Excluding Direct and Indirect Damages

Earlier this month I unleashed the following tweet:

So I noted with interest the opinion of the Texas Court of Appeals in Innovate Technology Solutions, L.P. v. Youngsoft, Inc., 05-12-00658-CV, 2013 WL 6074126 (Tex. App. Nov. 19, 2013) (PDF copy here).

The contract at issue contained the following limitation of liability:

Not withstanding anything contained elsewhere in this Agreement and under any circumstance, for any reason whatsoever, YS shall not be liable for any incidental, ancillary, direct, indirect, special or consequential damages, including but not limited to lost profits, whether in tort or contract, and based on any theory of liability.

Given the presence of both “direct” and “indirect,” it’s not surprising that Youngsoft argued that because of that limitation of liability, “Innovate is not entitled to recover any damages from Youngsoft under any circumstances, notwithstanding anything to the contrary in the … Agreement.”

The trial court held in favor of Youngsoft, but the Court of Appeals reversed, holding that giving the limitation of liability the meaning sought by Youngsoft would make the entire contract “illusory, void, and unenforceable.”

This case serves as a reminder that attempting to exclude both direct and indirect damages makes no sense. (See MSCD 13.117.) It’s hard to imagine that anyone who includes both “direct” and “indirect” is really attempting to exclude all damages. Instead, it’s more likely that they’re just throwing in whatever happens to come to mind, whether they understand it or not. After all, many drafters don’t understand what “consequential damages” means (see this post and this post), so they’re not likely to worry to much about “direct” and “indirect.”

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.