LAW OF CONTRACTS

REMOTENESS OF DAMAGE

SUBMITTED TO- PROF. NISHTHA AGRAWAL

SUBMITTED BY- NIHIT MISHRA

ROLL NO. - 1006AL0063
SEM- 2B

DECLARATION
The text reported in the project is the outcome of my own efforts and no part of
this project assignment has been copied in any unauthorized manner and no part of
it has been incorporated without due acknowledgement.

NIHIT MISHRA
 TABLE OF CONTENTS

 DECLARATION
 TABLE OF CASES
 RESEARCH METHODOLOGY
A. OBJECTIVE
B. HYPOTHESIS
C. RESEARCH QUESTIONS
D. COVERAGE AND SCOPE
 INTRODUCTION

TABLE OF CASES
 Rigby v. Hewitt and Greenland v. Chaplin.
 Smith v. London and South Western Railway Co.
 Re Polemis and Furness, Withy & Co.
 Liesbosch Dredger v. S.S. Edison
 THE WAGON MOUND CASE 
 Hughes v. Lord Advocate
 Doughty v. Turner Manufacturing Co. Ltd.
 RESEARCH METHODOLOGY

1. OBJECTIVE
 To do an in depth study of remoteness of damage due to the
carelessness of a person in a contract and check the liability.
2. HYPOTHESIS
 The scope of the damages and legal liabilities of it in the contract
and the understanding remoteness of damage and forseeability of
it.
3. RESEARCH QUESTIONS
 What is remoteness of damage?
 How it affects a contract?
 Liability of wrongdoer when damage is remote?

4. COVERAGE AND SCOPE

 The coverage of this project is limited to the extents of
contracts and all the cases and precedents are discussed were
widely known making it easier to understand the concept with
the depths involved.

INTRODUCTION
In context of the Indian Contract Act, 1872 damages are referred in context to breach of contract
i.e. a party's failure to perform some contracted-for or agreed upon act, or his failure to comply
with a duty imposed by law which is owed to another or to society. Breach of contract is a legal
concept in which a binding agreement or negotiated for exchange is not respected by one or more
of the parties to the contract by non-performance or interference with the other party's
performance. On a breach of contract by a defendant, a court generally awards the sum that
would restore the injured party to the economic position they expected from performance of the
promise or promises. When it is either not possible or not desirable to award damages measured
in that way, a court may award money / damages designed to restore the injured party to the
economic position they occupied at the time the contract was entered, or designed to prevent the
breaching party from being unjustly enriched. Parties may contract for liquidated damages to be
paid upon a breach of the contract by one of the parties. Under common law, a liquidated
damages clause will not be enforced if the purpose of the term is solely to punish a breach. The
clause will be enforceable if it involves a genuine attempt to quantify a loss in advance and is a
good faith estimate of economic loss. Courts have ruled as excessive and invalidated damages
which the parties contracted as liquidated, but which the court nonetheless found to be penal.
Damages are likely to be limited to those reasonably foreseeable by the defendant. If a defendant
could not reasonably have foreseen that someone might be hurt by their actions, there may be no
liability. This is known as remoteness.
Remoteness of Damage
Every Breach of contract upsets many a settled expectations of the injured party. He may feel the
consequences for a long time and in variety of ways. A person contracts to supply to shopkeeper
pure mustard oil, but he sends impure stuff, which is a breach. The oil is seized by an inspector
and destroyed. The shopkeeper is arrested, prosecuted and convicted. He suffers the loss of oil,
the loss of profits to be gained on selling it, the loss of social prestige and of business reputation,
not to speak of the time and money and energy wasted on defense and mental agony and torture
of prosecution. Thus theoretically the consequences of a breach may be endless, but there must
be an end to liability. The defendant cannot be held liable for all that follows from his breach.
There must be a limit to liability and beyond that limit the damage is said to be too remote and,
therefore, irrecoverable.
DAMAGES
The damages are divided into two categories. They are:

General Damages: General damages are those which arise naturally in the usual course of
things from the breach itself. Another mode of putting this is that the defendant is liable for all
that which naturally follows in the usual course of things after the breach.

Special Damages: Special damages are those which arise on account of the unusual
circumstances affecting the plaintiff. They are not recoverable unless the special circumstances
were brought to the knowledge of the defendant; so that the possibility of the special loss was in
contemplation of the parties

Liquidated Damages : When the terms of a contract are broken, if a sum is named in the
contract as the amount to be paid in case of breach, the party complaining of the breach is
entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive
compensation not exceeding the amount so named. If a stipulation to pay a certain amount by
way of penalty has been provided in the contract, then reasonable compensation not exceeding
that amount should be paid. (Section 74 of the ICA) In the example, in clause 2, except on
account of Force Majeure, Y is entitled to claim liquidated damages. This will be more beneficial
to Y because Y will be entitled to a predetermined sum of money. Under clause 1, Y will have to
prove all damages suffered by him at the time of breach. However, once liquidated damages are
awarded, no claim for damages by way of loss of profits or other incidental damages will lie.
Thus, the events activating liquidated damages should be clearly stated, so that the parties are
free to claim damages in cases of breach of contract. From a reading of section 74, it becomes
clear that Indian law does not distinguish between liquidated damages and penalties, as is the
case in the UK and the USA. In these countries, the question whether the sum stipulated in a
contract is in the nature of a penalty or liquidated damages is a question of law.

Actual Damages
 Section 73 of the ICA provides as follows: When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party who has committed breach,
compensation for any loss or damage caused to him thereby, 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 such breach. Compensation is not paid for any remote or indirect loss or
damage sustained by reason of the breach. Besides, an explanation to this section adds that: In
estimating the loss or damage arising from a breach of contract, the means which existed of
remedying the inconvenience caused by the non-performance of the contract must be taken into
account.

Now, the starting point of any rule of the remoteness of damage is the familiar notion that a line
must be drawn somewhere, it would be unacceptably harsh for and be responsible for all the
consequences which he has caused.
Certainly, the question of where to draw the line on recover-ability of consequential losses
cannot be answered by a mathematically precise formula. Judges have used their discretion from
time to time, and in that process, two formulas have been highlighted:
1. The test of reasonable foresight
2. The test of directness

THE TEST OF REASONABLE FORESIGHT

According to this test, if the consequences of a wrongful act could have been foreseen by a
reasonable man, they are not too remote. If on the other hand, a reasonable man could not have
foreseen the consequences, they are too remote. And, a person shall be liable only for the
consequences which are not too remote i.e. which could be foreseen.

THE TEST OF DIRECTNESS

According to the test of directness, a person is liable for all the direct consequences of his
wrongful act, whether he could have foreseen them or not; because consequences which directly
follow a wrongful act are not too remote. The only question which has to be answered in such
any case whether the defendant’s act is wrongful or not, i.e., could he foresee some damage? If
the answer to this question is in the affirmative, i.e., if he could any damage to the plaintiff, then
he is liable not only for those consequences which he could have foreseen but for all the direct
consequences of his wrongful act.
THE CONTENTION (Waxing and Waning)
The test of reasonable foresight was, for the first time, laid down by Pollock, C.B., in his
separate opinions rendered in two cases of the Court of Exchequer in 1850, the cases being
Rigby v. Hewitt and Greenland v. Chaplin. This was rejected expressly in the case by the court
of appeal in Re Polemis and Furness, Withy and Co. Ltd. in favor of the test of directness.
Though the first authority for the view if advocating the directness test is the case of Smith v.
London & South Western Railway Company where Channel B. said: where there is no direct
evidence of negligence, the question what reasonable man might foresee is of importance in
considering the question whether there is evidence for the jury of negligence or not…. but when
it has been once determined there is evidence of negligence, the person guilty of it is equally
liable for its consequences, whether he could have foreseen them or not. What the defendant
might reasonably anticipate is only material with reference to the question, whether the
defendants were negligent or not, and cannot alter their liability if they were guilty of negligence.

Smith v. London and South Western Railway Co.

FACTS – The railway company was negligent in allowing a heap of trimmings of hedges and
grass near a railway line during dry weather. A spark from the railway engine set fire to the
material. Due to high wind, the fire was carried to the plaintiff’s cottage which was burnt.
The defendants were held liable even though they could not have foreseen the loss to the cottage.

Re Polemis and Furness, Withy & Co.

FACTS – The defendants chartered a ship. The cargo to be carried by them included a quantity
of Benzene and/or petrol in tins. Due to leakage in those tins, some of their contents collected in
the hold of the ship. Owing to the negligence of the defendants’ servants, a plank fell into the
hold, a spark was caused.
Consequently, the owners of the ship were held entitled to recover the loss – nearly 200,000
pounds, being the direct consequence of the wrongful act although such a loss could not have
been reasonably foreseen.
Liesbosch Dredger v. S.S. Edison
FACTS – Owing to the negligence of Edison, the dredger Liesbosch was sunk. The owners of
Liesbosch required it for the performance of a contract with a third party, but since they were too
poor to purchase a new one, they hired one at an exorbitant rate.
They sued the owners of Edison for negligence and their claim for compensation included: (1)
the price of the dredger; and (2) the hire charges which they had to pay from the date of the
sinking to the date they could actually purchase a new dredger.
The House of Lords accepted their claim under the first head and allowed compensation equal to
the market price of the dredger comparable to Liesbosch. As regards the second head of claim,
the compensation allowed was for loss suffered in carrying out the contract with the third party
from the date of the sinking of Liesbosch to the date when another dredger could reasonably
have been put to work. Thus, the claim after the time when a new dredger could have been
reasonably purchased and put to work was rejected. The reason why a new dredger could not be
purchased by the plaintiffs was their poverty and the House considered the additional loss being
due to the extraneous cause of poverty and as such too remote.

THE WAGON MOUND CASE 

In this case, the appellants’ vessel was taking oil in Sydney Harbor at the Caltex wharf. Through
the carelessness of their servants, a large quantity of oil was allowed to spill into the harbor. The
escaped oil was carried by wind and tide beneath a wharf owned by the respondents, who were
ship-builders and ship-repairers. They were refitting a vessel and for that purpose, their
employees were using welding equipment. The distance between respondent’s wharf and the
Caltex wharf was 600 feet.
When the respondents’ manager became aware of the conditions in the vicinity of the wharf, he
instructed the workmen that no welding or burning operations were to be carried on until further
orders. He enquired from the manager of Caltex Co. whether they could safely carry on the
welding operations and the result of the inquiry, coupled with his own belief as to inflammability
of the furnace oil on water in the open led him to think that he could safely carry on the
operations. He gave instructions accordingly but directed that all safety precautions should be
taken to prevent inflammable material falling into the oil. On the third day, there was an outbreak
of fire. The exact cause of the fire is unknown, but the most probable explanation which the
Court accepted was that underneath the wharf was floating a piece of debris with some
smoldering cotton waste or rag on it. It was set on fire by the molten metal falling from the
wharf. Thus, floating oil was set a fire and the wharf was severely damaged.

The trial as well as the Supreme Court followed the Polemis rule and held the defendant liable,
with the reason that any reasonable man could form the chain of events deduce that the
negligence of the defendant was the direct cause for the fire.
However, the Privy council ruled in favor of the Overseas Tankship Ltd. holding that the Re
Polemis was no longer valid law. Since a reasonable man could not foresee the damage caused,
the appellants were held not liable, even though the negligence of the servants was the direct
cause of the injury.
The test of reasonable foresight has been applied to many other cases thereafter.

Hughes v. Lord Advocate

In this case, the post office employees opened a manhole for the purpose of maintaining
underground telephone equipment. The manhole was covered with a tent. One evening it was left
surrounded by paraffin lamps but otherwise unguarded. A child of eight years entered the tent
and started playing with one of the lamps. The lamp fell into the manhole and caused a violent
explosion resulting in the fall of the boy in the hole and severe burns thereof.
It was held that since the kind of damage was foreseeable although the extent was not, the
defendants were liable.
Doughty v. Turner Manufacturing Co. Ltd.
The plaintiff was employed by the defendants. Some other workmen of the defendants let an
asbestos cement cover slip into a cauldron of hot molten liquid. It resulted in an explosion and
the liquid thereby erupted, causing injuries to the plaintiff. The cover has been purchased from a
very reputed manufacturer and nobody could foresee that any serious consequences could follow
by the falling of the cover into the cauldron.
Held, that the damage resulting from the explosion was not of the kind as could have been
foreseen, and, therefore, the defendants were not liable.
CONCLUSION

The test of reasonable foresight seems to be well established and widely accepted by now to
determine the question of the remoteness of damage, the facts of the case and the evidence
present shall always be the priority determining factors for the fate of any case.
BIBLIOGRAPHY