M&A agreements and other commercial contracts frequently contain a provision that bars the recovery of “consequential damages”—often referred to by courts and practitioners as a consequential damages bar. The term “consequential damages”, however, lacks a precise definition, and thus, the question whether certain types of damages are recoverable in light of a consequential damages bar is a recurring subject of high-stakes litigation. In particular, there is an established body of New York law addressing whether lost profits constitute consequential damages or direct damages. The answer to this question often can mean the difference between a case that involves nominal damages, such as costs and expenses to cure a breach, and a bet-the-company litigation involving the potential recovery of millions of dollars of lost profits. Yet many sophisticated commercial parties continue to include a boilerplate consequential damages bar in their contracts, often on the assumption that it protects against a multi-million dollar lost profits award in the event of a breach. This may prove a dangerous assumption.
Consider the following example. Manufacturer enters into a contract whereby it agrees to sell widgets to reseller at a fixed price per unit that is periodically adjusted based on a pricing formula agreed to by the parties. The contract is governed by New York law and contains a provision barring the recovery of “consequential” damages. Manufacturer breaches the contract, and reseller sues for the lost profits it was expecting to receive from the resale of the widgets over the three-year term of the contract. Counsel for manufacturer, confident that the contract’s consequential damages bar precludes recovery of lost profits, seeks dismissal. Are the reseller’s lost profits, which flow from the pricing formula in the contract, “consequential damages”?
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