Date: Mon, 4 Aug 2008 16:47

From: Robert Stevens

Subject: The Achilleas

A few remarks.

2. As I see it, the underlying question is whether contractual remoteness rests on the intention of the parties or whether it is a default rule imposed by law subject to the contrary intention of the parties. My root difficulty with the former is that I would regard the obligation to pay damages as being imposed by law whether the parties have agreed to it or not; and if that is so, it is hard to see how rules relating to damages can be based on the parties’ intentions.

All legal obligations are imposed by law in the trivial sense that without the legal system they wouldn't exist. The issue is why the legal system imposes the obligation. Clearly the obligation to pay damages is not imposed because (save possibly in the case of liquidated damages clauses) that is what the parties have agreed to. Obligations to pay damages arise because of the commission of a wrong = the infringement of a primary right. However, we do not enter a different world when shifting from the primary right to the secondary right.

I have a (primary) right that you do not drive over my foot in your car. The 'best' respect for that right is for you not to drive over it. Once you have done it, it is too late to achieve perfect compliance. In morality (and law) you must now do the 'next best' that you can. In morality this would include an apology. In morality and law this also includes paying a sum of money which is the nearest approximation to your not having run over my foot. The secondary obligation is derived from the primary obligation.

In contract it is precisely the same. The party in breach must pay a sum of money which as closely as possible approximates performance. The law follows morality here. The secondary obligation to pay damages is based upon the primary obligation to perform. Inevitably, therefore, just as the primary right is sourced in the agreement, so is the obligation to pay damages. We don't forget about the parties' agreement when we get to the quantification of damages stage.

It would be possible to have a legal system where the secondary obligation was not based upon the 'next best' which could be compelled to be done. So, we could chop off the hands of contract breakers or lock them in stocks or, perhaps more fashionably, try to work out what quantum of damages will give the most efficient result. That is not the common law, thankfully. In every case, the scope of the obligation to pay damages turns upon the construction of the agreement.

3. Concepts such as ‘assumption of responsibility’ and ‘acceptance of risk’ are important in understanding remoteness but are ambiguous as to whether they rest on the parties’ intentions or are imposed (subject to contrary intention).

They are based upon the parties' intentions as objectively manifested.

4. Strictly speaking interpretation of a contract has nothing to do with remoteness. Interpretation is concerned with understanding the express words used by the parties. On the other hand, I can see that remoteness might be helpfully regarded as resting on the implication of a term by the courts. But, as we all know, the implication of terms by the courts raises the precise ambiguity that we are trying to resolve, namely whether the term is implied because it rests on the parties’ intentions (usually referred to as a term implied in fact) or is imposed by law subject to contrary intention (usually referred to as a term implied in law).

I disagree here. The rule is not based upon *positively* implying a term into an agreement (c.f. Adam Kramer). Rather the question is the negative one of seeking to ascertain the (inevitable) limits of what has been agreed to. Words both as a matter of language and law are not intended to be absolute. So, if I tell a babysitter to teach my children a game while I am out, if he has taught the children knife throwing or playing chicken with speeding cars on the Iffley Road, I think I have reason to complain. This is not because either of us necessarily thought about these possibilities at the time of agreement, nor is it because we need to imply a term to exclude them. Rather the word 'game' in its context was limited in scope.

Promises are neither in law nor morality intended to be absolute. In determining where the promises made run out, the courts are not artificially implying fictitious terms. Rather they are engaging in the unavoidable business of ascertaining what the limits of what has been agreed to are. If we didn't have the remoteness rules for breach of contract we would be treating the promise to perform as absolute, which promises are not intended to be (or very rarely are) .

5. Applying the default rule approach, no-one (as far as I am aware) has argued that one must apply the ‘reasonable contemplation as likely remoteness test ‘mechanistically’. Rather it gives us the fair starting point in the vast majority of cases. This is because it is almost always regarded as fair that the defendant should bear the risk of compensating the innocent party for a type of loss that, at the time of contracting, a reasonable man would have regarded as a serious possibility in the event of breach. That default rule encourages the giving of information about potential unusual loss so that, if it so wishes, the party undertaking the obligation can seek extra payment or can seek to exclude the risk in the contract (by an exclusion clause). But, as with the obligation to pay damages, that rule of remoteness does not rest on the parties’ intentions: it is a default rule imposed by the law.

I am not sure whether the proposition that it is fair is a separate one from the proposition that the current default rule serves the goal of encouraging disclosure. Assuming that they are separate:

(i) Why fair? Why is it not more fair that the wrongdoer bears the loss rather than the innocent party? Why this default rule (which the parties can contract out of) rather than any other? How and why are you determining what is fair without reference to the agreement?

(ii) If the default rule is about encouraging disclosure, why are losses which neither party could have reasonably foreseen irrecoverable? These could not have been disclosed as they were not known. Why is the test one of reasonableness, rather than what the promisee actually knew, which is after all all that he has the ability to disclose?

The encouraging disclosure idea also seems to me to fly in the face of the general position of English law that there is no duty of disclosure. If I agree to sell to you some apples, I am not obliged to disclose to you that I know that the market for apples is about to dramatically fall because of the imminent arrival of a shipload of coxes. Conversely if you know the market is about to rise sharply, you don't have to tell me so that I can bump up the price to reflect this. The common law allows us to exploit the information we have so that the counterparty unbeknownst to him is making a bad deal. Why should the law try and encourage the disclosure of some things relevant to the price but not others?

If one is to see it as resting on an implied term, the term is one implied in law not a term implied in fact.

I don't think it is based upon an implied term.

Moreover, that default rule is not always a fair rule in the circumstances e.g. where the information about unusual loss is given in a situation where the party undertaking the obligation cannot realistically negotiate extra payment or a clause excluding the risk (hence the famous hypothetical examples of taxi-drivers and shop assistants faced with information about potential unusual losses). And of course the default rule is always subject to the parties’ contrary intention.

6. I do not think that English law has regarded the default rule as unfair and therefore displaced where the actual loss is ‘disproportionate’ to the price or where the actual quantum of loss (as opposed to the type of loss) could not have been quantified at the time of contract. Leading cases such as Victoria Laundry, Heron II, Parsons v Uttley Ingham and Brown v KMR Services all seem to contradict that idea.

I must confess that I think Brown v KMR is doubtful, as it is based on a misunderstanding of what 'type of loss' means. If it is right, Victoria Laundry seems wrong.

7. The Achilleas worries me because the reasoning of Lords Hoffmann and Hope (quaere Lord Walker) does seem to have departed from the above ‘standard’ approach and to have adopted the ‘remoteness is what the parties agreed’ approach. Moreover, as regards the actual decision, if one applies the above default rule analysis to the facts of the case, (a) the loss of a follow-on fixture would surely have been reasonably contemplated as a serious possibility had breach been thought about at the time of contracting; and (b) I am not sure that it is fair for that default rule to be displaced by the ‘general understanding of the shipping industry’ where that understanding appears to be legally flawed. (Arguably it is also contradicted by The Heron II where, as I understand it, there was also a counter-understanding by the shipping industry.) If the decision had been reached (or could retrospectively be saved!) by saying that the normal default rule is displaced in this case because of the parties’ intentions that that sort of loss should not be recoverable that would be fine. But that would require, as I see it, an implied term in fact excluding the follow-on fixture loss. Should such an exclusion clause have been implied in this case? Such a term would not be necessary for business efficacy and, applying the ‘reasonable bystander’ test, I would have expected the response of these owners to have been that they were not accepting ‘of course’ that the loss of a follow-on fixture was excluded.

Well, again, I don't think we are in the world of implying terms.

8. On a more technical point, are we sure what the majority is in The Achilleas? Clearly Lords Hoffmann and Hope are together as, in not signing up to that approach, are Lord Rodger and Baroness Hale. So the crucial speech to interpret is Lord Walker’s. He agrees with Lords Hoffmann, Hope and Rodger. I find what he says rather difficult: e.g. para 86 seems to support Lord Hoffmann but earlier in para 69 he seems to talk of a common basis as distinct from an assumption of responsibility.

Where a judge gives more than one reason for a decision, each of which is sufficient for the result so that no single one is necessary, all form part of the ratio.

He agrees with Hoffmann and Hope and their reasons for allowing the appeal. Therefore those reasons form part of the ratio of the decision. The same with the reasons of Lord Rodger. Put another way, there is a majority both for Lord Hoffmann's and Lord Rodger's reasons for allowing the appeal. I wouldn't myself try and defend Lord Rodger's position, for the reasons you give.

Rob

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