Excluding Consequential Damages Is a Bad Idea

[For a follow-up to this post, see this March 2, 2010 blog post.]

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:

Neither party will be responsible or held liable for any consequential, special, or incidental losses or damages.

You can rely on sellers asking for this kind of provision, and buyers routinely accept it. But I suspect that many lawyers and their clients have an uncertain grasp of what such provisions are meant to accomplish. A rationale you’ll hear is that they prevent a party from seeking damages that are remote, in other words damages that the parties couldn’t have contemplated while they were doing the deal.

But you may be surprised if you take a closer look at these provisions. That’s what I did, with an article that I mentioned in this July 2008 blog post as my trusty guide: “Reassessing the ‘Consequences’ of Consequential Damage Waivers in Acquisition Agreements,” 63 Business Lawyer 777 (2008). (Click here for a copy.) 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.

Let’s start by considering what damages a party is entitled to in the absence of any limitation. 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. So even in the absence of any limitation, contract damages don’t compensate parties for losses that are remote.

So that’s the baseline. To understand the implications of excluding from that baseline certain kinds of damages, you have to understand the doctrinal jargon used. 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. 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.
  • 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.

It’s clear what “consequential damages” don’t do: they don’t compensate a buyer for remote or speculative losses, which shouldn’t even constitute losses. But many people are unaware of that. Here’s what Glenn’s article says on that subject:

[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. 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 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. 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.

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.

But for me, here’s the clincher, as stated in Glenn’s article: “While sellers have legitimate concerns over their potential liability for breach … , there are other means of addressing those concerns without the use of terms that have such uncertain meanings.”

Consider the contract I mentioned at the top of this post. 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. That by itself rules out the prospect of the buyer’s being awarded damages that far outstrip the purchase price. Why does the seller also need to engage in the messy business of excluding certain kinds of liability? Any buyer would be advised to resist vigorously that sort of overkill.

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. 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 would just says what the law is [language revised Feb. 16 9:00 a.m. EST in response to comment by Mark Anderson]:

Neither party will be liable for breach-of-contract damages that the breaching party could not reasonably have foreseen on entry into this agreement.

Glenn’s article in effect endorses this approach: “Instead of waiving ‘consequential’ damages, buyers should seek waivers of ‘remote’ or ‘speculative’ damages.”

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.

And even if my draft contains an absolute cap from the start, it would be harmless to exclude remote damages, and there might be some benefit to doing so: it could cut short any discussion I might otherwise be forced to have if the seller is one of the many who don’t understand that a buyer is entitled to only those damages that are foreseeable.

Of course, if the seller wants to double dip—wants both an absolute cap and to exclude consequential damages—we’d have to have a different, and more vigorous, discussion.


In closing, some stray thoughts:

  • This is just one example of an accepted bit of boilerplate that doesn’t make much sense. In this September 2006 blog post I wrote about another favorite waste o’ time, the “successors and assigns” provision.
  • 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. That’s something I considered in this recent post in connection with use of the terms fraud and intentional misrepresentation.

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.

42 thoughts on “Excluding Consequential Damages Is a Bad Idea”

  1. While this is technically accurate, the consequential damages waiver is a largely meaningless piece of boilerplate. I wouldn’t want to burn legal fees negotiating it the vast majority of circumstances.

    • If ‘consequential damages’ are defined as damages that are remote and unforeseeable, how could a court enforce their exclusion? Unless a party is arguing that a consequential damage was foreseeable? What about the principle of ‘freedom to contract’?

  2. Thanks. I learned something today. Boilerplate is always meaningless until it blows up in your face, i.e. a court decides otherwise.

  3. Ken, I think this is a good idea in principle. But when you say reasonably foreseeable, do you mean:

    (a) damages that are reasonably foreseeable as a consequence of breach by a third party who is not aware of any special circumstances or information made known by the buyer to the seller at the time the contract is made; or
    (b) damages that are reasonably foreseeable as a consequence of breach by the contracting parties in light of any special circumstances or information made known by the buyer to the seller at the time the contract is made (eg that without the crankshaft, the flour mill will not be operational)?

    Although I have used different words, my (a) and (b) are not a million miles from the direct versus consequential distinction in Hadley v Baxendale.

    My feeling is that simply saying “reasonably foreseeable” doesn’t give enough information to the court. All (unliquidated) damages have to be of a kind that is the “reasonable contemplation” (a very similar phrase to reasonably foreseeable) of the parties. If you are intending to say “not reasonably foreseeable to the Parties as a consequence of breach” you may, in effect, be echoing the two-limb Hadley v Baxendale approach. However, my understanding is that when lawyers seek to exclude consequential losses they are seeking to exclude the second limb of Hadley v Baxendale. To do this using the phrase “reasonably foreseeable” may take a few more words – I can’t immediately think of a “quick fix” form of words to add to your sentence.

  4. Mark: I have in mind that “reasonably foreseeable” damages would take into account damages relating to any special circumstances that the seller was aware of. In other words, they’d consist of your (a) and (b). Do you think I’d need to make any adjustments to my wording to achieve that?

    I don’t want to exclude special-circumstances damages because I don’t want to have to think about what the heck “special circumstances” means in practice. Instead, I’d rather just put some fixed cap on damages and be done with it.


  5. Ken, therefore I think the purpose of the clause would be to restate general law on remoteness of damage in plain language.

    Using English law in this area as a base, and considering the discussion in Chitty vol 1 at page 1450, a possible short form of words would be:

    “…any damages that are not reasonably foreseeable at the Effective Date by the Party that breaches this Agreement as a consequence of that breach.”

    This wording skips over some of the subtleties identified by the English courts in the leading cases, but is probably sufficient for general purposes.

    The main area where I could see this wording being used is where a party (eg seller) wishes to qualify a very broadly-drafted indemnity, so as to limit it to liabilities under general contract law.

  6. Mark: Point taken; I’ve adjusted the language accordingly, and I’m sure I’ll play with it some more.

    At a minimum, this language would serve to dissuade anyone from asking, unwittingly or otherwise, for exclusion of certain kinds of damages.


  7. While the academnic debate is useful and assists in the processes I would caution anyone who not a current lawyer and is drafting or negotiating any liability clauses, whether standard or customised, to take appropriate legal advice on each occasion. The interpretation of apparently obvious language can be affected by court decisions which may not yet have been reported in the wider press; additionally, different jurisdictions may well differ.

  8. Isobel: It would be sensible to take your advice for any kind of drafting. But as a general matter, the guiding principle of my drafting is to avoid looking to the courts to breathe meaning into my language: I find caselaw primarily helpful in terms of what it tells me about how not to say something. Ken

  9. Mark

    While I agree that many “consequential” damages would be irrecoverable in any event, the clauses we use go on to define “consequential” for the purposes of the contract as including, for example, loss of profit, loss of production etc. It is very common in oil & gas jobs to include something along these lines (see the LOGIC Standard forms in the North Sea).

    If you want proof that the “plain vanilla” clause of the type you quoted simply does not work, see the English case of Deepak -v- Davy McKee, which related to a methanol plant in India that blew up. That case involved a clause that simply excluded “indirect and consequential damages”. The judge held that “indirect” damages were irrecoverable in any event, and that, as a matter of interpretation, “consequential” must mean something similar, and so the costs Davy McKee thought they were excluding (loss of profit and overhead recovery during the period of repair) were not caught. Accordingly, it did not work in this context (although Davu escaped through another clause). English clauses got a bit longer as a result!


  10. Peter: I believe that “consequential damages” is a label applied to damages that are recoverable, absent contract provisions to the contrary.

    But more to the point, the case you point to would seem an object lesson in not relying on legal jargon and instead using other, more straightforward means of limiting damages.


  11. This advice is very specifically US Law advice. If you are dealing with English law note that very different considerations apply and that there is little congruence between consequential and leg 2 of Hadley and Baxendale. In English Law consequential means “not direct”. Unfortunately what is direct and what is indirect is a matter of fact and not of law and judges tend to find that which might appearto be indirect to be direct in the face of a bare exclusion of consequential loss

    • Hadley vs. Baxendale: Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them.

      Ken’s advice seems perfectly relevant to English law!

  12. Haward: Based on what I gleaned from Glenn’s article, I’m not sure you’re correct, but others are more qualified than I to speak to that. But more to the point, why bother parsing this sort of nonsense? Use some other, more rational form of limiting damages. Ken

  13. Ken: In my experience, focused on the engineering and construction industry, the main purpose of the clause is to attempt to narrow exposure to claims potentially arising from delay in performance. The words are not generally left alone, but are rather supplemented with reference to ‘incidental, special, indirect’ and other types of damages, and are then further supplemented with specific examples, most notably ‘loss of profit or loss of revenue’ or other similar damages that are readily foreseeable but are difficult or impossible to quantify, or are of such a potential magnitude as to upset the balance of the bargain between the parties. The specific list must be considered and negotiated for each contract depending on the situation. While I agree that an overall cap on damages is also to be recommended, I don’t think the two are necessarily mutually exclusive but rather can and should work together to properly structure the risk allocation between the parties. Also, in my experience, ‘disclaimers of liability for consequential damages’ (as they are often inaccurately referred to) are easier to negotiate with a purchaser than are aggregate caps. To me, these clauses are only ‘useless’ when viewed as ‘boilerplate’, and when carefully drafted have a vital purpose to defining the allocation of the risk between the contracting parties.

  14. Dave: Point taken. But even if you craft some sort of hybrid limitation on damages, I think you’re better off avoiding legal terms of art and instead stating clearly what’s included and what’s excluded. Ken

  15. How would this handle “loss of profits”,”loss of time”, “inconvenience”, or “loss of use” that are reasonably foreseeable by the parties at the time of contract?

    Aren’t these generally defined by court cases as “consequential damages” that may be foreseeable to the parties at the time of contracting?…

  16. JJ: If you want to exclude certain kinds of damages, it would be best to specify them without resorting to legal jargon that may be standard but is very confusing. Ken

  17. How would you deal with consequential damages clauses that carve out breach of confidentiality and indemnification obligations from limitation of consequential damages? I see that a lot, esp. coupled with a carve out of the same obligations from the limitation of liability clause – a “perfect storm” of liability.

  18. Tom: You’d find of interest the part of Glenn’s article that discusses how excluding certain kinds of damages relates to indemnification obligations. Carving out indemnification obligations would seem to significantly limit the effect of the exclusion. Ken

  19. Ken,

    I have just noticed an earlier post from Dave Follett. Assuming he is the same Dave Follett I worked with on a Canadian project a few years ago, we can confirm that a well crafted consequential loss exclusion can be very useful when seeking to reduce multi-million dollar damages claims :-)


  20. While I agree with the general thrust of the approach, I have the following concerns:

    -Who has reasonable foreseeability? If you handle a high volume contracts practice (when I was in-house a multinational company I did over 200 deals a year), it’s frankly impossible to get an in depth understanding of each deal the way an M&A attorney would. As a result, there may be people on the seller’s side (e.g., salespeople, account executives, IT experts, marketing specialists, maintenance supervisors) who could have reasonably foreseen the damages, but never shared enough information with you so that you could have done so. Should the seller have to accept a huge liability due to the inattention of one individual who couldn’t appreciate the litigation risk? It’s also difficult to use blanket approaches, such as limiting liability to the value of the products sold, as the goal is to minimize negotiations. The standard limitation of liability language is a much easier approach to negotiate (with possible giving the purchaser a requested carve-out).

    -How could one overcome seller inflexibility? I find most of Ken’s suggestions quite workable in practice, but this one would be tough. When you are representing a purchaser, unless you have extremely strong bargaining power, sellers simply will not budge on removing this kind of limitation of liability language. The best you can hope for is to go with the carve-out approach for confidentiality breaches, indemnification, and gross negligence. I’ve routinely seen sellers willing to walk away from deals worth millions over this language. That, of course, shouldn’t stop Ken from pointing out why the language might be wrong, though. But we would have a huge challenge in implementing this change.

    -What are consequential damages? When I hear the term I think of a laundry list of damages that usually come up in this clause, some of which are not consequential damages, but we often refer to them as such for convenience. Usually the list would be “consequential, indirect, incidental, special, punitive, and exemplary.” Obviously “punitive and exemplary” may overlap, but it doesn’t sound like that they would be excluded by Ken’s language above. “Special” damages I’ve seen defined as a species of both direct and indirect damages, and as a result may not be fully excluded under Ken’s language above. Ultimately, given the plethora of case law blue penciling limitation of liability provisions, and the vague and shifting nature of these damages terms, I would not want to skip specifically calling them out.

  21. At Ken’s invitation, here are my thoughts on some of the English law points that have been raised:

    Peter, I have just been looking at the Court of Appeal judgment in Deepak v Davy McKee. I assume you are referring to the Court of Appeal’s judgment rather than the High Court’s, as the CA expressly overturned the judge on the interpretation of the indirect and consequential losses clause. See paragraph 90 of the CA judgment, which reads: “The direct and natural result of the destruction of the plant was that Deepak was left without a Methanol plant, the reconstruction of which would cost money and take time, losing for Deepak any methanol production in the meantime. Wasted overheads incurred during the reconstruction of the plant, as well as profits lost during that period, are no more remote as losses than the cost of reconstruction. Lost profits cannot be recovered because they are excluded in terms, not because they are too remote. We consider that this Court is bound by the decision in Croudace where a similar loss was not excluded by a similar exclusion and considered to be direct loss. Accordingly we cannot agree with the Learned Judge’s conclusion.”

    I read this as a discussion of whether, in that case, loss of profits were direct losses, which is a familiar theme in a number of cases. This is a subject that Glenn covers in his article, where he rightly points out that to treat financial losses as examples of consequential losses, rather than as a separate category, is not always appropriate, as some financial losses can be direct losses. But it is quite possible that I have missed your point.

    Haward, I agree that most of this thread is concerned with US law, and that different considerations apply to English law. I have read Glenn’s article and found it very interesting on US law, but felt that some of the discussion of English law was incomplete and potentially a bit misleading. It is very tempting (but wrong, I think) to assume that, because both English and US law uses Hadley v Baxendale as the original source of the direct versus consequential distinction, English and US law are nowadays the same.

  22. Ken:

    While your description of direct damages compared to consequential damages is correct, I think it needs more for people to really be able to connect the dots. Here is what the UCC says:

    2-713(1)(a) is one good example: “the measure of damages in the case of wrongful failure to deliver by the seller or rightful rejection or justifiable revocation of acceptance by the buyer is the difference between the market price at the time for tender under the contract and the contract price together with any incidental or consequential damages under Section 2-715, but less expenses saved in consequence of the seller’s breach.”

    2-714(2) and (3) are another good example:
    “(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
    (3)In a proper case any incidental and consequential damages under the next section may also be recovered.”

    The point here is that “direct damages” are generally calculated one of two ways:
    (a) Expectancy: The value of the thing promised less the value of the thing delivered.
    (b) Cover: The cost of causing the thing delivered to conform to the promise.
    (With unchanging prices, no transaction costs, and a bunch of other assumptions, these are often equal to each other. In the real world, they are usually different.)

    That is pretty different from “damages that one would reasonably expect to arise from the breach in question, without taking into account any special circumstances of the nonbreaching party.”

    The difference is crucial in information and technology contracts. The market value of a computer might be $1m. But the loss of profits that it causes (and which would be “consequential damages” under the UCC) is often orders of magnitude higher because the client combines the computer with software and labor to run critical parts of the enterprise in ways that cannot be quickly recreated.

    Rather than excluding conquentials, I would much rather positively state that damages are limited to the expectancy or cover damages I describe above. But that’s a lot harder to get accepted than an exclusion of consequentials.

    Now, you may also say that, if you are capping damages in total, why bother excluding consequential damages. Here are the main reasons:
    1. If you keep consequentials in, you will be much more liklely to hit the cap. And recall that your cap is limted to revenues, not profits. So, if you make 10%, a cap to one year’s revenues is 10 years’ profits.
    2. Many of us worry about the enforcability of a damages cap. If my damages cap might fail, I certainly want to have the consequentials exclusion.
    3. It reinforces a message that is really important: Our obligations end on delivery. I’m not going to be responsible for the downstream consequences, even if I can foresee them, because they are properly under your control and for you to manage.

    Chris Lemens

  23. Chris: Saying that damages are limited to expectancy or cover damages is an interesting idea. And I’ll mull over your reasons for excluding consequential damages even if you have a cap. Ken

  24. Consequential damages versus direct damages can largely be a matter of fact that a court will determine. Ken makes a good point, that excluding certain types of damages is much more reliable than the blanket consequential damages. However, one important note that drafters should keep in mind is that if you exclude consequential damages (including loss of profits) the court MAY find that there are some loss of profit damages that are DIRECT damages and not consequential damages. Therefore, it is better to simply exclude loss of profits without including them as consequential damages.

    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.

  25. Ken: I’d like to understand in which area I’m not correct. I’ve made a series of short points which I can expand. I am sure of my ground! I am something of a fanatic on these points. Mark Anderson provides one of many cases showing the difficulty in English law (Deepak is in fact an Indian Law case heard in London because the parties wanted to get matters progressed and in India that is not always easy but for the purposes of the case it was agreed that the law is the same). My advice can be reduced to 1) always include a clear “laundry list”, 2) always exclude the liability in tort and (and) negligence too. One reason for that is that I have yet to find a case where, in the face of a bare exclusion of consequential loss, claimed losses were found to be consequential by a court.

  26. Haward: I understand your “laundry list” point, although I’m sure one could have an interesting discussion as to exactly what the laundry list should consist of.

    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.


  27. Hi Ken,

    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.

  28. This is a very interesting (and, in my experience, contentious) line of discussion. A couple observations: 1) Mr. Adams’s suggestion is most relevant only for US law commercial contracts; and, 2) I would further suggest that his suggestion is also more narrowly focused on the sale of goods (e.g., typical UCC transactions), and may not be appropriate for other types of B2B transactions. For example, those of us who represent sellers of business process outsourcing service (BPO) – especially technology services, such as software, SaaS, etc.—know that it is indeed quite common to see buyers request a large list of carve-outs from the LOL cap; and it is in this area that the exclusion of consequential damages becomes especially relevant. [Incidentally, I agree that having a solid, reasonable, overall LOL cap obviates much of the concern.] In many cases, when a buyer seeks to negotiate elimination of “exclusion of consequential damages” clauses, the sellers of BPO services are essentially asked to become de facto insurers of the buyer’s business by implicitly assuming a much larger degree of exposure for certain costs (lost business profits, replacement solution costs inclusive of training expenses, production down time, etc.). Are these “reasonably foreseeable costs” or not? Jurisdictions commonly disagree on the scope of what is reasonably to be expected, hence the belt & suspenders approach ensconced in the standard templates of many B2B sellers of BPO services. [I believe a field survey of “best practices” as evaluated by industry analysts such as AMR, Forrester, Gartner, etc suppor this assertion.]

    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.

  29. Robin: Thank you for your useful comment, which I will digest. (I’m on comment overload at the moment!) But two thoughts come to mind:

    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.


  30. I perhaps missed something, but I’m a bit skeptical. It’s my experience that most contracts have bifurcated LOL: “direct damages” and “consequential damages” (usually with incidental). These terms are certainly imported from their general use in the UCC (e.g., 2-710 and 2-715). The article doesn’t really have a hard time identifying a meaning. But instead it seems that the concern most concern with the “remoteness” justification.

    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.

  31. Two comments on this great article:

    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.

  32. I feel that the authors suggested provision would be turned down by every seller seeking to predictably limit damages (which is the point of limiting recovery to direct damages). The Author's suggested provision, disclaiming "all damages which are not foreseeable to the parties" is merely a restatement fo contract law, and will not be viewed as anything more than that by the court. This does not mean that other, remote and often unpredictable damages– which can often not be quantified ex-ante (i.e. lost profits, loss of goodwill) cannot be recovered.
    In contrast, limiting recovery to direct damages, and exemplifying the type of damages the parties seek to exclude ( For instance "such as, but not limited to, damages resulting from lost profits or revenues, loss of goodwill and/or business interruption or idle time losses, third party losses and any purely economic loss, etc."), Gives parties much more certainty in the event of breach or when contemplating the possibility of efficient breach.

  33. Very interesting, thank you. however what about this situation: it may be reasonably foreseeable that if I am a logistics company supplying motor vehicles parts line side that any late delivery may result in the plant stopping and huge penalties being payable by my customer to their customers. This however does not mean that it is a risk I would want to take for my relatively small transport fee, how would I go about excluding liability for this without mentioning consequential loss?

    • Alison,

      After reading this blog and all the comments, I have come to the same conclusion as advocated by Ken – Cap the overall liability.

      That does not mean that one can do away with the “No Consequential damages” (NCD) wording, but the cap provides a second armour if the primary NCD armour is pierced.

      The NCD is a practical utility and saves time & cost as long as the customers (& their lawyers) take it as a ‘gospel’ and do not read this blog.!!

      The Indian Contract Act, 1872 (codified by the English in India but not in their own land) cites illustrations to explain the “hadley vs baxendale-two limbs”. I found them similar to your example (reproduced verbatim) –

      “(i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A’s mill informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to
      receive from B, by way of compensation, the average amount of profit which would have been made by the working of the Mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.”

      “(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been then communicated to A), and is compelled to make compensation for breach of that contract. A must
      pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation.”

      “(p)A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B’s mode of conducting his
      business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.”

  34. Excluding liability and fiduciary/good faith duties – UK 2014 Case – Technology and Construction Court (TCC)decision – FUJITSU SERVICES v IBM UNITED KINGDOM [2014]

    Contractual exclusion of liability for loss of profit and contractual limits of liability holds. Claim for account of profits held to be covered under the cap of limit of liability.

    See http://www.trglaw.com/news165.html

    Some excerpts –

    “Clause 20.7 of the Sub-Contract had fairly typical exclusions and stated:
    “Neither Party shall be liable to the other under this Sub-Contract
    for loss of profits, revenue, business, goodwill, indirect or
    consequential loss or damage …”.

    The TCC said that the language of clause 20.7 was “clear and unambiguous” and that any liability on IBM’s part for damages for loss of profit based on the workshare and change control claims fell within this exclusion.”

    “If liability for the loss of profit claim was not effectively excluded,
    it would have been caught by these limits. In relation to the
    alternative claim for an account of profits, the TCC said that if such
    liability was not excluded by clause 20.7, it would be subject to these

    “Although the decision does not create any new law, it confirms the
    Courts will give effect to exclusion and limitation clauses provided
    that they are clear and unambiguous. It seems an exclusion of liability
    for an ‘account of profits’ in a relationship such as this needs to be
    separate from a ‘loss of profit’ exclusion.”


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