If the words used are clear enough you can exclude liability for negligence, misrepresentation, issues relating to quality and fitness for purpose among other things, plus types of loss within a category, such as excluding liability for consequential losses. The more ambiguous the exclusion clause, the more likely a Court will be to interpret the clause against the party relying on it. according to the usual c… Indemnities protect one party from a contract from suffering financial loss in relation to certain eventualities – usually those that would arise from the conduct of the other contracting party, or over which the other contracting party has control. A consequential loss is an indirect adverse impact caused by damage to business property or equipment. It's very standard and the lawyers know what it means, don't they? Consequential loss exclusion clauses are very common in commercial contracts, especially in those relating to construction and energy projects. loss of profit, revenue, goodwill etc.) Even assuming that the \"battle of the forms\" has been won, if a party is trading on its standard terms an unusual or unclear exclusion clause may fail if it is not given a sufficient degree of prominence to put the other party on notice. about Coronavirus (COVID-19) Insights and Information, Mutual indemnities and exclusion of consequential losses in commercial contract upheld by the Court of Appeal, about Investigations: Bribery & Corruption, about The French Government extends exceptional insolvency measures related to the COVID-19 crisis up to the 31st December 2021, about Charles Russell Speechlys launches as Hong Kong firm and welcomes litigator Ray Ng, about Charles Russell Speechlys continues international expansion with the hire of four new partners, the mutual indemnities (or 'knock-for-knock' provisions as they are known in the oil & gas industry) whereby losses arising from the performance of the contract were allocated between the two parties including a mutual undertaking by the owner and the contractor to indemnify each other against its own consequential losses; and. Sadly, there is no comprehensive list of what losses will always be considered to be "direct" or "consequential". They function in many different ways, such as designating which party will pay for certain losses that may arise. Understand your clients’ strategies and the most pressing issues they are facing. whether the owner's 'spread costs' (overheads such as the costs of personnel, equipment and services contracted from third parties which were wasted as a result of the delay) were within the meaning of consequential losses set out in the mutual indemnities. On this point, it is important to note that there is a risk that a clause that excludes liability for "consequential losses, including loss of profit" would not have the effect of excluding liability for all loss of profits. Contractual Liability Exclusion Clause I spoke about the Consequential Loss Exclusion at the inaugural MII Liability Conference in 2009 ( Gosh its going to be decade soon). If so included as an indemnity, these third party claims will already be carved out from the consequential damage disclaimer by virtue of the first carve-out listed above. An exclusion or limitation clause is only enforceable if it has been incorporated into the relevant contract. are bundled in with a reference to “indirect” loss. The highlighted word "or" in both clauses has the effect of ensuring that liability for both direct and indirect loss of profits (and/or loss of use, contract, production etc), is excluded. Some also specifically exclude liability for loss of profits. Each newsletter has a great deal of content and the daily feed allows you to 'pace' yourself. Decide what specific types of indirect or consequential loss you want to exclude and then list them in the definition... 2. Visit our hub page for the latest on planning for and coping with the impact of Coronavirus. Become your target audience’s go-to resource for today’s hottest topics. The claimant sought to recover from the defendant an indemnity in respect of sums which it had been obliged to pay to the chief officer's next of kin. A clause may be drafted to ensure that specific types of losses are claimable (such as direct losses), to provide that the innocent party has a specific obligation to mitigate losses or to exclude or include consequential loss. Dive into our thought leadership, insights, podcasts and recent work as well as press coverage and events. It was relevant to the interpretation applied by the Court in this case that the parties were of equal bargaining power. In June 2013, Cobar gave written notice to Macmahon terminating the contract. Construction and engineering contracts often therefore contain clauses excluding the contractor's liability for consequential losses. We work with a variety of clients across a broad range of sectors. 2020-596 were due to expire on 31 December 2020. 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. Each case will be decided on the specific facts. Transocean Drilling UK Ltd v Providence Resources Plc [2016] EWCA Civ 372. Take as an example, Clause 17.6 of the FIDIC Silver Book: "Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract …". Clauses that seek to exclude a party's right to damages are often subject to restrictive interpretation by the courts. However, without careful drafting, such clauses may not always achieve what the contractor intends. ", © Copyright 2006 - 2020 Law Business Research. losses which do not arise in the natural course of events but which were nevertheless within the contemplation of the parties to the contract at the time that the contract was entered into (for example, lost profits, if both parties were aware at the time of signing the contract that a delay to the completion of a new factory building would cause the owner to lose a major manufacturing contract). Back to basics What is an indemnity? The Consequential Loss Exclusion. A clause excluding liability for "indirect and consequential losses" is of limited value to a contractor. The mutual nature of the clause also showed the parties intended this to have a wide meaning. The delay resulted in a number of disputes between the parties including whether the delay was caused by the owner's breach of contract. Questions? How specific do indemnity clauses need to be? Power up your legal research with modern workflow tools, AI conceptual search and premium content sets that leverage Lexology's archive of 900,000+ articles contributed by the world's leading law firms. Keep a step ahead of your key competitors and benchmark against them. Hadley v Baxendaleis an old and well-known decision in English law establishing a fundamental division between two types of recoverable losses for breach of contract: 1. This episode looks at issues relating to bribery that can occur in business. Please contact customerservices@lexology.com. Introducing PRO ComplianceThe essential resource for in-house professionals. Our sector specialists are committed to a jargon-free, practical and commercial approach. The main ones are people (death, injury or illness), property damage and consequential loss. The Court decided that this 'set-off' argument put forward by the contractor was unacceptable. 5It is possible for the words used in a contract to amount to an indemnity even if the word is not expressly used. For an exclusion clause to be effective it must clearly identify what losses are being excluded. Macmahon claimed that the termination was invalid, and that the letter of termination constitut… An indemnity clause can be altered in many ways. The content is relevant to the areas that I address and the articles are written by counsel who are very experienced in these areas and can communicate in a meaningful and effective way. If the intention is to exclude liability for a certain type of loss in all cases, whether the loss is direct or indirect, then one way of avoiding this … The High Court found that the delay had been caused by the owner's breach of contract as the rig had not been in good working condition on delivery. Excluding consequential loss – Do you really know what you are not getting? It is typically on a party’s list of most important clauses that may require approvals at board level if certain requirements are not met. Don’t forget that the Australian Consumer Law cannot be excluded and any attempt to exclude the ACL may result in an unenforceable or void contract, not to mention criminal liab… We are delighted to announce the hire of four new partners across four of our offices. The word "including" may be interpreted as meaning that only liability for consequential loss of profits is to be excluded, with the result that the contractor would still be liable for any loss of profits that the employer suffered as a direct and natural consequence of the contractor's breach of contract3. … The parties in this case were the owner of a semi-submersible drilling rig and a contractor who entered into an agreement for the hire of the rig to drill in an area off the south coast of the Republic of Ireland. " Neither party will be liable for any indirect or consequential loss under or in connection with this contract ". within an IP licence agreement. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. The term "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. Several decisions of the English Court of Appeal have established that contractual exclusions for “consequential and indirect losses” will be limited to losses which fall within what is known as the “second limb” of Hadley v Baxendale. If the intention is to exclude liability for both direct and indirect losses of the categories listed, ensure that the clause is drafted to exclude liability for "all consequential losses, and [loss of profit/use/revenue etc]". It indicates a broadening of the court's interpretation of clauses excluding liability for 'consequential loss' by looking outside the definition of indirect losses falling within Hadley v Baxendale. The defendant relied upon the exclusion clause, arguing that the exclusion clause had defined "indirect or consequential" losses as including "the liabilities of the Customer to any other party". In relation to property damage, it is helpful to specify whether an indemnity is to cover only property that is owned by the party or also property that is leased, hired or otherwise provided. In October 2011 Macmahon Mining Services entered into a design and construct contract for the development of Cobar Management's copper mine in New South Wales. Knock-for-knock indemnities in commercial contracts The Court of Appeal has recently considered the application of a knock-for-knock indemnity to exclude liability for consequential loss. There was no appeal to that aspect of the High Court's judgment. An indemnity is a promise, usually made in a contract, to pay money on the happening of a specified event. This wording was said to expand the exclusion clause to include the costs of services from third parties such as those being claimed by the contractor as 'spread costs'. For more information please contact Tanya on +44 (0)20 7427 5058 or at tanya.wilkie@crsblaw.com. Indemnities can cover a range of subject matters. Many of the measures of the French Ordinance No. Both exclusion and indemnity clauses are contractual tools designed to allocate risk between parties. Another dispute was whether the contractor had a right to recover additional overheads or 'spread costs' resulting from the delay to the drilling operations and extended period of work. In short, PI insurance protects you in the event of a claim against you for professional negligence, covering direct and consequential losses to the client. Referring to 'consequential loss' in an exclusion clause does not, therefore, shed any light on what kind of economic or financial loss, or loss of profit or revenue, has been excluded. English law has traditionally allowed recovery of two categories of loss caused by a breach of contract: Under English law, the term "direct loss" will broadly cover losses falling within the first category, and "indirect losses" will cover losses falling within the second category. Mutual indemnities and exclusion of consequential losses in commercial contract upheld by the Court of Appeal. Contract disputes practical guides issue 8, December 2020, The Digital Services Act and Digital Markets Act: A new era for online regulation within Europe, FinTech Global Regulatory Round-up - w/e 11 December 2020, A litigator’s yearbook 2020 (England and Wales), Limitation of liability: consequential or indirect loss, Oil and gas: consequential loss another parenthetical profits dilemma. Indemnity clauses are contractual tools designed to allocate risk between parties considered to be effective it clearly! 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