Home > Damaged by COVID-19 – What losses will be recoverable?

Damaged by COVID-19 – What losses will be recoverable?

29th June 2020

Damaged by COVID-19 – What losses will be recoverable?

Three months into the Coronavirus lockdown, it is very likely that we will soon see cases where a Claimant has a breach of contract or tort claim, and the losses have been exacerbated as a result of COVID-19. There will undoubtedly be scope for argument over the extent to which such losses are recoverable from the Defendant.

Although the context of COVID-19 is unprecedented, it is unlikely that the courts will need to break new ground when assessing damages; they already have a full box of tools which can be deployed flexibly to achieve justice in a particular case. This article will deal briefly with four issues that are likely to arise: (i) date of assessment; (ii) remoteness; (iii) mitigation; (iv) scope of duty / the SAAMCO principle.

(i) Date of assessment

The normal rule for breach of contract is that losses are assessed as at the date of breach (The Golden Victory [2007] 2 AC 353.) However, this has never been an immutable rule, and the law in this area was significantly recast in the case of W Nagel (A Firm) v Pluczenik Diamond Company [2018] EWCA Civ 2640. In that case the Court of Appeal said:

“… this is not a rule of law but merely a rule of thumb which reflects the usual result in practice of applying the mitigation principle where there is an available market. Where there is an available market, it is presumed that the claimant acting reasonably will enter the market at once and obtain a replacement performance. Hence applying the mitigation principle has the result of crystallising the claimant’s loss at or at least shortly after the time of breach. But where the mitigation principle does not yield this result – for example because there is no readily available market – subsequent losses (and gains) have to be brought into the calculation.

It is easy to imagine how, in a COVID-19 context, there may be many reasons why it was not reasonable for an innocent party to mitigate their loss immediately. In particular, there may well be situations (as the Court of Appeal envisaged in Pluczenik Diamond) where there is no available market. These circumstances may allow for an argument that a different date for assessment of loss should be chosen, although this will turn on questions of fact as to the relevant sector in which the contract was concluded.

(ii) Remoteness

For breach of contract, the classic principle is derived from Hadley v Baxendale (1854) 9 Ex. 341, Victoria Laundry [1949] 2 K.B. 528 and The Heron II [1969] 1 A.C. 350. As expressed in Chitty on Contracts (33rd ed):

“A type or kind of loss is not too remote a consequence of a breach of contract if, at the time of contracting (and on the assumption that the parties actually foresaw the breach in question), it was within their reasonable contemplation as a not unlikely result of that breach.”

For tort, the rule is slightly different and is derived from The Wagon Mound [1961] A.C. 388 PC: what losses were reasonably foreseeable as at the date of breach?

In both contract and tort, it is the type of kind of loss that matters, not the extent or causal mechanism of that loss (Parsons (Livestock) Ltd v Uttley, Ingham & Co Ltd [1978] Q.B. 791 (contract); The Wagon Mound [1961] A.C. 388 PC (tort)). Applied to the present circumstances, as a general principle, the fact that losses have been significantly increased by COVID (which itself was unforeseeable) does not mean that the losses will be too remote.

A parallel can be drawn with the cases dealing with the 2008 financial crisis. In Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184, a finding that investment losses arising from the financial crash were too remote was overturned on appeal. Investment losses from market movements affecting the value of the underlying assets was a type of loss that was reasonably foreseeable, even if the extent of the losses was not. Similarly, in Wellesley Partners LLP v Withers LLP [2016] Ch. 529, losses arising in the context of the financial crisis were held not to be too remote.

(iii) Mitigation

The general principle is that an innocent party suffering loss at the hands of a wrongdoer must take all reasonable steps to mitigate the loss consequent on the breach. The question of what “reasonable steps” are is one fact and degree, to be judged in all of the circumstances.

In the COVID context, this is a question likely to attract considerable debate. Faced with the uncertainty created by the pandemic, should the Claimant have done something different to what they did? If so, what?

In general, the bar for reasonableness is a fairly low one:

  • A Claimant is not required to take risks with their own money (Jewelowski v Propp [1944] K.B. 510).
  • A Claimant is not required to take risks with their business reputation (Finlay & Co v N. v Kwik Hoo Tong H.M. [1929] 1 K.B. 400).
  • Where no readily available market is available as at the date of breach, the Claimant is not required to constantly re-check the market to see whether it has recovered (Glory Wealth Shipping Pte Ltd v Korea Line Corp (“The Wren”) [2011] EWHC 1819 (Comm)).

Bearing in mind this low bar, the courts are likely to have a good deal of sympathy for the argument that the Claimant was not able to take suggested steps by way of mitigation. Certainly, where doing so might have placed the Claimant or their staff at health risk, the courts are not going to find that they should have taken that step.

However, the courts are equally unlikely to simply wave through arguments that certain mitigation measures could not be taken because of COVID in some general or undefined way. Claimants will, therefore, need to be prepared to justify to the court in quite a specific way why certain measures were or were not taken.

(iv) Scope of duty/SAAMCO

There will undoubtedly be Claimants who, acting on professional advice, entered into a transaction which has now gone disastrously wrong. If that advice was negligent, they may quite truthfully be able to say that “but for” the negligent advice, they would never have entered into the transaction.

As was shown in BPE Solicitors v Hughes-Holland [2017] UKSC 21, a distinction must be drawn between:

  • Professionals providing information (who will be liable only for the losses arising as a result of that information being wrong); and
  • Professionals providing advice (who may be liable for all of the losses flowing from the transaction).

This distinction can already be of some difficulty to apply in practice, and it is unlikely that adding a COVID context will make it any easier. Particular issues may arise in relation to the relief schemes available from government – are professionals required to point out the availability of relief to their clients? If so (and they negligently fail to do it) are damages limited to the financial relief that the scheme would have provided, or could broader consequential losses be recoverable? As we know from BPE, that will depend upon the terms on which the Defendant was retained.

Conclusions

The challenge facing the courts when determining the likely quantum of recoverable losses is not one of making new law, but of figuring out how existing principles will be applied. It is worth thinking now about how these arguments might play out – we will soon be hearing from clients with potential claims who are eager to know.

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

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Sally Wollaston
Sally Wollaston
Business Development and Marketing Director
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