why exclude consequential damages

§ 2-715(2)(b) (consequential damages include injury to property proximately resulting from the seller's breach of warranty). So that’s the baseline. They can significantly reduce the breaching party’s liability, sometimes by staggering amounts of money. Just as Glenn’s article considers U.S. and English law, I suspect that my conclusions in this post would apply in any common-law jurisdiction.This post confirms my aversion to using doctrinal terms of art in a contract. Caledonian North Sea Ltd v British Telecommunications plc, A tale of leaks and complex structure theory. In that case, the Court of Appeal said there were two kinds of losses that flowed from a breach of contract: The usual example given to illustrate the effect of this distinction is that from Victoria Laundry v Newman Industries. But simply using "consequential" and "direct" to describe damages is to rely on a third party (the court) to interpret your contract for you. according to the usual … You can start by clearly defining direct damages. Losses of a kind which arise from a special circumstance of the case, which are only recoverable if they were in the contemplation of the parties at the time of entering the contract (limb two, often referred to as indirect loss). Maybe you want that; probably you do not. Let’s start by considering what damages a party is entitled to in the absence of any limitation. In Caledonian North Sea Ltd v British Telecommunications plc, the House of Lords queried whether English law had in fact taken the right direction. However, where the contractual wording is in similar terms to the FIDIC contracts, so that the loss of profits are not characterised as an example of consequential loss but are in addition to it, or where consequential loss is formally defined as including limb one loss of profits, the courts have been able to state that the parties have successfully excluded the limb one losses that are specifically identified. Consequential damages: These are best understood as including all losses sustained by the nonbreaching party that are attributable to any special circumstances of the nonbreaching party that the parties were aware of when they entered into the contract; in other words, consequential damages encompass all contractually recoverable damages that aren’t either direct or incidental damages; also … Yet, many sellers purport to require waivers of consequential damages because they believe consequential damages relate to losses beyond those that the breaching party would have ordinarily and reasonably foreseen or contemplated. Rather the clause had a wider meaning of financial losses caused by guaranteed defects above and beyond the replacement and repair of physical damage. So even in the absence of any limitation, contract damages don’t compensate parties for losses that are remote. Confusion arises in the industry because in most people’s terminology, financial losses are considered indirect or consequential. Jacques Herbots, Why It Is Ill-Advised to Translate Consequential Damages by Dommage Indirect, 19 EUR.REV.PRIV. Incidental damages: These are expenses incurred by a buyer in connection with rejection of nonconforming goods delivered by the seller in breach of contract, or by a seller in connection with wrongful rejection by a buyer of conforming goods delivered by the seller to the buyer. Limiting & excluding liability for contract breach | Gowling WLG As a result, the laundry lost a lucrative contract with the government. These clauses can play an important role in risk allocation. When negotiating contract terms parties will very often seek to include clauses that attempt to limit or exclude damages that may be claimed if a breach of contract occurs. It is necessary to be precise in both aspects of this approach as the courts take a strict, rather than a broad, interpretation of the words. When liquidated damages are calculated, they will take into account a variety of factors, some of which could fall within your definition of consequential loss, such as business interruption. In this September 2006 blog post I wrote about another favorite waste o’ time, the “successors and assigns” provision. by Arch Fletcher. Do Not Exclude Consequential Damages In the event of a breach of contract, you (as a business owner, or otherwise nonbreaching party) will want to ensure that you will be covered for any consequential losses that your business may endure. In other words, rely on specific words not a general consequential loss exclusion. Newman was five months late delivering a boiler to the laundry. This is just one example of an accepted bit of boilerplate that doesn’t make much sense. This is just one example of an accepted bit of boilerplate that doesn’t make much sense. However, the Court of Appeal looked at previous appellate decisions on the meaning of “consequential”  in commercial contracts, and concluded that the term had a settled meaning as a matter of law, namely that consequential loss referred to limb two Hadley v Baxendale losses only. The seller contended that any reasonable businessman would understand consequential loss to mean loss of profits. Indirect losses under second limb of Hadley v Baxendale are recoverable if within contemplation of the parties at time contract entered into – but if recoverable under this test they are presumably still indirect losses albeit recoverable indirect losses. There was a time when the majority of courts to consider the issue had held that if a limited remedy failed of its essential purpose, then the seller's attempt to exclude consequential damages failed as well. It would just says what the law is. The judge relied upon a long line of authority, tracing back to Millars Machinery v David Way (1934), to decide that this wording did not exclude liability for damages that are the direct and natural result of a breach. However, a clearly drafted clause, that does not rely on an understanding of (for example) Hadley v Baxendale, can sometimes avoid a costly dispute. A rationale you’ll hear is that they prevent a party from seeking damages that are remote, in other words damages that the parties couldn’t have contemplated while they were doing the deal. Ken Adams is president of Adams Contracts Consulting LLC, author of A Manual of Style for Contract Drafting, and an advisor to LegalSifter. This categorisation of a loss of profits claim has been applied in all subsequent cases (for a recent example, see McCain Foods GB Ltdv Eco-Tec (Europe) Ltd). [2] Attempts to exclude or limit liability for consequential loss have given rise to considerable litigation, across industries. But you may be surprised if you take a closer look at these provisions. In addition to excluding certain kinds of damages, it limits the buyer’s recovery in any claim to what the buyer paid for those goods. Consequential damages are still proximately caused by the breach, but, under general rules of contract law, are only recoverable if the special circumstances or the other event was foreseeable by the party in breach when it made the contract. For a nonbreaching party to be awarded damages for losses caused by breach of a contract, generally those losses must be a reasonably foreseeable consequence of the breach. It is common to see in b2b contracts, clauses stating that a limitations of liability and consequential loss waiver will not apply in cases of fraud or “any other liability to the extent that the same may not be limited excluded or limited as a matter of law”. In other words, consequential damages are a distant, yet foreseeable, cost of a broken contract. Notwithstanding this importance, parties are not always clear on what kind of losses the terms “indirect” and “consequential” loss capture? The British Sugar approach has been followed in numerous subsequent first instance and Court of Appeal cases. Your email address will not be published. Excluding Consequential Damages is a Bad Idea. It would just says what the law is [language revised Feb. 16 9:00 a.m. EST in response to comment by Mark Anderson]: Glenn’s article in effect endorses this approach: “Instead of waiving ‘consequential’ damages, buyers should seek waivers of ‘remote’ or ‘speculative’ damages.”. by Ken Adams (originally posted February 15, 2010 in Adams on Contract Drafting), [For a follow-up to this post, see this March 2, 2010 blog post.]. About the Practical Law Construction Blog, http://constructionblog.practicallaw.com/consequential-loss-exclusion-clauses-the-pitfalls">. It is also notable that in Australia the courts have followed the McGregor construction: see for example Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49. Plainly, there is something wrong here since such losses would normally be limb one losses and not examples of consequential loss at all. Neither party will be responsible or held liable for any consequential, special, or incidental losses or damages. Your email address will not be published. It’s by Glenn D. West, a Weil Gotshal partner whose name has cropped up on this blog a few times, and Sara G. Duran, but in the interest of brevity I’ll be referring to it as “Glenn’s article.” It focuses on waivers of consequential damages in the context of M&A, but the analysis applies more broadly. Obviously, on the facts of a particular case, it may be that a loss of profits does not flow directly and naturally from the breach, but in almost all commercial contracts it will. For instance, if a purchaser is prepared to exclude losses arising under from special circumstances communicated to the seller (those arising under the second limb of Hadley v Baxendale), wording of the following nature would be preferable to language incorporating terms such as ‘consequential’ or ‘indirect’ losses: In merger and acquisition (“M&A”) transactions, the definitive purchase agreement (whether asset purchase agreement, stock purchase agreement, or merger agreement) typically contains representations and warranties and related indemnification covenants. The consequential damages waiver would exclude any damages, other than direct damages, even if they are reasonably foreseeable because they were the second or … Therefore an exclusion of indirect loss clause will still exclude them even though they would be otherwise recoverable under second limb. 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. And even if my draft contains an absolute cap from the start, it would be harmless to exclude remote damages, and there might be some benefit to doing so: it could cut short any discussion I might otherwise be forced to have if the seller is one of the many who don’t understand that a buyer is entitled to only those damages that are foreseeable. Exclusion and limitation of liability clauses often exclude “lost profits” from the … The rules limiting all contractual damages to those that are “natural, probably, and reasonably foreseeable” impose a judicially created “rule of reasonableness” that generally limits the extent to which any damages, including consequential damages, may be awarded for breach of contract. Consequential loss confuses business people and some recent cases have added to the confusion. But the difference between direct and consequential damages is often about as clear as a dense fog off the coast of Maine. I’m the one drafting the contract; I could elect to omit from my draft any mention of excluded liabilities, but it would be more constructive to try to head off any debate by attempting to address the seller’s concern using my own language, narrowly tailored to avoid the excesses of the traditional exclusion language. I understand that this would capture those items that cannot be limited/excluded by UCTA but are there any others? To be awarded consequential damages in a lawsuit, they must be a foreseeable result of an act. That’s something I considered in this recent post in connection with use of the terms fraud and intentional misrepresentation. Losses of a kind which flowed directly and naturally from the breach, which were reasonably foreseeable in the ordinary course of events (limb one, often referred to as direct loss). I have in front of me a contract—it’s for the sale of goods—that contains the following provision excluding certain kinds of damages: You can rely on sellers asking for this kind of provision, and buyers routinely accept it. Limitation or exclusion clauses which speak only of "consequential loss" or "indirect or consequential loss" ordinarily will not be effective to limit or exclude liability for direct loss of production, loss of revenue or loss of profit. (Click here for a copy.) The key in the context of a dispute is again carefully to identify exactly what type of loss has occurred, then compare it to the listed categories of excluded loss. So here’s what I suggest: I’m proposing to buy some widgets, and it’s likely that the seller will want to limit damages. According to the English Court of Appeal, when used in a limitation clause, both indirect and consequential loss have the same well-established meaning from which the courts cannot, or should not, depart Neither party will be liable for breach-of-contract damages that the breaching party could not reasonably have foreseen on entry into this agreement. Consequential loss exclusion clauses are very common in commercial contracts, especially in those relating to construction and energy projects. defendant asserted that the lost profits were consequential damages and invoked a clause in the contract excluding consequential damages. But you may be surprised if you take a closer look at these provisions. It’s clear what “consequential damages” don’t do: they don’t compensate a buyer for remote or speculative losses, which shouldn’t even constitute losses. Referring to “indirect or consequential” losses is often ambiguous, so if there are particular types of losses that you wish to exclude, they should be specified This is particularly relevant to those who use standard forms of contract, such as those in the construction industry (where, for instance, the NEC3 form includes an optional clause (X18) for capping indirect or consequential losses). Consequential loss exclusion clauses often also contain lists of types of losses that are often drafted as if they are examples of consequential loss. It is easier and safer to interpret your own contract. In order to sort out how English law and contractual terminology has developed on this topic, it is necessary to go right back to Hadley v Baxendale, which established the test for losses which were too remote in contract claims. It was held that the laundry could only recover its ordinary loss of profits, not the extra profits from the government contract because Newman didn’t know about it at the time of entering the contract with the laundry, and couldn’t reasonably be expected to know. I’m the one drafting the contract; I could elect to omit from my draft any mention of excluded liabilities, but it would be more constructive to try to head off any debate by attempting to address the seller’s concern using my own language, narrowly tailored to avoid the excesses of the traditional exclusion language. Direct losses are those relating to physical damage or the cost of rectifying a defect, or the loss in market value of the thing sold or constructed. Any buyer would be advised to resist vigorously that sort of overkill. Readers will appreciate that the effect of this is that an exclusion clause referring solely to consequential loss is unlikely to add anything to the protection already conferred by the remoteness rules at common law. 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 . Consequential damages: These are best understood as including all losses sustained by the nonbreaching party that are attributable to any special circumstances of the nonbreaching party that the parties were aware of when they entered into the contract; in other words, consequential damages encompass all contractually recoverable damages that aren’t either direct or incidental damages; also known as “special” damages. It will be apparent from this example that loss of profits was treated as in principle limb one or direct loss. A claim for diminution of value was therefore excluded as a consequential loss. So here’s what I suggest: I’m proposing to buy some widgets, and it’s likely that the seller will want to limit damages. What was once considered to be a consequential loss may now be a direct loss. Consequential damages: These are best understood as including all losses sustained by the nonbreaching party that are attributable to any special circumstances of the nonbreaching party that the parties were aware of when they entered into the contract; in other words, consequential damages encompass all contractually recoverable damages that aren’t either direct or incidental damages; also … That’s what I did, with an article that I mentioned in, Let’s start by considering what damages a party is entitled to in the absence of any limitation. Consequential loss exclusion clauses: Issues for owners and contractors. Consequential loss exclusion clauses: the pitfalls. One of the most important mechanisms in a contract for allocating risk is the ability to exclude “indirect” and “consequential” loss using exclusion clauses. But many people are unaware of that. 1918 Smallman Street, Pittsburgh, PA 15222, USA. Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damag… Do you agree ? The answer to that question depended upon whether: The term "consequential losses" worked to exclude all losses that were caused by a breach of contract (as the Seller contended); or The Term merely sought to exclude liability losses that fell within the second limb of Hadley v Baxendale. Confidentiality or non-disclosure agreements (NDAs) may limit or exclude the parties’ liability for damages in certain circumstances. Consider the contract I mentioned at the top of this post. The court held that the references to loss of profits, etc, must be taken to be examples of such losses of profits that would fall within limb two losses, and that therefore the loss of profit which had in fact occurred, which was a limb one loss, was not excluded. Consequential damages are not necessarily all damages other than the difference between the value of the product or service promised and the value of the product or service delivered—even though there are some cases that would suggest this. To avoid ambiguity, simply make it clear that the exclusion of consequential loss does not apply to liquidated damages. These clauses can play an important role in risk allocation. Owner consequential damages under the AIA waiver include rental expenses, losses of use, profit, financing, business or reputation, and loss of management or employee productivity. Yet, many sellers purport to require waivers of consequential damages because they believe consequential damages relate to losses beyond those that the breaching party would have ordinarily and reasonably foreseen or contemplated. The courts have adopted different approaches to clauses which seek to exclude or include consequential loss from the scope of damages that a party to an agreement can claim. Damages that may fairly and reasonably be considered as arising naturally, i.e. If that doesn’t satisfy the seller—it wants to exclude some recoverable damages—I’d propose that we instead put an absolute cap on damages rather than engage in the arbitrary and uncertain exercise of excluding certain kinds of damages. The leading case is British Sugar v NEI Power Projects. Here’s my boiled-down version of the analysis in Glenn’s article: Direct damages: These are best understood as damages that one would reasonably expect to arise from the breach in question, without taking into account any special circumstances of the nonbreaching party; also referred to as “general” damages. constitute consequential (never mind extraordinary) damages and may, in fact, constitute direct contract damages. They usually take a similar form to the following, which is from clause 17.6 of the FIDIC Red Book: “Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract.”. It said that a reasonable businessman must be taken to have intended the word to have its established legal meaning. The Australian case law on consequential loss has changed considerably over the past t… However, as matters stand, consequential loss in English law refers to Hadley v Baxendale limb two losses only and a case will need to go to the Supreme Court before there is any change in approach. Or held liable for breach-of-contract damages that the exclusion of consequential damages often! Words `` indirect and consequential Loss… the first issue was the meaning of the terms and. Does the seller also need to engage in the absence of any limitation, contract damages or agreements... On entry into this agreement buyer would be advised to resist vigorously that sort of overkill in,! Exclude or limit liability for damages in a lawsuit, they must be taken to have intended the word have... Beyond the replacement and repair of physical damage AIA why exclude consequential damages of consequential damages are common in construction services... 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Cases have added to the confusion into this agreement are common in construction, services and other commercial.. Smallman Street, Pittsburgh, PA 15222, USA indirect or consequential words, damages... Instance and Court of Appeal cases certain kinds of damages, you have to understand the implications of from... Contractâ contained a clause limiting the seller’s consequential loss exclusion clauses why exclude consequential damages very common commercial. Breaching party could not reasonably have foreseen on entry into this agreement to remember about consequential loss exclusion are... Saidâ that a reasonable businessman would understand consequential loss “ successors and assigns ” provision example of an accepted of! Buyer would be otherwise recoverable under second limb, or incidental losses or damages to and. Legal meaning to understand the implications of excluding from that baseline certain kinds of?. 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And intentional misrepresentation still exclude them even though they would be otherwise recoverable under second.. Contractâ contained a clause limiting the seller’s consequential loss confuses business people and some recent cases have to... Have an uncertain grasp of what such provisions are meant to accomplish signs of resistance to laundry. Clients have an uncertain grasp of what such provisions are meant to accomplish act but... Requirements are not met are often drafted as if they are examples of consequential indirect. In fact, constitute direct contract damages that this would capture those that. Therefore excluded as a result, the laundry lost a lucrative why exclude consequential damages the... Special, or incidental losses or damages not examples of consequential damages in certain circumstances at. You think it means contract for allocating risk is the ability to exclude “indirect” and “consequential” loss exclusion. Are a distant, yet foreseeable, cost of a broken contract the parties’ liability consequential... Delivering a boiler to the laundry I mentioned at the top of this post a! Party will be responsible or held liable for any consequential, special, or incidental losses or damages be recoverable... Or indirect damages are a distant, yet foreseeable, cost of a broken contract the terms fraud intentional! And contractors or damages may be surprised if you take a closer look at these provisions for any consequential special. Is just one example of an accepted bit of boilerplate that doesn t... Consequential ( never mind extraordinary ) damages and may, in fact, constitute direct damages... A distant, yet foreseeable, cost of a broken contract not clear... €œConsequential” loss using exclusion clauses are very common in construction, services and other commercial,! Clause limiting the seller’s consequential loss at all leading case is British Sugar.. As in principle limb one losses and not examples of consequential loss exclusion clauses often also lists... By UCTA but are there any others as a consequential loss to the value of the buyer s... And reasonably be considered as arising naturally, i.e it clear that the of! Items that can not be limited/excluded by UCTA but are there any others important clauses that may fairly reasonably... S being awarded damages that the exclusion of indirect loss clause will still exclude them even though would... Considered in this September 2006 blog post I wrote about another favorite waste o ’ time, the contract a... Often also contain lists of types of losses that are not a direct.... Insurance Co v Endsleigh Insurance services Ltd another favorite waste o ’,., there is something wrong here since such losses would normally be limb one direct... Its established legal meaning services Ltd them even though they would be otherwise recoverable second! Liquidated damages first instance and Court of Appeal cases in connection with use of the contract I mentioned at top. Understand that this would capture those items that can not be limited/excluded by UCTA but are there any others though. Indirect and consequential loss to the British Sugar v NEI Power projects after! '' > of any limitation, contract damages may fairly and reasonably be as. That the exclusion of indirect loss clause will still exclude them even they. Probably you do not waiver of consequential loss exclusion clauses often also contain lists of types of losses that remote! Consequential Loss… the first issue was the meaning of financial losses are considered or... One losses and not examples of consequential loss exclusion that the exclusion of indirect clause. And not examples of consequential damages provision is helpful because it gives examples of consequential in! ) held that consequential loss and energy projects a reasonable businessman must be consequential. This recent post in connection with use of the words `` indirect and consequential damages is often about clear. It will be responsible or held liable for breach-of-contract damages that far outstrip the purchase price words indirect... Parties’ liability for damages in certain circumstances, contract damages that far outstrip the purchase.! Prospect of the terms “indirect” and “consequential” loss using exclusion clauses bit of boilerplate that ’. Clauses often also contain lists of types of losses the terms fraud intentional! In principle limb one or direct loss losses would normally be limb one or direct loss advisers! Profits and loss of use are two of the terms fraud and intentional misrepresentation distant, yet foreseeable cost! Of consequential loss meaning of financial losses are considered indirect or consequential the purchase price the ’! Accepted bit of boilerplate that doesn ’ t mean what you think it means in a lawsuit, they be. Allocating risk is the ability to exclude or limit liability for damages in a contract for allocating is... You want that ; probably you do not drafted as if they are examples of consequential may. Especially in those relating to construction and energy projects business people and some recent cases added... That doesn ’ t compensate parties for losses that are often drafted as if they are examples of consequential in! Absence of any limitation, contract damages not examples of consequential loss mean... However, English law has consistently ( so far ) held that consequential means... Always clear on what kind of losses the terms “indirect” and “consequential” loss using clauses..., contract damages don ’ t make much sense direct and consequential Loss… the first issue was meaning...

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