Indirect & Consequential Loss

I recently had to negotiate some terms and the clause for indirect and consequential loss popped up. As a buyer I want to ensure that all loses are remedied but from a suppliers perspective they want to limit any loss that is indirect & consequential and often want to remove this. Sometimes the clause is joint sometimes parties disagree. I had to go away and think about how I wanted to play this one.

Why do I need to have the clause? For my client’s I need to try and protect them against loss to safeguard their money. In contract law loss in this context is linked to an unusual loss of special circumstances, it only applies where the loss cannot be predicted in advance , it is only enforced if the other party knew or should have known of the circumstance of the loss when they made the contract. This definition is known as the second limb of the rule in Hadley v Baxendale [1854] EWHC Exch J70. This means that the supplier is not signing up to unlimited indirect and consequential losses, it is only effective if they could foresee the loss occurring.

A contract cannot cover for every provision. Therefore, a consequential clause will be viewed in the context of the contractual liability as a whole and will not be interpreted in isolation.

As a general clause on consequential loss can be wide its important that such a clause is drafted clearly so that both parties understand exactly what losses are recoverable.

Examples of consequential loss that could be listed:

 loss of income or revenue;

loss of business; loss of profits or contracts;

loss of anticipated savings;

loss of data;

loss of goodwill;

wasted management or office time;

Direct loss (first limb) is a loss which arises as a direct and natural result of a breach, and in the ordinary course of events.

This means that the loss is flowing naturally from the breach. For example, Alex buys a car from Bobby intending to use it immediately to drive to London. The car breaks down on the way to London. The costs for the necessary repairs of the car is a direct loss and Alex is entitled to claim the repair cost. He has booked an expensive meal at a restaurant that was paid in advance but did not arrive on time and lost his reservation without eating the fancy meal.

Indirect or consequential loss (second limb) is a loss which arises from particular and unusual circumstances that the parties knew or should have known about at the time the contract was entered in to, and do not flow naturally from the breach. So this means the damages available to Alex as the innocent party who has suffered a loss of wasting money for a meal that he didn’t eat, although Alex could claim against Bobby for the car breaking down and the repairs cost, he cannot claim against the indirect consequential loss of missing his meal reservation because Bobby was not aware of the fancy restaurant booking. If Alex had said to Bobby that the a condition of the contract was that he was intending to drive to an expensive restaurant after the purchase of the car and missing it would result in his booking being cancelled as non refundable then Alex has a chance of claiming for indirect consequential loss.

You don’t necessarily need a fortune cat to keep the money flowing in but you do need to make smart choices about when to stand firm and when to be flexible when negotiating contracts.

For more information check out Practical law or check out another page you might like on liabilities