Exclusion of liability for “indirect or consequential” losses

Exclusion and limitation clauses in commercial contracts are used to control, or put a cap on, a party’s liability. One of the most common types of clause is one that attempts to limit liability for “indirect or consequential” loss or damage. The reason for wishing to exclude liability for “indirect or consequential” losses is that these losses may be unpredictably large, or open-ended, representing an “unquantifiable risk”.

There is no standard wording of exclusion clause for “indirect or 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. Clauses of this nature can potentially be difficult because a “loss of profit” (or similar loss) may be either a direct or an indirect consequence of a breach of contract. In such cases, the question arises: does the clause exclude liability for “direct” and “indirect” losses of profit (or similar losses), or only “indirect” loss of profit?

There has been a surprising dearth of guidance from the English courts on this issue, although a case from last week leant in favour of the latter (narrower) interpretation of the exclusion clause in question.

• The case concerned whether a ports authority was liable to pay the costs of repatriating the body and paying compensation to relatives for the death of a Ukrainian merchant seaman. The ship owner (who engaged the seaman) paid these costs and compensation, and sought to pass them on to the negligent port authority.
• The claim was made under a stevedoring contract between the ship owner and the port authority. The contract contained a clause excluding the port authority from liability for “indirect or consequential” losses in providing stevedoring services, including for “the liabilities of” the ship owner “to any other party”.

The court held that although the liability of the ship owner represented a liability “to any other party”, it was nevertheless a direct liability which was not caught by the exclusion clause. The court interpreted the exclusion of liability for “indirect or consequential” losses, including “the liabilities of [the ship owner] to any other party” to exclude only those liabilities to other parties which were “indirect or consequential”, not all liabilities to third parties. The court said that a party seeking to limit liability for such losses must do so by using clear and unambiguous language.

In summary:

• Care should be taken when drafting to ensure that a clause excludes what it is supposed to. Don’t expect others to know what losses you are trying to exclude. Referring to “indirect or consequential” losses is often ambiguous, so if there are particular types of losses that you wish to exclude, they should be specified
• This is particularly relevant to those who use standard forms of contract, such as those in the construction industry (where, for instance, the NEC3 form includes an optional clause (X18) for capping indirect or consequential losses). Where appropriate, standard forms should be amended to identify the particular types of loss that a party is conscious of that it wishes to exclude.
• Exclusion and limitation clauses should be drafted to comply with the legislation regarding fairness where the legislation applies (Please click here for further details).

Case: Ferryways NV v Associated British Ports [2008] EWHC 225 (Comm)