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Case summary for Hadley v. Baxendale:
- Hadley owned and operated a mill when the mill’s crank shaft broke. Hadley entered into a contract with Baxendale, to deliver the shaft to an engineering company on an agreed upon date. Hadley failed to inform Baxendale that the mill was inoperable until the replacement shaft arrived.
- Baxendale failed to deliver the shaft to the engineering company on the agreed upon date, and as a result, Hadley’s mill remained inoperable resulting in extended lost profits.
- Hadley brought suit against Baxendale, claiming he was entitled to special damages in the form of lost profits even though he did not inform Baxendale of the special circumstances.
- The court held that in order for a non-breaching party to recover damages arising out of any special circumstances, the special circumstances must be communicated to and known by all parties at the time of formation. Since Hadley failed to disclose his special circumstances to Baxendale, he was barred from the award of lost profits.
Hadley v. Baxendale Case Brief
Statement of the facts:
After his crank shaft broke, Hadley’s corn mill operation ceased until the shaft could be replaced. Hadley had to send the shaft to engineering company, Joyce and Co., so that they could use it as a model to make a new one. Hadley and Pickford and Co., a shipping company owned and operated by Baxendale, entered into a contract where if Hadley deliver the shaft to Pickford and Co before noon the next day, Baxendale would have the shaft delivered to Joyce and Co. the following day. As agreed, Hadley delivered the shaft to Pickford and Co. before noon and paid the shipping services. Unfortunately the shipping was delayed as a result of Pickford’s negligence, and the shaft was delivered several days after the agreed upon date. As a result of Pickford’s breach, Hadley’s mill remained closed until the new shaft was delivered. In response Hadley filed a claim against Baxendale seeking damages. In the claim for damages, Hadley included the lost profits his business suffered as a result of Pickford and Co.’s breach.
The trial court awarded Hadley damages of £25 in the form of lost profits. Baxendale appealed.
Rule of Law or Legal Principle Applied:
A non-breaching party to a contract may recover damages which are reasonably foreseeable to the parties at the time of contract formation. The non-breaching party may also recover damages stemming from circumstances which were communicated to all known parties at formation.
The trial judge should instruct the jury not to consider lost profits in awarding damages.
At the time both parties entered into a contract, Hadley failed to tell Baxendale that any delay in shipping would result in Hadley’s lost profits. Since Baxendale did not know of Hadley’s special circumstances, that his mill was inoperable until the new shaft was delivered, the special circumstances were not reasonably foreseeable at the time the contract was formed.
The court of exchequer held that when one party breaches, the other party may recover damages that are reasonably foreseeable to both parties at contract formation. In addition, the non-breaching party may also recover damages arising out of any special circumstances so long as those circumstances were communicated to and known by all parties.
Here, Hadley’s failure to disclose his special circumstances prevents him from recovering damages. Hadley never informed Pickford and Co. that his mill operation was entirely dependent on receiving a new shaft. The court points out that not all broken mill shafts render the mill inoperable resulting in lost profits. For example, some may have a a temporary mill shaft for use when the broken one is out for repair. As a result, Baxendale is not liable for the damages arising out of Hadley’s unknown circumstances.
Hadley v. Baxendale established a limitation on damages to those which naturally result from a breach and are reasonably contemplated by the contracting parties at contract formation. These damages are known as consequential damages.