Why the law limits recoverable loss
A party who makes a contract takes on the risk of failing to perform it, and the agreed price reflects the risks that party can see. It would be unfair to impose liability for consequences that party had no reason to expect when agreeing the price, because there was no opportunity to decline the contract, to charge more or to limit liability. The remoteness rule therefore ties liability to what the parties could have had in mind when they made the contract. A claimant who faces unusual risks can protect itself by telling the other party about them before the contract is concluded.
The two limbs of Hadley v Baxendale
In Hadley v Baxendale a mill stopped working because its crankshaft broke, and the carrier engaged to take the broken shaft to engineers in Greenwich, as a pattern for a new one, delivered it late. The mill owners claimed the profits lost while the mill stood idle. They failed, because the carrier had not been told that the mill had no spare shaft, and a carrier would not ordinarily expect a mill to stop altogether while a shaft was away. From that case the courts take two limbs.
- Losses arising naturally, in the usual course of things, from the breach. These are recoverable whatever the defendant actually knew, because any reasonable person in the defendant's position would have contemplated them.
- Losses arising from special circumstances outside the usual course of things. These are recoverable only if the defendant knew of those circumstances when the contract was made, so that the loss was within the contemplation of both parties.
Victoria Laundry v Newman Industries (1949) shows the two limbs working together. A boiler was delivered five months late. The laundry recovered the profits it would ordinarily have made from the extra capacity, because the supplier knew it was a laundry that needed the boiler for its business. It could not recover the profits of some exceptionally lucrative dyeing contracts, because the supplier had not been told about them.
In The Heron II (1969) the House of Lords explained that the loss must have been contemplated as not unlikely to result. That requires a higher degree of probability than the reasonable foreseeability test used in the tort of negligence, because contracting parties can allocate risks between themselves when they agree terms.
Type of loss, not its extent
If the type of loss was within the parties' contemplation, the claimant can recover it in full even if it turned out to be far larger than anyone expected. In Parsons v Uttley Ingham (1978) a supplier installed a pig food hopper with its ventilator sealed, the food went mouldy and many pigs died of disease. Some illness in the pigs was within contemplation as a result of feeding them bad food, so the loss of the pigs was recoverable although the particular disease and the scale of the loss were not contemplated.
A worked example
A printing firm orders a new press from a manufacturer for delivery on 1 March. When ordering, the firm tells the manufacturer that the press will replace its only working press. The press arrives a month late. During that month the firm loses the profit it would ordinarily have made from its regular printing work. Because the manufacturer was told, when the contract was made, that this press would replace the firm's only working press, loss of the firm's ordinary printing profit during the delay was within both parties' contemplation and is recoverable. Compare Hadley v Baxendale, where the carrier was not told that the mill had no spare shaft.
In the same month the firm also loses a highly profitable contract to print a government report, which it had not mentioned to the manufacturer. That loss arises from special circumstances the manufacturer did not know about when the contract was made, so it is too remote. Change the facts so that the firm told the manufacturer about the government contract when it placed the order, and that loss falls within the second limb and is recoverable.
The traps SQE1 questions set
- Knowledge is tested at the time the contract was made. Telling the defendant about special circumstances after the contract was concluded, even before the breach, does not bring the loss within the second limb.
- The contract test is stricter than the tort test. A loss that was merely reasonably foreseeable may still be too remote in contract.
- If the type of loss was within contemplation, its full extent is recoverable even if it was unexpectedly large.
- Remoteness is a separate question from causation and from mitigation. A loss can pass the remoteness test and still be reduced because the claimant failed to take reasonable steps to limit it after the breach.
- In an unusual case the court may also ask whether the defendant can be taken to have assumed responsibility for the type of loss claimed (The Achilleas, 2008), but the ordinary starting point is the Hadley v Baxendale test.
A haulier contracts to deliver a machine to a factory by 1 June. A week after the contract is signed, the factory tells the haulier that it needs the machine to fulfil an unusually valuable export order. The machine arrives late and the factory loses the export order. Can the factory recover the profit it would have made on that order?
Show the answer
No. The profit on the export order arose from special circumstances, so it is recoverable only if the haulier knew of them when the contract was made. The factory told the haulier a week after the contract was signed, which is too late to bring that loss within the parties' contemplation. The factory may still recover losses that arise naturally from late delivery of the machine.
Sources
- Hadley v Baxendale (1854) 9 Exch 341
- Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528
- Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350
- H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791
- Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48
Law as at 6 October 2026.