#7292 - Liquidated Damages And Penalties - Contracts 2

Baltic Shipping Co v Dillon (‘The Mikhail Lermontov’) (1993) 176 CLR 344

Relevant Facts: On 16/2/86 the Mikhail Lermontov cruise vessel was holed and sank. It had commenced on 7/2 and was scheduled to return to Sydney on 21/2. The appellant and respondent were owner and passenger respectively. As a result of sinking the respondent loss possessions and suffered injuries – she commenced action in the NSWSC AD.

Case History: The appellant eventually made admissions of negligence – the trial judge entered judgement for damages for the respondent including ‘restitution of fare’ and compensation for disappointment and loss of entertainment. The appeal to the NSWCA was dismissed. They appealed to the High Court.

The claim in restitution

Ratio (Mason CJ):

• When an innocent party seeks to recover money paid in advance under a contract in expectation of entire performance by the contract-breaker who renders incomplete performance, the innocent party cannot recover unless there has been total failure of consideration

  • An exception to this rule is when title is not transferred in the sale of chattels – unlawful possession amounts to total failure of consideration (David Securities Pty Ltd v Commonwealth Bank)

  • When the defendant’s right to retain the payment is conditional upon performance of his/her obligations – in this way the payment is a ‘part payment’ conditional upon performance (Dies v British & International Mining)

• The question of whether an advance payment is absolute or conditional is one of construction. It depends on whether the payee is required by the contract to perform work and incur expense before completing this performance of his/her obligations under the contract

• The consequence of the respondent’s enjoyment of the benefits of the contract during the first eight days is that the failure of consideration was partial, not total.

• It would not be reasonable to treat the appellant’s right to retain the fare as conditional upon performance when the appellant is under a liability to provide substantial benefits throughout the course of the voyage – the return to Sydney was but one of these elements

The combination claim

• After resolving the authorities his honour held that full damages and complete restitution will not be given for the same breach of contract because restitution removes the basis on which performance may be called upon and equally because performance was conditional upon payment anyway. Also the plaintiff will almost always be protected by damages

With regards to payment for disappointment and distress his honour reached the same conclusion as McHugh J

The general rule relating to damages for distress and disappointment

Ratio (McHugh J):

• His honour reviewed the origins of the general rule in Hamlin and Addis that disappointment and distress cannot be recovered in breach of contract. He rebutted all the reasons for the rationale (can’t be assessed? It is in tort, deemed risk? Why should they bear risk from this head of damage but not flowing from breach? Increased cost of entering into contracts? This does not outweigh the demands of distributive justice)

• His honour then reviewed a number of exceptions (Hobbs – personal inconvenience or suffering, walking home, train didn’t stop; Bailey, Stedman, Athens – disappointment from holiday cases, Cox – (lawyer case) contemplation of the parties but this was rejected and confined in Bliss v South East Thames)

• His honour declined to reject the view in Halmlin and Addis and concluded:

“Damages for distress and disappointment are recoverable in an action for breach of contract if it arises from breach of an express or implied term that the promisor will provide the promisee with pleasure or enjoyment or personal protection OR if it is consequent upon the suffering or physical injury or physical inconvenience”

The right to damages in this case

McHugh J: An implied promise to provide a pleasurable and enjoyable cruise for 14 days was broken and thus must be compensated. The sum of $1147 (restitution) and $5000 (disappointment) would be unreasonable excessive. $5000 is fair compensation

Brennan J: Distinguished between contracts where it is express to protect a promisee from disappointment and where it is merely a mental reaction to breach – the promise was ‘a holiday cruise, an interlude to refresh the mind and relax the spirits’ which was instead shipwrecked

Deane and Dawson JJ – the very object of the contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided.

Order: Appeal allowed

8 Definitions

"wrong" means an act or omission that:

(a) gives rise to a liability in tort in respect of which a defence of contributory negligence is available at common law, or

(b) amounts to a breach of a contractual duty of care that is concurrent and co-extensive with a duty of care in tort.

9 Apportionment of liability in cases of contributory negligence

(1) If a person (the "claimant") suffers damage as the result partly of the claimant’s failure to take reasonable care ( "contributory negligence") and partly of the wrong of any other person:

(a) a claim in respect of the damage is not defeated by reason of the contributory negligence of the claimant, and

(b) the damages recoverable in respect of the wrong are to be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.

(2) Subsection (1) does not operate to defeat any defence arising under a contract.

(3) If any contract or enactment providing for the limitation of liability is applicable to the claim, the amount of damages recoverable by the claimant by virtue of subsection (1) is not to exceed the maximum limit so applicable.

Shevill v Builders Licensing Board (1982) 149 CLR 620

Facts: The appellants were guarantors of due performance by the lessee of the terms of a lease by the respondent of land for a term of three years from 7/3/76. The lease reserved a yearly rent of $46655 which the lessee had covenanted to pay in advance in equal monthly instalments. Cl 9a) stipulated that if rent remained unpaid for 14 days or if there was breach of any of the provisions or if winding up/bankruptcy proceedings should be taken against the lessee, the lessor had the right to re-enter the premises. The lessee was constantly in arrears with large debit balances in June (some of which was reduced) and three dishonoured cheques.

Gibbs CJ:

• It is disputed that the appellants are liable under the guarantee for whatever damages are payable by the lessee to the respondent. Two submissions were made

Since the breach of contract entitled the respondent to terminate, it followed when this right was exercised it became entitled to damages for loss of benefits which performance of the contract would have conferred upon it

• Contracts can be repudiated if liabilities are renounced by evincing an intention not to be bound or by showing that one intends to fulfil the contract only in a manner substantially inconsistent with his obligations and no other way

• While the test in Bancks is based around assurance of strict and substantial performance, the respondent contends that the right to re-entry and the covenant in cl 3 (payment) and provisions in cl 9(a) became an essential term giving the respondents the same rights available under general law to a party electing to terminate for repudiation/fundamental breach.

• Cl 9(a) stipulates a number of circumstances in which the rights under it will arise – many of which do not suggest that the position of the lessor has been substantially affected or threatened including minor breaches of covenants such as failure to keep the premises clean.

  • It would require very clear words to bring about such a result

• The clause does not support the respondent’s argument and the rights under that clause are exhaustively defined by it

• There is nothing in the provisions to give the lessor who exercises a right to re-enter the same rights as would have been available if he accepted repudiation or rescinded on the ground of breach of an essential terms (i.e. right to damages from the fact that the lessee wont pay for further rent during the remainder of the term).

• Any subsequent breaches did not result from the event (non-payment) and by exercising the right to re-entry the lessor is absolved from these future non-payments.

The conduct of the lessee revealed such an unwillingness or inability to perform the contract as to amount to repudiation of it

• The evidence does not reveal that the lessee committed breaches that went to the root of the contract – there was no evidence to show how long the difficulties of the lessee were going to last or whether the financial position would improve or deteriorate. IN fact the lessees had rarely paid rent more than two months in arrears

• It is not...