P carried extensive milling business. Mill stopped by crankshaft breakage. D engaged to carry shaft to manufacturers. P's servant told D mill was stopped. D delayed delivery causing heavy loss. Action for loss of profits. Decide.

The problem before us is a classic one in the law of contract, drawn directly from the most celebrated case in the history of contractual damages — Hadley v Baxendale (1854) 9 Exch 341. The facts are virtually identical, and the case provides the governing principle. Let us reason through it with care.

The Facts and the Central Question

P carried on an extensive milling business. His mill was brought to a standstill by the breakage of the crankshaft. The broken shaft needed to be sent to the manufacturers as a pattern for a new one. P engaged D, a carrier, to transport the shaft. P's servant informed D that the mill was stopped. D delayed delivery through neglect, and the consequence was that P did not receive the new shaft for several days beyond the time when it would otherwise have arrived. P now brings an action claiming the loss of profits suffered during the period of delay.

The question is a focused one: can P recover his loss of profits from D, given what was communicated to D at the time of contracting?

The Governing Principle: Section 73 and the Two-Branch Rule

Section 73 of the Indian Contract Act, 1872, lays down that compensation is payable for loss or damage which either arose naturally in the usual course of things from the breach, or which the parties knew, at the time of the contract, to be likely to result from the breach. The section further declares, with emphatic clarity, that compensation shall not be given for any remote and indirect loss or damage.

These two branches were articulated with enduring authority by Alderson B in Hadley v Baxendale itself, and Section 73 is declaratory of exactly those principles. The first branch covers what a reasonable man in the defendant's position would take to be the natural, ordinary consequence of a breach of that particular type of contract — what will happen in the great majority of similar cases. The second branch covers special loss arising from special circumstances, but only if those circumstances were communicated to and known by the defendant at the time of entering the contract, so that the parties may be taken to have contracted with reference to that special risk.

Applying the First Branch: Does Loss of Profits Arise Naturally?

At first sight, one might think that if a miller's crankshaft is delayed by a carrier, the natural consequence must be that the mill cannot run and profits are lost. But the court in Hadley v Baxendale rejected precisely this reasoning. The reasoning of Alderson B was that in the great multitude of cases where a broken shaft is sent to a manufacturer by a carrier, the stoppage of the mill does not necessarily follow. The miller might well have a spare shaft; there might be some other defect that would have independently stopped the mill; or the delay might not cause any stoppage at all.

The loss of profits here is therefore not a consequence that in the ordinary course of things would be expected to arise from a carrier's delay in delivering a machine part. The ordinary and natural consequences of such a delay would be, at most, some delay in obtaining the replacement part — and the carrier would be liable for any additional freight or incidental cost of that delay. But the stoppage of the mill and the consequent loss of profits is a special loss, not a general or natural one.

Applying the Second Branch: What Was Communicated?

The second branch would allow recovery of special loss, but only where the special circumstances were actually communicated to the defendant at the time of contracting, so that both parties contracted with that special risk in contemplation.

Now, what was actually communicated to D in this case? P's servant told D only that "the mill was stopped." This is the fact that distinguishes this case from a situation where full disclosure is made. The communication that the mill was stopped, without more, does not convey to D that the entire resumption of the mill's working depended solely upon the timely delivery of this particular shaft. The carrier was not told:

• That P had no other crankshaft with which to work the mill in the meantime;

• That the only way to restart the mill was by the prompt return of this shaft;

• That every day of delay would result in lost profits of a specific magnitude.

In the absence of such fuller communication, the carrier could reasonably suppose that the mill was stopped for various possible reasons — perhaps there were other defects, or perhaps a spare shaft existed — and he could not be taken to have contracted with the specific responsibility that his delay alone would cause the entire mill to remain idle and profits to be lost during that period.

This reasoning was confirmed by the Court when it stated that the facts known to the defendant were insufficient to show reasonably that the profits of the mill must be stopped by an unreasonable delay in delivery of the broken shaft to the manufacturers.

The Illustration in Section 73 Itself: A Critical Distinction

Illustration (i) to Section 73 of the Indian Contract Act directly addresses this type of situation and draws a vital distinction. It provides that A delivers to B, a common carrier, a machine to be conveyed without delay to A's mill, informing B that his mill is stopped for want of the machine. B unreasonably delays delivery, and A in consequence loses a profitable Government contract. The illustration then awards A the average amount of profit which would have been made by the working of the mill during the delay, but not the loss of the specific Government contract.

This illustration illuminates two things simultaneously. First, where a miller clearly communicates to the carrier that the mill is stopped specifically for want of the machine being carried, the loss of ordinary mill profits during the delay is recoverable — because that special circumstance has been brought within the mutual contemplation of the parties. Second, even in that case, the loss of a specific, unusually profitable Government contract is still too remote, because that particular contract was never communicated to the carrier and was beyond what he could reasonably have contemplated.

The Critical Question for the Present Case

The present problem states that P's servant told D that the mill was stopped — not, crucially, that the mill was stopped for want of this particular shaft and that without its timely delivery no operation was possible. This is a thinner and less specific communication than what Illustration (i) to Section 73 contemplates.

Applying the principle strictly: if the communication was merely that the mill was stopped, without placing the carrier on notice that the mill's resumption was entirely contingent on this particular delivery, the carrier could not reasonably be taken to have contracted with reference to the special loss of mill profits. The first branch of the rule does not help P, because loss of profits is not a natural ordinary consequence of delayed delivery of a shaft. The second branch does not fully help P either, because the communication was insufficient to bring the specific dependence of the mill's operation on this shaft within the mutual contemplation of the parties.

Decision

On the facts as stated, P cannot recover the loss of profits. D is liable only for such damages as naturally arose in the usual course of things from the delay — which would be, at most, the cost of any additional delay in obtaining the shaft, or such incidental losses as followed ordinarily from a carrier's default in timely delivery, but not the loss of profits from the stoppage of the mill.

However, if the communication to D had been more specific — had P's servant told D not merely that the mill was stopped, but that it was stopped specifically for want of this shaft, that there was no other shaft available, and that every day of delay would cause loss of profits — then, by the terms of Illustration (i) to Section 73, P would have been entitled to the average profits of the mill for the period of delay. The carrier, having been made aware of those special circumstances at the time of contracting, would have impliedly accepted the risk of that special loss.

This is the enduring wisdom of the principle in Hadley v Baxendale, faithfully encoded in Section 73 of the Indian Contract Act: the defendant is liable only for that loss which, on the information available to him at the time of contracting, a reasonable man in his position would have recognised as the probable or likely consequence of his breach. Where special circumstances exist that bring a larger or unusual liability within the zone of contemplation, they must be communicated — clearly and specifically — at the time of making the contract. Mere disclosure that the mill is stopped, without more, does not suffice to convert a case of ordinary carrier's delay into a full-blown claim for loss of mill profits.