ARTICLE
CONSEQUENTIAL DAMAGES WAIVERS:
HOW TO CONSEQUENTIALLY AND
INCIDENTALLY (INCLUDING INDIRECTLY)
WAIVE YOUR REMEDY
Megan A. Ceder and Travis J. Distaso
ABSTRACT
Consequential damages waivers are often quickly absorbed
as boilerplate. There is, however, increasing literature on the
recognition of the potential misuse of such waivers, especially
with regard to the overlap between direct and consequential
damages. This article comments briefly on the above and adds
insights on the interpretation of specific terms in common
consequential damages waivers.
TABLE OF CONTENTS
I.
THE CORE OF CONTRACT ............................................................. 2
II. HARKENING BACK TO HADLEY .................................................... 4
III. THE CONSEQUENCE OF CONSEQUENTIAL .................................. 5
IV. WAIVING WORD BY WORD ........................................................... 6
A. State Interpretation ............................................................. 7
B. Incidental Damages ............................................................ 8
C. Indirect Damages ................................................................ 9
 Megan A. Ceder and Travis J. Distaso are associates in the Energy Transactions and
Projects Practice Group at Vinson & Elkins LLP, in Houston, Texas. They would like to
thank Shay Kuperman for his help and guidance throughout the article-writing process,
and Brooke Milbauer for her assistance and research.
1
2
HLRe: OFF THE RECORD
[6:1
D. Punitive Damages................................................................ 9
E. Lost Profits ........................................................................... 9
F. Diminution in Value ......................................................... 10
V. BEYOND HADLEY ........................................................................ 10
I.
THE CORE OF THE CONTRACT
In the world of business transactions, parties often desire
more than the mere exchange of assets or the development of a
project; they desire certainty around the effects of the
transaction. In the context of an acquisition of an asset, for
example, parties would have little difficulty agreeing to a bare
bones purchase and sale. The basic solution would be to contract
only for the delivery of legal title to the asset in exchange for
monetary equivalents. In such a scenario, the parties would allow
statutory and common law defaults to control any exigencies,
such as the amount of damages owed if a party believed the asset
was not as they expected or the determination of the party
responsible for unexpected costs.
More realistically, and especially in complex corporate
transaction, the parties may desire to limit the unexpected
effects of a transaction through the contractual allocation of
liability for specific events. In so doing, the parties modify
common law or statutorily prescribed remedies, to the extent
allowable by law. This allocation may be accomplished in a
variety of ways. Parties may decide to give warranties for certain
parts of an asset to extend for a certain amount of time, such as
that certain components of solar panels installed in a commercial
rooftop shall be free and clear of all defects for a period of five
years. They may also choose to allow for certain payments upon
an event of early termination or default.
More overtly, parties may contract for liquidated damages,
i.e., define certain events to trigger certain payments between
the parties. For example, if the parties agree to a construction
schedule and the contractor fails to deliver a certain component
of the project by the schedule’s deadline, the contractor may be
required to pay a specified, predetermined amount of damages.
Finally, parties may agree on an indemnity, i.e., an allocation of
the responsibility for damages with regard to an aspect of the
transaction. Regarding these contractual allocations, but
especially liquidated damages and indemnities, the parties may
set formal limits (often termed “limitations on liabilities”) for the
2015]
CONSEQUENTIAL DAMAGES WAIVERS
3
amount of damages for which a party may be liable under the
agreement.
It is within this context of “limitations on liabilities” that
consequential damages waivers come into play. That is, in addition
to the above specifications and limitations, parties often choose to
disclaim liability for certain types of damages, including
“consequential” damages resulting indirectly from a breach of
contract.
A boilerplate waiver of consequential damages provision is
as follows:
No Consequential Damages. Notwithstanding anything
to the contrary contained in this Agreement or provided for
under any applicable Law, no party hereto shall be liable to
any other Person, either in contract or in tort, for any
consequential, incidental, indirect, special or punitive
damages of such other Person, [including] [or any] loss of
future revenue, [or] income or profits[, or any diminution of
value or multiples of earnings damages] relating to the
breach or alleged breach hereof, whether or not the
possibility of such damages has been disclosed to the other
party in advance or could have been reasonably foreseen by
such other party.1
In theory, the intent is to disclaim liability for remote and
unforeseeable damages, thereby giving certainty to the amount of
damages for which a party may be liable in the future. The
concern with such waivers, however (at least as it pertains to this
article), is that a party may in fact be waiving any and all
damages available (or a greater amount of damages than
expected) as a remedy to the transaction. Take, for instance, a
contract for the development of a project. An owner and a
contractor agree to a transaction in which the contractor builds a
unique, state-of-the-art factory on the owner’s land. Upon
completion, the owner expects the factory to generate
extraordinary profits due to its unique nature. The parties
include in the contract a waiver of consequential damages. If the
contractor completes the construction on time but fails to deliver
the unique, state-of-the-art performance standard in the contract
and owes resulting breach of contract damages, those damages
may consist solely of extraordinary “lost profits” that the owner
expected to generate from the unique facility. In such case, the
1. Glenn D. West & Sara G. Duran, Reassessing the “Consequences” of
Consequential Damage Waivers in Acquisition Agreements, 63 BUS. LAW. 777, 778 (May
2008).
4
HLRe: OFF THE RECORD
[6:1
owner may be entirely without relief due to the waiver of
consequential damages in the contract. 2
II. HARKENING BACK TO HADLEY
As the waiver of consequential damages stems from the
desire to limit contractual damages, it is important to start at the
beginning. Unsurprisingly, we are taken back to England, to the
nineteenth century and to Hadley’s flour mill in need of a
crankshaft.3 In Hadley v. Baxendale, the crankshaft of a mill’s
steam engine broke and, after ordering a new one, Hadley
contracted with Baxendale to deliver the broken shaft to a
manufacturer to begin the process of creating the new one. 4
Although Baxendale agreed to transport the broken shaft the
next day, Hadley informed Baxendale of neither the reason for a
new crankshaft nor the effect of a delay in delivery, and
Baxendale agreed to transport the broken shaft the next day.5
Baxendale, however, failed to deliver the broken shaft until five
days later.6 Hadley sued Baxendale for the mill’s lost profits for
the period between when the mill would have been operating
without a delay on the part of Baxendale and when it actually
became operational.7 The court denied Hadley’s claim for lost
profits, noting that the “loss of profits here cannot reasonably be
considered such a consequence of the breach of contract as could
have been fairly and reasonably contemplated by both the parties
when they made the contract. For such loss would neither have
flowed naturally from the breach of this contract . . . nor were the
special circumstances . . . communicated to or known by
[Baxendale.]”8 In this holding, the modern bifurcation of damages
into “direct” and “consequential” was born.9
The Hadley division of damages into two prongs continues
today. First, a party may recover direct or general damages, i.e.,
losses that directly and naturally arise from the breach of a
contract.10 Second, a party may recover special or consequential
2. Id.
3. Hadley v. Baxendale, 9 Exch. 341, 341 (1854).
4. Id. at 344.
5. Id. at 343.
6. Id.
7. See id. at 342–44.
8. Id. at 357.
9. West & Duran, supra note 1, at 778.
10. Jason L. Richey & William D. Wickard, Consequential Damages in Today’s
Construction
Industry,
K&L
GATES
LLP
(May
5,
2008),
2015]
CONSEQUENTIAL DAMAGES WAIVERS
5
damages, i.e., losses arising from special circumstances
surrounding the breach to the extent that the breaching party
knew of the circumstances at the time the contract was made. 11
In line with Hadley, most jurisdictions, by default, allow parties
to recover damages only to the extent they were reasonably
foreseeable to the breaching party.12 As this analysis pertains to
Hadley, the court found that the lost profits were not reasonably
foreseeable from the late delivery of a crankshaft. 13 As such,
Hadley would only be able to recover for such lost profits if
Hadley had made Baxendale aware of this special
circumstance.14
III. THE CONSEQUENCE OF CONSEQUENTIAL
The second type of damages in Hadley, i.e., special or
consequential damages, is a more vaguely defined concept.15
While some commentators debate whether such damages should
be classified as merely “indirect” damages (as opposed to “direct”
damages in prong one of Hadley), a good definition for special or
consequential damages seems to be: “losses directly attributable
to and caused by a contract breach as a result of the special
circumstances of the non-breaching party that would not have
occurred in the ordinary case of a breach of a similar contract not
involving such special circumstances.” 16
This leads to a critical problem observed by commentators,
namely, the potential overlap between direct damages and
consequential damages. A good example is in the context of a
corporate asset acquisition. On the one hand, the parties may agree
in the representations and warranties that an asset has certain
specifications that the buyer is relying on to generate increased
profits, and, in turn, value in the future. Meanwhile, the parties
may also include a provision containing a waiver of consequential
damages.17 If the representations and warranties prove false, and
the asset fails to perform up to the buyer’s expectations, the buyer
http://www.klgates.com/files/Publication/d2f0d5fa-7ebb-4c2c-9d96-94577868f2d7/Presenta
tion/PublicationAttachment/35e1a2c8-ef0c-466d-aea0-9cd6af9dd6ca/constructioneer_articl
e_richey.pdf.
11. West & Duran, supra note 1, at 791–92.
12. Id.
13. Hadley, 9 Exch. at 355–57.
14. Id.
15. West & Duran, supra note 1, at 791–92.
16. Id.
17. Id.
6
HLRe: OFF THE RECORD
[6:1
may sue for breach of contract.18 While, under the Hadley default,
the buyer would likely recover because the representation of the
company’s special circumstances makes such damages reasonably
foreseeable, due to the waiver of consequential damages, the buyer
may in effect have no recourse as all damages would be in the form
of lost profits or otherwise consequential damages, both of which
were waived in our example provision.19
The easiest way to see this is by way of the four basic
scenarios in which it may occur:
Likely to Recover Lost Profits?
Inform of Special
Circumstances
Do Not Inform
of Special
Circumstances
Waive
Consequential
Damages
Depends*
No
Do Not Waive
Consequential
Damages
Yes
No
*A waiver of consequential damages that specifically
excludes damages arising from special circumstances may
exclude consequential damages, even if such damages are the
only possible damages recoverable.20 Such a waiver may occur,
for example, if the waiver includes “notwithstanding anything
else in the Agreement,” and if damages provisions are not carved
out or upstaged by state law.
IV. WAIVING WORD BY WORD
There is a further complexity with regard to consequential
damages waivers in that they waive many individual words
and phrases. Looking again at the boilerplate provision from
before:
18.
19.
20.
Id.
Id.
West & Duran, supra note 1, at 778.
2015]
CONSEQUENTIAL DAMAGES WAIVERS
7
No Consequential Damages. Notwithstanding anything
to the contrary contained in this Agreement or provided for
under any applicable Law, no party hereto shall be liable to
any other Person, either in contract or in tort, for any
consequential, incidental, indirect, special or punitive
damages of such other Person, [including] [or any] loss of
future revenue, [or] income or profits[, or any diminution of
value or multiples of earnings damages] relating to the
breach or alleged breach hereof, whether or not the
possibility of such damages has been disclosed to the other
party in advance or could have been reasonably foreseen by
such other party.21
In addition to waiving “consequential” and “special”
damages, the provision waives damages that are “incidental,”
“indirect,” or “punitive” and damages that are or derive from a
“loss of revenue,” “loss of income,” “loss of profits,” “diminution of
value,” or “diminution of multiples of earnings.” While these
terms are commonly waived together as a string of boilerplate
synonyms, many of these terms are subject to unique
interpretations.
A. State Interpretation
Importantly, one should be aware that state law varies in the
interpretation of these words. In Texas, for example, a court may
classify damages as direct if they are implicitly or explicitly
classified as such in the contract, even if they would otherwise be
considered consequential.22 In Tennessee Gas Pipeline Co. v.
Technip USA Corp., Tennessee Gas Pipeline (“TGP”) hired Technip
USA to construct a pipeline upgrade.23 The contract obligated TGP
to provide services at the site, including permit and water services,
as well as providing operations personnel.24 The upgrade took
longer than anticipated due to delays involving components,
technology, labor shortages, and weather.25 TGP sued for increased
21. Id. at 778 (emphasis added).
22. McKinney & Moore, Inc. v. City of Longview, No. 14-08-00628-CV, 2009 Tex.
App. LEXIS 9299, at *5 (Tex. App.—Houston [14th Dist.] Dec. 8, 2009, pet. denied) (“[B]y
definition, if particular damages are specifically accounted for in the contract, they are
direct, not consequential in nature.”). It is also worth mentioning that state categorization
of damages affects whether a party’s pleadings are sufficiently pled. For example, in
Texas, direct damages do not require a special pleading, whereas consequential damages
must be specifically pleaded. TEX. R. CIV. P. 56.
23. Tenn. Gas Pipeline Co. v. Technip USA Corp., No. 01-06-00535-CV, 2008 Tex.
App. LEXIS 6419, at *2 (Tex. App.—Houston [1st Dist.] Aug. 21, 2008, pet. denied).
24. Id. at *8.
25. Id. at *3.
8
HLRe: OFF THE RECORD
[6:1
costs it accrued due to the delay.26 Technip claimed that the
expenses were barred under the contract’s waiver of consequential
damages.27 The court of appeals held that, because the contract
“clearly contemplated” that TGP would be responsible for the
services, the expenses related to those services were direct
damages.28 However, the expenses incurred to rent a generator
were consequential because such expenses did not necessarily result
from the breach.29 Thus, the contract language controlled the court’s
determination of direct versus consequential damages.
B. Incidental Damages
Incidental damages may be defined to “include costs
incurred in a reasonable effort, whether successful or not, to
avoid loss” related to the breach. 30 Examples of incidental
damages include a party paying brokerage fees to arrange a
substitute transaction and costs to return or reject defective
goods or equipment. 31 Waivers of incidental damages could
prevent a party from recovering the reasonable costs to
attempt to avoid a loss or to remedy a breach, and these types
of waivers should “almost always” be resisted. 32 For example,
under a contract without a waiver of incidental damages, a
seller of nuclear fuel was able to recover $293 million for a
large incidental storage bill when the buyer failed to perform
under the contract. 33 If the parties had instead included in the
contract a waiver of incidental damages, the seller may not
have been able to recover damages for the large foreseeable
storage bill. 34
It bears mentioning that incidental damages appear to be
the least similar to the other damages in the above example
26. Id.
27. Id.
28. Tenn. Gas Pipeline Co., 2008 Tex. App. LEXIS 6419, at *8.
29. Id.
30. RESTATEMENT (SECOND) OF CONTRACTS § 347 cmt. c (1981).
31. Brian L. Hager, The Unintended Consequences of Consequential Damages
Waivers, HUNTON & WILLIAMS (Mar. 2013), http://www.richmondbar.org/wpcontent/uploads/2013/07/business_law_tip_March_2013.pdf.
32.
Avoiding Unintended Consequences of Damage Waiver Provisions in M&A
Agreements, GIBSON DUNN (July 10, 2012), http://www.gibsondunn.com/publications/
pages/AvoidingUnintendedConsequences-DamageWaiverProvisionsMAAgreements.aspx.
33. Commonwealth Edison Co. v. Allied Chem. Nuclear Prods., Inc., 684 F. Supp.
1429 (N.D. Ill. 1988).
34. Id.
2015]
CONSEQUENTIAL DAMAGES WAIVERS
9
waiver of consequential damages (even though they are
commonly included under the same section heading: “Waiver of
Consequential Damages”). As such, parties should be wary of
grouping this type of damages together with consequential
damages. If parties nevertheless do so, language should be
provided in the document stating that headings are for
convenience purposes only.
C.
Indirect Damages
Indirect damages are “consequential damages” according
to some commentators, while others disagree. 35 One court
noted that the meaning of “indirect damages” is “a question
on which it is difficult to obtain much assistance from
authority or dictionary definitions.” 36 Even so, it would be
beneficial for a buyer to do as follows:
[I]nstead of waiving “consequential” damages, buyers
should seek waivers of “remote” or “speculative” damages.
Even the term “indirect” damages is preferable to the term
“consequential” damages for a buyer. In the alternative,
buyers should suggest limiting the seller’s indemnification
obligation to losses “directly” arising from the breach,
particularly if the seller says it is concerned with “indirect”
consequences arising from intervening causes.37
D. Punitive Damages
Punitive damages are tort based and awarded as a
punishment for over-the-top behavior.38 Courts generally do not
award punitive damages in breach of contract cases and it makes
little to no difference if the parties waive this type of damages.39
E. Lost Profits
Loss of future revenue, income or profits is the “most
common form of consequential damages[;] however, not all lost
35. See West & Duran, supra note 1, at 792.
36. Caledonia N. Sea Ltd. v. London Bridge Eng’g Ltd., [2000] S.L.T. 1123, 1207
(Sess.), available at http://www.scotcourts.gov.uk/opinions/cou1308.doc.
37. West & Duran, supra note 1, at 806.
38. Lawrence Hsieh, Drafting Waiver of Consequential Damages, N.Y. L.J., Mar. 8,
2012, available at http://www.newyorklawjournal.com/id=1202544728589/DraftingWaiver-of-Consequential-Damages?slreturn=20150230011315 (requires a subscription to
access); see Punitive Damages Definition, LEGAL INFO. INST., https://www.law.cornell.edu/
wex/punitive_damages (last visited May 23, 2015).
39. Kingsley v. Baker/Beech-Nut Corp., 546 F.2d 1136, 1142 (5th Cir. 1977).
10
HLRe: OFF THE RECORD
[6:1
profits are consequential damages.”40 In fact, it may be costly to
waive lost profits as a subset of consequential damages. For
example, lost profits could be direct (as opposed to consequential)
damages upon a wrongful termination of the contract itself. The
non-breaching party could claim as direct damages the expected
profits from the contract had the breaching party fully
performed.41 However, if the breach of the same contract causes
termination of other contracts, then the lost profits may be
consequential damages.42 Therefore, buyers may want to avoid
language that waives lost profits as a separate category from
consequential damages. In fact, one court held that the following
provision waived recovery of lost profits, both consequential and
direct, because it treated lost profits as a separate category of
damages: “Neither party shall be liable for incidental, punitive,
exemplary, indirect or consequential damages, or lost profits
arising under or relating to this Agreement.”43
F. Diminution in Value
Diminution of value or multiples of earnings “is a measure
of value equal to the difference in the market value of what
was warranted or promised under the contract and what was
actually received.” 44 A claim for diminution of value could be
categorized as either a claim for direct or consequential
damages.45 Therefore, if a buyer agrees to the example waiver
above, it may waive forms of both direct and indirect damages,
hindering any ability to recover the appropriate damages
under the contract.
V. BEYOND HADLEY
Parties should recognize that the example consequential
damages waiver that often appears in the boilerplate of a
contract may heavily impact the amount of damages recoverable.
If special attention is not paid to the seemingly synonymous
string of words, there may be various unintentional consequences
40. Hager, supra note 31, at 2.
41. Id.
42. Id.
43. Thomas H. Warren, W. Jason Allman & Andrew Morris, Top Ten Consequential
Damage Waiver Language Provisions to Consider, ASS’N OF CORPORATE COUNSEL (July 1,
2012), http://www.acc.com/legalresources/publications/topten/ttcdwlptc.cfm.
44. Id.
45. See id. (stating diminution in value damages can be indirect or direct damages).
2015]
CONSEQUENTIAL DAMAGES WAIVERS
11
and an unanticipated allocation of risk. The following tips may be
followed in nearly every transaction:



Consider the type of damages that a party would
need to recover to be made whole under the contract
and draft accordingly;
In the event of doubt, attempt to negotiate a damages
cap on a whole, rather than a waiver of specific types
of damages; and
Do not waive the ability to recover incidental
damages, lost profits or, if applicable, diminution in
value.
While the lesson from Hadley v. Baxendale is often to inform
the other party of special circumstances, an overly aggressive
consequential damages waiver may nevertheless waive that
remedy dearly bargained for.