In this lesson, you’ll learn what constitutes consequential damages. You’ll also review a typical consequential damages clause and analyze an example.
Definition of Consequential Damages
Consequential damages are reimbursements which are sought in a civil court due to the breach of a contract. Another name for consequential damages is special damages. These damages arise when a contract is broken by one party of a contract.
Let’s look at a hypothetical situation to get a better picture of what consequential damages are.Abe and Bob have a contract for Abe to sell his magazine store to Bob. The contract includes a provision that states that if the store is destroyed prior to the final real estate closing, Bob can get out of the contract without penalty.
A month prior to the closing, the building sustains minor fire damage that can be easily corrected. However, Bob decides to withdraw from the contract. Since the damage was not serious, Bob is in breach of the contract. The lost profits sustained by Abe in the loss of the sale of his store would constitute as consequential damages.Consequential damages exist where there are certain elements, which include: the damages in question extend beyond the actual damages incurred by the non-breaching party, and a reasonable person would not anticipate or expect these damages in the regular course of business. Frequently, consequential damages include lost profits due to the breach of a contract.
Consequential Damages Determination
Depending upon the particular jurisdiction and nature of the case, a judge or a jury will assess the extent of the consequential damages. The dollar amount of the consequential damages one will receive depends largely upon each party’s expectations at the time of contract.For example, if a contract included a provision stating that there could be consequential damages, the court will take this fact into account. The court will incorporate the existence of the contemplated consequential damages into the final award amount. In addition, the court will consider the extent of the loss to the non-breaching party when calculating consequential damages.
Consequential Damages Clauses
A consequential damages clause can be drafted in numerous ways.
However, a typical clause will include a definition of what constitutes consequential damages. Moreover, the clause will usually refer to consequential damages as indirect damages or losses, or special damages. Furthermore, the clause will likely include a narrow definition of what could also be included as consequential damages. For example, loss of profit, anticipated profit, or deferred manufacturing production capability can all be included in a consequential damages clause.
Consequential damages are reimbursements which are sought in a civil court due to a breach of contract. These damages need to be damages that a reasonable person wouldn’t expect to occur during the regular course of business, and the damages in question extend beyond the actual damages incurred by the non-breaching party. In short, a consequential damages clause is important because of the protections it offers to each party in a contract.The actual assessment of the reimbursement amount can be tricky. A judge or jury must review the facts and circumstances in order to assign a dollar amount to the consequential damages value. This value can depend on what each party expected when the contract was signed.
The presence of a consequential damages clause can help provide guidance when the court determines this amount. This clause includes things like a narrow definition of consequential damages and a statement that consequential damages include indirect damages.