An
Agreement-Centred Approach to Remoteness and Contract Damage
(Published
in N Cohen and E McKendrick (editors), Comparative Remedies
for Breach of Contract
(Oxford, Hart Publishing, 2005) 249-286)
Adam Kramer†
Introduction
The
foreseeability rule that restricts contract damages awards,
known by common lawyers as the ‘rule of remoteness’, is
applied in both civil and common law jurisdictions. Directly or indirectly, all these jurisdictions
have taken the rule from Pothier, the eighteenth century
French jurist, who borrowed it from Molinaeus. Both Molinaeus and Pothier employed the
foreseeability rule on the grounds that the promisor has
‘expressly or impliedly charged himself’ with foreseeable
losses and is ‘presumed to have submitted to these only.’ In other words, the rule that only foreseeable
losses may be recovered was originally adopted as a crude
test of what losses the promisor had assumed responsibility
for under the agreement. Thus the point of departure for
this chapter: is the test as to recoverable losses based
on the intentions of the parties? And if a promisor is presumed
to have submitted to foreseeable losses, might not that
presumption sometimes be capable of rebuttal?
In
this chapter it will be argued that the allocation of responsibility
for the consequences of breach is one of the matters that
is determined by contractual agreement, even when it is
not covered by the express terms of those agreements. According
to this view, the central rule restricting awards of damages,
the foreseeability requirement, is not a strict rule originating
outside the contract for reasons of efficiency, fairness
or proportionality, but is a rule of thumb that is justified
when and to the extent that it indicates what the parties
wanted. The foreseeability rule, and many of the other rules
governing damages, should thus be understood as a framework
for discovering what was agreed, not a default rule to operate
when nothing was agreed.
The
common law reader may have already recognised that this
argument is in essence the long-discredited tacit agreement/implied
promise theory of remoteness, last supported in the latter
half of the nineteenth century and having as its high-point
the decision in British Columbia and Vancouver’s Island Spar, Lumber, and Saw-Mill Co.
v Nettleship. The discrediting that the theory suffered
was, it is submitted, partial, clumsy and largely unconvincing.
In addition, times have changed and we now have a much more
sophisticated understanding of the interpretation of contracts.
Under the modern approach, the English standard-bearer of
which is the leading case of Investors Compensation Scheme
v West
Bromwich Building Society, we are not afraid to find parts of the
agreement outside the express words by looking to the factual
matrix, the surrounding norms and the reasonable expectations.
Indeed we are required
to do so ubiquitously when we interpret express
words and imply terms. Where once we balked at intention-based
approaches to contract doctrines because of the objective
principle of interpretation, we now realise that all communication
is subject to such a principle, and necessarily so, and
that for the parties to reach a single agreement between
themselves the principle is necessary.
The
argument proposed will stand or fall on whether it convinces
the reader that the agreement, objectively interpreted and
rooted in implied norms as it is, can extend to the implicit
allocation of risk and responsibility. The new orthodoxy
is that parts of the agreement are tacit but are no less
genuinely intended for that. It is submitted, perhaps impertinently,
that it is for those who accept the new orthodoxy, but do
not accept an agreement-centred approach to remoteness,
to show that the implicit agreement covers details of primary
terms (discovered in interpretation) and new primary terms
(discovered through the implication of new terms) but does
not cover the allocation of responsibility of the parties.
If the agreement of the parties does stretch to the allocation
of responsibility for consequences of breach, it would be
hard to justify not giving effect to this allocation without
seriously undermining the justifiability and coherence of
the basic contractual aim of giving effect to what was agreed,
since we would then be giving effect to some things that
had been agreed but not others. It should be noted that it is not being
argued that the agreement includes an implied promise to
pay damages, or that it necessarily even extends all the
way to the consequences of breach, but rather that the allocation
of risk and responsibility is implied and an imposed obligation
to compensate gives effect to that allocation.
Of
course, it is difficult or impossible to prove this pudding
except in the eating. The bulk of the argument contained
herein is that the default rule theory is inadequate as
an explanation of the law and the implicit agreement theory
is much to be preferred. Full of variables as it is, the
foreseeability rule is simply too indeterminate usefully
to serve as a default rule. As Fuller and Perdue observed,
‘the test of foreseeability is less a definite test itself
than a cover for a developing set of tests’. The indeterminacy is not such
a problem, however, when the rule is understood as a rough
and ready rule of thumb for applying the parties’ agreement,
rather than a principle in its own right. Furthermore, the
agreement-centred theory should have the first chance of
explanation, since the default rule theory can only be convincing
if the agreement-centred theory has failed. Default rules
are externally imposed and should only be resorted to in
default, ie when the agreement has nothing to say on the
matter in question. It is argued herein that actually agreements
have a lot to say about the allocation of responsibility,
and that we shouldn’t be fooled into thinking otherwise
by what the agreement has to say not being explicit. Liquidated
damages clauses and exclusion clauses are the explicit tip
of the iceberg of the agreement.
The
implicit agreement theory, however, enables us to reconcile
under one slightly improved doctrine of remoteness various
doctrines that look to the allocation of responsibility.
In England and Wales that would include the current rules
of remoteness, the rules of mental distress damages and
of loss of amenity, and the recently-emerged scope of duty
test from South Australia Asset Management Corp v
York Montague. Such a change would be less a revolution
than a recharacterisation. The proposed test will lead to
largely the same results, still concentrating upon foreseeability,
but will do so with more coherence and justification.
Such
discussion is for later, however. First it is necessary
to explore a little the relationship between contractual
right and remedy, and what it might mean for the implicit
agreement of the parties to stretch to the assumption of
responsibility. Some examples of norms that may govern this
area and give rise to reasonable expectations will be posited,
and it will be demonstrated that our existing rules are
best understood as an attempt to discover the implicit allocation
of risk/responsibility. The community norms described herein
are not supported by direct empirical evidence, rather they
are inferred from the indirect evidence of current rules,
the body of judicial decisions, and my own everyday dealings
and communications with others. The detail of the norms
is probably wrong; they are proposed only to demonstrate
how one might go about discovering the implicit agreement
of the parties
The central thesis of this chapter is one that is relevant
to all the jurisdictions that use the foreseeability test
and some that don’t. However, primarily by reason of the
author’s ignorance, the examples of detailed rules and their
judicial application are drawn principally from English
law
Obligation-centred
accounts of remedies
The
relationship between rights and remedies in the law of obligations
is not easy to define. Even if it is the case, and I do not
concede that it is, that ‘[p]romise-keeping does not entail
any preference of one remedy over another’ and breach of contract is a ‘wrong’ and
so in principle gives a ‘wide-open remedial potential’ and
a ‘licence to mistreat the wrongdoer’, it is clear that our society and legal
system has an established preference for compensation by
way of damages awards as the primary remedy for torts and
breach of contract. The question thus arises how this compensation
is to be worked out in a particular case of commission of
a tort or breach of a contract. Whilst of course it is correct
that there are extrinsic policies and practical factors
that affect the particular remedy awarded in a particular
case, and these policies and factors should be identified,
arguments that attempt to play down the importance of the
right in determining the remedy do no service to our understanding of
the law, or at least the law of contract damages. More direct
attempts to get to grips with the question at hand are made
by Daniel Friedmann and Stephen Smith. Friedmann argues that
the
very recognition of a legal right entails some consequences
regarding the remedy, one of which relates to the initial
point of inquiry. This initial point relates to the value
of legal right, at least where such value can be ascertained.
The right of recovery may be qualified or subject to exceptions.
The initial point is, however, clear.
Friedmann
goes on to argue that the basic principle as to damages is identical
in contract and in tort… This principle provides
in essence that the purpose of damages is to put the plaintiff,
in economic terms, in the position in which he would have
been had the wrong (either a tort or breach of contract)
not been committed. The
different results reached in tort and contract derive from
the fact that they are usually called on to protect different
rights’ [emphasis in original].
Smith
has added that ‘The reason that different sums may be awarded
depending on whether a cause of action is in tort or in
contract is not because the measure of compensatory damages
awarded is different, but because the nature of the breach
of duty which the damages are meant to undo is different’
and so apparent differences in the measure of damages awarded
usually reflect differences in the ‘underlying obligation’.
However
I would like to go a little further and investigate aspects
of the relationship between rights and remedies that are hidden
by the words Friedmann and Smith use. If damages awards in
both contract and tort cases are determined by what Friedmann
calls the value of the underlying right and Smith calls the
nature of the underlying obligation, and it is respectfully
submitted that they are, then the question arises as to what
dimensions underlying obligations can and do take. The more
detailed the underlying obligation (for example, if it governs
the type of harm it is protecting from and the directness
with which that harm must be caused to be wrongful) the more
work the right does in determining the remedy and the less
work there is left for external policies and rules.
Elsewhere
I have investigated this question in the context of torts,
particularly the tort of negligence. I argued that, when tortious rules are
interpreted against the background of societal norms of
behaviour and responsibility from which they originate,
one can derive the type of harm against which protection
is provided and the proximity that the harm must have to
the offending cause to give rise to recovery. In other words,
rules of causation and proximity and the type of harm for
which compensation is provided are to a great extent dictated
by the underlying tortious obligation, as obligation-centred
principles, rather than by independent policies originating
outside the obligation. In this chapter I would like to
investigate how this approach and these conclusions can
be applied to contract law.
In
one way, this project is easier to apply to contractual
obligations. Tortious obligations derive from community
standards and, as such, are the same for everyone and change
little over time, thus their scope rarely needs to be addressed
as the scope of most torts has been laid down after investigative
interpretation over previous decades or longer. Contractual obligations, however, stem
from individual agreements made in individual contexts,
and so just about every contract case requires the interpretive
process to be engaged in anew. For this reason we are more
familiar, and so comfortable, with the interpretive process
in contractual cases. On the other hand, however, whereas
it makes good sense to think of tortious obligations as
being oriented towards particular types of harm caused in
a particular way, at
first sight it makes less sense to see contractual
obligations as being similarly oriented. This is because
tortious obligations are obligations not to cause harm,
whereas contractual obligations are obligations to do or
abstain.
Still,
it does not require one to take Holmes’ Bad Man’s point
of view, and to fully endorse the theory of efficient breach, to see that contractual obligations
might be oriented towards losses resulting from their non-performance.
It is true that promises are treated by the parties as more
than just obligations to pay damages (for example, promises
are also significant in terms of morality, trust and cooperation), but the legally-binding (and so coercive)
nature of contracts at least partly undermines the moral
and social force (the ‘bond-creating function’) of the promises
those contracts contain. In commercial cases in particular,
the contract is often made with at least one eye on the
remedies that would become available in the case of breach. The common occurrence of exclusion
and limitation clauses and liquidated damages clauses is
merely the clearest manifestation of this fact. Even taking
the internal, or good man’s, point of view, and treating
contracts as morally binding promissory commitments, one
can see that promises entail an assumption of responsibility
for the consequences of breach. The existence of enforcement remedies
such as specific performance and injunctions does not prevent
the scope of responsibility for a breach being an important
issue, both for the party that is deciding whether to perform
and for the court that is deciding whether to compel performance.
An
obligation-centred account of contract law damages
As
John Wightman has observed (commenting on the SAAMCO
decision, to which we will later return):
The
tradition of seeing contract damages rules as imposed by
law (subject to contrary express agreement) may have meant
that the assessment of damages has not been sufficiently
sensitive to the parties’ reasonable expectations where
these are not made express. The law on implied terms demonstrates
the importance of primary obligations which have not been
agreed by the parties. It would be surprising if there were not a
similar need for secondary obligations to be shaped by factors
which are not express but depend upon the expectations of
the parties in their particular contracting community.
To
see the correctness of Wightman’s comments does not require
one to take the view that the obligation to pay damages
is itself intended by the parties (a view that not even Holmes held), and besides, the question is complicated
by the wide-spread knowledge among contractors that the
law will impose legal liability for breach. Rather than
argue for an intended obligation to compensate, it is argued
herein merely that obligations are oriented to particular
consequences and that the risks of such consequences are
allocated within the contract. As Cartwright observes,
In
contract the defendant consents to be bound to an agreement
which contains within it a particular balance of risks and
rewards: in consequence, the limit to the losses for which
he is responsible is set by reference to what he can be
taken to have accepted at the time of concluding the agreement.
The
final step to an award of damages is taken by the law itself
in the well-known rule that ‘where a party sustains a loss
by reason of a breach of contract, he is, so far as money
can do it, to be placed in the same situation with respect
to damages, as if the contract had been performed’. The crucial thing to recognise here is
that the contract itself determines which of the
infinite
characteristics of the situation in which the
non-breaching party was expecting to be, require compensation. Wightman, above, put this in terms of
‘shaping’ the obligation to pay damages ‘by factors which
are not express but depend upon the expectations of the
parties in their particular contracting community’. The
emphasis on expectations, discussed below in terms of social
norms, is valuable, but Leon Green puts it more precisely,
in terms that German lawyers will recognise:
Parties,
in making contracts, rarely contemplate the
losses which would result from its breach. But they
do count the advantages they will gain from its performance.
What interests does
the contract promote or serve? These are actually
considered in the most part, and those which are shown to
have been considered or reasonably falling within the terms
in view of the language used and background of the transaction,
mark its boundaries—the limits of protection under it. Did
the parties intend (using intention in the sense indicated
above) that the injured interest was to be protected? Did
this agreement fairly comprehend the advantage now claimed
to have been lost? [emphasis in original]
It
would be absurd to argue that a vendor, who has agreed to
deliver on a particular date, is unaware of or uninterested
in the importance of the delivery to the promisee. Such
an uninterested vendor would be ambivalent between the following:
the delivery may be important because the promisee wants
the vendor to get out of the house more, it may be important
because the promisee thinks the date specified is astrologically
auspicious, it may be important because the promisee needs
the goods on the specified date for use, or it may be important
because the promisee estimates that the market will be up
on that date so the goods will fetch a good resale price.
If promises are to provide reasons for action, that does
not mean that all promises must, in practice, provide equally
good reasons for action. The significance of the consequences
of breach varies with the circumstances of the contract
and the parties to it.
If
we recognise that the obligations are oriented towards consequences,
purposes and interests, then we can see that the measure
of damages, and maybe the answers to other remedial questions,
are determined by the contractual agreement itself. For
this reason, I think that when Friedmann concedes that the
rules of remoteness are not self-evident even once the contractual
or tortious right has been identified, he concedes too much. It is argued herein
that the scope of responsibility for breach of contract
is implicitly determined by the contract itself. The orientation
is a descriptive feature of each obligation that goes without
saying and can be implied (in fact) through the ordinary
process of interpretation, looking at the factual matrix
and the apparent purposes through the lens of the objective
test and the usual common sense principles.d
A
little will be said about how such an orientation should
be identified, in other words how it is accessed through
the pragmatic process of interpretation. As discussed elsewhere,
in the absence of express disavowal, a promisor appears
to intend, and so is by the objective test deemed to have
intended, the principles and standards that it would be
normal to intend in the circumstances. The norms are important only when
and to the extent that they reasonably appear by both parties
to have been intended; they are what the parties would have
reasonably expected to apply: this is why the reasonable
expectations are part of the binding agreement. Thus in
arms-length commercial transactions the norms will be inclined
more towards the assumption that the parties are out to
serve and protect themselves, whereas in less commercial
arrangements such as employment the norms will factor in
more of an assumption of cooperation. All depends upon the
contracting culture. The following, then, are some possible
norms that one might expect to apply in the absence of disavowal,
although it must be stressed again that these will only
be expected to apply if and when it is normal for them to
apply, and indeed on their face they could not all apply
as some would sometimes conflict:
1 Every Obligation Has Some Orientation
It
is elementary that if a contractual promise has been made
it must have some orientation—some interests it seeks to
further or protect or some consequences that were in mind—else
why was it made/required? In other words, it is very unlikely
that parties will have intended a contractual promise to
be without orientation and so responsibility for consequences,
as that would mean the promise would be ‘illusory’ and could be breached with impunity.
As Pollock has said, in the context of a discussion of the
doctrine of consideration, whatever ‘a man chooses to bargain
for must be conclusively taken to be of some value to him’. Thus whereas a promisor may well be able
to argue that in a particular case a promisee did not suffer
any relevant (contractually contemplated) loss in a particular
case of a breach, it rarely makes any sense to argue, with
regard to a particular term, that the promisee could never
suffer any relevant loss as a result of breach. If this does appear to obtain,
then ‘relevant loss’ is almost certainly not being defined
the way the parties appear to intend it to be defined. This
is the problem with cases such as Surrey CC and Mole
DC v Bredero
Homes Ltd, and cases in which a promise
is made for the benefit of a third party. To say that specific relief may be available
in such cases is no answer: the damages remedy, the primary
remedy in our law of contract, should be made adequate by
giving effect to the responsibility assumed in all cases
in which this is possible. Just because it is difficult to assess
loss in cases where the obligation is oriented towards a
non-financial interest does not mean that the court should
not make an assessment anyway, as it does in personal injury
cases all the time. Where a promisor made a gain from the
breach, that may even provide an evidentially presumed measure
of promisee loss, but the focus should still be on compensating for the losses
within the contract’s orientation, not on restoring gain.
2
It May be that the Promisor can Prima Facie be Assumed
to be Taking Responsibility for all Consequences with Regard
to which the Promisee Considered the Promise Significant
This
reminds us only that a promisor knows what he is letting
himself in for and prima facie assumes responsibility
that extends as far as the losses for which he is a sine
qua non cause, since cause in our society is often sufficient
for blame. However many of the following norms greatly limit
the scope of the apparently intended responsibility beyond
this one.
3 The Promisor Enters the Contract
Voluntarily
In
this respect the promisor’s situation is very different
to that of a tortfeasor. The incurring of the obligation
out of choice indicates that the incurring of the obligation
is in the nature of a gift or sale (depending upon whether
it is in a deed or a contract with consideration) rather
than in the nature of a compulsory transfer of rights forced
by society and its rules. Because of this, the promisor
is not obliged to assume any more responsibility than she
wishes to, and, of course, it is apparent that a promisor
(being at least partly self-interested) will want to assume
as little responsibility as is necessary for her purposes
or is required by the promisee who is buying the promise.
In other words, the scope of responsibility will almost
always be heavily circumscribed.
4 The Promisee Enters the Contract Voluntarily
The
promisee is not like the potential victim of a tort because
the promisee has not had the transaction and relationship
imposed upon him but rather has entered into it voluntarily.
Consequently, the allocation of responsibility is made by
the parties in full knowledge of the possibility of breach,
and with full opportunities for disclosure and negotiation,
whereas in the case of most torts the allocation is made
by society with no awareness, input or control on the (eventual)
victim’s part. As the rules are not those of society but
those of the parties, and as the transaction has not been
entered into involuntarily, there is no reason to be harsh
to the promisor or to err on the side of the promisee. In standard form and consumer cases this
norm may well not apply.
5
As the Promisor is Rational, the Promise and Assumption
of Responsibility will be Part of a Plan
The
promisor will only usually accept responsibility for consequences
for which he is able to plan, and in any case is unlikely
voluntarily to take responsibility for all the consequences
of breach: to do so would be to guarantee performance in
all respects. Thus, firstly and most simply, the promisor
will not usually assume responsibility for unforeseeable
losses since he cannot take them into account in deciding
whether to perform or in guarding against liability for
non-performance. Secondly and more importantly, it will
be understood from the context of the promising that the
promise is made (the performance is desired) for a particular
reason or reasons: the promisee’s reasons for wanting the
promise, the promisor’s reasons for wanting to give the
promise. It will be these desired results that
the promisor can reasonably be expected to be guaranteeing,
and usually no more (given the promisor’s interest in assuming
no less responsibility than that required to serve the purposes
of making the promise).
6 Furthermore: The Promisor is Usually Looking to Make a Profit
At
least in commercial cases, not only will the promisor not
intend to assume unforeseeable losses (as discussed in the
previous norm), but the promisor is intending to make a
profit and to run a business and to look out for herself.
Thus the circumstances of the deal, particularly the magnitude
of the price and what insurance could have been available
at what cost, are relevant in determining what responsibility
the promisor reasonably appears to have intended to assume.
7 Insurance and Prices are Often
(in Business) Fixed Generally Rather than on a Contract-By-Contract
Basis
When
a price is fixed generally, rather than for a specific bespoke
transaction, the price will be fixed on the basis of the
average magnitude of losses not a specific loss caused in
a specific way, and so the scope of the consequences (‘type’
of loss) for which risk has been assumed by the promisor
will be wide and unspecific. However in cases in which it
is reasonable to expect the promisor to insure his risk,
it may only be reasonable to expect the type of loss for
which risk has been assumed to be as wide as the insurance
likely to be available. Thus where a specific loss that
occurs is caused in a way that would take it outside the
insurance that could be expected to have been taken out
(and upon the basis of which the transaction was entered),
responsibility for that loss will often not have been assumed.
8
It May be that a Promisee is Less Likely to Accept the Risk
of Suffering Physical Harm than to Accept the Risk of Suffering
Economic Loss
If
this is the normal attitude of promisees, then, in the absence
of express words or conflicting norms, it would be more
reasonable to interpret a promisor as accepting responsibility
for physical harms than for economic harms. Consequently,
in physical cases the type of loss for which liability was
assumed can be drawn more widely and the likelihood for
such loss to give rise to responsibility need be lower.
9
A Promisee Usually Accepts the Risk of Suffering Idiosyncratic
Non-economic Losses Due to Disappointment or Lack of Pleasure
These are things often taken to be subject to the vicissitudes of
life and luck. Generally the risk of loss of enjoyment or
amenity will not be assumed by the promisor, although where
the promisee’s purpose in entering the contract was clearly
of this nature (as in some consumer cases) then this norm
is displaced, particularly in cases where there is no other
obvious orientation to an obligation (see norm (1) above).
Norms such as these depend upon such apparently messy factors
as how stoical a culture expects its members to be, and
can thus change (albeit slowly) as a culture becomes more
or less blaming and litigious. This makes sense, since the
culture is part of the background against which the parties
are contracting.
10
It May be that a Promisor will not Normally Accept the Risk
of Losses that are Exacerbated by the Promisee’s Impecuniosity
At
least in commercial cases.
11
Often the Party that can most Easily or Cheaply
Avert the Consequences can be Assumed to have taken Responsibility
for them
This
is Posner’s view of the remoteness rule, although he would base it directly on
efficiency, rather than taking the approach here by which
it is assumed that sometimes the parties will intend the most efficient allocation
of risk. A norm of joint-cost minimisation may
also explain the rule preventing recovery of avoidable losses,
again on grounds of implicit understanding (i.e. intention)
rather than external manipulation of the contract and remedies
in the name of efficiency.
12
A Party is Unlikely to take Responsibility for
Losses Caused by the Fault of the other Party
First, then, the promisor is unlikely to assume responsibility for
losses caused by the promisee’s own fault. If the mitigation
rule is to have an agreement-centred foundation, the most
likely foundation is this norm (supplemented by a slightly
more positive cooperative obligation to attempt to minimise
losses for which the other party will ultimately be liable)
and the preceding one (number 11). Second, when looking
at the promisee’s assumption of risk, this norm may have
implications in cases of promisor fraud. It is an established
norm of interpretation that it is presumed that a promisee
would not agree to exclusions of liability for fraudulent
or negligent actions of the promisor or promisor’s agent
(such a presumption rebuttable in most cases by a clearly
worded exclusion clause). Similarly, it may be that a promisee
cannot be reasonably understood to agree that the usual
implicit exclusion of promisor liability for unforeseeable
losses extend to cases of fraudulent breach by the promisor.
This is discussed further below.
13 The use of a Fixed Price will Often Imply the Corresponding Allocation
of Risk of Market Changes
14 There Will be Many More Norms that Result from Specific Business Practices
that cannot Easily be Generalised, Especially where there
is a Contracting Community in which Customs can Develop
Using
this account to explain the law
At
first sight, the account proposed herein is ill-fitted as
a description of the present law. The current rule of remoteness
is that loss is considered not to be too remote if it is
of a type or kind that, at the time of contracting, was reasonably foreseeable as not unlikely to result, in the light of the knowledge
that can be reasonably imputed to the promisor and the knowledge
that the promisor in fact had. Losses that fall within this definition
are said to be in the ‘reasonable contemplation of the parties’.
The orthodox view of the law seems to provide little room
for doubting that that mere knowledge of the promisor, without
some further assumption of responsibility, is sufficient
to give rise to liability, and indeed this ‘further assumption
of responsibility’ approach has been rejected by the House
of Lords. Judges do not discuss pricing, insurance
and the other matters referred to in the norms mentioned
above, and indeed mental distress and loss of enjoyment
are usually understood as being based upon a separate test
of recoverability to the ordinary remoteness test. First
appearances can be deceptive, however, and it will be shown
that something like the account proposed herein is the best
explanation of the law not only for prescribing changes
but also for the purposes of describing and justifying the
law as it stands at present.
Are
Damages Essentially about Foreseeability or the Scope of
an Assumption of Responsibility?
In
Hadley v Baxendale, Baron Alderson did
not need to consider whether mere foreseeability of a loss
was sufficient for promisor responsibility, as the loss
in that case was held not to be foreseeable. Soon after
the decision, however, John Mayne raised just this issue:
But
it may be asked with great deference, whether the mere fact
of such consequences being communicated to the other party
will be sufficient, without going on to show that he was
told that he would be held answerable for them, and consented
to undertake such a liability?
Mayne’s
view is on the same lines as the view put forward here,
namely that contractual obligations are oriented towards
various purposes and consequences of breach on the basis
of apparently intended assumption of risk. The rival view
is that remoteness is merely a test of knowledge-informed
foreseeability, and that liability does not depend upon
express or even implied assent to the foreseen risk. The
assumption of risk view was at its height in the late nineteenth
and early twentieth centuries, championed by Sir James Shaw
Willes in England and Oliver Wendell Holmes Jr in the US.
Willes J put the view in the following terms:
the
mere fact of knowledge cannot increase the liability.
The knowledge must be brought
home to the party sought to be charged, under such
circumstances that he must know that the person he contracts
with reasonably believes that he accepts the contract with
the special condition attached to it [emphasis added].
Holmes
observed in the seminal Federal US case on contract remoteness
that: ‘the extent of liability… should be worked out on
terms which it fairly may be presumed [the defendant] would
have assented to if they had been presented to his mind.’ Extra-judicially he has written that
What
consequences of the breach are assumed is more remotely,
in like manner, a matter of construction, having regard
to the circumstances under which the contract is made. Knowledge
of what is dependant upon performance is one of these circumstances.
It is not necessarily conclusive, but it may have the effect
of enlarging the risk assumed… The price paid in mercantile
contracts generally excludes the construction that exceptional
risks were intended to be assumed.
By
the mid-twentieth century the pendulum had swung away from
the assumption of risk theory. Although Asquith LJ appeared
to support the Nettleship view in the Victoria
Laundry case, a dictum of Lord Upjohn in The Heron
II expressly stated that mere knowledge and foresight
is enough, rejecting the view that liability must be made
a term of the contract. Although it was the stricter form of
the assumption of risk theory (requiring that the assumption
of responsibility be an actual term of the contract) that
had been rejected, this dictum has been taken as laying
to rest the Nettleship approach. With the exception of South Africa,
where the tacit agreement approach is good law even now, modern judges and textbooks give little
attention to the assumption of risk view, and base remoteness
squarely on foreseeability and knowledge.
However
despite this, it is submitted that the implied assumption
of risk approach is still good law and the basis for the current
remoteness test. The paucity of explicit recognition that
the test is based upon the implied assumption of risk is due
to the rarity with which the tests lead to a different result,
because foresight and reasonable knowledge will almost always
be enough to give rise to an apparent assumption of risk.
It will almost always be correct that ‘[o]nce the defendant
has been given notice of unusual potential losses, he can
act accordingly, whether by refusing to contract, or by raising
the price, or by reducing the probability of breach, or by
excluding liability’ and so by entering the contract
the defendant, without more, impliedly assumes responsibility
for foreseeable losses. This is so providing the unusual potential
losses are part of the mutual context in which the contract
is made and in which it stands to be interpreted. However foresight will not always be enough
to infer an assumption of responsibility.
In
short, the inference of assumption of responsibility from
mere foreseeability is not justified in the following (overlapping)
situations:
i)
Where the promisor has no choice but to enter the contract,
entering the contract does not indicate a voluntary assumption
of the risk of foreseeable losses as it was not voluntary.
This may explain some of the common carrier cases.
ii)
Where the consequences of breach are severe, as compared
to the benefits received by the promisor under the contract
(the price), it will sometimes not be reasonable to infer
that the promisor undertook the risk of such consequences
merely from the promisor’s apparent foresight of such consequences. This point is made by Robert Goff J in
The Pegase, who explains that where breach is not unlikely
to result in ‘particularly high profits…or… particularly
catastrophic results’
such as the stoppage of a whole factory for want
of machinery or raw materials (as occurred in both Hadley v Baxendale and Nettleship), more than mere foresight may be required to infer an assumption of
risk.As
Halson explains, ‘[i]ndications of the implicit assumption
of responsibility would come from D’s adjustment of the
proposed price, or from his adding some provision to the
contract to deal with the risk, such as a clause restricting
C’s remedy or one which in specified circumstances excused
D’s non-performance’. As the paradigmatic example shows, ‘if
I tell my taxi driver that I will miss the opportunity of
making a profit of £1 million if I fail to reach an appointment
on time, his acceptance of me as a passenger should not
lead to the inference that he accepts the risk’,although things would be different if
he upped the fare to £100,000. In the absence of such indications
of an assumption of responsibility, it is at least necessary
that the loss was ‘signalised’ to the promisor as
part of the ‘purpose and intent’ of the promisee in entering
the contract such that ‘he may fairly be held, in entering
his contract, to have accepted the risk’.
iii)
Where the promisor has been communicated knowledge that
renders losses foreseeable, it may not be reasonable to
understand that promisor as implicitly accepting responsibility
for the losses where the communication of the information
was, albeit before the contract was entered into, too late
to assist the promisor. If the promisor has already performed
his promise to the relevant extent (for example where the
goods have already been manufactured and boxed) and has
already fixed the price (for example where, as is usual,
the price is fixed generally) and has already taken out
whatever insurance is to be taken out (for example where
insurance is taken out generally) then the promisor cannot
realistically make greater endeavours not to breach or secure
an increased return or secure against the risk. In such
circumstances it may well be too late reasonably to understand
the promisor to have taken the risk, given that the usual
justification for foreseeability giving rise to responsibility
is that ‘the parties might have specially provided for the
breach of contract by special terms as to the damages in
that case’. Although the parties may still provide special
terms, they are, as we all know, in practice unlikely to
do so, and so the opportunity is more theoretical than real.
Since
many transactions, particularly consumer ones, are standardised
rather than negotiated individually, the situation discussed
in the previous paragraph may be very common. As Atiyah
observes of contracts of carriage, ‘terms are likely to
be fixed by the carrier on the basis of some general rate
applicable to the weight or volume or quantity of the goods
to be carried. It is normally impracticable to fix a separate
rate for every contract.’ Because the price and the terms
are fixed in advance, as the consumer well knows, it will
often not be reasonable to think that the promisor has accepted
responsibility merely because the promisee has communicated
a special circumstance to her. If a buyer mentions to a
high street electronics salesman, before finalising the
purchase of a television, that the television will be placed
in a highly flammable room, then it is not reasonable to
understand the salesman to be accepting the risk of the
television malfunctioning, giving off sparks, and setting
the house on fire. It is important to note that in this
and many such cases, the risk in question may well be one
that the vendor has already accepted, since it is reasonable
in such cases to understand the promisor as fixing his risk
broadly and in very general terms given that the pricing
and insurance are done on that basis. However the point being made here is
that the particular communication of the special information
makes no difference to the apparent scope of the assumed
risk unless the promisor in some way ‘signalises’ an acceptance
of the risk.
iv)
Where the promisor has been communicated knowledge that
renders losses foreseeable, it may not be reasonable to
understand that promisor as implicitly accepting responsibility
for the losses where the communication of the information
was casual; fortuitous,
or from someone other than the claimant;
or to an employee who, albeit with authority to undertake
responsibility, is unlikely to do so lightly and so impliedly
and in commercial reality plays no part in negotiating the
terms. As was the case in the previous paragraph,
the loss may still fall within the scope of the responsibility
assumed, not because it is reasonable to think that responsibility
was assumed in response to the communication of special
knowledge, but rather because it is reasonable to think
that the risk was fixed broadly with a general assessment
of the possible losses.
Despite
this, in many, or perhaps the majority, of situations, foreseeability
of the loss will be sufficient for the promisee to infer
that the risk of loss was assumed by the promisor. This
should not blind us, however, to the underlying principle
according to which remoteness is dependant upon assumption
of risk, with foresight important only insofar as it (along
with the fact of subsequent entry into the contract) indicates
an apparent assumption of risk. As Halson puts it:
This
should be put in terms of the intention of the parties rather
than in terms of reasonable contemplation or foreseeability.
Although the categories of loss which are reasonably anticipated
will often be those for which the parties intend D to be
liable, their intention (express or implicit) should be
the paramount test: it may sometimes be inferred from the
express terms that there was an intention that D should
not be liable for a particular loss even though it could
have been reasonably anticipated.
As
McGregor observes, ‘[n]ot only must the parties contemplate
that the damage resulting from the special circumstances
may occur, but they must further contemplate that the defendant
is taking the risk of being liable for such consequences
should they occur.’ Recently, Waller LJ, obiter, approved McGregor’s observation, explicitly stating that ‘simply drawing
the attention of the [promisor] to special circumstances,
does not necessarily impose a liability on the payer to
be responsible for damages flowing from the special circumstances
to which attention has been drawn’ and stating that for
the promisee to succeed at trial he would have to demonstrate
that the promisee had ‘accepted the risk’ of the particular
loss for which the claim was brought. The formidable chorus of modern
academic voices to this effect should be harkened, and the test should be reformulated.
We could do worse than adopt the formulation of Robert Goff
J (as he then was):
have
the facts in question come to the defendant’s knowledge
in such circumstances that a reasonable person in the shoes
of the defendant would, if he had considered the matter
at the time of making the contract, have contemplated that,
in the event of a breach by him, such
facts were to be taken into account when considering his
responsibility for loss suffered by the plaintiff as a result
of such breach. The answer to that question may vary
from case to case, taking in to consideration such matters
as, for example, the nature of the facts in question and
how far they are unusual, and the extent to which such facts
are likely to make fulfilment of the contract by the due
date more critical, or to render the plaintiff’s loss heavier
in the event of non-fulfilment [emphasis added].
How
likely must occurrence of the loss be?
If,
as is argued, foreseeability is important because of what
it indicates about assumption of risk, then the level of
likelihood of occurrence of the loss that must be foreseen
is certain: a loss must be foreseeable as sufficiently likely
that it can be inferred that the promisor assumed responsibility
for it. This, in
