Credit facility documents typically include a waiver of consequential damages and an indemnification provision. While these provisions are typically part of the "boilerplate" language in the relevant documents, lenders must be mindful of the interplay between these two provisions to ensure that, when taken together, they provide the necessary protections.
Understanding Consequential Damages and Indemnification
In contrast to direct damages, which are the natural and likely consequences of a breach of contract, consequential damages are those losses and damages that do not flow directly or immediately from a breach. While direct damages typically are not waived in a credit agreement, consequential damages usually are waived by the borrower—and sometimes waived by both the borrower and the lenders.
Indemnification is the obligation to reimburse a party for the damages they have sustained as a result of the underlying contract. Credit facility indemnification provisions typically require that the borrower reimburse the lenders and agents for damages incurred—including damages that were related to the credit facility and awarded to third parties.
How Do Indemnification and the Waiver of Consequential Damages Intersect Each Other in Credit Facilities?
As noted above, under many credit facilities, only the borrower waives the right to receive consequential damages (i.e., the Lender would not be liable for any consequential damages, but the borrower would be liable). However, borrowers often negotiate that the waiver of consequential damages be mutual—meaning the borrower would not be liable for any consequential damages either. While this approach seems relatively straightforward, an unintended result in the drafting can occur where the waiver overrides the indemnity.
The intent of a mutual waiver of consequential damages is that neither the borrower nor the lender will pursue each other for consequential damages—and not that the borrower will not indemnify (reimburse) the lender if it is found liable to pay consequential damages to a third party. To make this clear, mutual waiver of consequential damage provisions should explicitly exclude third party damages from the waiver. Below is a version of a carve-out often seen in the market:
…other than, in the case of any Credit Party, in respect of such damages incurred or paid by an Indemnitee to a third party, or which are included in a third-party claim, and for any out-of-pocket expenses related thereto.
Including this carve-out will help make it clear that the waiver is not intended to override the indemnity—and that the borrower remains liable to indemnify the lender for third party claims—even if those are consequential damages.
For additional information, please reach out to your regular Mayer Brown lending contact.