Hadley v Baxendale

Facts

The claimants, Mr Hadley and another, were millers and mealmen and worked together in a partnership as proprietors of the City Steam-Mills in Gloucester. They cleaned grain, ground it into meal and processed it into flour, sharps, and bran. A crankshaft of a steam engine at the mill had broken and Hadley arranged to have a new one made by W. Joyce & Co. in Greenwich. Before the new crankshaft could be made, W. Joyce & Co. required that the broken crankshaft be sent to them in order to ensure that the new crankshaft would fit together properly with the other parts of the steam engine. Hadley contracted with defendants Baxendale and Ors, who were operating together as common carriers under the name Pickford & Co., to deliver the crankshaft to engineers for repair by a certain date at a cost of £2 sterling and 4 shillings (current value of about £240.00)[1].

Baxendale failed to deliver on the date in question, causing Hadley to lose business. Hadley sued for the profits he lost due to Baxendale's late delivery, and the jury awarded Hadley damages of £25 (present value about £2500). Baxendale appealed, contending that he did not know that Hadley would suffer any particular damage by reason of the late delivery.

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.

Judgment

The Court of Exchequer, led by Baron Sir Edward Hall Alderson, declined to allow 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 the party would lose profits if it is not delivered on time. The court suggested various other circumstances under which Hadley could have entered into this contract that would not have presented such dire circumstances, and noted that where special circumstances exist, provisions can be made in the contract voluntarily entered into by the parties to impose extra damages for a breach. Alderson B said the following.

Significance

Lon L. Fuller and WR Perdue evaluated the idea of reducing contractual remoteness to a foreseeability triumph in this way:

"In its second aspect Hadley v Baxendale may be regarded as giving a grossly simplified answer to the question which its first aspect presents. To the question, how far shall we go in charging to the defaulting promisor the consequences of his breach, it answers with what purports to be a single test, that of foreseeability. The simplicity and comprehensiveness of this test are largely a matter of illusion. In the first place, it is openly branded as inappropriate in certain situations where the line is drawn much more closely in favor of the defaulting promisor than the test of foreseeability as normally understood would draw it.' There are, therefore, exceptions to the test, to say nothing of authorities which reject it altogether as too burdensome to the defaulter. In the second place, it is clear that the test of foreseeability is less a definite test itself than a cover for a developing set of tests. As in the case of all "reasonable man" standards there is an element of circularity about the test of foreseeability. "For what items of damage should the court hold the defaulting promisor? Those which he should as a reasonable man have foreseen. But what should he have foreseen as a reasonable man? Those items of damage for which the court feels he ought to pay." The test of foreseeability is therefore subject to manipulation by the simple device of defining the characteristics of the hypothetical man who is doing the foreseeing. By a gradual process of judicial inclusion and exclusion this "man" acquires a complex personality; we begin to know just what "he" can "foresee" in this and that situation, and we end, not with one test but with a whole set of tests. This has obviously happened in the law of negligence, and it is happening, although less obviously, to the reasonable man postulated by Hadley v. Baxendale."

As early as 1894, the U.S. Supreme Court recognized the influence of Hadley upon American law:

The Hadley holding was later incorporated into Section 351 of the Restatement (Second) of Contracts. A 1994 law review article noted that as of that year, Hadley had been cited with approval by the state supreme courts of 43 U.S. states; three state supreme courts had adopted the Hadley holding without citing Hadley itself; and intermediate appellate courts in the four other states had also favorably cited Hadley.

In Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] 1 Lloyd’s Rep 175, Robert Goff J stated,

"Although the principle stated in Hadley v Baxendale remains the fons et origo of the modern law, the principle itself has been analysed and developed, and its application broadened, in the 20th century... The general result of the two cases is that the principle in Hadley v Baxendale is now no longer stated in terms of two rules, but rather in terms of a single principle—though it is recognised that the application of the principle may depend on the degree of relevant knowledge held by the defendant at the time of the contract in the particular case. This approach accords very much to what actually happens in practice; the courts have not been over-ready to pigeon-hole the cases under one or other of the so-called rules in Hadley v Baxendale, but rather to decide each case on the basis of the relevant knowledge of the defendant."

However, it has been suggested that the rule in Hadley v Baxendale is not as novel as its celebrated importance suggests. Justice Edelman, in a speech on the topic, asserts that “the rule set out in Hadley v Baxendale was not novel”. For example, Justice Edelman notes that, in 1564, the French jurist Charles Dumoulin had argued that liability for breach of contract should be limited to foreseeable damage, thereby pre-dating this same sentiment in Hadley v Baxendale.