Hadley v. Baxendale: The Case of Unforeseen Damages

Law Books Case Contract

Contract Law

In the United States, most people are aware that our legal system is modeled on the British legal system. However, people are generally less aware that British law informs our own law in many areas. In point of fact, a number of our most fundamental legal concepts take origin in British case law. The famous case of Hadley v. Baxendale (1854) is one important example of this phenomenon.

Hadley v. Baxendale is an English contract law case which made a major contribution to the legal doctrine of foreseeability. As we will see, the plaintiff Hadley (who was the defendant in the appellate case) suffered considerably in lost profits as a consequence of the poor performance of Baxendale. However, the lost profits were not recoverable because the loss of such profits was not a reasonably foreseeable consequence of this performance.

Facts

Mr. Hadley and his associate were millers who worked together in the town of Gloucester. Hadley hired Baxendale to deliver a broken crankshaft to a repair shop in Greenwich so that the repairmen could correctly make a new crankshaft. The delivery was a time sensitive matter and Hadley needed the part to arrive at the repair shop by a specific date. Baxendale failed to deliver the broken crankshaft to the shop by the proper date and as a consequence of this lateness Hadley lost business. Hadley brought a claim against Baxendale to recover the profits which were lost as a result of Baxendale’s poor performance. The trial court jury awarded Hadley £25 (roughly £2500 today). This award was appealed and then brought before the Court of Exchequer.

Law

In cases where a breach of contract has occurred, damages which result from the breach are recoverable only when such damages could be reasonably foreseen unless special circumstances were communicated explicitly between the parties involved. Just because damages result from a breach of contract does not mean that they are automatically recoverable; they must be a reasonably foreseeable consequence of the breach.

Ruling

The appellate court (Court of Exchequer) overturned the jury award and determined that, although Baxendale had violated the contract by failing to deliver the crankshaft at the proper time, it was not reasonably foreseeable that the lateness would have caused a substantial loss of profits. In order for such lost profits to have been recoverable Hadley needed to have specifically communicated the fact that such lost profits were a probable consequence of late delivery.

Though factually and theoretically very simple, the case of Hadley v. Baxendale is a landmark decision and still informs our contract law today. As spectacular as it may sound, Hadley may still be invoked today when a package is not delivered on time!

Image credit: MrTinDC

Given its significance, the case of Hadley v. Baxendale is known by virtually every attorney no matter what their specialty. Attorneys who would like to learn more about how we can help them should view our tax tips for lawyers video

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Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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