The meaning of consequential losses – a new approach from the courts?
Cathrine Ripley looks at what the High Court’s interpretation of “consequential loss” and what it means for businesses.
When it comes to negotiating a commercial contract, most parties will be keen to ensure that they don’t accept more liability than they need to.
One key aspect of this is to distinguish between direct losses (ones which are reasonably foreseeable) and other, less obvious, losses (often referred to as indirect, consequential or special losses).
This approach has been around since the 19th century case of Hadley v Baxendale and it is very common for a contract to seek to exclude liability for indirect/consequential loss.
However disputes can arise as to whether a particular loss falls within the scope of the exclusion and there have been a number of cases where the Courts have held that consequential loss means a loss resulting from special circumstances which is only recoverable if the other party knew of those circumstances.
However, more recently the Courts have given a wider meaning to the words “consequential loss”. In the 2016 case of Polaris LLC v HHIC-Phil Inc a ship owner claimed compensation from the shipbuilder for repairs and various other costs associated with the shipbuilder’s breach of contract. The Court held that the limitation of liability provision should be viewed in the context of the contract as a whole and that “consequential loss” should not have the narrow Hadley v Baxendale meaning. Instead, it had the effect of excluding all liability over and above the liabilities specifically accepted by the shipbuilder (namely the cost of replacement and repair of physical damage to the ship).
This new approach has led several commentators to suggest that a more natural meaning will be given to “consequential loss” in the future.
In any event it serves as a useful reminder of the importance of taking a careful approach when drafting and negotiating any limitation of liability provisions in a commercial contract.
The parties should aim for clear and unambiguous wording which:
- identifies the different types of loss which could flow from a breach of the contract; and
- makes clear whether or not the parties are responsible for them.
If you have any questions in relation to this article please contact Cathrine Ripley.