Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller

Exercise 14

BACKGROUND AND FACTS?The Hadleys (the plaintiffs) ran a flour mill in Gloucester, England. The main crankshaft attached to the steam engine in the mill broke, causing the mill to shut down. The crankshaft had to be sent to a foundry located in Greenwich so that a new shaft could be made to fit the other parts of the engine. Baxendale, the defendant, was a common carrier that transported the shaft from Gloucester to Greenwich. The freight charges were collected in advance, and Baxendale promised to deliver the shaft the following day. It was not delivered for a number of days, however. As a consequence, the mill was closed for several days. The Hadleys sued to recover the profits lost during that time. Baxendale contended that the loss of profits was "too remote" to be recoverable. The court held for the plaintiffs, and the jury was allowed to take into consideration the lost profits. The defendant appealed.
IN THE LANGUAGE OF THE COURT
ALDERSON, J. [Judge]
* * * * * * Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, [that is,] according to the usual course of things, from such breach of contract itself, or 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 of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.
* * * Now, in the present case, if we are to apply the principles above laid down, we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill. * * * Special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. [Emphasis added.]
DECISION AND REMEDY The Court of Exchequer ordered a new trial. According to the court, to collect consequential damages, the plaintiffs would have to have given express notice of the special circumstances that caused the loss of profits.
IMPACT OF THIS CASE ON TODAY'S LAW This case established the rule that consequential damages are awarded only for injuries that the defendant could reasonably have foreseen as a probable result of the usual course of events following a breach. Today, the rule enunciated by the court in this case still applies. To recover consequential damages, the plaintiff must show that the defendant had reason to know or foresee that a particular loss or injury would occur.
The e-commerce Dimension If a Web merchant loses business due to a computer system's failure that can be attributed to malfunctioning software, can the merchant recover the lost profits from the software maker? Explain.