You are halfway through a supplier's standard terms and you hit the sentence every template carries: neither party is liable for indirect or consequential loss. A few lines later there is usually a cap on total liability, then a list of carve-outs, then something about liquidated damages or service credits. Each clause changes who pays if the deal goes wrong, and they only do their job if they fit together.
The consequential loss exclusion is a risk allocation device. It displaces the default damages rules that trace back to Hadley v Baxendale (1854) 9 Exch 341, which the High Court has restated in cases like Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64. The first limb of that rule covers loss that arises naturally in the usual course of things from the breach. The second limb covers loss that was in the reasonable contemplation of both parties when they contracted. Without an exclusion, a customer can claim both kinds of loss. The exclusion is designed to remove the second category, which is where the big and uncertain figures live: lost profits, downtime, reputational harm. This guide walks through the clauses you will actually find in a contract, what each one does, and where they tend to go wrong.
The clauses that carry the risk
The exclusion clause itself
The core clause is usually a single sentence excluding "indirect or consequential loss". It works by cutting off claims for loss beyond the normal measure of damages, and its effect depends almost entirely on the words that surround it.
The trap is treating the labels as precise legal terms. In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358, Nettle JA of the Victorian Court of Appeal explained that ordinary reasonable business people naturally conceive of consequential loss as everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach. The court emphasised that the words "direct" and "consequential" are not terms of art. Australian courts construe the clause against the whole contract and ask what losses the parties actually intended to exclude, so the labels alone carry less weight than the losses you name:
- What the other side will push for: a short clause that says "indirect or consequential loss" and nothing else, because vagueness leaves room to argue later.
- The trap: genuine ambiguity in an exclusion clause is generally resolved against the party relying on it, so a vague clause can be read narrowly.
- Drafting minimum: never rely on the labels alone. Use the labels as a starting point and then say what you actually mean, which is the subject of the next clause.
The list of excluded losses
Because the labels are unreliable, most well-drafted contracts define what consequential loss means. A real example comes from the contract in Macmahon Mining Services Pty Ltd v Cobar Management Pty Ltd [2014] NSWSC 731, where "Consequential Loss" was defined to mean any special or indirect loss or damage, and any loss of profits, loss of production, loss of revenue, loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, whether direct or indirect.
The list turns a label into a checklist. It removes most of the argument about whether a particular claim is caught, because the categories are named rather than implied. The drafting choice that matters most is tailoring the list to the deal. A manufacturer cares about loss of production and business interruption. A software customer cares about loss of revenue and data restoration. A supplier of professional services cares about wasted overheads and loss of opportunity. Include "whether direct or indirect" at the end of the list if that is the true intention, because it closes the loophole where a claimant argues a listed loss was actually direct:
- The trap: over-broad lists catch losses you wanted to keep. In the Macmahon case the contractor claimed the loss of the opportunity to earn profit after the principal terminated the contract, and the principal argued the definition caught it. The court refused to strike the claim out because whether a loss falls inside a defined term is a question of construction of the whole contract, considered against the facts.
- The trap: proofreading. The definition in Macmahon had to be read with the word "or" as "of" in three places before it made sense. A typo in a list of excluded losses can be the difference between a clause that works and one that does not.
The cap on total liability
A limitation of liability clause sets an overall ceiling on what a party must pay, commonly expressed as "the lesser of a dollar amount and a multiple of fees" or simply "the contract sum". In the Macmahon contract, each party's total aggregate liability was limited to the value of the contract sum, subject to stated exceptions.
The cap matters because it is the second line of defence. Even if some indirect losses slip through the exclusion, the cap still bounds the total exposure:
- Drafting choices: decide whether the cap is aggregate across all claims or applies per claim, and say so expressly. An aggregate cap is the stronger protection for the paying party.
- Drafting choices: decide what the cap covers. The safest wording catches "all liability under or in connection with this contract", including indemnities. If you want indemnities outside the cap, say so, because silence invites argument.
- The trap: a cap that refers only to "damages for breach of this agreement" can be argued not to reach claims in negligence, under an indemnity, or under the Australian Consumer Law.
The carve-outs
Carve-outs are the exceptions to the exclusion and the cap. Standard carve-outs include death or personal injury, fraud or wilful misconduct, breach of confidentiality, infringement of intellectual property, and data breach. Consumer law obligations are usually carved out as well, for reasons covered in the next section.
They exist for three reasons. Some liabilities cannot lawfully be excluded. Others are so serious that a court would read the clause against you before letting you escape them, so it is safer to name them. And some risks, like data breach, are insurable, so the party accepting them can price them rather than pretend they do not exist:
- The trap: carve-outs in the cap do not automatically appear in the exclusion. In Macmahon, the cap had exceptions that included wilful misconduct, but the separate consequential loss exclusion had none, and it operated "despite anything else in this contract". That made the exclusion cut deeper than the cap. Check that the two clauses are consistent.
- The trap: carve-outs for indemnified risks need insurance behind them. A carve-out without cover is just a larger exposure.
The consumer law clause
Australian Consumer Law (ACL) obligations sit outside what a contract can achieve, and the exclusion needs to acknowledge that. Under s 64 of the ACL, which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), a term is void to the extent it purports to exclude, restrict or modify the application of the consumer guarantees or liability for failing to comply with them. A blanket consequential loss exclusion therefore cannot stop a consumer from relying on the guarantees.
There is a useful drafting exception. Under s 64A, for goods or services not ordinarily acquired for personal, domestic or household use, a supplier can limit its liability for failing to comply with most guarantees to re-supplying the goods, repairing them, or paying the cost of doing so, provided the limitation is fair and reasonable. That is the legitimate way to put a ceiling on guarantee claims in business-to-business supply.
The unfair contract terms regime adds a further constraint. Under s 23 of the ACL, a term of a standard form consumer or small business contract is void if it is unfair. A contract is a small business contract where a party employs fewer than 100 people or has turnover under $10 million (s 23(4)), so most of your SME customers are covered. Since 9 November 2023, proposing or relying on an unfair term is itself a contravention, with penalties for a corporation of up to the greater of $50 million, three times the benefit obtained, or 30 per cent of adjusted turnover. A one-sided exclusion buried in a clickwrap or a standard form can therefore be more than unenforceable; it can be expensive:
- The trap: terms that set the upfront price or define the main subject matter are exempt from the unfair contract terms regime under s 26, so you cannot fix an unfair exclusion by calling it part of the price.
- The trap: a consumer guarantee carve-out that is inconsistent with the rest of the liability framework creates the exact uncertainty it was meant to remove.
Liquidated damages
Liquidated damages are a pre-agreed amount payable for a specified breach, such as a delay or a period of downtime. They give both sides certainty about the financial consequence of a defined failure, and they remove the need to prove loss at trial.
The constraint is the rule against penalties. In Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525, the High Court confirmed that a stipulated sum is a penalty, and therefore unenforceable, if it is out of all proportion to the legitimate interest of the innocent party in performance of the obligation. The drafting choice that matters is tying the figure to a genuine assessment of the loss the breach is likely to cause, and keeping a record of how the figure was calculated. A figure plucked from the air is the one most likely to be struck down.
Service credits and performance remedies
Service credits are a middle path between a blanket exclusion and full damages. Under a service level agreement, the supplier credits the customer a set amount, often a percentage of the monthly fee, for each missed performance target. The customer gets a practical remedy for the failures that matter most, and the supplier gets a predictable ceiling on those claims.
The drafting choice is whether the credits are the exclusive remedy for that class of failure. If the contract is silent, a customer may claim the credits and still sue for damages for the same downtime. If the credits are meant to be the whole answer, say so in an exclusive remedies clause.
Set-off
A set-off clause lets a party deduct amounts it claims it is owed from amounts it owes. Suppliers usually want to limit set-off to undisputed amounts, or prohibit it altogether, because a broad right lets a customer withhold payment on the strength of an unproven claim. Customers often push for the broad right for the same reason.
The drafting choice is to define precisely when set-off applies, and to require notice and reasonable detail of any disputed amount before it can be deducted. A tight clause protects cash flow; a loose one turns every disagreement into a payment dispute.
Indemnities
An indemnity is a promise to pay specified losses without the usual limits of causation and remoteness. It is a different animal from a damages claim, which is why the interaction with the exclusion and the cap needs to be explicit. The critical questions are whether indemnities sit inside or outside the cap, and whether the consequential loss exclusion applies to them. In Macmahon, the indemnity clause and the exclusion were separate, and the exclusion operated "despite anything else in this contract", which meant the carve-outs in the indemnity had to be read carefully against the exclusion. Check the same in your contract, because an indemnity outside the cap and outside the exclusion is exposure the rest of the framework never touches.
Optional clauses worth considering
If your deal carries particular risk exposures, consider adding one or more of the following:
- Exclusive remedies clause: add when service credits or liquidated damages are meant to be the whole answer for a class of failure, so the customer cannot claim credits and damages for the same event.
- Data breach carve-out: add in data-rich arrangements so breach response and notification costs remain recoverable, and the risk is priced rather than excluded.
- Insurance waiver or subrogation clause: add where the risk is insured, so an insurer's recovery rights do not undo the cap you negotiated.
- Cap escalation for indemnified risks: instead of leaving indemnities uncapped, set a higher sub-cap for them so the exposure is bounded but still meaningful.
- Dispute resolution escalation: add for long-running supply arrangements so quantum disputes move to early commercial resolution instead of litigation.
How an Artificer Legal lawyer would review these clauses
When we review a liability framework, we negotiate in a set order. The cap comes first, because it is the number that bounds everything else. The exclusion comes second, because it defines which losses the cap never needs to reach. The carve-outs come third, and the performance remedies last, because they should be aligned with the risks the parties actually care about.
The red flags we look for are the ones this guide has covered: a defined term that catches entitlements the parties never meant to lose, an exclusion with no carve-outs that cuts deeper than the cap, indemnities sitting outside the cap, and language that is inconsistent with the Australian Consumer Law. We also insist on the evidence behind any liquidated damages figure, and on exclusive remedy wording where credits are meant to be the whole answer. If you are reviewing a draft that carries any of these features, a commercial lawyer can tell you which clauses to push back on and which to accept, and can redraft the framework as a package rather than a collection of boilerplate.
The definition of consequential loss
The single drafting choice that most often decides a dispute is the definition of consequential loss. A clause that stops at the labels "indirect or consequential loss" leaves the question of what was excluded to a court, and as Peerless shows, courts do not read the labels as terms of art. A clause that defines the term, lists the losses in plain words, carves out what must not be excluded, and sits consistently with a cap, leaves very little to fight about. That is the difference between a clause that works and one that fails at the moment it is needed.
In summary: the exclusion removes the second limb of Hadley v Baxendale, the list makes the exclusion enforceable, the cap bounds what remains, the carve-outs protect the non-negotiable risks, and the performance remedies give both sides a commercial answer for the failures that matter most. Draft the package together, check it against the consumer law limits, and get legal review before you sign, because the clause that looks like boilerplate is often the clause that decides who pays.