What is the difference between consequential and incidental damages

The distinction between general and special damages is not that one is and the other is not the direct and proximate consequence of the breach complained of, but that general damages are such as naturally and ordinarily follow the breach , whereas special damages are those that ensue, not necessarily or ordinarily, but because of special circumstances.

For example, if the Uniform Commercial Code UCC applies in the context of the sale of goods, incidental damages and consequential damages will have their meaning defined by law. Incidental damages are those damages caused to a party to limit or avoid further direct damages caused by the breach. For example, you purchase a good that is defective and for security and safety reasons, you must have the good urgently repaired to prevent further damages or the further aggravation of the losses.

Consequential damages are damages that, at the time of signing of the contract, the parties could foreseeably estimate would result due to a contractual breach. For example, if a transportation company was purchasing a truck to its fleet for a special transportation contract and the truck is not delivered on time, it was foreseeable that the transportation company would not be able to execute its transportation obligations.

Consequential damages are also referred to as special damages or indirect damages. Such indirect damages are damages that do not necessarily flow from the breach of contract but are secondary in nature or indirect to breach. In other words, indirect damages are damages proximately caused by the breach and were foreseeable at the time the contract was signed. Compensatory damages are essentially damages awarded by the court to compensate a party for the damages or injuries suffered due to the breach or injurious act of the other.

As a way to mitigate risk in contracts, you can consider negotiating liquidated damages to mutually agree and negotiate potential harm caused by the breach of contract. Consequential damages go beyond direct damages and are intended to compensate for losses that are linked to the breach and were in the contemplation of the parties when the contract was signed. In construction contracts, a party may claim consequential damages for losses resulting from extra financing costs , additional overhead costs , lost bonding costs and more.

If an important construction project is delayed for whatever reason, many stakeholders will not be able to perform their work on time, their resources will not be utilized and they will absorb significant overhead expenses, payroll, potential insurance costs lost profits for being unable to move to the next project. If you are injured in an accident , your medical expenses, hospital expenses and all the immediate damages you suffer are direct damages.

However, if due to the injury, you are unable to work for three months, your loss of wages can be considered as consequential damages. The loss of wages is not directly linked to the accident itself but results from your special circumstances.

A real estate developer has a contract with a contractor to build a new office building by a certain date as it has already signed and committed to renting the premises to an important commercial tenant. The contractor fails to deliver the project on time and the work is not done properly. The real estate developer is unable to observe the terms of its contract with the important commercial tenant and is responsible for certain penalties. The direct damages are the costs associated with the delays in the project and the costs to have the work reperformed.

The consequential damages are loss of revenue or rental income due to the loss of the commercial tenant and the penalties levied on the developer resulting from its other contractual commitment with the commercial tenant. However, lost profits can be considered consequential damages in some situations, direct damages in some other situations and even speculative damages as well. The circumstances of the case will have an impact on how the court qualifies loss of profits. Consequential damages are recoverable provided that the damages flow naturally from the breach of contract or from special circumstances specifically communicated to the other contracting party at the moment the contract was signed making the special circumstance foreseeable.

If the consequential damages were not in the contemplation of both contracting parties at the moment the contract was signed, consequential damages are not recoverable. On the other hand, consequential damages are damages that, at the time of signing of the contract, the parties could foreseeably estimate may be suffered due to breach of contract. Outside the sale of goods, incidental damages are those costs and expenses incurred to avoid other direct damages while consequential damages are neither incidental nor direct but normally and naturally arise from the specific situation of a party.

Direct damages are damages resulting directly from a breach of the contract whereas consequential damages are damages that are not directly caused by the breach but normally and naturally arise from the circumstances of the non-breaching party.

This is done to minimize the risk of being held liable to pay consequential losses to the other party. In certain contracts, the consequential losses can be much higher than direct losses. For example, in an important construction contract, the consequential loss of a property owner or a client can include lost profits, financing costs, financial costs and more. The consequential loss can end up representing an amount much greater than the value of the construction contract itself and the possible direct damages resulting from a delayed project or work not performed in a workmanlike manner.

To be awarded consequential damages, the plaintiff must prove that the damages were reasonably foreseeable or within the contemplation of the parties when the contract was signed and it did what was possible to mitigate the loss or damages. The courts will expect the plaintiff to be specific as to the nature of the consequential loss so that it can be demonstrated that the damages were not just a proximate consequence of the breach of contract but really foreseeable damage when the parties entered into the contract.

To get an award for consequential damages, a party must demonstrate the quantum of the loss or damage with reasonable certainty. The amount cannot be based on hypothetical grounds but clear and relatively certain amounts resulting from the breach of contract. Just like special damages, under the Federal Rules of Civil Procedure, a party must specifically plead consequential damages.

The dealer then sells the car to someone else. If the dealer can show that he could have sold an identical car to the second purchaser regardless of what the first purchaser did, then the second sale stands on its own and cannot be used to offset the net profit recoverable from the first purchaser.

The factual inquiry in lost volume cases is whether the nonbreaching party would have engaged in the second transaction if the breach had never occurred. Incidental loss includes expenditures that the nonbreaching party incurs in attempting to minimize the loss that flows from the breach. To arrange for substitute goods or services, the nonbreaching party might have to pay a premium or special fees to locate another supplier or source of work. A consequential loss is addressed with consequential damages Those losses or injuries which are a result of a breach of contract but are not direct and immediate.

These are damages incurred by the nonbreaching party without action on his part because of the breach. Note, however, that one obvious, and often large, expenditure occasioned by a breach—namely, legal expenses in bringing a lawsuit to remedy the particular breach—is not an element of damages, unless the contract explicitly states that it is, and cannot be charged to the defendant. There is one situation, however, in which legal costs can be added to damages: when the breach causes the nonbreaching party to be involved in a lawsuit with someone else.

Consequential damages will not be allowed if those damages are not foreseeable. This issue is taken up in Section In the situation where there has been a breach but the nonbreaching party has really suffered no loss or cannot prove what his loss is, he is entitled to nominal damages Damages in name only, as where actual damages are nonexistent or cannot be proved.

Ricardo contracts to buy a new car from a dealer; the dealer breaches the contract. Ricardo finds and buys the same car from another dealer at the same price that the first one was to sell it for.

Ricardo has suffered nominal damages: five dollars, perhaps. Precisely because damages are sometimes difficult to assess, the parties themselves may specify how much should be paid in the event of a breach. Courts will enforce a liquidated damages Damages agreed to in the contract that are payable in case of breach.

If the liquidated sum is unreasonably large, the excess is termed a penalty and is said to be against public policy and unenforceable. Section Ingram , illustrates liquidated damages. Punitive damages Damages to punish the breaching party. They are proper in cases in which the defendant has acted willfully and maliciously and are thought to deter others from acting similarly. Since the purpose of contract law is compensation, not punishment, punitive damages have not traditionally been awarded, with one exception—when the breach of contract is also a tort for which punitive damages may be recovered.

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