Consequential and Indirect Losses

27 January, 2017
by: Cripps Pemberton Greenish

Readers will have seen clauses which attempt to exclude liability for ‘consequential and indirect losses’ and, indeed, indemnity clauses which try to impose liability for ‘consequential and indirect losses’.

But what does ‘consequential and indirect loss’ mean?

There is a famous case, Hadley v Baxendale [1854], which says that where there has been a breach of contract, the guilty party must pay “direct” losses and “indirect/consequential” losses.  Direct losses are those which any reasonable person might expect to follow from the breach.  Indirect or consequential losses are those that it would only be reasonable for the parties to the contract themselves to expect, because of their knowledge of the special circumstances surrounding the contract. 

Hadley v Baxendale has become so ingrained in the legal profession that it is usually assumed (including by the courts) that ‘consequential and indirect loss”, wherever it appears in a document, must have the meaning given to it by that case.

Recently, the courts have hinted that perhaps ‘consequential and indirect loss’ may mean more, namely any type of loss that follows from a breach of contract, whether it was in the contemplation of the parties or reasonably foreseeable by a third party, or not. 

In December 2016, the High Court decided in Star Polaris v HHIC that, at least in that case, the phrase ‘consequential or special losses, damages or expenses’ should have its natural meaning.  When considered in the context of the rest of the contract, it meant that the shipbuilder was responsible only for the cost of repair to a faulty engine and not for the other losses incurred by the claimant ship owner because of the defective engine. 

The contract made clear that, if the ship proved faulty, the only thing the shipyard had to do was make good the defects. To ram the point home, other wording said that the shipyard was not liable for any ‘consequential or special losses’ etc. 

The court refused to interpret that phrase in the Hadley v Baxendale way – to mean that the only losses excluded from the shipyard’s liability were those relating to matters both parties should have had in mind in the special circumstances of this particular ship construction. If it had been interpreted in the Hadley v Baxendale way, the shipyard might have found itself responsible for all the losses incurred by the ship owner provided they were reasonably foreseeable to any reasonable person.   

Because of the long and distinguished history of the 1854 Hadley v Baxendale case, this sort of argument could still run and run in the courts for years to come.  However, it looks like the courts will, in future, be more inclined to interpret ‘consequential and indirect loss’ to mean what any reasonable person would think the words mean – if that is what the context and wording of the contract make clear.