“Consequential Loss” Clauses:
are they any use?
SIMON RAINEY Q.C.
Some initial questions for the
draftsperson….
• What am I actually trying to achieve by this clause?
• What head or heads of loss is or are likely to flow from
breach of the contract by (a) my client and (b) the
other counterparty?
• Do I wish to exclude them all?
• In respect of those which I wish to exclude: do I wish
to exclude them in all circumstances?
• Or only in certain situations? If so, which?
AND
• Does my draft clause address the pitfalls in the
reported cases?
In the beginning…..
In the beginning… Hadley v Baxendale (1854) 9
Ex. 341 and Mr Baron Alderson’s dichotomy:
The first and second “limbs” or “rules”:
Limb 1. Losses which arise naturally or directly:
: Foreseen as a matter of course
Limb 2. Losses which arise from special circumstances and which would
not be thought of as arising in the ordinary course of things
: Not foreseen as a matter of course
: But foreseeable where there is special knowledge of the
special circumstances at the date of the contract.
(1) “Consequential Loss” Exclusion
Clauses
Type I: Short Form or “Plain Vanilla”
Type I: Short Form or “Plain Vanilla”
“In no event shall seller or buyer be liable for indirect or
consequential damages” (or variants including “special,
indirect or consequential”)
• See e.g. Millar’s Machinery Co. v. David Way & Son (1935) 40
Com. Cas. 204 (“consequential damages”);
• Saint Line Ltd v. Richardsons Westgarth & Co. [1940] 2 K.B. 99
(“indirect or consequential damages”);
• Croudace Construction Ltd v. Cawoods Products Ltd [1978] 2
Lloyd’s Rep. 55 (“any consequential loss or damage”); and
• British Sugar plc v. NEI Power Projects Ltd [1997] 87 B.L.R. 42
and Hotel Services Ltd v. Hilton International Hotels (UK) Ltd
[2005] BLR 235 (“consequential loss”).
Type I: What do these Clauses cover?
Limb 2 only
The leading case: Croudace Construction Ltd. v Cawoods Products Ltd
[1978] 2 Lloyd’s Rep 55: operation confined to exclude recovery of loss
and damage which would only be recoverable under the Limb 2.
•
See e.g. Waller L.J. in British Sugar v. NEI (op. cit.), at p. 51B:
“On a proper reading of that clause an obligation was being placed
on the defendants to pay such damages as flowed naturally and
directly from any supply by the defendants of faulty goods and
materials with the limitation being imposed in relation to some other
type of loss which did not flow so directly for example, damage
which might flow from special circumstances and come within the
second limb in Hadley v. Baxendale.”
Type I: What is the practical utility of the
“plain vanilla” or “Croudace” I Clause?
Given that a party will not be liable for such damages in most cases
anyway, because often the requisite knowledge of the special
circumstances will not be present, what is the point of the clause?
As Rix J. put it in BHP Ltd v British Steel PLC and Dalmine SpA [1999]
2 Lloyd’s Rep. 583
“…in some and perhaps many cases the distinction [e.g. between
the two limbs of Hadley v Baxendale] adopted to construe the
exclusion would be likely to exclude nothing”;
See to similar effect per Parker J. in the leading case of Croudace v
Cawoods
Type I: An example of its application
• A, a specialist oil trader, contracts as buyer to lift regular quantities
from B, a refinery, as seller. A fails to lift and B faced with tankage
problems shuts down production and product liftings from terminal.
• B claims for reduction of production and loss of general sales to
market: probably LIMB 1. Clause otiose.
• B claims also for penalties payable under a special contract for
regular supply to a government emergency buffer-stock: probably
LIMB 2.
• If A is unaware of the special contract: LIMB 2 loss and excluded
under Hadley v Baxendale anyway; Clause otiose.
• If A is aware of the special contract when contracting: loss is in
principle recoverable Limb 2 loss but is now CAUGHT by the Clause.
Type I: Conclusions
• Type I clauses will exclude recoverable Limb 2 losses: losses due to
“special circumstances known of”
• Cf. the doubts (for another day, in England at least) of Lord
Hoffmann in Caledonia North Sea Ltd v. British Telecommunications
PLC [2002] 1 Lloyd's Rep 553, who
“wish[ed] to reserve the question of whether, in the context of
the contracts in Hotel Services and similar cases, the
construction adopted by the Court of Appeal was correct”.
• Problems with such clauses? Having to work out what would and
would not be a recoverable Limb 2 loss in order to operate the
exclusion.
See for an example of this exercise: GB Gas Holdings v
Accenture (UK) Ltd [2010] EWCA Civ 912 and see also BHP v
British Steel.
But ..... ex Australia semper aliquid nova
A different approach: The ‘Hoffmann
doubts’ find favour in other jurisdictions
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd
(2008) 19 VR 358; [2008] VSCA 26 Victorian Court of Appeal
•
•
The expression "consequential loss" should not be equated to the second limb of
Hadley v Baxendale. Court focused on the distinction between "normal loss", being
loss that every plaintiff in a like situation will suffer, and "consequential loss".
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
•
Followed in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7)
[2012] SASC 49 by the Supreme Court of South Australia
•
•
•
Court acknowledged the current approach of the English Courts to the interpretation
of the term ‘consequential loss’, but found that those cases ‘failed to properly
construe those words in the context in which they appear’.
Considered that limiting ‘consequential loss’ to the types of losses covered in the
second limb of Hadley v Baxendale was ‘unduly restrictive’ and failed ‘to do justice
to the language used’.9
Instead, Court looked to the definition of ‘consequential’ in the Shorter Oxford
English Dictionary: ‘unless qualified by its context, [CL] would normally extend to
all damages suffered as a consequence of a breach of contract’
A different approach: The ‘Hoffmann
doubts’ find favour in other jurisdictions
Cf. Regional Power Corporation v Pacific Hydro Group Two Pty
Ltd [2013] WASC 356:
•
•
Did not follow English approach
But did not follow these cases: “construe the exclusion clause according to its
"natural and ordinary meaning", read in its place within the context of the contract
as a whole. Court noted that the meaning of "consequential loss" in a contract
needs to be evaluated by reference to its own unique presenting circumstances”
Macmahon Mining Services v Cobar Management [2014]
NSWSC 502 and [2014] NSWSC 731
•
•
•
Clause: "any loss or [sic] profits, loss or [sic] production, loss or [sic] revenue, loss
of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads,
whatsoever, whether direct or indirect.
Held: direct damage is that which flows naturally from the breach without other
intervening cause – with consideration being given to the causal relationship
between the breach and the damage (not, as the rule in Hadley in Baxendale tends
to do, to questions of remoteness)
The question of what is direct or indirect requires consideration of the proper
construction of the contract between Macmahon and Cobar in the context of facts
that are proven and found
… And the view from Singapore?
Singapore: so far, adherence to the
traditional “Croudace” approach
• Singapore Telecommunications v Starhub Cable Vision
2 SLR(R) 195; English approach applied.
[2006]
• Kay Lim Construction & Trading Pte Ltd v Soon Douglas (Pte)
Ltd [2013] 1 SLR 1 (Quentin Loh J): Croudace followed. Stress laid
on Commercial Certainty but “we should not be too pedantic with
labels and nomenclature. What is direct in one context may be
indirect in another and vice versa”
• Transocean Offshore International Ventures Ltd v Burgundy
Global Exploration Corp [2013] 3 SLR 1017 (Tay Yong Kwang J)
[did not arise on appeal at [2014] 3 SLR 381]:
“Based on this line of authorities, I give the same narrow
construction to the phrase “any indirect or consequential loss
howsoever caused or arising” in Art 19.1. The general limb of Art
19.1 thus only applied if Transocean’s loss of net profits under the
Drilling Contract fell within the second rule in Hadley v Baxendale
where Burgundy’s liability following a termination of the Drilling
Contract was concerned”
Type II: Additional Specified Losses referred to in
same clause as “Consequential Loss” with linking
language
Type II: Additional Specified Losses referred to in
same clause as “Consequential Loss” with linking
language
“Neither the Supplier nor the Purchaser shall bear any liability to the other …
for loss of production, loss of profits, loss of business or any other indirect
losses or consequential damages arising during and/or as a result of the
performance or non-performance of this Contract regardless of the cause
thereof.”
(Fairly typical: see BHP Petroleum Ltd v. British Steel PLC and Dalmine SpA
[1999] 2 Lloyds Rep 583)
Type II: Additional Specified Losses referred to in
same clause as “Consequential Loss” with linking
language
“Neither the Supplier nor the Purchaser shall bear any liability to the other …
for loss of production, loss of profits, loss of business or any other indirect
losses or consequential damages arising during and/or as a result of the
performance or non-performance of this Contract regardless of the cause
thereof.”
(Fairly typical: see BHP Petroleum Ltd v. British Steel PLC and Dalmine SpA
[1999] 2 Lloyds Rep 583)
QUESTION: What is the drafter trying to achieve by this? Is he /she trying
to add something which would not otherwise be included by an exclusion of
recoverable Limb 2 loss?
• If so: why link it to the term of art “Consequential Loss”? Why not just
exclude it simpliciter?
• If not: why bother to enumerate types of excluded recoverable Limb 2
losses?
Difficulty (1): Inclusive / Illustrative Linking “Including but not limited to” and “or any other” etc.
The two approaches to the difficulty
(1) The Rix J. Approach: ‘try to make sense of
the express reference using its assumed purpose’
BHP Petroleum Ltd v. British Steel PLC and Dalmine SpA [1999] 2 Lloyds Rep
583: Rix J’s “CONUNDRUM”
• In my judgment the best solution is to construe the clause as though it
read ‘for loss of production, loss of profits, loss of business or indirect
losses or consequential damages of any other kind’ and accept that the
parties may have been in error to permit the inference that the former
phrases are examples of indirect or consequential loss.
• At least in that way, each of the phrases is given its authoritative meaning,
which is what the parties must be supposed to have given their closest
attention to. If, however, only production, profit, or business which is within
the second limb … is intended to be referred to, then everything in the
clause other than ‘indirect losses or consequential damages’ becomes
redundant and the previous phrases become dangerously misleading and
potentially valueless.”
(2) The Clarke J. Approach: ‘look at the language
used and give its ordinary meaning’
The Herdentor (1996) “other”
• It does seem to me that if those words are construed by themselves, the
expression ‘any other indirect or consequential damage’ (my emphasis) gives
content to the meaning of ‘loss of profit, loss of use’ and ‘loss of production’
and strongly suggests that only indirect losses of profit, use and production
are to be excluded together with any other indirect or consequential damage
which may occur.”
• “As I have already said, the natural meaning of ‘other’ is that it relates back to
the words immediately preceding it and that it makes clear that it is only
‘indirect losses of profit, use and production’ which are to be excluded.”
The Clarke J. Approach in the Ascendant
Ease Faith Ltd v Leonis Marine Management Ltd [2006]1 Lloyd’s Rep 67 (Andrew
Smith J.) - “other”
•
“For my part, I do not find it easy to attribute to the parties the error that Rix J supposes
and, in effect, to deprive the word “other” of any real force. It is true that loss of profits
is capable of being a direct loss, but it need not be. For my part I do not find it remarkable
that parties seeking to exclude all indirect loss but being particularly concerned about
indirect loss of profit should agree upon provision that makes specific reference to loss of
profits.”
Ferryways NV v. Associated British Ports (The Humber Way) [2008] 1 Lloyd’s
Rep 639 (Teare J.) - “including but not limited to”
•
“In my judgment those words do not provide the sort of clear indication which is
necessary for the defendant’s argument. The parties are merely identifying the type of
losses (without limitation) which can fall within the exemption clause so long as the losses
meet the prior requirement that they are “of an indirect or consequential nature”.”
Cf. continuing last ditch (unsuccessful) attempts: Fujitsu Sevices v IBM UK [2014]
EWHC 752 (TCC) and Polypearl Limited v E.On Energy Solutions Limited [2014]
EWHC 3045 (QB).
Difficulty (2): Disjunctive or Conjunctive? - “Or”
Difficulty (2): Disjunctive or Conjunctive? - “Or”
Where and how is the “or” used?
Distinguish between:
(1) “[A, B, C] or indirect or consequential damage” and
(2) “Indirect or consequential damage or [A, B, C]”
(1) “[A, B, C] or indirect or consequential damage”
Will be treated as a separate identification, without contaminating linkage:
“for any loss of profit, loss of use, loss of production, loss of contracts or for
any financial or economic loss or for any indirect or consequential damage
whatsoever”
• Deepak v. ICI [1999] 1 Lloyd’s Rep 387
• London Fire & Emergency Planning Authority v. Halcrow Gilbert Associates
Ltd (2008) 24 Const LJ 103: Judge Toulmin QC.
“Clause 44.2 must be construed disjunctively, not conjunctively. It is
not intended to include loss of profit etc as examples of indirect or
consequential loss. It is intended to specify categories of loss which are
to be excluded. Although I have no evidence about it, it is reasonable
to suppose that this clause was drafted by lawyers who were mindful of
earlier decided cases, one of which I have cited”
(2) “Indirect or consequential damage or [A, B, C]”
May well be treated conjunctively and take one back to Inclusive / Illustrative
“Endsleigh will not be liable to Markerstudy for any indirect or consequential
loss or loss of profit or loss of business arising out of data input errors by
Endsleigh”
• Markerstudy Insurance Co Ltd v. Endsleigh Insurance Services Ltd [2010]
EWHC 281 (Comm). David Steel J:
“Here the Defendant is on somewhat firmer ground in asserting that the
specified forms of loss are free standing and were inclusive of both
direct and indirect loss. Nonetheless I prefer an approach similar to that
of Rix J in BHP v British Steel leading to the effect that the
introductory phrase ‘any [indirect or consequential] loss’
governs and defines the scope of the specified forms of loss. In
short, only indirect loss of profit or business is excluded”
Type II: Conclusions
• If the intention is to exclude the whole category or class of loss, avoid
Type II Clauses.
• Exclude the loss separately and independently. Avoid linkage: express
or implicit.
• Type II Clauses are likely to be no more useful than Type I.
• Indeed - they are typically much more productive of litigation and
uncertainty.
Type III: Additional Specified Losses referred to in
the same clause as “Consequential Loss” with linking
language and expansions
Type III: Additional Specified Losses referred to in
the same clause as “Consequential Loss” with linking
language and expansions
See e.g. Clause 14(c) of Supplytime 2005: “‘Consequential damages’
shall include, but not be limited to, loss of use, loss of profits, shut-in
or loss of production and cost of insurance, whether or not foreseeable
at the date of this Charter Party”.
See also “direct or indirect” additions.
Type III: Additional Specified Losses referred to in
the same clause as “Consequential Loss” with linking
language and expansions
See e.g. Clause 14(c) of Supplytime 2005: “‘Consequential damages’
shall include, but not be limited to, loss of use, loss of profits, shut-in or
loss of production and cost of insurance, whether or not foreseeable at
the date of this Charter Party”.
See also “direct or indirect” additions.
QUESTION: What is the drafter trying to achieve by this? Is he /she
trying to avoid the Rix vs. Clarke Approach difficulty?
• If so: (again) why link it to the term of art “Consequential Loss”? Why
not just exclude it simpliciter?
• If not: so why bother to perform this exercise?
Cf. BIMCO Explanatory Notes: ‘minor adjustments to a trusted formula’!
Type III: … the last refuge of the desperate?
Conclusions on Drafting Consequential Loss Clauses
1. What do you want to exclude? Clear target necessary.
2. If it is sought wholly to exclude certain heads of loss whether Limb 1
or 2: exclude them separately and independently.
3. Do not link with ‘Consequential or Indirect Loss or Damage’, whether
directly or indirectly.
(2) Problems with effective
Consequential Loss clauses
The problems of success?
Problems with effective Consequential Loss clauses
The problems of success?
Problems with effective Consequential Loss clauses
The problems of success?
(1) Where their effect deprives the contract of substantive force: problems of
nudum pactum.
•
•
•
Astrazeneca UK Limited v Albemarle International Corporation [2011]
EWHC 1574 (Comm)
Kudos Catering (UK) Limited v Manchester Central Convention Complex
Limited [2013] EWCA Civ 38
Cf. Fujitsu Services v IBM United Kingdom [2014] EWHC 752 (TCC)
Problems with effective Consequential Loss clauses
The problems of success?
(1) Where their effect deprives the contract of substantive force: problems of
nudum pactum.
•
•
•
Astrazeneca UK Limited v Albemarle International Corporation [2011]
EWHC 1574 (Comm)
Kudos Catering (UK) Limited v Manchester Central Convention Complex
Limited [2013] EWCA Civ 38
Cf. Fujitsu Services v IBM United Kingdom [2014] EWHC 752 (TCC)
(2) Where –by reducing the exposure to remedies in damages - it thereby
increases the availability of injunctive relief predicated upon inadequacy of
damages as an adequate remedy.
• AB v CD [2014] EWCA Civ 229
Problems with effective Consequential Loss clauses
The problems of success?
(1) Where their effect deprives the contract of substantive force: problems of
nudum pactum.
• Astrazeneca UK Limited v Albemarle International Corporation [2011]
EWHC 1574 (Comm)
• Kudos Catering v Manchester Convention Complex [2013] EWCA Civ 38
• Cf. Fujitsu Services v IBM United Kingdom [2014] EWHC 752 (TCC)
(2) Where –by reducing the exposure to remedies in damages - it thereby
increases the availability of injunctive relief predicated upon inadequacy of
damages as an adequate remedy.
• AB v CD [2014] EWCA Civ 229
(3) Where the wording in the specific heads of successfully excluded loss is too
imprecise and therefore open to a restrictive interpretation.
• Transocean Drilling UK Ltd v Providence Resources PLC (The Arctic III)
[2014] EWHC 4260 (Comm)
• Transocean Offshore International Ventures Ltd v Burgundy Global
Exploration Corp [2013] 3 SLR 1017
Problem (1) - Vitiating the contractual
substratum or nudum pactum
The principle
• Suisse Atlantique Société d'Armement Maritime SA v NV
Rotterdamsche Kolen Centrale (1967):
“One may safely say that the parties cannot, in a contract, have
contemplated that the clause should have so wide an ambit as in
effect to deprive one party's stipulations of all contractual force;
to do so would be to reduce the contract to a mere declaration of
intent. … the courts are entitled to insist, as they do, that the
more radical the breach the clearer must the language be if it is
to be covered . . .”
• Chitty / Professor Guest:
“if the clause does not entirely exclude the liability of one party,
but merely limits or reduces his liability, it does not render his
contractual promises illusory.”
Differences of approach: (1) any remaining head of
loss enough / looking at whole contract
The Herdentor (1996)
• A “double booked tug” case: allegation of deliberate withdrawal to do other
work and of repudiatory breach
• Cl. 18(3) Towcon no liability for ‘loss of profit, loss of use, loss of production
or any other indirect or consequential damage for any reason whatsoever’:
argued inapplicable as created a nudum pactum
• Clarke J. (obiter) - applying Bingham J in Swiss Bank Corporation v Brink'sMat Ltd [1986] 2 Lloyd's Rep. 79:
“There are I think difficulties ... if, contrary to my conclusions, it were held that the
hirer under the Towhire agreement could recover by way of damages for the
alleged repudiatory breach the extra cost of hiring any substitute tug, but not the
type of loss sustained on the facts of this case, it might not be easy to say that the
main object and intent of the contract was frustrated.”
Differences of approach: (1) any remaining head of
loss enough / looking at whole contract
Transocean Drilling UK Ltd v Providence Resources PLC (The Arctic III) [2014]
EWHC 4260 (Comm)
–
“loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or the cost of use of
property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every
tier or by third parties), loss of business and business interruption, loss of revenue (which for the avoidance of doubt shall not
include payments due to [Transocean] by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss
and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests”
Popplewell J:
•
[167] “If the clause were to be construed as Transocean contends, the exclusion would cover
all losses which Providence might conceivably suffer by way of damages for which
Transocean would otherwise be liable. [….] [Transocean] could not identify any head of loss
which Providence might suffer for which Transocean would be liable as damages for breach of
its contractual obligations, outside the specific indemnities in clause 18, if consequential loss
were to be construed as widely as he suggested. This is a clear indication that it cannot bear
such a construction. The Court will not readily construe a clause as having this effect because
to do so is to render the primary performance obligations in the contract effectively devoid of
contractual content, there being no sanction for non-performance.”
Differences of approach: (2) looking at the factual
substance of other heads of loss / the ‘obligation’
approach
Astrazeneca UK Limited v Albemarle International Corporation (2011)
“In no case shall BUYER or SELLER be liable for loss of profits or
incidental or consequential damages”.
The effect was that any loss due to the buyer’s breach would be felt by
seller in loss of profits: effect was to render obligation unenforceable.
Flaux J:
“AZ's construction of the second sentence of clause M is one which leaves Albemarle
with no effective remedy for AZ's breach of clause H. This has the effect of making
clause H, so far as AZ is concerned, little more than a statement of intent,
The court will strain against a construction which renders that party's obligation
under the contract no more than a statement of intent and will not reach that
conclusion unless no other conclusion is possible.
How to work out when the test is satisfied?
A tension in the authorities? Fujitsu Services Ltd v
IBM United Kingdom Ltd [2014] EWHC 752 (TCC)
• Sub-contract for provision of IT technology for DVLA
• Claim by Fujitsu that IBM had failed to allocate specified ‘workshare’ to
it with resultant loss of revenue share / profit.
• IBM countered contending that any loss of profit was excluded by
Clause 20.7: a ‘CL’ clause avoiding Type II and III pitfalls:
20.7 Neither Party shall be liable to the other under this SubContract for loss of profits, revenue, business, goodwill, indirect or
consequential loss or damage, […]
• Fujitsu argued that this meant that the workshare obligation was
illusory and relied on AstraZeneca.
• But Clause 20.7 went further ………
Fujitsu Services v IBM United Kingdom [2014]
EWHC 752 (TCC): a sophisticated ‘CL’ Clause
20.7 Neither Party shall be liable to the other under this Sub-Contract for loss of profits,
revenue, business, goodwill, indirect or consequential loss or damage, although it is agreed
that:
(a) this Clause 20.7 shall not apply to exclude costs to PwC and other Participants of
remedying failures and re-running activities, the cost of re-tendering, costs of engaging
other providers in the case of Fujitsu failure, and cost of termination which would otherwise
be recoverable from Fujitsu because they arose as a result of an event of default by Fujitsu
(including its Sub-Contractors and Affiliates and their respective employees, servants and
agents);
(b) actual agreed revenue share may be recoverable to the extent expressly agreed between
the parties;
(c) loss of profits shall be recoverable only as specified in Schedule 13 (Finance) or as a basis
which may be used for calculating damages payable for infringement of Intellectual Property
Rights or breach of confidentiality claims; and
(d) third party claims, including where a party has agreed to indemnify the other, shall be
recoverable to the extent that the underlying third party claim results directly from a failure
of the indemnifying Party, provided that this Clause 20.7(d) shall not be interpreted to make
loss of profits recoverable in circumstances where under Clause 20.7(c), loss of profit would
not be recoverable.
Fujitsu Services v IBM United Kingdom [2014]
EWHC 752 (TCC): Mrs Justice Carr’s approach
•
Distinguished AstraZeneca: “exclusion clause (clause M) in AstraZeneca was
•
Doubted a flat ‘statement of intent’ rule: “I do not consider it helpful to refer to a
•
Took a rigorous approach to allegations of nudum pactum: “the question is not
•
Stressed ALL available remedies”: She analysed what losses remained recoverable /
were expressly allowed for. She also referred to other remedies:
ambiguous and rudimentary. The contract as a whole was far less sophisticated and much
shorter than the Sub-Contract”
“statement of intent” rule as such. … But in any event, in my judgment, the “statement of
intent” rule, if such it be, is of little assistance in circumstances where, as here, the
wording is plain, the exclusion clause of mutual benefit and detailed in its form.” (Cf.
Bingham J. in Brink’s Mat)
whether FSL would have adequate remedies but whether or not IBM's construction of
clause 20.7 would deprive the contract (or, if one assumes in FSL's favour that a narrower
approach is permissible, the workshare arrangements) of all contractual force. It does not”
“Beyond these contractual mechanisms, in the event of the need to resort to the courts,
FSL could also bring a claim for declaratory relief in respect of its entitlement under the
workshare arrangements and/or a claim for specific performance and/or injunctive
relief.”
Nudum Pactum if present: the Result?
Kudos Catering (UK) Limited v Manchester Central Convention Complex Limited
[2013] EWCA Civ 38
• Five year catering and hospitality services contract
• MCC terminated. Kudos claimed damages for repudiatory (deliberate) breach of
contract including a claim for £1.3 million for lost profits.
• “18.6 The Contractor hereby acknowledges and agrees that the company shall
have no liability whatsoever in contract, tort (including negligence) or
otherwise for any loss of goodwill, business, revenue or profits, anticipated
savings or wasted expenditure (whether reasonably foreseeable or not) or
indirect or consequential loss suffered by the Contractor or any third party in
relation to this Agreement...”
The Result: Kudos Catering v MCC
Tomlinson LJ:
• “In my view the Agreement is, if the judge’s construction of Clause 18.6 is
adopted, effectively devoid of contractual content since there is no
sanction for non-performance by the Respondent. It is inherently unlikely
that the parties intended the clause to have this effect. The parties
thought that they were concluding a mutually enforceable agreement”
• “In order to construe the provision consistently with business common
sense, I would regard the expression "in relation to this Agreement" as
meaning in this context "in relation to the performance of this
Agreement", and thus as not extending to losses suffered in consequence
of a refusal to perform or to be bound by the Agreement. […] by their
language and the context in which they used it they demonstrated that the
exclusion related to defective performance of the Agreement, not to a
refusal or to a disabling inability to perform it.”
Problem (2) - The potential
enhancement of the availability of
non-damages remedies
AB v CD [2014] EWCA Civ 229
……or the dilemma of the successful draftsman
AB v CD [2014] EWCA Civ 229
• D owned IT rights in an “eMarketplace” and granted C a licence to
market it in the Middle East.
• D terminated the licence
• C applied for interim injunction under s44 of the Arbitration Act 1996 to
compel D to perform the terms of the licence pending an Award on the
merits.
• Clause 11.4: “Except for liability resulting from breach of clause 9.2, 9.3, 9.5 and/or 9.7,
or obligations arising under clause 11.1, in no event will either Party be liable to the other
Party or any third Party for loss of data, lost profits, costs of procurement of substitute goods
or services, or any exemplary, punitive, indirect, special, consequential or incidental
damages, under any cause of action and whether or not such Party or its agents have been
advised of the possibility of such damage. Except as provided in clause 11.3 and 11.6, either
Party's total liability in contract, tort, negligence or otherwise arising out of or in connection
with the performance or observance of its obligations, or otherwise, in respect of this
Agreement shall be limited to a sum equal to the total amount RevShare entitlement of that
Party during the previous six (6) calendar months prior to the calendar month in which such
damages accrued. This limitation will apply notwithstanding any failure of essential purpose
of any limited remedy provided herein.”
AB v CD [2014] EWCA Civ 229
Court of Appeal (Underhill LJ):
•
[27] “The primary obligation of a party is to perform the contract. The requirement
to pay damages in the event of a breach is a secondary obligation, and an
agreement to restrict the recoverability of damages in the event of a breach cannot
be treated as an agreement to excuse performance of that primary obligation. I
share Mance LJ's rejection of the position advanced by Mowlem that, even where a
provision limited the victim of a breach to damages which bore no relation to its loss,
those damages had nevertheless to be regarded an adequate remedy.” (applying
Bath v Mowlem (2004))
•
[30] “Mr Bergin argued that it could not be right that in every case where the victim
of a threatened breach of contract sought an interim injunction he could rely on the
existence of an exclusion or limitation clause to claim that damages would not be an
adequate remedy. I think that that overstates the consequences of the case which I
have accepted. A claimant will still have to show that if the threatened breach occurs
there is (at least) a substantial risk that he will suffer loss that would otherwise be
recoverable but for which he will (or at least may) be prevented from recovering in
full, or at all, by the provision in question.”
Problem (3) - The Need to Word the
Specifically Excluded Losses Clearly
Transocean Drilling UK Ltd v Providence Resources
PLC (The Arctic III) [2014] EWHC 4260 (Comm)
–
“loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or
the cost of use of property, equipment, materials and services including without limitation, those provided
by contractors or subcontractors of every tier or by third parties), loss of business and business
interruption, loss of revenue (which for the avoidance of doubt shall not include payments due to
[Transocean] by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss
and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field
interests”
Popplewell J held:
• [165] “Exclusion [C: “loss of use”], as with the other exclusions in [A] to [H],
must be construed in the context of it being a specifically defined incursion into
the territory of the first limb of Hadley v Baxendale, and should therefore be
approached by treating the enumerated types of loss as incremental incursions
into that territory, construed narrowly to limit the scope to specific categories
narrowly defined rather than a widespread redefinition of excluded loss”
• Did not extend to include spread costs.
Transocean Offshore International Ventures Ltd v
Burgundy Global Exploration Corp [2013] 3 SLR 1017
•
•
“(a) loss or damage arising out of any delay, postponement, interruption or loss of
production, any inability to produce, deliver or process petroleum or any loss of or
anticipated loss of use, profit or revenue”
“(d) loss of bargain, contract, expectation or opportunity”
Burgundy’s case: “or” = disjunctive, therefore all loss of profits excluded under (a),
alternatively within (d).
HELD Tay Yong Kwang J:
•
As to (a): “Read ejusdem generis, the phrase “any loss of or anticipated loss of …
profit” should be construed in the light of the overall genus of losses contemplated in
sub-cl (a). If the parties had intended to exclude any losses of profits howsoever
caused, it was open for the parties to unequivocally exclude this as a separate, freestanding category; but on a contra proferentem construction” [33]-[34].
•
As to (b): “Sub-clause (d) does not make express reference to “profits”. Instead, it
excludes liability for “losses of bargain, contract, expectation or opportunity”. I did
not think that the plain meaning of the four words was apt to describe the loss of
profits that one party expected to make under the Drilling Contract”
Conclusions
Consequential Loss Clauses: so are they any use?
• YES: always to exclude proper Limb 2 Losses, i.e. losses which are
only recoverable because of special circumstances and special
knowledge of them
• YES: to exclude specific heads of loss provided that they are kept
separate from the Limb 2 Exclusion (why not use a different non-‘CL’
clause?)
• YES: if separate, to exclude specific heads of loss in full but only
where there are other (real) recoverable heads of loss unaffected by
the Clause.
– And possible to address by a “Fujitsu v IBM” Clause
• YES: even where there are no other recoverable heads of loss, at
least for the specific heads in certain circumstances (misperformance).
• BEWARE! Other remedies to prevent the occurrence of breach may
be enhanced.
Thank you for your attention
© SIMON RAINEY Q.C.
Quadrant Chambers