Consequential damages

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Consequential damages, otherwise known as special damages, are damages that can be proven to have occurred because of the failure of one party to meet a contractual obligation, a breach of contract. [1] From a legal standpoint, an enforceable contract is present when it is: expressed by a valid offer and acceptance, has adequate consideration, mutual assent, capacity, and legality. [2] Consequential damages go beyond the contract itself and into the actions that arise from the failure to fulfill. The type of claim giving rise to the damages, such as whether it is a breach of contract action or tort claim, can affect the rules or calculations associated with a given type of damages. [3] For example, consequential damages are a potential type of expectation damages that 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 (also known as "compensatory damages"). Damages may include the cost to repair or complete the work in accordance with the contract documents, or the value of lost or damaged work. [4] In addition to the compensatory damage, an owner can also seek for consequential damages (sometimes referred to as "indirect" or "special" damages), which include loss of product and loss of profit or revenue. This 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. [4] 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. In order to seek consequential damages, a party who has suffered physical injury, property damage, or financial loss needs to perform a duty to mitigate damages, which means that they have an obligation to reduce or minimize the effect and any losses resulting from the injury. [5]

The degree of proof required for the consequential damages is also higher than for the direct damages. Consequential damages must also be pled with greater specificity. The plaintiff has it on their burden to prove that the damages occurred are not only the proximate consequence of the breach, but also that they were "reasonably foreseeable" or within the "contemplation of the parties" when the parties agreed to the terms of the contract. The logic for proving foreseeability is that a party who can foresee a consequences of a breach of a contract can modify the contract price accordingly to compensate for the risk that is assumed. Further, in order to recover damages caused by a breach, the non-breaching party must act reasonably and timely to mitigate its damages. [6]

The Supreme Court of the United States has held in United States v. 50 Acres of Land that consequential damages are not available in U.S. Federal takings.

Example

The provenance of the legal theory underlying "consequential damages" is widely attributed to the 19th century English case of Hadley v. Baxendale , [7] 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 was not 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 deliver 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.

Related Research Articles

At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at law, the loss must involve damage to property, or mental or physical injury; pure economic loss is rarely recognised for the award of damages.

Negligence is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as negligence involves harm caused by failing to act as a form of carelessness possibly with extenuating circumstances. The core concept of negligence is that people should exercise reasonable care in their actions, by taking account of the potential harm that they might foreseeably cause to other people or property.

Punitive damages, or exemplary damages, are damages assessed in order to punish the defendant for outrageous conduct and/or to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit. Although the purpose of punitive damages is not to compensate the plaintiff, the plaintiff will receive all or some of the punitive damages in award.

<span class="mw-page-title-main">Breach of contract</span> Type of civil wrong in contract law

Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. Breach occurs when a party to a contract fails to fulfill its obligation(s), whether partially or wholly, as described in the contract, or communicates an intent to fail the obligation or otherwise appears not to be able to perform its obligation under the contract. Where there is breach of contract, the resulting damages have to be paid to the aggrieved party by the party breaching the contract.

A legal remedy, also referred to as judicial relief or a judicial remedy, is the means with which a court of law, usually in the exercise of civil law jurisdiction, enforces a right, imposes a penalty, or makes another court order to impose its will in order to compensate for the harm of a wrongful act inflicted upon an individual.

Hadley & Anor v Baxendale& Ors [1854] EWHC J70 is a leading English contract law case. It sets the leading rule to determine consequential damages from a breach of contract: a breaching party is liable for all losses that the contracting parties should have foreseen. However, if the other party has special knowledge that the party-in-breach does not, the breaching party is only liable for the losses that he could have foreseen on the information available to them.

Tortious interference, also known as intentional interference with contractual relations, in the common law of torts, occurs when one person intentionally damages someone else's contractual or business relationships with a third party, causing economic harm. As an example, someone could use blackmail to induce a contractor into breaking a contract; they could threaten a supplier to prevent them from supplying goods or services to another party; or they could obstruct someone's ability to honor a contract with a client by deliberately refusing to deliver necessary goods.

Damages for breach of contract is a common law remedy, available as of right. It is designed to compensate the victim for their actual loss as a result of the wrongdoer’s breach rather than to punish the wrongdoer. If no loss has been occasioned by the plaintiff, only nominal damages will be awarded.

An adequate remedy or adequate remedy at law is part of a legal remedy which the court deems satisfactory, without recourse to an equitable remedy This consideration expresses to the court whether money should be awarded or a court order should be decreed.. Adequate remedy at law refers to the sufficient compensation for the loss or damages caused by the defendant with a proper monetary award. The court must grant the adequacy of remedy that will lead to a "meaningful hearing". Whether legal damages or equitable relief are requested depends largely on,whether or not the remedy can be valued. Both two elements, compensation and the meaningfulness of hearing, provide a proper way to have an adequate remedy. The word "meaningfulness" of hearing in the law process is the assumption that the defendant compensated must be meaningful for the injured party where the defendant made a fully covered compensation for all the losses. Hence, the hearing in which cannot give any right amount of compensation award or settlement is not "meaningful", and the unavailability of the compensation will lead to an inadequate remedy. The adequate remedy at law is the legal remedies by meaning it is satisfactory compensation by way of monetary damages without granting equitable remedies.

In English law, remoteness between a cause of action and the loss or damage sustained as a result is addressed through a set of rules in both tort and contract, which limit the amount of compensatory damages available for a wrong.

<span class="mw-page-title-main">Expectation damages</span>

Expectation damages are damages recoverable from a breach of contract by the non-breaching party. An award of expectation damages protects the injured party's interest in realising the value of the expectancy that was created by the promise of the other party. Thus, the impact of the breach on the promisee is to be effectively "undone" with the award of expectation damages.

Reliance damages is the measure of compensation given to a person who suffered an economic harm for acting in reliance on a party who failed to fulfill their obligation. If the injured party could go back in time, they should be indifferent to entering into the contract that would be breached and receiving the reliance damages as opposed to not entering into any contract with the breaching party. The injured party should be put in a substantially similar situation position as they would have been had the contract not been entered into. This is different from expectation damages, where the injured party should be indifferent between the fulfillment of the contract and never having entered into the contract.

A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date, and the activities and intentions of the parties entering into a contract may be referred to as contracting. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or equitable remedies such as specific performance or rescission. A binding agreement between actors in international law is known as a treaty.

<i>Transfield Shipping Inc v Mercator Shipping Inc</i>

The Achilleas or Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48 is an English contract law case, concerning remoteness of damage.

Jackson v Royal Bank of Scotland [2005] UKHL 3 is an English contract law case, which concerns remoteness of damage.

<i>Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd</i>

Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 is an English contract law case, concerning remoteness of damage. In it, the majority held that losses for breach of contract are recoverable if the type or kind of loss is a likely result of the breach of contract. Lord Denning MR, dissenting on the reasoning, held that a distinction should be drawn between losses for physical damage and economic losses.

<i>C Czarnikow Ltd v Koufos</i>

C Czarnikow Ltd v Koufos or The Heron II [1969] 1 AC 350 is an English contract law case, concerning remoteness of damage. The House of Lords held that the "remoteness" test, as a limit to liability, is, in contract, more restrictive than it is in tort.

Mitigation in law is the principle that a party who has suffered loss has to take reasonable action to minimize the amount of the loss suffered. As stated by the Canadian Federal Court of Appeal in Redpath Industries Ltd. v. Cisco (The), "It is well established that a party who suffers damages as a result of a breach of contract has a duty to mitigate those damages, that is to say that the wrongdoer cannot be called upon to pay for avoidable losses which would result in an increase in the quantum of damages payable to the injured party." The onus on showing a failure to mitigate damages is on the defendant. In the UK, Lord Leggatt describes the "function of the doctrine of mitigation" as enabling the law

to distinguish between effects on the claimant's financial position which are to be regarded as caused by the defendant's breach of contract and for which damages can therefore be recovered and effects which are attributed to the claimant's own action or inaction in response to the breach and for which the defendant is not liable.

<i>Southcott Estates Inc v Toronto Catholic District School Board</i> Supreme Court of Canada case

Southcott Estates Inc v Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 SCR 675, is a landmark case of the Supreme Court of Canada in the area of commercial law, with significant impact in the areas of:

<i>Honda Canada Inc v Keays</i> Canadian Supreme Court employment law case

Honda Canada Inc v Keays, 2008 SCC 39, [2008] 2 SCR 362 is a leading case of the Supreme Court of Canada that has had significant impact in Canadian employment law, in that it reformed the manner in which damages are to be awarded in cases of wrongful dismissal and it declared that such awards were not affected by the type of position an employee may have had.

References

  1. ↑ "Consequential Damages". LII / Legal Information Institute. Retrieved 2020-04-11.
  2. ↑ "Contract". LII / Legal Information Institute. Retrieved 2020-04-12.
  3. ↑ Arlen, Jennifer (2000). Encyclopedia of law and economics. Cheltenham, UK: Edward Elgar. pp. 682–719. ISBN   9781858985657.
  4. 1 2 "Remedies for Breach of Contract — Judicial Education Center". jec.unm.edu. Retrieved 2020-04-11.
  5. ↑ "Duty to Mitigate". LII / Legal Information Institute. Retrieved 2020-04-11.
  6. ↑ Jimerson, Charles; Haines, Kayla. "What Are Consequential Damages on a Construction Contract?". Lexology. Law Business Research. Retrieved 11 October 2021.
  7. ↑ [1854] EWHC J70, (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex 179, 18 Jur 358, [1843-60] All ER Rep 461.
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