Contractual damages are the financial compensation a party owes for damages caused by a breach of contract. In our practice, we see that damage compensation regimes are often carelessly adopted from old contracts. The difference between a well-considered arrangement and a standard text can amount to hundreds of thousands of euros in the event of a dispute. The Dutch Civil Code and CISG provide the legal framework; your contract determines the extent of remedies.
What is the legal problem?
Damage regulates how the victim of non-performance is placed in the same position as if the contract had been performed. Requirements are attribution, causality, and proof. Internationally, rules vary regarding foreseeability, limitation of indirect damages, and the burden of proof. An overly restrictive clause does not hold up under mandatory law; An overly broad clause renders commercial risks unmanageable.
What does the law say?
Under Dutch law, Articles 6:95-6:97 of the Civil Code govern compensation for damages. Article 6:98 of the Civil Code governs the attribution of damages to the breach of contract. Under Article 74 of the CISG, the principle of foreseeability applies: damages are compensable if they were foreseeable at the time of concluding the contract. Under English law, the Hadley v Baxendale regime (1854) follows a similar approach, distinguishing between first and second limb damages.
Stricter law applies to intent and conscious recklessness: contractual limitations are then set aside under Stein/Driessen (Supreme Court, December 12, 1997, NJ 1998/208). For consumers, Article 6:236 of the Dutch Civil Code (blacklist) applies.
What risks do companies face?
Unintended liability for lost profits can cause claims to escalate far beyond the contract value. Non-excluded consequential damages lead to disputes regarding what constitutes indirect liability. Granting unlimited total liability makes insurance impossible. International differences in foreseeability rules lead to divergent outcomes in arbitration. An ill-considered clause can financially impact an entire enterprise.
Practical example from our practice
We represented a Dutch supplier in a dispute with an American buyer without a limitation of damages clause. In the event of a delay, the buyer claimed 5 million euros in lost profits. The Dutch court deemed most items foreseeable under Article 6:98 of the Dutch Civil Code. Upon renegotiation, we incorporated the following: a damage ceiling of €500,000 per event, a total ceiling equal to the contract's annual turnover, the exclusion of lost profits and indirect damages, and an exception for intentional acts. Subsequent delays resulted in a limited claim within the ceiling.
What can you do?
Clearly define direct and indirect damages. Contractually exclude lost profits and indirect damages. Establish a proportional liability ceiling. Keep intent and gross negligence outside the limitations under the Stein/Driessen doctrine. Align with applicable law and insurance coverage. Combine this with complaint periods and rules of evidence. See also our article on How to avoid liability for indirect damages?