ACCA F4 - Corp and Business Law (ENG)

Part B The law of obligations  6: Breach of contract and remedies 93

Damages are a common law remedy intended to restore the party who has suffered loss to the same

position they would have been in if the contract had been performed. The two tests applied to a claim for

damages relate to remoteness of damage and measure of damages.

Damages form the main remedy in actions for breach of contract, but there are others: injunctions and

specific performance are the most important.

In a claim for damages the first issue is remoteness of damage. Here the courts consider how far down

the sequence of cause and effect the consequences of breach should be traced before they should be

ignored. Secondly, the court must decide how much money to award in respect of the breach and its

relevant consequences. This is the measure of damages.

4 Remoteness of damage

Remoteness of damage is tested by the two limbs of the rule in Hadley v Baxendale 1854.

 The first part of the rule states that the loss must arise either naturally from the breach or in a

manner which the parties may reasonably be supposed to have contemplated when making the

contract.

 The second part of the rule provides that a loss outside the usual course of events will only be

compensated if the exceptional circumstances which caused it were within the defendant's actual

or constructive knowledge when they made the contract.

Under the rule in Hadley v Baxendale damages may only be awarded in respect of loss as follows.

(a) (i) The loss must arise naturally from the breach.

(ii) The loss must arise in a manner which the parties may reasonably be supposed to have

contemplated, in making the contract, as the probable result of the breach of it.

(b) A loss outside the natural course of events will only be compensated if the exceptional

circumstances are within the defendant's knowledge when they made the contract.

Hadley v Baxendale 1854

The facts: The claimants owned a mill at Gloucester whose main crank shaft had broken. They made a

contract with the defendant for the transport of the broken shaft to Greenwich to serve as a pattern for

making a new shaft. Owing to neglect by the defendant, delivery was delayed and the mill was out of action

for a longer period. The defendant did not know that the mill would be idle during this interval. He was merely

aware that he had to transport a broken millshaft. The claimants claimed for loss of profits of the mill during

the period of delay.

Decision: Although the failure of the carrier to perform the contract promptly was the direct cause of the

stoppage of the mill for an unnecessarily long time, the claim must fail since the defendant did not know

that the mill would be idle until the new shaft was delivered. Moreover it was not a natural consequence of

delay in transport of a broken shaft that the mill would be out of action. The miller might have a spare.

The defendant is liable only if they knew of the special circumstances from which the abnormal

consequence of breach could arise.

Key term

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