Limits on Damages I — Foreseeability + Mitigation

The expectation formula produces a number; Chapter 26 takes that number apart. Three doctrines stand between a claimed loss and a recoverable one, and they do not punish breach — they keep awards reasonably foreseeable, reasonably certain, and reasonably avoidable. Today we work the first and the third, with Hadley anchoring the foreseeability filter and § 350 adding the mitigation filter beneath it.

The foreseeability filter

R2d § 351. Damages are “not recoverable for loss that the party in breach 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 of events (§ 351(2)(a) — general damages) or because of special circumstances “that the party in breach had reason to know” (§ 351(2)(b) — consequential damages). These are the two branches of Hadley v. Baxendale, codified. The test is ex ante and objective: it asks what the breacher had reason to know at contract formation, not what later turned out to matter, and it does not require a “tacit agreement” to bear the loss. Notice of special circumstances at the bargaining table is what moves a loss into branch two; § 351(3) also lets a court trim even a foreseeable award to avoid “disproportionate compensation.”

The certainty filter

R2d § 352. Damages “are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.” Certainty is distinct from foreseeability but bites hardest in the same place: lost profits. A well-established business can prove its losses from past performance; a new or erratic venture often cannot, and its speculative profits drop out — though the injured party can still fall back on reliance expenditures, which are usually easy to prove. Doubts are resolved against the breaching party.

The mitigation filter

R2d § 350. Damages “are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.” This is the avoidability or mitigation rule, and it is ex post: once a party has reason to know performance will not come, it must stop its own expenditures and take reasonable steps to arrange a substitute. The Restatement calls the “duty” to mitigate a misnomer — there is no liability for failing to act; the avoidable loss is simply subtracted. Section 350(2) protects the party who tries: reasonable but unsuccessful efforts to avoid loss do not bar recovery.

Cases

Hadley v. Baxendale denied the miller his lost profits because the carrier had no reason to know the mill sat idle for want of the shaft. It matters because the same loss is recoverable or not depending on whether the breacher was told — making foreseeability a drafting problem. The chapter’s problems show the filters working together: in the Freezer Failure problem, a startup’s $25M lost-funding claim exits at foreseeability because a refrigeration supplier had no reason to know the financing turned on the install date; in Jack’s Furniture, lost-profit claims fail both certainty (no signed client contract, no earnings history) and foreseeability (calling the order “a big deal” is not notice of the magnitude).

What you should be able to do

Sort a loss into general or consequential and decide whether notice moved it into branch two of Hadley / § 351. Apply § 352 to decide when lost profits are too speculative to recover. Apply § 350 to subtract avoidable losses, and explain why the mitigation “duty” carries no independent liability. Above all, keep the filters separate: foreseeability is judged at contracting and looks at the breacher; mitigation is judged after breach and looks at the injured party; a loss can pass one and fail the other. Next class turns to the case where the parties fix the number in advance — liquidated damages and the penalty rule.