Unless you are an existing client of the firm, having received from us a written statement that we represent you in a particular matter, you should not send us any confidential information or sensitive materials. [2] Note that within this article we use the terms “seller” and “company” in the context of a stock purchase transaction—the “seller” would be the selling shareholder(s) making the representations and warranties in the M&A purchase agreement, and the “company” would be the company being acquired. 777, 785 (2008). The document had been drafted by the seller, and it contained the customary provision excluding the seller’s consequential damages. 10.Id. [16] Id. Loss of profits due to an interruption of normal business practices. Fla. May 13, 2016). Trends in M&A Provisions: Exclusion of Consequential Damages, Medical, Educational & Cultural Institutions, Trust Investment & Administration Services, Affordable Housing & Economic Development, International Investment in U.S. Real Estate, Real Estate Acquisitions and Dispositions, Real Estate Joint Ventures & Equity Investment, http://www.goulstonstorrs.com/WhatsMarket, https://www.bloomberglaw.com/page/infocus_dealpoints, http://mtweb.mtsu.edu/cewillis/Hadley%20v%20Baxendale.pdf, http://www.adamsdrafting.com/new-article-on-consequential-damages/, American University Washington College of Law, Benjamin N. Cardozo School of Law, Yeshiva University, Binghamton University State University of New York, Brigham Young University - J. Reuben Clark Law School, Case Western Reserve University School of Law, Catholic University of America, Columbus School of Law, City University of New York at Baruch College, Cornell University, College of Engineering, Edmund A. Walsh School of Foreign Service, Georgetown University, Emory University Goizueta Business School, Georgetown University School of Foreign Service, Indiana University Jacobs School of Music, Indiana University-Purdue University at Indianapolis, Indiana University—Indianapolis Robert H. McKinney School of Law, National Law Center at George Washington University, Suffolk University, Sawyer School of Management, The George Washington University Law School, The London School of Economics and Political Science, The Wharton School of Business and Finance - The University of Pennsylvania, University of California at Berkeley School of Law (Boalt Hall), University of California, Hastings College of the Law, University of Cambridge, Judge Institute of Management, University of North Carolina at Chapel Hill, University of South Carolina Honors College, University of Southern California Gould School of Law, University of Southern California Law School, Washington College of Law, American University, Only two to nine percent of the purchase agreements expressly, 31% to 39% of the purchase agreements expressly. It’s only a difference of two words – loss vs. damage – but it can be very confusing for your car insurance clients to understand. M.G.A., Inc. v. Amelia Station, Ltd., 2002 Ohio App. 23, To anticipate this problem, the seller should include language in the contract to this effect: “The parties agree that, regardless of the failure of the sole and exclusive remedy, seller will not be liable for any consequential damages of whatsoever kind or nature.”. [1] Outside of the context of contracts for the sale of good, the meanings of consequential damages and incidental damages are somewhat different but they still should be separately disclaimed. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is … In that case, courts sometimes allow the aggrieved party to recover consequential damages despite the exclusion of consequential damages. In the ensuing litigation, the jury awarded Abercrombie damages for Penn Square’s negligence, but not for breach of contract. © 2020 Goulston & Storrs PC. 2. By contrast, the buyer typically argues that it should not be required to waive and exclude damages that it would otherwise, absent such waiver and exclusion, be able to assert against a seller in a normal breach of contract claim. Loss of customers due to cancellations or delays. Pa. Nov. 1, 2016). 15 If a drafter desires to exclude lost profits of any kind, the contract should say that lost profits are excluded regardless of whether they are characterized as direct or consequential damages. As noted below, this common argument is likely misplaced. power system, cost of capital, cost of purchased or replacement power, or. This argument also has limitations because buyers often do agree to waive and exclude some types of damages—most notably, special, incidental, or punitive damages. Given the often blurred parameters between direct and consequential damages, M&A lawyers should carefully consider the potential impact of including or excluding consequential damages in M&A purchase agreements because the provisions could materially impact a party’s responsibility for breaches of the agreement. LEXIS 160763 (E.D. Other limitations are that damages must be proven with reasonable certainty, and they must be the proximate consequence of the wrong. This is particularly noteworthy considering a recent trend, discussed below, indicating that parties are remaining silent on this point in the purchase agreement (i.e., neither expressly including, nor excluding, consequential damages from recovery). L.A. L. Rev. For example, states typically look with some measure of disfavor on contracts that excuse a party of liability for his or her own negligence. This case serves as the precedent for our modern day understanding of consequential damages recoverable upon breach of contract. We clarify the differences between consequential loss and consequential damage with real-life examples, so it’s easy for you to explain policy exclusions to clients. Law. When a contract contains an exclusive limited remedy for a buyer’s damages in the nature of “repair or replace,” if that remedy fails of its essential purpose (that is, if the product fails, and the seller does not repair or replace), the buyer is entitled to remedies otherwise allowed by law. Attorney Advertising. This distinction was the basis for “the most famous case in contract law, perhaps in all of Anglo-American civil law,” 6 Hadley v. Baxendale. [2] Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damages that the buyer may suffer as a result of the seller's breach should be included in, or excluded from, the seller's indemnification obligations. 7. § 2-719 cmt. 17. In such contexts, (a) incidental damages are costs and expenses incurred by the non-breaching party to avoid other direct and consequential losses caused by the breach, and (b) consequential damages … The articles can be found on Goulston & Storrs’ “What’s Market” web page at http://www.goulstonstorrs.com/WhatsMarket and on Bloomberg Law at https://www.bloomberglaw.com/page/infocus_dealpoints. . U.C.C. Nineteenth century English case law aside, as a practical matter, it is often difficult to determine, or at least to have any two lawyers agree upon, which types of damages constitute consequential damages. [12] Generally stated, absent specific language in the contract to the contrary,[13] a party’s specific reasons or motivations underlying its breach do not impact recoverable contract damages. LEXIS 32524 (W.D. Elec. LEXIS 689 (Sept. 19, 2016); Canterbury Apartment Homes LLC v. La. “Losses” are normally defined broadly and may include, for example: Any loss, liability, demand, claim, action, cause of action, cost, damage, royalty, deficiency, penalty, tax, fine or expense, whether or not arising out of third party claims (including interest, penalties, reasonable attorneys' fees and expenses) and all reasonable amounts paid in investigation or defense, and all amounts paid in settlement, of any of the foregoing. Batteries, or any problem that is caused by abuse, misuse, or an act of God (such as a flood) are not covered. 10 For example, in Hadley , if the plaintiffs had alerted the carrier at the time of contract formation that the mill would be closed due to the broken shaft, that should have been enough to make the carrier liable for consequential damages. Excluding Consequential Damages Is a Bad Idea 1. except as otherwise provided in section 11(c), no party shall, in any event, regardless of the form of claim, be liable for any indirect, special, incidental, punitive, exemplary, speculative, or consequential damages (including, but not limited to, any loss of use, loss of data, business interruption, and loss of income, profits, or business opportunities), regardless of whether it had an advance notice of the possibility of … And recall that your cap is limted to... 2. virtually all have involved claims for consequential losses in some form or another.” Andres Tettenborn, Consequential Damages in Contract—the Poor Relation?, 42 Loy. In no event shall any Party or any affiliate thereof or any of their respective directors, officers, agents, or employees be liable to any other Party or any affiliate thereof or any of their respective directors, officers, agents, or employees for any indirect, consequential, punitive, special, incidental or exemplary losses or damages (including without limitation lost profits or lost … 1. RESEARCH PATH: Commercial Transactions > General Commercial and Contract Boilerplate > Contract Boilerplate and Clauses > Articles, For more information on contracts for the sale of goods and services, see, > Commercial Transactions > Supply of Goods and Services > Supply and Purchasing Products > Practice Notes, For guidance in properly drafting sales and purchase agreements, see, > KEY PROVISIONS OF SALES AND PURCHASE AGREEMENTS, For a discussion on the use of pre-printed forms in contract formation, see, > Commercial Transactions > Supply of Goods and Services > Contract Formation, Breach, and Remedies under the UCC > Practice Notes, For tips on how to avoid mistakes in drafting contracts for the sale of goods, see, > SALE OF GOODS AGREEMENTS: AVOIDING COMMON PITFALLS, > Commercial Transactions > Supply of Goods and Services > Contract Formation, Breach and Remedies under the UCC > Practice Notes, For a list of drafting tips for creating commercial contracts, see, > COMMERCIAL CONTRACT DRAFTING AND REVIEW, > Commercial Transactions > General Commercial and Contract Boilerplate > Contract Boilerplate and Clauses > Practice Notes. “[I]t is of the very essence of a sales contract that at least minimum adequate remedies be available.” 19 Sometimes, an exclusive contractual limited remedy (for example, an exclusive remedy that limits the buyer’s recovery to the purchase price of the product) does not allow the aggrieved party sufficient damages to be made whole. But merely listing a specific remedy will not be sufficient to prevent the non-breaching party from obtaining other remedies. 2018), and is co-author of the Corbin on Contracts Desk Edition (2017). According to the 2017 ABA study, only nine percent of the agreements reviewed included a consequential damages “inclusion” provision (i.e., a provision that expressly includes consequential damages within indemnified losses), while 39% of the agreements expressly excluded consequential damages from coverage, and 52% of the agreements were silent on the issue. La. .” 21. Regardless of the correctness of the court’s conclusions, the parties could have avoided the costs and risks of litigation by addressing damages in a different way. § 2-719 cmt. . This article does not cover such provisions in other types of transactions or in public-to-public M&A transactions. . Exclusion and limitation of liability clauses often exclude “lost profits” from the types of consequential damages … By contrast, the buyer typically argues that it should not be required to waive and exclude damages that it would otherwise, absent such waiver and exclusion, be able to assert against a seller in a normal breach of contract claim. . The 2005 ABA study did not examine the exclusion of consequential damages, and therefore this study is not included within the chart. Here are some of the most significant problems involved in drafting exclusions of consequential damages—and some suggested ways to avoid them. Sellers, understandably, seek to limit the scope of the losses to which they provide indemnification. But the carrier inexcusably delayed the shipment, causing the mill to remain closed for a longer period of time. This practice is fraught with peril and demonstrates an indifference to the caselaw that exposes our clients to unnecessary risk. 5 The foreseeability doctrine manifests itself in the distinction between direct (or general) and consequential (or special or indirect) damages. The standards for excluding damages arising from a party’s tort liability are typically more stringent than the standards for excluding consequential damages arising from a garden-variety breach of contract. Timothy Murray , a partner in the Pittsburgh, PA, law firm Murray, Hogue & Lannis, writes the biannual supplements to Corbin on Contracts, is author of volume 1, Corbin on Contracts (rev. It is a frequently stated maxim that contract law seeks to … Mr. Avery is a member of the American Bar Association's working group which published the 2017 ABA private company mergers and acquisitions deal points study referenced within this article. 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