Waiver of consequential damages, Etc.: Overview, definition, and example
What is the waiver of consequential damages?
A waiver of consequential damages refers to a provision in a contract where one or both parties agree to relinquish the right to seek consequential damages in the event of a breach or failure to perform. Consequential damages (also known as indirect damages) are damages that result indirectly from a breach, such as lost profits, loss of goodwill, or other financial impacts that do not flow directly from the breach but arise due to the circumstances surrounding it.
A waiver of consequential damages clause limits the scope of liability by excluding these types of damages, which can sometimes be significant and unpredictable. This waiver is typically negotiated between parties to reduce the potential financial risk and to provide a clearer understanding of the extent of liability for a breach of contract.
Why is the waiver of consequential damages important?
The waiver of consequential damages is important because it helps manage risks for both parties involved in a contract. By waiving the right to claim consequential damages, the parties limit their exposure to potentially massive or unforeseen financial consequences. For businesses, these damages can sometimes far exceed the actual contract value, which could create significant liability.
From a business perspective, this waiver provides clarity and certainty. Both parties understand the limits of their potential exposure if something goes wrong. Without such a waiver, a party may be liable for a broad range of indirect losses that may not have been anticipated during the negotiation phase.
Understanding waiver of consequential damages through an example
Imagine a software company enters into a licensing agreement with a client, where the client uses the software in their operations. If the software fails and the client loses significant revenue as a result, the client might seek consequential damages, such as the lost profits due to the software’s failure.
However, if the licensing agreement includes a waiver of consequential damages clause, the client cannot claim these lost profits or any other indirect losses from the software company, even if the failure of the software causes significant financial harm to the client. The clause ensures that the software company’s liability is limited to direct damages, such as the cost of repairing or replacing the software.
In another example, a supplier and a manufacturer enter into a contract for the delivery of raw materials. The agreement includes a waiver of consequential damages provision, meaning that if the supplier fails to deliver on time, the manufacturer cannot claim damages for the resulting loss of business or customers, only for the direct costs incurred due to the delayed delivery.
An example of a waiver of consequential damages clause
Here’s how a waiver of consequential damages clause might look in a contract:
“Neither Party shall be liable to the other for any consequential, incidental, indirect, or punitive damages arising out of or in connection with this Agreement, including but not limited to lost profits, loss of business, or any other form of special damages, even if the Party has been advised of the possibility of such damages.”
Conclusion
The waiver of consequential damages clause is an essential risk management tool in contracts, as it limits a party's liability for indirect or unforeseeable losses arising from a breach. By including such a waiver, businesses can avoid significant financial exposure and ensure that both parties understand the limits of their liabilities. It also helps in creating more predictable and manageable outcomes in case of a breach, reducing the potential for lengthy disputes or disproportionate claims.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.