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A state of Injustice - table of contents
Losing Their Grip - The Case of Henry Keogh - table of contents
Introduction
The issue which we wish to examine in this article concerns the contractual rights of people who may be called “eccentric,” “idiosyncratic” or “individualistic”. Inevitably, terms such as these bring with them connotations of approval or disapproval. We wish to encourage the reader to suspend their judgments in this respect, until the issues have been properly examined. Morally speaking - “doing one’s own thing” may be good or bad depending upon the context and the issues involved.
Legally speaking - we will argue that it should be a matter of indifference, provided the activity is neither illegal nor immoral in the sense in which immorality may be seen to invalidate contracts. In this article, we will only be concerned with these issues to the extent that they involve matters of taste or personal preference, rather than matters of public order or social cohesion. Seen in this light, we may seem on the surface to be concerned with aspects of contract law which are not “mainstream”, and therefore may be thought to be of little real significance. After all, if we wish to focus on people who are eccentric, or whose interests are regarded as a little “odd”, then we cannot by definition be dealing with an issue which is going to concern large numbers of people.
However, it might well be the case that whilst the numbers of people with which we are concerned are small, the issues to which such cases give rise are fundamental, and go to the very basis of contract law and the nature of individual rights.
The moral underpinnings of contract law
Whilst it is common to talk of different “theories” of contract law - whether it be to do with “bargains” or with “promises” [1] or “reliance” [2] - it may be said that the differences between them are less important than what they have in common. The reason that the State, by way of the law, brings its coercive might in support of what are otherwise private acts of promising and bargaining, is because it recognises that they each reflect different aspects of common moral [3] and political principles. Without going into these issues at great length (for this is an essay in contract law, not morals or politics) it seems that the underlying moral issue has to do with “respect for persons” and the fact that when we seriously engage with each other, and make undertakings or give promises, a failure to live up to the expectations which we have created in others, undermines their sense of autonomy and well being. [4]
The whole development of the doctrine of promissory estoppel in modern contract law from High Trees [5] to Walton’s Stores [6] was designed to protect those who depended upon undertakings given by others, and who would have been then disadvantaged, if those other persons were then able to resile from those undertakings. In these circumstances, the undertakings concerned were not supported by the normal formalities so as to make them part of the contractual relationship between the parties. Nevertheless, the courts felt it appropriate to extend the range of enforceable rights so as to protect what they felt to be the legitimate expectations of the promisee.
This need to make such undertakings, or promises, legally enforceable, has tended to focus attention on the consequences for the promisee of the promise having been made. In these developments, the common law has shown that it can evolve to ensure that in commercial undertakings, people are not allowed to be “led up the garden path”. If you make an undertaking, knowing that the other party might act on it to their detriment, then if they do so act, you will be held to account if you attempt to deny the basis of their actions, for which you have been responsible. Otherwise, the promisee would claim to have been misled, and might well be “out on a limb” financially, as a result.
The promisor, on the other hand, whilst responsible in the more general sense for the predicament, can point to some nice-sounding legal technicalities, and proclaim that this result has nothing to do with him or her. The moral principle, that one should keep one’s word and thereby not mislead the other, becomes the basis for a legal principle, when the people engaged in the exchange are involved in commercial activities.
The elements of reliance and responsibility for undertakings in the commercial context became part of a complex area of law in estoppel, and law students were often surprised to find that whilst such an undertaking could be used as a defence, it was not until Walton’s Stores v Maher - allowed as the basis for an action itself. But if I have been deceived and placed at a disadvantage, why should I have to wait for the other person to proceed against me, before I can act to protect my interests? Many thought that there should be a clearer basis upon which people’s rights should be based.
No doubt the blanket provisions of the Trade Practices Act 1974 [7] against behaviour which is “misleading and deceptive” reflects this more general concern. [8] To be mislead, or deceived, attacks my integrity - it makes me a “means to an end” rather than an “end in itself”. Does it matter if the other person intended to mislead or deceive me, or just whether as a matter of fact I was misled? The Trade Practices Act has made it clear that we should not become caught up in the psychology and motivations of the maker of the statements, and judge the matter on its effect, rather than upon its motivations. In one small area of contract law, we can see the way in which the underlying moral principle is the basis for the development of the common law, which in turn becomes the basis for intervention by way of statutory law. It is therefore important to understand this relationship between the law, and its underlying moral principles.
Interplay between moral and political rights
In turn, these moral principles or rights have to be expressed in political terms. As an association of individuals, we may have the fullest extent of individual moral rights, but without the civil society to support and protect them, life becomes in the words of Thomas Hobbes, “solitary, poore, nasty, brutish and short”. [9]
In this move from individualism to civil society, there is, in effect, a trade off - often referred to as the “Social Contract”. [10] I give up or limit some of my individual moral rights in order to better protect and develop others. I may give up my individual moral right to resort to violence to protect my interests, because it is in my interest to discourage others from using violence against me. Collectively, as individuals, we assign to an abstract third party which we have brought into existence, (the State) the near exclusive right to use violence (the coercive power of the law) to protect our interests, provided that it does so according to set procedures. [11]
So there develops a tension or relationship between the individual moral rights which we retain, and the social or political rights which are used to protect them, and which arise from them. But there is always the danger that the expansion of one is at the expense of the other. If taken to the extreme, as happens in totalitarian societies, the collective political rights have subsumed almost all of the individual moral rights, and the role of the individual is merely to serve the collective interests. In liberal capitalist societies, the individual moral rights are taken to be paramount and the collective political rights are the minimum necessary to ensure the full and fair expression of those individual rights.[12]
We note here that the individual rights are only given up, when absolutely necessary, to ensure that the political will, is better positioned to protect those rights which remain. Of course, the vehicle through which that political will is exercised is the legal system. It is the legal system which provides the necessary public statement of the balance between the public and private interests, and the procedures or due process according to which those rights are exercised and changed.
These most fundamental aspects of philosophy and politics may appear to be a long way away from the details of the law of contract, but it is these very issues which, we believe, are at the heart of the misunderstandings which have arisen since the House of Lords case of Ruxley Electronics v Forsyth in 1995. [13] In recognising the relevance of these issues, we believe that it will assist us in our analysis of the issues involved. Such an analysis will help us to see that the legal principle emerging here is inconsistent with those most basic of moral and political principles.
The case of Ruxley Electronics
In essence, the case of Ruxley concerns a landowner who specified for the construction of a swimming pool which was not provided precisely according to the specification. The principle underlying the outcome in this case was neatly expressed by Lloyd LJ when he said that:
"The eccentric landowner is entitled to his whim provided the cost of reinstatement is not ‘unreasonable’."[14]
Although not entirely clear from that small extract, and for reasons which we will explore shortly, we believe that the essential misunderstanding underlying that position is that the individual rights of the landowner, are traded off against an unspecified “public interest” position, in a way which is not conformable with the principles which we have discussed above. Let us first look briefly at the facts in Ruxley.
Mr Forsyth had entered into a contract with Ruxley Electronics to build a swimming pool in Mr Forsyth’s garden at a cost of £17,797. Mr Forsyth pointed out to the contractor that being a fairly big man, he would feel anxious about diving into a pool which, according to the original specification, was only 6’ 6” deep. Mr Forsyth wanted to have a depth of 7’ 6”, and the contractor agreed to amend the specification accordingly. However, once the pool had been completed it was discovered that the maximum depth of the pool was only 6’ 9”, and at the entry point where a diver would come into contact with the water, the pool was only 6’ deep.
The parties were in agreement that the failure to provide the required depth for the pool amounted to a breach of contract. However, the expert evidence was that it was not possible to simply knock out the bottom of the pool and excavate it to a greater depth. The only sound engineering solution was to entirely remove the existing pool and rebuild it. The cost of doing this would include another £4,000 to the original price for the dismantling of the pool and the removal of waste, which would bring the total cost to some £21,560.
The issue for the court was that, apart from failing to meet the specification with regard to the depth of the pool at the deep end, the pool was in all respects useable, both for swimming and diving. Indeed, expert evidence was provided that even larger people such as Mr Forsyth could dive safely into the pool without hitting the bottom. However, the court also accepted that Mr Forsyth did suffer a real loss in that he personally did not feel safe diving into the pool. But the extra depth would not increase the objective utility of the pool in any way, and neither would it make any difference to the market value of the pool or the property.
Mr Forsyth argued that it was all well and good for the experts to argue about its “utility”, and its “value”, but that all of this was really beside the point. He was someone who had expressly contracted for a swimming pool which was to be 7’ 6” deep. This would make him feel safe and happy, and anything less would not provide him with the satisfaction and pleasure which he sought. He had explicitly contracted for something, and it was his view that he should get what he had contracted for - neither more nor less.
The legal view pre-Ruxley - Diminution or reinstatement
Prior to Ruxley, the court took the view that where a builder in a building contract performed defective work, the owner was entitled to either:
the difference in value between the actual performance and that which was contracted for. The diminution in value costs. Or,
the cost of having the work corrected or completed so as to bring it into line with the original specification. The reinstatement costs - as discussed in Bellgrove v Eldridge.[15]
Until Ruxley these had been the only available choices, and so the courts had felt that they were obliged to opt for one or the other. It was argued that as there had been no diminution in value, then because the courts had to award some damages, they were left with only the reinstatement option. However, in Ruxley, at first instance, the court took the view that there may be another alternative, and they explored the possibility of something in between diminution value on the one hand and replacement or reinstatement value on the other.
The Court of Appeal
Mr Forsyth took his case on appeal, contending that the trial judge should have made an award for the reconstruction of the pool to conform to the original specifications of the contract.
In allowing the appeal, the Court of Appeal by a majority of 2:1 (Staughton LJ and Mann LJ in the majority with Dillon LJ dissenting) held that it was not unreasonable in contracts of personal preferences to make an award of reinstatement costs even though there was no diminution in the value of the pool. [16] This was because Forsyth had suffered a real loss which could only be measured by the cost of curing it. The Court of Appeal referred to the well accepted principle that parties have a duty to mitigate, or minimise, their loss where it is reasonable for them to do so.
However, they thought that the “reasonableness” which comes into the question of mitigation was not relevant here. They said that in pursuing reinstatement, the owner was merely taking steps to secure the very thing which was promised under the contract, therefore, there was no avoidable loss. It would have been strange logic to say the owner had failed to mitigate his / her loss when the owner was pursuing the only avenue by which that expectation interest (or right) could be fulfilled. All 3 judges agreed that Forsyth’s intention as to the use to which he would put the money was irrelevant. [17]
The House of Lords
Ruxley Electronics then appealed to the House of Lords where the appeal was allowed unanimously. They placed emphasis on the central importance of the concept of “reasonableness” in selecting the appropriate measure of damages. They agreed with the trial judge that “the cost of reinstatement” was not the appropriate measure of damages as the expenditure would be out of all proportion to the good to be obtained. [18] They referred to the High Court of Australia in Bellgrove v Eldridge [19] which talks about whether reinstatement is the “necessary and reasonable” course to undertake in such circumstances. In Bellgrove, reinstatement costs were held to be the reasonable remedy because there was a substantial departure by the builder from the specifications in the contract making the construction unsafe. Lord Mustill acknowledged that:
"Having taken on the job the contractor is morally as well as legally obliged to give (the owner) what he stipulated to obtain, and this obligation ought not to be devalued."[20]
We could say that if you substitute the contractual obligation, which has been specified in some detail, for something else which may not be wanted by the owner, then you are devaluing it. This is particularly so where the owner stipulated for something of an aesthetic or emotional value and which cannot be measured by money or money’s worth. Except, perhaps, by allowing full reinstatement costs, which returns to the landowner the financial capacity to have what was contracted for.
Mustill then continued by referring to reinstatement costs and diminution costs;
"In my opinion, however, (t)here are not two alternative measures of damages, at opposite poles, but only one: namely the loss truly suffered by the promisee. In some cases the loss cannot be fairly measured except by reference to the full cost of repairing the defect in performance." [21]
Therefore, Mustill at least, clearly accepts that there are certain categories where the true loss could only be satisfied by reinstatement costs. And in such cases, he says:
"Neither the contractor nor the court has the right to substitute for the (owner’s) individual expectation of the performance a criterion derived from what ordinary people would regard as sensible." [22]
The very point which we are trying to bring out in this article is that owners such as those we are considering will almost by definition, not be “ordinary” persons. Being “ordinary” cannot surely be a criterion for the enforcement of one’s contractual rights - even “extraordinary” people have contractual rights too. However, both Lords Mustill and Bridge took a more qualified view by saying that the reinstatement costs may not be recovered, even in contracts of personal preferences, where:
"The cost of doing this would be so great in proportion to any benefit it would confer on the owner that no reasonable owner would think of incurring it." [23]
But how does one measure that lack of benefit? Here we are talking about this particular owner - and to substitute the “reasonable” owner for this particular owner is in fact to deprive the contracting owner of the characteristics that make them what they are. In our earlier discussion, we emphasised respect for persons and therefore to substitute a “generalised other” for this particular contracting party is to deprive that party of their essential characteristics.
The problem
As there was no diminution in value, the other alternative was that of reinstatement. The difficulty here was that the court would not actually order anyone to reinstate the pool. Given the already unhappy history between the contractor and Mr Forsyth, a court order to direct the contractor to reinstate the pool could lead to months of further acrimony between these parties as they attempt to complete the reinstatement. The cleaner solution is to award damages against the contractor, sufficient to cover the cost of reinstatement. However, under the law relating to damages, whether the person receiving the damages actually spends it in that way is entirely a matter for themselves. The court obviously thought that this could result in Mr Forsyth ending up with a perfectly useable pool (although not exactly to his liking) together with a payment of some £21, 000 which would be the reinstatement cost. The court was obviously concerned that this would give rise to a “windfall” in the hands of an “over-particular” owner, just because of some shortcoming in the way in which the work was completed. He not only has the pool, but the full cost of building it returned to him, together with a “bonus” £4,000. Could this be an incentive for rogues?
Can the “rogue factor” be eliminated?
Given what we have said, one must clearly be mindful that this could be an incentive for rogues to find something wrong with the contractor’s work in the hope of getting the costs returned. However, we must retain a proper perspective on all this. It is not just any shortcoming which would enable one to apply for reinstatement damages. Most shortcomings can be adequately dealt with under the normal principles of damages. Only shortcomings which have been specified in the contract, but not delivered would be candidates here.
Of those, many would not consider it to be worth their while to be bothered with applying for reinstatement costs. Only the committed individual to whom the shortcoming was of serious concern would put up with the problems and risks attendant upon the attempt to obtain redress in this way. If legal action is required, one has to say that both the time and costs involved are considerable.
During the conduct of the hearing, some doubts had arisen as to whether Mr Forsyth would actually apply any reinstatement damages, in completing the reinstatement. At one stage, Mr Forsyth gave an explicit undertaking to do this, but the Court of Appeal determined that it was not necessary for him to do this. He was entitled in accordance with the normal legal principles, to spend any “reinstatement damages” in any way he wished. Whether there is anything in all of this to suggest that Mr Forsyth was just “trying it on” is difficult to determine, but the more general issue as to whether people would “try it on” because of some inconsequential shortcoming, was obviously a matter of concern to the courts. However, we should be able in this, as well as in other cases, to trust the judges to get it right between the genuine case and the chancers - otherwise “bad cases make bad law”.
Consumer surplus and substitution
What the court wanted to achieve was some recognition of the nature of the shortcoming in the way in which the work was completed - to recognise that there had been a breach of contract. They did this by the introduction of the intermediate concept of “consumer surplus”. [24] This concept was to recognise the subjective value of whatever it was that had been produced, and which was in addition to both its utility, and the market price for the product.
The difficulty is that this intermediate concept may be fine in recognising the subjectivity of the contractual right, but in this case, the intermediate concept was used to effect a transition from the contractual right to something else with which it could be equated - with a monetary value, for example. This clearly amounts to substituting that which has been contracted for with something else. This translation from the contractual right to the remedial right was facilitated in the court’s judgments by the concepts of “reasonableness”, “common sense” and “value”. Are these concepts really adequate to enable the substitution of what the contracting party actually stipulated for, and indeed contracted for, with something else - what other people (whether real or fictitious) think that that person should accept.
In doing this, the court is replacing the individual right with a socially ordered substitute, and one which by its very nature is different from that which was specified. This is not an uncommon occurrence in the law - Kemp and Kemp on Personal Injuries places a monetary value on every part of the human anatomy. Clearly a finger is not the same as $5,000, but given that a person has lost a finger, they might as well have the money as compensation. The court can no more make fingers than they can turn back the hands of the clock.
In contract law, the underlying principle is that the person should, so far as is possible, be put in the position they would have been had the contract been completed. One way of doing this is to provide money in return for loss, damage and inconvenience. Clearly there are limits to the extent to which money can be used as an effective substitute for that which has been lost or damaged. In personal injuries matters, there is a very real sense in which the money cannot substitute for loss or damage - all it can do is attempt to protect against the financial consequences of that loss or damage.
However, in a case such as this, there was only one way in which the monetary remedy could effectively be used - that was to provide sufficient money to enable the owner to reinstate. Anything short of this means that the owner cannot reinstate - is effectively deprived of what they have contracted for - and is left with an amount of money which has no real relationship with that which has been lost. Whilst the court attempted to justify this reduced sum of money by appealing to the concepts of reasonableness and value, we wish to argue in what follows, that the use of these concepts in this type of case is inappropriate.
The nature of the inappropriateness, is that in a case such as this, the individual right is being inhibited in its realisation by social expectations, the reasoning for which is poorly articulated in the judgments, but which will appear on further analysis not to be in accordance with the principles which we have discussed above. As a result of this reasoning, certain individuals will be unable to realise through the process of contract law their moral rights, and will in an important sense be disenfranchised. In a political sense they will be subjected to confiscation of property or rights without fair and adequate compensation which one could argue is unconstitutional.
So now we must examine in some more detail the steps used in the reasoning in this case in order to understand the way in which the individual moral or legal rights were whittled away.
Loss of amenity
The trial judge held that the diminution remedy was not available, because there was no diminution in value, yet the cost of reinstatement was not appropriate as it would be “out of all proportion to the good to be obtained”. Therefore, the sensible approach was to consider that the contract was one for the construction of a pleasurable amenity, and that there had been to some extent some loss of amenity due to its non-conformity with the contract (rather like the “loss of enjoyment” in the holiday cases). [25] Therefore, Mr Forsyth could be awarded some £2,500 as general damages for this loss of amenity. This suggests that the right which has not been fulfilled is severable from the main part of the contract, and then an evaluation can be made as to the loss which has been brought about by the non-fulfilment of the severable part.
This has to be separately valued, as the only other basis for evaluation - the cost of replacement has been ruled out. The countervailing factor which disentitles the claimant to the full amount is based on the idea that the cost of this would be “disproportionate” or in some sense wasteful. This appears to be not too dissimilar to the US concept of “economic waste”.[26] What we need to know is whether this is an appropriate factor to weigh in the balance in the negotiation of private rights, as opposed to public rights, or a contest between a public and a private right. We will argue that the notions of wastefulness, or economic waste are only appropriate where the element of public right is involved. Where the contest is merely between private rights, then this concept is arguably inappropriate.
Value and markets
One of the difficulties facing us in the evaluation of the right which has not been fulfilled is the placement of some “value” upon it. Almost by definition, we are concerned with something which “has no value”. It is accepted on all sides that the there is no difference in value between the property with the contractual defect and the property without it. Another way to look at it would be to say that the value of something is the value for which it can be sold on the open market. But as soon as we begin to consider this aspect, we can see that the ideas of “value” and of “market” are inextricably linked. By “market”, we obviously mean some mechanism by which buyers and sellers can be linked for the purpose of exchange.
Such a “mechanism”, of course, directs our attention to the social element of both markets and value. The mechanism must operate between different persons - not necessarily a multiplicity, but at least one buyer and one seller. However, the situation which we are examining suggests that these elements do not exist in that situation. We are here concerned with something which is of importance to the individual, but which has no value, in money terms. There may well be a cost in bringing it into existence, but that which is brought into existence has no value - other than that cost. A right, which is of importance to me, may he an inherently private right - and there may be no-one else who would want to buy it from me. There is no market - there is no value to the right. The value of a “private right” might be as conceptually infelicitous as is the notion of a “private language”.
Economic waste
Clearly, the judges are taking a view which says in essence that if it costs £21,000 to provide a pool with the right depth, then from a social perspective, the expenditure of this amount of money is “disproportionate” to the “good” to be obtained. Therefore they are then making a judgement as to whether that “good” should be obtainable - and obviously answering this question in the negative. It may be that the sum of £21,000 is a lot to spend to enable one to have the pool with the required depth, given the situation that we now find ourselves in - but who has been responsible for bringing about that situation?
The point is that the expenditure of £21,000 is the only way in which that particular “good” can be achieved. Therefore, by awarding a lesser amount, they are determining that the person will have to live without that particular “good”. In thus depriving the person of something which they have specifically contracted for, they are going against a fundamental rule of contract law, and bringing in some other incommensurable factors.
The fundamental rule of contract law is that one who suffers a breach of contract should be placed, so far as money can do so, in the position they would have been in, had the contract been completed. Clearly £21,000 would achieve this objective - the person can spend the money to bring about exactly the same result as had originally been intended. £2,500 would clearly not achieve this result. In situations such as this, we are presumably dealing with people who are by any account fairly well off. In this context, what they are receiving - some £2,500 is relatively meaningless. Yet what they have lost, by virtue of the fact that they were willing to write it into their contract, is presumably of some importance to them.
If we were to have asked of them at the time that they completed the contract, “can we strike this item out of the specification, in return for reducing the contract price by £2,500?”, which, in effect, would be to give them the same deal as that offered by the court, is probably clear. The very fact that the owner has gone to the extent they have done in order to assert this right indicates that such an offer might well have been rejected. So from the individual owner’s point of view, they are getting something that they do not value, in return for something that they obviously did value.
The only obvious reason for doing this is that the courts consider it now to be “wasteful” or “inappropriate” to use a certain amount of resources (£21,000) to achieve some desired end (swimming pool depth). But these elements of wastefulness or inappropriateness are obviously social policy factors and may relate to the way in which public funds may be used. But these concepts are not appropriate in the context of the expenditure of private funds. We see around us all the time examples of conspicuous consumption, extravagance even waste. Although I might dearly like to see a socialist government which would put an end to all of this, and use all of the resources of our society in good and useful ways - the arbitrary elimination of private rights within a capitalist society, by the substitution of incommensurable outcomes, does nothing to develop the social order, but does much to undermine the order of private rights.
The difficulty is clearly that one is bringing in at the remedial stage, factors which were not present at the contracting stage and which serve to limit those contractual rights. The factors of “economic waste” or of “proportionality to the good to be obtained” are obviously social policy factors which are limiting the rights which had been contracted for. Clearly the individual right is being constrained by a social right, and a social right at that which was not asserted at the time of contract formation.
Where we are concerned about the construction of contractual terms, we might ask what the parties would have agreed to if that issue had been raised at the time of contract formation. Where we are dealing with an omission, or with something which has been inadequately expressed, this is an entirely appropriate procedure. But is it useful where the very right which is in question has been both clearly and adequately expressed? Perhaps the appropriate question to raise about the formation stage then would be what the parties might have had to say if the proposition which is now being proposed had been put to them at that time.
Contract formation
Clearly one cannot obtain a remedy to support a claimed right which is illegal or immoral - but there is no difficulty at the time of contract formation, of stating the general principle that you cannot contract for that which is illegal or immoral. But what is one to make at the time of contract formation of the “economically wasteful” principle? Could we say that one cannot contract for that which is economically wasteful? We don’t think so. Some of us may well take the view that travelling the world to play tiddleywinks is economically wasteful, but people are free to choose to do those things if they so wish, and contracts in support of them are clearly enforceable.
The travel agent or airline which fails to provide you with a seat on the aeroplane as contracted for, because they thought that your trip to see your granny was “economically wasteful” will do so at their peril. One may travel, or build for any purpose - or indeed for no purpose at all - and still expect the contracts to be enforceable. So too with swimming pools; if one contracts for the pool to be 10’, 20’ or even 50’ deep - and presumably one is working on the “more depth more cost” principle, then why should the contractor be allowed to deviate from the specification which has been agreed to, and then claim that conformity to it would be “wasteful” or “out of all proportion to the good to be obtained by the owner”?
Effect of advance notice of non-compliance
One of the points which was later raised in the House of Lords, was what would have happened if the contractor had made it clear at the outset that they were not going to perform the contract in accordance with the specification? If the contractor had said that they were not prepared to build the pool any deeper than 6’, then it is clear that they would not have been awarded the contract, and that another contractor would have been brought in to do the job. To state at the outset that you will perform according to the specification, and then to later claim that to do so would be wasteful, has the same effect as being misleading or deceptive. Had the contractor had it in mind to later adopt the wasteful principle, at the time at which he entered into the contract, then the activity would clearly be fraudulent. The contracting party is to be deprived of what they had specifically stipulated for in a manner over which they have no control.
Disproportionality
The idea of the cost of reinstatement being “disproportionate” in some way suggests that we can weigh in the scales the specified right (which by common admission had no value as such) against some monetary value. Two such different things cannot be evaluated against each other in the absence of a common standard.
Indian Marble
For example, I may have struck a bargain with the contractor to spend huge sums of money on the refurbishment of my kitchen floor using Indian marble. It is later found that the builder had used Australian Marble which looked just as good - and in fact may have cost just as much. But I had insisted on Indian marble because my grandfather had been an Indian marble worker, and knowing that I would have around me the materials of the sort on which he had worked, would be emotionally and aesthetically pleasing to me. It was very important to me, in emotional terms, to have Indian marble although it would have been a matter of indifference to the “reasonable” person and, for all I know, everyone else.
But that is no concern of mine - this was a very personal matter - and if I had been told that it would not add anything to the market value of the house, I would not be in the least bit concerned. Indeed, if I were to be told that I was being “unreasonable” I would have been equally unconcerned. The fact of the matter is that I am sufficiently well-off to be able to indulge myself, and I have chosen to spend my money in this particular way. Indeed, I take the view that once it is determined that the particular choices I have exercised are neither illegal nor immoral, then it is not the concern of anyone else, let alone the courts, to tell me that they consider my choices to be reasonable, rational, a matter of good taste or anything else.
And yet the court may deny me the opportunity to remedy the defect by an award of replacement costs as they regard that as an unreasonable remedy for me to seek. According to the court, the replacement cost would be “wholly disproportionate” to what they perceive to be my non-monetary loss (my consumer surplus). [27] They will apply the test of “reasonableness” (even though the reasonable person would not understand my particular concerns when it comes to marble floors) in determining my non- monetary loss (or consumer surplus) and therefore my remedy. This approach has elements of paternalism and social policy in it, in ways which are inappropriate. These views are defective for a number of reasons which amount to a failure to have appropriate respect for persons.
Second hand bricks
In Cheshire and Fifoot, reference is made - without further comment - to the suggestion in Bellgrove v Eldridge that:
"Where pursuant to a contract calling for second hand bricks the builder has constructed walls of new bricks the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second hand bricks." [28]
But before we all nod wisely, in agreement with each other, endeavouring to substantiate our faulty position, based upon our desire to avoid absurdities, we should examine a little more carefully the situation which is so ‘patently absurd’. It is not uncommon in the interpretation of contractual terms to look at the term in the light of the interests it was meant to protect. If the stipulation in favour of second hand bricks had been inserted by the builder, so as to reduce costs, and thereafter it was found that due to unavailability of such supply, or the costs of cleaning them, it was more cost effective to use new bricks, then what interest of the owner could be said to have been damaged?
In no respect could the interests of the owner have been impaired. But if the clause had in fact been included by the owner, then it would be necessary to understand the possible motivations which could have been behind such a requirement. It might be that the owner found something aesthetically pleasing about the older bricks, or maybe they came from the old abbey or pub down the road, and brought something with them of their history which the owner found appealing.
But should any of these explanations or motivations form part of the rationality which entitles such an owner to have what was stipulated for? Cannot an owner say that it is not the contractor’s business, nor indeed should it be any of the court’s business as to why a particular feature was stipulated for. The mere fact that it was sufficiently important to me to stipulate for it at the contracting stage, should be sufficient in its own right.
Nobody should require me to state why it is important in my particular scheme of things, in order that they can, perhaps, attempt to place some financial value upon it - or even worse - to ask some other “reasonable” people whether they think that I should be entitled to have that aspect of my contract enforced, or whether it is “proportionate” to the rest of the contract. My motivations in stipulating for it - whether aesthetic or utilitarian - are of no concern to anybody but myself, and if the builder wants to ask me why it should be so, I am equally entitled to say that if that question was not asked at the contract formation stage, why should it be of any relevance at the contract completion stage?
It may well concern aspects of my private life or of my personal psychology which I do not wish to divulge. I might well regard requests for such information as an invasion of my privacy or an undermining of my human rights. And yet, without information of this sort, how can any other person judge the “proportionality” of the completed aspects of the contract with those yet uncompleted? How indeed can they assess the “consumer surplus” by attributing a financial value to these aspects of my rights which I have been denied? So now we must ask whether the concept of “reasonableness” has any role to play here.
Reasonableness - the appropriate test?
As a social standard
Is it appropriate to use the reasonableness test at all? After all, it was introduced into the High Court judgment in Bellgrove, as if it was so obvious that it did not need the support of authority. [29] Yet the immediately prior reference to Hudson on Building Contracts referred to the owner’s right to “making the work or building conform to the contract” without the mention of “where reasonable to do so”. [30] Is the reasonable person here to be imbued with all of my characteristics - family background, emotional state, needs, desires etc? If so, why not just talk about me as the specific contracting party? If the reasonable person is to be a generalised other without my specific characteristics, then the nature of the bargain is being changed retrospectively and without my consent or participation.
This is at odds with the fundamental principles of contract law and morals which we have discussed. It achieves none of the political or social gains required from a limitation of individual rights, yet undermines the security of contracting. If we look at other areas of law where the concept of reasonableness is used, we can see that in some areas, such as the criminal law, it is used to set an appropriate standard applicable to all. In other areas, such as in certain aspects of contractual relationships, it is used to cure defects, where the contracting parties have either failed or have been inadequate in the expression of their respective rights.
As an appropriate social standard whether in the criminal law, or in torts, its role can be declared well in advance. If one launches a murderous assault upon another, and claims to have been acting in self-defence, one’s response will be measured in accordance with what a reasonable person would have been expected to do in the circumstances. A social standard operates in accordance with which one’s activities can be measured in an area which must be a matter of social policy.
If a person has just found out, after months of living on a building site, that their swimming pool has been badly built, and in frustration throws their cigarette butt over the fence - which sets alight to a piece of string, which in turn causes the petrol tank in the nearby car to explode, which ignites the LPG gas tank on the side of the house, which fires part of the tank into the air causing the aircraft flying overhead to crash on landing at the nearby airport. Apart from being very unfortunate, and making the person wish that they had thrown their cigarette into the swimming pool, they would certainly argue that the damages for which they can be held responsible should be limited to those which could have been reasonably foreseeable at the time.
Again social policy operates to set some limit upon liability. Metaphysicians and cosmologists would probably agree that everything that happens in the world (and beyond) is connected to everything else. But judges, being pragmatic folk, are not interested in whether the beating of the butterfly’s wings in Peru was linked to the earthquake in China. They know that we have to place some limits to social responsibility in a way which can be known and declared in advance, and which applies equally to all. By having some ascertainable principles in accordance with which the rights and responsibilities can be known, then responsible people can act by taking out insurances where the premiums can be calculated in accordance with the associated risks.
Where the concept of reasonableness is used in contract law, it is in circumstances where there has been some defect in the original arrangements, and some lack of specificity in the original documentation or the agreement has to be remedied by an appeal to what “reasonable” people would have done in the circumstances. If this particular person has failed to sufficiently specify what is to be done, then a reasonable other has to stand in their place, as the most effective socially ordered substitute.
However, we see that the use of “reasonableness” in these circumstances sets a social standard in circumstances where society demands that there be a minimum standard, or else the parties have failed adequately to determine the standard for themselves. What it cannot and should not be allowed to do is to render more indeterminate specific agreements which the parties have carefully worked out for themselves.
Skilled contractors, operating in their area of specialist interest should not need the courts to save them from the consequences of their own actions. If they think it inappropriate to use Indian marble, then they should say so at the time of the negotiations, rather than to impose a unilateral and cost saving change upon an unwilling party. A person who has engaged in commercial negotiations for a specified range of commitments, should not be allowed to come back to the court later and say, in effect that they did not mean it. It should not be open to them to speculate as to the respective values of the various commitments, and to allege that one or other of them were not of any real or substantial value to the owner.
Neither should it be open to the contractor, to pick and choose amongst those commitments which they will comply with and to argue that they should not be obliged to return to reinstate the missing commitments, because people other than the owner would not have thought them to be very important. Neither should it be suggested to the unfortunate owner that they should sell their defective property to someone less discriminating and then move elsewhere to satisfy their hopes of obtaining what they had contracted for - as was suggested by the contractor in Bellgrove v Eldridge. It seems strange to even suggest that all of the complex of rights and relationships which make up a person’s life should count as naught when set aside the possible extra cost or inconvenience which could be caused to an errant builder.
Risk Management
Really what we have been considering is the aspect of risk management. In torts, the courts help to adjust the social responsibilities between citizens so that the burdens are shared fairly. But where the parties are knowledgeable and fully informed, they can deal with the allocation of responsibilities between themselves. In the absence of vitiating factors such as fraud or undue influence, it is assumed that people of full age and responsibility can determine for themselves and in negotiations with others the cost of obtaining certain outcomes.
The whole point of contracting is to fix at some point in time the costs associated with those outcomes, and to allocate the responsibilities attached to them. But the costs only become fixed at that point in time for one of the contracting parties. For the party undertaking to fulfil the contract, the costs of doing so are often uncertain and maybe indeed attendant with substantial risks. The costs of materials or labour might rise, the currency might be devalued, war might break out at home or abroad and make certain components unavailable or more costly. But the accurate assessment and management of those risks is all part of parcel of being a player in the modern economy.
I buy coffee beans on the futures market because I want to engage in forward planning for investment and expansion, and this means that I prefer to work with known costs over the next few years. If the supply should increase and the cost of it plummet, then I may suffer from the necessity of having to buy product at the agreed price whilst others can buy it cheaper on the spot market. On the other hand, a new coffee bean bug might emerge to decimate the crops and the fortunes of those who had agreed to supply at a price which is now much less than that for which they can obtain them.
In all of this the fortunes of the companies involved in commercial activities might ebb and flow, and indeed the companies themselves might come and go - but to none of these commercial players, is it open to them to go to the court to be asked to be relieved of their contractual obligations, because it now appears too costly to them to fulfil them. They cannot say that the present cost of fulfilling the contract is disproportionate to the original price of the contract, or to the overall price of the contract. Nor can they go to the court to say that they do not have to fulfil the contract for coffee beans because they have just found out that I do not drink coffee, or perhaps a recent report has been published to say that coffee is bad for your health.
Nor can they provide me with cocoa beans or cabbages because it is thought they will help me to sleep better. If all of this is true with coffee beans, then why should it be any different with seven foot pools, or yellow brick roads? What I get should be what I paid for - and once I have my contract in place, that is precisely what I expect to be provided with - irrespective of the cost to the contractor.
The risk on the part of the builder is a failure to perform the contract, or non-fulfilment of certain conditions of the contract. These eventualities can be managed by way of insurance, or they may be reflected in the price charged by the builder.
On the owner’s side, the risk of non-compliance can only be controlled, ultimately by way of legal action. If the court removes this sanction, then they are in effect, rendering the requirements which relate to individual aesthetic needs unenforceable. In regard to these provisions, the owner has no way of managing or controlling non-compliance by the builder. Obligations of this nature then become no more than voluntary obligations. If there is some additional cost associated with the completion of the obligation - and even if the owner has paid additional amounts to cover that cost - then it still need not be complied with. This is to strike at the very basis of the “bargain” and “promise” theories of contract.
It may be said that there are both social costs and benefits connected with the requirement for contractors to perform their contracts according to the specifications. If you as a contractor regularly non-perform but are still required by the courts to pay the cost of non performance, then you may eventually be made bankrupt. It may be argued that this is no bad thing - this is how the market deals with an ineffective or inefficient performance. Indeed, it is interesting to note in the Ruxley case that this was not the first time that this builder had run into problems. Initially he had installed a pool which had subsequently cracked, and then had to be replaced. This time it was built to an incorrect depth.
On this view, it may be said that the courts, by not requiring the contractor to pay the full costs of non performance are protecting the inefficient or incompetent builders, from the consequences of their actions. It might even be said that there is some hidden social subsidy for the inefficient builders who are otherwise protected from the costs of full performance. That subsidy is of course to be paid by the individual owners who are forced to live with something for which they had not bargained.
Conclusion
This is yet another example of the tension running through in the law of contract. On the one hand, there is the idea of the freedom to negotiate contractual terms. [31] On the other hand it may be said that this freedom disappears once you want something that is out of the ordinary. Your right to insist on that becomes subject to the test of reasonableness.
If you have attempted to achieve a certain outcome - in relation to your property which is important to you and which cannot be exchanged or disposed of, then a shortcoming in those contractual obligations could leave the “aggrieved” party with a permanent sense of dissatisfaction, long after the contractor has gone on to other jobs. To be given something which is not “valued” by the contracting party in return for that loss, is an enforced substitution and fails to respect that person’s prior legal rights, and their moral and political rights to be dealt with fairly and in accordance with publicly declared procedures known in advance.
Endnotes
[1] See Fried C, Contract as Promise: a theory of Contractual Obligation (Cambridge, Mass: Harvard University Press, 1981).
[2] At the level of promise, reliance by one party on another’s promise may be sufficient reason for making a promise binding. See Goets and Scott, “Enforcing Promises: an Examination of the Basis of Contract” (1980) 89 Yale LJ 1261.
[3] See Fried, above in footnote 1. Fried explains promising in terms of the promisor voluntarily and deliberately invoking a convention which gives rise to a moral basis for enforcement. See also Smith, S’s defence of contractual obligation being based on the moral duty in “Performance, Punishment and the Nature of Contractual Obligation” (1997) 60 MLR 360. In the English and Australian Courts the view had been expressed that contracts should be kept and that a contract is not merely an option to perform or pay damages. See Coulls v Bagots Executor and Trustee Co Ltd (1967) 19 CLR 460 at 504 (Windeyer J); Czarnikow Ltd v Koufos [1966] 2 QB 695 at 730-1 (Diplock J).
[4] See also Fried’s account at page 16 of the nature of promising (and thus contracting), with its emphasis on promising as an “institution that is intended to invoke the bonds of trusts” is broadly consistent with our view.
[5] Central London Property Trust v High Trees House [1949]
[6] Walton’s Stores v Maher (1983) CLR
[7] With corresponding provisions in the States' fair Trading Acts.
[8] Section 52 of the Trade Practices Act - and the State equivalent Fair Trading Acts say that persons shall not engage in conduct which are misleading or deceptive - and this applies whether or not they intended to mislead or deceive - merely that their actions had this effect.
[9] Thomas Hobbes Civil Society
[10] Ref to social contract, and its modern variant in the form of Rawls A Theory of Justice
[11] Failure to comply with the court order could lead to charges of contempt with the possible sanction being imprisonment. Of course, for breach of contract, an offender would only be punished if they failed to perform their contractual duty after having been reminded of that duty by the court.
[12] R. Nozick Anarchy, State and Utopia.
[13] Ruxley Electronics v Forsyth (1995) 3 All ER 268.
[14] Lloyd LJ at 286.
[15] Bellgrove v Eldridge(1954) 90 CLR 613 - High Court of Australia
[16] At page 660. In Radford v De Froberville [1977] 1 WLR 1362 at 1284, Lord Oliver said that while “a plaintiff may be willing to accept a less expensive method of performance [there] is nothing unreasonable in his wishing to adhere to contract specification”.
[17] Ruxley Electronics Limited v Forsyth [1994] 1 WLR 650 at 657.This was also the view taken in Darlington [1995} 1 WLR 68 at 80-81 where Steyn J held that it was not the law’s concern what the plaintiff does with his damages.
[18] That the actual performance of the contract would result in economic waste.
[19] (1954)
[20] In Ruxley at p 227.
[21] Ibid.
[22] Ibid.
[23] Per Lord Bridge at 270.
[24] See Harris, Ogus and Phillips, “Contract Remedies and the Consumer Surplus” (1979) 95 LQR 581.
[25] Jarvis v Swan Tours [1973] QB 233, Jackson v Horizon Holidays [1975] 1 WLR 1468, Baltic Shipping v Dillon (1993) 176 CLR 344. It is interesting to note that in Jarvis, the plaintiff was awarded damages which included the cost of a substitute holiday.
[26] This concept first gained recognition in the First Restatement of Contracts, s 346(1) and was embraced in a number of American cases. However the Second Restatement no longer uses this notion of economic waste as a limitation to one’s right to the cost of reinstatement.
[27] For an argument that to give full compensation for non-pecuniary loss may be economically inefficient, see Rea, “Non-pecuniary Loss and Breach of Contract” (1982) 11 J Leg Stud 35
[28] 90 CLR at 618. Cheshire and Fifoot 7th ed para 23.19.
[29] Bellgrove at p 618.
[30] Hudson 7th ed
[31] See Jessell MR in Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq. 462 at 465.
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