eMeasuring and Compensating Loss Note: Hadley v. Baxendale is one of the most famous cases in history. Case: Hadley v. Baxendale (1854, ENG) [pp. 206-210] Parties: Plaintiff – Hadley Defendant – Baxendale Facts: The plaintiff, Hadley, operated a mill. The crankshaft of the mill broke, forcing the mill to shut down. Hadley contracted with the defendant, Baxendale, to deliver the crankshaft to engineers for repair by a certain date.
Baxendale failed to deliver on the date in question, causing Hadley to lose some business. Hadley sued for the profits he lost due to Baxendale’s late delivery, and the jury awarded Hadley damages of ? 25. Baxendale appealed, contending that he did not know that Hadley would suffer any particular damage by reason of the late delivery. Issue: Whether a defendant in a breach of contract case could be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.
Reasoning: The court said no to allowing Hadley to recover lost profits in this case, holding that Baxendale could only be held liable for losses that were generally foreseeable, or if Hadley had mentioned his special circumstances in advance. The mere fact that a party is sending something to be repaired does not indicate that they would lose profits if it was not delivered on time.
The court suggested various other circumstances under which Hadley could have entered into this contract which would not have presented such dire circumstances, and noted that where special circumstances do exist, provisions can be made in the contract voluntarily entered into by the parties to impose extra damages for a breach. In this case, however, the court stated: “the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. The rule of the case stands for placing the risk of loss on the party in the best position to handle it. In the business world, there is no reason to suspect that courier companies would have superior knowledge of milling operations and the likely losses, whereas the mill owner likely has a better chance to estimate and hence avoid loss (say by having a spare or agreement with other cooperating businesses that use cranks and shafts). Therefore, denying compensation if the courier is not informed avoids shifting the costs of loss reduction and prevention.
Hadley also promotes economic efficiency by forcing customers to disclose up front any unusual requirements. In turn, a rational courier can refuse shipments and advise customers that their requirements are impossible to meet, or charge higher fees to cover the cost of additional personnel and machinery as necessitated by any particular customer’s unique requirements. Today, large courier companies like UPS and FedEx have special divisions (UPS Express Critical and FedEx Custom Critical) which charge very high fees for guaranteeing that mission-critical shipments will reach their destinations intact and on time.
RULE: • American Tests on foreseeability: UCC 2-715(2) – § Consequential damages resulting from the seller’s breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting has reason to know and which could not reasonably be prevented by cover or otherwise, and (b) injury to person or property proximately resulting from any breach of warranty. Cover refers to getting a substitute ? Diff from Hadley case ? How would Hadley have come out if this UCC was used? ® Was there a substitute that could have been used? Someone else had the part? Rest 351 0 § (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as the probable result of the breach when the contract was made. § (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances , beyond the ordinary course of events , that the party in breach has reason to know. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. Reason to know (UCC) = reason to foresee (rest) 0 § Are these the same terms? Notes • In trial court, found that Baxendale’s delay in shipping the part was the direct cause of the lost profits D appealed because the amount in damages was too high The right measure of damages w/o lost profits – what could you get damages 0 for if not for lost profits? § Cost of shipping • Trial judge screwed up b/c he didn’t tell jury how to compute the damages • How could shipping company know about the lost profits? • What could shipping company have done? If they knew of the possible lost profits, and they could have been liable 0 or those lost profits, they could have negotiated for a higher cost in exchange for taking that risk. Or they could have refused. § How would the decide how much to charge? – possibility of it being late, multiplied by the liability amount Disclaimer, or limitation on liability 0 Make the package a high priority – indicate it was a special package 0 • Proper rule in this type of case – what types of damages can be obtained for breach of contract? Consequential damages (pg 206) 0 Natural arising – court says that means the usual course of things (like shipping something fragile, that shipper would know that its fragile) § In contemplation of both parties at time of K (special circumstances) (like shipping something fragile wrapped up so that shipper wouldn’t know unless it was communicated to them) How would a D know of possible liability for damages? ? ® P would tell him • b/c P didn’t tell D, this was a special circumstance where P would have had to inform D of the special circumstance for D to be liable