Indirect damage is consequential damage that does not result directly from the breach but develops outside of it — lost profits, loss of revenue, reputational damage. In our practice, we see that indirect damage amounts to many times higher than direct damage. A breach of 10,000 euros can lead to a claim of 500,000 euros via lost profits. A well-formulated exclusion protects your company against this silent killer.
What is the legal problem?
What qualifies as indirect damage depends on the applicable law. Under Dutch law, the distinction is not statutoryly defined. Under English law, it follows from Hadley v Baxendale (1854). Under CISG, foreseeability applies under Section 74. Without a clear definition, the counterparty or the judge has leeway to classify items as direct damage. A good exclusion clause defines and limits both categories.
What does the law say?
Under Dutch law, Article 6:98 of the Civil Code governs the attribution of damages to the breach of contract based on reasonableness. Articles 6:95-97 of the Civil Code regulate the scope of compensation. Under Article 74 of the CISG, foreseeable losses and lost profits are considered compensable. Under English law, first limb damages (natural consequence) are compensable by default; second limb damages (special consequences) only if foreseeable.
Exclusion is not possible for intent and conscious recklessness (Stein/Driessen, Supreme Court 12 December 1997, NJ 1998/208). For consumers, mandatory rules apply under Article 6:236 of the Dutch Civil Code (black list) and Article 6:237 of the Dutch Civil Code (grey list).
What risks do companies face?
Without exclusion, claims for lost profits and reputational damage can amount to many times the contract amount. In the case of vague clauses, judges award items in favor of the victim. An exclusion that is too broad may be contrary to mandatory law and be declared void. In international proceedings, divergent outcomes arise because concepts are interpreted differently by legal system.
Practical example from our practice
We represented a Dutch software supplier whose system experienced a week of downtime at a British client. The client claimed 2 million euros in lost profits. The general terms and conditions mentioned "indirect damage" without a definition. The English court assessed the claim partly as direct loss under Hadley v Baxendale. Upon renegotiation, we incorporated the definition: "indirect damage comprises lost profits, loss of revenue, lost savings, reputational damage, data loss, and lost opportunities." Subsequent incidents are limited to direct repair costs.
What can you do?
Define indirect damage with an enumeration (lost profits, loss of revenue, lost savings, reputational damage, data loss, lost opportunities). Exclude these items. Combine with a total ceiling. Keep intent and gross negligence outside the exclusion under the Stein/Driessen doctrine. Align with applicable law. Add a severability clause in case parts are void. See also our article on International Contractual Damages.