In contracts for the sale of goods, sellers rely on waivers of non-direct or special damages to limit their risk.
Special damages include (among other types of damages) incidental and consequential damages, terms which are often used interchangeably. Incidental and consequential damages, however, have distinct legal meanings under the Uniform Commercial Code (“UCC”) and need to be separately disclaimed by a disclaimer of damages.[1]
What are Incidental Damages
Under the UCC, incidental damages are incidental expenses reasonably incurred in inspection, receipt, transportation, care and custody of goods rightfully rejected as well as cover and replacement. Incidental damages are incidental expenses incurred by the non-breaching party in order to avoid other direct and consequential losses of breach.
Incidental Damages Example
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.
What are Consequential Damages
Under the UCC, consequential damages are damages resulting from the seller’s breach including (a) any loss resulting from requirements and needs of the buyer of which the seller had reason to know at the time of contracting and which could not reasonably be prevented by cover or otherwise; and (b) injury to persons or property proximately resulting from any breach of warranty. Consequential damages therefore require certainty as to the amount of loss, foreseeability of loss incurred as a result of breach at the time of contracting, and an inability to mitigate loss by cover or otherwise. Commonly, consequential damages include property damage, personal injury, attorneys’ fee, lost profits, loss of use, liability of buyer to customers, loss of goodwill, interest on money withheld by customers, and damages related to third party claims.
Example of Consequential Damages
Utilizing the airplane example, if the seller knew at the time of contract that the buyer would be using the airplane for commercial purposes, then it is foreseeable at the time of contracting that the buyer would incur lost profits in the form of lost airline ticket sales and loss of use costs while the airplane is in repair. Additionally, the buyer may be impacted by a loss of goodwill due to disgruntled customers.
It is important to note that lost profits can be considered direct, incidental, or speculative damages in certain circumstances. Disclaimers of consequential damages accordingly should define lost profits as types of consequential damages if the intent is to disclaim them.
Finally, disclaimers of damages sometimes disclaim indirect damages as well as incidental and consequential damages. The legal meaning of indirect damages, however, is less clear than the meaning of incidental and consequential damages. So, disclaimers of indirect damages should not be viewed as a substitute for explicit disclaimers of incidental and consequential damages, which always should be expressly disclaimed.
[1] Outside of the context of contracts for the sale of good, the meanings of incidental and consequential damages are somewhat different but they still should be separately disclaimed. In such contexts, (a) incidental damages are costs and expenses incurred by the non-breaching party to avoid other direct and consequential losses caused by the breach, and (b) consequential damages are damages that (i) are neither incidental nor direct damages and (i) normally and necessarily arise from the specific nature of either the particular breach or the buyer’s circumstances.
This is written by Matthew R. D’Ascenzo & Allyson Matvey.
