Consequential damages

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Consequential damages, otherwise known as special damages, are damages you can prove occurred because of the failure of one party to meet a contractual obligation. They go beyond the contract itself and into the actions garnished from the failure to fulfill. The type of claim giving rise to the damages can affect the rules or calculations associated with a given type of damages, including consequential damages (e.g., breach of contract versus a tort claim). For example, consequential damages are a potential type of expectation damages which arise in contract law.

When a contract is breached, the recognized remedy for an owner is recovery of damages that result directly from the breach (aka "Direct Damages), such as the cost to repair or complete the work in accordance with the contract documents, the loss of value of lost or damaged work. Consequential damages (also sometimes referred to as indirect or “special” damages), include loss of product and loss of profit or revenue and may be recovered if it is determined such damages were reasonably foreseeable or "within the contemplation of the parties" at the time of contract formation. This is a factual determination that could lead to the contractor's liability for an enormous loss. For example, the cost to complete unfinished work on time may pale in comparison to the loss of operating revenue an owner might claim as a result of late completion.

The Supreme Court of the United States has held that consequential damages are not available in U.S. Federal takings.

Example[edit]

An example of a situation where consequential damages is awarded:

Two parties (Neal Townsend and Matt Wisda) enter into a contract for the sale of an antique doll for $5,000. Neal Townsend (the seller) finds out that Matt Wisda (the Buyer) intends to re-sell doll to a collector for a 10% profit. Neal Townsend breaches the contract and sells the doll to the collector; doll’s value at time of breach is $6,000. The Compensatory Damages equals $1,000 ($6,000–$5,000). The Consequential damages equals $500 (10% of $5,000).

Total measure of damages: compensatory damages and consequential damages (lost profit)[edit]

The provenance of the legal theory underlying "consequential damages" is widely attributed to the 19th century English case of Hadley v. Baxendale,[1] in which a miller contracted for the purchase of a crankshaft for a steam engine at the mill. The party agreeing to produce the part (which was critical to the mill's operation and/or output) agreed to deliver the part for inspection as to fit by a certain date in order to avoid contractual and other business loss/liability. When the part wasn't delivered for inspection on time, the miller sued to recover not only the direct costs that were incident to the alleged breach, but also to recover the costs/losses that were entailed with the production shutdown resulting from the failure to timely delivery the crankshaft. Thus, Baxendale came to stand for the proposition that "consequential damages" are recoverable where a contract is breached by a party that knows - or is imputed to know - that ordinary expectancy, reliance, or restitution damages will not suffice to meet damages caused by the breach.

References[edit]

  1. ^ [1854] EWHC J70, (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-60] All ER Rep 461.