Introduction :

The term contract is defined under Section 2(h) of the Indian Contract Act, 1872. A contract is a promise enforceable by law. An agreement can be called a contact only when there is some consideration for it, when the persons or parties involved in the contract are competent, when they have provided free consent and when their object is lawful. A contract can be discharged by performance, or by agreement or by a breach of contract. A breach of contract is a when a party neglects his liability under it or completely or partially fails to perform his obligations as per the contract. As a result of the breach of contract, one party can claim damages or compensation from the other party who has not fulfilled his obligations to the contract in terms of money. Every action for damages puts forward two issues: remoteness of damage and measure of damages. The consequences for a breach of contract can be infinite in theory but there must be an end to the liability of the defendant. The issue here is to find where the limit to liability is as beyond that limit the damage is said to be irrecoverable and remote. In the case of Hadley v. Baxendale, an attempt was made to find a solution to the above issue.

Background :

The principle governing remoteness of damages was explained in this case. The rules stated in this case were that a party injured by a breach of contract could recover only those damages which were either to be considered “reasonably as arising naturally, i.e., according to the usual course of things” from the breach of contract, or could reasonably have been considered by both parties at the time they entered into the contract as the likely result of the breach. This is the basis for comprehending special damages. In this case, the plaintiffs, Hadley and another, were millers and worked in a partnership as proprietors of the City Steam-Mills in Gloucester. A crankshaft of a steam engine at the mill broke and Hadley arranged to have a new one made by W. Joyce & Co. in Greenwich. Before the new crankshaft could be made and delivered, W. Joyce & Co. required that the broken crankshaft be sent to them in order to ensure that the new crankshaft would fit properly with the other parts of the steam engine. The plaintiffs made a contract with the defendants, Baxendale, to deliver the crankshaft to the engineers for repair by a certain date at a cost of £2 sterling and 4 shillings. The plaintiffs’ servant had told the defendant that the mill was not able to function, and the shaft must be sent immediately. Baxendale failed to deliver the crankshaft on the date in question, causing Hadley to lose business. The plaintiff sued Baxendale for the loss of profits which would have been made during the period of the delay.

Issue :

Whether a defendant in a breach of contract can be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.

Analysis :

  • In this case, the Exchequer court permitted Baxendale’s appeal but did not allow Hadley to recover lost profits. Further, the court held that Baxendale will only be liable under two circumstances : (i) for the loss that was commonly foreseeable or (ii) if Hadley had put forth his special circumstances in advance. This decision has laid down two rules :-
  • General or direct damages are damages that arise naturally in the ordinary course of things from the breach itself. Here, the defendant can be held liable for all natural consequences of the breach of the contract.
  • Special or indirect damages are damages that arise on account of the unforeseen circumstances affecting the plaintiff. Damages cannot be recovered unless the possibility of the same had been put forth beforehand.

Here, the question in discussion is, whether the defendant in a breach of contract can be held liable for damages that he was not aware would be incurred from that breach. It can be said that the court’s decision is appropriate in this case because a nonbreaching party can claim damages that were caused naturally due to the breach itself or those that can be reasonably contemplated by the parties at the time of contracting. Although the breach by the defendant was the major cause of the lost profits of the plaintiff, it cannot be said that under normal circumstances such losses arise naturally from this kind of breach. There can be various reasons for a miller to send a crank shaft to a third party and the defendants had no clarity that their breach would cause a longer shutdown of the mill resulting in lost profits. As already said earlier, the plaintiffs had never communicated the special circumstances to the defendants.

The decision given by the Exchequer court has not only complied with the existing law i.e., Section 73 of the Indian Contract Act, 1872, but has also been used as a basis for providing decisions in cases like Madras Railway Co. v. Govinda Rau, Columbia Saw Mill Co. v. Nettleship, Horne v. Midland Railway Co., Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd etc. Section 73 of the Indian Contract Act, 1872 states that “when a contract has been breached, the plaintiff is entitled to receive, from the defendant, 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 could foresee when they made the contract, to be likely to result from the breach of it. Such compensation is not given for any remote and indirect loss of damage sustained by reason of the breach. This act clearly provides that the defendant cannot be held liable for any kind of remote or indirect loss sustained by reason of the breach of contract”. It appears from Section 73 of the Act that the general principle for assessment of damages is compensatory, i.e. the innocent party is to be placed, so far as money can do, in the same position as if the contract had been performed. 

In the case of Madras Railway Co. v. Govinda Rau, the plaintiff, a tailor in order to make some profits during the festive season, delivered a sewing machine and cloth to the defendant (railway company) to be sent to the place where the festival was being celebrated. There was a delay in the delivery of goods and the festival came to an end. The plaintiff had not communicated to the defendant about his special purpose but claimed compensation for the travelling expenses to the place of the festival and also for the profits which he would have earned. In this case, the court rightly held that the compensation claimed was too remote as the claims were due to the frustration of the special purpose and this was not known to the defendant company. A similar opinion was held in the case of Columbia Saw Mill Co. v. Nettleship where parts of the plaintiff’s saw mill were packed in several containers and handed over to the carrier (defendant). In the process, one container was lost and hence, a complete mill could not be operated. In case the mill had operated normally, the plaintiff would have earned the price of the lost container and its profits. Here, the court allowed compensation for the lost container but the intended use of the mill was viewed to be very remote. Again, in the case of Horne v. Midland Railway Co., the plaintiff, a shoemaker had to provide a said quantity of shoes to the French army. He was charging the party an extremely high price. The railway company (defendant) was supposed to transport the shoes by February 3rd. There was a delay and the consignee refused to accept it. In order for them to buy the shoes, the plaintiff had to bring down the price to half its original price. The plaintiff sued the defendant claiming for compensation of his losses. The loss was of an extraordinary nature and therefore the court did not favour the plaintiff to claim damages. Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd. Is another significant case law in this context because the link between the two rules (general and special damages) was re-examined in this case. The plaintiff, Victoria laundry was meant to receive a boiler from Newman Industries which was delayed by 5 months. The company lost a lucrative cleaning contract from the Ministry of Supply because they did not have enough laundry capacity. Victoria Laundry sued Newman Industries for its losses but the court allowed only general damages to be compensated for and not the loss of profits.

The Court in the case of Hadley v. Baxendale, has efficiently justified its reasoning in the decision and has interpreted the law appropriately. While analysing the judgement of this case, no loopholes or alternative approaches can be thought of because the court had presented a very logical, practical and valid decision which has further been used as a precedent in various Indian, English and Australian cases as stated above.

Conclusion :

The decision of Hadley v. Baxendale has been an influential case in many common law jurisdictions. It has been applied subsequently in the English, US and Australian jurisdictions. It is understood that the first rule stated above is objective in nature as it makes liability compensate for the losses incurred and it is entirely based on a reasonable man’s foresight of the loss that will ordinarily result from the beach of the contract. Whereas, the second rule is considered to be subjective in nature as it makes liability a thing only to an extent where it depends upon the knowledge of the parties at the time of the contract about the probable result of the breach. However, the burden of proof is on the plaintiff to show that he suffered losses due to the defendant’s breach which requires compensation. The case of Hadley v. Baxendale had a significant impact as the Law before this case was completely ignorant about the determination of consequential damages and the extent to which the damages can be claimed or not claimed. This paved way for Contract Law in India also to impose a section under section 73 of the Indian Contracts Act, 1872 that laid emphasis on consequential damages and in what circumstances it can be claimed. This judgement also served as a basic principle in future similar cases. This well-established case law also showcases the courts willingness to interpret contracts flexibly wherever it finds it appropriate. The main rule this case law brings about is the way to determine recoverability of losses or damages.


Kalyani S