exclusion of consequential damages

2018), and is co-author of the Corbin on Contracts Desk Edition (2017). [9] The Hadley rule establishes two categories of recoverable contract damages: (1) losses that would arise “normally and naturally” from a breach of any similar contract; and (2) any other losses arising from the “special circumstances” of the non-breaching party, if those special circumstances were communicated to the breaching party when the contract was made. When negotiating the inclusion or exclusion of consequential damages, sellers often assert that they should not be responsible for “speculative” damages or damages which are not otherwise foreseeable. 2d 993, 1003 (D. Minn. 2013). The result of consequential damages can include: 1. Liability for unliquidated damages in lieu of unenforceable liquidated damages. La. Once again the interpretation of exclusion clauses limiting liability for “consequential losses” has come before the courts. Oil Ltd. v. Strand Ins. We use cookies to improve the functionality and performance of our online services. (9) A statement in the following language: This warranty gives you specific legal rights, and you may also … Information on the cookies and other tracking technologies used can be found on our Cookie Policy page, along with instructions on disabling them. Judges and even seasoned commercial practitioners often have difficulty defining consequential damages—and for good reason. Before communicating with us by e-mail, please note that unsolicited emails and information sent to Goulston & Storrs PC do not create an attorney-client relationship with any of our attorneys, nor do they necessarily impose an obligation of confidentiality on us. Rep. 145 (1854). loss of production or loss of revenue). The opinion shows the court groping for clarity and bright lines where there weren’t any. They can significantly reduce the breaching party’s liability, sometimes by staggering amounts of money. Consequential Damages: Injury or harm that does not ensue directly and immediately from the act of a party, but only from some of the results of such act, and that is compensable by a monetary award after a judgment has been rendered in a lawsuit. The High Court’s decision in Star Polaris LLC v HHIC-PHIL INC is an interesting reminder of the debate surrounding exclusion clauses and the interpretation of “consequential loss”. This article does not cover such provisions in other types of transactions or in public-to-public M&A transactions. Corp., 418 F. Supp. 23, To anticipate this problem, the seller should include language in the contract to this effect: “The parties agree that, regardless of the failure of the sole and exclusive remedy, seller will not be liable for any consequential damages of whatsoever kind or nature.”. According to the 2017 ABA study, only nine percent of the agreements reviewed included a consequential damages “inclusion” provision (i.e., a provision that expressly includes consequential damages within indemnified losses), while 39% of the agreements expressly excluded consequential damages from coverage, and 52% of the agreements were silent on the issue. 3d 52 (E.D. “Losses” are normally defined broadly and may include, for example: Any loss, liability, demand, claim, action, cause of action, cost, damage, royalty, deficiency, penalty, tax, fine or expense, whether or not arising out of third party claims (including interest, penalties, reasonable attorneys' fees and expenses) and all reasonable amounts paid in investigation or defense, and all amounts paid in settlement, of any of the foregoing. 3d 1080, 1091, n. 18 (D. Minn. 2017). ” The court also held that an additional seven months of interest on the owner’s construction loan was a direct damage because the loan was “an integral cost of completing [the contractor’s] performance, which was construction of the building.” The same was true of several months of additional utility bills— they “were a direct part of [the owner] carrying out [the contractor’s] performance on its own.”. Confidentiality or non-disclosure agreements (NDAs) may limit or exclude the parties’ liability for damages in certain circumstances. .” 21. Co. Ltd., [2006] EWHC (Comm) 58 [2006], 1C.L.C. 2.Id. “We give up consequential damages all the time,” he said abruptly. Research, 2016 U.S. Dist. For example, the exclusion of liability clause in ENAA 1996 (GC 30.2) refers to “any indirect, special or consequential loss or damage”. But when the contract that was breached is related to and contemplates the collateral business arrangement, the loss from the collateral arrangement may be classified as direct damages. 18. Such provisions should be explicit, making clear that the exclusion extends to negligence. There is “a presumption that clauses prescribing remedies are cumulative rather than exclusive. Hadley v Baxendaleis an old and well-known decision in English law establishing a fundamental division between two types of recoverable losses for breach of contract: 1. When a breach causes loss from a collateral, unrelated third- party business arrangement, it is typically a consequential damage. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. The owner finished the project on its own and sued the contractor for breach. The articles can be found on Goulston & Storrs’ “What’s Market” web page at http://www.goulstonstorrs.com/WhatsMarket and on Bloomberg Law at https://www.bloomberglaw.com/page/infocus_dealpoints. [7], The court denied Hadley’s claim for lost profits, concluding that damages must arise “naturally … 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.”[8] According to the court, Hadley's lost profits could not be a consequence of a breach of contract if the parties did not reasonably foresee the lost profits as a consequence during the contract's formation. 2d 1091 (N.D. Calif. 2003). other property or equipment, loss of profits or revenue, loss of use of. Hadley v. Baxendale quickly seeped into the DNA of our common law and is given articulation in the Uniform Commercial Code governing the sale of goods. However, in the 2017 study, the trend has again reversed, with silence again becoming the majority approach (with 52% of reviewed agreements remaining silent on the matter). v. S.W. The parties could have specifically referenced each category and plainly stated their intentions as to them. Many disputes between contracting parties involve not only contractual but extra-contractual claims. except as otherwise provided in section 11(c), no party shall, in any event, regardless of the form of claim, be liable for any indirect, special, incidental, punitive, exemplary, speculative, or consequential damages (including, but not limited to, any loss of use, loss of data, business interruption, and loss of income, profits, or business opportunities), regardless of whether it had an advance notice of the possibility of … U.C.C. § 2-715(2)(a). [5], The seminal case regarding consequential damages is Hadley v. Baxendale,[6] an English contract case from 1854. We clarify the differences between consequential loss and consequential damage with real-life examples, so it’s easy for you to explain policy exclusions to clients. 23.See, e.g., Steer Am., Inc. v. Niche Polymer, LLC, 2018 U.S. Dist. The 2005 ABA study did not examine the exclusion of consequential damages, and therefore this study is not included within the chart. This would have required just a few sentences—in contrast to the 3,000-plus words the court devoted to the same damages. Exclusions of "consequential damages" are widespread and, amongst business people and lawyers alike, there appears to be an ordinary and natural meaning commonly associated with that phrase which encompasses "everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach". ONE TIME, I WAS REVIEWING THE TERMS OF A PROPOSED contract with an executive for a client that was buying a product for a significant sum of money. E. Materials Corp. v. Mitsubishi Plastics Composites Am., Inc., 307 F. Supp. If the parties intend the term to describe the sole remedy under the contract, this must be clearly expressed.” 17 The party seeking to limit damages needs to spell out that the prescribed remedy is the sole and exclusive remedy. . Again, there are a wide variety of definitions of consequential damages. . Baxendale’s firm agreed to transport the shaft the day after it was received, but did not actually ship the part until five days later. 22. Sellers, understandably, seek to limit the scope of the losses to which they provide indemnification. This practice is fraught with peril and demonstrates an indifference to the caselaw that exposes our clients to unnecessary risk. Consequential damages, along with special, incidental, and punitive damages, are often the focus of negotiations regarding the scope of damages. 3 This is tantamount to inviting a group of complete strangers of indeterminate ability—better known as jurors—to decide what the contract means, rarely a prudent drafting strategy (except where the parties cannot agree on the contract language—in that case, they might decide to take their chances on ambiguity). “I see,” I said. Courts also apply this principle to contracts governed by common law principles. 3. Among the damages Stern Oil sought was lost profits for a prompt payment discount that Stern Oil would have received from ExxonMobil under its separate contractual arrangement with ExxonMobil if the Stern Oil-Brown franchise agreement had not been breached. Brown breached the franchise agreement, and Stern Oil sued. See also (list is generated automatically):. The state laws governing the purchase agreement’s interpretation are likely to determine the specific classification of damages among direct, consequential, or other types of damages. By contrast, the buyer typically argues that it should not be required to waive and exclude damages that it would otherwise, absent such waiver and exclusion, be able to assert against a seller in a normal breach of contract claim. 15, 2009); Lowe v. Smith, 2016 Tenn. App. Robert M. Lloyd, The Reasonable Certainty Requirement in Lost Profits Litigation: What It Really Means, 12 Transactions 11 (2010). § 2-719 cmt. Contract law seeks to enforce promises made between parties. Detriment that arises from the interposition of special, unpredictable circumstances. 11. This is not just a U.C.C. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. [1] Outside of the context of contracts for the sale of good, the meanings of consequential damages and incidental damages are somewhat different but they still should be separately disclaimed. Yet, too often we draft exclusions as if only contractual claims will be asserted. Consequential damages, otherwise known as special damages, are damages that can be proven to have occurred because of the failure of one party to meet a contractual obligation, a breach of contract. On appeal, Penn Square argued that the damages were in the nature of consequential damages, which were excluded by the parties’ contract. Also, consequential and incidental damages are not recoverable under this warranty. Over the 11-plus years covered by the six prior ABA studies:[20]. This article is based on, and updates, the article of the same name co-authored by Mr. Avery and Mr. Lin, and published in the Bloomberg Mergers & Acquisition Law Report, 18 MALR 414, 3/17/2014. See alsoTeam Contrs., L.L.C., 2017 U.S. Dist. Plaintiffs retained a carrier to transport the broken shaft to an engineering company where it would be used as a model to make a new shaft. Rep. 145 (1854), reproduced at http://mtweb.mtsu.edu/cewillis/Hadley%20v%20Baxendale.pdf (as viewed Apr. Mar. 10 For example, in Hadley , if the plaintiffs had alerted the carrier at the time of contract formation that the mill would be closed due to the broken shaft, that should have been enough to make the carrier liable for consequential damages. Many of us worry about the enforcability of a damages cap. Why not just say it plainly? But the carrier inexcusably delayed the shipment, causing the mill to remain closed for a longer period of time. This scenario is rare, but it occurs when “a product with a latent defect [is] incorporated into something else that cost much more to fix than merely the purchase price of the defective item.” 20 In one case, a contract limited the seller’s damages to the purchase price of the product, but it was foreseeable to the seller that “the purchase price amounted to only a small fraction of the overall repair cost when the product failed . Advanced BodyCare Sols., LLC v. Thione Int’l, Inc.,615 F.3d 1352 (11th Cir. Of course, the task of chronicling every type of legally foreseeable loss that might occur can present daunting drafting challenges. 15.Id. This is particularly so in situations where a small breach of contract by one party can result in very significant consequential damages (such as large losses of profits) to another. 425 P.3d 757 (Okla. Ct App. Even though the resales would have been transactions separate from the breached contract between the manufacturer and the distributor, the lost profits flow directly from, and are a natural and probable result of, the breach. The series is currently being updated to reflect the 2017 ABA private company study and will be published throughout 2018. It’s only a difference of two words – loss vs. damage – but it can be very confusing for your car insurance clients to understand. 7. Sept. 29, 2017). As a practical matter, however, the seller’s obligations (including representations, warranties, and covenants) are typically much broader and more extensive than the buyer’s obligations, and accordingly the seller is usually more inclined than the buyer to exclude consequential damages or otherwise limit indemnification coverage. 23, 2018). LEXIS 1804 (July 22, 2014). [6] 156 Eng. Simply put, consequential damages typically are more significant when it comes to the amounts awarded. Accordingly, the purchase agreement’s choice of law provision may have a material effect in a post-closing dispute as to which buyer damages are included, or excluded, from recovery upon the seller’s breach. [16] Id. Yet, the court held that various other expenses that were directly caused by the contractor’s delay and that might have been foreseeable—extra expenses for insurance and advertising and the added costs of leasing furniture, fixtures, and equipment—were consequential damages because they were not things that the owner expected to receive from the contractor’s performance. U.C.C. Ltd. P’ship. Although the contract specifically mentioned certain types of consequential damages that were excluded, the court found gaps in the language, and it was unclear whether various categories of damages fell within the consequential damages exclusion. 13. This article is one of a series of over 20 articles co-authored by Mr. Avery looking at trends in private company M&A deal points. 39% to 63% of the purchase agreements were silent on the issue. The court disagreed, holding that although it is possible to contractually restrict and even avoid tort recovery, any such exculpatory language in the contract must clearly and unambiguously evince the parties’ intent to restrict or avoid tort damages. Hadley did not communicate to Baxendale the reason for the delivery, nor did he inform the firm of the significant loss profits he would incur as a result of a delayed delivery. When drafters include a generic exclusion of consequential damages in their contracts without bothering to define what consequential damages are, it is frequently a fact question whether the damages are direct or consequential. Similarly, where a product manufacturer breaches a contract with a distributor that prevents the distributor from making resales of the product, the damages from the resales that the distributor was deprived of making have been held to be direct damages. Regardless of the correctness of the court’s conclusions, the parties could have avoided the costs and risks of litigation by addressing damages in a different way. Consequential loss exclusion clauses often also contain lists of types of losses that are often drafted as if they are examples of consequential loss. A leading scholarly article on the topic suggests consequential damages includes “all losses sustained by the non-breaching party to a contract as a result of the breaching party’s default, beyond those losses that would normally and necessarily result from such breach in the absence of the non-breaching party’s special circumstances.”[17] The authors go on to state that “[e]ven more simplistically, ‘consequential’ or ‘special’ damages should be understood as encompassing all contractually recoverable damages that do not fit within the category of either ‘incidental’ damages or ‘direct’ damages.”[18] In contrast, another commentator has opined that “[w]henever you use in a contract a term of art such as ‘consequential damages,’ you’re inviting confusion: any two people might have different ideas to what it means, assuming that they’ve given the matter any thought.”[19]. Despite the parties’ best intentions, whether a category of damages are considered direct damages or consequential damages is often determined on a case-by-case basis. [4] This article looks at the usage of consequential damages exclusions in private company M&A transactions as reflected in the ABA private target deal point studies. 777, 785 (2008). “[The contractor’s] performance under the contract was to construct the motel, but [the contractor] did not complete that performance. The implications of this ought to be alarming for contract drafters. Damages that may fairly and reasonably be considered as arising naturally, i.e. 16. 1.Team Contrs., L.L.C. The court held that these lost profits were direct, not consequential, damages. [2] Note that within this article we use the terms “seller” and “company” in the context of a stock purchase transaction—the “seller” would be the selling shareholder(s) making the representations and warranties in the M&A purchase agreement, and the “company” would be the company being acquired. Exclusion and limitation of liability clauses often exclude “lost profits” from the types of consequential damages … This argument also has limitations because buyers often do agree to waive and exclude some types of damages—most notably, special, incidental, or punitive damages. Employee Benefits & Executive Compensation, Corporate Board Diversity Requirements Expand: Guidance for Corporations, Current Awareness: Net Neutrality—Tweeting Corporate Information—SEC Cybersecurity Enforcement, Drafting Exclusion of Consequential Damages Clauses, Top 10 Practice Tips: Secondary Offerings, Investigation Requirements for #MeToo Complaints, Arbitration Agreement and Class Action Waiver Enforcement in Employment Litigation and the Impact of the Supreme Court's Decision in Epic Systems, Guidance for Employers on Direct Contracting With Health Care Providers, Wetlands Regulations: Considerations for Project Developers, In-house Counsel as Gatekeeper: Wearing Many Hats; Weighing Multiple Risks. From a legal standpoint, an enforceable contract is present when it is: expressed by a valid offer and acceptance, has adequate consideration, mutual assent, capacity, and legality. As noted below, this common argument is likely misplaced. 14.See Elorac, Inc. v. Sanofi-Aventis Can., Inc., 2018 U.S. Dist. U.C.C. The carrier neither knew nor should have known that the mill had to close down awaiting the new shaft. losses falling within the first limb of Hadley v Baxendale). 11 Corbin on Contracts § 56.6 (2018). 6. 2010); Consolidation Coal Co. v. Marion Docks, Inc., 2010 U.S. Dist. 9 But consequential damages—which are collateral to the breach—are also recoverable even though they were not reasonably foreseeable at the time of contract formation so long as they were actually foreseeable to the breaching party due to special circumstances peculiar to that transaction. Va. Apr. Each category of damages was foreseeable at the time of contract formation. Credit v. Hindman, 734 F.3d 657, 673 (7th Cir. 12. . In no event shall any Party or any affiliate thereof or any of their respective directors, officers, agents, or employees be liable to any other Party or any affiliate thereof or any of their respective directors, officers, agents, or employees for any indirect, consequential, punitive, special, incidental or exemplary losses or damages (including without limitation lost profits or lost … Too often, our contracts resort to generic, cookie-cutter language that excludes consequential, special, and indirect damages without further explanation. In the ensuing litigation, the jury awarded Abercrombie damages for Penn Square’s negligence, but not for breach of contract. Prior results do not guarantee a similar outcome. Solutions v. Control Sys. But merely listing a specific remedy will not be sufficient to prevent the non-breaching party from obtaining other remedies. 4. As a preliminary issue, the High Court had to consider the exclusion clause in the sub-contract, which read: “20.7 Neither Party shall be liable to the other under this Sub-Contract for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage…” A federal court’s decision in Jay Jala, LLC v. DDG Constr., Inc. 11 is a cautionary tale about how blurry the lines can be. Between contracting parties involve not only contractual claims will be asserted 6 ] an English case... Part of Brown ’ s consequential damages is a director and co-chair of the losses to which they indemnification... Much more liklely to hit the cap, or or special or indirect ) damages more., which could exclusion of consequential damages even more substantial Amelia Station, Ltd., 2002 ) ; v.... 63 % of the losses to which they provide indemnification or topic ( s ) of interest a motel a... Use of in Hadley, plaintiffs operated a grist mill that was shut down because of a breach a! 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