Hadley V Baxendale

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Hadley v. Baxendale is the classic case of contract law, which gave the rule that considerable harm, could be recuperated just if; at the time the agreement was made . The facts of the case are the petitioners, Mr Hadley and an alternate, were mill operators and mealmen and cooperated in an association as proprietors of the City Steam-Mills in Gloucester. They cleaned grain, ground it into dinner and dressed it into flour, sharps, and wheat. A crankshaft of a steam motor at the factory had broken and Hadley organized to have another one made by W. Joyce & Co. in Greenwich. When the new crankshaft could be made, W. Joyce & Co. obliged that the broken crankshaft be sent to them keeping in mind the end goal to guarantee that the new crankshaft …show more content…

Baxendale in terms of incentives and information. Contract may leads to inefficiency, if it has imperfect information about the parties situation. For example, it is efficient for the promisor to take any precaution to avoid breach that costs less than the value of the promise to the promisee. At the time of contracting, however, the promisor may not know the value of the promise to the promisee. Indeed, during negotiations the promisee has incentives to conceal the true value ofthe potential promise in order to get a better price. As a result, the promisor may take inefficiently few precautions to avoid breach. By limiting the promisee's damages, however, to those that are reasonably foreseeable, the rule in Hadley creates incentives for parties to negotiate around this problem. Because the promisee cannot recover damages for losses that are invisible to the promisor at the time of formation, this rule gives the promisee an incentive to disclose this information when negotiating. Once the hidden information is communicated, the promisor then has an incentive to take the efficient level of precaution to avoid breach because he will be liable for the full amount of the promisee's damages. The duty to mitigate damages also has an economic explanation. The law requires that disappointed promisees modify their post-breach behavior to limit promisors' damages

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