Hadley v. Baxendale
Citation: Court of Exchequer, 9 Ex. 341, 156 Eng. Rep. 145 (1854)
Facts
A crankshaft at Hadley’s mill broke, halting operations. Hadley sent the broken shaft to a carrier, Baxendale, to be transported to a manufacturer for use as a model to make a replacement. Baxendale delayed delivery, causing Hadley’s mill to remain idle longer than necessary. Hadley sued for lost profits during the extended shutdown. The carrier had not been told that the mill was idle or that the shaft was the only one available.
Issue
Whether a carrier is liable for consequential damages — specifically lost profits — that were not foreseeable at the time of contracting.
Holding
The court held that Baxendale was not liable for lost profits. Damages for breach of contract are limited to those that arise naturally from the breach or that were in the reasonable contemplation of both parties at the time of contracting as a probable result of breach.
Rule
Contract damages are limited to: (1) losses arising naturally from the breach in the ordinary course of events, or (2) losses that both parties reasonably contemplated at the time of contracting as a probable consequence of breach. Special or consequential damages require notice of special circumstances.
Significance
The foundational case on consequential damages and foreseeability in contract law, establishing the two-prong Hadley rule that is codified in UCC § 2-715 and adopted in the Restatement (Second) of Contracts § 351. Every contracts course teaches this case to define the outer limits of recoverable damages.