## **Learning Outcomes**

This article explains causation, certainty, foreseeability, and related limitations on contract damages, including:

- How to identify each claimed head of loss and test it systematically for factual (“but for”) causation on MBE-style questions.
- How to distinguish between losses caused by the breach and losses attributable to independent intervening events or a failure to mitigate.
- How to apply the rules of certainty to separate recoverable expectation or reliance damages from speculative or conjectural claims, especially for new businesses or lost profits.
- How to use the Hadley v. Baxendale foreseeability framework to classify damages as direct (general) or consequential (special) and determine which are recoverable.
- How remoteness, probability, and the length of the causal chain restrict unusually indirect or extraordinary losses, even when some causal connection exists.
- How the duty of mitigation (avoidability) operates in employment, goods, and services contracts, including calculating reductions in damages where reasonable substitute performance was available.
- How to structure a clear exam answer that walks through causation, certainty, foreseeability, remoteness, and mitigation in the correct sequence and applies them to the facts.

## **MBE Syllabus**

For the MBE, you are required to understand the principles governing the recovery and limitation of contract damages, with a focus on the following syllabus points:

- The requirement of factual causation (“but for” test) in contract damages.
- The rule of certainty: damages must be proved with reasonable certainty, not speculation.
- The rule of foreseeability: only losses foreseeable at contract formation are recoverable.
- The distinction between direct (general) and consequential (special) damages.
- The combined effect of remoteness and mitigation (avoidability) on recoverable damages.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is NOT a requirement for a plaintiff to recover damages for breach of contract?
   a) The loss was caused by the breach.  
   b) The loss was foreseeable at the time of contracting.  
   c) The loss can be proved with reasonable certainty.  
   d) The loss was mitigated by the defendant.

2. Under the rule of foreseeability, a breaching party is liable for:
   a) All losses actually suffered by the non-breaching party.  
   b) Only losses that were contemplated by both parties at contract formation.  
   c) Losses that were a natural result of the breach or specifically communicated as a possible result.  
   d) Only losses that are covered by insurance.

3. If a plaintiff cannot prove the amount of damages with reasonable certainty, the court will:
   a) Award nominal damages only.  
   b) Estimate the damages liberally in the plaintiff’s favor.  
   c) Award punitive damages.  
   d) Automatically grant specific performance.

## **Introduction**

When a contract is breached, the non-breaching party is generally entitled to expectation damages: an amount intended to put them in the position they would have occupied if the contract had been performed. But not every claimed loss is recoverable. Even after you calculate the basic measure of expectation damages, you must apply several limiting doctrines.

On the MBE, questions about damages usually turn on four linked limitations:

- Causation
- Certainty
- Foreseeability
- Avoidability (mitigation)

This article focuses on the first three, while also showing how remoteness and mitigation interact with them.

> **Key Term: Causation (in contract)**  
> The requirement that the loss claimed must have been factually caused by the breach—i.e., the loss would not have occurred but for the breach, or the breach was a substantial factor in producing the loss.
>
> **Key Term: Certainty**  
> The principle that damages must be proved with reasonable certainty. The fact of damage must be shown, and the amount must be capable of reasonable, non-speculative estimation.
>
> **Key Term: Foreseeability**  
> The rule that damages are limited to losses that were foreseeable to the breaching party at the time the contract was made, either because they arise naturally from the breach or because special circumstances were communicated.
>
> **Key Term: Direct Damages**  
> Losses that flow naturally and directly from the breach itself in the ordinary course of events (e.g., the difference between the contract price and the market price at the time of breach).
>
> **Key Term: Consequential Damages**  
> Losses that result from special circumstances beyond the ordinary course of events, such as lost profits on collateral transactions, recoverable only if those losses were foreseeable to the breaching party at contract formation.
>
> **Key Term: Remoteness**  
> The idea that damages that are too far removed from the breach—because of a long or unusual causal chain, or because they were not a probable result of the breach—are not recoverable.
>
> **Key Term: Mitigation**  
> The requirement that the non-breaching party take reasonable steps after the breach to reduce their losses; they may not recover for losses that could have been avoided without undue risk or expense.

In exam problems, once you identify a breach, you should run a quick “damages filter”:

1. Was this head of loss **caused** by the breach?
2. Can the loss be proved with **reasonable certainty**?
3. Was this type of loss **foreseeable** at contract formation?
4. Could this loss have been **avoided** with reasonable efforts?

Only losses that pass all four stages are fully recoverable.

### Causation: The "But For" Test

The first requirement for recovering damages is factual causation. The plaintiff must show that the breach was a substantial factor in causing the loss. If the loss would have occurred even if the contract had been fully performed, damages are not recoverable for that loss.

In contract, causation is usually analyzed with a simple **“but for”** test:

- Would the plaintiff have suffered this loss **but for** the defendant’s breach?
- If not, the breach is a factual cause of the loss.
- If the same loss would have occurred anyway, the breach did not cause it.

Multiple causes can exist. The breach need not be the sole cause, but it must be a substantial contributing cause. If an independent event completely explains the loss, causation fails.

Examples:

- A buyer claims lost profits because a supplier delivered late. If the market price collapsed for unrelated reasons and the buyer would have suffered the same loss even with timely delivery, the supplier is not the factual cause of those lost profits.
- A contractor abandons a job and the owner’s building later burns down in an unrelated fire. The contractor’s breach did not cause the fire damage.

Causation also interacts with **mitigation**. Losses that the plaintiff could have reasonably avoided after the breach are typically treated as not caused by the breach, but by the plaintiff’s own failure to mitigate.

### Certainty: No Recovery for Speculation

Even if a loss is caused by the breach, the plaintiff must prove it with **reasonable certainty**. Courts distinguish:

- **Fact of damage**: It must be clear that some damage occurred.
- **Amount of damage**: The exact dollar figure need not be mathematically precise, but must be capable of reasonable estimation based on evidence.

If the fact of damage is purely speculative—e.g., “If the deal had gone through, I might have become a market leader and eventually made millions”—no recovery. If the fact of damage is established but the amount is uncertain, courts may estimate the amount using available evidence.

Common patterns:

- **Lost profits of an established business** are often recoverable if the business can show past profit records, market data, or comparable businesses to estimate future profits with reasonable certainty.
- **Lost profits of a new business** are much harder to prove. Many jurisdictions treat them as inherently speculative, though strong evidence (such as signed contracts with customers, expert testimony, or industry data) can sometimes satisfy the certainty requirement.

When expectation damages (lost profits) are too uncertain, the plaintiff may still recover:

- **Reliance damages** (expenditures made in reliance on the contract), and
- **Out-of-pocket losses**, which are typically easy to prove with receipts or invoices.

The key for the exam: you do not need exact figures, but you do need evidence that allows a **fair, rational approximation** of the loss.

### Foreseeability: The Hadley Rule

Even a caused and certain loss is not recoverable unless it was **foreseeable** at the time of contracting. This is the **Hadley v. Baxendale** rule.

Damages are limited to:

1. **Direct (general) damages** – losses that arise naturally in the ordinary course of events from this type of breach. These are always considered foreseeable.
2. **Consequential (special) damages** – losses that result from the plaintiff’s special circumstances, recoverable only if:
   - The defendant had reason to know of those circumstances, and
   - The type of loss was a probable result of breach in light of those circumstances.

Important points:

- Foreseeability is assessed **at the time of contract formation**, not at breach or at trial.
- The **type** or **kind** of loss must be foreseeable; the precise amount need not be.
- Trade usage, the nature of the contract, and prior dealings can all supply foreseeability.

Example: If a seller knows that the buyer is purchasing goods for resale, lost resale profits from a failure to deliver will often be considered foreseeable consequential damages.

### Remoteness and Mitigation

Remoteness overlaps with both causation and foreseeability. A loss is too remote if it is:

- The result of an unusually long or complex causal chain, or
- Not a probable, reasonably anticipated result of the breach.

Mitigation operates as a separate, but related, limitation:

- The non-breaching party must take **reasonable steps** after the breach to limit their losses.
- They need not take heroic or risky measures, but cannot sit back and allow damages to mount.
- The defendant bears the burden of proving a failure to mitigate and the amount of loss that was avoidable.

Common mitigation patterns:

- Wrongfully discharged employees must make reasonable efforts to find comparable employment; they cannot recover for lost wages they could have earned in comparable jobs they unreasonably declined.
- Buyers of goods should make reasonable efforts to “cover” by purchasing substitute goods; sellers should attempt reasonable resale. Failure to do so can limit recovery.

Costs reasonably incurred in mitigation (e.g., resale costs, search costs for replacement employment) are themselves recoverable as part of damages, provided they were caused by the breach and reasonably incurred.

### **Worked Example 1.1**

A supplier fails to deliver custom parts to a manufacturer, breaching their contract. As a result, the manufacturer loses a lucrative contract with a third party. The supplier was not told about the third-party contract.

> **Answer:**  
> The manufacturer cannot recover for the lost third-party contract. This is a consequential loss that was not foreseeable to the supplier at contract formation, since the supplier was not informed of the special circumstances. The lost third-party contract is therefore too remote under the foreseeability rule, even though it was caused by the breach.

### **Worked Example 1.2**

A new restaurant opens and contracts with a chef, who breaches the contract before the restaurant opens. The restaurant sues for lost profits.

> **Answer:**  
> The restaurant will have difficulty recovering lost profits because, as a new business, it likely cannot prove the amount of loss with reasonable certainty. Without a track record of past profits or reliable market evidence, projected profits are speculative. The court may award only nominal damages or proven reliance expenditures (such as marketing or fit-out costs) caused by the breach.

### **Worked Example 1.3**

A seller agrees to supply a retailer with 1,000 laptops by October 1. The seller knows the retailer plans to run a major October promotion featuring those laptops. The seller delivers three weeks late, causing the retailer to miss the promotion and lose substantial profits on expected sales.

> **Answer:**  
> The retailer’s lost profits are likely recoverable as consequential damages. The loss was factually caused by the late delivery, the retailer can probably prove the amount with reasonable certainty using past promotion data and projections, and—critically—the seller knew at contract formation about the planned promotion. The lost profits were thus a foreseeable type of loss arising from late delivery.

### **Worked Example 1.4**

An employee has a one-year employment contract at $5,000 per month. After three months, the employer wrongfully fires the employee, who stays unemployed for the remaining nine months despite several offers of similar jobs at $4,800 per month.

> **Answer:**  
> The employee’s basic expectation damages would be $45,000 (9 × $5,000). However, the employee had a duty to mitigate by accepting comparable employment. The jobs at $4,800 were substantially similar. The employee could have avoided $43,200 of the loss (9 × $4,800). The employer is liable only for the difference between the contract salary and what the employee could reasonably have earned: $1,800 (9 × $200), plus any proved search costs.

### **Worked Example 1.5**

A buyer agrees to purchase 500 tons of steel at $500 per ton. The seller repudiates before delivery when the market price has risen to $550 per ton. The buyer chooses not to buy substitute steel, hoping prices will fall, but they instead rise further, and the buyer claims damages of $100 per ton (based on the later $600 market).

> **Answer:**  
> The buyer’s damages are limited by mitigation and foreseeability. The buyer could have covered at $550 when the seller repudiated. The foreseeable, avoidable loss at that point was $50 per ton. By unreasonably waiting and speculating on the market, the buyer allowed additional loss to accrue that could have been avoided. The recoverable damages are therefore $25,000 (500 × $50), not $50,000.

### **Exam Warning**

On the MBE, watch for questions where the plaintiff claims very large or unusual damages. Before you accept those numbers, always ask:

- Was this specific loss **caused** by the breach, or by some separate event?
- Is there evidence showing the **fact and amount** of loss with reasonable certainty?
- Was this **type of loss** foreseeable at the time of contracting?
- Could the plaintiff have **reasonably avoided** some or all of this loss?

If any of these filters fail, full expectation damages will not be available, and the best answer will often limit recovery to direct damages, reliance damages, or nominal damages.

### **Revision Tip**

When answering MBE questions on contract damages, quickly run through this checklist for each claimed head of loss:

1. **Causation** – Would this loss have occurred but for the breach?
2. **Certainty** – Is there solid evidence of the fact of loss and a reasonable basis to estimate the amount?
3. **Foreseeability** – Was this kind of loss reasonably within the parties’ contemplation at contract formation?
4. **Mitigation / Remoteness** – Was the loss a probable result of breach, and did the plaintiff act reasonably to reduce it?

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Damages for breach of contract are limited by causation, certainty, foreseeability, and mitigation (avoidability).
- Causation: The breach must be a substantial factual cause of the loss; losses that would have occurred anyway are not recoverable.
- Certainty: The fact of damage must be shown, and the amount must be capable of reasonable estimation; speculative lost profits (especially for new ventures) are often denied.
- Foreseeability: Only losses foreseeable at contract formation are recoverable—either direct damages or consequential damages that arise from known special circumstances.
- Remoteness: Losses that are unusually indirect or not a probable result of breach are too remote and are not recoverable.
- Mitigation: The non-breaching party must take reasonable steps to reduce losses; avoidable losses are not treated as caused by the breach.
- Direct damages are generally recoverable when caused, certain, and foreseeable; consequential damages require proof of special notice and foreseeability.

## **Key Terms and Concepts**

- Causation (in contract)
- Certainty
- Foreseeability
- Direct Damages
- Consequential Damages
- Remoteness
- Mitigation

Remedies - Causation, certainty, and foreseeability