DAMAGES FOR BREACH OF CONTRACT FOR SALE OF GOODS

• Author: LEOW CHYE SIAN
• Citation: (2001) 13 SAcLJ 135
• Date: 01 December 2001
• Published date: 01 December 2001

Introduction

In this article, the writer seeks to examine some common issues in the assessment of damages where there is a breach of a contract for the sale of goods.

Together with the general law on the sale of goods, the law relating to damages in such contracts has been codified in the Sale of Goods Act1. Sections 50, 51, 53 and 54 which contain the relevant law form the starting point in considering damages for various types of breach, but since the statute consists of a codification of the common law, the bulk of the material remains case law. However, in so far as the guidance offered by precedents is concerned, the following observations by Warren LH Khoo J, in delivering the judgment of the Singapore Court of Appeal in Hong Fok Realty Pte Ltd v Bima Investment Pte Ltd2 should be noted:

“It must be borne in mind … that the ascertainment of damages is an exercise to establish a question of fact, that is, what loss and damage have been suffered by the plaintiff in the particular case before the court, and to award him damages ascertained according to these principles. Decided cases are useful more for the principles they enunciate, than for the result of the application of the principles.”

Remoteness of Damages and Measure of Damages

As Andrew Phang said in his book3:

“In the ultimate analysis a claim for damages raises two distinct questions. … These emerge from the fundamental principle that the remoteness of the damage for which compensation is claimed must be distinguished from the monetary assessment of that compensation.

The first is: for what kind of damages is the plaintiff entitled to recover compensation? …

To this end Hadley v Baxendale4 defined the kind of damage that is the appropriate subject of compensation, and excluded all other kinds as being too remote. The decision was concerned solely with what

is correctly called remoteness of damage, and it will conduce to clarity if this expression is reserved for cases where the defendant denies liability for certain of the consequences that have flowed from his breach.

The second question, which must be kept quite distinct from the first, concerns the principles upon which damage must be evaluated or quantified in terms of money. This may appropriately be called the question of the measure of damages. The principle adopted by the courts in many cases dating back to at least 1848 is that of restitutio in integrum. If the plaintiff has suffered damage that is not too remote, he must be restored to the position he would have been in had that particular damage not occurred.”

Alderson B stated the rule that governs remoteness of damage as follows in delivering the judgment of the Court of Exchequer in Hadley v Baxendale5:

“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, that is, 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.”

In this case, the plaintiffs were the millers of a mill and had entered into a contract of carriage with the defendant, a common carrier. The defendant was to deliver the plaintiffs’ broken crank shaft to the makers as a pattern for a new one. The plaintiffs claimed damages for loss of profit caused by a delay by the defendant.

Alderson B demonstrated that, in accordance with the principle he had just expressed, there were only two possible grounds upon which the plaintiffs could sustain their claim. Firstly, that in the usual cause of things the work of the mill would cease altogether for the want of the shaft. This, he said, would not be the normal occurrence, for, to take only one reasonable possibility, the plaintiffs might well have had a spare shaft in reserve. Secondly, that the special circumstances were so fully disclosed that the inevitable loss of profit was made apparent to the defendant. This however was not the case since the only communication proved was that the article to be carried was the shaft of a mill and that the plaintiffs were the owners of the mill.

The words “either” and “or” used in the formulation of the rule as explained by Alderson B show that it contains two branches. The first

deals with the normal damage that occurs in the usual course of things; the second with abnormal damage that arises because of special or exceptional circumstances.6

Asquith LJ in what is generally regarded as a classic exposition of the law reformulated the test of remoteness of damage laid down by Alderson B in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd7. He summarised the substance of the test in the following three propositions:-

“In cases of breach of contract, the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.

What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.

For this purpose, knowledge ‘possessed’ is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the ‘ordinary course of things’ and consequently what loss is liable to result from a breach of contract in that ordinary course. This is the subject matter of the ‘first rule’ in Hadley v Baxendale. But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses of special circumstances outside the ‘ordinary course of things’, of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the ‘second rule’ so as to make additional loss also recoverable.”8

In this case the facts were as follows:

The plaintiffs, launderers and dyers, decided to extend their business. For this purpose and for the purpose of obtaining certain dyeing contracts of an exceptionally profitable character, they required a larger boiler. The defendants, an engineering firm, contracted to sell and deliver to the plaintiffs on 5 June a certain boiler of the required capacity. This however was damaged in the course of removal and was not delivered until 8 November. The defendants were aware of the nature of the plaintiffs’ business and they were informed in more than one letter before the conclusion of the contract that the plaintiffs were “most anxious” to put the boiler into use “in the shortest possible time.”

In an action for breach of contract, the plaintiffs claimed (a) damages for the loss of profit, assessed by them at sixteen pounds a week, that they would have earned through the extension of their business but for the delay in delivery of the boiler, and (b) damages, assessed at two hundred and sixty two pounds a week, for the loss of the exceptional profits that they would similarly have earned on the highly lucrative dyeing contracts.

In the opinion of the Court of Appeal, the defendants, with their engineering experience and with the knowledge of the facts possessed by them, could not reasonably contend that the likelihood of some loss of business was beyond their prevision. They were indeed ignorant that the plaintiffs had in prospect the “highly lucrative” dyeing contracts and so could not be liable specifically for the “highly lucrative” profits that the plaintiffs had hoped to make. However the plaintiffs were not precluded from recovering a general sum which might represent the normal profit to be expected from the completion of the dyeing contracts.

In The Heron II9, however, the House of Lords differed from the judgment of Asquith LJ with regard to the criterion by which to determine the remoteness of damage arising from a breach of contract. They stated that the question is not as Asquith LJ said, whether the damage should have been foreseen by the defendant but whether the probability of its occurrence should have been within the reasonable contemplation of both parties at the time when the contract was made, having regard to their knowledge at that time.

What is the degree of probability required and how is it to be defined? Asquith LJ said:

“In order to make the contract-breaker liable under [Hadley v Baxendale] it is not necessary that he should have actually asked himself what loss is liable to result from a breach. … It suffices that if he had considered the question he would as a reasonable man have concluded that the loss in question was liable to result … Nor … to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is indeed enough … if the loss (or some factor without...