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SMU Law Review
Volume 54 | Issue 2 Article 10
Consequential Damages: Hadley v. Baxendale
under the Uniform Commerical Code
Paul S. Turner
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Paul S. Turner, Consequential Damages: Hadley v. Baxendale under the Uniform Commerical Code , 54 SMU L. Rev. 655 (2001) https://scholar.smu.edu/smulr/vol54/iss2/
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CONSEQUENTIAL DAMAGES:
HADLEY v. BAXENDALE UNDER THE
UNIFORM COMMERCIAL CODE
Paul S. Turner*
For my own part I think that, although an excellent attempt was made in Hadley v. Baxendale to lay down a rule on the subject [of damages], it will be found that the rule is not capable of meeting all cases; and when the matter comes to be further considered, it will probably turn out that there is no such thing as a rule, as to the legal consequences of damages, applicable in all cases. -Wilde, B. 1
The term "consequential damages" has often been used with respect to harm suffered as a "consequence" of the breach (^) of duty, but not as a direct and immediate and (^) foreseeable consequence. The use of this (^) expression should be abandoned. -Arthur Linton Corbin^ 2
The use of this term "consequential damage" "prolongs the dispute," and "introduces an equivocation which is fatal to any hope of a clear settlement." It means both damage which is so remote as not to be actionable, and damage which is actionable. Sometimes it is used to denote damage, which, though actionable, does not follow immedi- ately, in point of time, upon the doing of the act complained of; what ERLE, C.J., aptly terms "consequential damages to the actionable degree." 3
"Consequential" or "special" damages... are not defined in terms in the Code, but are used (^) in the sense given them by the leading cases
- Paul S. Turner is a retired Assistant General (^) Counsel of Occidental Petroleum Corporation. He has served as an official advisor and participant in the drafting of U.C.C. Articles 3, 4, 4A, and 5 and practices law and consults on banking (^) and commercial legal matters in Los Angeles, California. His books and articles include LAw OF PAYMENT SYS- TEMS (^) AND EFT (Aspen Law & Business 1999) and STANDBY AND COMMERCIAL LETTERS OF CREDIT (Aspen Law & Business 1996) (co-author). Mr. Turner wishes to acknowledge gratefully the comments of Richard L. Field of Cliffside Park, New Jersey and George Hisert of San Francisco, California.
1. Note, An Economic Approach to Hadley v. Baxendale, 62 NEB. L. REV. 157 (1983) (quoting Sir James Plaisted Wilde, Baron Judge of the Court of Exchequer, in Gee and Others v. Lancashire and Yorkshire Ry. (^) Co., 6 H. & N. 211, 220-21, 158 Eng. Rep. 87, 91 (1860)) [hereinafter An Economic Approach].
- ARTHUR LINTON CORBIN, 5 CORBIN ON CONTRACTS § 1011, at 87 (1964) [herein- after CORBIN ON CONTRACTS].
- Eaton v. B. C. & M. R. R., 51 N.H. 504, 519 (1872).
CONSEQUENTIAL DAMAGES
I. CONSEQUENTIAL DAMAGES UNDER THE COMMON LAW
A. HADLEY V. BAXENDALE
In Hadley v. Baxendale,^10 millers in nineteenth century Greenwich, (^) En- gland, contracted with the owners of a factory in Gloucester, England, to have the factory build a crankshaft (^) to replace the broken crankshaft used to operate the mill. The factory owners asked the millers to ship the bro- ken shaft to the factory in Gloucester before work on the new shift was to begin so that the new crankshaft would fit the other parts of the mill. In arranging for the shipment, the millers contracted with the defendants, who were common carriers for hire from Greenwich to Gloucester, to have the broken shaft delivered to the factory in Gloucester. The carriers, by neglect, delivered the broken shaft to the factory five days later than the two days agreed upon. As a result of this delay, the completion of the new shaft was delayed. The millers alleged in their suit against the carriers that because of the delay in completion, the mill was unable to operate as it otherwise would have been. In particular, the millers sought to recover damages for their inability to supply their cus- tomers (^) with flour during the period of delay. They asserted that they had been obliged to purchase flour to supply to some of their customers, de- prived of gains and profits, and unable to employ their workforce, to whom they were compelled to pay wages during the period of delay.
The carriers' defense in the litigation was that the damages sought by the millers were too remote. The judge referred the legal issues, as well as the fact-finding, to the jury, which was the common practice then, and the jury awarded damages of fifty pounds to the millers. On appeal, the Court of the Exchequer ordered a new trial, and for the guidance of the lower court and future courts, enunciated the general rule of recoverable damages followed by Anglo-American courts to this day. Where two parties have made a contract which one of them has (^) bro- ken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result (^) of the breach of it. If special circumstances under which the contract was actually made were communicated by the plaintiffs to the de- fendants, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably con- template would be the amount of injury which would ordinarily fol- low from a breach of contract under the special circumstances so known and communicated. But, on the (^) other hand, if these special circumstances were wholly unknown to the party breaking the con- tract, he, at the most, could only be supposed to have had in his con-
- 9 Exch. 341,156 E. R. 145 (1854) (reprinted in ALL E. R. REP. 1843-1860, 461 (G.F.L. Bridgman ed., Butterworth & Co. Ltd. 1965)).
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templation the amount of injury which would arise generally, and in the great multitude of^ cases^ not^ affected^ by^ any^ special^ circum- stances, from such a breach of^ contract.^ For, had^ the^ special^ circum- stances been known, the parties might have^ specially^ provided^ for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.II The court concluded on the facts before it that the plaintiffs had com- municated only that the article to be carried was the broken shaft and that the plaintiffs were the millers of the mill. These facts alone, the court held, could not lead the defendant carriers to contemplate that lost prof- its would result from a delay in the delivery of the broken shaft. Thus, the defendant carriers were entitled (^) to a new trial. The term "conse- quential damages" does not appear anywhere in the court's opinion.
B. EVRA v. Swiss BANK
The leading contemporary case on consequential damages involves a bank's failure to comply with instructions to make a wire transfer. The case, decided before the adoption of U.C.C. Article 4A on wire transfers, is Evra Corp. v. Swiss Bank Corp.^12 In Evra, Hyman-Michaels Company, a Chicago dealer in scrap metals, had chartered a ship, the Pandora. The charter required Hyman-Michaels to pay the charter installments into the account of the Pandora owners at the Bank de Paris et des Pays-Bas in Geneva. Hyman-Michaels would normally pay the installments by send- ing wire transfer instructions to its bank, Continental Illinois Bank, in Chicago. The instructions would then be sent by Continental to its London office, then sent from the London office to Continental's corre- spondent, Swiss Bank in Geneva, and finally sent from Swiss Bank to the Bank de Paris in Geneva for the credit of the Pandora's owners. The flow of these payment instructions is illustrated below.
- Id. at 151; ALL E.R. REP.1843-1860, at 465.
- 673 F.2d 951 (7th Cir. 1982).
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ing Siegel v. Western (^) Union Telephone Co. 13 In Siegel, Western Union negligently misdirected a $200 (^) money order. Had the order been di- rected properly, (^) the $200 would have been legally bet on a horse that won and paid $1,650. The plaintiff sued Western Union for the (^) $1,450 "lost profit." The court, however, applied the rule in Hadley v. Baxendale, holding that the plaintiff (^) could not recover its lost profit because Western Union (^) had no knowledge of the use of the funds. The Evra court concluded that Siegel was authority (^) for exonerating Swiss (^) Bank, stating that the reason for the holding was to be found in the "animating principle" of Hadley (^) v. Baxendale: (^) that "the costs (^) of the unto- ward consequence of a course of dealings should be borne by that party who was able to avert the consequence at least cost and failed^ to^ do^ so." In Evra, the court found that Hyman-Michaels may have been (^) able to avert the consequences of its breach, (^) but had behaved imprudently. Hav- ing barely avoided termination after the (^1972) late payment, it waited until the last (^) minute to send instructions to make the April 1973 late payment that resulted in the termination of (^) the charter. On the day it received the notice of termination, (^) Hyman-Michaels was imprudent, the court com- mented, for it failed to "pull (^) out all the stops to get payment to the Ban- que de Paris on that day, and instead [it dithered] while Continental (^) and Swiss Bank wasted^ five^ days^ looking for the^ lost telex message." ' The Evra court noted (^) the link between the rule in Hadley v. Baxendale and both the doctrine of avoidable consequences and the tort (^) principle that limits liability to the "foreseeable consequences" of the defendant's carelessness. (^) In its emphasis on the failure of Hyman-Michaels to behave prudently when prudent behavior would apparently have avoided (^) the loss, Evra may be said to have put a theoretical economics (^) gloss on the traditional view of Hadley v. Baxendale.1^6 In any event, the fundamental holding in Evra, as in Siegel, (^) seems to be simply that only damages that the defendant might reasonably have foreseen are available to (^) the ag- grieved party. The Evra court stated, "Swiss Bank did not have enough information to infer that if (^) it lost a $27,000 payment order it would face a liability in excess of $2 million.' 7
C. VARIOUS (^) FORMULATIONS OF THE HADLEY v. BAXENDALE RULE-CONSEQUENTIAL DAMAGES What (^) are "consequential damages?" Most practitioners would agree that the term refers to damages that a person (^) in the position of the breaching (^) party would not reasonably have foreseen at the time of con- tracting.^18 They would also agree (^) that such damages should not be avail-
- 37 N.E.2d 868 (Il. App. 1941).
- (^) Evra, 673 F.2d at 957. 15. Id.
- Judge Posner is a noted exponent of applying economics theory to legal issues. (^) See An Economic Approach, supra note 1.
- Evra, 673 F.2d at 956.
- See CORBIN ON CONTRACTS, supra note 2, at § 1007.
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able to the aggrieved party, or at least that they are not generally available under^ the^ common^ law.^ In^ Hadley^ v.^ Baxendale,^ for example, the court found that the carriers might not have reasonably foreseen that the mill owners would sustain lost profits^ by^ reason^ of^ the^ delay^ in^ deliv- ering the^ broken^ crankshaft.^ The^ unforeseeable^ lost^ profits of^ the^ millers would thus constitute^ "consequential^ damages"^ (as^ most^ practitioners would use the term today). Suppose, however, that the millers notified^ the^ carriers^ that^ a^ delay^ in delivering the broken shaft would result^ in^ a^ shutdown^ of^ the^ mill, thereby resulting in the mill owners' losing profits? Under these circum- stances, most^ practitioners,^ I^ believe, would^ probably^ agree,^ in^ accord with the decision in Hadley v.^ Baxendale,^ that^ the^ lost^ profits^ would^ be available as^ damages to^ the^ mill^ owners.^ Would^ the practitioners^ also agree, however, that^ the^ lost^ profits^ had^ retained their^ character^ as^ "con- sequential damages?" Or would they reason that^ the^ loss^ of^ profits^ was no longer "consequential" damages because the^ loss^ had^ become^ foresee- able by^ reason^ of^ the^ notice?^ The^ question^ is^ not^ a^ substantive one,^ but^ a terminological one.^ If^ we^ assume^ that^ the^ lost^ profits are^ available^ to the millers because of the notice to the carriers, should^ the^ damages^ continue to be called "consequential" or should^ they^ be called^ something^ else? I doubt that most practitioners have^ given^ much^ thought^ to^ this^ ques- tion, but I suspect that many practitioners might take the^ view^ that^ when otherwise unforeseeable damages become foreseeable because^ the breaching party has advance notice of the circumstances, the damages should no longer be called consequential. That^ view^ would^ be consistent with what^ seems^ to^ be^ the^ typical^ application^ of^ the^ term^ "consequential" to damages that are not available to^ the^ aggrieved^ party. In any case, if we wish to distinguish between unforeseeable^ damages (the damages conventionally^ known^ as^ "consequential^ damages")^ and otherwise unforeseeable^ damages^ that^ become^ foreseeable^ because the breaching party is advised of the special circumstances, what^ shall^ we^ call the latter kind of damages? In this paper we will call^ these^ damages "ad- vised consequential damages." The U.C.C. fails^ to^ define^ the^ term^ "consequential^ damages"^ although it uses the term in a number of provisions. Moreover, the term is^ used differently in different articles of^ the U.C.C. Section 1-106 seems to use the term "consequential damages" in the most often used sense. In this sense, "consequential damages" are simply remote and^ indirect^ damages^ that^ would^ not^ normally^ be^ reasonably^ fore- seeable by the breaching party at the^ time of^ contracting.^ In^ this^ simple sense, consequential damages are normally not^ recoverable^ by^ the breaching party. Section 1-106(1)^ of^ the^ current^ version^ of^ Article^1 and Section 1-305(a) of the 2000 Annual Meeting^ Draft^ of^ Article^1 appear^ to use the term^ in^ this^ simple sense.^ They^ do^ not^ indicate^ whether^ the^ term excludes "advised consequential^ damages,"^ that^ is,^ remote^ and indirect
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Finally, the term "consequential damages" is commonly applied, as we noted above, in its simplest sense to refer to damages that are said to arise as a "consequence" of the breach but would not be foreseeable at the time of contracting to a reasonable person in the position of the breaching party. In this context, the term "consequential" is virtually sy- nonymous with the terms "unforeseeable," "indirect," "special," and "re- mote" and antonymous with the terms "foreseeable," direct," "general," "natural," "ordinary" (^) and the (^) like. In this simple sense, consequential
damages are not recoverable, but they may become recoverable when the aggrieved party has given notice of the special circumstances giving rise to the damages to the breaching party or when the breaching party other- wise is aware of the special circumstances. In this paper, we use the term "advised (^) consequential (^) damages" to describe damages that (^) have changed their character in this manner in order to distinguish them from conse- quential damages that are not advised to the breaching party and thus generally not recoverable. Of course, many of these terms overlap others. The reader may well have formed the opinion at this point that the use of these terms is more complicated than it needs to be. It's no surprise that Professor Corbin favored couching the rules simply in terms of foreseeability and advo- cated that the use of the term "consequential damages" be abandoned. 19 The confusion resulting from the plethora of damages terms described above may be seen in the use of the term in "consequential damages" clauses commonly used in contract provisions in which a party disclaims its liability for such damages. The disclaimer is intended normally to con- stitute a waiver by one party, the waiving party, of its right to seek dam- ages from the other party when the other party, the disclaiming party, would not ordinarily reasonably have foreseen the damages. The drafters of consequential damages clauses commonly make two er- rors. First, the disclaimers often have the waiving party disclaim its right to "incidental" as well as "consequential" damages, as in the following example from the American Bar Association's Model Electronic Pay- ments Agreement and Commentary:^20 "9.3 Neither party shall (^) be liable to the other under this Agreement for any special, incidental or consequent- ial damages... [Emphasis supplied]." Counsel for the waiving party very often fails to object to the waiver of incidental damages in the mistaken belief that incidental damages are the same as, or a form of, consequential damages. As noted in this paper, the term is used in Articles 2 and 2A to refer to expenses incurred by the aggrieved party in the unwinding of the sales or lease transaction after
- See id. §1011.
- The Agreement, often referred to as the "Model Trading Partners Agreement," is the product of the ABA's Electronic Data Interchange and Information Technology Divi- sion of the Section on Science and Technology. It is available from the ABA at Publication Orders, P.O. Box 10892, Chicago, IL 60610-0892, 1-800-285-2221. See also section 5B2 of the Home Banking Agreement (4th draft dated February 15, 2000) produced by the Task Force on Home Banking Agreement in my files but not yet publicly available.
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the breach has occurred. (^) Incidental damages should not normally be waived. Second, (^) the disclaiming party may mean to include "advised conse- quential damages" in the disclaimer (^) but fail to do so in the belief that "consequential (^) damages" (^) include advised (^) consequential (^) damages. (^) A pru- dent drafter for the disclaiming (^) party would probably want to couch the disclaimer along the following lines: Neither (^) party shall be liable to the other under this Agreement for any special or consequential damages even (^) if such party has been advised of the possibility of^ such^ damages...^ [Emphasis^ supplied].^21
D. THE RESTATEMENT FORMULATION OF THE HADLEY V.
BAXENDALE RULE
Professor Corbin was a consultant to the Second Restatement of Con- tracts project, and the Restatement drafters followed his (^) counsel that the term "consequential damages" "should be abandoned.12 2^ The Restate- ment drafters then couched the rule in terms of foreseeability and omit- ted the term "consequential (^) damages. '2 3^ The Restatement formulation states: (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.^ 24
The Comment in the Restatement to the rule quoted above further explains the application of the rule: 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
- Section 9.3 of the (^) Model Electronic Payments Agreement and Commentary. See also section 6.3 of the (^) ABA's Model Funds Transfer Services Agreement and Commentary, available as indicated (^) in the preceding footnote. For a model that fails to cover advised consequential damages, see section (^) VB2 of the Home Banking Agreement referred to in the preceding footnote; see also (^) section 16(a) of the Letter of Credit Application and Agree- ment by James G. Barnes published in Uniform Laws Annotated, vol. 4, Uniform (^) Commer- cial Code Forms (^) and Materials, §5-104-Form 11; West's Legal Forms, vol. 15 Commercial Transactions, (^) § 62.3-Form.5; and Uniform Commercial Code Legal Forms, vol. 2, § 5A:6.
- See supra note 2.
- Restatement (Second) of Contracts § (^347) uses the term "consequential loss" to "include such items as injury to person or property (^) resulting from defective performance." RESTATEMENT (SECOND) (^) OF CONTRACTS § 347, cmt. c. (1981). The aggrieved party's right to consequential (^) loss under the Restatement is subject to the general foreseeability re- quirements of the rule in section 351, which omits the word "consequential" entirely.
- Id. § 351(1)(2)(a)(b).
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generally available, except to the extent that other rules of law (^) make them unavailable. (^) This ambiguity has been noted, 2 8^ but the drafters (^) of section 1-305(a) of the 2000 Annual Meeting (^) Draft of Article 1 have not addressed it.
Articles 2 and 2A Article (^2) governs the rights and obligations of sellers and buyers in the sale of goods. Article 2A governs (^) the rights and obligations of lessors and lessees (^) in the lease of goods. Articles 2 and 2A, uniquely among (^) the articles of the U.C.C., provide for three kinds (^) of damages: (i) "statutory compensatory" (the term is (^) the author's term and not a term used (^) in the U.C.C.): (ii) "incidental;" and (iii) "consequential" (in the (^) special sense in which that term is used in Articles 2 and 2A.). (^) To aid in understanding what constitutes conse- quential (^) damages under these articles, it is helpful briefly to (^) review the other kinds (^) of damages available under Articles 2 and 2A. The term "statutory compensatory" or "compensatory" damages, (^) as used (^) in this paper, refers to damages available under provisions (^) in which Articles 2 and 2A specify how (^) to calculate particular damages. To calcu- late the damages due to a buyer of goods, for example, when the seller has wrongfully (^) repudiated the contract or failed to deliver the goods, (^) Ar- ticle 2 specifies alternative (^) formulas under which the buyer may recover (i) the difference between the cost of alternative (^) goods purchased by the buyer and the contract price of the goods that (^) were to have been deliv- ered by the seller 29 or (ii) the difference between (^) the market price and the contract price. 30 If the aggrieved buyer (^) has accepted the goods, Arti- cle 2 provides that the buyer may (^) recover the loss resulting in the ordi- nary course of (^) events from the seller's breach. 31 If the seller is in (^) breach of warranty with respect to the accepted (^) goods, Article 2 provides that the buyer may recover the difference (^) in value between the goods and the value they would have had if they had been as warranted. 32 Other compensatory (^) damages provisions in Article 2 specify how to calculate the (^) damages due to the seller when the buyer is in breach (^) of contract. 33 Similar provisions of Article (^) 2A specify how to calculate com- pensatory (^) damages in the case of the lessor's or the lessee's breach. (^34) All of these damages, due to the aggrieved party under Articles 2 and 2A, (^) are referred (^) to in this paper as "statutory compensatory" (^) damages. "Incidental" (^) damages, the second category of recoverable (^) damages under (^) Articles 2 and 2A, are generally costs associated (^) with the unrav-
- See HAWKLAND, (^) U.C.C. SERIES § 1-106:4 (Supp. 2000) [hereinafter HAWKLAND, U.C.C. SERIES].
- See U.C.C. § 2-712.
- See id. § (^) 2-713.
- See (^) id. § 2-714.
- See id.
- See id. §§ 2-708 - (^) 2-709.
- See generally U.C.C. §§ (^) 2A-508 - 2A-532.
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eling of the sales or lease transaction after the breach has occurred. Inci- dental damages resulting from a breach by the seller under Article 2, for example, include costs incurred by the buyer in (i) rejecting nonconform- ing goods, (ii) purchasing alternative goods, and (iii) taking care of deliv- ered goods before they have been rejected. 35 Incidental damages resulting from a breach by the buyer under Article 2 include expenses incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, and in connection with the return or re- sale of^ the^ goods.^
36
The incidental damages due to the aggrieved lessor or lessee under Ar- ticle 2A are similar to^ those^ due^ an^ aggrieved^ party^ under^ Article^ 2.^
(^3 )
Incidental damages are specified in lists that are not intended to be ex- haustive in sections 2-710, 2-715(1), 2A-520(1), and 2A-530. 3 8^ These inci- dental damages are recoverable in addition to the compensatory damages described above. The third category of damages recoverable under Articles 2 and 2A is "consequential (^) damages." (^) These (^) consequential damages (^) are not (^) the same as the consequential damages that are unavailable in section 1-106. The term is not defined in Articles 2 or 2A, but under provisions that state what consequential damages "include," it seems that the term is in- tended principally to refer in Articles 2 and 2A to what we have desig- nated above as "advised consequential damages." These are damages that would not ordinarily be foreseeable, but have become foreseeable be- cause the breaching party was aware at the time of contracting of the special circumstances that gave rise to the damages. These special cir- cumstances are called "particular requirements and needs" in Articles 2 and 2A. For example, under the "include" clause in Article 2, "conse- quential damages" resulting from the seller's breach include: "any loss resulting from general or particularrequirements and needs of which the
seller at the time of contracting had reason to know... ."[emphasis
added] 3 9
Similarly, under the "include" clause in section 2A-520(2), "conse- quential damages" resulting from the lessor's breach include losses result- ing from general or particular requirements and needs of which the lessor at the time of contracting had reason to know.
- See HAWKLAND, U.C.C. SERIES, supra note 28, § 2-715:2. Under section 2-715(1), incidental damages resulting from the seller's breach include "expenses reasonably in- curred in inspection, receipt, transportation and care and custody of goods rightfully re- jected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense (^) incident to the delay or breach." Id.
- See U.C.C. § 2-710.
- See id. §§ 2A-520, 2A-530.
- Section 2-710 applies to the seller's damages and section 2-715 to the buyer's dam- ages in sales transactions. Section 2A-520 applies to the lessee's damages and section 2A- 530 to the lessor's damages in lease transactions.
- U.C.C. § 2-715(2). The damages may only be recovered when they "could not reasonably be prevented by cover or otherwise." Id.
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that many courts have found three elements with respect to which the recovery of damages is available. 42 First, the aggrieved party can recover damages (^) resulting in the ordinary course of events from the breach. These are "ordinary," "proximate," "general," or "natural," and may be had, Professor Hawkland states, without proof of foreseeability. Second, the aggrieved (^) party can recover damages that a reasonable person would have foreseen "in the great multitude (^) of cases." Here the actual loss that occurred must have been foreseeable. Third, the aggrieved party can re- cover damages that flow from special circumstances that were communi- cated to the breaching party at the time of contracting "assuming these losses were foreseeable consequences of (^) the breach in the light of the fact that the promisor had knowledge or reason to know of these (^) special cir- cumstances. ' 43^ Professor (^) Hawkland's third category is embodied in the term "advised consequential damages" (^) as used in this paper. We have noted that the term consequential damages is typically used in contract clauses and by the 'courts as a synonym for "special" or "indi- rect" damages, that is, (^) for damages resulting from requirements and needs of which the defendant at the time of contracting did not have rea- son to know. This usage is directly the opposite of the usage in Articles 2 and 2A. Stated differently, the term "consequential damages" is typically used to mean damages (^) that are not reasonably foreseeable, while Articles 2 and 2A use the term to mean damages that are reasonably foreseeable. In my view, (^) the U.C.C. would have better served practitioners if it had made uniform the use of the term (^) instead of perpetuating its conflicting use. Despite the conflict in terminology, however, the damages formula- tions in Articles 2 and 2A are entirely consistent with the rule formulated in Hadley v. Baxendale and, for that matter, with the consequential dam- ages provisions in the other (^) articles of the U.C.C. The difference is not in the results that the different formulations would (^) produce but rather in the formulations themselves. Articles 2 and 2A use "include" clauses virtually to define "conse- quential damages" to mean foreseeable damages, and then make conse- quential damages available to the aggrieved party. Hadley v. Baxendale makes foreseeable damages available to the aggrieved party without the use of any definition. Article 1, and (^) other U.C.C. Articles not including Articles 2 and 2A, make consequential damages either available or not available without defining (^) the term but in a manner that seems generally consistent with the results in Hadley v. Baxendale and Articles 2 and 2A (though not entirely free from ambiguity).
Articles 3, 4 and 4A
Article 3 applies to negotiable instruments, Article 4 to bank deposits and collections, and Article 4A to electronic funds transfers.
- See HAWKLAND, (^) U.C.C. SERIES, supra note 28, § 2-715:3.
- Id.
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Section 3-
Section 3-411 applies (^) to a bank that has become obligated to pay a check by accepting a certified check or issuing (^) a cashier's check or teller's check. Subsection (b) (^) provides that the person seeking to enforce the check "may (^) recover consequential damages if the obligated bank (^) refuses to pay after receiving (^) notice of particular circumstances giving rise to the damages." '
The rule in section 3-411 is clear. The bank (^) is liable only to .the extent that the bank has notice of the possibility of the damages, but after the notice is received, the term "consequential" (^) would seemingly make the bank liable for the actual damages no matter how unforeseeable, (^) indirect or remote (^) they would otherwise have been. The bank avoids (^) liability, however, when the bank's refusal occurs because the bank has suspended payments, asserts (^) a defense that it reasonably believes is available against the person (^) seeking to enforce the check, has a reasonable doubt (^) whether the person seeking to enforce the check is entitled (^) to payment, or pay- ment is prohibited by (^) law.
Section (^) 4-
Under section 4-103(e), (^) the measure of damages for the bank's failure to exercise ordinary (^) care in handling a check is the amount of the check less an amount that would have been (^) realized by the exercise of ordinary care. If there is also bad faith, the damages include (^) "any other damages the party suffered (^) as a proximate consequence. '45^ The provision may not be, strictly (^) speaking, a "consequential damages" provision because (^) it fails to use that term. By making the bank liable, however, (^) for "any other damages the party suffered as a proximate (^) consequence" of the bank's conduct, (^) the provision seems to make the bank liable for (^) consequential damages (^) provided the "proximateness" test is satisfied. 46 Official (^) Com- ment 6 to section 4-103 states that the proximateness (^) of the damages sought (^) is to be tested by "the ordinary rules applied (^) in comparable cases." '47^ The cases would presumably include cases in which the (^) issue is the availability of consequential damages, although there (^) seems to be less of an element, or no element (^) at all, of "reasonable foreseeability" in de- termining "proximate cause" than in determining whether damages are "consequential" (^) damages.
Section 4-402(b)
Under (^) section 4-402(b), a bank that wrongfully dishonors (^) a check is liable (^) to its customer for damages "proximately caused" by (^) the wrongful dishonor. The bank's (^) liability is limited to actual damages proved and
- U.C.C. § 3-411(b).
- See id. § 4-103(e).
- Id.
- Id. § 4-103, cmt. (^) 6.
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The exposure of banks in the United States to large sums as conse- quential damages for failure to comply with wire transfer instructions was a significant factor in the decision to write the new Article 4A on funds transfers. 58 The Official Comments state with respect to the Evra opinion: "If Evra means (^) that consequential damages can be imposed if the culpa- ble bank has notice of particular circumstances giving rise to the dam- ages, it does not provide an acceptable solution to the problem of bank liability for consequential damages." 59
The drafters of Article 4A wanted to make "consequential damages" unavailable to the sender of wire transfer instructions when the receiving bank failed to comply with the instructions. They wanted also to make "advised consequential (^) damage" unavailable (^) to the sender under these
circumstances. Stated otherwise, they wanted to make remote, indirect and normally unforeseeable damages, i.e. "consequential damages," not available to the sender even when the bank was aware of the special cir- cumstances giving rise to the damages. To ensure that a receiving bank would not be liable to the sender for consequential damages (except only when the bank has expressly agreed in writing to assume such liability) - however the term "consequential damages" may be defined - the drafters of section 4A-305 specified in subsections (a), (b) and (d) the available damages described above. Then in subsections (c) and (d), they provided simply that in addition to the specified recoverable damages, other damages, "including consequential damages," are recoverable only "to the extent provided in an express written agreement of the receiving bank."'60^ The drafter thus deftly avoided any ambiguity that might arise by reason of'the use of the term "consequential." (^) Only the specified (^) damages are available. (^) Consequent- ial damages-whatever the term may mean-are not available. Of course, if Evra were to be decided today, the exclusion of all dam- ages for the wrongs specified under section 4A-305 other than the dam- ages specified in the section would insulate Swiss Bank from any claim for the more than $2 million sought by the plaintiffs. Moreover, absent any written agreement by Swiss Bank to execute wire transfer instruc- tions received from Continental Bank, Swiss Bank would not be obliged to act on the instructions and hence not obliged to pay any damages-not even interest, incidental expenses or the plaintiffs' expenses in the wire transfer transaction. Even if one were to assume that Swiss Bank had entered into a written agreement to execute Continental Bank's wire
- See PAUL S. TURNER, LAW OF PAYMENT SYSTEMS AND EFT § 4.02[A] (Aspen Law & Business 1999). Banks and bank regulators were concerned that large losses could lead to systemic failures.
- U.C.C. § 4A-305, cmt. 2.
- Id. § 4A-305(c) and (d). In section 4A-305(e), the drafters also provided a limited right of the aggrieved party to recover its attorney's fees. Attorney's fees are not available under the section when the claim is based on the bank's failure to execute the instructions and the funds transfer agreement provides for damages (presumably any damages-not just damages for failure to execute instructions).
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transfer instructions, the agreement would (^) be enforceable (i) only by Continental Bank, not by the plaintiffs, who had no privity with (^) Swiss Bank and (ii) only (^) to the extent the bank expressly agreed to assume the damages.
Section 4A-
Section 4A-404(a) is very similar to section 3-411 described (^) above. The latter allows the holder of a cashier's check, (^) teller's check or certified check to (^) recover consequential damages when the bank fails to pay the check without (^) any of the excuses justifying non-payment specified in the section. Section 4A-404 allows the beneficiary of a wire (^) transfer to re- cover consequential (^) damages from the beneficiary's bank when the bank refuses to pay the (^) beneficiary after the bank has accepted an incoming payment order for the beneficiary's account unless the bank (^) proves that its reason for non-payment was based on a reasonable (^) doubt concerning the right of the beneficiary to payment. Thus if a customer's (^) bank that has accepted an incoming payment order for the benefit of (^) the customer refuses to pay the customer, the bank may be liable to the customer for consequential (^) damages resulting from the refusal "to the extent the bank had notice of the damages ....^ " It may be noted here that sections 3-411 (^) and 4A-404 both make dam- ages labeled "consequential (^) damages" available when the bank has been explicitly advised of the special circumstances (^) giving rise to the damages. Stated differently, (^) the term "consequential damages" is used in a manner that (^) makes clear that the damages available under these sections include what we have called "advised consequential damages." This usage might support an argument that where the term appears elsewhere in a U.C.C. provision that makes consequential (^) damages un- available, advised consequential (^) damages are also unavailable. On this basis, the section 1-106 rule that consequential damages (^) may not "be had" would make advised consequential damages (^) also unrecoverable not- withstanding their foreseeability by the breaching party. (^) This argument would hardly seem definitive, however, in the absence of any (^) indication that section 1-106 was intended to overrule the foreseeability rules of Hadley v. Baxendale.
Article 5
Article 5 governs the rights and obligations of the parties in letter of credit transactions. The remedies (^) available under Article 5 are specified in section 5-115, (^) which provides generally that consequential damages are not available to an aggrieved beneficiary from a bank that wrongfully dishonors the beneficiary's presentation of documents, 62 not available (^) to an aggrieved applicant from a bank that wrongfully (^) honors the presenta-
- Id. § 4A-404(a).
- (^) See U.C.C. § 5-115(1).
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