Consequential Damages and Exclusion Clauses

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“‘When I  use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean—neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master—that’s all.’”

Humpty would, no doubt, have appreciated the definitional flexibility courts have given to “general damages.” General damages could be a component of consequential damages, and therefore excluded under a clause limiting recovery of consequential damages. Or they could be direct damages and recoverable. The criterion in either case would be the naturalness or foreseeability of the result. The courts, like Humpty, have been free to choose.

In this article, I argue that concepts like foreseeability, naturalness, and collateral business have not been useful in determining whether a particular claim can be excluded under a consequential damages limitation. The outer edges of consequential damages might be blurry, but I believe that I have somewhat sharpened the definition. I approach the problem by analyzing three different categories of claims. First, if a claim arises from wrongful termination, the loss of value of the claimant’s contract—the lost profits—would be direct damages. Properly calculated, the lost profits would reflect the claimant’s reasonable mitigation; in the simplest version they are just the contract-market differential. The more controversial version of this argument concerns contracts in which the claimant is not directly paid for its services—for example, distribution contracts in which the distributor’s compensation is a function of the sales. 

Second, I argue that in most instances, losses arising from a delay (like in Hadley v. Baxendale) should be treated as consequential damages. Courts have generally been consistent about this; I discuss two instances in which courts concluded otherwise. In the first, I suggest that the costs should have been treated as consequential. In the second, I reinterpret the contract as the manufacturer buying distribution services; the court, I suggest, got the right result but for the wrong reason. Finally, if the complaint concerns the breach of a warranty, the direct damages would not be future lost profits; rather, they would be the costs of providing the claimant with what it had been promised. The damages could entail the costs of achieving what had been warranted, as in AEP v. Westinghouse.

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Cite as

Victor P. Goldberg, Consequential Damages and Exclusion Clauses, 3 Criterion J. on Innovation 27 (2018).