As is the case in the law of tort, the law of contract accepts that not all losses flowing from a breach of contract are recoverable. A line must be drawn somewhere dictating which loss is recoverable and which is not. The foundation of the law on remoteness in contract is the decision of the Exchequer Chamber in Hadley v Baxendale (1854) 9 Ex 341 in which Baron Alderson set out the test to be applied:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may [1] fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or [2] 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.