For the contract breaker to be liable for a particular kind of loss, the causal connection between breach and loss is this: it is enough that the kind of loss caused would have been within the reasonable contemplation of the contract breaker, if, at the time of the contract, he had wondered, hypothetically, about the consequences of the breach which later occurred (The Heron II [1969] 1 A.C. 350; [1967] 2 Lloyd’s Rep. 457). Again, if the kind of loss would have been within his reasonable contemplation, the full extent of that loss need not: he is liable in full, at least, where it is too difficult for the court to separate one kind of loss from another (Parsons v. Ingham [1977] 2 Lloyd’s Rep. 522). The contract breaker is said to have assumed a secondary contractual obligation to pay damages for such loss in the event of breach of his primary contractual obligations—to buy, sell or whatever—(Photo Production v. Securicor [1980] 1 Lloyd’s Rep. 545, 552-553, per Lord Diplock).

The connection between cause and loss required by the law of contract is closer than that required by the law of tort. This is said to be justified on this ground: parties to a contract get together beforehand, so the eventual victim has a chance to alert the other to loss that could arise in case of breach and which would be beyond the other’s reasonable contemplation. Otherwise the victim has no right to infer that the contract breaker has assumed any secondary obligation to pay for such loss. On the other hand, if the kind of loss is within reasonable contemplation, on the basis of what the contract breaker knows or is told at the time of the contract, he implicitly guarantees his own performance to the extent of such kinds of loss; or, might one say, stands insurer against his own breach.

The underwriter, however, seems to have a much safer position. He is only liable under his policy, if the event covered is the proximate cause of the loss suffered. It has been argued elsewhere (1981) Camb. L.J. 284) as follows:

Rule (a): The proximate cause of loss is the event, whether covered or excepted by the policy, which, in the circumstances prevailing at the time of the event, led inevitably to loss of the kind in question (Leyland Shipping v. Norwich Union [1918] A.C. 350).