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Brief Counsel

Damages in tort and contract claims - who pays first and how much?

09 May 2012

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​Most of the commentary around Marlborough District Council v Altimarloch Joint Venture Limited & Ors judgment focussed on the duty of care owed by local authorities for some statements they make in Land Information Memoranda.

But the decision also highlights the risks of making statements before a contract is concluded (whether a party to the contract or not) and provides guidance on the litigation strategy to adopt if things go wrong.

The context

Altimarloch sued the vendors and Marlborough District Council after buying land to start a vineyard on the basis of incorrect statements by the vendors’ agents and the Council regarding the water rights that came with the land. 

It sued the vendors in contract for pre-contractual misrepresentation (and the vendors in turn sued their agents) and the Council in tort for negligent misstatement.  And it won in both the High Court and the Court of Appeal.  The vendors, too, succeeded in their claim for a full indemnity from their agents.  The Council and the vendors’ agents appealed to the Supreme Court.

In addition to the LIM issue, the case threw up three questions for the Supreme Court:

  • whether the Council had caused Altimarloch any loss for which it could be held liable before Altimarloch had finalised its contractual claims against the vendors
  • whether the Council should contribute to any damages payable by the vendors (or, rather, their agents), and
  • what the correct measure of damages was for Altimarloch’s claim against the vendors in contract.

Although the Court was unanimous in its view on the LIM question, these other issues were not decided unanimously.  And, as each Justice wrote a separate judgment, distillation of the Court’s overall decision on each question is not straightforward.

Had the Council caused Altimarloch any loss for which it could be held liable?  

The Council ran a somewhat novel argument to avoid liability.  Key to that argument was that Altimarloch stood to recover more from the vendors in contract than from the Council in tort.  And, the vendors’ agents (who were before the Court) confirmed that they would pay. 

That being the case, the Council argued that it had caused Altimarloch no loss and the Court should not give judgment against it.

The Court rejected that argument, by majority.   It said that:

  • Altimarloch’s losses on the contract were to be assessed at the time it parted with its money and paid too much for the land
  • Altimarloch was not under an obligation to sue the vendors first in contract before it could pursue the Council in tort
  • the Court should not factor in the value of any contractual claims unless and until Altimarloch had been paid in full, and    
  • declining to give judgment against the Council before that happened would always expose Altimarloch to some risk that it might be left worse off.  This could happen, for example, if an event after judgment meant the vendors’ agents were no longer in a position to pay (the Christchurch earthquake was cited as one possible such event).

Should the Council contribute to any damages payable by the vendors?

The normal statutory mechanism for determining the relative contributions of defendants, the Law Reform Act 1936, did not apply because the vendors were liable in contract whereas the Council was liable in tort. 

But Justices McGrath and Anderson and (less clearly) Chief Justice Elias signal that a less technical approach to non-statutory contribution principles may be warranted – one which would allow contribution orders to be made where the conduct and resulting damage is in substance the same (regardless of the legal basis for liability). 

Indeed, Justices McGrath and Anderson went on to make such an order despite the claims against the Council and the vendors having different legal bases. 

In the end, however, the Council did not have to pay any contribution to the vendors (or their agents) as the other members of the Court did not order it to do so.  Justices Tipping and Blanchard concluded that the parties’ liabilities were not sufficiently similar and Chief Justice Elias (despite expressing approval of Justices McGrath and Anderson’s approach to the contribution issue) had already decided that the Council had not caused any loss. 

As a result, the Council could only be held liable for the loss its negligent misstatement had caused. 

How should damages against the vendors in contract be measured?

The fundamental objective of an award of contractual damages is to put the plaintiff in the position they would have been in had the contract been performed.

Altimarloch had an interest in having the contract performed that went beyond ensuring it had got the pure financial value it had contracted for.  It could not just go out into the market and buy equivalent water rights, nor could it sell the land and set up operations elsewhere. 

For these reasons, the Court concluded that satisfaction of the fundamental objective of contractual damages required more than an award on the orthodox ‘difference in value’ measure.  Instead, it awarded Altimarloch damages on a ‘cost of cure’ measure (which would enable it to achieve “functional equivalence” with the water rights it contracted for by constructing a dam).

Chapman Tripp comments

The key points to take out of the Court’s decision on these issues are:

  • there is no easy escape route for parties who negligently induce others to enter into loss-making contracts.  They will be liable for loss suffered at the time the contract is entered into (the difference between the amount paid and value received).  The availability of contractual claims against other solvent parties will not remove the obligation to make good that loss.  Nor can the value of those claims be factored into assessment of the plaintiff’s loss to reduce the amount of damages otherwise payable
  • that said, a less strict approach to non-statutory contribution principles does mean that those who commit torts and others who break contracts can be lumped in together.  Parties liable in tort, like the Council, can potentially bring in other defendants liable in contract, like the vendors, and vice versa, in the event they find themselves alone in the firing line, and
  • plaintiffs who sue in contract may get more than the standard ‘difference in value’ measure if that would not provide adequate compensation in practice.  A genuine interest in having the contract performed (which will probably be the case, for example, when the goods are not easily substituted) might mean that the contract-breaker has to do what is necessary to ensure that the plaintiff gets what it bargained for – even if doing so involves considerable expense.

Our thanks to Simon Elliot for writing this Brief Counsel. For further information, please contact the lawyers featured.

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