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What is Causation in Australian Contract Law?

An Overview on Causation in Australian Contract Law

Law may be viewed as a “fact-orientated system” of rules that regulate human and social behaviour (Weber, 2009, p. 118). The application of causation in law is “based on facts” and liability is based on performed acts (Weber, 2009, p. 118). To establish liability, causation must also be found.

There are differences of opinion on what constitutes causation. While causation may not be controversial in many contract cases, legal scholars share a view that the substantive theory of causation is regarded as one of the “most difficult, but ubiquitous issues” in contract law (Edelman, 2015, p. 20). Notwithstanding, causation has a practical effect in limiting the award of damages in contract law by questioning the causal relationship between the breach and loss claimed (Paterson & Robertson, 2020).

In this article, we address the frequently asked questions about causation in Australian Contract Law:

What is Causation in Contract Law?

To recover damages for a breach of contract, a causal connection is required between the breach and the loss claimed. The plaintiff carries the onus of showing that the loss and damages claimed for, on the balance of probabilities, is the proper causal connection (Seddon & Bigwood, 2023). Often, in contractual disputes, causal connection can be established by applying the but-for test.

The but-for test is a counterfactual inquiry that requires comparing “between what happened following the defendant’s breach and what would otherwise have happened” (Hamer, 1999, p. 559). Two relevant questions also arise in the application of the but-for test. The first is, what constitutes a relevant legal cause, and secondly, what is necessary to legally prove causation (Weber, 2009).

In answering these broad inquiries, the law can “choose the character” that causal relations should have and establish its own epistemology on causal relations (Stapleton, 2015, p. 701). Stapleton (2015) describes that the law is not constrained by the “metaphysical disputes about the concept of ‘causation’” and that “it is free to choose what character relations” and events may be described “as causal relations” (p. 702).

Read More: What Are Damages in Australian Contract Law?” provides a broad overview on the types of damages that can be awarded in contract law.

What is the common sense approach?

Legal scholars commonly claim that the causal inquiry is a “question of fact, not law” (Carter, 2018, p. 807). When this idea is examined closely, differences emerge amongst scholars on the thematic approach. Carter (2018) claims that causal theory is “not concerned with philosophic speculation but is only concerned with ordinary everyday life, thoughts and expressions” (p. 807). This represents a practical application of whether as a matter of “ordinary common sense and experience”, a breach is “so connected with the plaintiff’s loss (Carter, 2018, p. 807). Others characterise this approach as “applying the criteria of common sense, rather than those of logic, philosophy or science” (Seddon & Bigwood, 2023, para 23.35).

Is causation a metaphysical inquiry?

There is divergence amongst legal scholars on the relevance of a common-sense approach in causal theory. Legal scholars criticise the common-sense approach by claiming it influences the “judge or jury to reason by reference to unstated premises” and to assert as “common, a conclusion that is often highly contested” (Edelman, 2015, p. 20). Further, causal theory is claimed as not being a question of fact, but rather, a metaphysical question because causal theory raises hypothetical questions of counterfactuals (Edelman, 2015).

If counterfactuals are accepted as being an important part of causal theory, then “it is possible to see a considerable number of circumstances…” (Edelman, 2015, p. 20). Therefore, causal theory requires investigating the relationships required before “an outcome (O) is caused by an event (E).” (Edelman, 2015, p. 20). In particular, causal theory requires the “hypothetical prediction from a time immediately prior to the defendant’s breach”, and is premised on a hypothetical counterfactual that the defendant did not commit the breach, when they actually did (Hamer, 1999, p. 560). This is a metaphysical commitment.

What is the “But For” test?

The ‘but-for’ counterfactual test asks the predictive question whether a plaintiff would have suffered the loss but for the defendant’s breach. The implication of the but-for test is described as “if the loss in question would have occurred even if there had been no breach of contract, that breach cannot be regarded as its cause” (Seddon & Bigwood, 2023, para. 23.35).

Put simply, “an act is a cause of the result if the result would not have happened but for the result” (Weber, 2009, p. 122). Others characterise the test as an inquiry of the “counterfactual and informed by hindsight” (Stapleton, 2015, p. 705). It also reflects a metaphysical element about the “law’s interest in how the phenomenon would have been prevented” (Stapleton, 2015, p. 705). 

The but-for test compares two states of affairs. There is a comparison between the “actual state of affairs” with a “hypothetical or counterfactual state of affairs” (Hamer, 1999, p. 567). The counterfactual state of affairs concerns what may “have happened if the defendant had not committed the breach” (Hamer, 1999, p. 567). Therefore, it is a contrastive test between the “actual static state” and the “hypothetical counterfactual world” (Stapleton, 2015, p. 705).

It examines “what happened in the actual world” and what may have happened in the absence of the defendant’s alleged wrongful breach (Stapleton, 2015, 706). This “hypothetical no-breach world” reverses the plaintiff’s alleged breach to investigate whether causal connection can still be established (Stapleton, 2015, p. 705). This investigation compares the hypothetical and the actual, “completely equal in their respective starting points” distinguished only by the “but for” act (Weber, 2009, p. 122).

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What is a Counterfactual?

In causal theory, the counterfactual test requires “an ability to specify some definite possible world” (Schaffer, 2010, p. 298). The counterfactual can be described as comparing between “the actual world and the hypothetical counterfactual world” (Stapleton, 2015, p. 705).  Others agree that it is a comparison between “the factual, the real sequence of events” with the counterfactual (Weber, 2009, p. 122).

Therefore, the common thread amongst counterfactuals is that causal claims “can be explained in terms of counterfactual conditionals of the form “If A had not occurred, C would not have occurred” (Heebee & Menzies, 2024, p. 1). David Lewis (1973) aptly describes counterfactual analysis as “something that makes a difference, and the difference it makes must be different from what would have happened without it” (p. 161).

However, a question arises on the appropriate selection of the possible world, and how it is distinguishable from the actual world. Possible world theory gained traction with the development of propositional and modal logic (Menzel, 2016, para 1). Distinguishing from possible worlds, the actual world that exists “does not enjoy a kind of privileged existence” (Menzel, 2016, para 2.1.2). Rather, the actual world is simply “our world, the world that we happen to inhabit” (Menzel, 2016, para 2.1.2).

The counterfactual world represents an equally possible world that differs in the “but for” act, and on what may have happened if the but-for act did not occur. It is a counterfactual world that is “non-backtracking” and holds “the past fixed up until the time (or just before the time) at which the counterfactual’s antecedent is supposed to obtain” (Heebee & Menzies, 2024, para 1.1). Therefore, the actual world’s “laws of nature” are also adopted in the counterfactual world but differ in some particular fact (Heebee & Menzies, 2024, para 1.2).

By contrasting the actual and the counterfactual, it assists with analysing and evaluating the facts in the actual world by exploring the effects if a particular event was not present in the counterfactual world (Stapleton, 2015).

Bibliography

  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Edelmen, J. 2015. Unnecessary Causation. Australian Law Journal, 89(1), 20-30.
  • Hamer, D. (1999). Chance Would Be A Fine Thing: Proof of Causation and Quantum in an Unpredictable World. Melbourne University Law Review, 23(3), 557-634.
  • Heebee, H & Menzies, P. (2024). Counterfactual Theories of Causation. The Stanford Encyclopedia of Philosophy., https://plato.stanford.edu/entries/causation-counterfactual/
  • Lewis, D. 1973. Causation, Journal of Philosophy, 70, 556–567.
  • Menzel, C.(2016). Possible Worlds. The Stanford Encyclopedia of Philosophy. https://plato.stanford.edu/entries/possible-worlds/.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Schaffer, J. (2010). Contrastive Causation in the Law. Legal Theory, 16(4), 259-297.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.
  • Stapleton, J. (2015). An ‘Extended But-For’ Test for the Causal Relation in the Law of Obligations, Oxford Journal of Legal Studies, 35(4), 697-726.
  • Weber, H. (2009). The ‘But For’ Test and Other Devices – The Role of Hypothetical Events in the Law, Historical Social Research, 34(2), 118-128.

Implied Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Express Terms | Consideration | Intention to Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Privity of Contract | Classification of Terms | Contract Law (Theories) | Remoteness | Damages |

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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