CONTRACTS HADLEY AND BAXENDALE BACK TO THE FUTURE

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1 CONTRACTS HADLEY AND BAXENDALE BACK TO THE FUTURE Martin Luitingh, Barrister Edmund Barton Chambers, Sydney INTRODUCTION Damages are a measure of compensation awarded by a court to a person or entity for loss or injury. This simplified motherhood statement accords with obligations created under the primary divisions of the law of obligations being contract, tort, restitution and statute. There is a growing tendency for plaintiffs who have suffered damages, to approach the question of damages with ingenuity and dexterity. Courts faced with a proven loss, have the difficult task of determining the actual loss suffered by a party. The question being asked in this paper is whether traditional notions of damages are sufficiently developed to deal with the increasingly complex circumstances that give rise to damages and whether the principles in Hadley v Baxendale (1954) 9 Exch 341, perhaps inadvertently, opened the door to a more expansive approach to damages. The principle of fairness that forms the cornerstone of the law of damages is dynamic, and changes according to the needs and perceptions of society about what is fair and reasonable. That is the challenge that faces the courts. Should courts be free to approach the question of damages without necessarily being restricted to the traditional artificial constructs used to compute damages in the past? THE INITIAL PREMISS A person must take reasonable care to avoid acts or omissions, which can reasonably be foreseen and would be likely to injure his neighbour. Who, then, in law, is my neighbour? The answer seems to be persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions, which are called in question. This statement was controversial in 1932, when May Donoghue sued David Stevenson, because she suffered injury when she found a snail in her bottle of ginger beer. Opposing barristers, who later became giants of their era, vigorously debated the correctness of the principle. George Morton, KC and WR Milligan of the Scottish Bar acted for May Donoghue. David Stevenson was represented by WG Normand, KC, Solicitor General for Scotland, JL Clyde and T Elder Jones, of the English Bar. Mr Milligan raced Lord Birkenhead around the Cambridge quadrangle, the event which was captured in the film Chariots of Fire, and later became Lord Advocate at the time that Mr Clyde was appointed Lord President of the Court of Sessions. 1 Under the law of obligations the rules governing the recovery of compensation necessarily distinguishes between different kinds of harm causing loss. In tort the requirement of reasonable foreseeability is an adequate touchstone for liability arising from death or physical injury. In Livingstone v Rawyards Coal Company (1880) 5 AC 25 at 39, the test for damages per Lord Blackburn was said to be that sum of money which will put the party who has been injured or who has suffered, in the same position as he would have been in if he had not sustained the wrong. Damages in contract were expressed in similar language. In 1848 in Robinson v Harman 2 the court held that the granting of a lease without good title and with knowledge that there was no title to pass, caused 14 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007

2 loss to the plaintiff, who was entitled to recover in an action for breach, damages not only for his expenses but beyond that for damages resulting from the loss of his bargain. Parke held at 855: The rule of the common law is 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 test for damages in tort and contract reflected in the thinking of the 1850 s are couched in the same language with similar notions of fairness for compensation, namely: to be placed in the same position. (Had the tort not been committed or had the contract been fulfilled.) These artificial constructs were the tools used for the determination of damages. A BRIEF EVOLUTION OF DAMAGES 1854 Hadley v Baxendale 3 did much to advance a consistent approach to these principles and at the same time enunciate a principle which has, as a statement of law, been applauded. The interpretation of the judgment in Hadley has led to a more expansive approach to damages and is likely to continue to be fundamental in the determination of damages in the future. In Hadley, the owners of a flourmill sought damages flowing from the undue delay in providing a new shaft as a replacement for a broken shaft. The plaintiffs claimed that the undue delay in repair caused them to suffer a loss of profits claimed in the suit. Alderson B held: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it. 4 In this particular instance, however, it was held that the loss of profits could not reasonably be considered a consequence of the breach and could not reasonably have been contemplated by both parties at the time that the bargain was concluded, nor were the damages such that they could be said to have flowed naturally from the breach. The Hadley approach to damages was a more expansive notion of damages. It is a test which afforded the courts more flexibility and did not restrict damages to the artificial construct being put in the position a party would have been in on the hypothesis that the bargain was complete. In Hadley it was held that there could be: (a) recovery of damages according to the usual course of things that flow naturally from the breach; (b) such damages as are within the contemplation of the parties at the time they made a contract. The black letter lawyer may be offended by the introduction of this latter principle. On one view, the very purpose of concluding a bargain is to give the parties an opportunity to make disclosure and asses risk and define the limits of the obligations. This rule introduces a test, tortious in nature, based on something akin to foreseeability, namely that damages can be awarded as are within the contemplation of the parties. 5 Put another way, damages based on what the parties foresaw at the time of the conclusion. The use of the word contemplation suggests that the principle of disclosure was either incomplete or not possible and that risks that give rise to damages beyond the stated bargain, are recoverable. At this juncture the introduction of what has now become known as consequential loss is conceived. The community has become comfortable with this characterisation of loss. Loss of profit is today accepted as a perfectly legitimate head of damage In Hamlin v The Great Northern Railway Company, 6 a plaintiff businessman sought to recover damages for delay caused by the defendant railway company that had caused him to miss certain business appointments as a result of which he suffered loss. It was held that the plaintiff was only entitled to recover his expenses. Pollock CB 7 held that in actions for breach of contract, no damages could be awarded that are incapable of being specifically stated and appreciated with certainty. This might have been one of the early principles defining the limits of damages that flow naturally from the breach: Where damages are sought to be recovered for a breach of contract, they must be damages which are appreciable, capable of being stated, and capable of being estimated. and [I]t may be laid down as a rule, that generally in action upon contracts no damages can be given which cannot be stated specifically, and that the plaintiff is entitled to recover whatever damages naturally result from AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER

3 the breach of contract, but not damages for the disappointment of mind occasioned by the breach of contract In Hobbs v London and South Western Railway Co, 9 the plaintiffs, a father, mother and two children, were taken by the defendant railway company to the wrong stop in the middle of the night and were compelled to walk, in the rain, for hours, as a consequence of which the wife took ill. The plaintiffs sought damages for the inconvenience of having to walk in the middle of the night and further sought damages for the inconvenience of the wife being unable to assist her husband in his business due to her illness and medical expenses. The defendant railway company sought to rely on Hamlin v Great Northern Railway Company and submitted that the plaintiffs were unable to recover damages for the mere inconvenience. The court distinguished Hamlin on the facts of the case. Cockburn CJ held: 10 [I]n as much as there was manifest personal inconvenience, I am at a loss to see why that inconvenience should not be compensated by damages in such an action as this. and; [I]f the jury are satisfied that in the particular instance personal inconvenience or suffering has been occasioned, and that it has been occasioned as the immediate effect of the breach of the contract, I can see no reasonable principle why that should not be compensated for. As to the second claim for damages relating to the plaintiff wife s illness, the court held that this was too remote from the breach of contract and as such no damages were recoverable. Cockburn CJ held: 11 That to entitle a person to damages by reason of a breach of contract, the injury for which compensation is asked should be one that may fairly be taken to have been contemplated by the parties as the possible result of the breach of contract. Therefore you must have something immediately flowing out of the breach of contract complained of, something immediately connected with it, and not merely connected with it through a series of causes intervening between the immediate consequence of the breach of contract and the damage or injury complained of. Mellor J was of the opinion that: 12 for the mere inconvenience, such as annoyance and loss of temper, or vexation, or for being disappointed in a particular thing which you have set your mind upon, without real physical inconvenience resulting, you cannot recover damages. That is purely sentimental, and not a case where the word inconvenience, as I here use it, would apply. The pre occupation of the law with tangible physical evidence of damages has been a controversial aspect, it was the gravamen of the nervous shock cases and received intense analysis before it was finally established that damages for nervous shock could sustained without tangible physical evidence in the late 1990 s. This thinking nevertheless formed the basis of the distinction drawn by Mellor J in Hobbs. There are two questions raised by this judgement: (a) Is there a material distinction in character between inconvenience and vexation? and; (b) Is the nature of this kind of contractual damage not better characterised as damages in tort? 1909 In Addis v Gramophone Company Limited (1909), 13 an employee manager was wrongfully dismissed and claimed damages not only for recovery of wages but also exemplary damages for the manner in which he was dismissed and its effect on his ability to obtain future employment. Lord Loreburn LC held: 14 If there be a dismissal without notice the employer must pay an indemnity; but that indemnity cannot include compensation either for the injured feelings of the servant, or for the loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment. Lord James of Hereford in his concurring judgment provided: 15 I have always understood that damages for breach of contract were in the nature of compensation, not punishment and further added: 16 In many other cases of breach of contract there may be circumstances of malice, fraud, defamation, or violence, which would sustain an action of tort as an alternative remedy to an action for breach of contract. If one should select the former mode of redress, he may, no doubt, recover exemplary damages, or what is sometimes styled vindictive damages; but if he should choose to seek redress in the form of an action for breach of contract, he lets in all the consequences of that form of action. One of these consequences is, I think, this: that he is to be paid adequate compensation in money for the loss of that which he would have received had his contract been kept, and no more. 16 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007

4 Lord James of Hereford in this passage relied on the Robinson test and stated damages in the nature of tort ought to be claimed in an action for tort. Claims under contract or tort would award damages upon different considerations that may lead to different results but there should be no duplication of damages Categorising damages such as vexation (or annoyance) and inconvenience continued to confuse litigants in a commercial context. Barry J affirmed the view of the judges in Hamlin and Addis. In Bailey v Bullock and Ors 17 he drew a distinction between mere annoyance and physical inconvenience: 18 It is clear that the plaintiff cannot recover damages for the annoyance or mental distress which he may have suffered as a result of the defendant s default, nor can he be compensated for any loss of social prestige ; there is a very real difference between mere annoyance and injury to feelings, on the one hand, and physical inconvenience, on the other. and; This is not a case in which they ought to have contemplated that these consequences would result from their breach; it is a case in which the consequences of the breach were brought to their notice in the clearest possible terms. In assessing the damages for discomfort and inconvenience of this nature, I must not be extravagant. 19 Within a commercial context contractual damages were shadowed by elements of damages which were not precisely calculable, but which nevertheless were within the contemplation of the parties at the time of concluding the contract, the resistance to this thinking was obvious but the door on Hadley had not been shut. The introduction of within the contemplation of the parties requires some defining limit, it had been bridled by the test of remoteness. Perhaps viewed in another way it could be considered akin to the principle of proportionality; a characterisation which is familiar to the determination of tortious damages Proportionality and damages In the case of Bellgrove v Eldridge 20 action for damages for breach of contract was brought by a building owner against a builder who had departed substantially from the building specifications. The result was a defective foundation and an unstable building. The High Court consisting of Dixon CJ, Webb and Taylor JJ unanimously decided: In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing it with the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only be ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract. 21 and further, the qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt. 22 In this instance the court held that demolition and re erection of a new building at the cost of the builder was both a necessary and reasonable remedy. That remedy is one that was consistent with damages that flow naturally from the breach and the plaintiff being put into the same position as she would have been had the contract being fulfilled In D Galambos & Son v McIntyre Woodward J held: 23 Where it would be reasonable to perform remedial work in order to mend defects or otherwise to produce conformity with the plans and specifications which were part of the contract, the measure of damages is the fair cost of that remedial work. Where the defect is such that repair work would not be a reasonable method of dealing with the situation (usually because the cost of such work would be out of proportion to the nature of the defect), then the measure of damages is any diminution in the value of the structure produced by the departure from plans and specifications or by defective workmanship. 24 Even without the aid of authority I would be inclined to the view that a distinct diminution in enjoyment of a home amounting to more than a mere annoyance could be compensated for in an action for breach of contract by the builder even though no pecuniary loss could be shown. In the present case I have no doubt that the inability to make habitable rooms out of the areas concerned is a substantial inconvenience within the meaning of the principle stated. 25 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER

5 1990 In W Jeffreys Holdings Pty Ltd v Appleyard and Associates 26 Cole J drew a significant distinction: Jeffreys sought to derive from Bellgrove v Eldridge a contention that where negligent design of a structure by an engineer results in rectification costs being incurred to rectify defects flowing from the design, the measure of damages for negligent design is the totality of such costs. In my view Bellgrove does not establish that principle. Clearly if a builder constructs a building otherwise than in accordance with contractual plans, and the building can be altered to comply with those plans, providing such costs of alteration are reasonably incurred, the building would be liable for the cost of such alterations. However a distinction is to be drawn between a contract to produce a result for a price and a contract to exercise due skill and diligence in the performance of functions. In the former the measure of damages may well be the cost of achieving the result: but in the latter the measure of damages should be of such an amount as will put an injured party in the same position as he would have been if he had not sustained the injury for which damages are claimed. 27 and; [A]ssuming causation, and either reasonable foreseeability or contemplation is established, the general proposition accepted in Bellgrove that damages when awarded should be of such an amount as will put an injured party in the same position as he would have been in if he had not sustained the injury for which damages are claimed applies. It restricts the quantum of damages to such an amount In Rowlands v Collow, 29 Thomas J of the New Zealand High Court in Wellington made several findings in relation to concurrent liability in tort and contract and also in relation to the recovery of damages for mental distress caused by a breach of contract: 30 It follows that the tortious duty need not arise from circumstances outside the contract. On the contrary, it is the relationship created by the contract which gives rise to the common law duty. One does not have to step delicately around the contract searching for independent circumstances which will provide a foundation for the duty of care; the circumstances exist in the very fact that the parties have entered into a contractual relationship. It is self evident that the contractual relationship is of a character and sufficiently proximate to comply with any test for the recognition of a duty of care in negligence. Further, in relation to the recovery of damages for mental distress: 31 In my respectful view, limiting damages for mental distress to certain classes of case when the damages would otherwise come within the general principles applicable to damages in contract is both unnecessary and unwise. Rather, the question of whether or not such damages are recoverable should be resolved in terms of the test of remoteness as it might be articulated at any given time. If it is, the damage which has been contemplated should be met by an appropriate award of damages. His Honour made the following observations: 32 It may therefore be timely for the courts to reassert in this context the basic principles relating to remoteness of damages. If this is done the question in relation to all contracts is whether mental distress was a reasonably foreseeable consequence of the breach of contract or was within the reasonable contemplation of the parties in respect of any such breach at the time they entered into the contract. I therefore propose to award damages for the distress, anxiety and inconvenience suffered by the owners in this case in contract as well as in tort. Their mental distress and the inconvenience they suffered, and will yet suffer, must have been a reasonably foreseeable consequence of Mr Collow s breach of duty and the ensuing construction of a defective driveway. It must have been in his contemplation that, if he failed in his duty to design and construct a reasonably usable driveway, the owners would suffer much upset, anxiety and inconvenience. The test in Hadley v Baxendale is readily met. 33 The Court of Appeal of Ontario in Brown v Waterloo Regional Board of Commissioners of Police Linden J held: 34 It is now clear that damages are recoverable for mental suffering flowing from a breach of contract if such damage is within the contemplation of the parties at the time they enter the contract [I]n cases of breach of contract of employment whether the person is demoted or actually discharged illegally damages for mental distress are now recoverable, if it was reasonably foreseeable at the time the contract was entered into and if it was caused by the breach complained of. 35 His Honour further held: 36 On the issue of foreseeability, it must be recognised that, normally, one does not anticipate physical or mental suffering as a result of a breach of contract. Certain types of contracts are different however. Contracts of employment, because they are so personal and so important to the employee are of this special type as well. 18 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007

6 1993 In the High Court decision of Baltic Shipping Company v Dillon 37 Mason CJ held: 38 [I]n the present case, the contract, which was for what in essence was a pleasure cruise, must be characterised as a contract the object of which was to provide for enjoyment and relaxation. It follows that the respondent was entitled to an award of damages for disappointment and distress and physical inconvenience flowing from that breach of contract. Indeed, an award for disappointment and distress consequential upon physical inconvenience was justified on that account alone. Brennan J on the issue of recovery for disappointment and mental distress held: 39 [T]he relevant question is therefore whether disappointment of mind is sufficiently likely to result from a particular breach to make it proper to hold that the loss flowed naturally from the breach. In one sense, a promisee s disappointment of mind flows naturally whenever a contractual promise is not fulfilled. But where disappointment of mind is no more than a mental reaction to a breach of contract and damage flowing therefrom, the law has treated such a mental reaction as too remote. and further 40 [I]f a contract contains a promise, express or implied that the promisor will not cause the promisee, or will protect the promisee from, disappointment of mind, it cannot be said that disappointment of mind resulting from breach of the promise is too remote. Deane and Dawson JJ agreed with the Chief Justice, holding: [W]here the disappointment and distress have been caused by breach of a contract under which the party allegedly in breach is shown expressly or impliedly to have agreed to provide pleasure, entertainment or relaxation or to prevent molestation or vexation. In cases falling within that category, an assumption that the disappointment and distress occasioned by breach would not have been within the contemplation of the parties is particularly unjustifiable. 41 The Justices concluded: The direct consequence of Baltic s admitted breach of contractual duty was that Baltic failed to provide the latter part of that promised pleasant holiday. Instead, it provided an extraordinarily unpleasant experience. Subject to the ordinary need to avoid double compensation, Mrs Dillon was entitled to recover damages for the disappointment and distress which she suffered as the result of Baltic s breach of contract. 42 Gaudron J, in agreeing with the Chief Justice, held: I agree with the Chief Justice, for the reasons that his Honour gives, that Mrs Dillon is entitled to damages for disappointment and distress. Disappointment is a natural consequence of the shortening of her holiday. 43 Finally, McHugh J held: In the present case, it was an implied term of the contract that the fourteen day cruise in the South Pacific would be an enjoyable experience. The sinking of the Mikhail Lermontov resulted in a breach of that term. Consequently, the trial judge was correct in awarding damages to Mrs Dillon for the disappointment which she suffered when the cruise failed to provide the enjoyment which Baltic had promised. The application of basic principle concerning the awarding of damages for breach of contract requires an award of damages for distress or disappointment where it is an express or implied term of the contract that the promisor will provide pleasure or enjoyment or personal protection for the promisee. 44 In the result, the court should not presently reject the general rule enunciated in Hamlin and substantially confirmed in Addis. At the same time, it should recognize that damages for distress or disappointment are recoverable in an action for breach of contract if it arises from breach of an express or implied term that the promisor will provide the promisee with pleasure or enjoyment or personal protection or if it is consequent upon the suffering of physical injury or physical inconvenience. 45 The contract between Mrs Dillon and Baltic was one in which Baltic impliedly promised to provide a pleasurable and enjoyable cruise for fourteen days. Its failure to do so means that it must pay damages for the distress and disappointment suffered by Mrs Dillon. 46 A SNAPSHOT OF DAMAGES SO FAR In circumstances where the cost of redress under a breached contract outweighs the value of the contemplated change or where it is practically impossible to deliver the original bargain a court may award damages being the difference in value between the defective bargain and the original bargain. In practice, it is often very difficult (particularly in residential building matters) to adduce such proof. It may not be possible to prove diminution of value for instance, where a person contracted for a large window permitting an expansive view, AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER

7 that same window for another may constitute a lack of privacy, with no determinable difference in market value. Still, the owner has not been given what they have bargained for and the cost of rectification may be prohibitive. Is the rule that no damages are recoverable? According to Bellgrove v Eldridge the test is that the remedy sought must be both reasonable and necessary and therefore if a cost is disproportionate to the rectification being contemplated, a court may consider that such damages are not reasonable. The introduction of reasonableness is well known to the law of damages, such as for instance the duty to mitigate damages, it is less well known to the law of damages as a measure by which to restrict the quantum of damages. Contractual damages for loss of amenity are characteristically tortious damage and can be recovered under contract in certain circumstances, particularly where the terms of the contract promise pleasure or comfort or a personal preference 47 (Dillon) Ruxley Electronics v Forsyth and Construction Limited 48 Forsyth contracted Ruxley to build a swimming pool. It was agreed that the depth of the pool would be seven foot six inches. The depth of the pool was six foot nine inches. In an action for recovery of the balance owing under the contract the court ordered Forsyth to pay the balance of the contract but ordered that an amount of two thousand five hundred pounds be awarded for loss of amenity. Forsyth succeeded in the Court of Appeal, that court finding that the proper measure of damages was the cost of building a new pool (whether or not Forsyth intended to re build the pool). The House of Lords reversed the decision of the Court of Appeal and confirmed the judgment of the trial judge. It was submitted by Mr Jacob, counsel for Mr Forsyth, that the court was faced with only two options: in the event that the court found that there had been a breach of contract and a commensurate loss suffered, then the court was obliged to award either damages: (a) for the cost of rectification which in this case was the replacement of a pool; or (b) being the difference between the market value of the pool as built and the market value of the pool as if the pool had been built according to specifications. In this case there was no difference in the market value and loss having been suffered, the court was left with no option but to award damages in accordance with (a) above. The court declined to accept that it was compelled to follow either one or the other measure of damages and relied on the following central tenants of damages to support a judgment which followed a novel third route, the court held that damages: (a) are compensatory in nature and not punitive; (b) are awarded to put the plaintiff, insofar as money can do it, into the same position as they would have been had the contract been fulfilled and should not bestow upon the plaintiff a benefit or profit. For this proposition they relied on the US judgment of Cardozo J in Jacob and Youngs v Kent; 49 (c) must be both reasonable and necessary. As authority for this proposition the judges looked east to that far off outpost of the British Empire, the High Court of Australia (Bellgrove v Eldridge). The third route to damages proposed by the House of Lords was that it is appropriate in certain circumstances to award as damages in contract for loss of amenities (being loss of enjoyment, inconvenience, disappointment, mental stress, frustration and annoyance) in order to do justice and to be reasonable. This unwieldy yet potentially very powerful head of compensation was not set free in the paddock of damages unbridled. The courts have stated that the circumstances in which such awards are likely to be found are amongst others: (a) where the object of the contract was to bestow a personal preference according to the terms of the contract. See Oliver J in Radford v De Froberville; 50 (b) where the object of the contract is to provide comfort or pleasure and that term of the contract is breached. See Dillon v Baltic Shipping Company; (c) in domestic building contracts where the employers are natural persons and the building contract reflects their personal preferences. See Coshott v Fewings Joinery Pty Limited; 51 and (d) contracts which promise a certain level of satisfaction or peace of mind Farley v Skinner [2001] 3 WLR 899 The House of Lords finally expressed its view in Farley v Skinner [2001]3 WLR 899. Before we consider Farley it would be useful to refer to the summary of Bingham LJ formulated in Watts at p1445: 20 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007

8 1. A contract breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party. This rule is not, I think, founded on the assumption that such reactions are not foreseeable, which they surely are or may be, but on considerations of policy. 2. But the rule is not absolute. Where the very object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead. If the law did not cater for this exceptional category of case it would be defective. A contract to survey the condition of a house for a prospective purchaser does not, however, fall within this exceptional category. 3. In cases not falling within this exceptional category, damages are in my view recoverable for physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort. If those effects are foreseeably suffered during a period when defects are repaired I am prepared to accept that they sound in damages even though the cost of the repairs is not recoverable as such. But I also agree that awards should be restrained, and that the awards in this case far exceeded a reasonable award for the injury shown to have been suffered. Farley v Skinner The facts In 1990 the plaintiff, a successful businessman, contemplated retirement. He owned a flat in London, a house in Brighton and a property overseas. He wanted to buy a gracious country residence. He became interested in a beautiful property known as Riverside House in the village of Blackboys in Sussex which was situated some 15 miles from Gatwick International Airport. The property is in the heart of the countryside. There is a stream running through the middle of it. The property has a croquet lawn, tennis court, orchard, paddock and swimming pool. Although the attractive house required modernisation and refurbishment, it appeared to be ideal for the plaintiff. There was, however, one question mark over the transaction. For the plaintiff a property offering peace and tranquillity was the raison d être of the proposed purchase. He wanted to be reasonably sure that the property was not seriously affected by aircraft noise. The plaintiff engaged as his surveyor the defendant, who had been in practice as a sole practitioner for some years. The surveyor had to investigate the usual matters expected of a surveyor who inspects a property. In addition the plaintiff also specifically asked the surveyor to investigate, amongst other things, whether the property would be affected by aircraft noise. The plaintiff told the surveyor that he did not want a property on a flight path. The surveyor accepted these instructions. On 17 December 1990 the surveyor sent his report to the plaintiff. From the plaintiff s point of view it was a satisfactory report. About aircraft noise the surveyor reported: You have also asked whether we felt the property might be affected by aircraft noise, but we were not conscious of this during the time of our inspection, and think it unlikely that the property will suffer greatly from such noise, although some planes will inevitably cross the area, depending on the direction of the wind and the positioning of the flight paths. Comforted by this reassuring report the plaintiff decided to buy the property. The purchase price was 420,000 (which included 45,000 for chattels). The purchase was completed on 28 February In the next few months the plaintiff caused the house to be modernised and refurbished at a total cost of about 125,000. During this period he was unaware that there was a significant problem associated with aircraft noise. On 13 June 1991 the plaintiff and his partner (who had a 32.74% beneficial interest) moved in. Since 1991 they had lived there three to four days a week for seven to nine months of the year. After he moved in the plaintiff quickly discovered that the property was indeed affected by aircraft noise. In fact, the property was not far away from a navigation beacon (the Mayfield Stack) and at certain busy times, especially in the morning, the early evening, and at weekends, aircraft waiting to land at Gatwick would be stacked up maintaining a spiral course around the beacon until there was a landing slot at the airport. Aircraft frequently passed directly over, or nearly over, the position of the house. The impact of aircraft noise on the tranquillity of the property was marked. The property was undoubtedly affected by aircraft noise. It is common ground that the plaintiff s enjoyment of the property was diminished by aircraft noise at those times when he was enjoying the amenities of the property outdoors and aircraft were stacked up, maintaining their spiral course around the beacon, waiting for a landing slot at the airport. Nevertheless, after initial vacillation, the plaintiff decided not to sell the property and he does not presently intend to do so. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER

9 Lord Steyn might have gone some distance to adopting the expansive approach in the following passage at paragraph 20: The broader legal context of Watts v Morrow [1991] 1 WLR 1421 must be borne in mind. The exceptional category of cases where the very object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation is not the product of Victorian contract theory but the result of evolutionary developments in case law from the 1970s. Several decided cases informed the description given by Bingham LJ of this category. The first was the decision of the sheriff court in Diesen v Samson 1971 SLT (Sh Ct) 49. A photographer failed to turn up at a wedding, thereby leaving the couple without a photographic record of an important and happy day. The bride was awarded damages for her distress and disappointment. In the celebrated case of Jarvis v Swans Tours Ltd [1973] QB 233, the plaintiff recovered damages for mental distress flowing from a disastrous holiday resulting from a travel agent s negligent representations: compare also Jackson v Horizon Holidays Ltd [1975] 1 WLR In Heywood v Wellers [1976] QB 446, the plaintiff instructed solicitors to bring proceedings to restrain a man from molesting her. The solicitors negligently failed to take appropriate action with the result that the molestation continued. The Court of Appeal allowed the plaintiff damages for mental distress and upset. While apparently not cited in Watts v Morrow [1991] 1 WLR 1421, Jackson v Chrysler Acceptances Ltd [1978] RTR 474 was decided before Watts v Morrow. In Jackson s case the claim was for damages in respect of a motor car which did not meet the implied condition of merchantability in section 14 of the Sale of Goods Act The buyer communicated to the seller that one of his reasons for buying the car was a forthcoming touring holiday in France. Problems with the car spoilt the holiday. The disappointment of a spoilt holiday was a substantial element in the award sanctioned by the Court of Appeal Nikolich v Goldman Sachs J B Were Services Pty Ltd [2006] FCA 784 (23 June 2006) This was a claim for damages for mental distress arising out of breach of contract. Justice Wilcox held: A major depressive disorder constitutes a psychiatric illness. Subject to one matter, it follows that Mr Nikolich is entitled to recover damages in respect of the mental distress he suffered, including the psychiatric illness itself, consequentially upon the respondent s breaches of the contractual obligations it undertook in WWU. This judgment was found upon the principle that the particular employment contract established a contract to deliver employment which would provide peace of mind and that the oppressive conduct of the plaintiff s immediate employer was a breach of that contract. The result was severe mental distress and the damages that emerged from that illness. This case finally brings together two difficult areas of the law, damages for breach of contract and mental distress beyond that psychiatric illness, perhaps recognizing that physical inconvenience and annoyance are no longer the outer limits of remoteness of damage in contractual matters. The characterization of damages were upheld on appeal in Goldman Sachs J B Were Services Pty Limited v Nikolich [2007] FCAFC 120 (7 August 2007). CONCLUSION Hadley v Baxendale enunciated a principle for the assessment of damages which has allowed an expansive approach to the question of determining damages. The decision has given rise to significant debates on disclosure risk assessment and cost benefit consequences. In the search for fairness, the Victorian approach to damages has perhaps been considered inadequate to deal with the vicissitudes of modern commercial life. Courts are becoming bolder about compensating parties and looking at the real loss suffered rather than confining themselves to a particular method of calculating loss. The High Court in Australia has not yet accepted the principle enunciated in Ruxley and Farely (supra) but there is evidence that at grass roots level elements of the approach is finding favour in Australia. See in this regard: Thorpe v Lochel & Ors [2005] WASCA 85 (11 May 2005); Ramzy & Anor v CTTT & 2 Ors [2005] NSWSC 48; Bellgrove (supra) High Court; Coshot (supra) NSWCA; and Nikolich supra) Federal Court. The question is asked whether it is still appropriate to speak of an exception to the rule in Addis, or whether the exception has now disproved the rule and become a branch of damages under the law. Perhaps the approach in New Zealand in Rowlands v Collow has touched on the answer. The law of obligations gives rise to a duty between parties in a 22 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007

10 legally proximate commercial relationship. A breach of that duty gives rise to damages; those damages are a matter for the assessment by the court in its broadest discretionary power, subject to one principal restriction, the question of remoteness of damage. For the contract lawyer this development in the law of damages means at least two things: (a) the contract drafter should pay attention to the undefined parameters of damages and, where possible, draft clauses that deal with the consequences of breach and or establish a calculable formula for damages; and (b) to the litigator there is a duty to consider a much wider field of damages including potential expert testimony for the diminution of value and an assessment of contract for damages based on loss of amenities, mental distress and upset, which until just recently had been damages that have remained firmly within the realm of tort or confined to the so called exception in Addis. REFERENCES 1. Bryan Thomas in an illuminating and well researched article in the BCL 2004 vol 4 at page (1848) 1 Exch 850 at (1854) 9 Exch At McHugh JA (as he then was) in Alexander v Cambridge Credit Corporation Ltd [1987] 9 NSWLR 310 at (1856) Exch vol 26 at page At page (1856) 1 H & N 408 at (1875) L.R. 10 QB At page At page At page [1909] AC At page At page At page [1950] All ER At page At page (1954) 90 CLR At page At page (1974) 5 ACTR At [12] 25. At [15] February 1990, Supreme Court of NSW Common Law Division Building and Engineering List 27. At At [1992] 1 NZLR At At At At (1982) 37O R (2d) 277 at At At (1993) 176 CLR At At At At At At At At At See also an outstanding article by Douglas Bates The assessment of contractual damages in BCL vol 15 February Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 (HL) 49. (1921) 129 NE [1977] 1 WLR 1262 at 1270D 51. Unreported judgment in the NSW Court of Appeal by Gleeson CJ; Priestly and Beazley JJ dated 15 July Nikolich v Goldman Sachs J B Were Services Pty Ltd [2006] FCA 784 (23 June 2006) AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER