LIMITATION OF LIABILITY CLAUSES, DIRECT & CONSEQUENTIAL LOST PROFITS
By: Robert S. Reda
On January 6, 2015, the Illinois Appellate Court for the 2nd District decided the Lost Profits matter of Westlake Financial Group v. CDH-Delnor Health System, dockted as 2-14-0580. Click here for Opinion
The relationship between Westlake and Delnor was defined by a General Service Agreement. On April 18, 2011, Delnor notified Westlake by letter that it would not honor the contract because it merged with another company and the surviving entity switched to a new Broker of Record, Towers Watson, replacing Westlake.
Westlake argued that the termination letter breached the contract entitling it to direct Lost Profits as damages. Delnor argued that the limitation of liability clause in the contract barred Westlake from recovering all lost profits, whether direct or consequential.
Direct and Consequential Damages
: “Direct damages,” also called “general damages,” are “[d]amages that the law presumes follow the type of wrong complained of.” Black’s Law Dictionary 394 (7th ed. 1999). “Consequential damages” are losses or injuries that do not flow directly and immediately from a party’s wrongful act but rather result indirectly from the act. Hartford Accident & Indemnity Co. v. Case Foundation Co., 10 Ill. App. 3d 115, 124 (1973); Black’s Law Dictionary 394 (4th ed. 1999); see also 24 Richard A. Lord, Williston on Contracts § 64:12 (4th ed. 2014) (general damages are those that naturally flow from the breach while consequential damages were not the invariable result of such a breach but were reasonably foreseeable or contemplated by the parties as a probable result of a breach when the contract was entered).
: Lost profits can be categorized as either direct or consequential damages, depending on the situation. For example, in Midland Hotel Corp. v. Reuben H. Donnelley Corp., 118 Ill. 2d 306, 319 (1987), the supreme court stated that, as a matter of law, the plaintiff’s lost profits from the defendant’s breach of an oral contract to properly include it in the first issue of a newly published telephone directory were a direct result of the defendant’s breach. On the other hand, lost profits were deemed consequential damages in Burrus v. Itek Corp., 46 Ill. App. 3d 350, 358 (1977) (consequential damages incurred where defective printing press caused decrease in output).
Limitation of Liability Clause
: At issue in the Westlake case was the contract’s limitation of liability clause. It is common for contracts between businesses to contain clauses limiting damages for a breach. Clauses limiting such damages are enforced due to the strong public policy favoring freedom of contract, but such clauses are not favored and will be strictly construed against a benefitting party. Hicks v. Airborne Express, Inc., 367 Ill. App. 3d 1005, 1011 (2006).
The limitation of liability clause in Westlake’s contract stated:
. . . under no circumstances shall either party be liable to the other party for any indirect, incidental, consequential, special, punitive or exemplary damages even if either party has been advised of the possibility of such damages, arising from this Agreement, such as, but not limited to, loss of revenue or anticipated profits or lost business.
In this instance, “loss of revenue or anticipated profits” is the same as lost profits. Delnor argued that the above clause barred both direct and consequential lost profits. Westlake argued that the ordinary and customary meaning of the phrase “such as, but not limited to,” is “for example.” The Appellate Court agreed with Westlake, stating that although consequential lost profits were not allowed, Westlake was entitled to its direct lost profits. Cf. People v. Greene, 96 Ill. 2d 334, 339 (1983) (phrase “such as, but not limited to” provided guidance on the kinds of explosive devices prohibited by a statute).
This Opinion is a clarification of existing limitation of liability clauses regarding lost profits. You should have your lawyer, hopefully me, check your contracts limitation of liability clause and update in light of this new ruling.
Robert S. Reda is Westlake's lawyer, a Chicago business attorney and trial lawyer at Reda & Des Jardins, LLC, a forward-thinking, technologically savvy law firm providing top-notch legal services to clients ranging from startups to large companies in a variety of industries.