[1949] 1 All ER 997
Court of Appeal
The facts are stated in the judgement of Asquith LJ.
Asquith LJ
This is an appeal by the plaintiffs against a judgment of Streatfeild, J, in so far as that judgment limited the damages to £110 in respect of an alleged breach of contract by the defendants which is now uncontested. The breach of contract consisted in the delivery of a boiler sold by the defendants to the plaintiffs some twenty odd weeks after the time fixed by the contract for delivery. The short point is whether, in addition to the £110 awarded, the plaintiffs were entitled to claim in respect of loss of profits which they say they would have made if the boiler had been delivered punctually...
The ground of the learned judge's decision, which we consider more fully later, may be summarised as follows. He took the view that the loss of profit claimed was due to special circumstances, and, therefore, recoverable, if at all , only under the second rule in Hadley v Baxendale, and not recoverable in the present case because such special circumstances were not at the time of the contract communicated to the defendants. He also attached much significance to the fact that the object supplied was not a self-sufficient profit-making article, but part of a larger profit-making whole, and cited in this connection Portman v Middleton and British Columbia, etc., Saw Mill Co. v Nettleship. Before commenting on the learned judge's reasoning, we must refer to some of the authorities...
What propositions applicable to the present case emerge from the authorities as a whole, including those analysed above? We think they include the following: (1) It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed: Wertheim v Chicoutimi Pulp Co. This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule. Hence, (2): In cases of breach of contract the aggrieved party is only 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. (3) What was at that time reasonably foreseeable depends on the knowledge then possessed by the parties, or, at all events, by the party who later commits the breach. (4) For this purpose, knowledge 'possessed' is of two kinds - one imputed, the other actual. Everyone, as a reasonable person, is taken to know the 'ordinary course of things' and consequently what loss is liable to result from a breach in that ordinary course. This is the subject-matter of the 'first rule' in Hadley v Baxendale, but to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses of special circumstances outside the 'ordinary course of things' of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the 'second rule' so as to make additional loss also recoverable. (5) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate, not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result: see certain observations of Lord Du Parcq in Monarch Steamship Co., Ltd. v A/B Karlshamns Oljefrabriker (6), Nor, finally, to make a particular loss recoverable, need it be proved that on a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is enough, to borrow from the language of Lord Du Parcq in the same case, if the loss (or some factor without which it would not have occurred) is a 'serious possibility' or a 'real danger.' For short, we have used the word 'liable' to result. Possibly the colloquialism 'on the cards' indicates the shade of meaning with some approach to accuracy.
If these, indeed, are the principles applicable, what is the effect of their application to the facts of the present case? We have, at the beginning of this judgment, summarised the main relevant facts. The defendants were an engineering company supplying a boiler to a laundry. We reject the submission for the defendants that an engineering company knows no more than the plain man about boilers or the purposes to which they are commonly put by different classes of purchasers, including laundries... Of the uses or purposes to which boilers are put, they would clearly know more than the uninstructed layman. Again, they knew they were supplying the boiler to a company carrying on the business of laundrymen and dyers, for use in that business. The obvious use of a boiler, in such a business, is surely to boil water for the purpose of washing or dyeing... [This] is the obvious purpose which, in the case of a laundry, leaps to the average eye. If the purpose then be to wash or dye, why does the company want to wash or dye, unless for purposes of business advantage, in which term we, for the purposes of the rest of this judgment, include maintenance or increase of profit or reduction of loss? We shall speak henceforward not of loss of profit, but of 'loss of business.' No commercial concern commonly purchases for the purposes of its business a very large and expensive structure like this - a boiler nineteen feet high and costing over £2,000 - with any other motive, and no supplier, let alone an engineering company, which has promised delivery of such an article by a particular date with knowledge that it was to be put into use immediately on delivery, can reasonably contend that it could not foresee that loss of business (in the sense indicated above) would be liable to result to the purchaser from a long delay in the delivery thereof. The suggestion that, for all the supplier knew, the boiler might have been needed simply as a 'stand-by,' to be used in a possibly distant future, is gratuitous and was plainly negatived by the terms of the letter of Apr. 26, 1946...
... [W]e would wish to add, first, that the learned judge appears to infer that because certain 'special circumstances' were, in his view, not 'drawn to the notice of' the defendants, and, therefore, in his view, the operation of the 'second rule' was excluded, ergo, nothing in respect of loss of business can be recovered under the 'first rule.' This inference is, in our view, no more justified in the present case than it was in Cory v Thames Ironworks Co. Secondly, while it is not wholly clear what were the 'special circumstances' on the non-communication of which the learned judge relied, it would seem that they were or included the following: - (a) the 'circumstance' that delay in delivering the boiler was going to lead 'necessarily' to loss of profits, but the true criterion is surely not what was bound 'necessarily' to result, but what was likely or liable to do so, and we think that it was amply conveyed to the defendants by what was communicated to them (plus what was patent without express communication) that delay in delivery was likely to lead to 'loss of business'; (b) the 'circumstance' that the plaintiffs needed the boiler 'to extend their business.' It was surely not necessary for the defendants to be specifically informed of this as a precondition of being liable for loss of business. Reasonable persons in the shoes of the defendants must be taken to foresee, without any express intimation, that a laundry which, at a time when there was a famine of laundry facilities, was paying £2,000 odd for plant and intended at such a time to put such plant 'into use' immediately, would be likely to suffer in pocket from five months' delay in delivery of the plant in question, whether they intended by means of it to extend their business, or merely to maintain it, or to reduce a loss; (c) the 'circumstance' that the plaintiffs had the assured expectation of special contracts, which they could only fulfil by securing punctual delivery of the boiler. Here, no doubt, the learned judge had in mind the particularly lucrative dyeing contracts to which the plaintiffs looked forward and which they mention in para. 10 of the statement of claim. We agree that in order that the plaintiffs should recover specifically and as such the profits expected on these contracts, the defendants would have had to know, at the time of their agreement with the plaintiffs, of the prospect and terms of such contracts. We also agree that they did not, in fact, know these things. 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...
We are, therefore, of opinion that the appeal should be allowed and the issue referred to an official referee as to what damage, if any, is recoverable in addition to the £110 awarded by the learned trial judge. The official referee would assess those damages in consonance with the findings in this judgment as to what the defendants knew or must be taken to have known at the material time, either party to be at liberty to call evidence as to the quantum of the damage in dispute.
In The Heron II Asquith LJ's "reasonable foresight" test was disapproved of by the House of Lords. The House of Lords held that a higher degree of probability is required to satisfy the test of remoteness in contract than in tort.