Consequential Loss Clauses In Contracts And How To Utilise Them

• Published date: 08 November 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: Barton Legal
• Author: Mr Bill Barton

Consequential loss, which is also known as indirect loss, is any loss which may arise from the specific context of the case (e.g., if a part within a machine is not delivered on time and the company which owns the machine claims it cannot operate its whole factory, and therefore cannot pay its workers, as a result of the delay). Such losses are usually only recoverable if it can be said the defaulting party (e.g., the supplier of the part to the machine) was aware of the link and, therefore the likelihood of the resulting loss, due to their breach.

The concept of consequential loss, to some extent at least, is attributable to the case of 'Hadley v Baxendale' (1854). This case involved the claimant mill owner engaging the defendant to repair a crankshaft in the mill and return it. The defendant took longer than agreed, and the claimant could not operate the mill during the delay as a result. The claimant claimed for loss of profits. The Court held that the defendant was not liable for loss of profits as it was not informed the mill would be closed. The damages were not foreseeable/could not be said to be reasonably contemplatable by the defendant when it entered into the Contract.

This is compared to direct losses, which are easier to understand for the party that may be in default (e.g., if there are various defects in a building and the developer rectifies those defects, then the loss and expense is the cost incurred to rectify them).

Due to the ambiguity of consequential losses, some parties will seek to exclude liability for them in the contract. This is especially the case on large projects (such as oil and gas), where the loss that may be sustained could be very high.

A consequential loss clause may state that a party (usually the party who supplies or installs a product) is not responsible for '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 or any other indirect or consequential losses'.

The purpose of such a clause is to ensure that (usually) the party with the better bargaining position (and the one who may be taking on more risk) is not exposing itself to potential claims for losses that could not have been reasonably foreseen. A building contractor, whose work on a building may have some defects, would not want to expose itself to being liable for the Employer losing its ability to rent the building as a result of the Employer not being able to...