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Measuring 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
§ (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)


§ 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
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
for 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
○ Make the package a high priority - indicate it was a special package
• Proper rule in this type of case - what types of damages can be obtained for
breach of contract?
○ Consequential damages (pg 206)
§ 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.