HADLEY vs BAXENDALE Case establishes the leading rule for determining consequential damages resulting from a breach of contract. It laid down the principle that a breaching party is liable for all losses that the contracting parties should have expected, but not for any losses that the breaching party could not have expected based on the information available to him.
COURT: The Court of Exchequer
BENCH: Alderson B, Parke B, Platt B, and Martin B
- The plaintiff, Hadley, was the owner of a mill with a broken crankshaft. So, he hired the defendant, Baxendale, to transport the crankshaft to the location where it would be repaired and then back to the plaintiff.
- The defendant then made an error, causing the crankshaft to be returned to the plaintiff a week later than expected because of which his mill remained out of operation during that time. The plaintiff claimed the defendant had acted negligently and attempted to recover the loss of profit because of the unplanned, week-long closure.
- Hadley sued for the profits he lost because of Baxendale’s late delivery, and a jury awarded him £25. Baxendale appealed, claiming that he had no knowledge that Hadley would be harmed because of the late delivery.
- Whether the defendant was liable for breach of contract and whether the plaintiff was entitled to damages because of lost profits?
- Whether the plaintiff’s loss of profits because of the mill’s closure was too remote to justify a claim?
- The plaintiff complained that because of late delivery of the crankshaft, his mill had to remain inoperative for several days, and he lost the profits that he otherwise would have gained. Therefore, the defendant stood liable for breach of contract and had to pay compensation.
- The defendant retorted that such an action was unreasonable because he had no knowledge that the mill would have to close because of the delayed return of the crankshaft, and thus the loss of profit did not meet the test of remoteness.
Justice Baron Alderson: When two parties enter a contract that one of them breaches, the damages that the other party should receive should be those that can fairly and reasonably be considered either arising naturally, i.e., in the ordinary course of things, from the breach of contract itself or those that can reasonably be assumed to have been in the contemplation of the parties at the time they entered the contract. Losing profits, in this case, cannot be considered a consequence of the breach of contract in how both parties could have reasonably expected when they made the contract.
The Court ruled in favor of the defendant, holding that a party could only successfully sue for losses caused by a breach of contract if the loss is reasonably viewed to have resulted naturally from the breach, or if the fact that such losses would occur should have been reasonably expected by the parties when the contract was formed. Baxendale was not liable for the mill’s lost profits because he had not reasonably foreseen the consequences of delay and Hadley had not informed him of them.
Hadley v. Baxendale is thus a landmark English case in the law of contract, which set forth the rule that damages are limited to those that occur naturally because of the breach and those that the parties reasonably expected at the time of the formation of the contract. It is a leading case as it established the principles by which the jury should be guided in determining the extent of damages resulting from any breach of contract.
Note: RELEVANT PROVISIONS OF REMEDIES OF BREACH OF CONTRACT IN INDIAN CONTRACT ACT, 1872 WERE FORMULATED BASED ON HADLEY VS BAXENDALE CASE.