UK: High Court Applies Contractual Cap On Liability Only After Reducing Damages For Contributory Negligence

In a recent case, the High Court has clarified the correct approach to reducing damages in order to reflect a finding of contributory negligence where there is also a contractual cap on liability: Natixis SA v Marex Financial and Access World Logistics (Singapore) Pte Ltd [2019] EWHC 3163.

The defendant argued that the court should apply the contractual cap first, and then make the reduction for contributory negligence. The court disagreed, holding that the reduction for contributory negligence had to be applied to the total amount of the damage suffered and not to the capped amount.

The court's decision will be welcome to claimants as it will often result in a higher award of damages than if the defendant's preferred approach were adopted. It is also consistent with previous authority in the context of the application of the so-called SAAMCO cap (which operates to limit a defendant's liability in negligence to those losses which fall within the scope of the duty of care). The court referred to the decision in Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190, in which the House of Lords held that a reduction for contributory negligence had to be applied before considering the application of the SAAMCO cap, rather than resulting in a further reduction of the capped figure.

The decision also illustrates the court's typical approach to awarding costs where allegations of fraud are abandoned at a very late stage. In this case, the court found that the defendant's costs of responding to the fraud allegations should be paid on an indemnity basis.

Harriet Tolkien, an associate in our disputes team, considers the decision further below.

Background

In a previous judgment in this case ([2019] EWHC 2549 (Comm)), Mr Justice Bryan held that a bank, Natixis, was entitled to damages from a commodities broker, Marex, for breach of five purchase contracts. Under the contracts, Marex had agreed to sell Natixis nickel, which was stored at the warehouses of a third party, Access World. The court found that Marex had provided Natixis with forged warehouse receipts and Natixis was therefore entitled to recover damages of approximately US$ 32 million.

Marex brought a Part 20 claim against Access World alleging both negligence and fraud, but the fraud allegations were withdrawn at a very late stage.

Bryan J held that Access World was liable to Marex in negligence because one of its employees had verified that some of the warehouse receipts subsequently found to be forgeries were authentic. That had resulted in a Hedley Byrne type assumption of responsibility. However, the recoverable damages were limited as a result of the limitation of liability provisions in Access World's standard contract. In addition, the damages fell to be reduced by 25% for contributory negligence, to reflect the fact that Marex had failed to send the remaining warehouse receipts to Access World for verification (notwithstanding the fact that, had it done so, Access World may have negligently authorised those receipts also).

In the present decision, the court dealt with various issues arising from that judgment, including: (i) the order in which the contractual liability cap and the reduction for contributory negligence should be applied to calculate the sums due to Marex by way of damages; and (ii) the basis on which Marex should pay Access World's costs of defending the withdrawn fraud allegations.

Decision

Sums due to Marex by way of damages

Access World argued that the correct approach was to start by applying the limitation of liability in Access World's standard contract and then reduce the resulting amount by 25% for contributory negligence.

Bryan J disagreed:

1. The judge started by reminding himself that, in his decision in [2019] EWHC 2549 (Comm), he had not found that Access World's duty in negligence was limited to a certain amount. Rather, he had found that the amount that could be recovered was limited.

2. The judge agreed with Marex's submission that the only power to reduce an amount of damages for contributory negligence is under section 1(1) of the Law Reform (Contributory Negligence) Act 1945, which provides as follows:

3. This conclusion was supported by the case of Platform Home Loans, referred to above. In that case, not only did the House of Lords identify that the first line of section 1(1) was directed at the damage that is suffered, and not the capped amount of the damage, but actually applied the approach advocated for by Marex. The court in that case had started with the basic loss, reduced it for contributory negligence and then considered whether there was any reduction as the result of a maximum liability figure (in that case based on the so-called SAAMCO cap).

4. Finally, Bryan J held that, if the cap were applied before any discount for contributory negligence, section 1(1)(b) would have no application.

Therefore, the correct approach was to start with Marex's liability to pay Natixis, which was US$32 million, reduce that amount by 25% for contributory negligence, and then apply the cap.

In the present case, the contractual liability cap was €100,000 in respect of each wrongly authenticated warehouse receipt. There were fourteen relevant warehouse receipts and, in all but one case where the amount at stake was less than €100,000, the amount recoverable was caught by the cap because the cap was lower than the amount after the basic loss had been reduced by 25%. The total damages figure was therefore €1.4 million less the necessary adjustment for the one instance where a lower amount was at stake.

Costs of Marex's fraud claim

Bryan J also had to consider the basis on which costs should be awarded in relation to Marex's fraud claim against Access World. The claim was, in essence, that the individual responsible at Access World for authenticating the warehouse receipts had acted dishonestly.

Marex had pursued the fraud claim in order to try and mitigate the risk posed by the limitation on liability in Access World's standard contract and to avoid the outcome that it ultimately faced: recovering from Access World just a fraction of the sums it was ordered to pay to Natixis. The judge had no hesitation in finding that Marex should be ordered to pay Access World's costs on an indemnity basis because:

• Whilst the judge accepted that fraud claims are often inferential, there was "not one shred of actual evidence" for this claim.
• Marex nonetheless pursued the claim through to trial, including in cross examination and written closing submissions, but then abandoned the claim in oral closing submissions.
• The fraud allegations attracted considerable publicity, particularly in the trade press, and many members of the press were present at the start of the trial.

Bryan J therefore found that this was "a classic case where Marex's conduct in pleading and pursuing the claim in fraud takes matters out of the norm" and indemnity costs were appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.