Lost Profits As Contract Damages

The Boulder Business Lawyers of LaszloLaw Discuss Limitation of Damages, including Lost Profits, in Contracts.

We previously discussed limitations of damages clauses in a prior post. As we discussed, contracts for services or goods may include clauses that waive the ability for one or both parties to recover consequential damages in the event of a breach of contract. Consequential damages refer to economic harm beyond the immediate scope of the contract–or damages that are indirect.  Direct damages refer to those which the party lost from the breach of the contract itself.

However, depending on the nature of the agreement, lost profits can be direct damages or consequential damages or even both. This is important because it will dictate how you draft your limitation of liability clause.

Take for instance the following examples of limitation/waiver of damages clauses:

#1:  “Neither party shall be liable for incidental, punitive, exemplary, indirect or consequential damages, or lost profits arising under or relating to this Agreement.”

#2:  ” “Neither party shall be liable for incidental, punitive, exemplary, indirect or consequential damages, including lost profits, arising under or relating to this Agreement.”

Both clauses seem substantially similar.  However, courts have interpreted both clauses in a completely different manner when it comes to recovering lost profits.

Take for instance the following example: say in a services contract, the party who is receiving the services breaches the contract.  Now, the service provider has suffered a loss of profits under the contract.  Are these lost profits direct damages or consequential damages? This matters because under #1 above, regardless of whether lost profits are considered consequential or direct, both may be waived.  However, under #2, because the specific language states that neither party shall be liable for “…consequential damages, including lost profits…”, only lost profits that are considered consequential are waived.  Thus, the service provider still may have a claim for lost profits that are directly caused under the contract itself solely because of the construction of clause #2 above.

Boulder Business Lawyers

The Boulder Business Lawyers of LaszloLaw have over 30+ years of experience in representing businesses on a wide range of legal topics.  Contact our Boulder business lawyers today at 303-926-0410 or online.