C Czarnikow Ltd v Koufos (The Heron II)

Contract damages are recoverable where, when the contract was made, a reasonable defendant with the relevant knowledge would have contemplated the type of loss as a sufficiently substantial possibility of breach. Certainty or an odds-on probability is unnecessary. Mere foreseeability of a highly unusual consequence is insufficient.

Where marketable goods are carried to a known market within a reasonably predictable period, loss caused by market fluctuation during culpable delay may arise naturally, despite the carrier's lack of notice that the goods will be sold on arrival. The prima facie measure is the difference between the market value when delivery was due and the value upon actual delivery. Sea carriage attracts no special rule restricting damages to interest on the cargo's value.

In C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, a shipowner agreed to carry sugar from Constanza to Basrah. Contractual deviations extended a voyage which could reasonably have been predicted to take 20 days by nine days. During the delay, the Basrah market price fell, and the charterers received less for the sugar than they would have received upon timely arrival.

The umpire awarded £4,188 10s 8d, including £4,010 16s 8d for the fall in market value. McNair J, following The Parana L.R. 2 P.D. 118, restricted recovery to £172 for interest and expenses. The Court of Appeal, by a majority comprising Diplock and Salmon LJJ, restored the umpire's award; Sellers LJ dissented. The central issue was whether loss caused by the market fall was too remote and whether sea carriage was subject to a special, more restrictive measure of damages.

Disposition

1. The appeal was dismissed unanimously. The House affirmed the Court of Appeal's restoration of the umpire's award, including damages for the fall in the market value of the sugar.

2. All five Law Lords applied the contractual remoteness rule derived from Hadley v Baxendale (1854) 9 Ex. 341. The relevant inquiry is what a reasonable contract-breaker, possessing the parties' general or communicated knowledge when the contract was made, would have contemplated as a sufficiently probable type of loss. Certainty and an odds-on probability are unnecessary. The assessment is practical and commercial rather than mathematical.

3. Lords Morris, Hodson, Pearce and Upjohn treated Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 K.B. 528 as a valuable modern exposition of the established rule, while rejecting or questioning the imprecise phrase on the cards. Lords Pearce and Upjohn expressly accepted serious possibility or real danger as appropriate formulations. Lord Morris regarded the competing expressions as aids rather than rigid tests. Lord Reid reached the same result using not unlikely, meaning a probability substantially below an even chance but greater than a merely foreseeable and unusual possibility.

4. The contractual test differs from reasonable foreseeability in tort. Contractual liability depends upon the parties' assumed contemplation and knowledge at formation. Tort liability may extend to unusual consequences which remain reasonably foreseeable. The opportunity to communicate unusual risks or allocate them by agreement justifies the narrower contractual boundary.

5. The shipowner knew that Basrah had an established sugar market, that market prices fluctuated, and that the voyage duration was reasonably predictable. A reasonable shipowner would therefore have contemplated a real commercial risk that culpable delay would expose the cargo interests to loss through a falling market. Notice of the charterers' actual intention to sell promptly upon arrival was unnecessary.

6. Where delayed delivery causes actual market loss, the prima facie measure is the difference between the market value when the goods should have arrived and their market value when they did arrive. Recovery remains confined to the loss actually suffered and is subject to reasonable mitigation.

7. There is no special rule for carriage by sea restricting damages for delay to interest on the cargo's value. The strict requirement of reasonable certainty associated with The Parana was obsolete and could not govern the appeal. The approach in Dunn v Bucknall Brothers [1902] 2 K.B. 614, which treated recoverability as dependent upon the circumstances rather than an absolute maritime rule, accorded with general principle.

1. House of Lords: The shipowner's appeal was dismissed unanimously. The Court of Appeal's restoration of the umpire's full award was left undisturbed.
2. Court of Appeal: Diplock and Salmon LJJ, Sellers LJ dissenting, reversed McNair J and restored the umpire's award for market loss.
3. High Court: McNair J, following The Parana L.R. 2 P.D. 118, held that the charterers could recover only £172 for interest and minor expenses.
4. Arbitration: The umpire awarded £4,188 10s 8d, including £4,010 16s 8d for the fall in the sugar's market value during the delay.