Contract Remedies - Consequential Damages
Hello Entrepreneurs!The protagonist in my previous post included a liquidated damages provision in its business contract, but also included a cumulative remedies provision in the boilerplate section of the contract. As a result when it breached the contract, the other party claimed a litany of other remedies, including consequential damages even after it had been compensated by the liquidated damages. Which party prevails of course depends on the detailed facts of the case, governing law, jurisdiction, etc.
In contract law, the general goal of money damages is to compensate an aggrieved contract party for damages suffered as a result of a breach. Money damages compensate the non-breaching party for direct damages as well as indirect damages suffered as a result of the breach. A basic way to explain the calculation of direct damages is you take the value of any partial performance (if any) received and subtract it from the market or contract value of the performance promised. The resulting number is the direct damage suffered by the non-breaching party as a result of the contract breach. For example, if you are a manufacturer and your parts supplier fails to deliver the parts you require to make your products, direct damages will compensate you for the incremental cost of going out there and purchasing the parts from a substitute supplier. You have the duty to mitigate your damages, so you'll have to shop around, but if after reasonable research you find that it costs more to purchase replacement parts, you can claim the difference in the breach of contract claim.
Consequential Damages are a main subcategory of indirect damages. These include the recovery of lost revenues or profits suffered as a result of the breach. If your vendor ships you a defective component that causes you to lose the sale to your customer, the profit you would have made had you been able to ship compliant goods constitutes consequential damages. Other types of consequential damages frequently claimed include loss of production, opportunity costs, loss of anticipated cost savings, lost business and lost good will. As you might imagine, this opens up quite a can of worms, so most obligors will try to limit them by contract. Here is some sample contract language.
"NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES SUFFERED BY SUCH OTHER PARTY, INCLUDING, BUT NOT LIMITED TO, LOST REVENUES OR LOST PROFITS, WHETHER ARISING IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY, BREACH OF STATUTORY DUTY OR OTHERWISE, AND REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES."
Had the protagonist included such language in its business contract, it might have staved off at least the claim for consequential damages.