The law of contracts and the law of torts - Essay Example

 The law of contracts and the law of torts are separate and distinct, yet interrelated and connected by similarities. One such similarity are the rules regarding the remoteness of damages. The damages remoteness rules limits, in both contract and tort cases, the amount of compensatory damages for which a negligent defendant may be liable. This doctrine ensures that defendants are only liable for the damages that can fairly be attributed to him. In tort law, the rule regarding damages remoteness is that a defendant may not be liable for any damages that are reasonably foreseeable.1 Similarly, the rule regarding damages remoteness in contract law is that a defendant's liability is limited to any consequences that flow reasonably from the breach, or are contemplated by the parties.2 Two cases that demonstrate this interconnectedness between the two bodies of law are Overseas Tankship Ltd v Morts Dock & Engineering Co Ltd,3 a tort case that established the tort rule regarding remoteness of damages, and Hadley v Baxendale,4 which is the contract counterpart to Overseas. In my opinion, this is correct – that a defendant should only be liable for reasonably foreseeable damages or for damages that are contemplated by the parties, as in the case of contract law. This is because the parties in contract law have a bargained-for exchange, one that should address any foreseeable contingencies. It would be fundamentally unfair to hold the defendant liable for damages that are not reasonably foreseeable by the parties. If the damages were reasonably foreseeable, then the parties would be able to bargain for them, which means that a breach that is reasonably foreseeable should properly hold the defendant liable. However, any damages that are not reasonably foreseeable by any party is not something that would be contemplated by their agreement, and both parties should bear the risk in the event that this occurs. Likewise, in torts, the defendant cannot and should not be held responsible for damages that are too remote for the parties to contemplate. If this were the case, then the defendant could be held liable for any number of things that were not directly caused by him, and the chain of causation should have been broken, such as through an intervening act. If the causation chain is broken by an intervening act or because the damage was too remote, then the right result would be to absolve the defendant of the blame. The following cases illustrate this point. Hadley v. Baxendale involved millers whose crank shaft had broken, and they called upon the defendants to deliver a crankshaft to repair. The defendants delayed sending the crankshaft to plaintiffs for seven days, when it was only supposed to take two. The plaintiffs milling operation ceased during the period this seven day period. Therefore, the plaintiffs sued for profits lost during the five extra days that the crankshaft was not delivered. The court ruled that the plaintiffs could not recover such loss, as it could not fairly and reasonably be considered to arise naturally from the breach.5 Hadley established the basic rule for how to determine the scope of consequential damages arising from a breach of contract, and this rule is that parties should only be liable for all losses that ought to have been contemplated by the contracting parties, and those that arise naturally, in the ordinary course, from the breach. Hadley's basic rule regarding damages was modified to the composite test of “reasonably foreseeable as liable to result” in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949).6 Victoria Laundry regarded a laundry which ordered a boiler from Newman Industries. Newman Industries delivered the boiler five months late. During this period of time, Victoria Laundry had to forego a lucrative contract with the ministry of supply, due to the Victoria Laundry's limited laundry cleaning capacity, which was a result of not having the boiler. The question before the court is whether Victoria Laundry can recover for profits lost as a result of foregoing the contract with the ministry of supply. This loss was considered an “extraordinary” loss, as opposed to “ordinary” losses, which are the losses suffered during the ordinary cause of business. The Victoria Laundry court held that the claimant could be compensated for loss of profits on the ordinary laundry business, but not for the loss of profits that they would have made on lucrative dyeing contracts, as the defendant could not reasonably foresee that this loss would occur.7 Therefore, the Victoria Laundry court modified and clarified the Hadley rule, stating that a defendant may be liable for losses that are reasonably foreseeable, but not losses that would not be foreseeable without defendant's special knowledge. While Hadley and Victoria Laundry have outlined the contours of the remoteness of damages for contract cases, the landmark torts case, Overseas Tankship Ltd. v. Morts Dock and Engineering Co. Ltd., established the rule regarding remoteness in the torts context. Overseas concerned the plaintiffs, whose ship was docked in Sydney Harbor in 1951, and whose crew allowed furnace oil to leak from the ship, which floated to an area where other ships were being repaired. The defendants, knowing that the oil was there, continued to use welders in vicinity of the oil, which ignited the oil and caused damage to plaintiff's ship. The defendant's argued that they should not be held liable for the resulting damages, as they could not foresee that oil would ignite on water. The Privy Council agreed, holding that a party can only be held liable for damage which was reasonably foreseeable, and it was not reasonably foreseeable that oil would ignite on water. 8 This decision disapproves and replaces the tests of In Re Polemis,9 which stated that a defendant is liable for all damages that result from his negligence, foreseeable or not, stating that Polemis is "out of the current of contemporary thought." In the case of In Re Polemis, the defendant's employees were loading cargo into a ship. Due to an employee's negligence, a plank fell into the hold of the ship. The plank caused a spark, which ignited some benzene stored in the hold, causing an explosion that sunk the ship.10 The Polemis court found that, even though the fire was not foreseeable, the defendant was still liable for the damages caused by the fire, as it was a direct result of his actions.11 In the law of negligence, the test of whether the consequences were reasonably foreseeable is a criterion of culpability and compensation alike. However, culpability is regarded as depending on the foreseeability of consequences, and compensation depends on whether the negligent act or omission was the “direct” cause of the damage, whether foreseeable or not. Therefore this is a false dichotomy.12 The cases above illustrated the similarities between torts and contracts in the area of damages. In torts, the negligent defendant is liable for the damages which are foreseeable and not too remote. This doctrine ensures that defendants are only liable for the damages that can fairly be attributed to him. Similarly, in contracts, the defendant is only liable for damages which naturally arose from the breach of contract, not for damages that could not be foreseen nor contemplated without special knowledge. While these cases demonstrate the basic similarities between torts law and contract law, in the area of the remoteness of damages, there are also subtle differences in this area between the torts and contracts doctrines. For instance, in contract law, if a defendant had knowledge of a special situation that plaintiff is in, then he is held to be responsible for the damages if this situation did not occur because of his negligence. An example of this is in the Victoria Laundry13 case - if the defendant in that case was aware that Victoria Laundry was attempting to secure a contract with the ministry of supply, then the defendant presumably would have been liable for the extraordinary damages that were sought to compensate Victoria Laundry for the loss of this contract. Because the defendant was not aware of this situation, he was held not to be liable. However, in tort law, this would presumably not be the case. For instance, in the Overseas Tankship14 case, the defendant was aware that there was oil beneath the dock, and they continued to spark welding material into the oil anyway. They were not held liable, despite having knowledge of plaintiff's special vulnerability. This is because it wasn't foreseeable that oil would ignite in water. Likewise, it would not have necessarily been foreseeable by the defendant in Victoria Laundry that his negligence would cause Victoria Laundry not to get the contract with the ministry of supply, yet the Victoria Laundry court implied that, if the defendant had the knowledge that Victoria Laundry was trying to get this contract, the defendant might have been held liable. So this is a subtle difference between the doctrines. Another difference between the tort and contract doctrines is that, in contract law, a higher degree of probability that the loss would occur is needed for liability than in tort law. This is because, in contracts, the parties have an opportunity to apportion the liabilities and contingencies through the contract itself, while, in torts, there is no such opportunity.15 This is the reasoning used by the court in Czarnikow Ltd. v. Koufo, otherwise known as the Heron II.16 In the Heron case, the defendant, Koufos, chartered a Basra-bound ship for plaintiff, bearing 8000 tons of sugar. The ship was nine days late, and, in the interim, the price of sugar dropped. The plaintiff sued defendant for the difference in the price of sugar. At issue was whether this loss was too remote. The Heron court held that it was not, in the process elucidating a subtly different test than the one put forth in Victoria Laundry, stating that, instead of using the word foreseeable, the words “not unlikely” should be used. “Not unlikely” would mean that the probability of the event happening is considerably less than even, yet not unusual and easily foreseeable.17 Therefore, a defendant in a contract case can be held liable if the event was “not unlikely” to occur, whereas, in torts, the losses must be much more remote to preclude liability. Lord Upjohn has phrased this principle in another way, stating that “the tortfeasor is liable for any damage which he can reasonably foresee may happen as a result of the breach though unlikely it may be, unless it can be brushed aside as far-fetched.”18 One area where the differences between contract and tort rules on remoteness become clear concerns liability for misrepresentation. The Wagon Mound (No 1) principle of foreseeability applies to liability in negligence under Heller,19 which concerned a negligent misrepresentation of facts. In Heller, the defendant represented to plaintiff that a particular company was in good standing, therefore the plaintiff loaned this company, Easipower, money. Easipower subsequently went into liquidation, and the plaintiffs sued defendant for negligent misstatement. This case was considered a contract case, and decided with contract principles, because the plaintiff relied upon defendant's statement, which created a contractual duty. The court applied the Wagon Mound test to the defendant's liability. However, in the tort of deceit, the stricter “directness” test of Re Polemis applies, due to the greater fault of the defendant. This principle is illustrated in the case Royscott Trust Co. v. Rogerson. 20 In this case, one Andrew Rogerson purchased a car on credit from Maidenhead Honda Centre, Ltd., which submitted forms to the plaintiff that indicated that Mr. Rogerson was purchasing a car with 20% down, when his actual down-payment was only 15.7%. The plaintiff lent Mr. Rogerson the money to purchase the car, when, if the true facts were known, it would not have, as its policy was only to lend money if there was 20% down or more. Mr. Rogerson went broke and illegally sold the car. The Rogerson court held that the Maidenhead Honda Centre was liable to the plaintiff, despite the apparent unforeseeability of Mr. Rogerson's illegal act, applying the same standard as for common-law fraud. In other words, Maidenhead was liable for all damages flowing from the misrepresentation, no matter how remote. This more extensive basis for recovery also applies to claims brought under section 2(1) of the Misrepresentation Act 1967,21 thanks to the reading of section 2(1) adopted by the Royscott court.22 As for the duty to mitigate losses in contract verses contributory negligence, there are similarities and differences between the two. Contributory negligence in tort means that the plaintiff was somehow responsible for his or her own loss.23 The duty to mitigate in contracts means that the plaintiff needs to have taken reasonable steps to prevent loss.24 There are similarities in that, with both concepts, the amount that the plaintiff will recover from the defendant is reduced by the amount that he or she is at fault for his or her own loss. The main difference is that, with the duty to mitigate, the plaintiff is required to have taken proactive steps, whereby, in the contributory negligence, there is usually some sort of omission on the part of the plaintiff, such as failing to wear a seat belt or failing to wear a helmet when cycling. Again, these are good tests that reach good results. The plaintiff has to bear some kind of risk in what he or she does. The plaintiff cannot just do what he or she pleases and expect compensation. Thus, if the plaintiff, say, crosses a railway while the train is coming in an effort to beat the train, and that plaintiff gets hit by the train, there is no way that the train alone should be to blame, even if there was not a railroad crossing arms at this intersection. The plaintiff has a duty to be cautious when crossing the railway, especially if there are no lights and arms, and a train would be difficult to miss. Therefore, the plaintiff needs to be compensated according to how much fault the railroad would have in this case, and this is proper. This is just one example of the concept, but it would yield just results. Without the concept of contributory negligence, the railroad would be completely at fault, and that would be unjust and would send a message that people can be as careless as they please, as long as somebody else is more careless, and this is the wrong message to send. Likewise, the duty to mitigate in contracts is another excellent rule. This rule prevents, say, an apartment complex from getting the full amount from a tenant who has abandoned an apartment before the lease is up, when that apartment does not even try to rent out the unit to somebody else. And, if the apartment does rent the unit out, then it should properly be able to only get rent out of the abandoned tenant for the amount of time that the apartment was empty, not for the whole lease. Otherwise, the landlord will be getting paid twice for the same unit, and this would not be just. As with contributory negligence, both parties should bear the risk when something occurs, and both parties have a responsibility in the contract. The duty to mitigate makes sure that no one party bears the risk completely in the case of a breach, and puts both parties on essentially equal footing. BIBLIOGRAPHY Czarnikow Ltd. v. Koufo, (1967) 3 ALL E.R. 686. Deakin, Simon, and Johnston, Angus, and Markesinis, Basil. Tort Law 6th Edition, Oxford University Press: 2008. Doyle v. Olby Ironmongers, (1969) 2 QB 158. East v. Mauer, (1990) 2 ALL E.R. 737. Hadley v. Baxendale, (1854) 9 Exch. 341. Hedley Burne & Co. Ltd. v. Heller, (1964) AC 465. Hooley, Richard. “Damages and Misrepresentation Act 1967,” 107 L.Q.R. 547, 1991. Lamb v. Camden London Borough Council, (1981) QB 625. Lunney, Mark, and Oliphant, Ken. Tort Law Text and Materials 3rd Edition, 2008. Overseas Tankship (UK) Ltd. v. Morts and Dock and Engineering Co. Ltd. (The Wagon Mound), (1961) UKPC 1. Re Polemis & Furniss, Withy & Co. Ltd., (1921) 3 KB 560. Royscott Trust Co. v. Rogerson, (1991) 3 ALL E.R. 294. Street, John Murphy. Torts 12th Edition, Oxford University Press: 2007. Taylor, Richard and Taylor, Damian. Contract Law 2nd Edition, 2009. Victoria Laundry Ltd. v. Newman Industries Ltd., (1949) 2 KB 528. Read More