|The Jolly Contrarian’s Glossary |
The snippy guide to financial services lingo.™
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.
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 to someone else who was prepared to pay more for it. Or the money I could have made with the car, had you performed your contract and rented it to me. 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.
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.
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, 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 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, he has not “caused” your loss at all: you have, through your crappy product. Look, I’m just the messenger, okay?