Koufos v C. Czarnikow Ltd (The Heron II) (1969)

Hadley v Baxendale gives the two-limbed rule on remoteness, but judges had long disagreed on how likely a loss must have appeared to the contract-breaker for it to be recoverable. Victoria Laundry v Newman Industries (1949) had spoken of loss "reasonably foreseeable as liable to result", and of "a serious possibility" or "a real danger". Many read that as bringing the contract test close to the tort test of reasonable foreseeability.

The Heron II is the case in which the House of Lords pulled back. All five Law Lords held that the contract test is not the tort test of reasonable foreseeability: it demands a higher degree of probability. They then differed on the right words for that degree — Lord Reid's "not unlikely", others' "serious possibility" or "real danger" — which is exactly what an examiner will ask you to explain.

By a charter party of 15 October 1960 the charterers (Czarnikow, the respondents) chartered the shipowner's (Koufos, the appellant's) vessel Heron II to load 3,000 tons of sugar at Constanza and carry it to Basrah. A reasonably accurate prediction of the voyage was twenty days. In breach of contract the vessel made deviations that caused a delay of nine days.

The charterers intended to sell the sugar at Basrah promptly on arrival. The shipowner did not know this, but he knew there was a market for sugar at Basrah. Shortly before the sugar was sold, the market price fell, partly because another cargo of sugar arrived. Had there been no delay the sugar would have fetched £32 10s. 0d. per ton; it actually fetched £31 2s. 9d.

The charterers claimed the difference. The shipowner admitted liability for interest and minor expenses but denied that the fall in market price could be recovered. McNair J, following The Parana (1877), decided for the shipowner. The Court of Appeal (Diplock and Salmon LJJ, Sellers LJ dissenting) reversed him. The shipowner appealed.

1. How probable must a loss have appeared to the defendant, at the time of contracting, for it to be recoverable in contract under Hadley v Baxendale?
2. Is the contract test the same as the tort test of reasonable foreseeability?
3. Did The Parana lay down a rule that loss of market is not recoverable for delay in a sea voyage?

The appeal was dismissed. The charterers recovered the loss caused by the fall in market price; it was not too remote.

Lord Reid — "not unlikely"

Lord Reid framed the question as whether a plaintiff can recover "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." He explained the phrase: "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."

On the facts, the shipowner knew of the market at Basrah and "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." He must also be taken to know that market prices fluctuate.

Contract and tort differ. "The modern rule in tort is quite different and it imposes a much wider liability." The reason is that "In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party's attention to it before the contract is made". A tort victim has no such chance.

Victoria Laundry criticised. Lord Reid did not agree with Asquith LJ's statement of principles in so far as it went beyond the older authorities: "To bring in reasonable foreseeability appears to me to be confusing measure of damages in contract with measure of damages in tort." He also rejected "a serious possibility", "a real danger" and "on the cards" as tests, pointing out that "there is wide gulf between saying that some event is not unlikely or quite likely to happen and saying merely that it is a serious possibility, a real danger, or on the cards." In his view those tests "would extend liability for breach of contract beyond what is reasonable or desirable."

The Parana. Its strict test — that it was "reasonably certain" the goods would be sold on arrival — "has long been obsolete", and "whether The Parana is formally overruled or not, it cannot be relied on as establishing a rule so as to require the present case to be decided in a way inconsistent with the general law as it exists to-day." Lord Reid expressly left open the sale-of-goods rule in Slater v Hoyle & Smith.

Lord Pearce — "serious possibility" or "real danger" accepted

Lord Pearce took a more favourable view of Victoria Laundry: "Accordingly in my opinion the expressions used in the Victoria Laundry case were right." He did not accept "on the cards" as a useful test, and explained that Asquith LJ's words "liable to result" were "not intended as a further or different test from " serious possibility " or " real danger "." He held that if The Parana laid down any general rule "it was wrongly decided".

Lord Upjohn — not the tort test, not near-certainty

Lord Upjohn put the middle position plainly: "It is clear that on the one hand the test of foreseeability as laid down in the case of tort is not the test for breach of contract; nor on the other hand must the loser establish that the loss was a near certainty or an odds-on probability. I am content to adopt as the test a "real danger" or a " serious possibility "." He too deprecated "on the cards", and regarded The Parana as obsolete or overruled.

Lord Morris of Borth-y-Gest and Lord Hodson also dismissed the appeal.

In contract, damage is recoverable only if, on the information available to the defendant when the contract was made, the loss was of a kind that he should have contemplated as sufficiently likely to result from the breach — a degree of probability described as "not unlikely", a "serious possibility" or a "real danger", which may be less than an even chance. This is a stricter test than reasonable foreseeability in tort. A carrier who knows goods are being carried to a market must contemplate loss from a fall in market price caused by delay; The Parana lays down no contrary rule for carriage by sea.

• Direct question: Explain the rule of remoteness of damage in contract. How did the House of Lords in The Heron II refine Hadley v Baxendale? Set out the two limbs, then the degree-of-probability question, then the contract/tort contrast and Lord Reid's reason for it.
• Problem question: a carrier delays goods and the market falls. Ask what the carrier knew at contracting — that the goods were going to a market is enough to make loss of market "not unlikely". Special losses the carrier knew nothing of (as in Victoria Laundry's lucrative contracts) remain too remote.
• Point worth marks: state the split in wording — "not unlikely" (Lord Reid) versus "serious possibility"/"real danger" (Lords Pearce and Upjohn) — and that all rejected "on the cards".
• Link: use with Hadley v Baxendale and Victoria Laundry in any answer on damages; the three together are the standard sequence.