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Chewing it over...

In the early 1990's, a partnership called Samson Lancastrian imported dog chews from Pet Products in Thailand and resold them to Economy Bag. The Royal Bank of Scotland (RBA) issued a letter of credit with Samson as first beneficiary and Pet Products as second beneficiary. Economy Bag authorised Samson to act as its agent, so Economy Bag never knew the price being charged by Pet Products or the mark-up Samson was earning.

It did, however, know the identity and address of the Thai company, because its packing list had been disclosed to them. In January 1993, by which stage there had been 33 previous transactions, Economy Bag asked RBS to open a transferable Letter of Credit in favour of Samson in relation to one consignment of dog chews. RBS did so and Samson instructed the bank to transfer the Letter of Credit to Pet Products.

Two months later, the bank sent a completion statement to Economy Bag whereby Samson's large mark-up became clear. In response Economy Bag then dealt with Pet Products direct and Samson lost repeat business. The Judge found that RBS had a contractual duty of confidence which it owed to Samson.

This had been breached and he awarded damages on the basis that without the breach, trading would have continued for some time although there was an increasing likelihood of its termination because of the risk that Economy Bag would finally contact the middleman. He was therefore awarded 4 years' loss of profit at a declining level, so as to reflect the increasing risk of early termination of the arrangement between the parties.

The Court of Appeal held that the trial judge was in error, dealing with quantification not the question of remoteness of damage. In the circumstances, it was necessary to base the damages on the level of knowledge held by the bank as to the relationship between Samson and Economy Bag during the course of trading, so that the cut-off point for the bank's liability was the end of such period as was reasonable, based on the banks knowledge of the facts at the time of the breach.

As a result, only 1 year's loss of profit could be awarded. The House of Lord's held that this was a case in which the principles laid down in Hadley –v- Baxendale relating to remoteness of damage apply. Firstly, the Court of Appeal had fallen into error in the assessment of damages because the date of the making of the contract not the date of the breach is the relevant date for considering the knowledge of the parties . Furthermore, the bank had not included any kind of provision limiting its liability for the loss of repeat business to any particular period. It was a decision solely for the trial judge as to the period which was reasonably foreseeable to the bank at the time of making the contract.

They restated the rule in Hadley –v- Baxendale as explained in Koufos –v- Czarnikow [1969] 1 AC350 as follows:- "The crucial question is whether on the information available to the Defendant when the contract was made, a reasonable man in his position would have realised that such loss was sufficiently likely to result from the breach to make it proper to hold that the loss flowed naturally from the breach or that the loss of that kind should have been within his contemplation…" Given that there had been 33 transactions prior to the crucial one in 1993 and that there was evidence that in the years that followed 1993, EB had made regular purchases from PP direct, it was clear that a period of 4 years loss of repeat business albeit on a declining scale was a proper level of damages.

The Court of Appeal had limited the damages to a loss of profit for 1 year which is rather low bearing in mind the 3 years of previous dealings between Samson and Economy Bag taken together with the apparent absence of any evidence of dissatisfaction on the part of Economy Bag prior to the unintended disclosure of the level of mark-up. In the circumstances, the trial judge in awarding damages on a diminishing scale over a number of years produced a much more sophisticated assessment of the loss which much more accurately reflected the loss of opportunity.

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