BALTIC SHIPPING COMPANY v. DILLON
(1993) 176 CLR 344(1993) F.C. 93/001
(Judgment by: McHUGH J)
Between: BALTIC SHIPPING COMPANY
And: DILLON
Judges:
MASON CJ
BRENNAN J
DEANE J
DAWSON J
TOOHEY J
GAUDRON J
McHUGH J
Subject References:
Contract
Judgment date: 10 February 1993
CANBERRA
Judgment by:
McHUGH J
Baltic Shipping Company ("Baltic") appeals against an order of the Supreme Court of New South Wales (Court of Appeal). The order in question dismissed an appeal by Baltic against so much of an order made in the Admiralty Division of the Supreme Court as awarded damages to the respondent, Mrs Joan Norma Dillon, for breach of contract by Baltic. The action for breach of contract arose out of the sinking of the "Mikhail Lermontov", a cruise ship owned by Baltic.
2. Sometime prior to 7 February 1986, Baltic agreed in consideration of the sum of $2,205, payable in advance, to carry Mrs Dillon on the "Mikhail Lermontov" on a fourteen day cruise in the South Pacific. At about 5.30 pm on 16 February 1986, the tenth day of the cruise, the ship struck a rock. It sank later that evening. Mrs Dillon was taken off the ship, shortly before it sank. Subsequently, she commenced an action against Baltic in the Admiralty Division of the Supreme Court of New South Wales for breach of contract. After the hearing of the action had commenced, Baltic admitted liability. Pursuant to the powers conferred by the Contracts Review Act (1980) (N.S.W.), Carruthers J., who heard the action((163) (1989) 21 NSWLR 614.), set aside a deed under which Mrs Dillon released Baltic from liability in consideration of the payment of certain moneys including a partial repayment of her fare. His Honour awarded Mrs Dillon the following damages:
| Restitution of the balance of fare | $ 1,417 |
| Loss of valuables | 4,265 |
| Compensation for disappointment and distress | 5,000 |
| Damages for personal injury | 35,000 |
| $45,682 |
An appeal to the Court of Appeal (Gleeson C.J. and Kirby P., Mahoney J.A. dissenting) against the award of damages failed((164) (1991) 22 NSWLR 1).
3. The questions for determination in this Court are whether Mrs Dillon was entitled to have her fare refunded and whether she was entitled to claim damages for distress and disappointment because the cruise was not completed.
Was there a total failure of consideration?
4. Contrary to the conclusion reached in the Supreme Court of New South Wales, Mrs Dillon was not entitled to have her fare refunded. The advance payment of the fare was not a security for the price of the cruise. Nor was it a payment which was to be earned by Baltic only upon performance of its promise to provide a fourteen day cruise. The fare, with other fares, was payable in advance in order to provide a fund from which Baltic could meet the expense of providing the various benefits associated with the cruise, benefits which were to be enjoyed throughout and from the commencement of the cruise. Consequently, the right of Baltic to retain the amount of the fare became unconditional once Baltic began to provide those benefits to Mrs Dillon. Furthermore, the subsequent sinking of the "Mikhail Lermontov" did not alter Baltic's unconditional right to retain the amount of the fare. Because the common law has no doctrine of apportionment in respect of a partial failure of consideration, Mrs Dillon's remedy in respect of Baltic's failure to complete the cruise was an action for damages for breach of contract and not an action for partial restitution of the sum paid as the price of the fare.
Conditional payments
5. When a contractual payment is made conditionally upon the performance of a promise by the payee, the right to retain the moneys after discharge of the contract is dependent upon whether the promise has been performed. If the promise has not been performed, there has been a total failure of consideration by reason of the nonfulfilment of the condition, and the money is recoverable as money had and received to the use of the payer((165) Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32 , at p 65). In this context, consideration is not necessarily the same concept as the consideration which supported the formation of the contract. In a case where a promise and not an act or forbearance is the consideration for the contract, it is the performance of the promise which constitutes the consideration for the purpose of the law of restitution((166) ibid., at p 48; Rover International Ltd. v. Cannon Film Ltd. (1989) 1 WLR 912 , at pp 923-924). As Birks((167) An Introduction to the Law of Restitution, (1985), p 223) says:
"Failure of the consideration for a payment ... means that the state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed to sustain itself."
6. Furthermore, where the condition upon which the money was paid has failed, the payer is entitled to the return of the money advanced, even though that person has obtained some benefit from the contract. Work done or expense incurred by the payee or benefit enjoyed by the payer will not constitute consideration unless it constitutes a partial performance of the condition upon which the money was paid. Thus, the purchaser of a motor vehicle is entitled to the return of the full purchase price of the vehicle if the vendor has failed to make title even though the purchaser has had the use of the vehicle for a considerable period((168) Rowland v. Divall [1923] 2 KB 500 ; Warman v. Southern Counties Car Finance Corporation Ltd. [1949] 2 KB 576 ; Butterworth v. Kingsway Motors (1954) 1 WLR 1286 .). The seller cannot retain the purchase moneys because their retention is conditional upon the vendor making good his or her promise to transfer the title of the vehicle to the purchaser. Similarly, a solicitor who is paid money on account of costs to seek a court order cannot retain the costs if he fails to take reasonable care to seek the order even though he has incurred expense or done work on the case((169) Heywood v. Wellers (1976) QB 446).
7. Moreover, "once it does appear that the condition for retaining the money has failed the fact that it failed in response to the payer's own breach does not matter"((170) Birks, op cit, p 238). As Birks says((171) ibid., pp 236-237), this is the best explanation of the much discussed case of Dies v. British and International Mining and Finance Corporation((172) (1939) 1 KB 724) where a buyer in default was held entitled to recover instalments of the purchase price of guns and ammunition. Once the seller elected to accept the buyer's repudiation and terminate the contract, the consideration for the advance payment had wholly failed because the seller retained the guns and ammunition.
8. However, when a contractual payment is not subject to any condition or the condition for its retention has been fulfilled, discharge of the contract does not entitle the payer to the return of money advanced even though the payee is in breach of a promise going to the root of the contract. In such a case, the payer's remedy is for breach of contract for non-performance of the promise and not for restitution of the payment. In McDonald v. Dennys Lascelles Ltd.((173) (1933) 48 CLR 457 , at pp 476- 477), Dixon J. pointed out:
"When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected." (emphasis added)
Thus in Whincup v. Hughes((174) (1871) LR 6 CP 78), the plaintiff, who had paid a premium to have his son apprenticed to a watchmaker for a term of six years, failed to recover the premium or any part of it when the watchmaker died during the second year of the apprenticeship. Bovill C.J. said((175) ibid., at p 82) that "the person receiving the premium naturally assumes that it becomes his property to be dealt with as he pleases". His Lordship said((176) ibid., at p 81) that the "general rule of law is, that where a contract has been in part performed no part of the money paid under such contract can be recovered back".
9. Whether or not a payment is the subject of a condition at the time a contract is discharged depends upon the express and implied terms of the contract. As a general rule, however, absent an indication to the contrary, a payment, made otherwise than to obtain the title to land or goods, should be regarded as having been made unconditionally, or no longer the subject of a condition, if the payee has performed work or services or incurred expense prior to the completion of the contract. If the payment has been made before the work has been performed or expense incurred, it should be regarded as becoming unconditional once work is performed or expense incurred. In that situation, the advance payment is ordinarily made in order to provide a fund from which the payee can meet the cost of performing the work or services or meeting the expenditure incurred or to be incurred before the completion of the contract. Hyundai Industries v. Papadopoulos((177) (1980) 1 WLR 1129 ) illustrates the point. A shipbuilder agreed to construct a ship under a contract which provided for the payment of instalments of the purchase price during the progress of the work and gave the builder the right to terminate the contract if an instalment was unpaid. The House of Lords unanimously held that the builder, after terminating the contract for failure to pay an instalment, was entitled to recover the price of the instalment from a guarantor. All their Lordships held that the guarantor was liable having regard to the terms of the guarantee. But a majority of their Lordships held that the guarantor was also liable because the buyer itself was still liable to pay the unpaid instalment even though the contract had been terminated.
The right to be paid the instalment was an unconditional right which was not affected by the subsequent discharge of the contract. Lord Fraser of Tullybelton's speech((178) ibid., at p 1148) makes it plain that the right to the instalment was unconditional because its purpose was to compensate the builder who "was bound to incur considerable expense in carrying out his part of the contract long before the actual sale could take place". It would have been a fortiori the case if the buyer had sought to recover an instalment which it had paid prior to breach. The builder would have had an unconditional right to retain the instalment.
The consideration for the fare did not totally fail
10. In the present case, the termination of the cruise on the tenth day did not result in a total failure of consideration for the payment of the fare. If the fare had been payable at the end of the cruise, the consideration for the payment, for the purpose of the law of restitution, might possibly have been described as a fourteen day cruise of the South Pacific. But the requirement that the fare be paid in advance makes it impossible, for the purpose of the law of restitution, to construe the consideration in that way.
11. The commercial purpose which is served by the advance payment of a fare for a cruise of the kind involved in this case is that it contributes to a fund which enables the shipowner to meet the cost of providing the benefits associated with the cruise without the necessity of using its working capital to meet the outgoings involved((179) cf. Scandinavian Trading v. Flota Ecuatoriana [1983] 2 AC 694 , at pp 702-703.). Much of that cost is incurred before the ship leaves port; almost all of the cost is incurred before the passenger finally disembarks. Furthermore, the passenger commences to enjoy the benefits of the cruise at or about the time of embarkation. The advance payment of such a fare cannot, therefore, be regarded as a security for the price of the services to be provided by the shipowner. Nor should it be regarded as a payment which is earned only upon completion of the cruise in accordance with the terms of the contract of carriage. Properly characterised, the advance payment of the fare is a reimbursement or prepayment of the cost of providing each of the benefits to be enjoyed by the passenger throughout the cruise.
12. The purpose of the advance payment would be negated if the shipowner's right to retain the fare was conditional upon an exact performance of its promise to carry the payee for the duration of the cruise. If that was the basis of the payment, the shipowner would be obliged to refund the fare if the contract was discharged by frustration even though the cruise was almost completed. The proper conclusion, therefore, is that once the passenger commences to enjoy the promised benefits, the right of the shipowner to retain the fare becomes unconditional. If the shipowner fails to fulfil its contractual promise after the passenger has commenced to enjoy the promised benefits, the passenger's remedy is an action for damages for breach of contract. The passenger cannot bring an action for restitution of the payment of the fare: once the passenger commences to receive the promised benefits, he or she receives consideration for the payment.
13. Accordingly, once Baltic began to provide the promised benefits to Mrs Dillon, the right of that company to retain the fare became unconditional. The loss which she suffered, in paying for a cruise which was not completed, was recoverable in an action for breach of contract - not in an action for restitution.
14. In the judgments in the Supreme Court and in the argument in this Court, attention focussed on the question whether the contract of carriage was "an entire contract"((180) cf. Steele v. Tardiani (1946) 72 CLR 386 , at p 401). This approach assumed that, if the contract was an entire one, the price of the fare was recoverable and that, if the contract was not an entire one, the price of the fare was not recoverable. But with great respect to the learned judges of the Supreme Court, the issue here was the basis of the advance payment. If no advance payment had been required, and Baltic had sued to recover the whole of the fare notwithstanding the sinking of the "Mikhail Lermontov", the question whether the contract was an entire one would have had relevance. If the contract was characterised as an entire contract, Baltic would not have been able to recover the price of the fare. But where a payment is made in advance of the completion of a contract, the critical issue is the reason or basis for the payment and not whether the contract was an entire one. A finding that a contract is an entire contract does not necessarily mean that an advance payment is recoverable. Conversely, a finding that a contract is not an entire contract does not necessarily mean that an advance payment is irrecoverable. After discharge of a contract, the recoverability of any payment made before the completion of the contract is dependent on whether the "state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed to sustain itself"((181) Birks, op cit, p 223).
15. The learned trial judge also thought that the price of the fare was wholly recoverable as money had and received to the use of Mrs Dillon because whatever benefits she had enjoyed prior to the sinking were "entirely negated by the catastrophe"((182) (1989) 21 NSWLR, at p 668). Once Baltic had given consideration for the payment, however, its rights to retain the money became unconditional. The subsequent catastrophe could not make Baltic's retention of the money conditional once it had become unconditional.
16. Mrs Dillon was not entitled to recover the price of her fare on the basis of restitution. The appeal must be allowed on this point.
17. During the hearing of this appeal, however, the respondent was given leave to add a notice of contention to the effect that the award of $1,417 should not be disturbed because the money awarded to the plaintiff "as restitution damages should properly have been identified under a different head". I shall postpone discussion of this contention until I deal with the claim for damages for distress and disappointment.
The claim for damages for distress and disappointment
18. The appeal against the award of damages for distress and disappointment should be dismissed. Under the common law, damages are not recoverable for distress or disappointment arising from a breach of contract unless the distress or disappointment arises from breach of an express or implied term that the promisor will provide the promisee with pleasure, enjoyment or personal protection or unless the distress or disappointment is consequent upon the suffering of physical injury or physical inconvenience. In the present case, it was an implied term of the contract that the fourteen day cruise in the South Pacific would be an enjoyable experience. The sinking of the "Mikhail Lermontov" resulted in a breach of that term. Consequently, the trial judge was correct in awarding damages to Mrs Dillon for the disappointment which she suffered when the cruise failed to provide the enjoyment which Baltic had promised.
The general rule relating to damages for distress and disappointment
19. Damages for breach of contract cannot ordinarily be awarded for distress or disappointment arising from that breach. In Hamlin v. The Great Northern Railway Company((183) (1856) 1 H. and N. 408, at p 411 (156 ER 1261, at p 1262)), Pollock CB said:
"In actions for breaches of contract the damages must be such as are capable of being appreciated or estimated ... but it may be laid down as a rule, that generally in actions upon contracts no damages can be given which cannot be stated specifically, and that the plaintiff is entitled to recover whatever damages naturally result from the breach of contract, but not damages for the disappointment of mind occasioned by the breach of contract."((184) This passage was cited with approval by Dixon and McTiernan JJ. in Fink v. Fink (1946) 74 CLR 127 , at pp 142-143.)
20. In Hamlin, the defendant, in breach of contract, failed to carry the plaintiff to his destination in accordance with the advertised timetable, forcing the plaintiff to obtain overnight accommodation in the course of his journey and to buy a new ticket to resume his journey. The plaintiff sued for breach of contract alleging that, in consequence of the delay, he failed to keep appointments with customers and was detained for longer than he should have been. The Court of Exchequer held that he was entitled only to nominal damages "and such other damages of a pecuniary kind as he may have really sustained as a direct consequence of the breach of contract"((185) (1856) 1 H. and N., at p 411 (156 ER, at p 1262).).
21. The rule that damages cannot be recovered for distress arising out of a breach of an ordinary contract was substantially confirmed in Addis v. Gramophone Company Limited((186) [1909] AC 488 ) where the House of Lords set aside an award of damages for "the abrupt and oppressive way in which the plaintiff's services were discontinued, and the loss he sustained from the discredit thus thrown upon him"((187) ibid., at p 490). Lord Loreburn L.C. said((188) ibid., at p 491) "that indemnity cannot include compensation either for the injured feelings of the servant, or for the loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment". After the decision in Addis, the general rule was so firmly established in England and Australia that in Fink v. Fink((189) (1946) 74 CLR 127 , at p 144) Dixon and McTiernan JJ. could say that, in an action for breach of contract, "(r)esentment, disappointment and the loss of esteem of friends are not proper elements".
22. Various explanations of the rationale of this rule have been proffered. None of them is satisfactory. The rationale implicit in Hamlin was that damages for disappointment (or distress) are not awarded because they cannot be assessed accurately. Yet in many actions of tort((190) e.g. defamation, malicious prosecution and false imprisonment.), damages for distress can be awarded. Although in those actions assessing general damages for distress is a difficult task, courts make such awards "by the exercise of a sound imagination and the practice of the broad axe"((191) Watson, Laidlaw and Co. Ltd. v. Pott, Cassels and Williamson (1914) 31 RPC 104, at pp 117-118, cited by Isaacs J. in Whitfeld v. De Lauret and Co. Ltd. (1920) 29 CLR 71 , at p 81.). In Addis, however, Lord Atkinson said that((192) (1909) AC, at p 495):
"to apply in their entirety the principles on which damages are measured in tort to cases of damages for breaches of contract would lead to confusion and uncertainty in commercial affairs, while to apply them only in part and in particular cases would create anomalies, lead occasionally to injustice, and make the law a still more 'lawless science' than it is said to be".
23. While it can be accepted that not all principles relating to an award of damages in tort ought to be applicable in an action for breach of contract, it is difficult to see why no damages should be awarded for distress or disappointment arising directly from the breach of contract itself. Difficulty of assessment does not stop courts awarding those damages in actions in tort. If the plaintiff is denied recovery for distress or disappointment in a contract case, the award of damages will fail to fulfil the objective of compensating the plaintiff for the harm which he or she has suffered as the result of the defendant's breach.
24. Another explanation for the general rule is that disappointment and distress arising from breach of contract are not within the contemplation of the parties to ordinary, particularly commercial, contracts((193) Brown v. Waterloo Regional Board of Commissioners of Police (1982) 136 DLR (3d) 49, at p 56). But such an explanation does not accord with everyday experience relating to the making of contracts. The parties to many contracts, including many commercial contracts, are fully aware, when they make them, that breach will result in disappointment and sometimes distress to the innocent party((194) See Watts v. Morrow (1991) 1 WLR 1421 , at p 1445, and cf. Burrows, "Mental distress damages in contract - a decade of change", (1984) Lloyds Maritime and Commercial Law Quarterly 119, at p 121).
25. Treitel contends that the ordinary rule is sensible because "anxiety is an almost inevitable concomitant of expectations based on promises, so that a contracting party must be deemed to take the risk of it"((195) Treitel, The Law of Contract, 8th ed. (1991), p 878.). However, the proposition that "anxiety is an almost inevitable concomitant of expectations based on promises", while generally true, does not explain why the injured party should have to bear the risk of this particular head of damage while being entitled to be compensated for other damage flowing from breach of contract. Furthermore, the proposition that the "party must be deemed to take the risk of it" merely records the result of the rule and is not an explanation of it.
26. Messrs Greig and Davis contend that to allow damages for distress or disappointment "would lead to an increase in the cost of entering into a contract, without any substantial benefit being derived therefrom"((196) The Law of Contract, (1987), p 1414). This conclusion may well be correct. But the learned authors do not develop any argument in support of it. Allowing damages for distress and disappointment would increase the cost of entering into contracts. But it is at least arguable that the cost of meeting such claims does not outweigh the demands of distributive justice in ensuring that individuals are properly compensated for the harm which they suffer by reason of breaches of contracts.
27. It is difficult to resist the conclusion that the unexpressed((197) But see Hayes v. Dodd [1990] 2 All ER 815 , at p 823 where Staughton LJ. said that he would not view with enthusiasm the prospect that every shipowner, having successfully claimed unpaid freight or demurrage, would be able to add a claim for mental distress suffered while waiting for his money) basis for the general rule was the instinctive fear of the common law judges that to allow damages for disappointment or distress consequent upon breach of an ordinary contract would be to inflate damage awards in contract cases, particularly in commercial cases where the breach has been accompanied by high handed behaviour. At the same time, it must be acknowledged that the common law judges have admitted significant exceptions to the general rule. Moreover, they have often sought to justify these exceptions by propositions which undermine the general rule itself.
The exceptions
28. From an early period, the common law allowed damages for injured feelings and wounded pride consequent upon a breach of a promise of marriage((198) Berry v. Da Costa (1866) LR 1 CP 331, at p 333.). Moreover, soon after the decision in Hamlin, the Court of Exchequer held that damages for "inconveniences and annoyances" could be awarded for breach of contract. In Burton v. Pinkerton((199) (1867) LR 2 Ex 340), the plaintiff had agreed to serve as a seaman on a ship "upon an ordinary commercial voyage"((200) ibid., at p 348.). However, in breach of contract, the defendant placed the ship under the control of a foreign government which was at war, causing the plaintiff to leave the ship at a foreign port. The Court held that the plaintiff was entitled to damages for the inconveniences and annoyances arising from the defendant's breach of contract.
29. Nine years after Burton, the Queens Bench held that a plaintiff was entitled to damages for the inconvenience of having to walk home in the early hours of the morning when a train failed to stop at the station for which he had bought a ticket((201) Hobbs v. London and South Western Railway Co. (1875) LR 10 QB 111). Cockburn C.J. said((202) ibid., at p 116) that:
"if the jury are satisfied that in the particular instance personal inconvenience or suffering has been occasioned, and that it has been occasioned as the immediate effect of the breach of the contract, I can see no reasonable principle why that should not be compensated for".
His Lordship said that Hamlin did not decide that personal inconvenience, however serious, was not to be taken into account as a subject-matter of damages. Blackburn J. asserted((203) ibid., at p 120) that in Hamlin there was no inconvenience at all, saying((204) ibid., at pp 120-121) that "sleeping at Grimsby instead of Hull seems really to be nothing". Mellor J. said((205) ibid., at p 122.):
"that for the mere inconvenience, such as annoyance and loss of temper, or vexation, or for being disappointed in a particular thing which you have set your mind upon, without real physical inconvenience resulting, you cannot recover damages. That is purely sentimental, and not a case where the word inconvenience, as I here use it, would apply."
But his Lordship went on to say((206) ibid., at p 123) that:
"where the inconvenience is real and substantial arising from being obliged to walk home, I cannot see why that should not be capable of being assessed as damages in respect of inconvenience".
Some years earlier in Kemp v. Sober((207) (1851) 1 Sim (N.S.) 517 (61 ER 200)), Lord Cranworth V.-C. had held that "the feeling of anxiety" was the suffering of damage for the purpose of obtaining an injunction to restrain a breach of covenant not to carry on a business or calling.
30. Notwithstanding the exceptions admitted in these cases, the general rule laid down in Addis was almost automatically applied until the post-war period((208) See for example, Groom v. Crocker [1939] 1 KB 194 and Fink.). Burton and Hobbs seem to have been largely ignored. In Salmond and Williams on Contracts, which was published in 1945, the learned authors went so far as to say((209) p 579.) that in an action for breach of contract compensatory damages were "given as compensation for and measured by the material loss suffered by the plaintiff" (emphasis added).
31. In Bailey v. Bullock((210) [1950] 2 All ER 1167 ), however, Barry J. distinguished Addis and applied Burton and Hobbs to award damages for "inconvenience and discomfort" where a solicitor in breach of his retainer had failed to obtain possession of the plaintiff's house and, as a result, the plaintiff was compelled to live with his parents-in-law in circumstances of physical inconvenience. Barry J. said((211) ibid., at p 1171.) that the "inconvenience should have been reasonably contemplated by the defendants as a probable result of their failure to perform their contractual duties".
32. The decision in Bailey was followed in Stedman v. Swan's Tours((212) (1951) 95 Sol J 727) where the English Court of Appeal awarded damages for "appreciable inconvenience and discomfort" arising from a breach of contract by the defendants in failing to arrange first class hotel accommodation at a resort. Stedman was relied upon by Zelling J. in Athens-MacDonald Travel Service Pty. Ltd. v. Kazis((213) (1970) SASR. 264) where the plaintiff was awarded damages for the substantial inconvenience and discomfort which arose during a holiday in Cyprus as the result of the defendant's failure to make the necessary travel arrangements.
33. In Jarvis v. Swans Tours Ltd.((214) (1973) QB 233), the Court of Appeal made further inroads to the rule in Addis by making an award of damages for "loss of enjoyment" where the plaintiff's skiing holiday did not measure up to the promises in the defendant's brochure. Lord Denning M.R. thought that Hamlin and Hobbs no longer stated the law accurately. His Lordship said((215) ibid., at pp 237-238):
"In a proper case damages for mental distress can be recovered in contract, just as damages for shock can be recovered in tort. One such case is a contract for a holiday, or any other contract to provide entertainment and enjoyment. If the contracting party breaks his contract, damages can be given for the disappointment, the distress, the upset and frustration caused by the breach."
He did not further elucidate the meaning of "a proper case". Edmund Davies L.J. said((216) ibid., at p 239) that where a person has paid for:
"an invigorating and amusing holiday and ... returns home dejected because his expectations have been largely unfulfilled ... it would be quite wrong to say that his disappointment must find no reflection in the damages to be awarded".
Stephenson L.J. said((217) ibid., at pp 240-241) that:
"there may be contracts in which the parties contemplate inconvenience on breach which may be described as mental: frustration, annoyance, disappointment; and, as ... this is such a contract, the damages for breach of it should take such wider inconvenience or discomfort into account".
Damages for disappointment have been awarded in other "holiday" cases((218) Jackson v. Horizon Holidays (1975) 1 WLR 1468 ; Jackson v. Crysler Acceptances (1978) RTR 474.).
34. The decision in Jarvis was soon extended beyond the area of holiday contracts. At first, the rationale of an award of damages for distress in contract cases was explained as being the contemplation of the parties that the breach might give rise to distress. In Cox v. Philips Industries Ltd.((219) (1976) 1 WLR 638 , at p 644), Lawson J. held that damages could be awarded for vexation, frustration and distress if "it was in the contemplation of the parties" that such damage would result from breach. His Lordship awarded damages for the "depression, vexation and frustration" which arose from the defendant's breach of contract in relegating the plaintiff, its employee, to a position of lesser responsibility. In Heywood v. Wellers((220) (1976) QB 446), the Court of Appeal, like Lawson J. in Cox, appeared to regard "the contemplation" of the parties as the basis for awarding damages for distress. The Court awarded the plaintiff damages for the mental distress arising from the failure of her solicitors, in breach of their retainer, to obtain an order restraining a man from molesting her. Although Jarvis and Jackson v. Horizon Holidays((221) (1975) 1 WLR 1468 ) were cited in argument, Lord Denning M.R. said((222) Heywood (1976) QB, at p 459) that what the plaintiff had suffered was within the contemplation of the defendants "within the rule in Hadley v. Baxendale"((223) (1854) 9 Ex 341 (156 ER 145).). James LJ.((224) Heywood (1976) QB, at p 461) cited Jarvis for the proposition that the damages were payable because it was "within the contemplation of the contracting parties that a foreseeable result of a breach of the contract will be to cause vexation, frustration, or distress". Bridge L.J. said((225) ibid., at pp 463-464) that the damages were recoverable because the plaintiff had suffered mental distress which was "the direct and inevitable consequence of the solicitor's negligent failure to obtain the very relief which it was the sole purpose of the litigation to secure". His Lordship said that a clear distinction could be drawn between mental distress which arose in that situation and mental distress which arose as an incidental consequence of the misconduct of litigation by a solicitor and which was not recoverable.
35. However, recent English cases have decisively rejected the view that the contemplation of the parties is the basis upon which damages for distress or disappointment are awarded for breach of contract. Instead, they have concluded that such damages are recoverable only when the object of the contract is to provide enjoyment, pleasure or freedom from distress or where the distress is consequent upon the suffering of physical injury or physical inconvenience.
36. In Bliss v. South East Thames Regional Health Authority((226) (1987) ICR 700), the Court of Appeal expressly rejected the statement of Lawson J. in Cox that damages could be recovered for breach of a contract of employment if distress arising from the breach was within the contemplation of the parties. Dillon L.J., who gave the leading judgment, said((227) ibid., at p 718):
"Modern thinking tends to be that the amount of damages recoverable for a wrong should be the same whether the cause of action is laid in contract or in tort. But in the Addis case Lord Loreburn regarded the rule that damages for injured feelings cannot be recovered in contract for wrongful dismissal as too inveterate to be altered, and Lord James of Hereford supported his concurrence in the speech of Lord Loreburn by reference to his own experience at the Bar.
There are exceptions now recognised where the contract which has been broken was itself a contract to provide peace of mind or freedom from distress: see Jarvis v. Swans Tours Ltd. and Heywood v. Wellers. Those decisions, do not however cover this present case."
Consequently, the Court of Appeal set aside an award of damages for frustration, vexation and distress arising from the defendant's breach of an employment contract.
37. The approach of Dillon L.J. in Bliss was approved by the Court of Appeal in Hayes v. Dodd((228) [1990] 2 All ER 815 ) . Staughton LJ. said((229) ibid., at p 824.):
"I am not convinced that it is enough to ask whether mental distress was reasonably foreseeable as a consequence, or even whether it should reasonably have been contemplated as not unlikely to result from a breach of contract. It seems to me that damages for mental distress in contract are, as a matter of policy, limited to certain classes of case. I would broadly follow the classification provided by Dillon LJ. in Bliss v. South-East Thames Regional Health Authority:
'... where the contract which has been broken was itself a contract to provide peace of mind or freedom from distress ...'
It may be that the class is somewhat wider than that. But it should not, in my judgment, include any case where the object of the contract was not comfort or pleasure, or the relief or (sic) discomfort, but simply carrying on a commercial activity with a view to profit."
In Hayes, the Court of Appeal set aside damages for anguish and vexation arising from the negligence of solicitors who had been retained on a purchase of a commercial property.
38. In Watts v. Morrow((230) (1991) 1 WLR 1421 , at p 1442.), the Court of Appeal held that "in the case of the ordinary surveyor's contract, damages are only recoverable for distress caused by physical consequences of the breach of contract". Bingham L.J. said((231) ibid., at p 1445) that a contract breaker was not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation caused to the innocent party. His Lordship said that the rule was not founded on the assumption that such reactions are not foreseeable but on considerations of policy. However, he said that the rule was not absolute and that where "the very object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead."
39. No uniformity of approach to the question of damages for distress for breach of contract is discernible in the decisions of other courts in the British Commonwealth. Decisions in Australia, Canada and New Zealand are spread along a spectrum from acceptance of Addis to rejection of that decision.
40. Apart from the decision of Zelling J. in Athens-McDonald Travel Services Pty. Ltd. and the decision of the Court of Appeal in the present case, Australian courts have paid little attention to the developments in England in the last 40 years concerning the award of damages for distress arising from breach of contract. In Allison v. Hewitt((232) (1974) 3 NSWDCR 193) and Falko v. James McEwan and Co.((233) (1977) VR 447), Jarvis was distinguished on the basis that it applied to holiday situations and not to ordinary commercial contracts.
41. In Brickhill v. Cooke((234) (1984) 3 NSWLR 396), the New South Wales Court of Appeal, basing itself on Perry v. Sidney Phillips and Son((235) (1982) 1 WLR 1297 .), held that damages for inconvenience should be given in an action for negligence arising from the report of an engineer who had been retained to inspect and report to the plaintiff on the condition of a dwelling. However, the decision throws no light on the recovery of damages for inconvenience for breach of contract((236) See also Campbelltown City Council v. Mackay (1989) 15 NSWLR 501, at pp 510-511 where the Court of Appeal again applied Perry to uphold an award of damages for vexation, distress and worry in a negligence action.). Jarvis was applied in another action for tort in Graham v. Voigt((237) (1989) 89 ACTR 11). In Holt v. Biroka Pty. Ltd.((238) (1988) 13 NSWLR 629), Jarvis was also applied to an action brought under the Fair Trading Act 1987 (N.S.W.) but without any real examination of its basis.
42. In Canada, the Supreme Court has taken a view contrary to that taken by the English Court of Appeal in Bliss, Hayes and Watts. In Vorvis v. Insurance Corporation of British Columbia((239) (1989) 58 DLR (4th) 193, at p 204), a majority of the Court said that cases such as Jarvis, Cox and Heywood "stand for the proposition that in some contracts the parties may well have contemplated at the time of the contract that a breach in certain circumstances would cause a plaintiff mental distress". Wilson J., with whose judgment L'Heureux-Dube J. concurred, went much further than the majority. Her Honour said((240) ibid., at p 212) that the absolute rule laid down in Addis and applied by the Supreme Court of Canada in Peso Silver Mines Ltd. (N.PL) v. Cropper((241) (1966) 58 DLR (2d) 1) was no longer the law. She said that what binds "the numerous English and Canadian authorities ... in which damages have been awarded for mental suffering in a variety of different contractual situations" is "the notion that the parties should reasonably have foreseen mental suffering as a consequence of a breach of the contract at the time the contract was entered into".
43. In New Zealand, the demise of the Addis rule seems imminent, if it has not already occurred. In Horsburgh v. New Zealand Meat Processors Industrial Union of Workers((242) (1988) 1 NZLR 698) and Hetherington v. Faudet((243) (1989) 2 NZLR 224), the Court of Appeal indicated that the rule in Addis may require reconsideration. Subsequently, in Whelan v. Waitaki Meats Ltd.((244) (1991) 2 NZLR 74), Gallen J. held that damages for mental distress were available for breach of an employment contract. Most recently, in Rowlands v. Collow((245) (1992) 1 NZLR 178), Thomas J. awarded damages to the plaintiff for mental distress and inconvenience suffered as a result of an engineer's breach of contract in relation to the construction of a driveway. His Honour said((246) ibid., at p 207.):
"It may therefore be timely for the Courts to reassert in this context the basic principles relating to remoteness of damages. If this is done the question in relation to all contracts is whether mental distress was a reasonably foreseeable consequence of the breach of contract or was within the reasonable contemplation of the parties in respect of any such breach at the time they entered into the contract. With commercial contracts it is most unlikely that such damage will have been foreseeable or within the parties' contemplation; with contracts of a more personal nature, mental distress could well be a foreseeable consequence and within the contemplation of the parties."
The applicable rule
44. If the matter were free from authority, the object((247) See The Commonwealth v. Amann Aviation Pty. Ltd. (1991) 174 CLR 64 , at pp 80, 98, 116, 136, 148, 161) of an award of damages for breach of contract and the principles of causation((248) See March v. E and M.H. Stramare Pty. Ltd. (1991) 171 CLR 506 ) and remoteness((249) See Wenham v. Ella (1972) 127 CLR 454, at pp 471-472; Burns v. M.AN. Automotive (Aust.) Pty. Ltd. (1986) 161 CLR 653, at p 667) would require the conclusion that damage for disappointment or distress, resulting from breach of contract, was compensable if it was within the reasonable contemplation of the parties when the contract was made. No doubt in most cases, the disappointment would be so negligible that the damage suffered could be regarded as de minimis and ignored. But in other cases, it seems unreasonable that the party in breach should escape liability even though, at the time of making the contract, that person knew that breach might result in the other party suffering disappointment. Suppose, for example, that an agent had agreed to purchase land on behalf of a principal knowing that, for many years, the principal had desired to purchase the land for the purpose of expanding his or her business. It seems unreasonable that the agent should escape liability for damages for disappointment if, in breach of contract, he or she were to fail to buy the land. Yet not only does the general rule, confirmed in Addis, deny recovery in such a case, but it also seems impossible to bring the case within the exceptions now recognised by the English courts. If in such a case, the innocent party has suffered not only disappointment but distress, the argument for damages for disappointment and distress, as well as any pecuniary loss, seems compelling. However, the rule in Addis has stood for the best part of a century. In this country it has suffered little, if any, inroad by judicial decision. Furthermore, in Fink, two((250) Dixon and McTiernan JJ.; see (1947) 74 CLR, at pp 142-143) of the three members of the majority accepted the common law rule to be that stated by Pollock C.B. in Hamlin.
45. It is still open to this Court to declare that damages for distress and disappointment in contract cases are not subject to any special rules. However, I do not think that the step should be taken in this case. Counsel for Mrs Dillon did not argue that the general rule laid down in Hamlin and confirmed in Addis should be rejected. He was content to rely on the modern English decisions. Consequently, the Court did not have the benefit of argument concerning the social and economic consequences of a decision which overturned the rule formulated in Hamlin. On the other hand, having regard to the decisions in Burton and Hobbs, the developments in England, Canada and New Zealand in the last 40 years and the requirements of basic principle, this Court should not accept everything that was said by Pollock C.B. in Hamlin or by the House of Lords in Addis.
46. The application of basic principle concerning the awarding of damages for breach of contract requires an award of damages for distress or disappointment where it is an express or implied term of the contract that the promisor will provide pleasure or enjoyment or personal protection for the promisee. Unless this Court were to refuse to follow Burton, Hobbs and Bailey as well as the decisions in Stedman and Athens-McDonald Travel Services Pty. Ltd., damages must also be recoverable for distress or disappointment consequent upon the suffering of physical inconvenience as the consequence of a breach of contract. Furthermore, because damages for personal injury may be recovered in an action for breach of contract((251) Woolworths Ltd. v. Crotty (1942) 66 CLR 603; Cullen v. Trappell (1980) 146 CLR 1 ) and because psychiatric illness constitutes personal injury((252) Mount Isa Mines Ltd. v. Pusey (1970) 125 CLR 383), damages for mental distress associated with a psychiatric illness or physical injury must also be recoverable in an action for breach of contract.
47. In the result, the Court should not presently reject the general rule enunciated in Hamlin and substantially confirmed in Addis. At the same time, it should recognise that damages for distress or disappointment are recoverable in an action for breach of contract if it arises from breach of an express or implied term that the promisor will provide the promisee with pleasure or enjoyment or personal protection or if it is consequent upon the suffering or physical injury or physical inconvenience. The question whether the general rule enunciated in Hamlin should be overruled can be considered when the Court has heard full argument on the question.
Mrs Dillon's right to damages for distress and disappointment
48. The contract between Mrs Dillon and Baltic was one in which Baltic impliedly promised to provide a pleasurable and enjoyable cruise for fourteen days. Its failure to do so means that it must pay damages for the distress and disappointment suffered by Mrs Dillon((253) See Jarvis (1973) QB 233). However, the sum awarded to her was more than twice the sum paid as the price of the fare. When combined with the return of the fare, it was much too high a figure. I agree with the comment of Kirby P.((254) (1991) 22 NSWLR, at p 31) in the Court of Appeal that in the absence of "some exceptional circumstance increasing the sting of the failure to provide the enjoyment and pleasure promised ... no more than half the sum awarded in this case should be the norm for the ordinary passenger". This sum is, of course, in addition to any damages awarded for the financial loss suffered by a plaintiff in paying for a promise which has not been fulfilled.
49. This is a convenient place to deal with the contention of Mrs Dillon that the $1,417 awarded as restitution of the balance of her fare should not be disturbed because that sum was recoverable as general damages. While I agree that general damages were recoverable by Mrs Dillon for the financial loss which she suffered in paying for a fourteen day cruise which was not completed, nevertheless the notice of contention must be rejected. If Mrs Dillon retained both the sum of $1,417 and the sum of $5,000, her compensation would be unreasonably excessive. If the appeal is allowed on the restitution issue and dismissed on the distress issue, however, the sum of $5,000 will be fair compensation for the general damage which she suffered over and above the loss of her valuables and personal injuries.
50. Accordingly, I agree with the orders proposed by the Chief Justice.