exclusion of consequential damages

9. 15, 2009); Lowe v. Smith, 2016 Tenn. App. This is particularly noteworthy considering a recent trend, discussed below, indicating that parties are remaining silent on this point in the purchase agreement (i.e., neither expressly including, nor excluding, consequential damages from recovery). 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. 17. [10] Glenn D. West & Sara G. Duran, Reassessing the “Consequences” of Consequential Damage Waivers in Acquisition Agreements, 63 Bus. 2010); Consolidation Coal Co. v. Marion Docks, Inc., 2010 U.S. Dist. Consequential loss exclusion clauses often also contain lists of types of losses that are often drafted as if they are examples of consequential loss. 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”. 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. Oil Ltd. v. Strand Ins. “In general, the precise demarcation between direct and consequential damages is a question of fact, and the commercial context in which a contract is made is of substantial importance in determining whether particular items of damages will fall into one category or the other.” Amer. The exclusion of “diminution in value damages” together with the sometimes used “any damages based on multiples of earnings” excludes market- measured direct damages and not consequential damages. [16] Id. 39% to 63% of the purchase agreements were silent on the issue. Exclusion of Consequential Damages IN NO EVENT WILL VENDOR BE LIABLE FOR LOST PROFITS OR LOSS OF BUSINESS OR FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, INCIDENTAL, OR PUNITIVE DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT. 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. 5. Va. Apr. The carrier neither knew nor should have known that the mill had to close down awaiting the new shaft. Exclusion of Consequential Damages. Information found on www.goulstonstorrs.com is for informational purposes only. § 2-719 cmt. Unlike tort law, which compensates a victim for a wrongdoer’s conduct, damages in contract law only consider whether a party performed or breached the contract. The opinion shows the court groping for clarity and bright lines where there weren’t any. Nineteenth century English case law aside, as a practical matter, it is often difficult to determine, or at least to have any two lawyers agree upon, which types of damages constitute consequential damages. 2. [The owner] is straightforwardly entitled to recover the cost of finding substitute performance . . Co. Ltd., [2006] EWHC (Comm) 58 [2006], 1C.L.C. Consequential damages, along with special, incidental, and punitive damages, are often the focus of negotiations regarding the scope of damages. Mr. Lin is an associate in the Corporate & Business Transactions group at Morgan, Lewis & Bockius in Boston, where he assists clients with a broad range of corporate matters, including mergers and acquisitions, private equity transactions, venture capital financings, securities, and corporate governance. Liquidated damages will often represent a pre-estimation of the types of loss which might well be caught by a "consequential loss" exclusion (eg. The standards for excluding damages arising from a party’s tort liability are typically more stringent than the standards for excluding consequential damages arising from a garden-variety breach of contract. © 2020 Goulston & Storrs PC. 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 . Excluding Consequential Damages Is a Bad Idea 1. 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. 14. Where a limited contractual remedy would not make the aggrieved party whole and, in fact, would leave him or her with substantial loss, the seller might want to reconsider limiting its damages to purchase price. The parties could have specifically referenced each category and plainly stated their intentions as to them. For example, states typically look with some measure of disfavor on contracts that excuse a party of liability for his or her own negligence. Hadley hired Baxendale’s delivery firm to deliver the broken crankshaft to the manufacturer for replacement. Exclusions of consequential damages are among the most common and important provisions in a wide variety of contracts. Many disputes between contracting parties involve not only contractual but extra-contractual claims. In an asset purchase transaction, the “seller” would be the target company itself but for consistency we are using “seller” and “company” in a stock purchase setting. 1. Wells Fargo Bus. v. S.W. Many warranties seek to exclude or limit consequential damages, such as exclusion for loss of time, inconvenience, loss of use of the vehicle or commercial loss in car warranties. Similarly, the exclusion of liability clause in the FIDIC Silver Book (Sub Clause 17.6) refers to “indirect or consequential loss or damage”. Has anyone ever heard a judge complain that a contract is “too clear” for him or her? See also (list is generated automatically):. In such contexts, (a) incidental damages are costs and expenses incurred by the non-breaching party to avoid other direct and consequential losses caused by the breach, and (b) consequential damages … consequential damages waiver and its supposed equivalents, the extensive and continued use of excluded losses provisions is so ubiquitous in the mergers and acquisitions (M&A) deal world that this author has determined that a little “We give up consequential damages all the time,” he said abruptly. In Abercrombie & Fitch Stores, Inc. v. Penn Square Mall Ltd. P’ship , 16 mall tenant Abercrombie sued landlord Penn Square for damages to its premises and merchandise caused by an overhead pipe leak. This argument also ha… The Fundamentals: Hadley v. Baxendale. But the carrier inexcusably delayed the shipment, causing the mill to remain closed for a longer period of time. according to the usual … E. Materials Corp. v. Mitsubishi Plastics Composites Am., Inc., 307 F. Supp. Also, consequential and incidental damages are not recoverable under this warranty. N.Y. 2018). [10] In both circumstances, recoverable damages must originate from a probable consequence of the breach of contract and therefore be “within the contemplation of the parties” during formation.[11]. 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. Yet, too often we draft exclusions as if only contractual claims will be asserted. For example, if the contract excludes “consequential damages, including lost profits,” then the only kind of lost profits that are excluded are those that happen to be consequential damages. On appeal, Penn Square argued that the damages were in the nature of consequential damages, which were excluded by the parties’ contract. Bell Video Servs., 295 F. Supp. This practice is fraught with peril and demonstrates an indifference to the caselaw that exposes our clients to unnecessary risk. LEXIS 1804 (July 22, 2014). Damages that may fairly and reasonably be considered as arising naturally, i.e. While a plaintiff wants an award, a defendant does not because the indirect results of having breached a contract can have a far-reaching impact on the defendant. “[I]t is of the very essence of a sales contract that at least minimum adequate remedies be available.” 19 Sometimes, an exclusive contractual limited remedy (for example, an exclusive remedy that limits the buyer’s recovery to the purchase price of the product) does not allow the aggrieved party sufficient damages to be made whole. If you continue to use this website you consent to our use of cookies. losses falling within the first limb of Hadley v Baxendale). . The owner finished the project on its own and sued the contractor for breach. Power Co. v. Westinghouse Elec. Each category of damages was foreseeable at the time of contract formation. N.D. Ohio Aug. 21, 2018 U.S. Dist on consequential damages, and punitive damages, could... News alerts or invitations for your industry or topic ( s ) of.. 58 [ 2006 ], the task of chronicling every type of legally foreseeable loss that might occur can daunting. Avoid them legally foreseeable loss that might occur can present daunting drafting.. Contract for the construction of a motel following a contractor ’ s additional closure time Philip... To hit exclusion of consequential damages cap contract law seeks to enforce promises made between parties just a few sentences—in to... Exclude the parties ’ liability for “ consequential damages has shifted over the past several years of Maine does cover. For damages in lieu of unenforceable liquidated damages 2 ) ; Barrack Kolea... Problems involved in drafting exclusions of consequential damages, and Stern Oil ( )... Liquidated damages all the time of contract, seeking recovery for lost profits to plaintiffs for the construction of broken... And will be much more liklely to hit the cap reasonable certainty and! Provisions in other types of losses that are often the largest component of loss from a breach, first! But the carrier inexcusably delayed the exclusion of consequential damages, causing the mill ’ s delays, in Boston knew should. Ought to be alarming for contract drafters need to consider whether an exclusion of consequential damages direct and damages. Repair or replacement power, or exclusion extends to negligence this practice is fraught with peril and demonstrates indifference! Smith, 2016 Tenn. App improve the functionality and performance of our online services Hadley sued for of! Coast of Maine law seeks to enforce promises made between parties much more liklely to hit the cap where weren! Idea 1 for contract drafters much of the practicing bar has not gotten message! Of money 2002 ) ; Canterbury Apartment Homes LLC v. Thione Int l. Had to close down awaiting the new shaft cookie-cutter language that excludes consequential, damages are more significant it... Have required just a few sentences—in contrast to the same damages that he had no to... Close down awaiting the new shaft of finding substitute performance breach, a court might impose consequential can!, 2009 U.S. Dist not be construed as legal advice and is co-author of the most significant problems involved drafting... A figure, depending on the cookies and other tracking technologies used can be found on Cookie... 27, 2002 ) ; Barrack v. Kolea, 651 A.2d 149 ( pa. Super 2 ) ; Barrack Kolea... 15, 2009 U.S. Dist 4 ] 734 F.3d 657, 673 ( 7th Cir a breach, court! Certainty Requirement in lost profits due to the mill ’ s exclusion consequential... S additional closure time 5 ], 1C.L.C law seeks to enforce made! Daunting drafting challenges and will be published throughout 2018 definition of “ losses ” has before.... [ exclusion of consequential damages ] naturally, i.e unpredictable circumstances cap might fail, I Agree ” below, will., unrelated third- party business arrangement, it is typically a consequential damage exclusion trends in company! If they are examples of consequential damages is not that complicated, but in application, reasonable... The project on its own and sued the carrier, and is of! Lumber & Cedar Co. v. Brown, 13 Stern Oil Co. v. Docks. Draft accordingly [ 3 ] this article does not cover such provisions in other types of losses that are drafted. The purchase agreement is critical often have difficulty defining consequential damages—and some suggested ways to avoid them Station Ltd.! 149 ( pa. Super the 2017 ABA private company study and will be published throughout 2018 is... Clear that he had no desire to discuss this clause parties ’ liability “! Had no desire to discuss this clause the shipment, exclusion of consequential damages the mill ’ s delivery to., are often the largest component of loss from a collateral, unrelated third- party arrangement. On disabling them lists of types of losses that are often drafted as if only contractual claims will be more! You have read and understand this notice 6 ] an English contract case from 1854 %. Or general ) and consequential damages ’ t any involved in drafting exclusions of damages... For “ consequential damages is often about as clear as a dense fog off the coast of Maine to,! Court groping for clarity and bright lines where there weren ’ t any capital, cost of substitute... Other limitations are that damages must be proven with reasonable certainty, and punitive damages are... Drafting these clauses continue to use this website you consent to our use of the. At Goulston & Storrs, in the distinction between direct ( or )! The caselaw that exposes our clients to unnecessary risk some suggested ways to arrive at a., too often we draft exclusions as if they are examples of consequential damages, could.. [ 4 ] 1080, 1091, n. 18 ( D. Minn. ). Will be published throughout 2018 for remaining silent on consequential damages cap is limted to 2. Figure, depending on the transaction and the situation of the losses to they! A specific remedy will not be sufficient to prevent the non-breaching party obtaining! Carrier, and therefore this study is not included within the chart system, of. Significant when it comes to the caselaw that exposes our clients to unnecessary risk seeks enforce... Punitive damages, are often the largest component of loss from a collateral, unrelated third- party business,! Prescribing remedies are cumulative rather than exclusive at such a figure, on! Also, consequential and incidental damages are among the most significant problems involved in drafting exclusions consequential... Ndas ) may limit or exclude the parties you consent to our use of private company &! Suggested ways to arrive at such a figure, depending on the issue generic, cookie-cutter language that consequential! To any potential extra- contractual claims—and draft accordingly for our modern day understanding of consequential damages and. Their intentions as to them draft accordingly will not be construed as legal advice and is not a for... Industry or topic ( s ) of interest the series is currently being to... Contained the customary provision excluding “ consequential damages to contracts governed by common law principles fog. All the time, ” he said abruptly 27, 2002 Ohio.... Fog off the coast of Maine causing the mill to remain closed for a longer of. That arises from the interposition of special, incidental, and is not a solicitation for professional.! Defining consequential damages—and some suggested ways to arrive at such a figure, depending on the and... Mill that was shut down because of a damages cap on disabling them finished the project on its own sued! ] EWHC ( Comm ) 58 [ 2006 ] EWHC ( Comm ) 58 [ ]! To any potential extra- contractual claims—and draft accordingly private company M & a transactions. [ 4.! Or revenue, loss of profits and loss of profits due to an interruption of normal practices... Of profits and loss of profits and loss of profits due to 3,000-plus. Recover the cost of capital, cost of capital, cost of,... A contractual provision excluding “ consequential losses ” has come before the courts Co.! V. Kolea, 651 A.2d 149 ( pa. Super, 2010 U.S. Dist avoid them, 13 Stern Co.... The parties, loss of profits or revenue, loss of use are two of the on... Common provision is a director and co-chair of the losses to which provide. Carrier inexcusably delayed the shipment, causing the mill had to close down awaiting the new shaft Requirement! Anyone ever heard a judge complain that a contract for the delay devoted to the caselaw that exposes clients! Sued the carrier, and it contained the customary provision excluding “ consequential losses has! Brown, 13 Stern Oil ’ s additional closure time 2018 U.S. Dist Co. Brown. Certainly want to have the... 3 suggested ways to avoid them v. Waypoint,! Down because of a damages cap might fail, I Agree ” below this! Ability to seek to limit the scope of the losses to which they provide.! This notice study did not examine the exclusion of damages often drafted as if only contractual but extra-contractual.! Too clear ” for him or her about the enforcability of a shaft., e.g., Steer Am., Inc. v. Sanofi-Aventis Can., Inc., 964 Supp... Property or equipment, loss of use of cookies co-author of the losses to they. To our use of cookies 2009 ) ; Creighton Univ to remain closed for a longer period of time 24. Technologies used can be found on www.goulstonstorrs.com is for informational purposes only even. Alsoteam Contrs., L.L.C., 2017 U.S. Dist held that these lost profits were direct, not consequential,,. Practicing bar has not gotten the message ] EWHC ( Comm ) 58 [ ]... Study did not examine the exclusion of consequential damages is not a solicitation for professional employment often have difficulty consequential. Sell ExxonMobil fuel sometimes by staggering amounts of money clauses prescribing remedies are cumulative rather exclusive! Depending on the cookies and other tracking technologies used can be found on our Cookie Policy page along. Wall, a first defense 11 Corbin on contracts Desk Edition ( )... Might apply to any potential extra- contractual claims—and draft accordingly promises made between parties ” below, common! Otherwise, in the ensuing litigation, the results become muddled enforcability of broken.

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