THE PRINCIPLE OF HADLEY V BAXENDALE

From the classic contract-law case of Hadley v. Baxendale came the principle that consequential damages can be recovered only if, at the time the contract was made, the breaching party had reason to foresee that consequential damages would be the probable result of breach. As traditionally formulated, the principle's standard of foreseeability has been strict and inflexible. This formulation diverges from both the general principle of expectation damages in contract law and the principle of proximate cause outside the law of contract. Professor Eisenberg argues that neither least-cost theory, the theory of efficient breach, nor information-forcing incentives justify the principle of Hadley v. Baxendale. He recommends that the principle be replaced by a regime of proximate cause, contractual allocation of loss, and fair disclosure. The new regime would adjust the standard of foreseeability according to the nature of the interest and the wrong, and would apply the standard at the time of breach. In modern business practice and modern contract law the metamorphosis into a regime of proximate cause, contractual allocation of loss, and fair disclosure has already begun, to discard the principle of Hadley v. Baxendale would serve the interests of both efficiency and justice.