Hadley owned a mill, and the
shaft broke, shutting down operations. They needed to ship the shaft to
another city for repairs. They contracted with Baxendale, who claimed
that they would deliver the shaft the next day for £2. Baxendale did not
deliver the shaft for several days and Hadley lost business because of it.
So he sued.
It was assumed that Hadley
would lose business for a day or two anyway, but he felt the slacking on
Baxendale's part resulted in a larger loss of business than he would have
if Baxendale had worked faster.
Hadley argued that the damages
from loss of mill operation were not too remote, and were the only real
damages that Hadley suffered.
Other than lost time, Hadley
didn't suffer any monetary loss. Baxendale delivered the shaft just
fine, they just wasted Hadley’s time by doing it slowly.
Baxendale argued that the
damages for the operation of the mill were 'too remote' and they were not
liable for them.
Basically, Baxendale argued
that the only thing he could be liable for was direct damage (like if he
lost the shaft), he couldn't be responsible for how much money Hadley's
mill lost because that was out of his control.
Should Baxendale's liability
be dependent on how much business Hadley had? If Baxendale took the
exact same actions with a busy mill and a not busy mill should his
liability be different?
The English Trial Court
awarded Hadley £25 ($1000s of dollars today!). Baxendale appealed.
The English Trial Court came
to the conclusion that the breach of contract did definitely cause the
loss, and was the only cause of the loss.
The Court looked to French
case law which said, "The damages due to the plaintiff consist in
general of the loss that he has sustained, and the profit which he has
been prevented from acquiring. The defendant is only liable for damages
foreseen, or which might have been foreseen at the time of execution of
The English Appellate Court
reversed and remanded back to the Trial Court with explicit instructions
to the jury as to how to properly calculate damages.
The Appellate Court found
that the Trial Court could not consider the loss of profit in the
calculation of damages. (exactly the opposite of tort law!)
The Court found that if
there are special circumstances to the contract, then the defendant is
liable for damages occurring due to those special circumstances.
Assuming of course that those circumstances were properly communicated to
the defendant at the time the contract was entered into.
This is the principle of foreseeability.
Damages after the breach
are known as consequential damages.
Consequential damages are
only recoverable if they are foreseeable.
Foreseeable is defined as things that are true in the
vast majority of cases, or if they are specifically communicated. And
by specifically communicated, we mean to the head of the company, not
some random clerk who takes your order.
The Appellate Court felt
that Hadley did not properly explain that the mill wasn't working solely
because of the shaft. Therefore, Baxendale could not be held liable for
damages resulting from that problem.
Basically, Baxendale didn't
know the potential consequences of being slow, so he shouldn't be
responsible for damages he could know nothing about.
Remember, this was Hadley's
servant talking to Baxendale's clerk, neither of whom had the capability
to authority to raise prices. So, is it even reasonable to assume that
risks could be communicated?
What is the problem with
giving Hadley the benefit of the bargain? In this case, and in many cases, the actual direct damages and
therefore the benefit of the bargain is zero.
If the loss is borne by the
shipper, the price of shipping goes up. If the loss is borne by the
miller, the price of bread goes up. There is a real loss in this case,
who should bear the costs?