Hadley v Baxendale (1854) 9 ExCh 341, [1843-60] All ER Rep 461- (Case Commentary)

Introduction

Hadley v Baxendale (1854) 9 Exch 341, [1843-60] All ER Rep 461 is a leading English contract law case. It sets the leading rule to determine consequential damages from a breach of contract: a breaching party is liable for all losses that the contracting parties should have foreseen but is not liable for any losses that the breaching party could not have foreseen on the information available to him.

It is basically a formative case dealing with the circumstances in which damages will be available for breach of contract. The decision of Hadley v Baxendale has been a prominent case in many common law jurisdictions.  It has been applied consequently in the English, US, and Australian jurisdictions.

The case establishes that the test of remoteness in contract law is contemplation. Damages are available for loss which:

1.      naturally arises from the breach according to the usual course of things; or

2.      is within the reasonable contemplation of the parties at the time of contracting as the probable result of a breach (this may be, for example, because special circumstances have been communicated at the time of contracting and therefore can be said to be within their reasonable contemplation)

It was established in this case that the claimants may only recover losses which reasonably arise naturally from the breach or are within the parties’ contemplation when contracting.

Background

Facts

The claimants, Mr. Hadley, and another, were millers and meal men and worked together in a partnership as proprietors of the City Steam-Mills in Gloucester. They cleaned grain, ground it into meal, and processed it into flour, sharps, and bran. A crankshaft of a steam engine at the mill had broken and Hadley arranged to have a new one made by W. Joyce & Co. in Greenwich. Before the new crankshaft could be made, W. Joyce & Co. required that the broken crankshaft be sent to them to ensure that the new crankshaft would fit together properly with the other parts of the steam engine.

Hadley entered into a contract with the defendants Baxendale and Ors, who were operating collectively as common carriers under the name Pickford & Co., to deliver the crankshaft to engineers for fixing by a certain date at a fee of £2 sterling and 4 shillings.

Baxendale failed to deliver on the date asked by Hadley, causing him to lose his business. Hadley sued for the estimated profits he had lost due to Baxendale's late delivery, and the jury granted Hadley damages of £25. Baxendale appealed, arguing that he did not know that Hadley would bear any damage because of the late delivery.

The question raised by the appeal, in this case, was whether a defendant in a breach of contract case could be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.

Issues

Whether a defendant in a breach of contract can be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.

Procedural History:

The trial court awarded Hadley damages of £25 in the form of lost profits. Baxendale appealed.

Rule of Law or Legal Principle Applied:

A non-breaching party to a contract may recover damages that are reasonably foreseeable to the parties at the time of contract formation. The non-breaching party is also entitled to recover damages arising from circumstances that were communicated to all known parties at the time of contract formation.

Held

The Court found for the defendant, viewing that a party could only successfully claim for losses stemming from breach of contract where the loss is reasonably viewed to have resulted naturally from the breach, or where the fact such losses would result from breach ought reasonably to have been contemplated of by the parties when the contract was formed. As Baxendale had not reasonably anticipated the consequences of delay and Hadley had not informed him of the same, he was not liable for the mill’s lost profits.

A non-breaching party is entitled to the damages arising naturally from the breach itself or those that are in the reasonable contemplation of the parties at the time of contract. In this case, while the breach by Defendants was the actual cause of the lost profits of the plaintiffs, it cannot be said that under ordinary circumstances such loss arises naturally from this type of breach. There is a variety of reasons for a miller to send a crankshaft to a third party. The defendants had no way of knowing their breach would cause a lengthier shutdown of the mill, resulting in a considerable loss. Further, the plaintiffs never conveyed the special circumstances to the defendants, nor did defendants know of these stipulations.

Analysis

When the plaintiff and the defendant entered into a contract, Hadley did not inform Baxendale that any interruption or postponement in shipping would result in Hadley’s lost profits. Since Baxendale did not know of Hadley’s special circumstances, that his mill was inoperable until the new shaft was delivered, the special circumstances were not reasonably foreseeable at the time the contract was formed.

The decision of the court of exchequer, that when one party breaches, the other party may recover damages that are reasonably foreseeable to both parties at contract formation is reasonable. The non-breaching party may also recover damages arising out of any special circumstances so long as those circumstances were communicated to and known by all parties.

Here, Hadley’s failure to reveal his special circumstances prevented him from recovering damages. Hadley never enlightened Pickford and Co. that his mill operation was completely dependent on receiving a new shaft. The court sparks light on the subject that that not all broken mill shafts render the mill inoperable causing a loss in profits. For instance, some may have a a temporary mill shaft for use when the broken one is out for restoration. As a result, Baxendale is not liable for the damages arising out of Hadley’s unknown circumstances.

Hadley v. Baxendale established a limitation on damages to those which naturally result from a breach and are reasonably contemplated by the contracting parties at contract formation. These damages are known as consequential damages.

Conclusion

To conclude, it can be said that, Hadley v. Baxendale was one of the most commemorated cases in contract law, which sets forth the default rule that unforeseeable consequential damages are unrecoverable. The case has come to represent an important limit to the general rule awarding full expectation damages for breach Hadley takes on great significance in the literature as an archetype for contract default rules that improve an economic system.

Where two parties have entered into contract which one of them has breached, the damages which the other party should receive in respect of such an infringement should be fairly and practically be considered either arising naturally, i.e., according to the usual course of things, from such an infringement itself, or such as may relatively be supposed to have been in the scrutiny of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special conditions under which the contract was truly made were communicated by the plaintiffs to the defendants, and thus were made known to both parties, the damages consequential from the breach of such a contract, which they would reasonably anticipate, would be the amount of injury which would normally follow from a breach of contract under these special circumstances so known and communicated. However, on the other hand, if these special circumstances were completely unknown to the party breaching the contract, he could only be supposed to have had in his contemplation the amount of injury which would arise usually, and in the great multitude of cases not affected by any special circumstances, from such an infringement of contract.

-Simran Khurana

Guru Gobind Singh Indraprastha University.