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Consequential Damages

Consequential damages are a double-edged sword. An aggrieved party certainly wants the ability to recover all damages resulting from a breach. At the same time, consequential damages create significant downside risk and sometimes metastasize disputes. Parties should exercise care when deciding whether to permit or exclude this damage category. 

What are Consequential Damages?

Consequential damages are "losses that do not flow directly and immediately from an injurious act but that result indirectly from that act." Consequential damages are also known as "special damages." Examples of consequential damages include lost profits, lost savings, and loss of use. These damages are beyond direct damages, which flow directly from the breach. 

For example, consider a contract for the construction of a big box store. If the general contractor fails to deliver the project on time, the store might incur consequential damages in the form of the profits it could not generate due to the delay. Conversely, if the store wrongfully terminates the contract, the general contractor might incur consequential damages in the form of lost profits it expected to earn on the remainder of the project.

In order to recover consequential damages, the damages must be foreseeable, or within the contemplation of the parties at the time they entered into the contract. Using that same example, the general contractor's lost profits were certainly foreseeable. However, if the general contractor had planned to invest those profits in bitcoin and missed out on a huge investment windfall as a result of the wrongful termination, those losses would not be foreseeable or recoverable.

Excluding Consequential Damages.

Many construction contracts exclude consequential damages. A standard provision reads something like this (usually in capital letters): "In no event will either party be liable to the other for procedural costs, loss of profits, loss of use, or for any other incidental, consequential, indirect, or special damages." These limitation of liability provisions are fully enforceable. The theory is that sophisticated commercial parties should be allowed to negotiate their respective risk. So the question is, should it stay or should it go?

The answer largely depends on a party's confidence in their ability to comply with the contractual requirements. Consequential damages can be substantial. Excluding them limits both the ability to recover and the amount of liability. Many parties are willing to make that trade to minimize downside risk. Others who are confident in their performance and believe they will be the claimant in any dispute insist on striking the exclusion. To each their own. 

Trying to Get Around the Exclusion: The Economic Loss Rule. 

Even where there is a clear exclusion in the contract, claimants sometimes to try get around the exclusion by asserting fraud and negligence claims. These are tort claims, which are not necessarily limited by contractual terms. But there is a legal principle that sometimes prevents this called the economic loss rule. The economic loss rule bars a party that suffers only economic loss from bring a tort claim unless there is an independent duty. The scope of this rule in Colorado is in a state of flux and the analysis is complicated. If you are having trouble sleeping, you can find a comprehensive article on the status of the economic loss rule in Colorado here. Long story short, there are very limited circumstances where a party could still seek consequential damages despite a clear exclusion in the contract. This is worth exploring, as it could make all the difference in the world. 

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