Consequential Loss Case Study

In English law, and laws derived from English law (US laws, Australian, Singaporean and Indian law, as examples) the term “consequential loss” is a classic case of words not bearing their dictionary meanings in a legal context. A party who breaches a contract is generally liable to the innocent party for any loss that falls within one of the following two ‘limbs’:

1. Loss that arises “naturally” or “according to the usual course of things” from the breach. The courts often refer to this first limb as direct” losses.

2. Such additional loss as the parties would, at the time when they made the contract, have reasonably expected to be the probable result of such a breach. The courts generally refer to this second limb as ‘consequential’ or ‘indirect’

That is a difficult distinction to make in practice, as most losses contemplated by the parties are losses that will arise ‘naturally’ from the breach. When a contractual clause excludes or limits liability for ‘consequential’ loss or damage, as a matter of law, it only excludes loss under the second limb. The scope of such exclusion may therefore be far narrower than commercial negotiators realise. In particular, they may believe that it excludes liability for all loss that is a consequence of a breach including, for example, loss of profit. But the law often regards loss of profit as a direct loss. Consequently, the wording is critical and should be reviewed by a contracts manager. The concept of indemnity is simple: one party to a contract agrees that, in the event of a claim against the other party, they will make good any financial loss suffered by the other party. The indemnity regime is an agreement to allocate liability for physical damage in a particular way that may not reflect the normal, or ‘common law position’. The ‘common law position’ is a term that is used to describe the legal position should an issue not be addressed expressly in the contract or relevant statute. That is to say if the contract is ‘silent’ in regard to the specific issue. The common law position in regard to liability is that liability follows fault. It is typical in the upstream oil and gas industry to enter into a ‘knock-for-knock indemnity regime. A knock-for-knock indemnity regime is a contractual agreement whereby each party takes responsibility for their own personnel and property regardless of