What Is Incidental Damages?
Incidental damages are reasonable expenses incurred by a non-breaching party as a direct result of the other party's breach of a contract. These damages, primarily a concept within commercial law and contract law, aim to compensate the aggrieved party for out-of-pocket costs directly related to the breach of contract37, 38. They are distinct from the primary losses suffered and serve to put the injured party in the position they would have been in had the contract been fulfilled, by covering costs incurred in attempting to mitigate or deal with the breach36.
History and Origin
The concept of incidental damages has evolved from common law principles governing remedies for breach of contract. Its modern application is notably codified in statutory frameworks like the Uniform Commercial Code (UCC) in the United States. The UCC, which governs commercial transactions, specifically outlines incidental damages for both sellers and buyers. For example, UCC § 2-710 details a seller's incidental damages, which may include expenses for stopping delivery, transportation, and care of goods after a buyer's breach. Similarly, UCC § 2-715 addresses a buyer's incidental damages, covering costs like inspection, receipt, and transportation of rightfully rejected goods. 34, 35This codification provides clear legal standards for courts to award such damages, ensuring that parties are reimbursed for foreseeable and direct expenses incurred due to a contractual failure.
33
Key Takeaways
- Incidental damages are direct, out-of-pocket expenses incurred by a party due to a contract breach.
- They are distinct from the main contractual losses and from consequential damages, which cover indirect losses.
- Common examples include costs for inspecting, storing, or transporting goods after a breach, or expenses for seeking alternative performance.
- The Uniform Commercial Code (UCC) provides specific definitions and examples for incidental damages for both buyers and sellers in sales contracts.
- The purpose of incidental damages is to reimburse the non-breaching party for costs associated with dealing with the breach and mitigation of damages.
Interpreting Incidental Damages
Interpreting incidental damages involves identifying costs that are a direct and reasonable consequence of a contract breach, rather than the primary loss of the bargain itself. These damages are typically viewed as expenses incurred by the non-breaching party to manage the fallout of the breach. For example, if a seller breaches a contract by failing to deliver goods, the buyer's costs to find and secure a replacement from another supplier (known as "cover") would include incidental damages like expedited shipping or inspection fees for the new goods. 31, 32The legal system aims to ensure that the aggrieved party is made whole by compensating for these necessary expenses, but not to award a windfall. 30The focus is on expenditures that directly address or arise from the breach itself, often linked to preserving the value of the contractual subject matter or finding an alternative. 29These costs are generally recoverable even if not explicitly stated in the initial contract, provided they were reasonably foreseeable.
28
Hypothetical Example
Consider "Apex Appliances," a retailer, that orders 50 high-end refrigerators from "ColdTech Manufacturing" for an upcoming sale event, with a delivery date set for June 1st. The contract specifies a price of $1,000 per unit. On May 28th, ColdTech informs Apex that due to a production issue, they cannot fulfill the order, which constitutes a breach of contract.
To minimize losses and avoid disappointing customers, Apex Appliances immediately seeks an alternative supplier, "Frosty Goods." Frosty Goods has the refrigerators but charges $1,050 per unit and requires expedited shipping at an additional cost of $2,000 to meet Apex's timeline. Upon receiving the new shipment, Apex also incurs $500 in additional labor costs to quickly unload and store the refrigerators due to the rushed delivery schedule.
In this scenario:
- The primary damages for Apex Appliances would be the difference in price per unit ($50 x 50 units = $2,500).
- The incidental damages would be the $2,000 for expedited shipping and the $500 for additional labor, totaling $2,500. These are direct, additional expenses Apex incurred specifically to address ColdTech's breach and secure substitute goods.
Apex would seek to recover both the primary damages and these incidental damages from ColdTech.
Practical Applications
Incidental damages arise in various commercial and legal settings, particularly where there is a breach of contract. Their practical application ensures that parties are compensated for costs directly tied to managing the consequences of a contractual failure.
In sales contracts governed by the Uniform Commercial Code (UCC), incidental damages are a common remedy. For a seller, if a buyer wrongfully rejects goods, incidental damages might include costs incurred in stopping the delivery, transporting the goods back to the seller, caring for the goods in storage, or commissions and expenses related to reselling the goods to another party. 27For a buyer, if a seller fails to deliver or delivers non-conforming goods, incidental damages can cover expenses like inspecting the rejected goods, transporting them, or reasonable charges incurred in finding and purchasing substitute goods (known as "cover").
26
Beyond sales, these damages can appear in service agreements or other commercial dealings. For instance, if a service provider breaches a contract, the injured party might incur incidental damages such as the cost of finding a temporary replacement provider or additional administrative expenses related to the disruption. The goal is to provide legal remedies that fully compensate the non-breaching party for the immediate, measurable expenses caused by the breach, reinforcing the principle that parties should be made whole, not just for the direct loss of value, but for the necessary costs of adjustment. 24, 25The Uniform Commercial Code, specifically Article 2 concerning sales, provides detailed provisions for these remedies, underscoring their importance in commercial transactions.
23
Limitations and Criticisms
While incidental damages are crucial for ensuring fair compensation in breach of contract cases, they are not without limitations. A primary limitation is the requirement that such expenses must be "commercially reasonable" and directly incurred as a result of the breach. 21, 22This can sometimes lead to disputes over what constitutes a reasonable expense, necessitating careful documentation by the aggrieved party. Costs that are deemed excessive, speculative, or not directly tied to mitigating the breach may not be recoverable.
Another point of contention can be the distinction between incidental damages and consequential damages. While incidental damages are generally seen as direct costs of dealing with the breach (e.g., storage fees for rejected goods), consequential damages are more indirect losses (e.g., lost profits due to delayed production). 19, 20Courts often scrutinize consequential damages more closely, requiring them to be foreseeable at the time the contract was formed, which is a higher bar than for incidental damages. 18This distinction can complicate damage claims, as parties may try to categorize losses in the most favorable way. Some critics argue that the lines between these types of damages can be blurry in practice, leading to litigation over classification rather than just the amount. 17Furthermore, certain costs, like attorney's fees, are generally not recoverable as incidental damages unless specified in the contract or by statute, which can leave a party short of being fully "made whole".
16
Incidental Damages vs. Consequential Damages
The distinction between incidental damages and consequential damages is a crucial concept in legal remedies for a breach of contract. Both are types of compensatory damages intended to make the non-breaching party whole, but they cover different categories of losses.
Incidental damages are direct, out-of-pocket expenses incurred by the non-breaching party specifically to manage the fallout of the breach. These costs are directly related to the actual breach itself and typically involve efforts to minimize further losses or to secure a replacement for the failed performance. Examples include expenses for inspecting non-conforming goods, storing rejected items, transporting goods back to the seller, or costs associated with seeking alternative suppliers (often referred to as "cover"). 14, 15They are the immediate, commercially reasonable charges or commissions that result from the other party's failure to perform.
13
Consequential damages, on the other hand, are indirect losses that result from the breach, often stemming from special circumstances or conditions known to the breaching party at the time the contract was formed. These losses are not a direct response to the breach but are a consequence of it affecting other business operations or opportunities. Common examples include lost profits from related contracts, loss of business reputation, or additional operational costs incurred due to production delays caused by the breach. 11, 12For consequential damages to be recoverable, they generally must have been foreseeable by the breaching party at the time the contract was entered into.
9, 10
In essence, incidental damages relate to the costs of reacting to the breach, while consequential damages relate to the broader, often downstream, economic harm suffered as a result of the breach's impact on the injured party's overall situation.
FAQs
What types of expenses are typically considered incidental damages?
Typical expenses considered incidental damages include costs for inspecting goods, storing rejected or returned items, transportation charges, reselling costs, and reasonable expenses incurred in finding and procuring substitute goods or services after a breach of contract. These are direct, out-of-pocket costs aimed at addressing the immediate impact of the breach.
7, 8
Are attorney's fees considered incidental damages?
Generally, attorney's fees are not automatically considered incidental damages unless specifically provided for in the contract or by statute. In the U.S. legal system, parties typically bear their own legal costs, known as the "American Rule," although exceptions exist for frivolous lawsuits or specific contractual clauses.
6
How do incidental damages relate to a seller's or buyer's remedies under the UCC?
Under the Uniform Commercial Code (UCC), incidental damages are a component of the damages that can be recovered by both aggrieved sellers and buyers. For sellers, UCC § 2-710 specifies costs such as those incurred in stopping delivery or reselling goods after a buyer's breach. For buyers, UCC § 2-715 covers expenses related to inspection, transportation, and "cover" (procuring substitute goods) after a seller's failure to perform. Th4, 5ese provisions help ensure that parties involved in commercial transactions receive comprehensive legal remedies.
Is there a limit to how much can be claimed as incidental damages?
Yes, claims for incidental damages must be "commercially reasonable" and directly attributable to the breach of contract. Co3urts will scrutinize the necessity and proportionality of the expenses incurred. Costs that are excessive, unnecessary, or not a direct result of dealing with the breach may be disallowed. The principle of mitigation of damages also applies, requiring the non-breaching party to take reasonable steps to minimize their losses.
Can incidental damages be claimed alongside other types of damages?
Yes, incidental damages are typically claimed in addition to other types of damages, such as expectation damages (the direct loss of the bargain) or, in certain circumstances, consequential damages. They compensate for the peripheral costs of responding to the breach, helping to ensure the aggrieved party is fully compensated for their losses.1, 2