Incidental damages are reasonable expenses incurred by one party to a contract as a result of the other party’s breach of the contract. These expenses may be awarded in a civil lawsuit in addition to the award of compensatory damages. To explore this concept, consider the following incidental damages definition.
Definition of Incidental
- Something that happens by chance or without intention
- Occurring as an unpredictable consequence
1655-1665 Middle English
Costs Considered Incidental Damages
Incidental costs are costs that were not expected in the normal execution of the contract, but arose due to the breach of the contract. Such costs may include:
- Inspection of items
- Transportation or care of items
- Expenses or commissions incurred in connection with incident or delay of items
- Storing of defective items until the supplier can retrieve them
Incidental vs. Consequential Damages
The difference between incidental and consequential damages is the cause of the expense or loss. Incidental damages are the direct result of one party’s breach of contract. Consequential damages are more indirect, being incurred not as a result of the breach itself, but due to the end result of the breach.
Example of Incidental Damages
Bright Lite Bulb Store contracts to install 100 light fixtures in a local mall within 7 days, and so enters into a purchase agreement with a supplier to buy the fixtures. The supplier agrees to deliver the fixtures within three days. On the fifth day, the supplier notifies Bright Lite they cannot fill the order, breaching the contract. Because the mall is unable to change their timeline, Bright Lite loses the contract and has to refund the mall’s money. The losses incurred by Bright Lite are a direct result of the supplier’s breach of contract, and so are considered incidental damages.
Example of Consequential Damages
The mall in the above example fails to make their deadline to open a new store space because installation of the lights is delayed, and loses two days rental income as a result. The mall’s losses are caused by the result of the lighting supplier’s breach of contract with Bright Lite, and so are considered consequential damages.
Limitation of Liabilities Clause
Any party may be held liable for damages caused by their breach of contract. Understanding this, many companies include a Limitation of Liability clause in their contracts, limiting their responsibility in certain circumstances, such as:
- Placing a maximum limit on the party’s liability
- Limiting liability to the purchase price of the contract
- Excluding certain damages such as transportation or restocking expenses
The Limitation of Liability clause reduces the chance of a breaching party having to pay unreasonable sums of money.
The term “compensatory damages” refers to a sum of money awarded to an individual who suffers damages or losses directly caused by the acts of another. These damages might be awarded for a number of reasons, including money to cover medical bills of a person injured in an accident, or to pay for repairs to property damaged by another. Compensatory damages may also be awarded to a party who incurs costs due to another party’s breach of contract.
Example of Compensatory Damages
A factory owner finds that one of his production line machines is damaged and he orders a new part from one of his suppliers. The supplier agrees to have the part to the owner within two days. However, the suppliers fails to deliver the part as agreed, and the factory owner has to wait an additional week for the part to arrive. Since the machine was down for over a week, causing the factory owner to lose money because the product could not be produced during the down time. The factory owner may sue the supplier for breaching their contract, which may result in the supplier being ordered to pay for the losses incurred due to the breach.
Other Types of Damages
In civil law, there are a variety of damages that may be awarded by a court of law. The type of damages sought depends on the circumstances.
Actual damages – a monetary amount awarded to an injured party for losses or injuries caused by another party. Actual damages are also referred to as “compensatory damages.”
Liquidated damages – a specific monetary amount for damages agreed to by the parties in forming the contract, to be awarded in the event the contract is breached.
Related Legal Terms and Issues
- Breach of Contract – Failure of one or more parties to fulfill their obligations under a contract.
- Liable – to be responsible for something according to the law. When in breach of contract, the breaching party is often held liable.
- Plaintiff – a party who seeks legal action against another party in a court of law. This may be an individual filing a civil lawsuit against another party, or the prosecutor in a criminal case.