These are likely to include both direct losses e. The risk of a badly drafted exclusion clause is that it is left to the courts to interpret its meaning, which can often result in a decision which leaves one party exposed to unanticipated liabilities. As with all cases on limitation of liability, this decision revolves around the exact wording of the clause but the Judge accepted that when read as a whole, it could be seen that the clause had the wider meaning of financial losses caused by guaranteed defects, above and beyond the cost of replacement and repair of physical damage.
The relevant clause was intended to operate as a complete code under which all liability for losses over and above those specifically accepted by the defendant shipbuilder were excluded.
Now, the trend, reflected in the Star Polaris decision, is for the courts to give the words used their natural and ordinary meaning. This is particularly true for commercial contracts negotiated between sophisticated parties. It is a helpful reminder of the need to draft such clauses carefully in a clear and unambiguous way which accurately reflects the intentions of the parties as to which types of losses are excluded. To some, this may mean the exclusion of claims:.
At common law, damages are recoverable for breach of contract to compensate for losses caused by a breach that are not too remote. Losses are not too remote if they:. While this was a test that lawyers were familiar with, it did present some challenges.
In relation to certain losses, including loss of profit and revenue, it was often difficult to characterise the loss as falling under the second limb of Hadley v Baxendale or not. This meant that if a party wanted to be sure whether this had been excluded, it needed to expressly do so. While related, the test in the second limb is focussed on the knowledge of the parties at contract execution, whereas the plain and ordinary meaning was more concerned with how close the actual causative relationship was between breach and loss, considered at the time of the breach i.
Quoting from McGregor on Damages, Nettle JA gave the example of the failure to supply services or goods in breach of a contract to do so. Generally, the direct loss would be the difference between the contract price and the market price of those goods or services. The consequential losses are any other losses beyond this measure that are caused by the breach and not too remote.
These examples have caused some confusion. Pacific Hydro concerned a contract for the supply of electricity by the Defendant to the Plaintiff. The Plaintiff relied on this contract to meet its statutory obligations to supply its customers with electricity.
How to bring a consequential loss claim if required What is consequential loss in contract law? 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. They also serve as a benchmark in understanding how critical it is when drafting a contract: To study the exact wording of the contract carefully To assess what losses might occur before drafting a contract To clearly define within the contract what constitutes breach Watford Electronics Ltd V Sanderson CLF Ltd [] EWCA Civ A contract for the supply of bespoke integrated systems between Watford and Sanderson included a clause purporting: To exclude any liability for indirect or consequential loss.
The court discussed the question and whether it was fair and reasonable when the contract was made to include a term which sought: To exclude contractual claims for indirect and consequential losses To restrict loss directly and naturally resulting in the ordinary course of things, from breach of warranty to the price paid for the equipment The decision of the court was that the clauses were fair and reasonable having being negotiated by two experienced business people who were of equal bargaining power.
This case serves as a reminder that: When a contract is breached, the courts will put the innocent party in the position they would have been in had the contract been performed When drafting a contract it is vital to be as precise as possible about the types of loss that will and will not be recoverable It is advisable to prepare a list of all foreseeable losses and agree with the other party which of those losses are recoverable if things go wrong Items of potential loss, for which there is no intent to assume liability, should be excluded What are examples of consequential damages?
This means that: The loss is within the reasonable contemplation of the parties. This principle applies even though the extent of such loss is far greater than the parties would have contemplated. For example, a herd of pigs become ill with a serious disease as a result of a faulty pig-nut silo. In the ordinary course of events only a relatively minor illness might have been expected as a result.
The court held that it would not limit the liability because it was reasonable to suppose that the parties would have contemplated at the time of the contract that, in the event of the silo being defective, there was a serious possibility of illness and even death among the pigs.
The loss must be foreseeable not merely possible. For example, a contract for the carriage of sugar was delayed by nine days. The marked price of the sugar dropped following the late arrival of the sugar. In this instance the parties must have known that market prices fluctuate and the losses were in the reasonable contemplation of the parties as a possible result of a breach.
The loss must be foreseeable at the date of contracting not at the date of breach. For example, A is importing goods and resells them to B. C, is acting as an intermediary between A and B, and responsible for issuing letters of credit.
By mistake C sent a letter to B demonstrating that A was gaining 19 percent mark-up on each transaction. B ends the contract with A. A suffers loss of the opportunity to make future profits from its agreement with B.
As a result, A claimed four years loss of profit from C. In this instance the court decided that four years is not very remote to claim damages for the loss of future profit, since it is demonstrated that the damages arise naturally and were a reasonably predictable consequence of the actions that brought the breach of contract. Knowledge is of two kinds: Imputed knowledge First is the knowledge that all reasonable people are assumed to know the kind of loss which is liable to result from breach in the ordinary course of things.
Actual knowledge Second is the knowledge of special circumstances which may cause a greater loss, known as actual knowledge. It is paramount to consider the following points if you would like to reduce the opportunity for an exclusion clause to be challenged: Clear and unambiguous wording is essential. If ambiguous and open to interpretation, any doubt as to its meaning may be decided against the party seeking to rely on it.
Do not try to hide or bury an exclusion clause. Clearly identify the liability you would like to exclude. It is advisable to consider what liability you would like to exclude before you start drafting your contract. The two limbs of direct and indirect consequential loss, as explained in Hadley v Baxendale above, need to be considered carefully.
As a result, you might need to consider if you want to exclude certain direct loss, such as direct loss of profit, in parallel with an exclusion of consequential loss.
List precisely the categories of loss you will not be responsible for if possible. The liability in question needs to be incorporated into the contract and covered by a clause in the contract. Break down the issues. Consider using separate clauses which break down the issues to be easily understood by the parties. Express obligation. Statutory Controls.
UCTA imposes restrictions of liability for breach of express and implied contractual obligations. For example, Section 3 of UCTA prevents the use of an exclusion clause which excludes liability for breach of contract or claims to permit a contractual performance substantially different from what is expected or allow claims of no performance.
How to bring a consequential loss claim if required If you decide to bring a consequential loss claim, you must follow the Civil Procedure Rules CPR.
Before filling your claim and provided you established that there is a breach of contract, you should consider the following: Dispute Resolution Clause When dealing with a contract dispute your first action is to carefully review your contract.
The main forms of a binding decision, aside from litigation are: Arbitration is when an Arbitration Agreement between the parties dictates that the dispute is resolved by an arbitrator Expert Determination is the process where the dispute between the parties is submitted to a neutral expert to decide on the matter referring to them Adjudication is specific to construction and professional negligence contracts Some contracts will also consider an escalation clause, also known as tiered or stepped dispute resolution clause.
Limitation Periods A limitation period is a time limit within which a party can bring a claim. Pre-Action Protocols Prior to commencing proceedings there is an expectation by the courts for the parties to consider Pre-Action Protocols. The rules governing the pre-action protocols can be found in the: Pre-action protocols.
Currently there are 13 official pre-action protocols. These deal with disputes related, but not limited to construction and engineering, professional negligence and possession claims. The distinction can quickly become unhelpful if the longhand definitions are forgotten as plainly a kind of loss like damage to property, on different sets of facts, could be direct or indirect under the Hadley v Baxendale test. This leads to a lot of confusion as people try to pigeonhole, say, loss of profits as necessarily being in one category or another.
In reality, lawyers need to look to the case law for guidance on whether loss of profits have been determined to be claimable in similar circumstances to the ones they face, and then draft the best they can to reinforce or avoid the consequences.
The courts have therefore long recognised that loss of profits arising from a breach of contract can be a direct loss or an indirect loss, depending on the circumstances, including the nature of the contract and the nature of the breach. Before commenting on these cases, it is helpful to delve further into the approach the courts take when interpreting exclusions clauses designed to avoid liability for loss of profits should losses be claimable under the Hadley v Baxendale rule.
It is important for all parties that these provisions are drafted clearly and unambiguously. A clearly drafted clause is less likely to be disputed, and if it ever fell to the courts to interpret the clause, there is less risk that the court might interpret it in a way that was not anticipated, leaving a party exposed to unexpected risks and liabilities. Good exclusion clauses do not leave it to the case law to decide what will be direct or indirect loss.
They spell out the division of risk between the parties, and expressly exclude some types of loss or cover other types through express warranties and indemnities. It is good practice, when drafting an exclusion or limitation clause, to set out clearly the types of loss that the parties intend will be recoverable subject to any agreed cap and those that will be excluded.
IBM was the principal contractor under a contract for the provision of IT and business process change services and Fujitsu was its subcontractor. Fujitsu alleged that IBM had breached the subcontract by failing to allocate to Fujitsu the performance of services that, under the terms of the sub-contract, should have been performed by Fujitsu. As a preliminary issue, the High Court had to consider the exclusion clause in the sub-contract, which read:.
Were the types of loss listed in the clause loss of profits, revenue etc. If the intention was to exclude indirect loss of profit only, the court said that it would have expected the parties to make this clear. There was nothing in the context or surrounding clauses that pointed to a different interpretation than to simply apply the words of the clause.
The same issue arose in a more recent case — Polypearl Limited v E. Polypearl claimed that E. Polypearl argued that its lost profits on the shortfall were a direct loss, and the judge agreed. The judge noted that the words in parenthesis made the meaning of the clause ambiguous. Did these words mean that Clause It seems from these cases and others [6] that ambiguity around whether a particular type of loss is excluded or not commonly arises where references to specific types of loss e.
0コメント