The rule in…Hadley v Baxendale

This is the first in a series of “The Rule In…” postings. Judges and lawyers often use certain common law rules as a shorthand means of describing an essential legal principle. They will say something like “…well of course that would be governed by the rule in so-and-so” often referring to a case decided in the eighteen hundreds as if it was an old friend. There is a reason these cases are referred to in this way.

What is it?

A rule that determines whether or not a particular type of damages suffered as a result of a breach of contract are recoverable based on the concept of “remoteness”.

Why is it important?

The viability of litigation can often be determined by the amount of damages a party is likely to recover. Even though a party may have good prospects on the question of liability (ie- whether there was a breach of contract), the amount of total damages they can recover may be limited. For example, a large damages claim may include as a considerable proportion a claim for lost business profits resulting from the breach of contract. If the lost profits claim fails for being too remote, the litigation may end up being a waste of time, money and emotion.

The Rule

There are two limbs under either of which a party can claim losses:

  1. “in the usual course of things”: damage that would be a “not unlikely” result of a breach of the particular contract in question (eg. a contract for the supply of equipment which proves faulty causing lost profits as a result of an inability to use it); or
  2. because the defendant knew that a breach of contract would cause the plaintiff losses of the specific nature it is claiming (eg-if the plaintiff tells the defendant it will use the piece of equipment to enable it to service a new client which will double the size of its business, damages resulting from the loss of the new client’s business caused by the faulty equipment can be claimed, subject of course to any disclaimer in the supply contract).

The Case

The owners of a flour mill sued the tardy carrier of a broken crankshaft sent away for repair. The lost profits claimed were found not to be “in the usual course of things” because the carrier couldn’t have known that the lack of this piece of equipment would result in the mill being stopped. The mill may well have had a replacement crankshaft at hand.

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Filed under Civil, damages, The Rule In

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