Foundations of Law and Economics
1854
Hadley v. Baxendale
9 Exch. 341, 156 Eng. Rep. 145 (1854)
Court of Exchequer
Issue
Foreseeability, information disclosure, and limits on consequential damages for breach of contract.
Facts
Hadley's mill stopped when a crankshaft broke. Baxendale's carrier firm delayed delivery of the shaft to the manufacturer, and Hadley sought lost profits for the period during which the mill remained shut.
Holding
The court limited recoverable damages to losses arising naturally from the breach or losses reasonably contemplated by both parties at the time of contracting.
Reasoning
The court reasoned that special losses are not recoverable unless the breaching party had notice of the special circumstances. Because the carrier was not told that delay would shut down the mill and cause lost profits, those losses were too remote.
Why It Matters
Hadley is foundational for economic analysis of contract damages because it encourages parties with unusual loss exposure to disclose information or contract for special protection.
Institutional Analysis
Institutional problem
The remoteness rule allocates the burden of communicating unusual loss exposure before breach and limits damages when that information was not shared.
Economic analysis
Limiting recovery to ordinary or communicated losses can induce the party with private information about exceptional consequences to disclose and, where useful, pay for additional protection. The rule may reduce precaution and insurance costs for ordinary transactions. It may undercompensate when communication is costly, bargaining is standardized, or the breaching party is already the cheaper risk bearer.
Alternatives and limits
Default damages, liquidated-damages clauses, carrier liability limits, insurance, and mandatory consumer protections allocate information and risk differently. The information-forcing account is an economic interpretation; the legal test remains grounded in the governing doctrine of recoverable contractual loss.
This analytical supplement distinguishes institutional interpretation from the court’s holding and reasoning.
Research Questions
- Which party can identify and insure the unusual loss at lower cost?
- When do standardized contracts prevent meaningful disclosure or bargaining?
Case Text and Citation
Cite the reported decision as 9 Exch. 341, 156 Eng. Rep. 145 (1854). The linked copy is provided for reading access and may be hosted by a court, institutional repository, or secondary case archive.
Open case text: University of Minnesota Law Library