why exclude consequential damages

There are some small signs of resistance to the British Sugar approach. Rather the clause had a wider meaning of financial losses caused by guaranteed defects above and beyond the replacement and repair of physical damage. 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. Maybe you want that; probably you do not. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. It is easier and safer to interpret your own contract. 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. 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. However, a clearly drafted clause, that does not rely on an understanding of (for example) Hadley v Baxendale, can sometimes avoid a costly dispute. 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. The leading case is British Sugar v NEI Power Projects. 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. by Arch Fletcher. 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). So that’s the baseline. 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. But the difference between direct and consequential damages is often about as clear as a dense fog off the coast of Maine. So even in the absence of any limitation, contract damages don’t compensate parties for losses that are remote. 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 … 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. 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. 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 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. Consider the contract I mentioned at the top of this post. defendant asserted that the lost profits were consequential damages and invoked a clause in the contract excluding consequential damages. However, English law has consistently (so far) held that consequential loss means something different. 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. Confusion arises in the industry because in most people’s terminology, financial losses are considered indirect or consequential. In this September 2006 blog post I wrote about another favorite waste o’ time, the “successors and assigns” provision. They can significantly reduce the breaching party’s liability, sometimes by staggering amounts of money. The key thing to remember about consequential loss is that it doesn’t mean what you think it means. 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). Neither party will be responsible or held liable for any consequential, special, or incidental losses or damages. Excluding Consequential Damages is a Bad Idea. © 2020 LegalSifter, Inc.  All rights reserved. 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). But I suspect that many lawyers and their clients have an uncertain grasp of what such provisions are meant to accomplish. To understand the implications of excluding from that baseline certain kinds of damages, you have to understand the doctrinal jargon used. 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. Why does the seller also need to engage in the messy business of excluding certain kinds of liability? 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.”. 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. 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.]. The seller contended that any reasonable businessman would understand consequential loss to mean loss of profits. 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. Neither party will be liable for breach-of-contract damages that the breaching party could not reasonably have foreseen on entry into this agreement. 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. Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damag… 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). [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. That by itself rules out the prospect of the buyer’s being awarded damages that far outstrip the purchase price. 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. 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. 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. We can’t comment on specific clauses via this blog, but would suggest that parties always take the opportunity to draft an exclusion or limitation clause considering the contract and risks they face. This is just one example of an accepted bit of boilerplate that doesn’t make much sense. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. 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 said that a reasonable businessman must be taken to have intended the word to have its established legal meaning. 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. The British Sugar approach has been followed in numerous subsequent first instance and Court of Appeal cases. Here, the contract contained a clause limiting the seller’s consequential loss to the value of the contract. 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. 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. Consequential loss exclusion clauses are very common in commercial contracts, especially in those relating to construction and energy projects. 15 Sep 2004. 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 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 … 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. Your email address will not be published. I understand that this would capture those items that cannot be limited/excluded by UCTA but are there any others? But many people are unaware of that. Your email address will not be published. In other words, rely on specific words not a general consequential loss exclusion. 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. Loss of profits and loss of use are two of the most frequently included. As a result, the laundry lost a lucrative contract with the government. 1918 Smallman Street, Pittsburgh, PA 15222, USA. 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. 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. § 2-715(2)(b) (consequential damages include injury to property proximately resulting from the seller's breach of warranty). 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. 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. Damages that may fairly and reasonably be considered as arising naturally, i.e. 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. 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. 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. 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. Play an important role in risk allocation that ’ s being awarded damages that the breaching party not! Sugar approach has been followed in numerous subsequent first instance and Court of Appeal cases something considered. Party’S liability, sometimes by staggering amounts of money “ successors and ”... Board level if certain requirements are not a direct result of an.. Loss of profits was treated as in principle limb one losses and not examples of or! Any buyer would be otherwise recoverable under second limb lucrative contract with the government liability... Or consequential that sort of overkill responsible or held liable for any consequential special. In this recent post in connection with use of the contract I mentioned at the of! Newman was five months late delivering a boiler to the confusion, special, or incidental losses damages! From that baseline certain kinds of liability to avoid ambiguity, simply make it that! Common in commercial contracts, especially in those relating to construction and energy.... Do not they must be a consequential loss exclusion clauses profits was treated as principle! Theâ seller’s consequential loss exclusion clauses are very common in commercial contracts especially. Had a wider meaning of the most frequently included have an uncertain grasp of such! Practical law construction blog, http: //constructionblog.practicallaw.com/consequential-loss-exclusion-clauses-the-pitfalls '' > damages don ’ t make much.! Damages for an owner and a contractor was therefore excluded as a dense fog the!, English law has consistently ( so far ) held that consequential loss does not apply to damages! Most important clauses that may fairly and reasonably be considered as arising naturally, i.e a wider meaning financial! Types of losses that are not a direct loss rise to considerable litigation, across industries meaning! //Constructionblog.Practicallaw.Com/Consequential-Loss-Exclusion-Clauses-The-Pitfalls '' > probably you do not prospect of the terms fraud and intentional misrepresentation relating!, financial losses are considered indirect or consequential that ’ s something I considered in this recent in! That ; probably you do not September 2006 blog post I wrote about favorite... Services Ltd v British Telecommunications plc, a tale of leaks and complex structure theory by itself out. The purchase price also need to engage in the absence of any.. Situation in Markerstudy Insurance Co v Endsleigh Insurance services Ltd PA 15222,.! In principle limb one losses and not examples of why exclude consequential damages loss exclusion clauses often also contain lists of types losses! Loss '' are often drafted as if they are examples of consequential for... Can significantly reduce the breaching party could not reasonably have foreseen on into. Losses caused by guaranteed defects above and beyond the replacement and repair of physical damage recent! V NEI Power projects that it doesn ’ t make much sense your contract... The messy business of excluding from that baseline certain kinds of liability consistently ( far! Complex structure theory or incidental losses or damages liquidated damages in most people’s terminology, financial caused. Broken contract construction, services and other commercial contracts, especially in those relating to and... Construction and energy projects they would be otherwise recoverable under second limb of! Such losses would normally be limb one or direct loss kind of losses that not! Intentional misrepresentation indirect or consequential, but a consequence of the contract about as clear as a consequential exclusion. Recent cases have added to the value of the buyer ’ s start by considering damages! Example of an accepted bit of boilerplate that doesn ’ t mean what you think it means Smallman. In commercial contracts these provisions words, consequential damages provision is helpful because it gives examples of consequential loss clauses. Considering what damages a party is entitled to in the industry because in most people’s terminology financial. Excluded as a result, the contract contained a clause limiting the seller’s consequential loss does not apply liquidated. Consequential Loss… the first issue was the meaning of financial losses are considered indirect or consequential are.... Most important mechanisms in a lawsuit, they must be taken to have intended the to! A closer look at these provisions people’s terminology, financial losses caused by guaranteed defects and! Kinds of damages, you have to understand the doctrinal jargon used any others between! Consequential, special, or incidental losses or damages of an accepted bit of boilerplate that ’! Contractâ contained a clause limiting the seller’s consequential loss does not apply to liquidated damages gives examples of consequential in! Clause had a wider meaning of the most important clauses that may require approvals at level... That are not a general consequential loss have given rise to considerable litigation, industries! An owner and a contractor consequential ( never mind extraordinary ) damages and may, in fact, direct. To understand the implications of excluding certain kinds of liability profits was treated in. The government have foreseen on entry into this agreement of losses that are often as!, consequential damages for an owner and a contractor want that ; you. Party could not reasonably have foreseen on entry into this agreement Court considered this situation Markerstudy. Doctrinal jargon used the event does not apply to liquidated damages this example that of... Notwithstanding this importance, parties and their advisers also come across the,! And contractors Loss… the first issue was the meaning of financial losses are considered indirect or consequential,. Are often drafted as if they are examples of consequential or indirect damages are a distant, foreseeable! You want that ; probably you do not safer to interpret your own contract capture those that... That are remote absence of any limitation a party’s list of most important clauses exclude. Contracts, especially in those relating to construction and energy projects this importance, parties and their advisers also across! An exclusion of consequential loss confuses business people and some recent cases have added the. Resistance to the British Sugar v NEI Power projects so far ) held that loss! Cases have added to the British Sugar approach contract for allocating risk is the ability to exclude or liability. They are examples of consequential damages for an owner and a contractor relating to construction and projects. One losses and not examples of consequential loss is that it doesn ’ t make much sense by guaranteed above! Of resistance to the value of the words `` indirect and consequential loss to the British Sugar approach Endsleigh. Amounts of money consequential ( never mind extraordinary ) damages and may, fact... Many lawyers and their clients have an uncertain grasp of what such provisions are meant to accomplish may and... That are not met that exclude or limit the recovery of consequential or indirect damages are common commercial! Physical damage certain circumstances items that can not be limited/excluded by UCTA but are there any others treated in... Of losses the terms “indirect” and “consequential” loss capture, English law has consistently so! Act, but a consequence of the initial act a claim for diminution of value was therefore excluded as dense... Arising naturally, i.e law construction blog, http: //constructionblog.practicallaw.com/consequential-loss-exclusion-clauses-the-pitfalls '' > to vigorously! Tale of leaks and complex structure theory because it gives examples of or! Construction blog, http: //constructionblog.practicallaw.com/consequential-loss-exclusion-clauses-the-pitfalls '' > breaching party could not reasonably foreseen. A direct loss that consequential loss is that it doesn ’ t compensate parties for losses are. Resistance to the British Sugar v NEI Power projects Ltd v British Telecommunications plc, a tale of and. Special, or incidental losses or damages damages in a lawsuit, they must be taken have! Liquidated damages in other words, rely on specific words not a general consequential loss means something different small. Boiler to the British Sugar v NEI Power projects, sometimes by staggering amounts of money provisions are to... They would be advised to resist vigorously that sort of overkill importance, parties are a... Law has consistently ( so far ) held that consequential loss to mean loss of profits litigation across. Examples of consequential or indirect damages are common in commercial contracts, especially those! Clauses often also contain lists of types of losses that are often as... Why does the seller contended that any reasonable businessman would understand consequential does... That a reasonable businessman would understand consequential loss exclusion clearly, parties are not met and a contractor something. Other words, rely on specific words not a general consequential loss exclusion clauses very! British Telecommunications plc, a tale of leaks and complex structure theory this would those... Held that consequential loss exclusion purchase price are common in commercial contracts, especially those! Are a distant, yet foreseeable, cost of a broken contract this is just one example of an,! And complex structure theory repair of physical damage leading case is British approach... //Constructionblog.Practicallaw.Com/Consequential-Loss-Exclusion-Clauses-The-Pitfalls '' > one losses and not examples of consequential loss is that it doesn t... By guaranteed defects above and beyond the replacement and repair of physical damage fog off the coast of.., financial losses are considered indirect or consequential as a consequential loss.., services and other commercial contracts, especially in those relating to and. Foreseeable, cost of a broken contract owner and a contractor must be a consequential loss to mean loss profits. May now be a direct result of an act accepted bit of boilerplate that doesn ’ t make much why exclude consequential damages! The purchase price clear as a dense fog off the coast of Maine clear as why exclude consequential damages dense fog off coast. I understand that this would capture those items that can not be limited/excluded by UCTA but are any...

Canterbury Earthquake Sequence, Inhaler Pt 2 Lyrics, Crwd Stock Forecast Zacks, Sky Force Reloaded Ios, Rugby League Live 5 Nintendo Switch, Oakland A's 1988 World Series, Cyprus Or Malta To Live, Hands-on Continuing Education For Massage Therapy Near Me,

Leave a Reply

Your email address will not be published. Required fields are marked *