Critical Analysis of Hadley v Baxendale

Historical Significance

If one believes that Hadley's borrowing from the civil law was a rare occurrence, such a
conclusion would most assuredly be inaccurate. At least from the days of the Norman
Conquest, and especially in the 19th century, the common law and the civil law have
continually imported and exported legal ideas and doctrines to and from each other 1. Thus,
Hadley's importation of a civil law rule into the English common law system is actually,
historically speaking, not a startling phenomenon at all. Such transplanting of foreign rules
into domestic legal systems has been occurring throughout most of Western history certainly
since the Roman republic and empire 2. Not only that, but the transplantation of foreign rules
into legal domestic systems is actually the most frequent basis for legal development, as
opposed to legal invention by the members of the bar and the academic community 3. For
instance, the most basic of commercial instruments-the sales contract-is remarkably
unchanged from the arrangement which pertained in the Roman Empire.

1 See Gunther A. Weiss, The Enchantment of Codification in the Common-Law World, 25 YALE J. INT'L L.
435, 438 (2000)

2 See ALAN WATSON, LEGAL TRANSPLANTS: AN APPROACH TO COMPARATIVE LAW

95 (2d ed. 1993) [hereinafter WATSON, LEGAL TRANSPLANTS].

3
Id. ("[T]ransplanting is, in fact, the most fertile source of development. Most changes in most
systems are the result of borrowing.")
In Hadley v Baxendale it may be viewed as giving a completely simplified answer to the
question which is its first aspect presents. The answer to the question, how far shall we go in
charging to the defaulting promisor the consequences of his breach, it answers and deal with
what purports to be a single test, that of foreseeability4. The easiness and completeness of
this test are principally a matter of an illusion. In its first place, it is openly brand-named as
inappropriate in certain situations where the line is drawn much more closely in favor of the
defaulting promisor than the test of foreseeability as normally understood would draw it.
There are, therefore exceptions to the test, which say nothing of authorities which rejects it
altogether as too difficult to the defaulter. In its second place, it is very clear that the test of
foreseeability is less a definite test itself than a cover for a developing set of tests. As it is in
the case of all "reasonable man" standards there is an element of circularity about the test of
foreseeability. Like for what items of damage should the court hold the defaulting promisor?
For those which he should as a reasonable man have foreseen. But what should he have
foreseen as a reasonable man? Those items of damage for which the court feels he ought to
pay. Therefore, the test of foreseeability is a subject to manipulation by the simple device
of stating and defining the characteristics of the hypothetical man who is doing the
foreseeing5. By a gradual process of judicial attachment and rejection this secures a complex
personality we begin to know just what he can foresee in this and that situation, and we end

See, e.g., GRANT GILMORE, THE DEATH OF CONTRACT 83 (2d. ed. 1995) (Hadley v.
Baxendale is still, and presumably always will be, a fixed star in the jurisprudential firmament.); Ian
Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules,
101 YALE L.J. 729, 734-35 (1992) (Hadley continues to be one of the most analyzed contracts cases
in the law and economic literature.); Russell Korobkin, The Status Quo Bias and Contract Default
Rules, 83 CORNELL L. REV. 608, 618 n.21 (1998) (Perhaps the most famous case in all of contract
law, Hadley has become the example that default rule theorists most often employ to illustrate their
conceptual arguments.).

Hadley, 156 Eng. Rep. at 147-48. Parke referred to "Sedgwick," a noted treatise of the day. Id. at
147. See generally THEODORE SEDGWICK, A TREATISE ON THE MEASURE OF DAMAGES
(Arthur G. Sedgwick & Joseph H. Beale eds
not with one test but with a whole set of tests. This has happened in the law of negligence,
and it is happening, although obviously, to the reasonable man postulated by Hadley v.
Baxendale6.

Where two parties have made a contract with each other and which one of them has broken,
the damages which the other party was 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 it7.

Now, if the special circumstances under which the contract was actually made were linked
by the plaintiffs to the defendants, and thus known to both parties, the damages resulting
from the breach of such a contract, which they would reasonably contemplate, would be the
amount of injury which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated8.

Hadley v. Baxendale, 156 Eng. Rep. 145, 147

Article 74 of the CISG provides as follows: Damages for breach of contract by one party consist of
a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the
breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have
foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he
then knew or ought to have known, as a possible consequence of the breach of contract. United
Nations Convention on Contracts for the International Sale of Goods, opened

See Hadley, 156 Eng. Rep

"But, as on the other hand, if those special circumstances were wholly were unknown to the
party breaking the contract, he, at the most, could only be supposed to have had in his
contemplation the amount of injury which would arise generally, and in the great multitude of
cases not affected by any special circumstances, from such a breach of contract."

Facts of the Case

The plaintiffs, namely, Jonah and Joseph Hadley, were the grain millers and meal men at
the docks in the Gloucester, England. Their mill was relatively cutting edge for the times,
as it was powered by a steam engine rather than water power, allowing grain to be milled at
the docks before shipment. The mill was brought to a standstill when the engines crankshaft
broke. The Hadleys arranged to have a new one made by a manufacturer some distance
away. Before the new crankshaft could be fabricated, however, the manufacturer required that
the broken shaft be sent to it in order to ensure that the crankshaft would fit together properly
with the other parts of the steam engine. The Hadleys contracted with the defendant
Baxendale, who operated as a well-known common carrier, to deliver the crankshaft to the
manufacturer by a certain date for an agreed freight. Through some negligence, the carrier
failed to deliver on the date in question, so the mill was forced to remain closed an extra five
days. And The defendant had delayed in shipping the crankshaft. As a result the plaintiff had
lost profits caused by the delay in having his mill made operational. The defendant argued
that the plaintiffs losses were too remote in that at the time of entering the contract the lost
profits could not have been contemplated by the parties.

The Hadleys sued Baxendale for the profits they lost during those days. Baxendale
contended that he did not know the Hadleys would suffer any particular damage by reason
of the late delivery. He was not aware that the mill could not resume working because the
Hadleys did not have a spare shaft or other means of operating the mill.

Held

The Court declined to let Hadley to recover lost profits in this case, holding that Baxendale
could only be held liable for losses that were generally foreseeable, or if Hadley had
mentioned his special circumstances in advance. The mere fact that a party is sending
something to be repaired does not indicate that the party would lose profits if it is not
delivered on time. The court suggested various other conditions under which Hadley could
have entered into this contract that would not have presented such terrible conditions, and
noted that where special conditions exist, provisions can be made in the contract voluntarily
entered into by the parties to impose extra damages for a breach. The court also held that the
damages were too isolated. In doing so the court established two rules for the determination
of remoteness of damages in contract- Firstly The defendant will be liable for damages that
may reasonably be supposed to have been in the contemplation of the parties arising in the
normal course of events.

Secondly Where special circumstances are communicated, the defendant will be liable for
damages that may have been reasonably contemplated by the parties acquainted with that
special knowledge.

Court of Exchequer Chamber led by presiding Judge Baron Sir Edward Hall Alderson
placed element of Foreseeability as major determinate in consequential damages award.
Alderson noted that Appellant could have been held liable for losses that were generally
foreseeable, or if the Appellate had explicitly stated his special circumstance in advance to
the Appellant in needing the repaired component back in the prescribed time to minimize
business profit losses.

For the mere fact of transferring something to be fixed does not automatically indicate they
will lose profits if the item was not delivered on time, for the Judge theorized from a point of
law that the injured party may already had a replacement installed or that other means of
continuing business operations may have been enacted. Therefore, Court must observe a
matter of fairness upon both injured and breaching parties in damages assessment. Hence,
Appellee could have decided where special circumstances exist, provisions can be made in
the contract voluntarily entered into by the parties to impose extra damages for a breach.
Thereby, reducing contractual remoteness to a foreseeability, whereby this exercise can
possess both simplicity and comprehensiveness depending on reasonably within the
contemplation of both parties as a probable consequence of a breach.

Crtitical Analysis

In adjudicating the level of fairness in breach of contract case, Court elected to apply
different legal tests for direct damages versus consequential damages. Direct Damages are
derived from the actual contract breach itself, however for Consequential Damages of
breaching partys failure to perform and injured partys level of dependence on this
performance having a negative impact on business operations, Court elected to impose a
temporal element for review. Overall tenet in ascertaining compensations as a remedy is to
restore the parties back to a finish place they would have been in the contract been properly
performed, or colloquially restore the equilibrium of fairness in contract performance or what
should have been performed.

For this case, Baxendale and Ors breach of contract and direct damages are almost self
evident since they requested and secured crankshaft component delivery at specified time by
Joseph and Jonah Hadley, Appellant charged Appellee for the delivery service, and promised
its delivery from Gloucester to Greenwich circa 2 days. However, Appellant neglected to
deliver as promised for next 7 days, thereby sustaining direct damages9.

For consequential damages, Court instilled three criteria of Knowledge, Reasonably,

Foreseeability. For Knowledge, Court determined that Appellees servant dispatched to
request delivery service from Appellant only stated the mill was stopped, and that the shaft
must be sent immediately. Via this communication, no mention of any special urgency in
getting the crankshaft back to restore Appellees business operations, therefore it was
Reasonable for the Appellant not to have realized such a neglected transportation delay
would have negative collateral impact on the Appellee. Therefore, Appellant did not possess
Foreseeability that its actions would have automatically garnish such expanded negative
results. Henceforth, Court declared that Consequential Damages are limited to those that
arise naturally from a breach and those that are reasonably contemplated by the parties at the
time of contracting. The possession of communicative knowledge or even customary trade
practices between contracting parties is crucial in determining scope of contractual
reasonableness, foreseeability, and responsibility.
9

Florian Faust, Hadley v. Baxendale-An Understandable Miscarriage of Justice, 15 J. LEGAL HiST.

41, 41-42 (1994) (quoting Wilson v. Newport Dock Co., 35 L.J.R. (N.S.) Ex. 97, 103 (1866)).
Concerning the Reasonable Person Test, Court integrated Foreseeability less as a
definitive element, and more towards a legal platform in developing series of tests. Namely,
"For what items of damage should the court hold the defaulting promisor? Those which he
should as a reasonable man have foreseen. But what should he have foreseen as a reasonable
man ?. Via this hypothetical man doctrine, Court has used it to define refine - establish the
scope of foreseeability. Thus, via Judicial Inclusion and Exclusion, this hypothetical man
builds a complex persona by which the Court can definitively state what he could have or
should have foreseen in a particular situation10.

For the most part, giving effect to the letter of the rule in Hadley v Baxendale will also give
effect to the spirit of fair dealing that underlies the rule. Where the two diverge, though, is
where A enters into a contract with B, knowing that B is likely to suffer a particular kind of
loss if A breaches that contract, but A does not factor that knowledge into his decision as to
whether or not to enter into his contract with B.

If As breach does result in B suffering that kind of loss, the letter of the rule
in Hadley vBaxendale indicates that A should be held liable for that loss: at the time A
entered into his contract with B, it was reasonably foreseeable that if A breached his contract
with B, then B would suffer that type of loss.

However, the essence of the rule indicates that A should not be held liable for Bs loss at
least where he wasnt at fault for not factoring in the prospect of Bs suffering that type of
loss into his decision as to whether or not to contract with B, and if so on what terms. The
reason is that holding A liable for that kind of loss would mean that he wasnt given a fair
chance to consider whether or not he should contract with B, and if so on what terms. Had
A taken seriously the prospect that he might be held liable for the sort of loss that B has
suffered as a result of As breach, he might have refused to contract with B, or have
contracted on different terms. As he did not take that prospect seriously and, apparently,

10

Richard Danzig, Hadley v. Baxendale: A Study in the Industrialization of the Law, 4 J. LEGAL
STUD. 249, 249 n.2 (1975) (quoting J. WHITE & R. SUMMERS, HANDBOOK OF THE LAW
UNDER THE UNIFORM COMMERCIAL CODE 314 (1972)).
acted reasonably in failing to take that prospect seriously he should not be held liable for
the loss that B has suffered.

So the communication and the essence of the rule in Hadley v Baxendale will go in unlike
directions in the state where a contracting party predicts that the other party might suffer a
particular type of loss if the contract was breached.

According to the spirit of the rule in Hadley v Baxendale, a defendant should not be held
liable for a loss that he did not take the risk of being held liable for when he entered into his
contract with the claimant. Where the contracting party is shown to be familiar with all the
consequences that must of requirement follow from a breach on his part of the contract, it
may be reasonable to say he takes the risk of such consequences. Lord Hoffmann said that
a defendant should not be held liable for a loss that he did not agree to be held liable for
when he entered into the contract.

It seems reasonable to found liability for damages upon the intention of the parties because
all contractual liability is voluntarily undertaken. It must be in principle wrong to hold
someone liable for risks for which the people entering into such a contract in their particular
market, would not reasonably be considered to have undertaken.

In law, the damages are money demanded by, or ordered to be paid to, a person as
compensation for loss or injury11. In context of the Indian Contract Act, 1872 damages are
referred in context to breach of contract i.e. a party's failure to perform some contracted-for
or agreed-upon act, or his failure to comply with a duty imposed by law which is owed to
another or to society. Breach of contract is a legal concept in which a binding agreement or

11

Hadley, 156 Eng. Rep. at 147-48. Parke referred to "Sedgwick," a noted treatise of the day. Id. at 147. See
generally THEODORE SEDGWICK, A TREATISE ON THE MEASURE OF DAMAGES (Arthur G. Sedgwick
& Joseph H. Beale eds., Baker, Voorhis & Co. 9th ed. 1920) (1847)
bargained-for exchange is not honored by one or more of the parties to the contract by non-
performance or interference with the other party's performance.

On breach of contract by a defendant, a court generally awards the sum that would restore
the injured party to the economic situation they estimated from performance of the promise
or promises. When it is either not possible or not desirable to award damages measured in
that way, a court may award money damages designed to restore the injured party to the
economic position they occupied at the time the contract was entered , or designed to prevent
the breaching party from being unjustly enriched

On the basis of the two principles laid down by the court the defendants were not held liable
for the losses of profits, because in the large mass of cases of millers transport off broken
shafts for repair, it does not follow in the ordinary circumstances that the mill is stopped.
Even though it was pointed out that the mill was stopped there could have existed several
reasons for the stopping of the mill 12. The fact that the mill was out of action for want of the
shaft was a special circumstances affecting the plaintiffs mill and the same should have been
pointed out to the defendants in clear terms. It should have also been communicated that the
plaintiff would have suffered irrational loss by way of delay.

Economic arguments

The efficient breach theory. The claim of this theory is that damage rules should promote
efficiency. The theory focuses on this situation where there is a seller who has a contract with
a buyer, the first buyer, and then the seller kinds a second buyer who will pay him more for
the goods13, so much more that the seller can sell to the second buyer, fully compensate the
first buyer for the breach of that contract, and still come out ahead.

12

Hadley v. Baxendale, 156 Eng. Rep. 145, 147 (Ex. 1854).

13

Hadley v. Baxendale, 156 Eng. Rep. 145, 147 (Ex. 1854).

This, of course necessitates that the seller have precise information about the cost of the
breach to the first buyer; otherwise the seller won't make the right calculation about whether
the breach wiould be efficient.

Example

Case A

Damages to the first buyer will be $32,000. Neither the seller nor the buyer know this; they
both think the damages will be $16,000; they think this because that is what the damages
usually are from this kind of breach.

In this case, the seller will be willing to breach if the second buyer pays him $16,000 + his
expected profit from selling to the first buyer + some more. Then the buyer will think that he
will come out ahead by selling to the second buyer and compensating the first buyer. But the
seller will be wrong since the actual cost of the breach is $32,000.

Case B

Damages to the first buyer are $32,000, and the buyer knows this although the seller does
not. Here the seller will, unless the buyer tells him, think the damages are $16,000 and will
make the wrong decision about what is an efficient breach.

Similar Case to it

EVRA Corp. v. Swiss Bank Corp.

This is a transportation case, It is the money which is being transported , not a shaft. A bank
was transporting money to Europe. The fundamental contract in the case was between
Hyman-Michaels Co and an unnamed ship owner. H-M chartered the ship for two years, at
a rate that turned out to be extremely favourable. Good for H-M; bad for the ship owner.

The owner got his chance in 1972; H-M were late with a payment, which was a breach. The
owner did not sue for damages, instead he claimed the right to rescind--claimed a substantial
breach. The case went to arbitration and the arbitrator ruled against the ship owner. Held that
the late payment was not a substantial breach. Also, ship onwer had not objected to previous
late payments, waived right to rescind.

But then H-M was late again, in 1973; this time the arbitrator ruled in favor of the owner; he
could rescind. Reasons: the payment was several day late this time, and the delay was H-M's
fault.

Foreseeability in EVRA

What we want to look at certainly is the dispute between H-M and the bank. H-M made its
payments by sending a telex. One reason the second payment was late was that the bank
lost the telex. This resulted in a $2.1 million loss for H-M. The question under Hadley is:
was this loss foreseeable by the bank? The court says no; the bank could not have know that
$2 million was at stake. Result: the breacher--the bank that lost the telex--is not held liable
by the court. Court notes that there are a lot of similar cases involving suits against telegraph
companies. Looks like a standard application of the foreseeability rule.

The arguments in EVRA

In EVRA, a Posner opinion the court does talk about the theoretical justifications for the
Hadley doctrine. The court considers two arguments.

First, it looks at the argument that the bank will not know how carefully to treat the telex if it
does not know what the potential damages are. This is just the Hand formula: precautions
are efficient if and only if the cost of the precautions is less than. This would be good
argument for holding that H-M should disclose the potential damages.

The second argument is the mitigation argument that we were just considering above. The
court says the bank may have been careless in losing the wire transfer, the telex, but H-M was
also careless in waiting to the last minute to wire the payment. H-M could have prevented
the loss by wiring sooner, or by following up more quickly. The court's view of the case is
that H-M should have done more to prevent the loss.

This is the application of the Hadley foreseeability test we considered earlier. We define
unforeseeable damages as those damages the reasonable non-breacher would have prevented.
This tells the non-breacher: "The risk of those damages is on you because under the Hadley
rule, you won't be compensated for them14. Since H-M, had it acted reasonably by sending
the wire earlier, would have prevented the loss, the loss is unforeseeable. So under the
Hadley foreseeability test, the bank does not have to pay for the loss.

From Hadley's apparent lesson of efficient precautions, "penalty-default" theory has been
drawn!' A penalty default is a rule intended to en-courage opt-out by a party with private
information that she will disclose when contracting for an alternative to the rule. In Hadley,
a party who will suffer exceptional loss from breach is denied damages for such loss if her
contract is silent. She can avoid the default rule by proposing that the con-tract include
insurance against exceptional loss. With this proposal, she identifies herself as someone at
risk of such loss and permits her counterpart to take, and charge for, efficient precaution.
Penalty-default theory abstracts from the damages term at issue in Hadley. In principle, the
theory may ex-plain or justify any rule that is particularly costly for a party with private in-
formation she would like to conceal. Such a default rule may force the dis-closure of
information that will yield efficient contractual relationships, such as efficient precaution in
Hadley

14

Existing empirical work on the Hadley doctrine includes Richard Danzig, Hadley v. Baxendale: A
Study in the Industrialization of the Law, 12 J. LEGAL STUD. 241 (1975); Janet T. Landa, Hadley v.
Baxendale and the Expansion of the Middleman Economy, 16 J. LEGAL STUD. 455 (1987); Richard
A. Epstein, Beyond Foreseeability: Consequential Damages in the Law of Contract, 18 J. LEGAL
STUD. 105 (1989); Johnston, supra note 7, at 639-48s