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Consequential Damages

by Paul Bugden (Hextalls LLP)

Consequential Damages

1. What do we mean by consequential/indirect and economic losses?

At its broadest consequential or indirect loss (there appears to be little if any difference in the meaning of the two words) might be taken to include any loss of profit suffered by a merchant on damaged/lost goods so that anything above the price paid for them is such a loss. This however is not the view taken by English law, which regards the price obtainable by the merchant at the place of import as the market value of the goods and as such as a direct loss reflecting the deprivation of his interest in the goods. (N.B. CMR is different - it takes the market price at the place of export)

More usefully it might be taken to include any claim for damages for loss of user profits where a good is brought by the claimant for its own use (e.g. machinery or plant), claims for damages payable to third parties and other costs incurred as a result of the breach and loss of goodwill.

A narrower definition would be any claim for damages which does not directly arise out of any physical damage to the goods or, even more narrowly, any claim which arises in the complete absence of physical damage; e.g. as in the case of a claim arising out of delay in delivery of with non-perishable goods where there is no physical deterioration in the goods and where the loss is as such wholly ‘economic’.

It may be necessary to distinguish between consequential damages and costs. A head of claim may not be properly recoverable as consequential damages but nevertheless may properly form part of an eventual claim for costs in the action e.g. a survey report and legal fees etc. Likewise distinguish also between damages and statutory interest.

‘Economic’ loss means any financial loss but is often used to denote financial loss which relates only remotely or exiguously to any physical damage and especially loss (i.e. so called ‘pure’ economic loss) which occurs entirely independently of, and indeed without, any physical damage at all.

2. For what purpose do we seek to define consequential etc losses?

Exclusion clauses in Bills of Lading may seek to exclude ‘consequential’, ‘economic’ or ‘indirect’ losses. More generally the issue embraces the distinction between physical damage and economic loss as well as general issues of forseeability, causation and mitigation. Claims brought in contract generally permit recovery for pure economic loss whereas the chattel torts do not.

3. What is physical damage and loss?

This is the opposite of pure economic loss and for purpose of this note and indeed more generally includes cases where the goods are not destroyed but put irretrievably beyond the possession of the claimant by mis-delivery or otherwise. The loss compensated is in effect the deprivation of the proprietary interest of the claimant in the goods. Possession, or the right to possession, is viewed just as much, if not more so, for this purpose as a proprietary interest as is bare title and indeed the primary legal remedy for chattel torts (conversion) compensates the party entitled to immediate possession of the goods and no other.

4. The nature of the damages recoverable as a result of the wrong.

Before one can consider issues of causation and remoteness one has to consider whether the damages are prima facie recoverable by the cause of action to be proved. This is often a point which is overlooked. As a general principle the law of tort affords compensation to the claimant to put him in the position he would have been had the wrong not been committed. It does not give compensation for loss of bargain as such albeit compensation in tort for the value of a good is usually taken to include its resale price at the discharge port and hence includes an element of the claimant’s profit. Damages in contract however seek to put the innocent party in the position (but no better than) he would have been had the contract been performed.

The contracting parties have the expectation of mutual financial benefit from the completed transaction and if the breach gives rise to a loss of that benefit then such loss is recoverable (as so-called ‘loss of bargain’) whether or not ‘consequential’, ‘economic’ or otherwise. In the chattel torts by contrast the wrongdoer does not assume an obligation in the ordinary way for anything thing other than physical loss or damage to goods compensated by reference to the value of the goods.

As such there is no liability for delay of itself unless the delay causes physical damage. Again more generally as noted above the obligations in the chattel torts are owed primarily not to the owner but to the possessor of the goods or (where they have been bailed and the claim is against the bailee) to the party entitled to their possession (i.e. the bailor) whereas contractual obligations are owed to the contracting party irrespective of his title in or possession of the goods at the time of the wrong.

5. Causation

Assuming that the loss is recoverable in principle the first question is whether the loss was caused by the wrong. This is essentially a matter of application of commonsense principles. This is a different issue from that of forseeability. A loss may be foreseeable; albeit not in law caused by the wrong. Difficult issues arise where an intervening exacerbating event occurs as result of the actions of the claimant, an intervening third party or force majeure. N.B. Causation is viewed differently in insurance law.

6. Remoteness

Once it is established that the loss was caused by the wrong then the next step is to see whether it was foreseeable. A loss is only recoverable if it is not too remote and it is too remote if it was not reasonably foreseeable. Again this is largely a question of the facts as objectively known to the parties at the time the contract was made (not at the time of the breach) or in a case in tort at the time the tort was committed. In the context of carriage of goods one has therefore to ascertain the knowledge of the carrier at the time the contract was made. In many cases this will depend upon the nature of the business of the carrier. An NVOCC operator who acts a general forwarder for its customers on a regular basis is likely to be taken to know far more about the possible consequences of a breach of contract than say an ocean carrier who deals with many more shippers/forwarders and has little direct contact with them let alone close knowledge of their business.

More generally knowledge depends upon the knowledge which would be imputed to the parties by an objective observer or knowledge which was specially imparted to the wrongdoer by the innocent party before the contract was made.

So where the facts giving rise to an appreciation of the consequences of breach are drawn specifically to the carrier’s attention before the contract is made the carrier can be liable for a much wider range of damage than would otherwise ordinarily be the case.

7. Mitigation

Finally we have to consider whether the claimant took adequate steps to mitigate his loss. A claimant is not expected to assume onerous duties in this regard but where there is an obvious and straightforward means of avoiding or mitigating the loss the claimant ordinarily has a duty to take such steps. The expense of taking steps in mitigation is generally recoverable

8. Impecuniosity of the Claimant

Generally speaking at least in the majority of commercial cases the impecuniosity of the claimant is irrelevant when it comes to considering steps it ought to have taken to mitigate its loss.

9. Damages calculated at market value of goods at contracted port of discharge where there is a market at that place in the goods

If there is a market in the relevant goods at the port of discharge then it follows that upon application of ordinary rules of mitigation the innocent party ought to go in to buy replacement goods if the goods are lost, mis-delivered or otherwise un-saleable. Likewise where the goods are damaged the loss is the difference between the market price for the goods in the condition that they ought to have been in and the market price in the condition in which they were actually delivered. Equally it follows that where there has been delay in delivery any market fluctuation determines the extent if any of the loss.

There can be some difficulties in ascertaining whether there is indeed a market for the goods and if so whether the Court is concerned with the market price in which goods can be bought or the market price in which the goods can be sold. The better view would seem to be that where the claimant has to go out and buy substitute goods to replace goods lost altogether (or to fulfil re-sale contracts for goods delivered late or damaged) the Court ought to be concerned with the market price at which the replacement goods could be bought by the claimant but where the claimant has (for whatever reason) no need to buy replacement goods the Court ought to be concerned with the market price at which the goods could be sold in the condition in and at that date on which they were actually delivered.

Accordingly where goods are lost if the market remains the same or has fallen then there will be ordinarily no substantial claim in damages on the part of the claimant because the claimant can ex hypothesi go into the market and buy substitute goods at the same or lesser price.

10. No consequential losses recoverable where there is a market for the goods

As a result of the application under the above rules that where there is a market for the goods then no truly consequential losses of profit are recoverable because they could have been avoided by buying in substitute goods and this so whether the claim is for loss for loss, damage or delay. However the claimant may still be able to also recover incidental costs which are not considered truly in the nature of consequential losses e.g. the costs of disposal of spoilt goods.

11. Losses recoverable where there is no market

Where there is no market the claimant is entitled to the proper damages which flow from the breach – these may include, for example, loss of user profits where these are in contemplation of the other party, the cost e.g. of purchasing a replacement product and transporting it to the claimant’s home country and damages paid to third parties. The nature of the claims that can be raised in these categories varies enormously and it is here that issues of remoteness (and indeed causation) most frequently come into play.

12. Are consequential and other like losses capable of exclusion by contract?

Carriers often seek to exclude claims for consequential or like losses in their contracts, if only to avoid the possibility under English law of liability for large amounts of damages as a result of facts brought to their special notice by the claimant before the contract was made. Typically there may be clauses in the contract of carriage seeking to exclude or limit liability for damages for delay per se where this does not give raise to physical deterioration of the goods.

A properly drafted clause can exclude such loses although the Court will construe such clauses restrictively and in any event will not of course give effect to same if they are contrary to statute e.g. in particular the Hague Visby Rules or CMR where applicable. So far as English law is concerned the Hague Visby Rules and to some extent at least CMR (but note the CMR position as to location of the ‘market’) embrace recovery for consequential/economic losses and any attempt to exclude their full and proper and application is ineffective. The issue is of course immaterial if the damages are liquidated by the contract itself in which case the loss is recoverable according to the terms of the contract whether or not consequential.

13. Application of contractual terms limiting or excluding liability to claims by third parties.

Such exclusions will of course generally only be effective, if at all, against the other party to the contract, unless reliance can be placed by the defendant upon;

o The Contracts (Rights of Third Parties) Act 1999;

o The doctrine of bailment on terms whereby the claimant bailor in parting with possession of the goods to its bailee may be taken to have expressly or even impliedly authorised a direct bailment, subsitutional or sub-bailment of the goods to the actual carrier on restrictive terms,

o The Law of Agency, whereby a contracting carrier may be taken to have contracted as agent for his sub-contractors for the purpose of conferring the benefit of protective clauses upon them.

Paul Bugden
Hextalls LLP

September 24, 2007

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