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.

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.

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.

If you need help with consequential damages, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.