Learning Outcomes
This article explains the principles of causation and remoteness of damage in contract law. You will learn how courts determine if a breach of contract caused a particular loss (factual causation) and whether that loss is too remote to be recoverable (legal causation/remoteness). Understanding these concepts, including key tests like the 'but for' test and the rules from Hadley v Baxendale, is necessary for assessing the availability of damages in contract law scenarios presented in the SQE1 assessment. This will assist you in applying legal principles to multiple-choice questions effectively.
SQE1 Syllabus
For SQE1, you must understand the principles that determine the recovery of damages following a breach of contract. This involves assessing both causation and remoteness. Your ability to apply these rules to factual scenarios is key.
As you revise this topic, focus on:
- the requirement to establish a causal link between the breach and the loss claimed
- the operation of the 'but for' test in determining factual causation
- the concept of intervening acts (novus actus interveniens) potentially breaking the chain of causation
- the rules on remoteness established in Hadley v Baxendale and subsequent case law
- distinguishing between losses recoverable under the two limbs of the Hadley v Baxendale test
- the potential impact of the 'assumption of responsibility' principle on remoteness.
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.
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What is the primary test used to determine factual causation in contract law?
- The foreseeability test.
- The 'but for' test.
- The assumption of responsibility test.
- The remoteness test.
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Which of the following best describes the first limb of the rule in Hadley v Baxendale?
- Losses that arise from special circumstances known to both parties.
- Losses that arise naturally, according to the usual course of things, from the breach.
- Losses that the defendant expressly agreed to be responsible for.
- Losses caused by an unforeseeable intervening event.
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An event that breaks the chain of causation between the defendant's breach and the claimant's loss is known as:
- Contributory negligence.
- A frustrating event.
- A novus actus interveniens.
- A force majeure event.
Introduction
When a contract is breached, the innocent party may seek damages to compensate for their losses. However, not all losses flowing from a breach are recoverable. Two key hurdles must be overcome: causation and remoteness. First, the claimant must prove that the defendant's breach actually caused the loss (factual causation). Second, the loss must not be too remote a consequence of the breach (legal causation or remoteness). You need to understand how these principles operate and apply them to practical scenarios.
FACTUAL CAUSATION
The first step is to establish a factual link between the breach of contract and the loss suffered by the claimant. The breach does not need to be the sole cause of the loss, but it must be an effective cause.
Key Term: Factual Causation
The principle that the claimant must demonstrate a direct causal link between the defendant's breach of contract and the loss sustained.
The 'But For' Test
The standard test for factual causation in contract law is the 'but for' test.
Key Term: "But For" Test
This test asks: 'But for the defendant's breach of contract, would the claimant have suffered the loss?' If the loss would have occurred anyway, regardless of the breach, then the breach did not cause the loss, and damages cannot be recovered for it.
The application of this test can be seen in cases like Galoo Ltd v Bright Grahame Murray [1994], where auditors' negligent failure to identify a company's insolvency was not considered the cause of its trading losses, as the company would likely have continued trading and incurred losses anyway due to its own mismanagement.
Intervening Acts (Novus Actus Interveniens)
Sometimes, an event occurs after the defendant's breach but before the claimant suffers the loss. If this later event is held to be the true cause of the loss, it may 'break the chain of causation' initiated by the defendant's breach.
Key Term: Intervening Act (Novus Actus Interveniens)
A new, independent act or event occurring after the defendant's breach that breaks the chain of causation, relieving the defendant of liability for the loss caused by the intervening act.
For an act to break the chain of causation, it must generally be unforeseeable and independent of the original breach. If the intervening act was something reasonably foreseeable or likely to happen as a result of the breach, it usually will not break the chain. For example, in Stansbie v Troman [1948] (a tort case illustrating the principle), a decorator breaching his duty by leaving a house unlocked was held liable for a subsequent burglary, as the theft was a foreseeable consequence of his breach.
Worked Example 1.1
Supplier Ltd breached its contract by delivering defective components to Manufacturer Ltd. Manufacturer Ltd used the components, and its finished product failed quality control. However, evidence showed that Manufacturer Ltd's own assembly process was also faulty and would have caused the product to fail even if the components had been perfect. Can Manufacturer Ltd claim damages for the failed products from Supplier Ltd?
Answer: Applying the 'but for' test, Manufacturer Ltd likely cannot recover damages for the failed products. But for Supplier Ltd's breach (defective components), Manufacturer Ltd would still have suffered the loss (failed products) due to its own faulty assembly process. Therefore, Supplier Ltd's breach was not the factual cause of this specific loss.
Worked Example 1.2
Cargo Ltd contracted to transport goods for Exporter Ltd by sea, promising delivery by 1st May. Cargo Ltd breached the contract, and the ship arrived on 3rd May. On 2nd May, a highly unusual and unforeseeable tsunami struck the port, destroying the warehouse where the goods would have been stored had they arrived on time. Is Cargo Ltd liable for the destruction of the goods?
Answer: Cargo Ltd is unlikely to be liable. Although the delay was a breach, the tsunami was arguably a novus actus interveniens. It was an unforeseeable, independent event that broke the chain of causation between the delay and the loss. The loss was caused by the tsunami, not the two-day delay.
REMOTENESS OF DAMAGE
Even if factual causation is established, a loss may still be irrecoverable if it is considered too 'remote' from the breach. This principle limits the defendant's liability to losses that were reasonably within the contemplation of the parties at the time the contract was made.
Key Term: Remoteness of Damage
The legal principle that limits the recovery of damages in contract to those losses that are not too remote a consequence of the breach. It requires the loss to have been reasonably foreseeable or within the parties' contemplation at the time of contracting.
The Rule in Hadley v Baxendale
The foundational test for remoteness comes from Hadley v Baxendale (1854). This case established a two-limb test:
- First Limb: Losses arising naturally, i.e., 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.
- Second Limb: Losses that may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. This covers losses arising from special circumstances, but only if those circumstances were known to the party in breach at the time of contracting.
Key Term: First Limb (Hadley v Baxendale)
Covers losses that flow directly and naturally from the breach in the ordinary course of events. Liability arises from the parties' 'imputed knowledge' of what normally happens.Key Term: Second Limb (Hadley v Baxendale)
Covers losses arising from special circumstances outside the ordinary course of events. Liability requires the party in breach to have had 'actual knowledge' of these special circumstances at the time of contracting, such that they could reasonably foresee the specific loss.
In Hadley v Baxendale itself, the mill owner couldn't recover lost profits from the carrier's delay in delivering a broken crankshaft because the carrier didn't know the mill was stopped (special circumstance) and such a complete stoppage wasn't a natural consequence of delay in delivering a part (usual course of things).
The case of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] further clarified this. A late delivery of a boiler entitled the laundry to damages for ordinary loss of profit (first limb), but not for the loss of exceptionally lucrative dyeing contracts, as the supplier did not know about these specific contracts (second limb not satisfied).
Assumption of Responsibility
More recently, cases like Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] have suggested an additional consideration, focusing on whether the loss claimed is of a type for which the party in breach can be taken to have assumed responsibility when entering the contract. This looks at the context, market understanding, and presumed intentions of the parties.
Key Term: Assumption of Responsibility
A principle, particularly relevant following The Achilleas, suggesting that remoteness may also depend on whether the type of loss suffered was one for which the contract breaker implicitly or explicitly accepted responsibility.
This principle generally operates to limit recovery where, although foreseeable, the scale or type of loss is outside what the market or parties would reasonably expect the contract breaker to bear.
Exam Warning
SQE1 questions often test the distinction between the two limbs of Hadley v Baxendale. Ensure you can identify whether a loss arises 'naturally' (limb 1) or from 'special circumstances' communicated to the defendant (limb 2). Remember that for limb 2, the defendant needs actual knowledge of the special circumstances at the time of contracting.
Worked Example 1.3
Ria hires QuickBuild Ltd to construct a standard garden shed, explaining she needs it by 1st June to store her gardening tools. QuickBuild finishes late on 1st July. As a result, Ria had to rent storage space for her tools in June at a cost of £100. Ria also claims she missed out on winning the "Best Village Garden" competition prize of £1,000 because she couldn't access her specialist tools stored elsewhere. Is QuickBuild liable for both losses?
Answer:
- £100 storage cost: This loss likely falls under the first limb of Hadley v Baxendale. It arises naturally from the delay in providing storage space (the shed). QuickBuild could reasonably foresee Ria needing alternative storage. This is likely recoverable.
- £1,000 prize money: This loss likely falls under the second limb. Winning a competition is a special circumstance. Unless Ria specifically told QuickBuild at the time of contracting that the shed was essential for accessing tools to win this specific £1,000 prize, the loss is likely too remote. QuickBuild did not have actual knowledge of this special potential loss. This is likely irrecoverable.
Key Point Checklist
This article has covered the following key knowledge points:
- Claimants must establish both factual causation and that the loss is not too remote to recover damages for breach of contract.
- Factual causation is typically determined using the 'but for' test: would the loss have occurred but for the breach?
- An intervening act (novus actus interveniens) may break the chain of causation if it is unforeseeable and independent.
- Remoteness is governed by the two-limb test in Hadley v Baxendale.
- The first limb covers losses arising naturally from the breach (imputed knowledge).
- The second limb covers losses arising from special circumstances known to the defendant at the time of contracting (actual knowledge).
- The principle of assumption of responsibility (The Achilleas) may also be relevant in assessing remoteness.
Key Terms and Concepts
- Factual Causation
- "But For" Test
- Intervening Act (Novus Actus Interveniens)
- Remoteness of Damage
- First Limb (Hadley v Baxendale)
- Second Limb (Hadley v Baxendale)
- Assumption of Responsibility
