Introduction:
Winning a case requires two related tasks: proving the other side is at fault or breached the agreement, and proving what damages the wrongful action caused. Too many parties concentrate on the issue of liability rather than the equally vital issue of the amount of damages. It does little good to win and not receive the appropriate amount of money lost.
In a breach of contract action in California, absent contrary provisions in the contract, you normally receive damages that would compensate you for the losses you incurred and put you back in the position you would have been in if no breach had occurred.
In contract law, foreseeable damages are those that reasonably arose naturally from the breach or which the parties expected could occur if there were a contract breach. These damages are either the type that would naturally and ordinarily be expected to arise from a breach of any similar contract, or they arise from special circumstances applicable to the non-breaching party.
Among the diverse types of damages, distinguishing between actual and foreseeable damages is crucial for effectively determining the likely recovery. This article shall discuss the requirements of recovery of foreseeable damages in California contract actions.
The Basic Law:
Contractual damages refer to the monetary compensation awarded to a party for another party’s breach of contract. These damages are intended to restore the injured party to the position they would have occupied had the breach not occurred. The primary aim is to cover losses incurred from the breach, thereby upholding the integrity of the contractual agreement.
Actual damages, also known as compensatory damages, are a type of contractual damages aimed at compensating the injured party for the actual loss suffered due to the breach. These damages are calculated based on the direct financial impact of the breach, including both tangible and intangible losses. Actual damages are quantifiable and are directly linked to the specific breach at hand.
Foreseeable damages, on the other hand, encompass those losses that the breaching party could have reasonably anticipated at the time of contract formation. These damages are not necessarily directly tied to the breach itself but are understood to be a likely consequence of the breach occurring. The foreseeability criterion is crucial in determining the scope of damages that can be claimed.
To give an example: assume you are to deliver thirty pallets so my company can ship construction materials to a job site, which must be achieved within thirty days due to other materials being shipped by other trades. The plant for which the project is working must close, losing tens of thousands a day, while the project is finished. My profit for each pallet is only three hundred dollars, but if I am late, I face penalties of five thousand dollars per day due to the delay on the project. You are ten days late in delivering the materials I need to build the pallets. I am thus late and face fifty thousand dollars in late payments in addition to the lost profit per pallet. Do I get the full fifty thousand dollars in addition? The answer to that question would ride on whether the damages were reasonably foreseeable. That, in turn, would be determined by notice; by the contractual language of my purchase order; and the reasonableness of the damages.
Actual Damages in Breach of Contract
Actual damages provide a concrete basis for financial compensation. When a party breaches a contract, actual damages serve as a tangible measure of the loss suffered by the non-breaching party. The calculation of actual damages involves assessing the direct financial losses incurred by the injured party. This process requires an examination of the contract terms, the nature of the breach, and the resulting financial consequences.
In contract disputes, actual damages often come into play when there is a clear and direct link between the breach and the losses incurred. For example, in cases where a breach leads to a loss of profits, additional costs, or other measurable financial impacts, actual damages provide a mechanism for the injured party to recover these losses. This makes actual damages a fundamental component of contract law, upholding the principle that parties should be held accountable for the direct consequences of their actions.
Foreseeable Damages in Breach of Contract
These damages are related to the potential consequences that a reasonable party could predict at the time of contract formation, encompassing both direct and indirect losses that may arise from a breach. This foresight requirement is a key element in determining the scope of damages eligible for compensation.
The foreseeability concept is rooted in the landmark case Hadley v. Baxendale, which established the principle that damages should only be awarded for losses that the breaching party could have reasonably foreseen. This criterion ensures that parties are not held liable for consequences that were unforeseeable at the time of contracting, promoting fairness and predictability in contract law.
Foreseeable damages encompass a broader range of potential losses, including consequential damages that go beyond the immediate impact of the breach. These can include lost profits, reputational harm, and other indirect effects that the breaching party could have reasonably anticipated. The emphasis on foreseeability encourages parties to clearly communicate potential risks and consequences during contract negotiation, thereby mitigating the likelihood of unforeseen disputes. Placing such possible consequences in the contract itself is good drafting and eliminates later questions of what was foreseeable.
The Differences Between Actual and Foreseeable Damages
While both types of damages seek to provide financial redress, they differ in their scope and the criteria used to assess them.
Actual damages focus on the direct, quantifiable losses incurred as a result of a breach. These damages require a clear and direct connection between the breach and the financial impact, ensuring that the compensation awarded accurately reflects the true extent of the loss. The calculation of actual damages involves a detailed assessment of the breach’s financial consequences, making them a precise and reliable measure of loss.
In contrast, foreseeable damages consider the broader scope of potential losses that could be anticipated at the time of contract formation. These damages encompass both direct and indirect losses, including consequential damages that may arise from the breach. The foreseeability criterion requires an evaluation of what a reasonable party could have anticipated, emphasizing the importance of foresight and communication during contract negotiation.
Foreseeable damages are damages that both parties to the contract knew or should have been aware of at the time when the contract was made To be reasonably foreseeable, a type of loss or damage must be within the contemplation of the parties at the time when the contract was made or they knew or should have known that such damages were likely.
Practical Considerations:
Courts are expensive, and the more questions at issue, the longer the trial will take and the more it will cost. One reason many contracts seem verbose and complex to laypersons is that the experienced attorney knows that often redundant phrasing in a contract can eliminate later arguments as to what each party expected.
This is no more relevant than in wording the contract to directly address the issue of what damages are foreseeable. If breach of my contract is going to result in truly substantial damages not necessarily known to the other party, then it is vital to insert that fact in writing in the contract.
Certain set phrases are common in a contract. If timing could result in high damages, then a time is of the essence clause should be inserted. The clause simply states that timely performance is vital to the contract and, if possible, a description of the likely result of failure should be inserted. An example would be: “Time is of the essence in this agreement and the parties agree that failure to deliver the materials in good condition on or before X date will result in substantial damages being incurred by Party A due to contractual commitments Party A has to third parties hereunder.”
If the product being purchased is of key safety concern for the buyer, that can also be specified, and if the seller does not want to incur such potential liability, then the seller should carefully limit such liability in the agreement. (Note: this may conflict with local law that may impose such liability regardless of the contractual wording.) Thus, if I am purchasing safety gear for a boat and it will be taking passengers into dangerous waters, I want the purchase order to so note. And if I am the manufacturer and do not want that liability, I must insert clear language that the product is not to be utilized in such dangerous conditions.
Hashing out the actual potential liability during contract negotiations is key. To wait until a judge or jury must determine it is both expensive and risky. And if one cannot agree on the extent of potential liability during negotiations, then both parties should carefully consider if this arrangement is workable. It is worthwhile to create contractual commitments in writing that avoid later disputes over extent of liability.
Conclusion:
Careful wording can eliminate the issue as to what is a foreseeable damage, but no court will enforce truly unreasonable terms. It is essential for the parties to come to a meeting of the minds as to what is a foreseeable damage in the event of breach and both parties should be aware that if an insurance company is involved in the possible payout that they may have their own criteria which may seek to avoid the terms of the agreement.
For those parties entering a high-risk contract in which liability is massive, it is common for one of the parties to refuse to take that risk, given the cost-benefit involved. Typically, an engineering company working on a large construction project will limit total exposure to the amount paid to the engineering company in the contract, regardless of the massive damages that failure to perform correctly could cause, such as the collapse of the building. As rationale, the engineering company would explain that no amount of fee could cover such potential liability. Conversely, the contractor or owner may hesitate to hire the company that restricts their own liability in such a manner.
However, the key for the parties is that they address the issue before an event forces both into a court of law. What appears to be common-sense foreseeability to one party, or one judge, may not be to the other party. As one client put it, “If we can’t agree on who pays what if things go wrong, I want to know it before I sign the dotted line.” Wise advice.