Breach of contract
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Negotiation Anatomy™
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What happens when you don't do what you oughta.
Quelle domage
- Just because one party breaches the contract, it doesn’t mean the other suffers a loss.
- Just because one party suffers a loss, it doesn’t mean the other breached the contract.
For very sound reasons the law of contract imposes limitations (“causation”, “proximity” and “remoteness of damage”) on the damages a party may recover for breach of contract:
- Causation: The breach needs to be the operating cause of the innocent party’s loss (is that the causa sine qua non?);
- Remoteness: They need to have been the sorts of losses the parties reasonably contemplated might arise from a breach when they entered the contract – i.e. they need to be reasonably foreseeable - the “usual consequences” of a breach of contract.
These ordinary principles apply pragmatically to limit the damages a party must pay to what is reasonable for what that party was responsible.
Hadley v Baxendale
All summed up very nicely in the case of Hadley v Baxendale where Baron Alderson said:
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 breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., 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.
Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.
But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.
For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them.
Since Hadley
A bunch of garlanded cases, some involving laundry and others named after ships, have drummed out this original dicta. Chitty would summarise these as concluding that a loss is not too remote a consequence of breach if, at the time of contract, the consequence it was within their reasonable contemplation as a not-unlikely result of their breach.
Indemnity for breach of contract
In theory, these pragmatic considerations of proximity, causation and remoteness do not apply where you have provided an indemnity for your breach of contract. This is why lawyers FREAK OUT about indemnities. By an indemnity you agree to pay a sum on demand in a certain event. The only question becomes whether you paid the amount when it was demanded. Note, in theory:
- Causation: The question of whether the contract has been breached — usually the domain of the Queen’s Bench division — must be determined by the alleging indemnitor. Should that determination be wrong, do you have a counter-breach of contract? A restitutionary action for money had and received?
- Remoteness of damage: Because your indemnity payment is for all losses howsoever caused, whether direct or indirect ... (ad nauseam) you are essentially contracting out of the rules of remoteness of damage, to your own detriment. You can hardly claim loss of profits weren't within the parties reasonable contemplation when you have explicitly contemplated it.
Consequential loss
See: consequential loss
Indemnities
Compare with an Indemnity where one party agrees to be responsible for a loss the other suffers even when the first doesn’t breach the contract.