What is a collateral benefit?
In order to be recoverable, it is not enough that a loss is caused ‘but for’ a breach of contract. Some events and actions subsequent to the breach are sufficiently important that the law treats them as exculpating the breach of contract. It is sometimes said that an event ‘breaks’ the chain of causation such that the Claimant is no longer responsible for the loss. Sometimes these are negative events – unforeseeable occurrences outside of the true measure of loss – but not always.
A collateral benefit, sometimes given the latin tag res inter alios acta (literally a thing done among others) is an interceding good fortune which does not act in law to reduce the measure of loss notwithstanding that the claimant may have substantially reduced or mitigated the issues they find themselves in.
There are two very straightforward examples which most lawyers likely appreciate without being aware of: charity and insurance. Say party A (negligently or breaching contract) damages the property of B, and C intercedes on B’s behalf and repairs B’s property for free (or at a cut-price rate). It would plainly be unjust if A could rely on C’s charity to exculpate its own breach. The same is true of non-financial assistance; C’s assistance is to be left out of the account and the result is that B is entitled to claim from A the cost of obtaining A’s assistance in the market.
Insurance works similarly. Insurance is the benefit one receives for the savvy decision to obtain cover and to pay the premium. It has been explained that ‘as between the claimant and the wrongdoer, the law treats the receipt of the benefit [of insurance] as tantamount to the claimant making good the loss from its own resources, because they are attributable to his premiums, his contributions, or his work’ (Lowick Rose LLP v Swynson Ltd [2018] AC 313 ¶11).
Those, however, are only two common examples of a wider principle and all lawyers ought to take care to ensure that they are correctly identifying the scope of the recoverable loss. A couple more (not so straightforward) examples which commonly arise are:
- Payments by Parent Co to Subsidiary Co. Sometimes defendants will take the (usually poor) point that because a trading loss has been made good by a parent or related company, the subsidiary has not truly suffered a loss. That is wrong – the payment by Parent Co is a collateral benefit and not to be taken into account (see Jones v Stroud DC [1986] 1 WLR 1141). The same is likely true of a joint venture partner.
- Settlements with a co-claimant (thereby re-organising the claimants’ liabilities) are usually said to be collateral. What about settlements with a third party? For instance, say an insured settles with insurer but then wishes to recover the shortfall from its broker. Broadly speaking (albeit not always), provided the settlement was reasonable, the insured can recover the shortfall from the broker.
- Credit arrangements. If B makes good the loss caused by A by way of a loan or credit from C, it obviously continues to suffer a loss. Difficult issues arise where the credit is conditional on recovery from A. In at least one case, such a charge was still held to be collateral. Conversely, hedging contracts, at least in industries like oil where they are a given, are not res inter alios acta, and are to be taken into account. Credit agreements require particular care and close analysis.
The difficulty for solicitors advising clients is that outside of well-defined categories (and even there they are not always that well defined), the question of whether something is collateral is not the subject of definitive rules. The cases are fact sensitive and do not always pull in the same direction. In Famosa Shipping Co Ltd v Armada Bulk Carriers Ltd (The Fanis) [1994] 1 Lloyd’s Rep 633, Mance J, described question of whether an event breaks the chain of causation as something of a ‘common sense’ judgment. Against that, however, hearing Lowick Rose in the Supreme Court, Lord Mance cautioned that it was not a ‘green light for doing whatever seems fair on the facts of the particular case’.
Some tentative assistance may be identified within E&F Man Capital Markets v Come Harvest & Or [2022] EWCA Civ 1704, While noting that there was no single principle for all cases, the judges agreed that (at least in respect of the case before them), a structured approach ought to:
- Identify the transaction in question. What exactly have A & B agreed to do, and what ought to be the benefits of that transaction?
- What benefits did B receive? Might it be properly regarded as part of the transaction, or of some other transaction?
If the benefit arose independently of the circumstances giving rise to the loss, then it is collateral. While unlikely to answer each and every issue, that at least provides the outline of a roadmap to help lawyers advise their clients on this difficult area of the law of damages.
