Too Remote? Clarification of the Principle of Remoteness of Damages

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 [2010] EWHC 542 addresses the confusion surrounding the principle of remoteness of damages and has clarified the principles under current case law.

Background

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...