Tests of Causation and Remoteness of Damage in Contract Law

This essay discusses the tests of causation and the common law rules on remoteness of damage in contract law, with relevant cases. It explores the theory of remoteness of damage and its application in contract breach cases. The essay also examines the tension between court decisions in relevant cases and the scope of liabilities for parties in breach.

Running head: CONTRACT LAW
Contract Law
Name of Student
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Author Note

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Introduction
In this essay the tests of causation and the common law rules on remoteness of damage
are being discussed in details with relevant cases. The different tests of causation like the factual
test and the test of remoteness are discussed in this essay. Further the essay discusses the theory
of remoteness of damage in agreement with the statement that has been mentioned in the
question. The two limbs for the test of remoteness are also discussed in the light of the relevant
cases. Further the common law rules on the test of remoteness are critically discussed. For the
claim of damages in case of a contract breach the theory of remoteness is seen to be forming a
very critical part. The theory was first introduced in 1857 in case of Hadley v Baxendale1. After
that the theory had been used by judges in several cases. This theory was used in a recent case
known as the Achilleas case. The decision in this case is said to be seemingly changing the
principle that expands the scope of the liabilities of the party in breach. Thus it can be seen as an
essential judgment for the explanation of the law as it has formed modification of the subsequent
judgments.
Tests of Causation
Causation in the law of negligence can be described as the direct link between the loss
and damage of the claimant and the act of negligence by the defendant.2 In case there is a breach
of the duty of care by the defendant that would be seen to be causing damage and loss to the
claimant the liability of negligence can be established giving the right to the claimant to get
1 Paziue, Cristian. "Remoteness of Damage in Contract and Its Functional Equivalents: A Critical Economic
Approach." UCLJLJ 5 (2016): 87.
2 Hylton, Keith N., and Haizhen Lin. "Negligence, causation, and incentives for care." International Review of Law
and Economics 35 (2013): 80-89.

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compensation for the loss and damage by the defendant. For making a claim for the damages the
claimant is needed to prove that the damages were actually caused because of the breach in the
duty of care. For this purpose the test can be seen to be providing a balance between remoteness
and proximity by proving the link between the loss and damage of the claimant and the actions
of the defendant and further proving that the damage sustained by the action was foreseeable at
the relevant time. In the Lamb v Camden [1981]3 case it was stated by the court that duty,
causation and remoteness are the devices used by court for limiting the liabilities caused by way
of negligence.
There are two tests for the establishment of the causation. These two tests are factual test
for causation and legal test for causation or remoteness of the damage. The factual test also
known to be the ‘but for’ test can be considered as the basic test for the establishment of
causation. In this test defendant would only be held liable for paying damages if it is proved that
the damages would not be occurring ‘but for’ the act of negligence of the defendant. In an
alternate way the defendant on the balance of probability would not be held liable if it can be
proved that the damage of the claimant would have been happening anyways regardless of the
action of negligence. This was discussed in detail in the South Australia Asset Management Corp
v York Montague Ltd [1997]4 case. In this case the negligence caused by the doctor resulted in a
risk for the mountaineer which would not have occurred otherwise. Yet it was not seen to be
sufficient for incurring liabilities for the doctor. It was stated by the court that the duty of the
doctor is to be taking care of the injuries by way of knee failures, so even if the injury can be said
to be foreseeable the doctor could not be held liable.
3 Lamb v Camden LBC (1981) QB 625
4 South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, 214

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Remoteness of Damage
Remoteness of damage is seen to be described as the legal test of the causation used for
the determination of type of loss that has been caused by any breach of duty or by breach of any
contract that can be compensated by making an award for damages5. Remoteness of damage can
be seen to be different from the factual test of causation in the way that factual test of causation
is seen to be raising the question if the causation of the damage is arising from the breach of any
duty or from the breach of a contract. Once the establishment of the factual cause is done the
question regarding the preparation of the law towards the attribution of the damages awarded to
the breach in spite of the factual connections is raised. The damages which are considered as too
remote would not be recoverable even if the factual links are established between breach of the
duties or contract and the loss.
The test of remoteness of damages has first been set out in the Hadley v Baxendale
[1854]6 case. The issue in this case was concerned with the extension of the liabilities of the
defendant for a contract breach. In the case a broken mill shaft was being contracted to be
transported to the repairers from the claimant’s mill by the defendant. The delivery of the shaft
was late and as a result the mill has been idle for long time. Damages for the profit loss were
sought by the claimants. For finding the remoteness of the damage a two stage test was set out by
the court for the defendant. The test suggested that for the recovery of a loss it must be seen to be
normally arising from a result of the breach or it must have been regarded by both the parties as a
likely result for the breach. In this case neither of the tests was satisfied since the drive shaft is
important to any mill it was expected reasonably that there would be spare shafts present. In
5 O'Sullivan, Janet. O'Sullivan and Hilliard's the Law of Contract. Oxford University Press, 2018.
6 Hadley v Baxendale [1854] 9 Ex 341

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essence the test in the case can be seen to be a test of foreseeability which means that the
recovery of the loss would only be possible in case it was contemplated by both the parties. The
loss should not only be foreseeable but also not unlikely. For the assessment of the
contemplation of the parties the knowledge that is needed to be taken into account can be divided
under two limbs. These two limb tests require the loss to be arising in accordance with the
natural course of any breach and the loss to be reasonably regarded by both the parties during the
time of contract as probable result in case a breach happens.
These limbs are however interpreted to be part of general test to consider if the loss was
foreseeable by way of the defendant’s knowledge that he should have been possessing during
the time of contract as discussed in the Victoria Laundry Windsor v Newman Industries [1949]7
case. In this case the defendant was late for five months to deliver a boiler to the claimant which
led to the claimant losing some lucrative contracts from the Government. Claim for the damages
for both ordinary and extraordinary loss was made by the claimant. In the court it was stated that
the defendant can only be held responsible for the compensation of the ordinary loss. The
extraordinary losses were stated by the court could only be recoverable if the defendant had been
sufficiently knowledgeable about the reasonable attribution of the acceptance of the loss. This
view was also presented in C Czarnikow Ltd v Koufos or The Heron II [1969]8 case. It was also
affirmed in this case that a higher degree of foreseeability can be seen to be needed in contract
than needed in the tort. It was stated by the lordships that the probabilities of the loss that has
been foreseen should be ‘not unlikely’. However in the Parsons (Livestock) Ltd v Uttley Ingham
& Co Ltd [1978]9 case the test was phrased as a generality of higher level by court. The court in
7 Victoria Laundry Windsor v Newman Industries [1949] 2 KB 528
8 C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 A.C. 350
9Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978]

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this case adopted the approach that for the limitation of the claim for the damages the only
consideration should be on foreseeing the type of the loss and not its extent. By this perspective
the test of remoteness impact for the limitation of the claim for the damages was also restricted.
By the reasoning of this approach the decision in the case Victoria v Newman would also be seen
to be doubtful as in the case both ordinary and extraordinary losses were seen to be losses of the
profit.
In the South Australia Asset Management Corpn v York Montague Ltd [1996]10 case
referred to as SAAMCO a radical approach was taken into consideration by the court. In the
mentioned case the test of remoteness was regarded as a prima-facie assumption that can be
rebuttable in the way that responsibility of the loss would not have been regarded by the
defendant in a reasonable manner. In this case the test of the scope of duty was applied by the
court while reasoning that the distinction of the differentiation of the loss can be recoverable.
This approach was also taken into consideration in the Banque Bruxelles Lambert SA v Eagle
Star Insurance Co Ltd [1996]11case. In the SAAMCO case the question that was raised was the
extent of the liabilities of a valuer providing a property overvaluation negligently as a security of
loan to a lender. The court held that for the ‘assumed responsibility’ of the valuers they were
liable for the losses. Thus it can be seen that in the SAAMCO case the remoteness of damage test
was modified by the court by deeming the loss to be equivalent to the loss that has been suffered
by the lender in the absence of the overvaluation negligence. These types of cases are preferred
to be explained by the courts by way of restricted assumptions that are being implied in a
agreement –centered approach.
10 South Australia Asset Management Corpn v York Montague Ltd (SAAMCO) [1996] UKHL 10
11Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] 3 WLR 87

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The rule has been extended further in the decision of the court in the Transfield Shipping
Inc v Mercator Shipping Inc (The Achilleas) [2008]12 case. In the case the owners of the
Achilleas went into an agreement of time charter with the first charterers for a delivery to the
owners within the date May 2nd. The notice for the delivery was given by the first charterers
between April 30th and May 2nd. Another agreement for time charter was entered by the owners
with new charterers with the last date of the delivery to be May 8th. The delivery of the ship by
the first charterer was done on 11th May. For this delay the owners had to suffer a loss by
agreeing to lower prices with the second charterers. The owners claimed damages for the loss
incurred in the late of delivery as well as the difference of price with the second charterer. It was
decided by the court that the Achilleas’ owners were only entitled for claim of damage of loss
incurred in the 9 days delay in the delivery. Based on the judgment of the case the courts at the
time of estimation of the damages consider certain things. The considerations are if the loss was
foreseeable during the time of contract, if any information was provided at the time of contract
that could prevent the excess liability, if there was any purpose of duty, absence of any exclusion
clause, if there was any market understanding or expectation and the risk of the potential risk
compared to the price that has been paid to the promisor.
Conclusion
In this essay a detailed discussion was seen to be done regarding the causation of damage
and remoteness of damage. The different tests of causation like the factual test and the test of
remoteness are discussed. The two limbs for the test of remoteness are also discussed in the light
of the relevant cases. Further the rules of the common law on the test of remoteness are critically
12 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL48

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discussed. For the claim of damages in case of breach of contract the theory of remoteness can be
seen to form a very critical part. The remoteness of damage was first seen to be set out in the
Hadley v Baxendale case. There are numerous cases that have been seen to be using the rule of
test of the remoteness of the damage. Further in the cases like the Heron II and the Achilleas the
theory of the remoteness of damage has been seen to be extended according to the requirements
of the case. Thus the statement in the question stating that the tension between the principle
controversial issue that is the relation between the court’s decisions in the two cases of Victoria
Laundry Windsor v Newman Industries [1949] and Parsons (Livestock) Ltd v Uttley Ingham &
Co Ltd [1978] is still seen to be remaining largely unresolved can be seen to be true in the
context of cases like the Heron II, Achilleas and SAAMCO. The decision in the recent case
called the Achilleas can be seen to be extending the theory of remoteness of damage and thus is
said to be seemingly changing the principle that expands the scope of the liabilities of the party
in breach. Thus it can be seen as an essential judgment for the explanation of the law as it has
formed modification of the subsequent judgments.

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Reference
Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] 3 WLR 87
C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 A.C. 350
Hadley v Baxendale [1854] 9 Ex 341
Hylton, Keith N., and Haizhen Lin. "Negligence, causation, and incentives for
care." International Review of Law and Economics 35 (2013): 80-89.
Lamb v Camden LBC (1981) QB 625
O'Sullivan, Janet. O'Sullivan and Hilliard's the Law of Contract. Oxford University Press, 2018.
Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978]
Paziue, Cristian. "Remoteness of Damage in Contract and Its Functional Equivalents: A Critical
Economic Approach." UCLJLJ 5 (2016): 87.
South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, 214
South Australia Asset Management Corpn v York Montague Ltd (SAAMCO) [1996] UKHL 10
Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL48
Victoria Laundry Windsor v Newman Industries [1949] 2 KB 528