Teaching Assistants: Victor Goldberg on Sub-Sales in the UK

This is the eighth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the seventh chapter of RLCD, which visits an issue related to that covered in the previous chapter (and previous post): does it affect damages in a sale between A and B when B entered into a separate agreement to sell to C?

The issue in this chapter is similar to the issue in the middleman cases covered in Chapter 6 of RLCD and the previous post.  In the US context, recovery is sometimes limited in the middleman cases.  In the English cases on sub-sales, things could go either way.  Professor Goldberg's position is that courts should consider sub-sales when the parties design contracts so as to incorporate sub-sales.  Otherwise, sub-sales should not effect the calculation of damages.

Sometimes, the courts reach what Professor Goldberg thinks is the right rule by applying the Hadley rule -- they ignore sub-sales that were not in the contemplation of the parties at the time of contracting.  More generally, in the first fifty years of cases considering the matter, courts did not take sub-sales into account in calculating damages (RLCD, 124-27).  But beginning with Hall v. Pim, courts returned to the Hadley rule and took sub-sales into account when they determined that the contract contemplated that the buyer would re-sell (RLCD 127-30).  

The contract at issue in Hall v. Pim was a string contract.  A sold to B who sold to C who sold to D etc.  It makes no sense for each party in the string to worry about some contract deep up or down the line.  Subsequents sales should have no effect.  The relevant trade association felt the same way and overruled the House of Lords through private legislation, creating form contracts that limited the remedy to direct damages from the breach (RLCD, 130-32).  Courts have ignored this development and continue to apply the Hall v. Pim rule (RLCD, 132-35).  Professor Goldberg sums up his view as follows:

If A contracts with B and B contracts with C, and A breaches, the B-C contract should have no bearing on A's damages.  That simple rules does not require the court to speculate about what the parties might have contemplated.  If A and B truly contemplated that the B-C contract be taken into account, it would be easy enough for them to make that explicit in their contract.  The market measure should, therefore apply irrespective of sub-sales -- subject to the parties' ability to contract out of that rule. 

The chapter then moves on to discuss two warranty cases, in which A sells defective products to B, which then sub-sells to C.  Courts struggle with the question of whether the consequential damages on the sub-sale (or the lack thereof) should be taken into account in determining the remedy for breach of warranty.  Again, the first step should be to look at the contract and figure out whether then parties addressed the issue.  The courts do not do so; rather they try to determine what was in the contemplation of the parties (RLCD, 135-38).   If the parties have not addressed the issue, the default rule should simply be that damages are the difference between the market price of the goods as warranted and the goods as delivered (RLCD, 139).  Where there are exceptions that is because they are expressly written into the contracts (RLCD 139-40).

In his conclusion, Professor Goldberg notes that UK courts have recognized two exceptions to the general rule that the contract-market differential is the standard measure of damages such cases.  First, the courts distinguished between cases involving non-delivery and delayed delivery.  Second, in string contracts, sub-sales could be taken into account if contemplated by the parties and not too remote.  Neither exception made any sense, and the courts persisted in the second exception despite clear evidence that the commercial actors whose contracts were governed by these decisions revised their standard forms to expressly reject the exception to the general damages rule.  Courts similarly relied on their own sense of  what was within the contemplation of the parties in ruling that sellers should indemnify buyers for harms to their sub-buyers.  There is no need for courts to speculate on what the parties contemplate.  Commercial parties make their intentions clear with contractual provisions (RLCD, 140-41).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation

Teaching Assistants: Victor Goldberg on the Middleman's Damages