Date: Wed, 9 Feb 2005 13:33:31 -0500

From: Jason Neyers

Subject: Remoteness

Dear Colleagues:

I guess I am partial to the Pothier view (as described by Robert) since I see contract as an agreed upon transfer of one's entitlement to another. Since it is a consensual two-sided exchange one has to examine the terms of the agreement made between the parties. What H v B seems to say is that one is entitled to the thing promised and the ordinary use of the thing since knowledge of these are shared between the parties and must form the basis of the exchange. In my mind, therefore, the rule is not so much a bargaining over damages but rather over shared use. If you have a use that is subjective and not shared then it is not really part of the exchange and therefore not compensable. In order to make it part of the two-sided exchange, the information of the special use must be communicated and accepted by the other side. Thus, a collateral benefit is that the rule encourages disclosure of the risk of harm but this is not its purpose -- rather its purpose is to make concrete the two-sided exchange nature of contract.

After the ordinary/special aspect and the timing aspect of the contract remoteness rule are taken into account, I am not sure that there is much difference between the reasonably foreseeable requirement of tort and the reasonable contemplation requirement of contract (despite the views of Lord Reid, who I do not really think understood the reasonable part of reasonable foreseeability).

Cheers,

Robert Stevens wrote:

The HL decision in Jackson v RBS that Jason mentioned yesterday does not take the law on remoteness very much further. However, it has made me think again about remoteness in contract damages.

In the tort of negligence, it is possible to justify a rule which says that only reasonably foreseeable harm is recoverable as required by the fault principle. The defendant is only at fault in relation to the loss which was a reasonably foreseeable consequence of his actions (cf Wagon Mound (No 1)).

Where a (strict) contractual obligation is breached, requiring the loss to be within the reasonable contemplation of the defendant as a serious possibility at the time of contracting, cannot be justified by appealing to the fault principle. The duty breached is strict. As between the party in breach of contract and the innocent party who should bear the unforeseeable loss? Stating that it is 'fair' that the innocent party does so doesn't provide an explanation.

It may be that the remoteness rule in contract serves the useful aim of encouraging disclosure of the risk of harm ("I should warn you that I don't have a spare shaft for my mill and you mustn't be late"). But this cannot be a sufficient justification for the rule as it applies where the claimant doesn't know of the unusual loss he might suffer (ie where he has nothing to disclose). Disallowing the recovery of loss which could not be foreseen by either party cannot be justified by a policy in favour of disclosure.

It could be argued that the remoteness rule encourages people to contract as they know they are not entering into open-ended obligations to pay unlimited damages. On the other hand, it could be said to discourage bargaining as you may be forced to bear a large loss due to the deliberate breach of the counter-party. There is no such thing as a free lunch - someone has to bear the loss.

Another explanation comes from Pothier (whose formulation of the rule was indirectly the source for the formulation in Hadley v Baxendale). He said that only losses within the defendant's reasonable contemplation could be recovered as it was only those which the defendant could be considered to have consented to be liable for. However, is it sensible to speak of the defendant only having accepted the risk of having to pay for foreseeable damages? The parties bargain for performance, not damages and it is no longer usual to attempt to justify contractual damages as being what the parties bargained for (cf Holmes). Does the fact that I know you might suffer a particular loss as a result of my breach of contract mean that I am consenting to make good that loss if I breach the contract?

If the justifications for the remoteness rules in contract and the tort of negligence are different this may help us to explain why the content of those rules differ and how they inter-relate where liability is concurrent. Certainly the justification for the rule in WM (no 1) doesn't seem to apply to Hadley v Baxendale, I am just not sure what the appropriate justification for H v B is. Further which justification, if any, tells us the degree of probability with which the risk of harm must be reasonably contemplated? Not unlikely? Probable? Serious possibility?

Views?

--
Jason Neyers
January Term Director
Assistant Professor of Law
Faculty of Law
University of Western Ontario
N6A 3K7
(519) 661-2111 x. 88435

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