What is remoteness of damages in contract law?

Question

What is the principle of remoteness when calculating damages for breach of contract?

Answer

The aim of damages is to compensate the innocent party for their loss. The principle of remoteness aims to prevent claims for losses that are too remote from the breach (Murray, 2014).

The test for remoteness in contract law comes from Hadley v Baxendale. The rule is that damages can be claimed in respect of anything that would be considered to arise naturally from the breach or be reasonably contemplated by both parties at the time the contract was agreed. Arising naturally requires a simple application of the causation rules. However, reasonably contemplated is more complex (Chen-Wishart, 2015).

Reasonably contemplated requires a consideration of both parties’ knowledge at the time the contract was entered into, and there must be a serious possibility of the loss (The Heron). Hadley is a great example of this; the defendant’s late delivery of a crankshaft resulted in the claimant’s mill being inactive until it was delivered, but the claim for the loss of profits was rejected, as the defendant was not aware that the crankshaft was required for the mill’s operation. If the claimant had mentioned the fact the mills operation was reliant on the crankshaft, the claim would have succeeded (Cartwright, 1996).

References

Cartwright, J., (1996) Remoteness of Damage in Contract and Tort: A Reconsideration. The Cambridge Law Journal. 55(3), pp.448-514

Chen-Wishart, M., (2015) Contract Law. Fifth Edition, Oxford University Press.

Murray, R., (2014) Contract Law. Third Edition, Sweet & Maxwell.

Hadley v Baxendale (1854) 9 Ex 341

The Heron II [1969] 1 AC 350