Learning Outcomes
This article explains the principles of causation and remoteness of damage in contract law as they are tested in SQE1 FLK1. It clarifies how courts establish factual causation using the 'but for' test, the notion of an effective cause, and the role of intervening acts (novus actus interveniens) that may break the chain of causation. It examines how a claimant’s conduct, mitigation duties, and contributory negligence can affect the causal analysis and the level of recoverable damages. The article then sets out the contractual remoteness framework, focusing on the two limbs in Hadley v Baxendale, the distinction between imputed and actual knowledge, and the heightened contractual foreseeability threshold in The Heron II. It highlights how assumption of responsibility, particularly in The Achilleas and subsequent authorities, can refine or limit the scope of recoverable loss. The coverage is aligned with typical SQE1 multiple-choice question patterns, emphasising precise issue-spotting, correct classification of heads of loss, and disciplined application of causation and remoteness tests to short fact patterns.
SQE1 Syllabus
For SQE1, you are required to understand the principles that determine the recovery of damages following a breach of contract, including assessing both causation and remoteness and applying these rules to factual scenarios, with a focus on the following syllabus points:
- 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.
- the relevance of the foreseeability standard in Koufos v C Czarnikow (The Heron II) compared with tort
- how mitigation and (limited) contributory negligence can affect recovery in contract
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.
In applying factual causation, courts frequently adopt a common-sense approach as well as the 'but for' test. Even where multiple factors contribute to a loss, it is sufficient that the breach is an effective or substantial cause of the loss; purely background conditions or the claimant’s independent choices may not suffice to link loss to breach.
Key Term: Effective Cause
A cause with real and substantial (not merely minimal or background) effect in bringing about the loss, assessed by common sense and the facts of the case.
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. The court emphasised the need to identify the breach as an effective cause rather than a mere occasion for the loss.
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.
Intervening acts can be: a third party’s deliberate or grossly negligent conduct; a natural event of unexpected magnitude; or the claimant’s own unreasonable act (for example, knowingly using defective equipment and thereby causing additional loss). A claimant’s unreasonable conduct is particularly likely to break the chain or to reduce damages.
Key Term: Contributory Negligence
In contract, a reduction in the claimant’s damages for their own negligence will apply where the contractual duty is one to take reasonable care and skill, or where concurrent liability in negligence exists. Where the contractual obligation is strict, contributory negligence will not usually reduce damages.
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.
Causation where the claimant’s act plays a role
A claimant’s own conduct may contribute to loss in several ways:
- by breaking the chain entirely (for instance, where the claimant unreasonably persists in a course of action knowing of a danger)
- by amounting to a failure to mitigate (reducing recoverable damages)
- by engaging the defence of contributory negligence (where the contractual duty is one to take reasonable care and skill).
Key Term: Mitigation
The requirement that a claimant take reasonable steps to minimise their loss after breach. Failure to mitigate does not break causation but reduces damages to what would have been suffered had reasonable mitigation occurred.
A well-known example, though in tort, is Lambert v Lewis [1982] AC 225, where a farmer continued to use a towing hitch he knew was defective; the chain of causation was broken when the defect later caused injury. Similar reasoning can apply in contract where the claimant knowingly acts unreasonably in a way that eclipses the breach.
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.Key Term: Imputed Knowledge
Knowledge of the usual consequences of a breach that the law assumes reasonable contracting parties have, even if not subjectively present.Key Term: Actual Knowledge
Information actually communicated (or otherwise shared) between the parties at contracting about special circumstances that could magnify 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).
The House of Lords in Koufos v C Czarnikow (The Heron II) [1969] refined the foreseeability threshold in contract. The test for contractual remoteness is stricter than tort: the loss must be a serious possibility or “not unlikely” in the reasonable contemplation of the parties at the time of contracting, not merely a remote possibility.
Key Term: Reasonable Contemplation
The foreseeability standard in contract: losses must be of a kind that was a serious possibility (not merely a far‑fetched risk) in the parties’ contemplation at the time of contracting.
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. Post-Achilleas decisions, such as Supershield Ltd v Siemens Building Technologies [2010] and John Grimes Partnership Ltd v Gubbins [2013], emphasise that Hadley remains the default test; assumption of responsibility will usually only displace it where the context and market expectations clearly show that the type of loss was not one the contract breaker agreed to bear.
Foreseeability and the type of loss
Courts first identify the relevant “type” or “kind” of loss. If that type of loss was within the reasonable contemplation of the parties at the time of contracting (applying the “not unlikely” threshold), it is generally recoverable under limb one. If the loss results from special circumstances, limb two applies and recovery depends on actual knowledge. Where the market context indicates that the parties did not reasonably assume responsibility for that type of loss, Achilleas reasoning may restrict recovery even if it was foreseeable.
Wasted expenditure and “direct loss”
Damages are assessed to put the claimant in the position they would have been in had the contract been performed. Where expectation loss (lost profit) is difficult to prove, the claimant may claim wasted expenditure, provided it is not a “bad bargain” claim. Recent authority indicates that, depending on the contract, wasted costs may often be a direct and therefore limb-one loss arising naturally from breach. This helps distinguish such claims from more speculative consequential losses.
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.
Worked Example 1.4
A shipowner charters a vessel to charterers who must redeliver by 1 July. In breach, they redeliver late on 11 July. The owner had lined up a profitable follow-on charter at a higher market rate, but that opportunity falls away due to late redelivery. Should damages be limited to the loss during the 10‑day overrun, or can the owner claim the difference on the entire follow-on charter they lost?
Answer:
Applying The Achilleas, the court may find that in the time‑chartering market the usual assumption is that charterers are responsible for the daily loss of hire during the overrun, but not for the broader market loss on a lost follow‑on fixture unless responsibility for such loss was assumed. Therefore, damages are likely confined to the period of late redelivery. Context and market understanding drive this result; Hadley still governs most cases, but Achilleas limits recovery when the market would not expect liability for this type of extended loss.
Worked Example 1.5
Seller delays delivering a commodity cargo to Buyer at Basrah. The market price drops during the delay and Buyer resells at a lower price than would have applied had delivery been on time. Are the price difference losses too remote?
Answer:
Under The Heron II, a market price drop following late delivery of a commodity to a known trading location is a loss of a type that is “not unlikely” in the parties’ contemplation. This is a limb‑one loss and is recoverable, despite price movements being uncertain in amount. The kind of loss—loss of market value due to delay—was within reasonable contemplation.
Worked Example 1.6
Integrator Ltd engages Consultant LLP to design a software interface. After breach by Consultant, Integrator abandons the project and claims wasted internal and external costs spent in reliance on the contract. Consultant argues these are too remote.
Answer:
Wasted expenditure reasonably incurred in performance and abandoned because of breach is often a direct (limb‑one) loss. Provided the contract was not a “bad bargain”, and the costs were reasonably incurred, courts will generally treat them as arising naturally from the breach. The amounts would be subject to proof and reduction for any benefits retained and for mitigation.
Interplay with mitigation and contributory negligence
Remoteness is conceptually distinct from mitigation. However, failure to mitigate will reduce otherwise recoverable losses. For example, if a buyer can source substitute goods at a reasonable price but delays unreasonably, the recoverable loss is measured by the reasonable cover price. Contributory negligence can reduce damages in contract where the contractual duty is one to take reasonable care and skill (for example, a professional services contract); it will not reduce damages where the obligation is strict (for example, to deliver goods conforming with a description).
“Special circumstances” and communication
For limb two, the party in breach must have actual knowledge of the special facts that could magnify the loss at the time of contracting. It is sufficient that the facts were communicated in substance; precise quantification is not required. If only the general possibility is flagged (for instance, “timing is critical due to a scheduled event”), some limb‑two losses may still be too remote unless the specific consequence (such as a particular high-value contract) was within the parties’ contemplation.
Chain of causation and remoteness together
It is common to address factual causation first (did the breach cause the loss?) and then remoteness (was the loss too remote?). Sometimes the same facts matter to both. For instance, an extraordinary third‑party act may be treated as breaking the chain (no causation), or as rendering the loss too remote (outside reasonable contemplation). Which doctrine applies will depend on how the court characterises the supervening event.
Additional worked examples
Worked Example 1.7
A supplier delivers chemical feedstock late. The buyer’s production line halts; the buyer then hires emergency third‑party supplies at a premium price to keep the line going. Are the premium costs recoverable?
Answer:
Yes, if the type of loss is within limb one: a premium paid for substitute supply due to late delivery is a natural and foreseeable consequence. The buyer must act reasonably to mitigate, so the premium must be reasonable in amount and necessity.
Worked Example 1.8
Contractor negligently installs a water sensor in a plant room. A leak occurs and, due to a stuck valve installed by a third party, water damage becomes extensive. Contractor argues the valve failure was an intervening act breaking the chain.
Answer:
The third party’s malfunction is not so unforeseeable as to break the chain; it interacts with the contractor’s breach to aggravate loss. The contractor remains liable for the extensive damage as an effective cause; the loss is not too remote as water damage is a natural consequence of a failed sensor.
Worked Example 1.9
A photography studio breaches an agreement to shoot a wedding. The couple claim for the distress and disappointment at not having professional photos.
Answer:
Generally, non‑pecuniary loss is not recoverable in contract. But where a major object of the contract is to provide pleasure, relaxation or peace of mind, damages for disappointment may be awarded. A wedding photography contract falls within this category, so reasonable damages for loss of enjoyment may be awarded.
Worked Example 1.10
A freight forwarder’s breach delays delivery of a bespoke machine. The buyer claims for downstream penalties under its own contract with its customer. The forwarder had not been told about this downstream contract at the time of booking.
Answer:
Downstream penalty exposure is a special circumstance. Without actual knowledge at the time of contracting, limb two is not satisfied and the penalties are likely too remote. The buyer may still recover direct losses that arise naturally (such as reasonable storage or rearrangement costs), subject to mitigation.
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, with a common‑sense inquiry into whether the breach was an effective cause of the loss.
- An intervening act (novus actus interveniens) may break the chain of causation if it is unforeseeable and independent; foreseeable or natural sequelae typically will not.
- Remoteness is governed by the two-limb test in Hadley v Baxendale, refined by Victoria Laundry and The Heron II as to foreseeability in contract.
- The first limb covers losses arising naturally from the breach (imputed knowledge); the second limb covers losses from special circumstances known to the defendant at contracting (actual knowledge).
- The foreseeability threshold in contract is whether the type of loss was a serious possibility (“not unlikely”) at the time of contracting, not merely a remote risk.
- The principle of assumption of responsibility (The Achilleas) may limit recovery where market context shows the defendant did not accept responsibility for that type of loss, but Hadley remains the default test.
- Wasted expenditure reasonably incurred and rendered useless by breach can often be a direct (limb‑one) loss, subject to the “bad bargain” rule and mitigation.
- Mitigation reduces recoverable loss; contributory negligence may reduce damages only where the contractual duty is one of reasonable care and skill or there is concurrent liability in negligence.
Key Terms and Concepts
- Factual Causation
- Effective Cause
- "But For" Test
- Intervening Act (Novus Actus Interveniens)
- Remoteness of Damage
- First Limb (Hadley v Baxendale)
- Second Limb (Hadley v Baxendale)
- Imputed Knowledge
- Actual Knowledge
- Reasonable Contemplation
- Assumption of Responsibility
- Mitigation
- Contributory Negligence