January 20, 2022

M&A Agreements: Rethinking Consequential Damages Exclusions

Many private company acquisition agreements exclude consequential damages from the scope of the coverage provided under the agreement’s indemnification provisions. This recent blog from Weil’s Glenn West takes a look at that practice, which he contends arises out of a myth concerning the type of losses encompassed by these terms.

Specifically, Glenn says that the myth is that consequential damages are “somehow damages beyond the actual, compensatory damages incurred by the buyer as a result of the breach, and instead somehow covered damages that were remote or speculative.”  This excerpt says that’s not the case:

The fact, however, is that remote or speculative damages are not recoverable as damages for breach of contract as a matter of traditional common law principles. Indeed, all damages awarded for breach of contract are, in most cases, required to be reasonably certain and foreseeable. And historically, the only difference between general damages and consequential damages was the fact that general damages were deemed foreseeable because they were the normal consequence of a breach of any similar contract with any counterparty, whereas consequential damages only arose because of the special circumstances of a particular counterparty (like the fact that the counterparty entered into a contract with a third party that was dependent upon performance of the primary contract).

As a result, consequential damages (also known as special damages) required enhanced foreseeability and the need to actually communicate those special circumstances to the breaching party at the time of contracting in order to hold the breaching responsible for such special or consequential damages.

The blog argues that excluding consequential damages can end up depriving the buyer of the right to be compensated for “real, actual and foreseeable damages.”  It also claims that this risk is magnified by the fact that not all courts embrace the traditional understanding of consequential damages, with some courts taking the position that it has no established meaning. That means that a court’s idiosyncratic interpretation of the term might result in the buyer waiving rights to damages that it did not intend to waive.

John Jenkins