Consequential Consequences: Contractually Excluding Damages For Lost Profits

Clauses that exclude or limit the recovery of consequential or indirect damages are common in construction, services and other commercial contracts. These clauses can play an important role in risk allocation. This is particularly so in situations where a small breach of contract by one party can result in very significant consequential damages (such as large losses of profits) to another.

Exclusion and limitation of liability clauses often exclude "lost profits" from the types of consequential damages that are recoverable. But, will this type of clause always work to exclude recovery of any type of lost profit? As the recent Dow Chemical Canada ULC v. NOVA Chemicals Corporation, 2018 ABQB 482 case illustrates: not always. In summary, in some situations, if the claimed-for "lost profits" can be categorized as "direct damages" instead of "consequential damages", these sorts of standard clauses (which often times focus on lost profits in the context of consequential damages only) will be insufficient to fully exclude recovery of all lost profits.

The Limitation at Issue

The Dow case arose out of a long-standing dispute between two chemical companies over the operation of a joint venture chemical production facility. The parties claimed and counterclaimed against each other for hundreds of millions in damages, including lost profits. One of the many issues in dispute was whether a limitation of liability clause in the subject contract precluded the recovery of lost profits.

The limitation clause at issue stated that one of the parties (defined as the "Operator") would not be liable for any breaches of contract or tort, unless it acted with gross negligence or willful misconduct, and then only if the damages suffered were not specifically "Excluded Damages".

"Excluded Damages" were defined as "indirect or consequential damages (including without limitation loss of profits and damages arising from loss of production)" (among other things). Was this reference to "loss of profits" broad enough to prevent all claims for lost profits?

Are "Lost Profits" Direct or Consequential?

The first question the Court looked at was whether lost profits were "direct damages" or "indirect and consequential damages".

Canadian law distinguishes between "direct damages" and "indirect and consequential damages" based on an English case from the 1800s, known as Hadley v. Baxendale. That case has long been part of the Canadian law of contracts and defines the...