Though from Contract Negotiation perspective it is a trend or well established principle to ensure that we have all the usual limitation set out in the contract including the overall liability cap for direct losses/damages and exclusion of indirect or consequential losses/damages, it is important for the organization operating in different countries to understand the possibility that the same liability provision may be interpreted differently in different jurisdiction. There may be local law provisions which will apply irrespective of the contractual understanding.
This paper seeks to discuss the different approach in terms of interpretation of contractual provisions in a different way in various jurisdictions considering the pitfalls of the legal system under which we are operating especially in the light of the below question:
How much liability for indirect or consequential losses is actually excluded in case of such agreement to exclude indirect or consequential losses/damages in the Contract and does it achieve the intended result?
Consequential loss is often used in everyday language as shorthand for a broad category of losses including loss of profit, loss of opportunity, loss of goodwill and so on; but the legal meaning of the term may be quite different. As a result, a clause that purports to exclude liability for consequential losses may not in fact achieve the result that the parties intended or expected. Therefore misunderstanding the legal distinction between “consequential” and “direct” losses can lead to exclusion clauses that do not achieve their intended aims. Typically, one of the parties wants to exclude liability for all loss of profit, but the contract describes loss of profit as a species of consequential loss e.g. when the clauses reads as “Neither party shall be liable to the other for any special, indirect, incidental, consequential (including loss of profit or revenue)”. The clause may not then cover direct loss of profit and the claim may be entitled for the direct loss of profit against the intent of the parties to exclude the liability for loss of profit or revenue.
Different
Consequential Loss Under Swiss Law
The default position under Swiss Law is that all damage or loss having an adequate causal link with the damaging event will be claimable. Whether a causal nexus is adequate or not is often left to the equitable judgment of the courts. The Supreme Court in Switzerland has a tendency to consider very remote or indirect causal links as adequate. On its face therefore a contract exclusion clause that purports to exclude consequential damages (without reference to types of such damages) would be regarded as simply restating the principle of adequate causality or would in effect be no limitation at all.
Consequential Loss Under English Law
The concept of ‘consequential loss’ under English law is aligned to indirect loss. In the case of Hadley v. Baxendale,1 the court distinguished between:
Losses that are the direct and natural consequence of a breach (commonly termed ‘direct’ loss); and
Those losses which do not arise in the natural course of events but which may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as the probable consequence of a breach of it (commonly known as ‘indirect’ or ‘consequential’ loss).
In the absence of a clear intention to exclude consequential loss, an English court will award damages for both direct and consequential loss arising out of a breach of contract, provided that the requirements of the second limb of Hadley v. Baxendale are satisfied.
Consequential Loss Under UAE Law
It has been suggested by some commentators that consequential loss under the UAE Civil Code (the “Code”) should be confined to tort and tortious liability (primarily, it seems, on the basis of the distinction between direct and consequential loss in Article 283 of the Code). However, following judicial interpretation of Articles 246-2 and 282-298 of the Code, it would now appear to be generally settled that damages will be awarded for all forms of loss recognized by the Civil Code (including consequential loss) that stem from a breach of contract,2 provided that:
There has been a wrongful and deliberate act of breach by a party; and
The parties (at the time of contracting) should have expected, predicted, or foreseen (tawaka) the damages (in this context the form of damages are provided for in Article 292 and 293 to include every loss or sufferance endured) as a likely consequence of such breach.
Consequential Loss Under Thai law
Section 222 of Thailand's Civil and Commercial Code addresses the recoverability of damages under Thai law. It does so in terms that are similar to English common law:
"The claim of damages is for compensation for all such damage as usually arises from non-performance.
The creditor may demand compensation even for such damage as has arisen from special circumstance, if the party concerned foresaw or ought to have foreseen such circumstances."
The first paragraph of Section 222 allows recovery of all damages that are the normal consequence of a breach of contract. The second paragraph provides a claim for compensation that has arisen from "special circumstance", where the party causing the damage foresaw or ought to have foreseen those relevant circumstances.
As in common law systems described above, losses such as loss of profit may in some circumstances be considered to be direct losses that fall within the first paragraph of Section 222, while in other circumstances they may be considered to be "special circumstance" losses that fall within the second paragraph of Section 222. Given the further complication and uncertainty caused by the fact that "consequential loss" is not itself a concept that is mentioned anywhere in the CCC, so that it is not a concept with any clear meaning in Thai law, it will be obvious that clauses purporting to exclude liability for consequential loss run a real risk of failing to achieve their objective.
Consequential Loss Under Hong Kong
Hong Kong law defines indirect or consequential loss in a way that will be very familiar to UK, Australian and New Zealand lawyers. Following the rule in Hadley v Baxendale, direct losses are those that naturally flow in the ordinary course of things. These are “objectively foreseeable. “Indirect” or “consequential” losses are those that may have been contemplated by both parties at the time the contract, as the probable result of the breach of contract. These are losses which may have been subjectively foreseeable only by the parties concerned. A clause which excludes “indirect” or “consequential” losses will exclude those which are specific to the contract concerned and which parties must have known would arise as a result of the breach. For the purposes of exclusion clauses, the difference between an “indirect” and a “consequential” loss is unlikely to be significant.
Under Hong Kong law, if the exclusion clause only seeks to exclude liability arising from indirect and consequential loss without specifying a particular category of loss, i.e. lost profits, whether such a clause will be effective will depend on the facts of the case, in particular, whether such losses were objectively foreseeable or whether they were foreseeable only by the contracting parties.
Consequential Loss Under PRC
Indirect loss is not a legal term under PRC Civil law. ‘Indirect loss’ is a theoretical concept. However, indirect loss is indirectly considered in the PRC Civil law and the Contract Law of the People’s Republic of China (“Contract Law”) and General Principles of the Civil Law of the People’s Republic of China (“GP Civil LAW”).
Indirect loss is commonly regarded as unforeseeable loss and dependent on individual conditions of the wronged party. Therefore it is difficult to assess the extent the loss. Based upon PRC legal principles, indirect losses are those losses which do not flow directly and naturally from the breach or infringement act. A clause which excludes “indirect” loss will exclude those losses that are not directly caused by violations of a legal or contractual obligation, are unforeseeable and have no direct causal relationship to the loss. Under PRC law, the ascertainment of indirect loss is based on causal relationship and not upon the type of loss (such as loss of profit, legal fees and so on). Therefore, if the exclusion clause does not specifically mention loss of profits, it is arguable that lost profits can be recovered despite an exclusion of “indirect” loss. It will depend on the facts of the case whether the loss of profits flow directly and naturally from the breach or infringement act.
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