Does consequential loss always include loss of profits?

8 April, 2011

Parties often hold the view that excluding liability for indirect or consequential loss in contracts means there will be no liability for future lost profits. A recent case provides fresh confirmation that this view is mistaken.

In contract law, a defendant will only be liable for a loss if it isn’t too remote. There is a two stage test for remoteness:

  1. losses arising naturally, according to the normal course of things, from the breach of contract itself (often referred to as direct losses); and
  2. such loss as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as a probable result of the breach (often referred to as indirect losses).1

In contracts it is common to find a clause excluding liability for consequential loss. The effect is to exclude liability for losses under the second limb of the above test. Many contractual parties assume that this includes future loss of profits.

However, future loss of profits can fall within either of the above tests. To determine whether lost profits are direct or indirect losses, the court will look at the whole scenario.

In a case this year2, McCain Foods brought a claim against a company who had supplied a defective system for McCain’s biogas-powered production facility. The High Court held that McCain’s “direct loss” included the lost revenue from the surplus electricity it would have been able to sell back to the grid had the defendant’s system (and hence McCain’s facility) worked.

This also has an impact on drafting exclusion clauses for contracts: a clause that excludes “indirect and consequential losses, including loss of profits” will only exclude indirect loss of profit. So it would not have helped the defendant in the McCain case.

 

1Link to judgment: Hadley v Baxendale (1854) 9 Ex 341

2Link to judgment: McCain Foods GB Limited v ECO-TEC (Europe) Limited [2011] EWHC 66 (TCC)

Reviewed in 2015