CASE COMMENT

LAW OF CONTRACTS

SOUJAS SAHA
B.A. LL.B Section A
A90811122028
Faculty – Mr Atish Chakraborty
Case:

Hadley & Anor v Baxendale & Ors [1854] EWHC J70

Introduction:

In circumstances of contract breach, damages are the most used remedy. In contract law,
damages are frequently awarded to put the non-breaching party in the position he would have
been in if the contract had been completed properly. However, in such instances, a key
question to examine is the scope of the breaching party's culpability.

Is the breaching party obligated to reimburse the non-breaching party for all direct and
indirect losses incurred because of the contract's breach? Is compensation available for
remote losses?

The English case of Hadley v. Baxendale ([1854] EWHC J70) 1854 is the most important
case law that tackles these concerns. A bench led by Judge Sir Edward Hall Alderson decided
the case at the Court of Exchequer.

The judgment limits the breaching party's liability such that the damages imposed are not
excessively large to compensate. A cap on the contracting party's liability is justified by the
fact that unrestricted liability would discourage the average person from entering commercial
transactions. Contracting becomes a risky enterprise with unbounded liability because the
parties cannot foresee the monetary worth of their promise.

Facts:

The facts of the English case of Hadley v. Baxendale concern a contract for carriage of a
mill's broken component. Hadley and his associates were the owners of Gloucester's City
Steam Mills. Using steam power, the mill was involved in the cleaning and processing of
food grains into flour and bran. The crankshaft driving the steam engine broke on one of the
mill's days of operation, bringing operations to a halt.
The mill's owners engaged Greenwich-based engineering firm W. Joyce & Co. to create a
new crankshaft. The fractured crankshaft was submitted to the makers as a reference for the
new component.

Hadley contacted Baxendale, who was running the common carrier Pickford & Co., through
his agent. Both parties agreed on a price for the shipping of the broken crankshaft, as well as
a delivery timeframe. Hadley did stress that it is critical that the delivery be completed before
the deadline.

However, the consignment was rerouted through London, where the fractured crankshaft was
stored until it could be sent along with other components to Greenwich. The shipment arrived
at the manufacturer several days late. The mill in Gloucester remained closed at this time.
Hadley sustained a significant loss as a result of the mill's inactivity.

Aggrieved by his loss Hadley sued Baxendale for damages to compensate for the losses he
has suffered due to the non-operation of the mill and possible loss of goodwill and customers.

Issues Involved:

 Whether the defendant was liable for breach of contract and whether the plaintiff was
entitled to damages because of lost profits?

Judgment:

The Bench determined that Hadley could not recover lost earnings from Baxendale since the
mill's closure was not foreseen because of the breaching party's breach of contract. Hadley did not
specify at the time of contracting that the mill would be out of commission until the replacement
crankshaft was fitted. A party cannot be asked to compensate for something he could not
reasonably anticipate when entering into a contract.
The judges cited several scenarios in which a mill owner could send his gear for maintenance.
There could be a spare for such a critical component so that the mill can continue to operate, or
the mill could continue to operate even without the component. Since the component was so
vital to the mill’s operation Hadley could have simply informed Baxendale of the nature of
loss he stands to suffer if the delivery is not made on time. A reasonable man cannot be
expected to come to that conclusion on his own.

Judge Sir Edward Hall Alderson laid down a general rule on damages in breach of contracts
as:

“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.”

Analysis:

As previously stated, the Hadley v. Baxendale rule distinguishes between two categories of
losses: general damages and consequential or particular damages.

The general damages are those that inevitably result from a contract failure. For example,
suppose Raj makes a contract with Jai to supply a particular quantity of food grains at a given
price on a certain date but fails to fulfil the agreement. The general damages in such a
circumstance will be equal to the difference between the price Jai has to pay for purchasing
the same quantity of food grains from another vendor on the given date. So, the general
damages in such a case will be the difference between the market price and the contract price
of the goods.

According to the Hadley v. Baxendale rule, the non-breaching party may claim consequential
damages only if both parties to the contract were aware of the likelihood of such losses
stemming from the breach of contract. It should also be mentioned that the rule on
consequential damage is applied based on the parties' knowledge at the time of contracting
and the norm of a reasonable man.

The rule on consequential damages effectively limits the liability of contract parties in the
case of a breach of contract. Consider the same scenario we mentioned in the case of general
damages, in which A delivers food grains to B on a specific day. If B required the food grains
as an input to his food processing industry and A failed to provide the products on schedule,
the industry would be forced to close. A shall be liable for profit loss only if B has told him
that production must be halted due to a delay in the delivery of food grains.

Relation with The Indian Contract Act, 1872:

The rule of Hadley v. Baxendale is incorporated in the first proviso of Section 73 of the
Indian Contract Act, 1872. The Section, in full, states that:

“73. Compensation for loss or damage caused by breach of Contract1– 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.

Such compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract-

The rule as embedded in Section 73 of the Indian Contract Act, 1872 had been used to decide
several seminal cases by the Indian Judiciary.

Madras Railway Co. v. Govinda Rau was one of the first cases in India to apply the Hadley v.
Baxendale rule. Govinda Rau, the petitioner in this case, was a tailor who hired the Railway
Company to transport his sewing machine and garments to Karamadai, where he planned to set
up shop during a local festival. However, the items were delayed, and Govinda Rau was forced to
return without being able to conduct his business.

Rau filed a lawsuit against the Railway Company for compensation for his travel expenditures
and lost income from operating his business during the festival.

The High Court of Madras dismissed the claim for lost profit, citing Section 73 of the Indian
Contract Act, 1872, because Rau had failed to notify the Railway Company of the date by which
the commodities were to be delivered or the purpose for which the goods were being conveyed.

Another example of the rule's use is shown in Union of India v. Hari Mohan Ghosh. The case
concerned a misplaced consignment of artificial silk being transported by the Indian Railways.
The owner of the commodities, Hari Mohan, sued the railways for the value of the goods as well
as the lost profit. The Railways were not awarded damages for lost profits by the Guwahati High
Court as they were not aware of the purpose or nature of goods transported.
Conclusion:

The Hadley v. Baxendale rule limits the liability of contract parties. According to the rule, in the
event of a contract breach, the breaching party must pay damages only for losses that result
naturally from the breach and losses that the parties may reasonably anticipate at the time of
contracting. Because it reduces the cost of a breach, the rule encourages contracting in economic
transactions. Compensatory damages are simply to be paid for the most immediate consequences
of a breach.

However, with changes in business practises and technological breakthroughs, the most remote
consequences of a breach of contract can be forecast and averted. As a result, numerous authors
argue that the Hadley v. Baxendale ruling is obsolete and needs revision.

Reference:

Mathews Savio (July 14, 2021) blog.ipleaders.in