A consequential damages exclusion is a provision that prevents one or both parties from recovering indirect, secondary, or downstream losses resulting from a breach of contract. Consequential damages typically include lost profits, lost business opportunities, lost revenue, business interruption, loss of goodwill, and other economic harm that flows indirectly from the breach rather than directly from it. For example, if a vendor fails to deliver materials on time, direct damages would be the cost to purchase replacement materials; consequential damages would be the lost profits from projects that couldn't be completed due to the delay. This clause essentially says neither party can sue for these types of losses, regardless of whether the breach was foreseeable.
While these clauses are common in commercial contracts and serve a legitimate purpose—limiting unpredictable exposure and keeping insurance costs reasonable—they can be problematic if they're one-sided or overly broad. A party accepting this restriction gives up significant leverage in disputes and may find themselves with no meaningful remedy if a breach causes substantial business harm. The enforceability of such clauses varies by jurisdiction, and courts sometimes refuse to enforce them if they're deemed unconscionable or if they eliminate all meaningful remedies. In restrictive covenant contexts (like non-competes), this clause becomes particularly concerning because it may prevent you from recovering losses if the other party violates the restriction.
Resist accepting a mutual consequential damages exclusion if your business relies on timely performance or if breach could cause significant downstream harm. If the other party insists on the exclusion, negotiate for carve-outs for losses that are reasonably foreseeable (such as lost profits on specific identified projects). Consider whether you can obtain adequate insurance to cover excluded damages. At minimum, ensure the clause is truly mutual and applies equally to both parties—never accept a one-sided exclusion where only you're barred from recovering consequential damages. Document in writing any damages scenarios you discuss during negotiation, as this may help establish foreseeability if a dispute arises.
Frequently Asked Questions
What does this clause mean in simple terms?
A consequential damages exclusion is a provision that prevents one or both parties from recovering indirect, secondary, or downstream losses resulting from a breach of contract. Consequential damages typically include lost profits, lost business opportunities, lost revenue, business interruption, loss of goodwill, and other economic harm that flows indirectly from the breach rather than directly from it.
Why should I care about this clause?
For example, if a vendor fails to deliver materials on time, direct damages would be the cost to purchase replacement materials; consequential damages would be the lost profits from projects that couldn't be completed due to the delay. This clause essentially says neither party can sue for these types of losses, regardless of whether the breach was foreseeable.
What are my options?
While these clauses are common in commercial contracts and serve a legitimate purpose—limiting unpredictable exposure and keeping insurance costs reasonable—they can be problematic if they're one-sided or overly broad. A party accepting this restriction gives up significant leverage in disputes and may find themselves with no meaningful remedy if a breach causes substantial business harm.
How does this affect small businesses?
The enforceability of such clauses varies by jurisdiction, and courts sometimes refuse to enforce them if they're deemed unconscionable or if they eliminate all meaningful remedies. In restrictive covenant contexts (like non-competes), this clause becomes particularly concerning because it may prevent you from recovering losses if the other party violates the restriction.