Reasonably Contemplating Remoteness of Damages

Reasonably Contemplating Remoteness of Damages

November 23, 2020

By Brian Babcock

The basic rule of contract damages is that the type of loss must be “reasonably contemplated” by the parties at the time they entered into the contract. Otherwise, we say that they are “too remote”. A defendant’s potential exposure cannot be unlimited.

The courts have struggled to define what “reasonably contemplated” means for over 150 years, since this rule was stated in an early English decision. For business people to know what they can recover, or are responsible to pay in damages, there must be some consistency, and a theory which lawyers can use to advise them of their rights. Otherwise we are left with arbitrary results, and no one benefits from such uncertainty.

One thing that is clear is that there is no simple “verbal formula” or definition that we can quote to explain the law.

This leads to the courts saying that the facts must be considered through the lens of “policy considerations”. Another vague term that does not really give much clarity.

If the role of the principle of remoteness limiting damages is truly to prevent unfair surprises to defendants by avoiding unlimited liability for their breach of contract, we need a theory that people can understand.

One theory is presented by the British writer Sir Robin Cooke who suggests that the policy considerations include judges asking themselves these questions:

(i) What is the degree of likelihood of the damages?

(ii) What is the degree of directness of the causation?

(iii) The nature of the damages – to person, property or pure economic loss (in decreasing order of likely recovery)

(iv) The degree of culpability – deliberate or ‘grossly negligent’ acts attract greater damages than carelessness or technical breaches

(v) Whether the defendant had a reasonable opportunity to limit liability by inserting a contractual limit on liability (risk allocation)[1]

This theory appears to be somewhat consistent with Canadian cases. From reading those cases we add a few more observations:

  • Where the defendant has special knowledge of the plaintiff’s industry, there is likely to be wider liability
  • Where the defendant has specific knowledge of the plaintiff’s own plans or needs, there is likely to be wider liability
  • Where the defendant has professional expertise, there is likely to be wider liability
  • Where the contract involves an obvious “profit generator” aspect, there is likely to be wider liability. An example here would be a contract for the sale of Christmas toys, where late delivery, missing the Christmas shopping season, would result in greater losses[2]
  • Where the defendant charged a premium price, there is likely to be wider liability
  • On the other hand, where the transaction is a routine low cost transaction, there is likely to be more limited liability. Courier services would go out of business if they could not limit their liability, but in special cases, where timely delivery is vital and a premium is paid, wider liability has been found.
  • Who could have taken steps to prevent more easily? More economically? Our contract theory still is grounded in traditional theories of economic efficiency being paramount, so in the absence of explicit risk allocation, the risk may fall on the party who can best avoid it.

None of these observations reduces the test for what is “reasonably contemplated” into 25 words or less, but they do provide a framework to estimate your potential recovery, or your exposure.

 

[1]“Remoteness of Damafes and Judicial Discretion” (1978) 37 Cambridge LJ 288 quoted in Remedies Cases and Materials seventh edition (Emond Montgomery) at p. 13.

[2]    I am indebted to Lee Stuesser, founding Dean of the Bora Laskin School of Law at Lakehead University for this example, and for sharing his teaching notes with me.