LEGAL PRINCIPLE: CONTRACT LAW – Measure of Damages – Remoteness and Rule in Hadley v. Baxendale
PRINCIPLE STATEMENT
Where two parties have made a contract which one has broken, the damages which the other ought to receive should be such as may fairly and reasonably be considered as either arising naturally (according to the usual course of things) from such breach 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.
RATIO DECIDENDI (SOURCE)
"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 as either arising naturally, i.e., 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."
EXPLANATION / SCOPE
The Hadley v. Baxendale remoteness rule limits recoverable damages to foreseeable consequences. Two branches: (1) First branch—damages arising naturally from the breach in the usual course of things (ordinary damages); these are always recoverable as they’re inherently foreseeable; (2) Second branch—special damages arising from particular circumstances; recoverable only if those circumstances were communicated to the breaching party at contract formation, making such damages within their reasonable contemplation. This prevents liability for unforeseeable losses. The test is objective: what would reasonable persons in the parties’ positions have contemplated? Timing matters—contemplation is assessed at contract formation, not breach. This rule encourages: disclosure of special circumstances requiring protection; appropriate risk allocation; and proportionate liability.