Hadley v. Baxendale
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Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854), was a famous English contract law case that set the basic rule for how to determine the scope of consequential damages arising from a breach of contract.
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[edit] Facts
The plaintiff, Hadley, operated a mill. The crankshaft of the mill broke, thus forcing the mill to shut down. Hadley contracted with the defendant, Baxendale, to deliver the crankshaft to engineers for repair by a certain date. Baxendale failed to deliver on the date in question, causing Hadley to lose some business.
Hadley sued for the profits he lost due to Baxendale's late delivery, and the jury awarded Hadley damages of £25. Baxendale appealed, contending that he did not know that Hadley would suffer any particular damage by reason of the late delivery.
[edit] Issue
The question raised by the appeal in this case was whether a defendant in a breach of contract case could be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.
[edit] Result
The court said no to allowing Hadley to recover lost profits in this case, holding that Baxendale could only be held liable for losses that were generally foreseeable, or if Hadley had mentioned his special circumstances in advance. The mere fact that a party is sending something to be repaired does not indicate that they would lose profits if it was not delivered on time. The court suggested various other circumstances under where Hadley could have entered into this contract which would not have presented such dire circumstances, and noted that where special circumstances do exist, provisions can be made in the contract voluntarily entered into by the parties to impose extra damages for a breach.
In this case, however, the court stated: "the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract."
[edit] Law and economics
The rule of the case stands for placing the risk of loss on the party in the best position to handle it. In the business world, there is no reason to suspect that courier companies would have superior knowledge of milling operations and the likely losses, whereas the mill owner likely has a better chance to estimate and hence avoid loss (say by having a spare or agreement with other cooperating businesses that use cranks and shafts). Therefore, denying compensation if the courier is not informed avoids shifting the costs of loss reduction and prevention.
