Contract Causation & Remoteness

Causation and Remoteness

The key principle of the law of damages /compensation is that the claimant should be put into the position in which he would have been, but for the breach in so far as money can so do.  This is limited by the requirement for causation and the principles of remoteness.  Causation covers causation in fact as adapted by further principles which place limits on what is characterised as cause at law, legal causation.

The principles of remoteness required that the loss must be such that it was or is deemed to have been, in the contemplation of the parties.  This latter principle of remoteness in a contract claim restricts the level of loss that might be recovered. It is narrower than the principle and concept of remoteness in a civil wrong claim.

The purpose of the rule is to limit breach of contract claims to losses and damages which are the immediate and natural consequences and the result of the breach. If all consequential and follow-on loss had to be compensated, then the parties would be the insurers of each other’s transactions.

The courts seek to provide a balance between the protection of the claimant’s expectations, while not unfairly prejudicing the defendant by surprising unquantifiable and unknown potential losses, which he could not reasonably have foreseen.

Causation

Damages may be recovered for loss which is caused by the breach of contract. Loss and damage which is not caused by the breach, cannot be recovered. In one sense, causation refers to the logical sequence of factual cause and effect. A distinction is drawn between being the cause of or merely the “occasion” for the claimant’s loss.

The defendant will be liable if he is the dominant or effective cause of loss, and has done more than merely given the opportunity for the loss to be suffered. An intervening act which could reasonably be expected to happen, will not break the chain of causation.

The claimant may need to call evidence by various experts, in order to calculate the consequential loss in the circumstances.  Expert witnesses may be called to give their expert assessments of what could or should have resulted, but for the breach.

In many cases, the calculation of what could or might have happened is difficult and conjectural. The courts will seek to act on the basis of what they determine to be most probable and reasonable in the circumstances.

The principles of remoteness in contract law are such that causation is rarely a significant issue.

The issue of “causation” is not as prominent in breach of contract cases as in tort /civil wrong cases.  Breach of contracts usually involves economic loss exclusively. In some cases, it may be accompanied by other losses such as personal injury or property damage. The tracing of economic loss to the breach is generally easier in a breach of contract case than in a tort case.

Causation and Intervening Factors

Where the breach is attributable to a new intervening force or factor, then the defendant will not be liable for the loss. The general principle is that an intervening act of a third party breaks the chain of “causation” or responsibility on the defendant’s part. If it can be fairly said that the third party ’s action has caused the loss, then the defendant will not be liable.

There are many instances where the third party “intervener’s action is entirely reasonable and foreseeable.  The defendant may have particular duties in the circumstances, the very essence of which are to protect against loss to that third party.  In many such cases, the chain of causation is not broken.

The claimant himself may be the person who has intervened, thereby causing the loss in some sense.  If the third-party has placed the claimant in a particular position in which he must take evasive action, then provided that he does not act unreasonably or fail to mitigate the damage suffered, the chain of causation will not be broken.

General Remoteness Rule

Remoteness of damages refers to the limiting point, beyond which damages which are attributable to the breach of contract, may not be recovered.  Damage or “knock on” loss beyond this point, is said to be too remote.

Damages recoverable are those which

• can be fairly and reasonably considered to arise naturally according to the usual course of things from the breach of the contract;
• can be reasonably supposed to have been in the contemplation of the parties at the time of the contract, as the probable result of the breach (together, the so called first limb); and
• arise from special circumstances communicated by the defendant to the claimant (the so-called second limb)

The claimant must prove his loss and prove that it falls within the above criteria.  He must show that it is more probable than not, that he would have behaved or acted in a particular way if he is to recover damages for the consequences of not being able to do so.

The loss recoverable is such as flows naturally from the breach. The position is measured as at the time when the contract is entered. It is sometimes said that the recoverable loss is such that it must naturally and directly arise as an immediate and necessary effect of the breach.

Loss Must Arise Naturally from Breach

Contract law is said to compensate for the loss which “arises naturally” out of or is the “probable” or direct consequence of the breach.  There is no entitlement to a complete indemnity for all losses actually suffered as a result of the breach, however, improbable or unpredictable.

The loss must be reasonably foreseeable as liable to result from the breach.  This depends on the knowledge of the parties at the relevant time or at least the knowledge of the party who committed the breach.  The party’s knowledge may be actual or imputed.  Everyone, as a reasonable person, is taken to know the ordinary course of things and accordingly what loss is liable to result from a breach of contract in that ordinary course.

A party is not generally liable for extraordinary profits, profits which are unknown to him, profits that are known to him and which he could not deal in the ordinary course of business. However, where a particular type of economic loss is in the contemplation of the defendant, the fact that its amount may be greater than that which was anticipated does not prevent recovery of the whole loss.

Hypothetical State of Mind

It is not necessary that the contract breaker has actually asked himself what loss is liable or likely to result.  It is often said that the parties contemplate performance, and not breach.  It is enough that he would, as a reasonable man have concluded, had he averted to it, that the loss in question is liable to result from the breach.

It is not necessary, given his state of knowledge, that the defendant could as a reasonable man, foresee that a breach would necessarily result in that loss.  It is enough if he could foresee it was likely to do so or that it was a “serious probability”, “real danger”, or is “on the cards”. Later cases have criticised these formulations.  It is said that “reasonable foreseeability” equates the contract rule with the tort / civil wrong rule.

The House of Lords has indicated that the above principles do not mean that every type of damage which is reasonably foreseeable ought to be considered as naturally (i.e. in the usual course of things) arising is to be supposed to be in the contemplation of the parties. Where the type of damage is plainly foreseeable as a real possibility but will occur only in a small minority of cases, it cannot be regarded as arising “in the usual course of things” or be supposed to be in the “contemplation of the parties”.

Formulations of Likelihood I

The parties are not taken to contemplate (for the purpose of recovery of damages), types of loss or damage which in the knowledge available to the defendant, would appear to him as only likely to occur in a small minority of cases. The loss in question must be of the type/ kind which the defendant when he made the contract ought to have realised was not unlikely to result from the breach.  The words “not unlikely” means a degree of probability considerably less than an even chance, but nevertheless not very unusual and easily foreseeable.

The contract breaker need not necessarily have asked himself what loss is liable to result from the breach.  Parties are unlikely to contemplate breach as such when they contemplate the performance of the contract.

The courts ask the question, whether, if he had considered the issue at the time, he would have concluded that the loss in question was a serious possibility, a real danger or “on the cards”. Although various forms of words are used to express the principle, none of them is entirely definitive.

Formulations of Likelihood II

The courts have criticised the “liable to result” formulation, on the basis that one would usually say that when a person foresees a very improbable result, he foresees that it is “liable” to happen. On this criticism, there is a wide gulf in the ordinary use of language, between saying that some event is “very likely” or “quite likely” to happen and saying that it is a “serious possibility”, a “real danger” or is “on the cards”.

The House of Lords rejected the colloquialism “on the cards” as too vague or even capable of denoting a most improbable or unlikely event.  The expression “serious possibility” or “real danger”, seemed more appropriate as correctly reflecting the requisite degree of probability.

What is sufficiently likely or certain, depends on the circumstances. Where physical injury or damage is within the contemplation of the parties, it is not too remote because the degree of physical injury or damage that in fact occurred, could not have been anticipated.

Particular Vulnerability of Innocent Party

Where the claimant lacks the means to mitigate loss, a greater loss than might otherwise have occurred may result.  Some cases hold that the defendant is not generally responsible for the claimant’s lack of means. However, other cases have taken different approaches.  The question will come down to the court’s interpretation of what would arise naturally in the course of things.

In commercial cases, the courts are less likely to impute possible financial difficulties or impecuniosity. However, where individual traders or consumers are involved, with lesser means, the courts may more readily impute foreseeability of these circumstances.

The ‘eggshell rule’ applies to those relatively few breach of contract cases, where physical injury or property damage arises as a possibility. Accordingly, where defective animal feed was supplied and there was a slight, but not a serious possibility, that the animals would become ill and die, the defendants were held to be liable.

Sufficient to Foresee Type of Loss

Provided that a particular type of loss may arise naturally, it is not necessary to show that the actual degree of the loss that in fact occurs, was contemplated.  The actual consequence may be more or less serious than could have been reasonably contemplated.

It is not necessary to show that the actual breach was within the contemplation of the parties.  It is enough that the particular type of loss is a natural consequence of that particular type of breach.  It is not necessary to show that the parties actually contemplated or thought about the matter.

The particular type of breach need not be foreseen.  The defendants are liable for breach of the contract irrespective of whether the breach is foreseeable.  However, the type of loss that arises naturally from that particular breach may be recovered, notwithstanding that the parties had not (and were not likely to have) adverted specifically to it

Knowledge of Ordinary Loss Imputed

The courts will impute knowledge to the defendant.  The business and profession of the parties and the circumstances will affect what will be imputed.  Where the defendant sells goods to a dealer in those goods, he is likely to be liable for loss of profits on resale. Reasonable businessmen are usually taken to understand the ordinary practices and exigencies of the other’s trade or business.

It is a question of the circumstances as to what one party knows about the activity of the other.  The simpler the activity, the more readily it will be inferred that the other has knowledge of it which might be reasonably known. However, where the defendant’s businesses are more complicated either, in the manner of organisation or modus operandi, the other party will be less readily assumed to be aware of it.

Where the claimant is an entirely self-contained profit earning unit, which produces products for a mass market, the defendant will be more readily assumed to be aware of the prospective loss of profits, than if the defendant supplies a specialist part only, that another incorporates in a final product.

Boundary of Ordinary and Special Loss

The loss that is imputed is that which may arise in the ordinary course of things.  Where a person knows that the other party is a dealer in particular goods, the loss of business profits by reason of the failure or delay in delivery will be in the defendant’s contemplation.  This damage is of a type ordinarily resulting from a breach of this type of contract. If such damage is in fact incurred, then the defendant will be liable.

In some cases, the nature of the subject matter of the contract or its terms may be such as to make it clear that the particular contract is being entered for the particular venture or transaction, or business. However, the fact that the defendant knows the general nature of the claimant’s business, does not necessarily deem him to know the nature of that business and its probable bearing on the loss, in consequence of a breach.                     

The defendant will be taken to have contemplated changes in the state of the market.  Where the default is in supply rather than in acceptance, the supplier will generally be taken to contemplate that there may not be a market in which the other party can acquire equivalent alternative goods and substitutes.

Special Knowledge I

What is reasonably foreseeable depends on the knowledge possessed by the parties at the time of the contract, or at least the party who committed the breach. Knowledge may be imputed or actual.   Every person, as a reasonable person is taken to know the ordinary course of things and consequently what losses are liable to result from a breach in that ordinary course.  He is deemed to know this, regardless of his state of knowledge.

Where a party in breach has, in fact, particular knowledge of special circumstances, outside of the ordinary course of things, so that a breach in those circumstances would be liable to cause more loss, then he is liable for that loss.

The defendant must be shown to have the requisite knowledge at the time he entered the contract. A mere casual discussion of the circumstances or general knowledge may not be enough.  The fact that a particular circumstance was one of a number of possibilities, would not be enough.

Special Loss II

This alternative basis or “second limb”  covers additional or non-ordinary loss which could reasonably be supposed to be in the contemplation of the parties, as a probable result of the breach, in light of the special knowledge of the party who has breached the contract. The special knowledge may be such as to increase the level of damages otherwise recoverable.

Where the party in breach has knowledge of special circumstances as to losses which may occur outside of the ordinary course of things, he may have further liability for that other or additional loss.

The application of the rule will depend, to some extent on the defendant’s expertise and his knowledge of the claimant’s business. It will depend on the types of goods or services concerned, the price paid for them and the risks which the parties impliedly undertake.

Source of Knowledge

Under the “second limb”, by which the defendant bears the greater risk, there need not be a specific agreement that he is to bear the risk.  Once he has knowledge of the special circumstances, such that increased loss may result, from a breach he is likely to impliedly carry the risk.

It may not be enough that the defendant had actual knowledge of additional prospective loss.  On one view it is necessary to show that it has been communicated to him by the claimant in circumstances, such that he must have known that he contracted on the basis that the accepted the contract with special conditions and risks.  On this approach obtained casually, or from a stranger may not be enough.

There is a contrary approach which holds that a lesser degree of impression or knowledge on the part of the defendant will suffice.  Under this view, the defendant is liable if he enters a contract with knowledge of the special circumstances where it is reasonable to infer that a particular loss arising as a result of those special circumstances, is something which he must contemplate as a result of the breach.

Under either view, the parties must contemplate (if only in an imputed sense) that the defendant is taking the risk concerned, as a result of the special circumstances of which he has been made aware. The defendant need not specifically assent to taking the risk of additional liability nor must the matter be made part of the contract.  However, casual knowledge from a third party is unlikely to be enough.  If the information comes from the claimant, it will usually suffice and does not require a specific indication that the defendant is to take the risk.

Loss of Opportunity

A claim for loss of opportunity is commonly seen to be too speculative.  In some cases, where it is held to flow naturally from the breach, then in accordance with general principles, it may be allowed as a type (or head) of loss. In this case, the courts will seek to quantify the value of the lost chance, even though the assessment may be a matter of probability.

The loss must be sufficiently probable and likely, in order to allow recovery for the lost chance.  The chance must have a value of itself.  The principle does not allow assessment of the probability of unlikely losses.

Property

If a sub-sale by the buyer is actually known and within the contemplation of the parties, the damages are assessed by reference to it.    In contrast, a seller of land is less likely to contemplate that his buyer is likely to resell and make a profit.

This will rarely be the case in a contract for the sale of land.  Generally, a person selling land will assume that the buyer is using it for the purpose of his use, was rather than dealing in selling of land for profit.

Contrast with Other Claims

There are different rules of remoteness for breach of contract and civil wrongs. In a breach of contract claim, the remoteness rules are much more restrictive.  A more limited class of loss may be recovered by way of compensation.

Physical injury and property damage can arise in some breaches of contract, in which case many of the same causation and remoteness issues that arise in civil wrongs, will apply. Economic loss, by way of loss of profit without physical injury or damage, is treated more narrowly.  A claim for loss of profit involves a different factual analysis to physical or a property interest claim and more restrictive principles apply.