Given the uncertainties in predicting what the term "consequential loss" may mean in any given circumstance, if a party intends that it should not be liable for certain types of losses, then the exclusion clause should list, in clear terms, exactly which types of losses are to be excluded. Transocean Drilling UK Ltd v Providence Resources Plc [2016] EWCA Civ 372. All these types of monetary losses can either be direct, or indirect ('consequential'). Helping you with the responsibilities of wealth, from securing the growth of assets to guiding you through complex and sensitive situations. To view all formatting for this article (eg, tables, footnotes), please access the original, Terminating your contract: when can you call it quits? Keep a step ahead of your key competitors and benchmark against them. Consequential loss is usually covered by professional indemnity (PI) insurance. loss of profit, revenue, goodwill etc.) Decide what specific types of indirect or consequential loss you want to exclude and then list them in the definition... 2. Several decisions of the English Court of Appeal have established that contractual exclusions for “consequential and indirect losses” will be limited to losses which fall within what is known as the “second limb” of Hadley v Baxendale. Mutual indemnities and exclusion of consequential losses in commercial contract upheld by the Court of Appeal. A clause may be drafted to ensure that specific types of losses are claimable (such as direct losses), to provide that the innocent party has a specific obligation to mitigate losses or to exclude or include consequential loss. Macmahon claimed that the termination was invalid, and that the letter of termination constitut… Direct losses are those which any reasonable person might expect to follow from the breach. This episode looks at issues relating to bribery that can occur in business. Construction and engineering contracts often therefore contain clauses excluding the contractor's liability for consequential losses. However, one increasingly common form of wording states that party X will not be liable for “indirect or consequential” losses suffered by party Y, including loss or deferment of profit or revenue, loss of business or other specified losses. For the purposes of this article, it is assumed the drafting is clear. If the intention is to exclude liability for a certain type of loss in all cases, whether the loss is direct or indirect, then one way of avoiding this … Our sector specialists are committed to a jargon-free, practical and commercial approach. losses which do not arise in the natural course of events but which were nevertheless within the contemplation of the parties to the contract at the time that the contract was entered into (for example, lost profits, if both parties were aware at the time of signing the contract that a delay to the completion of a new factory building would cause the owner to lose a major manufacturing contract). If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. within an IP licence agreement. Where intellectual property is involved, the indemnity should include an indemnification by the seller for infringement of the intellectual property rights of a third party. When it comes to considering liability for loss of profits, English courts have held that loss of profits could fall within either the first or the second category of losses. This wording was said to expand the exclusion clause to include the costs of services from third parties such as those being claimed by the contractor as 'spread costs'. Exclusion of Consequential Damages. Each case will be decided on the specific facts. Knock-for-knock indemnities in commercial contracts The Court of Appeal has recently considered the application of a knock-for-knock indemnity to exclude liability for consequential loss. 2020-596 were due to expire on 31 December 2020. Take as an example, Clause 17.6 of the FIDIC Silver Book: "Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract …". The Court noted that an interesting feature of the contract in question was the extent to which the parties had agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract. On this point, it is important to note that there is a risk that a clause that excludes liability for "consequential losses, including loss of profit" would not have the effect of excluding liability for all loss of profits. In practice, it can be difficult to determine whether a loss falls within the first or second category. indirect/consequential” losses. They function in many different ways, such as designating which party will pay for certain losses that may arise. It was decided that the principle of freedom of contact required the Court to give effect to the parties' agreement and the contractor was not entitled to recover consequential losses for the period of delay as the contractor was obliged to indemnify the owner against the contractor's own consequential losses. How specific do indemnity clauses need to be? The Australian case law on consequential loss has changed considerably over the past te… Some also specifically exclude liability for loss of profits. An indemnity clause can be altered in many ways. There was no appeal to that aspect of the High Court's judgment. Sadly, there is no comprehensive list of what losses will always be considered to be "direct" or "consequential". The Court of Appeal has reversed the High Court's decision in Transocean Drilling UK Ltd v Providence Resources Plc [2014] EWHC 4260 (Comm) which found that a contractor was entitled to recover consequential losses for a delay caused by a breach of contract by the other party. To have a right of set-off it would have been necessary for the contractor to have a right to recover a sum of money, but any such right was eliminated by the clause excluding consequential losses. However, the legal meaning of the term may be quite different. Back to basics What is an indemnity? Exclusion clauses in a contract aim to exclude a party’s liability for certain types of losses. If a contractor intends to exclude liability for certain losses, it should ensure that the clause expressly lists the categories of losses that are to be excluded. If the intention is to exclude liability for both direct and indirect losses of the categories listed, ensure that the clause is drafted to exclude liability for "all consequential losses, and [loss of profit/use/revenue etc]". An indemnity is an obligation given by one party to a contract to compensate the other for some defined loss. Professional Indemnity & Corporate Liability Property Public Liability Sales & Distribution ... but also an ‘exclusion of consequential loss’ clause. As a result of a failure of the rig, drilling operations had to be suspended for 27 days. 4NB: Consequential loss may be direct or indirect and may be excluded if it is both indirect and consequential. In October 2011 Macmahon Mining Services entered into a design and construct contract for the development of Cobar Management's copper mine in New South Wales. You've probably seen this type of "exclusion clause" hundreds of times in ICT and other commercial contracts and not thought much of it. The High Court found that the delay had been caused by the owner's breach of contract as the rig had not been in good working condition on delivery. Many of the measures of the French Ordinance No. It seems from these cases (and others) that ambiguity around whether a particular type of loss is excluded or not commonly arises where references to specific types of loss (e.g. Excluding consequential loss – Do you really know what you are not getting? The case considered the extent of the freedom of two commercial parties to determine the terms on which they wish to do business. For example, in a case where defects caused an explosion at a methanol plant, the Court found that the reconstruction costs, loss of profits and wasted overheads all arose as a direct result of the breach of contract2. Indemnities protect one party from a contract from suffering financial loss in relation to certain eventualities – usually those that would arise from the conduct of the other contracting party, or over which the other contracting party has control. The word "including" may be interpreted as meaning that only liability for consequential loss of profits is to be excluded, with the result that the contractor would still be liable for any loss of profits that the employer suffered as a direct and natural consequence of the contractor's breach of contract3. The more ambiguous the exclusion clause, the more likely a Court will be to interpret the clause against the party relying on it. One of the most important mechanisms in a contract for allocating risk is the ability to exclude “indirect” and “consequential” loss using exclusion clauses. 1. This interpretation led the High Court to decide the contractor was entitled to recover the 'spread costs'. … The clause in question merely gave the contractor a right to withhold disputed sums pending resolution of a dispute and did not give rise to substantive rights. For an exclusion clause to be effective it must clearly identify what losses are being excluded. are bundled in with a reference to “indirect” loss. whether the owner's 'spread costs' (overheads such as the costs of personnel, equipment and services contracted from third parties which were wasted as a result of the delay) were within the meaning of consequential losses set out in the mutual indemnities. The specific wording of the exclusion clause and mutual indemnities included the following wording: "...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)...". Indemnities can cover a range of subject matters. Each newsletter has a great deal of content and the daily feed allows you to 'pace' yourself. " Neither party will be liable for any indirect or consequential loss under or in connection with this contract ". However, in this case, the parties were of equal bargaining power and the Court held that the mutual indemnities which extended to consequential losses should stand. A clause excluding liability for "indirect and consequential losses" is of limited value to a contractor. about Coronavirus (COVID-19) Insights and Information, Mutual indemnities and exclusion of consequential losses in commercial contract upheld by the Court of Appeal, about Investigations: Bribery & Corruption, about The French Government extends exceptional insolvency measures related to the COVID-19 crisis up to the 31st December 2021, about Charles Russell Speechlys launches as Hong Kong firm and welcomes litigator Ray Ng, about Charles Russell Speechlys continues international expansion with the hire of four new partners, the mutual indemnities (or 'knock-for-knock' provisions as they are known in the oil & gas industry) whereby losses arising from the performance of the contract were allocated between the two parties including a mutual undertaking by the owner and the contractor to indemnify each other against its own consequential losses; and. 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