Excluding Consequential Damages in a Confidentiality Agreement?

I noticed that the Rocket Lawyer confidentiality agreement that I wrote about in this post yesterday excludes liability for “direct, indirect, special, or consequential damages.”

Language excluding damages is a nightmare, because hardly anyone understands what that jargon means. It’s something I wrote about in this February 2010 post and this March 2010 blog post, both on AdamsDrafting. Here’s the glossary I provided in the earlier of those posts:

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.

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.

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.

I ended up recommending that you avoid the jargon and come up with clearer limits.

But I recall that in my Koncision research, I came up with an even more immediate reason for not drafting Koncision’s confidentiality-agreement template so as to allow the drafter to preclude the disclosing party from seeking consequential damages: If the recipient discloses confidential information other than as provided in the contract, any damages that the disclosing party suffers would likely consist of consequential damages.

Here’s something I noted at the time on that subject:

Another topic that came up at the ACC annual meeting was the role, if  any, in NDAs of exclusion of consequential damages.

It seems that excluding consequential damages wouldn’t make sense for the Disclosing Party. For example, the following is from Michael A. Epstein, Frank L. Politano, Marc T. Shivers and André J. Brunel, Drafting License Agreements:

“Another type of claim that may be carved out from the LOL are claims resulting from the breach of the agreement’s confidentiality provisions, especially when one or both of the parties is giving the other party access to highly confidential information, the release of which would cause the party serious damage by compromising its competitive advantage. The release or loss of confidential information is generally going to result primarily in consequential damages. If the parties want to allow the recovery of these damages, they will need to be carved out of at least the qualitative LOL.”

I’m not sure I buy this, simply because the fog of jargon precludes any measure of certainty. But I’m willing to latch on to any additional justification for not having to wade into the exclusion-of-damages mess for purposes of Koncision’s confidentiality-agreement template.

If you have any views on this, I’d be happy to hear them.

Rocket Lawyer’s confidentiality agreement precludes the recipient, not the disclosing party, from seeking consequential damages. Interestingly, it appears that the exclusion in the Rocket Lawyer confidentiality agreement in effect seeks to exclude all liability. It would have been clearer to say as much, although I don’t know that such a provision is enforceable, whether in its clear or less-clear form.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

10 thoughts on “Excluding Consequential Damages in a Confidentiality Agreement?”

    • I’m a little late to this party, but it sounds like everyone’s in agreement not to exclude liability for consequential damages in NDAs.

      Like Westmorlandia, I usually carve out consequential damages resulting from a breach of the confidentiality provisions from the limitation of liability clause in commercial agreements of all types. I also generally carve out enforcement of confidentiality obligations from clauses that would delay seeking an effective remedy, such as extended dispute resolution clauses.

  1. Not only do I agree with Mark, but I’ll go further anent your final comment and say that if you exclude both direct and consequential damages, there is no consideration for the recipient’s promise to keep the information confidential, causing the entire agreement to fail. I believe the term for that type of drafting is what Mark’s people call “too clever by half.”

  2. I agree with everyone on the subject of confidentiality agreements – limiting liability seems inappropriate, and is not usually seen. This post has also reminded me to be more careful when drafting agreements on other matters that include confidentiality provisions – it must be quite common for confidentiality provisions to be caught by general limitation provisions in such cases.

    • In most of the Oil & Gas EPC Contracts, there are usually carve-outs or exclusions to the limitation of liability provisions in the Contracts. The liability of the Contractor for breach of his confidentiality obligations as specified in the Contract can be found as one such carve-out or exclusion in most of the Contracts.

  3. This is slightly off topic but still related to nda’s and damages… It is often heard that a non-disclosure agreement is worth nothing without a liquidated damages clause because damages arising out of an NDA breach are indirect and the actual damage / amount is very difficult to prove. I work with NDA’s regularly but have seen only very few penalty clauses so far. If liquidated damages clause is so important why is it so rarely seen in NDA’s?

    • I’ve not read anything that suggests that it’s a good idea to provide for liquidated damages in an NDA. Quite the opposite—it sends a wrong message, in that it tells the receiving party that it can disclose the confidential information, as long as it’s willing to pay the price.


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