The basic principle of contract damages is to put the non-breacher in as good a position as he or she would have been had the contract been performed as promised.

Does the court achieve this goal when it follows the “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”?

Correct! If you award the amount that would have been received if the contract had been performed, you put the non-breacher in the position he or she would have been had the contact been performed as promised.

Incorrect. If you award the amount that would have been received if the contract had been performed, you put the non-breacher in the position he or she would have been had the contact been performed as promised.

The court distinguishes two types of damage: (1) those arising in the usual course of things; and (2) those reasonably supposed to be in the contemplation of the parties at the time of contracting. Focus for now on (1). If the court were to hold that the Hadley’s lost profits were damages arising in the usual course of things, then it would award the Hadley’s the lost profits and thereby putting them in the position they would have been had the breach not occurred.

Correct! The court’s position is that the non-breacher should receive damages arising in the usual course of things. If it sees the lost profits as such damages, it will award them and thereby put the Hadley’s back in the position they would have been in had the breach not occurred.

In terms of the three step-procedure, the damage calculation looks like this.

First, the contract-performed position: No lost profits.

Second, the result-of-the-breach-proper-mitigation position: Six days lost profits.

The court does not discuss mitigation. Evidently, it assumes there were no reasonable steps the Hadleys could take to reduce their damages.

Third, the award: Award the lost profits–provided that one of these two things is true: (1) the lost profits are damages arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the lost profits would be a probable result of the breach.

Given that (1) is true, the court will award the lost profits.

Incorrect. The court’s position is that the non-breacher should receive damages arising in the usual course of things. If it sees the lost profits as such damages, it will award them and thereby put the Hadley’s back in the position they would have been in had the breach not occurred.

In terms of the three step-procedure, the damage calculation looks like this.

First, the contract-performed position: No lost profits.

Second, the result-of-the-breach-proper-mitigation position: Six days lost profits.

The court does not discuss mitigation. Evidently, it assumes there were no reasonable steps the Hadleys could take to reduce their damages.

Third, the award: Award the lost profits–provided that one of these two things is true: (1) the lost profits are damages arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the lost profits would be a probable result of the breach.

Given that (1) is true, the court will award the lost profits.

Suppose you routinely hire me to deliver packages for you. As we both know, the packages never contain items worth more than $20. Today, however, you hand me a package containing a diamond necklace worth $1 million. You hand me the package already wrapped and do not tell me the value of what it contains.

(a) The damage of $1 million if the package is lost is “reasonably supposed to be in [my] contemplation . . . at the time of contracting.”

(b) The damage of $1 million if the package is lost is not “reasonably supposed to be in [my] contemplation . . . at the time of contracting.”

Incorrect. The damages do not arise in the usual course of things. The packages rarely if ever contain items so valuable. Further, in the circumstances, I reasonably assume the package does not contain anything very valuable, so the damage of $1 million if the package is lost is not “reasonably supposed to be in [my] contemplation . . . at the time of contracting.”

In terms of the three step-procedure, the damage calculation looks like this.

First, the contract-performed position: No loss.

Second, the result-of-the-breach-proper-mitigation position: $1 million loss.

Assume there is nothing you can do to reduce damages.

Third, the award: Award the $1 million-provided that: (1 the lost profits are damages arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the lost profits would be a probable result of the breach.

Neither (1) nor (2) is true, so you do not get the $1 million.

Correct. The damages do not arise in the usual course of things. The packages rarely if ever contain items so valuable. Further, in the circumstances, I reasonably assume the package does not contain anything very valuable, so the damage of $1 million if the package is lost is not “reasonably supposed to be in [my] contemplation . . . at the time of contracting.”

In terms of the three step-procedure, the damage calculation looks like this.

First, the contract-performed position: No loss.

Second, the result-of-the-breach-proper-mitigation position: $1 million loss.

Assume there is nothing you can do to reduce damages.

Third, the award: Award the $1 million-provided that: (1 the lost profits are damages arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the lost profits would be a probable result of the breach.

Neither (1) nor (2) is true, so you do not get the $1 million.

The court will not award damages not “reasonably supposed to be in the contemplation of the parties at the time of contracting.” Suppose the court were to hold–as indeed it does below–that the Hadley’s lost profits were not “reasonably supposed to be in the contemplation of the parties at the time of contracting.” Then it would not award the lost profits.
(a) This would not to put the Hadley’s back in the position they would have been had the contract not been breached.

(b) This would put the Hadley’s back in the position they would have been had the contract not been breached.

Correct. It would appear that the Hadley’s are not put in the position they would have been in had the contract not been breached.

Is this consistent with The basic principle of contract damages: put the plaintiff in as good a position as he or she would have been had the contract been performed as promised? The court continues with a justification of its position. How convincing do you find it?

Incorrect. It would appear that the Hadley’s are not put in the position they would have been in had the contract not been breached.

Is this consistent with The basic principle of contract damages: put the plaintiff in as good a position as he or she would have been had the contract been performed as promised? The court continues with a justification of its position. How convincing do you find it?

The court held that the loss on the additional 1000 bags was reasonably foreseeable by the telegraph company at the time of contracting as the probably result of the breach. Thus, the plaintiff’s expectation award was:

(a) The loss on 2000 bags of coffee.

(b) $0.

(c) The loss on 1000 bags of coffee.

Incorrect. The award is just the loss on 1000 bags. Here is the damage calculation:

First, the contract-performed position: Loss on 1000 bags.

Second, the result-of-the-breach-proper-mitigation position: Loss on an additional 1000 bags.

Assume there is nothing the coffee dealer can do to reduce damages.

Third, the award: Award the loss on the additional 1000 bags–provided that: (1 the loss is one arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the loss would be a probable result of the breach.

Since the court assumes that (2) is true, it awards the loss on the additional 1000 bags.

Incorrect. The award is not $0; it is the loss on 1000 bags. Here is the damage calculation:

First, the contract-performed position: Loss on 1000 bags.

Second, the result-of-the-breach-proper-mitigation position: Loss on an additional 1000 bags.

Assume there is nothing the coffee dealer can do to reduce damages.

Third, the award: Award the loss on the additional 1000 bags–provided that: (1 the loss is one arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the loss would be a probable result of the breach.

Since the court assumes that (2) is true, it awards the loss on the additional 1000 bags. The award would be $0 only if the court held that neither (1) nor (2) was true.

Correct. Here is the damage calculation:

First, the contract-performed position: Loss on 1000 bags.

Second, the result-of-the-breach-proper-mitigation position: Loss on an additional 1000 bags.

Assume there is nothing the coffee dealer can do to reduce damages.

Third, the award: Award the loss on the additional 1000 bags–provided that: (1 the loss is one arising in the usual course of things; or, (2) a reasonable person would, at the time of contracting, have thought the loss would be a probable result of the breach.

Since the court assumes that (2) is true, it awards the loss on the additional 1000 bags.

The court supports this claim with convincing facts about mills in England.

Incorrect. Here is the crucial part of the court’s reasoning.

The court asserts: (1) “Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back their broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose that, at the time of the delivery to the carrier, the machinery of the mill had been in other respects defective, then, also, the same results would follow.”

From (1), they conclude: (2) It is obvious that, in the great multitude of cases millers sending off broken shafts to third parties by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.

The problem is that (1) notes that certain things are possible. (2) however asserts that those same things are the things normally true. This does not follow. It is possible that you will be run over by a car when you cross the street, but his normally does not happen.

Is there a better justification for the decision in Hadley? The next question raises the same issue in the context of another case.

Correct. Here is the crucial part of the court’s reasoning.

The court asserts: (1) “Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back their broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose that, at the time of the delivery to the carrier, the machinery of the mill had been in other respects defective, then, also, the same results would follow.”

From (1), they conclude: (2) It is obvious that, in the great multitude of cases millers sending off broken shafts to third parties by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.

The problem is that (1) notes that certain things are possible. (2) however asserts that those same things are the things normally true. This does not follow. It is possible that you will be run over by a car when you cross the street, but this normally does not happen.

Is there a better justification for the decision in Hadley? The next question raises the same issue in the context of another case.

The court held that the loss on the additional 1000 bags was reasonably foreseeable by the telegraph company.

(a) It is clear that a reasonable person would realize are the likely result of a breach of a contract of the type in question.

(b) It is clear that the damages arose from special circumstances, and that the telegraph company was aware of these special circumstances.

(c) Neither (a) nor (b).

Incorrect. The damages certainly do not arise in the usual course of things. A mistaken message in a telegram–any telegram–does not, in the normal course of things, give rise to damages resulting from market fluctuations; nor, one might plausibly contend, does this happen in the normal course of things, in the case of telegrams sent by coffee brokers. The court held, however, that the telegraph company was, or should have been, aware of the special circumstances (what it calls the “business importance” of the message) giving rise to the damages. The court argued that

We think the reasonable rule . . . is that where a message as written, read in the light of well-known usage in commercial correspondence, reasonably informs the operator that the message is one of business importance, and discloses the transaction so far as is necessary to accomplish the purpose for which it is sent, the company should be held liable for all the direct damages resulting from a negligent failure to transmit it as written, within a reasonable time, unless such negligence is in some way excused. Under this rule, both dispatches as presented to appellant’s operator were sufficiently explicit to charge it with the loss sustained by appellees, resulting from what has been found by the jury to be its inexcusable mistakes. Lathrop, 586 -7.

The problem is that, as Judge Cardozo notes in Kerr Steamship Co., Inc. v. Radio Corporation Of America, 245 N.Y. 284 (1927), “{t}he truth seems to be that neither the clerk who receives the message over the counter nor the operator who transmits it nor any other employee gives or is expected to give any thought to the sense of what he is receiving or transmitting. This imparts to the whole doctrine as to the need for notice an air of unreality.” Id. at 291.

Cardozo offers a policy rationale instead:

Much may be said in favor of the social policy of a rule whereby the companies have been relieved of liabilities that might otherwise be crushing. The sender can protect himself by insurance in one form or another if the risk of nondelivery or error appears to be too great. The total burden is not heavy since it is distributed among many, and can be proportioned in any instance to the loss likely to ensue. The company, if it takes out insurance for itself, can do no more than guess at the loss to be avoided. To pay for this unknown risk, it will be driven to increase the rates payable by all, though the increase is likely to result in the protection of a few. Id.

Do you find Cardozo’s rationale convincing?

Incorrect. The damages certainly do not arise in the usual course of things. A mistaken message in a telegram–any telegram–does not, in the normal course of things, give rise to damages resulting from market fluctuations; nor, one might plausibly contend, does this happen in the normal course of things, in the case of telegrams sent by coffee brokers. The court held, however, that the telegraph company was, or should have been, aware of the special circumstances (what it calls the “business importance” of the message) giving rise to the damages. The court argued that

We think the reasonable rule . . . is that where a message as written, read in the light of well-known usage in commercial correspondence, reasonably informs the operator that the message is one of business importance, and discloses the transaction so far as is necessary to accomplish the purpose for which it is sent, the company should be held liable for all the direct damages resulting from a negligent failure to transmit it as written, within a reasonable time, unless such negligence is in some way excused. Under this rule, both dispatches as presented to appellant’s operator were sufficiently explicit to charge it with the loss sustained by appellees, resulting from what has been found by the jury to be its inexcusable mistakes. Lathrop, 586 -7.

The problem is that, as Judge Cardozo notes in Kerr Steamship Co., Inc. v. Radio Corporation Of America, 245 N.Y. 284 (1927), “{t}he truth seems to be that neither the clerk who receives the message over the counter nor the operator who transmits it nor any other employee gives or is expected to give any thought to the sense of what he is receiving or transmitting. This imparts to the whole doctrine as to the need for notice an air of unreality.” Id. at 291.

Cardozo offers a policy rationale instead:

Much may be said in favor of the social policy of a rule whereby the companies have been relieved of liabilities that might otherwise be crushing. The sender can protect himself by insurance in one form or another if the risk of nondelivery or error appears to be too great. The total burden is not heavy since it is distributed among many, and can be proportioned in any instance to the loss likely to ensue. The company, if it takes out insurance for itself, can do no more than guess at the loss to be avoided. To pay for this unknown risk, it will be driven to increase the rates payable by all, though the increase is likely to result in the protection of a few. Id.

Do you find Cardozo’s rationale convincing?

Correct. The damages certainly do not arise in the usual course of things. A mistaken message in a telegram–any telegram–does not, in the normal course of things, give rise to damages resulting from market fluctuations; nor, one might plausibly contend, does this happen in the normal course of things, in the case of telegrams sent by coffee brokers. The court held, however, that the telegraph company was, or should have been, aware of the special circumstances (what it calls the “business importance” of the message) giving rise to the damages. The court argued that

We think the reasonable rule . . . is that where a message as written, read in the light of well-known usage in commercial correspondence, reasonably informs the operator that the message is one of business importance, and discloses the transaction so far as is necessary to accomplish the purpose for which it is sent, the company should be held liable for all the direct damages resulting from a negligent failure to transmit it as written, within a reasonable time, unless such negligence is in some way excused. Under this rule, both dispatches as presented to appellant’s operator were sufficiently explicit to charge it with the loss sustained by appellees, resulting from what has been found by the jury to be its inexcusable mistakes. Lathrop, 586 -7.

The problem is that, as Judge Cardozo notes in Kerr Steamship Co., Inc. v. Radio Corporation Of America, 245 N.Y. 284 (1927), “{t}he truth seems to be that neither the clerk who receives the message over the counter nor the operator who transmits it nor any other employee gives or is expected to give any thought to the sense of what he is receiving or transmitting. This imparts to the whole doctrine as to the need for notice an air of unreality.” Id. at 291.

Cardozo offers a policy rationale instead:

Much may be said in favor of the social policy of a rule whereby the companies have been relieved of liabilities that might otherwise be crushing. The sender can protect himself by insurance in one form or another if the risk of nondelivery or error appears to be too great. The total burden is not heavy since it is distributed among many, and can be proportioned in any instance to the loss likely to ensue. The company, if it takes out insurance for itself, can do no more than guess at the loss to be avoided. To pay for this unknown risk, it will be driven to increase the rates payable by all, though the increase is likely to result in the protection of a few. Id.

Do you find Cardozo’s rationale convincing?