Consequential damages
Indirect losses that flow from a breach because of the injured party’s particular circumstances, such as lost profits, rather than its direct cost.
What it means
Contract law generally splits damages into two groups. Direct damages are losses that naturally follow from a breach, such as the cost of hiring someone else to redo defective work. Consequential (or special) damages are further-removed losses that result from the injured party’s particular situation, such as lost profits, lost customers, or harm to reputation.
Suppose a bakery’s refrigeration contractor installs a faulty unit. The cost to repair or replace the unit is a direct loss. The spoiled stock and the week of lost sales while the bakery is closed are likely consequential. Many contracts exclude consequential, indirect, incidental, special, and punitive damages, so the bakery might recover only the repair cost.
These exclusions usually favor the party doing the work, because knock-on losses can dwarf the contract price. The line between direct and consequential damages is not always clear, and courts in different states draw it differently, especially for lost profits. Some contracts avoid the debate by listing which losses are recoverable, or by carving breaches of confidentiality, data security, or indemnity obligations out of the exclusion.
What to watch for
- Check whether the exclusion is mutual, because a one-way exclusion protects only the other side.
- See whether lost profits are excluded outright, since in some deals lost profits are your main loss.
- Look for carve-outs for confidentiality breaches, data breaches, indemnities, and willful misconduct.
- If specific losses matter to you, such as the cost of replacement services or data recovery, check whether the contract expressly treats them as direct damages.
Example clause
Neither party will be liable to the other for any indirect, incidental, special, or consequential damages, including lost profits or lost revenue, even if advised of their possibility. This exclusion does not apply to a breach of Section 8 (Confidentiality).
Neither side can claim lost profits or knock-on losses, except where confidential information is misused.