Consequential Damages Redux: An Updated Study of the Ubiquitous and Problematic “Excluded Losses” Provision in Private Company Acquisition Agreements

100 Min Read By: Glenn D. West

An “excluded losses” provision is standard fare as an exception to the scope of indemnification otherwise available for the seller’s breach of representations and warranties in private company acquisition agreements. Sellers’ counsel defend these provisions on the basis of their being “market” and necessary to protect sellers from unreasonable and extraordinary post-closing indemnification claims by buyers. Buyers’ counsel accept such provisions either without much thought or on the basis that the deal dynamics are such that they have little choice but to accept these provisions, notwithstanding serious questions about whether such provisions effectively eviscerate the very benefits of the indemnification (with the negotiated caps and deductibles) otherwise bargained for by buyers. For buyers’ counsel who have given little thought to (or who need better responses to the insistent sellers’ counsel regarding) the potential impact of the exclusion from indemnifiable losses of “consequential” or “special” damages, “diminution in value,” “incidental” damages, “multiples of earnings,” “lost profits,” and the like, this article is intended to update and supplement (from a practitioner’s perspective) the legal scholarship on these various types of damages in the specific context of the indemnification provisions of private company acquisition agreements.


While “[i]t may seem like threshing old straw” to again be writing about the consequential damages waiver and its supposed equivalents, the extensive and continued use of excluded losses provisions is so ubiquitous in the mergers and acquisitions (M&A) deal world that this author has determined that a little re-threshing of this old straw may well be justified if even a few remaining grains of insight can yet be derived.1 In the process of threshing anew this old straw, it is hoped there will be a renewed focus by both buyers and sellers on the consequences of these provisions, as well as a change in practice regarding the entire concept of excluded losses, in the context of the indemnification provisions of private company acquisition agreements.

In 2008, The Business Lawyer published an article,2 which for the first time examined the use of excluded losses provisions in the context of private company acquisition agreements and which concluded that the term “consequential damages” was “shockingly ambiguous,”3 had no “clearly established meaning,”4 was “misunderstood and fraught with uncertain application in the merger and acquisition context,”5 and should “be stricken from the deal lexicon.”6 The article also suggested that many of the other terms often found in excluded losses provisions were potentially horrifying waivers of the basic measures of compensatory, contract-based damages in the specific context of the breach of a bargainedfor representation and warranty in a private company acquisition agreement.7 The overall conclusion of the article was that there was simply no justification for an excluded losses provision to preclude recovery for the vast majority of the enumerated types of damages.8 Yet, as predicted in the article,9 these provisions continue to find their way into many private company acquisition agreements.10 And when disputes arise regarding such provisions, a court is required to determine their meaning, even though the resulting “laundry list of precluded damages might have been put in the . . . [a]greement by lawyers who themselves were unclear on what those terms actually mean.”11

Since the publication of The Business Lawyer article in 2008, practitioners and academics in the United States and many other common law jurisdictions have continued to note the problematic and uncertain meaning of consequential damages waivers in a variety of contexts.12 Furthermore, a number of new …

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By: Glenn D. West


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