INTRODUCTION

This project contains 2 Sections of Indian Contract Act. Those are Section 73 & Section
74. In which Section 73 says Compensation for or damage caused by breach of contract.
And Section 74 says Compensation for breach of contract where penalty stipulated for.

Hadley vs. Baxendale (1854) is regarded as a fixed star in the juries-prudential

firmament; it is more often cited as an authority than any other case in the law of
damages All this fame is based on the fact that the case formally introduced the rule of
foresee ability into the common law of contract.

Hadley vs. Baxendale (1854) is not only a case of enormous influence on the law of
damages, but it will always have been an object of juridical controversy and has elicited
contrasting reactions. For example in 1886 Chief Baron Pollock praised the decision:
more extensive and accurate knowledge of decision in our law books and a more
accurate power of analyzing.

Indian Contract Act

Introduction
The Indian Contract Act occupies the most important place in the Commercial Law.
Without contract Act, it would have been difficult to carry on trade or any other
business activity and in employment law. It is not only the business community which
is concerned with the Contract Act, but it affects everybody. The objective of the
Contract Act is to ensure that the rights and obligations arising out of a contract are
honored and that legal remedies are made available to those who are affected.
According to Indian Contract Act, 1872 Section 1, this Act may be called the Indian
Contract Act, 1872.

Division of the Indian Contract Act

General division of the Indian Contract Act, in the past, Indian Contract Act had a
wide scope and included from Section 1 to 75 the General Principles of contract,
Section 76-123 includes Sale of Goods Act, Sections 124 -147 deals with Contracts of
Indemnity and Guarantee, Section 148-181 is about contracts of Bailment and Pledge,
Section 182-238 is of Agency, Section 239-266 is of Partnership Act.

 Contract

As per the Indian Contract Act, 1872, a "contract" is an agreement enforceable by

law. The agreements are not enforceable by law are not contracts. An
"agreement" means 'a promise or a set of promises' forming consideration for
each other. And a promise arises when a proposal is accepted. By implication, an
agreement is an accepted proposal. In other words, an agreement consists of an
'offer' and its 'acceptance'.

 Offer
An "offer" is the starting point in the process of making an agreement. Every
agreement begins with one party making an offer to sell something or to provide
a service, etc. When one person who desires to create a legal obligation,
communicates to another his willingness to do or not to do a thing, with a view to
obtaining the consent of that other person towards such an act or abstinence, the
person is said to be making a proposal or offer.

 Acceptance
An agreement emerges from the acceptance of the offer. "Acceptance" is thus, the
second stage of completing a contract. An acceptance is the act of manifestation
by the offeree of his assent to the terms of the offer. It signifies the offeree's
willingness to be bound by the terms of the proposal communicated to him. To
be valid an acceptance must correspond exactly with the terms of the offer, it
must be unconditional and absolute and it must be communicated to the offeror.

 Agreement
An "agreement" is a contract if 'it is made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and is
not expressly declared to be void'. The contract must be definite and its purpose
should be to create a legal relationship. The parties to a contract must have the
 legal capacity to make it. According to the Contract Act, “Every person is
competent to contract who is of the age of majority according to the law to which
he is subject, and who is of a sound mind, and is not disqualified from
contracting by any law to which he is subject". Thus, minors; persons of unsound
mind and Persons disqualified from contracting by any law are incompetent to
contract.

 Consent
Consent is very important part of the contract. The contracts become Void if
misrepresentation, mistake or anything like this the fraud will be committed
.Incase of a breach of a contract specific performance is granted but it has
various exceptions to it, depending on the situation. If the general essentials
ingredients of a contract are fulfilled, a valid legal contract is formed and it
becomes affective from date it is signed.

 Consideration
Mutual and lawful consideration for agreement, it should be enforceable by law.
Hence, intention should be to create legal relationship. Agreements of social or
domestic nature are not contracts, Parties should be competent to contract, and
contract should not have been declared as void under Contract Act or any other
law is also important elements of a valid contract. The contract becomes Void if
any of these elements are not fulfilled.

Conclusion
They are various forms of contracts such as contract of indemnity, contract of
guarantee, agency etc. The contract act illustrates elements that need to be fulfilled for
a valid contract along with exception and after wards it deals with the sections that
illustrates the remedies for both parties in case the contract has been breached or has
been considered to be void in case of any of the elements not being fulfilled. It is very
important for a normal day to day trading and regular dealing to have a valid and
effective contract and it need to be made affective under the Contract act
The BREACH OF CONTRACT
Sections 73 & 74
Section 73 :- Compensation of loss or damage caused by breach
of contract

When a contract has been broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or
damage caused to him thereby, which naturally arose in the usual course of things from
such breach, or which the parties knew, when they made the contract, to be likely to
result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract:

When an obligation resembling those created by contract has been incurred and has not
been discharged, any person injured by the failure to discharge it is entitled to receive
the same compensation from the party in default, as if such person had contracted to
discharge it and had broken his contract.

Explanation :- In estimating the loss or damage arising from a breach of contract,

the means which existed of remedying the inconvenience caused by non-performance of
the contract must be taken into account.

Illustrations

(A) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be

paid on delivery. A breaks his promise. B is entitled to receive from A, by way of
compensation, the sum, if any, by which the contract price falls short of the price for
which B might have obtained 50 maunds of saltpetre of like quality at the time when the
saltpetre ought to have been delivered.
(B) A hires B's ship to go to Bombay, and there takes on board, on the first of January, a
cargo, which A is to provide, and to bring it to Calcutta, the freight to be paid when
earned. B's ship does not go to Bombay, but A has opportunities for procuring suitable
conveyance for the cargo upon terms as advantageous as those on which he had
chartered the ship. A avails himself of those opportunities, but is put to trouble and
expense in doing so. A is entitled to receive compensation from B in respect of such
trouble and expense.

(C) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed for
delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is
entitled to receive from A, by way of compensation, the amount, if any, by which the
contract price exceeds that which B can obtain for the rice at the time when A informs B
that he will not accept it.

(D) A contracts to buy B's ship for 60,000 rupees, but breaks the promise. A must pay to
B, by way of compensation, the excess, if any, of the contract price over the price which
B can obtain for the ship at the time of breach of promise.

(E) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at
that place, starting on a specified day. The boat, owing to some unavoidable cause, does
not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed
beyond the time when it would have arrived if the boat had sailed according to the
contract. After that date, and before the arrival of the cargo, the price of jute falls. The
measure of the compensation payable to B by A is the difference between the price
which B could have obtained for the cargo at Mirzapur at the time when it would have
arrived if forwarded in due course, and its market price at the time when it actually
arrived.

(F) A contracts to repair B's house in a certain manner, and receives payment in
advance. A repairs the house, but not according to contract. B is entitled to recover from
A the cost of making the repairs conforming to the contract.
(G) A contracts to let his ship to B for a year, from first of January, for a certain price.
Freights rise, and, on the first of January, the hire obtainable for the ship is higher than
the contract price. A breaks his promise. He must pay to B, by way of compensation, a
sum equal to the difference between the contract price and the price for which B could
hire a similar ship for a year on and from the first of January.

(H) A contracts to supply B with a certain quantity of iron at a fixed price, being a higher
price than that for which A could procure and deliver the iron. B wrongfully refuses to
receive the iron. B must pay to A, by way of compensation, the difference between the
contract price of the iron and the sum for which A could have obtained and delivered it.

(I) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A's

mill, informing B that his mill is stopped for want of the machine. B unreasonably delays
the delivery of the machine, and A, in consequence, loses a profitable contract with the
Government. A is entitled to receive from B, by way of compensation, the average
amount of profit which would have been made by the working of the mill during the
time that delivery of it was delayed, but not the loss sustained through the loss of the
Government contract.

(J) A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees a ton,
to be delivered at a stated time, contracts with C for the purchase of 1,000 tones of iron
at 80 rupees a ton, telling C that he does so for the purpose of performing his contract
with B. C fails to perform his contract with A, who cannot procure other iron, and B, in
consequence, rescinds the contract. C must pay to A 20,000 rupees, being the profit
which A would have made by the performance of his contract with B.

(K) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a
certain piece of machinery. A does not deliver the piece of machinery, at the time
specified, and, in consequence of this, B is obliged to procure another at a higher price
than that which he was to have paid to A, and is prevented from performing a contract
which B had made with a hired person at the time of his contract with A (but which had
not been communicated to A), and is compelled to make compensation for breach of
that contract. A must pay to B, by way of compensation, the difference between the
contract price of the price of machinery and the sum paid by B for another, but not the
sum paid by B to the third person by way of compensation.

(L) A, a builder, contracts to erect and finish a house by the first of January, in order
that B may give possession of it at that time to C, to whom B has contracted to let it. A is
informed of the contract between B and C. A builds the house so badly that, before the
first of January, it falls down and has to be rebuilt by B, who in consequence, loses the
rent which he was to have received from C, and is obliged to make compensation to C for
the breach of his contract. A must make compensation to B for the cost of rebuilding of
the house, for the rent lost, and for the compensation made to C.

(M) A sells certain merchandise to B, warranting it to be of a particular quality, and B, in

reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be
not according to the warranty, and B becomes liable to pay C a sum of money by way of
compensation. B is entitled to be reimbursed this sum by A.

(N) A contracts to pay a sum of money to B on a day specified. A does not pay the money
on that day. B, in consequence of not receiving the money on that day, is unable to pay
his debts, and is totally ruined. A is not liable to make good to B anything except the
principal sum he contracted to pay together with interest up to the day of payment.

(O) A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a certain

price. B, afterwards, before the first of January, contracts to sell the saltpetre to C at a
price higher than the market price of the first of January. A breaks his promise. In
estimating the compensation payable by A to B, the market price of the first of January,
and not the profit which would have arisen to B from the sale to C, is to be taken into
account.

(P) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows
nothing of B's mode of conducting his business. A breaks his promise, and B, having no
cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by
closing of the mill.
(Q) A contracts to sell and deliver to B, on the first of January, certain cloth which B
intends to manufacture into caps of a particular kind, for which there is no demand,
except at that season. The cloth is not delivered till after the appointed time, and too late
to be used that year in making caps. B is entitled to receive from A, by way of
compensation, the difference between the contract price of the cloth and its market
price at the time of delivery, but not the profits which he expected to obtain by making
caps, nor the expenses which he has been put to in making preparation for the
manufacture.

(R) A, a ship owner, contracts with B to convey him from Calcutta to Sydney in A's ship,
sailing on the first of January, and B pays to A, by way of deposit, one-half of his
passage-money. The ship does not sail on the first of January, and B, after being in
consequence, detained in Calcutta for some time, and thereby put to some expense,
proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney,
loses a sum of money. A is liable to repay to B his deposit, with interest, and the expense
to which he is put by his detention in Calcutta, and the excess, if any, of the passage-
money paid for the second ship over that agreed upon for the first, but not the sum of
money which B lost by arriving in Sydney too late.

Section 74 :- Compensation for breach of contract where penalty

stipulated for

When a contract has been broken, if a sum is named in the contract as the amount be paid in
case of such breach, or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to have
been caused thereby, to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case may be, the penalty stipulated
for.

Explanation :- A stipulation for increased interest from the date of default may be a
stipulation by way of penalty.
Exception :- When any person enters into any bail bond, recognizance or other
instrument of the same nature or, under the provisions of any law, or under the orders
of the Central Government or of any State Government, gives any bond for the
performance of any public duty or act in which the public are interested, he shall be
liable, upon breach of the condition of any such instrument, to pay the whole sum
mentioned therein.

Explanation :- A person who enters into a contract with the government does not
necessarily thereby undertake any public duty, or promise to do an act in which the
public are interested.

Illustrations

(A) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A
fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not
exceeding Rs. 1,000, as the court considers reasonable.

(B) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B Rs.
5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation; not
exceeding Rs. 5,000 as the court considers reasonable.

(C) A gives a recognizance binding him in a penalty of Rs. 500 to appear in court on a
certain day. He forfeits his recognizance. He is liable to pay the whole penalty.

(D) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent at the
end of six months, with a stipulation that, in case of default, interest shall be payable at
the rate of 75 per cent from the date of default. This is stipulation by way of penalty, and
B is only entitled to recover from A such compensation as the court considers
reasonable.

(E) A, who owes money to B, a money-lender, undertakes to repay him by delivering to

him 10 maunds of grain on a certain date, and stipulates that, in the event of his not
delivering the stipulated amount by the stipulated date, shall be liable to deliver 20
maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable
consideration in case of breach.

(F) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly installments, with
a stipulation that, in default, of payment of any installment, the whole shall become due.
This stipulation is not by way of penalty, and the contract may be enforced according to
its terms.

(G) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly
installments of Rs. 40, with stipulation that, in default of payment of any installment,
the whole shall become due. This is a stipulation by way of penalty.
Hadley vs. Baxendale

Hadley v Baxendale

Court Exchequer Court

Decided 23 February 1854

Citation(s) [1854] EWHC J70, (1854) 156 ER 145, 9 ExCh

341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-
60] All ER Rep 461

Transcript(s) Abridged judgment on bailii.org

Court membership

Judge(s) Parke B, Alderson B, Platt B and Martin B

sitting

Keywords

Breach of contract, remoteness

Definition :- Hadley v Baxendale [1854] EWHC J70 is a leading English contract

law case. It sets the basic rule to determine consequential damages from a breach of
contract: a breaching party is liable for all losses that the contracting parties should have
foreseen, but is not liable for any losses that the breaching party could not have foreseen
on the information available to him.
Facts

The claimants, Mr Hadley and another, were millers and mealmen and worked together
in a partnership as proprietors of the City Steam-Mills in Gloucester. They cleaned
grain, ground it into meal and processed it into flour, sharps, and bran. A crankshaft of a
steam engine at the mill had broken and Hadley arranged to have a new one made by W.
Joyce & Co. in Greenwich. Before the new crankshaft could be made, W. Joyce & Co.
required that the broken crankshaft be sent to them in order to ensure that the new
crankshaft would fit together properly with the other parts of the steam engine. Hadley
contracted with defendants Baxendale and Ors, who were operating together as
common carriers under the name Pickford & Co., to deliver the crankshaft to engineers
for repair by a certain date at a cost of £2 sterling and 4 shillings (current value of about
£240.00).

Baxendale failed to deliver on the date in question, causing Hadley to lose business.
Hadley sued for the profits he lost due to Baxendale's late delivery, and the jury awarded
Hadley damages of £25 (present value about £2500). Baxendale appealed, contending
that he did not know that Hadley would suffer any particular damage by reason of the
late delivery.

The question raised by the appeal in this case was 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.

Judgment

The Court of Exchequer, led by Baron Sir Edward Hall Alderson, declined to
allow 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 the party would lose profits if it is not delivered on time.
The court suggested various other circumstances under which Hadley could have
entered into this contract that would not have presented such dire circumstances, and
noted that where special circumstances exist, provisions can be made in the contract
voluntarily entered into by the parties to impose extra damages for a breach. Alderson B
said the following.

Baron Alderson

Now we think the proper rule in such a case as the present is this: Where two
parties have made a contract which one of them has broken, the damages which
the other party ought to receive in respect of such breach of contract 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, 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. Now, if the special circumstances under which the contract was actually made
were communicated by the plaintiffs to the defendants, and thus known to both
parties, the damages resulting from the breach of such a contract, which they
would reasonably contemplate, would be the amount of injury which would
 ordinarily follow from a breach of contract under these special circumstances so
known and communicated. But, on the other hand, if these special circumstances
were wholly unknown to the party breaking the contract, he, at the most, could
only be supposed to have had in his contemplation the amount of injury which
would arise generally, and in the great multitude of cases not affected by any
special circumstances, from such a breach of contract. For, had the special
circumstances been known, the parties might have specially provided for the
breach of contract by special terms as to the damages in that case, and of this
advantage it would be very unjust to deprive them. Now the above principles are
those by which we think the jury ought to be guided in estimating the damages
arising out of any breach of contract...

But it is obvious that, in the great multitude of cases of millers sending off broken
shafts to third persons by a carrier under ordinary circumstances, such
consequences would not, in all probability, have occurred, and these special
circumstances were here never communicated by the plaintiffs to the defendants.
It follows, therefore, that 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 ”

Significance

Lon L. Fuller and WR Perdue evaluated the idea of reducing contractual remoteness
to a foreseeability triumph in this way:

"In its second aspect Hadley v Baxendale may be regarded as giving a grossly simplified
answer to the question which its first aspect presents. To the question, how far shall we
go in charging to the defaulting promisor the consequences of his breach, it answers
with what purports to be a single test, that of foreseeability. The simplicity and
comprehensiveness of this test are largely a matter of illusion. In the first place, it is
openly branded as inappropriate in certain situations where the line is drawn much
more closely in favor of the defaulting promisor than the test of foreseeability as
normally understood would draw it.' There are, therefore, exceptions to the test, to say
nothing of authorities which reject it altogether as too burdensome to the defaulter. In
the second place, it is clear that the test of foreseeability is less a definite test itself than
a cover for a developing set of tests. As in the case of all "reasonable man" standards
there is an element of circularity about the test of foreseeability. "For what items of
damage should the court hold the defaulting promisor? Those which he should as a
reasonable man have foreseen. But what should he have foreseen as a reasonable man?
Those items of damage for which the court feels he ought to pay." The test of
foreseeability is therefore subject to manipulation by the simple device of defining the
characteristics of the hypothetical man who is doing the foreseeing. By a gradual process
of judicial inclusion and exclusion this "man" acquires a complex personality; we begin
to know just what "he" can "foresee" in this and that situation, and we end, not with one
test but with a whole set of tests. This has obviously happened in the law of negligence,
and it is happening, although less obviously, to the reasonable man postulated
by Hadley v. Baxendale."

As early as 1894, the U.S. Supreme Court recognized the influence

of Hadley upon American law:

“In Hadley v. Baxendale (1854) 9 Exch. 345, ever since considered a leading
case on both sides of the Atlantic, and approved and followed by this court in
Telegraph Co. v. Hall, above cited, and in Howard v. Manufacturing Co., 139
U.S. 199, 206 , 207 S., 11 Sup. Ct. 500; Baron Alderson laid down... the
principles by which the jury ought to be guided in estimating the damages
arising out of any breach of contract. ”

The Hadley holding was later incorporated into Section 351 of the Restatement (Second)
of Contracts. A 1994 law review article noted that as of that year, Hadley had been cited
with approval by the state supreme courts of 43 U.S. states; three state supreme courts
had adopted the Hadley holding without citing Hadley itself; and intermediate appellate
courts in the four other states had also favorably cited Hadley.

In Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The

Pegase) [1981] 1 Lloyd’s Rep 175, Robert Goff J stated,

"Although the principle stated in Hadley v Baxendale remains the fons et origo of the
modern law, the principle itself has been analysed and developed, and its application
broadened, in the 20th century... The general result of the two cases is that the principle
in Hadley v Baxendale is now no longer stated in terms of two rules, but rather in terms
of a single principle—though it is recognised that the application of the principle may
depend on the degree of relevant knowledge held by the defendant at the time of the
contract in the particular case. This approach accords very much to what actually
happens in practice; the courts have not been over-ready to pigeon-hole the cases under
one or other of the so-called rules in Hadley v Baxendale, but rather to decide each case
on the basis of the relevant knowledge of the defendant."

However, it has been suggested that the rule in Hadley v Baxendale is not as novel as its
celebrated importance suggests. Justice Edelman, in a speech on the topic,[6] asserts that
“the rule set out in Hadley v Baxendale was not novel”. For example, Justice Edelman
notes that, in 1564, the French jurist Charles Dumoulin had argued that liability for
breach of contract should be limited to foreseeable damage, thereby pre-dating this
same sentiment in Hadley v Baxendale.

Conclusion :- The court finds that lost profits should not have been awarded at
trial; therefore, the court orders a new trial with a statement of the jury instructions to
be used.