The words “consequential loss” or “indirect loss” often appear in contracts. But what do they actually mean and what is the difference between these types of losses and “direct loss”?
Under English law the distinction between “direct” and “indirect” or “consequential” loss is based on what was foreseeable i.e. what was in the contemplation of the parties at the time the contract was entered into and not the actual type of loss itself.
Where there has been a breach of contact the innocent party can recover from the defaulting party:
• Losses which flow naturally, according to the normal course of things from the breach of contract itself i.e. the losses that the reasonable person might expect the relevant breach to produce. These are known as “direct” losses and they are what a reasonable person would consider to be the “usual course” or in the “ordinary circumstances”. • Losses which do not arise naturally, but which may reasonably have been in the contemplation of the parties at the time they made the contract are commonly referred to as “indirect” or “consequential” losses. This type of loss is concerned with knowledge of special circumstances outside the usual course of things and that loss would have reasonably been contemplated by the party in breach with knowledge of the special circumstances.
Any loss which does not fall into either of the above two categories would be considered as being too “remote” by the courts to be recoverable.
The type of loss does not itself determine whether it should be considered a “direct” or “indirect” loss. It is a common misconception that loss of profit is an indirect or consequential loss. However, that is not the case. Loss of profit could be a “direct” loss if, for example, that loss arises from the loss of use of hired equipment. It all depends upon the circumstances of the case.
Contracting parties will usually try to limit the amount of damages recoverable by the other party in the event of a breach of contract. It is always worth the parties spending some time and effort to identify the type of losses that may arise if the contract is breached by one of them and to specifically set out in the contract which type of losses are to be included or excluded as this will save both time and expense for the parties if there is a dispute later on. The parties should not assume that all their losses will be covered by simply referring to “indirect” or “consequential losses” in the contract given that these terms may have different meanings in different contracts.
If you require assistance with the preparation of a contract or in relation to any dispute arising from it or if you need help with any COVID-19 related issue then please contact Luke Patel on 0113 227 9316 or by email at “LPatel@LawBlacks.com”.