Indirect and consequential loss

Barry Riley

It is not unusual to see limitation clauses in contracts which exclude liability for indirect or consequential loss. The Court of Appeal has consistently ruled that indirect and consequential loss are effectively one and the same, and need to be distinguished from direct loss.  Under the famous Hadley -v- Baxendale (1854) case, direct loss equates to losses arising naturally in the ordinary course of things, whereas indirect and consequential loss means losses likely to arise from special circumstances of the case.

In this recent High Court decision, some of the pitfalls of these clauses were illustrated, and it was held that a clause excluding consequential and indirect loss did not reduce the damages at all, because the Court held that the losses were in fact direct.  It exemplifies the difficulties in applying the Hadley –v- Baxendale criteria.

It is a very subjective point to consider whether something is a “special circumstance” of the case, or whether it arises naturally in the ordinary course of things.

More predictable ways to limit liability include (1) capping liability at an insurable level, (2) imposing procedural restrictions or (3) excluding specific identified types of loss, and therefore avoiding the direct/indirect classification altogether.

McCain Foods (GB) Limited –v- Eco-tech (Europe) Limited 2011 

Barry Riley
DDI – 0117 9453 042


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