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What is Remoteness in Australian Contract Law?

An Overview on Remoteness in Australian Contract Law

In Australian contract law, loss caused by a breach is a “necessary, but not a sufficient, prerequisite to the recovery for damages” (Seddon & Bigwood, 2023, para 23.39). The concept of remoteness acts as an important legal constraint on a plaintiff’s access to recovery and reflects the notion that “a line must be drawn somewhere” to limit contractual liability (Tettenborn, 2007; Cartwright, 1996, p. 488). Otherwise, liability based purely on causal chain may lead to an indeterminate but real consequence of having “no beginning or end” (Seddon & Bigwood, 2023, para 23.39).

Generally, for a loss to be recoverable, a plaintiff must show that their loss is not remote (Paterson & Robertson, 2020). Even if causation is established, remoteness limits a defendant’s liability caused by their breach (Paterson & Robertson, 2020). A loss will not be recoverable if a plaintiff’s loss is too remote (Carter, 2018). The inquiry on remoteness is ultimately a question of fact and law (Carter, 2018).

In this article, we address the frequently asked questions regarding remoteness in Australian contract law:

What is the remoteness rule in Hadley v Baxendale?

Whether a loss is too remote for a plaintiff to claim is a rule laid down in the 170-year-old English case of Hadley v Baxendale (1984) 9 Exch 341 (“Hadley v Baxendale”). It was a decision “originally devised to provide direction to jurors deciding on damages awards” (Harris, 2011, p. 124). While the rule can be interpreted as giving effect to the contracting parties’ “allocation of risk” on potential losses when a contract is made, the inquiry is not performed with “mathematically precise” formulas (Robertson, 2008, p. 172; Cartwright, 1996, p. 488).  Rather, the conventional view on remoteness may be broadly framed as “whether the defendant implicitly undertook responsibility for the loss in question at the time the contract was made” (Robertson, 2008, p. 172).

Notwithstanding, legal scholars have cast doubt on the conventional view of remoteness. Whether remoteness properly reflects the parties’ allocation of risks is questionable as, in practice, “contractual agreements often say nothing about the consequences of breach” (Robertson, 2020, p. 176). Instead, in actuality, business people and commercial endeavours often view contracts with optimism as an instrument documenting their intended performance of “their contractual obligations,” rather than engage in deep contemplative exercise of potential breaches and culpability (Robertson, 2008, p. 176). Notably, the English case of Hadley v Baxendale has been adopted in various High Court decisions in Australia. In Hadley v Baxendale, Lord Alderman stated the original principle on remoteness:

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”

Albeit one rule, the rule is generally separated into two separate tests or limbs. The first limb relates to losses that naturally arises “according to the usual course of things” (Carter, 2018, p. 809). The second limb relates to losses as “may reasonably have been supposed to have been in the contemplation of the parties” (Paterson & Robertson, 2020, p. 570).

What is the first limb of the rule in Hadley v Baxendale?

Under the first limb in Hadley v Baxendale, loss is reflective of “conventional” losses that flow “according to the usual course of things” from a defendant’s breach (Carter, 2018, p. 811). That is, the kind or type of losses should flow as other “similarly placed plaintiffs,” and this may depend on whether “a reasonable person would have realised that such a loss was likely to occur as a usual consequence” (Carter, 2018, p. 809; Seddon & Bigwood, 2023, para 23.39).

It is suggested when applying the first limb, the “plaintiff is entitled to assume that the defendant has knowledge of ‘ordinary risks” (Cartwright, 1996, p. 491).  Ultimately, this position reflects the conventional view that a reasonable defendant is assumed to have accepted a prescribed set of allocation of risks within a given context. However, the first limb may also be criticised as being indeterminate and imprecise (Harris, 2011). The term, “usual course of things”, can inherit different meanings depending on “different contexts and relationships” (Harris, 2011, p.124).

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What is the second limb of the rule Hadley v Baxendale?

If a loss does not occur within the usual course of things, then the plaintiff may also rely on the second limb of the rule in Hadley v Baxendale. The second rule focuses on “knowledge actually possessed by the defendant” (Carter, 2018, p. 814). Based on a defendant’s possessed knowledge, the inquiry “focuses on the types of loss that a reasonable person would have contemplated…” (Robertson, 2008, p. 178). Therefore, the “test allows recovery of the losses which were in the defendant’s contemplation” (Cartwright, 1996, p. 507).

By substituting actual parties with “reasonable person in their positions”, the test of reasonable contemplation becomes a counterfactual inquiry (Robertson, 2008, p. 178). The counterfactual inquiry assumes that a “reasonable person has engaged in a process of contemplation” even though the actual defendant “is unlikely to have engaged” in the same exercise (Robertson, 2020, (p. 178). This is also notwithstanding the reality that “in most cases contracting parties do not turn their minds to this question because they contract in the expectation that they will perform” (Paterson & Robertson, 2020, p. 178).

What is the rationale for a remoteness rule?

There are competing views on the remoteness rule’s rationale. Amongst legal scholars, there is “increasing support in the contract literature” that the remoteness rule may be interpreted as “giving effect to the implicit allocation of risk made by the parties under their contract” (Paterson & Robertson, 2020, p. 642; Robertson, 2008, p. 172). Similarly, the function of risk allocation when applying remoteness can be described as “the price which the parties have agreed upon as representing the value of goods or services being bought is calculated in the expectations of things turning out normally.” (Adhar, 1994, p. 60). Therefore, abnormality and unforeseeable are not priced in, unless contemplated. Otherwise, it would be unjust for a party to a breach to not be given an “opportunity to make an informed decision” about a potential loss in circumstances when a reasonable person could “not have contemplated at the time of making the contract” (Robertson, 2008, p. 181).

There is also an alternative view that claims the Hadley v Baxendale rule is a policy device for the judiciary. That is, remoteness operates in practice to achieve “desirable policy outcomes” by “disguising substantive principles in another form” (Harris, 2011, p. 128). Rather than being a transparent toolkit, contemporary application of remoteness could be interpreted as a “kind of camouflage” that does not expose the “real reasons underpinning conclusions in the case law” (Harris, 2011, p. 128).

Bibliography

  • Adhar, R. (1994). Remoteness, ‘Ritual Incantation’ and the Future of Hadley v Baxendale: Reflections from New Zealand. Journal of Contract Law, 7, 53-72.
  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Cartwright. (1996). Remoteness of Damage in Contract and Tort: A Reconsideration. Cambridge Law Journal, 55(3), 488-514.
  • Harris, M. (2011) Fairness and Remoteness of Damage in Contract Law: A Lexical Ordering Approach. Journal of Contract Law, 28, 122-149.
  • Robertson, A. (2008). The Basis of the Remoteness Rule in Contract. Legal Studies, 28(2), 172-196.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.
  • Tettenborn, A. (2007). Hadley v Baxendale Foreseeability: a Principle Beyond Its Sell-by Date?, Journal of Contract Law, 23, 120-147.

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) | Causation | Damages |

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

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