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Commercial Question

Loss of chance

updated on 08 October 2013

Question

How do English courts decide the award of damages for loss of chance?

Answer

There are two broad categories of contractual loss under English law:

  • expectation loss is the most common and is used by claimants to put themselves in the position that they would have been in had the contract been performed correctly; and
  • reliance loss, where a claimant can recover the costs incurred in performing a contract before the breach, or where a claimant claims for other expenses for which contract intended recovery, if its terms had been performed.

Expectation loss can be straightforward. For example, A was in breach of a contract with B, who as a result of the breach suffered X amount of loss. However, there is a rarer form of damages where the loss is not easily quantifiable. These are damages awarded on a loss of chance basis. After all, it is not always possible for a claimant to quantify a loss when, for example, what has been lost is an opportunity to make money.

We can explore what loss of opportunity entails legally through the example of a talent contest. Imagine queuing for 10 hours for a televised talent competition in which the winner receives £100,000. You get through the first and second rounds, but as you await the call for the third and final round (as one of the remaining 10 contestants), you find out that the audition has already taken place without you. Through no fault of your own, you have lost your chance to win the jackpot.

The above example is similar to the facts in Chaplin v Hicks (1911). In this case, the claimant overcame competition from 6,000 other entrants to be among the final 50 contestants in a beauty contest. However, in a breach of contract, the defendant denied the claimant the chance of attending the final audition, where she could have been selected as one of the 12 winners. The court therefore found it sufficient to award damages to the claimant for that lost chance.

But before delving into the fascinating alternate reality of lost chances, we must first consider liability.

Liability: all or nothing

One of the key areas where loss of chance is important (and above all, valuable) is in professional negligence claims.

Unlike the beauty contest example, where a clear breach of contract was the basis of the claim, professional negligence cases require a more technical level of liability analysis. For example, in a solicitor negligence claim, a duty will usually be established in a solicitor-client retainer. This retainer can include sections relating to the scope and type of work that a solicitor will perform for her or his client, as well as including any limitations on liability that the solicitor will put in place. It is, to all intents and purposes, a contractual document.

On the other hand, the factor that is used to judge whether there is in fact a breach of the duty established in the retainer will be whether the solicitor's actions (or lack of action) fell below the standard of a reasonable solicitor. The standard test exemplified in the case of Midland Bank Trust v Hett, Stubbs and Kemp (1979) can be summarised as being that of a reasonably competent practitioner having regard to the standards normally adopted in his or her profession. This is similar to a standard tortious test that will be familiar to law students who have studied the 'reasonable person' or 'reasonable professional' test in other areas.

Liability is an all-or-nothing concept and, in professional negligence claims, this means that if a defendant professional can prove that he or she acted within the standards normally adopted in his or her profession, a claim will fail.

Causation: a chance to shine

Before considering loss of chance, it is important to stress that a claimant will still have to prove elements of its case on the balance of probabilities (the usual burden of proof) in relation to its own actions. As will be considered below, the loss of chance assessment only comes into play when a court needs to consider the hypothetical actions of a third party. In the talent show example, this would be whether the claimant can prove on the balance of probabilities that, if she or he had been invited to the final audition, then she or he would have turned up.

Only once the claimant can overcome the issue of liability and any other 'balance of probability' aspects of its case will consideration turn to what chances a claimant had of achieving a better result. In our talent contest example (assuming that there is a contractual relationship underpinning each contestant's entry), one way of looking at the lost opportunity is that any one of the contestants in the final would have a one in 10 chance of winning the competition. The lost chance for any one contestant in the final 10 would therefore be a basic split of the jackpot on the basis that a one in 10 chance of winning £100,000 means a loss of £10,000. However, this is obviously an artificial calculation to make because this is a contest, not a lottery.

Under the terms of the competition, the winner would take away the full prize money, not a proportion of it. You may be the favourite to win, so £10,000 doesn't reflect your lost chance; or you could have been up against particularly strong competition, in which case £10,000 is generous. However, in Chaplin v Hicks the Court of Appeal accepted a simpler approach. The contestant was one of 50 competing for 12 places (a 24% chance of winning) and damages were apportioned on the claimant's 24% chance of being in the final 12. This was on the basis that there were a limited pool of candidates at the final stage of the competition and the court held that the claimant could be justly compensated with damages even though it would be “impossible”to assess those damages precisely. There did not seem to be a better way of assessing the claimant's loss on the facts presented.

Professional negligence cases can be far more complicated, but the link to opportunity remains. What if an adviser's breach of duty (say, a solicitor acting below the standard of a reasonable solicitor, or an accountant below the standard of a reasonable accountant) causes a claimant company to miss the opportunity of purchasing another company and another purchaser makes a substantial profit from their purchase? If we assume that liability is established and the company is one of four other companies chasing the purchase, will the court simply apportion the loss of chance on a basis of 25%, as it is impossible to calculate the claimant's exact loss? In the majority of professional negligence cases, there will be more relevant facts to consider than were present in Chaplin v Hicks and it is therefore very unlikely to be as simple as apportioning the lost chance in the same way.

Factors to consider

A claimant may claim for the full amount of the profits that they could have made from the purchase (subject to a discount on the basis that the claimant may not have made as much money from the purchase as the eventual buyers), but the court must consider what the claimant's chance of actually purchasing the company would have been if not for the adviser's negligence. A claimant may argue that they had a much better than 25% chance of success on the basis of evidence which shows that they were the favourites or were the most advanced bidders. On the other hand, a defendant may say that even without the alleged breach, there would have been little or no chance of the claimant purchasing the company and, as a result, the claimant had much less than a 25% chance of success.

To assess these competing arguments, a court will analyse the factual circumstances of the alleged breach and try to establish just how strong a position the claimant was in, or would have been in, had the defendant not been negligent. The court will consider the determination of the other buyers and whether they were in a practically disadvantaged or advantaged position in comparison with other competitors, financially or jurisdictionally.

Another solicitor negligence scenario arises if a solicitor misses a deadline. The starting point will again be the claimant's lost opportunity: how good was the case? What were the chances of success without the solicitor's negligence?

What is fascinating about this exercise is the process of trying to gauge an unknown (the chance of the claimant's success or chance of achieving a better result) against what is known - the factual circumstances of the case. One of the most interesting aspects of this type of work is the way practitioners need to put themselves in the shoes of the parties and immerse themselves in the facts to truly understand the value of the opportunity and the claim. After all, in a large claim, a small percentage chance alteration can make a huge financial difference to each side.

However, ultimately this analysis will still be somewhat artificial and there are plenty of areas of dispute. Unlike many areas of litigation where the court is trying to find out - and decide on - what actually happened; professional negligence cases are often based on hypothetical scenarios. This is interesting because working out how a third party (whether that be a business, a talent show judge, or a court) will react to events can be challenging enough at the time, let alone when trying to work out what would have happened in an alternate universe where the claimant is given their chance again.

Professional negligence claims consist of many layers: the technical basis of the all-or-nothing hurdle of liability, hypothetical scenarios, attempting to quantify a chance and putting a financial value on that chance.

Franco D'Andrea is a second-year trainee at Ince & Co.