Remoteness of Damage in Contract
Remoteness of Damage in Contract
1. What is Remoteness of Damage?
Remoteness of damage refers to the principle that not all losses caused by a breach of contract are recoverable.
Only those damages that are reasonably foreseeable or proximate to the breach can be claimed.
The law limits liability to damages that naturally arise or were within the contemplation of the parties at the time of contract.
2. Why is Remoteness Important?
To prevent unlimited liability for remote or unforeseeable losses.
To ensure damages awarded are fair and predictable.
Encourages parties to consider risks when entering contracts.
3. Key Tests for Remoteness
A. Direct or Natural Consequence Test
Damages are recoverable if they naturally arise from the breach.
Example: Loss of profits that flow directly from breach.
B. Contemplation Test (Reasonable Foreseeability)
Damages recoverable if they were within the contemplation of the parties at contract formation as a probable result of breach.
Focuses on what parties knew or should have known.
4. Leading Case Laws
🏛️ Hadley v. Baxendale (1854) 9 Exch 341 (English Law)
Established the foundational test for remoteness.
Facts: Plaintiffs’ mill shaft broke; defendants delayed delivery to repair; plaintiffs claimed lost profits.
Held: Damages recoverable only for losses naturally arising or reasonably contemplated by both parties.
If special circumstances exist, damages are recoverable only if made known to the defendant.
🏛️ Koufos v. C Czarnikow Ltd. (The Heron II) [1969] 1 AC 350 (UK)
Clarified foreseeability for contract damages.
Held: Losses must be not unlikely (i.e., foreseeable as a serious possibility) to be recoverable.
Set a higher threshold than tort law for foreseeability.
🏛️ Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528
The plaintiffs claimed damages for loss of profits due to delayed boiler delivery.
Held: Only profits from ordinary business were foreseeable; special contracts (like government contracts) were not.
Losses must be within reasonable contemplation to be recoverable.
5. Application under Indian Law
Indian courts follow the principle of Hadley v. Baxendale.
Damages recoverable are those which:
Arise naturally from the breach, or
Were in the contemplation of both parties at the time of contract.
Indian Contract Act, 1872, Section 73 supports this principle by allowing compensation for loss or damage arising naturally or reasonably foreseeable.
6. Summary Table
| Aspect | Explanation |
|---|---|
| What damages are recoverable? | Those naturally arising or reasonably contemplated |
| Test for remoteness | Hadley v. Baxendale test: direct consequence & contemplation |
| Foreseeability level | Loss must be reasonably foreseeable (not far-fetched) |
| Special circumstances | Must be communicated to the other party |
7. Summary
Remoteness limits damages to foreseeable losses.
Protects parties from being liable for unexpected or extraordinary losses.
Encourages parties to disclose special risks when contracting.
Damages must be either:
Naturally resulting from breach, or
Foreseeable by both parties at the time of agreement.
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