Looking for the Hadley v Baxendale case summary?
What is the Hadley rule in contract law?
What is a breaching party’s responsibility for consequential damages?
In this article, we will break down the “Hadley v Baxendale” case in detail so you know all there is to know about it.
We will look at the facts of the case, the rule of law, the foreseeability test, the extent of consequential damages or special damages a defendant may be liable for and more.
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Table of Contents
Hadley v Baxendale rule
The Hadley v Baxendale case is an English decision establishing the rule for the determination of consequential damages in the event of a contractual breach.
The Hadley case states that the breaching party must be held liable for all the foreseeable losses.
In other words, a breaching party cannot be held liable for damages that were not foreseeable at the conclusion of the contract.
A contracting party will be held accountable for damages that arise naturally from the breach of contract and those that were in the reasonable contemplation of the parties at the time the contract was concluded.
Let’s look at the facts of the case for a deeper analysis of how the court came to this conclusion.
Hadley v Baxendale facts
The claimants (Hadley et al), were millers operating a mill at the City Steam-Mills in Gloucester.
The defendants (Baxendale and Ors) were common carriers operating under the trade name Pickford & Co.
Hadley suffers a broken crankshaft of one of his steam engines at the mill.
To have it repaired, Hadley needed to send the broken crankshaft to Joyce & Co, located in Greenwich, to have it repaired.
Hadley contacts Pickford & Co for the shipping and is informed that they can have the part shipped to Greenwich by the following day if the broken crankshaft was delivered to them before noon.
The next day, Hadley brings the crankshaft to Pickford & Co before noon and enters into a shipping contract to have the crankshaft delivered to Joyce & Co. by a specific date for a contract value of £2 sterling and 3 shillings.
Due to neglect, Baxendale does not deliver the crankshaft by the promised delivery date.
Due to Baxendale’s neglect, the crankshaft repair is delayed by several days forcing Hadley’s mill to remain closed.
Hadley files a lawsuit against Baxendale for loss of profits.
In the first instance, Hadley is awarded £251 in the first instance by the jury.
Baxendale appeals the decision.
The court of appeal renders a decision with respect to the defendants’ liability for consequential damages claimed by the claimants.
Hadley v Baxendale case brief
Let’s look at the Hadley Baxendale case brief to quickly establish the legal significance of the case.
The issue related to the court defining the defendants’ liability for consequential damages (lost profits) suffered by the plaintiffs due to the defendants’ negligence resulting in a breach of contract.
The Hadley rule is that a non-breaching party can claim damages to the extent they naturally arise from the breach or damages that were in the reasonable contemplation of the parties upon entering into the contract.
Hadley v Baxendale foreseeability test
Hadley vs Baxendale requires that the court consider the foreseeable damages when evaluating damages for breach of contract (the foreseeability test).
The defendant is liable to the extent damages were foreseeable
To what extent should a breaching party be held liable for a breach of contract?
The answer to this question is: to the extent the damages were foreseeable at the conclusion of the contract.
What damages would a reasonable man foresee upon entering into the contract?
To determine what was foreseeable at the conclusion of the contract, the court must evaluate the question based on the reasonable man test.
What should have a reasonable man foreseen?
By considering what a reasonable man could have foreseen as potential damages or harm to the other party, at the conclusion of the contract, the court can establish the extent of consequential loss to be assumed by the breaching party.
Hadley v Baxendale damages
According to the Hadley vs Baxendale case, the non-breaching party to a contract should recover damages arising naturally from the breach.
Also, the non-breaching party can claim damages if the potential of the damage or injury was in the reasonable contemplation of the parties when the contract was signed.
If a party is informed, prior to entering into a contract, that a delay in the delivery would represent $1,000 in special damages in addition to the direct damages, the courts will condemn the defendant to pay such special damages as it was known to the defendant and in the contemplation of the parties upon signing.
Hadley v Baxendale consequential loss
Hadley v. Baxendale (1854) establishes the limits and boundaries of special damages that can be claimed by a party against another for breach of contract.
As it pertains to special damages or consequential losses, the court ruled that the extent of what can be claimed from a breaching party is what was in the reasonable contemplation of the parties upon entering into the contract.
Loss of profits was not in the reasonable contemplation of both parties
In the Hadley case, the court of appeal highlighted that it was not reasonable for the defendants to reasonably contemplate the loss of profits claimed by Hadley.
The mere fact that a carrier is asked to deliver something does not follow that profits could be lost due to delays.
In the case at the bar, the court found that the only facts communicated to Baxendale were that Hadley operated a mill and the article to be carried was a shaft from the mill.
Such facts were not sufficient to allow Baxendale to reasonably contemplate the exposure to special damages when entering into the contract.
The court then raises the question as to how Baxendale could have reasonably figured that profits at the mill were stopped by a delay in the delivery.
Hadley v Baxendale conclusion
On appeal, the Court of Exchequer did not award Hadley damages for lost profits.
The court came to the conclusion that Baxendale could not be held liable for damages that it could not have foreseen when he entered into the contract.
Damages are limited to what was in the reasonable contemplation of both parties
The damages a non-breaching party may claim should be limited to those in the contemplation of the parties upon entering into the contract.
In the court’s view, Hadley could have entered into a contract in a different way by including contractual provisions allowing for additional damages in the event of a breach or notifying Baxendale of his special circumstances.
If Hadley would have informed Baxendale of his special circumstances and potential for loss of profits before signing the contract, then the potential for his lost profits would have been known to Baxendale and would have been in the parties contemplation.
Hadley v Baxendale FAQ
What was the principle laid down in Hadley v Baxendale?
In Hadley v Baxendale 1854, the court distinguishes between two types of damages:
- Damages arising in the usual course of things
- Damages that were in the reasonable contemplation of the parties upon conclusion of the contract
The court found that a breaching party must not be held liable for damages relating to special circumstances not known to the party breaching the terms of the contract.
In other words, if due to special circumstances, a party may suffer special damages, if the party communicates such special circumstances to the other party before signing the contract, then damages resulting from such special circumstances would have been known by the breaching party.
What is the rule of Hadley v. Baxendale?
The rule adopted by the English court in Hadley v Baxendale clarifies the extent of a party’s liability for special damages or losses due to its breach of contract.
In essence, damages that a reasonable person would realize can result from a breach of contract are foreseeable and thus eligible damages for the plaintiff.
Damages due to special circumstances are reasonably foreseeable and eligible damages for the plaintiff only to the extent the defendant was aware of them or should have reasonably been aware of them at the time the contract was formed.