| Date | 30 April 1997 |
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| Judgment | British Sugar Plc v NEI Power Plant Projects Ltd ; QBD 20th December 1996, [1997] 13BLISS4 |
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| The Issue | Definition of consequential loss. |
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| Implication |
Where a contract includes a term limiting liability for consequential loss, this will not have the effect of limiting recovery of damages arising naturally, as described in the first limb of the rule in Hadley v Baxendale. |
printContracting parties in the construction industry are usually rather keen to limit their liability in the event of failure in their performance. In the case of Bovis v Whatlings (Contract Journal 8 February 1996), the works contractor was seeking to limit its exposure to damages, and since the employer would not accept a term which would limit liability in the event of failure to meet the specification, they finally agreed to a clause which limited liability in respect of "time related costs". The contractor failed to progress the work properly, its employment was determined, and the employer pressed a claim for £2.7 million in damages. In court the term "time related damages" was held to mean very little, and certainly could not apply to damages flowing from bad performance or non performance. The contractor's attempts to limit liability in just this sort of circumstance had obviously failed. In the more recent case of British Sugar Plc v NEI Power Plants Projects Ltd, heard on the 20th December 1996, a similar attempt was made to limit the liability of the contractor, but on this occasion in respect of "consequential loss". This is one of those terms which is used with great regularity in the construction industry, sometimes with scant regard for its proper meaning. Before considering this case it would be useful to rehearse the legal framework which underpins the assessment of the correct measure of damages in the event of a breach of contract by one party. Unlike many areas of law this is one area which has remained unchanged for nearly 150 years, following the case of Hadley v Baxendale in 1854. Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with regard to damages, as if the contract had been performed. The general rule is thought to be compensatory, although recent cases have begun to question this principle. Nevertheless, the rule in Hadley v Baxendale remains relatively clear. "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either (1) arising naturally, ie according to the usual course of things from such breach of contract itself, or (2) such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contact, as the probable result of the breach of it." Returning to our case, NEI had written a letter which had been incorporated into the contract saying "the seller will be liable for any loss, damage, cost or expense incurred by the purchaser arising from the supply by the seller of any such faulty goods, or materials, or any goods or materials not being suitable for the purposes for which they are required, save that the seller's liability for consequential loss is limited to the value of the contracts." The contract value was £106,000 but British Sugar sought damages of £5 million. They argued that on the contract's true construction, the limitation applied only to consequential loss, and not loss resulting directing or naturally from the breach of contract ( the first limb of Hadley v Baxendale) and did not therefore limit or restrict other forms of liability or loss. NEI relied upon the standard textbook, McGregor on Damages, arguing that consequential loss meant "all loss other than the normal loss which might be suffered as a breach of contract, negligence, or other breach of duty, the normal loss being the difference between the value of the goods and the services transferred under the contract, and the value of what would have been transferred but for the breach or negligence." The court rejected NEI's argument. The judge came to the conclusion that consequential loss referred to in the contract letter was to be construed as meaning such loss as the plaintiff may prove over and above that which arose as a direct result of the breaches which British Sugar could prove in accordance with the rules in Hadley v Baxendale. It seems the proper way to interpret this decision would be that consequential loss was held to approximate to loss within the second limb of Hadley v Baxendale, and therefore the limitation or 'ceiling' would not apply to damages which arose within the first limb, that is loss arising naturally, according to the usual course of things. Accordingly if British Sugar could demonstrate that its claims were for damages arising naturally, they would not be subject to the imposed ceiling of the value of the contract.
CJ-9717
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