Hadley v Baxendale [1854] EWHC Exch J70 (23 February 1854)

A mill's operations stopped due to a broken crankshaft. The carrier's delay in delivering the broken shaft for repair caused further profit loss. The court held the carrier was not liable for these unforeseeable special losses, establishing the remoteness of damage test.

Facts

The plaintiffs, Hadley and another, were owners of the City Steam Mills in Gloucester. A crankshaft in their steam engine broke, causing all milling operations to cease. They needed to send the broken shaft to engineers in Greenwich to serve as a model for a new one. The plaintiffs’ agent contracted with the defendants, operating as Pickford & Co., who were common carriers, to transport the shaft to Greenwich. The defendants’ clerk was informed that the item was the broken shaft of a mill and that the plaintiffs were the millers. The defendants promised delivery on the following day. However, due to the defendants’ neglect, the delivery was delayed by several days. As a result, the mill remained idle for longer than necessary, and the plaintiffs lost considerable profits.

Issues

The central legal issue was the correct measure of damages for a breach of contract. Specifically, the court had to determine whether the defendants were liable for the full extent of the plaintiffs’ lost profits, which occurred as a consequence of the delayed delivery. The case turned on whether such a loss was a foreseeable and direct result of the breach or whether it was too remote to be recoverable.

Judgment

The Court of Exchequer, in a judgment delivered by Baron Alderson, found in favour of the defendants and ordered a new trial. The court sought to establish a clear rule for assessing damages to prevent uncertainty and unfairness. The judgment established a two-limbed test for determining when damages are not too remote.

The Rule for Remoteness

Baron Alderson articulated the now-famous principle for assessing contractual damages:

Now we think the proper rule in such a case as the present is this:—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 of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such 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.

Application of the Rule

The court applied this two-limbed test to the facts of the case:

First Limb (Natural Arising): The court concluded that the loss of profits did not arise ‘naturally’ or ‘in the usual course of things’ from the delay. It was not an inevitable consequence of a delayed delivery of a broken shaft that the mill would be stopped. As Baron Alderson reasoned, the plaintiffs might have owned a spare shaft, or the mill’s stoppage could have been due to other problems. The total cessation of work was not an ordinary and predictable result of the carrier’s breach.

Second Limb (Contemplation of the Parties): For the second limb to apply, the special circumstances must be communicated to the defendant. The court noted:

Now, 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 of such a contract, 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.

In this case, the plaintiffs had failed to communicate the critical special circumstance: that the mill was entirely dependent on the swift return of a new shaft and that any delay would result in a complete loss of profits. The defendants were only told they were transporting a broken mill shaft for the millers. This information was insufficient to put them on notice of the substantial losses that would follow from a delay. Therefore, the loss of profits could not be reasonably supposed to have been in the contemplation of both parties as a probable result of the breach.

Implications

The judgment in Hadley v Baxendale is of foundational importance in contract law. It established the test for remoteness of damage, which remains the basis for assessing consequential loss. The decision created a crucial distinction between general damages (those foreseeable in the ordinary course of things under the first limb) and special damages (those arising from special circumstances, recoverable only if those circumstances were known to both parties at the time of contracting under the second limb). This rule promotes legal certainty and encourages communicating parties to allocate risk effectively, by placing the onus on the party with knowledge of special circumstances to disclose them if they wish to recover for unusual losses.

Verdict: A new trial was ordered on the grounds that the judge misdirected the jury by allowing them to consider the loss of profits when calculating damages. The rule for a new trial was made absolute.

Source: Hadley v Baxendale & Ors [1854] EWHC Exch J70 (23 February 1854)