CONTRACT DAMAGES AND THE PROMISEE'S ROLE IN ITS OWN LOSS.

• Date: 01 January 2019
• Author: Courtney, Wayne

Contents I Introduction II The Connection between Causation and Avoidable Loss A The Controversy and Why it Matters B The Causal Contrast and the Counterfactual C Onus of Proof and the Fact-Law Distinction D Norms, Standards of Conduct and the Inception of the Duty to Avoid Loss III The Avoidable Loss Rule and Other Causal Norms A Abnormality B Voluntary Conduct C Reasonableness and Transfer of Reliance 1 Reliance upon the Contract 2 Ending Reliance upon the Contract 3 Consequences of the End of Reliance IV Testing the Model A Before Breach B From Breach until Sufficient Awareness of Breach 1 Duties to Guard against Particular Risks that Materialise 2 Failure to Check 3 Failure to Heed Warning 4 Transactions with Third Parties C After the Promisee is Sufficiently Aware of Breach 1 Which Norm and Standard? 2 Election to Terminate or Affirm the Contract, and Renewed Reliance on the Contract V Conclusion I Introduction

The promisee may play a part in the loss it suffers from the promisor's breach of contract. Contract law regulates the promisee's claim for compensation through principles such as causation, mitigation and contributory negligence. These give effect to various norms and standards. Some assess the quality of the promisee's conduct by reference to culpability, such as whether it is careless or unreasonable; or to freedom of choice; or to its extraordinariness. Others seek to weigh the relative causal impact of different factors. In Australia, and elsewhere in the Commonwealth, there has been growing uncertainty over how these principles, norms and standards interact.

This article examines three concepts: causation, avoidable loss and reliance upon the contract. The narrow focus of this article means that many of the complexities of causation can be put aside. 'Factual' or 'but for' causation is not in issue. (1) It can be assumed that the promisor's breach was a necessary factor in the sequence of events producing the loss. 'Legal' causation is relevant. The promisee's conduct may be so significant in nature or degree that, causally, it is treated in law as superseding the promisor's breach. In the traditional language of the common law it is a novus actus interveniens: an intervening act (or omission). Within the civil liability legislation, where applicable, it is an aspect of 'scope of liability'. (2)

Mitigation in contract is conventionally defined as a composite of three rules. (3) The rule considered here is the first stated by McGregor on Damages, (4) also known as the 'avoidable loss' rule. In simple terms, a promisee is not compensated for loss which it could reasonably have avoided. Like intervening causation, the rule is negatively oriented. The reliance concept is the third piece of the puzzle. A promisee is, prima facie, entitled to assume that proper performance will be, and has been, rendered by the promisor. It may also rely upon the state of affairs that would be generated by performance. This concept can, to an extent, shield the promisee from its ignorance of the promisor's breach or its consequences. It has a role to play when evaluating the promisee's conduct as a matter of causation or mitigation.

My argument is that intervening causation, the avoidable loss rule and the reliance concept can be integrated into an overarching causal analysis. There are two strands to the argument. The first strand is about implementation of the avoidable loss rule. The rule can be modelled as one form of intervening causation that operates in addition to, and may overlap with, other norms that determine intervening causes. The other strand of the argument examines the norm which underlies the avoidable loss rule. What justifies the rule and the more discriminating standard of reasonableness, compared with other standards used in intervening causation? Voluntariness is a cogent reason but, ultimately, not a wholly satisfactory basis for the rule. The better view is that the rule reflects a transfer in reliance on the contract, from promisor-reliance to self-reliance. The distinctive feature of the avoidable loss rule is that it evaluates conduct taken (or deemed to have been taken) deliberately in response to breach of contract. That is, it assesses the self-reliant promisee's choices.

The argument is limited in several ways. A complete account of the promisee's involvement in its loss would include contributory negligence. Some reference is made to this below, though it is not considered at length. The focus is upon principles that bar recovery for all, or discrete elements of, loss, rather than with proportionate reduction of an otherwise compensable loss. The argument proceeds on the orthodox basis that causation and the avoidable loss rule are distinct from contributory negligence. (5) Civil liability legislation presents another complication. For claims arising from negligence, including breach of contractual duties of care, (6) the legislation divides the causal inquiry into 'factual causation' and 'scope of liability'. (7) Breaches of strict contractual duties continue to be governed by common law principles. This article assumes that, in the present context at least, common law principles of intervening causation are not relevantly different from corresponding concepts embodied within the statutory 'scope of liability. (8) The argument is, therefore, unitary and does not distinguish between different types of contractual duty. Lastly, although the argument draws on cases outside of contract (particularly in negligence) as illustrating general principles of causation, it makes no claim that the reliance thesis holds generally for tort or other civil wrongs. (9)

Part II outlines the debate over the connection between causation and the avoidable loss rule. It shows that there is considerable similarity in the operation of the two concepts. Differences remain, and these are addressed in Part III. Part III develops the argument that the avoidable loss rule is based upon a causal norm reflecting a shift in reliance on the contract. Part IV tests the thesis against a selection of cases which represent common factual patterns. Part V contains the conclusion.

II The Connection between Causation and Avoidable Loss

A The Controversy and Why it Matters

Marshalled on one side of the debate are those who consider causation and mitigation, including the avoidable loss rule, to be independent principles, (10) causation being applied first. In Burns v MAN Automotive (Aust) Pty Ltd ('Burns'), (11) for example, Brennan J said that the 'reasonableness of the [promisee's] decision is critical to the question of mitigation but it is no novus actus which breaks the chain of causation'. (12) Each provides a basis for denying all or part of the promisee's claim; the promisee may succeed on one and fail on the other. (13) The separatist view is that causation and mitigation provide different reasons for denying compensation. (14) Thus, McGregor argues that framing mitigation in terms of causation risks disguising 'the real ground of a decision'. (15)

In contrast, a growing body of decisions in the United Kingdom describes mitigation in causal terms. (16) Modern developments can be traced to Koch Marine Inc v D'Amica Societa di Navigazione ARL, (17) where Robert Goff J rationalised all three of McGregor's mitigation rules (18) in terms of causation. (19) Similar reasoning can be found in North America. (20) Australian courts have sometimes struggled to explain the substantive difference between the avoidable loss rule and the promisee's conduct as an intervening cause. (21) In an oft-cited passage in Driver v War Service Homes Commissioner, (22) Irvine CJ said that the promisee's 'duty' to mitigate

does not mean that he is under any duty in the ordinary sense, towards the party breaking the contract, but that he cannot be said to have really incurred any loss which might have been avoided by his taking such steps as a reasonably prudent man in his position would have taken to avoid further loss to himself ... (23) Academic proponents of the causal analysis include Dyson and Kramer. (24) Their model rests upon the proposition that damages are 'assessed as if the claimant acted reasonably, if in fact it did not'. (25) Corbin held a similar view. (26) If the causal model is right, it follows that contributory negligence and the avoidable loss rule operate at different levels. The avoidable loss rule is applied first to define the basic loss, which may then be apportioned to account for contributory negligence. (27)

Why does it matter? Some of the more noteworthy implications are as follows. One supposed difference lies in the onus of proof. (28) More substantially, the avoidable loss rule and causation presuppose different degrees of knowledge possessed by the promisee. This in turn affects the time at which the principles take effect. (29) A typical situation is where the promisee perceives some symptoms of a breach of contract but cannot know that breach has actually occurred. (30) The promisee's reaction should be evaluated using causation rather than the avoidable loss rule. This would be practically irrelevant if the standards were the same, and so this points to another difference. Critics of assimilation are right to say that conventional causation and the avoidable loss rule rely upon different reasons, or use different standards, to evaluate the promisee's conduct. The latter is in some respects more stringent; the promisee might succeed under causation but fail if the event were assessed under mitigation.

The contrast carries over to the period during which both sets of principles operate. Take the example of a promisee who turns down an offer of substitute performance from the promisor after breach. A mitigation perspective is to ask whether the rejection is unreasonable. A traditional causal perspective might consider whether the rejection was reckless or grossly foolish, or, perhaps, a...