The May 2008 issue of The Business Lawyer contains a great article by Glenn D. West and Sara G. Duran of Weil Gotshal entitled “Reassessing the ‘Consequences’ of Consequential Damage Waivers in Acquisition Agreements.” Click here for a copy.
Here’s the abstract:
Consequential damage waivers are a frequent part of merger and acquisition agreements involving private company targets. Although these waivers are heavily negotiated, the authors believe that few deal professionals understand the concept of consequential damages and, as a result, the inclusion of such waivers may have an unexpected impact on both buyers and sellers. The authors believe that this Article is the first attempt to define “consequential damages,” as well as some of the other terms used as purported synonyms, in the merger and acquisition context. After tracing the historical derivation of the term and its current use by the courts, this Article considers the impact of such waivers in a hypothetical business acquisition and proposes some specific guidelines for the negotiation of these waivers.
This article is a wake-up call to those who are used to blithely asking for, or acceding to, a “No Consequential Damages” provision that precludes a laundry list of poorly understood measures of damages, particularly consequential, incidential, indirect, and special damages. This article does a good job of explaining what those terms mean, and I expect that I’ll keep it close at hand when drafting limitations on damages.
As a general matter, I steer clear of jargon. Whenever you use in a contract a term of art such as “consequential damages,” you’re inviting confusion: any two people might have different ideas to what it means, assuming that they’ve given the matter any thought. I’ll always try instead to express the underlying meaning.
Exactly! When I press the person proposing the provision to give examples, they seem to be listing the exact kind of DIRECT damages my client would reasonably expect the negligent or breaching party to be responsible to reimburse. I will read the article with great interest.
While not in the context of an acquisition agreement, “consequential damage waivers” are de rigueur in many patent and technology license agreements. Even assuming “consequential damages” were something everyone understood, the problem in patent license context is that most boilerplate language includes things like “special” or “punitive” damages as well (see the example clause in the article). Would this mean that this clause would close the potential for being liable to the other part for “treble damages” in the case of willful infringement–for example, under an indemnification obligation?