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. This knowledge is essential for correctly advising on liability and assessing damages in contract disputes for the SQE1 exam.
SQE1 Syllabus
For SQE1, you need 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.
Key areas for your revision from this article include:
- 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.
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.
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.
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.
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.
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), have refined the test, suggesting that for a loss to be recoverable under contract law, it must have been contemplated as 'not unlikely' or a 'serious possibility' resulting from the breach, a stricter test than the 'reasonable foreseeability' used in tort.
Modern Developments: Assumption of Responsibility
The House of Lords decision in The Achilleas (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. This test is generally seen as supplementing, rather than replacing, the Hadley v Baxendale framework, particularly in cases with unusual market volatility or specific industry understandings.
Revision Tip
For SQE1, focus on applying the two limbs of Hadley v Baxendale. While awareness of The Achilleas is useful background, the core application questions will likely revolve around the traditional two-limb test and whether the loss was a natural consequence or arose from communicated special circumstances.
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 only required to take steps that are reasonable in the circumstances. They are not expected to engage in complex litigation or take excessive financial risks.
Worked Example 1.2
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.
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.
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' 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.
- Failure to mitigate can reduce the amount of damages recoverable.
Key Terms and Concepts
- Factual Causation
- Legal Causation
- Remoteness
- Mitigation
