In contract law, consequential damages, commonly referred to as "special damages" or "expectation damages," are a type of damages that arise as a result of a breach by one party. Consequential damages are damages that:
(a) are beyond direct damages suffered by a non-breaching party (b) that a reasonable, and prudent person would expect as a result of a breach (c) at the time of the contract, the breaching party should of known or anticipated if a breach occurred. These are mainly damages that a breaching party should of expected when they breached and would not be a surprise to them or a shock that it happened once they breached the contract.
While direct damages focus on the costs associated directly with the contract itself, consequential damages focus on the costs outside of the contract. These are typically:
- Lost profits
- Lost products
- Lost revenues
- Lost time
- Damage to reputation
- Reduction in value
Clauses that forbid consequential damages are extremely commonplace, almost to the extent of becoming considered "boilerplate." These clauses often say that either one of the parties will not be liable for the consequential damages that result in the event of a breach.
A consequential loss is the amount of loss that occurred as a result of a breach that was indirect to the actual loss. This could be as a result of being unable to use business property or equipment which then resulted into loss of business. The loss of business or profit would be considered consequential loss.
It will depend largely on the language of the contract. However, regardless of what the contract or the clause itself says, there is an increasing trend towards determining these clauses unenforceable, likely because parties do not write them with enough care. There are a couple of general points that render these clauses as unenforceable.
- Parties fail to define consequential damages – Simply stating that a party is not liable for ‘consequential damages’ or ‘losses’ does not necessarily indicate that either party agreed to and bargained for forfeiting future, potential losses.
- Lost profits or revenues may actually be general damages – In recent cases, courts have held that waivers of lost profits or revenues, and potentially other "consequential" damages, are actually general damages, and therefore the waiver is unenforceable, since the parties did not actually agree to waive those general, direct damages.
There are several considerations courts examine when determining the validity of these clauses, including:
- Sophistication of the parties – The more sophisticated the parties, the less likely a court may be to permitting them to agree to limit their damages. However, if one of the parties is markedly more sophisticated than the other, a court may be more inclined to determine this type of clause as unenforceable.
- Context of the agreement – The less specific a clause is, the more likely it is boilerplate, and more likely it is that a court will deem it unenforceable. This is because it is likely not a bargained for limitation of damages, but simply an afterthought, and it may not be fair to hold a party liable for the good fortunes of another.
- Foreseeability – How foreseeable it is that a breech will result in damages will help a judge determine whether the damages are consequential or direct, probable losses.
Given the changing viewpoints and complicated nature of limitations on damages, if you are involved in a contract dispute, seeking the advice of an attorney is highly recommended. A experienced business attorney can review your case and advise you on your contract rights and steps you can take for full recovery.