Compensatory and Consequential Damages

Compensatory and Consequential Damages

Compensatory Damages ……..Direct damages. Difference between the

value of what the breaching party was supposed to do under the contract and the value of what was actually done by the breaching party.

Consequential Damages……..Special damages.  Foreseeable at the time the

contract was formed.  They were within the reasonable contemplation of the parties.

Scenario One:        Company A (“Seller”) manufacturers a popular electronics device.  Company B (“Buyer”) orders 500,000 units @$100/unit. Delivery date of April 1, 2016, “time is of the essence.”

        Seller fails to deliver by April 1 and Buyer purchases 500,000 similar units from another manufacturer @$125/unit.

        Compensatory damages are (i) the extra cost ($25.00 per unit) times (ii) the number of units purchased from the other manufacturer (500,000 units) for a total loss of $12,500,000 in compensatory damages.

 Scenario Two:        Company A (“Seller”) manufacturers a popular electronics device.  Company B (“Buyer”) orders 500,000 units @$100/unit. Delivery date of April 1, 2016, time of the essence and also tells Seller, at the time the contract is formed, that Buyer will be immediately reselling those units to Company C @$200/unit, so it is critical Buyer takes delivery of the units on April 1 for redelivery to Company C on April 5, 2016 (or Buyer loses its deal with Company C).

        Seller fails to deliver by April 1 and Buyer is unable to quickly purchase 500,000 similar units from another manufacturer in order to make the April 5 resale deadline.

        Consequential damages are calculated as (i) the difference between the price Buyer would have gotten from Company C ($200/unit) over the cost of what Buyer would have paid Seller ($100/unit)[or a profit of $100/unit] times (ii) the number of units Buyer would have sold to Company C (500,000 units) for a total loss of $50,000,000 in consequential damages.

1.        How should Seller protect itself in contract negotiations with Buyer?

a.        Make it clear, in writing, that all consequential damages are waived;

b.        Refuse to provide for “time is of the essence:”

c.        Consider liquidated damage clause

2.        How should Buyer protect itself in those same contract negotiations with Seller?

        a.        Make it clear, in writing, the upside profits on the

reselling and the critical nature of the April 1 delivery and April 5 redelivery dates.