Consequential loss
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Consequential loss, sometimes called indirect loss, relational economic loss, loss of opportunity or loss of profits is a loss arising from a breach of contract not caused directly by the breach, but is a second-order consequence of it: such as the opportunity cost to the innocent party of having a contract with you which you then breached.
Had I not been committed to rent you my car, I could have rented it to someone else for more money.
- Direct loss: is the rental income you were supposed to pay me for the rental period. It is predictable, finite, determinate and easy 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: the marginal extra income I could have earned had I not rented you the car at all, but rented it do someone else who was prepared to pay more for it. This is generally harder to get your head around. “Well, I was planning to be a free-lance limo driver, and I was going to worked non-stop, twenty-four hours a day for the whole period, only driving punters who were paying me £20 pounds a mile”. Almost everything about this is speculative, including what the claimant was planning to do with the car in the first place. It could have rented a car elsewhere (at exactly, or less than, its direct loss) and mitigated its consequential loss entirely without bothering the party in breach.
In the old days, there was some authority that consequential loss was not recoverable at all, unless specifically agreed. 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. Not so any more: see below.
Indemnities
Pay particular attention to indemnities. where not well-crafted, as many are not, indemnities are oddly susceptible for consequential losses, because indemnities do not require a breach of contract, and the usual rules of remoteness and foreseeability do not (in theory) apply. Badly constructed indemnities are likely to be treated rather like contractual breaches however, but where an indemnity is very wide (as many are) it is not controversial to exclude liability for consequential and indirect losses, and if your counterparty baulks at this, most likely she doesn’t really understand indemnities. Many lawyers don’t.
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, 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.
where consequential loss is the only realistic loss you can claim: - the confidentiality agreement
The accursed NDA where, if you can really claim contractual damages[1] at all, they are all likely to 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 she has not caused your loss at all: you have, through your crappy product.
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
References
- ↑ 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 a confi at any rate.