I never saw it coming!
The liability resulting from a seemingly small omission could be bigger than you expect.
We all know that if a party breaches a contract, it has to compensate the other for any losses. But consequences can be far-reaching, so how far will the courts go in awarding damages?
In the recent case of Sclater v Lindsay’s AI, Burnetts' client, Hamish Sclater, a pedigree Aberdeen Angus breeder, sent his prize bull, Deveron Limited Edition, to Lindsay’s AI, a Carlisle-based specialist EU-licensed artificial insemination (AI) centre to have semen collected for export. Unfortunately Lindsay’s AI misspelt the bull’s name on the semen straws (small test-tubes) resulting in Carlisle County Court ordering them to pay Mr Sclater £67,945 in damages.
So how did such a small mistake lead to such a large claim? Under EU and DEFRA rules, unless the bull’s name is correctly identified, the semen is unsaleable. Mr Sclater consequently lost a lucrative contract to sell the semen in Ireland. To make matters worse, the bull died before the mistake was discovered, so it was not possible to take any more semen. It had become, in reality as in name, a Limited Edition.
Judge Peter Hughes QC said "it was a small and innocent mistake, which was not spotted until it was too late to rectify. Its impact was profound and it has caused a great deal of worry and heartache on both sides. I do not think that the Defendants have found it easy to come to terms with the significance of the mistake."
The courts, in such situations, will try to put the claimant, so far as money can, in the position he would have been in had the breach not occurred. However, the consequences of a breach could be vast, so a line has to be drawn somewhere. Accordingly, the courts will only award damages for the natural consequences of a breach and will exclude any losses considered "too remote".
The test is twofold. (1) But for the breach, would the loss have occurred? If so, then (2) is the loss claimed one which the parties could reasonably have foreseen when they agreed the contract?
Two cases helped develop this test. In the first, a Victorian miller broke his mill-shaft and sent it to Greenwich for mending. The carrier agreed to deliver it the next day, but got waylaid in various taverns between Gloucester and Greenwich. Meanwhile the mill stood idle and the miller sued for the profit he lost by the carrier’s lateness. The court decided that the miller couldn’t claim because the carrier couldn’t have foreseen that the miller wouldn’t have a spare mill-shaft.
In the second case, the owners of a laundry ordered a large boiler to help them meet an exceptionally lucrative dying contract. The boiler was damaged in transit and they claimed the exceptional profits they consequently lost. The suppliers didn’t know about the exceptional contract. The court concluded that the suppliers could have foreseen that the laundry would lose profits, but not the exceptional level of profits claimed. Accordingly, they could only claim the “normal” profits to be expected from regular contracts. However, if the laundry had told the suppliers they had an especially lucrative contract, they could have claimed their full loss of profits.
So, the question the courts will ask is: "what would two reasonably competent business-people, possessing the knowledge these parties had when the contract was formed, have foreseen as the consequences of this breach?"
In Mr Sclater’s case, damages were awarded in two parts - £31,845 for lost profit on the semen sales and £36,100 for the loss to Mr Sclater of the enhanced value of his herd. Lindsay’s defence was that the losses were unforeseeable. How were they to know that the bull was so valuable, or that Mr Sclater had a valuable contract in Ireland, or that the bull would die?
However, the court disagreed. Lindsay’s deal with many animals, some very valuable. Although the bull was valuable, it was not unforeseeably so. Also, animals can be unavailable for further collections for many reasons, of which death is just one, so, it was within the range of foreseeable expectations that this mistake could be irremediable. Also, the whole point of collecting at an EU-licenced AI centre is to export semen, breed successfully and thereby enhance the value of the parent herd, so the breach could foreseeably result the losses claimed. This came as a shock to Lindsay’s, but, according to the Judge, it shouldn’t have – they could and should have seen it coming.
The lessons from this case apply to all businesses, not just those in the agricultural sector. So what can businesses do to protect themselves?
- Conduct a risk assessment. Think about your contracts and your customers. What might go wrong and what might be the consequences for them?
- If there are any circumstances which have special significance for you, does the other party know? If not, tell them in writing at the outset why they are significant and what consequences might follow if things go wrong.
- Check whether insurance is available against possible losses for you and/or your customers.
- Consider written contracts excluding liability for certain losses.
- Review your contract-forming procedures and make sure everyone who forms contracts for your organisation is properly trained – both for the routine and the unusual.
For more information on this topic, contact Burnetts’ Dispute Resolution Department on 01228 552222 or visit the dispute resolution pages.All Factsheets