Consequential damages are also known as “special damages,” and are damages that are not a direct result of an incident itself, but are instead consequences of that incident. An example of consequential damages would be a driver getting into a car accident because, instead of paying attention to the road, he was focused on another car accident that had just happened across the street. The first car accident cannot be blamed for directly causing the injuries to those in the second car accident. However, the second car accident did occur as an indirect result of the first car accident. To explore this concept, consider the following consequential damages definition.
Definition of Consequential Damages
- Damages that occur as an indirect result of an event.
Circa 14th century Middle English
What are Consequential Damages
Consequential damages are damages that occur as an indirect result of an incident. However, in order for someone to win consequential damages in a lawsuit, the damages must have been a foreseeable result of that incident. For example, consequential damages are often awarded to reimburse an accident victim’s loss of wages, when he could not work for weeks after being injured in an automobile accident.
Direct damages, on the other hand, would include the costs involved with fixing the damage that was done to the car, as well as paying for the medical costs incurred by the victim after receiving treatment.
In the world of civil law, and in addition to these examples of consequential damages, there exist a variety of damages that can be awarded by a court, depending on the circumstances at issue. Examples of these kinds of damages include:
- Actual Damages – Also known as “compensatory damages,” actual damages are monies awarded to an individual for injuries or damages that were caused by the other party.
- General Damages – General damages are awarded for pain and suffering, an inability to perform a particular function, or a loss of consortium – anything that does not have a specific dollar value.
- Punitive Damages – Punitive damages are damages that are awarded to punish a defendant for his bad behavior, or as a way to deter others from engaging in the same illicit behavior.
Limitation of Liability Clause in a Contract
When parties enter into a contract, it is understood that anyone can be held liable for damages caused by a breach of that contract. In order to protect themselves, many companies will include what is known as a Limitation of Liability clause in their contracts. The Limitation of Liability clause limits the extent to which that party can be held responsible for any unfortunate events. Such protections include:
- Setting a maximum limit for that party’s level of liability
- Limiting liability to the price paid to hire the party that is being hired
- Excluding certain damages, such as expenses associated with the cost of doing business, like transportation or restocking
In a nutshell, the purpose of the Limitation of Liability clause is to reduce the possibility that the breaching party will have to pay an unreasonable amount of money in the event of a breach.
Consequential Damages vs. Direct Damages
The main difference between consequential and direct, or incidental, damages is that direct damages are paid to reimburse a plaintiff for something the defendant was supposed to do, but failed to do due, thus breaching the contract. The additional costs that the plaintiff incurs as a result of the defendant’s breach of contract that were not initially part of what the plaintiff was supposed to receive from the defendant are consequential damages.
Consider the following example of consequential damages involving a toy manufacturer, and the retail store with which it is contracted to do business:
ABC Toys enters into a contract with XYZ Department Store to deliver 800 baby dolls by the end of November, which XYZ will sell during the Christmas season. By the time the deadline rolls around, XYZ discovers that ABC Toys has not produced the 800 dolls as agreed.
ABC Toys has breached the contract it entered into with XYZ. Now, not only does XYZ have to eat the costs that were involved in hiring ABC Toys, but they now have to hire a different manufacturer, and at a higher cost, to rush the manufacturing of the 800 dolls so XYZ can have them in time for the Christmas season.
In this example, the direct damages are the initial costs that XYZ initially laid out to hire ABC Toys. The consequential damages are the costs that XYZ had to pay to hire an additional contractor – and at a significantly higher, rush rate – to do the job that ABC Toys was contracted to do in the first place. XYZ can now sue ABC Toys for both direct and consequential damages due to ABC Toys’ breach of contract.
In even simpler terms, consequential damages are typically the more significant damages in terms of amounts awarded. These are the damages that the plaintiff so desperately wants to be awarded, and that the defendant will do anything not to have to pay. This is because consequential damages act as a kind of punishment for a breach of contract, and because the indirect results of someone’s actions can be significantly more far-reaching than the direct results.
Consequential damages can include everything from the loss of profits due to the interruption of normal business practices, to the loss of customers due to delays or cancellations. The fact that they can be assigned to a wide array of consequences means that the amount of consequential damages that can be awarded to a plaintiff can skyrocket rather quickly. This is why it is so crucial that the damages in a breach of contract action be clearly identified as either direct or consequential damages.
Consequential Damages Example Involving a Breach of Confidentiality
Leading Market Technologies, Inc. (LMT) hired Silverpop Systems, Inc. to distribute advertisements through LMT’s confidential email address. However, hackers managed to access the section of Silverpop’s network where the email list was stored. The list may have been stolen, but LMT was unable to confirm that. Upon learning of this breach, LMT sued Silverpop for a breach of the confidentiality provisions that Silverpop had contractually agreed to in working for LMT. Silverpop filed a motion to dismiss, arguing that the damages LMT had suffered were consequential, and were therefore barred by the consequential damages waiver that was written into their agreement.
The district court sided with Silverpop, finding that the consequential damages waiver did, in fact, bar any damages award that could come from a breach of Silverpop’s data. The court found that the purpose of the contract was to establish an agreement with regard to email marketing, and that confidentiality obligations were secondary to that purpose. Therefore, LMT would be entitled to direct damages, which would consist of the lost monies that were paid for the promised advertising services, and any other damages would be consequential. This would include the lost value of the once confidential email list.
Specifically, the Court reasoned:
“[T]he loss suffered by LMT is of a type resulting from the breach of a specific term of the agreement. In the absence of a breach of the confidentiality provision, LMT would not have incurred the loss to the sale value of the LMT List. Thus, considering the purpose of the parties’ agreement, the damages LMT seeks are not the type that ‘arise naturally and from the usual course of things.’ LMT’s damages are consequential rather than direct.”
The court dismissed LMT’s breach of contract claim because LMT had agreed to include the waiver of all consequential damages in the contract it had entered into with Silverpop. The court dismissed the case despite the fact that claims for a breach of confidentiality were excused from the contract’s separate maximum of total damages that could be incurred and paid out.
The decision that was made in this case was actually a pretty important one to the world of information technology. In most cases, the purpose of a contract like the one made here is solely to provide IT services to the client. The server’s obligation to keep the involved data confidential is secondary to the main purpose of the contract, and to the server’s performance as a whole. Courts relying on the decision made in this case will determine that, if an IT contract contains the typical waiver of consequential damages, a client who suffers a data breach may not be able to seek a remedy for the consequential damages incurred as a result.
LMT appealed to the Eleventh Circuit Court of Appeals, however the Court ultimately affirmed the lower court’s decision so entirely that it did not even provide a further explanation. It simply attached a copy of the lower court’s decision for reference.
Related Legal Terms and Issues
- Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
- Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
- Loss of Consortium – The loss suffered by an individual after his spouse has died or been injured due to another person’s negligent or intentional act.
- Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.