Explanation:

Hadley V. Baxendale-
In the year (1854) an attempt was made to define the extent of this line in the case of Hadley v. Baxendale[3].

Facts: The claimants, Mr Hadley and another, were millers and mealmen and worked together in a partnership as proprietors of the City Steam-Mills in Gloucester. They cleaned grain, ground it into meal and processed it into flour, sharps, and bran. A crankshaft of a steam engine at the mill had broken and Hadley arranged to have a new one made by W. Joyce & Co. in Greenwich. Before the new crankshaft could be made, W. Joyce & Co. required that the broken crankshaft be sent to them in order to ensure that the new crankshaft would fit together properly with the other parts of the steam engine. Hadley contracted with defendants Baxendale and Ors, who were operating together as common carriers under the name Pickford & Co., to deliver the crankshaft to engineers for repair by a certain date at a cost of £2 sterling and 4 shillings (current value of about £240.00).

Baxendale failed to deliver on the date in question, causing Hadley to lose business. Hadley sued for the profits he lost due to Baxendale's late delivery, and the jury awarded Hadley damages of £25 (present value about £2500). Baxendale appealed, contending that he did not know that Hadley would suffer any particular damage by reason of the late delivery.

Issue: Whether a defendant in a breach of contract case could be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.

Decision: Alderson B Laid Down-
"Now 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 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 defendants were held not liable on the basis of this principle.  As the fact that the mill was out of action for want of the shaft was a special circumstance affecting the plaintiff's mill and the same should have been pointed out to the defendant in clear terms.

This decision has always been taken as laying down two rules:
General Damages: It refers to the damages that arise naturally in the usual course of things from the breach itself. The defendant is liable for all the natural consequences of the breach of the contract.
Special Damages: It refers to the damages that arise on account of the unusual circumstances affecting the plaintiff. It is not recoverable unless the possibility of the same was discussed beforehand.

Madras Railway Co.. V. Govinda Rau
Facts: Plaintiff, a tailor had delivered a sewing machine and some cloth the defendant railway company to be sent to a place where he was expected to carry on his business with special profit by reason of a forth-coming festival. Due to the fault of the company, the transmission of the machine got delayed. Plaintiff had not conveyed his special purpose to the defendant.
Issue: Plaintiff claimed the expenses of travelling up to the place of festival and of staying there and the loss of profits which he would have earned.
Held: Court held that the damages claimed were too remote. All of this was due to the frustration of the special purpose and that was not known to the company.

Building Contract:
Works and building contracts are undertaken only with a view to earning profits, the party committing the breach would be liable for the contractor's loss in terms of expected profits.

Difference Between Market Price And Contract Price (Sale And Suppy Transactions)
In a sale transaction, damages are generally awarded on the basis of the difference between the contract price and market price. If the seller defaults, the byer may have to buy elsewhere at an extra cost. If the buyer defaults, the seller may have to make a forced sale which may bring him less money than what he would have obtained under the contract. Such difference is recoverable as damages. The buyer is under a duty to keep his loss to the minimum by buying his material elsewhere so as to keep the business going.

Dominion of India vs. All India Reporter

According to section 73 of the Indian Contract Act (1872), 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. This section defines the liability of a party who breaches the terms of a contract. The question in this case was whether the party can recover special damages from the other party under this section.

Facts

The respondent lost three volumes of Indian Digest in transit through railways. The volumes were booked by the respondent at Nagpur for being carried and delivered at Delhi railway Station. The consigned was addressed to the respondent by himself. The respondent brought a suit against the applicant for compensation for the loss of the three volumes. The respondent contended that the lost volumes were the part of a series and their loss rendered the remaining books unusable. Hence, they sought the price of the entire set of eight volumes as compensation. The trial court accepted the respondent’s contention and held the applicant liable to compensate the respondent for the entire set. The applicant filed a revision application from this judgment.

Issue

Whether the applicant is liable for the loss of three volumes or the entire set?

Arguments Advanced

Contentions by the applicant

1. The applicant is not liable to compensate the respondent for the entire set as the fact that the loss of the three volumes renders the set useless was not brought to the attention of the applicant and there is no proof as the same.

Contentions by the respondent

1. The lost three volumes were part of a set and their loss renders the entire set useless. Hence, the applicant is liable to compensate the respondent for the entire set. 

Judgment

According to section 73 of the Indian Contract Act (1872), 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. The same was applied in this case to hold the applicant liable only for the value of the three lost volumes.