rule in Hadley v Baxendale

In cases of breach of contract, an innocent party will not always recover all of the losses that it suffers. Common law rules limit the damages which may be recovered in damages, one such rule restricts recover of damages which are too remote. The rule in Hadley v Baxendale is the leading case which governs recovery of loss which is too remote. It has two limbs.

The first limb allows the claimant to suffering loss as a result of a breach of contract to the losses which were in the reasonable contemplation of the parties, as at the time the contract was made. These are losses arising naturally from the breach of contract, in that the damage is an inevitable consequence of the beach. This is known as direct loss.

The second limb allows the claimant to recover loss which was in contemplation by the parties as at the date of the contract. This is known as consequential loss.

First Limb in Hadley v Baxendale

Hadley was a miller who sent a mill shaft out for repair to Baxendale. Baxendale was late returning the repaired mill shaft which meant that the mill was idle for a period which it would not have been had the mill shaft been delivered on time. Baxendale did not know that the Hadley did not have a spare mill shaft, and it therefore could not be said that the idle time for the mill was an inevitable consequence of the breach of contract to fail to deliver the repaired mill shaft in time. Accordingly, Hadley was not granted direct loss under the first limb in Hadley v Baxendale.

Second Limb in Hadley v Baxendale

Victoria Laundry Ltd v Newman Industries Ltd 1949 was a case dealing with the second limb in Hadley v Baxendale. In that case, the claimant needed a new boiler for a business which it was starting. The boiler arrived five months late. Newman was found liable for the loss of profit caused by the inability for Victoria Laundry to trade, because it did not have a boiler. Newman did not know of contracts which were available from the government which would have been especially profitable. There needs to be a serious possibility or a real danger of damage being caused for the loss to be recovered under the second limb of Hadley v Baxendale.

If a minor breach of contract leads to a large sum of damages, it is less likely that a court will find that the defendant should be liable for an extraordinary sum of damages, unless the defendant was on notice the likely consequences of the minor breach.

In Hadley v Baxendale 156 ER 145:

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. Now, if the special circumstances under which the contract was actually made where 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. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, 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. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants.

In the Heron II 1969 1 AC, Lord Reid sitting in the House of Lords commented on Hadley v Baxendale as follows:

clearly did not and could not mean that it was not reasonably foreseeable that delay might stop the resumption of work in the mill. He merely said that in the great multitude—which I take to mean the great majority—of cases this would not happen. He was not distinguishing between results which were foreseeable or unforeseeable, but between results which were likely because they would happen in the great majority of cases, and results which were unlikely because they would only happen in a small minority of cases...
He meant that a result which will happen in the great majority of cases should fairly and reasonably be regarded as having been in the contemplation of the parties, but that a result which, though foreseeable as a substantial possibility, would only happen in a small minority of cases should not be regarded as having been in their contemplation.

The Point of the Case

It is not enough that the breach caused the loss. If damages are to be recovered, the loss must be of a type that flows naturally from the breach or that should have been within the defendant’s contemplation. If the loss satisfies one of these two tests, the loss and damage is reasonably foreseeable and recoverable by the claimant.