Disclaimer of consequential damages: Overview, definition, and example
What is a disclaimer of consequential damages?
A disclaimer of consequential damages is a provision in a contract that limits or excludes a party’s liability for damages that may arise as a consequence of a breach, but are not directly caused by the breach itself. Consequential damages, also known as indirect damages, are damages that occur as a secondary result of the primary breach, often due to a chain of events. These damages can include loss of profits, loss of business opportunities, or other financial impacts that are not immediately linked to the breach.
The disclaimer in a contract typically states that, in the event of a breach, neither party will be liable for any consequential damages arising from the breach. The purpose of this clause is to protect parties from facing financial exposure for damages that might be difficult to predict or prove, and to limit their liability to direct damages only (those that directly result from the breach).
Why is a disclaimer of consequential damages important?
A disclaimer of consequential damages is important because it provides clarity and predictability in the event of a dispute. By limiting liability to direct damages, it helps prevent one party from being exposed to large, unforeseen financial liabilities that may arise due to ripple effects from a breach.
For example, if one party fails to deliver goods on time, the other party might suffer loss of sales, lost customer trust, or damage to their business reputation. A disclaimer of consequential damages limits the responsible party's liability to the actual cost of the goods or services and excludes claims for broader business losses.
This clause is common in contracts where there is uncertainty about the extent of potential damages and where one party does not want to be held responsible for indirect or unforeseeable losses.
Understanding disclaimer of consequential damages through an example
Let’s say a software development company enters into a contract with a client to create a custom software solution. The client expects that the software will increase productivity and profits. However, due to delays in development, the client cannot use the software on time, causing them to lose out on significant sales opportunities.
If the contract includes a disclaimer of consequential damages, the software company would not be liable for the lost sales or business opportunities the client faced due to the delay. Instead, the software company’s liability would be limited to direct damages, such as the cost of the software development or any costs directly related to the breach (e.g., refunding the client for paid fees).
In another scenario, a manufacturer fails to deliver products to a retailer on time, and as a result, the retailer loses sales and customer trust. A disclaimer of consequential damages would prevent the retailer from seeking compensation for lost sales or damage to its reputation, and the manufacturer’s liability would be limited to direct costs, such as the value of the undelivered goods.
Example of a disclaimer of consequential damages clause
Here’s how a disclaimer of consequential damages clause might appear in a contract:
“In no event shall either Party be liable for any consequential, incidental, special, or punitive damages, including but not limited to loss of profits, loss of business opportunities, or damage to reputation, arising from a breach of this Agreement. The liability of either Party for any breach shall be limited to the direct damages arising from such breach, and in no case shall exceed the total amount paid by the Client under this Agreement.”
Conclusion
A disclaimer of consequential damages is a critical clause in many contracts, designed to limit liability for indirect or unforeseeable losses that may arise from a breach. This provision helps manage risk by ensuring that parties are not exposed to excessive financial consequences due to secondary damages that could be difficult to quantify or predict. It allows parties to focus on direct, measurable damages, offering a clearer, more predictable framework for resolving disputes and limiting legal exposure.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.