Hadley v. Baxendale, 9 Ex. 156

Court of Exchequer Chamber

1854

Chapter

20

Title

Contract Remedies

Page

782

Topic

Limitations on Recovery of Expectation Damages

Quick Notes

If the Pl had made it clear that the mills operation was dependent upon getting the new crank shaft, the outcome would have been in their favor

Book Name

Contracts Cases, Discussions, and Problems.  Blum Bushaw, Second Edition.  ISBN:  978-0-7355-7069-6.

Issue

o         Whether the Pl - can fairly and reasonable recover for lost damages?  No, It was not clear in the contract.

Procedure

Trial

o         Jury found verdict for Hadley for 251.

Exchequer

o         New Trial.  Loss of profits here cannot reasonably be considered and such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.

Facts

Rules

Reason

Pl Hadley

Df Baxendale

What happened?

o         Hadley was a mill owner.

o         A crank shaft became broken that stopped mill production.

o         The shaft had to be sent to engineers of the manufacturer Joyce & Company, to serve as a pattern for a new one. 

o         Hadley used Pickford & Company as carriers. 

o         The Pl - servant advised the P&Cs clerk that the mill was stopped, and that the shaft must be sent immediately.

o         The clerk answered by saying if it was sent up by twelve oclock ANY day, it would be delivered at Greenwich on the following day.

o         The sum of 2 pounds and 4 shillings was paid for delivery.

Neglect

o         P&Cs delivery of the shaft at Greenwich was DELAYED by some NEGLECT, and the Pl did NOT receive the new shaft for several days.

o         The mill was not working for this time.

Pl - Action

o         The delay caused lost profits that would have otherwise been received.

Df - Response

o         Damages were too remote, and not liable.

Jury Verdict

o         Found for the Pl for 25 pounds.

Df Appeals

Appellate Court reverses

o         Loss of profits here cannot reasonably be considered and such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract

Estimate Damages

Rule

o         An injured party may recover those damages reasonably considered to arise naturally from a breach of contract, or those damages within the reasonable contemplation of the parties at the time of contracting.

o         Where two other 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 fairly and reasonably be considered either arising naturally, i.e,. according to the usual courts of things, from such breach of contract itself, or 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.

To Recover consequential losses resulting from a breach, the following is required:

1.         The loss must be a natural consequence of the breach, OR

2.         The buyer communicates to the seller the probable result of the breach

Special circumstances

o         If the special circumstances under which the contract was actually made were communicate by the Pl - to the Dfs, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow form a breach of contract under these special circumstances so known and communicated.

1.       Actually communicated to other party.

2.       Damages would reasonably be contemplated from the breach.

o         If these special circumstances were wholly unknown to the party breaking the contract, the Df could ONLY be supposed to have had in his contemplation the amount of injury which would arise generally.

Special Circumstances Damages Rule

o         Damages for special circumstances are assessed against a party only when they were reasonably within the contemplation of both parties as a probable consequence of a breach.

Special Damages Reasoning

o         Baxendale did not know that the mill was shut down and would remain closed until the new shaft arrived.

Good Test Phrase

o         Loss of profits could not fairly or reasonably have been contemplated by both parties in case of a breach of this contract without Hadley having communicated the special circumstances to Baxendale.

o         The court ruled that the jury should not have taken the loss of profits into consideration.

Overall Reasoning

o         The court reasoned that Pickford had no way of knowing that Pl - would lose profits if the shipment of the shaft was delayed, as this information was not communicated directly to them and therefore the loss of profits was not reasonably contemplated by both the parties when they made the contract. 

o         Although the fact that the mill was closed was communicated, it was not made completely clear to the Df - that the mill was closed because of the broken shaft and could not re-open again until it was fixed. 

o         For all the DFs knew, the mill was closed for another reason.

Remanded For New Trial

Class Notes

Two Types of Damages

1.       Those damages that arise naturally according to the usual course of things, or

2.       Those damages that were in the reasonable contemplation of the parties.

Hadley, limits damages when they meet neither test.

Generally, direct and incidental damages survive scrutiny under Hadley.

In rare cases, where changes in market condition are sudden, unexpected, and disastrous, courts may occasionally invoke the principle to limit hugely disproportionate damage awards.

Absent these kinds of extreme circumstances, principle of foreseeability seldom come into play when determining what direct damages a breacher may owe.

As long as the direct damages are reasonable, foreseeability seldom limits the recovery of incidental damages.