Hadley v Baxendale (1854) 9 Exch 341

Facts

• The case concerned a breach of contract and the extent of liability for losses suffered by the non-breaching party.
• The main issue was whether the breaching party could be held liable for damages that were not a natural result of the breach or outside the parties' reasonable contemplation at contract formation.
• Special circumstances alleged by the claimant were not communicated to the defendant at the time the contract was made.

Issues

1. What is the correct rule for determining the remoteness of damages in contract law?
2. Under what circumstances can a party be held liable for losses arising from a breach which are not the ordinary or natural results of that breach?
3. What role does the communication of special circumstances at the time of contract formation play in determining recoverable damages?
4. How do subsequent legal developments, such as the assumption of responsibility test, affect the application of the original rule?
5. What is the relationship between the principle of remoteness of damage and the duty to mitigate loss?

Decision

• The court established a two-limb rule for remoteness of damages in contract cases.
• Damages are recoverable if they arise naturally in the usual course of things from the breach, or if they are within the reasonable contemplation of both parties due to special circumstances known at contract formation.
• Losses arising solely from uncommunicated special circumstances are not recoverable.
• Later cases have built on this framework, introducing the assumption of responsibility as a further limitation to liability, requiring evidence that the party in breach assumed responsibility for that type of loss.
• The duty to mitigate loss complements the rule of remoteness, limiting recovery where the innocent party has unreasonably failed to minimize damages.

Legal Principles

• The two-limb test for remoteness of damages requires either: (i) loss arising naturally (first limb) or (ii) loss arising from special circumstances communicated to and known by both parties at contract formation (second limb).
• The reasonable contemplation of both parties at the time the contract was made is the standard for recoverability of damages.
• The first limb is objective, not requiring actual knowledge of special circumstances; the second limb protects against liability for unforeseeable losses unless specifically communicated.
• The assumption of responsibility test may further restrict liability for certain losses, considering whether the party in breach specifically accepted the risk of those losses.
• The duty to mitigate requires the claimant to take reasonable steps to minimize losses resulting from breach, and recovery will be limited by failure to do so.

Conclusion

Hadley v Baxendale defines the core principles limiting recoverable damages for breach of contract to losses that are either the natural result of the breach or those that were reasonably contemplated by both parties because of special circumstances known at the contract's formation. Subsequent case law introduced refinements, but the two-limb test continues to underpin the assessment of contractual damages and interacts with the claimant's duty to mitigate losses.