What Are Consequential Damages?
In a breach of contract lawsuit, the court typically awards direct compensatory damages to fix the immediate harm. However, a broken contract often causes a ripple effect of indirect financial losses. These indirect losses are known as consequential damages (or special damages).
For example, imagine a contractor is hired to build a roof on a new hotel. The contractor does a terrible job, and the roof collapses.
- Direct Damages: The cost to hire a new contractor to rebuild the roof ($100,000).
- Consequential Damages: Because the roof collapsed, the hotel's grand opening was delayed by three months. The hotel owner sues the contractor for the three months of lost booking revenue and hotel profits ($500,000) caused by the delay.
The Foreseeability Test
Florida courts are highly cautious when awarding consequential damages because they can bankrupt a defendant. To successfully win consequential damages, the plaintiff must prove the "Foreseeability Test" (established by the famous 1854 case Hadley v. Baxendale).
The plaintiff must prove that at the exact moment the contract was signed, the defendant knew or should have reasonably foreseen that breaching the contract would cause those specific indirect financial losses. If the lost profits were completely unpredictable, the judge will not award them.
Waivers in Real Estate Contracts
Because consequential damages are so massive and unpredictable, almost every sophisticated commercial lease and construction contract contains a Waiver of Consequential Damages clause. By signing this, both the landlord and the tenant (or the owner and the builder) mutually agree that if a lawsuit occurs, neither side is allowed to sue the other for lost profits, loss of use, or business interruptions. They can only sue for direct, hard costs.
Related Terms
- Compensatory Damages — The overarching category that includes direct and consequential losses
- Contract — The agreement that may explicitly waive these damages
- Breach of Contract — The cause of action triggering the damages claim
Barnes Walker Commercial Litigation
Barnes Walker's trial attorneys vigorously litigate complex commercial contract disputes, deploying extensive financial modeling to prove (or defend against) massive consequential damage claims related to lost business profits. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC