Hadley Vs Baxendale

From the prominent contract law case of Hadley vs Baxendale came the principles for limiting lia-
bility i.e, consequential damages can only be recovered if at the time when contract was made the
breaching party had reason to foresee that consequential damages would be the probable result of
breach.1We intend to direct the attention by giving an economic approach to it by various theories at
the same time dealing with how economic approach makes a difference in context to law. Moreover,
we will also address that, while making contract the parties to the contract must clarify all the terms
and no incomplete information should be entertained and if there is no concurrence in clarity of terms
of the contract then not only the breaching party but the party making the contract is also liable as
in the case of Hadley vs Baxendale.

I. INTRODUCTION

The well known case in contract law Hadley vs Baxendale sets forth two major principle relating to
remoteness of damages which has brought about a change in the scenario in regards to limiting the
consequential damages and has enforced us to accentuate and bring variations by giving an economic
approach to it. Also, we will include how does economic approach in law brings change in the legal
aspects and widen the horizon of decision making. Economic analysis is an interdisciplinary subject
that brings together two great fields of study and facilitates a greater understanding of both.2

Bringing an economic approach in the case increases efficiency of performance of a contract and help
us focus on the value maximisation.There are two types of buyers, one who place low value of per-
formance and the other with high value of performance.Now, the buyer who will place low value on
performance will prefer not to reveal all the information to the promisor while on the other hand the
buyer with high value on performance will reveal all the information in respect to get his work done
and it makes it important for the promisee to take efficient precaution in case of breach and would
also make it evident for the promisor to take precaution for not breaching the contract.

When one party to the contract knows about the risk involved then we can’t held the other party liable
for loss if the breach takes place until and unless it is conveyed to the other party the risk of breaching

1
Hadley Vs Baxendale, 9 Exch. 341, 156 Eng.Rep. 145 (1854).
2
Cooter Robert, Law and Economics, 4th Edition Pearson 3 (2010).
the performance. It is important to note that the transferring parties information is the one that assist
the promisor and the promisee in efficiently planning their exchange.

The other aspect that takes up the major role is the foreseeability.The promisee must foresee the
consequences in case of breach of contract by the promisor. Taking an example of a electricity house
from where electricity is been given to an area if any of the instrument is broken they must have a
spare because they know the chain of consequences they have to face as they need to deal with the
people who get electricity due to them.The people wont wait till the instrument is fixed. So reasonable
amount of precaution considering the foreseeability of the event is must.

Moreover, as the principle of Hadley vs baxendale enunciates only those damages can be recovered
which arouse at the time the contract was made or damages that occur naturally i.e., in usual course
of employment.The expected damages would occur wholly on the basis of what was decided while
making of a contract and not on the basis of what all processes were done in completion of con-
tract.The promisor is liable for breach of contract and not the lost profit. Consider an example where
a commercial photographer purchases a roll of film to take pictures of the Himalayas for a magazine.
The cost of development of the film by the manufacturer is included in the purchase price. The pho-
tographer incurs heavy expenses (including the hire of an airplane) to complete the assignment. He
mails the film to the manufacturer but it is mislaid in the developing room and never found.3 Now,
the photographer cannot ask the reimbursement for his flight ticket and other expenses that lead to
the main contract.These are just supplement to the main contract and the reimbursement can only be
claimed for the main contract and not its supplements as otherwise then it would avoid similar losses
in future.

II. ECONOMIC ANALYSIS OF LAW

Until recently, law is confined only to the use of economics to the areas such as trust law, regulated
industries, tax. Law needs economics in these areas to answer such questions “what is the defendant’s
share of market?” This limited interaction changed in the early 1960s when the economics analysis

3
Hause Larry, An Economic Approach to Hadley v. Baxendale: EV Corporation v. Swiss Bank Corporation,Volume
62 Issue 1 Nebraska Law Review 169 (1982).
of law expanded into more traditional areas of the law, such as property, contracts, torts, criminal law
and procedure, and constitution law. This new use of law asked different questions such as “what
remedy for breach of contract will cause efficient reliance upon promises?”, “Will harsher punish-
ment deter violent crimes?”.

Economist provided a scientific theory to predict the effects of legal sanctions on behaviour. To econ-
omists, sanctions look prices, and presumably, people respond to these sanctions much as they re-
spond to prices. In addition to a scientific theory of behaviour, economics provides a useful normative
standard for evaluating law and policy. Laws are not just arcane technical arguments; they are instru-
ments for achieving important social goals. Economics predicts the effects of policies on efficiency.
Efficiency is always relevant to policy making because it is always better to achieve any given policy
at lower cost rather than at higher cost.4

To give a better idea of what economic analysis of law means, one example to cynosure would be-

Example- an oil company signs a contract to deliver oil by certain date from the Middle East to
European manufacturer. Before the oil is delivered, war breaks out in the exporting country, so that
the oil company cannot perform the contract as promised. The lack of oil causes the European man-
ufacturer to reduce production and loss profits. The manufacturer brings an action against the oil
company for breach of contract and asks the court to award a sum of money, called “damages,” that
is equal to the amount of profits the manufacturer would have realised if the oil has been delivered as
promised. Unfortunately, the contract is silent about the risk in non-performance in the event of war,
so that the court cannot simply read the contract and resolve the dispute on the contract’s own terms.
In resolving the suit, the court must decide whether to excuse the company from performance on the
ground that the war made the performance “impossible” or to find the oil company in breach of con-
tract and to require the oil company to compensate the manufacturer lost profits.5

The crucial point is that the parties failed to allocate between the risks of a contingency- in this in-
stance, war that has arisen to frustrate performance of the contract.

Here, economics provide a method for the court to decide the apportionment of losses between the
two parties. From the standpoint view of economic efficiency, the court should assign the loss from
non-delivery so as to make future contractual behaviour more efficient. A rule for doing this assigns
the losses to the party that could have borne the risk at less cost. One way to make risk more bearable
is to take precautions against it. The company doing business in Middle East is probably in a better

4
ibid., 4.
5
ibid., 6.
position than a European manufacturer to assess the risk of war in that region and to take precautions
against it. The oil company could have taken reasonable precaution by either arranging different ship-
ping routes or have arranged to purchase oil elsewhere which the oil company didn't accompli. Be-
cause the oil company is better able to bear the risk of war, economic efficiency requires the court to
hold the oil company liable for breach of contract and therefore, make it responsible for paying the
European manufacturer’s lost profits due to non-performance.

Similarly, Hadley could have taken reasonable precaution by either keeping a spare part or by pur-
chasing the other till the time the new shaft is delivered as there can be situations where frustration
of contract can take place and in that situation they can’t held the other party liable for their misap-
propriation. Therefore, economic approach in law helps in taking decisions efficiently by keeping in
mind how will it be justifiable to both the parties rather than keeping in mind the party who has been
breached and also in limiting the expected damages

III. ECONOMIC APPROACH TO HADLEY VS. BAXENDALE

In the case of Hadley vs baxendale, Hadley i.e, the plaintiff owned a flour mill which went down due
to broken shaft that worked the mill.The plaintiff wanted to transport the broken shaft to Joyce & Co.
of Greenwich to get a new shaft and for this very reason went to Pickford & Co.i.e, the defendant
who was large scale public carrier to transport hr broken shaft to Greenwich on following day but
due to some reason it didn’t reach Greenwich at the following day and the mill remained stopped
until then and Hadley faced huge loss and filed a suit against baxendale for breach of contract as well
as to recover the consequential damages.

When we address the case in the economic point of view firstly, we look into the standard of foresee-
ability. Hadley could have foresee the consequences that could have arise in case the shaft would not
arrive at a proper time and have taken precaution accordingly but there was no sign of precaution
taken at the side of Hadley whereas the defendant was unknown about the consequences of breach at
the time the contract was made.The case of Victoria Laundry (Windsor) Ltd. v. Newman Industries-
Ltd. illustrates the extent to which standardisation could be carried. Victoria Laundry was in the laun-
dry and dyeing business. It owned a boiler whose capacity was 1500-1600 pounds evaporation per
hour, but it wanted a boiler of much greater capacity so that it could expand its business. In April
1946, Victoria contracted to buy from Newman a used boiler with a capacity of 8000 pounds per
hour, at a price of £2150, loaded at Newman's premises, delivery on June 5. Newman employed a
third person, T, to dismantle the boiler. On June 1, T damaged the boiler in the process of dismantling
it. As a result, Victoria did not receive delivery until November 8, and sued Newman for lost profits
during the period from June 5 to November 8. Victoria claimed that if the boiler had been timely
delivered on June 5, during the period from June 5 to November 8 it would have accepted "highly
lucrative" dyeing contracts for the Ministry of Supply he resulting loss of profits was stated to be
£262 per week. The court held that Victoria could not recover its actual (individualised) lost profits
under the lost Ministry of Supply contracts unless the seller was on notice at the time the contract
was formed of the prospect and terms of those contracts, but that Victoria could recover "some general
[standardised] sum for loss of business in respect of dyeing contracts to be reasonably expected."6

Under Hadley, the seller's liability was determined by what he knew or should have known at the
time of contract formation, so that he could shut his eyes to circumstances that developed in the course
of time and performance and to information communicated after the contract was made. The effi-
ciency reasons for not stratifying precaution is because of the incomplete cost of communicating and
not utilising the relevant information.The principle of hadley vs baxendale therefore conceived of
contracts as lacking, for liability purposes, any capacity for dynamic change with respect to circum-
stances unfolding after contract formation.7According to the doctrine of avoidable consequences, one
cannot cover for those injuries for which a reasonable man would have avoided.8Therefore, the de-
fendant is liable only for the conditions mentioned in contracts and not for the mistakes of the plaintiff
or that arose due to the breach of contract.

According to the Least Cost Theory, it can be perceived that buyers may act imprudently during the
period after breach occur, by failing to take low cost measures that would minimise the loss because
they hope that the loss will fall on the seller. EVRA Corp. v. Swiss Bank Corp.9 was just such a case.
The defendant was a bank that had negligently failed to complete a transfer of funds. That failure
caused the plaintiff to lose his rights under a valuable contract with a third party, but the plaintiff
could have inexpensively protected his rights under the contract by wiring a replacement payment
when he learned that the original fund transfer had not been made. However, cases in which a buyer
acts imprudently after the breach, by failing to minimise the loss.10Similarly, when Hadley came to
knew that the delivery of shaft had been delayed then he should have thought of an alternative instead
of waiting for the delayed delivery of shaft and losses for several days. This shows his embezzle
towards the damages that he had to claim from seller. Moreover, the seller had a reason to know that

6
Victoria Laundry (Windsor) Ltd. v. Newman IndustriesLtd. 2 K.B. 528 (Eng. C.A.)(1949).
7
Eisenberg Melvin,The Principle of Hadley vs. Baxendale, Volume 80 Issue 3 California Law Review 571(1992).
8
Restatement of Contracts 336 (1932).
9
EVRA Corp. v. Swiss Bank Corp.459 U.S.1017(1982).
10
Supra note 8 at 584.
the probable lose of profits if the shaft is not delivered on time, the seller also had reason to know
hadley’s actual loss of profits might be normal, infrannormal or supra-normal. As a matter of effi-
ciency, that is all the seller needed to know, unless the damages were so far above normal that the
exante probability of their occurrence was not significant.

Hence, the degree of fault should be recognised by the contract rules used to determine legal
cause.Once it is determined that the breach of contract has occurred, the extent to which the casual
chain of consequences physically flowing from the breach will be traced to determine the amount of
compensation to which a plaintiff is entitled should be made to depend on the degree of fault involved
in the breach.

IV. CONCLUSION

As our society is now increasingly dependent on the security of transactions wealth now is measured
by the value of promises one gives.Breaking this promise becomes a serious matter and also desire
to penalise becomes stronger.One cannot be held liable on the degree of desire but on the degree of
fault to the breach of contract.The buyer might take advantage of the breach of contract by not taking
precaution even after the breach of contract as they can put the blame on the seller for the recovery
of loss profits.The essential elements to the contract must include fail disclosure and not doing so
must not make the other party to the contract liable for the consequential damages in case of breach
of contract.The economic approach to the case of Hadley vs baxendale help in imparting efficiency
and distribution of damages according to the legal cause.