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'Direct loss' and 'indirect loss'

'Indirect loss' is most frequently considered in the context of assessing quantum of damages and in interpreting exemption clauses.

The normal function of damages for breach of contract is compensatory but is limited by the principles of causation and remoteness. Damage which is too remote is not recoverable even if there is a causal link between the breach of contract and the loss.

Hadley v Baxendale established the 'two limb test' for assessing whether damage resulting from a breach of contract is or is not too remote. Damages may only be recovered for:

1. •

   losses arising naturally—the defaulting party is liable for any losses, which may fairly and reasonably can be considered as arising naturally from the breach of contract. The court will take into consideration the type of trade or transaction in question (direct loss), or

2. •

   potentially foreseeable losses—those which were in the reasonable contemplation of the parties at the time