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The exceptions to the rule in Addis [v Gramophone Co Ltd [1909] AC 488] are fraught with difficulties and ambiguities. The preferable route is therefore to simply allow recovery of contractual damages for mental distress where to do so would not contravene the principle of remoteness of damage.

Question 1 of 2     “[T]he exceptions to the rule in Addis [v Gramophone Co Ltd [1909] AC 488] are… fraught with difficulties and ambiguities… [T]he preferable route is therefore to simply allow recovery of contractual damages for mental distress where to do so would not contravene the principle of remoteness of damage”: Andrew Phang, “The CrumblingEdifice? The Award of Contractual Damages for Mental Distress” [2003] Journal of Business Law 341, 388.

                               Critically evaluate this statement.

Addis establishes that non-pecuniary losses are generally non-recoverable in breaches of contract. Non-pecuniary loss refers to “distress, frustration, anxiety…” (Bingham LJ, Watts v Morrow). Attached to this “blanket ban” rule (Holmes, “Mental Distress Damage…” 2004, 687) are some exceptions. As they have caused the most confusion and controversy, focus will be upon the two outlined in Watts. Namely, physical inconvenience and the ‘object of contract’ exceptions – the uncertainty of which are especially portrayed in Farley v Skinner. It is submitted that replacing Addis’ rule with the doctrine of remoteness of damage would be a more straightforward method of compensating non-pecuniary losses, though not without its own drawbacks.

Bingham LJ in Watts (p1445) said non-pecuniary losses are recoverable (a) where the defendant fails to provide the “pleasure, relaxation, piece of mind” which was the “very object of the contract”, and (b) for physical inconvenience caused by the breach and its subsequent mental distress. Contrastingly, damages under the remoteness test (Hadley, Victoria Laundry) would be awarded where the non-pecuniary loss would reasonably have been in the contemplation of both parties, upon formulation of the contract (Jackson), as a “serious possibility” or a “not unlikely” (The Heron II) result of the breach. Courts fear the remoteness test would trigger a floodgate of claims and enormous awards similar to the United States (Staughton LJ, Hayes). However, courts’ continual emphasis on keeping damages “restrained” (Bingham LJ, Watts, p1445) and modest – e.g. £8,500 for a couple’s spoiled world cruise (Milner) and £10,000 acknowledged as especially high (Farley) – suggests these fears are exaggerated. To decipher the preferable route, analysis of both exceptions are required.

Phang believes the physical inconvenience exception is justified because judges can fairly easily draw a line between the mental distress and its physical manifestations. For instance, in Hobbs – where the defendant had to walk home due to an incomplete train journey – the court successfully distinguished between mere vexation or annoyance and real physical discomfort. Contrastingly, Lord Cooke argued, “the line may not always be easy to draw” (Johnson, p50). The issue is that physical and mental matters are predominantly intertwined, and the mental distress stemming from the physical inconvenience is often so poignant that it might as well be considered the main rationale for awarding damages (Phang) – the very factor which supposedly falls outside the scope of the exception. While McKendrick and Graham explore the possibility that the difference between “inconvenience” and “disappointment” may be “like an elephant on the doorstep… a judge knows it when he sees it” (“The Sky’s the Limit…” 2002, p165), it is argued that it is an artificial distinction with minimal guidance. Moreover, in a world now characterising certain mental distress as acute psychiatric illnesses (Johnson v Unisys), it is unfortunate that the law is not mirroring such acknowledgement – especially as mental distress unaccompanied by physical manifestations are sometimes more worthy of compensation than physical aspects (Phang). Opportunity to shed some light on these issues arose in Farley, where the claimant sought damages for distress caused after the property surveyor failed, after instruction, to inform him of aircraft noise. However, the judges failed to provide clarity.

Despite the physical inconvenience exception forming the basis of Lord Clyde’s reasoning, he found it inessential to produce “detailed analysis or definition” of the term ‘physical’ as he believed ‘inconvenience’, on its own, is capable of discerning “difficulty and discomfort which are more than mere matters of sentimentality” (para [35]). Such lack of explanation affords judges considerable discretion to tailor the exception to suit their viewpoints in different cases, validating Phang’s opinion that the exceptions are fraught with ambiguities. Arguably, Lord Scott’s sensory approach was more informative. He stipulated that where the cause of the inconvenience is sensory (hearing, touch, sight, smell etc.), damages can be awarded subject to the remoteness rules (para [85]). At first glance, this appears more attractive than Lord Clyde’s haphazard explanation. Nevertheless, it continues to ignore that what triggered Mr Farley’s distress was not the sensory disturbance of aircraft noise, but the circumstances under which the noise occurred: disrupting his enjoyment of a “quiet reflective breakfast… or pre-dinner drinks” (para [69]).

The ‘object’ exception is utilised in an abundance of contractual contexts: solicitors failing to secure a non-molestation order (Heywood); holidays not living up to advertised expectations (Jarvis); failure to construct a pool deep enough for diving (Ruxley v Forsyth). With its arbitrarily wide scope, the exception risks disintegrating as its own category (Phang) when it overlaps with others (e.g. Farley where both exceptions were applicable but no clear guidance given on when to apply each). More controversial is the fact damages are only awarded where the matter of importance is made known expressly, not impliedly (e.g. express request of pool depth in Ruxley and express inquiry about aircraft noise in Farley). Following the expansion in Farley, albeit minor, to include ‘major’ or ‘important’ factors of the contract within the exception, distinguishing between express and implied terms is required to limit the scope of the exception as mental satisfaction is arguably an ‘important’ object of every consumer contract (Burrows). However, ignoring that a purchaser’s peace of mind is implicit in a survey contract is precisely part of the problem; encompassing only express terms leads the granting of damages to depend upon the claimant obtaining legal advice on how to sufficiently specify important factors, irrespective of the fact they may be obvious under the contract (McKendrick).

Farley also failed to elucidate matters on the object exception. While Lord Steyn and Lord Hutton utilised the minor extension to the object exception, and Lord Clyde the physical inconvenience exception, Lord Scott adopted a radical approach using Ruxley as a basis to award damages wherever the claimant has been deprived of a contractual benefit valuable to them which cannot be compensated any other way. Shifting the focus onto the claimant’s ‘performance interest’ is doubtlessly expansive, but risks contorting Robinson v Harman’s compensatory principle by putting the claimant in a better position than he would have been in had the contract been performed. In other words, Lord Scott was flawed in using Ruxley to justify compensation in Farley because, unlike Mr Forsyth who had a contractual entitlement to a deep pool, Mr Farley only had entitlement to the use of reasonable care and skill by the surveyor, not an entitlement to a house unaffected by noise. Holmes believes Lord Scott unknowingly awarded damages for consequential loss under the physical inconvenience exception, and Burrows believes the thrust of his approach indicates that mental distress is recoverable if not too remote. Thus, rather than yielding a more principled layout, the contradictory and disparate judicial approaches in Farley are confusing enough to make one’s “head spin” (Bowen, “Watts v Morrow and the Consumer Surplus” 2003, 6) – merely exacerbating the exceptions’ ambiguities.

While the well-established remoteness rules may achieve a more consistent approach than exceptions lacking “systematic rationalization” (Echonchong, “Breach of contract…” 1996, 634), adopting its tests would defy previous decisions. For instance, Bingham LJ in Watts (p1445) explaining that the Addis rule is founded on policy considerations as opposed to foreseeability implies that mental distress damages require harsher restrictions than remoteness (Burrows).  Moreover, the remoteness rules risk ordinarily ruling out non-pecuniary loss as too remote: while some distress may be foreseeable in most contractual breaches, distress severe enough to warrant damages is unlikely to have been in the parties’ contemplation (Phang). Notwithstanding this, it is clear from the overlaps and the head-spinning speeches in Farley that the ambiguity permeating the exceptions continues to make it difficult to identify their precise content and needlessly complicates this area of law.


Question 2 of 2     Browne-Wilkinson LJ’s judgment in Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd (The Raffaella) [1985] 2 Lloyd’s Rep 36 has generated a line of case law that justifies the existence of the rule in Watteau v Fenwick [1893] 1 QB 346.

                               Critically discuss.

Under ‘apparent authority’, the principal is estopped from asserting that he is not bound to the contract made by his agent with the third party on the grounds that the principal has represented to the third party that the agent is permitted to act on his behalf. The orthodox approach is that this representation must derive from the principal, not the agent (Armagas). Nonetheless, The Raffaella and subsequent case law modifies this rule by establishing that the agent can have apparent authority to make representations as to his own authority, as long as he would usually have such authority. Analysing what is ‘usual’ forms part of apparent authority, yet, Watteau characterised ‘usual authority’ as a category in its own right. While both apparent and usual authority enhance the third party’s protection and attach significant importance to the nature of the agent’s position when deciphering his authority, the fact apparent authority cannot (Armstrong v Stokes) apply in undisclosed agencies (i.e. where the third party is unaware of the principal’s existence) but usual authority can, suggests it would be incorrect to argue that case law following The Rafaella has justified the rule in Watteau. Rather, it is submitted, alongside many academics, that Watteau is no longer good law.

In Watteau, Mr Humble, the manager (agent) of the defendant’s (principal) beerhouse, bought cigars on credit despite instructions not to. Since cigars were usually supplied and dealt with by managers of similar establishments, the principal was nevertheless bound by the cigars contract. Wills J rejected the need for the principal to ‘hold out’ (i.e. represent) the agent’s authority because it would mean secret limitations would always prevail against the third party. Therefore, “the principal is liable for acts by the agent which are within the authority usually confided to an agent of that character… notwithstanding limitations put upon that authority” (p348-349). Simply put, usual authority attaches objectively onto the agent’s trade or profession. In The Raffaella, Mr Booth, the bank’s credit manager (agent), incorrectly assured the third party that his sole signature was sufficient to bind the bank to the guarantee. Browne-Wilkinson LJ argued that, where the principal confers actual or apparent authority on the agent to make general representations on his behalf, the third party can rely on representations made by the agent regarding his authority to enter into such transactions even if inaccurate. Consequently, Mr Booth, as the representative in charge of the transaction, had apparent authority to make the representation that only one signature was required.

Matters become complicated where the third party knew of the agent’s limited authority. While the third party’s knowledge was sufficient to bar them from relying on the representation in Armagas, the third party in First Energy – despite being initially informed of the limitation – was entitled to rely on the agent’s representation that the agent could sanction a credit facility on behalf of the bank’s head office with one signature. Armagas was distinguished on the grounds that the third party in Armagas knew the agent could never have had such authority. Whereas, First Energy did not know whether the agent’s authority had been extended, and it was unrealistic to expect them to confer with the head office. First Energy was unequivocally confirmed by the Jamaican Privy Council in Kelly v Fraser. A senior employee of the human resources department (agent) transferred Mr Fraser’s pension plan without the trustee’s knowledge. Despite the agent not having, nor purporting to have, authority to perform the transfer himself, he was held to have apparent authority to communicate to the third party that the transfer had been authorised by those who could approve it (Lord Sumption, [15]).

The idea that case law subsequent to The Raffaella provides a justification for Watteau is arguably founded in the potential overlap between usual and apparent authority. Usual authority attaching objectively to the agent’s profession accords with apparent authority depicting the agent’s profession as an “accurate guide to the ambit of his authority” (Ian Brown, “The Agent’s Apparent Authority” 1995, 367). Encapsulating the concept of an “inherent agency power” – i.e. power possessed by the agent to “bind the principal in matters incidental to transactions the agent is authorised to conduct” (The Second Restatement to the Law of Agency, paras 8A, 116) – not only demonstrates that both usual and apparent authority arise from the nature of the agent’s role (Stone), but also represent a departure from the orthodox positon that authority cannot derive from representations made by the agent (Munday, “Agency…” 2010). For instance, Kelly concentrates on conduct which potentially “cloak[s]” the agent with apparent authority to communicate the transfer (Woan, “The apparent authority…” 2014, 263). Indeed, it is the focus on what is ‘usual’ which lead academics to conflate apparent and usual authority; Stone says usual authority can be brought within apparent authority by arguing that the principal appointing the agent to a particular job constitutes the principal ‘holding out’ the agent as having the usual authority attached to that job.

Apparent and usual authority also coincide in their objective to enhance protection afforded to bona fide third parties. Just as Wills J avoided allowing secret limitations of authority to defeat the third party’s action, Steyn LJ in First Energy emphasised the need to protect “reasonable expectations of honest men” (p533-534). Similar to Watteau, First Energy provided this protection by assessing the agent’s authority according to how the third party would have perceived it (Munday) as opposed to focussing on the principal’s representation. Justification for this derives from the perception that, since the principal predominantly benefits from the agent’s work, he should also be responsible where the agent acts carelessly (Reynolds and Bowstead). Furthermore, it is often “commercially unwise” (Munday, [4.35]), unreasonable, or even impossible for third parties to investigate the agent’s precise authority, especially within “bureaucratically complex organisations” (Lord Sumption, Kelly, [13]). Thus, for instance, it makes good commercial sense that customers should be able to rely on what senior managers convey to them. Although, Kerr LJ in The Raffaella criticised the use of the agent’s position as the sole criterion for authority as it would trigger an abundance of cases questioning the status and authority belonging to different types of agents. Therefore, Watteau’s objective attachment of authority is invalidated, especially considering complex, contemporary business practices do not enable facile identification of agents’ ‘usual’ authorities (Brown). More important, however, is the fact usual authority can apply in undisclosed agencies.

To avoid “secret limitations” of authority incessantly prevailing against third party claims, Wills J in Watteau established that the principal is bound by the agent’s acts even where there has not been a “holding out of authority” by the principal to the third party (p349). By contrast, Browne-Wilkinson LJ in The Raffaella said the principal’s representation of the agent’s authority is the starting point for apparent authority. Therefore, apparent and usual authority are incomparable because, as Fridman explains, someone who is not known to be an agent by the third party cannot logically be said to have been ‘held out’ by the principal as having apparent authority. Stern explains that the clash between usual and apparent authority creates a scenario where an undisclosed principal can never limit the agent’s authority because, if he is required to ‘represent’ them to the third party, the principal would cease to be ‘undisclosed’ once the third party became aware of the agency relationship. Also, the prospect that the third party can bind undisclosed principals to acts made by the agent which the principal expressly forbade is “putting the cart before the horse” (Stern, “A problem…” 1919, 12) – the principal cannot designate the agent’s powers because incidental powers are already attributed to them under law.

To summarise, apparent and usual authority possess similar policy considerations regarding innocent third parties. However, Watteau rejecting the necessity of the principal’s representation makes it almost impossible to justify its rule under apparent authority, which relies specifically upon this representation. In acknowledging that usual authority disturbed “the peace of mind of trial judges” (Wood JA, Sign-O-Lite, p548), Canada overruled Watteau, and it is posited that England should follow suit.

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