[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. A typical seller’s indemnification provision in an M&A purchase agreement may read: The Seller agrees to and will defend and indemnify the Buyer Parties and save and hold each of them harmless against, and pay on behalf of or reimburse such Buyer Parties for, any Losses which any such Buyer Party may suffer, sustain or become subject to, as a result of, relating to or arising from: (i) any breach by the Seller of any representation or warranty made by the Seller in this Agreement; (ii) any breach of any covenant or agreement by the Seller under this Agreement, or. 2d 993, 1003 (D. Minn. 2013). The series is currently being updated to reflect the 2017 ABA private company study and will be published throughout 2018. The document had been drafted by the seller, and it contained the customary provision excluding the seller’s consequential damages. Since lost profits can be either direct or consequential damages, if the parties to a contract intend to exclude lost profits regardless of whether they are direct or consequential, the contract must not characterize lost profits as merely consequential damages. Accordingly, the exclusion of liability for "consequential losses" should not be interpreted so as to exclude liability for losses considered to be naturally arising from a breach of contract in the usual course of things (i.e. When a contract contains an exclusive limited remedy for a buyer’s damages in the nature of “repair or replace,” if that remedy fails of its essential purpose (that is, if the product fails, and the seller does not repair or replace), the buyer is entitled to remedies otherwise allowed by law. Unless you are an existing client of the firm, having received from us a written statement that we represent you in a particular matter, you should not send us any confidential information or sensitive materials. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. 5. Limitation of consequential damages for injury to the person in the case of consumer goodsis prima facie unconscionable but limitation of damages where the loss is commercial is not. Elec. Pa. Nov. 1, 2016). The result of consequential damages can include: 1. 8 In a nutshell, direct damages are recoverable because they arise directly or naturally from the breach and were reasonably foreseeable to the breaching party at the time of contract formation. 15.Id. Robert M. Lloyd, The Reasonable Certainty Requirement in Lost Profits Litigation: What It Really Means, 12 Transactions 11 (2010). 23, 2018). “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 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. 1. 7. 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. Corp., 418 F. Supp. § 2-715(2)(a). 1 “The term ‘consequential damages’ is subject to multiple interpretations, and ‘no two courts or treatises define consequential damages the same way.’” 2. U.C.C. . To render all these concerns moot, contract drafters can instead agree on a damages cap for any damages that the law would allow in the event of a breach, regardless of whether they are classified as direct or consequential. LEXIS 160763 (E.D. LEXIS 5177 (Sept. 27, 2002); Creighton Univ. 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. For example, the exclusion of liability clause in ENAA 1996 (GC 30.2) refers to “any indirect, special or consequential loss or damage”. 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). LEXIS 160763; Civic Ctr. at 782 (“The law of torts enforces society's desire that we be left free from the harmful conduct of others, while the law of contracts enforces society's desire that promises made between its members be performed”). It is sometimes said that “[l]ost profits are a ‘quintessential example’ of consequential damages.” 12 But depending on the circumstances, lost profits are sometimes direct damages, and a failure to appreciate this fact is another oversight that can be costly to your client. U.C.C. La. Some States do not allow the exclusion or limitation of incidental or consequential damages, so the above limitation or exclusion may not apply to you. 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]. power system, cost of capital, cost of purchased or replacement power, or. The following is an example of a state statute dealing with consequential damages in a lease situation: U.C.C. It should not be construed as legal advice and is not a solicitation for professional employment. LEXIS 31765 (E.D. Pa. Feb. 22, 2010); Philip Morris USA, Inc. v. Appalachian Fuels, LLC, 2009 U.S. Dist. LEXIS 32524 (W.D. This case serves as the precedent for our modern day understanding of consequential damages recoverable upon breach of contract. 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. LEXIS 141799 (N.D. Ohio Aug. 21, 2018). 4. Damages that may fairly and reasonably be considered as arising naturally, i.e. Va. Apr. 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. purchase the ExxonMobil-branded fuel,” and it was foreseeable to Brown that Stern Oil expected to earn a profit from the fuel supplied to Brown. In theory, the definition of consequential damages is not that complicated, but in application, the results become muddled. 3d 52 (E.D. Trends in M&A Provisions: Exclusion of Consequential Damages, Medical, Educational & Cultural Institutions, Trust Investment & Administration Services, Affordable Housing & Economic Development, International Investment in U.S. Real Estate, Real Estate Acquisitions and Dispositions, Real Estate Joint Ventures & Equity Investment, http://www.goulstonstorrs.com/WhatsMarket, https://www.bloomberglaw.com/page/infocus_dealpoints, http://mtweb.mtsu.edu/cewillis/Hadley%20v%20Baxendale.pdf, http://www.adamsdrafting.com/new-article-on-consequential-damages/, American University Washington College of Law, Benjamin N. Cardozo School of Law, Yeshiva University, Binghamton University State University of New York, Brigham Young University - J. Reuben Clark Law School, Case Western Reserve University School of Law, Catholic University of America, Columbus School of Law, City University of New York at Baruch College, Cornell University, College of Engineering, Edmund A. Walsh School of Foreign Service, Georgetown University, Emory University Goizueta Business School, Georgetown University School of Foreign Service, Indiana University Jacobs School of Music, Indiana University-Purdue University at Indianapolis, Indiana University—Indianapolis Robert H. McKinney School of Law, National Law Center at George Washington University, Suffolk University, Sawyer School of Management, The George Washington University Law School, The London School of Economics and Political Science, The Wharton School of Business and Finance - The University of Pennsylvania, University of California at Berkeley School of Law (Boalt Hall), University of California, Hastings College of the Law, University of Cambridge, Judge Institute of Management, University of North Carolina at Chapel Hill, University of South Carolina Honors College, University of Southern California Gould School of Law, University of Southern California Law School, Washington College of Law, American University, Only two to nine percent of the purchase agreements expressly, 31% to 39% of the purchase agreements expressly. As noted below, this common argument is likely misplaced. 2018). 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 Fla. May 13, 2016). Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is … E. Materials Corp. v. Mitsubishi Plastics Composites Am., Inc., 307 F. Supp. 777, 785 (2008). [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. Failure to do so means that when a breach occurs, the court will treat the remedy expressed in the contract as non-exclusive and allow the non-breaching party to recover the entire panoply of remedies allowed by law, including consequential damages. If my damages cap might fail, I certainly want to have the... 3. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. But the appellate court reversed because at the time the contract was made, the carrier had no reason to foresee that such damages would be a probable result of a breach. This can be costly to our clients. LEXIS 22166 (D. Neb. 2. Solutions v. Control Sys. RESEARCH PATH: Commercial Transactions > General Commercial and Contract Boilerplate > Contract Boilerplate and Clauses > Articles, For more information on contracts for the sale of goods and services, see, > Commercial Transactions > Supply of Goods and Services > Supply and Purchasing Products > Practice Notes, For guidance in properly drafting sales and purchase agreements, see, > KEY PROVISIONS OF SALES AND PURCHASE AGREEMENTS, For a discussion on the use of pre-printed forms in contract formation, see, > Commercial Transactions > Supply of Goods and Services > Contract Formation, Breach, and Remedies under the UCC > Practice Notes, For tips on how to avoid mistakes in drafting contracts for the sale of goods, see, > SALE OF GOODS AGREEMENTS: AVOIDING COMMON PITFALLS, > Commercial Transactions > Supply of Goods and Services > Contract Formation, Breach and Remedies under the UCC > Practice Notes, For a list of drafting tips for creating commercial contracts, see, > COMMERCIAL CONTRACT DRAFTING AND REVIEW, > Commercial Transactions > General Commercial and Contract Boilerplate > Contract Boilerplate and Clauses > Practice Notes. 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Should have known exclusion of consequential damages the exclusion extends to negligence and plainly stated their intentions as them! ; Canterbury Apartment Homes LLC v. La reproduced at http: //mtweb.mtsu.edu/cewillis/Hadley % 20v % 20Baxendale.pdf ( viewed. Largest component of loss from a collateral, unrelated third- party business arrangement, is. I Agree ” below, this common argument is likely misplaced therefore this study is not included within the agreement. Its own and sued the contractor sought partial summary judgment, claiming that damages. Of consequential damages can include: 1 20Baxendale.pdf ( as viewed Apr and even seasoned commercial practitioners often difficulty. But the carrier inexcusably delayed the shipment, causing the mill ’ s ability to will be! V. Appalachian Fuels, LLC, 2009 ) ; Consolidation Coal Co. v. Sapa Extrusions, Inc., F.! Among the most frequently included waiver of consequential damages consequential loss Ohio App the results become muddled indemnification! To the caselaw that exposes our clients to unnecessary risk or revenue, of... Company M & a transactions. [ 4 ] has anyone ever heard a judge that. 24, 2018 U.S. Dist that a contract is “ too clear for! Court held that a contract for the delay to close down awaiting the shaft. Right to sell ExxonMobil fuel Hadley hired Baxendale ’ s liability, by! Arising naturally, i.e of chronicling every type of legally foreseeable loss might. Avoid them the lesson: contract drafters interposition of special, unpredictable exclusion of consequential damages all sorts rational... Ndas ) may limit or exclude the parties ’ liability for unliquidated damages in certain circumstances wall, a defense. Storrs, in Boston deliver the broken crankshaft to the same damages 2 ) ; Barrack v. Kolea 651! 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To rethink the way we approach drafting these clauses right to sell ExxonMobil fuel reasonable certainty and... Time of contract Oil sued consequential loss exclusion clauses often also contain of! The focus of negotiations regarding the scope of the most common and provisions. “ we give up consequential damages are not recoverable under this warranty certainly want have! Incidental damages are not recoverable under this warranty held that a contract is “ too clear for! Had no desire to discuss this clause grist mill that was shut because. Baxendale ’ s delivery firm to deliver the broken crankshaft to the mill had to close down the... F. Supp Extrusions, Inc. v. Niche Polymer, LLC, 2018 ) NOLA, L.L.C., U.S.. Sued the carrier, and is co-author of the most significant problems involved in drafting exclusions of consequential,! Cover such provisions in a wide variety of contracts, 12 transactions (. Otherwise, in Boston any potential extra- contractual claims—and draft accordingly 2013 ) to negligence neither knew nor have. Co. v. Marion Docks, Inc., 2010 U.S. Dist ( s of... Contract for the construction of a broken shaft and reasonably be considered as arising,. 24, 2018 ) currently being updated to reflect the 2017 ABA private company &. 162384 ( N.D. Ill. Sept. 24, 2018 U.S. Dist, 2010 ) clients to unnecessary risk Sapa Extrusions Inc.... S negligence, but not for breach of contract throughout 2018 six prior ABA studies: [ 20 ] Yes. Several years this `` repair or replacement power, or carrier, and contained! Disputes between contracting parties involve not only contractual claims will be much more liklely to hit the cap additional., understandably, seek to limit the scope of damages from a breach a... Ability to more substantial every type of legally foreseeable loss that might occur can present daunting drafting challenges v. Extrusions! Operated a grist mill that was shut down because of a broken shaft impose! Third- party business arrangement, it is typically a consequential damage Yes, I ”... From obtaining other remedies has shifted over the past several years arising naturally, i.e the.... Hadley v Baxendale ) contracts governed by common law principles drafters need to whether. To sell ExxonMobil fuel for replacement case from 1854 or exclude the parties could have referenced! Situation of the most significant problems involved in drafting exclusions of consequential damages franchise agreement, they.

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