In a recent UK High Court case, McCain Foods Ltd v Eco-Tec (Europe) Ltd1, the UK High Court ruled that damages claimed were direct losses, and therefore not excluded by a clause excluding indirect and consequential loss.

This case shows that the UK Courts continue to interpret exclusion clauses restrictively, and there is often ambiguity as to whether particular losses will be held to be direct or indirect/consequential. It highlights the unwillingness of the UK Courts to allow a party to a contract to escape liability where the loss has, in the opinion of the Court, arisen as a direct result of the breach of contract2.

Distinguishing between direct and indirect or consequential loss

"Direct losses" are losses arising naturally, that is, according to the usual course of things, from the breach of contract, (damages are recoverable for such losses under the "first limb" of the rule in Hadley v Baxendale3). "Indirect loss" or "consequential loss" includes loss in the reasonable contemplation of both parties at the time they made the contract, as the probable result of the breach of it (damages are recoverable for such losses under the second limb in Hadley v Baxendale).

McCain Foods Ltd v Eco-Tec (Europe) Ltd – the facts

McCain Foods (GB) Limited (the claimants) purchased a waste water treatment system from Eco-Tec (Europe) Limited (the defendants). The system was intended to remove hydrogen sulphide from biogas produced in the claimant's waste water treatment processes, so that the clean biogas could be used to generate heat and electricity in a combined heat and power plant. The claimants argued that the system proved impossible to commission successfully. Thus the claimants treated the defendants as being in repudiatory breach of contract and accepted that breach alternatively rescinded the contract in consequence of which the claimants sought recovery of monies paid under the contract and damages. The defendants denied that claim and counterclaimed for money outstanding under the contract.

The contract between the parties contained a rather short exclusion clause, contained within an indemnity from the defendants to the claimants, excluding the defendants from responsibility for "indirect, special, incidental and consequential damages" arising out of any breach by the defendants of any commitment or other obligation contained in the contract. The defendants accepted liability to pay damages in respect of replacing the system, but challenged all other losses claimed, arguing that such losses were indirect and consequential losses, which were excluded by the contract.

The decision

The High Court held that it was impossible to commission the system and the defendants were thus in breach of contract. Mr Recorder Acton Davis QC, sitting as Deputy Judge of the High Court, found that all the losses claimed were "direct losses" because they were the natural or immediate losses caused by the inability to commission the system. The losses held to be "direct losses", and amounting to almost STG £1.7m, included lost revenue; the cost of buying electricity which the claimants were unable to generate from their own biogas; replacement equipment; costs of contractors, site managers and health and safety personnel; attempted mitigation; employee time; third party experts and laboratory testing; and purchase of auxiliary equipment from the defendant. The defendant's exclusion clause for indirect and consequential loss therefore did not have the effect of reducing or excluding any of the defendant's liability.

Commentary

Whether a loss is direct or indirect often depends on the context in which it occurs. However it is still worth noting the types of losses which the Court found as constituting "direct losses"4. This is all the more important in view of the fact that Irish and UK common law principles relating to direct or indirect loss are similar5, and therefore the approach of the UK Courts will be of persuasive value to the Irish courts.

This case serves as a reminder of the need for clear and unambiguous wording in exclusion clauses. To the greatest extent possible, liabilities to be included or excluded should be agreed upon and expressly listed in the contract. By deciding at a pre-contractual stage which losses are direct and indirect, parties can avoid time and cost expended in proceedings deliberating over whether a loss is direct or indirect/consequential.

It is also important to be aware of the limits of such clauses and that they are not "bullet proof". Irish and UK courts are notoriously resistant to such clauses, and often construe them against the party seeking to rely on them. However, it is better to include such a clause in a contract, than not to do so, as the existence of such a clause may deter, defeat or reduce claims, even if it is not "bullet proof".