United States: Consequential Damage Disclaimers In Supply Agreements

What is a consequential damage?

This is the million (sometimes multimillion) dollar question. According to Black's Law Dictionary, consequential damages are "losses that do not flow directly and immediately from an injurious act but that result indirectly from the act."1

Let's take a straightforward example: if you get hit by a car, your hospital and physical therapy bills are clearly a direct damage. On the other hand, if you are out of work for six months recovering from the injuries, your lost wages during that time are consequential damages. Note that, although the damages are consequential, in terms of the financial impact on you, they are no less real than the direct damages. The same is true in a commercial scenario.

Examples of Consequential Damages.

Below is a list of common examples of consequential damages in a commercial context:

  • Loss of anticipated profits;
  • Loss of business;
  • Cost of unsuccessful attempts to repair defective goods;
  • Loss of goodwill;
  • Losses resulting from interruption of buyer's production process;
  • Loss of reputation; and
  • Loss of sales contracts because of delayed products.

Disclaimers of Consequential Damages.

In theory, the definition of consequential damages is not that complicated, but in application, the results become muddled. Commercial contracts typically include a consequential damage disclaimer, but one reason to resist such a disclaimer may simply be to avoid contentious and expensive litigation to determine whether a party's damages were direct or consequential in nature.

Generally speaking, if you are the buyer under a supply agreement, you will want to resist a disclaimer (even a mutual disclaimer) of consequential damages, because it is much more likely to benefit the seller of the product than it is to benefit you as the buyer. Typically, the buyer's primary or only obligation under a supply agreement is payment for the product, the failure to do which does not carry with it as much risk of consequential damages as the sale of a product creates for the seller.

Further, Article 2 of the Uniform Commercial Code (which governs the sale of goods and has been adopted in all states except Louisiana) provides that personal injury or property damage proximately resulting from any breach of warranty is a consequential damage.2 As such, as a buyer under a supply agreement, if the contract includes a consequential damage disclaimer, your warranty remedies will not help you in the case where the product the seller has sold you is defective and injures someone (it should be noted that a warranty remedy provision may also provide for sole and exclusive remedies of repair/replace/refund, in such case your warranty remedies will not protect you for such personal injury/property damage claims, even in the absence of a consequential damage disclaimer).

On the other hand, as the manufacturer/seller of a product, the seller could be subject to a host of consequential damages in the event it fails to timely deliver the products or delivers defective products and as such the seller will want to push for a consequential damage disclaimer.

Carve outs from the Consequential Damage Disclaimer.

In most arm's-length commercial agreements between sophisticated parties, the parties will agree to include a consequential damage disclaimer that is subject to certain carve-outs that permit a party, in certain situations, to recover consequential damages from the other party. The most common carve-outs from a consequential damage disclaimer are as follows:

  1. Third party indemnification claims. Claims brought by third parties for which a party is entitled to be indemnified should be carved out from consequential damage disclaimers. If an indemnifying party commits an act for which it has provided an indemnity under the agreement (for example, a common indemnity is for claims arising from a party's negligent acts or omissions) and that act injures a third party who then sues the indemnified party, the indemnified party will expect to be held harmless for that suit. However, a claim by a third party (and the defense of such claim) is likely to be classified as a consequential damage as to the indemnified party. As such, an indemnity can be overridden by a consequential damage disclaimer that does not properly carve out third party claims.
  2. First party negligence and misconduct. In addition to third party indemnification claims (which may, depending on the indemnity provision, include third party claims resulting from a party's negligence or willful misconduct), where bargaining power permits, the buyer should push for a separate carve-out from the consequential damage disclaimer for "first party" negligence or willful misconduct. That is, if a party is negligent or acts with willful misconduct, and the other contractual party is injured by it, the injured party should be entitled to recover all damages resulting from such negligence or willful misconduct, regardless of whether those damages are direct or consequential. As discussed above, a consequential damage is still a real damage that a party must prove it has suffered. There is no reason a party should be excused from liability for such damages arising from that party's negligence or willful misconduct simply because the damages are consequential. It should be noted that, in states that have adopted the Economic Loss Rule, this carve-out will not be sufficient to preserve a claim for economic losses resulting from a negligence/willful misconduct claim. If you want the right to recover those types of losses in such states, you will need to include an indemnity for first party negligence and willful misconduct or carve such losses out from the sole and exclusive remedy provisions of the warranty.
  3. First party intellectual property infringement. Where intellectual property is involved, the indemnity should include an indemnification by the seller for infringement of the intellectual property rights of a third party. If so included as an indemnity, these third party claims will already be carved out from the consequential damage disclaimer by virtue of the first carve-out listed above. However, where buyer's intellectual property is involved, a buyer should also insist on a carve-out for damages incurred by the buyer as a result of an infringement by the seller of the buyer's (rather than a third party's) intellectual property rights. The damages resulting from a violation of intellectual property rights are often going to be consequential (for example, lost profits or loss of market share). As such, for a buyer to have an adequate remedy for a violation by the seller of the buyer's intellectual property rights, first party intellectual property infringement must be carved out from the consequential damage disclaimer.
  4. Product Recall. If a buyer needs to conduct a product recall or other field corrective actions, the buyer may incur expenses that far exceed the cost of replacing, repairing or refunding the price of the product (which would be the direct damage and which are typically the sole remedies for a warranty claim). For example, there may be fines by regulatory agencies, money spent canvassing to reach purchasers, internal costs of employees dedicating time to the recall, and costs of field work, among others.
  5. Breach of Confidentiality. The reason for carving out damages related to a breach of confidentiality out of a consequential damage disclaimer is because the bulk of the damages that arise from a breach of confidentiality will, in fact, be consequential. As with intellectual property infringement claims, in order for a buyer to have an adequate remedy for a breach of the confidentiality provisions, damages resulting from the breaches of confidentiality must be carved out from the consequential damage disclaimer.

Conclusion

Whether or not to include a consequential damage disclaimer and, if included, what types of carve-outs to include, depends on whether you are the buyer or seller, what your relative bargaining power is, and what types of issues are likely to arise.

Footnotes

1 DAMAGES, Black's Law Dictionary (10th ed. 2014).

2 U.C.C. § 2-715(2)(b).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions