Consequential loss

The basic principles of contract →Go uptown Quick reminder: in the law of contract “losses” and “damages are” different, though related things. Losses are pecuniary misfortunes that you might suffer as a result of a breach of contract. They can be divided into: “Direct” losses, that are the natural and foreseeable consequence of breach of contract. “Indirect” or “consequential” losses, which are a more speculative nature. Note that “loss of profit” and “loss of opportunity” are not judicially recognised categories of loss: they can be either direct — for example, foregone interest on a defaulted payment — or indirect — the winnings you would have got from putting that defaulted payment on a rank outsider who came good in the 2:35 at Kempton — but if in doubt (i.e., not a natural consequence of the breach) assume they will be indirect Damages are the amounts a court orders a naughty counterparty to pay to an innocent to compensate for its loss of bargain (in a contract) or atone for its wrongdoing (in a tort or breach of trust). They may, or may not, be the same amount as the actual losses suffered: “General” damages compensate for direct losses. “Special” damages relate to indirect losses. They are rare in contracts, even when not specifically excluded which, in finance contracts, they usually will be. “Punitive” or “exemplary” damages do not compenstate for loss at all, but rather punish a wrongdoer for outrageous behaviour. These are not available under English contract law but may be awarded — extremely rarely — in tort or for breach of trust. There is also an “Account for profit”: an order to hand over profits made through the misuse of someone else’s physical or intellectual property. This remedy is not available for a simple breach of contract. Grievances and remedies, charted Grievance Remedy Contract Tort Fiduciary Direct loss General damages Yes Yes Yes Indirect/consequential loss Special damages Usually No Usually No Usually No Egregious wrongdoing Exemplary/punitive damages No Yes Possibly Profiting at owner’s expense Account for profit No Yes Yes Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability Not contracts: Restitution — quasi-contract — quasi-agency Index: Click ᐅ to expand: Contract Tort Restitution Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

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.

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, 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 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

• Hadley v Baxendale
• Indemnity
• Breach of contract
• Remoteness of damage