R2d § 351
Unforeseeability and Related Limitations on Damages
(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. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.
Professor's notes
Elements: (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 breach because it follows (a) in the ordinary course of events, OR (b) as a result of special circumstances, beyond the ordinary course, that the breaching party had reason to know; (3) a court may limit damages for foreseeable loss if justice so requires to avoid disproportionate compensation.
Hadley v. Baxendale is the source: lost mill profits not recoverable from a delayed shaft carrier because the carrier had no reason to know the mill was shut down for want of the shaft.
Common misunderstanding: students think foreseeability is a tort-style proximate cause test. It is not. § 351 fixes foreseeability at the time of CONTRACTING (not at breach) and asks what the BREACHING party knew. The two-track rule (ordinary course vs. special circumstances) drives the entire consequential damages analysis.
Cases that operationalize this rule
Text
R2d § 351. Unforeseeability and Related Limitations on Damages.
(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.
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.