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Consequential loss, sometimes called [[indirect loss]], [[relational economic loss]], [[loss of opportunity]] or [[loss of profits]] is a loss claimed to arise as a result of breach of contract that did not arise ''directly'' out of the failure by one party to perform the contract, but is better looked at as the opportunity cost suffered by the innocent person in entering a contract which you then breached.
{{a|contract|{{subtable|{{small|80}}{{loss v damages}}</div>}}}}''Not to be confused with [[direct loss]]''


These days, the extent of [[damages]] are guided generally by the usual rules regarding foreseeability, [[causation]] and [[remoteness of damage]], but in most cases, [[consequential loss]] will fail these tests—especially foreseeability—and unlikely to be recoverable in an ordinary action for [[breach of contract]], at least in the absence of an [[indemnity]].
[[Consequential loss]], sometimes called [[indirect loss]], [[relational economic loss]], is a loss arising from a [[breach of contract]] not caused ''directly'' by the breach, but as a second-order consequence of it: such as the [[opportunity cost]] to the innocent party of having a [[contract]] with you which you did not then perform.  


In the old days, there was some authority that [[consequential loss]] was not recoverable at all, unless specifically agreed.
It is ''not'' the same as a [[loss of opportunity]] or [[loss of profits]]: these may be direct losses or indirect losses, depending on the contract (see {{casenote|Hadley|Baxendale}}). Let us take an example:
{{quote|Under a contract Peggy agreed to rent Buddy her car for the weekend. Buddy took the car but failed to pay the agreed rental. As this is a [[breach of contract]], Peggy, ah, sued.<ref>I know, I know: laborious set-up; disappointing pay-off. It doesn’t matter anymore.</ref>


===Example - buying a car===
'''[[Direct loss]]''': Peggy’s direct loss is the rental income Buddy was supposed to pay  for the rental period. It is predictable, finite, determinate and easy for the parties to hold in contemplation. “If I can’t go through with this the worst I can be stuck with is the cost of renting that car for a week”.
Where a party to a contract for the sale and purchase of a car has breached the {{tag|contract}} by failing to deliver the car:
*'''[[Direct loss]]''': is the value of the undelivered car.
*'''[[Consequential loss]]''': is the loss of the profit the purchaser could have earned by using the car had it been delivered on time.


The value of the [[direct loss]] is easy enough to assess: it’s the prevailing market value of a new car. It is also predictable, finite, determinate and easy for a contracting party to hold in contemplation. “If I can’t go through with this the worst I can be stuck with is the value of a new car. They currently retail at £25 grand.” You might get a fright if Volkswagen suddenly puts its prices up, but it isn’t going to kill you. The cost to the innocent party of mitigating its consequential loss is also, and necessarily, capped at exactly the value of that direct loss: it can buy, or rent, a car from someone else.
'''[[Consequential loss]]''': Had Peggy not committed to rent her my car to Buddy, she could have rented it to someone else ''for more money''. Her “consequential loss” was the extra income she could have earned doing that. Also, she could have used the car herself, and earned money as, I don’t know — a limo driver.  


[[Consequential loss]], on the other hand, is generally harder to get your head around. “Well, I was planning to be a free-lance limousine driver, and I was going to worked non-stop, twenty four hours a day for a month, only driving punters who were paying me £20 pounds a mile”. Almost everything about this involves some kind of speculation, including what the plaintiff was planning to do with the car in the first place. The plaintiff could have acquired a car elsewhere (at exactly, or less than, its direct loss) and mitigated its ''consequential'' loss entirely without bothering the defendant.
This is generally harder to get your head around: almost everything about it is speculative, including what she was planning to do with the car in the first place. And generally she herself could have rented an car elsewhere (at exactly, or less than, her [[direct loss]]) and then used it in any of the ways she is now complaining about, to earn that money and mitigate her ''consequential'' loss. Cars being somewhat fungible, her lost opportunity is not ''really'' caused by Buddy. All he is responsible for is the amount he actually agreed to pay.}}


===Example - [[stock lending]]===
In the old days, there was some authority that [[consequential loss]] was not recoverable at all, unless specifically in the contemplation of the parties — that authority is {{casenote|Hadley|Baxendale}}.  
On the other hand, sometimes consequential losses ''are'' within the parties’ reasonable contemplation, they are easy enough to calculate, and it is fair enough to include them. Such as, upon a failure to settle a [[stock loan]]. The failure to make the onward delivery might incur a {{gmslaprov|buy-in}} cost from the onward recipient.


===[[Remoteness of damage]]===
These days, the extent of [[damages]] are guided generally by the usual rules regarding [[foreseeability]], [[causation]] and [[remoteness of damage]], but in most cases, [[consequential loss]] will fail these tests—especially [[foreseeability]]—and are unlikely to be recoverable in an ordinary action for [[breach of contract]], at least in the absence of an [[indemnity]].
It is sometimes, erroneously, said that [[consequential loss]] is not recoverable under ordinary [[contractual damages]] principles. The test of “[[remoteness of damage]]” is “[[foreseeability]]”—or “what was in the reasonable contemplation of the parties”. Now it is true that in many cases [[consequential loss]] is ''not'' in the reasonable contemplation of the parties. But this is not necessarily so: sometimes it is, as the example above points up quite nicely:


In this case it would be clearly contemplated that the failure to deliver the taxi would lead to a loss of income, and provided that loss could be sensibly quantified (a different question) it would quite conceivably be covered.
In the financial markets we generally assume there is a liquid market for most financial instruments, or at any rate all of their components, and all one needs to enter into those instruments is ''funding''. If you committed your own funds to Party X, a rogue, then you can satisfy your seller’s remorse by borrowing back those funds from another lender, and applying your borrowed funds to make the investment you are now claiming to have forsaken. The loss you have incurred, therefore, is not the fabulous return you would have made on that investment, but the cost of borrowing you would have incurred in making it.


Explicitly seeking indemnification for [[damages]] that ''may'' not be covered by ordinary remoteness principles risks creating an argument, where before there was none, and winding up in a worse position that you otherwise would be. “Consequential” losses ''may'' be recoverable in contract as long as they are reasonably foreseeable and in contemplation of the parties, which may well be true in the case of hedging losses and the like. But if you specifically seek to include consequential losses, the Skinnerian reponse of most lawyers is to reject it out of hand. If you sought an indemnity just for ordinary contractual losses, you might be able to include sufficiently foreseeable consequential losses.
===[[Indemnities]]===
Pay particular attention to [[indemnities]]. Unless [[Well-crafted indemnity|well-crafted]] — and most are not — [[indemnities]] are oddly susceptible to [[consequential loss]] bother, because they do not depend on a [[breach of contract]] for payment, and so the usual rules of [[remoteness]] and [[foreseeability]] do not apply. Courts are likely to treat ''badly'' constructed [[indemnities]] rather like contractual breaches,<ref>But might not — so why take that risk?</ref> but where an [[indemnity]] is very wide (as many are) it is not controversial to exclude consequential and indirect losses from its scope. If your counterparty baulks at this, she’s either a bit of a dick or — more likely — she doesn’t really understand [[indemnities]]. (Many lawyers don’t.)


===See Also===
In any case, trying to recover [[consequential losses]] for [[breach of contract]] through sneaky [[indemnities]] is dick behaviour, basically, and another reason never to agree indemnities for [[breach of contract]].
{{casenote|Hadley|Baxendale}}
 
''There is more — much more — on this topic at the [[indemnities]] article.''
 
===When [[consequential losses]] ''are'' [[Foreseeability|foreseeable]]: [[stock lending]]===
Sometimes [[consequential losses]] ''are'' within the parties’ reasonable contemplation, easy enough to calculate, and it is fair enough to include them. Such as, upon a failure to settle a [[stock loan]]. The failure to make the onward delivery might incur a {{gmslaprov|buy-in}} cost from the onward recipient.
 
===When [[consequential losses]] is alls you got: [[confidentiality agreement]]s===
The accursed [[NDA]] where, if you can really claim [[contractual damages]]<ref>[[Damages]] arising from misuse of [[intellectual property]] aren’t at their core, [[contractual damages]], because [[intellectual property]] rights don’t arise by [[contract]] — well, not under a [[confi]] at any rate.</ref> at all, they are all likely to [[Consequential loss|consequential]] and speculative in nature.
 
The chap who had your client list and used it to win the business you aspired to win yourself has, at worst, caused you a [[consequential loss]]: the [[loss of profits]] from that business. But more likely, {{sex|he}} has not “caused” your [[loss]] at all: ''you'' have, through your crappy product. Look, I’m just the messenger, okay?<br>
{{sa}}
*{{casenote|Hadley|Baxendale}}
*[[Indemnity]]
*[[Indemnity]]
*[[Breach of contract]]
*[[Breach of contract]]
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{{c2|Contract|Damages}}
{{c2|Contract|Damages}}
{{ref}}

Latest revision as of 13:30, 14 August 2024

The basic principles of contract
Quick reminder: in the law of contract “losses” and “damages are” different, though related things.

Losses are pecuniary misfortunes that you might suffer as a result of a breach of contract. They can be divided into:

“Direct” losses, that are the natural and foreseeable consequence of breach of contract.
“Indirect” or “consequential” losses, which are a more speculative nature.

Note that “loss of profit” and “loss of opportunity” are not judicially recognised categories of loss: they can be either direct — for example, foregone interest on a defaulted payment — or indirect — the winnings you would have got from putting that defaulted payment on a rank outsider who came good in the 2:35 at Kempton — but if in doubt (i.e., not a natural consequence of the breach) assume they will be indirect

Damages are the amounts a court orders a naughty counterparty to pay to an innocent to compensate for its loss of bargain (in a contract) or atone for its wrongdoing (in a tort or breach of trust). They may, or may not, be the same amount as the actual losses suffered:

“General” damages compensate for direct losses.
“Special” damages relate to indirect losses. They are rare in contracts, even when not specifically excluded which, in finance contracts, they usually will be.
“Punitive” or “exemplary” damages do not compenstate for loss at all, but rather punish a wrongdoer for outrageous behaviour. These are not available under English contract law but may be awarded — extremely rarely — in tort or for breach of trust.
There is also an “Account for profit”: an order to hand over profits made through the misuse of someone else’s physical or intellectual property. This remedy is not available for a simple breach of contract.
Grievances and remedies, charted
Grievance Remedy Contract Tort Fiduciary
Direct loss General damages Yes Yes Yes
Indirect/consequential loss Special damages Usually No Usually No Usually No
Egregious wrongdoing Exemplary/punitive damages No Yes Possibly
Profiting at owner’s expense Account for profit No Yes Yes
Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent

Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitution — quasi-contract — quasi-agency

Index: Click ᐅ to expand:
Contract
Tort
Restitution
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Not to be confused with direct loss

Consequential loss, sometimes called indirect loss, relational economic loss, is a loss arising from a breach of contract not caused directly by the breach, but as a second-order consequence of it: such as the opportunity cost to the innocent party of having a contract with you which you did not then perform.

It is not the same as a loss of opportunity or loss of profits: these may be direct losses or indirect losses, depending on the contract (see Hadley v Baxendale). Let us take an example:

Under a contract Peggy agreed to rent Buddy her car for the weekend. Buddy took the car but failed to pay the agreed rental. As this is a breach of contract, Peggy, ah, sued.[1]

Direct loss: Peggy’s direct loss is the rental income Buddy was supposed to pay for the rental period. It is predictable, finite, determinate and easy for the parties to hold in contemplation. “If I can’t go through with this the worst I can be stuck with is the cost of renting that car for a week”.

Consequential loss: Had Peggy not committed to rent her my car to Buddy, she could have rented it to someone else for more money. Her “consequential loss” was the extra income she could have earned doing that. Also, she could have used the car herself, and earned money as, I don’t know — a limo driver.

This is generally harder to get your head around: almost everything about it is speculative, including what she was planning to do with the car in the first place. And generally she herself could have rented an car elsewhere (at exactly, or less than, her direct loss) and then used it in any of the ways she is now complaining about, to earn that money and mitigate her consequential loss. Cars being somewhat fungible, her lost opportunity is not really caused by Buddy. All he is responsible for is the amount he actually agreed to pay.

In the old days, there was some authority that consequential loss was not recoverable at all, unless specifically in the contemplation of the parties — that authority is Hadley v Baxendale.

These days, the extent of damages are guided generally by the usual rules regarding foreseeability, causation and remoteness of damage, but in most cases, consequential loss will fail these tests—especially foreseeability—and are unlikely to be recoverable in an ordinary action for breach of contract, at least in the absence of an indemnity.

In the financial markets we generally assume there is a liquid market for most financial instruments, or at any rate all of their components, and all one needs to enter into those instruments is funding. If you committed your own funds to Party X, a rogue, then you can satisfy your seller’s remorse by borrowing back those funds from another lender, and applying your borrowed funds to make the investment you are now claiming to have forsaken. The loss you have incurred, therefore, is not the fabulous return you would have made on that investment, but the cost of borrowing you would have incurred in making it.

Indemnities

Pay particular attention to indemnities. Unless well-crafted — and most are not — indemnities are oddly susceptible to consequential loss bother, because they do not depend on a breach of contract for payment, and so the usual rules of remoteness and foreseeability do not apply. Courts are likely to treat badly constructed indemnities rather like contractual breaches,[2] but where an indemnity is very wide (as many are) it is not controversial to exclude consequential and indirect losses from its scope. If your counterparty baulks at this, she’s either a bit of a dick or — more likely — she doesn’t really understand indemnities. (Many lawyers don’t.)

In any case, trying to recover consequential losses for breach of contract through sneaky indemnities is dick behaviour, basically, and another reason never to agree indemnities for breach of contract.

There is more — much more — on this topic at the indemnities article.

When consequential losses are foreseeable: stock lending

Sometimes consequential losses are within the parties’ reasonable contemplation, easy enough to calculate, and it is fair enough to include them. Such as, upon a failure to settle a stock loan. The failure to make the onward delivery might incur a buy-in cost from the onward recipient.

When consequential losses is alls you got: confidentiality agreements

The accursed NDA where, if you can really claim contractual damages[3] at all, they are all likely to consequential and speculative in nature.

The chap who had your client list and used it to win the business you aspired to win yourself has, at worst, caused you a consequential loss: the loss of profits from that business. But more likely, he has not “caused” your loss at all: you have, through your crappy product. Look, I’m just the messenger, okay?

See also

References

  1. ↑ I know, I know: laborious set-up; disappointing pay-off. It doesn’t matter anymore.
  2. ↑ But might not — so why take that risk?
  3. ↑ Damages arising from misuse of intellectual property aren’t at their core, contractual damages, because intellectual property rights don’t arise by contract — well, not under a confi at any rate.
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