Add to Materials for ALI-ABA Web Cast “Real World Document Drafting: Default, Remedies, and Liability Limitation Provisions” originally presented on April 22, 2008

10.0 Consequential or Special Damages
10.1 Background
In the pleading context, consequential damages are often referred to as “special damages.” Under the rule of Hadley v. Baxendale, a party in breach of contract is liable only for foreseeable damages. These would include damages that may be expected to ordinarily result from a breach and those of which the breaching party has been specifically advised. Receipt of such notice permits the party that may be held liable to take special precautions to either avoid a breach or mitigate such damages in the event of a breach. Judge Posner has observed that contract law takes two approaches to consequential damages in cases in which the contract itself fails to make provision concerning them. One which Judge Posner concludes has fallen into disuse is that consequential damages can be awarded only if the promisor has assumed the risk of the consequences in question—has, in other words, agreed to bear them, whether expressly or as a matter of “what the parties probably would have said if they had spoken about the matter.” The second requires merely that the consequential damages be foreseeable to be awarded by a court.
10.2 Drafting Approaches
Consequential damages may be disclaimed or limited subject to the possibility that such limitation may be held by a court to be unconscionable or otherwise to fail in its essential purpose. If recovering consequential damages in the event of a breach is important to your client, to be safe and to seek to preclude a court from applying a modified Globe Refining approach (if your negotiation position permits) you may want to expressly in your agreement indicate that it is the intention of the parties that in the event of a default by the other party your client will be entitled to consequential damages without limit. You may also want to make it clear that the parties intend that this is so without reference to any perceived disproportion between price charged or consideration incident to the transaction and the possible extent of the losses that your client may suffer in the event of a breach. Proposing this approach may result in your ending up with a contract that provides a limit on consequential damages. Even if so. a sufficiently high monitory limit may be preferable to leaving such issue to a court. Another approach to establishing foreseeability is to make reference to possible consequential damage that your client might incur in some detail in the recitals to the contract.