Hadley v. Baxendale

A mill's crankshaft broke, a carrier took days too long to deliver it for repair, and the mill sat idle losing profits it never got back. The court that decided who should pay for that idle time wrote the rule every contract-law student still opens their textbook to.

Parties

Joseph and Jonah Hadley — plaintiffs; millers at the City Steam-Mills, Gloucester, whose mill was stopped for want of a crankshaft.

Joseph Baxendale — defendant; carrying on business as Pickford & Co., the common carriers engaged to deliver the broken shaft.

Facts

The Hadleys operated a mill at Gloucester. The mill's crankshaft broke, stopping all milling operations, since the shaft was the component connecting the steam engine to the rest of the mill's machinery. A new shaft had to be made to order by W. Joyce & Co., engineers at Greenwich, and the broken shaft needed to be sent to them to serve as a pattern. The Hadleys' clerk took the broken shaft to the defendant's office and told the carrier's clerk only that the article was a broken shaft from the mill and that the mill was stopped. He was told that if the shaft was sent by noon it would be delivered at Greenwich the next day. The shaft was handed over before noon and carriage was paid, but by some neglect of the carrier's servants, delivery was delayed for several days beyond what had been promised. As a result, the mill remained idle for those extra days, and the Hadleys lost the profits they would otherwise have earned. They sued Baxendale for the loss of profits caused by the delay.

Issues Raised

1. What is the correct general test for determining which heads of loss are recoverable as damages for breach of a contract?
2. Was the loss of milling profits during the extra days of delay a loss recoverable against the carrier for breach of the contract of carriage?
3. Had the special circumstances — that the mill was completely stopped for want of this particular shaft, and that any delay in its delivery would stop the mill's earnings — been sufficiently communicated to the carrier so as to bring that loss within the contemplation of both parties at the time of contracting?

Arguments Contended

On behalf of the Hadleys (plaintiffs): It was argued that the delay was the direct and proximate cause of the mill's continued stoppage, that the carrier knew the article being carried was a broken mill-shaft being sent away for repair, and that any carrier receiving a broken shaft for carriage to an engineer ought reasonably to have understood that the mill could not run without it; the loss of profits during the period of unreasonable delay was therefore a natural and direct consequence of the breach, for which the carrier should be liable in full.

On behalf of Baxendale (defendant): It was argued that the carrier's clerk had been told nothing beyond the bare fact that the article was a broken shaft belonging to a mill; he was never told that the mill possessed no spare shaft, that the mill was entirely idle for want of this shaft alone, or that any delay in carriage would necessarily produce a loss of the mill's running profits. In the ordinary course of things, a miller might well have a spare shaft, or other work to occupy the mill, so that a carrier could not be expected to anticipate that a delay of this kind would stop the mill's earnings altogether; such loss, not having been communicated or reasonably within contemplation, was too remote to be recoverable.

Court's Reasoning

Baron Alderson, delivering the judgment of the Court, held that 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 should be such as may fairly and reasonably be considered either (1) as arising naturally, that is, according to the usual course of things, from such breach itself, or (2) 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. The Court explained that if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach which they would reasonably contemplate would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But if these special circumstances were wholly unknown to the party breaking the contract, he could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.

Applying this test, the Court found that the only facts communicated to the carrier were that the article was a broken shaft, and that the plaintiffs were the millers of the mill. It was not communicated that the mill was stopped entirely for want of this shaft, that the plaintiffs possessed no other shaft, or that a delay in delivery would necessarily produce a loss of profits. In the great multitude of cases of millers sending shafts to third persons for repair, such special consequences would not, in the ordinary course of things, follow from a delay in delivery; a miller might have a spare shaft in reserve, or might for other reasons not lose any profits from such a delay. It would therefore have been wholly unreasonable to hold that, in the great multitude of such cases occurring under ordinary circumstances, the loss of profits from an idle mill could reasonably be supposed to have been in the contemplation of both parties at the time they made this ordinary contract of carriage.

Judgement

The Court held that the loss of profits arising from the mill's continued stoppage could not reasonably be considered either as arising naturally from the breach, in the usual course of things, or as having been within the contemplation of both parties at the time of contracting, since the special circumstances making such loss probable were never communicated to the carrier. Since the trial judge had left it open to the jury to take the loss of profits into account in assessing damages, without this qualification, the Court ordered a new trial — with the effect that the Hadleys could not recover their lost profits on the case as it stood.

Legal Principle / Ratio

Damages recoverable for breach of contract fall into two limbs only: (1) loss arising naturally, according to the usual course of things, from the breach itself — "general damages" — and (2) loss that may reasonably be supposed to have been in the contemplation of both parties, at the time the contract was made, as the probable result of its breach — "special damages," recoverable only where the special circumstances giving rise to that loss were actually communicated to, and thus known by, the party in breach at the time of contracting.

Significance

Hadley v. Baxendale is the founding authority on remoteness of damage in contract law across the common law world, and the direct source of the two-limb structure later codified in Section 73 of the Indian Contract Act, 1872 — the Notes on Kinds of Damages build "general" and "special" damages directly on this case's two limbs. It draws the essential line between loss a contract-breaker must pay for and loss that is simply too remote or unforeseeable, and remains one of the most heavily tested cases in any contract-law syllabus, Indian or English.

Exam-Important Points

• Facts in one line: a mill's crankshaft broke; the carrier delayed delivering it to the repairer for days; the mill owners sued for the profits lost during the extra delay.
• Holding: lost profits not recoverable — the special fact that the mill was completely stopped for want of this shaft was never communicated to the carrier, so the loss was too remote.
• The two-limb test: (1) loss arising naturally, in the usual course of things, from the breach; (2) loss reasonably in the contemplation of both parties at the time of contracting, because the special circumstances making it likely were actually communicated.
• Classic exam trap: the rule does not require the exact loss to be foreseen — only that the special circumstances making that kind of loss probable were known to both parties when the contract was made.
• Codified in India as Section 73, Indian Contract Act, 1872 — limb (1) becomes "general damages," limb (2) becomes "special damages."
• Judgment delivered by Baron Alderson for the Court of Exchequer; the case is cited simply as "Hadley v. Baxendale (1854)" without needing the full bench listed.

Facts, bench and citation verified against the original law report ((1854) 9 Exch 341; 156 ER 145), Wikipedia's summary of the judgment, and an independent case-brief — the bench (Parke, Alderson, Platt and Martin, BB., judgment delivered by Alderson B.) and the two-limb test are confirmed consistent across all three sources.