Including a liquidated damages (LD) clause in a commercial contract is a popular way of dealing with the possibility of breach. This guide explains the critical steps to take in making sure liquidated damages clauses are enforceable. However, the interpretation of the clauses by the courts is a highly fact-sensitive exercise and therefore may not necessarily produce consistent outcomes. Limitation or exclusion clauses which speak only of "consequential loss" or "indirect or consequential loss" ordinarily will not be effective to limit or exclude liability for direct loss of production, loss of revenue or loss of profit. Given the interpretation of direct damages and consequential damages in the two cases above, clause C.3 may not provide any more protection to the engineer than the clauses in those cases did. A consequential loss is an indirect adverse impact caused by damage to business property or equipment. However, in evaluating the natural and ordinary meaning of the clause, the judge reached the same conclusion as the traditional approach: “The exclusion is "for any indirect or consequential loss or damage". If so, what meaning is attributed to the words “consequential loss” in contractual exclusion clauses? However, a typical clause will include a definition of what constitutes consequential damages. Consequential damages include, but are not limited to, lost profits, lost revenues, and lost business opportunity, whether the other party was or should have been aware of the possibility of these damages. Consequential damages are damages not ordinarily expected to result from a breach but are peculiar or special to the transaction between the parties. Search. The Judge rejected this interpretation on the basis that it made everything in the clause other than “indirect losses or consequential damages” redundant. In theory, the definition of consequential damages is not that complicated, but in application, the results become muddled. Australian common law has established that excluding liability for consequential loss must not be too broad. Courts award compensation for consequential damages only if both parties to the contract were aware of or contemplated these "special circumstances" at the time of the contract. However, this often leads to an even more unpleasant surprise when the contract is breached, and the consequential or liquidated damages clause determines the remedy. Lately, some IT providers are attempting to either disclaim consequential damages or limit the liability for damages. Sometimes the remedy seems completely disproportionate to the harm caused by the breach. Now, assume using the example above that the owner of … Do consequential loss exclusion clauses have an impact on non-damages claims? Furthermore, if both a waiver of consequential damages and liquidated damages clause exist within a contract, the contract should clearly state that the liquidated damages clause is a limited exclusion to the waiver of consequential damages. Direct loss is the natural result of the breach in the usual course of things. The document had been drafted by the seller, and it contained the customary provision excluding the seller’s consequential damages. These clauses can save time and money by assigning a specific dollar value for each day that passes between the substantial completion date of the contract and the date that the contractor or subcontractor finishes the job. While a seemingly simple test, Texas courts have had varying outcomes depending the specific facts and circumstances. In more cases, the remedy was misunderstood by one of the parties at the beginning of the contract, yet is being imposed against it. By: Timothy Murray ONE TIME, I WAS REVIEWING THE TERMS OF A PROPOSED contract with an executive for a client that was buying a product for a significant sum of money. A claim for diminution of … The plaintiff argued that the lost profits were direct damages, so the exclusion would not apply, and the New York Court of Appeals, in a 4-3 decision, agreed. Consequential Damages: Injury or harm that does not ensue directly and immediately from the act of a party, but only from some of the results of such act, and that is compensable by a monetary award after a judgment has been rendered in a lawsuit. Contract Type. Consequential loss exclusion clauses: Issues for owners and contractors. It is possible that IT service providers are reacting to some of the recent changes to data privacy laws (e.g., General Data Protection Regulation [GDPR] in the European Union [EU]) and the potential damages for a breach of data privacy laws. Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. Most foreseeable kinds of loss are direct, including financial losses such as loss of profits and loss of business or goodwill. Consequential damages, on the other hand, may “result naturally, but not necessarily, from the defendant’s wrongful acts.” Consequential damages must be foreseeable and must trace directly back to the wrongful act in order to be recoverable. Rather the clause had a wider meaning of financial losses caused by guaranteed defects above and beyond the replacement and repair of physical damage. Where a clause includes other heads of loss alongside “consequential loss”, how will the law approach such clauses? Some of these clauses only exclude certain economic or consequential losses – such as loss of profit, and loss of production – while others explicitly exclude all consequential losses, sometimes combined with a non-exhaustive list of examples and sometimes by just using the phrase “consequential loss” or “consequential and indirect losses”. A consequential loss clause provides protection to a business or owner should they experience loss of income, resulting from things such as theft, fire, floods and other natural disasters. by Arch Fletcher . Additional filters are available in search. Contents Fullest extent permitted Expectation damages wich Examples. Clause 10.1 identified the particular loss for which Sony would be liable and defined the limit of such liability. Drafting Exclusion of Consequential Damages Clauses Posted on 12-18-2018 . Breaching parties are excluded from paying damages if there is an exclusion clauses in the contract protecting against the loss. A consequential damages clause can be drafted in numerous ways. Liquidated damages clause. Mutual Waiver of Consequential Damages Clause. Clauses that seek to exclude a party's right to damages are often subject to restrictive interpretation by the courts. Include Keywords. Careful consideration should therefore be given to what the parties consider to be direct losses and consequential losses. He decided that it was best to construe the clause as if it read “for loss of production, profits, business, indirect losses or consequential damages of any other kind”. Clause 10.3 excluded the lost profits and business interruption losses claimed by 2E as these were consequential on the loss of the goods. Construction contracts include liquidated damages clauses because actual consequential damages can be difficult to quantify. Clauses: Waiver of Consequential Damages, Limitation on Liability, Etc. 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. defendant asserted that the lost profits were consequential damages and invoked a clause in the contract excluding consequential damages. For example, Clause 17.6 of the FIDIC Silver Book provides: “Neither Party shall be liable to the other Party for loss of use of any Works, ... consequential loss or damage, both Croudace and Millars support the view that the term “consequential” is confined to the second limb of the rule in Hadley v Baxendale. It relied on Transocean and Star Polaris in support of this interpretation. Typically upheld by the courts, the Mutual Waiver of Damages Clause is a provision that addresses specific types of damages claims and limitations of liability of those particular claims for both parties involved in a contract. Payment of damages for consequential loss doesn’t necessarily have to happen. However, in this case, the parties were of equal bargaining power and the Court held that the mutual indemnities which extended to consequential losses should stand. Essentially, the consequential loss results from the inability to use certain things needed to operate the business; consequently, that inability results in losses for the business. In assessing damages for breach of contract: ... By definition, therefore, consequential losses are exceptional and often not recoverable. Detriment that arises from the interposition of special, unpredictable circumstances. The phrase “consequential or special losses, damages or expenses” did not mean those losses coming within the second limb (arising from special circumstances known at the time the contract was entered into). These clauses can play an important role in risk allocation. 4. Disclaimers of Consequential Damages. Jurisdiction.