The principle of 'remoteness of damages' was articulated in Hadley v Baxendale [1843 All ER Rep 461] in 1853. It is a concept which has been widely debated, and to this day, remains somewhat ambiguous. However the recent case of Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd  EWHC 542 addresses the confusion surrounding the principle of remoteness of damages and has clarified the principles under current case law.
As mentioned above, it is Hadley v Baxendale which established the remoteness of damages test in contractual disputes, a test which remains the principal tenet of the law on damages in England and Wales. Under this principle the claimant is permitted to recover the following in the event of a contractual breach:
- Losses arising naturally, according to the normal course of things, from the breach of contract itself (direct loss); or
- Such loss as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as a probable result of the breach (consequential loss).
In essence, direct loss does not require a claimant to establish special knowledge, whereas consequential loss does. This actual knowledge of special circumstances is applicable when the loss which flows from the breach is greater than or different from the consequence arising out of normal circumstances. If it is to be argued the defendant had actual knowledge of such an atypical outcome, it must be established that that special knowledge was held at or prior to the formation of the contract.
The 2008 case of Transfield Shipping Inc v Mercator Shipping Inc [2008 UKHL 58] compounded confusion in respect of the principle of remoteness of damages, as the judgment appeared to establish a new legal test for remoteness. This shipping industry case involved the late redelivery of a vessel by 9 days. The claim was for damages of US$158,301.17. It was held that it would not have been the parties' intention that such a short delay would expose the charterers to such great pecuniary liability. The confusion arose from the varying approaches the judges took in formulating this judgment. In particular, Lord Hoffman and Lord Hope appeared to propose a new approach to the remoteness test, one which was intended to reflect the intentions of the contracting parties. In short, forseeability was held not always to be, in isolation, an appropriate approach in ascertaining remoteness.
Transfield was subsequently considered by the Court Of Appeal in Supershield Limited v Siemens Building technologies FE Limited  EWCA Civ 7 which involved liability for a flood which had damaged an office building. The case was dismissed on appeal, but the commentary on remoteness is illuminating. It was stated by Toulson LJ that Hadley v Baxendale remained the 'standard rule', but that there may be cases where the Court, having regard to the contract and the commercial background, may decide that the standard approach will not reflect the expectation or intention reasonably imputed to the parties.
He stated that:
"If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances".
This concept is somewhat complex. The notion that something that would not occur in ordinary circumstances yet is held to be foreseeable leaves a potential defendant exposed to a wide range of eventualities.
The recent case of Sylvia is widely considered to have clarified the law on remoteness of damages following these earlier cases.
By way of brief background, Sylvia was another shipping dispute which involved a claim for loss of profit on a cancelled sub charter. The case involved the appeal of a tribunal decision and the award arising thereunder.
Hamblen J addressed the confusion which shrouds the principle of remoteness of damages. He stated that it is important to make it clear that there is no new generally applicable legal test of remoteness in damages and that the orthodox approach under the first limb of Hadley v Baxendale, the direct loss approach, remains the general approach which will be applicable in the vast majority of cases and that it "works perfectly well". Hamblen reiterated the conclusions of the seminal textbook, Chitty on Contracts, that "there will seldom be 'any factual foundation for making a determination as to whether the defendant implicitly assumed responsibility for the risk in question'".
Hamblen did confirm that there may be scope, in unusual cases, in which the context, surrounding circumstances or general understanding of the relevant market may render it necessary to consider whether there has been an assumption of responsibility. This would only occur in rare cases where the general test resulted in unquantifiable liability or liability which would be contrary to market expectations.
Save for these rare instances, it is clear that the rules under Hadley v Baxendale will continue to apply. What remains less certain is whether Sylvia has addressed once and for all the confusion endemic in the remoteness of damages principle. Only time and subsequent case law will reveal this.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.