Clause primer
Consequential damages exclusion
The clause bars recovery of certain categories of indirect loss, such as lost profits or consequential damages, regardless of the amount.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: waiver of consequential damages, exclusion of indirect damages, no special damages clause. Where you find it: Services, SaaS, technology, supply, construction and licensing agreements, usually next to the liability cap.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
Except for Excluded Claims, neither party will be liable to the other for any indirect, incidental, special, consequential, exemplary or punitive damages, or for any loss of profits, revenue, business or goodwill, whether direct or indirect, arising out of or relating to this Agreement, even if advised of their possibility. This exclusion applies to claims in contract, tort (including negligence) or otherwise. Nothing in this Section limits a party's obligation to pay amounts due under this Agreement or amounts awarded to a third party under Section 10 (Indemnification).
How it works
Excluded categories
The list removes types of loss from recovery, regardless of the dollar amount. Terms such as "consequential" and "special" have meanings drawn from case law, and those meanings differ among states.
Lost profits, direct or indirect
Naming lost profits and stating "whether direct or indirect" excludes them even where they flow directly from the breach. Without that wording, lost profits may be recoverable as direct damages in some cases.
Foreseeability language
"Even if advised of their possibility" removes the argument that the loss was within the parties' contemplation. That argument would otherwise matter under the usual test for consequential damages.
Carve-backs
The final sentence keeps payment obligations and third-party indemnity awards outside the exclusion. Without it, an indemnitor could argue that a third party's damages are consequential to it.
Why it is there
The clause removes the hardest-to-predict losses from the deal, which supports pricing and insurance. It mainly protects the party whose failure could cause large downstream harm, usually the provider. Customers often accept it for ordinary performance failures but resist it for data breaches or confidentiality violations, where most of the harm can fall into excluded categories. Read with the cap, it defines both the type and the amount of recoverable loss.
How it works with other clauses
- Liability cap: the exclusion limits the kinds of loss, and the cap limits the amount; the exclusions from each should match.
- Indemnification: a carve-back is needed so third-party awards are not treated as consequential.
- Defined direct damages: some agreements list recoverable costs, such as remediation or replacement services, to avoid argument.
- Confidentiality and data protection: breach costs may be excluded unless carved out.
Negotiating it
Who it protects: Usually the provider, and in mutual form both parties.
If it protects you
- Keep lost profits excluded "whether direct or indirect".
- Keep the foreseeability language.
- Keep carve-outs short and specific.
If it runs against you
- Standard ask: make the exclusion mutual and carve out confidentiality, data and indemnity claims.
- Standard ask: list specific costs as recoverable direct damages.
- Fallback: a higher cap for the carved-out claims instead of unlimited exposure.
Escalate before accepting: A one-way exclusion that bars the customer's recovery of data breach and remediation costs, with no carve-back for indemnity or confidentiality.
What AI explanations get wrong
- Assuming lost profits are always consequential. Check: read whether the clause says "direct or indirect" and consider governing law.
- Missing the indemnity carve-back. Check: confirm third-party awards are excluded from the waiver.
- Treating the exclusion as a dollar cap. Check: identify the separate cap clause.
- Ignoring data breach costs. Check: list likely costs and test which category each falls into.
Where the law varies
The line between direct and consequential damages is drawn by case law and differs among states and by context. Some courts read general exclusion language narrowly, so specific wording matters.
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the SaaS and Vendor Agreements Pack.