Remedies, Causation and Remoteness — SQE1 FLK1 Contract Law

Your caterer rings three weeks before the wedding. It is not coming. Nothing has been done, nothing has been paid, and the price you agreed was £6,000. The only caterer who can take the booking at that notice wants £9,000, and you pay it. How much can you recover from the first caterer? Not £9,000. £3,000. That single number is the whole of contract damages in miniature.

This is Remedies, Causation and Remoteness, the last topic in Contract, and the one that tests whether you can do more than spot a breach. Spotting the breach is the easy half. What follows is a chain. What loss, caused by what, how remote, how much, and could you have avoided it. Keep the couple in mind. We are coming back for them.

Here is the route. Damages first, and the three measures. Then how the court puts a figure on them. Then causation, then remoteness. Then the losses you can and cannot claim, then mitigation. Then agreed damages clauses and the penalty rule. Then specific performance and injunctions. Then indemnities and guarantees. And last, the rare cases where the court takes the defendant's profit instead of your loss.

Start with what damages are for. They are compensatory. The court puts you, so far as money can, in the position you would have been in if the contract had been performed. That is the expectation interest, or loss of bargain, and it is the primary measure. Your couple would have had their food and paid £6,000. They have the food and have paid £9,000. The bargain they lost is worth £3,000, and no more.

Two consequences. Damages for breach are yours as of right once loss is proved, not a matter of the court's discretion. And contract damages look forward, to performance, where tort damages look backward, to where you would have been if the wrong had never happened. Forward and backward. Keep those directions straight.

Three measures exist. Expectation loss, the primary one. Reliance loss, the expenditure wasted in reliance on the contract. And restitutionary interest, recovering a benefit conferred on the other side. Reliance is the fallback when profits are too speculative to prove. A film company could not show what a film would have earned after its leading actor pulled out. It recovered what it had spent instead, including money spent before he signed.

But reliance has a hard limit. If the defendant proves you would never have recouped that spending even with perfect performance, you do not get it. Reliance will not rescue you from a bad bargain. And you must elect. A bakery would have made £8,000 of extra profit on an oven that never came, having spent £5,000 preparing for it. It cannot have both, because the profit figure already assumed the spending.

How does the court put a figure on it? Where there is an available market, the measure is the difference between the contract price and the market price at the date of breach. For sale of goods that is codified: s 51(3) of the Sale of Goods Act 1979 for the buyer, s 50(3) for the seller. Breach date is the general rule, but it is not mechanical, and the court can depart from it to do justice.

Now defective performance. Two ways to measure it. The cost of putting the defect right, or the difference in value between what was promised and what you got. In Ruxley Electronics and Construction Ltd v Forsyth, a swimming pool was built shallower than the contract specified. Rebuilding it would have cost £21,560. The difference in value was nil, because the pool was perfectly usable.

So what was awarded? Not the rebuilding cost, which was disproportionate. Not nothing, either. £2,500 for loss of amenity. Where the cost of cure is out of all proportion to the benefit it buys, the court turns to the difference in value. Or to a modest sum for the amenity lost. And always ask whether the claimant really intends to carry out the cure.

Causation next, and it catches people out. Proving a breach is not enough. You must show the breach caused the loss, and the test is but for. Try one. A security company promises a guard at a warehouse every night, and one night sends nobody. That night a river bursts its banks and £200,000 of stock is destroyed. Nothing a guard could have done would have saved any of it. Liable, or not?

Not liable. The breach and the loss merely coincided in time, and that is not causation. Then there is the intervening act, novus actus interveniens, which can break the chain. An unreasonable act by the claimant, an unforeseeable act by a third party, or an unforeseeable natural event.

Foreseeable acts do not break it. A contractor fits ordinary doors where the contract called for fire doors. Six months later somebody sets fire to the ground floor, and it runs up through the building. Arson, and still no break in the chain, because fire is the very thing the doors were there to contain. And the breach need only be an effective cause, not the sole one.

Remoteness now. Causation asks whether the breach produced the loss. Remoteness asks whether the law will make the defendant pay for it. The rule is Hadley v Baxendale, from 1854, and it has two limbs. First limb: loss arising naturally, in the usual course of things, from the breach. Second limb: loss both parties may reasonably be supposed to have had in contemplation when they contracted, as the probable result of breaking it.

The difference between them is knowledge. The first limb runs on imputed knowledge, what a reasonable person would know anyway. The second needs actual knowledge of the special circumstances, communicated at or before the time of contracting. Not later. Telling your supplier about the unusually profitable sub-sale after signing does you no good.

Watch it work. A laundry orders an industrial boiler, telling the supplier it wants it for immediate use in its business. Delivery is five months late. The laundry loses its ordinary laundering profits, and it also loses exceptional profits on some especially lucrative dyeing contracts with a government department, which the supplier knew nothing about. Which head is recoverable?

The ordinary profits only. That is Victoria Laundry v Newman Industries, from 1949. A supplier who knows the boiler is for immediate business use must contemplate lost ordinary profits during a delay, so those sit inside the first limb. The government contracts were a special circumstance it had never been told about, so that head is gone.

Two refinements. A ship carrying sugar arrived late, the market had fallen meanwhile, and the loss was recoverable as within the parties' reasonable contemplation. The phrase used was not unlikely, a higher bar than the reasonably foreseeable test in tort. And where a time-chartered ship was returned late, the charterer paid only the difference in rates over the overrun period. Had it assumed responsibility for more? Lord Hoffmann thought not.

What can you actually claim? Financial loss above all, ordinary lost profits and, where they are within contemplation, exceptional ones. Wasted expenditure. Physical damage to property. Cost of cure, subject to reasonableness. And loss of a chance: a contestant shut out of the final selection of a beauty competition, one of fifty finalists for twelve prizes, recovered for the chance she lost. It must be real and substantial, and the award is discounted.

Mental distress is different. The general rule is that damages for distress, disappointment and injured feelings are not recoverable in contract. An employee dismissed in a humiliating manner recovered nothing for his injured feelings. Contract law protects economic interests, not emotional wellbeing. Then come two exceptions.

First, where the very object of the contract was pleasure, enjoyment or peace of mind. A solicitor booked a holiday sold as a house party. It was nothing of the sort, and he recovered for the disappointment itself. Second, and wider. A surveyor asked specifically to investigate aircraft noise reported none. Distress damages were available because a major or important object of the contract was to give pleasure or prevent distress. It need not be the only object.

Mitigation. You must take reasonable steps to reduce your loss, and you cannot recover what you could have avoided. Strictly it is not a duty, because nobody can sue you for failing. It is a limit on recovery. And the standard is not high. No extraordinary steps, no unreasonable expense, no judging with hindsight.

Two points that win marks. The burden of proving a failure to mitigate sits on the defendant, not on you. And reasonable expenses of mitigating are recoverable even where the mitigation fails. Your couple took the only caterer who could do the job at three weeks' notice. Nobody could call that unreasonable, so the whole £3,000 stands.

But mitigation cuts both ways. If your step produces a benefit, it comes off the loss. A power company replaced defective turbines with better ones, and the savings exceeded what the replacements cost. It recovered nothing for their price. Your true net loss. No more.

Now agreed damages. A liquidated damages clause fixes in advance what is payable on breach, and if enforceable you recover that sum whatever your actual loss turns out to be. The old test asked whether it was a genuine pre-estimate of loss, and the label the parties chose was never conclusive.

That test has gone. In Cavendish Square v Makdessi, from 2015, the Supreme Court reformulated it. Ask whether the clause imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in enforcement of the primary obligation. That interest must go beyond simply being compensated.

The companion appeal makes it concrete. An £85 charge for overstaying in a car park was not a penalty. The operator had a legitimate interest in managing the car park efficiently, not merely in deterring breach. And a penalty clause is simply struck out. You then prove your actual loss in the ordinary way.

One more on these clauses. Terminate before the work is finished, and a liquidated damages clause for delay applies up to the date of termination and stops there. After that the innocent party claims general, unliquidated damages under ordinary principles.

Equitable remedies now, and two words govern them. Discretionary, and inadequate. Specific performance orders the defendant actually to perform. The court is never bound to grant it, and it is available only where damages would be an inadequate remedy. You must come with clean hands.

Where is it granted? Sales of land, almost always, because every piece of land is unique. Unique goods with no market substitute. Shares in a private company, where no market exists. Where is it refused? Personal service or employment, because the court will not compel one person to work for another.

Refused, too, where constant supervision would be needed. A tenant covenanted to keep a supermarket open in a shopping centre and closed it anyway. The House of Lords would not order it reopened. Such an order needs supervising for as long as it lasts. It forces the defendant to trade at a loss. And nobody can say cleanly whether it is being obeyed. Then the equitable bars. No consideration, unclean hands, delay, hardship.

Injunctions come in three shapes. Prohibitory, restraining a breach, which is how a restrictive covenant is enforced. Mandatory, compelling positive action, closer to specific performance and harder to obtain. And interim, a temporary order before trial to hold the position.

For interim relief the test is American Cyanamid v Ethicon, from 1975. Is there a serious question to be tried? Would damages be an adequate remedy for either side? Where does the balance of convenience lie? If all else is even, preserve the status quo. The claimant normally gives a cross-undertaking in damages.

Two creatures that get confused. An indemnity is a promise to compensate the other party for specified losses. It is a primary obligation, and its scope comes from its drafting. So it can cover losses far too remote to be damages. Its limitation period may run from the date the loss was suffered.

A guarantee is secondary. The guarantor answers for another's debt or default if that person fails to perform. Try one. If X does not pay, I will. Guarantee, or indemnity? Guarantee, because the liability is conditional on someone else's failure. And that matters, because s 4 of the Statute of Frauds 1677 requires a guarantee to be evidenced in writing and signed by the guarantor. Without writing it is unenforceable. Not void. Unenforceable.

One more guarantee rule. Vary the underlying obligation materially, without the guarantor's consent, and the guarantor is discharged altogether. Not reduced to the sum originally guaranteed. Released.

Last, the rare cases where the court looks at the defendant's gain instead of your loss. In Attorney General v Blake, a former intelligence officer published his memoirs in breach of a lifelong confidentiality undertaking, and no financial loss could be shown. He was ordered to account for the royalties. Exceptional, and only where ordinary remedies are inadequate and the claimant has a legitimate interest in preventing the profit.

Beside it sit negotiating damages: the fee you could reasonably have demanded to release the defendant from the obligation. The Supreme Court has confined those to breaches costing you a valuable asset created or protected by the right infringed, such as a restrictive covenant. Not a general escape from proving loss.

A word on how SQE1 tests all this. You will not be asked to recall case names or section numbers. You get a scenario, five answers, and one instruction: pick the best. So learn the rules. The names in this episode are memory pegs, nothing more.

If you keep only three. Hadley v Baxendale, for the two limbs that decide every remoteness question. Ruxley Electronics and Construction Ltd v Forsyth, for the pool, and a cure that costs out of all proportion to what it buys. And Cavendish Square v Makdessi, for the modern penalty test.

Four traps. One: you cannot have expectation and reliance for the same loss. Elect. Different heads of loss may use different measures, but the moment they overlap you are asking to be paid twice for the same money.

Two: assumption of responsibility has not replaced Hadley v Baxendale. Apply the two limbs as your primary test, and treat assumption of responsibility as an additional consideration, mostly in commercial shipping and commodity cases. The conventional approach remains the starting point.

Three: a penalty clause does not destroy the claim. It is struck out, and you go on to prove your actual loss in the ordinary way. Four: the label on the document decides nothing. A paper headed guarantee may be an indemnity. Ask whether the liability is truly secondary, conditional on someone else's default, or primary.

Quick check. A coach operator sends a coach to a garage for an engine overhaul, telling the garage it is one of the vehicles it runs on its daily services. The garage returns it three weeks late. Over those weeks the operator loses £9,000 of ordinary takings. It also turns down a one-off contract to move a film crew, worth £25,000 of profit, which it had never mentioned to the garage.

What can it recover? Three candidate answers. One: both sums, because each followed directly from the garage keeping the coach too long. Two: the £9,000 of ordinary takings, but not the £25,000 the film contract would have earned. Three: both sums, with the £25,000 reduced to reflect the chance the film contract might have fallen through. Pause if you want a moment.

The answer is two. A garage told it is overhauling a coach used on daily services must contemplate lost ordinary takings while the vehicle is off the road. First limb. The film contract was a special circumstance the garage knew nothing about, so it falls outside both limbs.

Why the others fail. Option one treats directness as the test, and it is not. A loss can follow inevitably from a breach and still be too remote, if it depends on circumstances the defendant knew nothing about. Option three offers a discount, but a head of loss that fails the remoteness test is not discounted. It is refused.

Five things to take away. One: damages are compensatory and look forward, which is why your couple recover £3,000 and not the £9,000 they had to pay. Two: causation is but for, and an intervening act breaks the chain only where it is unreasonable or unforeseeable.

Three: remoteness is two limbs, ordinary loss on imputed knowledge, special loss on actual knowledge at the time of contracting. Four: cost of cure gives way to difference in value where it is out of all proportion, and mitigation caps what you recover. Five: equitable remedies are discretionary, and you reach them only where damages will not do.

That is the end of Contract. Next time, a new subject: Tort.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.