Consequential Damages
What does "Consequential Damages" mean in law?
Consequential damages (also called special or indirect damages) compensate for losses that do not flow directly from the breach itself but rather from the special circumstances of the injured party. Under the rule established in Hadley v. Baxendale, consequential damages are recoverable only if the breaching party knew or had reason to know of the special circumstances giving rise to the loss at the time of contracting. This foreseeability limitation serves as a critical check on liability, preventing parties from being exposed to unlimited and unknowable risk. The injured party must also prove consequential damages with reasonable certainty and must take reasonable steps to mitigate them.
Definition
Consequential damages (also called special or indirect damages) compensate for losses that do not flow directly from the breach itself but rather from the special circumstances of the injured party. Under the rule established in Hadley v. Baxendale, consequential damages are recoverable only if the breaching party knew or had reason to know of the special circumstances giving rise to the loss at the time of contracting. This foreseeability limitation serves as a critical check on liability, preventing parties from being exposed to unlimited and unknowable risk. The injured party must also prove consequential damages with reasonable certainty and must take reasonable steps to mitigate them.
Example
When a supplier failed to deliver a critical machine part on time, the factory recovered consequential damages for the profits it lost during the two-week production shutdown, because the supplier knew the factory depended on timely delivery.