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Making the distinction when it comes to compensation

legal matters

Law students are taught that damages are intended to put the claimant into the position they would have been, but for the breach. For claims in tort, the intention is that the claimant should be put into the position they were in before the negligence. For claims in contract, the idea is to put them into the position they would have been, had the contract been performed.

In an early attempt to understand the distinction I imagined a claimant, sporting an Indiana Jones-style hat, crossing an ancient rope bridge in a jungle, across a crocodile-infested ravine. Midway, the bridge starts to collapse. If the claimant's cause of action against the jungle is in tort, the invisible hand of the law will rescue the claimant and put them back where they started. If the claim is in contract, the law will carry them across the divide and deliver them safely to the far side.

Even this basic compensatory principle of damages takes some getting used to, reliant as it is upon the individual circumstances of each claimant, twinned with the requirements of reasonableness. 'If someone crashes into the boot of my car, how are they to know that I don't have a case of vintage champagne in it?' a wellknown QC was asked by a representative of a contracting concern, when challenging their advice. 'If you did, you would be compensated for the busted bubbly, and if you didn't you would not, ' replied the barrister. 'But why should they recover more, just because they have extravagant drinking habits?' asked the builder. 'Because they were transporting expensive alcohol at the time, ' the barrister replied. 'And why can't I recover the same?' asked the builder. 'Because you weren't transporting expensive alcohol.'

The following case has nothing to do with traffic accidents or lost drinking opportunities but does concern the principle of whether you are entitled to interest on your losses at an overdraft rate, say, if you were not overdrawn at the time.

Taking the compensatory principle to its extreme entitles you to have your contract performed, however disproportionate the cost of performance is to the actual loss sustained.

In the case of Ruxley Electronics v Forsyth (1996) the claimant discovered that a swimming pool had been built 50cm shallower at the diving end than the depth contracted for.The cost of rebuilding the pool 50cm deeper was considerable, whereas the as-built depth was sufficient for all swimming purposes. The House of Lords felt obliged to emphasise the role of reasonableness when assessing damages, and reiterated that if the cost of reinstatement was out of all proportion to the advantage to be gained, it would be unreasonable to insist upon it.

With these principles in mind, consider the facts of Southampton Container Terminals v Hansa (1999). The defendant's vessel approached the claimant's container terminal in a storm, attended by two tugs. Amid attempts to berth the vessel, its bow collided with a crane, causing it to topple over.

The claimant claimed the cost of replacing the crane with a modified second-hand model transported from the US, totalling £2.3 million.

So far so good. However, the defendant pointed out that the claimant had already ordered new, larger cranes and had no intention of replacing the old, outmoded one. It accepted that it was liable only for the market value of the crane at the time, of about £600,000. So what was the measure of the claimant's loss: market value or nearly four times that sum?

Various permutations were explored in court, but because the accident happened at a quiet time, and any inconvenience had been expected in anticipation of the new cranes, there were no other financial losses. The judge concluded that it would be unreasonable to replace the crane. The claimant recovered the market value. Of course, had it not had new cranes on order it would have been entitled to the £2.3 million.

So where does all this leave my intrepid explorer crossing the crocodile pit?

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