Incidental Damages in Contract Law

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 What Are Incidental Damages?

In contract law, incidental damages refer to the reasonable expenses incurred by a party as a result of the other party’s breach of contract. These costs are directly caused by the breach and are compensable as part of the fight for the remedy to put the non-breaching party in the same financial position they would have been in had the breach not occurred.

Seller’s Incidental Damages

In the case of a buyer breaching a contract, the seller’s incidental damages could include costs related to stopping production, storing the goods that were ready to be shipped, or reselling the goods to another buyer.

Seller’s Incidental Damages Scenario

Imagine you’re a manufacturer of high-quality wooden furniture. A large retail chain has placed an order for 500 custom dining tables to be ready in three months. You ramp up production, bring in additional labor, and start accumulating the tables.

A week before the delivery date, the retailer suddenly cancels the order, citing a shift in their sales strategy. This cancellation constitutes a breach of contract on the retailer’s part.

Now, as a manufacturer, you’re left with 500 custom dining tables. You’re now faced with costs that you wouldn’t have incurred if not for the breach:

  • You may need to halt production, which might involve costs such as settling up with temporary workers you had hired to meet the order.
  • You might have to find storage for the already-produced tables until you can find another buyer. The costs of such storage facilities could be significant, especially considering the size and number of the tables.
  • Finally, you would likely need to resell these tables. This might involve marking down the price significantly to attract buyers quickly or spending on advertising to reach potential buyers.

All these expenses – halting production, storing the goods, and reselling the goods – are incidental damages because they are a direct consequence of the retailer’s breach of contract.

Buyer’s Incidental Damages

Conversely, if a seller breaches the contract, the buyer’s incidental damages might include costs associated with obtaining the goods from another seller, such as increased transportation costs, inspection costs for the replacement goods, or any additional costs incurred to cover the breach.

Buyer’s Incidental Damages Scenario

Consider that you are the owner of a chain of pizza restaurants. You have a contract with a supplier for specialized pizza ovens. These ovens are part of your unique selling proposition – they cook pizzas to perfection in less than five minutes, and no other local supplier stocks them.

Two weeks before the opening of a new restaurant, your supplier suddenly informs you that they cannot deliver the ovens due to a production halt. This is a breach of contract.

With an imminent grand opening, you’re forced to find another source for the ovens:

  • You identify an overseas supplier who has the ovens, but they cost more, and you also have to pay extra for expedited shipping to get them on time.
  • Once the ovens arrive, you have to get them inspected for safety and compliance – another cost you hadn’t factored in.
  • In addition, because of the rush and unfamiliarity with the new supplier, you decide to hire a professional installer to ensure the ovens are set up correctly – another unexpected cost.

These costs – the price difference, expedited shipping, inspection, and professional installation – represent the buyer’s incidental damages. They were incurred directly because of the original supplier’s breach of contract.

What Are Some Incidental Damages Examples?

Suppose a manufacturer agrees to buy a specific component from a supplier for their production line, but the supplier fails to deliver on time. The manufacturer might incur additional costs for expedited shipping from another supplier or expenses related to production delays. These costs would be considered incidental damages.

In another scenario, if a retailer orders goods from a wholesaler and the wholesaler fails to deliver, the retailer might have to purchase the goods from another source at a higher price. The additional cost would be considered an incidental damage.

Lastly, Imagine you run a popular bakery that specializes in gourmet cupcakes. You have a contract with a local farm to supply fresh strawberries, which are a key ingredient in your bestselling strawberry cream cupcakes. Your strawberry cream cupcakes are widely known and drive a significant portion of your daily sales.

However, a week before the peak season—Valentine’s Day—the farm suddenly informs you that due to an unforeseen pest infestation, they won’t be able to supply the strawberries. This is a breach of contract.

In the face of this breach, and given the impending demand surge, you have to quickly secure another source of strawberries:

  • After much searching, you find a distant farm that can supply the strawberries. However, this farm charges a higher price for strawberries due to the higher quality of their produce.
  • Due to the farm’s distance, the transportation costs to have the strawberries delivered to your bakery are considerably higher.
  • As you’re unfamiliar with this new supplier, you decide to have the strawberries independently inspected for quality before using them, incurring additional inspection costs.
  • Also, to meet your immediate needs, you have to arrange for expedited delivery, which adds further to your costs.

Furthermore, due to these complications, you need to temporarily halt the production of your strawberry cream cupcakes, leading to missed sales and disappointed customers.

In this case, the higher price for the strawberries, the additional transportation costs, the inspection costs, and the costs of expedited delivery all represent incidental damages resulting from the original supplier’s breach of contract. Also, while the lost sales due to the production halt might not strictly fall under incidental damages, they could be considered consequential damages and thus are important in understanding the full impact of the breach.

What Is the Difference between Incidental and Consequential Damages?

Incidental damages are those directly resulting from a breach, such as costs to avoid or mitigate the immediate effects of the breach. Consequential damages, on the other hand, are not the immediate result of the breach but arise as a consequence of specific circumstances known to the parties at the time of the contract. Consequential damages are often more indirect and can include lost profits or damage to reputation.

For instance, if a special-order machine isn’t delivered on time (seller’s breach), the buyer’s incidental damages might include the costs of obtaining a replacement. If the buyer also loses a lucrative contract because they couldn’t fulfill production without that machine, those lost profits would be considered consequential damages.

How Can a Lawyer Help?

When dealing with a breach of contract and potential damages, a skilled attorney can be an invaluable resource. They can help you understand your rights, calculate your damages, and fight for the remedy you deserve.

A contract lawyer has in-depth knowledge of contract law and its intricacies. They can analyze the terms of your contract, identify any potential breaches, and help you understand your rights and obligations.

Whether you’re facing a breach of contract issue as a buyer or a seller, it’s crucial to consult with a professional to ensure your interests are adequately protected. LegalMatch can help you find an experienced contract lawyer who can provide you with tailored advice and robust representation in your case.


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