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Be Careful About Contractual Damage Waivers

auto attorney

HSP attorney Oren Tasini works with automotive dealerships regarding legal compliance, regulatory and franchise matters, and in the purchase and sale of automotive franchises. He also is a Past President of the National Association of Dealer Counsel and wrote this piece for NADC’s April newsletter.

Contracts, including asset purchase agreements, commonly seek the waiver by a party of a right to obtain certain kinds of damages, usually, consequential, indirect, special or punitive damages. The waiver of consequential damages particularly should cause a contracting party to pause. A careful analysis of the law of contracts and the parties’ rights upon breach reveals that a waiver of consequential damages, in essence waives a party’s right to receive the standard measure of damages for a contract breach – all damages that are the natural, probable and reasonable foreseeable consequences of the breach.

Although it may be reasonable to seek a waiver of punitive damages, the concept of consequential damage is fundamental to a party’s right to collect damages to which he is normally and rightfully entitled. For example, the standard and typical indemnification provision in an asset purchase agreement provides for the selling party to defend and indemnify the purchasing party from any breach of the seller’s representations and warranties. What is the effect of a waiver of consequential damage where a seller misstates its financial statements? Absent the waiver, one could easily argue it would be equal to the multiple, times the overstated earnings. This is a natural foreseeable consequence of the breach. Another measure might be the lost profits the seller expected to earn, but will not receive due to the misstatement. A waiver of the right to receive consequential damages may preclude such claims. Consequently, consequential damages and the right to pursue them, go to the essence of the contractual benefit of the bargain and should never be waived in any contractual agreement.

 

 

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