Legal Updates

Commercial Law: Breach of Contract - Damages and Compensation - Remoteness

In the House of Lords decision in, Jackson v Royal Bank of Scotland [2005], the claimants brought proceedings against the bank for breach of contract and claimed damages for loss of the opportunity to earn further profits. The House or Lords ruled that the claimants were entitled to damages for loss of the opportunity to earn profits.

The claimants traded as a partnership. They carried on business under the name S. They were in the import/export business, importing and selling goods to customers in the United Kingdom. S's principal customer in the UK was another partnership called EB. The defendant bank, Royal Bank of Scotland, was the banker for both businesses.

The relationship between the two partnerships terminated when the transferable credit arrangements between the parties came to an end. The defendant was responsible for the termination because the defendant sent in error certain documents to EB instead of S.

The effect of the defendant's error was to reveal to EB the substantial profit S was making on the transactions. When EB discovered the size of the mark-up by S, EB terminated the relationship with S. As a result S ceased trading and was dissolved.

S brought proceedings against the defendant for breach of contract and claimed damages for loss of the opportunity to earn further profits from the relationship with EB. The judge held that S was entitled to damages. He held that there was a significant chance that S's trading relationship with EB would have continued for a further four years however in view of the uncertainties, S had reduced its projected profits (projected by S for each of those years for the purposes of his award and he increased the amount of the reduction year by year).

The defendant appealed.

The Court of Appeal rejected the defendant's submissions that:

• The claim for the loss of the repeat business was too remote;
• It was not in the defendant's reasonable contemplation that the disclosure of the profit that S was making would lead to the termination by EB of its trading relationship with S; and
• The relationship between S and EB was so unstable that, if any award were to be made, it should be simply one of general damages;

The Court of Appeal held that the judge was in error in his approach to quantum and that the award of damages should be limited to a period of one year from the date of the breach, with all other loss being regarded as too remote.

S appealed, contending that the defendant's liability was open-ended because it had not limited its liability in the contract to any particular period. The defendant cross appealed, claiming that the proper conclusion from the facts was that there was no foreseeable loss at all and that in any case any attempt to assess S's actual loss was so speculative that any award should be confined to one of general damages.

1.   The appeal by S was allowed. The cross appeal was dismissed. The House of Lords held

• Once the confidential information was released there was no repeat business.
• There was no evidence that the parties had contemplated at the time of the contract that knowledge of the supplier's identity and that its contact details would lead inevitably to the knowledge of the prices which were being charged by it.
• The fact that EB had the means of obtaining the information if it chose to do so was irrelevant.
• In entering into a contract with the defendant, the effect of the contract that the defendant was obliged not to disclose the information, and S had an obvious and legitimate commercial interest in maintaining its confidentiality.
• There was no reason to suppose that, if it had been asked at the time of the contract, S would have agreed to the release of that information by the bank to EB.

S were entitled to an award of damages to put them in the same position as they would have been had the contract not been breached.

2.   The Court of Appeal had erred in its decision to limit the defendant's liability to a period of one year:
 

• The bank had not included any provision in the letter of credit limiting its liability for the loss of repeat business to any particular period.
• In the circumstances the award which the judge had made, on a reducing basis extending over a four year period, was as good an estimate as could now be made of the effect on S's profits of the bank's breach of contract.

The House of Lords reversed the Court of Appeal's decision.

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© RT COOPERS, 2005. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.