Consequential loss

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.

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.

In the old days, there was some authority that consequential loss was not recoverable at all, unless specifically agreed.

Example - buying a car

Where a party to a contract for the sale and purchase of a car has breached the 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, 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.

Example - stock lending

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 buy-in cost from the onward recipient.

Remoteness of damage

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.

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.

See Also

Hadley v Baxendale

• Indemnity
• Breach of contract
• Remoteness of damage