1. Many vendors have a policy of "no consequential damages" that is strictly enforced from the GC down. As a result, it's often impossible in practice to discard the distinction of damage types in favor of an aggregate cap.

2. Carve outs. There is a fairly standard set of items that are "carved out" of the limitation on liability and thus subject to so-called "unlimited" liability (i.e., the limit imposed by applicable law). Indemnities, for example, should neither be subject to distinctions of direct/consequential, nor should they be capped. Likewise, breaches of confidentiality are often "carved out" for unlimited liability on the theory that the damages necessarily occur on the fringes of causality.

In any case, I agree that the back-and-forth that has developed around consequential vs. direct damages is a red herring.

I can’t speak to what M&A lawyers believe, but my instinct is that “remote” damages is short-hand for excluding damages beyond the four corners of the contract (i.e., direct damages). Indeed, this might include damages that would be recoverable under the law, like the cost to cover. This is certainly true of us that work on lots of day-to-day contracts and technology agreements.

In those cases, while damages might be foreseeable by someone on my side of the contract, I generally don’t care. I’m likely not going to be in the best position to evaluate the potential risk and I don’t want to be responsible for them unless I can easily identify them in each instance of a breach. As I see it, the other party is in a much better position to start enumerating the things it believes I should be liable for if there is a breach. If the particular damages are meaningful enough that a party WANTS them in the damages, I’d let the other party start by nailing down those forseeable liabilities and adding them to the contract. If the amount of risk they want me to assume goes to large, we walk away.

I do this with my contracts in which my client is the seller. While those agreements inevitably waive incidental and consequential damages (usually just the buyer’s by default), I make sure that things are most troubling aren’t waived. Things like: non-refundable costs of shipping, travel, costs incurred by allocating personnel (in the case of scheduled services), the costs associated with tangible materials, etc. Another example, when the breach involves non-payment, I include a clause allowing me to recover attorney’s fees for collection issues.

If I’m a buyer, I try to make sure I know what remedies I want in the contract if something goes horribly wrong. In services contracts, you should be able to identify your “remedy” in the case a service provider doesn’t perform, doesn’t deliver on time, etc. I would not rely on the law to provide me with such important answers.

As to your proposal, I see it as both redundant and potentially more confusing. It’s unnecessary because you can’t recover those “damages” anyway. It’s confusing because it leaves open the issue of “foreseeability” for court anyway. It may also be a trap for the unwary–something that may be good or bad depending on whether your client is the unwary type.

I’m skeptical of the notion that one of my recommendations might work under U.S. law but not under the law of some other jurisdiction. I go out of my way to craft language that doesn’t look to the courts to articulate meaning, so generally a given recommendation will either work everywhere or nowhere. That’s something I discussed in this March 2009 blog post.

And you say that “having a solid, reasonable, overall LOL cap obviates much of the concern.” I’m gratified, as that was my main point.

Ken

If there is a reasonable risk to revenue relationship in a contract (e.g., 12 months fees paid under the contract; or some otherwise agreed upon multiple of contract value) then BPO sellers need not have this concern, as it is the appropriate role of the seller to assume some degree of business risk. When that basic caveat fails, though—for example, when a buyer wants uncapped liability for consequentials related to certain types of at risk “data” (HIPAA, PCI, PII, GLB, etc)—one of the fundamental notions of commercial contracting fails: that any sensible agreement should invoke a reasonable risk-to-revenue relationship. And in such cases often the best deal for a seller is the one that never closes.

As an aside, I feel impelled to point out that the Pillsbury firm (with whom I have no personal or business connection) has published an excellent U.S. state-by-state analysis of statutory and case law holdings on the extent to which exclusions of certain types of damages are permitted in each state. Other similar resources are available as well. Legal counsel (on both sides of the table) would be wise to carefully consider choice of law provisions to insure the agreed upon jurisdiction does not proscribe, as a matter of law, contractual attemts to shift risk by excluding (or limiting) certain types of damages.

Very fruitful discussion on the types of damages especially related to ‘consequential damages’. However, I am not really very clear about your definition of ‘incidental damages’.

I believe consequential damages would be those that could be as potentially measured by the non-breaching party to recover cost against any loss or damage suffered due to breach of contracts considering the circumstances. Though the court might decide the actual loss, the parties may sit together and can resolve the issue.

Regarding excluding liability in tort, you might find of interest Glenn West’s article on the subject. This September 2009 blog post contains a link to it.

By the way, please excuse my inartful response to your initial comment. I attempted to flag that I’m not remotely familiar enough with English law to be reaching any conclusions on the subject. My thanks to Mark Anderson for chiming in.

Ken

What I enjoyed most about Glenn’s article was his comments regarding incidental damages. Many parties expect to recover these types of damages, especially those relating to the actual cost of cover. In fact, sometimes incidental damages can exceed the price of a product and when that happens, the actual cost of cover will only be marginally reimbursed if incidental damages are excluded.