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>> In the next three
modules we will explore

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

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foreseeability, mitigation,
and reasonable certainty.

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

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Let's begin with a
reminder of terminology.

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We have learned that
the non breaching party

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is entitled to recover
expectation damages.

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

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most often is lost profits.

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This loss is embodied
in the first element of

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the damage formula, loss in value.

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These damages are also
referred to as direct damages.

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But we also saw that

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

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The second element of the damage formula,

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often referred to as
consequential damages.

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These damages relate not to

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the direct financial loss
resulting from lost profit,

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but rather to other losses
that flow from that breach.

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The law imposes limitations
on the recovery of

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both direct and consequential damages.

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As the first limitation,

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the non-breaching party
must prove that the harm

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

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But causation plays a less important role

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in contract law than it does tort law.

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Instead, foreseeability provides
the most important limitation

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on the recovery of
damages in contract law.

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In other words, there will be instances

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involving remote damages
that were approximately

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caused by a breach but which are not

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recoverable because they
were not foreseeable.

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The limitation of foreseeability
was first developed in

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the 19th century case
of Hadley v. Baxendale,

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a case you can rest assured

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

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According to that case,

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the non breaching party is entitled to

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recover only those damages
that the breaching party

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could reasonably foresee at the time of

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contracting as likely to
result from a breach.

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

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Foreseeability is an objective
standard that links the extent

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of damages recoverable to
what a reasonable person in

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

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contracting would be the likelihood
of such damages accruing.

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Generally direct damages.

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Those that result in a loss
of contractual value from

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the breach are readily foreseeable
and raise a few issues.

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Every party understands that
if it breaches the contract,

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it will be liable for the profits that

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

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In contrast, foreseeability is

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a major issue when it comes
to consequential damages.

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In Hadley v. Baxendale,

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

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They entered into a contract
with the defendants,

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a railway shipping company to
carry the broken crank shaft to

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

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

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

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

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In Hadley v Baxendale,

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

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First, a non-breaching party plaintiff

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is entitled to recover all damages that

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it can prove occurred in
the ordinary course of

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events as a result of the breach.

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These are often referred
to as general damages.

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This rule is encompassed in

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

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The second rule established
by Hadley v. Baxendale

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concerns what have become
known as special damages.

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The injured party is
entitled to recover for

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contractual losses that did not occur in

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the ordinary course of events but were

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

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But such recovery is allowed
only if the defendant had reason

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to know those special circumstances
at the time of contracting.

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This rule is encompassed in Subpart 2b of

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Section 351 of the
restatement of contracts.

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Obviously in many cases whether or not

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special damages are recoverable
will turn on the information

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concerning its special circumstances that

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the non-breaching party convey to

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the breaching party at
the time of contracting.

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This is fair because it holds
the breaching party liable for

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special damages only when
that party was made aware

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during negotiations of the
possibility of such damages

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

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Let's consider an example
that will help to

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distinguish between general
damages and special damages.

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At the beginning of winter,

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

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

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After a particularly heavy snowstorm,

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Jane fails to show up for 36 hours.

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At that time, desperate to get to work,

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Mary hires Bill to plow her driveway.

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He charges $100 more than Jane.

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Moreover, as a result of Mary's

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

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she missed the scheduled
business meeting which resulted

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

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In terms of simple causation,

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

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

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But as noted above however,

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causation alone is not determinative

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of the damages recoverable
in contract law.

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The damages must have been foreseeable

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to the breaching party at
the time of contracting.

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It's entirely foreseeable that Jane would

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incur the consequential
damages resulting from

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having to hire another
plumbing company to clear

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her driveway in the event that
Jane breach the contract.

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Such consequential damages fall
within the realm of general damages.

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It is unlikely however that
Jane could reasonably foresee

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

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Such damages are
considered special damages

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

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As such, perhaps in Mary's having informed

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Jane of the potential occurrence
of such special damages,

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a court would not hold Jane
liable for the damages.

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

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had informed Jane that in
the event it snowed on

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a particular date it was
mandatory that the driveway be

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plowed because of the necessity that

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

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a court might well hold Jane
liable for such damages.

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In all likelihood however,

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

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

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Requiring that special
circumstances that might

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

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contracting is fair because it

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assures that the breaching
party take those circumstances

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into account when deciding
whether or not to

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enter into the contract and on what terms.

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In addition, the rule
of Hadley v. Baxendale

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encourages every party to convey
complete information about

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possible risks of damages
to the other side to

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