January 13, 2014
What's the damage?
Procurement Perspectives | Stephen Bauld
Often a supply agreement - particularly any supply agreement drafted by a supplier - will contain a provision along the following lines: The supplier's liability under this contract in respect of any breach shall be limited to the damages directly attributable to that breach.
The supplier will not be responsible for punitive or aggravated damages, nor for any indirect, incidental or consequential damages, nor for any special damages or loss arising in connection with the customer’s use or inability to use this product.
This exclusion shall apply irrespective of whether an action is brought for breach of contract, in tort, or on any other basis.
This provision shall apply irrespective of whether that breach is determined to have been “fundamental” in nature.
Sometimes provisions of this kind are made more equitable, by extending such limited liability to both parties. Provisions of this sort (known as limitation of liability or “LOL” clauses) exclude liability for those damages or loses which arise, not from the immediate act of the supplier, but in consequence of that act.
The meaning of a “fundamental” breach has already been considered.
You would have to consider the meaning of consequential and special damages, in order to determine the type of damages that are excluded from recovery under a provision of the foregoing kind.
To explain provisions of this kind, you would begin by considering the kinds of damages that may be recovered in an action for breach of contract.
The basic rules regarding the recovery of damages in such cases were set down in the direction of Alderson B, v. Baxendale, and it is that case that the basic distinction between “special” and other damages is drawn for purposes of the law of contract. In this case Alderson B. stated:
“Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may be reasonably be supported to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.
“If special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate would be the amount of injury which would ordinarily flow from breach of contract under special circumstances so known and communicated.
“But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract”.
The term “consequential damages” describes damages that flow indirectly from a breach of contract.
They are incidental to the main damages sustained.
The term is ordinarily understood as referring to those damages resulting from the general or particular needs of a party which, at the time of contracting, the other party had reason to know would probably result from the breach and personal injuries caused by the breach.
By way of contrast, incidental damages include expenses relating to defective goods, such as storage, shipment, inspection, etc., and cost to mitigate damages.
Consequential damages also result from breach of the underlying contract, but they depend upon other circumstances the parties knew or should have known when they entered into the contract.
Stephen Bauld is Canada's leading expert on government procurement. He can be reached at firstname.lastname@example.org.
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