Jetrader - Spring 2016 - 43

between the contract price and the market
price for the engine at the time of breach.
Consequential damages are those that
do not necessarily arise naturally from the
breach, but which were reasonably contemplated by the parties at the time they
entered into the contract. In New York,
indirect damages are synonymous with consequential damages. They are additional
losses, which, at the time of contract,
the injured party was either warranted in
believing that the breaching party would
assume liability for or which the breaching
party fairly might have consciously assumed
the liability for. A seller may recover lost
profits as consequential damages or,
depending on the facts, direct damages.
The UCC expressly provides for the recovery
of consequential damages by buyers/lessees, but not sellers/lessors.
In the engine sale example, Engine
Seller's direct damages for a breach by
MRO Buyer would be the loss of the value
of the transaction and any loss that Engine
Seller would take should it not be able to
re-sell the engine to another party at the
same price. Engine Seller's consequential damages could include the cost of
shipping, inspection and expenses to put
the engine into the delivery condition for
MRO Buyer. Lost profits would be a component of one or the other. MRO Buyer's
direct damages for a breach by Engine
Seller would include any additional cost to
MRO Buyer to source a replacement engine.
MRO Buyer's consequential damages could
include the same types of damages Engine
Seller incurred - costs of shipping and
inspection and possibly the cost to lease
an engine stand. In each case (to claim
consequential damages), the non-breaching
party must show that the claimed expenses
were a natural or expected consequence of
the failure of the transaction.
Direct damages are simpler to prove.
Given their more speculative nature, consequential damages can be more difficult
to prove, but may be of equal or more value
than direct damages.
Incidental damages are those additional
expenses incurred by a non-breaching party
as a result of a breach. Articles 2 and 2A of
the NY UCC provide clear definitions of these
types of damages for sales and lease contracts and include reasonable costs of transportation, inspection and care of the goods

following the breach. Taking the engine
example, this could include costs of storage
of the engine and other expenses required
to avoid (further) loss following breach as a
replacement transaction is pursued.
Punitive damages seek to punish a
party in order to deter further wrongdoing. Punitive damages are not given for a
simple breach of contract. They are awarded
only when the breaching party acts in a
fraudulent, malicious or other egregiously
dishonest manner. Knowingly supplying
false records in connection with an engine
sale is a prime example.
Parties may freely waive their entitlement to any category of damages as long
as the waiver is not "unconscionable." New
York courts will enforce damage waivers as
written, so the parties should be very clear
on their intent.
Parties seek balance in their agreements,
including reciprocal waivers like the one
at the top of this article. Sellers/lessors
have different issues and exposures than
buyers/lessees. Consequential damages
to MRO Buyer for Engine Seller's breach
could include compensation payments
due to its airline customer for failure to
supply the engine. Failure to deliver an
aircraft under lease could cause schedule
and revenue impact to the airline lessee.
A seller/lessor may want protection from
those potentially huge and considerably

more indirect damage claims. Breach by a
buyer/lessee can impact a seller/lessor's
financing arrangements including breakage
and arranger's fees. These types of damages should be considered carefully in the
context of each transaction to ensure that
the final agreement permits for, and doesn't
waive, the recovery of those damages fairly
related to the transaction.
Damage waivers are common practice,
but are often viewed as "boilerplate" for
the lawyers to handle. They can have a
tremendous commercial impact, however.
If not thoughtfully negotiated, they can
leave you "waiving goodbye" to some very
important rights and protections.
Don Mitchell is a partner with the law firm of
Smith, Gambrell & Russell, LLP and concentrates his practice in U.S. and cross-border
aviation equipment finance transactions and
litigation. Please email any questions, comments or suggestions for future topics to:
dmitchell@sgrlaw.com.
©2016 Donald B. Mitchell
Endnotes
1

For purposes of this article, New York law will
"govern."
This article will not address waivers in financing
agreements, which are covered separately under
Article 9 of the NY Uniform Commercial Code.
This article will paraphrase/summarize court decisions and for brevity, will not provide citations.

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