MJ O'Connor Solicitors

The Brief

21.03.2007

Excluding legal liability for consequential or indirect loss - How effective is your exclusion clause?

In commercial contracts, particularly those used in the construction industry and utility supply contracts, the performing party frequently wishes to achieve the maximum degree of legal certainty under the contract by including a provision whereby his or her liability for 'consequential loss' is excluded. The requirement for legal certainty is often a reflection of the performing party’s insurance cover. Consequential loss usually includes a wide range of financial loss including loss of profits, revenue, data, business opportunity, business contacts, anticipated savings or benefits and damage to goodwill. However the simple use of the words 'liability for consequential loss is excluded' does not necessarily achieve that objective.

This is because since a leading case of the Victorian era in Hadley -v- Baxendale, the Courts have classified damages as being not strictly direct or consequential but rather as:-

• those arising naturally, i.e. according to the usual course of things, from the breach of contract itself (in broad terms direct loss); and

• those that may reasonably be supposed to have been within the contemplation of both parties at the time they made the contract as being the probable result of a breach of the contract (in broad terms indirect loss or consequential loss).

In general the Courts consider the 'forseeability' of the loss. Liability of a contracting party arises in respect of damages which flow naturally and directly from the breach under the first head of the Hadley Rule and in respect of damages which flow from the special circumstances of a case under the second head.

What the parties consider to be consequential loss, such as a loss of profit, might in fact be a loss which arises naturally from the breach and hence falls within the first head (i.e. direct head) of the Hadley Rule. Depending on the circumstances such consequential loss could be characterized as being direct (first head), indirect (second head) or a combination of the two. Simply inserting a clause into a contract which purports to exclude liability for indirect or consequential loss may therefore not operate legally to exclude liability for the loss even though one or both of the parties might have intended this to be the result.

When drafting an exclusion clause in any contract or any genre of contract it is of the utmost importance to give very careful consideration to the types of loss which may arise from a breach of that particular contract or genre of contracts and use appropriate language so as to clearly and specifically exclude liability for those losses.

For further information contact Olivia McCann omccann@mjoc.ie. (Prior to joining M J O'Connor, Olivia McCann was Legal Counsel at Canary Wharf Group London.)

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