Consequential loss: Difference between revisions
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{{a| | {{a|contract|{{subtable|{{small|80}}{{loss v damages}}</div>}}}}''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. | |||
In the old days, there was some authority that [[consequential loss]] was not recoverable at all, unless specifically | 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> | |||
'''[[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 {{casenote|Hadley|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]]=== | ===[[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.) | 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.) | ||
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]]. | 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.'' | ''There is more — much more — on this topic at the [[indemnities]] article.'' | ||
===When [[consequential losses]] ''are'' foreseeable: [[stock lending]]=== | ===When [[consequential losses]] ''are'' [[Foreseeability|foreseeable]]: [[stock lending]]=== | ||
Sometimes consequential losses ''are'' within the parties’ reasonable contemplation, | 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]] | ===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 | 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 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> | 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}} | {{sa}} | ||
{{casenote|Hadley|Baxendale}} | *{{casenote|Hadley|Baxendale}} | ||
*[[Indemnity]] | *[[Indemnity]] | ||
*[[Breach of contract]] | *[[Breach of contract]] | ||
Latest revision as of 13:30, 14 August 2024
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The basic principles of contract
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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
- ↑ I know, I know: laborious set-up; disappointing pay-off. It doesn’t matter anymore.
- ↑ But might not — so why take that risk?
- ↑ 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.