Foreign Currency: Claims, Judgments and Damages

Michael Howard; John Knott and John Kimbell

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CHAPTER 7 Tort

General considerations

Introductory

7.1 Whereas contracting parties are to a large extent able to regulate the legal effect of their future relationship with each other by suitable terms and conditions in their contract, such benefits are not available to strangers whose relationship arises solely from a tort.1 This difference can have a profound effect in many situations where a dispute occurs, in particular where it may enable a contracting party to avoid or limit his or her financial liability by an effective exclusion or limitation clause, whereas a non-relationship tortfeasor will gain comparable relief only where it is afforded by statute.2 7.2 From another perspective, the victim of a tort will not be hampered in his claim by any exclusion clauses; neither, however, will he generally have been able to seek to bind the tortfeasor, in advance, to accept the assessment of damages in accordance with the law of a particular country, or in a particular currency (save as provided for under Article 14.1(b) of Rome II). In contrast, a party to a contract (including where all parties are not pursuing a commercial activity) may be able to introduce clauses that will effectively determine not only the contract’s applicable law and the currency or currencies in which the monetary obligations under the contract are expressed and paid, but also the currency in which damages for a breach are to be assessed.3 And even in the absence of an express provision identifying the currency relevant for the assessment of damages for breach of contract, there may be a sufficient indication that the parties intended, or they are deemed to have

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intended, that a particular currency should govern all transactions and liabilities.4 In addition, a party to a contract has the possibility of minimising the effect of currency fluctuations by linking liabilities under the contract wholly or partly to the performance of another currency or a basket of currencies, or to a commodity such as gold. 7.3 In English law, until relatively recently, and except with claims for unliquidated damages for non-pecuniary loss such as a personal injury, compensation has generally been assessed as at the time of loss or damage. Normally, save in respect of consequential or continuing loss, this will be the date when a cause of action arises. As a result, there has inevitably been a delay between that time and the time when judgment is given. Often (as with other claims) there is a further, although usually a much shorter, delay before payment is made, either voluntarily or by an enforcement process.5 And during these periods the value of the currency in which damages are assessed may have fluctuated, both in terms of its domestic purchasing power and its exchange rate against other currencies.6 7.4 In the years immediately before and after 1970, when the internal value of sterling fell away owing to inflation, and its external value also weakened, the effect for commercial claimants operating wholly or in part in a foreign currency, including many international traders and foreign shipowners, was to subject them to variations in the value of sterling, often with disastrous consequences. This was particularly noticeable for claimants who traded in the US dollar, which was then, and still is, the dominant currency within the shipping and petroleum industries, among others. All the time that sterling was depreciating against the dollar, for a claimant trading in dollars the real value to him of his potential compensation was also depreciating. Also, during that period, for many other foreign claimants recourse to English law had the disadvantage of causing their claim to be invested in a currency depreciating more severely than their own. Conversely, during any periods when sterling was appreciating in relation to a claimant’s currency, recourse to the English courts would artificially enhance the value of a claim to the detriment of defendants. Neither result was satisfactory. 7.5 As indicated earlier,7 the sterling-breach-date rule8 which the House of Lords

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purported to apply in The Volturno 9 was a compound rule, derived partly from the late-Victorian case Manners v Pearson 10 (obligatory conversion into sterling) and partly from the then well-established principle that compensation for damage to property was normally assessed as at the date of loss. Traces of the latter rule can be found in Lord Wilberforce’s speech in Miliangos, where he said: ‘As a general rule, in English law damages for tort or for breach of contract are assessed as at the date of the breach’, although he added the qualification, reflecting the move away from that principle, that: ‘It is for the courts, or for arbitrators, to work out a solution in each case best adapted to giving the injured [claimant] that amount in damages which will most fairly compensate him for the wrong which he has suffered.’11 As will be shown, the foreign currency cases in the 1970s had the effect of removing the obligatory conversion element for tort claims, while in a separate development of the law the breach-date element has been relaxed in a broad range of situations, such as for a claim in nuisance,12 a contract of sale case,13 a claim for loss caused by negligent advice,14 and a claim for damages for breach of a charterparty.15 7.6 A detailed examination of the principles governing the time as at which damages in tort are assessed is outside the scope of this work, but it is clear that the greater flexibility now shown by the courts in selecting the time for assessment, combined with changes in the treatment of foreign currency claims, has led to a fairer system. In these developing areas of the law there is still scope for further clarification, as greater flexibility has its counterpart in less certainty and the need for more guidance of a general nature. In earlier days, when the date of the loss determined both the time for assessment of damages and also the rate of exchange for any necessary conversion into sterling, these aspects were relatively trouble-free, albeit liable to cause injustice. With the courts nowadays having a greater flexibility of approach, both in relation to the assessment date and the selection of currency, it is important for there to be a broad framework within which individual disputes are resolved, and adequate guidance as to how it will be applied, so as to give the parties and their advisers a sound basis for predicting the merits of a claim and making appropriate decisions. Otherwise, litigation becomes a lottery.16

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Early uncertainty for tort claims following Miliangos17

7.7 Immediately after the House of Lords reached a decision in Miliangos, which swept away the straitjacket rule of obligatory conversion into sterling for debts incurred in a foreign currency, there was uncertainty as to whether the courts would apply a similar relaxation in relation to damages for breach of contract or damages arising from a tort. It was one thing for judgment on a debt to be given in the currency in which the debt was incurred (the currency of account), particularly, as in Miliangos, where the currency and place of payment, and the governing law, were all foreign; it was another thing for damages to be awarded in a foreign currency, particularly damages in tort, where the parties had had no opportunity to contract for any particular currency for that purpose, and where the governing law might be English. 7.8 In light of these considerations, many people believed that claims for damages for torts should continue to be assessed in sterling, and they saw some support for this belief in the words of Lord Wilberforce in Miliangos , where he said: ‘In my opinion it should be open for future discussion whether the rule applying to money obligations, which can be a simple rule, should apply as regards claims for damages for breach of contract or for tort.’18

Rome II

The relevance of the Rome II Regulation for tort claims

7.9 As this work is about the application of English law for resolving a range of situations connected with losses sustained and claims made in a foreign currency, it will be useful to have in mind the broad principles according to which English law may or may not be the relevant law for the purpose of those tort claims that come within the scope of the Rome II Regulation.19 This Regulation, which deals with the

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law applicable to non-contractual obligations, came into force on 11 January 2009, largely replacing the provisions of the Private International Law (Miscellaneous Provisions) Act 1995, which (save in relation to defamation actions) had itself replaced the common law double-actionability rule, which had previously determined whether torts committed abroad were actionable in England and Wales.20 7.10 By section 11 of the 1995 Act, the law applying to tort claims was generally the domestic law of the country where the tort or its most significant element occurred, but the general rule could be displaced under section 12 when analysis showed that another law was substantially more appropriate. Now, the choice of law for tort claims is governed by the Rome II Regulation, which applies to all civil claims arising from a non-contractual obligation brought before any court of a Member State of the European Community except Denmark,21 regardless of where in the world a breach occurred, and regardless of whether or not either party is domiciled or resident within the Community.22 And whereas previously, under English private international law conflict of laws rules, an English court would at one time have treated the assessment of damages within allowable heads as a procedural matter, to which it would apply its own rules, now the Regulation provides expressly that the applicable substantive law will also govern the assessment of

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damages.23 As a result, an English court may need to apply a foreign, even a non-European Community,24 domestic law,25 to determine not only the substantive rights between parties, including resolving issues such as remoteness, contributory negligence,26 and limitation of liability,27 but also the amount of any compensation or the nature of any other remedy sought; and, crucially, whether a party is ‘entitled to compensation for damage sustained personally’,28 and questions about ‘liability for the acts of another person’.29 7.11 That is not to say that all non-contractual claims with a foreign element brought before an English court will in practice be governed by the law of a foreign country, even where Rome II applies. First, there is a selection or identification process based on the place where damage occurred (regardless of where the cause, or any consequential losses, occurred).30 The law thus selected will be displaced if the parties were both habitually resident in one other country when the damage occurred, in which case that country’s laws will apply.31 Second, there is provision for the selection of the law of another country when the tort ‘is manifestly more closely connected’ with that country.32 Third, the parties may, as under the 1995 Act, agree to their dispute being determined in accordance with English law.33 And

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fourth, there may be overriding mandatory provisions of English law.34 There are also some special rules for particular torts.35 7.12 Traditionally, in respect of many tort claims with a foreign element which have been brought before the English courts, the parties have agreed (or have not objected36) to English law applying to all aspects. Prime examples are claims and cross-claims arising out of ship collisions occurring within the territorial waters of another country.37 London is the dominant forum for the determination of such claims, and has been for 200 years or more. That situation will not be affected by Rome II. Similarly, where other parties wish their disputes to be dealt with in an English court, it is generally because they wish not only that an English judge shall hear their case, but also that English domestic law shall apply. Traditionally, this has been particularly true for claims arising out of contracts, which generally have a jurisdiction and law clause, but it is also often true for tort claims. 7.13 The preceding comments about the Rome II Regulation do not aim to be comprehensive, and are necessarily brief. For a more complete understanding of its full terms and effect, the Regulation should be referred to,38 and specialist works should be consulted. For the remainder of this chapter, except where expressly stated, it is assumed that English domestic law is applicable to any dispute.

The Despina R

Overview

7.14 The rest of this chapter contains a detailed examination of both the case that changed the law for tort claims (paras -63), and also (para onwards) the subsequent cases in which elements of the new procedure have been further worked out, together with examples illustrating the application of the principles that now govern tort claims with a foreign currency connection. This is intended to explain the reasoning that underpins the new approach, and to highlight arguments for and against particular solutions, so that practitioners and others involved in advising in relation to tort claims may gain a full understanding of the issues affecting the selection of the most appropriate currency for the award of damages. - cover the progress of the key case through the courts; -

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summarise the main principles to be drawn from the House of Lords’ judgment; - set out some arguments that may be available against assessment in a particular currency; - review the benefits arising from the outcome of the case; and - examine an unresolved issue involving agency. Afterwards, to of this chapter illustrate the application of the new procedures for tort claims in a variety of practical situations where English law applies; to explore solutions to problems arising where, by reason of Rome II, the applicable law is a foreign law; to look at mitigation; and and set out some conclusions.

The Despina R:39 the issues

7.15 After Miliangos the stage was set for a test case for tort claims, which happened to involve a dispute arising from a contact between two Greek ships in Shanghai Harbour in April 1974. The vessel Despina R had struck the vessel Eleftherotria, causing damage. Temporary repairs to Eleftherotria were carried out at Shanghai; permanent repairs were deferred until the ship reached Los Angeles. Expenses arising from the contact were directly incurred in Chinese renmimbi yuan, Japanese yen, US dollars, and a small amount in sterling. The claimants also suffered a loss of hire, which, but for the incident, would have been paid in US dollars. And there was a small claim for deferred repairs.40 7.16 When The Despina R was working its way through the courts, there were two key matters for consideration. First, did the start of the relaxation of the sterling-judgment ‘rule’ confirmed by Miliangos mean that judgment could be given in a foreign currency? And, second, if so, how were the judgment currency, or currencies, going to be selected?41 The parties to the proceedings were the respective owners of the ships, neither of the ships being on demise charter. Liability for the incident had been resolved by agreement between the parties whereby the claimants, the owners of Eleftherotria, would recover 85 per cent of their proved damages, while the defendants, the owners of Despina R, would not recover any of their losses. The matter in issue before the courts was the question of the currency in which the claimants’ claim should be assessed. 7.17 There was a dispute because, whereas the defendants contended that the claim should be assessed in the traditional way, in sterling, the claimants - inspired by Miliangos - wanted their damages assessed by reference to the US dollar, against which sterling had depreciated since the time the losses were sustained.42 They also advanced a secondary case which, insofar as it dealt with repair costs, included

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pounds sterling, Chinese RMB and Japanese yen. The two parties were supported by the same Protection & Indemnity Association, which was seeking clarification in view of the importance of the point for this and other disputes in which various of its members were involved. The issue was, of course, also of great interest to the commercial community in general, and the settlements of some other claims were deferred pending the outcome. The currency issue was raised as a preliminary point of law. 7.18 At first instance Brandon J noted that after Miliangos it was possible to give judgment in a foreign currency where that would produce a just result. On the facts, he considered that judgment in a foreign currency would provide better justice than an award in sterling. He would have wished to give judgment in US dollars, but felt constrained by the Court of Appeal’s decision in The Canadian Transport,43 which had rejected an argument for valuing in the claimants’ currency (the French franc) a loss that had been directly incurred in Argentine pesos, before (as was then considered obligatory) converting the loss into sterling.44 Brandon J felt obliged to award damages in accordance with the next best solution for the case, which entailed assessment in the several currencies of immediate expenditure and loss, namely pounds, RMB and yen.

The Despina R: the Court of Appeal’s decision

7.19 Both parties appealed. Stephenson LJ pointed out that the appeal raised two important questions:

(1) Whether an English court could give a party who has suffered damage or loss in a foreign currency, in consequence of the tort of another party, judgment for damages in a foreign currency; and (2) if it can, in what foreign currency should it order those damages to be paid.45

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