Hadley v. Baxendale
9 Exch. 341 (1854) (1854)
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Rule of Law:
Damages for breach of contract are limited to those that arise naturally from the breach itself or were in the reasonable contemplation of both parties at the time the contract was formed. Consequential damages for special circumstances are only recoverable if those circumstances were communicated to and known by the breaching party.
Facts:
- The plaintiffs operated a mill in Gloucester which was forced to shut down when its only crank shaft broke.
- The plaintiffs needed to send the broken shaft to engineers in Greenwich to serve as a pattern for a new one.
- The plaintiffs contracted with the defendants, a carrier company, to transport the broken shaft to Greenwich.
- The plaintiffs' servant informed the defendants' clerk that 'the mill was stopped' and the shaft must be sent 'immediately.'
- The defendants' clerk was told that delivery would occur the following day if the shaft was provided by noon.
- Due to the defendants' neglect, the delivery of the shaft was delayed.
- This delay in shipment caused the plaintiffs' mill to remain closed for several extra days, resulting in lost profits.
- The plaintiffs never explicitly informed the defendants that the mill's operation was entirely dependent on the prompt delivery of this specific shaft.
Procedural Posture:
- The plaintiffs sued the defendants in the Gloucester Assizes (a trial court).
- At trial, the defendants objected that the claim for lost profits was too remote to be recovered as damages.
- The trial judge let the issue go to the jury, which returned a verdict for the plaintiffs, awarding them £25 for lost profits beyond an amount already paid into court.
- The defendants appealed the verdict to the Court of Exchequer, seeking a new trial.
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Issue:
Does a party who breaches a contract by delay become liable for lost profits that were not a natural consequence of the breach and arose from special circumstances not communicated to that party at the time the contract was made?
Opinions:
Majority - Alderson, B.
No. A party who breaches a contract is only liable for damages that were reasonably foreseeable at the time the contract was made. The court established a two-part rule for contract damages. First, a party is liable for damages arising naturally from the breach in the 'usual course of things' (general damages). Second, a party is liable for damages arising from special circumstances, but only if those special circumstances were communicated by the plaintiff to the defendant when the contract was made (special/consequential damages). Here, the defendants were only told that the item was a broken mill shaft and that the mill was stopped. It was not foreseeable from this limited information that a delay would cause the entire mill to lose profits, as the plaintiffs might have had a spare shaft or the mill might have been stopped for other reasons. The 'special circumstance' that the mill's entire operation depended on the prompt return of this shaft was not communicated. Therefore, the lost profits were not in the reasonable contemplation of both parties and are not recoverable.
Analysis:
This case establishes the foundational rule for determining the scope of consequential damages in breach of contract cases. The 'foreseeability' or 'contemplation' test created here limits a breaching party's liability to only those damages that were reasonably predictable at the time of contracting. It forces parties with special, high-risk circumstances to disclose them, allowing the other party to either take extra precautions, charge a higher price for the increased risk, or decline the contract altogether. This principle remains a cornerstone of contract law in common law jurisdictions.
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