Damages: The Test of Remoteness and Reasonable Foreseeability

Posted by Catherine Robinson on August 13, 2021

2-min read

On 13^th July 2020, the Privy Council handed down a judgment that appears to have refined the principles from the seminal case of Hadley v Baxendale. That judgment was Attorney General of the Virgin Islands v Global Water Associates Ltd [2020] UKPC 18. In an effort to determine what exactly the rules on reasonable foreseeability now are, this article shall take you through a whistle-stop tour of the case law on the test of remoteness for damages in Contract Law.

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Starting point: the two limbs of Hadley v Baxendale

Here, Alderson B stated that if a party wishes to recover damages for breach of contract, that party must establish that the loss they have suffered was foreseeable. In other words, the loss must not be too remote.

Specifically, he set out two situations in which the test of remoteness will be satisfied:

Where loss will arise naturally from the breach of contract, meaning that it is common knowledge that the kind of loss suffered would be suffered based on the breach.
Where the loss that has arisen would have reasonably been contemplated by both parties (if the contract were to be breached) at the time the contract was made.

Victoria Laundry v Newman Industries

In this case, the Court of Appeal considered a situation where the second limb of Hadley v Baxendale was relevant. The judges considered that the test of ‘actual’ knowledge (the second limb of Hadley v Baxendale) involved an evaluation as to whether the loss was ‘reasonably foreseeable’.

Czarnikow Ltd v Koufos (The Heron II)

Lord Reid took issue with the court’s reference to ‘reasonably foreseeability’ in Victoria Laundry v Newman Industries as this term is used in Tort Law when considering what the defendant ought to have known at the time of the breach, rather than at the time the contract is created. As such, Lord Reid stated that the more appropriate test is whether the defendant contemplated that the loss would be ‘not unlikely’ if the contract were breached.

This test appeared to be upheld in the subsequent cases of H Parsons (Livestock) Ltd v Uttley Ingham and Co Ltd, Brown v KMR Services Ltd and Wesley Partners LLP v Withers LLP.

In H Parsons (Livestock) Ltd v Uttley Ingham and Co Ltd, the court clarified that so long as the type of loss is within the parties’ reasonable contemplation, the extent of it need not be.

Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas)

The Lords in this case seemingly attempted to limit the broad principles outlined in Hadley v Baxendale and the subsequent line of case law. They argued that parties do not assume responsibility for all associated losses following a breach. Instead, Lord Hoffmann stated that the importance should be placed on what the parties objectively intended.

In order to determine the extent of responsibility that may be assumed for a breach, the court suggested that the reasonable man test should be used, as per Satef-Huttenes Albertus Spa v Paloma Tercera Shipping Co SA (The Pegase).

Attorney General of the Virgin Islands v Global Water Associates Ltd

Lastly, we shall turn to the court’s latest refinement of the law. I think the most interesting thing about this case is it demonstrates how the courts themselves can err in applying fundamental tests in Contract Law, to the point where this case was appealed to the Privy Council.

In this case, the court rephrased the test of reasonable foreseeability by stating that recoverable loss must be reasonably foreseeable as a ‘serious possibility’. Even though this phrase differs from Lord Reid‘s statement in The Heron II that the loss must be ‘not unlikely’, it is argued here that there has been no change to the underlying principles of the law on remoteness of damages.

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Disclaimer:

The information provided in this blog post is based on the research I carried out for my law degree which I completed in 2020. I accept no responsibility for errors or omissions. Legal principles and interpretations may change over time, and the content presented here may not reflect the most current developments in UK contract law. This information is intended for general informational purposes only and should not be considered as legal advice or relied upon as a substitute for professional legal counsel. For the most up-to-date and accurate legal information or advice, it is advisable to consult with a qualified legal professional who is knowledgeable about the latest legal developments and can provide guidance specific to your situation.