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{{g}}[[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.  
{{g}}[[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.  


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]].
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.
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.


===Example - buying a car===
===Indemnities===
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:
Pay particular attention to [[indemnities]]. where not [[Well-crafted indemnity|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.
*'''[[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.
''There is more — much more — on this topic at the [[indemnities]] article.''


[[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.
===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 {{gmslaprov|buy-in}} cost from the onward recipient.


===Example - [[stock lending]]===
===where consequential loss is the only realistic loss you can claim: - the [[confidentiality agreement]]===
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.
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 {{tag|contract}} — well, not a [[confi]] at any rate.</ref> 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 {{sex|she}} has not caused your [[loss]] at all: ''you'' have, through your crappy product. <br>
 
===Example - the [[confidentiality agreement]]===
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 {{tag|contract}} — well, not a [[confi]] at any rate.</ref> at all, they are likely to be all of a consequential and highly speculative nature. The fellow who had your client list and used it to win business from your clients you aspired to win yourself has at worst caused you a consequential loss: the loss of profits from that business. But more likely {{sex|she}} has not caused your [[loss]] at all: ''you'' have, through your inferior product. <br>


===[[Remoteness of damage]]===
===[[Remoteness of damage]]===

Revision as of 10:39, 6 December 2019

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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

Hadley v Baxendale

References

  1. 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.