Corporate & Securities Law

Follow-Up on Consequential Damages

By Ken Adams

After chewing over the comments to this post on excluding consequential damages, I’m left with the following thoughts:

• I remain of the view that putting a cap on damages is the simplest and least contentious way to limit damages. And it can make excluding certain kinds of damages less relevant, or even entirely irrelevant. Whether a cap makes sense would depend on the transaction, but it’s the first thing I’d explore when it comes to limiting damages.
• But if you also want to limit kinds of damages, consider that when describing something, it’s generally clearer to say what it is rather than what it isn’t. So instead of saying what damages the buyer isn’t entitled to, it might be simpler to specify the only damages that the buyer is entitled to. In the case of sale of goods, presumably you’d articulate, without using jargon, expectancy damages (the value of the thing promised less the value of the thing delivered) and cover (the cost of causing the thing delivered to conform to the promise), with perhaps some cap built in.
• If you also, or instead, want to exclude certain kinds of damages, I recommend that you not use the phrase consequential damages, as there’s widespread confusion as to what it actually means. From the seller’s perspective, it’s risky to rely on an exclusion of consequential damages, as courts are prone to holding that elements of damages that the seller might have intended to exclude are in fact direct rather than consequential. See, for example, this Bird & Bird analysis of a recent English case. (Thanks to reader Robin for sending me the link.)
• Instead, be specific as to what you’re excluding. Don’t use legal terms of art; instead, refer to “lost profits” or whatever else is on your mind. But whatever elements you include, think them through! Glenn West’s article?the one I linked to in my original post?explores two hypothecal situations and the different kinds of damages involved. I recommend that you consult those hypotheticals and for any given transaction devise comparable hypotheticals of your own, so that what you end up asking for actually makes sense in the context of your transaction.
• A buyer might be more willing to live with a limited range of damages if it’s entitled to liquidated damages in certain contexts.
• In my original post I proposed, as a baseline, language that simply tells the seller that they won’t be liable for damages that weren’t foreseeable when the contract was signed. Of course, in a large organization you face the question, foreseeable by whom?the CEO or the person further down the food chain who’s negotiating the deal, or someone in between? But presumably whatever cap or other limits to damages are built into the contract would render that pretty much irrelevant as an issue.

You’ll see in these thoughts the influence of some of the comments to my original post. My thanks to everyone who waded in.

Full post as published by AdamsDrafting on March 02, 2010 (boomark / email).