[1967] 3 All ER 686
House of Lords
Lord Reid
My Lords, by charterparty of Oct 15, 1960, the respondents chartered the appellant's vessel, Heron II, to proceed to Constanza, there to load a cargo of three thousand tons of sugar; and to carry it to Basrah, or, in the charterers' option, to Jeddah. The vessel left Constanza on Nov 1. The option was not exercised and the vessel arrived at Basrah on Dec 2. The umpire has found that "a reasonably accurate prediction of the length of the voyage was twenty days." But the vessel had in breach of contract made deviations which caused a delay of nine days.
It was the intention of the respondent charterers to sell the sugar "promptly after arrival at Basrah and after inspection by merchants." The appellant shipowner did not know this, but he was aware of the fact that there was a market for sugar at Basrah. The sugar was in fact sold at Basrah in lots between Dec 12 and 22 but shortly before that time the market price had fallen partly by reason of the arrival of another cargo of sugar. It was found by the umpire that if there had not been this delay of nine days the sugar would have fetched £32 10s per ton. The actual price realised was only £31 2s 9d per ton. The charterers claim that they are entitled to recover the difference as damage for breach of contract. The shipowner admits that he is liable to pay interest for nine days on the value of the sugar and certain minor expenses but denies that fall in market value can be taken into account in assessing damages in this case.
McNair, J, following the decision in The Parana, decided this question in favour of the appellant. He said:
"In those circumstances it seems to me almost impossible to say that the shipowner must have known that the delay in prosecuting the voyage would probably result, or be likely to result, in this kind of loss."
The Court of Appeal by a majority (Diplock and Salmon, LJJ, Sellers, LJ, dissenting) reversed the decision of the trial judge. The majority held that The Parana laid down no general rule, and, applying the rule (or rules) in Hadley v Baxendale, as explained in Victoria Laundry (Windsor), Ltd v Newman Industries, Ltd, they held that the loss due to fall in market price was not too remote to be recoverable as damages.
It may be well first to set out the knowledge and intention of the parties at the time of making the contract so far as relevant or argued to be relevant. The charterers intended to sell the sugar in the market at Basrah on arrival of the vessel. They could have changed their mind and exercised their option to have the sugar delivered at Jeddah, but they did not do so. There is no finding that they had in mind any particular date as the likely date of arrival at Basrah or that they had any knowledge or expectation that in late November or December there would be a rising or a falling market. The shipowner was given no information about these matters by the charterers. He did not know what the charterers intended to do with the sugar. But he knew there was a market in sugar at Basrah, and it appears to me that, if he had thought about the matter, he must have realised that at least it was not unlikely that the sugar would be sold in the market at market price on arrival. He must also be held to have known that in any ordinary market prices are apt to fluctuate from day to day: but he had no reason to suppose it more probable that during the relevant period such fluctuation would be downwards rather than upwards - it was an even chance that the fluctuation would be downwards.
So the question for decision is whether a plaintiff can recover as damages for breach of contract a loss of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from a breach of contract causing delay in delivery. I use the words "not unlikely" as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.
For over a century everyone has agreed that remoteness of damage in contract must be determined by applying the rule (or rules) laid down by a court including Parke, Martin and Alderson, BB, in Hadley v Baxendale; but many different interpretations of that rule have been adopted by judges at different times. So I think that one ought first to see just what was decided in that case, because it would seem wrong to attribute to that rule a meaning which, if it had been adopted in that case, would have resulted in a contrary decision of that case.
In Hadley v Baxendale the owners of a flour mill at Gloucester, which was driven by a steam engine, delivered to common carriers, Pickford & Co, a broken crank shaft to be sent to engineers in Greenwich. A delay of five days in delivery there was held to be in breach of contract, and the question at issue was the proper measure of damages. In fact the shaft was sent as a pattern for a new shaft and until it arrived the mill could not operate. So the owners claimed £300 as loss of profit for the five days by which resumption of work was delayed by this breach of contract; but the carriers did not know that delay would cause loss of this kind. Alderson, B, delivering the judgement of the court 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. But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose that at the time of the delivery to the carrier the machinery of the mill had been in other respects defective, then, also the same results would follow."
Then, having said that in fact the loss of profit was caused by the delay, he continued:
"But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred..."
Alderson, B, clearly did not and could not mean that it was not reasonably foreseeable that delay might stop the resumption of work in the mill. He merely said that in the great multitude - which I take to mean the great majority - of cases this would not happen. He was not distinguishing between results which were foreseeable or unforeseeable, but between results which were likely because they would happen in the great majority of cases, and results which were unlikely because they would only happen in a small minority of cases. He continued:
"It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract."
He clearly meant that a result which will happen in the great majority of cases should fairly and reasonably be regarded as having been in the contemplation of the parties, but that a result which, though foreseeable as a substantial possibility, would happen only in a small minority of cases should not be regarded as having been in their contemplation. He was referring to such a result when he continued:
"For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants."
I have dealt with the latter part of the judgement before coming to the well known rule, because the court were there applying the rule and the language which was used in the latter part appears to me to throw considerable light on the meaning which they must have attached to the rather vague expressions used in the rule itself. The rule is that the damages
"... should be such as may fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it."
I do not think that it was intended that there were to be two rules or that two different standards or tests were to be applied. The last two passages which I quoted from the end of the judgement applied to the facts before the court, which did not include any special circumstances communicated to the defendants; and the line of reasoning there is that, because in the great majority of cases loss of profit would not in all probability have occurred, it followed that this could not reasonably be considered as having been fairly and reasonably contemplated by both the parties, for it would not have flowed naturally from the breach in the great majority of cases.
I am satisfied that the court did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally, ie, in the usual course of things, or be supposed to have been in the contemplation of the parties. Indeed the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which, on the knowledge available to the defendant, would appear to him as only likely to occur in a small minority of cases.
In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff's loss was directly caused by the defendant's breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.
The modern rule in tort is quite different and it imposes a much wider liability. The defendant will be liable for any type of damage which is reasonably foreseeable as liable to happen even in the most unusual case, unless the risk is so small that a reasonable man would in the whole circumstances feel justified in neglecting it; and there is good reason for the difference. In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party's attention to it before the contract is made, and I need not stop to consider in what circumstances the other party will then be held to have accepted responsibility in that event. In tort, however, there is no opportunity for the injured party to protect himself in that way, and the tortfeasor cannot reasonably complain if he has to pay for some very unusual but nevertheless foreseeable damage which results from his wrongdoing. I have no doubt that today a tortfeasor would be held liable for a type of damage as unlikely as was the stoppage of Hadley's Mill for lack of a crank shaft: to any one with the knowledge the carrier had that may have seemed unlikely, but the chance of it happening would have been seen to be far from negligible. But it does not at all follow that Hadley v Baxendale would today be differently decided...
It may be that there was nothing very new in this, but I think that Hall's case must be taken to have established that damages are not to be regarded as too remote merely because, on the knowledge available to the defendant when the contract was made, the chance of the occurrence of the event which caused the damage would have appeared to him to be rather less than an even chance. I would agree with Lord Shaw that it is generally sufficient that that event would have appeared to the defendant as not unlikely to occur. It is hardly ever possible in this matter to assess probabilities with any degree of mathematical accuracy. But I do not find in that case, or in cases which preceded it, any warrant for regarding as within the contemplation of the parties any event which would not have appeared to the defendant, had he thought about it, to have a very substantial degree of probability.
Then it has been said that the liability of defendants has been further extended by Victoria Laundry (Windsor), Ltd v Newman Industries, Ltd. I do not think so. The plaintiffs bought a large boiler from the defendants and the defendants were aware of the general nature of the plaintiffs' business and the plaintiffs' intention to put the boiler into use as soon as possible. Delivery of the boiler was delayed in breach of contract and the plaintiffs claimed as damages loss of profit caused by the delay. A large part of the profits claimed would have resulted from some specially lucrative contracts which the plaintiffs could have completed if they had had the boiler: that was rightly disallowed because the defendants had no knowledge of these contracts. Asquith, LJ, said:
"It does not, however, follow that the plaintiffs are precluded from recovering some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected."
It appears to me that this was well justified on the earlier authorities. It was certainly not unlikely on the information which the defendants had when making the contract that delay in delivering the boiler would result in loss of business: indeed it would seem that that was more than an even chance. And there was nothing new in holding that damages should be estimated on a conjectural basis. This House had approved of that as early as 1813 in Hall v Ross.
What is said to create a 'landmark', however, is the statement of principles by Asquith, LJ. This does to some extent go beyond the older authorities and in so far as it does so, I do not agree with it. In para (2) it is said that the plaintiff is entitled to recover 'such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach'. To bring in reasonable foreseeability appears to me to be confusing measure of damages in contract with measure of damages in tort. A great many extremely unlikely results are reasonably foreseeable: it is true that Asquith, LJ, may have meant foreseeable as a likely result, and if that is all he meant I would not object farther than to say that I think that the phrase is liable to be misunderstood. For the same reason I would take exception to the phrase 'liable to result' in para (5). Liable is a very vague word, but I think that one would usually say that when a person foresees a very improbable result he foresees that it is liable to happen.
I agree with the first half of para (6). For the best part of a century it has not been required that the defendant could have foreseen that a breach of contract must necessarily result in the loss which has occurred; but I cannot agree with the second half of para (6). It has never been held to be sufficient in contract that the loss was foreseeable as 'a serious possibility' or 'a real danger' or as being 'on the cards'. It is on the cards that one can win £100,000 or more for a stake of a few pence - several people have done that; and anyone who backs a hundred to one chance regards a win as a serious possibility - many people have won on such a chance. Moreover The Wagon Mound (No 2) Overseas Tankship (UK), Ltd v Miller Steamship Co Pty, Ltd could not have been decided as it was unless the extremely unlikely fire should have been foreseen by the ship's officer as a real danger. It appears to me that in the ordinary use of language there is a wide gulf between saying that some event is not unlikely or quite likely to happen and saying merely that it is a serious possibility, a real danger, or on the cards. Suppose one takes a well-shuffled pack of cards, it is quite likely or not unlikely that the top card will prove to be a diamond: the odds are only three to one against; but most people would not say that it is quite likely to be the nine of diamonds for the odds are then fifty-one to one against. On the other hand I think that most people would say that there is a serious possibility or a real danger of its being turned up first and, of course, it is on the cards. If the tests of 'real danger' or 'serious possibility' are in future to be authoritative, then the Victoria Laundry case would indeed be a landmark because it would mean that Hadley v Baxendale would be differently decided today. I certainly could not understand any court deciding that, on the information available to the carrier in that case, the stoppage of the mill was neither a serious possibility nor a real danger. If those tests are to prevail in future, then let us cease to pay lip service to the rule in Hadley v Baxendale. But in my judgement to adopt these tests would extend liability for breach of contract beyond what is reasonable or desirable. From the limited knowledge which I have of commercial affairs I would not expect such an extension to be welcomed by the business community, and from the legal point of view I can find little or nothing to recommend it...
It appears to me that, without relying in any way on the Victoria Laundry case, and taking the principle that had already been established, the loss of profit claimed in this case was not too remote to be recoverable as damages. So it remains to consider whether the decision in The Parana established a rule which, though now anomalous, should nevertheless still be followed. In that case owing to the defective state of the ship's engines a voyage which ought to have taken sixty-five to seventy days took 127 days, and as a result a cargo of hemp fetched a much smaller price than it would have done if there had been no breach of contract. The Court of Appeal held, however, that the plaintiffs could not recover this loss as damages. The vital part of their judgement was as follows:
"In order that damages may be recovered, we must come to two conclusions - first, that it was reasonably certain that the goods would not be sold until they did arrive; and secondly, that it was reasonably certain that they would be sold immediately after they arrived, and that that was known to the carrier at the time when the bills of lading were signed."
If that was the right test then the decision was right, and I think that that test was in line with a number of cases decided before or about that time (1877); but, as I have already said, so strict a test has long been obsolete; and, if one substitutes for "reasonably certain" the words "not unlikely" or some similar words denoting a much smaller degree of probability, then the whole argument in the judgement collapses.