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. I understand that this would capture those items that cannot be limited/excluded by UCTA but are there any others? The AIA waiver of consequential damages provision is helpful because it gives examples of consequential damages for an owner and a contractor. by Arch Fletcher. That’s what I did, with an article that I mentioned in this July 2008 blog post as my trusty guide: “Reassessing the ‘Consequences’ of Consequential Damage Waivers in Acquisition Agreements,” 63 Business Lawyer 777 (2008). defendant asserted that the lost profits were consequential damages and invoked a clause in the contract excluding consequential damages. However, a clearly drafted clause, that does not rely on an understanding of (for example) Hadley v Baxendale, can sometimes avoid a costly dispute. Therefore an exclusion of indirect loss clause will still exclude them even though they would be otherwise recoverable under second limb. 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. In other words, consequential damages are a distant, yet foreseeable, cost of a broken contract. It will be apparent from this example that loss of profits was treated as in principle limb one or direct loss. Any buyer would be advised to resist vigorously that sort of overkill. Here, the contract contained a clause limiting the seller’s consequential loss to the value of the contract. (Click here for a copy.) 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.”. In this September 2006 blog post I wrote about another favorite waste o’ time, the “successors and assigns” provision. 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. 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. Here’s what Glenn’s article says on that subject: Given that background, here are my problems with excluding certain kinds of damages: Many of those asking that certain kinds of damages be excluded assume incorrectly that otherwise the nonbreaching party would be entitled to recover remote damages.The jargon used in such exclusion language doesn’t have a clearly established meaning, so is conducive to dispute.It seems arbitrary to exclude certain kinds of contractually recoverable damages but not others. 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. It is easier and safer to interpret your own contract. 15 Sep 2004. Confidentiality or non-disclosure agreements (NDAs) may limit or exclude the parties’ liability for damages in certain circumstances. 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. 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. The Commercial Court considered this situation in Markerstudy Insurance Co v Endsleigh Insurance Services Ltd. That by itself rules out the prospect of the buyer’s being awarded damages that far outstrip the purchase price. 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. 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). The plaintiff argued that the lost profits were direct damages, so the exclusion would not apply, and the New York Court of Appeals, in … Exclusion and limitation of liability clauses often exclude “lost profits” from the … Your email address will not be published. § 2-715(2)(b) (consequential damages include injury to property proximately resulting from the seller's breach of warranty). 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. Your email address will not be published. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. In some cases, the parties specifi cally exclude But you may be surprised if you take a closer look at these provisions. But the difference between direct and consequential damages is often about as clear as a dense fog off the coast of Maine. 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. To be awarded consequential damages in a lawsuit, they must be a foreseeable result of an act. 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. Let’s start by considering what damages a party is entitled to in the absence of any limitation. 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. A claim for diminution of value was therefore excluded as a consequential loss. You can start by clearly defining direct damages. 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. Neither party will be responsible or held liable for any consequential, special, or incidental losses or damages. 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 . 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. About the Practical Law Construction Blog, http://constructionblog.practicallaw.com/consequential-loss-exclusion-clauses-the-pitfalls">. 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. 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. However, English law has consistently (so far) held that consequential loss means something different. In most arm’s-length commercial agreements between sophisticated parties, the parties will agree to include a consequential damage disclaimer that is subject to certain carve-outs that permit a party, in certain situations, to recover consequential damages from the other party. Consequential loss exclusion clauses: the pitfalls. Plainly, there is something wrong here since such losses would normally be limb one losses and not examples of consequential loss at all. In Caledonian North Sea Ltd v British Telecommunications plc, the House of Lords queried whether English law had in fact taken the right direction. Indirect and Consequential Loss… The first issue was the meaning of the words "indirect and 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. 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. 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. 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. Carve outs from the Consequential Damage Disclaimer. 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. 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. Consequential loss exclusion clauses are very common in commercial contracts, especially in those relating to construction and energy projects. Maybe you want that; probably you do not. Required fields are marked *. 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. 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. It would just says what the law is. 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. But many people are unaware of that. 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. As a result, the laundry lost a lucrative contract with the government. Loss of profits and loss of use are two of the most frequently included. Caledonian North Sea Ltd v British Telecommunications plc, A tale of leaks and complex structure theory. 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. The consequential damages waiver would exclude any damages, other than direct damages, even if they are reasonably foreseeable because they were the second or … To understand the implications of excluding from that baseline certain kinds of damages, you have to understand the doctrinal jargon used. The British Sugar approach has been followed in numerous subsequent first instance and Court of Appeal cases. Consequential loss confuses business people and some recent cases have added to the confusion. 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. 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. 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: Rather the clause had a wider meaning of financial losses caused by guaranteed defects above and beyond the replacement and repair of physical damage. 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. 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. 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 other words, rely on specific words not a general consequential loss exclusion. 1918 Smallman Street, Pittsburgh, PA 15222, USA. [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. But I suspect that many lawyers and their clients have an uncertain grasp of what such provisions are meant to accomplish. Notwithstanding this importance, parties are not always clear on what kind of losses the terms “indirect” and “consequential” loss capture? So that’s the baseline. 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. 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. It said that a reasonable businessman must be taken to have intended the word to have its established legal meaning. 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 … 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. 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. This is just one example of an accepted bit of boilerplate that doesn’t make much sense. 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 … 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.”. Clearly, parties and their advisers also come across the unexpected, after the event. The Australian case law on consequential loss has changed considerably over the past t… 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.]. 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. 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. As a result, even in the absence of a contractual waiver of consequential damages, this standard of reasonableness creates limits on the extent of the non-breaching party’s recovery for losses that the breaching party did not otherwise specifically agree to bear. Not met damages, you have to understand the doctrinal jargon used to liquidated damages the government are very in... 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