A poorly worded clause on “consequential loss” can turn a $50,000 repair into a $1 million lawsuit. In Australian contract law, consequential loss refers to indirect losses that go beyond the usual or immediate result of a breach. If your commercial contracts don’t clearly define or limit this liability, your business could be exposed to serious financial risk.
This article, prepared by our contract law team, explains the legal framework, shows you how to draft enforceable exclusion clauses, and outlines practical steps to reduce exposure.
Key Takeaways
Consequential loss refers to indirect or special losses beyond the normal damages flowing from a breach
Courts follow the second limb of Hadley v Baxendale and the reasoning in Environmental Systems v Peerless Holdings
Ambiguity in exclusion clauses is interpreted against the drafter unless definitions are precise
Australian Consumer Law (ACL) section 64A restricts exclusion clauses in consumer contracts
Many insurance policies exclude consequential loss, so the risk may fall entirely on your business
What is Consequential Loss under Australian Law?
Direct vs Consequential Loss
Direct (or normal) loss:
- Arises naturally in the usual course of events following a breach
- Recoverable as of right
Consequential (or indirect) loss:
- Results from special circumstances within the parties’ contemplation at the time of contracting (Hadley v Baxendale, second limb)
- Recoverable only if the contract or surrounding facts show the parties contemplated that loss
Under Hadley v Baxendale (1854), consequential loss falls under the second limb – meaning it’s not recoverable unless both parties knew of the risk when the contract was made.
In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008], the Court held that consequential loss includes losses “beyond the normal measure of damages” – such as lost opportunity, abnormal overheads, or disruption unique to the claimant.
Check out our article on Liquidated Damages to find out more on this.
Statutory Overlay: Consumer Protection Limits
Under section 64A of the Australian Consumer Law (Schedule 2, Competition and Consumer Act 2010), you cannot exclude liability for consequential loss in consumer contracts unless:
The goods or services are not ordinarily acquired for personal or domestic use, and
The exclusion is fair and reasonable under the circumstances
Tip: If your business sells to consumers, review all limitation clauses for compliance with the ACL.
Why Consequential Loss Clauses Matter
A small breach (e.g., late delivery) can trigger massive indirect losses, like lost production or lost profits.
Standard public and product liability insurance usually excludes “assumed liability,” especially for consequential loss.
Poorly drafted clauses can shift your entire risk profile, affecting pricing, financing, and insurance coverage.
How to Draft Enforceable Consequential Loss Clauses
Techniques to Ring-Fence Liability
- Define consequential loss expressly: Include or exclude specific heads: loss of profit, revenue, data, production, reputation
- Use separate caps for direct and indirect loss: Example: direct loss capped at contract value; consequential loss excluded entirely
- Align with insurance: Confirm policy language matches contractual risk allocation
- Carve-outs: Carve out indemnities for third-party IP infringement or personal injury so exclusions cannot be relied on for those events
Sample Clause (Narrow Exclusion)
Neither party is liable for any Consequential Loss, being loss of profit, revenue, business interruption or indirect economic loss whether or not foreseeable, except to the extent such Loss arises from:
- wilful misconduct by that party
- liability to third parties under clause X (IP indemnity)
Common Drafting Errors
Not defining “consequential loss” at all – leading courts to apply common law definitions
Including the same item (e.g., “loss of profit”) in both direct and consequential categories
Ignoring ACL section 64A in consumer-facing contracts
Assuming insurance covers all risks – it often excludes indirect or assumed liability
Learn more about unenforceable contract terms in our article.
Insurance Implications
Issue | Impact |
Contractual assumption of consequential loss | Often falls outside standard policy cover |
Endorsement for “assumed liability” | May restore cover but subject to sub-limit |
Project-specific professional indemnity | Typically covers economic loss but check for indirect loss carve-outs |
Practical Examples
Patersons Securities Ltd v FOS (2015)
Broker mismanagement led to portfolio loss. The court found lost profits were direct losses because any investor in the same position would suffer similarly.
Manufacturing Supply Contract Hypothetical
A machine supplier delivers faulty equipment.
Direct loss: $50,000 in replacement parts
Consequential loss: $900,000 in lost revenue during a four-day shutdown
A well-drafted clause excluding “loss of production or profit” could protect the supplier from the $900K claim.
Checklist: Limiting Exposure to Consequential Loss
- Map all potential indirect losses relevant to the transaction
- Draft a bespoke definition aligned with commercial objectives
- Verify consistency across indemnity, limitation of liability, and insurance clauses
- Consider statutory bars under ACL and state legislation
- Record any shared assumptions in pre-contractual correspondence
Need assistance drafting or negotiating a consequential loss clause or limiting your liability? Contact our team for a tailored risk assessment and that aligns with your strategic and insurance objectives.
Frequently Asked Questions
How can I tell if a loss is “consequential”?
Ask: Would every party in this situation suffer this loss? If not, it’s probably consequential.
Are all lost profits consequential?
No. Lost profits may be direct where they follow naturally from the breach (Patersons Securities). Context is critical
Can I completely exclude consequential loss in a consumer contract?
Not entirely. Section 64A of the ACL requires exclusions to be fair and reasonable and only applies to non-personal goods/services.
Does public liability insurance cover consequential loss?
Generally no. Most policies exclude indirect economic loss unless an endorsement expressly extends cover
What if a consequential exclusion clause is ambiguous?
Courts construe ambiguity against the party seeking to rely on the exclusion – especially for boilerplate language.
About the Author
Farrah Motley
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