It is common to have clauses in your building contract excluding or limiting a party’s liability for “indirect and consequential” losses, even where those losses were caused by that party’s breach of contract. By Emily Busby
As these clauses typically state specific types of loss to be excluded, you would think it would be obvious what is excluded.
However, the recent case of Ferryways NV -v- Associated British Ports has demonstrated that there are still difficulties of these types of exclusion clauses are often overlooked and, in reality, they do not always have the effect the parties intended.
Types of loss
The starting point is the common law which has established that there are two types of loss which are recoverable as a result of a breach of contract. There are losses which come about as a natural and direct consequence of the breach, for example the cost of repairing defects. These are generally known as direct losses. Secondly, there are losses which were foreseeable by the parties, for example, loss of profit or opportunity. These are typically referred to as indirect and/or consequential losses. When seeking to exclude or limit liability, it is common for parties to exclude the second type.
Difficulties arise where a loss which is generally considered to be an indirect or consequential loss (such as loss of profit) is, in the circumstances, a direct loss. Even if provision is made in the contract to exclude indirect and consequential losses, including without limitation loss of profits, if the loss of profits has arisen as a direct result of the breach, unless specific wording is included to state that a party would be excluded from liability for loss of profits, whether arisen directly or indirectly, the party would still be liable for such a direct a loss.
Due to the fact that the term “indirect and consequential losses” is inherently uncertain and changeable depending on the circumstances, it would be sensible to avoid using general wording when excluding or limiting liability. Failure to adequately and accurately limit liability could mean a contractor being responsible for losses it had not anticipated, or an employer having no recourse in respect of certain types of losses.
For both parties to be clear at the outset which losses each will be liable for, the types of loss to be limited or excluded should be expressly stated, whether the loss arises directly or indirectly out of a breach of contract. This can be done by either clearly defining indirect or consequential loss in the contract in such terms, or putting in suitable wording such as ‘neither party shall be liable to the other for any direct or indirect loss of profits or for any other special, indirect or consequential loss’.
Emily Busby is a solicitor at Dundas & Wilson London