[Contract II] 13. HADLEY v. BAXENDALE

[jhj2799]

HADLEY v. BAXENDALE  Court of Exchequer 156 Eng. Rep. 145 (1854)

Facts: The plaintiffs, Hadley and another, owned and operated a mill in Gloucester. A component of their steam engine, the crankshaft, broke, causing the mill to cease operations. They contracted with the defendants, Pickford & Co., to transport the broken shaft to W. Joyce & Co. in Greenwich for repair. The plaintiffs informed the defendants' clerk that the mill was stopped and that the shaft must be delivered immediately. The defendants delayed the delivery of the shaft by several days, resulting in the plaintiffs' mill being inoperative for an extended period. The plaintiffs sued for the lost profits incurred during this delay.

Issue: Whether the defendants, as common carriers, are liable for the consequential damages, specifically the lost profits, caused by the delayed delivery of the crankshaft, considering they were not explicitly informed of the specific business consequences of their delay.

Rule: The court established a rule for assessing damages for breach of contract:

1.     Damages should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself.

2.     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 the breach of it.

Application:

The court applied the established rule to the facts as follows:

• The plaintiffs' servant informed the defendants' clerk that the mill was stopped and that the shaft must be sent immediately. However, the court needed to determine if this communication was sufficient to make the lost profits a foreseeable consequence of the delay.
• The general rule for determining damages was that they should be such as would naturally arise from the breach of contract itself, or which the parties would have reasonably contemplated as a probable result of the breach.
• While the breach by the defendants was the actual cause of the plaintiffs' lost profits, it could not be said that under ordinary circumstances such loss arises naturally from this type of breach. There are numerous reasons for a miller to send a crankshaft to a third party. The defendants had no way of knowing that their breach would cause a longer shutdown of the mill, resulting in lost profits.
• The court concluded that the defendants could not have reasonably contemplated the extent of the consequential damages (lost profits) without a more explicit communication of the potential financial impact on the plaintiffs' business. The plaintiffs never communicated the special circumstances to the defendants, nor did the defendants know of the special circumstances.

Consequential and incidental damages refer to costs and losses incurred indirectly from the breach of contract. Here, the court found that such damages (lost profits) were not recoverable unless the special circumstances leading to these damages were clearly communicated to both parties at the time of contract formation. While the plaintiffs informed the defendants that the mill was stopped, this was deemed insufficient to establish that the defendants should have reasonably anticipated the specific financial losses incurred.

Conclusion: The court concluded that the plaintiffs' damages (lost profits) were too remote and not recoverable under the rule established. Therefore, the judge should have directed the jury not to consider the loss of profits when estimating the damages. The case was remanded for a new trial with this guidance.

Feedback & Notes:

Breach of contract: Did not deliver the crane of the mill by the promised time – major duty violated

Recovery for the breach of contract: cancel + obtain damages

No cancellation; delivered

Duty to deliver was performed by the defendant

Late performance --> major violation? What’s difference between late performance and non-performance

Partial breach?

Difference between partial performance and full performance

- Partial performance: incomplete performance; requires the remaining duty to be accomplished by the contract 

Is late delivery considered partial performance? What’s the remaining duty to perform?

• Full performance without proper due care; Broke fiduciary duty
• Late performance; Major or minor breach?
• Why should we distinguish minor breach from major breach? Big consideration for damages
• Ex) Spouses do not live together for 50 years. Does this mean they want to cancel the marriage contract? Is divorce decree required?
• Ex) in a Chinese restaurant, you ordered food but it was served 30 minutes late than the promised time. But you ate it. Can he cancel the contract because it was served late?
  • Once he ate all the food he can’t cancel/not pay and ask for damages
  • If you want to cancel the food you should not eat the food
• Based on late performance, can the breaching party cancel the contract?
  • The cancellation is not available
  • Cancellation: return to the original state where no contract existed
• This issue never mentions about the cancellation of the contract
  • They did not return the shaft; they took the shaft
• If this breach was major, you can cancel the contract and require damages
• Late delivery
  • The non-breaching party took the product and later asked for damages together with the cancellation
  • To request cancellation, there should be a major breach by the seller (e.g. defective product)
  • Even though the cancellation is available, he does not have to take the option and just request for damages
  • You should figure out whether the breach was major or minor
• What are the damages in this case?
  • Delivery charge refund

Assignment: In a hypothetical scenario where an individual could not apply to law schools on time due to the late delivery of transcripts by the Law School Admission Council (LSAC), the types of damages that might be compensable could include actual, consequential, incidental, and potentially expectation damages, depending on the specifics of the case and the jurisdiction's legal standards.

Actual Damages

Actual damages, also known as compensatory damages, refer to the direct financial losses incurred by the individual due to the breach. In this context, actual damages could include:

-       Application Fees: Reimbursement for any non-refundable application fees paid to law schools that are now wasted because the applications were not submitted on time.

-       Transcript Fees: Reimbursement for the cost of ordering the transcripts from LSAC.

Consequential Damages (Special Damages)

Consequential damages refer to the indirect or secondary losses that result from the breach. These are typically more significant and harder to quantify. In this case, consequential damages might include:

-       Lost Future Earnings: If the delay caused by LSAC led to the individual missing a year of law school, the individual could claim the lost earnings from starting their legal career a year later than planned.

-       Relocation Costs: If the delay affects the individual's plans to relocate for law school, any additional costs incurred due to changing relocation plans could be claimed.

Incidental Damages

Incidental damages are the reasonable costs incurred to deal with the breach. For instance:

-       Additional Costs for Reapplying: Costs related to reapplying to law schools for the next admission cycle, including new application fees, travel costs for interviews, and other related expenses.

Expectation Damages

Expectation damages aim to put the non-breaching party in the position they would have been in had the breach not occurred. In this scenario:

-       Potential Scholarship Loss: If the individual missed out on scholarship opportunities due to the delayed application, they could claim the amount they would have received.

-       Lost Opportunity Costs: Compensation for the value of lost opportunities, such as internships, summer associate positions, or other professional opportunities that would have been available if the individual had started law school on time.

Emotional Distress (Limited)

While emotional distress damages are typically not awarded in breach of contract cases, there could be exceptions if the breach was particularly egregious or caused significant emotional harm that was foreseeable at the time of contracting.

Punitive Damages (Rare)

Punitive damages are not typically awarded in breach of contract cases unless there is evidence of willful, malicious, or fraudulent conduct. If it could be proven that LSAC acted with gross negligence or malice, there might be a claim for punitive damages, although this is rare and highly dependent on jurisdiction.

Legal Basis

To claim these damages, the plaintiff would need to establish:

-       Breach of Contract: That LSAC had a contractual obligation to deliver the transcripts on time.

-       Foreseeability: That LSAC knew or should have known that timely delivery was crucial and that delay could cause significant harm.

-       Causation: That the delay directly caused the claimed damages.

-       Quantifiable Loss: The exact financial impact of the delay.

Conclusion

If LSAC's late delivery of transcripts prevented timely application to law schools, the individual could potentially claim various types of damages, including actual, consequential, incidental, and expectation damages. The specific damages would depend on the demonstrable financial losses and the foreseeability of such losses at the time of contracting.