The surprising Indian influence on English contractual remoteness rules, by Katy Barnett

The English case Hadley v Baxendale, which established the fundamental rules governing contractual remoteness in common law countries, seems quintessentially British, an offshoot of the English Industrial Revolution. Hadley’s mill crankshaft broke, and Baxendale agreed to courier it so the crankshaft could be cast and a new one made. The crankshaft was returned later than Hadley stipulated, and Hadley claimed a loss of profits from the mill arising from the late return. Baron Alderson outlined the two “limbs” of Hadley v Baxendale, which required the loss to be either natural and usual, or, if the loss involved special circumstances, for those circumstances to be communicated to the defendant at the time of making the contract. In modern English law the remoteness rule has sometimes been compressed to a single test, namely whether the loss was in the contemplation of the parties, having regard to the information known to them at the time of making the contract. However, this post suggests that the dominance of Hadley v Baxendale was (at least in part) cemented by the law of India, and British attempts to codify English law during colonial times.

The British colonisation of India and surrounds really began in earnest when the East India Company took control of “Presidency” towns: Madras, Bombay (Mumbai) and Calcutta. From 1757 to 1858, these portions of India came under Company rule, and British control of India was expanded well beyond original bounds. The Company was empowered to apply English law in the trading territories controlled by it, but only the law as it stood before 1726. British courts in Presidency Towns initially took into account the personal law of the persons involved in a contractual transaction. The law of the defendant was applied (Muslim, Hindu or British). This was a kind of ”millet” system, similar to that used in the Ottoman Empire, where the religion or ethnic background of the parties determined the law applied. However, in practice, the British courts in the Presidency Towns often simply applied the English law of contract. In the rural areas outside the towns (known as the mofussil) the British courts were empowered to use “justice, equity and good conscience” and thus the law applied was more ad hoc and likely to reflect the religions of the persons involved, although ultimately over time, the breadth of what constituted “justice, equity and good conscience” allowed colonial judges to override personal law, and substitute British legal principles for local law.

After the Indian Rebellion in 1857 against East India Company rule, the British ”Raj” took over the governance of India and substantial parts of South Asia. Even before then, there had been repeated calls for a codified contract law for India, which, after many stops and starts, culminated in the enactment of the Indian Contract Act 1872. The question of specific relief was controversial, and was deferred to the Specific Relief Act 1877, because British factory owners had traditionally treated  indigo growers (ryots) harshly, and the Raj did not want the factory owners to be able to force the ryots to perform disadvantageous contracts they had been compelled to enter under duress.

However, contract damages were not controversial. Accordingly, the first paragraph of section 73 of the Indian Contract Act 1872 provided:

“When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.“

It is easy to see the influence of Hadley v Baxendale upon the drafting of this paragraph: “naturally arose in the usual course of things” and “which the parties knew, when they made the contract, to be likely to result from the breach of it,” are clearly taken from Baron Alderson’s judgment. The rule in Hadley v Baxendale is further reiterated by the second paragraph of section 73, “Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach.” The codifiers of Indian contract law drew from from English case law to provide the wording and illustrations for the code: case law feeding into legislation in a way which might be surprising to some common lawyers.

Section 73 is also accompanied by eighteen illustrations ((a) to (r)) explaining how contract damages are to be calculated in various circumstances. Again, the influence of Hadley v Baxendale is writ large. Illustration (i) is clearly based upon a variation of the facts of Hadley v Baxendale:

A delivers to B, a common carrier, a machine, to be conveyed without delay, to A’s mill, informing B that this mill is stopped for want of machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.

In fact, the illustration also anticipates the result of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, where the non-breaching party was compensated for expected loss of profit, but not for unusually lucrative follow-on contracts.

Illustration (p) is also based upon a variation of the facts of Hadley v Baxendale, involving a delay in delivery of manufacturing materials rather than a common carrier:

A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B’s mode of conducting his business. A breaks the promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by closing of the mill.

In fact, Hadley v Baxendale was not necessarily the obvious solution for legislative drafters. Niranjan has noted that the rule in Hadley v Baxendale was initially regarded as controversial (V Niranjan, “The Contract Remoteness Rule: Exclusion, Not Assumption of Responsibility” in A Dyson, J Goudkamp and F Wilmot-Smith, Defences in Contract (Oxford, 2017) 187, 198), and in 1873, the United States editors of Smith’s Leading Cases described it as ”a merely arbitrary rule, laid down in our courts for the first time” (John Innes Clark Hare, Horace Bonney Wallace and John William Wallace, Smith’s Leading Cases, Vol 2, 7th edn (Philadelphia, 1873) 492). Why then, did the codifiers decide to use Hadley v Baxendale as a basis for the remoteness rule expressed in section 73?

Alderson B’s discussion of the policy reasons behind the distinction between naturally arising losses and “special circumstances” provide some clue as to the link:

“For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract… But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons 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.”

In other words, if the loss was an ordinary one, the defendant will be liable. However, if the defendant might be subject to unusual losses as a result of a breach of contract, it is up to the plaintiff to raise those unusual losses at the time of making the contract so that the defendant can make a choice as to how to deal with the risk to which they are exposed (charge a higher rate, include an exclusion clause etc). This policy reflects the Will Theory of Contract: in other words, the parties must have a meeting of the minds to form an agreement.

In a forthcoming chapter on the history and drafting of the Indian Contracts Act 1872 (in KV Krishnaprasad, S Swaminathan, U Varottil and V Niranjan (eds), Foundations of Indian Contract Law (Oxford 2023), Professor Swain considers how the Indian codification project was influenced by the work of the French jurist, Robert-Joseph Pothier, and his Will Theory of Contract, as well as by David Dudley Field’s Draft New York Civil Code of 1862. It is also reasonably clear, as Niranjan has also noted, that the rule in Hadley v Baxendale was derived from the writings of American legal scholar Theodore Sedgwick, who was in turn explicitly inspired by Pothier’s works.  Moreover, in the 1862 Draft New York Code, Hadley v Baxendale had been explicitly codified in §1496. This illustrates not only that English and United States law influenced Indian law, but that the push to consider codification led to consideration of civilian concepts from French law. The boundary between civilian and common law jurisdictions is thus more porous than often appreciated: here civilian codes and scholarship influenced fundamental developments in the common law (both in case law and statute).   

Thus, the rule in Hadley v Baxendale was consistent with the approach and normative underpinnings of the codification project (precisely because it drew on Pothier and Will Theory). Moreover, the 1862 Draft New York Code showed that such a rule could be codified (although as Professor Swain has noted, the influence of the New York Code cannot be overstated). Consequently, despite the fact that it had not yet become fully settled law in its home jurisdiction, the rule in Hadley v Baxendale represented a good ”fit” for the general approach of the Indian Contract Act in 1872, and was codified in section 73.

The Indian Contract Act 1872 was used as a template for the Malaysian Contract code, and then, when the colonies in the region gained independence from colonial rule in 1947, modern-day India, Pakistan and (later) Bangladesh all retained it. Hence it had an immense and continuing influence on the law of the region. But that was not its only influence.

It is suggested that the codification of the rule of Hadley v Baxendale in India also influenced the acceptance of that rule in England and Wales, because it turned the minds of the British lawyers towards a consideration of the remoteness rule which fitted best with the normative justifications of contract more generally (whether in India or Britain). As Justice Mark Leeming has noted in an Australian context, statutes are sometimes under-appreciated by common law scholars: “their role lies not merely in stating norms of law, but in influencing judge-made law and as a critical driver of change and restraint…” While the influence of English law on Indian law is clear, the corresponding and later influence of Indian law on the development of English law is less well-known, and shows that Indian private law, and the law of surrounding south Asian countries, is a worthy and perhaps overlooked area of study. It is hoped that this post encourages more scholarship and interest.  

Posted by Katy Barnett.

Suggested citation: K Barnett, “The surprising Indian influence on English contractual remoteness rules”, BACL blog, available at https://wp.me/p80U0W-1mn.