>> 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.