Understanding Damages Waivers: Consequential, Incidental, Lost Profits, and More

by Practical Law Commercial Transactions

A Practice Note discussing waivers of consequential, incidental, indirect, and other damages, commonly referred to as consequential damages waivers, within limitation of liability clauses in commercial contracts. This Practice Note explores these critical risk allocation mechanisms, which are frequently key negotiation points. It explains the different types of damages for breach of contract, including direct, incidental, and consequential. This Note also provides practical advice for drafting effective consequential damages waivers that align with client objectives, including the characterization of lost profits and the use of carve-outs for situations like fraud or breach of confidentiality. Furthermore, it emphasizes the importance of ensuring consistency between a consequential damages waiver and a contract's indemnification provision to avoid negating the waiver's intended effect.