Other Relevant Principles

Remoteness of damage

An innocent party seeking to obtain damages must show that the defendant’s breach of the
contract was the effective cause of his loss. However, even where the plaintiff successfully
establishes this, it does not mean that the defendant has to assume liability for all losses
suffered by the plaintiff as a result of his breach. The defendant cannot be held liable for
losses which, though following from his breach, are too remote. The defendant must foresee
either before or at the time he entered into the contract that the plaintiff will suffer loss. The
loss is too remote if the defendant foresees that the plaintiff suffered loss after the contract.

The remoteness of damages was governed by the celebrated case of Hadley v Baxendale
[1843-60] All ER Rep 461 where a shaft in the plaintiff’s mill broke down and the plaintiffs
hired the defendant to transport the shaft for repairs. The defendant delayed in delivering the
shaft and the defendant did not know that the plaintiffs did not have a spare shaft. The
plaintiffs sued for loss of profits as damages. The question raised by the appeal in this case
was whether the defendant could be held liable for damage that the defendant was not aware
would be incurred from a breach of the contract and whether the loss of profits resultant from
the mill’s closure was too remote for the claimant to be able to claim. Plaintiff’s claim for
loss of profit was rejected by the court on the ground that it was too remote. Baxendale could
only be held liable for losses that were generally foreseeable or if Hadley had mentioned his
special circumstances in advance. The mere fact that a party is sending something to be
repaired does not indicate that they would lose profits if it were not delivered on time. Losses
are too remote if they are: 1st limb – ordinary losses which arise naturally in the usual course
of things or 2nd limb – extarordinary losses which arise within the reasonable contemplation
of the parties at the time they entered into the contract. Here, the loss of profits did not fall
under the 1st limb as normally mills would have spare shaft. Since the defendant did not know
that the plaintiffs did not have spare shaft, the losses did not fall under 2nd limb. Hence, the
losses are not recoverable which is too remote.

The rule in Hadley v Baxendale was restated in Victoria Laundry (Windsor) Ltd v Newman
Industries Ltd [1949] 2 KB 528 where the loss for which a plaintiff seeks to recover must, at
the time of the contract, be reasonably foreseeble as liable to result from the breach. In
determining what was reasonably foreseeable by the parties, regard must be had to the
knowledge possessed by the parties. For this purpose, knowledge possessed is of two kinds,
that is imputed knowledge and actual knowledge. As to the first, imputed knowledge, this
means that everyone, as a reasonable person, is taken to know the ‘ordinary course of things’
and consequently what loss is liable to result from a breach of contract in that ordinary
course. In relation to actual knowledge, this applies where in a particular case, parties
actually possess knowledge of special circumstances outside the ‘ordinary course of things’
of such a kind that a breach in those special circumstances would be liable to cause more loss.
Thus, the rule in Hadley v Baxendale was explained in terms of reasonable foreseeability
with reference to imputed knowledge which embodies the first limb and to actual knowledge
which embodies the second limb.

In Malaysia, Section 74 of the Contracts Act 1950 provides for the test for remoteness of
damages which is nearly similar to the test in Hadley v Baxendale. The first limb of s 74 (1)
provides for compensation of losses ‘which naturally arose in the usual course of things from
the contract’. This would refer to losses which are normally expected from a breach in
question. The second limb of s 74 (1) is for losses which ‘the parties knew, when they made
the contract, to be likely to result from the breach of it’. These are special losses which have
been known or contemplated by the parties.

Referring to the current case, the court referred to Victoria Laundry case where the plaintiffs
who were buyers of a boiler for their laundry and dry cleaning business which was delivered
late and in breach of contract by the defendants, were held able to recover ‘ordinary’ loss of
profits but not loss of profits from an extraordinarily lucrative contract of which the
defendant knew nothing. In this present case, it was alleged in the statement of claim that at
all material times the defendants well knew that the plaintiffs bought the said goods in the
ordinary course of their business for resale at a profit to its customers and that in breach of
the said contracts, the defendants wrongfully failed to deliver the said goods as agreed or at
all. In such circumstances, when as here, the buyer is a trader and the seller knew or ought to
have known that the buyer bought the goods with a view to resale, the buyer is entitled to his
loss of profits on the resale upon non-delivery of the goods by the seller.
Mitigation of damage

The principle that damages will not be awarded for loss that is too remote is complemented
by the principle that an innocent party has a duty to mitigate his loss. The duty to mitigate
only comes about when there is a breach of contract. The principle of mitigation of damage is
provided in the Explanation to s 74 (3) of CA 1950 where in estimating the loss or damage
arising from breach of contract, the means which existed of remedying the inconvenience
caused by the non performance of the contract must be taken into account. The burden of
proof is on defendant to prove that plaintiff has failed to mitigate.

An early authority is the case of Kabatasan Timber Extraction v Chong Fah Shin [1969] 2
MLJ 6, FC. In this case, the appellants had contracted to supply timber to the respondent,
which was to be delivered at the site where the respondent had erected a sawmill. Three lots
were subsequently delivere. The trial judge found that the second lot, instead of being
delivered to the mill, was dumped more than 500 feet from the mill. The respondent
purchased new timber elsewhere in substitution of the second lot and claimed for the cost of
doing so which was allowed by the High Court in the form of damages of $13,192.41. On
appeal, the Federal Court held that the respondent had a duty to take reasonable steps to
mitigate its loss. The court held that instead of expending money tp purchase new timber, all
that was required of the respondent was to arrange to haul the logs which were lying a few
hundred feet away from the sawmill to the sawmill. Thus, the Federal Court only awarded
damages of $1,000 for the approximate cost of hauling the logs to the sawmill.

The question on whether plaintiff has failed to mitigate the loss is a question of fact. There
are three main principles of mitigation which are avoidable losses, avoided losses and money
spent in mitigation. For the purpose of this case, we will only discuss on avoidable losses.
The plaintiff will not recover damages for losses it should have avoided where the plaintiff
cannot recover damages for any losses which can be avoided had he take any reasonable
steps to avoid the losses. This can be seen in the case of Tansa Enterprise Sdn Bhd v
Temenang Engineering Sdn Bhd [1991] where the defendant was alleged to have breached
the contract to supply common bricks to the plaintiff. As such, the plaintiff claimed for the
losses incurred due to the breach. However, the court held that the common brick is available
in the open market at the material time and that they could have bought it there. As such, the
plaintiff could have mitigated his loss. Nevertheless, in mitigating losses, the aggrieved party
must ensure that they did not put their commercial reputation or good public relations at risk.
They must also ensure that in doing so, it must not cause them unreasonable expenses or
involved them in complicated litigation.

Referring to the current case, it was held that the normal measure of damages for non-
delivery of goods sold is the difference between the market price and the contract price but
this rule applies only where there is an ‘available market’ that is to say that the buyer should
be able to go out and buy equivalent goods. In the case of fob or cif contracts, the relevant
market for the purpose of the assestment of damages, in the case of non-delivery, is the
market price at the place of delivery. However, where the goods concerned are not
immediately available or are not near at the hand, the question whether the buyer should wait
or buy from afar is to be determined by what is reasonable. On the facts of the instant case,
the port of destination of the goods was Montreal, Canada. It was alleged that the plaintiffs
could not obtain the goods in Canada as there was no market there for the same nor could
they have obtained the goods anywhere else as their quota had been exhausted. Those being
the facts, there was no available alternative source whereby the plaintiffs could have obtained
replacement goods to mitigate their loss. The plaintiffs had therefore discharged the burden of
proof which lay upon them in this regard.