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Hindsight is 20/20: Assessment of damages in light of Covid-19

Summary

The assessment of damages can in many cases take account of events subsequent to breach and what is known by the date of trial. This is despite what has been traditionally referred to as a general rule that damages are assessed as at the date of breach.

Hindsight, proverbially said to be 20/20, will therefore be much required in 2020. The quantification of some claims may be radically affected by the effects of Covid-19.

The (supposed) general rule

It remains necessary to start with the traditional recitation that “as a general rule in English law damages for tort or for breach of contract are assessed as at the date of the breach”: Miliangos v George Frank (Textiles) Ltd [1976] AC 443 at 468D.

This has been repeatedly affirmed as a starting point, albeit subject to exceptions, including notably in: The Golden Victory [2007] UKHL 12 at [11] and [13]; Chitty on Contracts (33rd ed), para 26-096; and Jackson & Powell on Professional Liability (8th ed), para 11-263.

Nonetheless, if one starts with this general rule, there are a remarkably high number of potential exceptions. Moreover, these exceptions are not always readily explicable nor demarcated in a way that preserves the rule itself. The effect is that it is becomes more difficult to predict or justify when a Court should take into account subsequent events.

By way of a non-exhaustive list of examples of where a Court might depart from the general rule and take into account subsequent events:

  • A holistic test of “if to follow it would give rise to injustice” or where “necessary or just to do so in order to give effect to the compensatory principle”. (Johnson v Agnew [1980] AC 367 at 401A and The Golden Victory at [13].) This merely begs the question of when it is necessary to disapply the rule and opens the door to new, ad hoc exceptions.
  • Where one party terminates a contract in response to an anticipatory breach by the other party, it can sometimes be necessary to consider subsequent events. This was the scenario in the two leading modern cases, The Golden Victory and Bunge SA v Nidera BV [2015] UKSC 43.
  • Where damages depend upon a future contingency which would have had to be estimated at the date of breach but is known by trial. (Tele2 v Post Office [2009] EWCA Civ 9 at [60]; and Ageas v Kwik-Fit [2014] EWHC 2178 (QB) at [35], though always subject to the contractual allocation of risk, [37] et seq.)
  • Damages in claims for personal injury are an outright exception where the Courts will look at subsequent events: McGregor on Damages (20th ed), para 40-037.

A focus on the correct counterfactual

The better (and arguably now prevailing) approach is that the real question as to the date of assessment is one of identifying the correct counterfactual and in particular regarding mitigation: what ought the claimant to have done in response to the breach and when? This rationalizes the general rule and its multitude of open-ended exceptions into a test that can be applied.

This approach now has the direct support of Pluczenik Diamond Co NV v W Nagel [2018] EWCA Civ 2640, at [41], which reframes the two leading Supreme Court cases as favouring this view:

“Although it has often been said that damages should be assessed ‘as at’ the date of breach, following the decisions of [The Golden Victory] and [Bunge SA v Nidera BV], it is now clear that this is not a rule of law but merely a rule of thumb which reflects the usual result in practice of applying the mitigation principle where there is an available market. Where there is an available market, it is presumed that the claimant acting reasonably will enter the market at once and obtain a replacement performance. Hence applying the mitigation principle has the result of crystallising the claimant’s loss at or at least shortly after the time of breach. But where the mitigation principle does not yield this result – for example because there is no readily available market – subsequent losses (and gains) have to be brought into the calculation.”

This approach is also consistent with a sizeable body of academic commentary, which has further noted that the supposed general rule has often seemed more honoured in the breach than the observance in recent years.

Importantly, this approach does not start with an unexplained premise that the Court should blindly ignore evidence arising after a particular date. Instead, it simultaneously selects and justifies the use of one date or another to assess damages, as part of the overall counterfactual.

Edwards v Hugh James Ford Simey

In particular, a focus on the correct counterfactual sits neatly with the recent decision in Edwards v Hugh James Ford Simey (A Firm) [2019] UKSC 54.

In this case, the claimant had instructed the defendant solicitors to pursue a claim under a government compensation scheme. Under the terms of that scheme, on the medical evidence then available, the claimant could have obtained a services award in addition to a tariff award for general damages. However, on behalf of the claimant, the defendant negligently accepted an offer in full and final settlement that comprised only the tariff award and not the services award.

The defendant sought to deny liability for the services award on the basis that subsequent medical evidence showed a lesser diagnosis under which the claimant would have received no more than they had received by the tariff award in the event.

The Court’s pithy answer to this, at [31], was that the subsequent medical evidence “is simply not relevant when constructing the counterfactual situation which would have arisen if [the defendant] had fulfilled their duty”. In the counterfactual in which the defendant had properly sought a services award under the normal operation of the scheme, the claimant would have received it. That was an end to the matter as the correct counterfactual went no further than this.

By contrast, this decision is less easily accommodated or explained in the traditional framework. Did this not overcompensate the claimant? Given that it was a claim arising from personal injury, should the common law approach of looking at subsequent events not apply? In each case, should this mean that the date of assessment changed? Instead of asking these questions, the simple solution lies in a focus on what ought to have happened in the counterfactual.

Some basic applications of a focus on the counterfactual

As identified in Pluczenik, if there was an available market to remedy the breach it will ordinarily be reasonable for the claimant to have resorted to this shortly after the date of breach. Hence, under trite principles of mitigation, damages will be assessed on the basis of a counterfactual that the claimant did so, which must entail that damages should be assessed at that time. This is what is meant by the loss ‘crystallising’: the Court will calculate damages against a counterfactual in which the breach was remedied at a given point in time, so what happens thereafter is irrelevant. This accounts for the many scenarios that do look to the date of breach, such as a failure to supply goods or services or negligent surveying.

Conversely, if acting reasonably the claimant has not remedied the breach, the loss never crystallised and subsequent events continue to inform the assessment of loss (subject to general principles). If a defendant failed to perform a contract or negligently damaged property but it was reasonable for the claimant not to pay for substitute performance or repairs, then subsequent events remain material. If it would now be reasonable for the claimant to remedy the breach, damages should reflect whether the cost of doing so has increased or decreased.

There are a multitude of reasons why it might have been reasonable not to remedy the breach, so that subsequent events will factor into the assessment of damages. These include if the claimant was unaware of the breach at all or if they were locked into the consequences of the breach.

The established approach to common law claims for personal injury remains and is rationalised. If a claimant suffers an injury, the claimant cannot crystallise their loss by making the injury or its effects disappear at a fixed cost. Subsequent events, such as how the injury develops or how it affects the claimant’s work, will therefore continue to inform the quantification of the claim.

One must of course take care in considering what the claimant ought to have done in response to the breach and the overall position in that counterfactual. However, there is at least a coherent framework to explain why this enquiry matters and how it yields a date of assessment.

Hindsight in 2020

On any view Covid-19 and the global response to it have had profound effects. Where appropriate, the assessment of damages for breaches prior to this period may be radically affected by those subsequent events, just as with breaches occurring now.

Many counterfactuals would have been less profitable than would have been previously forecast. A claimant who, due to the defendant’s breach in contract or tort, was prevented from (say) providing client-facing services and where this loss never crystallised has, in light of subsequent events, likely suffered a much smaller loss of profit than might have been assumed. The same will likely be true of most contracts that depend on the high-street, public events or general consumer spending.

In other cases, subsequent events may show that a claimant’s loss is greater than would have been forecast assuming ordinary circumstances. Perhaps it is reasonable for the claimant to now undertake emergency property repair works but the necessary cost is increased due to appropriate safety measures for those undertaking the works. Or perhaps the claimant was prevented from sharing in the growth in certain sectors, such as a spike in demand for certain goods or remote services.

In these cases, all parties will want to assess whether Covid-19 has increased or decreased the loss and how to evidence this. A starting point may be to look at the appropriate industry trend or specific comparators, but with adjustments if the claimant would have been particularly well or ill-placed to deal with the new market conditions.

In relevant cases, parties would be well advised to revisit assumptions as to the date of assessment and the quantification of settlement offers. Any scenario must necessarily be considered on its particular facts (and with regard to other issues, such as remoteness) but in many instances it may now be appropriate to take account of subsequent events. In those cases, there may be a further need to update settlement offers accordingly.

Written by Michael Harper.



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