British Westinghouse Electric & Manufacturing Company v Underground Electric Railways Company of London

The defendant contracted to supply turbines to the claimant. The turbines supplied were defective and did not conform to the contract. The claimant stated that they were reserving their right to sue for damages for breach of contract. In the meantime, they continued to use the turbines.

They later replaced those turbines with different ones. By this time, turbine technology had moved on and the new turbines were much more efficient than anything previously available.

The parties entered arbitration to determine the damages the defendant was required to pay. The arbitrator found that

1. It was reasonable mitigation for the claimant to buy substitute turbines.
2. Even if the original turbines had been contract-compliant, the claimant still would have benefited from replacing them with superior substitutes at the time they did.

The arbitrator submitted a question to the High Court, asking whether the claimant was entitled to recover the cost of the substitute turbines from the defendant. The High Court answered in the affirmative, and the arbitrator made the award. The defendant appealed.

Issue(s)

1. Was the claimant entitled to recover the full cost of the new turbines, given that they gave the claimant an economic advantage over what the defendant was contractually obliged to provide?

Decision

The Privy Council held for the defendant. The fact that the substitute turbines gave the claimant an economic advantage over what the contract should have provided was a relevant matter when determining what the defendant was liable to pay. The current award placed the claimant in a better position than they would have occupied than if the contract had been performed, which did not accord with the usual principles of contract damages. So, the Privy Council remitted the case back to the arbitrator to recalculate the award, bearing this in mind.

This Case is Authority For…

Contract damages should not place the innocent party in a better position than they would have occupied had the contract been properly performed. Where a party mitigates their loss in a way which puts them in a better position than if the contract had been properly performed, ‘the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act’ (Viscount Haldane LC).

Other

Though the court normally lacks jurisdiction to interfere with an arbitrator’s award, they may do so when that award was (on its face) based on a legally erroneous response to the arbitrator’s question to the High Court.