Hadley v Baxendale (1854) – When the loss is not just ‘run of the mill’

Hadley & Another v Baxendale & Others (1854) 9 Ex 341

This case concerns remoteness of losses – a line must be drawn dictating which losses are recoverable and which are not. There are two aspects – an objective, ‘normal’ possibility of loss, and a subjective, ‘known’ possibility of loss. If the actual loss suffered fulfils neither of these limbs, then it cannot be claimed for.

Baron Alderson set out two limbs:

Limb 1 – Objective

Can the loss have been fairly and reasonably considered to have arisen naturally?

This type of loss is based on ‘the usual course of things’ – i.e. a normal and expected loss to suffer in the circumstances arising from the breach of contract itself. The loss suffered may be of a rare enough kind that it does not satisfy this test. In that case, the claimant must establish the second limb.

Limb 2 – Subjective

Was the loss reasonably supposed to have been in the contemplation of both parties, at the time that the contract was signed?

The specific parties in the case (crucially, the defendant) must have had sufficient actual knowledge of the particular circumstances to be aware of the risk of possible losses. If the defendant is not aware of the possibility of loss flowing from their potential breach of contract, they will not be liable for said losses if they do occur.

The case facts

The crankshaft of a steam engine at a mill owned by Hadley was broken, so he contracted with Baxendale to transport it for repairs. Baxendale only returned the crankshaft a week after agreed in the contract. During this week the claimant’s mill continued to be out of operation. The claimant sued, attempting to recover potential profits that he would have received during the unexpected week of closure.

The defendant argued that he had not known that delay would result in closure of the mill, and thus resulting loss of profit – therefore, arguing that the loss was too remote from the breach for a claim. He argued that he had not reasonably foreseen the consequences of delay (i.e. the loss), especially because the claimant had not informed him of the consequences of any possible delay. Because something was being repaired, it does not mean that profits would be lost if it was not returned in time.

The court held for the defendant, on the grounds that the loss had not fulfilled either limb of the test which Baron Alderson established:

            The loss of profits did not flow naturally from the delay to delivery.

            The defendant was not aware of the possibility of losses incurred by late delivery.

Significance

A party can only successfully claim for losses flowing from a breach of contract when those losses are considered to have arisen naturally from the breach, or where such losses would be reasonably contemplated by both parties as a being a result of such a breach, when the contract was formed.

A contracting party should ensure that notice of the possibility of loss flowing from breach of contract is included in the document (and explanation of importance of due delivery, e.g. ‘time is of the essence’).

In derivatives law, delay is catered for by well-established contractual remedies, each master agreement generally having its own boilerplate clauses providing procedures for delay or failure of delivery or payment.

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