• In the case of Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350, it was held by the House of Lords that only where there is a ‘serious possibility’ of loss resulting from the breach, can loss be recoverable.

Facts of Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350

  • The C chartered a ship from the D to carry sugar to Basrah where the sugar would be sold in the market
  • The ship arrived 9 days late in Basrah, and by then the price of sugar had fallen drastically
  • The D was unaware that the C was going to sell the sugar in Basrah, but was aware that there was market for sugar there
  • C then sued the D for a breach of contract and claimed damages for the loss of profit

Issues in Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350

  • What constituted as a loss of profit which was recoverable through damages, and did that apply here?

Held by the House of Lords

Appeal dismissed – the loss of profits was reasonably foreseeable.

Lord Reid

To recover damages, the D “ought to have realised was not unlikely to result from a breach of contract causing delay in delivery” [383]

“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.”” [390]

Considering the test of foreseeability in Hadley v Baxendale [1854], Reid L explained the rule; it was not “intended that there were to be two rules or that two different standards or tests were to be applied.” [385]

  • “In cases like Hadley 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. … 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.” [385]

Tort imposes a wider liability, meaning the D may be liable for any damage that is held to be reasonably foreseeable. There is good reason for this differing from contract: as there, one party can direct the other’s attention to a risk they would otherwise see as unusual. The same cannot be done in tort where the injured party would not have the opportunity. [386]

Lord Morris

Morris L did not believe the D should be able to escape liability by contending he was aware of the possibility of loss but the probability of it

  • “He might have used any one of many phrases. He might have said that a loss would be likely: or that a loss would not be unlikely: or that a loss was liable to result: or that the risk that delay would cause loss to the respondents was a serious possibility: or that there would be a real danger of a loss: or that the risk of his being liable to have to pay for the loss was one that he ought commercially to take into account. As a practical business man he would not have paused to reflect on the possible nuances of meaning of any one of these phrases. Nor would he have sent for a dictionary.” [400]

He went on to say that delay “liable to result or at least was not unlikely to result” in the loss [406]

Lord Upjohn

Upjohn L disagreed with the previous decisions of British Columbia Saw Mill Co. Ltd. v. Nettleship [1868] and Horne v. Midland Railway Co [1873],

  • “If parties enter into the contract with knowledge of some special circumstances, and it is reasonable to infer a particular loss as a result of those circumstances that is something which both must contemplate as a result of a breach. It is quite unnecessary that it should be a term of the contract.” [422]

He was “content to adopt as the test a “real danger” or a “serious possibility.”” Believing the two to be somewhat interchangeable between different judges and juries [426]

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