How far can the foreseeability of the damage under English and Czech Commercial law go

Elmira Lyapina

In order to answer this question, imagine that you are an English entrepreneur, which owns the company engaged in common carriers. This company on agreed conditions delivers the necessary goods to the customer from the manufacturer. One day, due to some economic reasons, you are late with delivery. You are prepared to pay caused costs to the customer, but the last brings an action against you, and asks you to pay the sum 10 times higher the amount. Ex-customer, now the plaintiff, states that because of your negligence he has suffered a loss. However, when entering the contract or dealing the conditions he has not mentioned that the delay in delivery may cause him such damages. On the other side, you could not foresee potential damages. Certainly, you will not be willing to pay his loss, but the question arises is different. Is his demand to compensate not just real or direct damages, but also indirect damages due to profit loss, legal?

English Court of Excherquer’s Landmark in its significant decision in the case Hadley v. Baxendal e from 1854, based on the concept of French Code Civil, offered the test of foreseeability. This test brought important points for the future (not only) common law, these are – the consequential damages and special circumstances.

Consequential damages are such indirect damages that flow from the breach of the contract, with the direct damages caused the financial loss resulting from the lost profit. Those consequential damages could be recovered only if, at the time the contract was made, the breaching party had reason to foresee (special circumstances) that the consequential damages would be the probable result of breach.^[1]

According to that decision, plaintiff was not entitled to recover his consequential damages. Does it seem fair for you, as a defendant?

Now imagine that you own a mill, but some element got broken. You pay company carriers – to deliver on time replacement of the broken detail directly from the manufacturer. However, due to the negligence of carriers you suffer huge loss – not just financial, but also emotional distress – you lost your clients. How the above decision seems now? How to protect yourself from the possible negligence of the other contracting party?

Despite the disappointing for the plaintiff decision, the Court showed the logic of the issue of the foreseeability test, which determines how far can foreseeability of the damage under English law go. The Exchequer Chamber stated: the damages “can be recovered to the injured party if the damages are:

- either reasonably considered as arising naturally, according to the usual course of things, from the breach, or
- might reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it”.^[2]

These two limbs legal academics are complementing by the consideration, that the damages should be allocated between the parties “the law in fact, aims not at the satisfaction but at a division of the lost profit”.^[3] That principle has evolved to the tacit agreement test, under what the parties recover the damages they agreed beforehand. In other words, here occurs the necessity of the parties to inform each other on possible damages. Regarding the above case – the plaintiff should inform, what lost may delay bring. Particular situation requires knowledge of specific circumstances. This confirms Robert Goff J^[4], which stated that the application of the test foreseeability principle may depend on the degree of relevant knowledge held by the defendant at the time of the contract in the particular case.

In the case Hadley v Baxendale, the defendant as company carrier may had assumption that there are two types of millers – high-damage and low-damage types. As prices for carriage were not reflecting the expected costs of damages in a computable consequence, the carrier had to pay for direct damages.^[5]

Approach of the English courts based on the principle of remoteness – or causality between the consequential damage and behavior of the defendant, it should be not far too remote from the breach of the contract.

That two limbs of the foreseeability test are not mutually exclusive Lord Walker stated in the decision on the case Jackson v Royal Bank of Scotland 2005, embedding that there is a common ground for these limbs as the reasonable contemplations of the parties, or shared knowledge of both parties.

The importance of the special knowledge of the consequences of the contract breach was redefined in the case Achillaes ( 2008). It was stated, that special knowledge differs from the ordinary course of things, if the breach occurs, and it is important the intention of the parties to be liable for unforeseeable risks while entering the contract. Further, this decision on Achillaes was clarified in other case - Slyvia Shipping -that from the plaintiff was “expected to demonstrate that the party in breach of contract had assumed responsibility for the further extensive damages. And there was a question that the resulting liability claimed likely to be unquantifiable, unpredictable, uncontrollable or disproportionate”^[6].

Fulfillment of contractual obligations, or following the principle pacta sund servanta, and responsibility for the damage caused by breaching the contract - are well known not only in the common law, but also in the continental law. However, in contrast to the English law, where is consequence after the breach of contractual obligation is pecuniary compensation, so called positive contractual interest, the rights of plaintiff in the continental Europe come from the fact, that the main purpose of the courts by protection of the injured party rights, is through requirement to fulfill undertaken obligations^[7] or to restore the previous state before the breach by the party in breach.

English experiences on contractual obligations inspired the Vienna Convention on Contracts and the International Sale of Goods, meaning of article 74 of which was adopted by old Czech Commercial Code (513/1991 Coll), and flowed to the new Civil Code (89/2012 Coll.).

Explanatory memorandum of the Civil Code mentions the characteristics of the contractual liability as objective, and also the compensation for the foreseeable damage. It also states that the foreseeability of the damage can be understood in a wider context than just contractual liability. While analyzing the liability and compensation – the following factors are counting:

- if the person can reasonbly foresee the emergence of damage, and/or
- if the person have truly foreseen.

Czech model of the principles of the foreseeability of damage based on German doctrine of adequate causality. It is considered that the injured party is in relatively better position, and that at the time of concluding the contract the party in breach could have foreseen as what any reasonable person could have foreseen.^[8]

The German jurisprudence developed the institute for pre-contractual liability, taking into consideration culpa in contrahendo offered by legal academic Jehring. This doctrine based on good faith principle and pre-contractual agreements giving rise to special relationships, obligations from which could extend to the time after the conclusion of the contract itself.^[9]

The adequacy concept of causation is based on criterion of foreseeability of the damage consequence. According to this criterion is being assessed, if the damage, in the frame of generally accepted ideas, can be an adequate and expectable consequence of the breach of contractual duty. Jan Krčmář, Czech prominent lawyer, noted that “if the damage was caused by some action, conclusion that such damage is a regular (adequate) result of such action, means, that a person of ordinary abilities could this damage as a consequence of his actions foresee”.^[10]

Czech Civil code relies on concept of the theory of “sufficient” causation, which is based on the finding of the Constitutional Court of the Czech Republic No I 312/05. It stated that “for liability for damage is not necessary, that for the emergence of some damage was for the certain acting person concretely predictable or foreseeable, but it is sufficient that for the above mentioned optimal contemplator the emergence of damage is highly improbable.”^[11]

Damages, which were not foreseeable for any of contracting parties, excluded from the compensation in the event of breach of contractual duty. The reason for this limitation of compensation is mentioned above the principle bona fidea: the contracting party could not include for its decision the possible consequences of the breach of contract, at the time of concluding the contract, as it does not know about their emergence. Also provision of § 2902 Civil Code limits the amount of compensation and at the same time stressing the importance of obligation sharing the related information of possible damage.

Thus, if in the framework of assessment of conditions of liability for damage is not concluded, that damage was foreseeable, at least in the examination of causation, the pest will not be recognized liable for damage and its compensation. At the same time, the pest has possibility to prove he had not foreseen the damage.^[12]

Regarding the extent of damages in the Czech law could be found only in Explanatory Memorandum to the Civil Code. However, it is possible in the contract to limit the liability from the breach of contractual duties, but up to the extent of damage caused intentionally.^[13]

A breach of contractual duties is adjusted in the § 2913 of the Civil Code so, that if the party breaches the obligations from the contract, it should compensate to the injured party the damage, and to the person, to whose interest should serve agreed obligations. The provisions of § 2913 (2) of Civil Code^[14] based on the concept of force majeur. There are mentioned circumstances, excluding liability, the obligation of the pest to compensate the damage will relieve, if he will prove that he could not fulfill its obligations under the contract due to extraordinary unpredictable and insurmountable obstacles arose independently of his will. However, that does not spread to the obstacles resulting from his personal circumstances.

The answer to the question - how far can the foreseeability under the Czech commercial law go - can provide besides the legal theory the case law (given by Supreme and Constitutional Courts).

The decision of the Supreme Court of the Czech Republic 32 Cdo 2843/2008 in which it concluded, based on the § 397 of the old Commercial Code, that the damage is not required to be compensated if the damage was unforeseeable, and if the party in breach was not informed about the possible damage.

That was likewise situation to the mentioned above English cases – when the customer A on the one hand had a contract for work – building an object – with the constructor B, and on the other – contract with the investor C. In time of duration the contract the customer A concluded the amendment to the contract with the investor C, where were specified the conditions of contractual penalties on the late handover of the object. As the maker B was late with handover the object due to removing the defects, the customer A should pay the fine to the investor C. As constructor B has not received the payment for the work, he sued the costumer. So, as A became a defendant, she raised an objection in order to pay the amount for made work as a difference between the fine she paid to the investor C. The Supreme Court decided in favor of plaintiff B, stating that the plaintiff was not aware of the amendment on the one side, and the defendant has not informed him beforehand on the other side, applied the provision of §379^[15] probability of a certain result and foreseeability of damage and impossibility of subjectively assessment of this situation. Even though the defendant is right, that the agreement on contractual penalty is a common way to ensure the fulfillment of the obligation in construction industry, and it could be foreseen, however in these certain circumstances the plaintiff could not have predicted, that in the future the defendant will additionally conclude a contractual penalty with its contractual partner C.

In the other case 29 Odo 690/2001 the Supreme Court decided in favor of plaintiff, which was the client of the Czech bank (CB), through which he sent money to a Russian bank. The CB used a third bank as an intermediate, which during the money translation lost its license. So, the client sued the Czech bank in order to get back the money. The Court concluded that even though the CB could not foresee, that the mediate bank will get into trouble, however, such risk always latently exists. Indeed the defendant had foreseen this risk, as it examined different banks for using them for this subjective payment. Foreseeability in this field lays only on the bank, as the client could not dispose actual or relevant information about the specific bank payment operations, and the bank performs as a professional trader in a banking market. So bank should not wait the information from the client or from the interested persons, while due its knowledge and position, should prevent such obstacles and possible damages on time. Nevertheless, court suggested that Czech bank could use the possibility to liberate from this liability by preventive limiting its liability in the contract.

As it was shown, the concept of foreseeability under English and Czech Commercial Law is on the same direction, it could be seen from the presented case law. The common principles are the reasonable human being in good faith entering the contract with the fact of reasonable foreseeability of damage.

Although, the Czech contemporary law was influenced not just by Justinian, and German and Austrian laws, but also by the common law principles, through the Vienna Convention on International Sales of Goods, it follows its own way, and the starting point on assessing the foreseeability is assumption of the optimal contemplator that the emergence of damage is highly improbable.

What exactly is foreseen – is another issue, as according to the English concept – the type of damage, whether it is direct or indirect (remoteness of damage), while according to the French concept – the extent of loss. The CISG overlapped the individual elements and determined that should be foreseen the type and the extent of the damage, as the chain of events leading up to the loss. So, the possible injured party should foresee possible damage or to “assume that particular result is likely, i.e. it is more likely to occur than not occur.”^[16]

Bibliography.

David, R., 1978, Major Legal Systems in the World Today, An Introduction to the Comparative Study of Law. John E. C. Brierley. Published by Free Press, 2ed. 1978

Eisenberg, M.A., 1992, The Principle of Hadley v. Baxendale, California Law Review, 80/3

European Contract Law: Materials for the CFR. Edited by Sellier, Münich. – 2008. Chapter 5: Good Faith, available on http://www.legiscompare.fr/site-web/IMG/pdf/13._CH_5_Good_faith.pdf

Fuller, L.,Perdue,W., 1936, The Reliance Interest in Contract Damages. 46 Yale LJ 52.

Honoré, A., 2010, Causation in the Law, The Standford Encyclopedia of Philosophy, ed. Edward N. Zalta

Hulmák, M. and Col 2014, Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). Comment, 1 ed. Prague, C. H. Beck, 1572 p.

Krčmář, J., 1947, Právo občanské 3, Právo obligační, Prague, p. 313

Perloff, S., 1981,Breach of Contract and the Foreseeability Doctrine of Hadley v. Baxendale, Journal of Legal Studies, p. 39

Rogers,J., Howell D.J., 2010, Remoteness of Damages under English Law: Hadley v Baxendale Remains the Standard Test, Norton Rose Fulbright, available on http://www.nortonrosefulbright.com/knowledge/publications/94413/remoteness-of-damages-under-english-law-hadley-v-baxendale-remains-the-standard-test

Runesson, E.M., 2009, Foreseeability and Law & Economics, Stockholm Institute for Scandianvian Law 1957-2009 available on http://www.scandinavianlaw.se/pdf/41-17.pdf

Řehorová L., 2015, Předvídatelnost jako prostředek limitace náhrady škody v mezinárodním obchodě, article in Právní proctor, available on http://www.pravniprostor.cz/clanky/ostatni-pravo/predvidatelnost-jako-prostredek-limitace-nahrady-skody-v-mezinarodnim-obchode, http://www.pravniprostor.cz/clanky/ostatni-pravo/predvidatelnost-jako-prostredek-limitace-nahrady-skody-v-mezinarodnim-obchode-ii-cast

Šilhán, J., 2011, Náhrada škody v obchodních vztazích a možnosti její smluvní limitace, 2 ed., Prague, C.H. Beck

Sztefek, M., 2014, Předvídatelnost škody v novém občanském zákoníku, Jurisprudence, 5/2014, Prague, pp. 25-33

Ver Steeg, R.,2011, Perspectives on Foreseeability in the Law of Contracts and Torts: The Relationship between “Intervening Causes“ and “Impossibility”, 2011 Mich. St. L. Rev. 1497 (2011)

Zimmermann R., Whittaker S. (Eds.), 2000, Good Faith in European Contract Law, Edited by: Zimmermann R., Whittaker S. Cambridge studies in international and comparative law 14, Cambridge university press, p. 756.

[...]

^[1] Perloff, S., 1981,Breach of Contract and the Foreseeability Doctrine of Hadley v. Baxendale, 10 Journal of Legal Studies, 39

^[2] Supra note 8 Danzig, R., 1975, Hadley v Baxendal: A Study in the Industrialization of the Law, 4 J LEGAL STUD. 249, 251 & n.5 in The Principle of Hadley v Baxendale.

^[3] Fuller, L.,Perdue,W., 1936, The Reliance Interest in Contract Damages. 46 Yale LJ 52, p.85

^[4] In case Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] 1 Lloyd’s Rep 175

^[5] Runesson, E.M., 2009, Foreseeability and Law & Economics, Stockholm Institute for Scandianvian Law 1957-2009 available on http://www.scandinavianlaw.se/pdf/41-17.pdf

^[6] Rogers,J., Howell D.J., 2010, Remoteness of Damages under English Law: Hadley v Baxendale Remains the Standard Test, Norton Rose Fulbright, available on

^[7] David, R., 1978, Major Legal Systems in the World Today, An Introduction to the Comparative Study of Law. John E. C. Brierley. Published by Free Press, 2ed. 1978

^[8] Runesson, E.M., 2009, Foreseeability and Law & Economics, Stockholm Institute for Scandianvian Law 1957-2009 available on http://www.scandinavianlaw.se/pdf/41-17.pdf

^[9] Zimmermann R., Whittaker S. (Eds.), 2000, Good Faith in European Contract Law, Edited by: Zimmermann R., Whittaker S. Cambridge studies in international and comparative law 14, Cambridge university press. P. 756.

^[10] Krčmář, J., 1947, Právo občanské 3, Právo obligační, Prague, p. 313

^[11] Hulmák, M. a kol., 2014, Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). Komentář. 1. vydání. Praha: C. H. Beck, 1572 p.

^[12] ibid

^[13] Šilhán, J., 2011, Náhrada škody v obchodních vztazích a možnosti její smluvní limitace, 2 ed., Prague, C.H. Beck, p.42

^[14] which replaced provisions of § 374 of Commercial code 513/1991 Coll.

^[15] Of Commercial Code No 513/1991 Coll.

^[16] Ver Steeg, R.,2011, Perspectives on Foreseeability in the Law of Contracts and Torts: The Relationship between “Intervening Causes“ and “Impossibility”