losses held not indirect
McCAIN FOODS v ECO-TEC [2011]
Many contracting parties have a false perception regarding the extent of the protection provided to them by an exclusion of ‘indirect and consequential loss’ which seeks to limit their exposure if there are problems with performing a contract. This decision illustrates some of the pitfalls of such wording, which did not reduce the damages at all because the losses claimed were all held to be ‘direct’.
facts:
- A system was supplied by E to M to remove a harmful chemical from biogas produced as a bi-product of a waste water treatment facility so that M could generate heat and electricity from the biogas. The system was defective. M claimed damages for breach of contract for:
- buying a replacement system;
- having to buy electricity instead of generating it;
- loss of revenue from the system, including selling Certificates of Renewable Energy Production; and
- paying contractors, a site manager, health & safety personnel and various other staff costs.
- E accepted that it was liable for the cost of buying another system, but argued that all the other losses were indirect and it was not liable for them as there was a clause in the contract excluding liability for “indirect, special, incidental and consequential damages”.
decision:
- The Court ruled that all the losses (the costs of repair, replacement, mitigation and associated losses) were direct and E was therefore liable for all the damages M had claimed. The exclusion clause had no effect in reducing the amount of damages payable.
- As a matter of principle, the Judge said the losses were all of the type of damage that arises naturally from the breach, in the ordinary course of things. This categorisation comes from what is known as the ‘first limb’ of a very old case, Hadley v Baxendale [1854]. As such, that made them direct instead of indirect losses.
points to note:
- This judgment demonstrates how risky it can be to assume that an exclusion of ‘indirect loss’ will prevent substantial claims for financial loss.
- Depending on the facts, losses, such as damage to property, loss of profits and loss of revenue can be classified as direct losses. So an exclusion of indirect loss will not necessarily exclude these types of loss, if in the circumstances they are considered to be direct. This was also illustrated in the case of Centrica v Accenture, where C was able to claim a number of different heads of loss as they were deemed to be direct rather than indirect losses.
- Given that only a Court can determine as a matter of fact whether or not a loss claimed is direct or indirect, suppliers should consider other ways of securing more certainty about the extent of their liability, for example, by:
- capping their liability so that even if a loss claimed is deemed to be direct, any exposure will hopefully be limited; however, to be enforceable any financial limit generally needs to be ‘reasonable’ in context;
- dispensing with an exclusion of ‘indirect loss’ and listing more meaningful categories of loss which the parties should specifically address as being either recoverable or non-recoverable;
- specifying a reasonable time period within which the customer must bring any action, (as in the recent Röhlig v Rock case), which if not complied with, discharges the supplier from liability.