Why Consequential Damages Matter – And Could be Costly

Imagine that your company contracts with an IT company, to service and maintain your software. But they don’t do the job, or don’t do what they were supposed to do under the contract. As a result, your computer systems go down, you have to hire another company to do the job and you lose a bunch of sales while this whole fiasco is going on.

You lose so many sales, that your business cannot pay its rent that month, and the company eventually goes under.

If you sue the IT company for breach of contract, what are your damages?

Is it just the cost to get your computers or IT systems, serviced by another company or the money you paid to the non performing company?

Or is it the loss of the business, and all the sales, that you couldn’t complete while your computers are gone?

Or is it more than that-is the IT company fully responsible for the entire loss of your business?

Causation Questions

This is the fundamental question in contracts—to what extent is a breaching party liable for the damages that the breach causes? Because many forms of damages—in our example above, the loss of sales, or even the complete loss of the business—aren’t actually in the contract or contemplated by the parties, although they are a direct consequence of the breach of the contract.

Consequential Damages

These are called consequential damages. Consequential damages are damages that are caused by a party’s breach of a contract, but those damages are outside of the four corners of the contract, or else, aren’t damages that parties to a contract could reasonably expect to owe in the event of a breach.

Good or Bad?

On one hand, consequential damages are good—they allow a party in a breach of contract to get all of its damages, and allow the nonbreaching party to be made fully whole from the damages caused by a breach.

But many are critical of consequential damages, because they could potentially be limitless—anything and everything caused by a breach could be an element of damages, and a party that enters into a contract may have no way of knowing what its potential exposure may be in the event of a breach of contract.

There are also causation issues; in many cases, a business’ losses are caused by multiple factors—not just the breach of a single contract.

That’s why there is no one answer to why consequential damages are good or bad; much depends on who you are in a contract, and whether you want to limit both liability, as well as potentially limit what you could recover from the other side.

If you are seeking to limit damages, and avoid consequential damages, there should be something in your contract that says that these kinds of damages cannot be recovered.

Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today for help with your breach of contract case.

Sources:

learn.aiacontracts.com/articles/180701-consequential-damages-what-they-are-and-how-architects-can-mitigate-them/

privateequity.weil.com/features/do-you-really-know-what-consequential-damages-means/