Foreseeability of damages

This year marks 150 years since the most celebrated common law case of all time, the 1854 decision of Hadley v Baxendale. Hadley is the one case that every lawyer practising in common law jurisdictions throughout the world will have read and applied. Its teaching is so universal and basic that many law tutors will mark a student down if he or she merely trots out the case. Showing an understanding of the principles in a wider context will be expected. In the past 10 years in the UK alone, it is said that Hadley has been cited in 139 judgments. Many of those will have concerned construction disputes.
As is the case with many important legal decisions, the cause in Hadley was trivial. Joseph and Jonah Hadley were the owners of a flour mill in Gloucester. The Hadleys were businessmen at the heart of the industrial revolution. They had installed steam-driven power to their waterfront mill, bringing cheap imports of grain, massive throughput and previously unheard of profits in flour milling.
Then disaster struck. The main shaft to the steam engine broke. A replacement shaft could only be made by a company in Greenwich, and in order to do this, the company needed the broken shaft to take accurate dimensions. Since the mill was shut down, the Hadleys had to move quickly to get the shaft from Gloucester to Greenwich. They contacted Pickfords, which promised that for a payment of £2-4s, it would deliver the shaft to Greenwich by the following day.
In 1854, Pickfords was the biggest carrier around. It could trace its origins back to the late 17th century. In 1817 however, at the point of bankruptcy, Pickfords had been taken over by Joseph Baxendale, who together with a small group of associates, had rebuilt the business with remarkable success, taking considerable advantage of the emergence of the railways.
Despite this commercial standing, Pickfords did not perform well for the Hadleys. By some unspecified neglect, the broken shaft was not delivered to Greenwich for several days. The consequence was that the Hadleys did not receive the new shaft for several days after they would otherwise have done, delaying the working of the mill.
The Hadleys claimed that they had been obliged to buy flour to supply some of their customers, had been deprived of profit and had been unable to employ their workmen, to whom they were compelled to pay wages during the extended closure of the mill. They sued for £300 damages.
Baxendale objected that the damages claimed were too remote and that it could not be liable. The Court of Exchequer agreed. Since Baxendale did not necessarily know that the mill would be idle until the shaft could be returned (there might have been a spare shaft or there might have been other reasons for the mill being shut down during that period), Baxendale could not be liable for those damages.
The opinion of the court became known as the "foreseeability" test. You cannot be held liable for losses that you could not reasonably have anticipated.
The famous rule that was set out in the case is: "Where two parties have made a contract that one of them has broken, the damages that the other party ought to receive in respect of a breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie, 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."
The rule therefore has what has been called two "limbs". The first limb assumes that the parties have knowledge of certain basic facts. Defendants will be held liable for damages that arise according to the usual course of things. The second limb, on the other hand, requires additional specialist knowledge by the defendant. Since Baxendale did not in fact know that the mill would be shut down until the shaft was replaced, he could not be liable for damages that resulted from that closure.
A more recent example is found in the case of Balfour Beatty v Scottish Power, where the latter had agreed to supply temporary power for Balfour's concrete batching plant.
Balfour was constructing an aqueduct by continuous concrete pour, and as a result of a power failure, had to demolish what had been constructed and start again.
It claimed the cost of doing so as damages. It was held that Scottish Power did not, and was not presumed to, know of the practice of construction by continuous concrete pour and the claim failed.
The significance of Hadley is that it came at a time when the law of contract was only beginning to emerge. Previously, commercial relationships were regulated by custom, not by individual agreement. Hadley fixed a basic contract rule that has stood the test of time, which is both predictable and flexible. On another occasion, the power company may be aware of the requirement for continuous concrete batching. It had better take precautions to avoid power failure or charge more in exchange for the risk.
Hadley is often cited in two other areas of construction law. First, in connection with the exclusion of liability for consequential loss that is often found in construction contracts. The courts have found that generally, consequential loss is likely to approximate to loss within the second limb of Hadley. In other words, despite a clause in the contract excluding liability for consequential loss, the claimant will still be entitled to recover all his losses that can be shown to arise naturally.
Second, the courts have made it clear that contract provisions for loss and/or expense, as found in the JCT contracts for example, are to be equated with damages under the first limb of Hadley. Contractors that include in their loss and expense claims such items as exceptional profit or overheads should bear in mind this 150-year-old law.
The Hadleys' mill is being restored this year as part of the redevelopment of part of Gloucester's historic docks. It seems the common law rule on foreseeability of damages will be around as long as the old mill.