A contract is an agreement which creates obligations, and are enforceable in a court of law. A contract can be used to exchange products or services, and depending on the terms as well as the context, a contract can be either simple or complex.

If you are entering into a contract involving considerable substantial sums of money, it may be in your best interest to retain the services of a business attorney in order to protect your rights and prevent any disputes associated with the contract.

When a dispute arises between parties over an alleged contract, the court must first establish that a contract even exists in a legal context. There are four essential elements that make up a valid contract, which the complaining party must prove:

  1. Offer: One or both of the parties must have made a promise to do, or refrain from doing some specified action in the future;
  2. Consideration: Consideration represents that something of value was exchanged, in exchange for something else of value. An example of this would be money for services. Consideration can also be thought of as the value that induces the party to enter into the contract;
  3. Acceptance: Unambiguous acceptance of the terms of the contract can be shown through words, deeds, or performance. If the contract specifies the exact manner of acceptance, acceptance must generally mirror the terms of the offer; and
  4. Intent: The most crucial element of a contract is that the parties contracting had the intent to contract. The parties must intend to create legal relations, and must also understand at the time of contracting that the agreement is enforceable in a court of law.

There are two different governing laws that determine how the court will govern the interpretation of the contract, as well as enforcement of the terms of the contract. The Uniform Commercial Code, or “UCC,” controls contracts that are primarily for the sale of goods. The UCC is a standardized collection of guidelines governing the law of commercial transactions. As such, most states have adopted the UCC in whole or in part. Common law is what governs the majority of contracts. The state’s common law is an evolving set of laws, mostly created by judges, which result from court decisions throughout the years.

If the contract is for the sale of goods, and occurs between one or two merchants, the UCC will govern the transaction. The UCC provides that acceptance does not have to mirror the terms of the offer for a valid contract to be found, unless:

  • The terms of acceptance significantly alter the material terms of the original contract; or
  • The offeror objects within a reasonable amount of time.

Are There Different Types Of Contracts?

There are a variety of different types of contracts, including:

  • Bilateral Contract: A bilateral contract is one in which there is a mutual exchange of promises, and is commonly regarded as the most common of contracts. An example of a bilateral contract would be performing the act of mowing a person’s lawn in exchange for money for performing the act;
  • Unilateral Contracts: A unilateral contract is one in which the offer requests performance, instead of an exchange of promises. A unilateral contract is generally only complete and formed when performance is complete. An example of a unilateral contract would be a reward poster, as the contract is only formed when the item requested on the reward poster is returned. Once the item is returned, the money will then be provided for performance;
  • Express Contracts: An express contract is a contract that is formed by explicit language. Additionally, an express contract will recite the agreement as well as its terms in entirety and specificity; and
  • Implied Contract: An implied contract is a contract that is formed by behavior of the parties. Where there may not be a clear contract, one will be found where the behavior shows a clear intent by the contracting parties. An example of an implied contract would be when a veterinarian examines and treats an animal in their office. It is implied that the veterinarian will do their best, and that the client will pay the fee that is charged for the treatment.

What Are Consequential Damages?

Consequential damages, commonly referred to as “special damages” or “expectation damages,” are a specific type of damages that arise as a result of a breach by one party.

Consequential damages are damages that:

  1. Are beyond direct damages suffered by a non-breaching party;
  2. That a reasonable, and prudent person would expect as a result of a breach; and
  3. At the time of the contract, the breaching party should have known or anticipated if a breach occurred.

These are damages that a breaching party should have expected when they breached the contract, and would not be a surprise to them that it happened once they breached the contract.

While direct damages generally focus on the costs associated directly with the contract itself, consequential damages focus on the costs outside of the contract. Examples generally include:

  • Lost profits;
  • Lost products;
  • Lost revenues;
  • Lost time;
  • Damage to reputation; and
  • Reduction in value.

Clauses forbidding consequential damages are considerably commonplace, so much so that they may be considered “boilerplate.” These clauses generally state that either one of the parties will not be liable for the consequential damages resulting in the event of a breach.

A consequential loss is the amount of loss which occurred as a result of a breach that was indirect to the actual loss, which could be as a result of being unable to use business property or equipment which then resulted in loss of business. As such, the loss of business or profit would be considered a consequential loss.

Are Consequential Damages Clauses Enforceable?

Whether consequential damages clauses may be enforceable largely depends on the language of the contract. However, regardless of what the contract or the clause itself says, these clauses are generally considered to be unenforceable because parties do not write them with an acceptable amount of care.

An example of this would be how parties fail to define consequential damages. Simply stating that a party is not liable for ‘consequential damages’ or ‘losses’ does not necessarily indicate that either party agreed to forfeiting future, potential losses.

Additionally, lost profits or revenues may actually be general damages. Courts have recently held that waivers of lost profits or revenues, and potentially other “consequential” damages, are actually considered to be general damages. As such, the waiver is unenforceable, because the parties did not actually agree to waive those general, direct damages.

Some examples of the considerations that courts examine when determining the validity of these clauses include:

  • Sophistication of The Parties: The more sophisticated the parties, the less likely a court may be to permit them to agree to limit their damages. However, if one of the parties is considerably more sophisticated than the other, the court may be more likely to determine this type of clause as unenforceable;
  • Context of the Agreement: The less specific that a clause is, the more likely it is considered to be boilerplate. As such, it is more likely that a court will consider it to be unenforceable. This is because it is likely not a bargain for limitation of damages, but simply an afterthought, which may not be fair to hold a party liable for the good fortunes of another; and
  • Foreseeability: This refers to how foreseeable it is that a breach will result in damages, which will help a judge determine whether the damages are consequential or direct, probable losses.

Do I Need A Lawyer To Obtain Consequential Damages?

If you are involved in a contract dispute, you should consult with a contract attorney. An experienced attorney can help you understand your legal rights and options according to your state’s specific laws, and they will also be able to represent you in court, as needed. Your attorney can work towards a suitable damages award to remedy your contract dispute.