Teaching Assistants: Victor Goldberg on Consequential Damages in the U.S.

This is the eleventh in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the tenth chapter of RLCD, in which Professor Goldberg addresses consequential damages and exclusion clauses under U.S. law.

My students always struggle to understand the difference between direct and consequential damages, especially with respect to lost profits.  I always confidently tell them that direct damages arise as the immediate result of the breach, and the connection to the lost profits as consequential damages is more attenuated, for example, arising from the non-breaching party's inability to run its business due to the breach, as in Hadley v. Baxendale), or liability for its own downstream breach caused by the original breach.  The casebook I used for Sales last year even had a great series of hypos in which it asked students to distinguish direct, incidental and consequential damages.  How neat!

But the more my students pushed me that more I had that uncomfortable "I know it when I see it" feeling, and Professor Goldberg's chapters on consequential damages illustrate why.  The distinction is harder to make the more you look at it.

Professor Goldberg tries to provide some clarity to this area of the law.  Right off the bat, he would eliminate two categories of damages.  As we already noted in an earlier post, he would not allow lost volume sellers to recover.  In RLCD's Chapter 12, he rejects lost profits in the new business context (RLCD, 173).  In the American context, Professor Goldberg discusses three categories of cases.  

In cases in which plaintiffs seek lost profits in connection with contract terminations, Professor Goldberg argues that the losses should be treated as direct damages (RLCD, 175-80).  That holds true whether the claim is for goods not delivered or for anticipatory repudiation of a contract to deliver goods in the future.  Professor Goldberg next looks at indirect compensation in the context of distribution agreements.  If retailers were paid flat fees for their services, then their harm from a breach would be easy to calculate.  Their expectation would be the flat fee.  But they usually get paid indirectly, through the difference between the wholesale and the retail price. There is no reason to think that the way payments are structured make the damages a retailer suffers from breach any less direct (RLCD, 180-85).   

Professor Goldberg then covers cases, like Hadley, in which the harm is caused by delay.  While Hadley clearly involved consequential damages, sometimes delay can cause direct damages, but courts confuse the analysis.  They treat consequential damages that would be compensable under the Hadley test as direct and award them, even when the parties have agreed to an exclusion of consequential damages (RLCD, 185-89).  Breach of warranty cases pose their own unique challenges in terms of valuing the harm to the non-breaching party, but the direct harm is best measured as either the costs of providing what had been warranted or  the value of what had been warranted (RLCD, 190-94).  Professor Goldberg does not address the distinction between incidental and consequential damages in this chapter, and in some of the cases he discusses, that distinction might matter.

Courts struggle when the parties include lost profits in their lists of excluded categories of damages.  What do the parties thereby mean?  Lost profits can be "the purest version of direct damages, the contract-market differential" (RLCD, 195).  Are the parties incorrectly assuming that lost profits are always consequential damages or did they really intend to exclude almost all damages?  The outcomes turn, appropriately, on the specificity of the exclusion, but courts are reluctant to enforce a limitation on lost profits as direct damages (RLCD, 195-97).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction
Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset
Teaching Assistants: Victor Goldberg on The Golden Victory
Teaching Assistants: Victor Goldberg on Lost (Volume) in America
Teaching Assistants: Victor Goldberg on Lost Volume in the UK
Teaching Assistants: Victor Goldberg on Mitigation
Teaching Assistants: Victor Goldberg on the Middleman's Damages
Teaching Assistants: Victor Goldberg on Sub-Sales in the UK
Teaching Assistants: Victor Goldberg on Jacob and Youngs v. Kent
Teaching Assistants: Victor Goldberg on Victoria Laundry