C. Haward Soper (below) is an Honorary Professor of Law at the University of Leicester specializing and contract management with a bit of game theory thrown in.
Commercial players, in my extensive experience, conceive of consequential loss as uninsurable financial and economic losses arising from breach of contract. Occasionally a Judge will agree with this definition. In Australia, in a rare example, Nettle J ruled that: –
… ordinary reasonable business persons would naturally conceive of ‘consequential loss’ in contract as everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26)
I opened one chapter in my ancient MPhil (‘Some Issues in Contemplation and Damages in the Common Law of Contract’, University of Leicester 1992)): –
It is often thought, particularly in the mechanical and electrical engineering industry, that the phrase “consequential loss” is a cover all for any “metaphysical” or “economic” loss such as lost profit or production …
I meant by this that this is how commercial players think of such losses. I am not the only one. One finds loss of profit described as consequential in multiple textbooks, claiming that the distinguished authors cannot be being careless with language (I list a number in my article and my book).
In the seminal English case in 1935, the first time as far as I have been able to detect that a clause excluding ‘consequential damages’ was examined, Millar’s Machinery (Millar’s Machinery Company, Ltd v David Way & Son (1935) 40 Com Cas 204), Branson J ruled, without much support, that ‘consequential ‘has come to mean not direct’. He decided that this meant that the cost of replacing a rejected gravel washer was “direct” and not “consequential” but that a claim for gravel bought for a particular future contract and unusable due to the rejection was not allowed because the damage was too remote and that losses caused by the unavailability of the machine were excluded by the use of the term “consequential.” The Judgment in Millar’s, in my opinion, makes complete sense, although, as we shall see the definition of consequential as meaning not direct allowed future Judges huge latitude in determining the characterization of damage as direct.
In an earlier article and a recent book (below), I examine the peculiar phenomenon that from Millar’s in 1935 until 2014 where an English Court was asked in terms to classify claimed damages, on a bare reading of consequential or indirect and consequential, all damage, no matter how seemingly unlikely, unnatural or remote, claimed in such cases in England and Wales was classified as direct and limb one. This included in one case (GB Gas Holdings Limited v Accenture (UK) Limited [2009] EWHC 2734 (Comm)) ex-gratia payments made to disgruntled clients. This led to my assertion, becoming the title of the article, that Atkinson J’s claim in the next major case (Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99, [1940] 67 Lloyds LR 62) on the point that ‘in a sense all loss is consequential’ is something of an inversion of the reality which is in English Law that in reality no loss is ‘consequential’.
I often had occasion to discuss the issue with experts from other jurisdictions, as I was working in a global environment. In particular I was able to ascertain that the term ‘consequential’ has a somewhat random meaning in the US; Glenn D West’s very good survey of the case law (Consequential Damages Redux, pp. 990-991 and at footnote 111) notes that “American courts do not appear to follow a bright-line rule that certain types of losses are always consequential and certain other types of losses are always direct or general,” quoting Michael Polkinghorne: –
The first problem with the term “indirect and consequential loss” is a fundamental one: no one agrees on what it means. Not even between common law jurisdictions, not even within common law jurisdictions
White and Summers observe: –
damages that might be consequential under one contract can be direct or ordinary under another
Uniform Commercial Code (5th edn, West Group 2000) at 49.
In my book I examine cases in multiple jurisdictions, finding that the influence of the English cases is deep and long-term. In almost all jurisdictions, with the possible exception of South Africa, Courts tend to assert mechanically that consequential means indirect.
The usual position that Judges in English or ‘Anglo’ jurisdictions take is that direct means “limb one” and indirect or consequential means “limb two”, both references to the rule in Hadley v Baxendale. See for example: –
It is well established that an exclusion of “consequential” loss does not exclude losses occurring naturally in the usual course of things, but only losses falling within the second limb of the rule in Hadley v Baxendale
Cockerill J in Saga Cruises BDF Ltd & Anor v Fincantieri SPA ([2016] EWHC 1875 (Comm))
This analysis is a major error. Baron Alderson accepted that the delay to the shaft caused a loss of profit but because normally the mill would not be idle: –
… in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances
Hadley v Baxendale (156 ER 145, 23 LJ Ex 179, 9 Exch 341)
And Lord Reid, in two passages which could hardly be more clear in delimiting limb two, ruled: –
… the Court did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally i.e. in the usual course of things or be supposed to have been in the contemplation of the parties … a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things
The Heron II (Koufos v C Czarnikow Ltd [1969] 1 A.C. 350 at 385)
… it is not enough that in fact the plaintiff’s loss was directly caused by the defendant’s breach of contract …The crucial question is whether, … he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation
The dividing line between limb one and limb two is, therefore, not between direct and indirect, nor between direct and consequential but rather between
- direct and natural and in the usual course of things (Lord Reid above) and
- within reasonable contemplation (whether direct or indirect or consequential).
Lord Reid’s analysis must mean that direct, even direct and natural is not enough to convey damage into the first limb. The fundamental additional requirement is that it is also damage of a type which would be found in Baron Alderson’s great multitude of cases (Lord Reid explaining this must have meant the great majority). It is clear, therefore, that “indirect” loss by definition falls into limb two but not so clear that “consequential” loss does.
Consequential has, it seems, no fixed meaning, and the use of it as a term of art is apt to allow Judges considerable leeway in the characterisation of claims, especially as this is likely to be a matter of fact rather than law.
My conclusion, after a review of cases in England and Wales, Ireland, Scotland, the US, Canada, Australia, New Zealand, South Africa, India, Singapore, Malaysia and Hong Kong, is that, even should future Judges be persuaded to adopt a commercial meaning for consequential, parties in any jurisdiction, even those where there may be some possibility of Judges taking a more commercial view, wishing to achieve a degree of protection against financial and economic loss should spend time and effort drafting appropriate (complex and lengthy) clauses to ensure that their particular risks are properly covered.
Recent Comments