What legal issues are addressed in this case?

The central issue is whether a carrier who delays delivery of a broken mill shaft is liable for the mill owners' lost profits during the resulting stoppage, i.e., whether such consequential damages are too remote. Subsidiary issues include what knowledge the carrier had at the time of contracting (the plaintiffs' servant said only that the item was a mill shaft and that the mill was stopped), whether remoteness is a question of law for the court or of fact for the jury, whether the judge adequately instructed the jury on a definite rule of damages, and whether the carrier's status as a common carrier without any special contract enlarged or limited its liability.

What rule did the court rely on in this case?

The court applied the two-limb rule: damages for breach of contract are those fairly and reasonably considered either (1) arising naturally, i.e., according to the usual course of things, from the breach itself, or (2) reasonably supposed to have been in the contemplation of both parties at the time of contracting as the probable result of breach. If special circumstances were communicated to and known by both parties, damages include the injury ordinarily following breach under those circumstances; if they were wholly unknown to the breaching party, he is presumed to contemplate only the injury that would arise generally in the great multitude of cases. Since the defendants knew only that the article was a broken mill shaft and the plaintiffs were millers, which was consistent with the plaintiffs having a spare shaft or other defects in the mill, lost profits were neither natural nor contemplated, and the jury should not have considered them.

Would the case have come out differently if certain facts were changed?

Yes. If the plaintiffs had told the carrier that the mill was wholly idle, that they had no spare shaft, and that the delay in getting the model shaft to the engineers would extend the stoppage, the lost profits would fall within the second limb as within the parties' contemplation and likely be recoverable. Likewise, if the carrier had contracted specifically to deliver by a stated time with knowledge that the mill depended on it (as in Waters v. Towers), or if the circumstances made stoppage the obvious and necessary result of delay, the outcome could differ. Conversely, if the carrier had been told only that a part was being sent back, or if the plaintiffs had a spare shaft in place, the ruling against recovery would apply even more strongly.

Hadley v. Baxendale

Court of Exchequer - 9 Ex. 341, 156 Eng. Rep. 145 (1854)

Main Takeaway

Damages for breach of contract are limited to losses arising naturally from the breach or reasonably within both parties' contemplation at the time of contracting, so special losses such as a stopped mill's lost profits are recoverable only if the special circumstances were communicated to the breaching party. This foreseeability rule allocates risk by letting parties who know of unusual exposure price or limit it.

Issues

Is a carrier liable for a customer's lost profits resulting from delayed delivery of a broken mill shaft when the carrier was not informed of the special circumstances that would make such losses a probable consequence of the delay?

Facts

Hadley and another (plaintiffs) operated a steam-powered flour mill in Gloucester. The mill's crank shaft broke and the mill stopped working. The plaintiffs needed to send the broken shaft to W. Joyce & Co., the engineers in Greenwich who had made the engine, to serve as a pattern for a new shaft. The plaintiffs' servant took the shaft to the office of Baxendale and others (defendants), common carriers trading as Pickford & Co., and told the clerk that the mill was stopped and the shaft must be sent immediately. The clerk replied that if it was delivered by noon on any day, it would reach Greenwich the following day. The plaintiffs paid 2l. 4s. for carriage, and the clerk was told that a special entry would be made if required to hasten delivery. The defendants neglected to deliver the shaft promptly, so the new shaft arrived several days later than it otherwise would have. The mill remained idle longer, and the plaintiffs lost profits they would otherwise have earned. The plaintiffs did not tell the defendants that they had no spare shaft or that the mill's operation depended entirely on the shaft's prompt return.

Procedural History

The plaintiffs sued the defendants for breach of the carriage contract. The defendants pleaded non assumpserunt to the first count and paid 25l. into court on the second count. The plaintiffs entered a nolle prosequi on the first count and replied that the sum paid in was insufficient on the second. At trial before Crompton, J., at the Gloucester Assizes, the defendants objected that the lost-profit damages were too remote. The judge left the case generally to the jury, which returned a verdict for the plaintiffs with 25l. in damages beyond the amount paid into court. The defendants obtained a rule nisi for a new trial on the ground of misdirection, and the Court of Exchequer heard argument on the rule.

Holding and Rationale

(Alderson, B.)

No. The defendants are not liable for the plaintiffs' lost profits, and a new trial is required because the jury was given no definite rule to guide its assessment of damages.

The proper rule is that damages for breach of contract should be such as may fairly and reasonably be considered either arising naturally, according to the usual course of things, from the breach 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 its breach.

If special circumstances were communicated by the plaintiff to the defendant and thus known to both parties, the damages are the injury that would ordinarily follow from a breach under those known circumstances. If the special circumstances were wholly unknown to the breaching party, he can be supposed to have contemplated only the injury that would arise generally, in the great multitude of cases not affected by special circumstances. Had the special circumstances been known, the parties could have provided specially for the consequences of a breach, and it would be unjust to deprive them of that opportunity.

Applying this rule, the only facts communicated to the defendants were that the article was the broken shaft of a mill and that the plaintiffs were the millers. These facts do not show that the mill's profits would necessarily stop on an unreasonable delay in delivery. The plaintiffs might have had a spare shaft, or the mill machinery might have been defective in other respects, so that delay would not have affected profits. In the great multitude of cases in which millers send broken shafts by carrier, such a loss would not ordinarily follow. The special circumstances that would make the loss a natural consequence were never communicated to the defendants.

Therefore the loss of profits could not reasonably have been contemplated by both parties as a probable result of the breach. The trial judge should have instructed the jury not to consider lost profits in estimating damages, and a new trial is ordered.