Czarnikow Ltd v Koufos (Heron II)

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Reid,Lord Morris of Borth-y-Gest,Lord Hodson,Lord Pearce,Lord Upjohn
Judgment Date17 Oct 1967
Judgment citation (vLex)[1967] UKHL J1017-1

[1967] UKHL J1017-1

House of Lords

Lord Reid

Lord Morris of Borth-y-Gest

Lord Hodson

Lord Pearce

Lord Upjohn

Koufos
and
C. Czarnikow Limited

Upon Report from the Appellate Committee, to whom was referred the Cause Koufos against C. Czarnikow Limited, that the Committee had heard Counsel as well on Monday the 12th, as on Tuesday the 13th, Wednesday the 14th, Thursday the 15th, Monday the 19th, Tuesday the 20th, Wednesday the 21st and Thursday the 22d, days of June last, upon the Petition and Appeal of Nicolas Demitris Koufos, of 86b Vassileos Constantinou Avenue, Piraeus, Greece, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 5th of April 1966, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of C. Czarnikow Limited, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled. That the said Order of Her Majesty's Court of Appeal, of the 5th day of April 1966, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.

Lord Reid
1

My Lords

2

By charter Party of 15th October, 1960 the Respondents chartered the Appellant's Vessel, Heron II, to proceed to Constanza, there to load a cargo of 3,000 tons of sugar; and to carry it to Basrah, or, in the Charterer's option, to Jeddah. The vessel left Constanza on 1st November. The option was not exercised and the vessel arrived at Basrah on 2nd December The Umpire has found that "a reasonably accurate prediction of the length of the voyage was twenty days". But the vessel had in breach of contract made deviations which caused a delay of nine days.

3

It was the intention of the Respondents to sell the sugar "promptly after arrival at Basrah and after inspection by merchants". The Appellant did not know this but he was aware of the fact that there was a market for sugar at Basrah. The sugar was in fact sold at Basrah in lots between 12th and 22nd December but shortly before that time the market price had fallen partly by reason of the arrival of another cargo of sugar. It was found by the Umpire that if there had not been this delay of nine days the sugar would have fetched £32 10s. 0d. per ton. The actual price realised was only £31 2s. 9d. per ton. The Respondents claim that they are entitled to recover the difference as damage for breach of contract. The Appellant admits that he is liable to pay interest for nine days on the value of the sugar and certain minor expenses but denies that fall in market value can be taken into account in assessing damages in this case.

4

McNair J., following the decision in The Parana L.R. 2 P.D. 118, decided this question in favour of the Appellant. He said:

"In those circumstances it seems to me almost impossible to say that the shipowner must have known that the delay in prosecuting the voyage would probably result, or be likely to result, in this kind of loss."

5

The Court of Appeal by a majority (Diplock and Salmon L.JJ., Sellers L.J. dissenting) reversed the decision of the trial judge. The majority held that The Parana laid down no general rule, and, applying the rule (or rules) in Hadley and Another v. Baxendale and Others (1854) 9 Ex. 341 as explained in Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B 528, they held that the loss due to fall in market price was not too remote to be recoverable as damages.

6

It may be well first to set out the knowledge and intention of the parties at the time of making the contract so far as relevant or argued to be relevant. The Charterers intended to sell the sugar in the market at Basrah on arrival of the vessel. They could have changed their mind and exercised their option to have the sugar delivered at Jeddah but they did not do so. There is no finding that they had in mind any particular date as the likely date of arrival at Basrah or that they had any knowledge or expectation that in late November or December there would be a rising or a falling market. The shipowner was given no information about these matters by the Charterers. He did not know what the Charterers intended to do with the sugar. But he knew there was a market in sugar at Basrah, and it appears to me that, if he had thought about the matter, he must have realised that at least it was not unlikely that the sugar would be sold in the market at market price on arrival. And he must be held to have known that in any ordinary market prices are apt to fluctuate from day to day: but he had no reason to suppose it more probable that during the relevant period such fluctuation would be downwards rather than upwards—it was an even chance that the fluctuation would be downwards.

7

So the question for decision is whether a plaintiff can recover as damages for breach of contract a loss of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from a breach of contract causing delay in delivery. I use the words "not unlikely" as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.

8

For over a century everyone has agreed that remoteness of damage in contract must be determined by applying the rule (or rules) laid down by a Court including Lord Wensleydale (then Parke B.), Martin B and Alderson B. in Hadley v. Baxendale. But many different interpretations of that rule have been adopted by judges at different times. So I think that one ought first to see just what was decided in that case, because it would seem wrong to attribute to that rule a meaning which, if it had been adopted in that case, would have resulted in a contrary decision of that case.

9

In Hadley v. Baxendale the owners of a flour mill at Gloucester which was driven by a steam engine delivered to common carriers, Pickford & Co., a broken crank shaft to be sent to engineers in Greenwich. A delay of five days in delivery there was held to be in breach of contract and the question at issue was the proper measure of damages. In fact the shaft was sent as a pattern for a new shaft and until it arrived the mill could not operate. So the owners claimed £300 as loss of profit for the five days by which resumption of work was delayed by this breach of contract. But the carriers did not know that delay would cause loss of this kind.

10

Alderson B. delivering the judgment of the Court said (at page 355):

"We find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made were that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill. But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose that at the time of the delivery to the carrier the machinery of the mill had been in other respects defective, then also the same results would follow."

11

Then, having said that in fact the loss of profit was caused by the delay, he continued:

"But it is obvious that in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred."

12

Alderson B. clearly did not and could not mean that it was not reasonably foreseeable that delay might stop the resumption of work in the mill. He merely said that in the great multitude—which I take to mean the great majority—of cases this would not happen. He was not distinguishing between results which were foreseeable or unforeseeable, but between results which were likely because they would happen in the great majority of cases, and results which were unlikely because they would only happen in a small minority of cases. He continued:

"It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract."

13

He clearly meant that a result which will happen in the great majority of cases should fairly and reasonably be regarded as having been in the contemplation of the parties, but that a result which, though foreseeable as a substantial possibility, would only happen in a small minority of cases should not be regarded as having been in their contemplation. He was referring to such a result when he continued:

"For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which perhaps would have made it a reasonable and natural consequence...

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10 firm's commentaries
  • Complex Commercial Litigation Law Review – England and Wales
    • United Kingdom
    • JD Supra United Kingdom
    • 27 January 2021
    ...(1854) 9 Ex. 341; Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd 4 [1949] 2 KB.528; Koufos v. C. Czarnikow Ltd (The Heron II) [1969] 1 AC 350.67 Hadley v. Baxendale [1854] EWHC Exch J70 at page 151. A recent summary of the test for remoteness can be found in the Privy Council’s dec......
  • Consequential Loss in Energy Commodity Contracts
    • United Kingdom
    • JD Supra United Kingdom
    • 9 October 2015
    ...with its natural and ordinary meaning in light of the contract as a whole. 2 Hadley vs Baxendale [1854] 9 Ex.341 3 The Heron II [1969] 1 A.C. 350 4 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48 5 See judgment of Lord Hoffman which stated that "cases of ......
  • Complex Commercial Litigation Law Review – England & Wales
    • United Kingdom
    • JD Supra United Kingdom
    • 10 January 2019
    ...(1854) 9 Ex. 341; Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd 4 [1949] 2 KB.528; Koufos v. C. Czarnikow Ltd (The Heron II) [1969] 1 AC 350. 45 Hadley v. Baxendale [1854] EWHC Exch J70 at page 46 Chitty, J (2012), Chitty on Contracts: General principles. 31st ed. Sweet & Maxw......
  • Remoteness Of Damages ' Privy Council Summarises Principles
    • United Kingdom
    • Mondaq UK
    • 7 September 2020
    ...consider Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 and Koufos v C Czarnikow Ltd ("The Heron II") [1969] 1 AC 350, and distinguishing this case from the Singapore case of Burgundy Global Exploration Corpn v Transocean Offshore International Ventures Ltd......
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5 books & journal articles
  • Change of position and restitution for wrongs: 'ne'er the twain shall meet'?
    • Australia
    • Melbourne University Law Review Vol. 33 Nbr. 1, April 2009
    • 1 April 2009
    ...right to be compensated for losses should be restricted: see Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145; Koufos v C Czarnikow Ltd [1969] 1 AC 350, 393 (Lord Morris); Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 91 (Mason CJ and Dawson (228) H LA Hart, The Concept of Law (2nd......
  • Claims for the value of the lost contractual performance
    • Australia
    • University of Western Australia Law Review Nbr. 45-1, June 2019
    • 1 June 2019
    ...silent 145See Carter, Courtney and Tolhurst, above n 2 at 177. 146(1854) 9 Exch 341 at 354 per Alderson B. 147Koufos v C Czarnikow Ltd [1969] 1 AC 350 (HL). Decisions like Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7, Sylvia Shipping Co Ltd v Progress Bulk Carrie......
  • The Problem with Amann: Would an Agreement-Centred Approach to Remoteness Benefit Australian Jurisprudence?
    • Australia
    • University of Western Australia Law Review Nbr. 42-2, October 2017
    • 1 October 2017
    ...for breach of contract, particularly with respect to remoteness. 18 Hadley v Baxendale (1854) 156 ER 145 at 151. 19 [1949] 2 KB 528. 20 [1969] 1 AC 350; [1967] 3 WLR 1491. 21 David McLauchlan, ‘Remoteness Re-invented?’ (2009) 9 Oxford University Commonwealth Law Journal 109 at 112-113. 22 (......
  • Whither Remoteness? Wellesley Partners LLP v Withers LLP
    • United Kingdom
    • The Modern Law Review Nbr. 79-4, July 2016
    • 1 July 2016
    ...589.27 The Wagon Mound ibid.28 (1854) 9 Ex 341, 354 (Alderson B).29 [1949] 2 KB 528 (CA).30 [1978] QB 791 (CA).31 [2005] 1 WLR 377.32 [1969] 1 AC 350.33 n 30 above, 806-807.682 C2016 The Author. The Modern Law Review C2016 The Modern Law Review Limited.(2016) 79(4) MLR Aaron Tayloror ‘sco......
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