Exoneration clauses in commercial contracts: excluding indirect damage

The subject of this blogpost concerns the interpretation of indirect damage in exoneration clauses under Dutch case law and in judicial writing. Further, it presents information to help contracting parties avoid potential misunderstandings about the interpretation of indirect damage.

Indirect damage

Under Dutch law, the interpretation of contracts (and therefore indirect damage) is governed by the Haviltex standard. According to this standard, the wording of the contract is not the only element that matters when interpreting a contract; weight should be given to all of the specific circumstances of the case, subject to the principles of reasonableness and fairness. This means that when a case is brought before a court in the Netherlands, the court will examine not only the wording of the provisions, but also the intention of the parties and what they could reasonably expect from each other. The intention or circumstances must have been apparent to the other party.

As there is no generally accepted meaning for indirect damage in Dutch, the wording of the provision cannot serve as a sufficient basis for the interpretation of indirect damage. Another problem is that, at the time contracting parties conclude a contract, they do not take the interpretation of the term indirect damage into consideration. Therefore, it is difficult for judges to determine the intention of the parties. For this reason, Dutch judges look for a link with more general objective reference points; judges take into consideration the remaining text of the contract, and the general interpretation of indirect damage in the sector at hand.

Usually, Dutch judges also seek a link with the Dutch statutory provisions for compensation (article 6:95 DCC – article 6:98 DCC). In this way, Dutch judges make a distinction between direct and indirect damage by taking into consideration the degree of accountability within the meaning of article 6:98 DCC. This entails that direct damage means “directly accountable damage”. The term indirect damage means, in that case, “less directly accountable damage” but still accountable within the meaning of article 6:98 DCC. Furthermore, judges define the term indirect damage as damage which is not the direct consequence of the breach of the contract at hand. In that case, direct damage means damage which is the direct consequence of the breach of contract at hand.

These latter references appear frequently in Dutch case law. However, a disadvantage of these reference points is that their method is not very clear, because the question is: at what point is the damage concerned “directly accountable damage” and at what point is the damage concerned “less directly accountable” within the meaning of article 6:98 DCC? Furthermore, at what point is the damage in question “the direct consequence of the breach of contract” and at what point is it not?

In Dutch literature and case law, a link with Anglo-American law (i.e. UK and US law) is sought by interpreting indirect damage. According to Anglo-American law, the term direct damage means damage that occurs “as a result of the usual course of things after the breach of contract.” Indirect damage entails damage which is less closely linked, but still within “the reasonable contemplation of the parties at the time of entry into the contract.”

A disadvantage of this approach (and Anglo-American law case law on this topic) is that this method is still unclear, as the question this time is: at what point does damage occur directly as a result of the usual course of things after the breach of contract, and at what point it does not. However, this Anglo-American law reference point may be useful if a dispute arises between parties from these jurisdictions, as it is plausible that at the time such parties concluded the contract, they would have had the intention to seek a link with Anglo- American law.

Conclusion

In Dutch literature and case law, a link is sought with different general objective reference points when interpreting indirect damage. However, none of these reference points are particularly clear. Therefore, it is difficult to predict whether or not liability for certain types of damage is excluded in a case where liability for indirect damage has been excluded by way of an exoneration clause.

To avoid potentially unpleasant surprises, it is therefore recommended to clearly lay down what the term indirect damage means in the exoneration clause at hand.  Contracting parties can, for example, give examples of the term indirect damage exemplified by “lost profits” or “loss due to delay”. The term direct damage should be formulated negatively in that case; i.e. direct damage is damage that is not indirect.