The Hidden Trap Potentially Lurking in Your Consequential Damages Waiver

GTX Legal
Oct 17
2 min read

Updated: Oct 29

You included a consequential damages waiver in your contract to greatly limit your potential liability. Smart move, right?

Yes, but not so fast.

If your contract also includes broad indemnification terms, that waiver might not protect you as much as you think.

Here’s an Example to Illustrate

Your company (Contractor A) signs a construction contract with Owner B. The contract includes:

A mutual waiver of consequential damages, and
An indemnification provision requiring you to cover "all damages" from third-party claims arising from your breach or negligence.

After commencing work, you miss critical construction deadlines. Owner B can't meet commitments to its customer, Retailer C. As a result, Retailer C sues Owner B for various damages, including lost profits and business opportunities (classic consequential damages) and the court awards Retailer C those damages.

The Question: If Owner B seeks indemnity coverage from you (Contractor A) for all damages incurred in connection with that third party claim, are you liable for the consequential damages component awarded to Retailer C, or does your consequential damages waiver protect you from those damages?

The uncomfortable answer: Depending on the state you are in, you may be liable for the consequential damages awarded to Retailer C despite the waiver. Here's why.

Why Your Waiver Might Not Protect You As Much As You Thought

Some courts interpret consequential damages waivers narrowly, applying them only to direct claims between the contracting parties. Meanwhile, indemnification provisions are drafted broadly - "all claims," "all damages," "all losses" - and that language usually sweeps in consequential damages from third-party claims.

The result? Following the example above, your waiver protects you in a direct dispute with Owner B, but not when Owner B gets sued by Retailer C and passes that liability back to you through indemnification.

This isn't a theoretical problem. It creates real exposure that can far exceed your contract value, especially when third parties claim lost profits, business opportunities, or reputational harm.

Two Ways to Protect Yourself

1. Cap your total liability with a dollar limitation.

Include a clear dollar liability cap (e.g., "in no circumstances shall total liability of either party exceed 2X the fees paid or payable hereunder"). This dollar cap protects you from unlimited exposure when third-party claims arise.

2. Explicitly extend your consequential damages waiver to third-party claims.

Add language to your waiver like: "This waiver applies to all claims, including those arising from third-party indemnification obligations." This removes ambiguity, bolstering the waiver.

The Bottom Line

A consequential damages waiver certainly reduces risk, but it's not foolproof. Without careful drafting, you could unknowingly face untenable exposure from third-party claims you thought were limited.

This is exactly the kind of hidden contract risk that can derail growth, complicate exits, and create nasty surprises during due diligence. Careful review now can save you significant exposure later.

Need help reviewing your contracts for these kinds of gaps? GTX Legal specializes in practical contract review and negotiation for growing companies. We identify risks like the one mentioned above before they become problems—and we do it in days, not weeks, in a cost-effective, value-add manner.

Please feel free to contact us at: info@gtxlegal.com or call 954-282-1464.