Hadley v Baxendale Comparing a landmark case in contracts to Sections 73 and 74 of the Indian Contract Act By - Abhigyan Bhattacharya

Hadley v Baxendale

Comparing a landmark case in contracts to Sections 73 and 74 of the Indian Contract Act

Authored By - Abhigyan Bhattacharya

BA LLB (Hons) (Ongoing)

Jindal Global Law School

Batch Of 2021

ABSTRACT

Damages are an integral part of contracts. This paper will be answering the question of how section 73 and section 74 of the Indian Contract Act compares to the rule set down in Hadley v Baxendale[1]. This paper will contain a detailed analysis of section 73 and section 74 of the Indian Contract Act and highlight the concepts of remoteness and reasonable foreseeability which are integral parts of these two sections. It will also include a detailed account of the case of Hadley v Baxendale[2] and analyse the judgment that was laid down in it, understanding what makes it a landmark case in the field of damages in contracts. In that analysis there will be sections highlighting how the judgment in the case dealt with the aforementioned concepts of remoteness and the measure or reasonableness of damages. Finally, it will include a comparison of the details of this case with the two sections seeing how the influences of a case from 1854 can be felt in modern day legislation.

CHAPTER 1: DAMAGES

Damages are compensation in the form of money to compensate for the loss suffered by an injured party. The onus is on the aggrieved party to prove his loss. Why do damages exist?  They exist to ensure that if a party is wronged, there is some form of compensation to ensure that they are at least returned to the state that they were in before the offence occurred. In relation to contracts, when they are breached, the injured party claims damages or in very specific scenarios, the injured party may demand the completion of a certain clause in the contract.”. Now, sections 73 and 74 in the Indian Contract Act highlight these damages. Also, section 21 of the Specific Relief Act deals with compensation. Actions for damages need to pass two tests, namely “remoteness of damages” and the "measure/ reasonableness of damages”.

The first test is the remoteness of damage. The defendant cannot be held liable for all the consequences that arise from the breach of a contract. Hence an upper limit needs to be applied to the liability of the defendant. Now this varies from case to case as a result of which the problem of drawing the line comes into question.[3] The second test is the measure or reasonableness of damages. For the damages to be claimable, the consequences of the breach should be reasonably foreseeable.[4] To determine this, the facts of a case have to be very carefully and minutely examined. A landmark case in this field is Hadley v Baxendale before which remoteness and reasonableness were not fully considered by the courts[5].

SECTION 73

Section 73 of the Indian Contract Act deals with “compensation for loss or damage caused by breach of contract”[6]. This can be explained by stating that the party that breached the contract is responsible to compensate the injured party for any loss that naturally arose from the breach of the contract. A case dealing with Section 73 is State Bank of Saurashtra v P.N.B[7]. In this case, the Supreme Court of India overthrew a judgement passed by a Special Court set up by the Special Court Act of 1992. The three judge bench passed their judgement under Section 73 of the Indian Contract Act where they held that the respondent was entitled to the initial amount that the party had paid for the delivery of undelivered units and in addition to that interest calculated at the rate of 17.5% per annum as it was previously claimed.

 In this situation the question of remoteness comes into play. The Indian Contract Act itself highlights this by stating that no indirect losses or “remote” damages could be held under the purview of this section. So, for example, if A enters into a contract with B to transport gold to be sold to a customer. However, A ends up breaching the contract and delivers the goods almost a month late. As a result of this, the main buyer of B’s gold ends up going to another seller. However, in the process of suing A, B also brings up the fact that the price of gold had fallen during the month of delay caused by A and so A was also responsible for the potential money he could have made by selling the excess gold at a higher rate. As a result of this, following section 73, A would only be responsible for the loss caused by the gold not selling to the main buyer and not the latter offence.

A case dealing with this concept of remoteness is Monarch Steamship Co. Ltd. v Karlshamms Oljefabriker[8]. In that case, a cargo ship was tasked with transporting some goods to a Swedish port. However, the voyage was delayed owing to damage in the vessel and by the time the ship managed to set sail, war broke out, declared by British Admiralty. As a result of this, the goods had to be discharged at Glasgow instead of Sweden. During the court proceedings, the aggrieved party tried to claim the charges for transport from Glasgow to the Swedish port. This was deemed to be too remote by the House of Lords.

SECTION 74

Section 74 of the Indian Contract Act deals with “compensation for breach of contract where penalty is stipulated for”[9]. This means that if any amount is stated in the contract as a sum to be paid on breach of contract, then irrespective of the presence of any actual damage having been caused by the breach, the aggrieved party is entitled to receive a reasonable compensation from the party who breached the contract. However, this amount cannot exceed the amount that was stipulated in the contract. An important case dealing with the determination of damage under breach of contract, in recent times, is the case of Kailash Nath Associates v Delhi Development Authority[10]. In this case, the appellant had bid to the respondent, 3.12 crores during a public auction. Out of this gross sum, 78 lakhs were deemed as earnest money and a clause in the contract stipulated that “in the case of any non-compliance or misrepresentation by the bidder the earnest money shall be forfeited”[11]. The bid was accepted and when the Delhi Development Authority asked for the remaining 75% of the money, the appellant asked for an extension owing to a recession in the industry. After this a second extension was asked for by the appellant. The DDA did not respond to this for three years after which they simply claimed that the earnest money was forfeit. According to the judgement, since section 74 awarded reasonable compensation for damages, the damage caused is a sine qua non under this section.

In this situation, the question of measure or reasonableness of damage comes into play. As highlighted under Section 74, the compensation which the aggrieved party is entitled to when contract is breached, must be reasonable. So, for example, let’s say A enters into a contract with B to deliver a hundred steel bars to B by a stipulated date. However, A and B also decided that upon breach of the contract, the aggrieved party would be entitled to damages worth 60 lakh rupees from the other party. Due to some mishap, 98 steel bars are delivered to B and as a result of this, B sues A for the full 60 lakhs. In such a scenario, the courts consider the reasonableness of damages and most probably would come to a more appropriate compensation from A’s side which is proportional to the gravity of the breach.

A case that deals with this very question is V.K. Ashokan v CCE[12]. This case dealt with the recovery of a reasonable sum. It was held that in a scenario where damages could not be calculated and all the terms of the contract provided was a penalty, only a reasonable sum could be recovered by the aggrieved party which didn’t specifically need to be the sum specified in the contract.

CHAPTER 2: HADLEY V BAXENDALE

FACTS AND JUDGEMENT

This is a landmark case in contracts which laid out the foundation for the way we perceive damages today since it was in this case that the concepts of remoteness and reasonableness were first debated and settled on by a court. In this case, a crankshaft broke in the plaintiff’s flour mill following which they wanted to transport the broken crankshaft so that it could be fixed by the original manufacturer Joyce and Co. at Greenwich and they chose to do it through a large public carrier that was trading under the name Pickford and Co. The clerk at Pickford was informed that the mill was stopped and replacing the components were a priority. The plaintiff was informed that if the broken part was sent to them by twelve in the afternoon on any day, the part would be delivered to Greenwich the following day.

The broken crankshaft was placed in Pickford’s custody before twelve the very next day and Hadley paid them two pounds for the shipment. The clerk at Pickford was even informed that if required some special request should be entered to hasten the delivery of the new part. However, some neglect caused the delivery to be delayed by five days. The shipment was routed through London and it was supposed to be sent directly to Greenwich by train but it was kept in London for quite a few more days and was sent by a canal along with some unrelated shipment of iron goods. This whole ordeal caused the mill to remain closed for five extra days. The plaintiffs claimed that due to the delay, the mill had to be closed for longer than initially intended. However during this time the plaintiffs still had to pay the wages of the workers and at the same time they could not afford to lose out on their sales. So, they had to resort to having to buy raw materials such as flour from other external sources just so that they could supply it to their customers and thus lost out on a lot of potential profit that they could have made otherwise. On this basis, they claimed three hundred pounds in damages from the defendant and Pickford countered this by arguing that the damages were too remote.

Ultimately the courts held that only reasonable damages could be considered by the courts for recovery and the damages should have been reasonably foreseen by both the parties in question and the plaintiffs had failed to satisfy either test. This resulted in the infamous first and second rules of this case.[13]

REMOTENESS OF DAMAGE

In this case, the judge Alderson B stated that ‘Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it’.[14] On the basis of this principle, it was held that the defendants would not be liable for the lost profits. The fact that the mill was non-functional due to the broken crankshaft was just a special circumstance and it could have been turned off for several other reasons. This decision laid down the rules for general damages and special damages.[15] There could have been several possible inspirations behind the ruling in this case namely the French Civil Code[16], Louisiana Civil Code[17], James Kent’s ‘Commentaries’[18] and finally Sedgwick’s ‘A Treatise on the Measure of Damages’[19]. The decision made by the court to make such a strict rule on remoteness was reflected in the Martin B. and Alderson B.’s concerns that if this were to happen again, any trivial breach of a contract could result in potentially exponential damages[20].

MEASURE/ REASONABLENESS OF DAMAGES

This case answered the question concerning the principles on which the evaluation and quantification of damage must occur or in other words, the reasonableness of the damage that occurred.[21] In Hadley[22], the courts held that the damages in question, namely the lost profits, were not recoverable by the defendants. The Court stated that “and here there is a clear rule, that the amount which would have been received if the contract had been kept, is the measure of damages if the contract is broken.”[23] Using this rule, the courts reasoned that only the damages which could have been reasonably foreseen as a consequence of the breach of the contract could be recovered by stating that damages could only be recoverable if they “may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as a probable result of the breach of it”[24]. Since, in this scenario, the defendants were not aware of the work orders, they had no way or reason to understand and expect the fact that as a direct result of the delay, the plaintiff was going to suffer such significant losses. If the plaintiff had been made aware however, this concept of reasonable foreseeability would not apply and he would have been held liable for the damages that were caused.[25]

COMPARING SECTION 73 AND SECTION 74 OF THE INDIAN CONTRACT ACT TO THE RULE ESTABLISHED IN HADLEY V BAXENDALE

Hadley v Baxendale[26] was a very important case that cleared up most of the discrepancies that were occurring in court over consequential losses.[27] Being as important as a case it was in the landscape of damages, its fair to say that its influences can be seen even today. Let us compare the rule set in that case to sections 73 and 74 of the Indian Contract Act.[28]

Section 73 very clearly states that compensation can be recovered in any case where the loss or damage arises naturally from the breach of the contract and any case in which the parties involved knew that such loss could occur at the time of the writing of the contract as a likely result of the breach.[29] The first rule is quite objective since it relies on reasonable foresight of the loss that could arise from a breach of contract whereas as the second rule is objective and relies on the extent of liability it can extend to depending on the parties’ knowledge at the time.[30] This can be compared to Hadley[31] since the courts stated that the damages could not have been foreseen by either party since the defendants were not informed about the possible damage that would have been caused by the delay of the crankshaft and the mill having to remain closed for longer. As a result of this, the rule of remoteness acts as a preventive measure to protect parties against unfair damages.

Secondly, section 74 of the Indian Contract Act deals with foreseeability. It states that even if damages stipulated, they need to be reasonable with respect to the breach of the contract. This is especially highlighted by the fact that the plaintiffs in this particular case[32] wanted damages worth three hundred pounds for a relatively slight breach of contract, especially because the repair job of the broken crankshaft only cost two pounds and four shillings which translates to approximately two hundred and forty pounds in today’s currency. As a result of this, the plaintiffs were awarded damages worth twenty-five pounds. When we compare the rule and section 74 there is a striking similarity between the two. Section 74 also sustains the rule that the court made thus sustaining the fact that only reasonable damages can be compensated since otherwise it would be extremely unfair on either party if they were charged similarly unreasonable damages and also prevent either party from taking advantage of the other.

CONCLUSION

Hadley v Baxendale[33] was a very relevant case when it was passed. It put forward the two rules that had arguably the most impact with respect to damages, namely remoteness and reasonableness. Both of these, act as a preventive measure to ensure a fair way in which the damaged party can potentially get their damages while not asking for compensation that is too unreasonable for the plaintiff. Section 73 and section 74 of the Indian Contract Act keep up these very same rules that were established. Thus, it could be said that they were inspired by Hadley v Baxendale.[34] So, when we compare the two they are in fact quite similar and it could also be said that these rules based on damages were quite heavily influenced by this landmark case in contracts.

[1] Hadley v Baxendale 156 Eng. Rep. 145 1854 9 Exch. 341.

[2] Ibid.

[3] Rajah & Tann Asia, ‘Remoteness of Damage: extending the exception to Hadley v Baxendale’ (Lexology, 29 July 2010) https://www.lexology.com/library/detail.aspx?g=d75a04b9-b5d4-489a-8f48-2f1fa265931a accessed 17 April 2022.

[4] Trembly Law Firm, ‘Using Hadley v Baxendale to Understand Foreseeability’ (Trembly Law) https://tremblylaw.com/using-hadley-v-baxendale-to-understand-foreseeability/ accessed 17 April 2022.

[5] Michael Furmston, Cheshire, Fifoot & Furmston’s Law of Contract Fifteenth Edition (Oxford University Press, 2009).

[6] Indian Contract Act 1872, s 73.

[7] State Bank of Saurashtra v. P.N.B., SCC 2001 5 SC 751.

[8]  'Monarch Steamship v Karlshamns - 1949' (Lawteacher.net, April 2022) accessed 17 April 2022.

[9] (n 6).

[10] Kailash Nath Associates v. DDA, SCC 2015 4 SC 136.

[11] Arnav Shastri, ‘Section 74, Indian Contract Act, 1872: Application and Analysis in the light of Kailash Nath Associates v. DDA’ (Racolb Legal, 28 April 2021)  http://racolblegal.com/section-74-indian-contract-act-1872-application-and-analysis-in-the-light-of-kailash-nath-associates-v-dda/#:~:text=In%20the%20case%20of%20Kailash,party%20at%20the%20first%20place. Accessed  17 April 2022.

[12] V.K. Ashokan v. CCE, SCC 2009 14 SC 85.

[13] George S. Geis, 'Empirically Assessing Hadley v. Baxendale' (2005) 32 Fla St U L Rev 897.

[14] (n 1).

[15] Rajesh Kapoor, Avatar Singhs’s Contract & Specific Relief (EBC 2021).

[16] French Civil Code 1854, art 1151.

[17] Louisiana Civil Code (1825), art 1928.

[18] James Kent, Commentaries on American Law (Boston: Little, Brown & Co., 1858).

[19] Theodore Sedgwick, A treatise on the measure of damages, or, An inquiry into the principles which govern the amount of compensation recovered in suits at law (New York: John Voorhies, 1852).

[20] Warren Swain, The Law of Contract 1670-1870 (Cambridge University Press 2015).

[21] Michael Furmston (n 5).

[22] (n 1).

[23] (n 1).

[24] Warren Swain (n 20).

[25] (n 4).

[26] (n 1).

[27] Warren Swain (n 20).

[28] Warren Swain (n 20).

[29] Rajesh Kapoor (n 15).

[30] Rajesh Kapoor (n 15).

[31] (n 1).

[32] (n 1).

[33] (n 1).

[34] (n 1).