UK: Were The Losses Claimed Indirect and/or Consequential? If So, Were They Covered by a Contractual Exclusion Clause

The case of McCain Foods Gb Ltd v Eco-Tec (Europe) Ltd [2011] EWHC 66, which came before Mr Recorder Acton Davis QC provides an interesting example of how the court will approach the categorisation of losses claimed as either direct or indirect and/or consequential.

Here, McCain entered into a supply and purchase agreement ("SPA") with Eco-Tec, to purchase a system which would remove hydrogen sulphide from its waste water treatment processes at its Whittlesey plant in Cambridgeshire. McCain had substantial problems in commissioning the system, and ultimately were unable to complete it. McCain chose to treat this as a repudiatory breach of the SPA, which it accepted by letter to Eco-Tec.

McCain commenced proceedings for recovery of amounts paid under the SPA and damages. The heads of loss included items such as lost revenue and additional utility costs. Eco-Tec denied liability, but also defended the claim on the basis that even if it was liable for the repudiatory breach, the SPA contained an exclusion clause which excluded liability for certain losses as follows:

On the facts, particularly McCain's expert evidence, the Judge found that the system was not up to the standard intended in the SPA which meant that McCain could not complete the commissioning. Therefore Eco-Tec had committed a repudiatory breach of contract, which McCain properly accepted.

The Issue:

Could the losses claimed be categorised as indirect, special, incidental or consequential and therefore fall within the exclusion clause?

The Decision:

The Judge held that all the heads of loss could be categorised as direct loss, and accordingly the exclusion clause did not have any effect. Following previous decisions of the Court of Appeal, the Judge held that one of the purposes of the system was to produce renewable energy, which meant that McCain could sell Certificates for Renewable Energy Production to electricity suppliers. Therefore, the failure of the system resulted directly in the loss of this revenue stream. Equally, McCain had to purchase the electricity that would have been produced by the system elsewhere. Therefore, this cost was also a direct loss.

Commentary:

When drafting an exclusion clause, suppliers or contractors should be careful to set out exactly what heads of loss they expect to be excluded under the clause. Parties should not rely on wording similar to that used in this case. If loss of profit or revenue is to be excluded, then this should be expressly stated. If a particular head of loss is set out in an exclusion clause, then in the event that a dispute arises, the parties can be more certain of where they stand, and potentially save money and time on legal proceedings.

This article is one of a series contributed by Fenwick Elliott to the Building website. To see further articles in this series please go to www.fenwickelliott.co.uk/legal-briefing.

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