What Does a Contract Say When It Excludes Indirect Damages? On the other hand, if your contract excludes and all indirect damages, the client might only be able to sue for $50,000. While indirect damages need to have been reasonably foreseeable, when a plaintiff has a smart, creative lawyer, it’s not impossible to come up with enormous numbers. In the above scenario, instead of suing for just $50,000, your client could try and sue you $500,000. And perhaps also the impact to reputation. So, in addition to the value of the contract itself, a smart lawyer would add on the damage for any lost business caused by the breach of contract. Imagine then your business has a contract for $50,000 and for whatever reason, you aren't able to deliver the full value of work. Let’s imagine that you are a service provider of some kind – perhaps a company that does software development or marketing services, for example. How Big A Difference Does It Make to Exclude Indirect Damages? While these terms can sometimes have different meanings, they are often used interchangeably (though “punitive” damages does mean something specific: damages that are awarded not because they are compensation for harms suffered but when somebody does something so awful the judge or jury will add a penalty to dissuade them from ever doing the same thing again). Indirect damages have all sorts of labels: consequential, incidental, indirect, exemplary, special, enhanced, punitive, etc. So if a software developer has a contract to repair a broken website by a certain date and fails to do that, the indirect damages to the client would include, for example, the value of all the lost business from visitors to the client’s website who were very unimpressed by the still-broken website. Indirect damages refers to all the knock-on effects on the contract breach on the non-breaching party – all the non-immediate consequences that might happen. For instance, if a marketing agency does some work for $50,000 and the client doesn’t pay them, the marketing agency can sue for $50,000 in direct damages. When lawyers talk about “direct damages” caused by a breach of contract, they specifically mean those damages directly and immediately resulting from one side’s violations of the contract. The question then is, what damages are available under your agreements to you and to the counterparty? And what kinds of damages might be excluded? Even if no one is actually thinking about going to court, these same factors will often determine what sort of dispute settlement you and the other party to a contract may ultimately agree upon. And when potential damages are low, the reverse is true. Likewise, higher potential damages gives the non-breaching party a lot more leverage over the breaching party in any settlement negotiations. Higher potential damages means that the non-breaching party has a lot more to get out of going to court. You also need to know what damages are available. Whenever there’s a contract dispute, it’s not enough to think about which side breached the agreement and how. Wording to exclude damages means the contract is asking the parties agreeing to exclude the ability to make a claim for specific types of damages in the event of a contractual breach. In contracts, one or more of the parties can ask to exclude various types of damages.
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