Construction and engineering contracts often contain provisions excluding or limiting liability for “consequential loss”, including “loss of profit”. Is all loss of profit a consequential loss? A recent TCC case sheds light on this important issue.
ADS Aerospace Limited (“Aerospace”) v EMS Global Tracking Limited (“Global”)
Aerospace and Global joined forces to develop and sell a new satellite tracking device for the aeronautical market. Global agreed to produce and supply the device to Aerospace (until giving 12 months notice of its intention to cease production) and Aerospace was given exclusive worldwide distribution rights.
Unfortunately, only 17 units were sold and, following unsuccessful discussions about a new product, the parties fell out. Global said they would no longer supply the product to Aerospace. Notwithstanding the poor sales, Aerospace sued Global for damages for, amongst other things, loss of profit.
The decision, consequential loss & loss of profit
The court was not persuaded that Global had any liability to Aerospace, but it did address the contractual provisions limiting Global’s liability for loss of profit and consequential losses. Such losses can generally be recovered if they were within the parties’ contemplation (actual or imputed) when they entered into the contract. Their recoverability may also be excluded by agreement (as is commonly done).
The contract in question provided that Global would not be liable “for any consequential loss or damage, whether for loss of profit or otherwise and whether occasioned by the negligence of [Global] or his employees or agents or otherwise, arising out of or in connection with any act or omission of [Global]…”.
The court held that this clause operated to exclude loss of profit when it arose as a type of consequential loss. If a loss of profit was suffered as a direct loss, it would be recoverable.
The key question was: what did the parties contemplate at the time of entering the contract? Since the purpose of the contract was to make profit, the court found it would have been in the reasonable contemplation of the parties that any refusal by Global to supply goods to Aerospace would naturally result in loss of profit, which could be recovered from Global as a direct loss.
Relevance for construction contracts
The case is of particular relevance for construction and engineering contracts where parties often include provisions to limit or exclude liability but the purpose of the contract is perhaps less clear. For instance, if a contractor is employed to carry out fit out works to a shop that cannot trade during the works, and those works are delayed, can the shop claim for loss of profit for the extended period for which it had to remain closed?
The issue has received some consideration in earlier construction cases. In Corfield v Grant, the owner of a hotel that was closed for longer than anticipated due to works being carried out was found to be entitled to recover profit that he could reasonably have expected to earn had the hotel been finished on time as a direct loss. In the Scottish decision of Robertson Group (Construction) Limited v Amey-Miller (Edinburgh) JV, concerning work carried out under a “stop gap” contract that allowed recovery of “all direct costs and directly incurred losses”, a contractor was found to be entitled to recover damages for loss of profit as a direct loss where it was prevented from carrying out work it was entitled to perform, since “[t]he intention to make a profit lies at the heart of all, or nearly all, commercial activity”.
The indications (depending on the specific factual circumstances) are therefore that loss of profit could be recoverable as a direct loss in construction and engineering contracts. “Loss of profit” can be either a direct loss or an indirect loss. If, therefore, the intention is to exclude all liability for loss of profit (whether direct or indirect), a contract should explicitly provide for the total exclusion of that type of loss.