Hadley v. Baxendale

Read the analysis of famous judgement of Hadley v Baxendale to learn the evolution of principle behind Section 73 of the Indian Contract Act after the Exchequer Court held nexus of circumstances to be the deciding factor in breach of contract
CITATION(1854) 9 EX 341
COURTExchequer Court
JUDGES/CORAMParke B, Alderson B, Platt B and Martin B
DATE OF JUDGEMENT23.02.1854

Introduction

Theoretically, there may be endless consequences of a breach of contract and the Defendant cannot be held liable for all of it. Hence, a limit is put on the liability beyond which the damage is said to be too remote and, therefore, irrecoverable. The classic contract-law case of Hadley v. Baxendale draws the principle that consequential damages can be recovered only if, at the time the contract was made, the breaching party had reason to foresee that, consequential damages would be the probable result of breach. This formulation diverges from both the general principle of expectation damages in contract law and the principle of proximate cause outside the law of contract.

Facts

The facts of the case are as follows: The Plaintiff was the owner of a steam-driven mill which had a broken crankshaft. They had to send the broken part from Gloucester, in the west of England, to Greenwich, near London, where it would be used as a model in the manufacture of a replacement part. It was important to have the part transported quickly, as the Plaintiff did not have a spare, and was losing profits while the engine was out of order. Pickfords, the shipping firm, was late in the delivery of the part, and the Plaintiff sued for the lost profits caused by the delay.

Issues

The main issue in the case was: Whether or not the loss of profits resultant from the mill’s closure was too remote for the claimant to be able to claim?

Summary of court decision and judgment

The Trial Court left the case generally to the jury, which awarded the Plaintiff damages of £25 above and beyond £25 that Pickford had already paid into court. The Exchequer Chamber reversed, but not on the theory of remoteness. On the facts, the Court found that losses of this kind did not arise according to the usual course of things, and the plaintiffs had failed to disclose their potential loss of profits at the time of making the contract. Only damage that could be foreseen (or contemplated as some judges continue to insist) at the time of entry into the contract, is recoverable in damages.The court concluded that the Plaintiff had failed to satisfy either test of reasonably arising natural damages or reasonable contemplation. The two branches of the court’s holding have come to be known as the first and second rules of Hadley v. Baxendale.

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Analysis

Hadley v. Baxendale is considered to be the basis of the law to determine whether the damage is the proximate or remote consequence of the breach of contract. The rule as laid down by Justice Alderson is as under:

“Now we think the proper rule in such a case as the present is this:

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 fairly and reasonably be considered either arising naturally, i.e., according to the usual course 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.”

Thus, the rule in Hadley v. Baxendale consists of two parts. On the breach of a contract by one party, the right of the other party is to recover such damages:

  • as may fairly and reasonably be considered arising naturally, i.e., according to the usual course of things from such breach, or
  • as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract. In both the cases it is necessary that the resulting damage is the probable result of the breach of contract.

In its actual application it is difficult to ascertain whether it is the first or the second part of the rule which governs the case because sometimes a claim “may be said to be within both parts of the rule”[1] or in some case the damages sustained “fall under one, or under both, of the limbs of the rule”[2]

Conclusion

It may be concluded that the general principle with respect to claiming the consequential damages by Non-Defaulting Party is that the Non-Defaulting Party is only entitled to recover / claim such part of the damages or losses resulting from the breach by the Defaulting Party, as was at the time of execution of the contract reasonably foreseeable as liable to result from the breach. Further, the damage or loss “reasonably foreseeable” would inter-alia depend on the knowledge possessed / shared between the parties. It is expected out of a reasonable person to understand and foresee the damage which may be suffered by the Non-Defaulting Party and resulting from the breach by the Defaulting Party in the “ordinary course”. However, in case of existence of “special circumstances”, which are outside the purview of the “ordinary course” what is of utmost importance, so as to be able to claim the consequential damages, is that the Defaulting Party should be aware of the said “special circumstances” which would result into consequential losses for the Non-Defaulting Party, at the time of executing the contract. The principles laid down in aforesaid case of Hadley v. Baxendale have also been adopted by the draftsmen within the language of Section 73 of the Indian Contract Act and the same has also been applied in various Indian cases.

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[1] Hall v. Mayrick, (1957) 2 QB 455 at’ 471.

[2] Compania Naviera Manorpan v. Bowaters, (1955) 2 QB 68 at 93.