PROVING THINGS 199: “THE BITTER TRUTH”: INNOCENT PARTIES MAY SUFFER NO LOSSES – AND RECEIVE NO DAMAGES

January 13, 2021 · by · in Civil evidence, Damages

The judgment of Mr Stephen  Houseman QC sitting as a Deputy High Court judge in YJB Port Ltd v M&A Pharmachem Ltd & Anor [2021] EWHC 42 (Ch) is another example of a party failing to prove it had suffered any loss at all.

 

“The bitter truth for an innocent party is that some breaches by its counterparty, however unscrupulous or unethical, result in no loss that can be recovered by an award of compensatory damages; cf. injunctive relief or gain-based damages. Damages are awarded for the breach itself not the manner of the breach”

THE CASE

At a trial on liability the claimant had established that the defendants were in breach of certain agreements. This second trial was concerned with the question of whether the claimant had suffered any loss as a result of those breaches.  The judge found that the claimant had not suffered any losses.

PROVING CAUSATION

The judge outlined the practical issues relating to establishing causation.
  1. It has been noted on occasion that there are few areas of law more difficult than causation. It is one thing to state the test; another thing to apply it in practice.
  2. The established general formula for causation in a claim for damages for breach of contract is whether the relevant breach is an “effective” or “dominant” cause of loss suffered by the innocent party, rather than merely creating the occasion or opportunity for the relevant loss to be sustained by such party: Monarch Steamship Co. Ltd. v. Karlshamns Oljefabriker AB [1949] AC 196; Quinn v. Burch Brothers (Builders) Ltd. [1966] 2 QB 370; Galoo Ltd. v. Bright Grahame Murray [1994] 1 WLR 1360 at 1374G-H.
  3. The cases which focus upon and distinguish the mere creation of an occasion or opportunity for loss to be sustained mostly concern supervening conduct or decisions on the part of the claimant (e.g. Quinn, Galoo). In such context it is important to determine whether the defendant’s breach or the claimant’s own subsequent behaviour in response to the breach or its consequences is responsible for the latter’s loss. That situation does not arise in the present case, because there is no suggestion that YJB’s own post-breach or indeed post-discovery-of-breach behaviour caused or contributed towards any diminution in capital value of the TA brand/business during the relevant period.
  4. The indefinite article in the basic formulation is potentially important. Where the breach of contract is one of two causes “both cooperating and both of [approximately] equal efficacy” that suffices to establish causation as a matter of law and the court need not choose between competing causes or decide which is the more effective: Banque Keyser Ullman SA v. Skandia (UK) Insurance Co. Ltd. [1990] 1 QB 665 at 717; see also Chitty on Contracts (33rd Ed.) at 26-076. The classic illustration of this situation concerns separate wrongs committed by the defendant and a third party (as in Banque Keyser itself; see also Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd. [1992] 1 A.C. 233) which does not arise in the present case. The parties nevertheless agreed that the same general approach applies to disentangling parallel operative causes such as actual and threatened breaches of the same contractual term.
  5. In certain situations, it may be appropriate for the court to apportion the causal effect of a proven wrong – for example, where the cause of a claimant’s personal injury or illness cannot be shown to be wholly attributable to a particular defendant’s wrongdoing (e.g. successive employers) or the defendant’s actionable as opposed to (prior) non-actionable behaviour or time-barred wrongdoing: e.g. Allen & others v. British Rail Engineering Ltd. & another [2001] EWCA Civ 242; [2001] ICR 942. Although citing such authorities, YJB correctly did not seek such apportionment in the present case.
  6. In other circumstances the court may resolve evidential difficulties in favour of the innocent party under what is known as the ‘fair wind’ principle: see, for example, Browning v. Messrs Brachers [2005] EWCA Civ 753 at [204]-[210]; Parabola Investments Ltd. v. Broweallia Cal Ltd. [2010] EWCA Civ 486; [2011] QB 477 at [22]-[24]. But there are limits to such evidential latitude or leniency. As Lord Leggatt JSC (as he has since become) stated in Marathon Asset Management LLP & another v. Seddon & others [2017] EWHC 300 (Comm); [2017] 2 CLC 182 at [165]: “These principles […] may give a claimant a fair wind, but not a free ride.“
  7. The court is ultimately required to apply common sense in ascertaining whether a breach of contract operates as an effective cause of the loss claimed. This does not involve the appliance of science. It may embrace imprecision or imperfection. The ultimate goal is to avoid or minimise relative injustice, bearing in mind the moral asymmetry where one party is at fault and the other an innocent victim of wrongdoing. As Devlin J (as he then was) stated in Heskell v. Continental Express Ltd. [1950] 1 All E.R. 1033 at p.1048: “Common sense is a blunt instrument not suited for probing into minute points…“
  8. The bitter truth for an innocent party is that some breaches by its counterparty, however unscrupulous or unethical, result in no loss that can be recovered by an award of compensatory damages; cf. injunctive relief or gain-based damages. Damages are awarded for the breach itself not the manner of the breach: per Lord Steyn in Malik v. Bank of Credit and Commerce International SA [1998] AC 20, 51. Damages are not recoverable for a risk of injury: see Marathon Asset Management (above) at [154]-[167].

NO LOSS

The judge then found that the claimant had not established it had suffered any losses as a result of the breach.
    1. Has YJB discharged its burden of showing that Breach#1 was an effective cause of any diminution in capital value of the TA brand/business during the relevant period? In light of the above, the answer to this must be No. The non-commercial production of modest quantities of ST for the purposes of conducting patient acceptability trials prior to 18/19 September 2017 was an internal preparatory step. It had no impact upon YJB’s business. It caused no diminution in the capital value of the TA brand or business at the time it took place or when it was discovered by YJB or at/by 6 February 2019. The expert evidence is not relevant to this question. The answer is plain and obvious as a matter of common sense.
  2. Has YJB discharged its burden of showing that Breach#2 was an effective cause of any diminution in capital value of the TA brand/business during the relevant period? In light of the above, the answer to this must – by definition – also be No. Breach#2 is an aspect of or precursor to Breach#1. It cannot be said M&A’s agreement to produce modest quantities of ST for use in patient acceptability trials caused any diminution in the capital value of the TA brand or business in circumstances where the actual production of such quantities (Breach#1) did not have such causal effect. This position is inescapable and accords with obvious common sense.
    1. Has YJB discharged its burden of showing that Breach#3 was an effective cause of any diminution in capital value of the TA brand/business during the relevant period? In light of the above, the answer to this must also be No. There is no sustainable basis for finding that the mere act of ordering some Xanthan Gum in December 2017 caused any diminution in the capital value of the TA brand or business at the time it took place or when it was discovered by YJB or at/by 6 February 2019. The expert evidence is not relevant to this question. It is, once again, plain and obvious as a matter of common sense.
    2. Is the answer any different if all three of the Proven Breaches are amalgamated or accumulated into a composite causation inquiry? I consider not. Their causative potency is not enhanced in this way – assuming it were a permissible approach, including in light of the Males Order. Whilst YJB sought to combine the Proven Breaches into a single composite violation of clause 3(f), that is not how the first trial judge approached her analysis and it is not a legally sound approach to the present analysis. The Proven Breaches were isolated preparatory steps. Although reprehensible, and in other circumstances capable of forming the basis for grant of appropriate injunctive relief, such unlawful conduct did not cause any diminution in the capital value of the TA brand or business at the time it took place or when it was discovered by YJB or at/by 6 February 2019. Put another way: zero plus zero plus zero equals zero. This is plain and obvious as a matter of common sense.
    3. Is the causation inquiry affected by the co-existence of threatened future (i.e. non-actionable) breaches of clause 3(f) on the part of M&A? I consider not, both as a matter of law and as a matter of fact:
(1) As a matter of law, this is so because such threatened future breaches are not actionable per se and must therefore be discounted for these purposes: they cannot operate to enhance or augment the causative quality or potency of the Proven Breaches, as already analysed. The authorities which address parallel potential causes of the same loss, as noted above, deal with a situation where a non-actionable or extraneous causal component may be said to supplant or relegate the proven breach as an effective cause of the relevant loss. The same cannot be exploited to enhance or augment the causative power of such breach, if not sufficient on its own. Indeed, it is ironic and telling that a claimant should seek to introduce a parallel potential cause in this way, when that would ordinarily be in the interests of a defendant seeking to diminish the causative effect of his own breach.
(2) As a matter of fact, this is so because – in so far as relevant by way of analogy, as submitted by YJB – the threatened future breach of clause 3(f) and suspected future breach of clause 15 are what operated most powerfully on the decision-making of AIL as commercial suitor for the TA business at such time, as I have found to be the case above. Such concerns eclipsed the Proven Breaches in terms of AIL’s subjective appreciation and risk-assessment. This accords with commercial sense: it is the prospect of actual competition that concerns a rational businessman with a stake in the relevant market. It is impossible to assume or conclude that M&A’s threatened future breach (aka ‘non-actionable cause’) was an “approximately equal” cause in this context; on the contrary, it was – if anything – the dominant cause of any diminution in capital value of the TA business at the relevant time.
(3) On proper analysis, the Threatened Breach Finding adds nothing to the causation analysis. YJB added this to its pleaded case by way of amendment in this second phase of the proceedings so as to bulk out the Proven Breaches for causation purposes (see paragraphs 48 to 51 above). M&A’s concurrent threatened breach is, excusing the metaphor, no more than a legal thickener in this context. YJB relies on it as a form of catalyst to intensify the causative effect of the Proven Breaches. This is both legally impermissible and factually inaccurate, in my judgment.
(4) Threatened breaches are not relevant to the causation inquiry, irrespective of the findings in the Judgment. Whilst the Proven Breaches only made sense in commercial terms as a precursor to actual future competition, whether unlawful and/or subsequently lawful, by adding credibility to such threat or prospect, that does not mean that they gain causative traction through being understood in such commercial context or business dialogue at the relevant time. The same can just as easily be said of other conduct on the part of M&A that was found not to have breached clause 3(f) at the relevant time, such as the application(s) to register a trademark for ST (see paragraph 27 above). The causation test remains the same. YJB’s analysis attempts to make bricks from straw by mixing in M&A’s threatened future breach or breaches of clause 3(f).
(5) As directed or advised by Males LJ when refusing permission to appeal in this context, the function of the court at the present trial is to identify loss “caused by the specific acts which have been found to amount to breaches of clause 3(f)” and nothing else. The reason why “great care” is needed in conducting such analysis is precisely because extraneous matters (in particular, concurrent threatened future breaches of the same provision) have the potential to muddy the waters. Whilst common sense may be a blunt instrument, it does not justify soft focus or air-brushing at the expense of analytical precision and integrity. The Proven Breaches are the only causative protein in this particular mix.
  1. The purpose of damages for breach of contract is, of course, to put the innocent party so far as monetarily possible into the position as if the guilty party had performed the relevant promise in the way and to the extent that he is found to have broken it. No compensation is required to put YJB into the position as if none of the Proven Breaches had occurred. None of those breaches on the part of M&A caused any loss to YJB at the time or by February 2019. The position is analogous to the misappropriation (by copying) of confidential information addressed in Marathon Asset Management cited above. The wrongful act deprived the claimant of nothing and caused it no compensatable loss.
  2. If damages were awarded in this context that would put YJB in a better position than if M&A had not committed the Proven Breaches. It would compensate YJB for putative breach or breaches of clause 3(f) that never occurred or, worse still, for the mere prospect or threat of future lawful competition. As matters have turned out, such lawful competition has still not occurred.
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