‘Remoteness of damages – <i>Hadley </i>v.<i> Baxendale</i>

4.6. Both parties agreed that the correct exposition of the scope of protection afforded by English law for breach of contract was established in Hadley v. Baxendale1 and, therefore, that case represented the established principles for assessing [Claimant’s] claims for damages. The scope of protection is marked out by what was in the contemplation of the parties. ...

4.9. The Tribunal finds that the following extract from the [Claimant’s] Prehearing Submission on Damages is an accurate summary of the relevant principles:

A. The Operative Principle of English Damages Law

It is a basic principle of English damages law, enshrined in the iconic case of Hadley v. Baxendale, 9 Exch 341 (1854), that recoverable damages in an action for breach of contract are those flowing proximately and foreseeably from the breach… Once a particular type of damage is determined to be recoverable by the claimant, either because it arises naturally and directly from the breach, and/or because it was in the actual or imputed contemplation of the parties at the time of contracting, then the defendant will be held liable for the whole of the loss, notwithstanding that the quantum was greater than the parties might have contemplated: H. Parsons v. Uttley [1978] 1 All E.R. at 802. The fact that the scale or amount of the damages may not have been foreseeable in no manner makes them too remote to be recovered: Jackson v. Royal Bank of Scotland [2005] 1 WLR 377; Wroth v. Tyler [1974] Ch. 30, 60-62. As noted in the Chitty treatise, quoting from Kpohraror v. Woolwich Building Society [1996] 4 All E.R. 119, 126, “the party who has suffered damages does not have to show that the contract-breaker ought to have contemplated, as being not unlikely, the precise detail of the damage or the precise manner of its happening. It is enough that he should have contemplated that damage of that kind was not unlikely.” Chitty on Contracts, Vol. I, Ch. 26-050 at 1452 (emphasis in original). It matters not at all, in short, insofar as the full recoverability of the claimant's damages is concerned, that the wrongful actions of the defendant have inflicted on the plaintiff demonstrable economic harm larger than what might have been in the defendant's contemplation at the time of contracting, or, for that matter, substantially larger than the face value of the contract which has been breached. The only requirement is that the particular nature of the damages suffered, … have been a foreseeable consequence at the time of contracting, of the eventuality of the contract's breach....

4.10. The contracting parties, as reasonable businessmen, are taken to understand the ordinary practices and exigencies of the other’s business. It is sufficient that “the reasonable man, in the defendant’s position at the time of contracting would have understood that, by making the promise in those circumstances, he was assuming responsibility for the risk of the type of loss in question”.2

Application of <i>Hadley </i>v.<i> Baxendale </i>principles

[Project owner] claim – [Claimant’s] increased personnel and overhead costs

4.11. It is first necessary to record the concessions made on behalf of [Respondent 1] at the oral hearing and elsewhere in its written submissions. First, it was "acknowledged that the Contract says that these valves are required for use in the ... Gas Project.” It was also acknowledged that [Respondent 1] knew that it was important that there should not be delay because the Contract provided in clause 53 for the financial consequences of the delay. ...

4.12. Secondly, [Respondent 1] acknowledged that there were some damages flowing directly from its breach in terms of the first rule in Hadley v. Baxendale, namely the claims for piping redesign, re-tender and the extra cost of replacement PSVs. ... It may be noted in passing that this latter concession sits uneasily with [Respondent 1’s] total (but incorrect) reliance on clause 5 as a limitation provision.

4.13. What [Respondent 1] contended was that "the missing piece in the jigsaw of liability so far as [Claimant] is concerned is the absence of any evidence showing that [Claimant] put [Respondent 1] on notice of contracts between [Claimant] and ... other people ..." ... It was [Respondent 1]’s submission that it was not enough for [Claimant] to have conveyed that time for delivery was critical. [Claimant] needed to convey, and it did not, that under the Contract there was a potential liability for a significant amount for damages for delay because they had another contract with another party and might be exposed to liability under that contract if there was delay. Or at the very least, [Claimant] needed "to say that the contract it is entering into with the defendant affects the contract which they themselves have with a third party. They have to say that they have a contract with a third party, and really they should say what the financial consequences are if they break it" ... In short, the [Respondent 1’s] submission was that notice had to be given of the existence of the second contract and the potential magnitude of the liability for delay.

4.14. As to the first contention, the Tribunal finds that [Respondent 1] knew or reasonably ought to have known that [Claimant] had a contract with [the Plant owner]. Apart from anything else, this finding is established by the heading on the Invitation to Bid ... It was clear throughout the negotiation process, and at the time that the Contract was signed, that [Respondent 1] was to supply the PSVs to [Claimant] so that they could be incorporated into the Plant. The invitation to tender document listed [the Plant owner] as the client, making it clear that [Claimant] was engaged on the project by [the Plant owner] under a head contract. In addition, as noted earlier, the Contract stated in the definition section that the “owner” was [the Plant owner].

4.15. The Tribunal further finds that [Respondent 1] knew upon the signature of the Contract that if it ever became necessary to find a replacement supplier for the PSVs, it would take a very considerable time to complete the formalities with the replacement supplier. The six months’ process which preceded the signing of the Contract was an ample indication of this fact.

4.16. The Tribunal further finds that, as experienced reasonable business entities engaged in this field, the parties would have had within their reasonable contemplation that the contractual arrangements involved in projects of this sort would include provisions dealing with the consequences of delay and that in such circumstances, [Respondent 1]’s failure to deliver the PSVs was not unlikely4 to result in [Claimant] being exposed to the possibility of damages for delay under its agreement with [the Plant owner].

4.17. In addition to the background of the project itself, throughout the negotiation process it was made clear that the timing of the delivery of the PSVs was critical. This was acknowledged by [Respondent 1] and was referred to in its internal communications. The necessity for timely delivery reinforced the fact that failure to deliver by repudiating the Contract was not unlikely to result in [Claimant’s] exposure to liability to [the Plant owner] for the delay. It is noted, as set out in clause 11.1 of the Contract,5 that there was to be a guarantee for a specific period. As pointed out in the passage in Elbinger relied upon by [Claimant] and set out [earlier in this award6], that too underscores that the PSVs were to be put to immediate use and timely delivery was of critical importance.

4.18. As to the second contention, that [Claimant] should have advised [Respondent 1] of the likely financial consequences of breach, the authorities show that such is not a requirement: see paragraph 4.9 above. [Respondent 1] is in effect arguing and has argued that to succeed [Claimant] had to prove that damages of the scale which are claimed here in respect of [the Plant owner] were within its contemplation. However, as pointed out earlier, the law is clear that what must be foreseen is only the type of damage not the extent of the damage.

4.19. On an objective basis, [Respondent 1] submitted that no reasonable party would have exposed itself to such liability on a contract with a value of approximately ... The Tribunal does not agree with this contention. In projects of the kind that are the subject of these proceedings, parties will routinely assume the risk of exposure to the other party’s liability to a third party. The Tribunal finds that the circumstances were not such that a reasonable person in the place of the defendant would not have accepted the risk of the unusual loss.

.........

[Claimant’s subcontractor] claim

4.21. It is now necessary to consider the claim made in respect of the [subcontractor] claim … It must be accepted that, as a matter of fact, the position was different from that relating to [the Plant owner] because the documentary record as between [Claimant] and [Respondent] prior to the Contract contains no mention of [the subcontractor]. In fact, the position was that [Claimant] had an erection subcontract with [the subcontractor]. [The subcontrator] was retained by [Claimant] … to undertake construction of the civil works insulation and erection of the injection compression station equipment and piping plus the construction of the pipeline links to the various well heads.

4.22. Under the terms of the … subcontract, [Claimant] was responsible to supply all equipment and major materials related to the project and [the subcontractor] handled only the erection and installation. [The subcontractor] is [a company incorporated in the same Middle Eastern state as Claimant] and the terms and conditions between [the subcontractor] and [Claimant] followed standard domestic practices as used by the Ministry of Petroleum for erection contracts with domestic firms where there are no overseas procurement obligations.

4.23. It may be that there was nothing in the precontractual negotiations or the contractual documentation which mentioned the erection subcontract between [Claimant] and [the subcontractor]. However, as an experienced business entity operating in this field through the manufacture, design and supply of PSVs, [Respondent 1] would know or ought reasonably to have known that not only would the purchaser of the PSVs have obligations to the client /owner but that in carrying out its obligations to [the Plant owner] it would very likely use subcontractors on some or all of the work for which it was responsible to [the Plant owner]. Consequently, [Respondent 1] ought reasonably to have known and understood that it was not unlikely that by its failure to perform, there would be disruption and loss to subcontractors for which [Claimant] would be in the first instance responsible.

4.24. The observations in the ICC Commission on International Arbitration Report on Construction Industry Arbitrations …7 at paragraph 10 are of relevance:

10. Construction disputes always arise in a variety of situations, but today a number of changes mean that they occur in contexts which differ from those traditionally encountered. In some countries the customary methods of procurement of construction projects are being supplemented by more sophisticated ones. These place greater emphasis on the responsibility of the contractor who in turn is now less and less an executant and more and more a manager and facilitator. At the same time contractors (and subcontractors) combine more in joint ventures to offer a range of skills and services and to share risk (and perhaps to make a profit). Nowadays major disputes are no longer mainly between client and contractor but increasingly occur between contractor and subcontractors…

4.25. As to the unliquidated nature of its [subcontractor] claim, [Claimant] referred in its submissions to English law supporting its right to claim damages for pending and unliquidated claims of a third party. [Respondent 1] did not challenge the asserted principles in its submissions. [Claimant] relied in particular on the judgment of the English High Court in Total Liban S.A v. Vitol Energy S.A.8[Claimant] submitted that it would accept and implement any technique adopted by the Tribunal to avoid it making a windfall recovery. [Claimant] suggested a directive from the Tribunal that amounts awarded to it for its potential liability to [the subcontractor] be paid directly by [Respondent 1] to [the subcontractor], in partial discharge of [Claimant’s] liability on [the subcontractor]’s claim against it. The adoption of such a technique by the Tribunal was not opposed by [Respondent 1]. The Tribunal finds that [Claimant] is entitled under English law to damages even though its liability to [the subcontractor] is potential and unliquidated. In addition, the Tribunal finds that it is appropriate to make provision in this Award to avoid the possibility of [Claimant] making a windfall recovery. The Tribunal considers that the technique suggested by [Claimant] is appropriate.

Summary as to application of <i>Hadley </i>v.<i> Baxendale</i> principles

4.26. For all of the foregoing reasons, the Tribunal finds that the damages claimed in relation to [the Plant owner], [Claimant’s] increased personnel and overhead costs, and [the subcontractor] fall within the first limb of the Hadley v. Baxendale principles. The Tribunal finds that [Claimant’s] liability for damages under its head contract with [the Plant owner] and its subcontract with [the subcontractor] were damages of a kind that naturally flowed from [Respondent 1]’s repudiation of the Contract. So too were [Claimant’s] increased personnel and overhead costs. The arrangements that [Claimant] had with [the Plant owner] and [the subcontractor] were usual for the type of project that [Claimant] was engaged in and [Respondent 1] as a reasonable business entity with experience in this area of business could be expected to be aware of these types of arrangements. By failing to deliver the PSVs and repudiating the Contract, it was a natural consequence that [Claimant] would incur delay penalties to [the Plant owner] and that it would be exposed to a potential liability to its subcontractor ... for the additional time that it was required to be on site. The delays also necessarily meant that [Claimant] would incur further costs itself as shown by its increased personnel and overhead costs. There was nothing unusual about these potential liabilities, which the Tribunal finds to have been in the reasonable contemplation of the parties as experienced operators in their respective and overlapping fields.

.........

Mitigation

4.30. It was agreed by both parties that [Claimant’s] obligation to take steps in mitigation of the damage caused by [Respondent 1]’s repudiation of the Contract was to take those steps which were reasonable in the ordinary course of business. However, the parties disagreed as to what constituted reasonable steps in the circumstances.

4.31. [Respondent 1] suggested that immediately upon receiving notification ... from [Respondent 1] of its intention to repudiate the agreement, [Claimant] should have re-tendered for replacement PSVs. Alternatively, it was the view of [Respondent 1’s expert] that [Claimant] should have foregone a renewed round of tenders and simply entered into negotiations with the second preferred supplier from the initial round of tenders that led to the Contract with [Respondent 1].

4.32. [Claimant’s] initial reaction was to seek an audience with [Respondent 1] to attempt to persuade [Respondent 1] to continue to perform its obligations under the Contract to deliver the PSVs. Given the relatively advanced stage of the procurement cycle, the Tribunal finds that this was a perfectly reasonable step for [Claimant] to take. Far from delaying the calling of tenders, [Claimant] initiated the tender process for re-procurement of PSVs just over two weeks after receiving the ... notice from [Respondent 1] and before it was informed definitively by [Respondent 1]’s lawyers that [Respondent 1] had no intention of performing its obligations to deliver the PSVs. The Tribunal finds that [Claimant] did not unduly delay matters by attempting to negotiate with [Respondent 1] before initiating a new tender process.

4.33. The Tribunal also finds that it was a reasonable step for [Claimant] to initiate a re-tender for the design, manufacture and delivery of the PSVs. It was accepted by both parties that it is usual in placing agreements for procurement of parts such as PSVs for there to be an international tender process. [Respondent 1]’s suggestion that [Claimant] should have foregone this process as a result of the repudiatory breach of [Respondent 1] is contrary to English legal principles on mitigation. [Claimant] was obliged to take such steps as were reasonable in the ordinary course of its business but was not required to take extraordinary steps such as those suggested by the party that had breached the Contract in the first place.

4.34. As to the contract entered into with [the new supplier], it was suggested by [Respondent 1] that the delivery cycle was too long and that delivery could have been made [earlier] which would have meant that the original project schedule was unaffected. [Claimant] submitted that the procurement cycle for the replacement PSVs of 13.5 months compared favourably with the 16.75 months for the [Respondent 1] PSVs. Similarly, delivery was 24 weeks from the commencement date compared to 28 weeks in the [Respondent 1] Contract. [Claimant] also submitted that [Respondent 1]’s contentions were based on a misinterpretation of the [[contract with the new supplier] since the time for delivery did not begin to run until the commencement date. This was not the date of signature of the contract but was the date when the Letter of Credit and performance guarantee was approved and issued. The Tribunal finds that the 24 week period for delivery did not commence until the letter of credit and performance guarantee were in place and were approved. ... The replacement PSVs were then delivered in line with the contract schedule.

4.35. [Respondent 1] suggested that [Claimant] was dilatory in arranging the letter of credit, and, therefore, it was [Claimant’s] fault that there was a delay in the delivery of the PSVs. Although it took some three months for the letter of credit to be arranged, as opposed to the one month stipulated in the contract, [Claimant] submitted that, as with the [Respondent 1] Contract, this period was profitably spent finalizing the technical specifications and design detail.

4.36. The Tribunal finds that the actions of [Claimant] in mitigation of its loss caused by [Respondent 1]’s repudiation of the Contract were reasonable in all respects. The PSVs were a bespoke and critical piece of the pipework for the ... gas injection plant. Once [Respondent 1] gave notice of its intention to repudiate the Contract, [Claimant] acted efficiently to source a new supplier. It was the evidence of [Respondent 1]’s witness ... that these parts could not be produced and delivered overnight but that there was a significant lead time of 6-7 months. The procurement cycle for the replacement PSVs compared favourably with the cycle under the [Respondent 1] Contract. Such suggestions put forward by [Respondent’s expert] as placing the contract without a competitive tender and airfreighting the PSVs overlooked the fact that such steps would have been extraordinary and did not accord with usual practice. Despite the fact that [Claimant] was incurring significant delay penalties to [the Plant owner], the Tribunal finds that to expect [Claimant] to forsake its ordinary business practice would have been unreasonable. The Tribunal finds that [Claimant] proceeded with suitable speed and efficiency when organizing replacement PSVs and that its actions were reasonable in the circumstances.’

1
(1854) 9 Exch 341.

2
Chitty on Contracts, paragraph 26-055, page 1455.

3
Editor’s note: Clause 5, entitled ‘Delay Penalties’, reads: ‘Should Seller delay in delivery of goods comparing to the delivery time schedule, Seller shall be liable to pay 0.33% of value of undelivered equipment per day to a maximum 5% of contract price, as penalty to Buyer. His payment would be full and final liability for late delivery.’

4
This is the test under the modern restatement of the Hadley v. Baxendale principles given in Chitty on Contracts, para 26-047, page 1450.

5
Editor’s note: Clause 11.1 and the preceding sentence read: ‘Provided that the proper handling, storage and operation procedures are followed, the Seller guarantees the proper performance of all the equipment subject of the Contract as described hereunder: 11.1 The guarantee period shall be twelve (12) months from the date of issuance of the Provisional Acceptance Certificate (PAC), which will be issued by the Buyer within twenty (20) days from successful erection, testing and commissioning of goods or 24 months from the commencement date of the Contract whichever is earlier.’

6
Editor’s note: Reference was made to [1874] L.R. 9 Q.B. 475(476.

7
Editor’s note: The Final Report on Construction Industry Arbitrations was published in the ICC International Court of Arbitration Bulletin Vol. 12 No. 2 (2001) and is available in the ICC Dispute Resolution Library at www.iccdrl.com.

8
(2001) Q.B. 643; [2000] 1 All ER 267. In that case it was held “[t]here was no rule of law that liability without payment did not constitute a recoverable loss. Thus, where a seller of goods breached its contract with a buyer, so as to result in the buyer being liable to a third party to whom it had contracted to sell the goods, the buyer had a claim for substantial damages against the seller prior to discharging its liability to the third party by payment. Any question of uncertainty as to the extent of damage or of prevention of windfall gains could be dealt with by resort to the range of techniques already available to courts and tribunals, the technique to be used in a given case depending on the liability in question.”