Contracts I - General, Special, Incidental, and Consequential Damages

Question 1

How are general, special, consequential and incidental damages defined according to Restatements & Hadley v. Baxendale?

Answer 1

Hadley defined general and special damages.

General damages = Direct damages = Usual damages = Natural Damages
Special damages = Indirect damages = Unusual damages = Unnatural Damages = Consequential damages

Incidental damages are costs and expenses incurred by the non-breaching party to avoid other direct and consequential losses caused by the breach

Question 2

Under the UCC, how are consequential damages defined?

Answer 2

The UCC defines consequential damages as “any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know.” UCC § 2-715(2)(a) (emphasis supplied). T

Thus, while emphasizing the Hadley requirement of foreseeability (“reason to know”), it recognizes that “consequential” may refer to either “general” or “particuar” (special) damages.

“Consequential” damages are often equated with lost profits which are assumed to be “special” damages. It is, however, clear that lost profits are recoverable as general damages (which a reasonable person is presumed to know without any special notice) where they flow directly and immediately from the breach of contract.

Question 3

According to the Restatements, how are expectation damages in general measured?

Answer 3

§ 347. Measure of Damages in General

Subject to [limitations noted below] , the injured party has a right to damages based on his expectation interest as measured by

(a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus

(b) any other loss, including incidental or consequential loss, caused by the breach, less

(c) any cost or other loss that he has avoided by not having to perform.

Question 4

Under the UCC, what are incidental damages?

Answer 4

Under the UCC, incidental damages are incidental expenses incurred by the non-breaching party in order to avoid other direct and consequential losses of breach.

For example, assume that a seller of an airplane falsely reports the mechanical repair and flight history of the airplane in its logbook, which the buyer relies on when purchasing the airplane. Months after the purchase, the airplane’s engine malfunctions during flight. The buyer in this case will be entitled to incidental expenses incurred in transporting the airplane to a repair shop, as well as repair costs.