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why exclude consequential damages

December 22, 2020

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. Any buyer would be advised to resist vigorously that sort of overkill. 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. 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. However, English law has consistently (so far) held that consequential loss means something different. 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. The plaintiff argued that the lost profits were direct damages, so the exclusion would not apply, and the New York Court of Appeals, in … 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. L. 931 (2011); Richard Hill, Limiting Exposure to Contractual Claims in Uncertain Times: Excluding Liability for “Consequential Loss” Under Australian and English Law,ASIA PAC.F. 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. The seller contended that any reasonable businessman would understand consequential loss to mean loss of profits. Do you agree ? In some cases, the parties specifi cally exclude 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. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. 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. Let’s start by considering what damages a party is entitled to in the absence of any limitation. [T]o define “consequential damages” as those losses that are so remote that they were beyond the contemplation of the parties at the time they entered into the contract is to define consequential damages as losses for which the law does not allow recovery in contract, regardless of any provision excluding such damages. Your email address will not be published. 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 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. Clauses such as “in no event shall either party be responsible to the other for indirect, special or consequential losses” are commonplace and are often accepted during contract negotiations, sometimes only subject to them being reciprocal. The sense of this distinction is supported in principle by the editors of McGregor on Damages (19th Edition): see the discussion at paragraphs 1-036 to 1-039. 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. If you are a lawyer or work in a legal capacity, please register for a free trial to see if Practical Law’s resources are right for your business. Confidentiality or non-disclosure agreements (NDAs) may limit or exclude the parties’ liability for damages in certain circumstances. 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 They can significantly reduce the breaching party’s liability, sometimes by staggering amounts of money. 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. 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. 15 Sep 2004. 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. 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. I understand that this would capture those items that cannot be limited/excluded by UCTA but are there any others? But I suspect that many lawyers and their clients have an uncertain grasp of what such provisions are meant to accomplish. But the difference between direct and consequential damages is often about as clear as a dense fog off the coast of Maine. Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damag… 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. It would just says what the law is. Why does the seller also need to engage in the messy business of excluding certain kinds of liability? It is typically on a party’s list of most important clauses that may require approvals at board level if certain requirements are not met. 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). That’s something I considered in this recent post in connection with use of the terms fraud and intentional misrepresentation. 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. It said that a reasonable businessman must be taken to have intended the word to have its established legal meaning. Damages that may fairly and reasonably be considered as arising naturally, i.e. Here the contract included an insurance clause that read: “Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profits or savings and all other pure economic loss) arising out of or in connection with this Agreement.”. Newman was five months late delivering a boiler to the laundry. So that’s the baseline. The consequential damages waiver would exclude any damages, other than direct damages, even if they are reasonably foreseeable because they were the second or … 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 . 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. 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. 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.”. 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. 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. The key when drafting is carefully to consider precisely what losses are likely to flow from a breach of contract, and then specifically to identify those types of losses in the exclusion clause. As two recent decisions in the energy sector have illustrated, adopting apparently wide-ranging and legalistic phraseology in such clauses may not have the desired result for the party seeking to limit its exposure. Consequential loss exclusion clauses: Issues for owners and contractors. Therefore an exclusion of indirect loss clause will still exclude them even though they would be otherwise recoverable under second limb. 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 … There are some small signs of resistance to the British Sugar approach. constitute consequential (never mind extraordinary) damages and may, in fact, constitute direct contract damages. 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. 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. § 2-715(2)(b) (consequential damages include injury to property proximately resulting from the seller's breach of warranty). 1918 Smallman Street, Pittsburgh, PA 15222, USA. Required fields are marked *. Consider the contract I mentioned at the top of this post. © 2020 LegalSifter, Inc.  All rights reserved. That by itself rules out the prospect of the buyer’s being awarded damages that far outstrip the purchase price. The Australian case law on consequential loss has changed considerably over the past t… Jacques Herbots, Why It Is Ill-Advised to Translate Consequential Damages by Dommage Indirect, 19 EUR.REV.PRIV. 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. In other words, consequential damages are a distant, yet foreseeable, cost of a broken contract. The Commercial Court considered this situation in Markerstudy Insurance Co v Endsleigh Insurance Services Ltd. Exclusions of consequential damages are among the most common and important provisions in a wide variety of contracts. 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. 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). Loss of profits and loss of use are two of the most frequently included. 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. 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. Carve outs from the Consequential Damage Disclaimer. Consequential loss confuses business people and some recent cases have added to the confusion. As a result, the laundry lost a lucrative contract with the government. Plainly, there is something wrong here since such losses would normally be limb one losses and not examples of consequential loss at all. 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. 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”. Each term is, to varying degrees, difficult to define clearly, given that it expresses a vague standard and given the inconsistent guidance provided by the wealth of related litigation in different jurisdictions. [2] defendant asserted that the lost profits were consequential damages and invoked a clause in the contract excluding consequential damages. 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. These clauses can play an important role in risk allocation. 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. But for me, here’s the clincher, as stated in Glenn’s article: “While sellers have legitimate concerns over their potential liability for breach … , there are other means of addressing those concerns without the use of terms that have such uncertain meanings.”. 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. 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. Comment document.getElementById("comment").setAttribute( "id", "4b9ae5a46aba0454e62b31f6c29b44f4" );document.getElementById("9c342b0c65").setAttribute( "id", "comment" ); The Practical Law team and our guest bloggers share their experience and opinions relating to construction and engineering law and projects. 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). It is easier and safer to interpret your own contract. But simply using "consequential" and "direct" to describe damages is to rely on a third party (the court) to interpret your contract for you. In other words, rely on specific words not a general consequential loss exclusion. One of the most important mechanisms in a contract for allocating risk is the ability to exclude “indirect” and “consequential” loss using exclusion clauses. 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. Very common in construction, services and other commercial contracts, especially in those relating construction... Co v Endsleigh Insurance services Ltd business of excluding from that baseline certain kinds of damages, you to. The leading case is British Sugar approach has been followed in numerous subsequent first instance and Court of cases... Difference between direct and consequential loss '' naturally, i.e maybe you want that ; probably you do not government! 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