Review Your Liability for Breach

A few years ago, a developer (Gubbins) appointed an engineering firm (Grimes) for a housing development. Grimes agreed to design a road and the drainage, and obtain the relevant s38 agreement (for adoption of the road by the local authority). That work had to be completed by March 2007.

It wasn’t. This was a breach of contract.

After another firm was brought in the works and adoption took place in June 2008. The question was whether the developer could recover from the engineer:

  • The difference between the prices of private homes in March 2007 and June 2008?
  • The difference between the agreed offer prices for affordable housing to a Housing Association and the price obtained?

Compensation

If you breach your contract, then the other party to your contract can bring a claim for compensation to put them in the position they would have been in if you had carried out your contract duties properly.

The compensation has to be either naturally occurring from the breach or reasonably foreseeable – when they entered into the contract – as the probable result (Hadley v Baxendale)

One of the ways of measuring the loss to a party when developing a new property is to use ‘diminution in value’ i.e. the reduction in the sale price or market value of a property caused by the breach.

What compensation can the developer recover?

Before the court hearing for the Gubbins dispute, there was evidence indicating that the development’s market value had dropped by about £400,000 caused by a slow decline in the property market (not a sudden crash).

The judge, Sir David Keene, said: “If there is no express term dealing with what types of losses a party is accepting potential liability for if he breaks the contract, then the law in effect implies a term to determine the answer. Normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken. But if there is evidence in a particular case that the nature of the contract and the commercial background, or indeed other relevant special circumstances, render that implied assumption of responsibility inappropriate for a type of loss, then the contract-breaker escapes liability.”

So reasonable foreseeability remains the general test of what damages can be recovered. The Court of Appeal said that the engineer could have reasonably foreseen that the developer would suffer losses from a property market fall if it caused delays to completion. The developer could recover the difference.

What should you do?

The court clearly stated that if the parties wanted to be clear precisely what compensation would be payable they could use clear terms to limit or increase the liability of the contract breaker. So:

  1. Write clear contracts
  2. Only sign contracts which you have read and understood.

Case: John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37 (05 February 2013)

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