Learning Outcomes
This article explores the core principles of causation and remoteness in determining recoverable damages for breach of contract. You will learn how to establish the causal link between a breach and the loss suffered, using the 'but for' test for factual causation and considering intervening acts for legal causation. Furthermore, you will understand the rules on remoteness, particularly the two limbs established in Hadley v Baxendale, and how they limit the types of losses recoverable. The treatment of ordinary and extraordinary losses is developed with leading authorities, including Victoria Laundry and The Heron II, and the modern assumption of responsibility approach in The Achilleas is explained. You will also see how contributory negligence may reduce damages in contract where a duty of care is engaged, and how mitigation operates in practice, including recovery of reasonable mitigation costs and market cover/resale measures. Worked examples illustrate how these rules are applied in typical commercial settings.
SQE1 Syllabus
For SQE1, you are required to understand how causation and remoteness operate to limit the recovery of damages following a breach of contract. This involves applying the relevant legal tests to factual scenarios, a skill frequently tested in MCQs, with a focus on the following syllabus points:
- Understanding the requirement for causation between the breach and the loss.
- Applying the 'but for' test for factual causation.
- Recognising events that may break the chain of causation (legal causation).
- Applying the two limbs of the remoteness test derived from Hadley v Baxendale.
- Distinguishing between losses recoverable under each limb.
- Understanding the requirement for the claimant to mitigate their loss.
- Appreciating when contributory negligence may reduce damages in contract.
- Recognising the role of assumption of responsibility in unusual market contexts.
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.
- What is the primary test for establishing factual causation in contract law?
- Which case established the main test for remoteness of damage in contract law?
- Under the main test for remoteness, what are the two types of loss that may be recoverable?
- True or False: A claimant can recover all losses that flow from a breach of contract, regardless of whether they were foreseeable.
- What principle requires the innocent party to take reasonable steps to minimise their losses following a breach?
Introduction
When a breach of contract occurs, the innocent party is generally entitled to damages to compensate for their loss. However, not all losses resulting from a breach are recoverable. The principles of causation and remoteness act as key limiting factors. Causation establishes the necessary link between the defendant's breach and the claimant's loss. Remoteness further restricts recovery to losses that were reasonably within the contemplation of the parties when the contract was made. Understanding these principles, particularly the rules derived from the seminal case of Hadley v Baxendale, is essential for assessing the extent of liability in contractual disputes.
Causation: Linking Breach to Loss
For damages to be awarded, the claimant must demonstrate that the loss suffered was caused by the defendant's breach of contract. This involves satisfying tests for both factual and legal causation.
Factual Causation
The starting point is factual causation, often determined by the 'but for' test.
Key Term: Factual Causation
Establishing that the loss would not have occurred 'but for' the defendant's breach of contract.
You must ask: would the claimant have suffered this loss anyway, even if the defendant had not breached the contract? If the loss would have occurred regardless of the breach, then factual causation is not established, and the defendant is not liable for that loss.
A single loss can have multiple contributing causes. Provided the breach is an effective (or substantial) cause of the loss, damages may be recoverable even if other factors also played a role. Courts do not require the breach to be the sole cause; the question is whether the breach materially contributed to the loss. Where several events combine to produce harm, the claimant’s own actions may be relevant to mitigation or contributory negligence (considered below), but they do not automatically defeat causation.
Legal Causation
Even if factual causation is established, the loss may still be irrecoverable if the chain of causation is broken by a new intervening act (novus actus interveniens).
Key Term: Legal Causation
Determining whether the breach was a legally significant cause of the loss, considering factors like intervening acts.
An intervening act can be:
- An act of a third party: If a third party's actions intervene between the breach and the loss, this may break the chain if the act was unforeseeable.
- An act of the claimant: If the claimant acts unreasonably after the breach, and this action causes or exacerbates the loss, the defendant may not be liable for that portion of the loss.
- A natural event: An unforeseeable natural event occurring after the breach might break the chain of causation.
The key consideration is often whether the intervening act was reasonably foreseeable as a consequence of the breach. If it was foreseeable, it is less likely to break the chain of causation.
A practical illustration is provided by equipment cases. Where a supplier delivers a defective component and the buyer continues to use it knowing it is unsafe, the buyer’s decision may break the chain (or be treated as a failure to mitigate), meaning subsequent damage caused by continued use is not recoverable. The analysis is fact-specific: if the buyer’s continued use was reasonable (for example, after temporary repairs and pending a replacement), the chain may remain intact, but any unreasonable persistence with a known danger is likely to sever causation.
Exam Warning
Do not conflate legal causation with remoteness. Legal causation is about whether an intervening act has severed the causal link. Remoteness is about whether the type of loss falls within the parties’ reasonable contemplation at the time of contracting. Both must be satisfied.
Remoteness of Damage: The Rule in Hadley v Baxendale
The principle of remoteness limits the extent of recoverable loss. Even if a breach caused the loss, damages can only be recovered for losses that are not too remote. The foundational test for remoteness comes from the case of Hadley v Baxendale (1854).
Key Term: Remoteness
A legal principle limiting damages to those losses that were reasonably foreseeable or within the contemplation of the parties at the time the contract was made.
The test has two limbs:
Limb 1: Ordinary Losses
Losses are recoverable if they arise naturally, “according to the usual course of things”, from the breach itself. These are losses that any reasonable person would expect to result from such a breach.
Examples include the difference between contract and market price where delivery is late or defective, the cost of cure where reasonable, and ordinary lost profits that would typically flow from a disruption (for instance, normal throughput lost when a critical machine is late, as in Victoria Laundry).
Limb 2: Extraordinary Losses
Losses are recoverable if they arise from special circumstances, provided these circumstances were communicated to the defendant at the time the contract was made. The defendant must have known about the special circumstances such that they would have contemplated the specific loss as a probable result of the breach.
This limb targets “non-usual” losses, such as the loss of a particularly lucrative one-off transaction or exposure to atypical downstream liabilities. Without communication of the special circumstances, such losses are generally too remote.
Worked Example 1.1
A courier is contracted to deliver a replacement part for a factory machine by noon the next day. The factory owner explains that the entire factory production depends on this part arriving on time. The courier delivers the part two days late. The factory loses £5,000 in ordinary profit due to the shutdown and also loses a specific, exceptionally profitable contract worth an additional £20,000, which depended on resuming production immediately. The courier was not told about this specific lucrative contract.
What losses are likely to be recoverable?
Answer:
The loss of £5,000 in ordinary profit is likely recoverable under Limb 1 of Hadley v Baxendale. Production stoppage and consequent loss of normal profit is a natural result of failing to deliver a critical machine part on time. The loss of the specific £20,000 contract is likely too remote under Limb 2. Although the courier knew the part was essential for production, they were not made aware of the specific exceptionally lucrative contract that depended on timely delivery. Therefore, this extraordinary loss was probably not within their reasonable contemplation at the time of contracting.
Degree of Likelihood
Subsequent cases, such as The Heron II (1969), refined the test, holding that for a loss to be recoverable in contract, it must have been contemplated as “not unlikely” or a “serious possibility” resulting from the breach. This is a stricter test than “reasonable foreseeability” used in tort. In practical terms, the type of loss, not its precise magnitude, must meet the threshold. If the kind of loss (e.g., ordinary lost profits or physical damage) was a serious possibility at the time of contracting, then the extent (even if greater than anticipated) is generally irrelevant.
This principle is illustrated by Parsons v Uttley Ingham (1978): where illness of livestock from defective feed storage was within the parties’ contemplation, the subsequent death of many animals was not too remote, even if the scale was larger than expected. Contract looks to the type of loss, not the precise degree.
Modern Developments: Assumption of Responsibility
The House of Lords decision in The Achilleas (Transfield Shipping v Mercator) (2008) introduced the concept of “assumption of responsibility” as potentially relevant to remoteness. This approach considers whether, based on the context, market understanding, and the nature of the contract, the party in breach objectively assumed responsibility for the type of loss that occurred.
Key Term: Assumption of Responsibility
An approach to remoteness asking whether, objectively, the party in breach assumed responsibility for the particular type of loss in light of the contract and market context.
In The Achilleas, a charterer’s late redelivery caused the shipowner to agree a lower rate on a follow-on charter in a volatile market. The court held that, in that market, parties understood late redelivery did not usually carry responsibility for an owner’s subsequent rate loss, unless specifically agreed. The consequence was that the losses were too remote. The approach does not replace Hadley v Baxendale; it supplements it in unusual markets or where the parties’ objective allocation of risk is clear. Most contracts continue to be analysed under the traditional two limbs, with assumption of responsibility reserved for rare, context-driven cases.
Revision Tip
Focus on applying the two limbs of Hadley v Baxendale. Use Victoria Laundry to frame “ordinary profits” and The Heron II to articulate the “not unlikely” threshold. Be aware of The Achilleas as a contextual overlay in unusual market settings, but apply it cautiously.
Worked Example 1.2
A feed silo is supplied and installed with a sealed ventilator that should have been opened. The failure causes mould growth, leading to illness in livestock and significant mortality. The supplier argues that while illness might be foreseeable, mass death is too remote.
Is the death of the livestock too remote?
Answer:
No. Where the type of loss (illness or physical harm to livestock) is within the parties’ contemplation, the extent (including death) is not too remote. Parsons v Uttley Ingham supports recovery of losses flowing from the foreseeable type of harm, even if more extensive than anticipated. The focus is on the kind of loss envisaged at contracting, not its precise magnitude.
Worked Example 1.3
A time charterer returns a vessel late by several days. During this period, market rates fall sharply. The shipowner concludes a follow-on charter at a substantially lower rate than previously agreed and claims the rate difference.
Are the owner’s rate losses recoverable?
Answer:
Ordinarily, rate losses might be argued as consequential profits loss. However, in the chartering context addressed in The Achilleas, market understanding was that late redelivery does not make charterers responsible for owner’s subsequent rate loss unless expressly agreed. Applying assumption of responsibility, the charterer did not assume responsibility for this type of loss, so the claim is likely too remote.
Mitigation of Loss
Even if losses are caused by the breach and are not too remote, the claimant cannot recover for losses they could have avoided by taking reasonable steps.
Key Term: Mitigation
The principle that the party suffering loss from a breach of contract must take reasonable steps to minimise the extent of their loss.
Reasonable Steps
The claimant is required to act reasonably, not heroically or at disproportionate risk or cost. Reasonableness is assessed objectively on the facts at the time, not with hindsight. Typical steps include securing substitute performance (cover purchases), reselling goods promptly after rejection, arranging temporary workarounds, or relocating production where feasible. If reasonable mitigation efforts fail or even increase loss, the claimant may still recover the increased loss because they acted reasonably.
Reasonable mitigation costs are recoverable as damages (as part of the loss caused by the breach), and benefits obtained through mitigation must be brought into account (set-off). Where there is a ready market, prompt cover or resale is expected; delays may reduce recoverable damages if they lead to avoidable loss.
Worked Example 1.4
A seller fails to deliver goods to a buyer as agreed. The buyer needs the goods for their business. An identical replacement is available from another supplier at a slightly higher price. The buyer unreasonably refuses to purchase the replacement, hoping the original seller will eventually deliver, and suffers significant business losses as a result of not having the goods.
Can the buyer recover for their full business losses?
Answer:
No. The buyer failed to mitigate their loss. They should have purchased the replacement goods from the alternative supplier. Their recoverable damages will likely be limited to the difference between the contract price and the price of the reasonable replacement, not the full extent of the business losses incurred after failing to mitigate.
Burden of Proof
The burden is on the defendant (the party in breach) to prove that the claimant failed to take reasonable steps to mitigate their loss.
Market Cover and Resale
In contracts for sale of goods, common mitigation patterns include:
- For buyer’s wrongful refusal: the seller should reasonably resell the goods and claim the loss measured by the difference between the contract price and the resale price (subject to market timing and reasonableness).
- For seller’s breach: the buyer should procure substitute goods and claim the difference between the cover price and the contract price, plus consequential losses that are not too remote.
Delays in covering or reselling in a falling market may reduce recoverable damages if the claimant cannot justify waiting.
Exam Warning
Remember that the duty to mitigate arises after the breach has occurred. The claimant does not need to anticipate a breach. Also, if the claimant takes reasonable steps to mitigate, they can recover the costs of those steps, even if the steps ultimately prove unsuccessful in reducing the loss.
Worked Example 1.5
A supplier fails to deliver commodity goods in a rising market. The buyer waits a week before buying substitutes, during which prices increase by an additional 10%. The supplier argues that the increase is avoidable.
How will mitigation affect the buyer’s damages?
Answer:
If prompt cover was reasonably available and the buyer unreasonably delayed, the recoverable difference may be limited to the price that would have applied had the buyer covered promptly. Any extra increase caused by the delay may be treated as avoidable and therefore unrecoverable.
Contributory Negligence in Contract
Damages may be reduced for contributory negligence where the defendant’s breach consists of failure to use reasonable care and skill (a qualified obligation), or the breach also gives rise to liability in tort. This arises, for example, in service contracts with an implied duty to exercise reasonable care and skill: if the claimant’s own negligence materially contributes to their loss, damages may be reduced accordingly. In pure strict obligations (such as failure to deliver conforming goods), contributory negligence does not generally reduce damages.
Contributory negligence and mitigation overlap conceptually but are distinct. Mitigation focuses on steps taken after breach to reduce loss; contributory negligence can be relevant before or after breach where the claimant’s negligence contributes to the occurrence or extent of loss and the defendant’s duty is one of reasonable care.
Worked Example 1.6
A professional surveyor negligently overlooks a significant defect in a building. The client purchases and undertakes refurbishment without seeking further inspections, despite clear indicators that should have prompted caution. A large proportion of remedial costs result from the client’s careless decisions.
Can damages be reduced?
Answer:
Yes, potentially. Because the contractual duty breached is one of reasonable care and skill, contributory negligence may apply. If the claimant’s own negligence materially contributed to the loss, the court can reduce damages to reflect their share of responsibility. This is fact-sensitive and depends on what a reasonable client would have done.
Applying the Principles Together
A coherent damages analysis involves:
- Establishing factual causation: would the loss have occurred but for the breach?
- Checking legal causation: has an intervening act severed the chain?
- Assessing remoteness: is the type of loss within the parties’ contemplation under Hadley (Limb 1 or Limb 2)? Apply The Heron II threshold and note that the extent of the loss is usually irrelevant once the type is foreseeable.
- Considering assumption of responsibility in unusual market contexts: did the party objectively assume responsibility for the type of loss (The Achilleas)?
- Accounting for mitigation: were reasonable steps taken to reduce the loss? Recover reasonable mitigation costs; set off benefits obtained; exclude avoidable loss.
- Considering contributory negligence where the duty breached is one of reasonable care and skill: reduce damages where claimant negligence contributed to the loss.
Exam Warning
Contract and tort employ different foreseeability thresholds. Do not apply the tort standard (“reasonable foreseeability”) to contractual remoteness unless the duty in question is one of reasonable care and skill and tort principles are engaged. In contract, The Heron II’s “not unlikely”/“serious possibility” threshold applies.
Key Point Checklist
This article has covered the following key knowledge points:
- Causation links the defendant's breach to the claimant's loss, requiring both factual (‘but for’) and legal (no break in chain) causation.
- Remoteness limits recoverable damages to those reasonably contemplated by the parties at the time of contracting.
- The Hadley v Baxendale test distinguishes between ordinary losses (Limb 1) and extraordinary losses arising from communicated special circumstances (Limb 2).
- The degree of foreseeability required in contract is generally higher than in tort (‘not unlikely’/‘serious possibility’ vs ‘reasonably foreseeable’).
- The assumption of responsibility principle (The Achilleas) may be relevant in specific contexts but the Hadley test remains central.
- The claimant has a duty to take reasonable steps to mitigate (reduce) their loss following a breach; reasonable mitigation costs are recoverable and benefits must be set off.
- Failure to mitigate can reduce the amount of damages recoverable.
- Contributory negligence may reduce damages where the defendant’s duty is one of reasonable care and skill or a concurrent duty in tort arises.
Key Terms and Concepts
- Factual Causation
- Legal Causation
- Remoteness
- Mitigation
- Assumption of Responsibility