by Raffi Varoujian

Created on: July 07, 2011

Under long-standing English case law (Hadley v Baxendale in 1854), when a contract is breached, and a party suffers loss or damage, that damage is categorised as either: (a) direct loss - a loss that arises as a natural and direct result of the breach; and (b) indirect, consequential or special loss - a loss that does not directly flow from the breach. Subsequent case law makes it clear that there is no legal difference between "indirect, consequential or special" loss, and they are treated as one and the same.

Confusion often arises about the use of "consequential", which is not defined by its normal usage in everyday language, but by a series of cases which have refined this second limb of Hadley v Baxendale into a number of specific, component parts. Accordingly, consequential loss should be interpreted as a loss that is  not direct, and arises out of "special" circumstances that are known (or foreseeable) by the parties at the time the contract was made.

A good example would be a contract to buy and fit out a commercial vehicle. If the seller provides a defective vehicle, and the buyer had to have it repaired, the claim by the buyer for compensation would be classified as a direct loss. However, if it was known at the time of the order that the vehicle was going to be used to transport perishable goods, and the goods were spoiled because the refrigeration didn't work, and, also as a consequence, the buyer lost a valued customer as a result, then this sort of claim would be classed as consequential loss.

A distinction between these two heads of loss is often made in exclusion clauses in commercial contracts. A supplier will usually seek to carve out liability for a consequential loss that may occur on breach of contract, while taking express liability for an direct loss.  However, recent case law has emphasised that the parties need to be very careful when they construct exclusion clauses. If a seller is seeking to exclude a specific head of loss, that loss should be clearly listed.

"Consequential loss" is often, erroneously, used as shorthand for heads of damage such as loss of business, loss of profit, or loss of goodwill. The courts are increasingly taking the view that such losses should be considered a direct result of the breach, making it harder to exclude them unless they are specifically called out in the contract. In other words, don't rely on "sweeper" provisions such as "all consequential, indirect or special loss shall be excluded" to exclude liability.

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