. 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. 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. That by itself rules out the prospect of the buyer’s being awarded damages that far outstrip the purchase price. Carve outs from the Consequential Damage Disclaimer. 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. 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. 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. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. 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 Commercial Court considered this situation in Markerstudy Insurance Co v Endsleigh Insurance Services Ltd. The plaintiff argued that the lost profits were direct damages, so the exclusion would not apply, and the New York Court of Appeals, in … Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damag… 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. The British Sugar approach has been followed in numerous subsequent first instance and Court of Appeal cases. Indirect and Consequential Loss… The first issue was the meaning of the words "indirect and consequential loss". The key thing to remember about consequential loss is that it doesn’t mean what you think it means. 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). In. To understand the implications of excluding from that baseline certain kinds of damages, you have to understand the doctrinal jargon used. 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. 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. Loss of profits and loss of use are two of the most frequently included. 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 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. 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. 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. Consequential loss exclusion clauses: Issues for owners and contractors. Excluding Consequential Damages is a Bad Idea. Newman was five months late delivering a boiler to the laundry. 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. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. Exclusion and limitation of liability clauses often exclude “lost profits” from the … 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. 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1918 Smallman Street, Pittsburgh, PA 15222, USA. 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. Notwithstanding this importance, parties are not always clear on what kind of losses the terms “indirect” and “consequential” loss capture? Confidentiality or non-disclosure agreements (NDAs) may limit or exclude the parties’ liability for damages in certain circumstances. 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. But simply using "consequential" and "direct" to describe damages is to rely on a third party (the court) to interpret your contract for you. Consequential damages are those that are not a direct result of an act, but a consequence of the initial act. 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. 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. Any buyer would be advised to resist vigorously that sort of overkill. 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. 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.”. 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. 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. 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). 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. Neither party will be liable for breach-of-contract damages that the breaching party could not reasonably have foreseen on entry into this agreement. © 2020 LegalSifter, Inc.  All rights reserved. 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. In some cases, the parties specifi cally exclude This is just one example of an accepted bit of boilerplate that doesn’t make much sense. 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. Attempts to exclude or limit liability for consequential loss have given rise to considerable litigation, across industries. 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. 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. 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. In this September 2006 blog post I wrote about another favorite waste o’ time, the “successors and assigns” provision. I understand that this would capture those items that cannot be limited/excluded by UCTA but are there any others? In Caledonian North Sea Ltd v British Telecommunications plc, the House of Lords queried whether English law had in fact taken the right direction. In other words, rely on specific words not a general consequential loss exclusion. 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. The Australian case law on consequential loss has changed considerably over the past t… There are some small signs of resistance to the British Sugar approach. Consequential loss exclusion clauses are very common in commercial contracts, especially in those relating to construction and energy projects. 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 you may be surprised if you take a closer look at these provisions. Your email address will not be published. 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”. 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. The seller contended that any reasonable businessman would understand consequential loss to mean loss of profits. 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. Limiting & excluding liability for contract breach | Gowling WLG 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. Caledonian North Sea Ltd v British Telecommunications plc, A tale of leaks and complex structure theory. The consequential damages waiver would exclude any damages, other than direct damages, even if they are reasonably foreseeable because they were the second or … 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 … Jacques Herbots, Why It Is Ill-Advised to Translate Consequential Damages by Dommage Indirect, 19 EUR.REV.PRIV. 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. About the Practical Law Construction Blog, http://constructionblog.practicallaw.com/consequential-loss-exclusion-clauses-the-pitfalls">. 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. 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. That by itself rules out the prospect of the buyer’s being awarded damages that far outstrip the purchase price. Carve outs from the Consequential Damage Disclaimer. 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. 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. 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. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. 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 Commercial Court considered this situation in Markerstudy Insurance Co v Endsleigh Insurance Services Ltd. The plaintiff argued that the lost profits were direct damages, so the exclusion would not apply, and the New York Court of Appeals, in … Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damag… 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. The British Sugar approach has been followed in numerous subsequent first instance and Court of Appeal cases. Indirect and Consequential Loss… The first issue was the meaning of the words "indirect and consequential loss". The key thing to remember about consequential loss is that it doesn’t mean what you think it means. 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). In. To understand the implications of excluding from that baseline certain kinds of damages, you have to understand the doctrinal jargon used. 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. 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. Loss of profits and loss of use are two of the most frequently included. 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 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. 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. 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. Consequential loss exclusion clauses: Issues for owners and contractors. Excluding Consequential Damages is a Bad Idea. Newman was five months late delivering a boiler to the laundry. 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. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. Exclusion and limitation of liability clauses often exclude “lost profits” from the … 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. 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