Remoteness of Damage, and the Duty to Mitigate

In one line

Two limits sit on every claim for damages: the loss must not be too remote, and the claimant must have done what he reasonably could to keep it down.

In the words a student can write in an exam: remoteness is governed by the two limbs of section 73 of the Indian Contract Act 1872, which enact the rules in Hadley v. Baxendale: recoverable loss is that which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from it, and "such compensation is not to be given for any remote and indirect loss or damage". Mitigation is governed by the Explanation to section 73, which requires "the means which existed of remedying the inconvenience caused by the non-performance of the contract" to be taken into account.

Why a line has to be drawn at all

Losses cascade. A carrier delivers a mill shaft a week late; the mill stands idle; its customers go elsewhere; the miller cannot pay his bank; the bank forecloses. Every one of those is, as a matter of fact, caused by the late delivery.

If the law made the carrier pay for all of it, no one would carry anything for a modest fee, because the potential liability would bear no relation to the price of the job. The parties would have to price for the worst customer they might ever have.

So the law fixes a point beyond which loss is not recoverable, and it chooses the point by asking what the parties can fairly be taken to have had in mind. A defendant is liable for what he could reasonably have contemplated, and not for what he could not.

Hadley v. Baxendale is the English decision in which that principle was stated in two rules, and section 73 enacts both. It is worth naming as the origin, and worth saying that in India the governing text is the section rather than the case.

Remoteness: the two limbs applied

Limb one: loss arising naturally, in the usual course of things

The loss any contract of this kind would ordinarily produce. No special knowledge is required, because the defendant is taken to have contemplated it from the nature of the transaction.

Examples: a buyer's loss on having to buy substitute goods at a higher market price; a seller's loss on reselling below the contract price; a printer's loss of ordinary printing work when his press is not delivered.

Limb two: loss the parties knew of at the time of contracting

Loss that is not ordinary, and is recoverable only if the parties knew, when they made the contract, that it was likely to result from a breach.