Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145

Citation

• Full case name: Hadley and another v Baxendale and others
• Reported at: (1854) 9 Exch 341; 156 ER 145; [1854] EWHC J70 (Exch)
• Court: Court of Exchequer
• Judgment date: 23 February 1854
• Judgment delivered by: Alderson B
• Subject: damages for breach of contract; remoteness; consequential loss

Facts

The claimants were millers at Gloucester. The crankshaft of their steam engine broke, and the mill could not operate without it. They engaged the defendant carriers to take the broken shaft to the engineers who were to make a replacement, for a charge of two pounds and four shillings.

The carriers delivered it late. The mill stood idle for longer than it would otherwise have done, and the millers claimed the profits they had lost during the delay. A jury awarded them fifty pounds. The carriers appealed, saying they had not been told that the mill was standing idle for want of the shaft.

Decision and the two limbs

The court set aside the award and ordered a new trial. Alderson B stated the rule that has governed the remoteness of damages in contract ever since:

“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.”

The first limb covers loss arising naturally, in the usual course of things. The second covers loss arising from special circumstances, but only where those circumstances were communicated to the defendant so that both parties had them in contemplation when they contracted.

On the facts the lost profits fell into neither limb. The carriers had not been told that the mill was idle and that the shaft was the only one, so they could not reasonably have contemplated that a delay would stop the business.

Why it matters for insurance

Hadley v Baxendale is the reason the phrase “consequential loss” appears in almost every commercial contract in the country, and the reason it causes so much trouble. English courts have traditionally read a contractual exclusion of “consequential loss” as excluding only losses falling within the second limb — those arising from special circumstances known to both parties — and not the ordinary loss of profit that arises naturally from the breach. A supplier who thinks it has excluded liability for lost profits may not have done.

That has direct consequences for insurance. A business that signs a contract capping or excluding liability on terms that do not work as intended may be exposed well beyond what it assumed when it bought its cover. Conversely, a business that relies on a supplier’s indemnity may find the indemnity does not reach the loss it actually suffers. Liability wordings often treat contractual liability differently from liability at common law, which makes the drafting of the underlying contract an insurance question.

On the first-party side the same reasoning underpins business interruption cover. BI insurance exists precisely because the losses that follow an interruption — lost gross profit, increased cost of working — are real and often unrecoverable from anyone else. Getting the definitions and the indemnity period right is what makes the policy answer them.

See also

• Consequential loss — what the phrase means in contracts and in policies
• CIS General Insurance v IBM — modern treatment of an exclusion of loss of profit
• Watts v Morrow — damages for distress and inconvenience in professional claims
• Heywood v Wellers — recoverable loss where a professional fails the client

References

• Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 (Court of Exchequer, 23 February 1854)
• Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350
• CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] EWHC 347 (TCC)

Frequently asked questions

What are the two limbs of Hadley v Baxendale?

The first limb covers loss arising naturally, according to the usual course of things, from the breach. The second covers loss arising from special circumstances, but only if those circumstances were in the contemplation of both parties at the time the contract was made as the probable result of a breach.

Does excluding consequential loss exclude lost profits?

Often not. English courts have traditionally read an exclusion of consequential loss as covering only second limb losses, leaving ordinary lost profits recoverable because they arise naturally from the breach. If a contract is meant to exclude loss of profit it usually has to say so expressly.

What has this got to do with business interruption insurance?

Business interruption cover exists to meet exactly the kind of loss that follows an interruption but is often irrecoverable from anyone else. Whether the policy answers it depends on the gross profit definition, the indemnity period and the extensions, not on the general law.

This page is insurance information for UK businesses, not legal advice. It summarises a reported judgment and explains why insurance buyers and brokers refer to it; it is not a substitute for reading the judgment or taking advice on your own facts. Case summaries are necessarily short and omit detail. Position stated as at August 2026.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.