Contract Law

Hadley v. Baxendale

(1854) 9 Ex 341; 156 ER 145

Facts

Hadley operated a flour mill.
The mill stopped working because its crankshaft broke.
A replacement crankshaft could not be manufactured until the broken shaft was sent to engineers as a model.
Baxendale’s carrier firm agreed to transport the shaft.
Delivery was delayed through the carrier’s breach.
During the delay, the mill remained closed and Hadley lost profits.
The carrier had not been clearly informed that:
the mill would remain completely shut until delivery; or
no spare shaft was available.
Hadley sued for the profits lost during the delay.

Damages are recoverable where they:
arise naturally, according to the usual course of things, from the breach; or
arise from special circumstances that were communicated to and contemplated by both parties when the contract was made.
Loss outside these two categories is too remote.

Delay in transporting machinery may naturally cause some inconvenience.
But it does not necessarily follow that the entire business will remain closed.
A mill might:
possess a spare shaft;
continue partial operations;
obtain another replacement;
use the delivery only for routine repair.
Therefore, complete loss of profits was not an ordinary and inevitable consequence of delayed delivery.
Hadley could recover such special loss only if the carrier knew the particular circumstances.
The carrier was told that the item was a broken mill shaft, but was not sufficiently informed that the mill could not operate until it arrived.
Without that knowledge, the carrier could not reasonably be understood to have assumed responsibility for all lost business profits.
The law limits damages in this way because contractual parties price and allocate risk based on information available when they contract.
Where unusual consequences are likely, the affected party must communicate them.

The lost profits were too remote and were not recoverable.
The carrier had not been given sufficient notice of the special circumstances.
Use this case for: ordinary losses are recoverable automatically; unusual losses require communication at the time of contracting. (Justia Law)