Remote expectations Legal notes Stuart Pemble considers whether a case involving delay by an engineer signals a possible change in the law on the recoverability of damages caused by a volatile property market
Law students of the future may be well advised to remember the name Walter Gubbins. This is because a successful counterclaim that Mr Gubbins (a Cornish farmer who was looking to branch out into residential development) brought against Devon-based engineer John Grimes Partnership Ltd (JGPL) has resulted the Court of Appeal seeming to challenge the apparently accepted orthodoxy that damages caused by volatile markets (be they property markets or otherwise) are irrecoverable in contract.
The facts of John Grimes Partnership Ltd v Gubbins [2013] EWCA 37; [2013] PLSCS 40 are relatively simple. Mr Gubbins wanted to develop a field for housing. Part of the development involved a new road which he wanted to be adopted by Cornwall County Council under section 38 of the Highways Act 1980. In September 2006, Mr Gubbins appointed JGPL to design the road and drainage for the site and to obtain the section 38 approval. The agreed fee, which Mr Gubbins paid, was £15,000.
The initial oral agreement between Mr Gubbins and Tim Swainson, a director of JGPL, was subsequently confirmed, at least in part, in a formal letter of engagement. HHJ Cotter QC, who heard the case at first instance, held that the oral agreement included an express term that the work would be completed by March 2007.
However, the work was not completed by March 2007. In fact, an initial (but incomplete) section 38 approval was only obtained on 17 February 2008. By April, Mr Gubbins had decided that enough was enough and on 8 May, a new engineer, a Mr Powell, replaced JGPL. He submitted a redesigned road and drainage layout on 16 June 2008 and received approval from the council two days later.
By this stage, JGPL had been paid just under £20,000 – already more than the agreed fee. However, it sought a further £2,893, which Mr Gubbins refused to pay. JGPL sued and Mr Gubbins counterclaimed. Part of that counterclaim was for the losses Mr Gubbins suffered as a result of JGPL’s delay and it was this issue that was considered by the Court of Appeal.
The delay was substantial: Judge Cotter held that the 15 months from March 2007 to June 2008 were all JGPL’s fault and that, but for JGPL’s breach of contract, the development would have been complete by June 2008.
The valuation experts for both JGPL and Mr Gubbins agreed that the gross sales value of the development had fallen by about 14% between June 2008 and July 2009 – from £3,827,500 to £3,429,500. Judge Cotter held that this loss was, in principle, recoverable by Mr Gubbins, although he deferred his decision as to the specific quantum. JGPL appealed.
Remoteness and the property market
The underlying principles of remoteness of damage have deep legal roots. Hadley v Baxendale (1854) 9 Exch 341 established that the wronged party can recover two types of loss: direct loss arising naturally from the breach of contract itself; and indirect loss, which is such loss as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as a probable result of the breach. Other types of loss are said to be too remote and irrecoverable.
Judge Cotter decided that the fall in value of the property was recoverable as indirect loss because Mr Swainson “well knew at the time of entering into the contract that delay in the contract brought with it the risk that the property market might move considerably, including to the significant disadvantage of Mr Gubbins”.
JGPL argued that the loss was too remote. In doing so, it relied on a far more recent decision of the House of Lords: Transfield Shipping Inc v Mercator Shipping Inc, The Achilleas [2008] UKHL 48. JGPL argued that The Achilleas was authority for the principle that the courts had to assess not just whether or not the loss was in the parties’ contemplation but whether the contract-breaker had accepted responsibility for that type of loss.
JGPL argued that the contrast between the relatively modest fee charged by them and the far larger nature of Mr Gubbins’ losses, and the fact that JGPL had no control over the wider property market, suggested that they had not accepted responsibility.
Refinement of remoteness principle
The Court of Appeal disagreed, in part because they felt that the principle apparently advocated in The Achilleas did no more than acknowledge that it may be common in certain markets – such as banking and shipping – for the parties either expressly or impliedly to limit the type of damages recoverable. There was nothing to link that principle to the property market.
Their Lordships also felt they were in any event bound by another decision of the Court of Appeal – Siemens Building Technologies FE Ltd v Supershield Ltd [2010] EWCA Civ 7; [2010] PLSCS 23. This summarised Hadley as reflecting the expectation regarding remoteness “to be imputed to the parties in the ordinary case” and that The Achilleas simply meant that “there may be cases where the court decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties.”
The Court of Appeal also discounted the difference between JGPL’s fee and Mr Gubbins’ damages as being a relevant factor.
A twist in the tale
Perhaps the point of greatest interest comes in relation to the obiter comments of Tomlinson LJ and Sir David Keene in relation to damages caused by “a rapid and extreme movement of prices in a volatile market”.
Both judges dismissed the suggestion that the fall in the property market in this case had been rapid, but did appear to accept that there might have been a distinction – in part caused by The Achilleas – between remoteness in the context of a volatile market and the normal rule.
Tomlinson LJ went the farthest, indicating that he might have been wrong in the past to suggest that loss suffered in a volatile market was too remote: “Happily this issue does not arise here When it does, I doubt if it permits of so trenchant or simplistic an answer as I was then inclined to supply.”
Stuart Pemble is a partner in Mills & Reeve LLP
