Consequential Damages and Exclusion Clauses

Abstract

Contracts often include language excluding compensation for consequential damages. However, the boundary between consequential and direct damages is a blurry one. Courts have used concepts like foreseeability, natural result of the breach, and collateral business in their attempts to define the boundary. Those categories, I argue, are not particularly helpful. I consider three classes of cases: wrongful termination, delay, and breach of warranty. This paper argues that lost profits, when referring to the change in value of the contract after a wrongful termination would be direct damages; the hard case involves terminated dealers who had been paid indirectly for retailing services by the difference between the wholesale and retail price. Claims arising from delay would almost always be characterized as consequential damages. If a seller warranted a machine would produce at a level of 100, but it only produced at 80, the seller would be liable for the difference — the consequential damage exclusion would not apply; however, some claims for breach of warranty would be for consequential damages.