Recoverable Damages from a Breach of Contract : The rule of Remoteness

6 October 2025 in Contract Lawyers | 7 min read | skip to FAQs

This article examines recoverable damages from a breach of contract and the rule of remoteness. When parties enter into a contract, they agree to adhere to the terms of the contract. If a party breaches these terms, the party who suffers loss from the breach is entitled to damages from the party who breached the contract. Damages constitute a monetary amount the party in breach must pay to the other party to compensate the other party for its loss. The purpose of damages is to restore the other party to the same position that the other party would have been in if not for the breach.

The Remoteness Rule

The remoteness rule was initially described in the English case of Hadley v Baxendale 1854. The rule is necessary to determine if the connection between the breach of the contract and the losses suffered are sufficiently linked to each other in order to award damages. If the breach and the loss are considered too remote, the remoteness test is failed, and the defendant is not liable for the plaintiff’s losses.

The Two Limbs of Hadley and Baxendale

Losses can be recovered as damages in the event that those losses are a direct result of the breach. If the losses are not a direct result of the breach such losses are considered to be consequential (also called indirect) and cannot be recovered as damages unless those consequential losses where within the contemplation of the parties at the time the contract was signed.

First Limb of the Remoteness Test

The first limb of the remoteness test refers to losses that arise directly from the breach of contract, for example, a freight company fails to deliver a product and thereby breaches the freight contract, the direct loss is the cost of an alternate freight company to deliver the product. The party not in breach is then restored to the position it would have been in, in the absence of the breach, that is it has possession of the product and the party in breach has effectively paid for the cost of the alternate freight company.

Second Limb of the Remoteness Test

The second limb of the remoteness test applies to the category of damages that fall outside of the first limb and are not a direct consequence of the breach. It involves the concept of contemplation of the parties at the time of signing the contract.

The focus of the second limb is based on the knowledge that the parties had at the time the contract was formed. If both parties contemplated the possibility of this loss occurring as a result of the contract breach, this limb is satisfied and the party not in breach is entitled to recover those losses. For example, if the freight company failed to deliver a product losses that are not direct may include damage to the product.  Therefore, such losses would not be recoverable because such losses are too remote, unless such losses were within the contemplation of the parties. If the product was perishable and the parties contemplated that any delay or failure to deliver may spoil the product then such losses would fall within the second limb and would be recoverable.

Consequential or Remote Losses

It follows that losses that are not direct or within the contemplation of the parties, as set out in the first or second limb of Hadley v Baxendale will not be recoverable by the party not in breach. In the case of Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR the Court found that a plaintiff cannot recover damages for their losses if they are considered too remote from the breach of contract. In this case, the court rejected a claim for extensive economic losses on the grounds that they were not direct and not reasonably within the contemplation of the parties at the time the contract was formed.

More Recent Case Law

The Victorian Court of Appeal applied a broader definition of consequential losses than in the case of Hadley v Baxendale. The Court found in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 (‘Peerless’), that consequential losses are ‘anything beyond the loss that every plaintiff in a like situation would suffer, such as lost profits or expenses incurred through breach’. The decision was adopted by the New South Wales Court of Appeal in Allianz v Waterbrook (2009) NSWCA 224.

The Important Role of Contract Drafting

To avoid any of the uncertainty that may arise from the determination of which losses may be recoverable from the breach of contract it is important that clauses defining which losses are recoverable are carefully drafted into any contract. The party required to perform under a contract will benefit from an exclusion of consequential loss clause. The party paying for and relying on the performance of the other party will benefit from a clearly drafted clause setting out which losses are recoverable and are not recoverable.

An exclusion of consequential loss clause should be drafted to clearly set out the intention of the parties and the losses which are within the contemplation of the parties.

The Western Australian Supreme Court held in the case of Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356 that any clause, including any clause regarding the exclusion or definition of consequential loss should be interpreted according to the natural and ordinary meaning of the words in the context of the entire contract.

Key Takeaways

1. A breach of contract that causes direct losses entitles the other party to recover those losses in the form of damages.
2. There may also be consequential, otherwise known as indirect losses, that the party is entitled to be compensated for.
3. These indirect losses resulting from the breach of contract may be recovered if they were within the contemplation of the parties or clearly defined in the contract.
4. Well drafted contracts that define what losses are recoverable to limit consequential loss are important. These clauses are referred to as limitation of liability clauses or exclusion of consequential loss clauses and should be drafted to clearly set out the intention of the parties and the losses which are within the contemplation of the parties.
5. Contemplation of the parties considers the knowledge that the parties had at the time of signing the contract. If both parties contemplated the possibility of this loss occurring as a result of the contract breach then the party not in breach is entitled to recover those losses.
6. If the potential consequential losses are not clearly defined in the contract they need to be assessed to determine if they were within the contemplation of the parties at the time of signing the contract. This is often a issue that the Court will consider.
7. Potential confusion regarding losses that may be recovered emphasises the need for properly drafted contracts that include clauses that define or limit the losses that may be recovered. This avoids future confusion and ambiguity should there be a breach of contract.
8. The rule of remoteness, as originally defined in Hadley and Baxendale, 1854, is a legal test that helps assess damages when there has been a breach of contract.
9. The rule of remoteness has 2 limbs, firstly when the loss is a direct consequence of a breach of contract and secondly when there is not a direct consequence of the breach. The second limb considers the concept of the losses within the contemplation of the parties at the time of signing the contract.

How Can BSM Sydney Lawyers assist you?

The contract lawyers at Brander Smith McKnight Sydney Lawyers have extensive experience in drafting contracts to mitigate against possible future problems and are experts in dealing with contract breaches and associated damages. BSM Sydney Lawyers will advocate for you, representing you in all aspects of negotiation and if required litigation. Our contract lawyers have over 30 years of experience in complex contract issues. BSM Lawyers offers a free 20-minute consultation to assess your individual matter.

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