ON 23 FEBRUARY 1854, the Court of Exchequer Chamber delivered Hadley v Baxendale [1854] EWHC Exch J70
(1854) 9 Ex Ch 341; 156 ER 145 (23 February 1854).

http://www.bailii.org/ew/cases/EWHC/Exch/1854/J70.html

The decision lays down the rule for assessing damages for breach of contract. There are two limbs: (1) losses which “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 (2) losses which “may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as the probable result of the breach of it”.

Per Alderson B:

“Now we think the proper rule is such 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. Now, if the special circumstances under which the contract was actually made where communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. The Judge ought, therefore, to have told the jury, that, upon the fats then before them, they ought not to take the loss of profits into consideration at all in estimating the damages. There must therefore be a new trial in this case.”

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