Hadley v Baxendale

Facts

The Hadleys owned a flour mill in Gloucester. The mill's crankshaft broke, and they needed to send it to engineers in Greenwich as a pattern for a new one. They engaged Pickford & Co, carriers of whom Baxendale was a partner, to take it there.

Through the carrier's neglect, delivery was delayed by several days. During the delay the mill stood idle, because the Hadleys had no spare shaft. They sued for the profits they lost while the mill was stopped.

Issue

Could the Hadleys recover their lost profits as damages for the carrier's breach of contract, or were those losses too remote?

Decision

The Court of Exchequer held that the lost profits were not recoverable in the circumstances, and ordered a new trial. The jury had been wrongly directed.

Reasoning

Alderson B set out the test that still governs remoteness in contract. Damages should be those which may fairly and reasonably be considered either:

1. arising naturally, that is, according to the usual course of things, from the breach itself (the first limb); or
2. 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 a breach (the second limb).

Applying the first limb, the court reasoned that a carrier who knows only that it's carrying a broken mill shaft wouldn't expect the mill to stop. In the usual course of things, a miller might have a spare shaft, or the mill might have other problems. So a stoppage didn't arise naturally from the delay.

Under the second limb, lost profits would have been recoverable only if the special circumstances, that the mill couldn't operate without this shaft, had been communicated to the carrier when the contract was made. The court treated them as not communicated.

Why it matters

Hadley v Baxendale draws the line between losses a defendant must pay for and those it shouldn't have to. The underlying idea is that a contracting party takes on responsibility for the losses it could reasonably foresee when it agreed to perform, and can price or insure against them.

The test has been developed in later cases:

• In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, a laundry recovered ordinary lost profits from a delayed boiler, but not the profits of especially lucrative dyeing contracts the supplier didn't know about.
• In Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350, the House of Lords held that the loss must have been within reasonable contemplation as "not unlikely" to result, a stricter test than the reasonable foreseeability used in tort.
• In Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, the House of Lords considered whether the defendant had assumed responsibility for the type of loss, in an unusual market.

How it comes up in exams

In a remedies question, deal with remoteness after establishing breach and causation:

1. Identify each head of loss separately.
2. Ask whether it arises naturally from the breach (limb one).
3. If not, ask what the defendant knew when the contract was made, and whether that made the loss reasonably contemplated (limb two).
4. Then consider mitigation and any limitation or exclusion clauses.

Contrast the contract test with remoteness in tort, set by The Wagon Mound (No 1).

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