What Are Consequential Damages?

"It is not uncommon for a business person to be offered a contract that contains a provision stating, in effect, that in the event a party breaches the contract, the damaged party will not be entitled to recover consequential damages. For example, written warranties made in connection with the sale of goods routinely provide that the seller will take certain actions with respect to any defective products, but that, in no event, shall the seller be liable for consequential damages. Some contract forms used in the construction industry, particularly those marketed by the American Institute of Architects (the AIA), provide that both parties -- the owner and architect in the Owner-Architect Agreement and the owner and contractor in the Owner-Contractor Agreement -- waive consequential damages for claims arising out of the agreement. What do these provisions mean? Under what circumstances would you want to include or delete such a provision when negotiating a contract?

When a party fails to perform part or all of the required duties under a contract, the other party -- the nonbreaching party -- can turn to the legal system for a remedy. One of the most common remedies available under the law to a nonbreaching party is the award of damages. In the context of contract law, the award of direct and consequential damages is intended to compensate the nonbreaching party for the injury suffered as a consequence of the breach. The goal of the law is to place the nonbreaching party in the financial position they would have occupied had the contract been fully performed.

Before compensating a party for an injury, the law requires that the injury must have been reasonably foreseeable to the other party. This is a significant limitation on damages. In our legal system, breaching a contract is not considered morally reprehensible. If people make a bad deal or contract, they are permitted to walk away from it, provided they are prepared to compensate the other party for the damages arising from the breach. Damages that could not have been reasonably foreseen by the breaching party at the time they entered the contract are not recoverable...........

..........Consequential damages differ from direct damages in that they are caused by special circumstances beyond the contract itself. For example, when a seller does not deliver goods, knowing that the buyer is planning to resell those goods immediately, the nonbreaching buyer may recover consequential damages consisting of the loss of profits from the planned resale. For the nonbreaching party to recover consequential damages, the breaching partymust have known -- or had reason to know – when entering the contract that special circumstances would cause the nonbreaching party to suffer an additional loss. If the injury complained of is outside the usual and foreseeable course of events, the nonbreaching party must show specifically that the breaching party had reason to know the facts and foresee the injury at the time the parties entered into the contract........"

By: Charles J. Pruitt, Partner, Wyse Kadish LLP


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James G. Zack, Jr.
Executive Director
Navigant Construction Forum,
Navigant Consulting, Inc.


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