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Contract – Carriage by sea – Damages under Hadley v Baxendale rule for Deliberate breach by Deviation – Whether ‘loss was sufficiently likely to result from the breach of contract’ – Measure of Damages – Damages in Contract and in Tort.

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Koufos v C Czarnikow Ltd (The Heron II) [1967] 3 All ER 686

For education purposes only


By charterparty of 15 October 1960, the respondents, the charterers and the owners of cargo, 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 1 November. The option was not exercised and the vessel, having unjustifiably deviated on her laden voyage, arrived at Basrah on 2 December, while normal length of this voyage shall be within twenty days.

Delay of nine days had a consequence that due to sharp drop in the price sugar from Ј 32 10s per ton to the Ј 31 2s 9d per ton, the charterers sustained considerable losses. It was also established that:

  1. The shipowner did not know of the charterers’ intention, but he knew that there was a market for sugar at Basrah.
  2. If the shipowner had thought about the matter, he must have realised that it was not unlikely that the sugar would be sold on arrival at the then market price, and that prices were apt to fluctuate daily.
  3. The shipowner had no reason to suppose that the fluctuation would be downwards rather than upwards.

The charterers brought an action to recover the difference between the amount that would have been realised on sale at Ј 32 10s per ton and the amount realised in fact, as damages for breach of the contract of carriage by delay due to deviation. This action failed in the High Court but their appeal succeeded in the Court of Appeal. Finally, the shipowner appealed to the House of Lords.

The shipowner footing on the first limb of Hadley v Baxendale rule argued that the fluctuations of market due to unforeseen and unpredictable causes during the period of delay are not of themselves "according to the usual course of things". The shipowner also argued that there were no facts here to bring the second part of the rule into operation.


In the House of Lords, before Lord Reid, Lord Morris of Borth-y-Gest, Lord Hodson, Lord Pearce and Lord Upjohn. 12, 13, 14, 19-22 June, 17 October 1967.

Lord Reid, at pp.690-691:

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.

…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 ([1843-60] All ER Rep at p 466; (1854), 9 Exch at p 356):

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.

… 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, i.e., in the usual course of things, or be sup-posed 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.

… If the tests of "real danger" or "serious possibility" are in future to be authoritative, then the Victoria Laundry (Windsor) v Newman Industries Ltd [1949] 1 All ER 997 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 judgment 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.

Lord Morris of Borth-y-Gest at p.697,698 and 701:

The classic judgment in Hadley v Baxendale has continuously been recognised as enshrining and formulating the guiding rules which are to be followed in deciding whether damage which has been the result of a breach of contract should be paid for by the contract breaker. The numerous reported decisions in the years since Hadley v Baxendale was decided show that sometimes there have been problems relating to the meaning and intention of the words used in the judgment in that case and that sometimes the problems have been those of ascertaining facts and then of relating accepted principle to the facts as found. When consideration has been given to the meaning and intention of the words used in the judgment in Hadley v Baxendale it has so often been manifest that words which are but servants to convey and express meanings - cannot always be servants of precision and may sometimes be given a dominance which is above their status. If "language is the dress of thought", it is the thought that must be understood.

… In the present case there was no special communication of special circumstances by reference to which the contract of carriage was made. The problem presented was therefore whether with the knowledge possessed by the parties at the time when the contract was made the loss in fact suffered by the charterers due to the delayed arrival (in breach of con-tract) of the sugar could fairly and reasonably be considered as arising naturally (i.e., according to the usual course of things) from such breach. … While the shipowner did not know precisely what plans the charterers had made he could be reasonably sure of one thing, namely that they had contracted for the shipowner’s ship to proceed at all convenient speed to its destination, because they wanted to have their cargo delivered at its destination at such time as the ship could be expected to arrive.

… The shipowner could and should at the very least have contemplated that, if his ship was nine days later in arriving than it could and should have arrived, some financial loss to the charterers or to an endorsee of the bill of lading might result. I use the words "at the very least" and the word "might" at this stage so as to point to the problem which is highlighted in this case. It is here that words and phrases begin to crowd in and to compete. Must the loss of the charterers be such that the shipowner could see that it was certain to result? Or would it suffice if the loss was probable or was likely to result or was liable to result? In the present context what do these words denote? If there must be selection as between them which one is to be employed to convey the intended meaning?

I think that it is clear that the loss need not be such that the contract breaker could see that it was certain to result. The question that arises concerns the measure of prevision which should fairly and reasonably be ascribed to him.

… I entertain no doubt that if, at the time of their contract, the parties had considered what the consequence would be if the arrival of the ship at Basrah was delayed, they would have contemplated that some loss to the charterers was likely or was liable to result. The shipowner at the time that he made his contract must have known that if in breach of contract his ship did not arrive at Basrah when it ought to arrive he would be liable to pay damages. He would not know that a loss to the charterers was certain or inevitable but he must, as a reasonable business man, have contemplated that the charterers would very likely suffer loss, and that it would be or would be likely to be a loss referable to market price fluctuations at Basrah. I cannot think that he should escape liability by saying that he would only be aware of a possibility of loss but not of a probability or certainty of it. He might have used any one of many phrases. He might have said that a loss would be likely: or that a loss would not be unlikely: or that a loss was liable to result: or that the risk that delay would cause loss to the charterers was a serious possibility: or that there would be a real danger of a loss: or that the risk of his being liable to have to pay for the loss was one that he ought commercially to take into account. As a practical business man he would not have paused to reflect on the possible nuances of meaning of any one of these phrases. Nor would he have sent for a dictionary.

The carriage of sugar from the Black Sea to Iraqui ports (including Basrah) is a recognised trade. The appellant shipowner knew that there was a sugar market at Basrah. When he contracted with the charterers to carry their sugar to Basrah, though he did not know what were their actual plans, he had all the information to enable him to appreciate that a delay in arrival might in the ordinary course of things result in their suffering some loss. He must have known that the price in a market may fluctuate. He must have known that if a price goes down someone whose goods are late in arrival may be caused loss.

Since in awarding damages the aim is to award a sum which as nearly as possible will put the injured party into the position in which he would have been if the breach of contract had not caused him loss and if in all the circumstances he had acted reasonably in an effort to mitigate his loss, I think that it must follow that, where there is delay in arrival, in many cases the actual loss suffered (above the amount of which there ought not to be recovery) can be measured by comparing the market price of the goods at the date when they should have arrived and the market price when they did arrive. That prima facie is the measure of the damages.

Lord Pierce at p.712-714:

I do not think that Alderson B ([1843-60] All ER Rep at p 465; (1854), 9 Exch at p 355), was directing his mind to whether something resulting in the natural course of events was an odds-on chance or not. A thing may be a natural (or even an obvious) result even though the odds are against it. Suppose a contractor was employed to repair the ceiling of one of the law courts and did it so negligently that it collapsed on the heads of those in court. I should be inclined to think that any tribunal (including Alderson, B, himself) would have found as a fact that the damage arose "naturally, ie, according to the usual course of things". Yet if one takes into account the nights, week ends, and vacations, when the ceiling might have collapsed, the odds against it collapsing on top of anybody’s head are nearly ten to one. I do not believe that this aspect of the matter was fully considered and worked out in the judgment. He was thinking of causation and type of consequence rather than of odds. The language of the judgment in the Victoria Laundry case was a justifiable and valuable clarification of the principles which Hadley v Baxendale was intending to express. Even if it went further than that, it was in my opinion right.

Nor do I consider that the Victoria Laundry case is inconsistent with the actual decision on the facts in Hadley v Baxendale. The carriers were asked (without special directions, as the court found) to transport a broken shaft away from a mill. "In the great multitude of cases" (to quote Alderson B’s own phrase ([1843-60] All ER Rep at p 466, letter c; (1854), 9 Exch at p 356) one would not expect the whole working of a mill to be stopped by a delay in transportation. The mere absence of urgent instructions spoke strongly against such a contingency. The fact that the shaft was to be used immediately by engineers for measurements (which one would have rather expected to go on paper by post) for making a new shaft would not, I think, have been in the contemplation of the carriers, on the meagre information available.

The facts of the present case lead to the view that the loss of market arose naturally, i.e., according to the usual course of things, from the shipowner’s deviation. The sugar was being exported to Basrah where, as the respondents knew, there was a sugar market. It was sold on arrival and fetched a lower price than it would have done had it arrived on time. The fall in market price was not due to any unusual or unpredictable factor.

Had this been a case of non-delivery on sale of goods whether by sea or land, it is uncontested that the defendants would be liable for the loss of market. Had it been a case of delay in sale of goods, the prima facie rule is that the damage is the difference between "the value of the article contracted for at the time when it ought to have been and the time when it actually was delivered" (per Blackburn J in Elbinger Actien-Gesellschafft v Armstrong ((1874), LR 9 QB 473 at p 477).

It is however argued that different considerations arise in delay in carriage at sea. The decision in The Parana (1877) 2 PD 118, it is said, established a special principle or practice with regard to delay in carriage by sea which should apply to this case and should confine the damages to loss of interest on the value of the goods. The Court of Appeal in The Parana (1877) 2 PD 118 appeared to decide largely on the ground that it was not "reasonably certain" that the goods would not be sold until they arrived and that they would be sold as soon as they did arrive. The estimates of the duration of the voyage appear to have varied between sixty-five days and ninety days; and in fact it took 127 days. No doubt the chief factor which influenced the court was that the uncertainties of the voyage were so great that the parties could not be said to have contracted on the footing that the goods would arrive at any particular moment.

In most cases the loss of market will be found to be within the contemplation of the parties in carriage of goods by sea. It is however ultimately a question of fact. Moreover it may be that in some unusual cases it will be found that the situation between the parties showed that the shipper was indifferent to the time of arrival and that the parties did not contract on the basis that in case of deviation or delay the shipowner should be liable for loss of market; but the absence of an express clause (which could easily be inserted) to that effect will obviously make it hard to establish. I have not dealt with the various particular facts in this case by which counsel for the shipowner’s able argument seeks to show that these particular parties did not contemplate damage by loss of market.

Lord Hodson at p.708:

True that where the facts are the same in two cases the damages will no doubt be the same whether the claim is made in contract or in tort; …

The approach in tort will, however, normally be different simply because the relationship of the parties is different. The claim against the tortfeasor who has inflicted tortious damage is not the same as the claim against an opposite party for breach of contract, for the latter claim depends on the contemplation of the parties to the contract and questions of remoteness as such do not arise. Consequently liability in tort may often be of a wider kind.

Hadley v Baxendale [1843-60] All ER Rep 461 applied.
Victoria Laundry (Windsor) v Newman Industries Ltd [1949] 1 All ER 997, considered. The Parana (1877), 2 PD 118 distinguished.


Comments

In Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, at p.182 Robert Goff, J gave the following analysis of The Heron II case, which was later upheld by Lord Hoffman in Transfield Shipping Inc (Appellants) v Mercator Shipping Inc (Respondents) [2008] UKHL 48:

In The Heron II, their Lordships were in general unwilling to accept foreseeability as the criterion of remoteness in contract, considering it to be more appropriate to liability in tort. Lord Reid, for example, preferred as a criterion for contractual liability the test whether the damages claimed were within the contemplation of the defendant at the time of the contract in the sense of being "not unlikely" to result from the breach. Others of their Lordships used different phraseology; but the thread running through the speeches is that the damages must have been within the contemplation of the defendant, not in the sense that they were probable (which would be too strict a test) but rather in the sense that there was a serious possibility of their occurrence or that they were not unlikely to occur. The general result of the two cases is that the principle in Hadley v Baxendale is now no longer stated in terms of two rules, but rather in terms of a single principle - thought it is recognized that the application of the principle may depend on the degree of relevant knowledge held by the defendant at the time of the contract in the particular case. This approach accords very much to what actually happens in practice; the Courts have not been over-ready to pigeon-hole the cases under one or other of the so-called rules in Hadley v Baxendale, but rather to decide each case on the basis of the relevant knowledge of the defendant.

In Transfield Shipping Inc (Appellants) v Mercator Shipping Inc (Respondents) [2008] UKHL 48 Lord Lord Walker of Gestingthorpe has given another account of judgments in the Heron II case:

78. To my mind, however, the diversity of opinion in The Heron II has another and more important significance. Other passages in the speeches show that their Lordships had well in mind (but did not, perhaps, spell out at length) that it is not simply a question of probability. It is also a question of what the contracting parties must be taken to have had in mind, having regard to the nature and object of their business transaction. If a manufacturer of lightning conductors sells a defective conductor and the customer’s house burns down as a result, the manufacturer will not escape liability by proving that only one in a hundred of his customers’ buildings had actually been struck by lightning. The need to take account of the nature and object of the contract is recognised, I think, in the passage (at p 385) from Lord Reid’s speech which I have already quoted; in Lord Morris’s speech at pp 398-399; in Lord Pearce’s speech at pp 416-417 (with the example of the court ceiling collapsing during a sitting); and in Lord Upjohn’s speech at pp 424-425. The need for the loss suffered to be within the horizon of the parties’ contemplation (Lord Pearce at p 416) makes it less important to define its degree of probability with any precision.

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