Hadley v. Baxendale

Case brief: template

Case name:	Hadley v Baxendale
Court:	Court of Exchequer
Citation; Date:	9 Ex. 341, 156 Eng. Rep. 145 (1854)

PROCEDURAL HISTORY
Trial court:		Appeal court (for appeal cases only):
Plaintiff:	millers	Appellant:
Defendant:	carriers	Respondent:

Facts of the case:
At the trial before Crompton, J„ at the last Gloucester Assizes, it appeared that the plaintiffs carried on an extensive business as millers at Gloucester; and that, on the 11 th of May, their mill was stopped by a breakage of the crank shaft by which the mill was worked. The steam-engine was manufactured by Messrs. Joyce & Co., the engineers, at Greenwich, and it became necessary to send the shaft as a pattern for a new one to Greenwich. The fracture was discovered on the 12th, and on the 13th the plaintiffs sent one of their servants to the office of the defendants, who are the well known carriers trading under the name of Pickford & Co., for the purpose of having the shaft carried to Greenwich. The plaintiffs' servant told the clerk that the mill was stopped, and that the shaft must be sent immediately; and in answer to the inquiry when the shaft would be taken, the answer was, that if it was sent up by twelve o'clock any day, it would be delivered at Greenwich on the following day. On the following day the shaft was taken by the defendants, before noon, for the purpose of being conveyed to Greenwich. and the sum of 21. 4s. was paid for its carriage for the whole distance; at the same time the defendants' clerk was told that a special entry, if required. should be made to hasten its delivery. The delivery of the shaft at Greenwich was delayed by some neglect: and the consequence was, that the plaintiffs did not receive the new shaft for several days after they would otherwise have done, and the working of their mill was thereby delayed, and they thereby lost the profits they would otherwise have received. On the part of the defendants, it was objected that these damages were too remote, and that the defendants were not liable with respect to them. The learned Judge left the case generally to the jury, who found a verdict with damages beyond the amount paid into Court. Whateley, in last Michaelmas Term, obtained a rule nisi for a new trial, on the ground of misdirection.

Remedy sought:

Court opinion (including key issues and arguments):
We think that there ought to be a new trial in this case; but, in so doing, we deem it to be expedient and necessary to state explicitly the rule which the Judge, at the next trial, ought, in our opinion, to direct the jury to be governed by when they estimate the damages. ''There are certain established rules." this Court says. in Alder v. Keighley (15 M. & W. 117). ''according to which the jury ought to find." And the Court, in that case, adds: "and here there is a clear rule, that the amount which would have been received if the contract had been kept, is the measure of damages if the contract is broken." 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. 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. 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. Now, in the present case, if we are to apply the principles above laid down, we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill. But how do these circumstances shew reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill.... But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that 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.... The Judge ought, therefore, to have told the jury, that. upon the facts then before them. they ought not to take the loss of profits into consideration at all in estimating the damages. There must therefore be a new trial in this case.

Disposition of case:
There must therefore be a new trial in this case.

ECONOMIC ANALYSIS OF THE CASE

Efficiency/incentive issues discussed in the court opinion:

Other efficiency/incentive issues relevant to the case:

Assessment of the economic consequences of the court decision:

     1. The Hadley v. Baxendale opinion has had universal acceptance in Anglo-American law as staling an appropriate rule of limitation on damages that would otherwise be recoverable under an unrestricted "expectation" rule. Does the decision itself appear to be sustainable on the facts of the Hadley case? In Victoria Laundry (Windsor) Ltd. v. Newman Industries. Ltd., [1949] 2 K.B. 528, 537 (C.A.), a later English court expressed the opinion that the headnote to Hadley is "definitely misleading in so far as it says that the defendants' clerk, who attended at the office, was told that the mill was stopped and that the shaft must be delivered immediately." If the court in Hadley had actually regarded that as established, it was suggested, then it is "reasonably plain" from Baron Alderson's opinion in Hadley that it would have decided that case "the other way round."
    On the other hand, it has been suggested that the opinion in Hadley can be viewed as consistent with the facts as stated in the headnote if one assumes that the clerk was not told either that the stoppage of the mill was solely due to the shaft's being broken or that no other shaft was available in the meantime. McCormick, The Contemplation Rule as a Limitation upon Damages for Breach of Contract, 19 Minn. L. Rev. 497, 500-501 (1935).
    Professor Richard Danzig concludes that there is evidence both ways on the question of whether the Hadleys indeed "served notice on the . . . clerk of their extreme dependence on the shaft," but suggests that in any event the "rudimentary law of agency" as it then existed might have required notice to be served on Baxendale himself, or at least on some agent more exalted than a mere receiving clerk. Danzig, Hadley v. Baxendale, A Study in the Industrialization of the Law, 4J. Leg. Stud. 249, 262-263 (1975). Professor Danzig's article (subReadings for Thursday, December 13, 2001 Page 4 stantially incorporated also in his book The Capability Problem in Contract Law (1978)) is an unusually interesting exploration of the context in which the Hadley case was decided. Besides the now conventional notion that the Hadley decision was more or less consciously an attempt to protect infant industries in the early stages of the industrial revolution. Professor Danzig sees a number of other factors reflected in that decision: tensions between Parliament and the courts, between different courts, and between judge and jury; differences over the proper extent of liability of common carriers, and about the way in which their activities should be regulated; and the still "rudimentary" state in 1854 of both commercial and agency law.
    2. The two types of damages described by the court in Hadley are frequently characterized as "general" and "special" damages. Professor John Murray has offered the following definitions of those terms: The distinction between general and special damages is often stated as follows: the former arise naturally from the breach and are implied or presumed by the law. The latter do not arise naturally; they are not within the common experience of mankind as arising in the particular situation and, therefore, they are not implied or presumed by the law. Thus, the terms general and special may be used synonymously with the terms natural and unnatural, usual and unusual. Murray goes on to point out that although all injury resulting from breach is literally "consequential," that term is ordinarily used only to refer to "special," or "unusual," damage. J. Murray, Contracts §225 n.48 (1974). Copyright 1974 by The Michie Co.
    3. Although the rule of Hadley v. Baxendale has been viewed traditionally as a rule limiting damages for breach of contract, it has also been applied to tort cases. See, e.g., Evra Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir. 1982) (Posner,J.); see also Kerr S.S. Co. v. Radio Corp. of America, 245 N.Y. 284, 157 N.E. 140 (1927) (Cardozo, C.J.). In the Evra case, the Court of Appeals invoked Hadley as authority for its ruling that the defendant bank was not liable for profits lost as a result of defendant's failure to act with due care in transmitting funds as directed by plaintiff; the delay in transmission caused the plaintiff to lose its right to an advantageous ship-charter contract. (The action was in tort because there was no direct privity between plaintiff and the defendant, which acted on instructions forwarded to it by intermediary banks.) Although justified by the court in terms of the Hadley requirement of foreseeability, the Evra decision has also been analyzed as an application of Judge Posner's economic theories, in effect transmuting the Hadley rule of foreseeability into a rule imposing liability on the party best able to avoid the injurious consequences of breach at the lowest cost, and thus reaching the "efficient" result. Note, An Economic Approach to Hadley v. Baxendale, 62 Neb. L. Rev. 157 (1983). A case with facts similar to Evra, and reaching the same result, is Central Coordinates, Inc. v. Morgan Guaranty Trust Co., 494 N.Y.S.2d 602 (Sup. Ct. 1985) (loss claimed to have resulted from bank's alleged delay in transmitting wire order for transfer of funds; no recovery on contract, negligence, or strict liability).