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

The plaintiffs, millers in Gloucester, sent a broken crankshaft via the defendants' carrier service to manufacturers in Greenwich for a replacement. The defendants delayed delivery, causing the mill to remain stopped longer than necessary. The court established the foundational rule for remoteness of damages in contract law.

Facts

The plaintiffs, Hadley and another, operated a steam-powered mill in Gloucester. On 11 May, the mill’s crankshaft broke, halting operations. The shaft needed to be sent to the manufacturers, W. Joyce & Co. at Greenwich, to serve as a pattern for a new one. On 13 May, the plaintiffs delivered the broken shaft to the defendants, Pickford & Co., well-known carriers. The plaintiffs’ servant informed the defendants’ clerk that the mill was stopped and the shaft must be sent immediately. The clerk confirmed that if sent by noon, it would arrive the following day. The plaintiffs paid £2 4s for carriage and mentioned a special entry could be made if required to hasten delivery.

Due to the defendants’ neglect, delivery was delayed by several days. Consequently, the plaintiffs lost profits they would have earned had the mill resumed operation promptly. At trial, the jury awarded £25 damages beyond the amount paid into court by the defendants.

Issues

The central issue was whether the plaintiffs could recover damages for lost profits resulting from the delayed delivery of the crankshaft. Specifically, the question was whether such damages were too remote to be recoverable in an action for breach of contract.

Judgment

Baron Alderson, delivering the judgment of the Court, held that a new trial was necessary because the jury had not been properly directed on the measure of damages.

The Court laid down the following rule:

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.

The Court explained that if special circumstances were communicated to the defendant at the time of contracting, damages resulting from breach under those special circumstances could be recovered. However, if the special circumstances were unknown to the defendant, he could only be liable for damages that would arise generally from such a breach in ordinary circumstances.

Applying this rule, the Court held that the defendants were not informed that the mill would remain idle until the shaft was returned. Without this knowledge, the loss of profits was not within the reasonable contemplation of the parties. The mere fact that the shaft was being sent to Greenwich, and that the mill was stopped, did not communicate that the entire business depended on the shaft’s prompt delivery. Therefore, the jury should not have considered lost profits in assessing damages.

Implications

This case established the foundational principle for the remoteness of damages in contract law, often referred to as the rule in Hadley v Baxendale. The two-limb test remains central to English contract law: damages are recoverable only if they arise naturally from the breach in the ordinary course of things, or if they were within the reasonable contemplation of both parties at the time of contracting due to special circumstances communicated to the defendant.

The decision significantly limits the scope of recoverable damages in contract, requiring claimants to prove that particular losses were foreseeable to the defendant. It protects contracting parties from unlimited liability for unforeseen consequences and encourages parties to communicate special circumstances that might affect potential damages. The rule has been applied and refined in numerous subsequent cases and remains a cornerstone of the law of damages in contract.

Verdict: Rule absolute for a new trial. The Court held that the jury had been misdirected and that the loss of profits should not have been considered in assessing damages, as the special circumstances were not communicated to the defendants.

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