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Consequential damages: Excluding “lost profits” can kill the exclusion, says Seventh Circuit

When you draft an exclusion of consequential damages, do you exclude “lost profits”?  In a Seventh Circuit case, a manufacturer’s contract with a distributor contained just such an exclusion of lost profits — but it did not specify that this referred to lost profits from collateral business transactions. As a result, the court affirmed a judgment that:

  1. under the circumstances of the case, lost profits were the only remedy available for breach (because the defendant manufacturer had so argued and thus had waived any contention otherwise);
  2. the exclusion of lost profits therefore caused the contract’s limited remedy to fail of its intended purpose; and so,
  3. under Wisconsin’s arguably-outdated interpretation of the UCC, all remedies under article 2 (sales) were therefore available to the plaintiff.

Sanchelima Int’l, Inc. v. Walker Stainless Equipment Co., No. 18-1823, slip op. (7th Cir. Apr. 10, 2019).

The Seventh Circuit did not address case law from other jurisdictions, e.g., New York, where courts held that lost profits from the contemplated transaction were direct damages, not consequential damages, and thus were not encompassed by an exclusion of lost-profits consequential damages. See, e.g., Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 11 N.E.3d 676, 988 N.Y.S.2d 527 (2014), where New York’s highest court held that, on the facts of the case, “lost profits were the direct and probable result of a breach of the parties’ agreement and thus constitute general damages” (emphasis added, citations omitted), and thus were not barred by a limitation-of-liability clause.  (For additional citations, see the Common Draft commentary on that point [self-cite].)