673 F.2d 951 (7th Cir. 1982)
In June 1972 Hyman-Michaels Company, a Chicago scrap metal dealer, chartered the ship Pandora.1 It was to carry steel scrap to Brazil under a one-year charter with an option to extend for a second year.2 The charter specified a fixed daily rate payable semi-monthly in advance by deposit to the owner's account at Banque de Paris et des Pays-Bas in Geneva.3
Hyman-Michaels normally obtained the payments by telephoning Continental Illinois National Bank and Trust Company of Chicago.4 Continental debited its account and sent a telex via its London office to Swiss Bank Corporation in Geneva for deposit in the owner's account.5
In late October 1972 Hyman-Michaels mailed a check for the installment due October 26 instead of using the wire method.6 The check arrived after the deadline. The Pandora's owner gave notice of cancellation on October 30.7 An arbitration panel ruled in Hyman-Michaels' favor on December 5, 1972, after finding that the owner had failed to give prior protest or warning.8
On the morning of April 25, 1973, Hyman-Michaels telephoned Continental to transfer $27,000 for the period April 27 to May 11.9 Continental's London office transmitted the telex early the next morning to a machine in Swiss Bank's foreign exchange department after the cable department number was busy. Swiss Bank did not effect the transfer.10
On April 27 the Pandora's owner notified Hyman-Michaels that the charter was canceled for nonpayment.11 Hyman-Michaels instructed Continental to persist but did not send a duplicate payment.12 Swiss Bank retransmitted the message on May 1 with payment refused on May 2.13
A second arbitration panel found that Hyman-Michaels had acted imprudently after learning of the missed payment and allowed cancellation.14 Hyman-Michaels, which had subchartered the Pandora at higher market rates, then sued Swiss Bank in federal district court for arbitration expenses and lost profits.15
Swiss Bank impleaded Continental. Continental cross-claimed against Hyman-Michaels. Hyman-Michaels counterclaimed against Continental.16 After a bench trial the district court awarded Hyman-Michaels approximately $2.1 million against Swiss Bank. The court dismissed the remaining claims. The parties appealed to the Seventh Circuit.17
Whether Swiss Bank Corporation is liable to Hyman-Michaels for consequential damages arising from its failure to execute a requested wire transfer of funds?18
The rule of Hadley v. Baxendale provides that consequential damages will not be awarded unless the defendant was put on notice of the special circumstances giving rise to them.19 This principle applies under Illinois law to claims for consequential damages whether arising in contract or tort, and it links to the doctrine of avoidable consequences requiring the injured party to take reasonable precautions.20
No. Applying the rule to the established facts, Swiss Bank knew from previous telexes only that Hyman-Michaels was paying the Pandora Shipping Company for the hire of a motor vessel named Pandora.21 It did not know when payment was due, what the terms of the charter were, or that they had turned out to be extremely favorable to Hyman-Michaels.22 Hyman-Michaels showed a lack of prudence by mailing the check late in October 1972, by waiting until the last day in April 1973, and by failing to send a duplicate payment immediately on April 27 after learning of the missed payment.23 Swiss Bank was not required to take precautions against a harm known with precision to Hyman-Michaels which could have averted the loss completely by exercising common prudence.24
Swiss Bank Corporation is not liable to Hyman-Michaels for consequential damages.25
Whether Continental Illinois National Bank and Trust Company breached any duty or contract to Hyman-Michaels in handling the April 1973 payment order?26
No. Continental transmitted the telex message to Swiss Bank on April 25 using a machine it had successfully used before for the same purpose.29 It advised its correspondent to persist in attempting to make payment on April 27 as instructed by Hyman-Michaels in its confirming letter.30 Continental's telex operator had no reason to expect a mishap. Continental used due care in assisting Swiss Bank in the hunt for the missing telex over the following days.31
Continental Illinois National Bank and Trust Company did not breach any duty or contract to Hyman-Michaels in handling the April 1973 payment order.32
Whether Swiss Bank Corporation is entitled to indemnification from Continental Bank if held liable to Hyman-Michaels?33
A third-party defendant is entitled to indemnification from another party only when the primary defendant is first held liable to the plaintiff on the underlying claim.34
No. Swiss Bank's third-party complaint against Continental Bank seeks indemnification in the event that Swiss Bank is held liable to Hyman-Michaels.35 Because the undisputed facts establish as a matter of law that Swiss Bank is not liable to Hyman-Michaels for consequential damages under the rule of Hadley v. Baxendale, the third-party complaint is moot.36 No further adjudication of the indemnification claim is required.
Swiss Bank Corporation is not entitled to indemnification from Continental Bank.37
Whether Hyman-Michaels' counterclaim against Continental Bank requires an independent basis of federal jurisdiction?38
A compulsory counterclaim arising out of the same transaction as the original suit does not require an independent federal jurisdictional basis. It falls within the ancillary jurisdiction of the federal courts even when it involves only state-law claims between nondiverse parties.39
No. Hyman-Michaels' counterclaim against Continental was a compulsory counterclaim arising out of the same transaction as the original suit against Swiss Bank.40 The counterclaim was induced by Continental's own cross-claim against Hyman-Michaels.41 Therefore it did not require an independent jurisdictional basis and fell within the ancillary jurisdiction of the federal courts even though it involved only state-law claims between nondiverse parties.42
Hyman-Michaels' counterclaim against Continental Bank does not require an independent basis of federal jurisdiction.43