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Reassessing the ?Consequences? of Consequential Damage Waivers in Acquisition Agreements

By Harvard Law School Program on Corporate Governance

(Editor’s Note: This post comes from Glenn D. West and Sara G. Duran of Weil, Gotshal & Manges)

In our article, Reassessing the ?Consequences? of Consequential Damage Waivers in Acquisition Agreements, which was recently published in The Business Lawyer, we provide clarity on the issue of Consequential Damages. Even though consequential damage waivers are a frequent part of merger and acquisition agreements involving private company targets, we believe that few deal professionals understand the concept of consequential damages and, as a result, the inclusion of such waivers may have an unexpected impact on both buyers and sellers.

After tracing the historical derivation of the term, and its current use, we provide a number of basic guidelines for addressing consequential damage waivers in acquisition agreements, which include the following:

• At a minimum, buyers should avoid the ?kitchen sink? approach to the consequential damage waiver.
• If possible, buyers should try to define ?consequential damages? for the purpose of any waiver provision in such a manner that the term covers only those consequential damages for which the law already denies recovery for breaches of contract.
• Buyers should avoid including the broad term ?lost profits? as a separate category of damages in the waiver provision.
• Sellers, on the other hand, should consider expressly limiting recoverable losses under their indemnification provisions to the ?normal measure? of contract damages.
• Buyers should never include ?incidental? damages in their waiver provisions under the assumption that they are a synonym for ?consequential? damages. They are not.
• Instead of waiving ?consequential? damages, buyers should seek waivers of ?remote? or ?speculative? damages. Even the term ?indirect? damages is preferable to the term ?consequential? damages for a buyer.
• Buyers should never agree to waivers of ?diminution in value? or ?multiples of earnings? damages.
• Sellers should not assume that contract law?s ?rule of reasonableness? necessarily applies to broadly worded indemnification provisions that purport to indemnify buyers for any and all losses that arise from a breach of a seller?s representation and warranty.
• Buyers, on the other hand, should not assume that contract?s ?rule of reasonableness? fails to apply to broadly worded indemnification provisions.

The full article can be found here.

Full post as published by The Harvard Law School Corporate Governance Blog on August 13, 2008 (boomark / email).