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Direct vs. Consequential Damages in the United States

Steven G.M. Stein

Although there is no clear demarcation between direct and consequential damages in the U.S., the distinction is critical to the outcome of many construction cases as waiver provisions are commonly integrated to construction contracts. In particular loss of profits and certain financing costs are the subject of conflicting determinations with consequent unpredictability.

Compounding the understandable difficulty in distinguishing between consequential and direct damages, is the fact that the U.S. law is not uniform.  The existence of over 50 different common law jurisdictions, cases applying the Federal Acquisition Regulations, and the use of civil law in the State of Louisiana, among others, renders any summary more subject to exceptions than clear rules. But, even in the U.S. context of varying and contradictory results which such a multiplicity of jurisdictions will create, the nebulousness surrounding the distinction between direct damages and consequential damages is remarkable. “No bright-line test”  has been created to distinguish direct from consequential damages. The courts have attempted to do so, but it has yielded inconsistencies.  This paper intends to identify different approaches taken to this distinction with special focus on the approaches to the loss of profits and certain financing costs. It does not purport to interpret specific contract provisions which may define consequential damages, but assumes that either the contract refers to consequential damages without more definition or does not address the subject.