Reassessing the "consequences" of consequential damage waivers in acquisition agreements

Business Lawyer

Volumn 63, Issue 3, 2008, Pages 777-807

  West, Glenn D ^a   Duran, Sara G ^a  

^a Private Equity Group of Weil Gotshal and Manees LLP

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EID: 49649106319     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (108)

1. See MERGERS & ACQUISITIONS SUBCOMM., COMM. ON NEGOTIATED ACQUISITIONS, SECTION OF BUS. LAW, AM. BAR ASS'N, 2007 PRIVATE TARGET MERGERS & ACQUISITIONS DEAL POINTS STUDY 68-71 (2007), available at http://wwwabanet.org/abanet/common/login/securedarea.cfm? areaType=committee&role=CL560000&rurl=/buslaw/committees/CL560000/ materials/matrends/2007_private.pdf.
2. See Glenn D. West, Avoiding Extra-Contractual Fraud Claims in Portfolio Company Sales Transactions - Is "Walk-Away" Deal Certainty Achievable for the Seller?, WEIL, GOTSHAL & MANGES LLP PRIVATE EQUITY ALERT, Mar. 2006, http://www.weil.com/news/pubdetail.aspx?pub=3368.
3. Our observations throughout this Article about "loss exclusions," consequential damage waivers in acquisition agreements, and the attorneys and deal professionals who draft and rely on them are based on our combined thirty-four years of experience representing clients in acquisitions and divestitures.
4. See Neb. Nutrients, Inc. v. Shepherd, 626 N.W2d 472, 481 (Neb. 2001) ("Uncertainty as to the fact of whether damages were sustained at all is fatal to recovery ...."); see also 25 C.J.S. Damages § 40 (2008) ("Where it cannot be shown with reasonable certainty that any damage resulted from the act complained of, there can be no recovery ...."); 17A AM. JUR. 2D Contracts § 707 (2008) ("[T]he mere breach of an agreement that causes no loss to the plaintiff will not sustain a suit for damages ....").
5. See infra notes 50-55 and accompanying text.
6. Typically a buyer will want to be indemnified against (and sellers generally agree to indemnify the buyer for) punitive and exemplary damages that the buyer incurs as a result of a third-party claim for which there is a specific indemnity or the existence of which results in a breach of one of the seller's representations and warranties. What neither the buyer nor the seller wants is to expose itself to a direct claim for punitive and exemplary damages by the other party to the acquisition agreement in a context not involving a third-party claim. A typical provision to clarify this distinction between direct and third-party claims would be the following sentence added to the end of the above "boilerplate" waiver provision: "The exclusion of consequential, incidental, indirect, special, or punitive damages as set forth in the preceding sentence shall not apply to any such damages recovered by third parties against a Purchaser Indemnified Party or a Seller Indemnified Party, as the case may be, in connection with Losses that may be indemnified hereunder."
7. See City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 266-67 (1981) ("Punitive damages by definition are not intended to compensate the injured party, but rather to punish the tortfeasor whose wrongful action was intentional or malicious, and to deter him and others from similar extreme conduct."); see also 25 C.J.S. Damages § 195 (2008) (Punitive damages "are awarded by way of punishment to the offender ... and are not intended to compensate the injured party").
8. See, e.g., Roger Lee, Inc. v. Trend Mills, Inc., 410 F.2d 928, 929-30 (5th Cir. 1969) (holding that claim for punitive damages was properly stricken because plaintiff alleged a cause of action in contract and not one in tort); Purdy v. Consumers Distrib. Co., Ltd., 648 F. Supp. 980, 983 (S.D.N.Y 1986) (finding that punitive damages are not available where sole claim is for breach of contact); E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 445 (Del. 1996) (holding that unless bad faith breach of contract amounts to a tort, there are no punitive damages for breach of contract); Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986) (finding that where only injury is economic loss to the subject of the contract itself, recovery lies in contract and exemplary damages are inappropriate); Kewin v. Mass. Mut. Life Ins. Co., 295 N.W2d 50, 55 (Mich. 1980) (holding that exemplary damages are only appropriate to compensate plaintiff in cases in which defendant acts tortiously).
9. For further discussion about the application of contractual principles to various aspects of the acquisition agreement, see West, supra note 2; Glenn D. West & Kim M. Shah, Debunking the Myth of the Sandbagging Buyer: When Sellers Ask Buyers to Agree to Anti-Sandbagging Clauses, Who Is Sandbagging Whom?, M&A LAW., Jan. 2007, at 3.
10. It may be a sad commentary on the state of deal lawyering generally but, as suggested by one court, many of the most sophisticated and "heavily counseled" acquisition agreements contain "glaringly ambiguous terms that lead to avoidable litigation." See Johnson & Johnson v. Guidant Corp., 525 F. Supp. 2d 336, 353 (S.D.N.Y. 2007). The term "material" in a material adverse change clause is a good example of an often used but frequently misunderstood term that appears in acquisition agreements without definition. See Kenneth Adams, What Does "Material" Mean?, DEAL LAW., Sept.-Oct. 2007, at 4;
11. Glenn D. West & S. Scott Parel, Revisiting Material Adverse Change Clauses - Private Equity Buyers Should (but Mostly Can't/Don't) Special Order Their MACs, WEIL, GOTSHAL & MANGES LLP PRIVATE EQUITY ALERT, July 2006, http://www.weil.com/ news/pubdetail.aspx?pub=3261.
12. See, e.g., infra note 13.
13. See, e.g., Applied Data Processing, Inc. v. Burroughs Corp., 394 F. Supp. 504, 508 (D. Conn. 1975) ("neither in Michigan nor elsewhere does the term 'consequential damages' have a clearly established meaning"). See also Caledonia N. Sea Ltd. v. London Bridge Eng'g Ltd., [2000] S.L.T. 1123, 1207 (Sess.) (noting that the meaning of indirect and consequential losses "is a question on which it is difficult to obtain much assistance from authority or dictionary definitions"); Gregory K. Morgan & Albert E. Phillips, Design Professional Contract Risk Allocation: The Impact of Waivers of Consequential Damages and Other Limitations of Liabilities on Traditional Owner Rights and Remedies, 33 J.C. & U.L. 1, 13 (2006) (stating that "no one knows what consequential damages are or may be, at least not with predictability or uniformity").
14. See, e.g., ASCH Webhosting, Inc. v. Adelphia Bus. Solutions Inv., LLC, No. 04-2593 (MLC), 2007 WL 2122044, at *5 (D.N.J. July 23, 2007); Marley Cooling Tower Co. v. Caldwell Energy & Envtl., Inc., 280 F. Supp. 2d 651, 658 & n.3 (W.D. Ky. 2003); World-Link, Inc. v. Citizens Telecomms. Co., No. 99CIV3054 GEL, 2000 WL 1877065, at *4 (S.D.N.Y. Dec. 26, 2000). However, exclusionary clauses (like consequential damage waivers) may not always work in the case of an intentional tort or other deliberate act. See, e.g., Apache Bohai Corp. LDC v. Texaco China By 480 F.3d 397, 406 (5th Cir. 2007) (holding that in accordance with New York public policy, limitations of liability do not apply to intentional or grossly negligent acts); Kalisch-Jarcho, Inc. v. City of N.Y., 448 N.E.2d 413, 416 (N.Y. 1983) (finding that an exculpatory clause is unenforceable to excuse intentional wrongdoings).
15. See Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 869 P.2d 454, 459-60 (Cal. 1994).
16. See 86 C.J.S. Torts § 2 (2008) ("[I]n order to impose tort liability, there must be fault.").
17. Applied Equip. Corp., 869 P.2d. at 460. See also Melvin Aron Eisenberg, The Principle of Hadley v. Baxendale, 80 CAL. L. REV. 563, 581 (1992) (stating that unlike the contract-based damage rule that limits recovery to losses that were probable and reasonably foreseeable at the time the contract was made, the tort-based damage rule "permits the recovery of all damages when the defendant's conduct is a substantial factor in bringing about the harm, as long as the result was not 'highly extraordinary'" (citing RESTATEMENT (SECOND) OF TORTS § 435 (1964))).
18. See supra note 7.
19. G.H. TREITEL, REMEDIES FOR BREACH OF CONTRACT 8 (1988).
20. Applied Equip. Corp., 869 P.2d at 461.
21. Id. at 460.
22. See, e.g., Reynolds Metals Co. v. Westinghouse Elec. Corp., 758 F.2d 1073, 1079 (5th Cir. 1985); World Metals, Inc. v. AGA Gas, Inc., 755 N.E.2d 434, 437 (Ohio Ct. App.), appeal denied, 754 N.E.2d 262 (Ohio 2001) (unpublished table decision); Smith v. Green, [1875] 1 C.P.D. 92, 94; Robinson v. Harman, [1848] 1 Exch. 850, 855; Victoria Laundry (Windsor) Ltd. v. Newman Indus. Ltd., [1949] 2 K.B. 528, 539.
23. See Enter. Oil Ltd. v. Strand Ins. Co. Ltd., [2006] EWHC (Comm) 58, [2006] 1 C.L.C. 33, 49. See also Applied Equip. Corp., 869 P.2d at 460 ("Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectations of the parties are not recoverable.").
24. Applied Equip. Corp., 869 P.2d at 460. For a further discussion of the rationale, see Vanderbeek v. Vernon Corp., 50 P.3d 866, 871 (Colo. 2002) ("The Hadley rule is designed to further a fundamental principle of contract law: parties must be able to confidently allocate risks and costs during their bargaining without fear that unanticipated liability may arise in the future, effectively negating the parties' efforts to build these cost considerations into the contract.").
25. Paul S. Turner, Consequential Damages: Hadley v. Baxendale Under the Uniform Commercial Code, 54 SMU L. REV. 655, 663 (2001).
26. See JOSEPH M. LOOKOFSKY, CONSEQUENTIAL DAMAGES IN COMPARATIVE CONTEXT 254 (DJOF Publishing 1996) (1989).
27. (1854) 9 Ex. 341, 156 Eng. Rep. 145.
28. See, e.g., STEWART MACAULAY, JOHN KIDWELL & WILLIAM WHITFORD, CONTRACTS: LAW IN ACTION 110-12 (2d ed. 2003).
29. See Lookofsky, supra note 25, at 12.
30. Hadley, 9 Ex. at 342.
31. Id.
32. See id. at 344.
33. Id. at 342.
34. Id. at 342-43.
35. There is controversy about these facts more than 150 years after the case was decided. There is some evidence that Baxendale's clerk was in fact told that the mill was shut down due to the broken crankshaft, but he was apparently not informed that the mill would remain shut down until the old crankshaft was delivered to the manufacturer so that a new crankshaft could be made. See Eisenberg, supra note 16, at 570 n.26.
36. Id. at 343.
37. Id.
38. See id. at 342-44.
39. See id. at 355-57.
40. Id. at 355.
41. Id. at 357.
42. See Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547, 1554-59 (1999); Eisenberg, supra note 16, at 588.
43. See supra note 41.
44. See Marranzano v. Riggs Nat. Bank of D.C., 184 F.2d 349, 350 (D.C. Cir. 1950) ("The right of the party to a contract to sue when damaged by the other party's violation of it does not depend upon the grant of such right by the terms of the contract itself."); see also 17A AM. JUR. 2D Contracts § 709 (2008) ("Although the parties may, in their contract, specify a remedy for a breach, that specification does not exclude other legally recognized remedies.").
45. See County & Dist. Props. Ltd. v. C. Jenner & Son, [1976] 2 Lloyd's Rep. 728, 737 (QBD) (citing Birmingham & Dist. Land Co. v. London & N. W. Ry. Co. (No. 1), (1887) L.R. 34 Ch.D. 261, 276 (CA)).
46. Caledonia N. Sea Ltd. v. London Bridge Eng'g Ltd., [2000] S.L.T. 1123, 1178 (Sess.).
47. Total Transp. Corp. v. Arcadia Petroleum Ltd. (The Eurus), [1996] 2 Lloyd's Rep. 408, 432 (QBD Comm), aff'd, [1998] 1 Lloyd's Rep. 351 (CA Civ).
48. See Cobalt Operating, LLC v. James Crystal Enters., LLC, No. Civ. A. 714-VCS, 2007 WL 2142926, at *30 (Del. Ch. July 20, 2007) ("In Delaware, damages recoverable under indemnification provisions such as the one involved here include all injurious consequences that were within the contemplation of the parties at the time the contract was made."), aff'd, No. 491, 2007, 2008 WL 652142 (Del. Mar. 11, 2008).
49. [1927] 2 K.B. 535.
50. Id. at 539 ("Where a contract contains a term that the promisor, if he shall not perform some term of the contract, shall pay a sum ascertained by the contract or ascertainable under its terms, and the promisee claims payment accordingly, the promisor is not called on to make compensation for breaking the contract, he is called on to perform it."). Some commentators in both the U.S. and the U.K. also seem to suggest that indemnity agreements are not subject to Hadley's rule of reasonableness. See LANNING BRYER & MELVIN SIMENSKY, INTELLECTUAL PROPERTY ASSETS IN MERGERS AND ACQUISITIONS § 12, at 12.17 (2002);
51. Belinda Doshi & Sarah Thompson, Warranties and Indemnities in Contracts: Protecting and Exploiting IP, J. INTELL PROP. L. & PRAC. 377, 379 (2007).
52. See, e.g., Applied Data Processing, Inc. v. Burroughs Corp., 394 F. Supp. 504, 509 (D. Conn. 1975) (citing 5 A. CORBIN, CORBIN ON CONTRACTS § 1011 (1974)); In re Enron Corp., 367 B.R. 384, 408 (Bankr. S.D.N.Y. 2007); New Valley Corp. v. United States, 72 Fed. Cl. 411, 414 (2006); Roanoke Hosp. Ass'n v. Doyle & Russell, Inc., 214 S.E.2d 155, 160 (Va. 1975); Baylor Univ. v. Sonnichsen, 221 S.W.3d 632, 636 (Tex. 2007).
53. 25 C.J.S. Damages § 2 (1966), quoted in Royal Ins. Co. of Am. v. Insignia Fin. Group, Inc., 751 N.E.2d 164, 170 (Ill. App. Ct. 2001).
54. Petroleo Brasileiro, S.A., Petrobras v. Ameropan Oil Corp., 372 F. Supp. 503, 508 (E.D.N.Y. 1974).
55. New Valley Corp., 72 Fed. Cl. at 41 (internal quotation marks omitted).
56. Mead Corp. v. McNally-Pittsburg Mfg. Corp., 654 F.2d 1197, 1209 n.17 (6th Cir. 1981).
57. This understanding of "consequential damages" is described in various ways. For example, in one case decided under New York law, consequential damages were defined as "damages which arise from special circumstances that make them probable, although they would be unusual apart from such circumstances." Nat'l Investor Servs. Corp. v. Integrated Fund Servs., Inc., 85 F. App'x 779, 781 (2d Cir. 2004) (quoting Coastal Power Int'l, Ltd. v. Transcon. Capital Corp., 10 F. Supp. 2d 345, 364 (S.D.N.Y. 1998), aff'd, 182 F.3d 163 (2d Cir. 1999)).
58. See Roy Ryden Anderson, Incidental and Consequential Damages, 7 J.L. & COM. 327, 334 (1987). See also U.C.C. § 2-715 (2002) ("Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach."); RESTATEMENT (SECOND) OF CONTRACTS § 347 cmt. c (1981) ("Incidental losses include costs incurred in a reasonable effort, whether successful or not, to avoid loss, as where a party pays brokerage fees in arranging or attempting to arrange a substitute transaction.").
59. See Anderson, supra note 56, at 334.
60. Schonfeld v. Hilliard, 218 F.3d 164, 175-76 (2d Cir. 2000).
61. See, e.g., In re Enron Corp., 367 B.R. 384, 408 (Bankr. S.D.N.Y. 2007).
62. See, e.g., Eisenberg, supra note 16, at 565.
63. Wärtsilä NSD N. Am., Inc. v. Hill Int'l, Inc., 436 F. Supp. 2d 690, 697 (D.N.J. 2006).
64. Roanoke Hosp. Ass'n v. Doyle & Russell, Inc., 214 S.E.2d 155, 160 (Va. 1975).
65. Wade & Sons, Inc. v. Am. Standard, Inc., 127 S.W.3d 814, 823 (Tex. App. 2003).
66. Carlisle Corp. v. Med. City Dallas, Ltd., 196 S.W.3d 855, 865-66 (Tex. App. 2006), rev'd on other grounds, No. 06-0660, 2008 WL 1145752 (Tex. Apr. 11, 2008).
67. Wärtsilä, 436 F. Supp. 2d at 697 (citing Addressograph-Multigraph Corp. v. Zink, 329 A.2d 28, 33-34 (Md. 1974)). For another definition of "general" damages, see City of Milford v. Coppola Constr. Co., 891 A.2d 31, 39 (Conn. App. Ct. 2006) ("'General damages are considered to include those damages that flow naturally from a breach, that is, damages that would follow any breach of similar character in the usual course of events.'" (quoting 24 WILLISTON ON CONTRACTS § 64:12 (4th ed. 2006))).
68. Koufos v. C. Czarnikow Ltd. (The Heron II), [1969] 1 A.C. 350, 405-06 (HL 1967). The English courts appear uniform in so defining "consequential damages." See, e.g., Millars Mach. Co. Ltd. v. Way, (1934) 40 Com. Cas. 204 (CA Civ); Saint Line Ltd. v. Richardsons Westgarth & Co., Ltd., (1940) 67 Lloyd's List L.R. 62, 67-69 (KBD); Croudace Constr. Ltd. v. Cawoods Concrete Prods. Ltd., [1978] 2 Lloyd's Rep. 55, 61-62 (CA Civ); British Sugar Plc v. NEI Power Projects Ltd., [1997] C.L.C. 622, 623-25 (QBD); Hotel Servs. Ltd. v. Hilton Int'l Hotels (UK) Ltd., [2000] B.L.R. 235 (CA Civ). Courts in other common law jurisdictions appear to agree. See, e.g., Sing. Telecomms. Ltd. v. Starhub Cable Vision Ltd., [2006] 2 S.L.R. 195, 218 (Sing. Ct. App.); Rolls-Royce N.Z. Ltd. v. Carter Holt Harvey Ltd., [2005] 1 N.Z.L.R. 324 (C.A.); Westcoast Transmission Co. Ltd. v. Cullen Detroit Diesel Allison Ltd., [1990] 45 B.C.L.R.2d 296, ¶¶ 24-27 (B.C. Ct. App.). But see Evtl. Sys. Pty Ltd v. Peerless Holdings Pty Ltd., [2008] VSCA 26, ¶ 87 (rejecting the English line of cases limiting "consequential loss" to the second rule in Hadley v. Baxendale, stating that "the true distinction is between 'normal loss', [sic] which is loss that every plaintiff in a like situation will suffer, and 'consequential losses', [sic] which are anything beyond the normal measure ...." The court noted, "[T]he prima facie measure of damages [is] the difference between contract price and market price: this is the normal loss." (internal quotation marks omitted)). Thus, according to this court, a consequential damage waiver would exclude any damages other than market-measured damages.); Peter Wood, Australia: A Fundamental Change in the Law Concerning Consequential Loss, MINTERELLISON NEWS ALERT, March 6, 2008, http://www.mondaq.com/article.asp?article_id=57988. The following U.S. cases follow the traditional approach. See Wärtsilä NSD N. Am., Inc. v. Hill Int'l, Inc., 436 F. Supp. 2d 690, 697 (D.N.J. 2006) (stating that consequential damages "arise from the intervention of 'special circumstances' not ordinarily predictable" (quoting Ryan Inc. E. v. Toll Bros., Inc., 43 F. App'x 601, 604 (4th Cir. 2002))); City of Milford v. Coppola Constr. Co., 891 A.2d 31, 39 (Conn. App. Ct. 2006) ("'Consequential damages ... include those damages that, although not an invariable result of every breach of this sort, were reasonably foreseeable or contemplated by the parties at the time the contract was entered into as a probable result of a breach.'" (quoting 24 WILLISTON ON CONTRACTS § 64:12 (4th ed. 2006))).
69. Croudace Constr. Ltd., [1978] 2 Lloyd's Rep. at 62.
70. Roanoke Hosp. Ass'n v. Doyle & Russell, Inc., 214 S.E.2d 155, 160 (Va. 1975).
71. Wade & Sons, Inc. v. Am. Standard, Inc., 127 S.W.3d 814, 823 (Tex. App. 2003).
72. Applied Data Processing, Inc. v. Burroughs Corp., 394 F. Supp. 504, 509 (D. Conn. 1975) (citing 5 A. CORBIN, CORBIN ON CONTRACTS § 1011 (1974)).
73. See Eisenberg, supra note 16, at 565.
74. See, e.g., Penncro Assocs., Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007); Computrol, Inc. v. Newtrend, L.P., 203 F.3d 1064, 1071 n.5 (8th Cir. 2000); ViaStar Energy, LLC v. Motorola, Inc., No. 1:05-cv-1095-DFH-WTL, 2006 WL 3075864, at *5 (S.D. Ind. Oct. 26, 2006); DP Serv., Inc. v. AM Int'l, 508 F. Supp. 162, 167 (N.D. Ill. 1981); Cont'l Holdings, Ltd. v. Leahy, 132 S.W.3d 471, 475 (Tex. App. 2003); Iino Shipbuilding & Eng'g Co. v. Hellenic Lines, Ltd., 175 N.Y.S.2d 750, 754 (N.Y. App. Div. 1958), aff'd, 157 N.E.2d 726 (N.Y. 1959). See also Sha-shana N.L. Crichton, Distinguishing Between Direct and Consequential Damages Under New York Law in Breach of Service Contract Cases, 45 HOW. L.J. 597, 601 (2002) ("Lost profits and lost future earnings are categorized as direct damages in some instances, and consequential damages in others.").
75. Imaging Sys. Int'l, Inc. v. Magnetic Resonance Plus, Inc., 490 S.E.2d 124, 126 (Ga. Ct. App. 1997) (quoting Franklin v. Demico, Inc., 347 S.E.2d 718, 721 (Ga. Ct. App. 1986), and Williams v. Kerns, 265 S.E.2d 605, 609 (Ga. Ct. App. 1980)), aff'd, 543 S.E.2d 32 (Ga. 2001).
76. See, e.g., supra note 72. In the classic English case of Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., [1949] 2 K.B. 528, the court apparently deemed ordinary lost profits natural and foreseeable under the first branch of Hadley and did not require special notice, but the extraordinary profits that would have been obtainable from an available and highly lucrative government contract were not recoverable under that branch because there was no notice. See id. at 542. See also Transfield Shipping Inc of Panama v. Mercator Shipping Inc of Monrovia (The "Achilleas"), [2007] 2 Lloyd's Rep. 555 (CA Civ) (holding that loss of profits from loss of new ship charter contract because of ship's late return by current charterer are losses arising under first, not second, branch of Hadley).
77. See, e.g., Cobalt Operating, LLC v. James Crystal Enters., LLC, No. Civ. A. 714-VCS, 2007 WL 2142926, at *30 (Del. Ch. July 20, 2007), aff'd, No. 491, 2007, 2008 WL 652142 (Del. Mar. 11, 2008).
78. In the "boilerplate" consequential damage waiver, this distinction is not made unless "[including]" is eliminated, "[or any]" is included, and the terms "lost profits" and "lost revenues" are thereby treated as standalone damage exclusions.
79. Courts tend to do this as well. See, e.g., Topp, Inc. v. Uniden Am. Corp., No. 05-21698-CIV, 2007 WL 3256849, at *3 (S.D. Fla. Aug. 23, 2007); Aurora Health Care, Inc. v. CodoniX, Inc., No. 03-C-612, 2006 WL 1589629, at *7 (E.D. Wis. June 2, 2006); Roneker v. Kenworth Truck Co., 977 E Supp. 237, 240 (W.D.N.Y. 1997); Scott v. Palermo, 649 N.Y.S.2d 289, 289 (N.Y. App. Div. 1996). So, deal counsel can perhaps be excused for this common misconception. Notwithstanding the common linking between all lost profits and consequential damages, the distinction between a clause that lists lost profits as a subset of consequential damages and a clause that lists lost profits as a separate category of excluded losses can, in fact, be a critical one. See, e.g., Penncro Assocs., Inc., 499 F.3d at 1155-62; Spinal Concepts, Inc. v. Curasan, No. 3:06-CV-0448-P, 2006 WL 2577820, at *5-6 (N.D. Tex. Sept. 7, 2006)
80. See supra note 22 and accompanying text.
81. See supra note 40 and accompanying text.
82. See supra notes 45-49 and accompany text.
83. See supra note 13 and accompanying text.
84. See Morgan & Phillips, supra note 12, at 13.
85. Any discussion of consequential damages invariably involves the use of a hypothetical. Typically a hypothetical in this area is a situation in which wild and ruinous losses are incurred by a contracting party and "caused" by a given breach for which no one would willingly make him- or herself liable. Properly understood, most of the wild and ruinous losses imagined in any such hypothetical are actually non-recoverable "remote" damages (i.e., damages that are not natural, probable, and reasonably foreseeable), not recoverable "consequential" damages arising from the buyer's special circumstances contemplated by the parties at the time they entered into the contract. But we hope our own hypotheticals illustrate the difference between non-recoverable "remote" damages and recoverable " consequential" damages and between "direct" damages and "consequential" damages.
86. This hypothetical fact pattern is loosely based on the English case of Smith v. Green, [1875] 1 C.P.D. 92, 94, the Scottish case of Waddington v. Buchan Poultry Products, Ltd., [1963] S.L.T. 168 (Sess.), and the U.S. case of Baden v. Curtiss Breeding Service, 380 F. Supp. 243 (D. Mont. 1974). For other hypotheticals with some similar facts, see Lookofsky, supra note 25, at 64, 253 (Contagious Abortion hypothetical and Bull Semen hypothetical), and Treitel, supra note 18, at 167 (Pothier cow hypothetical).
87. For a discussion of extra-contractual claims of fraud in the context of contractual limitations on available remedies, see West, supra note 2.
88. See supra note 21.
89. See supra note 22. The two branches of Hadley's rule of reasonableness are actually two different means of establishing foreseeability. Damages from the first branch (i.e., direct damages) are damages foreseeable because they occur in the "great multitude of such cases." Damages from the second branch require evidence of actual knowledge by the breaching party of the non-breaching party's "special circumstances" to hold the breaching party responsible for such damages. "[T]here are not so much two rules, as two means by which a defendant may possess the knowledge necessary to make his liability a fair one. That knowledge may either arise from the 'usual course of things', [sic] or from the communication of special circumstances...." See Transfield Shipping, 2 Lloyd's Rep. at 567, 570.
90. Note, however, that the cost of repair or restoration must be reasonable and is generally limited by the diminution in value attributable to the breach. See Jacob & Youngs, Inc. v. Kent, 129 N.E. 889, 891 (N.Y. 1921). In a case for breach of a construction contract, Judge Benjamin Cardozo set forth what is now referred to as the doctrine of economic waste, writing: "[T]he measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing.... The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value." See id. See also Check Cashers Express, Inc. v. Crowell, 950 So. 2d 1035, 1042 (Miss. Ct. App. 2007) ("The measure of damages for breach of contract and property damage can be either the reasonable cost of replacement or repairs, or diminution in value. The plaintiff must prove either of these measures with a reasonable certainty and the damage award must not unjustly enrich the plaintiff." (citation omitted)); Meade v. Kubinski, 661 N.E.2d 1178, 1184 (Ill. App. Ct. 1996) ("Where the expense of restoration exceeds the diminution in the market value of the property caused by the lessee's nonperformance, the diminution in fair market value is the proper measure of damages. The purpose of this rule is 'to prevent windfall recoveries.'" (quoting Ceres Terminals, Inc. v. Chi. City Bank & Trust Co., 635 N.E.2d 485, 502 (Ill. App. Ct. 1994))).
91. See, e.g., Waddington v. Buchan Poultry Prods., Ltd., [1963] S.L.T 168 (Sess.).
92. See Victoria Laundry (Windsor) Ltd. v. Newman Indus. Ltd., [1949] 2 K.B. 528, 540 (stating that in order to make a breaching party liable for damages under the Hadley rule, "it is not necessary that he should actually have asked himself what loss is liable to result from a breach.... It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result."); Lawrence v. Will Darrah & Assocs., Inc., 516 N.W.2d 43, 46 n.8 (Mich.) ("A reasonable test would require plaintiff to show only that defendant knew or should have known, from the nature of the transaction, that plaintiff would enter collateral transactions based upon it of the type actually entered. If this was foreseeable, then it is reasonable to hold defendant liable for plaintiff's losses."), reh'g denied, 519 N.E.2d 898 (Mich. 1994) (unpublished table decision).
93. Victoria Laundry, [1949] 2 K.B. at 540 ("[T]o make a particular loss recoverable, [it need not] be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is indeed enough...if the loss (or some factor without which it would not have occurred) is a 'serious possibility' or a 'real danger.'"); Manouchehri v. Heim, 941 P.2d 978, 983 (N.M. Ct. App. 1997) (holding that the buyer of an x-ray machine did not need to tell the seller the amount of income he would have earned from use of the machine in order to recover consequential damages "so long as the consequence of lost income was reasonably foreseeable. The law does not require those who enter into contracts to disclose to other parties the profits they expect to make from the contracts."); Waddington, 1963 S.L.T. at 171 ("If a party to a contract is aware that the breach of a stipulation which he has undertaken to observe is likely to result in physical injury to the property or person in respect of which, or of whom, the stipulation is made, I do not think he can be heard to say, a breach of contract being admitted, that he did not know the extent or consequences of the injury which his breach of stipulation was likely to inflict or cause. All the more so when the injury is a direct physical consequence of the breach.").
94. See supra notes 46-49 and accompanying text.
95. Had our rancher hired a veterinarian to attempt to cure the problem (albeit unsuccessfully) and incurred costs and expenses in responding to governmental inquiries into the cause and extent of the infection, these costs and expenses too would have constituted "incidental" losses or damages.
96. But see Vann v. McCord, 114 So. 418, 419-20 (Ala. Ct. App. 1927) (stating that the fact that an infected hog, which was warranted to be free of disease, would be placed with other hogs is a special circumstance that must be communicated to the seller of the infected hog in order for the seller to be liable to the buyer for the loss of the buyer's other hogs). In our example, of course, the specific purpose of acquiring the bull was to place it with other cattle for breeding purposes. If, in our hypothetical, the loss in profits from the anticipated calves were treated as consequential damages, the fact that the breeder and the rancher both contemplated that the purchased bull was to be placed with the rancher's herd of heifers would be irrelevant if the rancher had waived all consequential damage claims against the breeder.
97. In the United Kingdom, purely commercial disputes are now decided by a judge without a jury, a practice that was not in effect when Hadley was decided. See Supreme Court Act, 1981, c. 54, § 69 (U.K.).
98. See, e.g., Waddington v. Buchan Poultry Prods., Ltd., [1963] S.L.T. 168 (Sess.).
99. The market value of the business as received is the value of the business without the long-term contract and with the underground utility easement, missing required permit, and debarment from government contracts.
100. See S & S Textiles Int'l v. Steve Weave, Inc., No. 00 CIV. 8391 DLC, 2002 WL 1837999, at *10 (S.D.N.Y. Aug. 12, 2002) ("[A] party may not recover twice on the same obligation."); see also Morgan Bldgs. & Spas, Inc. v. Humane Soc'y of Se. Tex., No. 09-06-439 CV, 2007 WL 4991345, at *8 (Tex. App. Mar. 13, 2008) ("Double recoveries are not ordinarily allowed under law."); 22 AM. JUR. 2D Dam ages § 36 (2008) ("There cannot be double recovery for the same loss, even though different theories of liability are alleged in the complaint.").
101. Evtl. Sys. Pty Ltd v. Peerless Holdings Pty Ltd., [2008] VSCA 26, ¶ 93.
102. Id. at ¶¶ 87-88.
103. Id.
104. See supra notes 51-54; 58-60; 77.
105. See supra notes 45-49 and accompanying text.
106. See Hotchkiss v. Nat'l City Bank of N.Y., 200 F. 287, 293 (S.D.N.Y. 1911) ("A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent."), aff'd, 231 U.S. 50 (1913).
107. However, we realize that it is unlikely that lawyers and deal professionals will heed this recommendation.
108. See supra note 10.