I’ve written about consequential damages (primarily in this 2010 post and the follow-up), but I’ve been acutely aware that I’ve pointed out problems without proposing a better way to handle excluding consequential damages. That’s what I attempt with this post.
Here’s a randomly selected limitation-of-liability provision:
In no event shall a party have any liability to another party for any punitive damages, lost profits, diminution of value, consequential damages, special damages, incidental damages, indirect damages, exemplary damages, or other similar unforeseen damages.
This provision, like most others, gives the impression that the drafter regurgitated a string of ill-understood terms of art. You should be able to explain cogently why you wish to exclude each item. Otherwise, at a minimum you’re adding to your negotiation burden for no good reason. (The best discussion I’ve seen of that is in Alex Hamilton’s Sign Here: The Enterprise Guide to Closing Contracts Quickly.) And some of what you ask for might make no sense.
For reasons I explain in my 2010 post, a starting point would be to exclude damages that aren’t reasonably foreseeable:
Neither party will be liable for breach-of-contract damages that the breaching party could not reasonably have foreseen at the time of breach.
But what about consequential damages? Excluding consequential damages is intended to address a situation where one party tells the other about the first party’s particular needs (or, to use the term of art, “special circumstances”). For example, a potential customer might tell an Acme representative how the potential customer’s special circumstances had resulted in it having a bad experience with another supplier, leading to unexpected losses. If Acme’s representative reassures the customer but doesn’t inform anyone at Acme of the discussion, a court might well attribute the representative’s knowledge to Acme, making it possible for the customer to seek a remedy for losses incurred because the product or service in question had failed to address the customer’s special circumstances.
So consequential damages could be a legitimate concern. But I suggest that instead of referring to consequential damages (the effect) in your limitation-of-liability provision, you refer to special circumstances (the cause)—it’s clearer what’s being referred to. That could be accomplished by using the sentence below, in addition to the provision excluding remote damages:
Each party states that it has no knowledge of any special circumstances to which it is subject that would render reasonably foreseeable any damages that otherwise would not have been reasonably foreseeable, and it hereby waives any right to bring a claim against the other party for damages arising from any such special circumstances.
That sentence accomplishes two things. First, having each party say that it knows of no special circumstances renders irrelevant whatever chatter might have gone on previously. And second, each party waives any right to bring a claim for the damages in question. I could have instead said that each party won’t be liable for those damages, but there could be different reasons for absence of liability. I thought it best to be specific.
If one party accepts that the other is subject to special circumstances, that sentence could be made subject to an exception for damages arising from those special circumstances:
This is in the context of a one-time purchase of goods. It would have to be adjusted for an ongoing relationship.
And more generally, this is entirely novel, so I expect it to change. What do you think?
This looks really good — more understandable by lay people, and easier for a judge to explain in jury instructions, than trying to define “consequential damages.”
Someone has hacked D.C.’s Twitter! :-)
I may be misremembering, but I thought that one outcome of that 2010 discussion was that unforeseeable damages are outside the scope of contract damages without having to say anything at all (which I think was Glenn West’s observation that was your starting point). I also thought another outcome was that you suggested treating this subject through a numerical limit of liability. What changed your mind?
Yes, your recollection regarding remote damages is correct. But Glenn West’s recommendation is that people are sufficiently confused about this that it’s worth stating in a contract what the law provides, and I agree.
And yes, my recommendation was, broadly, to put a cap on it instead. But I’ve decided that that’s a cop-out. Consequential damages are a real issue, so the challenge is how to express the issue in a way that humanoids can understand. This post represents my first attempt.
Vance:
For me, the reality is that no one manages their sales organization to require their sales people to report all conversations about their prospects’ special circumstances. So if that’s the kind of thing that matters in your industry, an exclusion of consequential damages can be important. Otherwise, you have to contemplate that any old claim could hit your liability cap.
Chris
Ken:
As I’ve said privately, I prefer a solution that excludes these types of damages rather than trying to disclaim the factual condition that leads to it. We don’t know what happens if it turns out that the parties did actually discuss special circumstances. It seems to me that starting from a falsehood is a problem. But we know from case law that we can exclude consequential damages even if the parties have discussed special circumstances.
So I prefer to exclude the damages directly. I’d say this:
Neither party will be liable for damages that were foreseeable only because the other party had knowledge of the damaged party’s special circumstances.
Apart from that, I agree with what Ken said.
Chris
As I noted on LinkedIn (https://www.linkedin.com/feed/update/urn:li:activity:6944652042237870080?commentUrn=urn%3Ali%3Acomment%3A%28activity%3A6944652042237870080%2C6944662810740076544%29&replyUrn=urn%3Ali%3Acomment%3A%28activity%3A6944652042237870080%2C6945023281049612288%29), I have a hard time imagining how the buyer statement of fact would leave the seller in a worse position that if the buyer said nothing.
And having the buyer waive claims reflects what is actually happening.
But I’m confident this will undergo further changes.