Definition Consequential Damages: Everything You Need to Know
The definition of consequential damages, also known as "special damages," refers to damages from an indirect result of an event or incident. 3 min read
2. Consequences of Consequential Damages
3. Other Types of Damages
4. Actual Damages
5. General Damages
6. Punitive Damages
7. Limitation of Liability Clause
8. Related Legal Terms
The definition of consequential damages, also known as "special damages," refers to damages from an indirect result of an event or incident.
An Explanation of Consequential Damages
When the terms of a contract's "mutual waiver of consequential damages" clause are being negotiated, the parties involved may not appreciate the differences between consequential and direct damages.
When dealing with direct damages, these are paid to a plaintiff to reimburse the individual for something the defendant was responsible for doing but failed to do. The failure resulted in a breach of contract.
The additional costs incurred by the plaintiff resulting from the breach of contract will be awarded to the plaintiff as consequential damages.
Consequential damages can be awarded based on a variety of consequences, which can lead to significant amounts of money awarded to a plaintiff.
When dealing with a breach of contract action, it is important that the damages be identified as either consequential or direct damages.
An example of consequential damages being awarded would be a situation where an employee who has been involved in an automobile accident and is unable to work is reimbursed for his loss of wages.
The terms of the Uniform Commercial Code (UCC) consider consequential damages injuries resulting from a seller's breach of contract.
An example of a breach of contract would be a toy store contracting with a department store to deliver a specified number of dolls by the end of November. When the toy store has not delivered the specified number of dolls as agreed, it is a breach of contract.
The direct damages are the initial costs the department store initially paid to the toy company. The consequential damages are the costs the department store had to pay to hire a new manufacturer to finish what the toy store failed to do. The department store can sue for both consequential and direct damages.
Consequences of Consequential Damages
Simply put, consequential damages typically are more significant when it comes to the amounts awarded.
While a plaintiff wants an award, a defendant does not because the indirect results of having breached a contract can have a far-reaching impact on the defendant.
The result of consequential damages can include:
- Loss of profits due to an interruption of normal business practices.
- Loss of customers due to cancellations or delays.
Other Types of Damages
Along with consequential damages, several other types of damages exist that can be awarded by a court. These are actual damages, general damages, and punitive damages.
Actual damages are also referred to as "compensatory damages" and are awarded when an individual has sustained injuries or damages caused by the other party.
Damages are awarded to an individual for pain and suffering or if he is unable to perform a particular function.
These damages are awarded as a punishment to a defendant who has exhibited bad behavior. They also serve as a means of deterring others from participating in the same negative behavior.
Limitation of Liability Clause
Parties entering into a contract should be aware that they can be held liable for damages caused by breaching the contract. To protect against this happening, a company may include a Limitation of Liability clause to the contract.
The clause limits the extent the party can be held responsible for unfortunate events. Its purpose is reducing the possibility of an unreasonable sum of money being paid by the breaching party in the event the contract is breached. Protections include:
- Setting a maximum limit for the level of liability.
- Exclusion of certain damages associated with the cost of doing business such as restocking or transportation.
Related Legal Terms
- Contract - An agreement between two or more parties involving a promise made to provide or do something in return for something with a value attached.
- Defendant - A party who has had a lawsuit filed against them in civil court. The party has been charged or accused of a crime or offense.
- Plaintiff - A person who brings criminal proceedings or a civil lawsuit against another person or an entity.
- Loss of Consortium - The loss suffered by an individual after a spouse has been injured or dies due to another person's intentional act or negligence.
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