33. Contracts: Foreseeability

>> In the next three
modules we will explore

three limitations that the law imposes
on the recovery of contract damages,

foreseeability, mitigation,
and reasonable certainty.

This module will focus on foreseeability
using Hadley v. Baxendale.

Let's begin with a
reminder of terminology.

We have learned that
the non breaching party

is entitled to recover
expectation damages.

Damages that aim to give that
party the benefit of the bargain,

most often is lost profits.

This loss is embodied
in the first element of

the damage formula, loss in value.

These damages are also
referred to as direct damages.

But we also saw that

the non breaching party is entitled
to damages for other loss.

The second element of the damage formula,

often referred to as
consequential damages.

These damages relate not to

the direct financial loss
resulting from lost profit,

but rather to other losses
that flow from that breach.

The law imposes limitations
on the recovery of

both direct and consequential damages.

As the first limitation,

the non-breaching party
must prove that the harm

incurred was in fact caused
by the defendant's breach.

But causation plays a less important role

in contract law than it does tort law.

Instead, foreseeability provides
the most important limitation

on the recovery of
damages in contract law.

In other words, there will be instances

involving remote damages
that were approximately

caused by a breach but which are not

recoverable because they
were not foreseeable.

The limitation of foreseeability
was first developed in

the 19th century case
of Hadley v. Baxendale,

a case you can rest assured

every first-year law student
in the country is reading.

According to that case,

the non breaching party is entitled to

recover only those damages
that the breaching party

could reasonably foresee at the time of

contracting as likely to
result from a breach.

This principle is set forth in Subpart
one of Section 351 of the restatement.

Foreseeability is an objective
standard that links the extent

of damages recoverable to
what a reasonable person in

the position of the breaching
party would realize at the time of

contracting would be the likelihood
of such damages accruing.

Generally direct damages.

Those that result in a loss
of contractual value from

the breach are readily foreseeable
and raise a few issues.

Every party understands that
if it breaches the contract,

it will be liable for the profits that

the non-breaching party lost
as a result of the breach.

In contrast, foreseeability is

a major issue when it comes
to consequential damages.

In Hadley v. Baxendale,

the plaintiffs owned a mill that
was halted by a broken crank shaft.

They entered into a contract
with the defendants,

a railway shipping company to
carry the broken crank shaft to

Greenwich to be used as a model for
the construction of a replacement.

Through defendant's neglect, the delivery
of the crank shaft was delayed and

as a result the mill remained
shut down for several extra days.

The plaintiff sought to recover the
profit loss during that period.

In Hadley v Baxendale,

the court established two rules related
to foreseeability in contract damages.

First, a non-breaching party plaintiff

is entitled to recover all damages that

it can prove occurred in
the ordinary course of

events as a result of the breach.

These are often referred
to as general damages.

This rule is encompassed in

Subpart 2a of Section 351 of
the restatement of contracts.

The second rule established
by Hadley v. Baxendale

concerns what have become
known as special damages.

The injured party is
entitled to recover for

contractual losses that did not occur in

the ordinary course of events but were

the result of special circumstances
of the non-breaching party.

But such recovery is allowed
only if the defendant had reason

to know those special circumstances
at the time of contracting.

This rule is encompassed in Subpart 2b of

Section 351 of the
restatement of contracts.

Obviously in many cases whether or not

special damages are recoverable
will turn on the information

concerning its special circumstances that

the non-breaching party convey to

the breaching party at
the time of contracting.

This is fair because it holds
the breaching party liable for

special damages only when
that party was made aware

during negotiations of the
possibility of such damages

occurring and had the opportunity to
adjust the contract price accordingly.

Let's consider an example
that will help to

distinguish between general
damages and special damages.

At the beginning of winter,

Mary enters into a contract with
Jane whereby Jane agrees to plow

Mary's driveway within 12 hours
of the end of every snowstorm.

After a particularly heavy snowstorm,

Jane fails to show up for 36 hours.

At that time, desperate to get to work,

Mary hires Bill to plow her driveway.

He charges $100 more than Jane.

Moreover, as a result of Mary's

not being able to get her
car out of the garage,

she missed the scheduled
business meeting which resulted

in her losing a deal that would
earn her a profit of $2 million.

In terms of simple causation,

Jane's breach of contract resulted
both in Mary having to pay an extra

$100 to get her driveway plowed
and losing two million in profit.

But as noted above however,

causation alone is not determinative

of the damages recoverable
in contract law.

The damages must have been foreseeable

to the breaching party at
the time of contracting.

It's entirely foreseeable that Jane would

incur the consequential
damages resulting from

having to hire another
plumbing company to clear

her driveway in the event that
Jane breach the contract.

Such consequential damages fall
within the realm of general damages.

It is unlikely however that
Jane could reasonably foresee

that her breach would result in Mary's
losing a $2 million business deal.

Such damages are
considered special damages

because they do not occur in
the ordinary course of events.

As such, perhaps in Mary's having informed

Jane of the potential occurrence
of such special damages,

a court would not hold Jane
liable for the damages.

On the other hand, if at the
time of contracting Mary

had informed Jane that in
the event it snowed on

a particular date it was
mandatory that the driveway be

plowed because of the necessity that

she attend the closing of a
$2 million business deal,

a court might well hold Jane
liable for such damages.

In all likelihood however,

Jane would have refused to enter in
to such a risky contract or else

she would have charged an extraordinary
premium to take on that risk.

Requiring that special
circumstances that might

result in unusual damage be conveyed
to the other party at the time of

contracting is fair because it

assures that the breaching
party take those circumstances

into account when deciding
whether or not to

enter into the contract and on what terms.

In addition, the rule
of Hadley v. Baxendale

encourages every party to convey
complete information about

possible risks of damages
to the other side to

assure that it will be covered in
the event of a breach of contract.