Explain the facts of and the principles of law laid down in Hadley v. Baxendale and its position under the Indian Contract Act, 1872.

Question: Explain the facts of and the principles of law laid down in Hadley v. Baxendale and its position under the Indian Contract Act, 1872. [JJS 2018]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [Explain the facts of and the principles of law laid down in Hadley v. Baxendale and its position under the Indian Contract Act, 1872.]

Answer

The case of Hadley v. Baxendale, (1854) 9 Exch 341 is a landmark case in English contract law, which lays down a settled position of law regarding the recoverability of damages or loss for breach of contract.

Facts:

The Plaintiff, Hadley, owned a mill in Gloucester and had a broken crankshaft that needed to be transported to W. Joyce & Co. in Greenwich for repairs. The defendant, Baxendale, was a carrier contracted to deliver the broken crankshaft. Due to a delay caused by Baxendale’s oversight, the crankshaft was returned a week later than anticipated. As a result of this delay, Hadley’s mill could not operate during that week, causing a loss of profit.

Hadley sued Baxendale for the loss of profit incurred due to the late delivery.

Held:

The Court of Exchequer, England laid down two principles:

(1) Foreseeability of Damages: It was held that the damages recoverable for breach of contract should be such as may reasonably be considered either:

• Arising naturally, i.e., according to the usual course of things, from the breach itself.
• Such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach.

(2) Two-Limb Test for Damages: A two-limb test was established by the court for determining the recoverability of damages:

• Damages that arise naturally from the breach of contract (the first limb).
• Damages that were in the contemplation of both parties at the time of contract formation as a probable result of the breach (the second limb).
• In the case in hand, the Court of Exchequer, England found that the special circumstances of the crankshaft being critical to the mill's operation were not communicated to Baxendale. Therefore, Baxendale could not have reasonably foreseen that a delay in delivery would result in Hadley's mill being shut down and causing a loss of profit. Hence, Baxendale was not liable for the loss of profit.
  

Position under Indian Contract Act, 1872

The principles laid down in Hadley v. Baxendale are reflected under Section 73 of Indian Contract Act, 1872, which lays down provision regarding compensation for loss or damage caused by breach of contract.

Section 73 of the Indian Contract Act states as under:

"When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it."

In the case of Murlidhar Chiranjilal v. Harishchandra Dwarkadas, 1962 AIR 366, the Hon’ble Court applied the principles of Hadley v. Baxendale, emphasizing the necessity of the foreseeability of damages. The court held that to recover the compensation for loss or damage, it is necessary that loss must have been foreseen at the time of contract formation.

The Hon'ble Supreme Court of India in Maula Bux v. Union of India, (1969) 2 SCC 554, laid down that the court has the authority to award reasonable compensation in case of a breach even if no actual damages are proved.