| Date | 21 January 2008 |
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| Judgment | British Sugar Plc -v- NEI Power Plant Projects Ltd, CA 8th October 1997 |
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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. |
printWhat do the words consequential loss mean? Are they different from direct loss and if so how? When a contract excludes liability for consequential loss, as many construction contracts do, what exactly is being excluded? It seems the words "consequential loss" are frequently referred to in the construction industry but often with only a very vague understanding of their true meaning. In April 1997 in Contract Journal I reported the case of British Sugar Plc -v- NEI Power Plant Projects Ltd. This case has more recently been taken to the Court of Appeal and the decision of the lower court upheld. The judgment of the Court of Appeal, however, perhaps offers a clearer and more certain definition of the words "consequential loss". The draft contract between British Sugar and NEI had included a clause which provided that the seller, NEI, "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 not being suitable for the purpose for which they are required." NEI were concerned about this apparent unlimited liability and wrote saying "the company's terms of business trading is that our liability is limited to the value of the contract, and as such we cannot depart from this policy. We regret, therefore, that we cannot accept your proposal for consequential loss." In due course British Sugar appeared to accept this proposal and it was agreed that the contract clause in question would be amended to the effect that "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 not being suitable for the purpose for which they are required, save that the seller's liability for consequential loss is limited to the value of the contract." The contract value was £106,000, but as a consequence of alleged design and installation failures, British Sugar sought damages in excess of £5m. Whether they would be entitled to such damages depended on the effect of the limitation introduced by the revised clause, and thus the meaning of the words "consequential loss". Once again in the Court of Appeal it was considered that the proper way to examine this question was by reference to the 1854 case of Hadley -v- Baxendale. The rule firmly established by Hadley and Baxendale is as follows: "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 contract as the probable result of the breach of it." The position of British Sugar was simple. The £5m damages they claimed fell properly within the first limb of Hadley and Baxendale and was therefore not consequential loss. It was therefore not subject to the limitation imposed by the contract clause. NEI sought to argue differently. They argued that the term consequential loss had less to do with "forseeability" (the general concern of Hadley and Baxendale) and more to do with the nature of the loss itself. Thus they argued that consequential loss meant "all loss other than the normal loss which might be suffered as a breach of contract, the normal loss being the difference between the value of the goods and services transferred under the contract, and the value for what would have been transferred but for the breach." The Court of Appeal confirmed the decision of the lower court in rejecting this argument. They held that on a proper reading of the clause in question an obligation was being placed on NEI to pay such damages as flowed naturally and directly from any supply of faulty goods or materials. The limitation was to be imposed in relation to some other type of loss which did not flow so directly. For example, damage which might flow from special circumstances coming within the second limb of Hadley and Baxendale. In conclusion the Court of Appeal stated "it seems to me that the judge was right and that on the true construction of this contract the parties simply agreed to limit the defendant's liability for loss or damage not directly and naturally resulting from the defendant's breach of contract, to an amount equal to the value of the contract."
CJ-9803
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