cases of subcontracting his honour cited Seven Seas Properties Ltd v Al-Essa [1993] WLR where a party on-sold a property they were to buy for profit, both contracts needing to be completed in the same day. The vendors refused.

  • In such cases the defaulting party (defendant vendors) was liable for damages (under the second limb) which the defaulting party was on notice might be occasioned by breach so that it may be held they accepted such a risk

  • It was required the defendant be on notice at the date of the contract of the risk it is contended they accepted

• He considered Oxley v Brambles where the appellants were responsible for unloading equipment. The court found that while their obligation was to do so without damaging Bramble’s property or injure their employee’s it was too remote to contend that their breach would cause Brambles to suffer loss as a result of a claim by an employee (it was unpredictable)

Conclusion on remoteness – above

Was the loss in the reasonable contemplation of the parties (Ratio):

• The loss of fire was recoverable under either limb in Hadley – the general nature of the loss (damage to property) would have been within their reasonable contemplation

• However the loss contended for (loss of contract with SANIP) would not have been within the parties’ reasonable contemplation:

  • While the respondent new of the contract with SANIP (it did not know its terms) – this is sufficient for a presumption that they undertook the risk which needs to be rebutted (Robophone). It can by:

  • First, The supervision of the works was the responsibility of the appellant – the respondent only undertook that Mr Kirkness, as their product manager, was required to ensure the work was properly done

  • Secondly, the appellant remained responsible for its works under the contract with SANIP. The loss is not one arising directly from the appellant and respondent – it relates to a contract between SANIP and the appellant, breach of which was caused by the relationship between the appellant and respondent

    • As such where the appellant remained responsible for all work carried out by sub-contractors, it would not have been in the reasonable contemplation of the respondent that poor workmanship on its part would result in loss of the appellant’s entire contract with SANIP and even under the appellant’s contemplation.

  • Furthermore the contracts were for individual houses – where the job involved a contract price of $10,000, the contract price was so out of proportion to the risk of being liable for damages for loss of the entire contract with SANIP

Was the event that caused the loss one that was ‘not unlikely to occur’?

• An examination of the respondent’s witnesses show that neither had an understand that a fire was “not unlikely” to occur but they both new that it was bad building practice to place insulation of down-lights – the usual risk (according to Kirkness) was that the down light would fail because of overheating and even if the insulation ignited it would self-extinguish itself not spread flame

• The respondent contended hence that it was an unusual catastrophic event and hence something “not unlikely to occur” – no other conclusion could be reached on the evidence. The basis of application in Hadley v Baxendale is hence not made out.

Ipp JA also commented that Stuart was responsible for the workmanship of anyone they chose to sub-contract and if it complied with this obligation it would have ensured that the down-lights were boxed. Also relevant was that the representative of Stuart also failed to detect the presencde of down-lights and this was a cause of breach of contract with SANIP. He said that it would not have been within C’s contemplation that not only it would breach but S would also breach its contract. The trial judge’s finding that all agreed it would ignite was errorneous – not taking into account C’s witness. The effect of this is that their belief in the non-inflammable qualities of the material, they did not contemplate a breach in not booxing the down lights

Order: Appeal dismissed

Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653

Relevant Facts: The appellant (B) bought a prime mover from the respondent (M). The respondent warranted that the engine was fully reconditioned knowing that the vehicle was intended to be used in business and he should have known that he was not in affluent circumstances. On 7/1978 the appellant learned that the engine was not fully reconditioned and was defective at purchase. M wouldn’t rectify it even though pressed to do so by B. B couldn’t afford to pay the $7-8k required to bring it to its warranted condition. The defective state of the engine meant it could not travel on interstate routes. Accordingly, until the end of ’79, B used it within his own state to carry business at a loss. At the end of ’79 the vehicle broke down again and was repossessed by the finance company.

Case History: B sued in M in the QSC for breach of warranty – the damages awarded included a sum for loss of earnings for the period of 4 years after the purchase date since that was the period which it was expected to operate efficiently. M appealed to the FCSC who held that B could not recover for loss of profits after the condition of the engine was discovered in ’78. B appealed to the HCA against damage reduction

Gibbs CJ: considered it a case of whether the B did what he could to mitigate the damage caused by bteach of warranty

• A plaintiff’s duty to mitigate damages does not require him to do what is unreasonable – on policy it would seem unjust to prevent a plaintiff from recovering damages caused by breach because he lacked the means to avert the consequences

  • “A plaintiff who is under a duty to mitigate is not obliged, in order to reduce the damages, to do that which he cannot afford to do” (Megaw LJ in Dodd Properties v Canterbury City Council)

• Furthermore the financial difficulties in this case were largely brought about by M in supplying the defective prime mover

• Accordingly the plaintiff was entitled to recover whatever damage proved to be suffered by way of loss of profits otherwise earned during the 4 years of the effective life of the motor

• BUT the appellant did not do all that he reasonably could have to mitigate damages – it was not reasonable to carry on his business knowing that he would operate at a loss. It was not a case where the purchaser was locked into business and he was under no compulsion to go on losing money. It was not wrong to hold the respondent shouldn’t be charged with actual losses although the appellant was entitled to any loss of profit suffered after that date if proved.

Wilson, Deane and Dawson JJ: Characterised it as a case of determination of the point in time beyond which any damage suffered could not be said to be within the reasonable contemplation of the parties as flowing from the breach.

• Their honours cited the principle in Hadley v Baxendale and drew from Koufos:

  • “The crucial question is...on the information available to the defendant when the contract was made, he should, or the RM in his position would, have realised that such loss was sufficiently likely to result from the...