Acquisition agreements often contain provisions that restrict or prohibit the payment of “consequential,” “special,” or “incidental” damages for breach. [1] Principals and their counsel may intend that these provisions prevent liability arising from unknown and unforeseeable future events; however, because these terms are poorly understood in the context of acquisition agreements, the exclusion of these categories of damages may have unexpected consequences for the parties to a transaction. Buyers and sellers should carefully weigh the effect of these damage-limiting provisions and consider alternative, more clearly defined provisions to limit damages under their acquisition agreements.

General Contract Damages

Before examining contract provisions limiting damages, it is important to review briefly the basic principles for recovery of damages due to breach of contract. Damages arising out of the breach of a contract are generally limited by the principles set forth in the English case of Hadley v. Baxendale. [2] Hadley created a rule with two branches: (i) a party may recover for losses that directly and naturally arise from the breach of a contract and (ii) a party may recover for losses arising from special circumstances surrounding the breach to the extent that the breaching party knew of the circumstances at the time the contract was made. [3] Consistent with Hadley, under the default rules of most jurisdictions, recoverable losses arising under a breach of contract are limited to those damages that are reasonably foreseeable to the breaching party. [4]

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