Sunday, October 25, 2009

A Visit to First Principles: Including Briefing a Case

Hadley v. Baxendale, Court of Exchequer, 9 Exch. 341, 156 Eng. Rep 145 (1854)

FACTS: Plaintiffs were the owners of a mill whose operation was stopped due to the breakage of a crank shaft. The shaft had to be sent to engineers of the manufacturer [Joyce & Company] as a pattern for a new one. Plaintiffs used Pickford & Company as carriers. The clerk advised them that the shaft must be sent immediately, as the mill was stopped. The clerk was promised delivery in one day and paid 2 pounds 4 shillings for the delivery. However, Pickford failed to perform as promised and delivery was delayed for several days. As a result, plaintiff lost several days’ profits from the mill that otherwise would have been made if the shaft had been delivered on time. Plaintiff sues Defendant for lost profits.

HISTORY: In the trial case, the jury returned a verdict for the Plaintiffs for 25 pounds, plus the amount paid into Court. Defendant appeals and a new trial is ordered. Appellate court reverses.

ISSUE: Can Plaintiffs recover lost profits?


RULE/ANALYSIS: A New Rule was created in this case: The court found that an aggrieved buyer of services will be unable to recover consequential losses resulting from breach unless the losses are 1) a “natural” consequence of breach; or 2) the buyer brings the circumstances which would generate the losses expressly to the seller’s attention. The court reasoned that Pickford had no way of knowing that Plaintiffs would lose profits if the shipment of the shaft was delayed, as this information wasn’t communicated directly to them and therefore the loss of profits was not reasonably contemplated by both the parties when they made the contract. Although the fact that the mill was closed was communicated, it wasn’t made completely clear to the Defendants that the mill was closed because of the broken shaft and couldn’t re-open again until it was fixed. For all the Defendants knew, the mill was closed for another reason.

SUMMARY: Indirect or consequential damages are only recoverable if reasonably foreseeable by both of the parties at the time of the contract and arising naturally from such breach. This legal concept is still alive today – 150 years later. If the Plaintiffs had made it clear that the mill’s operation was dependent upon getting the new crank shaft, the outcome would have been in their favor.

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