Commercial Contracts Bulletin - February 2014

WHO IS... THE WEAKEST LINK?

Flanagan and Coles v Greenbanks Limited (t/a Lazenby Insulation) & Cross [2013] EWCA Civ 1702

The Court of Appeal recently used the five key principles detailed in the case of Borealis AB v Geogas Trading SA [2010] EWHC 2789 (Comm) to establish whether there had been a break in the chain of causation that resulted in a loss for one party to a contract. In the first instance, the County Court held that there was no break in the chain of causation and this was appealed. The appeal was dismissed by a 2:1 majority.

Background

In order to establish a chain of causation, a claimant must satisfy the 'but for' test on the balance of probabilities. In layman's terms, the claimant must prove that the loss would not have occurred but for the negligence of the defendant. For example, 'but for' the badly positioned road sign, you would not have crashed your car. This test will not be met if the loss would have happened regardless of the defendant's negligence or if the loss was caused by a different reason, e.g. there was a fault in the car or you were speeding.

If there is a combination of events that leads to a loss (such as the road sign and the speeding) the defendant may have been negligent (e.g. 'but for' the road sign), but the chain of causation can be broken by a different intervening act caused by the claimant or a third party (e.g. speeding). This intervening act may be due to the carelessness of the claimant or the third party; however carelessness is not a requirement for a break in the chain of causation. The court must apply the principles of the Borealis case and decide if the actions of the claimant or the third party break the chain of causation.

The Facts

Following a referral from Mr Cross, the claimants (Flanagan and Coles) had cavity wall insulation installed in their properties by Lazenby. The claimants suffered a loss by having the cavity wall insulation installed in their properties because it transpired that their properties were timber framed and accordingly were not suitable for cavity wall insulation. Mr Cross should have identified this in his initial survey; he failed to do so and he referred the claimants to Lazenby. Lazenby failed to carry out its own checks on the properties. Mr Cross argued that Lazenby's actions broke the chain of causation and therefore that he was not liable to the claimants. The Court of Appeal applied the principles of the Borealis case.

The Borealis case

The five key principles in the Borealis case are as follows:

The burden of proof is on the defendant to show that there is a break in the chain, but the claimant must still prove that the defendant's breach caused their loss. To break the chain of causation, the intervening act "must constitute an event of such impact that it obliterates the wrongdoing". It is doubtful that anything less than unreasonable conduct by the claimant or third party will break the chain of causation. Recklessness would break the chain, however, there is no law stating that recklessness is required. Another important factor is the state of knowledge of the claimant or third party. The more 'actual' knowledge the claimant or third party has of the breach and the need to take remedial measures, the more likely it is that the chain of causation will be broken. On the other hand, the less the claimant knows the more likely it is that only recklessness will be enough to break the chain of causation. Establishing a break in the chain of causation is fact sensitive. The Decision

The Court of Appeal was split by a 2:1 majority; all of the judges applied Borealis but with different approaches. Mr Cross argued that Lazenby had knowledge that previous surveys had been incorrect. The majority relied upon the part of Borealis which said, "the knowledge must be confined to a particular case" which therefore meant that Lazenby was not expected to have noticed that the survey was incorrect on this occasion. The majority also held that Lazenby was negligent (but not reckless) and that both Mr Cross' and Lazenby's errors together caused the resulting loss. Although Mr Cross argued that it was foreseeable that Lazenby would have checked the property before installing the cavity wall insulation, the court nevertheless held that this did not absolve Mr Cross of his breach. The judge in the County Court applied the principles of Borealis and decided that Mr Cross' breach was an effective cause alongside Lazenby's. In conclusion, the majority agreed with the County Court: they held that Mr Cross could not show that Lazenby's actions obliterated his own, and they dismissed the appeal.

The minority (Macur LJ), however, believed that it was correct to apply Borealis, but that the word 'obliterates' should not be interpreted so literally. Macur LJ commented, "there is no "all embracing test for what may constitute the breaking of the chain of causation". She argued that it is reasonably easy to check if a property is timber framed and that Lazenby knew that Mr Cross had previously provided incorrect surveys. For these reasons, Macur LJ held that Lazenby's negligence superseded Mr Cross' initial breach.

Comment

Borealis holds the correct principles to apply when establishing if there has been a break in the chain of causation. This case has shown differing methods of applying these principles, leaving the law in this area slightly unsettled. Essentially, each case turns on its own facts and it is more than likely that there will be further case law to follow.

OWNERLESS EMAILS: STILL NO TAKERS

Fairstar Heavy Transport N.V. v Philip Jeffrey Adkins Claranet Limited [2013] EWCA Civ 886

We commented on this case in our February 2013 Bulletin where it was decided by the High Court that it was not possible to own an e-mail. On appeal by Fairstar, the decision was overturned by the Court of Appeal which stated that, due to the existence of an agency relationship, ownership of an email was irrelevant in this case.

Facts: recap

The facts in Fairstar concerned the ownership of Fairstar's business e-mails that were sent to and from the personal e-mail account of the Chief Executive Officer, Mr Adkins. Fairstar is a Dutch company specialising in the transport of heavy cargo. Fairstar had instructed a Chinese shipyard to build several vessels. Finding itself in financial difficulty, Fairstar defaulted on payment. Consequently, the shipyard claimed that Fairstar was liable to pay a cancellation charge of US$37 million. Mr Adkins disputed that claim based on the terms of a collateral contract, presumably negotiated over e-mail. Shortly after, Fairstar was subject to a hostile takeover by the owners of a competitor, which terminated Mr Adkins' role as CEO.

In this case, Fairstar's new owners sought recovery of incoming e-mails that were automatically forwarded to Mr Adkins' private account (and deleted from Fairstar's server) and Mr Adkins' replies. Fairstar claimed a proprietary right in the e-mails' content. Fairstar stated that without access to these e-mails, it did not know what was agreed between Mr Adkins, on behalf of Fairstar, and the Chinese shipyard.

Appeal

The appeal placed greater emphasis on the principal and agency...

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