Hadley v. Baxendale
9 Ex. 341 (Ex.Ct. 1854)

  • Hadley owned a mill, and the shaft broke, shutting down operations. They needed to ship the shaft to another city for repairs. They contracted with Baxendale, who claimed that they would deliver the shaft the next day for £2. Baxendale did not deliver the shaft for several days and Hadley lost business because of it. So he sued.
    • It was assumed that Hadley would lose business for a day or two anyway, but he felt the slacking on Baxendale’s part resulted in a larger loss of business than he would have if Baxendale had worked faster.
  • Hadley argued that the damages from loss of mill operation were not too remote, and were the only real damages that Hadley suffered.
    • Other than lost time, Hadley didn’t suffer any monetary loss. Baxendale delivered the shaft just fine, they just wasted Hadley’s time by doing it slowly.
  • Baxendale argued that the damages for the operation of the mill were ‘too remote’ and they were not liable for them.
    • Basically, Baxendale argued that the only thing he could be liable for was direct damage (like if he lost the shaft), he couldn’t be responsible for how much money Hadley’s mill lost because that was out of his control.
    • Should Baxendale’s liability be dependent on how much business Hadley had? If Baxendale took the exact same actions with a busy mill and a not busy mill should his liability be different?
  • The English Trial Court awarded Hadley £25 ($1000s of dollars today!). Baxendale appealed.
    • The English Trial Court came to the conclusion that the breach of contract did definitely cause the loss, and was the only cause of the loss.
    • The Court looked to French case law which said, “The damages due to the plaintiff consist in general of the loss that he has sustained, and the profit which he has been prevented from acquiring. The defendant is only liable for damages foreseen, or which might have been foreseen at the time of execution of the contract.”
  • The English Appellate Court reversed and remanded back to the Trial Court with explicit instructions to the jury as to how to properly calculate damages.
    • The Appellate Court found that the Trial Court could not consider the loss of profit in the calculation of damages. (exactly the opposite of tort law!)
    • The Court found that if there are special circumstances to the contract, then the defendant is liable for damages occurring due to those special circumstances. Assuming of course that those circumstances were properly communicated to the defendant at the time the contract was entered into.
      • This is the principle of foreseeability.
      • Damages after the breach are known as consequential damages. Consequential damages are only recoverable if they are foreseeable.
        • Foreseeable is defined as things that are true in the vast majority of cases, or if they are specifically communicated. And by specifically communicated, we mean to the head of the company, not some random clerk who takes your order.
    • The Appellate Court felt that Hadley did not properly explain that the mill wasn’t working solely because of the shaft. Therefore, Baxendale could not be held liable for damages resulting from that problem.
      • Basically, Baxendale didn’t know the potential consequences of being slow, so he shouldn’t be responsible for damages he could know nothing about.
      • Remember, this was Hadley’s servant talking to Baxendale’s clerk, neither of whom had the capability to authority to raise prices. So, is it even reasonable to assume that risks could be communicated?
  • What is the problem with giving Hadley the benefit of the bargain? In this case, and in many cases, the actual direct damages and therefore the benefit of the bargain is zero.
    • If the loss is borne by the shipper, the price of shipping goes up. If the loss is borne by the miller, the price of bread goes up. There is a real loss in this case, who should bear the costs?