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UNDERSTANDING THE DIFFERENCE BETWEEN DIRECT AND CONSEQUENTIAL DAMAGES IN VIRGINIA – IMPORTANT THINGS YOU SHOULD KNOW BEFORE SUING FOR BREACH OF CONTRACT

If you have a potential breach of contract claim against someone in Virginia, then please read this blog, as it explains an important concept in recovering damages for breach of contract under Virginia law.

Hypothetical: Suppose that Microsoft has a contract with chipmaker NVIDIA to provide 100,000 computer chips for a price of $1 million. Microsoft intends to use these chips in their computers to write an Artificial Intelligence based software code for cloud computing company SNOWFLAKE – a contract worth $1 billion.

If NVIDIA breaches its contract with Microsoft and fails to supply it with 100,000 computer chips, as a result of which Microsoft cannot fulfill its contract with SNOWFLAKE, and ends up losing $1 billion, can Microsoft sue NVIDIA for $1 billion? How much can Microsoft seek in damages in this situation? The answer depends on an understanding of the differences between direct and consequential damages.

Direct vs Consequential Damages. There are two broad categories of damages ex contractu: direct (or general) damages and consequential (or special) damages. Washington & Old Dominion R.R. Co. v. Westinghouse Co., 120 Va. 620, 627, 89 S.E. 131, 133 (1916).

Direct damages are those which arise ‘naturally’ or ‘ordinarily’ from a breach of contract; they are damages which, in the ordinary course of human experience, can be expected to result from a breach.

Consequential damages are those which arise from the intervention of ‘special circumstances’ not ordinarily predictable. If damages are determined to be consequential, they are compensable only if it is determined that the special circumstances were within the ‘contemplation’ of both contracting parties. “Consequential damages are recoverable, in action for breach of contract, only if it is determined as matter of fact that special circumstances were within contemplation of contracting parties at time of contracting; “contemplation” includes both that which was actually foreseen and that which was reasonably foreseeable.”  Richmond Med. Supply Co. v. Clifton, 235 Va. 584, 369 S.E.2d 407 (1988).

If damages are determined to be direct, they are compensable. Whether damages are direct or consequential is a question of law. Whether special circumstances were within the contemplation of the parties is a question of fact. 5 A. Corbin, Contracts § 1012(89) (1964); C. McCormick, Damages s 140 (574) (1935); See Roanoke Hosp. Ass’n v. Doyle & Russell, Inc., 215 Va. 796, 801, 214 S.E.2d 155, 160 (1975).

Coming back to the hypothetical, the answer would depend on whether Microsoft’s contract with NVIDIA contemplated these special circumstances where NVIDIA actually foresaw and it was reasonably foreseeable that Microsoft would be unable to fulfill its billion-dollar contract with SNOWFLAKE if it breached its contractual obligations.

Absent such special circumstances, Microsoft’s breach of contract claim against NVIDIA is limited to a maximum of the contract price, that is, $1 million. In other words, Microsoft cannot recover $1 billion for a breach of contract claim against NVIDIA.

For more information on breach of contract claims, please contact Fox and Moghul at 703-652-5506.

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