Causation in Contract Damages: But-For Test, Legal Causation, and Alexander v Cambridge Credit (Part 1)

Causation in Contract Damages: Key Concepts and Case Law (Part 1)

• Damages aim to put the aggrieved party in the position they would have been in if the contract had been properly performed.
• Main limitations on damages (introduced here and to be followed by remoteness, mitigation, etc.):
  • Causation
  • Remoteness
  • Mitigation
  • Non-pecuniary loss (general compensation excluded)
• Non-pecuniary loss includes:
  • disappointment, anxiety, distress, or loss of reputation
• Loss of bargain damages: generally not available for termination under an express term unless there is also a common law right to terminate OR the contract clearly allows for damages for loss of bargain
• Parties may exclude or limit liability for breach of contract through contract clauses
• This video focuses on causation; remoteness, mitigation, etc., will be covered in subsequent videos

The issue: what does causation restrict?

• To obtain damages, the plaintiff must show the loss was caused by the breach, both:
  • in a factual sense (but-for causation)
  • in a legal sense (whether, as a matter of policy and common sense, the breach was the cause)
• Two-step process to establish causal connection: $ext{But-for test: would the damage have occurred but for the breach?}$
  • If the loss would have occurred but for the breach, there is no causation.
  • If the loss would not have occurred but for the breach, there may be causation.
• The but-for test is necessary but not sufficient for causation; you must also apply a common-sense/legal analysis to determine if the breach was the legal cause of the loss.
• In some cases there are multiple causes; it is enough that the defendant's breach was a cause of the plaintiff's loss (does not have to be the sole cause).
• An intervening event can break the chain of causation (novus actus interveniens).

The example: Robertson and Patterson’s scenario

• A seller fails to deliver materials to the buyer's factory.
• The buyer goes to a warehouse to obtain an alternative supply and is injured by a falling barrel.
• Question: should the original supplier be liable for the injury?
• Key questions:
  • Was the loss (injury) caused by the breach of contract?
  • In a factual sense (but-for) the breach led to the injury (because the breach caused the buyer to seek an alternative supplier, which caused the injury)?
• This example sets up the causation analysis to be illustrated in the video.

The But-for test in detail

• The law requires a two-part inquiry: 1) Apply the but-for test: would the damage have occurred but for the breach?
  • If yes, there is no causation.
  • If no, there may be causation.
    2) Even if the but-for test is satisfied, you must assess legal causation using common sense and policy considerations.
• The but-for test is a necessary condition for causation but not sufficient on its own.
• In many cases, the but-for test will be satisfied and causation will be established, but in others, despite satisfying the but-for test, causation may still fail in the legal sense.

Alexander and Cambridge Credit: applying the common-sense approach

• Case: Alexander and Cambridge Credit, New South Wales Court of Appeal.
• Facts: Cambridge Credit collapsed; auditors had mis-stated the company’s financial position by $10{,}000{,}000$ in 1971; had this been known, Cambridge would have wound up then, with losses of $10{,}000{,}000$, but Cambridge continued trading until 1974, incurring $155{,}000{,}000$ in losses (an extra $145{,}000{,}000$ over three years).
• The liquidator sued the auditors for the extra losses.
• Issue: whether the auditors’ breach caused the extra $145{,}000{,}000$ of losses.
• The but-for test was satisfied (the breach would have prevented the losses if known in 1971), but causation in the legal sense remained contested.
• The auditors argued the losses were caused by other factors (Adam and Eve approach): the registrar's incorporation decisions and other external factors.
• Justice McHugh and Justice Glass (majority) laid out the principles:
  • To establish a causal connection between a breach and damage, a plaintiff needs only to show that the breach was a cause of the loss; this is decided by applying common-sense principles.
  • In general, the but-for test will be sufficient to prove the causal connection, but it is only a guide.
  • The ultimate test is whether, as a matter of common sense, the relevant act or omission was a cause.
  • The common-sense test can override a strict but-for result when policy considerations and value judgments indicate otherwise.
• The court criticized the “Adam and Eve” approach (where every potential contributing factor is treated as a cause) and rejected it in favor of a more focused causal field analysis.
• The “causal field” concept (per the majority) refers to the necessary group of conditions that are jointly sufficient to produce the loss.
• On the facts, the majority held that the extra trading losses were not caused by the auditors’ breach:
  • Other supervening events were the true causes: internal business decisions, floods in Queensland, collapse of the real estate market, credit squeeze, and increases in interest rates and inflation.
  • Justice McHugh stated that the existence of a company cannot be the cause of its trading losses; to suggest otherwise conflicts with common sense.
• Justice Mahoney expressed a similar view and introduced the gun analogy: if a gun is fired and someone is injured, the gun’s manufacturer is the cause; yet in legal causation, the focus is on policy and common sense rather than a mechanical application of but-for.
• Justice Glass dissented; he and Justice McHugh/Mahoney suggested the loss may be too remote.
• Result: In Alexander v Cambridge Credit, the losses were not caused by the auditors’ breach under the common-sense causal test, so damages were not awarded.
• Summary takeaways from the case:
  • The but-for test is a guideline, not the ultimate determinant of causation.
  • The legal causation test relies on common-sense policy judgments to determine whether the breach was a causal factor in the loss.
  • The court can reject a breach as a cause even if the but-for test is satisfied, if other factors are the true drivers of the loss.
  • Remoteness and the role of intervening factors are closely connected to causation.

Key principles and implications from the causation framework

• Causation requires both factual and legal (causal) causation:
  • Factual causation: but-for the breach, would the loss have occurred?
  • If yes, no liability for that loss for breach.
  • If no, potential causation exists.
  • Legal causation: beyond the factual link, is the breach the legally relevant cause of the loss?
• The common-sense approach emphasizes policy considerations and value judgments about causation, rather than purely mechanical application of tests.
• Multiple causes are allowed: a breach need only be a cause, not the sole cause, of the loss.
• Intervening events can break the chain of causation, potentially insulating the breaching party from liability.
• The Alexander v Cambridge Credit decision illustrates that even where the but-for test is satisfied, the court may find no liability due to other stronger, intervening factors and the broader policy background.

Definitions and quick references

• But-for test: $ext{Would the damage have occurred but for the breach?}$
• Causal field: the set of conditions that are jointly sufficient to produce the loss; the breach must be within this field to be causally relevant.
• Novus actus interveniens: a new intervening act that breaks the chain of causation.
• Remoteness: the next major limitation on damages (to be discussed in the Remoteness video).
• Non-pecuniary loss: e.g., disappointment, anxiety, distress, loss of reputation (generally excluded from general damages).
• Loss of bargain: generally not recoverable for termination under express terms unless there is a common-law right to terminate or contract allows such damages.
• Mitigation: obligation to take reasonable steps to reduce loss; this reduces recoverable damages.
• Reminders for exam prep:
  • Always distinguish factual causation (but-for) from legal causation (policy/common-sense-based).
  • Consider multiple causation and intervening events when evaluating causation.
  • Be prepared to discuss how real-world cases (like Cambridge Credit) illustrate the tension between rigid tests and common-sense policy judgments.

Preview: next topic

• Next video will cover remoteness: the limits beyond which the defendant’s liability for loss will not extend, assuming causation is established.