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Commercial Contracts – why can’t I recover all my loss?

Mar 24, 2021

The basic position is that if Party A fails to comply with its obligations under a contract with Party B – Party B is entitled to damages to compensate it for its loss. Damages is not the only remedy capable of being pursued in the Court but for the purposes of this article we will be looking purely at the damages remedy for recovering losses. 

The damages remedy for recovering losses

The aim of an award of damages is to put Party B in the position it would have been in had the contract not been broken. In simple terms; what would Party B have expected to receive under the contract, and the damages will reflect that.

In many cases the loss can be clearly linked to the breach of the contract term and assessing the damages is a relatively straight forward matter.

Party B ordered 10,000 widgets from Party A and paid for them. On delivery it was discovered only 8,000 were present and Party A says it cannot deliver any more for another 3 months. That is no good to Party B which is subject to fulfilling orders of its own and it has to buy the missing 2000 widgets from Party C at an extra £5 per widget.

Party B is not only entitled to be reimbursed the cost of the 2000 widgets not delivered, but also to the additional £5 per widget that it had to spend with Party C. It would be clear to Party A that if it failed to deliver the full order, that Party B would have to top it up by purchasing more widgets from someone else and possibly incur more expense in doing so. The loss is reasonably foreseeable. If you turn that around; the loss will be recoverable if there is a serious possibility that such loss would be suffered as a result of that breach.

Of course, Party B cannot simply choose to buy the most expensive replacement widgets on the market – it has a responsibility to try and mitigate loss. But if it has done so and still has to pay extra it is entitled to recover that loss.

Many Contracts are more complex and if Party A breaches its contract, there could be all sorts of ramification which mean that Party B has suffered losses that clearly flow from the breach but which might not be recoverable because they are deemed “too remote”. They are losses that could not reasonably have been contemplated as a result of the breach

The more Party A knows about the likely consequences to Party B if it breaches the contract, the more likely the loss is to be regarded either as directly flowing from the breach [direct loss] or as a consequence of the loss [consequential loss] and recoverable because it was in the parties contemplation at the time they entered into the contract. The extent of the knowledge is assessed at the point the contract is entered into.

Thus if Party B had ordered the widgets from Party A knowing that it had a customer who was in dire need of widgets and would pay it three times the price Party B was paying Party A – when Party A fails to deliver the full consignment – the extra profit that Party B would have made is likely to be deemed too remote if Party A had no knowledge at the time.

If Party B had made it very clear to Party A that the consignment was needed urgently because they had a customer (Party D) who required them by a certain date – that may well be enough to show knowledge and enable Party B to recover not just the extra costs of trying to get the shortfall elsewhere, but if Party D in turn found another source and refused to accept the late widgets – the lost profit on those widgets.

Case

In a 2013 case of John Grimes Partnership -v- Gubbins Gubbins [G] obtained planning permission to develop land for residential housing. In 2006 G engaged John Grimes Partnership [J] to design a road and drainage for the site and required the work to be completed by March 2007. J failed to complete the work so in April 2008 G hired another engineer who finished it off. J sued G for unpaid fees and G counterclaimed for fees already paid for defective work that had to be done again and loss caused by the delay which had seen the market price of the houses fall.

J argued that the loss in the sale price of the houses was too remote and not recoverable. The High Court disagreed, and J appealed to the Court of Appeal. The Court of Appeal dismissed J’s arguments and held that given the nature of the contract, the commercial background and the lack of any special circumstances; the industry understanding was that such a delay would impact on the ability to sell the houses and if the market had fallen by the time the breach had been addressed, that loss was reasonably foreseeable. G got his damages for the loss in profit arising from the reduced prices of the houses.

The risk of being liable for such loss is why many Terms and Conditions and contracts expressly exclude liability for consequential loss. If you are supplying goods or services and your customer makes it clear “time is of the essence” [deliver on the specified date as late delivery is going to be a fundamental breach] that is a good indicator that if you get it wrong there may be consequential loss that is claimed over and above the direct loss.

If the requisite knowledge is in place at the time of the contract; arguing that it is not recoverable because it is consequential loss and excluded in your T&C’s – may not work. It may well be deemed by a Court to be a direct loss

If you need advice or assistance on a problem relating to recovering losses then please contact us on drteam@herrington-carmichael.com.

 

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

Frankie Tierney

Frankie Tierney

Partner, Disputes and Claims

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