No consequential damages: Overview, definition, and example
What is no consequential damages?
A no consequential damages clause is a contract provision that limits a party’s liability by preventing the other party from claiming indirect or consequential losses—such as lost profits, business interruption, or reputational harm—resulting from a breach of contract.
For example, if a software provider delivers a faulty product that causes a business to lose customers, the provider may be liable for fixing the software but not for the lost revenue due to the no consequential damages clause.
Why is a no consequential damages clause important?
This clause protects businesses from unpredictable and excessive financial claims that go beyond direct damages. It provides certainty about potential liabilities and ensures that contract breaches do not expose companies to claims for losses that may be difficult to quantify or prove.
For businesses, including or negotiating this clause is critical, especially in industries where delays, defects, or service failures could lead to significant financial consequences.
Understanding no consequential damages through an example
Imagine a logistics company contracts with a trucking provider to deliver goods. If a delay occurs and the goods arrive late, the logistics company can claim direct damages, such as refunding shipping costs. However, under a no consequential damages clause, the trucking provider would not be responsible for lost sales or missed business opportunities caused by the delay.
In another case, a cloud service provider experiences a system outage that prevents an e-commerce company from processing orders. While the provider may offer a service credit for downtime, it would not be liable for the e-commerce company's lost revenue or customer refunds due to the no consequential damages clause.
An example of a no consequential damages clause
Here’s how this clause might be written in a contract:
“Neither party shall be liable to the other for any indirect, special, incidental, consequential, or punitive damages, including but not limited to lost profits, loss of business, or reputational harm, even if advised of the possibility of such damages.”
Conclusion
A no consequential damages clause helps businesses manage risk by limiting liability for indirect losses. It provides clarity in contracts, ensuring that parties are only responsible for direct damages related to a breach. When negotiating contracts, businesses should carefully review this clause to understand its impact on potential claims and liabilities.
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.