Stuart Pty Limited v Condor Commercial Insulation Pty Limited - [2006] NSWCA 334

NEW SOUTH WALES COURT OF APPEAL

CITATION: Stuart Pty Limited v Condor Commercial Insulation Pty Limited [2006] NSWCA 334

FILE NUMBER(S):
40455/05

HEARING DATE(S): 19 & 20 June 2006

DECISION DATE: 28/11/2006

PARTIES:
Stuart Pty Limited (Appellant)
Condor Commercial Insulation Pty Limited (Respondent)

JUDGMENT OF: Beazley JA Ipp JA Tobias JA

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 7817/1999

LOWER COURT JUDICIAL OFFICER: Murrell DCJ

COUNSEL:
J West QC; J Stephenson (Appellant)
B Coles QC; P Barham

SOLICITORS:
Watson Mangioni (Appellant)
Turnbull Bowles (Respondent)

CATCHWORDS:
CONTRACTS – appellant sub-contracted insulation work to respondent – breach of sub-contract by respondent – head contract terminated as a result – whether respondent liable for appellant’s loss of profits on head contract
REMOTENESS – second limb of Hadley v Baxendale – whether loss within reasonable contemplation of parties – whether respondent knew of special circumstances such that it would be within reasonable contemplation that breach of contract would cause loss – head contract as special circumstance
REMOTENESS – second limb of Hadley v Baxendale – whether event giving rise to loss (a fire due to faulty workmanship) was not unlikely to occur REMOTENESS – knowledge of special circumstances – whether appellant responsible for supervising works – contract price out of all proportion with risk of being liable for enhanced damages

LEGISLATION CITED:

DECISION:
1. Appeal dismissed
2. Direct that the parties are to provide written submissions in respect of costs within seven days of the date of judgment.

JUDGMENT:

- 40 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40455/05
BEAZLEY JA
IPP JA
TOBIAS JA
28 November 2006

STUART PTY LIMITED v
CONDOR COMMERCIAL INSULATION PTY LIMITED

Headnote

Facts

The appellant entered into a contract with the Commonwealth of Australia to replace wool insulation in residential properties as part of the Sydney Aircraft Noise Insulation Program (SANIP). There were 932 properties in total that were due to be insulated, and the appellant had been allocated 71 pursuant to its contract with SANIP. The appellant sub-contracted this work to the respondent, with each property being subject to a separate contract comprising of a purchase order together with a scope of works schedule particularising the requirements for that property. This included, where relevant, the requirement that all down-lights be boxed before being covered with insulation.

On 28 January 1999, the appellant and respondent entered into a sub-contract for the installation of insulation at a property at 98 Newington Road, Marrickville. That contract did not identify any down-lights that needed to be boxed, despite that there were in fact five down-lights. On 27 July 1999, the insulated ignited, a fire broke out and damaged that property. Subsequently SANIP, having conducted a quality assurance audit, terminated the appellant’s contract in part due to faulty workmanship by the respondent.

The appellant brought proceedings against the respondent, claiming damages for its loss of profits resulting from the termination of its contract with SANIP.

The trial judge found that the fire was the principal reason that SANIP suspended the allocation of work to the appellant and that the faulty workmanship led to the termination of the contract. However the trial judge dismissed the appellant’s claim for damages as too remote.

Held per Beazley JA (Ipp JA generally agreeing; Tobias JA agreeing):

To recover damages under the second limb in Hadley v Baxendale the loss must have been within the reasonable contemplation of the parties at the time of the contract and whether the event that caused the damage was “not unlikely to occur”.
Hadley v Baxendale (1854) 9 Ex 341 (applied; discussed); C Czarnikow Ltd v Koufos [1969] 1 AC 350 (applied; discussed)

It is necessary for the parties to contemplate in some general way both the type of damage suffered and the manner in which it occurred, rather than in some precise way. This is an evaluative process.
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (referred to); Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 (followed)
The rationale for a defendant’s liability under the second limb in Hadley v Baxendale is an implied undertaking by the defendant to the plaintiff to bear the greater loss.
Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (discussed); Castle Constructions Pty Limited v Fekala Pty Limited [2006] NSWCA 133 (referred to)

(a) That undertaking can be implied where the defendant has actual knowledge of the special circumstances, and that knowledge was either acquired from the plaintiff or the defendant knew that the plaintiff knew of the defendant’s possession of that knowledge at the time the contract was entered into.

(b) To rebut the presumption implied by actual knowledge the defendant must show that there was no acceptance of the risk of liability. This may be done by way of an express clause or by the fact that the price for performance is disproportionate with the risk implied.
Czarnikow Ltd v Koufos (referred to)

The loss of profits from the SANIP contracts was not a risk the respondent was likely to have undertaken, even if it was aware of special circumstances relating to the contract.

In this case the “special circumstance” is the appellant’s contract with SANIP. The respondent knew of that contract and that the appellant expected it to be profitable however had no knowledge of its terms. That may be sufficient for the Court to infer that the respondent undertook the risk, subject to a rebuttal of any such inference.

(a) The appellant remained responsible for the works under its contract with SANIP, and the respondent did not undertake any contractual responsibility to supervise the work on behalf of the appellant. It would not have been in the reasonable contemplation of the respondent that poor workmanship on its part would result in the loss of the appellant’s entire contract with SANIP.

(b) The contract price (less than $10,000) was so out of proportion to the risk of being liable for damages for the loss of the appellant’s contract with SANIP to not be within the reasonable contemplation of the parties.

The event that gave rise to the loss in this case was the fire, which was an unusual catastrophic event and was not one which was “not unlikely to occur”.

Held per Ipp JA (Tobias JA agreeing):

The appeal turns on whether the appellant was entitled to the claimed loss of profits on the basis of the well-known Hadley v Baxendale test. This represents the law in Australia.
Czarnikow Limited v Koufos; Wenham v Ella (1972) 127 CLR 454; Burns vM.A.N. Automotive (Aust) Pty Limited (1986) 161 CLR 653; The Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64; Alexander v Cambridge Credit Corporation Limited (referred to)

Whether the loss was within the reasonable contemplation of the parties is a different and more restrictive test than being reasonably foreseeable.
Czarnikow Limited v Koufos (referred to)

It would not reasonably have been in the respondent’s contemplation when it entered into the contract with the appellant that not only would the respondent breach its contract by missing the existence of the down-lights in the dwelling (and not boxing them), but the appellant would breach its contract with SANIP by failing to detect the same down-lights.

The trial judge was in error in finding that all witnesses agreed that if a down-light was not boxed, the insulation could be set on fire. The non-inflammable qualities of the insulating material, as evidenced by the respondent’s witnesses, meant that the respondent did not contemplate its breach would cause a fire to break out.

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40455/05
BEAZLEY JA
IPP JA
TOBIAS JA
28 November 2006

STUART PTY LIMITED v
CONDOR COMMERCIAL INSULATION PTY LIMITED

Judgment

BEAZLEY JA:
Introduction
The appellant, a construction company, entered into a contract with the Commonwealth of Australia in respect of the Sydney Aircraft Noise Insulation Program (SANIP), which was a project for the replacement of wool insulation in residential dwellings under the Sydney Airport flight path.
In all there were 932 properties which were to be insulated and the appellant was one of seven contractors engaged by SANIP to perform the work.
The appellant engaged the respondent to carry out the insulation work that SANIP allocated to it, entering into a separate contract (referred to as a Purchase Order) in relation to each property. One such property was located at 98 Newington Road, Marrickville. The Purchase Order for the property was dated 28 January 1999 and the respondent commenced the insulation work on the property on about 9 February 1999.
On 27 July 1999, a fire broke out in the premises due to the respondent having carried out the insulation work negligently. Thereafter, SANIP cancelled its contract with the appellant.
At the time of the fire, SANIP had allocated 519 of the total number of 932 houses in which insulation work was to be undertaken under the project to the seven contractors, of which the appellant had been allocated 71 houses, or just under 14 per cent of those allocated. The appellant had previously done work for SANIP in respect of which it had been allocated approximately 12.5 per cent of the work.
The trial judge, her Honour Judge Murrell, averaged the allocation of work under this project and that which the appellant had previously undertaken and found that if work on the insulation project was allocated to the appellant at the averaged rate (being 13 per cent), in respect of the remaining 413 houses, it would have been allocated a further 54 houses. Averaging the profits that the appellant had earned in respect of each property upon which work had been undertaken up to that time, her Honour calculated that if the appellant was entitled to claim loss of profits for such projected work, it would have earned a total profit of approximately $500,000. (The parties agree that there is an arithmetical error in her Honour’s judgment, the correct figure being $313,200).
However, her Honour held that the appellant’s claimed loss for the profit on the unallocated houses was too remote and thus not recoverable. Accordingly, she dismissed the appellant’s claim.
The appellant appeals against her Honour’s finding.
The appeal raises the question whether the appellant is entitled to its loss under the second limb of Hadley v Baxendale (1854) 9 Ex 341.
Background
In late 1998, the appellant entered into negotiations with the respondent for the purposes of subcontracting the insulation work to the respondent. On 7 December 1998, Mr Brian Burden, the appellant's chief estimator, forwarded to the respondent a Wool Replacement Tender Schedule of Rates and requested the respondent to submit their tender rates for the Schedule. The Schedule contained an item whereby the tenderer was requested to specify its monthly capacity, that is, the number of houses in which it could each month carry out the work. Mr Burden had drawn a box around that item and made the notation "very important" underneath it. Included in the documentation that Mr Burden forwarded to the respondent was a copy of SANIP conditions for the carrying out of the work. Relevantly, cl 12 of those conditions provided:
“Construct downlight boxes as detailed on Drawings 32380 & 32383 where existing cannot be reinstalled or where existing does not comply with the Standard Specification.”
The Standard Specification required that if downlights were to be covered with insulation then they were to be boxed, the purpose being to prevent the insulation coming into contact with the downlight. It was acknowledged by all witnesses that it was bad building practice to put insulation directly over a downlight.
The respondent provided its tender rates to the appellant on 8 December 1998. In doing so, it specified that it could undertake insulation work at the rate of 36 houses per month.
On or about 16 December 1998, there was a meeting between the representatives of the appellant and respondent. At the meeting, Mr Rufus, one of the respondent’s representatives, stated that they were one of the biggest groups carrying out residential insulation and that they had sufficient labour to meet the appellant's requirements. Mr Burden, on behalf of the appellant, indicated that it was hoping to increase the number of houses they were allocated by SANIP. Mr Burden also advised that it was a government sponsored job and that the appellant required the works to be done properly and to a high standard.
Mr Rufus said that the respondent could guarantee to have enough sufficiently skilled men to meet weekly and monthly deadlines to the standard required of the appellant under its contract. He also stated that the respondent would comply with the terms and conditions of the specifications, and with the subcontract and the appellant's head contract with SANIP.
There was also discussion at this meeting as to the terms of payment, depending upon whether work was done on more or less than 30 houses per month.
On 17 December 1998, under cover of a letter of that date headed: “RE: Replacement of Wool in the SANIP Projects”, the respondent forwarded its final quote for the work and confirmed that it was available to commence work on 20 houses from 18 January 1999. In its quote, the respondent specified its monthly capacity as being 64 houses.
On 18 December 1998, the appellant entered into a contract with SANIP, and on 21 December 1998, accepted the respondent’s Schedule of Rates contained in its quote of 17 December 1998.
By at least mid-January 1999, the respondent had been advised by the appellant that it had been successful with its SANIP tender and that it intended to sub contract the work to the respondent. Brian Strehr, a project manager of the appellant, informed Brad Kirkness, the respondent's project manager, that there were at least 1,000 houses upon which insulation work had to be carried out and that "the project should be a real goldmine for all of us". The respondent's expectation at that time was that it was to complete one house per week. Craig Lambert, one of the respondent's directors, gave evidence that the respondent could manage that work load comfortably.
The parties were in a position to commence work at the end of January 1999. The appellant notified the respondent of the work that was to be carried out in respect of each house by forwarding to it a Purchase Order together with a ‘Scope of Works’ schedule which particularised the quantities for that project. The trial judge found, and there is no appeal from this finding, that each of the Purchase Orders constituted a separate contract.
On 28 January 1999, the appellant placed a Purchase Order with the respondent in respect of premises at 98 Newington Rd, Marrickville. The Purchase Order specified that the goods and services to be provided were: “Removal & replacement of insulation … as per scope of works annexure B & your costings attached”. The contract price was $8,709.15. There were printed Terms of Contract to which I will return.
The ‘Scope of Works’ documentation that comprised Annexure B set out the individual rates for the items of work to be carried out in respect of the premises. It also specified that the work was to be carried out to the standards set out in, relevantly, the Standard Specification. The effect of the reference to the Standard Specification was to incorporate the provisions of cl 12 of the conditions of contract, set out in [11] above, and more particularly to require that a downlight was not to be covered with insulation unless it was boxed. Annexure B also had provision for extras which included:
“Downlights to be treated in accordance with Standard Specification.”
However, the notation N/A appeared next to that item on this contract.
Nature of work to be carried out
The houses that were included in the project already had wool insulation laid in the ceilings over which chicken wire was placed. A noise barrier, or wave bar, was then placed on top of the chicken wire. The wool insulation had become infested by beetles and thus required replacement. The insulation work that was to be undertaken under the SANIP project involved peeling back the wave bar, lifting the chicken wire, removing the wool insulation and replacing it with polyester. Where the chicken wire was not retained, it was replaced with hoop iron.
Generally, the wet areas of premises, such as above bathrooms, were not to be insulated. However, where a wet area was small, it was often less expensive to extend the wave bar over that area, rather than place the bar around it. When that happened, the insulation would be placed over the wet area as well.
Each house that was to be insulated under the project was “scoped” for costing purposes. In respect of the houses allocated to the appellant in the SANIP project, and subcontracted to the respondent, the scoping was carried out by representatives of SANIP, the appellant and the respondent.
Work on premises at 98 Newington Rd
The premises at 98 Newington Road were scoped in December 1998. No downlights were observed during the scoping. However, Mr Kirkness, the respondent’s project manager, had adopted the practice of identifying all the downlights in a house, regardless of whether or not they were in an area that was to be insulated, and of instructing the respondent’s employees that, if downlights were located as a job was being undertaken, he was to be notified so that he could ensure that the downlights were properly boxed. Although this was the first house upon which the respondent undertook work, it appears that her Honour found, at least implicitly, that the respondent’s employees were given such an instruction in respect of this house. There was no challenge to the finding that this was the usual procedure and that it was one that applied to this job.
The premises were small and the respondent placed the insulation over the bathroom area. Mr Paine was in charge of the job on behalf of the respondent. He worked at the premises for approximately five consecutive days. He said that he inspected the premises on a daily basis and was aware of the importance of locating downlights. He said that he was not aware of there being downlights in the property and gave evidence that he was confident that none existed at the time that he worked on the property.
There were in fact five downlights in the bathroom area. However, as they were not noticed, the insulation was placed over the downlights, without the downlights being boxed so as to prevent heat build-up.
A fire occurred at the premises on 27 July 1999, causing damage to the front rooms of the house. Her Honour found that the fire was caused by the downlight transformer or the downlight lamp in the bathroom overheating, as a result of which the adjacent insulation ignited. The trial judge found that the respondent’s employees must have failed to notice the downlights and thus made no allowance for them when they laid the insulation over them. She found, and there was no dispute at trial, that the carrying out of the work in that manner was poor building practice and gave rise to a risk of fire. Her Honour concluded that the carrying out of the work in that manner constituted a breach of contract by the respondent.
SANIP's termination of the appellant's contract
Immediately after the fire, SANIP suspended the assignment of further work to the appellant pending the outcome of a quality assurance audit. The audit extended to all work undertaken by the appellant up to that point. The audit identified faulty workmanship by the respondent, including the work undertaken at 98 Newington Rd, and concluded that the appellant had failed to fulfil several of its contractual obligations to SANIP, including its obligation to adequately supervise the respondent. The appellant’s contract with SANIP was terminated because of the matters raised in the audit report. Her Honour accepted that the respondent’s conduct in laying insulation over the downlight was one cause of SANIP’s decision to terminate its relationship with the appellant.

The appellant claimed that its loss of profits resulting from the termination of its contract with SANIP was caused by the respondent’s breach of contract and that the respondent was thereby liable to it in damages. The claim was based on the second limb of Hadley v Baxendale. The respondent contended that the damage was too remote and did not fall within the second limb.
Legal principles
A party may recover damages for breach of contract:
“… such as may fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or such as may 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”. (Hadley v Baxendale at 354 (emphasis added)).
It is the second limb (bolded portion) of the rule with which this case is concerned.
In C Czarnikow Ltd v Koufos [1969] 1 AC 350 the House of Lords was concerned with the question whether a shipowner was liable for the charterers’ loss of profit, when, in breach of the charterparty, it had deviated from the proposed route whilst carrying a consignment of sugar, resulting in the ship being delayed by some nine or ten days. During that period sugar prices had dropped. The shipowner knew that the charterers were sugar merchants and that there was a sugar market in Basrah, the port of destination. It had no actual knowledge, however, that the charterer intended to sell the sugar promptly after its arrival.
Lord Reid, after considering the rule in Hadley v Baxendale, stated at 385:
“I am satisfied that the court did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally, i.e., in the usual course of things, or be supposed to have been in the contemplation of the parties … the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot … be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of cases.
In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff's loss was directly caused by the defendant's breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised … that loss of that kind should have been within his contemplation.”
His Lordship pointed out that the liability to pay damages under contract was more restricted than was the liability in tort.
Lord Reid also reviewed a number of other cases, including R & H Hall Ltd v WH Pim (Junior) & Co Ltd (1928) 33 Com Cas 324; [1928] All ER 763. His Lordship continued at 388 that Hall’s case established that damages were not too remote:
“[M]erely because, on the knowledge available to the defendant when the contract was made, the chance of the occurrence of the event which caused the damage would have appeared to him to be rather less than an even chance”.
His Lordship considered that it was "generally sufficient that [the event that caused the damage] would have appeared to the defendant as not unlikely to occur” (emphasis added), noting that probabilities usually could not be assessed with any degree of mathematical accuracy. However, there is a difference between when a consequence of breach was within the reasonable contemplation of the parties and when a consequence was reasonably foreseeable: see Lord Reid at 385. As his Lordship pointed out, at 389, “a great many extremely unlikely results are reasonably foreseeable”.

Lord Morris of Borth-y-Gest took a similar approach. He said at 396:
“On the facts of the present case it is however pertinent to pose the enquiry as to what the natural ordinary and sensible answer of the appellant would have been if he had asked himself what the result for the respondents would be if he (the appellant) in breach of contract and therefore unjustifiably caused his ship to arrive at Basrah some nine or ten days later than it could and should have arrived.”
His Lordship noted that the appellant did not know precisely what plans the respondent had for the sale of the sugar. Nonetheless, his Lordship considered that the appellant:
“… could and should at the very least have contemplated that if his ship was nine days later in arriving than it could and should have arrived some financial loss to the respondents or to an endorsee of the bill of lading might result.”
His Lordship stated that it was not necessary, for the contract breaker to be liable, that the loss that did result was one that could be seen as being certain to result. His Lordship continued at 397:
“If a party has suffered some special and peculiar loss in reference to some particular arrangements of his which were unknown to the other party and were not communicated to the other party and were not therefore in the contemplation of the parties at the time when they made their contract, then it would be unfair and unreasonable to charge the contract-breaker with such special and peculiar loss. If, however, there are no ‘special and extraordinary circumstances beyond the reasonable prevision of the parties’… then it becomes very largely a question of fact as to whether in any particular case a loss can ‘fairly and reasonably’ be constituted as arising in the normal course of things.”
On that approach, his Lordship considered that the result in any particular case did not depend upon having to make a choice between phrases such as "liable to result" or "likely to result" or "not unlikely to result". As his Lordship observed, each of these phrases might be helpful but so might many others.
Lord Hodson, at 410-411, considered that damage was recoverable if it was contemplated as “liable to result”. Lord Pearce, at 414-5, used the expression “serious possibility or real danger”.
Lord Upjohn at 422, observed that the recovery of damages in tort and under contract was different and that under the second limb of Hadley v Baxendale the entitlement to damages depended upon the “assumed common knowledge and contemplation of the parties”. At 424, his Lordship said that the question to be determined was:
"[W]hat as a practical matter is to be taken as within the contemplation of both parties as the result of a breach?"
His Lordship remarked upon the variety of expressions that had been used in the cases, namely:
“[L]ikelihood; possibility must have been in the minds of both parties; a matter commercially to be taken into account; a serious possibility or a real danger; a grave risk”,
and stated at 425, that he was prepared to adopt as the test a "real danger" or a "serious possibility".
In Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 McHugh JA (as his Honour then was) observed at 364 that the High Court appeared to have accepted Lord Reid’s speech in C Czarnikow v Koufos as correctly stating the law: see Wenham v Ella (1972) 127 CLR 454 at 471-472; Burns v M.A.N. Automotive (Aust) Pty Limited (1986) 161 CLR 653, 658; Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 368. See also Simonius Vischer v Holt & Thompson [1979] 2 NSWLR 322 at 363. McHugh JA expressed a preference for Lord Reid’s formulation.
McHugh JA pointed out at 365 that the actual decisions in Hadley v Baxendale and Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 arose out of the proposition that "the contemplation test" limited the area of potential liability. In that regard, his Honour considered that an important matter in determining whether the loss or damage was too remote was:
“[T]he extent to which the parties may be taken to have contemplated the events giving rise to the loss or damage.”
His Honour considered that it was not necessary for the parties to contemplate the degree or extent of the loss that was in fact suffered or the precise details of the events giving rise to the loss. It was sufficient, for the contract breaker to be liable, that the parties contemplated the kind or type of loss or damage that was suffered. Under that approach general loss of profits is a recoverable loss but loss of profits from a specially lucrative contract of which a defendant was unaware is not. McHugh JA pointed out, at 366, that “the parties must contemplate both the general nature of the loss or damage and the general manner of its occurrence”
It is apparent from his Honour's consideration of the principles that apply in determining whether a loss is recoverable within the second limb of Hadley v Baxendale, that it is the assumed or deemed contemplation of the parties that is relevant. However, as his Honour pointed out at 367, whilst it is unnecessary that the parties should have contemplated that the precise loss or damage would have occurred precisely in the way that it came about, it was necessary, in some general way, for the parties to contemplate both the type of damage suffered and the manner in which it occurred.
In Seven Seas Properties Ltd v Al-Essa (No 2) [1993] 1 WLR 1083, the plaintiff had agreed to purchase a leasehold property from the defendants. On the same day as entering into that contract, the plaintiff on-sold the property to a third party at a profit. Both contracts were to be completed on the same day. Upon the defendants learning that the plaintiff had on-sold the property for a profit they refused to complete. The third party sued the plaintiff for loss of bargain. The plaintiff in turn sued the defendants claiming damages in respect of the losses it suffered from being unable to complete its contract with the third party.
The plaintiff based its claim under the second limb in Hadley v Baxendale. It argued that, in the special circumstances known to the defendants, it might reasonably be supposed to have been in their contemplation that the plaintiff might enter into such a contract and that if it did so, a breach of contract by the defendant was liable, and indeed likely, to put the plaintiff in breach of any such contract of resale and would occasion loss or damage. The special circumstances relied upon were: the character of the premises, being a block of flats that needed refurbishment; the fact that property professionals were likely interested purchasers of the property who might be expected to buy in order to turn the property to account, as the opportunity might arise and to resell quickly if the price available was right; and the buoyant state of the property market at the time.
Gavin Lightman QC, sitting as a deputy High Court judge, accepted that these special circumstances had been established. He then considered the circumstances in which the losses occasioned to a purchaser by reason of the existence of a subcontract were recoverable, noting that without more they were not recoverable under the first limb of Hadley v Baxendale. A defaulting party was liable under the second limb by way of damages for the losses which, as at the date of the contract, the defaulting party was on notice might be occasioned by a breach so that it might fairly be held that when entering into the contract the non-defaulting party had accepted such risk. Mr Lightman QC said that for that purpose, a party was on notice of facts actually known by him; known by his agent and in respect of which it was the agent's duty to communicate to him; and which he should reasonably have deduced from either of these sources of knowledge. He continued, at 1088, that the defaulting party:
"… will only be held to have accepted the risk if he was on notice of the purpose and intent of the plaintiff in entering into the contract with him, and the consequent exposure of the plaintiff to the risk of damage of the character in question in the event of the defendant's breach."
In relation to a claim by a purchaser to recover losses arising under a sub contract, Mr Lightman QC held that it was necessary for the plaintiff to establish that the defendant was on notice at the date of the contract of the purpose and intent on the part of the plaintiff to enter into the subcontract and that the plaintiff’s fulfilment of the subcontract depended upon the defendant’s performance of his contractual obligations to the plaintiff.
In Castle Constructions Pty Limited v Fekala Pty Limited [2006] NSWCA 133 at [39] Mason P stated, in relation to the second limb in Hadley v Baxendale, that:
“[T]he law is conscious of the injustice of visiting the party in breach with the consequences of a loss that was not within that party’s reasonable contemplation when contracting”.
The reason for this is because, were it otherwise, the defaulting party may have lost the opportunity to make an informed decision as to whether or not to have accepted the risk. His Honour referred to the reasons of Gavin Lightman QC at 1088 to which I have referred. In my opinion, being in an informed position so as to decide whether to accept the risk would include having sufficient information to assess whether insurance cover for the risks concerned ought to be obtained.
The same point was made in Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, where the question arose as to whether a penalty clause in a contract was a genuine pre-estimate of loss. In discussing that question, Diplock LJ said, at 1447-1448:
“… the plaintiff may be able to show that owing to special circumstances outside ‘the ordinary course of things’ a breach in those special circumstances would be liable to cause him a greater loss of which the stipulated sum does represent a genuine estimate. In the absence of any special clause in the contract, this enhanced loss due to the existence of such special circumstances would not be recoverable at common law from the defendant as damages for the breach under the so-called ‘second rule’ in Hadley v Baxendale unless knowledge of the special circumstances had been brought home to the defendant at the time of the contract in such a way as to give rise to the inference that the defendant impliedly undertook to bear any special loss referable to a breach in those special circumstances.” (Emphasis added)
His Lordship recognised that the rationale for a defendant’s liability under the ‘second rule’ in Hadley v Baxendale is an implied undertaking by the defendant to the plaintiff to bear such loss. Actual knowledge of the special circumstances is relevant as one of the factors from which this undertaking can be implied. His Lordship also considered that in order to be liable under the second rule, the defendant should have acquired this knowledge from the plaintiff, or at least that he should know that the plaintiff knew that the defendant was possessed of it at the time the contract was entered into and so could reasonably foresee at that time that an enhanced loss was liable to result from a breach. His Lordship concluded that where both these factors are present, the defendant's conduct in entering into the contract without disclaiming liability for the foreseeable enhanced loss gives rise to the implication that the defendant undertakes to bear such loss.
In Oxley County Council v Macdonald & Ors; Brambles Holdings Ltd v Macdonald & Ors [1999] NSWCA 126 this Court (Sheller JA, Priestley and Powell JJA agreeing) pointed out that remoteness is a question of fact: see Monarch Steamship Co Limited v Karlshamns Oljefabriker (A/B) [1949] AC 196 at 223; Wenham v Ella at 466-7. In Oxley and Brambles an employee of Oxley’s had been injured whilst unloading equipment transported by Brambles. He sued both Oxley and Brambles and succeeded against both. Oxley and Brambles each brought a claim against the other for breach of contract.
Oxley alleged breach of an implied term of the contract that it load the goods in a safe and proper manner so that they could be unloaded safely. It was held that such an implied term was an incident of the contract of carriage and had been breached. Sheller JA at [61] said that:
“… there could … be little doubt that if Oxley suffered damage as a result of the breach of [the] contract, the measure of damages would be the damages and costs Oxley was required to pay to the plaintiff and the costs Oxley incurred in defending the proceedings”.
His Honour considered that this followed from Florida Hotels Pty Limited v Mayo (1965) 113 CLR 591 at 598-9. Florida Hotels involved a similar situation where an employer was responsible to its employee plaintiff for a work place injury. The accident had occurred in part due to inadequate supervision by the architect. It was held that the possibility of liability of the employer for injury to its employees flowing from the consequences of lack of supervision of the architect must have been within the reasonable contemplation of the parties and the architects were thus liable to the employer for the damages that the employer was required to pay to its injured employee.
Oxley was responsible for the unloading. The Court found that Oxley was contractually obliged to do so without damaging Brambles’ property or injuring Brambles’ employee or contractor. The Court considered however that a claim to recover damages from Oxley being the amount of its liability to the injured plaintiff, was too remote. Sheller JA said at [69]:
“Brambles’ claim in contract is not so clear. It was obliged to carry the goods to the Oxley depot and there deliver them on its truck. Oxley had the obligation of unloading. No doubt it was contractually obliged to do so so as not to damage Brambles’ property or injure Brambles’ employee or contractor. But the damages for breach of the contract which Brambles now claims to recover, being the amount of its liability to the plaintiff, were, in my opinion, too remote. I say this for the following reasons. The degree of probability that Oxley’s breach of the contract would cause Brambles to suffer loss as the result of a claim against it by an employee of Oxley for injuries suffered was such as to make the loss wholly unpredictable; see generally Greig & Davis, The Law of Contract, at 1376. In my opinion, damages for the loss which Oxley suffered as a result of the injury to its employee and its liability as employer to that employee could fairly and reasonably be considered to arise according to the usual course of things from Brambles’ breach of its contractual obligation to load and secure the goods with reasonable care and skill. However, I do not think that the possibility of Brambles’ liability to Oxley’s employee flowing from the consequence of Oxley’s failure to unload the goods with reasonable care and skill could fairly and reasonably be considered to arise according to the usual course of things; compare Florida Hotels v Mayo at 598. Nor do I think such damages could reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as not unlikely to occur; compare Hadley v Baxendale (1854) 9 Ex 341 at 355; 156 ER 145 at 151; Koufos v C Czarnikow Limited [1969] 1 AC 350 at 388; Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310 at 363 and following per McHugh JA.”
In Carter and Harland, Contract Law in Australia (2002, 4th ed), the learned authors state at [2128] that the most difficult aspect of the second limb “is the extent to which the defendant must have agreed to accept the risk of the damage”. They refer to Diplock LJ’s identification of the matters relevant to determining whether an undertaking to bear the risk of damage ought to be implied: see [53] above. The authors then state that:
“In order to rebut the presumption implied by actual knowledge [of the special circumstances] the defendant must show that there was no acceptance of the risk of liability for the damage.”

They indicate that, in commercial contracts, this might be achieved by an express clause in the contract, but that:
“[I]n respect of other types of contracts the defendant may perhaps rely on the fact that the price for performance is out of all proportion with the risk implied by the knowledge obtained”.
It is clear, however, that an express clause in the contract is not necessary, regardless of how one might characterise the contract: see Czarnikow v Koufos per Upjohn LJ at 421-422. See generally Greig and Davis, The Law of Contract (1987).
Was the damage too remote?
The appellant’s central attack upon the trial judge’s determination was that in dealing with the question of remoteness her Honour had failed to make findings on all of the evidence, and had somewhat simplistically found that the arrangement between the appellant and respondent was straightforward and that it was too much to expect that the damage claimed by the appellant would have been within the reasonable contemplation of the parties. In adopting that approach, the appellant contended that her Honour left out a number of fundamental aspects which underlay the contractual arrangement. The first related to supervision.
Supervision
The contractual arrangement between the appellant and SANIP was that although the appellant was entitled to subcontract, it remained responsible for the works. The appellant submitted, however, that notwithstanding this provision in its contract with SANIP, the respondent would have appreciated that in carrying out the insulation work it was effectively standing in the appellant's shoes. Related to this submission was the further submission that, according to the appellant, it was the respondent that was going to supervise the work, not the appellant.
This submission does not provide a complete picture of the way in which each contract between the appellant and respondent worked. In the first place, there was no provision in the contract that the respondent was to supervise the work on behalf of the appellant. Such a provision would not make sense given that the respondent was carrying out the work and was obviously obliged to carry it out with care. Mr Kirkness supervised the work of his own employees as one would expect. Nor did the contract price include any provision or ‘loading’ or consideration for carrying out supervision on behalf of the appellant.
Secondly, prior to each contract being entered into, including the contract for 98 Newington Road, works were “scoped” for costing purposes at which a representative of each of the appellants, the respondent and SANIP attended. The scoping involved Mr Kirkness, on behalf of the respondent, and the SANIP representatives going into the ceiling space. Mr Kirkness gave evidence that, usually, downlights could not be seen from within the ceiling space. The appellant’s representative, Mr Streher, remained downstairs. After the scoping inspection, Mr Streher, who had attended on site when the scoping was undertaken, checked the scope of works document, deleting work he considered unwarranted. It is apparent that in respect of 98 Newington Road, the presence of the downlights was missed by all parties during the scoping process.
The trial judge found that both the appellant and the respondent were engaged in the supervision of the work undertaken on each house. This finding has to be read with care. Mr Streher, on behalf of the appellant, supervised the work undertaken by the respondent. It is apparent from the evidence and from her Honour’s findings that there were serious deficiencies in that supervision. Her Honour found that Mr Kirkness, the respondent’s project manager, was also responsible for supervision. However, there is no suggestion in the evidence or in the findings of the trial judge that he undertook inspections or supervisory work on behalf of the appellant. As I have said, that was not part of the contract between the parties, nor was supervision reflected in the contract price. Rather, it is apparent from the evidence that Mr Kirkness’ obligation was to ensure, on behalf of the respondent, that the work was done to a reasonable standard.
Accordingly, the factual basis for the appellant’s submission in relation to supervision has not been made out, although for reasons which are discussed below, supervision remains relevant to the question of remoteness of damage.
Standard of performance of the work and anticipated profitability of the contract
The appellant further submitted that it was crucial, if the appellant was going to obtain a significant allocation of work, for the respondent to perform the work properly. As I understand this submission, the appellant contends that the respondent would have well understood that in order for the appellant to receive a substantial allocation of houses, all work performed under the contract would have to be performed well. That appears to be a common understanding between the parties, but in any event, it would be an implied term of the contract that the work be undertaken in a proper and workmanlike manner. It was failure to so perform the work in a proper and workmanlike manner that has constituted the breach in this case.
The appellant also submitted that it was relevant to liability under the second limb of Hadley v Baxendale that the respondent was aware that it was expected that the work would last for 12 months and that it would be "a goldmine". In other words, this was a major contractual arrangement for the appellant and the respondent who both understood its importance. In this regard, it was submitted that the respondent knew of the existence of the head contract, although it was not suggested that the respondent had a copy of that contract or otherwise had any knowledge of its terms.
Further, the appellant contended that the respondent knew that there was work to be undertaken on about 1,000 houses, that the appellant had stressed in its negotiations that the work was to be undertaken at a ‘high level’ of performance and that the respondent had said that it could carry out the work at the required level. There was no real contest about these matters, although it must be said that the need for the work to be performed at a ‘high standard’ does not advance the matter in any way, as it was not a term of the contract and there was no evidence that SANIP required work to be carried out other than in a proper and workmanlike manner.
The appellant then contended that the trial judge should have made the following findings of fact (which I shall refer to as ‘the additional findings’) having regard to all the evidence:
“… the following additional findings should have been made by the Trial Judge regarding the parties knowledge at the time of entry into the contract:
(a)[The respondent] believed that there were some 1000 houses upon which work would need to be performed and that if [the appellant] was successful in obtaining such work [the respondent] would perform the work for [the appellant].
(b)[The respondent] believed that there was sufficient work available to [the respondent], under contract to [the appellant], to last for some 12 months and that such work would be extremely profitable for [the respondent] and [the appellant].
(c)[The respondent] believed that [the appellant] was already securing additional allocations of houses on which work was to be done and that the more efficiently [the respondent] worked, the greater the opportunity for [the appellant] and consequently [the respondent] to obtain an increased allocation of houses from the 1000 houses which needed attention.
(d)[The respondent] was aware of the [the appellant’s] wish to procure from SANIP an increase in the number of houses to be allocated by SANIP contract and moved to assure [the appellant] that should [the appellant] be successful in gaining such increase in allocation, [the respondent] had more than enough workers available for it to cope with the resulting work.
(e)[The respondent] was aware that [the appellant] was relying upon the standard of [the respondent’s] performance to enable it to obtain an increase in allocation from a stock of some 1000 houses on which the SANIP work was to be performed.
(f)[The respondent] regarded its diligent and competent performance of its contract with [the appellant] as an essential prerequisite to [the appellant’s] ability to procure a greater allocation of houses from SANIP.
(g)[The respondent] realised that breach by it of its contract with [the appellant], or negligent performance of such contract, would mean that the further allocation of houses by SANIP would be unlikely to occur and that [the appellant] would thereby suffer loss of profits which would otherwise be available.”
The appellant submitted that given those circumstances, the respondent would have contemplated that there was a risk that if it did not carry out the work to a high level of performance, it was likely that the appellant would lose its contract with SANIP. In making that submission, the appellant contrasted the situation with what the shipowner knew in Czarnikow v Koufos, namely, that sugar being carried under charter party might possibly have been offloaded in Jeddah and that there was a market for sugar in Basra. It was submitted that the respondent’s knowledge here was far more extensive than that. In particular, it knew that there was a large number of houses in respect of which insulation had to be installed and that it was expected to be profitable.
It is convenient to deal with these additional findings that the appellant seeks to have made by reference to the respondent’s submissions.
Nature of contract between appellant and respondent
The respondent pointed out that the contract between the appellant and respondent was a single contract in respect of a specific property, the total contract price of which was less than $10,000 and there was no contractual obligation on the appellant to engage the respondent on any continuing basis.
Whilst this is correct, it must be remembered that at the time that the appellant and the respondent were negotiating the contract price, the appellant was insistent that the respondent nominate the number of houses that it was able to complete each month and the respondent was the only contractor that the appellant was intending to engage. Accordingly, the additional findings sought in paras (a) and (b) were part of the common understanding of the parties at the time that the contract was entered into.
During the course of the negotiations the number of houses the respondent specified that it was able to work on each month increased from 36 to 64, indicating that both parties were keen for there to be a high monthly turnover of the number of houses they could complete. The respondent submitted however that very little could be drawn from this because it was not part of its agreement with the appellant that it in fact would be completing the insulation work on any specified number of houses in any given month. In discussions as to payment for work done, it was proposed that the terms of payment would vary depending upon whether more or less than 30 houses per month were completed. It was thus apparent from those discussions that the appellant did not have any particular expectation as to the number of houses that would be completed in any given month.
Two things can be drawn from the above, which, it should be pointed out, correctly reflected the evidence. First, there was an expectation of ongoing work and a keenness by the appellant to have as much work done per month as possible, and the respondent was responding to the appellant’s requests in that regard in the six weeks or so leading up to the time that the appellant succeeded in gaining the SANIP contract. However, that was not sufficient, of itself, to give rise to a “belief” in the respondent that the appellant was already securing more work and that the more efficiently the work was done the greater the opportunity to obtain an increased allocation, as contended in additional findings (c) and (d).
The respondent’s next submission is also relevant to these two additional findings.
The respondent pointed out that it was not aware of the terms of the contract between SANIP and the appellant. All that it knew was that the appellant had been successful in obtaining a contract for the carrying out of the insulation work. The respondent did not know what criteria SANIP used or intended to use for the purposes of allocating work, what work it proposed to allocate, what work had been allocated at the time that the contract for the insulation work at 98 Newington Road was entered into, or what was the likely future allocation of work. Indeed, even the appellant had no knowledge of these matters. The actual circumstances were that the appellant was but one of seven contractors who had been engaged to carry out the insulation work.
The respondent’s submission on this is correct. The contract with SANIP was an entire contract in the sense that there was one contract for the carrying out of such work as SANIP allocated to the appellant. However, there was no contractual obligation on SANIP to allocate any work or any percentage of work to the appellant. The evidence supported an inference that the appellant wished to obtain as much work as possible under its contract with SANIP. That is quite different from saying that the respondent was aware that the appellant wished to procure an “increased allocation” of houses.
Further, although the appellant had been engaged in an earlier project with SANIP under which it had been allocated approximately 12.5 per cent of the work, there was no evidence that the respondent was aware of this. Nor was there any information available to either the appellant or the respondent that the allocation of work under the present project was likely to be of the same order, or more or less. Further, even though the appellant had indicated to the respondent that the "project should be a real goldmine for all of us” and that there were approximately 1,000 houses involved in the project, there was nothing more specific in the discussions between the parties about the size of the project, and the likely benefits to each. Nor, as I have indicated, was there any knowledge, let alone discussion, of how SANIP proposed to allocate the work.
I have already referred above to the ‘standard of work’ under the contract. For the reasons I have expressed at [68] ff, as well as the immediately preceding paragraphs in relation to the allocation of work, there was no basis for the making of additional findings in accordance with paras (e) or (f).
The respondent further submitted that the parties had in fact contemplated that it was possible that there might be a breach of contract, and had taken steps to deal with any such breach by the implementation of a system of inspection by the appellant that was intended to eliminate or at least minimise any problems that might arise from breach. The breach which occurred in this case was a failure to undertake the work in a proper manner. That was precisely the type of breach which the system of inspection was designed to address. In that circumstance it was submitted that it was unlikely that it would reasonably have been in the contemplation of the parties that should breach occur, the appellant would be entitled to recover damages for the loss of the allocation of further work under its contract with SANIP.
It was submitted that this point was reinforced by the express terms of the contract entered into between the appellant and the respondent. As I have already indicated, the contract between the parties in respect of each house in which insulation work was to be undertaken was in the form of a Purchase Order. The terms of the Purchase Order were, relevantly:
“1.          Terms of Contract
The agreement with [the appellant] in relation to this Order shall be governed exclusively by the terms of this Order …
2.            Conformance with Description
The [respondent] acknowledges that it is required to supply goods strictly in accordance with the description provided in this Purchase Order. In the event that goods are supplied which ... are found not to conform with the description ... [the appellant] may: (i) reject the goods in whole, (ii) reject the goods in part, or (iii) accept the goods and services as delivered …
3.            Warranties
The [respondent] warrants that: (i) the supplied goods are fit for their intended purpose … (ii) the supplied goods are free from any claim by third parties … (iii) [the respondent] has complied with all [relevant] laws and regulations [relating to the goods] … (iv) all goods comply with the requirements of any applicable Australian Standard …
4.            Indemnity
The [respondent] hereby indemnifies and keeps indemnified [the appellant] in respect of any liability for breach of the warranties in Clause 3 or death, personal injury or property loss consequent upon or in any way related to the goods supplied in respect of the Purchase Order.”
The respondent contended that the express terms of the contract were fundamental in determining what was in the reasonable contemplation of the parties as to the probable result of any breach. Under the express terms of the Purchase Order, the respondent’s liability was limited to indemnifying the appellant against a breach of the warranties contained in cl 3 which, in turn, was limited to a failure to supply goods which were fit for their purpose and the like. It was unlikely therefore that the parties would have in contemplation that should there be a breach of contract, the respondent would be liable to the appellant for the total loss of profits on the projected but uncertain allocation of work to the appellant under its contract with SANIP.
The respondent submitted that its argument was reinforced by the fact that, as at the point of entry into the contract for 98 Newington Road, the work to be undertaken did not include any work on downlights. It followed on this argument that if the work that was to be undertaken under the contract did not involve any attention to be given to downlights – because when the works were scoped prior to contract no downlights were located in the house – the parties were not likely to have in their mutual contemplation that a breach of contract would be connected with a failure to deal in a good and workmanlike manner with the existence of downlights on the premises with the catastrophic consequences of, firstly a fire, and then the consequential loss of the appellant’s contract with SANIP.
These submissions are directed to the additional finding sought in para (g). The finding so sought is not a factual finding as such, but a finding must be made in order for the conclusion to be reached that the appellant has made out its claim for damages. It is to that question that I now turn.
Conclusion on remoteness
In deciding whether the appellant has established an entitlement to damages under the second limb, the following matters require determination. The first is whether it could be said that the loss was within the reasonable contemplation of the parties. In this case, that question is, for the most part, although not solely, determined by having regard to the question whether the respondent was aware of special circumstances such as to enable the court to conclude that it would have been in the reasonable contemplation of both parties that the appellant would lose the SANIP contract if the respondent breached its contract with the appellant: see Robophone at 1447-1448. The second relates to the event that gave rise to the loss: see Czarnikow v Koufos at 385, in the extract set out at [36] above.
Was the loss in the reasonable contemplation of the parties?
The respondent submitted that it was apparent that the damages in this case were too remote when regard was had to the rationale that underlay the second limb in Hadley v Baxendale, namely, the circumstances in which a party would be fairly held to have accepted the risk of the loss that is claimed. It contended that that the type of damage which occurred here, being the loss of the appellant's contract with SANIP, was such as would occur only in a small minority of cases, and thus was not in the reasonable contemplation of the parties at the time that they entered into the contract. Rather, the loss that the parties would reasonably have in their contemplation as a result of failing to perform the work in a good and workmanlike manner would be the carrying out of, or possibly the cost of carrying out, rectification work.

In this case, there is no doubt that the appellant would have been liable to the homeowner for the loss caused by the fire and that loss would have been recoverable from the respondent under the first limb of Hadley v Baxendale notwithstanding the catastrophic result of the breach. But even if that loss was not recoverable under the first limb, it would have been recoverable under the second, because it would have been within the reasonable contemplation of the parties that damage might be caused to a property where faulty work had been performed and that rectification work would have to be done. It is irrelevant that the parties had not contemplated that the damage to the property as a result of the faulty workmanship was a fire or that such damage was greater than the parties had contemplated. It was sufficient that the parties contemplated the general nature of the loss – on this example, namely, damage to property: see Alexander v Cambridge Credit at 336; Oxley County Council v Macdonald (see at [58] above).
However, that is not the loss which is being claimed. The appellant claims damages for loss of its contract with SANIP, with whom the respondent had no contractual arrangement: cf Alexander v Cambridge Credit at 358. That contract was terminated in the circumstances already discussed – namely, that after an initial suspension of work during which time SANIP undertook an audit of the work undertaken by the appellant, all of which had been performed by the respondent, SANIP terminated the appellant’s contract for the appellant’s breach of contract, including a failure to properly supervise the work. The trial judge found that the fire was the principal reason that SANIP suspended the allocation of work to the appellant and that the laying of the insulation over the downlights was also one of the matters that led to the termination of contract.
The question as to whether damage or loss would reasonably have been in the contemplation of the parties is an evaluative process. In this case, I am of the opinion that it would reasonably have been in the contemplation of the parties that if the respondent failed to perform the work in a good and workmanlike manner as required under its contract with the appellant, the appellant would most likely have replaced the respondent with another contractor. In that case, it may have suffered loss due to a delay in being able to find a new contractor. It may also have suffered loss because a new contractor may have quoted higher prices than those agreed between the appellant and the respondent so that the appellant’s profit margin on each house was thereby reduced. Such losses would likely to have been recoverable under the second limb of Hadley v Baxendale. In my opinion, however, the loss in fact claimed is not one the risk of which the respondent is likely to have undertaken, even if it was aware of special circumstances relating to the contract.
As Diplock LJ explained in the passage set out above at [53] above, if the appellant is able to show “that owing to special circumstances outside ‘the ordinary course of things’ a breach in those special circumstances would be liable to cause him a greater loss” than the stipulated sum, or I would add, damages claimable under the first limb of Hadley v Baxendale, then that greater loss is recoverable within the second limb.
In this case the “special circumstance” is the appellant’s contract with SANIP. The respondent knew of that contract and knew that the appellant expected it to be profitable and that there were a large number of houses upon which work was to be undertaken. Apart from that however, the respondent did not know its terms. On the approach taken in Robophone, that may be sufficient for the Court to infer or presume that the respondent undertook the risk, unless it could be established that there were other factors upon which any such inference could be rebutted.
In this case, there are two particular considerations that are relevant to the ‘rebuttal’ of any such inference. First, the supervision of the works was the responsibility of the appellant in the way I have explained above. The respondent did not undertake any contractual responsibility to supervise the work on behalf of the appellant and it was not paid for the supervision of the work. The only ‘supervision’ undertaken by Condor was that Mr Kirkness, as the respondents’ project manager, was required to ensure that the work was properly performed. That was work undertaken for Condor, as I have already said.
Secondly, under its own contract with SANIP, the appellant remained responsible for the works. The loss claimed in this case is not a loss that arises directly as between the appellant and respondent. Rather, the loss relates to a contract between SANIP and the appellant allegedly caused by the breach of the contract between the appellant and the respondent. In circumstances where, under its contract with SANIP, the appellant remained responsible for all work carried out by sub-contractors, I am of the opinion that it would not have been in the reasonable contemplation of the respondent that poor workmanship on its part would result in the loss of the appellant’s entire contract with SANIP. I also doubt that it would have been in the appellant’s own reasonable contemplation.
Further, the contract amount for the individual contracts between the appellant and the respondent was quite small and the respondent had no contractual right to any ongoing relationship. Rather, each house was the subject of a separate contract, although at the time that this contract was entered into, the respondent did have an expectation of being the beneficiary of the work allocated to the appellant by SANIP. However, in the absence of any contractual right to such work, and where each job involved a contract price of about $10,000, I consider that the contract price was so out of proportion to the risk of being liable for damages for the loss of the appellant’s contract with SANIP not to be within the reasonable contemplation of the parties.
Was the event that caused the loss one that was “not unlikely to occur”?
Although the test for the second limb in Hadleyv Baxendale is usually expressed in terms which focuses upon loss of the kind that was suffered and asks whether such loss would have been within the reasonable contemplation of the parties at the time that they entered into the contract, Lord Reid in Czarnikow v Koufos at 388 also considered it relevant to have regard to the event that gave rise to the loss. If the event would have appeared to the respondent as not unlikely to occur, that would be sufficient to establish liability.
That is of particular significance in this case. The respondent’s breach of contract was a failure to perform work in a good and workmanlike manner. That breach had an immediate catastrophic consequence – namely, a fire that destroyed a house. In the way in which the authorities permit reference to the ‘event’ that gave rise to the loss, the ‘event’ in this case, in my opinion, was the fire.
The trial judge did not make a finding as to whether the fire was something that appeared to the defendant as “not unlikely” to occur. She did state that all witnesses agreed that it was bad building practice to put insulation directly over a downlight, as they could overheat, giving rise to a risk of fire. However, that comment was made in that part of her Honour’s judgment dealing with the cause of the fire, where she was considering the expert evidence alone.
An examination of the evidence of the respondent’s witnesses, Mr Lambert and Mr Kirkness, reveals that neither had an understanding that a fire was “not unlikely” to occur, although it appears both knew it was bad building practice to place insulation over downlights. Mr Lambert knew that if there were downlights, special treatment was needed. No more was established from his evidence than that. Mr Kirkness agreed that it was a well-known potential hazard that insulation shouldn’t come into contact with downlights. However, he denied that if the insulation was not kept away from the downlights there was a risk of fire. He said that if the insulation did come into contact:
“… it was probably more a potential that the down light would fail through overheating than the insulation catch fire because it was actually rated not to spread a fire through the roof. The idea of the insulation was to actually melt and pull away from the heat source, whether it be a down light, a faulty wire connection or anything like that… insulation is designed to not ignite and if it does ignite it will self-extinguish or the insulations that we were using would pull away from the heat source and not spread the flame. It was bad practice to put insulation over a down light because what would usually happen you would have the down light failing all the time.” (Emphasis added)
He explained that the downlight would fail because of overheating.
The respondent contended that the fire which occurred in the house some months after the insulation work had been completed was an unusual catastrophic event and was not one of which it could be said was “not unlikely to occur”.Given the evidence to which I have just referred, this is correct and no other conclusion could have been reached on the evidence. Accordingly, this basis for the application of Hadley v Baxendale had not been made out.
Accordingly, I agree with the trial judge’s assessment that the cancellation of the appellant’s contract with the resultant loss of profits on such balance of the work as might have been allocated to the appellant by SANIP was a loss that would not have been in the reasonable contemplation of the parties and was too remote.
It follows that I would dismiss the appeal with costs.
The respondent filed a lengthy Notice of Contention and written submissions were directed to it by both parties. On the second day of the hearing, the respondent totally withdrew the Notice of Contention. The respondent’s action in withdrawing the Notice should be reflected in an appropriate costs order. However, as the parties have requested that they be given an opportunity to argue costs, directions should be made for the filing of short written submissions on the question of costs.
ORDERS
1. Appeal dismissed;
2.Direct that the parties are to provide written submissions in respect of costs within seven days of the date of judgment.
IPP JA: I agree generally with the reasons to be published by Beazley JA, which I have had the benefit of reading. I wish to set out in my own words my reasons for agreeing with the orders her Honour proposes.
The appellant (“Stuart”) is a construction company. It is one of seven contractors that the Commonwealth of Australia engaged to replace wool insulation in residential dwellings in accordance with the Sydney Aircraft Noise Insulation Program (“SANIP”). SANIP envisaged the insulation of 932 properties. By July 1999 SANIP had allocated the insulation work for 519 of the 932 dwellings. Of these SANIP had contracted with Stuart to do the work for 71.
In January 1999 Stuart informed the respondent (“Condor”) that it intended to sub-contract to Condor the insulation work under its contract with SANIP. This sub-contracting process had earlier been discussed between Stuart and Condor and Stuart had accepted Condor’s schedule of rates for the work. By agreement between Stuart and Condor, Stuart was to give Condor a purchase order together with a “scope of works” schedule particularising the quantities for each dwelling. Each purchase order was to constitute a separate contract.
On 28 January 1999 Stuart gave Condor a purchase order to do the insulation work at a dwelling at 98 Newington Road, Marrickville. The purchase order required the removal and replacement of insulation in accordance with the scope of works schedule. The contract price was $8,709.15.
The contract for 98 Newington Road in effect required that no down-light in premises be covered with insulation unless it was boxed. Condor, in breach of the contract, insulated five down-lights without boxing them. Later, the insulation ignited, a fire broke out and damaged the house.
The fire caused SANIP to investigate all the work that Stuart had undertaken for it. SANIP discovered that Stuart’s work had, generally, been defective in several respects. The faulty workmanship included the insulation at 98 Newington Road. SANIP terminated its contract with Stuart. The trial judge found that “[b]ut for Condor’s breach, the fire would not have occurred and the SANIP work would not have been lost”.
Stuart claimed damages for loss of profits from Condor. The trial judge dismissed its claim on the ground that those damages were too remote. Stuart’s appeal is against this decision.
The appeal turns on whether Stuart was entitled to the claimed loss of profits on the basis of the well-known test laid down in Hadley v Baxendale (1854) 9 Ex 341 at 354.
This test was explained in CCzarnikow Limited v Koufos [1969] 1 AC 350. Czarnikow is regarded as representing the law in Australia: Wenham v Ella (1972) 127 CLR 454 at 471; Burns vM.A.N. Automotive (Aust) Pty Limited (1986) 161 CLR 653 at 667; The Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 at 92, 99. See also Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 where McHugh JA remarked at 363 to 364 that the High Court appears to have accepted Lord Reid’s speech in Czarnikow as correctly stating the law.
In Baltic Shipping Company v Dillon (1993) 176 CLR 344 Brennan J said at 368 that the rules in Hadley v Baxendale had been merged in a single principle expressed by Lord Reid in Czarnikow “and [had been] adopted in this Court”. The merged principle stated by Lord Reid at 385 is:
“The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.”
The phrase “make it proper” in the passage quoted is to be understood in the light of the criteria expressed by Walsh J in Wenham v Ella at 466 when he said that the object is “to achieve a result which provides reasonable compensation for a breach of contract without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept”.
In Czarnikow, Lord Reid emphasised that being within the contemplation of the parties is not the same as being reasonably foreseeable. It is a far more restrictive test. His Lordship pointed out at 389 that:
“A great many extremely unlikely results are reasonably foreseeable…”.
And at 390 that:
“It has never been held to be sufficient in contract that the loss was foreseeable as ‘a serious possibility’ or a ‘real danger’ or as being ‘on the cards’.”
In the present case, there is little doubt that Stuart’s claimed loss of profits was reasonably foreseeable. This, however, is not to the point.
In terms of the contract between Stuart and SANIP, Stuart remained responsible for the workmanship of any works it sub-contracted. Had Stuart complied with its contractual obligations to SANIP, it would have taken steps to ensure that the sub-contracted work included boxing the down-lights. As Beazley JA points out, prior to the work being done, when a representative of Stuart attended at the premises with representatives of the other parties to “scope” the works, Stuart’s representative, like the others, failed to detect the presence of the down-lights. Stuart neither specified in the purchase order the work of boxing the down-lights nor, once the work was complete, did it physically verify whether down-lights in the dwelling had been boxed. I repeat: by failing to have the down-lights boxed, Stuart committed a breach of its contract with SANIP.
In my view, it would not reasonably have been in Condor’s contemplation when it entered into the contract with Stuart that not only would it (Condor) breach its contract with Stuart by missing the existence of the down-lights in the dwelling (and not boxing them), but Stuart, too, would breach its contract with SANIP by failing to detect the same down-lights (with the result that the insulation came into direct contact with the lights). For this reason I agree with the orders proposed by Beazley JA.
There is another point to which Beazley JA draws attention. The trial judge stated that all witnesses agreed that if a down-light was not boxed, the light – when switched on – would heat the insulation and, eventually, the insulation could be set on fire. Beazley JA points out, however, that this finding ignores the evidence of Condor’s witnesses who testified that the insulation was designed not to ignite and not to spread flames when heated. The finding, therefore, was made in error.
The effect of the evidence of Condor’s witnesses is that, because of their belief in the non-inflammable qualities of the insulating material, Condor did not contemplate that its breach in not boxing the down-lights would cause a fire to beak out. In view of the trial judge’s omission to have regard to this evidence, there is no reliable finding that Condor, reasonably, should have contemplated that such a breach would have caused a fire. For this reason, too, the appeal should succeed.
TOBIAS JA: I have the benefit of reading in draft the judgment of Beazley JA and Ipp JA. For the reasons each has given, I agree with the orders proposed by Beazley JA.

**********

LAST UPDATED: 28/11/2006