Consequential Damages
Consequential damages are the downstream ripple effects of a breach.
18. Consequential Damages
Consequential damages are recoverable as part of expectation damages if the consequential damages were foreseeable to the breaching party and if the nonbreaching party can prove them with reasonable certainty.
- Consequential damages are the “downstream” effects of a contract breach (the consequences of the breach beyond the loss in value from losing contract performance).
- Consequential damages are recoverable only if the breaching party could have reasonably foreseen the loss at the time the contract was made.
- Consequential damages may be foreseeable either because:
- The loss would follow “in the ordinary course of events” from a contract of the type executed, or
- There were special circumstances that the breaching party had reason to know at the time the contract was made that would produce the kind of loss suffered.
- Consequential damages can be recovered only if they are provable with “reasonable certainty.”
- Lost profits from a new business are one example of consequential damages that are often too difficult to prove with reasonable certainty.
Consequential damages are the downstream losses a breach sets off beyond the direct loss in value. They are recoverable as part of expectation damages only if two gates are cleared: the loss was foreseeable and is provable with reasonable certainty.
Consequential damages are the downstream ripple effects of a breach. When a contract is broken, the nonbreaching party first loses the value of the performance itself, which is the direct loss. But the breach can also set off further losses out in the world: a factory that sits idle for want of a part, a sale to a third party that falls through, profits that never materialize. Those further losses are consequential damages, and they are recoverable as part of expectation damages, but only if two separate gates are cleared. Miss either one and the consequential damages are not recovered, even though they really happened and really hurt.
- 1Foreseeability. The loss must have been foreseeable to the breaching party at the time the contract was made. Foreseeability can be satisfied in either of two independent ways: the loss may follow in the ordinary course of events from a contract of the type executed, meaning any reasonable party in that line of business would expect that kind of loss to flow from this kind of breach; or, even an unusual loss is foreseeable if, at the time of contracting, there were special circumstances that the breaching party had reason to know would produce the kind of loss suffered. The plaintiff needs only one.
- 2Reasonable certainty. Even a perfectly foreseeable loss is not recoverable unless the nonbreaching party can prove its amount with reasonable certainty. Damages that rest on guesswork or speculation fail this test.
The classic illustration is lost profits from a brand-new business. A new venture has no track record of earnings, so its projected profits are often too difficult to prove with reasonable certainty, and courts frequently deny them on that ground even when the loss was plainly foreseeable. The lesson is that foreseeability and certainty are two distinct hurdles. Both must be cleared.
Foreseeability is measured at the time the contract was made, not the time of the breach. This is the trap that snares more students than any other. What the breaching party learned later, or could see coming as the breach unfolded, does not count. The question is always what was foreseeable when the deal was struck.
Two gates, both must open: foreseeable plus provable with reasonable certainty.
Foreseeability is measured at the time the contract was made, never at the time of breach.
ordinary course of events for a contract of that type
special circumstances the breaching party had reason to know at contracting
downstream loss recoverable only if foreseeable when the deal was struck and proven with reasonable certainty; new-business lost profits are the classic certainty failure.
A commercial bakery contracts with a parts supplier to deliver a replacement motor for its only industrial oven by a set date. The supplier delivers two weeks late, and the bakery, unable to bake during the delay, loses profits on orders it had to turn away. The bakery sues for those lost profits as consequential damages.
Suppose the bakery had never opened and was a brand-new venture with no track record. The loss is still foreseeable, but the projected profits of a new business are often too difficult to prove with reasonable certainty, so a court may well deny them at the second gate even though the first gate was cleared.
An option ties foreseeability to what the breaching party knew or could see at the time of breach, or to knowledge gained after signing but before breach.
Foreseeability is measured at the time the contract was made; knowledge acquired later does not satisfy the gate.An option treats foreseeability as the whole test (skipping certainty), reduces foreseeability to a single route, or restates the certainty bar as absolute certainty or mere possibility.
Recovery requires foreseeability AND reasonable certainty; foreseeability has two independent routes; the standard is reasonable certainty, not certainty beyond doubt.An absolute answer: lost profits can 'never' be recovered, all foreseeable losses are 'always' recoverable, or a party is 'always' charged with the worst foreseeable loss.
New-business profits are often, not never, too speculative; foreseeability never guarantees recovery because certainty must also be met; no rule imposes foresight of the worst possible loss.An option reaches the right recover/deny result but rests it on the bare fact that the loss occurred or that the breach caused it.
Causation alone is not the test; name the operative grounds, foreseeability at contracting plus reasonable certainty.An option imports a different doctrine (duty to mitigate, liquidated damages, punitive damages) or relabels the consequential loss as a direct loss in value.
The printed test is only foreseeability at contracting plus reasonable certainty; consequential damages are downstream effects, distinct from the direct loss in value.An option turns on a true but irrelevant fact, such as the size of the loss or the breaching party's good or bad faith.
The size of the loss and the breaching party's state of mind are not elements; only foreseeability and reasonable certainty control.the stem gives you a breach that causes a further, downstream loss, then loads in a fact about timing of knowledge (what the breaching party learned only later, or knew all along at signing), an unusual loss that depended on special circumstances, or a shaky profits figure, especially from a brand-new venture.
The instant you see a downstream loss, run the two-gate check.
Gate one: was the loss foreseeable to the breaching party at the time the contract was made, either in the ordinary course of events or through special circumstances it had reason to know then?
Gate two: can the nonbreaching party prove the amount with reasonable certainty?
Both yes means recoverable.
If the option moves the foreseeability clock to the time of breach, or skips the certainty gate, it is a distractor.
A printing company contracted with an ink supplier to deliver a special quick-dry ink by a fixed date. At the time they signed, the supplier knew nothing about why the printer needed the ink and had no reason to suspect anything unusual. Several days after signing, the printer happened to mention that without the ink on time it would lose a lucrative magazine contract worth far more than an ordinary order. The supplier delivered late, the printer lost the magazine contract, and the printer sued for those lost profits as consequential damages. Lost profits of this magnitude do not follow in the ordinary course of events from a routine ink order.
Is the printer likely to recover the lost profits on the magazine contract as consequential damages?
A wedding caterer contracted with a refrigeration company to repair the caterer's walk-in cooler by a stated date so the caterer could store food for a large booked event. When they signed, the caterer told the repair company about the event and explained that a missed deadline would force the caterer to cancel and refund the booking. The repair company finished late, the caterer canceled the event and refunded the customer, and the caterer sued for the lost profit on that booking. The caterer is an established business with years of booking records, and the lost profit on the canceled event can be calculated from those records.
Is the caterer likely to recover the lost profit on the canceled event as consequential damages?
An entrepreneur contracted with a contractor to build out a storefront for a restaurant the entrepreneur planned to open, her first ever in the industry. The contractor finished months late, delaying the opening. When the restaurant finally opened it struggled, and the entrepreneur sued the contractor for the profits she claimed the restaurant would have earned during the months it was delayed. The restaurant had never operated before, so it had no sales history, and the entrepreneur's profit figure rested on optimistic industry projections for a comparable but separately owned establishment.
Is the entrepreneur likely to recover the claimed lost profits for the delay period as consequential damages?
A trucking company contracted with an engine-rebuild shop to rebuild the engine of a delivery truck, telling the shop at signing that the truck was the company's only vehicle and was committed to a standing route of daily deliveries. The shop returned the truck weeks late. During the delay the company could not run its route, lost several regular customers, and, from its detailed delivery and revenue records, calculated the profits it lost on those runs. The company sued the shop for those lost profits.
On what basis is the trucking company most likely to recover the lost profits as consequential damages?
A farm contracted with a parts dealer to supply a replacement part for its harvester before the short harvest window opened. Nothing about the order signaled urgency, and at signing the dealer had no reason to know the farm had only a narrow window to bring in its crop or that a delay would spoil an entire season's yield. The dealer delivered the part a week late, the harvest window closed, and the farm lost its crop for the year. The farm sued for the value of the lost crop as consequential damages. A week's delay in supplying a routine harvester part does not, in the ordinary course of events, cause the loss of a whole season's crop.
Is the farm likely to recover the value of the lost crop as consequential damages?