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A Friendly Reminder About Lost Profits and Consequential Damages Waivers

I recently had occasion to litigate the issue of whether a client was barred by a contractual consequential damages waiver from recovering lost profits.  I had never given the issue much thought, but the contract provision was a problem for our client, so I needed a workaround.

As it turns out, lost profits are not (always) consequential damages, and therefore recovery of lost profits is not barred by a consequential damages waiver unless specifically called out.  From the Missouri Court of Appeals:

A plaintiff claiming a breach of contract has available and need not choose between three types of damages—actual, consequential, and benefit-of-the-bargain—as such damages are not necessarily inconsistent with one another . . . .  Actual damages are compensatory and are measured by the loss or injury sustained as a direct result of the wrongful act.  Consequential damages are those damages naturally and proximately caused by the commission of the breach and those that reasonably could have been contemplated by the defendant at the time of the parties’ agreement.  Finally, benefit-of-the-bargain damages, also called lost profits damages, are the net profits a plaintiff would have realized had the contract not been breached.

Catroppa v. Metal Bldg. Supply, Inc., 267 S.W.3d 812, 817-18 (Mo. Ct. App. 2008) (emphasis added and quotations and citations omitted).

The Seventh Circuit Court of Appeals puts a finer point on it: “[l]ost profits are considered to be general or direct damages in a breach of contract case, while they are considered special or indirect damages in a tort case.”  Moore v. Boating Industry Associations, 754 F.2d 698, 717 (7th Cir. 1985) (citing D.P. Servs., Inc. v. AM Intern., 508 F. Supp. 162, 166-67 (N.D. Ill. 1981) (vacated on other grounds by 474 U.S. 895 (1985)).

Now, we can quibble about whether this is the right rule, or even whether it is the generally-accepted rule.  But, let this post serve as a reminder that, when drafting your consequential damages waivers, you should also expressly exclude lost profits.  And if you’re litigating the effect of a consequential damages waiver that doesn’t call out lost profits, well, you may not have as much of a problem as you first thought.