Remoteness of damage

What kind of damage can the innocent party claim? This involves a consideration of causation and the remoteness of cause from effect, in order to determine how far down a chain of events a defendant is liable. The rule in Hadley v Baxendale states that damages will only be awarded in respect of losses which arise naturally, that is, in the natural course of things; or which both parties may reasonably be supposed to have contemplated, when the contract was made, as a probable result of its breach.

In Hadley v Baxendale, Hadley, a miller in Gloucester, had engaged the defendant to take a broken mill-shaft to Greenwich so that it could be used as a pattern for a new one. The defendant delayed in delivering the shaft, thus causing the mill to be out of action for longer than it would otherwise have been. Hadley sued for loss of profit during that period of additional delay. It was held that it was not a natural consequence of the delay in delivering the shaft that the mill should be out of action. The mill might, for example, have had a spare shaft. So, the first part of the rule stated above did not apply. In addition, Baxendale was unaware that the mill would be out of action during the period of delay, so the second part of the rule did not apply, either. Baxendale, therefore, although liable for breach of contract, was not liable for the loss of profit caused by the delay.

The effect of the first part of the rule in Hadley v Baxendaleis that the party in breach is deemed to expect the normal consequences of the breach, whether they actually expected them or not.

Under the second part of the rule, however, the party in breach can only be held liable for abnormal consequences where they have actual knowledge that the abnormal consequences might follow.

In Victoria Laundry Ltd v Newham Industries Ltd the defendants contracted to deliver a new boiler to the plaintiffs, but delayed in delivery. The plaintiffs claimed for normal loss of profit during the period of delay, and also for the loss of abnormal profits from a highly lucrative contract which they could have undertaken had the boiler been delivered on time. In this case, it was decided that damages could be recovered in regard to the normal profits, as that loss was a natural consequence of the delay. The second claim failed, however, on the ground that the loss was not a normal one; it was a consequence of an especially lucrative contract, about which the defendant knew nothing.

The decision in the Victoria Laundry case was confirmed by the House of Lords in Czarnikow v Koufos although the actual test for remoteness was reformulated in terms of whether the consequence should have been within the reasonable contemplation of the parties at the time of the contract. In The Heron II, the defendants contracted to carry sugar from Constanza to Basra. They knew that the plaintiffs were sugar merchants, but did not know that theyintended to sell the sugar as soon as it reached Basra. During  a period in which the ship was delayed, the market price of sugar fell. The plaintiffs claimed damages for the loss from the defendants. It was held that the plaintiffs could recover. It was common knowledge that the market value of such commodities could fluctuate; therefore, the loss was within the reasonable contemplation of the parties also As a consequence of the test for remoteness, a party may be liable for consequences which, although within the reasonable contemplation of the parties, are much more serious in effect than would be expected of them.

In H Parsons Ltd v Uttley Ingham & Co the plaintiffs, who were pig farmers, bought a large food hopper from the defendants. While erecting it, the plaintiffs failed to unseal a ventilator on the top of the hopper. Because of a lack of ventilation, the pig food stored in the hopper became mouldy. The pigs that ate the mouldy food contracted a rare intestinal disease and died. It was held that the defendants were liable for the loss of the pigs. The food that was affected by bad storage caused the illness as a natural consequence of the breach, and the death from such illness was not too remote.