Hadley v. Baxendale + foreseeability

The expectation formula tells you what the bargain was worth. It does not tell you which of the resulting losses the law will let you collect. The first filter is foreseeability, and its source is a broken mill shaft in Victorian Gloucester.

The two-branch rule

Hadley v. Baxendale. Damages for breach are recoverable for losses that either (1) arise naturally — in the usual course of things — from the breach itself, or (2) were in the reasonable contemplation of both parties at the time of contracting as the probable result of breach. Branch 1 covers general damages and passes automatically. Branch 2 covers special or consequential damages and passes only when the special circumstances were communicated to, and so known by, the breaching party when the contract was made.

The Restatement codification

R2d § 351. Damages are not recoverable for loss the breaching party “did not have reason to foresee as a probable result of the breach when the contract was made.” Loss is foreseeable either because it follows in the ordinary course (branch 1) or because of special circumstances “that the party in breach had reason to know” (branch 2). The modern rule asks only what the breacher had reason to know; it rejects the older “tacit agreement” gloss that required the breacher to have implicitly assumed the risk. Foreseeability is judged as of contract formation — an ex ante filter — which is why notice given at the bargaining table is decisive and notice given later may come too late.

Cases

Hadley v. Baxendale denied the miller his lost profits because the carrier had no reason to know the mill was idle for want of the shaft — the special circumstance was never communicated. It matters because it draws the line that still governs consequential damages: the same dollars of loss are recoverable or not depending on whether the breacher was told. That makes foreseeability a drafting problem as much as a litigation problem.

What you should be able to do

State the two branches and sort a given loss into general or consequential. Apply R2d § 351 to a notice fact pattern and decide whether communicated circumstances move a loss into branch 2. Explain why notice at contracting is the pivotal fact and why the modern rule does not require tacit agreement. Next class moves from total breach to defective performance, and the cost-to-complete versus diminution-in-value measure.