Restat 2d of Contracts, § 351

• Restatement of the Law, Second, Contracts
• Chapter 16- Remedies
• Topic 2- Enforcement by Award of Damages
• § 351 Unforeseeability and Related Limitations on Damages

(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach

(a) in the ordinary course of events, or

(b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

Comment:

a.  Requirement of foreseeability.  A contracting party is generally expected to take account of those risks that are foreseeable at the time he makes the contract. He is not, however, liable in the event of breach for loss that he did not at the time of contracting have reason to foresee as a probable result of such a breach. The mere circumstance that some loss was foreseeable, or even that some loss of the same general kind was foreseeable, will not suffice if the loss that actually occurred was not foreseeable. It is enough, however, that the loss was foreseeable as a probable, as distinguished from a necessary, result of his breach. Furthermore, the party in breach need not have made a "tacit agreement" to be liable for the loss. Nor must he have had the loss in mind when making the contract, for the test is an objective one based on what he had reason to foresee. There is no requirement of foreseeability with respect to the injured party. In spite of these qualifications, the requirement of foreseeability is a more severe limitation of liability than is the requirement of substantial or "proximate" cause in the case of an action in tort or for breach of warranty. Compare Restatement, Second, Torts § 431; Uniform Commercial Code § 2-715(2)(b). Although the recovery that is precluded by the limitation of foreseeability is usually based on the expectation interest and takes the form of lost profits (see Illustration 1), the limitation may also preclude recovery based on the reliance interest (see Illustration 2).

Illustrations:

1. A, a carrier, contracts with B, a miller, to carry B's broken crankshaft to its manufacturer for repair. B tells A when they make the contract that the crankshaft is part of B's milling machine and that it must be sent at once, but not that the mill is stopped because B has no replacement. Because A delays in carrying the crankshaft, B loses profit during an additional period while the mill is stopped because of the delay. A is not liable for B's loss of profit. That loss was not foreseeable by A as a probable result of the breach at the time the contract was made because A did not know that the broken crankshaft was necessary for the operation of the mill.

2. A contracts to sell land to B and to give B possession on a stated date. Because A delays a short time in giving B possession, B incurs unusual expenses in providing for cattle that he had already purchased to stock the land as a ranch. A had no reason to know when they made the contract that B had planned to purchase cattle for this purpose. A is not liable for B's expenses in providing for the cattle because that loss was not foreseeable by A as a probable result of the breach at the time the contract was made.

b.  "General" and"special" damages.  Loss that results from a breach in the ordinary course of events is foreseeable as the probable result of the breach. See Uniform Commercial Code § 2-714(1). Such loss is sometimes said to be the "natural" result of the breach, in the sense that its occurrence accords with the common experience of ordinary persons. For example, a seller of a commodity to a wholesaler usually has reason to foresee that his failure to deliver the commodity as agreed will probably cause the wholesaler to lose a reasonable profit on it. See Illustrations 3 and 4. Similarly, a seller of a machine to a manufacturer usually has reason to foresee that his delay in delivering the machine as agreed will probably cause the manufacturer to lose a reasonable profit from its use, although courts have been somewhat more cautious in allowing the manufacturer recovery for loss of such profits than in allowing a middleman recovery for loss of profits on an intended resale. See Illustration 5. The damages recoverable for such loss that results in the ordinary course of events are sometimes called "general" damages.

If loss results other than in the ordinary course of events, there can be no recovery for it unless it was foreseeable by the party in breach because of special circumstances that he had reason to know when he made the contract. See Uniform Commercial Code § 2-715(2)(a). For example, a seller who fails to deliver a commodity to a wholesaler is not liable for the wholesaler's loss of profit to the extent that it is extraordinary nor for his loss due to unusual terms in his resale contracts unless the seller had reason to know of these special circumstances. See Illustration 6. Similarly, a seller who delays in delivering a machine to a manufacturer is not liable for the manufacturer's loss of profit to the extent that it results from an intended use that was abnormal unless the seller had reason to know of this special circumstance. See Illustration 7. In the case of a written agreement, foreseeability is sometimes established by the use of recitals in the agreement itself. The parol evidence rule (§ 213) does not, however, preclude the use of negotiations prior to the making of the contract to show for this purpose circumstances that were then known to a party. The damages recoverable for loss that results other than in the ordinary course of events are sometimes called "special" or "consequential" damages. These terms are often misleading, however, and it is not necessary to distinguish between "general" and "special" or "consequential" damages for the purpose of the rule stated in this Section.

Illustrations:

3. A and B make a written contract under which A is to recondition by a stated date a used machine owned by B so that it will be suitable for sale by B to C. A knows when they make the contract that B has contracted to sell the machine to C but knows nothing of the terms of B's contract with C. Because A delays in returning the machine to B, B is unable to sell it to C and loses the profit that he would have made on that sale. B's loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the contract was made.

4. A, a manufacturer of machines, contracts to make B his exclusive selling agent in a specified area for the period of a year. Because A fails to deliver any machines, B loses the profit on contracts that he would have made for their resale. B's loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the contract was made.

5. A and B make a contract under which A is to recondition by a stated date a used machine owned by B so that it will be suitable for use in B's canning factory. A knows that the machine must be reconditioned by that date if B's factory is to operate at full capacity during the canning season, but nothing is said of this in the written contract. Because A delays in returning the machine to B, B loses its use for the entire canning season and loses the profit that he would have made had his factory operated at full capacity. B's loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the contract was made.

6. The facts being otherwise as stated in Illustration 3, the profit that B would have made under his contract with A was extraordinarily large because C promised to pay an exceptionally high price as a result of a special need for the machine of which A was unaware. A is not liable for B's loss of profit to the extent that it exceeds what would ordinarily result from such a contract. To that extent the loss was not foreseeable by A as a probable result of the breach at the time the contract was made.

7. The facts being otherwise as stated in Illustration 5, the profit that B would have made from the use of the machine was unusually large because of an abnormal use to which he planned to put it of which A was unaware. A is not liable for B's loss of profit to the extent that it exceeds what would ordinarily result from the use of such a machine. To that extent the loss was not foreseeable by A at the time the contract was made as a probable result of the breach.

c.  Litigation or settlement caused by breach.  Sometimes a breach of contract results in claims by third persons against the injured party. The party in breach is liable for the amount of any judgment against the injured party together with his reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable result of his breach at the time he made the contract. See Illustrations 8, 10, 11 and 12. This is so even if the judgment in the litigation is based on a liquidated damage clause in the injured party's contract with the third party. See Illustration 8. A failure to notify the party in breach in advance of the litigation may prevent the result of the litigation from being conclusive as to him. But to the extent that the injured party's loss resulting from litigation is reasonable, thefact that the party in breach was not notified does not prevent the inclusion of that loss in the damages assessed against him. In furtherance of the policy favoring private settlement of disputes, the injured party is also allowed to recover the reasonable amount of any settlement made to avoid litigation, together with the costs of settlement. See Illustration 9.

Illustrations:

8. The facts being otherwise as stated in Illustration 3, B not only loses the profit that he would have made on sale of the machine to C, but is held liable for damages in an action brought by C for breach of contract. The damages paid to C and B's reasonable expenses in defending the action were also foreseeable by A as a probable result of the breach at the time he made the contract with B. The result is the same even though they were based on a liquidated damage clause in the contract between B and C if A knew of the clause or if the use of such a clause in the contract between B and C was foreseeable by A at the time he made the contract with B.

9. The facts being otherwise as stated in Illustration 3, B not only loses the profit that he would have made on sale of the machine to C, but settles with C by paying C a reasonable sum of money to avoid litigation. The amount of the settlement paid to C and B's reasonable expenses in settling were also foreseeable by A at the time he made the contract with B as a probable result of the breach.

10. A contracts to supply B with machinery for unloading cargo. A, in breach of contract, furnishes defective machinery, and C, an employee of B, is injured. C sues B and gets a judgment, which B pays. The amount of the judgment and B's reasonable expenditures in defending the action were foreseeable by A at the time the contract was made as a probable result of the breach.

11. A contracts to procure a right of way for B, for a railroad. Because A, in breach of contract, fails to do this, B has to acquire the right of way by condemnation proceedings. B's reasonable expenditures in those proceedings were foreseeable by A at the time the contract was made as a probable result of the breach.

12. A leases land to B with a covenant for quiet enjoyment. C brings an action of ejectment against B and gets judgment. B's reasonable expenditures in defending the action were foreseeable by A as the probable result of the breach at the time the contract was made.

d.  Unavailability of substitute.  If several circumstances have contributed to cause a loss, the party in breach is not liable for it unless he had reason to foresee all of them. Sometimes a loss would not have occurred if the injured party had been able to make substitute arrangements after breach, as, for example, by "cover" through purchase of substitute goods in the case of a buyer of goods (see Uniform Commercial Code § 2-712). If the inability of the injured party to make such arrangements was foreseeable by the party in breach at the time he made the contract, the resulting loss was foreseeable. See Illustration 13. On the impact of this principle on contracts to lend money, see Comment e.

Illustration:

13. A contracts with B, a farmer, to lease B a machine to be used harvesting B's crop, delivery to be made on July 30. A knows when he makes the contract that B's crop will be ready on that date and that B cannot obtain another machine elsewhere. Because A delays delivery until August 10, B's crop is damaged and he loses profit. B's loss of profit was foreseeable by A at the time the contract was made as aprobable result of the breach.

e.  Breach of contract to lend money.  The limitation of foreseeability is often applied in actions for damages for breach of contracts to lend money. Because credit is so widely available, a lender often has no reason to foresee at the time the contract is made that the borrower will be unable to make substitute arrangements in the event of breach. See Comment d.  In most cases, then, the lender's liability will be limited to the relatively small additional amount that it would ordinarily cost to get a similar loan from another lender. However, in the less common situation in which the lender has reason to foresee that the borrower will be unable to borrow elsewhere or will be delayed in borrowing elsewhere, the lender may be liable for much heavier damages based on the borrower's inability to take advantage of a specific opportunity (see Illustration 14), his having to postpone or abandon a profitable project (see Illustration 15), or his forfeiture of security for failure to make prompt payment (see Illustration 16).

Illustrations:

14. A contracts to lend B $ 100,000 for one year at eight percent interest for the stated purpose of buying a specific lot of goods for resale. B can resell the goods at a $ 20,000 profit. A delays in making the loan, and although B can borrow money on the market at ten percent interest, he is unable to do so in time and loses the opportunity to buy the goods. Unless A had reason to foresee at the time that he made the contract that such a delay in making the loan would probably cause B to lose the opportunity, B can only recover damages based on two percent of the amount of the loan.

15. A contracts to lend $ 1,000,000 to B for the stated purpose of enabling B to build a building and takes property of B as security. After construction is begun, A refuses to make the loan or release the security. Because B lacks further security, he is unable to complete the building, which becomes a total loss. B's loss incurred in partial construction of the building was foreseeable by A at the time of the contract as a probable result of the breach.

16. A, who holds B's land as security for a loan, contracts to lend B a sum of money sufficient to pay off other liens on the land at the current rate of interest. A repudiates and informs B in time to obtain money elsewhere on the market, but B is unable to do so. The liens are foreclosed and the land sold at a loss. Unless A knew when he made the contract that B would probably be unable to borrow the money elsewhere, B's loss on the foreclosure sale was not foreseeable as a probable result of A's breach.

f.  Other limitations on damages.  It is not always in the interest of justice to require the party in breach to pay damages for all of the foreseeable loss that he has caused. There are unusual instances in which it appears from the circumstances either that the parties assumed that one of them would not bear the risk of a particular loss or that, although there was no such assumption, it would be unjust to put the risk on that party. One such circumstance is an extreme disproportion between the loss and the price charged by the party whose liability for that loss is in question. The fact that the price is relatively small suggests that it was not intended to cover the risk of such liability. Another such circumstance is an informality of dealing, including the absence of a detailed written contract, which indicates that there was no careful attempt to allocate all of the risks. The fact that the parties did not attempt to delineate with precision all of the risks justifies a court in attempting to allocate them fairly. The limitations dealt with in this Section are more likely to be imposed in connection with contracts that do not arise in a commercial setting. Typical examples of limitations imposed on damages under this discretionary power involve the denial of recovery for loss of profits and the restriction of damages to loss incurred in reliance on the contract. Sometimes these limits are covertly imposed, by means of an especially demanding requirement of foreseeability or of certainty. The rule stated in this Section recognizes that what is done in such cases is the imposition of a limitation in the interests of justice.

Illustrations:

17. A, a private trucker, contracts with B to deliver to B's factory a machine that has just been repaired and without which B's factory, as A knows, cannot reopen. Delivery is delayed because A's truck breaks down. In an action by B against A for breach of contract the court may, after taking into consideration such factors as the absence of an elaborate written contract and the extreme disproportion between B's loss of profits during the delay and the price of the trucker's services, exclude recovery for loss of profits.

18. A, a retail hardware dealer, contracts to sell B an inexpensive lighting attachment, which, as A knows, B needs in order to use his tractor at night on his farm. A is delayed in obtaining the attachment and, since no substitute is available, B is unable to use the tractor at night during the delay. In an action by B against A for breach of contract, the court may, after taking into consideration such factors as the absence of an elaborate written contract and the extreme disproportion between B's loss of profits during the delay and the price of the attachment, exclude recovery for loss of profits.

19. A, a plastic surgeon, makes a contract with B, a professional entertainer, to perform plastic surgery on her face in order to improve her appearance. The result of the surgery is, however, to disfigure her face and to require a second operation. In an action by B against A for breach of contract, the court may limit damages by allowing recovery only for loss incurred by B in reliance on the contract, including the fees paid by B and expenses for hospitalization, nursing care and medicine for both operations, together with any damages for the worsening of B's appearance if these can be proved with reasonable certainty, but not including any loss resulting from the failure to improve her appearance.

Subsections (1) and (2) are based on former § 330, with changes in language to conform to the language of Uniform Commercial Code §§ 2-714(1) and 2-715(2)(a). Subsection (3) is new. See 5 Corbin, Contracts §§ 1006-19 (1964 & Supp. 1980); 11 Williston, Contracts §§ 1344-44A, 1347, 1355-57 (3d ed. 1968); Danzig, Hadley v. Baxendale:  A Study in the Industrialization of the Law, 4 J. Legal Stud. 249 (1975).

Comment a.  This Comment rejects the "tacit agreement" test of Globe Ref. Co. v. Landa Cotton Oil Co., 190 U.S. 540 (1903). See Comment 2 to Uniform Commercial Code § 2-715; R.I. Lampus Co. v. Neville Cement Prods. Corp., 474 Pa. 199, 378 A.2d 288 (1977). When parties expressly exclude or limit consequential damages, the basic principles of freedom of contract counsel that the agreed upon provision should be enforced. Nonetheless, courts are often asked after the fact not to enforce such provisions and may construe a provision narrowly or find it unenforceable because of lack of bargain, bad faith, unconscionability or public policy. See Note, "No Damage" Clauses in Construction Contracts: A Critique, 53 Wash. L. Rev. 471 (1978); Annot., 74 A.L.R.3d 187 (1976). See also Siefford v. Housing Auth., 192 Neb. 643, 223 N.W.2d 816 (1974); American Elec. Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435 (S.D.N.Y. 1976). Illustration 1 is based on Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854); cf. Kerr S.S. Co. v. Radio Corp. of America, 245 N.Y. 284, 157 N.E. 140, cert. denied, 275 U.S. 557 (1927). But cf. Armstrong v. Bangor Mill Supply Corp., 128 Me. 75, 145 A. 741 (1929). Illustration 2 is based on Sitlington v. Fulton, 281 F.2d 552 (10th Cir. 1960); see also Rochester Lantern Co. v. Stiles & Parker Co., 135 N.Y. 209, 31 N.E. 1018 (1892).

Comment b.  Illustration 3 is based on Illustration 9 to former § 330; see also Brewer v. Custom Builders Corp., 42 Ill. App.3d 668, 1 Ill. Dec. 377, 356 N.E.2d 565 (1976) (builder liable for water damage to drywall installed by homeowner after assurance by builder that roof was watertight). But cf. Berlin Dev. Corp. v. Vermont Structural Steel Corp., 127 Vt. 367, 250 A.2d 189 (1968). Illustration 4 is based on Illustration 3 to former § 330; see Appliances v. Queen Stove Works, 228 Minn. 55, 36 N.W.2d 121 (1949). Illustration 5 is based on Illustration 6 to former § 330; Victoria Laundry (Windsor) v. Newman Indus., [1949] 2 K.B. 528; cf. Spang Indus. v. Aetna Cas. and Sur. Co., 512 F.2d 365 (2d Cir. 1975); Armstrong v. Bangor Mill Supply Corp., 128 Me. 75, 145 A. 741 (1929). Illustration 6 is based on Illustration 7 to former § 330; Guetzkow Bros. v. A.H. Andrews & Co., 92 Wis. 214, 66 N.W. 119 (1896); cf. Booth v. Spuyten Duyvil Rolling Mill Co., 60 N.Y. 487 (1875). But cf. Hill's, Inc. v. William B. Kessler, Inc., 41 Wash.2d 42, 246 P.2d 1099 (1952). Illustration 7 is based on Cory v. Thames Ironworks & Shipbuilding Co., L.R. 3 Q.B. 181 (1868); see Adams Express Co. v. Allen, 125 Va. 530, 100 S.E. 473 (1919).

Comment c.  This Comment is based on former § 334. Illustration 8 is based on Illustration 1 to former § 334; see also Verhagen v. Platt, 1 N.J. 85, 61 A.2d 892 (1948). As to liquidated damages, it is based on Illustration 11 to former § 330; Krauss v. Greenbarg, 137 F.2d 569 (3d Cir.), cert. denied, 320 U.S. 791 (1943). But cf. Albany Phosphate Co. v. Hugger Bros., 4 Ga. App. 771, 62 S.E. 533 (1908); Longview Constr. and Dev. v. Loggins Constr. Co., 523 S.W.2d 771 (Tex. Civ. App. 1975). Illustration 9 is supported by Verhagen v. Platt, supra. But cf. Chrysler Corp. v. E. Shavitz & Sons, 536 F.2d 743 (7th Cir. 1976); Czarnikow-Rionda Co. v. Federal Sugar Ref. Co., 255 N.Y. 33, 173 N.E. 913 (1930). Illustrations 10, 11 and 12 are based on Illustrations 5, 4 and 2 to former § 334. See also Stone, Recovery of Consequential Damages for Product Recall Expenditures, 1980 B.Y.U.L. Rev. 485.

Comment d.  Illustration 13 is based on Illustration 10 to former § 330; see also Murarka v. Bachrack Bros., 215 F.2d 547 (2d Cir. 1954); Kelley, Maus & Co. v. La Crosse Carriage Co., 120 Wis. 84, 97 N.W. 674 (1903). But cf. Marcus & Co. v. K.L.G. Baking Co., 122 N.J.L. 202, 3 A.2d 627 (1939).

Comment e.  This Comment is based on former § 343. Illustration 14 is based on Illustration 1 to former § 343. Illustration 15 is based on Illustration 3 to former § 343; Stanish v. Polish Roman Catholic Union of America, 484 F.2d 713 (7th Cir. 1973); Spiese v. MutualTrust Co., 258 Pa. 414, 102 A. 119 (1917). But cf. McMillain Lumber Co. v. First Nat'l Bank of Eutaw, 215 Ala. 379, 110 So. 602 (1926). Illustration 16 is based on Illustration 2 to former § 343; Doushkess v. Burger Brewing Co., 20 A. D. 375, 47 N.Y.S. 312 (1897).

Comment f.  Illustration 17 is suggested by Kerr S.S. Co. v. Radio Corp. of America, 245 N.Y. 284, 157 N.E. 140, cert. denied, 275 U.S. 557 (1927); Newsome v. Western Union Tel. Co., 153 N.C. 153, 69 S.E. 10 (1910). Reasoning such as that in Harper Furniture Co. v. Southern Express Co., 148 N.C. 87, 62 S.E. 145 (Super. Ct. 1908), aff'd by equally divided ct., 151 N.C. 739, 67 S.E. 1132 (1909), is rejected. Illustration 18 is based on Lamkins v. International Harvester Co., 207 Ark. 637, 182 S.W.2d 203 (1944). Illustration 19 is based on Sullivan v. O'Connor, 363 Mass. 579, 296 N.E.2d 183 (1973).

ALR Annotations:

Measure and elements of damages in action against physician for breach of contract to achieve particular result or cure. 99 A.L.R.3d 303.
Recovery by writer, artist, or entertainer for loss of publicity or reputation resulting from breach of contract. 96 A.L.R.3d 437.
Buyer's incidental and consequential damages from seller's breach under UCC § 2-715. 96 A.L.R.3d 299.
Construction contract provision excusing delay caused by "severe weather". 85 A.L.R.3d 1085.
Enforceability of voluntary promise of additional compensation because of unforeseen difficulties in performance of existing contract. 85 A.L.R.3d 259.
Damages to franchisee for failure of franchisor of national brand or service to provide the services or facilities contracted for. 41 A.L.R.3d 1436.
Comment Note. -- "Out of pocket" or "benefit of bargain" as proper rule of damages for fraudulent representations inducing contract for the transfer of property. 13 A.L.R.3d 875.
Construction contractor's liability to contractee for defects or insufficiency of work attributable to the latter's plans and specifications. 6 A.L.R.3d 1394.
Attorneys' fees incurred in litigation with third person as damages in action for breach of contract. 4 A.L.R.3d 270.
Measure of damages, to advertiser, for radio or television station's breach or wrongful termination of contract. 90 A.L.R.2d 1199.
Pleading mitigation of damages, or the like, in employee's action for breach of employment contract. 41 A.L.R.2d 955.
Right to recover, in action for breach of contract, expenditures incurred in preparation for performance. 17 A.L.R.2d 1300.

Digest System Key Numbers:

Damages 22