Toolbox Talk Series: Direct Versus Consequential Damages--Is There a Clear Demarcation?

In Hadley v Baxendale, 9 Ex. 341 [1854], of 1L Contracts lore, the Court of Exchequer set out the dichotomy of direct damages and consequential (or indirect) damages. In the 170 years that have followed, lawyers on both sides of the Atlantic have sought to parse out what are direct damages and what are consequential damages. In the March 20, 2025 installment of the Toolbox Talk Series, Gaetano P. Piccirilli and C. Quincy Conrad discussed this frequently disputed and convoluted classification of damages as direct or consequential in construction disputes.

Gaetano and Quincy noted the traditional explanations of direct and consequential damages almost invariably use those terms without explaining how the differ. For example, direct damages are frequently described as "necessary and usual" flowing from the breach. Consequential damages are described as "naturally, but not necessarily" flowing from the breach. Gaetano and Quincy recommend avoiding the use of whether the damages are "foreseeable." 

Instead, they offer a more streamlined and intuitive approach to classifying damages:

Direct: Relating to the value of the breaching party's performance.

Consequential: Collateral to the value of the breaching party's performance. 

When using the above framework, categorizing damages becomes easier to work through. For example, a contractor's delay causes a building not being ready for leasing may cause the owner to lose rental income. Because rental income is not part of the contractor's performance, the lost income are consequential damages. Conversely, if an owner terminates the contractor because of the unacceptable delays, the increased costs of performance to hire a replacement contractor directly relate to the original contractor's performance. Accordingly, those damages would be direct damages. These two examples also illustrate why using "foreseeability" as a dividing line can be problematic; lost income from construction delays is foreseeable, but rental income is not the performance the Owner expects from a contractor. 

The distinction between direct and consequential damages often is critical because industry contracts frequently contain waivers of consequential damages. As a direct damage, an owner could recover the increased costs of performance. However, the lost rental income, as a consequential damage could be non-recoverable as a consequential damage. Accordingly, parties negotiating a construction contract should pay close attention in defining consequential damages and any exceptions to a waiver of consequential damages. 

Thanks to Gaetano and Quincy for their insights and discussion on the classification of damages.

Editor Brendan J. Witry is an Associate at Laurie & Brennan LLP. His practice focuses exclusively on representing and advising owners, contractors, and trade contractors in construction disputes at all stages.