In the robust world of business contracts are concluded everyday. Nevertheless not every person takes time to consider the full extent of his potential liability for a breach of his contractual obligation.
Consider this scenario. Xtreme Entertainment Limited is a well-known concert organiser on the island. It enters into a contract with “Sweet Chune”, one of the island’s most famous entertainers who agrees to perform in a series of concerts over a two-week period. He is to receive a significant sum for his performances and a share of the profits. He withdraws from the series stating falsely that he had the ckikungunya virus and is unable to walk. After news of his withdrawal becomes public, sales for the concert series plummet, although Xtreme Entertainment Limited manages to secure another not-so-popular, replacement entertainer.
As a result of the lower than expected sales, Xtreme Entertainment Limited is unable to meet the expenses it incurred for the series. It also had to compensate disgruntled patrons, with partial refunds, for what they perceived to be a concert worth much less than what they bargained for. Xtreme Entertainment Limited’s profits declined drastically over the next few weeks, as many people were dissatisfied with its inability to deliver on the much-anticipated concert series. Its contract with “Sweet Chune” contained no clause that specifically covered such eventualities.
Damages awarded for breach of contract aim to put the claimant in the position he would have been in had the contract been performed. When a contract is breached, the party in breach will generally be liable for such loss that occurs naturally as a result of the breach. The defaulting party will also be liable for loss contemplated by both parties at the time they entered into the contract as the likely result of a breach. Any other type of loss is considered too remote and the party in breach would not be liable for such losses.
Whether or not all or some of the losses suffered by Xtreme Entertainment Limited are too remote will be the subject of argument. That determination is rarely straightforward and may have to be resolved through litigation. Here, one of the contracting parties is seeking to recover compensation for all losses while the other party is seeking to limit the extent of his liability. This scenario, though a hypothetical case, illustrates the questions surrounding the extent of the recoverable damage where a contractual breach results in loss to one of the contracting parties.
Uncertainty, however, can be minimized, if not completely avoided. Parties can include in their contract a clause waiving liability for certain consequential losses. In some contracts the waiver is very general and broad excluding liability for various categories of consequential loss, while in others such waivers specify what consequential losses are to be excluded, e.g. loss of profits, or the costs of securing a replacement entertainer.
The use of waivers may be preferred as a means of limiting the extent of consequential loss and defining its extent in any particular case. Such waivers should be specifically negotiated and carefully examined before a contracting party agrees to become bound by them. In the Xtreme Entertainment Limited scenario, had a waiver existed that specifically excluded certain losses “Sweet Chune” would be fairly certain of the extent of his liability to compensate Xtreme Entertainment Limited for its losses arising from his failure to carry out his contractual obligations.
Contracting parties will always carry out their contractual obligations in a perfect world. Prudentially, however, in an imperfect world, parties may wish to determine, beforehand, the extent of their liability for consequential losses arising from their breach of contract. If waivers are to be used, the contracting parties should seek legal advice to ensure that they are sufficiently air (and water) tight.