Consequential Damages Exclusion

What is a consequential damages exclusion?

When a vendor breaks its contract, your losses fall into two groups. Direct damages are the immediate cost, such as the fees you paid for a service that did not work. Consequential damages (also called indirect damages) are the losses that follow from the failure: missed sales, customers who leave, overtime for your team, or the cost of rebuilding lost data.

A consequential damages exclusion is a clause that says neither side can recover that second group. It works alongside the limitation of liability cap. The exclusion removes whole types of loss, and the cap limits what is left.

The law generally lets businesses agree to this. The Uniform Commercial Code, the US model law for sales of goods, says consequential damages "may be limited or excluded unless" the limit is unconscionable (so unfair a court refuses to enforce it). It adds that such a limit is not presumed unfair when the loss is commercial. That code covers sales of goods, so it may not apply directly to a software subscription.

Some limits remain. In California, Civil Code 1668 says a contract cannot excuse a party from responsibility for its own fraud, willful injury or violation of law.

The line between direct and indirect is not always clear. A 2020 English High Court ruling notes that business interruption may be direct or indirect depending on the wording and the facts. McGuireWoods makes the same point about data breach costs: courts may put them in either group.

What it looks like in a vendor's terms

A typical clause reads like this:

Neither party will be liable to the other for any indirect, incidental, special, consequential or punitive damages, or for lost profits, revenue, goodwill or data, even if it was told such damages were possible. This section does not apply to a party's indemnity obligations or to fees owed.

• Indirect, incidental, special, consequential: the losses that ripple out from the failure, rather than the failure itself.
• Lost profits, revenue, goodwill or data: named outright, so nobody can argue later that they were direct losses.
• Even if it was told: warning the vendor in advance does not change the result.
• Does not apply to: the carve-outs, meaning the exceptions where the exclusion falls away. Read these first.

Atlassian's Customer Agreement (section 14.1, as of October 2026) excludes "loss of use, lost data, lost profits, interruption of business" for both sides. The Salesforce, HubSpot and AWS agreements we read also apply their exclusions to both parties.

Why it matters to you

Picture a vendor outage that stops your checkout for a day. The fee you paid for that day might be a few dollars. Your lost sales, refunds and support hours are the real cost, and those are exactly the losses this clause names.

A data incident is the sharper case. Telling your customers, investigating and paying for credit monitoring can cost far more than a year of fees. McGuireWoods notes that many breach costs could fall into excluded groups unless the contract says otherwise. A super cap or a carve-out is one way to fix this.

The clause also cuts both ways. A mutual exclusion protects you if the vendor tries to claim its own lost profits from you. But the fees you owe often sit outside the protection: Salesforce and HubSpot both keep payment obligations outside their liability caps.

Your own customers may expect more from you than your vendor promises you. If your contracts with them have no matching exclusion, the gap is yours to absorb.

What to check

• Find the list of excluded losses and check whether "lost data" or "loss of use" is on it.
• Read the carve-outs. Ask whether breaches of confidentiality, data protection or security sit outside the exclusion.
• Ask for named breach costs (notifying affected people, helping them limit the harm, recreating lost data) to count as direct damages, as McGuireWoods suggests.
• Check that the exclusion is mutual. Wording that protects only the vendor is worth pushing back on.
• Compare it with your own customer contracts so you do not promise more than your vendors promise you.
• Watch for edits. A new item on the excluded list changes your position even when the price stays the same.

How Venpo helps

Venpo monitors your vendors' terms of service and other public legal pages and emails you a plain-English alert when the liability section changes, for example when a new type of loss is added to the excluded list. Each vendor has a change history, so you can see what the clause said when you signed.