Table of Contents
In Short
- The legal test of remoteness limits which losses a party can claim after a contract breach.
- Your business is generally only liable for losses that were foreseeable and within the scope of responsibility when the contract was made.
- Use clear limitation of liability clauses to reduce legal risk and avoid unexpected claims.
Tips for Businesses
Include a tailored limitation of liability clause in every contract to cap your exposure and exclude certain loss types. Make sure the clause is reasonable and clearly worded. Don’t rely on legal arguments alone—monitor performance, communicate early, and get legal advice to help prevent breach claims.
Things can go wrong when you supply goods or services to other businesses. You might miss a delivery deadline, accidentally misuse intellectual property, provide a defective product, or fail to meet a key contractual obligation. If that happens and you breach the contract, your customer may seek damages. These claims can go far beyond the value of the contract and include wider losses that you never expected to cover. The remoteness of damage refers to a legal test used to determine whether the losses claimed by a party are too remote from the breach to be recoverable and could help limit the amount recoverable for the defendant’s breach. This article explores these principles and how you can contractually protect your business from risk and take steps to prevent challenging legal disputes and breach of contract claims.
What is Remoteness of Damage?
Damages aim to compensate the other party by putting them in the position they would have been in upon proper performance of the contract. The measure of damages in a claim is based on important principles such as causation, mitigation and remoteness.
Remoteness of damage is a critical principle to consider. A breach of contract may cause many consequences, but only some of them will be the legal responsibility of the breaching party. The law draws a line between losses that are what both parties contemplated and those that are too remote.
Legal Test
The traditional core test comes from the case of Hadley v Baxendale. Under this test, your business will only be liable for losses that were in the contemplation of both parties at the time of contracting. An economic loss will meet this threshold if it arises in the ordinary course of things or from special circumstances communicated to or known by both parties when the contract was made. These two categories are often referred to as imputed knowledge and actual knowledge. Notably, the test considers what was foreseeable upon contract formation, not the date of the breach.
Even if a loss is foreseeable, your business liability may be limited if the courts decide you did not assume responsibility for that kind of loss. The House of Lords in The Achilleas case established that courts must examine the contract as a whole and ask what losses the parties reasonably understood to be covered.
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In other words, foreseeability alone is not always enough. Your business will be liable if the loss is of a type that your company can reasonably be taken to have accepted responsibility for.
These principles can be complex, and you should seek legal advice if you need to understand how they may apply to your particular breach of contract scenario.
Which Steps Can You Take to Protect Your Business?
The principle of remoteness of damage may help protect suppliers from excessive claims. However, relying on legal arguments about remoteness after a dispute has arisen is risky, and disputes can be costly, stressful, and time-consuming.
It is, therefore, essential to manage contractual risk proactively, and you can do this by including a well-drafted limitation of liability clause in your contracts. This clause can help you in significant ways when it comes to liability.
Limitation Clauses
Limitation clauses must comply with legal rules, particularly the reasonableness test under the Unfair Contract Terms Act 1977. This test applies where your business relies on standard terms that the other party has not had a real opportunity to negotiate.
A well-drafted limitation of liability clause must be clear, reasonable and tailored to the circumstances of your business relationship. To give your business the most substantial legal protection, you should work with a commercial solicitor to ensure your contracts contain appropriate limitations of liability and that you are not agreeing to open-ended risk.
You should ensure that your business understands its obligations under each contract and carefully monitors performance. Keeping accurate records, communicating issues early, and resolving problems before they escalate can reduce the chance of disputes and limit your exposure if things go wrong.
Continue reading this article below the formKey Takeaways
If your business breaches a contract, the customer might try to claim damages for losses. However, the law limits what losses they can claim with principles such as the ‘remoteness of damages’. While this general principle may offer some protection, taking steps to prevent risk is vital. To reduce the risk of significant or unexpected claims, ensure your contracts include a clear limitation of liability clause that caps your liability and limits it to the type of losses you wish to exclude.
If your business needs legal advice on preventing contractual risks, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A damages claim is when a claimant asks a defendant’s business to pay money to make up for a loss they say you caused by breaching a contract. It is a legal way of claiming compensation for breaching a contract.
A limitation of liability clause is a part of your contract that limits how much money your business would have to pay if you breach the agreement. It can also state which types of losses your business will not cover. You should draft such provisions in a precise manner with your commercial background and risks in mind.
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