Learning Outcomes
After studying this article, you will be able to explain the principle of remoteness of damage in contract law, apply the two-limb test from Hadley v Baxendale, distinguish between losses that are recoverable and those that are too remote, and analyse how foreseeability and assumption of responsibility affect damages claims. You will also be able to apply these rules to practical contract scenarios as required for the SQE1 FLK1 exam.
SQE1 Syllabus
For SQE1, you are required to understand the rules limiting recoverable damages for breach of contract. This article focuses on the doctrine of remoteness of damage, including the key tests and their application in practice. In your revision, pay particular attention to:
- the two-limb test for remoteness of damage established in Hadley v Baxendale
- the meaning and application of foreseeability in contract damages
- the distinction between losses arising naturally and those due to special circumstances
- the effect of assumption of responsibility and key developments in The Achilleas
- how remoteness interacts with causation and mitigation in contract law.
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 two-limb test for remoteness of damage in contract law, and which case established it?
- When are special losses resulting from a breach of contract recoverable?
- How does the assumption of responsibility principle affect the recoverability of damages?
- 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.
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.
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 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.
- 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.
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.
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.
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.
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.
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
If the breaching party knows the injured party will use the goods for a particular purpose, ordinary losses from not being able to use them are recoverable. However, exceptional losses (such as missing out on a unique contract) are only recoverable if the breaching party was made aware of them.
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. This is a stricter test than in tort law.
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.
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 is especially relevant in commercial contexts where market practice limits liability for certain types of loss.
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.
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.
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 is assessed at the time of contracting and focuses on the type of loss.
- Special losses are only recoverable if the breaching party knew of the special circumstances.
- The assumption of responsibility principle may further limit liability in some commercial cases.
- Physical damage losses are generally recoverable if the type of loss is foreseeable, regardless of extent.
Key Terms and Concepts
- remoteness of damage
- Hadley v Baxendale test
- foreseeability
- assumption of responsibility
