Constantine is a little Michigan town located near the Michigan and Indiana border. Not much is there: the St. Joseph river, a dam, and the Dam Site Bait Shop, Inc. I figure that the founder of the Dam Site Bait Shop was a lumberman who retired to fish on the river and spent his last penny to launch a business with a questionable return on investment. His wife probably said, "We're goin to go bankrupt over that forlorn Bait Shop of yours! Its a damn sight!" And his reply was, "Honeylumps, it's not the damn sight Bait Shop, it's the Dam Site Bait Shop!"
If dam site bait shops can be confusing, so can dam-ages for breach of contract. In the context of a commercial agreement, damages come in 2 categories: direct and indirect. Indirect damages have further variations called incidental or consequential, but no need to ponder that here. But what are direct vs. indirect damages? The basic distinction isn't complicated.
Let's say that you have 2005 Chili Red Mini-Cooper "S" automobile with 90,000 miles on it.
I want to buy it, but I'm worried about the brakes. "When did you have the brakes replaced last?" I ask. You reply, "These brakes are fine, the brakes are great, and they will stop this car on a dime." I ask you to represent that in a signed and dated purchase agreement for the car. I pay you the negotiated amount for the Mini-Cooper, and then drive it home. On the way, the brakes fail, causing me to hit another car, dents to both. The police report indicates that the brakes should have been replaced a long time ago. I go to a local Mini dealership and pay $900 for new brakes and $2,000 for body work. Then, I think about suing you for breach of our sales contract. How does the law compensate me for my loss? What damages might I recover?
I can recover the amount of $900 for the new brakes and the $2,000 for body repairs, assuming that the Mini dealership's charge for parts and labor was reasonable. I can also recover the amount I spent to fix the damage to the other car caused by the worn-out brakes. But I can also get indirect damages, i.e., the value of my time to take the car in to the Mini dealership to replace the brakes, the price for a rental car that I had to pay while the car was being fixed, and the gas I spent for the rental car; in fact, I decide now would be a good time to switch from Chili Red to British Racing Green, a premium metallic paint color costing me an extra $1,000.
Since indirect damages are inherently uncertain, in contracts between businesses you will usually find a disclaimer provision whereby the parties both agree that they can't recover these "downstream" damages from each other. Courts have no trouble with this concept as long as the damages aren't claimed in connection with personal injury or death, or gross negligence or willful misconduct. Remember that commercial law is focused on the free flow of goods, and if the parties can determine in advance what their liability exposure is if the deal goes south, that is a good thing.
But what about a court awarding me the $1,000 to have the car repainted with the all-time best color for any car in the modern or post-modern world, British Racing Green? No such luck, the law says that I have no right to unjustly enrich myself at your expense. To that I truly say, "DAMN!"
Thanks for blogging with me thus far.
2 comments:
Hmm. I'd think your $2,000 in body work is consequential damages. The classic ways of measuring direct damages are either the lost benefit of the bargain or the cost of cure. Under the lost benefit of the bargain, you would receive the difference in market value of the car as promised less the market value of the car as received. Under the cost of cure, you would receive the cost to remedy cause the car to be in the promised condition. The wreck was a downstream consequence. (In fact, the defendant may have an argument that you failed to timely mitigate your consequential losses if you had reason to believe the brakes were bad -- something that is very rare with direct contract damages.)
I don't really see how you can distinguish the cost of the body work as a consequence from the classic consequential damage of lost profits. Suppose that the consequence of the bad brakes was that yu had to pull over and get a cab, so missed a meeting, so lost a profitable new client. I think that they are equally consequential damages.
Hi Chris: It appears that I was more interested research Minis than refreshing my recollection on contract damages, so your assessment is probably correct. Thanks for taking the time to respond and keeping me focused. If any of my clients read this, take note, lawyers may differ in their assessment of direct vs indirect damages.
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