Damage for Breach of contract
Introduction
Hadley v Baxendale (1854) EWHC J70 is one of the leading cases in the English law of contract.
Its applied to set the basic principles for determining the consequential damages that may arise as
a result of a breach of a contract by one of the parties involved. The breaching party is practically
liable for all the losses that may occur and which the parties should have at the time of signing
the contract foreseen. The other cases that may also be relevant to these case are 9 ExCh 341
(1854) 23LJ Ex 179 and 18 Jur 358 (1843-60) All ER Rep 461.
In the case of Hadley v Baxendale the claimants, who were Mr. Hadley together with another
claimant were actually millers who were working in partnership with the owners of a Gloucester
City Steam Mills and their core business involved cleaning grain, grounding it and packaging
them in different brands. One of the Crankshafts of the machines malfunctioned and broke down
and a new order for a new one was made to W. Joyce and Company who were operating in
Greenwich. To manufacture a new Crankshaft, the broken sample had to be transported and
delivered to the manufacturers factory premises. Baxendale were contracted by Hadley to
transport the broken Crankshaft to the factory premises of W. Joyce & Co. in Greenwich for
about £240 current value and they were to deliver it within a particular period of time. However,
Baxendale delayed and failed to deliver as agreed causing Hadley huge losses in his business
estimated at around £2500 at the current value which were awarded to Hadley after suing
Baxendale for damages. Baxendale appealed claiming that he was not wasn’t aware that Hadley
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would suffer any loses as a result of any delay or late delivery. The question was whether a
defender would actually be liable for any damages that he was not aware of and if they would
amount to a breach f a contract. The court held that Hadley could not be compensated as the
defendant was not aware of any special loses that may have resulted from the contract and
Hadley failed to mention any foreseeable loses to the defendant that may result in a breach of
contract. The court contended that the claimants demands for the spare part to be repaired did not
on its own constitute any agency on the part of the defendant and that any loses that may have
occurred as a result of the spare part being delivered late were actually unforeseeable at the time
of making the contract.
The facts of the case of Hadley v Baxendale are similar to the ones of Transfield Shipping Inc v
Mercator Shipping Inc (2008) UKHL 48 that relates to the remoteness of damage. The
Mercator’s ship which was known as the Achilleas was hired by Transfield shipping company, a
charterer for a period ranging from Five to seven months and it was to be returned before
midnight of May 2 the year 2004. On that particular day the ship was booked for Cargill
international another charterer from South Africa at cost of $39,500 per day for a maximum
period ranging from four to six months but the Ship was returned on May 11 by Transfield
charterers. Cargill agreed to take the ship late and but a lower rate of $31500 per day as the
freight market rates had fluctuated negatively. The contentious issue was how much Transfield
should compensate Mercator Shipping Company for the loss of profits. Transfield agreed to
compensate the Mercator for the differences in rates i.e. $158,301 but Mercator insisted on the
breach of contract and wanted the whole cost of the new contract to be charged to Transfield i.e.
$1,364,584. The rule in Hadley v Baxendale was followed and Transfield was allowed to pay the
amounts resulting in the differences in rates. The court held that liability was in the case of
3 Damages for Breach of Contract
Transfield Shipping Inc v Mercator Shipping Inc was restricted and the actual differences in
market rates would adequately compensate Mercator for the period that the ship was delayed.
The court of Appeal, under Judge Rix stated that
“…damages for late redelivery should be limited to the overrun period measure
unless the owners can show that, at the time of the contract, they had given their
charterers special information of their follow-up fixture, are both undesirable and
uncommercial. It is undesirable because it puts owners too much at the mercy of
their charterers, who can happily drain the last drop and more of profit at a time of
raised market rates, taking the risk of late redelivery, knowing that they will never
have to pay their owners more than the current market rate for the overrun period,
a rate which will never in truth properly reflect the value to the charterers of being
able to fit in another spot voyage at the last moment. It is uncommercial because,
if it is demanded that the charterers need to know more than they already do in the
ordinary course of events, when they already know that a new fixture, in all
probability fixed at or around the time of redelivery, will follow on their own
charter, then the demand if for something that cannot be provided. All that an
owner will be able to tell his charterer in most cases is that he plans to fix his
vessel anew at the time of redelivery. To which the charterer might reply: ‘well I
know that already! But don’t expect that your telling me that is enough to put me
on notice for the purpose of claiming loss of fixture damages, if I deliver the
vessel late and you turn out to lose your fixture!’ Such an answer, however,
reflects the uncommerciality and error of the charterers’ submission”
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But the House of Lords totally disagreed with the Court of Appeal decision. While reversing the
court of Appeal decision, Lord Hoffmann stated in the case of Hadley v Baxendale that;
“The case therefore raises a fundamental point of principle in the law of
contractual damages: is the rule that a party may recover losses which were
foreseeable (“not unlikely”) an external rule of law, imposed upon the parties to
every contract in default of express provision to the contrary, or is it a prima
facie assumption about what the parties may be taken to have intended, no doubt
applicable in the great majority of cases but capable of rebuttal in cases in which
the context, surrounding circumstances or general understanding in the relevant
market shows that a party would not reasonably have been regarded as assuming
responsibility for such losses?”
The test for rate of damage compensation in this case appears to be determined by the action that
a reasonable person would have taken given the same circumstances that the defendant was in
and the issues that were under consideration at the time of contracting (Llod’s Maritime and
Commercial Law Quarterly, n, d). The defendant did not contemplate that in the event of a
breach such facts would be considered and that he would be responsible for any losses that the
plaintiff may suffer as a of the breach.
Lord Hoffman in the case of Hadley v Baxendale added that in the case of contemplation rule,
”I agree that cases of departure from the ordinary foresee ability rule based on
individual circumstances will be unusual, but limitations on the extent of liability
in particular types of contract arising out of general expectations in certain
markets, such as banking and shipping, are likely to be more common. There is, I
think, an analogy with the distinction which Lord Cross of Chelsea drew in
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Liverpool City Council v Irwin [1977] AC 239, 257-258 between terms implied
into all contracts of a certain type and the implication of a term into a particular
contract… It seems to me logical to found liability for damages upon the intention
of the parties (objectively ascertained) because all contractual liability is
voluntarily undertaken. It must be in principle wrong to hold someone liable for
risks for which the people entering into such a contract in their particular market,
would not reasonably be considered to have undertaken”
The above argument classifies losses into two; those that occur naturally as a result of a
breach in the usual way and those that arise due to special circumstances and which
were communicated expressively to the parties in the contract and also those that were
reasonably contemplated by both parties as a probability upon breach of the contract.
The Hadley v Baxendale case initial judgment by Alderson J. declined to compensate
the claimants as the only particulars that were communicated to the defendants was that
they were to transport the spare part for repair. The second rule however the judge notes
that its whether consequential damages would be recoverable as they are limited to
special circumstances that must have been contemplated by both parties. Alderson J.
stated in the case of Hadley v Baxendale (1854) EWHC J70;
“If special circumstances under which the contract was actually made were
communicated by the plaintiffs to the defendants, and thus known to both parties,
the damages resulting from the breach of such a contract which they would
reasonably contemplate would be the amount of injury which would ordinarily
follow from a breach of contract under the special circumstances so known and
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communicated. But, on the other hand, if these special circumstances were wholly
unknown to the party breaking the contract, he, at the most, could only be
supposed to have had in his contemplation the amount of injury which would
arise generally, and in the great multitude of cases not affected by any special
circumstances, from such a breach of contract. For, had the special circumstances
been known, the parties might have specially provided for the breach of contract
by special terms as to the damages in that case; and of this advantage it would be
very unjust to deprive them”.
The rules in Hadley v Baxendale have been modified by the case of Victoria Laundry (Winsor)
Ltd v Newman Industries Ltd where a reasonable foresee-ability test is required in all types of
damages in the law of contract.
In the case of Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009]
HCA 8, the court held that the damages for breach were the actual cost that the repair work
would amount to and the attempts to compel the defendants to renovate was actually an equitable
remedy compared to compensation for damages but performance of a contract is preferable than
equitable remedies (Diamond & Foss, 1994). The reservation of the building in the same state
that it was without any kind of alterations would have been preferable but loss is the actual cost
of returning or restoring the building back to the position that it would have been if the contract
was performed as agreed.
To conclude, the argument in Hadley V Baxendale as stated by Tottenborn (2007) is reasonable
but not on its entirety. The precedent in the case of Hadley v Baxendale applies in some cases
but not all special cases that may involve special circumstances that have not been mentioned.
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The case is still applicable and it’s not well past its sell date. It’s still relevant in certain specific
instances (Kramer, 2004). The aggrieved party should be compensated or be allowed to recover
the loss that was reasonably foreseeable by the other party that breached the contract hence liable
for the breach. Hadley v Baxendale provides a reasonable test for remoteness and the two cases
supplement the rule in Hadley v Baxendale.
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References
Diamond, T.A. & Foss, H. (1994) Consequential Damages for Commercial Loss: An Alternative
to Hadley v. Baxendale, 63 Fordham L. Rev. 665.
Kramer, A. (2004) An Agreement-Centred Approach to Remoteness and Contract Damages’ in
Cohen and McKendrick (ed), Comparative Remedies for Breach of Contract, p. 249-286
Llod’s Maritime and Commercial Law Quarterly (n, d) retrieved May 12 2015 from
https://www.i- law.com/ilaw/doc/view.htm?id=280269
Liverpool City Council v Irwin [1977] AC 239, 257-258
Transfield Shipping Inc v Mercator Shipping Inc (2008) UKHL 48
Tottenborn, A. (2007) Hadley v Baxendale Foreseeability: a Principle Beyond Its Sell-by Date?”
(2007) 23 Journal of Contract Law 120 at 147.
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8,
Victoria Laundry (Winsor) Ltd v Newman Industries Ltd
