Contract Law Made Simple Why Consequential Damages Are Dangerous and How to Avoid the Danger

For the sale of goods, the Uniform Commercial Code defines consequential damages as follows:
"Consequential damages resulting from the seller''s breach include

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty."

Keep in mind that paying consequential damages (for example, paying your losses for closing your factory for a month because the seller was late delivering critical machinery) might very well put the seller out of business. That''s why courts are very careful about awarding consequential damages because if they weren''t, people would be very hesitant to enter into contracts with each other because of the huge liability involved.

There are inherent limitations on consequential damages:

(i) The seller must have had reason to know of the "requirements and needs" ? for example, that you need a grinding machine by June 8th or you''ll have to close down your factory. He doesn''t have to actually know, but only have reason to know.

(ii) The seller must have had reason to know at the time of contracting ? so if you make a contract and later tell the seller "You gotta get me the grinding machine by June 8th or I''ll have to close down my factory", you won''t be entitled to consequential damages if he doesn''t (note that you may well be entitled to expectation damages if he breaches the contract, but they''re likely to be a lot less than consequential damages would be).

(iii) The loss must not have been reasonably avoidable ? if the seller told you he couldn''t get the grinding machine to you on time, and you could have bought another, somewhat more expensive one by June 8 but failed to do so, the seller won''t be responsible for your closure of your factory because you failed to mitigate your damages ? in other words, you didn''t do everything you could to minimize your losses. The seller may very well be responsible for the extra money you paid for the more expensive grinding machine.

A later article will discuss clause (b) of the Uniform Commercial Code section cited above.

As a practical matter, though, when writing a sales contract it is always a good idea for a seller to add a disclaimer (in all caps) stating that he is not responsible for any consequential damages.

Courts will honor these clauses in most cases.

DISCLAIMER: The foregoing is intended for reference only and not as legal advice.

Real Estate Law in Plain English explains real estate law without the legalese.