Home | Cases | Baltic Shipping v Dillon

 

Key information

Court
High Court of Australia


Appeal from
Supreme Court of NSW (Court of Appeal)

Baltic Shipping v Dillon
[1991] NSWCA 19;
(1991) 22 NSWLR 1

Judges
Gleeson CJ
Kirby P
Mahoney JA (dissenting)

Trial
Dillon v. Baltic Shipping Co
(1989) 21 NSWLR 614

Judge
Carruthers J

Issues
Damages - Mental Distress - entire contract - total failure of consideration

Link to full case
AustLII

Citator
LawCite

Related resources
Mikhail Lermontov Shipwreck
New Zealand Disasters website

Mikhail LermontovAustraliaBaltic Shipping v Dillon

High Court of Australia (1993) 176 CLR 344

Image source: http://www.nzmaritime.co.nz/lermontov.htm

Quick summary

Facts

Mrs Dillon contacted to was a passenger on a cruise ship, 'Mikhail Lermontov', owned and operated by Baltic Shipping. Nine days into a 14 day cruise the ship sank and Mrs Dillon lost her belongings and suffered injuries. She sued to recover the cost of the cruise and damages.

Held

Appeal succeeded in relation to the fare. Mrs Dillon could recover damages for distress, but not restitution for the fare.

On the issue of the fare

The fare could not be recovered because there was not a total failure of consideration. In addition:

  • Baltic Shipping's right to retain the fare was not conditional upon complete performance (per Mason CJ, Toohey, Gaudron and McHugh JJ)
  • If Mrs Dillon had had a right to recover the fare she would not have been entitled to full damages for breach of contract (per Mason CJ, Brennan, Deane, Dawson, Toohey and Gaudron JJ)

On the issue of damages for distress

Damages for disappointment and distress can be recovered only if they result from physical inconvenience caused by the breach or if the object of the contract is to provide enjoyment or relaxation or to prevent 'molestation'.

  • Mason CJ (at para 44) held that 'damages for disappointment and distress are not recoverable unless they proceed from physical inconvenience caused by the breach or unless the contract is one the object of which is to provide enjoyment, relaxation or freedom from molestation.' Justices Toohey and Gaudron agreed.
  • Justice Brennan held that if 'a contract contains a promise, express or implied, that the promisor will not cause the promisee, or will protect the promisee from, disappointment of mind, it cannot be said that disappointment of mind resulting from breach of the promise is too remote' and therefore damages are available (para 7)
  • In their joint judgment Justices Deane and Dawson accepted the general rule that a plaintiff is not entitled to recover damages for disappointment and distress for breach of contract, but held it did not apply to cases 'where the disappointment and distress have been caused by breach of a contract under which the party allegedly in breach is shown expressly or impliedly to have agreed to provide pleasure, entertainment or relaxation or to prevent molestation or vexation' (para 17). This was such a case.
  • Justice McHugh held that damages are available where the distress or disappointment 'arises from breach of an express or implied term that the promisor will provide the promisee with pleasure, enjoyment or personal protection or ... the distress or disappointment is consequent upon the suffering of physical injury or physical inconvenience.' (para 18). In the present case it was 'an implied term of the contract that the fourteen day cruise in the South Pacific would be an enjoyable experience'. (para 18)

Key points

Damages for disappointment and distress following breach of contract are not available unless (para 44):

  • they proceed from physical inconvenience caused by the breach; or
  • the object of the contract is to 'provide enjoyment, relaxation or freedom from molestation'

 

Some more detail

Facts

Baltic Shipping owned and operated the cruise ship, "Mikhail Lermontov".

  • Mrs Dillon was a passenger on a cruise which commenced in Sydney on 7 February 1986 and was scheduled to return on 21 February
  • On 16 February 1986 the ship struck a shoal and sank.
  • As a result of this event Mrs Dillon lost possessions and suffered injuries
  • Mrs Dillon and 122 passengers commenced proceedings in the Supreme Court of NSW against Baltic Shipping and its agent for damages.

Mikhail Lermontov

Mrs Dillon's claim

Mrs Dillon originally claimed return of the full fare ($2,205) on the grounds of total failure of consideration. This was refined during trial to the amount of the balance not already refunded by Baltic Shipping - $1,417.50. Baltic Shipping challenged the claim that there was a total failure of consideration.

Mrs Dillon further claimed compensatory damages for disappointment and distress.

Background to High Court proceedings

After Baltic Shipping made some admissions of negligence the trial judge, Justice Carruthers, held that Baltic Shipping was liable for damages and awarded the following:

  • $1,417 as "Restitution of fare". Carruthers J held the contract was an 'entire' contract (at p 667) and that (at 668) ' the plaintiff got no benefit from this contract. It is true that she did have eight days cruising ... but those benefits were entirely negated by the catastrophe ...'
  • $5,000 as "Compensation for disappointment and distress at the loss of entertainment (and facilities for enjoyment which had been promised)"
  • Additional sums awarded for personal injuries were not relevant to the present appeal.

Baltic Shipping appealed to the Court of Appeal. The appeal was dismissed my majority (Gleeson CJ, Kirby P; Mahoney JA dissenting)). The Court of Appeal held (relevantly) that:

  • 'certain exclusion clauses contained in the printed ticket received by the respondent were not incorporated in the contract under which she was carried on the vessel' (para 2 HC judgment)
  • the awards of restitution of fare and compensation for disappointment and distress were properly made.
    • in relation to total failure of consideration, Kirby P (with whom Gleeson CJ agreed on this point) stated that, although the plaintiff had received eight days of the cruise, it was an entire contract and the 'respondent did not contract with the appellant for an eight-day cruise, still less for an eight-day cruise interrupted by the disaster ... What she contracted for was a relaxing holiday experience. It is this that she failed to secure. The contract of carriage was properly categorised as an entire contract. I agree with the judge that there is a good analogy to Sir George Jessel MR's statement in Re Hall and Barker ((7) (1878) 9 Ch D 538, at p 545): '... If a shoemaker agrees to make a pair of shoes, he cannot offer you one shoe, and ask you to pay one half of the price." (at 26)
    • the Court of Appeal also rejected Baltic Shipping's argument that it could rely upon a clause purporting to limit the amount of consideration that could be recovered, both because it was not incorporated into the contract of carriage and because of Baltic's admission of negligence (per Kirby P).

On appeal to the High Court the relevant issues for determination related to the awards for restitution and compensation.

Held (High Court)

Chief Justice Mason

On the claim for restitution

His Honour held (at para 17) that the plaintiff was not entitled to recover payment either on the grounds of total failure of consideration or that the right to retain payment was conditional upon performance.

  • the failure of consideration was partial and not total, based on benefits of the cruise received in the first eight days. [para 17]
  • the contract called for the appellant to perform its contractual obligations from commencement and there is no basis 'for holding that the advance payment of the cruise fare created in the appellant no more than a right to retain the payment conditional upon its complete performance of its entire obligations under the contract.' [para 18]. In particular, it 'would not be reasonable to treat the appellant's right to retain the fare as conditional upon complete performance when the appellant is under a liability to provide substantial benefits to the respondent during the course of the voyage.' [para 18] .
Entire contracts and total failure of consideration

Noted (at para 10) that '[a]n entire contract or, perhaps more accurately, an entire obligation is one in which the consideration for the payment of money or for the rendering of some other counter-performance is entire and indivisible' and (at para 11) the 'concept of an entire contract is material when a court is called upon to decide whether complete performance by one party is a condition precedent to the other's liability to pay the stipulated price or to render an agreed counter-performance'.

Mason CJ noted (at para 11) that if 'this were a case in which the appellant sought to enforce a promise to pay the cruise fare at the conclusion of the voyage the concept would have a part to play; then, if the appellant's obligations were entire ... the appellant's incomplete performance of its obligations would not entitle it to recover.' But (at para 12) when 'an innocent party seeks to recover money paid in advance under a contract in expectation of the entire performance by the contract-breaker of its obligations under the contract and the contract-breaker renders an incomplete performance, in general, the innocent party cannot recover unless there has been a total failure of consideration' and if 'the incomplete performance results in the innocent party receiving and retaining any substantial part of the benefit expected under the contract, there will not be a total failure of consideration.'

His Honour also referred (at para 13) to the High Court's decision in David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353 in which the Court stated (at para 53): "the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact".

Conditional payments

At para 14 his Honour also held that there was an alternative basis for recover of money paid in advance - that is where the 'defendant's right to retain the payment is conditional upon performance of his or her obligations under the contract.' In such a case 'the plaintiff may be entitled to recover so long as the payment remains conditional.' Determining whether an advance payment - other than a deposit - 'is absolute or conditional is one of construction' (at para 16) and it is 'material to ascertain whether the payee is required by the contract to perform work and incur expense before completing this performance of his or her obligations under the contract. If the payee is so required then, unless the contract manifests a contrary intention, it would be unreasonable to hold that the payee's right to retain the payment is conditional upon performance of the contractual obligations'.

On whether both the claims for restitution and damages can be maintained

Notwithstanding his conclusion that the restitution claim could not be sustained, it was not necessary for Mason CJ to consider whether both claims could be simultaneously maintained. His Honour noted (at para 20) that there was authority to suggest 'that the claims are alternative and not cumulative'. However, his Honour also observed that Lord Denning MR was 'clearly of the view that the claims may be concurrent', referring to his comments in Heywood v. Wellers(1976) QB 446 at p 458. Mason CJ concluded that (at para 30) 'full damages and complete restitution will not be given for the same breach of contract.' This is because 'restitution of the contractual consideration removes ... the basis on which the plaintiff is entitled to call on the defendant to perform his or her contractual obligations. ... performance ... in which damages are sought, was conditional on payment by the plaintiff. Recovery of the money paid destroys performance of that condition.. In addition 'the plaintiff will almost always be protected by an award of damages for breach of contract ...' Thus (at para 31), 'even if the respondent had an entitlement to recover the cruise fare, Carruthers J. and the majority of the Court of Appeal erred in allowing restitution of the balance of the fare along with damages for breach of contract. The consequences of this conclusion will be considered below in light of the conclusion to be reached with regard to the award of damages for disappointment and distress.'

On the claim for damages for disappointment and distress

Mason CJ noted (at para 32) that pain and suffering 'is a well-known common law head of damage recoverable in actions for damages for personal injury'. His Honour further noted (at par 33), referring to Kemp v. Sober (1851) 1 Sim(NS) 517, that 'damages for anxiety suffered by the plaintiff may be recovered in an action for breach of a contract which promises freedom from anxiety'. However, despite Kemp and Sober, it was, for a long time, considered that 'damages for injured feelings of the kind just mentioned could not be awarded in an action for breach of contract.' (para 34).

However, (at para 35), the 'general rule that damages for anxiety, disappointment and distress are not recoverable in actions for breach of contract is ... subject to exceptions .... The scope of the exceptions has been expanded by judicial decision in recent years, so much so that the authority of the general rule is now somewhat uncertain.' In addition (at para 36) 'The conceptual and policy foundations of the general rule are by no means clear. It seems to rest on the view that damages for breach of contract are in essence compensatory ... and that they are confined to the award of that sum of money which will put the injured party in the financial position the party would have been in had the breach of contract not taken place. On that approach, anxiety and injured feelings do not, generally speaking, form part of the plaintiff's compensable loss which flows from a breach of contract.' His Honour noted (at para 37) that this 'policy is based on an apprehension that the recovery of compensation for injured feelings will lead to inflated awards of damages in commercial contract cases, if not contract cases generally'.

His Honour, however, observed that (at para 38) 'one might ask why the injured party should be deemed to take the risk of damage of a particular kind when the fundamental principle on which damages are awarded at common law is that the injured party is to be restored to the position (not merely the financial position) in which the party would have been had the actionable wrong not taken place. Add to that the fact that anxiety and injured feelings are recognized as heads of compensable damage, at least outside the realm of the law of contract. Add as well the circumstance that the general rule has been undermined by the exceptions which have been engrafted upon it. We are then left with a rule which rests on flimsy policy foundations and conceptually is at odds with the fundamental principle governing the recovery of damages, the more so now that the approaches in tort and contract are converging.'

Mason CJ then noted the exceptions to the general rule (at para 39):

  • damages for injured feelings are 'recoverable in the action for damages for breach of promise of marriage'
  • 'a plaintiff can recover damages for pain and suffering, including mental suffering and anxiety, where the defendant's breach of contract causes physical injury to the plaintiff', damages 'for pain and suffering consequent upon physical injury caused by breach of contract may be awarded' and 'damages for pain and suffering may include compensation for injured feelings', including nervous shock.
  • damages for compensation for physical inconvenience may be recovered in some circumstances, including 'the physical inconvenience suffered by a plaintiff when the defendant's train did not carry him to the stipulated destination ... and that suffered by a plaintiff who purchased property with defects not revealed in the surveyor's report upon which the plaintiff relied'
  • 'compensation for an element of subjective mental suffering where the plaintiff has sustained physical inconvenience as a result of the defendant's breach of contract and the mental suffering is directly related to that physical inconvenience'
  • there are cases 'in which the plaintiff has recovered damages for distress, vexation and frustration where the very object of the contract has been to provide pleasure, relaxation or freedom from molestation.' Mason CJ referred to Heywood v. Wellers ((1976) QB 446) in which the 'plaintiff instructed a solicitor to obtain an injunction to protect the client from molestation and the solicitor negligently failed to do so, the client

At para 44 his Honour observed that 'while the innocent party to a contract will generally be disappointed if the defendant does not perform the contract, the innocent party's disappointment and distress are seldom so significant as to attract an award of damages on that score. For that reason, if for no other, it is preferable to adopt the rule that damages for disappointment and distress are not recoverable unless they proceed from physical inconvenience caused by the breach or unless the contract is one the object of which is to provide enjoyment, relaxation or freedom from molestation.'

In this case the contract was clearly one 'the object of which was to provide for enjoyment and relaxation. It follows that the respondent was entitled to an award of damages for disappointment and distress and physical inconvenience flowing from that breach of contract. Indeed, an award for disappointment and distress consequential upon physical inconvenience was justified on that account alone.' (para 45)

His Honour (at para 47) agreed with McHugh J, that if Mrs Dillon were to retain both the fare in restitution and 'the sum of $5,000 awarded as compensation for disappointment and distress, her compensation would be excessive'

He concluded (at para 48) that the appeal should be allowed in relation to the order for restitution.

Justice Brennan

On the issue of the fare

Until the sinking Mrs Dillon was receiving the benefit bargained for under the contract and that regardless of whether the contract was entire there was no total failure of consideration (para 1). His Honour therefore agreed with Mason CJ that Mrs Dillon was not entitled to a return of the fare.

On the issue of compensation for disappointment and distress

Brennan J held the issue to be one of remoteness (para 3) as governed by Hadley v. Baxendale (1854) 9 Ex 341 (156 ER 145) and that the relevant question is whether 'disappointment of mind' 'is sufficiently likely to result from a particular breach "to make it proper to hold that the loss flowed naturally from the breach".' (para 3)

Brennan J noted (at para 4) that in 'one sense, a promisee's disappointment of mind flows naturally whenever a contractual promise is not fulfilled. ... But where disappointment of mind is no more than a mental reaction to a breach of contract and damage flowing therefrom, the law has treated such a mental reaction as too remote ...'. His Honour considered that if it was otherwise parties would not be able to reliably estimate liability in the event of breach, because it may depend on the 'subjective mental reaction of an innocent party to a breach' (para 5).

However, (at para 7) if 'a contract contains a promise, express or implied, that the promisor will not cause the promisee, or will protect the promisee from, disappointment of mind, it cannot be said that disappointment of mind resulting from breach of the promise is too remote. Such a promise is expressed or implied in many contracts the object of which is to provide a service or facility conducive to peace of mind, tranquility of environment or ease of living ... and damages have been awarded accordingly. ...' His Honour went on to provide a number of examples of the application of this principle.

Applying this to the present case,

(para 9) 'the plaintiff was promised a holiday cruise, an interlude to relax the mind and refresh the spirits. Or, at the least, the defendant promised to exercise all reasonable care to provide such a cruise. In breach of the contract, she was shipwrecked: an event provoking severe tension of mind and depression of spirit. The damage inevitably and directly consequent on the breach of the implied promise to carry her safely (or to use all reasonable care to carry her safely) to her destination was not simply a non-performance of the carriage but an exposure of the plaintiff to danger and an infliction of mental distress. The "disappointment and distress" in respect of which the trial judge awarded an amount of damages was a result of the shipwreck that occurred in breach of the defendant's contractual obligation. It was such an inevitable and direct result of that breach that it is proper to hold that it flowed naturally from the breach. An award of damages for "disappointment and distress" was therefore right in principle. ...'

Brennan J considered, however, that it was 'erroneous' for the trial judge to award both damages for disappointment and distress and the amount of the fare and agreed with the orders proposed by Mason CJ (at para's 10-11).

Deane and Dawson JJ

On the issue of restitution of fare

Their Honours noted (at para 9) that the 'critical question ... is whether the consideration for which Mrs Dillon paid the stipulated fare to Baltic wholly failed. ... If all that Mrs Dillon had relevantly received had been Baltic's bare promise, unperformed and unenforced, the consideration for the whole of the fare would have wholly failed. In fact, however, Baltic provided and Mrs Dillon accepted the accommodation, the sustenance, the entertainment and the transport involved in the first eight clear days of the fourteen-day cruise. ...'

Their Honours observed (at para 10) that 'the view that has prevailed in the courts below is that the consideration was entire and indivisible and it may be assumed, for the purposes of this appeal, that that view is correct. ...Ordinarily, however, an entire and indivisible consideration will not wholly fail if part of it is tendered and accepted....'. In the present case, even if the 'promised consideration was entire and indivisible, it did not wholly fail' (para 12) because Baltic provided eight days worth of the cruise. While the 'catastrophe of the shipwreck and its consequences undoubtedly outweighed the benefits of the first eight complete days. It did not, however, alter the fact that those benefits, which were of real value, had been provided, accepted and enjoyed.' (para 12)

Their Honours also considered that, even if this was not the case, Mrs Dillon could not recover both compensatory damages for failure to return and restitution for the fare (para 13).

On the issue of damages

Their Honours observed (at para 16) that 'a plaintiff is not entitled to recover damages for the "disappointment of mind", distress and injured feelings "occasioned by the breach of contract"' based on the rule in Hadley v Baxendale - 'it is to be assumed that disappointment or distress flowing from the breach of contract would not have been in the contemplation of the parties, at the time they made the contract, as a likely result of breach'. However, there are qualifications or exceptions and the issue here is 'whether disappointment and distress sustained by reason of breach of a contract to provide a pleasant and relaxing holiday experience comes within them. In our view, it does.' (para 16)

The present case falls within that category of case 'where the disappointment and distress have been caused by breach of a contract under which the party allegedly in breach is shown expressly or impliedly to have agreed to provide pleasure, entertainment or relaxation or to prevent molestation or vexation' (para 17)

'It was an implied term of the contract that Baltic would take all reasonable steps to provide such a cruise. The direct consequence of Baltic's admitted breach of contractual duty was that Baltic failed to provide the latter part of that promised pleasant holiday. Instead, it provided an extraordinarily unpleasant experience. ... Mrs Dillon was entitled to recover damages for the disappointment and distress which she suffered as the result of Baltic's breach of contract. (para 18)

Justice Toohey

Justice Toohey agreed with Chief Justice Mason. In particular:

  • There was not a total failure of consideration; as a result the fare was not recoverable
  • Mrs Dillon was entitled to damages for disappointment and distress and physical inconvenience.

Justice Gaudron

On the issue of the fare

Justice Gaudron noted (at para 9) that the contract did not merely involve a round-trip journey but was a contract for a 14 day pleasure cruise and that, as a result, 'there is no basis for treating the contract as an entire contract with the premature termination of the cruise constituting a total failure of consideration'. Her Honour noted that 'Mrs Dillon received the benefit of accommodation, sustenance and other facilities associated with the cruise until the ship went down.'

Her Honour further expressed the view that if a damages claim for compensation was successful, that would preclude a refund of the fare - were it otherwise Mrs Dillon could 'take the benefit of the contract without an obligation to give consideration for it.' (para 11)

On the issue of damages

Justice Gaudron agreed with Chief Justice Mason on this issue. (para 12)

Justice McHugh


On the issue of the fare

Justice McHugh (at para 4) held that Mrs Dillon was not entitled to a refund of the fare. There was no total failure of consideration (para 10) and this was not a payment made conditional on full performance (para 5 and 12-13)

On the issue of damages for distress and disappointment

At para 18:

'Under the common law, damages are not recoverable for distress or disappointment arising from a breach of contract unless the distress or disappointment arises from breach of an express or implied term that the promisor will provide the promisee with pleasure, enjoyment or personal protection or unless the distress or disappointment is consequent upon the suffering of physical injury or physical inconvenience. In the present case, it was an implied term of the contract that the fourteen day cruise in the South Pacific would be an enjoyable experience. The sinking of the "Mikhail Lermontov" resulted in a breach of that term. Consequently, the trial judge was correct in awarding damages to Mrs Dillon for the disappointment which she suffered when the cruise failed to provide the enjoyment which Baltic had promised.'

His Honour provided detailed background of the principles relating to damages for distress or disappointment and then analysed them in the context of this case at para 48, concluding that the 'contract between Mrs Dillon and Baltic was one in which Baltic impliedly promised to provide a pleasurable and enjoyable cruise for fourteen days' and its 'failure to do so means that it must pay damages for the distress and disappointment suffered by Mrs Dillon'.

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