Thursday, March 24, 2011


There are a number of potential types of damages that may be claimed:

·      Direct damages: Actual losses that are an immediate, natural and foreseeable result of the wrongful act. . An example of a direct damage would be the cost of “cover” which is the excess cost of re-procuring the item from another Supplier.
·      General damages: Includes direct damages and damages for losses whose monetary value would be difficult to assign.
·      Consequential or Special damages: indirect loss or injury.  Losses sustained not as a natural result of the injury but because of the circumstances, e.g. damages relating to the business that are easily calculable in monetary terms.  If the damages were reasonably foreseeable at the time of contract that the injury would probably result if the contract were broken. Consequential damages may include lost profits and other indirect injuries caused by the breach of the contract provided the such damages were foreseeable and can be determined with certainty
·      Special damages are damages that are peculiar to the situation or circumstance. For example under international property law a court may order treble damages as a special damage to prevent future occurrences
·      Incidental damages: Losses incurred in handing and caring for goods, reasonable expenses for cover, all other reasonable damages from the breach that don’t fit any other category. Incidental damages are paid to reimburse the cost of mitigating the damages sustained.
·      Expectation damages: Damages that are designed to put the injured party in the position they would have been in had the contract been completed (such as making certain profits).
·      Liquidated damages: An amount agreed upon by the parties to the contract as adequately compensating for the loss. Liquidated damages will be upheld if they are reasonable.
·      Punitive or Exemplary damages: damages for serious or malicious wrongdoing that are intended to punish or deter the party from doing it again or deter others from behaving similarly.

Limitation of liability provisions will traditionally limit the types of damages that may be claimed. For example the following limitation of liability would limit damages to only direct damages.
Limitation of Liability between Supplier and Buyer
In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages.

If there were individual commitments or section of the agreement where direct damages would not provide an adequate remedy, those commitments or sections would need to be carved out of the limitation of liability so other types of damages could be collected.
For example:

This mutual Limitation of Liability does not limit the obligations and liability of Supplier provided in the Section entitled Supplier Liability for Third Party Claims or the Subsection entitled Epidemic Defects.

For a breach of the named clauses, the Indemnifications and Epidemic Defects the limitation to only direct damages would not apply.  There are several reasons why you may want to exclude clauses such as these from the limitation to only direct damages.
First, the indemnifications involve third party claims and are not something that is damage directly between the Buyer and the Supplier. For Intellectual Property infringement, if a court found the infringement to be willful they could award treble (3X) damages as a penalty against that behavior.  A penalty is considered a special damage. For something like epidemic defects the Buyer wants to be able to recover the incidental and consequential costs associated with the defect such as field repair costs, re-work costs. Those cost would be excluded if all you could recover were direct damages,

With the exception of liquidated damages, there is a requirement of certainty with respect to damages. It’s not what you anticipate it’s what you actually sustain. For liquidated damaged there is not a requirement of certainty, the pre-agreed damages are only required to be reasonable.

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