Caps on liability are a common feature of negotiations in construction projects, particularly to enable contractors to price risks more easily and to therefore lower the cost for construction clients of procuring a project. It is also common for contractors and consultants to seek to limit their liability for consequential and indirect losses.

The key to fixing any cap on liability is to ensure that it is clearly worded as any uncertainty will normally be construed against the party seeking to rely on the limitation.  This is particularly true in terms of what the categories of loss the parties intend to be covered by the cap and what is meant by consequential and/or indirect loss.

In a recent case McCain Foods Ltd sought damages from the defendant supplier for a breach of contract following a contract to purchase equipment which was to be used to clean waste water. The equipment suffered operational problems and could not be commissioned and McCain sought damages for replacement equipment and loss of profits. The defendant claimed it was only liable for damages in respect of replacement equipment as all other items of quantum were irrecoverable as consequential loss. The court held that the costs of repair, replacement, mitigation and associated losses were all direct losses for which the defendant was liable and in addition McCain was also able to recover loss of profit as a direct loss.

The issue of what loss should be recoverable has been exercising commercial minds since Victorian times where a case called Hadley v Baxendale laid down the rules for the different types of losses that are recoverable for a breach of contract.

The decision broke the recoverable losses down into two categories:

1. Direct losses which are losses that may fairly and reasonably be considered either as arising naturally, in the usual course of things, from the breach of contract itself; and
2. Indirect losses which are losses which may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable breach of it.

Since that case, consequential and indirect losses have often been accepted as coming under the second limb of the Hadley v Baxendale categories, but the McCain case and a number of other recent cases have demonstrated the court's acceptance that loss of profits and other 'consequential losses' can be recoverable as direct losses depending on the facts of the case.

The decisions in Lobster Group Limited (Formerly Lobster Press Limited) (In Liquidation) v Heidelberg Graphic Equipment Limited, Close Asset Finance Limited and GB Gas Holdings Limited v Accenture (UK) Limited highlighted the fact that judges are increasingly adopting an approach of seeing consequential losses as direct losses and regarding attempts to exclude liability for such losses as unreasonable.

In GB Gas, the judge considered loss of profits or of contracts arising directly or indirectly, loss of business or of revenues arising directly or indirectly and losses or damages to the extent that they are indirect or consequential or punitive and decided that none of these heads of losses claimed came within the second limb of Hadley v Baxendale, were not therefore indirect and could therefore be recovered.

Careful drafting of the limitation clause is therefore required to ensure that the parties are agreed as to what losses are excluded or limited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.