Hadley v. Baxendale: Consequential Damages Made Clear

Hadley operated a mill. The mill's crankshaft broke, halting all operations. Hadley hired Baxendale (a carrier) to deliver the broken shaft to engineers who would use it as a model for a replacement. Baxendale delayed delivery, extending the mill's downtime. Hadley sued for lost profits during the delay.

The court established the foundational framework for contract damages, with two rules:

Rule 1 (General damages): The non-breaching party can recover damages that arise naturally from the breach — damages that any reasonable person would foresee as a probable result.

Rule 2 (Consequential damages): Special circumstances damages are recoverable only if the breaching party knew about those special circumstances at the time of contracting. Hadley's lost profits were not recoverable because Baxendale didn't know the mill would be shut down without the shaft.

Hadley v. Baxendale limits contract damages to those that are foreseeable at the time of contracting. This serves two purposes: it gives the breaching party fair notice of their potential liability (so they can price their services accordingly), and it prevents unlimited consequential damages that could dwarf the value of the contract.

Every contracts exam includes a damages question, and Hadley is almost always relevant. The key analysis: (1) What damages flow naturally from the breach? (2) Were there special circumstances? (3) Did the breaching party know about them at the time of contracting? If the answer to (3) is no, consequential damages are barred — even if the damages were enormous.