Hadley v Baxendale (1854)

Every question on damages for breach of contract begins here. Hadley v Baxendale decided how far liability for breach extends — the problem of remoteness of damage. A breach can set off a chain of consequences that never ends; the law has to cut the chain somewhere, and Alderson B's judgment supplied the knife.

For an Indian student it has a double importance: it is the origin of the rule and the source of s. 73, which codifies it. The Privy Council said as early as A.K.A.S. Jamal v Moolla Dawood Sons & Co (1916) that s. 73 is declaratory of the common law as to damages, and illustration (i) is Hadley itself transposed into the Act. But the section is not a photocopy of the English rule, and knowing where the wording diverges — and where the Indian illustration produces a different answer from the English case — is what a good answer contains.

Joseph and Jonah Hadley were millers at Gloucester, running the City Steam-Mills, a substantial operation driven by a steam engine. On 11 May 1853 the crank shaft of that engine broke and the mill stopped. A steam mill without its crank shaft is a building full of idle machinery.

The engine had been built by W. Joyce & Co of Greenwich. A new shaft could not be ordered from a catalogue; the broken one had to go to Greenwich to serve as the pattern from which the replacement would be cast. Until it arrived, nothing could begin.

On 12 May the Hadleys' servant went to the office of Pickford & Co, the well-known carriers, of which Joseph Baxendale was managing director. This is the moment on which the case turns. The servant told the clerk that the mill was stopped and that the shaft must be sent immediately. The clerk answered that if the shaft was delivered by twelve o'clock on any day it would be at Greenwich the following day. It was delivered next morning before noon and £2 4s was paid for the carriage.

The carriers then delayed. Through some neglect on their part the shaft did not reach Greenwich when it should have, and the new shaft did not come back to Gloucester for several days beyond the time it would otherwise have taken. For those days the mill stood idle.

The Hadleys sued for the profits lost during the avoidable stoppage — a claim of £300. At the trial the carriers paid £25 into court and the jury awarded a further £25. The carriers obtained a rule for a new trial on the ground that the judge should have directed the jury that lost profits were not a proper measure.

1. Where a carrier delays, is he liable for the profits the consignor loses while the goods are missing?
2. More generally, by what test does the law decide which consequences of a breach must be paid for?
3. Does it matter that the carrier's clerk had been told the mill was stopped?

For the Hadleys: the carrier had been told in plain terms that the mill was stopped and that speed was essential; the loss of milling profits was the obvious and immediate result of delay in returning the shaft; a carrier who accepts goods on those terms and then dawdles must answer for the natural result.

For Baxendale: the carriers were carriers of goods, not insurers of their customers' businesses. They were paid a few shillings to move a piece of iron from Gloucester to Greenwich, and had no means of knowing the state of the Hadleys' business, whether the mill had a spare shaft, whether it had other work in hand, or what its profits were. Damages of £300 on a £2 4s carriage were out of all proportion to anything they could be taken to have accepted. Loss of profit was a special loss, and unless the special circumstances were brought home to the carrier so that he had the chance to price or refuse the risk, he should not bear it.

A new trial was ordered. The Court of Exchequer held that the jury ought not to have been allowed to take the lost profits into consideration. In stating the reason, Alderson B laid down the rule that has governed ever since:

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.

Applying it, the lost profits were irrecoverable. In the great multitude of cases of millers sending off a broken shaft to a third person by a carrier under ordinary circumstances, the mill does not stand idle — a prudent miller has a spare, or the mill has other work. So the loss did not arise naturally. And the special circumstance that made this mill's profits depend on the shaft had not been brought home to the carriers in a way that could fairly be said to have made it part of their bargain.

Damages for breach of contract are recoverable only if they (a) arise naturally, according to the usual course of things, from the breach, or (b) may reasonably be supposed to have been in the contemplation of both parties, at the time of contracting, as the probable result of the breach.

The two limbs are conventionally called general damages and special damages. General damages arise in the ordinary course, and the defendant is fixed with them because everyone is taken to know the ordinary course of things. Special damages arise from unusual circumstances peculiar to the plaintiff, and are recoverable only if those circumstances were known to the defendant at the time of contracting.

Note what the case did not decide. It did not decide that a miller can never recover lost profits from a carrier, nor whether mere communication of the special circumstances is enough — that question was left open and became the later battleground. And the fact that the servant had told the clerk the mill was stopped sits uneasily with the result; the report of the facts and the reasoning have never been perfectly reconciled.

The purpose of the rule is to give the contracting party the chance to protect himself. If the special circumstances are communicated before the contract is made, he can decline the business, charge more, or stipulate for a limitation of liability. If they are not, he contracts on the footing of the ordinary case and should be judged by it. The rule is about the allocation of risk at the moment of contracting — which is why knowledge is tested at the time the contract was made, not the time of breach. A favourite examiner's point: knowledge acquired after the contract is irrelevant.

The second limb is objective in one sense and subjective in another. It requires the loss to have been in the contemplation of both parties, importing what the defendant knew and not merely what the plaintiff intended. Put briefly: the first rule is objective, resting on a reasonable man's foresight of what naturally follows; the second is subjective, resting on the parties' actual knowledge when they contracted.

Two decisions show the first limb at work. In Horne v Midland Railway Co (1873) shoe manufacturers had contracted to supply shoes at an unusually high price for the French army, to be delivered by 3 February. They told the railway the consignment must arrive by the 3rd but not that the contract was exceptional; delivery was late, the consignee refused, and the shoes fetched about half price. The exceptional element was irrecoverable. In Madras Railway Co v Govinda Rau (1898) a tailor sent his sewing machine and cloth to a place where he expected special business at a festival; the goods arrived after it. He recovered neither travel and stay expenses nor hoped-for profits, having given the railway no notice of his special purpose.

How s. 73 codifies the rule, and where the wording differs

Section 73, first paragraph:

When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

Both limbs are there. Note five differences, each worth a line in an answer:

1. "Which the parties knew" replaces "in the contemplation of both parties". The Indian formula is more concrete: what the parties actually knew when they contracted, not what they may be supposed to have contemplated.
2. "Likely to result" replaces "the probable result" — if anything the looser of the two, which is interesting against the English retreat from "reasonably foreseeable" in The Heron II.
3. An express bar on remote loss. The second paragraph: "Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach." Hadley has no such express statement; in India it is statutory.
4. Extension to quasi-contract. The third paragraph applies the same measure to obligations resembling those created by contract — ss. 68–72.
5. A statutory mitigation rule. The Explanation: "In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account." England reached the same result through case law.

There is also a substantive divergence hidden in the illustrations, and it is one of the best points available here. Illustration (i) reproduces Hadley: A delivers a machine to B, a common carrier, to be conveyed without delay to A's mill, informing B that his mill is stopped for want of the machine; B unreasonably delays; A loses a profitable Government contract. The Act's answer is that A is entitled to the average profit that would have been made by working the mill during the delay — but not the loss on the Government contract. On facts closely resembling Hadley, the Indian illustration awards the ordinary lost profits because the stoppage was communicated; the English case refused them. If a problem puts the Hadley facts in an Indian setting, illustration (i) governs, and the answer is not simply "Hadley v Baxendale, no lost profits".

Illustrations (k), (o), (p) and (q) are the other side: without communication of the sub-contract or special purpose, the buyer recovers only the market difference — not resale profit, not the loss of the season, not the loss caused by closing his mill.

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949). Launderers and dyers ordered a much larger boiler in order to expand; the sellers delivered five months late. Asquith LJ restated the subject in a set of propositions: only such loss is recoverable as was at the time of the contract reasonably foreseeable as liable to result from the breach; foreseeability depends on knowledge; and knowledge is of two kinds — imputed (everyone is taken to know the ordinary course of things: the first rule) and actual (knowledge of special circumstances: the second rule). The launderers recovered the ordinary profits they would have made with the boiler in use, because no supplier who promises an unusually large boiler by a fixed date, knowing it is to go into use at once, can say he could not foresee that loss of business would follow delay. They could not recover the extra profits on exceptionally lucrative dyeing contracts of which the sellers knew nothing.

The effect was to collapse the two rules into a single principle of foreseeability — a "new look" for Hadley. Diplock LJ later said there are not two rules but two instances of a single rule.

Koufos v C. Czarnikow Ltd (The Heron II) (1969). The House of Lords pulled back. A vessel carrying sugar from Constanza to Basrah deviated in breach and arrived nine days late; the charterer intended to sell on arrival, the market had fallen, and he claimed the difference. The shipowner knew there was a sugar market at Basrah and that prices fluctuate, but not that the charterer meant to sell at once. The House upheld the claim, restoring the emphasis on the contemplation of the parties rather than the reasonable man's foresight, because "reasonably foreseeable" is the language of tort and imports a much wider liability.

Lord Reid's analysis is the one to remember. Alderson B was not distinguishing foreseeable results from unforeseeable ones, but results that are likely because they happen in the great majority of cases from results that, though foreseeable as a substantial possibility, happen only in a small minority. The test offered was whether the loss was "not unlikely" — a degree of probability considerably less than an even chance but nevertheless not very unusual. Other phrasings were "liable to result", "a real danger", "a serious possibility". The point is that contract remoteness is narrower than tort remoteness, because the contract-breaker had the chance to bargain about the risk and the tortfeasor did not.

Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) (2008). Charterers redelivered a vessel nine days late. The owners had fixed a follow-on charter at a high rate; the delay forced renegotiation, by which time the market had collapsed, and the owners lost over a million dollars across the whole follow-on period. The charterers said the measure was the difference between market and charter rate for the nine days of overrun. The House of Lords held for the charterers.

The reasoning divided. Lord Hoffmann and Lord Hope used an assumption of responsibility analysis: the question is not merely whether the loss was of a foreseeable type, but whether, on a proper construction of the contract and against the background of market understanding, the contract-breaker can be taken to have assumed responsibility for that kind of loss. The general understanding in the shipping market was that liability for late redelivery was measured by the overrun period. Lord Rodger and Baroness Hale preferred the orthodox route: this type of loss was not within the parties' contemplation.

Because of that split the gloss has never displaced the orthodox rule even in England; later English cases treat it as an exception for unusual cases rather than the general test. Indian courts have not adopted it. Section 73 asks what the parties knew would be likely to result, not what responsibility the defendant assumed; adding that filter would be adding words to the section. Say in an Indian answer that The Achilleas is an important English development, confined and controversial even there, and no part of Indian law.

Karsandas H. Thacker v Saran Engineering Co Ltd (1965) is the Indian application to have ready. There was a contract to supply 200 tons of scrap iron; the buyer had undertaken to supply the same quantity to the Export Corporation of India. The seller failed to deliver, the buyer could not keep his commitment, and the Export Corporation recovered from him the difference between contract and market price. The buyer sued the seller for that sum and the Supreme Court refused it. The facts fell within illustration (k): the seller does not pay compensation the buyer has had to pay his sub-buyer unless he was made aware of the buyer's purpose at the time of the contract. Raghubar Dayal J added a second reason. Iron scrap was subject to a controlled price which had not changed, so on non-delivery the buyer could have bought in the market at the same controlled price and similar incidental charges; he therefore suffered no loss on the ordinary measure at all. The only loss he actually suffered flowed from his resale contract, outside the seller's knowledge.

Two examinable propositions come out of it: loss of profit on a resale is special loss needing communication; and the ordinary measure is the market difference, so where market price equals contract price there is nothing to recover.

The Explanation to s. 73 — mitigation

The Explanation directs that in estimating the loss, the means which existed of remedying the inconvenience caused by the non-performance must be taken into account. The injured party must take reasonable steps to keep his loss down and cannot recover what is due to his own neglect.

• Seller's side. If the buyer refuses delivery, the seller should resell at the prevailing market price and recover the difference; if he holds on and the market falls further he cannot recover the enlarged loss. A.K.A.S. Jamal v Moolla Dawood Sons & Co (1916, PC) is the classic: shares tendered and refused on 30 December, the loss on that day's market being Rs 1,09,218; the seller in fact sold later on a rising market and lost only Rs 79,862, yet was held entitled to the larger figure, because the loss is measured at the date of the breach. Lord Wrenbury: the plaintiff owes a duty of taking all reasonable steps to mitigate and cannot claim any sum due to his own neglect, but the loss to be ascertained is the loss at the date of the breach; if the seller retains the shares he cannot recover further loss if the market falls, nor have his damages reduced if it rises.
• Buyer's side. If the seller defaults, the buyer should buy from an alternative source if goods are available. Murlidhar Chiranjilal v Harishchandra Dwarkadas (1962) is the Indian authority most often cited on measure and mitigation together.
• Employment. A wrongfully dismissed employee must accept comparable alternative employment if offered, but need not take a lesser job to reduce the employer's bill.
• Character of the rule. It is not an enforceable duty owed to anyone. As the Bombay High Court put it in K.G. Hiranandani v Bharat Barrel & Drum Mfg Co, the Explanation is not an independent rule or duty but a factor to be taken into account in assessing damages under the main part of s. 73. The burden of showing failure to mitigate lies on the defendant.

Commit to your answer before reading each response.

1. What if the millers' clerk had told the carrier, "the mill is stopped and stays stopped until this shaft returns"?

Then the lost profits move from limb 2's failure into limb 2's success: the special circumstances were communicated at the time of contracting, so the extraordinary loss was in both parties' contemplation, and the carrier answers for it. Knowledge is the hinge on which the second limb turns — and it also explains carrier price lists: the more you disclose, the more the carrier bears, and the more the carriage should cost.

2. What if the mill had owned a spare shaft after all?

Then even the ordinary-loss claim thins out: with a spare in place, a delayed return causes no standstill "in the usual course of things," so limb 1 yields little. Damages compensate loss actually flowing from breach — the rule never guarantees the profits a well-run mill would not have lost.

3. What if, instead of a carrier, the defendant were today's courier delivering a lawyer's appeal papers, which arrive too late and the appeal is dismissed?

Same analysis, modern dress: the courier knows documents matter generally (limb 1: nominal or modest loss for delay), but the catastrophic loss of an appeal is a special circumstance — recoverable only if the courier was told what the packet was and when it had to arrive. This is why "declared value" and "time-critical" services exist.