Discuss rule as to remoteness of damage: "damages should be such as may fairly and reasonably be considered arising naturally from breach or as may reasonably be supposed to have been in contemplation of both parties."

The Rule Against Remoteness of Damage: The Two Branches of a Timeless Principle

Few rules in the law of contract have had as enduring an influence as the principle governing remoteness of damage. The rule directs that, upon a breach of contract, the party in default is not liable for every conceivable consequence of that breach — but only for such loss as falls within a defined zone of legal responsibility. The formula, as classically framed, is that damages must be such as may fairly and reasonably be considered arising naturally from the breach, or as may reasonably be supposed to have been in the contemplation of both parties at the time of contracting.

This is not merely a rule of calculation. It is, at its heart, a rule of fairness — a device by which the law protects the party who breaks a contract from bearing the entire cascade of misfortune that might follow, while ensuring that the innocent party is made whole for such loss as the defaulting party could, as a reasonable person, have anticipated.

The Source: Section 73 and Hadley v Baxendale

The principle is codified in Section 73 of the Indian Contract Act, 1872, which provides that the party who suffers by a breach is entitled to compensation for any loss or damage which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. The section explicitly declares that compensation shall not be given for any remote or indirect loss.

The statutory language closely follows the ruling of the Court of Exchequer in the celebrated English decision of Hadley v Baxendale (1854) 9 Ex 341. The facts are worth setting out, for they remain the permanent illustration of the rule. The plaintiffs were millers at Gloucester whose mill was brought to a standstill by a broken crankshaft. They engaged the defendant carriers to take the shaft to the manufacturer at Greenwich so that a new one could be made. The defendants delayed delivery through negligence. The plaintiffs claimed the profits lost during the period of stoppage. Alderson B, delivering the judgment of the court, denied the claim. The defendants had no knowledge that the mill's operations depended entirely on the delivery of that single shaft — it was equally probable that the millers had a spare. The loss of profits was therefore not a natural or contemplated result of the delay.

From this decision emerged the classic formulation, reproduced almost verbatim in Section 73: where two parties have made a contract which one of them has broken, the damages which the other party ought to receive should be either such as may fairly and reasonably be considered arising naturally, according to the usual course of things, from such breach itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.

The Two Branches Explained

The First Branch — General Damages: This limb addresses loss that flows from the normal, ordinary course of things as a natural consequence of the breach. The law presumes that reasonable parties understand the ordinary course of commerce in their field of dealing. As the House of Lords observed in Monarch Steamship Co Ltd v Karlshamns Oljefabriker AB (1949) AC 196, reasonable businessmen must be taken to understand the ordinary practices and exigencies of the other's trade or business — this general presumed knowledge is the foundation of liability under the first branch.

Consider Illustration (a) to Section 73: A contracts to sell and deliver fifty maunds of saltpetre to B at a certain price. A breaks his promise. B is entitled to receive the sum by which the contract price falls short of the price at which he could have obtained saltpetre of like quality in the market at the time of delivery. This is a direct, natural consequence of the breach — the kind of loss that arises in the great multitude of such cases, without any special communication of circumstances.

The Second Branch — Special Damages: The second limb extends liability to loss arising from special circumstances that fall outside the ordinary course of things — but only where those special circumstances were known to both parties at the time of contracting, so that the consequential loss was within their reasonable contemplation. In Simpson v London and North Western Railway Co (1876) 1 QBD 274, a manufacturer sent his samples by rail for exhibition at an agricultural show in Newcastle. The consignment note specifically mentioned that the goods "must be at Newcastle Monday certain." The samples arrived late and the show was missed. The court held the railway liable for the loss of profits at the show — the company's agent had actual knowledge of the purpose, and the probable consequence of delay was within the parties' contemplation.

By contrast, in Horne v Midland Railway Co (1873) LR 8 CP 131, shoe manufacturers conveying goods had informed the railway of the delivery deadline but had not disclosed the unusually high price they stood to receive under the contract with the French Army. The consignment was delayed and the consignee refused delivery. The court allowed only ordinary damages — the extraordinary loss arising from the special contract was not within the contemplation of the railway, who could not have anticipated it.

The Contemplation Test: Not Certainty, But Serious Possibility

A question of some subtlety arises: what degree of probability is needed before a loss can be said to have been "in the contemplation of both parties"? The courts have been at pains to clarify that the test is not one of certainty, nor even of probability in the sense of a mathematical likelihood greater than fifty percent.

The House of Lords addressed this squarely in Koufos v C Czarnikow Ltd (The Heron II) (1969) 1 AC 350. A chartered vessel deviated in breach of contract, causing a nine-day delay in the delivery of a cargo of sugar to Basrah. By the time the vessel arrived, market prices had fallen. The shipowner knew there was a market for sugar at Basrah and knew prices could fluctuate; what he did not know was that the charterer intended to sell immediately on arrival. The House of Lords allowed the claim. Lord Reid articulated the threshold: the loss need not be the probable result in the sense of being more likely than not to occur — it is enough that it was a result which was not unlikely, or that there was a serious possibility or real danger of its occurrence. This is a stricter test than mere foreseeability in tort — in contract, the law demands a higher degree of likelihood because the parties had the opportunity to disclose special risks at the time of contracting.

The Relationship Between the Two Branches

It is important to understand that the two branches are not watertight compartments — they are, in truth, two expressions of a single governing idea. As the Court of Appeal synthesised in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528, both branches rest upon the principle of reasonable foreseeability at the time of contracting. A laundry firm ordered a large boiler from the defendants, who delayed delivery. The plaintiffs claimed both ordinary loss of profits and the loss of highly lucrative dyeing contracts with the government. The court allowed the ordinary loss of profits — that was within the reasonable contemplation of a person who knew the boiler was for immediate commercial use — but disallowed the extraordinary profits on the government contracts, of which the defendants had no knowledge.

The first branch concerns what is known by imputation — what any reasonable person in the defendant's position would know about the ordinary consequences of breach in that type of transaction. The second branch concerns what is known by actual communication — the special facts brought to the defendant's notice so that an exceptional loss becomes foreseeable as a probable result. As the law stands, the defendant is not required to have contemplated the precise quantum of loss, or its exact manner of arising — it is enough that the type or kind of loss was within the reasonable contemplation of the parties.

Notice of Special Circumstances and Assumption of Risk

The second branch demands not merely knowledge, but a fair inference that the defendant was accepting the risk of the exceptional loss when entering the contract. A casual or offhand mention of special facts is not sufficient to attract liability; the circumstances must have been brought home to the defendant in such a manner as to permit a reasonable inference of acceptance of responsibility. In Kemp v Intasun Holidays Ltd (1987), a travel agent was told during booking that a customer's husband suffered occasionally from asthma — and the holiday accommodation turned out to be filthy and dusty, triggering an attack. The court held that this casual mention was insufficient to saddle the holiday company with liability for the medical consequences. The special circumstances must be communicated with clarity and deliberateness.

The Indian courts have adopted this principle faithfully. Illustration (l) to Section 73 provides a precise example: A, a builder, contracts to erect a house for B by the first of January, so that B may lease it to C, whom A is informed about. A builds the house so badly that it collapses before January. A is liable not only for the cost of rebuilding but also for the rent lost by B and the compensation B must pay C — because A was informed of the contract with C, and the consequences of his default were squarely within the parties' contemplation.

Illustration (i) is equally instructive: A delivers a machine to B, a carrier, to be conveyed without delay to A's mill, informing B that the mill is stopped for want of the machine. B unreasonably delays delivery and A loses a profitable Government contract. A is entitled to receive the average amount of profit that would have been made by the working of the mill during the period of delay — but not the loss caused by the loss of the Government contract, because that specific opportunity was not within B's contemplation.

Contract and Tort: A Purposeful Distinction

The rule of remoteness in contract is deliberately stricter than its counterpart in tort. In tort, the test is whether damage of the relevant type was reasonably foreseeable — even a slight risk of such damage will suffice. In contract, however, the standard is higher: the loss must have been a serious possibility or real danger at the time of contracting. This distinction is justified on a principled ground — parties to a contract have the opportunity, at the moment of formation, to disclose unusual risks and to allocate liability for them expressly or by implication. The party who fails to make such disclosure cannot later complain that the other was not warned of the exceptional consequences that might follow.

The Principle in Summary

The rule against remoteness of damage serves a purpose at once practical and philosophically sound. It draws a just boundary between the compensation that an innocent party deserves and the liability that a defaulting party ought fairly to bear. The party who breaks a contract is presumed to have contracted against the background of the ordinary state of affairs in that trade or business, and is bound by the natural consequences that flow therefrom. If more was at stake — if the loss that would result from breach would be graver, or would extend beyond ordinary expectations — then the other party bears the responsibility of disclosing those special circumstances so that the risk may be consciously accepted, priced into the contract, or guarded against by insurance. This reciprocal allocation of risks, as the authorities explain, is the true foundation of the rule — and it continues to govern the assessment of damages for breach of contract in India under Section 73 of the Indian Contract Act, with undiminished vitality.