Causation and remoteness - Remoteness of damage

Learning Outcomes

This article examines remoteness of damage in contract law, including:

• The two-limb rule in Hadley v Baxendale and the distinction between ordinary losses and special losses requiring communication of circumstances
• Foreseeability focusing on type of loss rather than extent, and the contrast between the contract standard of serious possibility (not unlikely) and the tort standard of reasonable foreseeability
• More generous treatment of physical damage and the rationale in Parsons v Uttley Ingham
• The assumption of responsibility approach from Transfield Shipping Inc v Mercator (The Achilleas) and its narrow, contextual application in later cases
• Interaction of remoteness with causation, scope of duty, and mitigation in determining recoverable loss
• Application in commercial and professional contexts (e.g., time-sensitive supply, shipping and chartering, professional services, digital services) and contractual allocation or limitation of remoteness risks subject to UCTA 1977 reasonableness and CRA 2015 fairness controls

SQE1 Syllabus

For SQE1, you are required to understand remoteness of damage in contract law, with a focus on the following syllabus points:

• the two-limb test for remoteness of damage established in Hadley v Baxendale
• the meaning and application of foreseeability in contract damages (type of loss versus extent)
• the distinction between losses arising naturally and those due to special circumstances, including actual and imputed knowledge
• the effect of assumption of responsibility and key developments in The Achilleas, and its subsequent treatment
• how remoteness interacts with causation and mitigation in contract law, and contrasts with tort standards
• practical risk allocation by clause, and statutory controls under UCTA 1977 and CRA 2015

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. What is the two-limb test for remoteness of damage in contract law, and which case established it?
2. When are special losses resulting from a breach of contract recoverable?
3. How does the assumption of responsibility principle affect the recoverability of damages?
4. True or false? In contract law, a party can recover for all losses caused by a breach, regardless of foreseeability.

Introduction

When a contract is breached, the injured party may claim damages. However, not all losses caused by a breach are recoverable. The law limits recovery to losses that are not too remote. The doctrine of remoteness of damage ensures that only losses which were reasonably foreseeable at the time the contract was made can be claimed. This protects parties from unexpected and disproportionate liability and encourages them to allocate unusual risks clearly in the contract.

Key Term: remoteness of damage
The legal rule that limits damages for breach of contract to losses that were reasonably foreseeable by both parties at the time of contracting.

The Principle of Remoteness in Contract Law

Remoteness of damage is a rule that restricts the damages recoverable for breach of contract. The key question is: was the loss in the reasonable contemplation of both parties when the contract was formed? If not, the loss is too remote and cannot be recovered. In most cases, “reasonable contemplation” is assessed objectively, by reference to the knowledge imputed by law (ordinary course of things) and the knowledge actually possessed by the parties (special circumstances communicated).

The Two-Limb Test: Hadley v Baxendale

The leading authority is Hadley v Baxendale (1854), which set out a two-limb test for remoteness:

• First limb: Losses that arise naturally from the breach, in the usual course of things. This limb is based on imputed knowledge; it captures the kinds of loss that ordinarily flow from breaches of contracts of this type.
• Second limb: Losses resulting from special circumstances, only if those circumstances were communicated to and known by the breaching party at the time of contracting. This limb is based on actual knowledge.

Key Term: Hadley v Baxendale test
The rule that damages are recoverable if they arise naturally from the breach or were within the parties’ contemplation due to special circumstances known at contract formation.

Losses that are not foreseeable under either limb are too remote and cannot be claimed. The second limb requires clear communication of the special circumstance (and sometimes its significance). The law does not require granular detail, but it does require enough information to put the other party on notice that breach may cause unusual loss.

Foreseeability and the Type of Loss

The test for remoteness is based on foreseeability. The loss must be a type that the parties could reasonably have foreseen as a probable result of the breach when the contract was made. The actual extent of the loss does not need to be foreseen—only the type.

Key Term: foreseeability
The requirement that a loss must be a likely result of breach, as reasonably contemplated by the parties at the time of contract.

In contract, the House of Lords in The Heron II clarified that the event must be “not unlikely” or a serious possibility. This is a stricter threshold than in tort negligence, which uses reasonable foreseeability broadly. This higher bar reflects the parties’ ability to negotiate and price risk ex ante.

Application of the Two-Limb Test

Losses Arising Naturally (First Limb)

These are losses that would usually result from the breach. For example, if a supplier fails to deliver goods, the buyer’s loss of profit from not being able to sell those goods is a natural consequence. Delay that foreseeably disrupts a normal downstream sale is typically covered, though truly exceptional chains of loss will not be.

Special Circumstances (Second Limb)

If the injured party faces unusual risks, such as a particularly lucrative contract depending on timely performance, these losses are only recoverable if the breaching party was told about them before the contract was made. Communication can be express, and sometimes circumstances known to both in the negotiations suffice if they make the unusual risk apparent.

Worked Example 1.1

A bakery contracts with a supplier to deliver flour by a set date. The supplier is late, and the bakery loses normal daily profits. The bakery also loses a large food service contract for a wedding, which it had not mentioned to the supplier.

Answer:
The bakery can recover its ordinary lost profits (first limb), but the loss of the special food service contract is too remote (second limb), as the supplier was not told about it.

Refinements and Key Cases

Victoria Laundry v Newman Industries

A boiler manufacturer delayed delivery. The buyer, a laundry, lost ordinary profits and missed exceptionally lucrative dyeing contracts. The court allowed recovery for the ordinary profits (first limb), but the particularly profitable contracts were too remote because the seller did not know of them (second limb). If the use is known, ordinary profits from that use are recoverable; the exceptional or unusually lucrative losses require actual knowledge of the special circumstances and their likely effect.

The Heron II

The House of Lords clarified that, in contract, the loss must be a “serious possibility” or “not unlikely” to result from the breach. That is a stricter test than in tort. If a carrier knows the cargo will be sold promptly on arrival, a modest market price movement loss caused by delay can be recoverable because such movements are “not unlikely” in commodity markets.

Parsons v Uttley Ingham

Where the loss is physical damage (e.g., property damage or personal injury), the courts may be more generous. If the type of damage is foreseeable, the full extent is recoverable, even if the scale was not anticipated. In the case, a defective hopper led to mouldy feed; the resulting pig illness and deaths were within the type of physical damage foreseeably caused by the defect, and the full loss was recoverable.

Worked Example 1.2

A supplier installs a feed system for a pig farmer. Due to a defect, the pigs become ill and many die. The supplier argues that such extensive loss was unforeseeable.

Answer:
The supplier is liable for all physical damage (the pigs’ illness and death), as this type of loss was foreseeable, even if the extent was not.

Assumption of Responsibility and The Achilleas

In Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas), the House of Lords introduced the idea that, in some cases, the key question is whether the breaching party can reasonably be taken to have assumed responsibility for the loss. If not, the loss may be too remote, even if it was foreseeable.

Key Term: assumption of responsibility
The principle that a party is only liable for losses it can reasonably be taken to have accepted responsibility for under the contract.

This principle is especially relevant in commercial contexts where market practice limits liability for certain types of loss. In Achilleas, a late redelivery of a vessel caused the owner to lose a lucrative follow-on charter; the House of Lords concluded the charterer had not assumed responsibility for such “loss of subsequent fixture” profits in the industry’s context and practice. Instead, the charterer was liable for the difference in market rate during the overrun period, a conventional and more limited measure.

Later cases treat Achilleas as a context-specific refinement rather than a wholesale replacement of Hadley. The assumption of responsibility analysis will often point back to the parties’ express terms, the contractual matrix, and industry norms. In cases of professional services (e.g., solicitors or advisors), the scope of the duty assumed and the kind of loss reasonably within that scope loom large in deciding remoteness.

Worked Example 1.3

A ship is returned late by a charterer, causing the owner to lose a valuable follow-on contract. The charterer knew late return could cause loss, but industry practice is not to compensate for such losses.

Answer:
The court may find the loss too remote if the charterer cannot reasonably be said to have assumed responsibility for the follow-on contract loss, even if it was foreseeable.

Practical Application: Modern Scenarios

Remoteness of damage applies to all contract types, including digital, commercial, and consumer contracts. Parties should communicate any special risks or unusual losses at the time of contracting to ensure they are recoverable if a breach occurs. They can also allocate or cap risks through clauses (e.g., “consequential loss” disclaimers, liability caps), subject to statutory controls (reasonableness under UCTA 1977 in B2B, fairness under CRA 2015 in B2C). Clear drafting can avoid disputes about whether a loss falls within either limb or whether responsibility was assumed.

Worked Example 1.4

A business hires a web developer to launch a new site by a fixed date, but the developer is late. The business loses expected sales and also misses a unique investment opportunity, which was not disclosed to the developer.

Answer:
The business can claim for lost sales (first limb), but not for the missed investment (second limb), as the developer was not told about it.

Deepening the Analysis

Type versus extent of loss

Contract remoteness focuses on the type (or kind) of loss. Once a type is foreseeable, you do not need to foresee the precise amount. In physical damage cases (Parsons), this results in full recovery once the kind of damage is within contemplation. In loss of profits cases, the kind of profit loss (e.g., ordinary sale margins) will be recoverable if it is “not unlikely” given the nature of the transaction.

Contract versus tort foreseeability

The Heron II confirms the contract bar is higher: a “serious possibility” or “not unlikely”. The tort standard is broader (“reasonable foreseeability”). Where concurrent duties (e.g., professional negligence) arise, the courts may analyse the scope of the duty and the kind of loss reasonably within it. Even then, the contractual matrix and assumption of responsibility can narrow the recoverable heads of loss compared to tort.

Causation and mitigation with remoteness

Remoteness sits alongside causation and mitigation. The loss must be caused by the breach (the “but for” test and no intervening acts breaking the chain). If the injured party fails to take reasonable steps to mitigate, they cannot recover avoidable loss. Successful mitigation that reduces or avoids loss is credited to the defendant. These filters sit before remoteness; only loss that passes causation and mitigation is then screened for foreseeability.

Communicating special circumstances

Under the second limb, it is not enough that one party knows special facts; those facts must be communicated, or be reasonably apparent, at formation. If the special circumstance is communicated but its practical significance is not (e.g., tight delivery triggers penalties on a unique project), the safer course is to make the risk allocation explicit in the contract. Without clear allocation, recovery will depend on whether the communicated facts made the unusual loss a likely result of breach.

Assumption of responsibility after Achilleas

Achilleas does not displace Hadley in most cases. It asks whether, in light of the contract’s nature, market practice, and risk allocation, the defendant can reasonably be taken to have assumed responsibility for the particular kind of loss. In shipping and some financial markets, conventional measures (e.g., market rate differential during overrun) may define the risk assumed. In professional services, the scope of duty can confine remoteness to losses that the adviser undertook to guard against (for example, ensuring a claim is made in time versus guaranteeing the client’s overall business success).

Contractual clauses and statutory controls

Parties frequently allocate remoteness risks by:

• defining recoverable categories (e.g., excluding “consequential or indirect loss”, or “loss of profits, revenue, or business”),
• setting liability caps or overall limits,
• requiring disclosure of time-sensitive or unusual risks.

In B2B, UCTA 1977 may subject such terms to reasonableness (s 2(2), s 3, s 6–7), while in B2C, CRA 2015 requires fairness (s 62) and transparency (s 68), and prohibits excluding liability for negligence causing death or personal injury (s 65). Even well-drafted exclusions cannot exclude liability for ordinary losses that are central to the bargain if such exclusions fail the statutory tests.

Worked Example 1.5

A data-hosting provider agrees to maintain 99.9% uptime for a retailer’s site. The contract contains a clause excluding “loss of profits or revenue” and limiting remedies to service credits. A prolonged outage causes substantial lost sales and a missed televised campaign impact the retailer had not disclosed.

Answer:
Ordinary lost sales are a type of profit/revenue loss that arises naturally. If the clause excluding such loss is reasonable/fair and clearly drafted, recovery may be limited to service credits. The missed campaign is a special circumstance loss which is too remote under Hadley absent disclosure. Statutory controls (UCTA/CRA) may affect the enforceability of the exclusion depending on the parties’ status and the clause’s transparency and reasonableness.

Worked Example 1.6

A corporate client instructs a solicitor to draft partnership terms for a time-sensitive expansion deal. The solicitor’s delay causes the client to lose that specific expansion opportunity worth exceptional profits. No liability cap or “loss of profits” exclusion is agreed.

Answer:
Ordinary losses from delay (e.g., transactional costs) would arise naturally. The exceptional profits depend on the scope of duty and whether such “loss of specific opportunity” was a kind of loss the solicitor can reasonably be taken to have assumed responsibility for. If the solicitor was aware the drafting was to secure this specific expansion window, the kind of loss (loss of that opportunity) may be recoverable, subject to proof of causation and the contract’s time-sensitivity being clear at formation.

Applying the Principles: A Practical Guide

When assessing remoteness in a scenario:

• Identify the alleged heads of loss and classify them by type (ordinary sale profits, market rate differential, physical damage, special opportunity).
• Check causation and mitigation first: were the losses caused by breach, and would reasonable steps have avoided them?
• Apply Hadley:
  • First limb: do these losses arise naturally from breach in this kind of contract?
  • Second limb: were any special circumstances (and their significance) communicated at formation?
• Apply The Heron II threshold: are the losses “not unlikely” (serious possibility) in the contract’s context?
• Consider Achilleas: is there evidence (contract terms, industry practice) that the defendant did not assume responsibility for this kind of loss?
• Review any contractual risk allocation clause and any applicable UCTA/CRA controls.

This path ensures that recoverable damages reflect what the parties reasonably contemplated and undertook at the time of contracting.

Key Point Checklist

This article has covered the following key knowledge points:

• Remoteness of damage limits recoverable contract losses to those foreseeable at contract formation.
• The Hadley v Baxendale test has two limbs: natural losses and special circumstances.
• Foreseeability in contract focuses on the type of loss, not its precise extent; the threshold is “not unlikely” (serious possibility).
• Special losses are only recoverable if the breaching party knew of the special circumstances at formation.
• Physical damage losses are generally recoverable if the type of loss is foreseeable; the full extent need not be anticipated.
• Assumption of responsibility may further limit recovery where the contractual context shows a risk was not undertaken (The Achilleas), applied narrowly and contextually.
• Remoteness works with causation and mitigation: only losses caused by breach and not avoidable by reasonable steps are then screened for foreseeability.
• Parties can allocate or limit remoteness risks by clause, subject to statutory controls (UCTA 1977 reasonableness; CRA 2015 fairness and transparency).

Key Terms and Concepts

• remoteness of damage
• Hadley v Baxendale test
• foreseeability
• assumption of responsibility