Consequential Damages

A term much used by lawyers and judges, without any real clarity as to what it means, resulting in much legal argument (and legal expense.)  Its importance in common law is that in most common law jurisdictions ‘consequential damages’ are not recoverable in contract disputes, though they are generally recoverable in tort.

However, while what ‘consequential damages’ are is, in principle, generally well understood and stated – what they are in practice is hopelessly confused. Generally, ‘consequential damages’ are described as “remote and speculative” damages, that are attributable to some special circumstances of the non-breaching party that the breaching party had no reason to be aware of.

In common law the case used to try (poorly) to illustrate the distinction is the hoary old 1856 example of Hadly v. Baxendale heard before the no-longer extant Court of Exchequer Chamber in London.  A short summary of the case is that Hadly was a miller who needed a replacement shaft for a steam engine in his mill (or the mill he was a partner in.) The shaft was properly fabricated and entrusted to Baxendale, a shipper, who had an accident en route and lost the shaft.  As a result the mill had to shut down for a protracted period and Hadly sought damages for the shutdown and consequent losses (which substantially exceeded the cost of freight and the the shaft.)   Hadly won in the lower court, but on appeal the Court refused the damages on the basis that Baxendale had no reason to foresee that these damages would result from the breach of the shipping contract.

The problem with using Hadly v. Baxendale as a teaching example is that it raises more questions than it answers. Were the damages consequential because Baxendale did not know they would flow from the breach (or reasonably could not know), or were they consequential because they were ‘indirect.’ If the first is the correct analysis, then the fact that the damages were in the form of ‘lost profits’ does not make them consequential damages – if the latter, well maybe they are (assuming one agrees that lost profits (or wages, etc.) are indirect damages. Complicating matters further is Article 74 of the Convention on Contracts for the International Sale of Goods (CISG), which provides:

“Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.”

The CISG thus explicitly includes “lost profits” as general damages, and thus normally payable for breach of contract – while many common law courts still regard lost profits as ‘consequential damages’ and thus not normally payable.

Thus, the harsh reality is that what ‘consequential damages’ are and may consist of is not clear. There is obviously some point at which damages become so remote, so surprising a consequence, that they can definitely be considered ‘consequential damages,’ but in most instances the legal argument is not about these distant consequences, but rather about more likely and certain results, like lost sales, lost pay, lost profits, and so on. Courts in the US, UK and elsewhere have held for example that lost profits are direct damages and not consequential, and vice versa. The answer as to what are ‘consequential damages’ is – it depends, on the court, the tribunal, the law, the jurisdiction and the judge. Many of them would conclude that Hadly v. Baxendale was wrongly decided today.

In contracts a solution to using the term ‘Consequential Damages’ might be to include a definition of what they constitute, but such a definition would be a list that of itself raises further definition problems and adds the issue of inclusio unius (est) exclusion alterius.

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