Key Takeaways

  • Consequential damages (also called special damages) are indirect losses resulting from a breach of contract or wrongful act that go beyond the immediate harm.
  • They differ from direct damages, which are foreseeable and naturally flow from the breach itself.
  • To recover consequential damages, they must be foreseeable at the time of contract formation and proven with reasonable certainty.
  • Common examples include lost profits, loss of business opportunities, reputational harm, and additional operational costs.
  • Contracts often include limitation of liability or waiver clauses to exclude or limit consequential damages, making careful drafting essential.
  • Courts evaluate foreseeability, causation, and certainty of loss when deciding whether to award consequential damages.

Consequential damages are caused when a business or party is harmed because of special circumstances. They are also known as "special damages." Damages of this kind are indirect and are not a direct result of the breach of contract.

What Are Consequential Damages?

Damages that are incurred because of special circumstances after a breach of contract are considered consequential damages. In order for damages to be recovered, the special circumstances must have been unforeseeable at the signing of the contract. These damages include any preventable damages that the seller had no part in and the buyer could have conceivably stopped. 

These damages are caused when a contract is breached. Contract disputes usually won't be an effective way to recover the damages, but the damages may be recovered through a tort lawsuit. Consequential damages are typically compensable through a monetary settlement, granted that it is clear that the breaching party is at fault. 

An injury that results from the side-effects of an act that caused, or resulted in the breaching are considered consequential damages. These damages must be considerable enough to warrant a guilty judgment after a lawsuit has been rendered. The act must be special, relatively unforeseen, and directed toward either personal property or an individual affected by the breaching of the contract.

These damages could also be a result of an untruthful statement related to the quality of the product being exchanged, the intentions of one of the parties involved, or an individual third party that is somehow related. Additionally, the damage could come from a privacy breach, or release of secure information.

There is often dispute over what circumstances constitute consequential damages, and what constitutes direct damages.

Key Elements for Recovering Consequential Damages

To successfully claim consequential damages, a party must generally prove three core elements:

  1. Foreseeability: The damages must have been reasonably foreseeable to both parties at the time the contract was formed. If the losses were too remote or unusual, courts may deny recovery.
  2. Causation: There must be a clear causal link between the breach and the consequential loss. The plaintiff must show that the breach was a substantial factor leading to the damages.
  3. Reasonable Certainty: The amount of the loss must be proven with a reasonable degree of certainty. Speculative or hypothetical damages are unlikely to be awarded.

Courts often apply the landmark case Hadley v. Baxendale as a guiding principle: damages that arise naturally from a breach or those contemplated by the parties when contracting are recoverable. If the special circumstances were not communicated or foreseeable, the breaching party typically isn’t liable.

Common Examples of Consequential Damages

Consequential damages often arise in business and commercial disputes. They include a range of indirect losses that go beyond immediate contractual harm, such as:

  • Lost profits: Revenue that would have been earned had the breach not occurred.
  • Loss of business opportunities: Missed contracts, investments, or partnerships caused by the breach.
  • Damage to reputation or goodwill: Loss of customer trust or market share following a breach.
  • Additional operational expenses: Unexpected costs incurred to mitigate losses, such as expedited shipping or hiring replacement contractors.
  • Third-party claims: Lawsuits or liabilities triggered by the breach’s ripple effects.

Because these damages can be substantial and difficult to calculate, they are often the subject of intense litigation.

Direct Damages

Consequential damages are contrasted with direct damages. Direct damages are more reasonable in situations where a contract is breached. In other words, direct damages should be expected in the case that one party breaches the contract.

These damages are considered direct if the consequences of the breaching could have been foreseen at the signing of the contract. This means that it would be understandable for either party to look forward and predict the same sort of thing happening. 

Direct damages are usually simpler, more direct, and easier to handle in court. Consequential damages are the larger, more catastrophic situations that polarize the two parties and call for further legal actions. This is because the contract would typically account for the larger, foreseeable damages and treat them accordingly.

Because consequential damages are side effects and result in a situation that would typically not occur, they tend to more significant than direct damages.

Direct vs. Consequential Damages in Practice

The distinction between direct and consequential damages often determines the outcome of a breach of contract lawsuit.

  • Direct damages naturally and necessarily result from the breach. For example, if a contractor fails to deliver materials, the cost to purchase them elsewhere is a direct loss.
  • Consequential damages, by contrast, are secondary losses that occur as a downstream effect. Using the same example, if the delay causes a project to miss a key launch date, resulting in lost sales, those losses are consequential.

Courts analyze whether the loss was within the parties’ contemplation at the time of contracting. If not, it’s likely considered consequential and may be excluded under the contract’s terms.

Liability Clause in Contracts

Both parties that enter into a contract understand that breaches of that contract will be punishable. When one party breaches and causes damages, that party is held liable. A Limitation of Liability clause is a way to check the amount of responsibility that breaching parties must have.

Limitation of Liability clauses have a few primary functions. The clause checks the limit of how much a breaching party can be held responsible for consequential damages. When a party is hired, this clause prevents the cost of hiring from being too high. It also allows for the exclusion of some damages that may result from consequential damages.

This clause is typically utilized when companies or individuals are entering into a contract that provides a high range of possible outcomes. It could also be that the other party is unreliable. In any case, this clause is an effective way to protect against consequential damages.

Seek a quality Limitation of Liability clause if you are entering into an agreement that meets any of the following criteria:

  • Has a lot of coinciding parts that could cause damages
  • Involves an unreliable party or individual
  • Is ambiguous in its nature and holds a great possibility for unforeseen change

If you are experiencing a case with consequential damages and you are having difficulty navigating them, it is always valuable to get advice from someone with a lot of experience.

Waivers and Limitations of Consequential Damages

Because consequential damages can be unpredictable and significant, many commercial contracts include provisions to limit or exclude them. These clauses typically appear as “limitation of liability” or “waiver of consequential damages” language.

  • Limitation of liability clause: Caps the amount of damages recoverable under the contract, often to the value of the contract itself.
  • Waiver of consequential damages: Explicitly excludes recovery of indirect losses like lost profits or reputational harm.

These clauses must be carefully drafted to be enforceable. Courts may scrutinize them for clarity, mutual agreement, and public policy compliance. In industries like construction and technology, negotiating these terms is critical, as they can significantly impact risk allocation and project outcomes.

How Courts Assess Consequential Damages

Courts typically assess consequential damages claims based on several key factors:

  • Foreseeability at contract formation: Were the losses reasonably predictable at the time the agreement was signed?
  • Notice of special circumstances: Did the non-breaching party communicate specific risks that might result from a breach?
  • Causation and remoteness: Was the breach a substantial cause of the loss, or were other intervening factors involved?
  • Evidence of damages: Are the claimed losses supported by financial records, expert testimony, or other credible evidence?

The burden of proof rests on the party seeking damages. If the court finds that the losses were too speculative or unforeseeable, the claim will likely fail.

Frequently Asked Questions

  1. What is the difference between direct and consequential damages?
    Direct damages are immediate and predictable results of a breach. Consequential damages are indirect losses that occur as a secondary effect, like lost profits or reputational harm.
  2. Are consequential damages always recoverable in a lawsuit?
    No. They are only recoverable if they were foreseeable at the time of contracting and can be proven with reasonable certainty.
  3. Can a contract exclude consequential damages?
    Yes. Many contracts include limitation of liability or waiver clauses that exclude or cap consequential damages. These provisions are generally enforceable if clearly stated.
  4. What is an example of consequential damages in business?
    If a supplier fails to deliver critical components on time, and the buyer loses a lucrative client as a result, the lost revenue may qualify as consequential damages.
  5. How can I protect my business from consequential damage claims?
    Use well-drafted contracts with clear limitation clauses, communicate potential risks early, and consult an attorney to negotiate and review terms.

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