BALTIC SHIPPING COMPANY v. DILLON

(1993) 176 CLR 344
(1993) F.C. 93/001

(Judgment by: DEANE J, DAWSON J)

Between: BALTIC SHIPPING COMPANY
And: DILLON

Court:
High Court of Australia

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:
DEANE J

DAWSON J

These proceedings arise out of the sinking of the "Mikhail Lermontov" off the South-Eastern coast of New Zealand in the late afternoon and evening of 16 February 1986. The respondent, Mrs Dillon, who was a passenger on the ship on a Sydney to Sydney pleasure cruise, suffered physical injuries and emotional trauma and lost items of personal property in the course of the shipwreck. She was also distressed and disappointed by reason of the fact that what had been planned and purchased as a happy holiday experience had ended in catastrophe.

2. Shortly after the shipwreck, the appellant ("Baltic"), who was the owner of the ship and the operator of the cruise, refunded $787.50 to Mrs Dillon as a "full refund ... of the unused portion of (the) passage money". Subsequently, in response to claims made by Mrs Dillon, Baltic paid her a further $4,786 by way of "settlement" of any claim she might have against it. Mrs Dillon accepted that amount and executed a deed of release.

Notwithstanding that settlement, Mrs Dillon instituted the present proceedings against Baltic in the Admiralty Division of the Supreme Court of New South Wales. Ultimately, the appellant admitted negligence. However, it denied any further liability to Mrs Dillon.

3. The learned Judge in Admiralty (Carruthers J.) held that the settlement which Mrs Dillon had made and the deed of release which she had executed should be declared void ab initio pursuant to the provisions of ss.7 and 9 of the Contracts Review Act 1980 (N.S.W.) and of s.87 of the Trade Practices Act 1974 (Cth). He also held that Baltic's standard conditions limiting liability had not, in the circumstances of the case, formed part of the contract between Baltic and Mrs Dillon. After making allowance for the $4,786 which Mrs Dillon had received on account of the "settlement", he made a total award of damages in her favour in the amount of $51,396, calculated as follows:

Restitution of (balance of) fare $1,417
Loss of (items of personal property) 4,265
Compensation for disappointment and distress at the loss of the entertainment, etc 5,000
Damages for personal injuries (including emotional trauma) 35,000
Interest 10,500 56,182
Less paid by the defendant 4,786
$51,396"

An appeal by Baltic to the New South Wales Court of Appeal (Gleeson C.J. and Kirby P.; Mahoney J.A. dissenting) was dismissed. Baltic now appeals from the judgment and orders of the Court of Appeal. It should be noted that the damages for loss of property, "personal injuries" and "disappointment and distress" were all awarded as compensatory damages for breach of contract. The statement of claim had contained an alternative claim in negligence but that appears to have been discarded as superfluous somewhere along the way.

4. Two issues now remain for determination on this appeal. The first is whether Mrs Dillon was entitled to the order made in her favour for "(r)estitution" of the amount of $1,417 being the balance of the fare after the refund of $787.50, that is to say, being that part of the fare which Baltic claims to be attributable to the period of the cruise which had expired before the shipwreck. The second is whether Mrs Dillon was entitled to "(c)ompensation for disappointment and distress at the loss of the entertainment, etc.".

Restitution of balance of the fare

5. The learned trial judge and the majority of the Court of Appeal held that Mrs Dillon was entitled to a refund of the whole fare. The money had, in their Honours' view, been paid under a contract of passage which was an entire contract. It had been paid for an indivisible consideration which had wholly failed. In the words of Kirby P. (with whom Gleeson C.J. agreed on this aspect of the case), Mrs Dillon "did not contract with the appellant for an eight day cruise, still less for an eight day cruise interrupted by the disaster which befell the "Mikhail Lermontov". What she contracted for was a relaxing holiday experience. It is this that she failed to secure." Both the learned trial judge and the majority of the Court of Appeal thought that there was a good analogy between the present case and Sir George Jessel M.R.'s well known example in In re Hall and Barker((122) (1878) 9 Ch D 538, at p 545.):

"(I)f a shoemaker agrees to make a pair of shoes, he cannot offer you one shoe, and ask you to pay one half the price".

6. The fact that the promised consideration under a contract is "entire" or "entire and indivisible"((123) See, e.g., Steele v. Tardiani (1946) 72 CLR 386, at p 401) will, subject to any applicable provision of the contract, prevent recovery, in an action in contract, of part of the promised purchase price in circumstances where there has been a failure to provide part of that consideration. In such a case, the purchase price represents the contractual quid pro quo for the whole of the promised indivisible consideration and the promisee is not, in the absence of any applicable provision in the contract, under a contractual obligation to accept or pay for part only thereof. If, in such a case, the promisee accepts the benefit of part only of the consideration, any enforceable obligation to pay for it must arise from some new contract or from the operation of principles of unjust enrichment in the particular circumstances.

7. The present case is not, however, one in which a party who has provided part only of the promised consideration seeks to recover part of the agreed purchase price. In the present case, it is the promisee, Mrs Dillon, who seeks to recover the whole of a prepaid purchase price on the ground that the consideration for which it was paid has wholly failed. Mrs Dillon does not rely upon any provision of the contract between Baltic and herself under which Baltic was obliged to refund the whole of the fare in the events which happened. There was no such contractual provision. The basis of her claim is the obligation of restitution which the law prima facie imposes upon the recipient of a payment made under a contract which has become "abortive for any reason not involving fault on the part of the plaintiff" in a case "where the consideration, if entire, has entirely failed, or where, if it is severable, it has entirely failed as to the severable residue"((124) Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32 , per Lord Wright at pp 64-65). Such a claim is not a claim on the contract((125) See Pavey and Matthews Pty. Ltd. v. Paul (1987) 162 CLR 221 , at pp 256-257; Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548 , at pp 572, 578; and, generally, Birks, "The Independence of Restitutionary Causes of Action", (1990) 16 University of Queensland Law Journal 1, at pp 19-20.). Its historical antecedent in terms of forms of action is the old indebitatus count for money had and received to the use of the plaintiff((126) See, e.g., Moses v. Macferlan (1760) 2 Burr 1005, at p 1012 (97 ER 676, at pp 680-681); Fibrosa (1943) AC, at pp 62-64; Bullen and Leake, Precedents of Pleadings, 3rd ed. (1868), pp 44-50.). Its modern substantive categorization is as an action in unjust enrichment. In other words, the receipt of a payment of money for a consideration which wholly fails "is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution ... to the person who has sustained the countervailing detriment"((127) Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation (1988) 164 CLR 662 , at p 673.).

8. The principle which underlies the claim of the payer for restitution of the whole purchase price in that category of case is "the most ordinary principle of law" identified by Brett L.J. in Wilson v. Church((128) (1879) 13 Ch D 1, at p 50):

"(W)here money is paid for a consideration which is to be performed after the payment, if that consideration wholly fails, the money becomes money in the hands of the borrowers held to the use and for the benefit of the lenders, and must be returned"((129) See, also, Fibrosa (1943) AC, per Lord Porter at p 81).

That statement of principle was made in an appeal from a judgment of Fry J. in proceedings in the Chancery Division. Like the indebitatus count for money had and received, it was framed in the traditional language of trust or use. The indebitatus count was, however, a common law count for the enforcement of a common law obligation((130) Indeed, a conclusion that the money had and received had been received by the recipient as a trustee was seen - though not always - as providing a defence against, rather than a foundation for, a claim on the count: see, e.g., Bullen and Leake, op cit, pp 46-47.) and the underlying principle which Brett L.J. identified had long been part of the fabric of the common law. Nonetheless, in a modern context where common law and equity are fused with equity prevailing, the artificial constraints imposed by the old forms of action can, unless they reflect coherent principle, be disregarded where they impede the principled enunciation and development of the law. In particular, the notions of good conscience, which both the common law and equity recognized as the underlying rationale of the law of unjust enrichment, now dictate that, in applying the relevant doctrines of law and equity, regard be had to matters of substance rather than technical form.

9. The critical question on this aspect of the present case is whether the consideration for which Mrs Dillon paid the stipulated fare to Baltic wholly failed. That consideration was not, for the purposes of her action in unjust enrichment, the contractual promise which she received from Baltic. Technically, it can be argued that Baltic's bare promise to provide the pleasure cruise itself represented some consideration for Mrs Dillon's fare and that, that being so, it is wrong to say that the consideration for the prepayment wholly failed. As has been said, however, the law of unjust enrichment is concerned with substance rather than technical form. If a bare promise to provide consideration were regarded as the provision of consideration, "there could never be any recovery of money, for failure of consideration, by the payer of the money in return for a promise of future performance, yet there are endless examples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled"((131) See Fibrosa (1943) AC, per Viscount Simon L.C. at p 48). Prima facie, where a simple promise of future performance is involved, the law of unjust enrichment looks to the future performance and not the bare promise as the relevant consideration((132) See, e.g., Rowland v. Divall [1923] 2 KB 500 , at pp 506-507; Shaw v. Ball (1962) 63 SR (N.S.W.) 910, at p 915; Rover International Ltd. v. Cannon Film Ltd. (1989) 1 WLR 912, at pp 923-924; Birks, An Introduction to the Law of Restitution, rev ed (1989), pp 222-223; Goff and Jones, The Law of Restitution, 3rd ed. (1986), pp 369-370; Beatson, The Use and Abuse of Unjust Enrichment, (1991), pp 3, 63). Thus, the consideration for which Mrs Dillon paid the fare was the substance of Baltic's contractual promise, namely, the actual provision of the components of the promised fourteen-day pleasure cruise upon the "Mikhail Lermontov". If all that Mrs Dillon had relevantly received had been Baltic's bare promise, unperformed and unenforced, the consideration for the whole of the fare would have wholly failed. In fact, however, Baltic provided and Mrs Dillon accepted the accommodation, the sustenance, the entertainment and the transport involved in the first eight clear days of the fourteen-day cruise. We turn to consider the significance of that fact.

10. It is arguable that the promised consideration of the pleasure cruise was severable in the sense that, subject to the obligation to transport passengers back to Sydney, the fare could be apportioned or allocated on a day by day basis. As has been seen, however, the view that has prevailed in the courts below is that the consideration was entire and indivisible and it may be assumed, for the purposes of this appeal, that that view is correct. The fact that the promised consideration was entire and indivisible may be important in an action in unjust enrichment for restitution of money paid for a consideration that has failed. Thus, as the above extract from the speech of Lord Wright in Fibrosa indicates((133) See above fn.(124). See, also, (1943) AC, at pp 56, 60, 77; and cf. The Commonwealth v. Amann Aviation Pty. Ltd. (1991) 174 CLR 64 , at p 117), the weight of authority supports the approach that in such an action that fact will automatically preclude recovery of part of the purchase price in a case of partial failure of consideration((134) See, generally, Goff and Jones, op cit, pp 54-55, 369-371, 449-454, 458-465, 480-481) with the result that the innocent party is confined to suing in contract for the difference in value between what was promised and what was provided((135) In many, and possibly most, cases, there will be no practical difference in the result in that the difference in value between what was promised and what was provided will be equivalent to that part of the purchase price which can be attributed to that which was not provided.). It is, however, unnecessary to consider that question here since it has not been argued that, if Mrs Dillon is not entitled to restitution of the full fare on the basis of a complete failure of consideration, the refund by Baltic of part of the fare was inadequate compensation for the failure to provide the final days of the cruise. Again, the fact that the consideration was entire and indivisible will prima facie entitle the promisee to reject a tender of only part of the consideration((136) See, e.g., Giles v. Edwards (1797) 7 TR 181 (101 ER 920)) and may, depending upon the circumstances, support a conclusion that part only of the consideration, if provided, was worthless and, for the purposes of the law of unjust enrichment, no consideration at all((137) See, e.g., Heywood v. Wellers (1976) QB 446, at pp 458-459). Ordinarily, however, an entire and indivisible consideration will not wholly fail if part of it is tendered and accepted. If, for example, the customer of Sir George Jessel's shoemaker, having paid in advance, had accepted one shoe and worn it with a matching shoe from another pair, it could not be said that the consideration for the prepayment had wholly failed. On the other hand, if the customer, having paid in advance, had refused to accept the tender of a single shoe on the ground that the agreed consideration of a pair of shoes was entire and indivisible, the money which he had paid would have been recoverable for a total failure of consideration.

11. There can be circumstances in which there is, for relevant purposes, a complete failure of consideration under a contract of transportation notwithstanding that the carrier has provided sustenance, entertainment and carriage of the passenger during part of the stipulated journey. For example, the consideration for which the fare is paid under a contract for the transportation of a passenger by air from Sydney to London would, at least prima facie, wholly fail if, after dinner and the inflight film, the aircraft were forced to turn back due to negligent maintenance on the part of the carrier and if the passenger were disembarked at the starting-point in Sydney and informed that no alternative transportation would be provided. Thus, in Heywood v. Wellers, Lord Denning M.R. regarded it as self-evident that, in some circumstances where part of a journey had been completed, money paid to the carrier or "driver" was recoverable "as of right" for the reason that it was "money paid on a consideration which had wholly failed"((138) ibid., at p 458).

12. However, the promised consideration in the present case was not, as a matter of substance, the transportation of Mrs Dillon from Sydney to Sydney. As has been said, it was the provision of all that was involved in the promised pleasure cruise as a holiday experience. Even on the assumption that that promised consideration was entire and indivisible, it did not wholly fail. Baltic provided and Mrs Dillon accepted and enjoyed eight complete days of the cruise. It is true that Mrs Dillon would have been entitled to decline to board the ship or to accept only part of the promised consideration if it could have, and had, been known in advance that all that Baltic would in fact provide was eight days of cruising culminating in the sinking of the ship off New Zealand as a result of Baltic's breach of its contractual duty to take reasonable care. If, in that necessarily hypothetical situation, Mrs Dillon had wisely decided to stay at home, the consideration for the fare would have failed completely and, subject to any applicable provisions of the contract between herself and Baltic((139) See, e.g., Fibrosa (1943) AC, at p 67), she would have been entitled to succeed in an action in unjust enrichment for the recovery of the whole fare. In circumstances where Mrs Dillon accepted and enjoyed the major portion of the pleasure cruise, however, there was no complete failure of the consideration for which she paid the fare. The catastrophe of the shipwreck and its consequences undoubtedly outweighed the benefits of the first eight complete days. It did not, however, alter the fact that those benefits, which were of real value, had been provided, accepted and enjoyed.

13. There is a further reason, which would appear not to have been raised in argument in the courts below, why Mrs Dillon's action for restitution of the fare paid to Baltic must fail. It is that she has sought and obtained an order against Baltic for compensatory damages for Baltic's failure to perform its contractual promises to her. In particular, she has received a refund of a proportionate part of the fare and has obtained and will retain (see below) the benefit of an award of damages for the disappointment and distress which she sustained by reason of Baltic's failure to provide her with the full pleasure cruise which it promised to provide. In these circumstances, Mrs Dillon has indirectly enforced, and indirectly obtained the benefit of, Baltic's contractual promises.

14. Ordinarily, as has been seen, "when one is considering the law of failure of consideration and of the ... right to recover money on that ground, it is ... not the promise which is referred to as the consideration, but the performance of the promise"((140) ibid., per Viscount Simon L.C. at p 48). That statement has nothing to say, however, to the situation which exists when the promisee has sought and obtained an award of full compensatory damages for the failure to perform the promise. In that situation, the damages are awarded and received as full compensation for non-performance or breach of the promise and represent the indirect fruits of the promise. That being so, it would be quite wrong to say either that the only quid pro quo which has been obtained for the payment by the promisee is the bare promise or that the promise and the recovery of compensatory damages for its breach can realistically be seen as representing no consideration at all. In such a case, the promise has been indirectly enforced and the award of compensation has, as a matter of substance, been received in substitution for the promised consideration. In those circumstances, the promisee, having received full compensation for non-performance of the promise, is not entitled to a refund of the price upon payment of which the performance of the promise was conditioned((141) See, e.g., Moses v. Macferlan (1760) 2 Burr, at p 1010 (97 ER, at p 679)). Were it otherwise, the promisee "would have the equivalent" of performance of the contractual promise "without having borne the expense" which he or she had agreed to pay for it((142) See T.C. Industrial Plant Pty. Ltd. v. Roberts Q'ld Pty. Ltd. (1963) 37 ALJR 289, at p 293; (1964) ALR 1083, at p 1090).

Damages for Distress and Disappointment

15. The general principle underlying the ascertainment of damages for breach of contract is that a successful plaintiff is entitled to the monetary sum which provides reasonable compensation for the breach "without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept"((143) Wenham v. Ella (1972) 127 CLR 454 , per Walsh J. at p 466). The various rules which have been enunciated by the courts in an endeavour to provide guidance and to promote consistency in the assessment of such damages have, to some extent, been self-fulfilling in that, particularly in the case of commercial contracts, the parties to a contract are likely to make their bargain on the basis that, in the absence of any contrary provision in the contract, damages will, in the event of breach, be assessed on the basis of those rules. In that context, and notwithstanding the validity of Walsh J.'s comment in Wenham v. Ella((144) ibid) to the effect that many of the "rules which constitute useful guidance in the ascertainment of damages" should not be treated as other than "prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve" an appropriate result, the courts should tread warily before disturbing general rules which have come to be regarded as settled.

16. One of the general rules relating to the assessment of compensatory damages for breach of contract which has been accorded the status of settled principle is the rule that a plaintiff is not entitled to recover damages for the "disappointment of mind", distress and injured feelings "occasioned by the breach of contract"((145) Hamlin v. Great Northern Railway Co. (1856) 1 H. and N. 408, at p 411 (156 ER 1261, at p 1262); and see, e.g., Addis v. Gramophone Co. Ltd. [1909] AC 488 ). That rule, where applicable, represents an essentially pragmatic and judicially imposed assumption which is to be made for the purposes of the application of the second limb of the rule in Hadley v. Baxendale((146) (1854) 9 Ex 341 (156 ER 145)), that is to say, it is to be assumed that disappointment or distress flowing from the breach of contract would not have been in the contemplation of the parties, at the time they made the contract, as a likely result of breach. As Kirby P. commented in the Court of Appeal, it is a result of history, rather than logic, that a different rule evolved in the law of torts. Notwithstanding that the rule is based upon pragmatism rather than logic, we are unable to agree with the suggestion to be found in some recent judgments that it should now be effectively abolished by judicial decision((147) See, in particular, Vorvis v. Insurance Corporation of British Columbia (1989) 58 DLR (4th) 193, at pp 212-220; Rowlands v. Collow (1992) 1 NZLR 178, at p 208.). There are, however, established qualifications of or exceptions to the general rule. The question which arises on this aspect of the case is whether disappointment and distress sustained by reason of breach of a contract to provide a pleasant and relaxing holiday experience comes within them. In our view, it does.

17. The many cases in which an award of damages for breach of contract has included compensation for mental distress can be grouped (sometimes a little uncomfortably) into a number of different categories, including breach of promise of marriage, breach of contract causing physical injury and breach of contract directly causing physical inconvenience. There is something to be said for the approach that those different categories of case in which the general rule is inapplicable should be seen as manifestations of some more general qualification or confinement of the prima facie rule. It has, for example, been suggested that the prima facie rule excluding damages in contract for mental distress should be seen as confined to ordinary commercial contracts and contracts involving proprietary rights as distinct from contracts relating to personal and social services and relationships((148) See, e.g., Horsburgh v. New Zealand Meat Processors Union (1988) 1 NZLR 698, at pp 701-702; Whelan v. Waitaki Meats Ltd. (1991) 2 NZLR 74, at pp 87-89.). It is, however, unnecessary to pursue that question for the purposes of the present case since we consider that regardless of whether it be possible to identify some such overall confinement of the general rule, it should be accepted that the present case falls within a category to which the general rule does not apply. That category of case encompasses cases where the disappointment and distress have been caused by breach of a contract under which the party allegedly in breach is shown expressly or impliedly to have agreed to provide pleasure, entertainment or relaxation or to prevent molestation or vexation((149) See, e.g., Silberman v. Silberman (1910) 10 SR (N.S.W.) 554, at pp 557-560; Stedman v. Swan's Tours (1951) 95 Sol J 727; Athens-MacDonald Travel Service Pty. Ltd. v. Kazis (1970) SASR. 264, at pp 270-275; Jarvis v. Swans Tours (1973) QB 233, at pp 237-238, 239, 240-241; Jackson v. Horizon Holidays Ltd. [1975] 1 WLR 1468 , at p 1472; Heywood v. Wellers (1976) QB, at p 459; Falko v. James McEwan and Co. (1977) VR 447, at p 451; Sampson v. Floyd (1989) 2 EGLR 49, at p 50; Hayes v. James and Charles Dodd [1990] 2 All ER 815 , at pp 824, 826.). In cases falling within that category, an assumption that the disappointment and distress occasioned by breach would not have been within the contemplation of the parties is particularly unjustifiable. In that regard, we agree with the comment of Bingham LJ. in Watts v. Morrow((150) [1991] 1 WLR 1421 , at p 1445):

"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. If the law did not cater for this exceptional category of case it would be defective."

18. The object of the contract between Baltic and Mrs Dillon in the present case was to provide Mrs Dillon with the relaxing enjoyment and entertainment of a fourteen-day pleasure cruise. It was an implied term of the contract that Baltic would take all reasonable steps to provide such a cruise. The direct consequence of Baltic's admitted breach of contractual duty was that Baltic failed to provide the latter part of that promised pleasant holiday. Instead, it provided an extraordinarily unpleasant experience. Subject to the ordinary need to avoid double compensation, Mrs Dillon was entitled to recover damages for the disappointment and distress which she suffered as the result of Baltic's breach of contract.

Conclusion

19. It follows from what has been said above that the award of damages in Mrs Dillon's favour should be reduced by eliminating the award of $1,417 which represented "(r)estitution" of that part of the fare which Baltic had retained as attributable to the eight clear days of the cruise before the shipwreck. The interest component of the award should consequently be reduced to the extent that it is attributable to that $1,417.

20. There remains for consideration the question whether the amount of $5,000 awarded for "disappointment and distress at the loss of the entertainment, etc." should be increased for the reason that, in the context of the need to avoid double compensation, that amount may have been adjusted down to take account of the fact that Baltic was also being required to make restitution of the whole of the fare. Both the learned trial judge and the majority of the Court of Appeal were clearly conscious of the need to avoid overlapping or double compensation. Nonetheless, we have come to the conclusion that any upwards adjustment of the amount of $5,000 could not be justified. Viewed against the "emotional scars" and "psychological trauma" (including "sense of panic, continued preoccupation with the event, nightmares, jumpiness, poor concentration and hyper-vigilance") which the learned trial judge found that Mrs Dillon had sustained as a result of the shipwreck, any disappointment and distress caused by Baltic's failure to provide the whole of the pleasure cruise seems to us to have necessarily been comparatively insignificant. In a context where Mrs Dillon has received a refund of part of the fare to cover the lost final days and has been compensated, under another head of damages, for those "emotional scars" and that "psychological trauma", the award of an additional $5,000 damages represents more than adequate compensation for any "disappointment and distress at the loss of the entertainment" and other benefits of those final days.