Published: April 12, 2011
Author: Jessica Ozalp

On March 15, a Wisconsin appellate decision affirmed a $29.1 million damages award against Andritz Inc. for breach of an option to purchase (Appleton Papers, Inc. v. Andritz, Inc., 2011 WL 867754 (Ct. App.) (No. 2009AP2295)). Andritz initially granted the option, then breached by refusing to sell its equipment at the agreed price when the other party attempted to exercise the option. Included in this hefty jury verdict was a $10.6 million bill for modifying the injured party’s operations building to accommodate larger replacement equipment. But Andritz’ agreement contained a limitation of liability provision excluding “all incidental or consequential damages.” So how did the court hold Andritz liable for building modification costs, although these costs represented consequential damages, to the tune of $10.6 million?

Andritz’ contract contained a key drafting mistake in its limitation of damages. Because of the way the court construed the limitation provision, the breach of the option to purchase was not covered, so these building modification costs were not excluded as damages. For any business intending to exclude incidental and consequential damages in a contract, it is important to understand what went wrong with Andritz’ contract by examining the language of the limitation provision and the court’s analysis.

Andritz’ limitation paragraph said, “In no event shall either party hereto be liable to the other for any incidental, special, indirect or consequential damages of any kind, or for lost profits, lost revenues, loss by reasons of plant shut-down or down-time or the plant’s inability to operate at full capacity to the extent arising out of the work authorized under this letter agreement.” Andritz believed this sentence contained two distinct limitations of liability:

1. A broad limitation of all incidental or consequential damages, and
   
2. A specific limitation of lost profits arising from plant shutdowns.

Andritz argued to the court that the second section beginning with “or for lost profits” was separate from the first part of the sentence, so that the qualification “to the extent arising out of the work authorized under this letter agreement” would ONLY apply to its specific limitation of lost profits. This would leave the first half, limiting all incidental or consequential damages, unqualified and intact. This reading would have prevented Andritz from having to pay the $10.6 million in building modification costs.

However, the court called this an overly technical reading based on grammar and punctuation, and said it would lead to an unreasonable result. The court decided that the “or” after “consequential damages of any kind” did not divide the sentence into two separate limitations of liability, so the qualifications modified both the limitation of consequential damages and the limitation of lost profits due to shutdowns.

Andritz could have done a number of things to clarify its exclusion of consequential damages, including simply dividing the sentence into two sentences instead of using “or.” Ultimately the court’s interpretation of the unassuming word “or” in this case meant that Andritz was liable for $10.6 million for damages it never intended to take responsibility for in its contract. Appleton Papers v. Andritz highlights subtle but important drafting considerations to ensure limitations of liability are given their full intended effect.

For more information about contract drafting in Wisconsin, contact Jessica Ozalp at 608.283.6744 or jozalp@axley.com.

Axley Brynelson is pleased to provide articles, legal alerts, podcasts and videos for informational purposes, but we are not giving legal advice or creating an attorney/client relationship by providing this information. The law constantly changes, and our publications may not be currently updated. Before relying on any legal information of a general nature, please consult legal counsel as to your particular situation. While our attorneys welcome your comments and questions, keep in mind that any information you provide us, unless you are now a client, will not be confidential.