Decided on : 23 February 1854.
Judges : Parke B, Platt B, Alderson B, Martin b
Court : Exchequer Court
Citation : (1854) EWHC J70, (1854) 156 ER 145, 9 ExCH 341, (1854) 23 LJ Ex 179
The case Hadley v. Baxendale is one of the pivotal cases dealing with the situation in which damages will be offered for breach of contract.
The above case establishes that the test of remoteness in contract law is contemplation.
In case of certain losses damages are provided which are :
The losses which occurs naturally from breach in the normal way.
The losses which are within reasonable consideration of both the parties during the time of contracting as the possible result of the breach.
The plaintiffs in the above case were millers and also the mealmen and they run the city Steam Mills in Gloucester. The plaintiffs worked in the mills with a steam-engine. In the engine there was the issue of broken crank shaft , which obstructed the steam engine from working. W Joyce & Co. was contracted in Greenwich for a new crank to be made. W Joyce & Co. needed new crank to make sure that the new shaft is made with appropriate dimensions.
The defendants worked as carrier operating in the company Pickford & Co. the defendants were appointed by the plaintiffs to deliver the broken shaft to W Joyce & Co. a particular time was specified for delivering the crank shaft the time period was two days after receiving it from plaintiffs, but they delivered it seven days after receiving it from the plaintiffs.
Due to the delay the plaintiffs were not able to work in their own steam-mills for five days as a result they were not able to meet the supplies of the customers from their own mills, which further prevented them from making profits which they would have made if there was no delay.
Procedural history :
Damages of dollar twenty-five was awarded to Hadley by the trial court in the form of lost profits. Appeal was made by Baxendale.
Rule applied in the case :
Damages which are reasonably foreseeable to the parties during the time when the contract is in formation can be recovered by non-breaching parties. The damages may even be recovered by the non-breaching parties which resulted from situations which were communicated to all known parties at the time of formation.
Issue in the case :
The issue involved in the case was :
“Can damages for a party’s breach include reasonably foreseeable damages and also damages resulting from special situations if the special situations were not communicated at the time the contract was formed?”
“A non-breaching party is entitled to damages occurring naturally from the breach itself or those that are in the reasonable contemplation of the parties at the time of contracting. Here, while the breach by Defendants was the genuine reason of the lost profits of Plaintiffs, it cannot be said that under regular situations like loss arises naturally from this type of breach. There is a multitude of reasons for a miller to send a crank shaft to a third party. Defendants had no way of knowing that their breach would cause a longer shutdown of the mill, leading to lost profits. Furthermore, Plaintiffs never communicated the special situations to Defendants, nor did Defendants know of the extraordinary situations.”
Judgement in the case :
At the time of awarding damages, it is duty of the Trial Court to instruct the jury to not consider lost profits.
Discussion in the case :
The damages are restricted that is to those which either naturally occur from a breach or those that are reasonably contemplated by the parties at the time of making the contract.
Reasoning in the case :
During the time when the parties were entering into a contract, Hadley failed to tell Baxendale that Hadley will lose profits if there will be any kind of delay in shipping. As, Baxendale was unaware of the special situation of Hadley, that his mill was unworkable till the delivery of the new shaft, therefore, the special situations were not reasonably foreseeable during the time when the contact was being made.
The court of Exchequer held that, “when one party breaches, the other party may recover damages that are reasonably foreseeable to both parties at contract formation. Additionally, the non-breaching party may also recover damages which are arising out of any special situations as long as those situations were communicated to and known by all parties.”
The failure of Hadley to reveal his special situation prevents him from claiming damages. Pickford and Co. was not informed by Hadley that his mill operation was totally dependent on the delivery of the new shaft. The court even pointed out to the fact that not all the shafts which are broken leads the mill unworkable which further results in losing the profits. Example, some people make arrangements of temporary mill shaft to use it when the broken shaft is out for repair. Therefore, Baxendale is not liable for any kind of damages out of Hadley’s unknown situations.
The case of Hadley v. Baxendale established a limitation on damages to those which naturally result from a breach and are reasonably considered by the contracting parties at the time of formation of the contract. Such type of damages are referred to as consequential damages.
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