The leading case on the point as to what damages can be recovered for the breach of a contract is that of Hadley vs. Baxendale.1 In this case the plaintiffs were owners of a steam mill. The shaft was broken and they gave it to the defendant, a carrier, to take to an engineer, to serve as a model for a new one. On making the contract, defendant's clerk was informed that the mill was stopped, and that the shaft must be sent immediately. He delayed its delivery; the shaft was kept back in consequence; and, in an action for breach of contract, plaintiffs claimed as special damages the loss of profits while the mill was kept idle. The court said in part: "We think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect to 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. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and, in the great multitude of cases, not affected by any special circumstances, from such a breach of contract; 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. 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."

9 Exch., 341; 23 Law J. Exch., 179; 18 Jur., 358; 26 Eng. Law & Eq., 398.

"Three rules may be deduced from Hadley vs. Baxendale: First, that damages which may fairly and reasonably be considered as naturally arising from a breach of contract, according to the usual course of things, are always recoverable; secondly, that damages which would not arise in the usual course of things from a breach of contract, but which do arise from circumstances peculiar to the special case, are not recoverable unless the special circumstances are known to the person who has broken the contract; thirdly, that where the special circumstances are known, or have been communicated to the person who breaks the contract, and where the damages complained of flow naturally from the breach of contract under those special circumstances, then such special damages must be supposed to have been contemplated by the parties to the contract, and is recoverable.2 A further rule is implied, viz., that damage which cannot be considered as fairly and naturally arising from breach of contract under any given circumstances is not recoverable, whether those circumstances were or were not known to the person who is being charged."3