A brief summary of the principles, recent developments and practical tips relating to whether non-pecuniary losses fall within a clause excluding liability for "lost profits".
- Common law damages are compensatory for loss or injury: in a claim for breach of contract, the general rule is that damages are meant to place the claimant in the same position as if the contract had been performed.
- In a commercial contract, this value is normally calculated on an “expectation basis”, ie the additional expenditure the claimant would require to achieve the benefit of the contract, had it been properly performed.
- Alternatively, a claimant may elect to claim damages on a “reliance basis”, ie the wasted expenditure incurred in reliance on the defendant’s promise.
- The compensatory principle applies irrespective of whether a claim is on an expectation or a reliance basis: a claimant cannot be put into a better position than had the contract been performed (Omak Maritime v Mamola Challenger Shipping).
- In Omak, the court stated that a claim for wasted expenditure is based on a rebuttable presumption that the value of the claimant’s contractual benefit must be at least equal to the amount that the claimant is prepared to expend to obtain such benefit: that presumption applies equally to non-pecuniary benefit where the claimant does not expect a financial profit.
- In Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services the court found that damages for wasted expenditure are not necessarily damages for lost profits. As a result, a claim for wasted expenditure was not excluded by a contractual provision excluding liability for lost profits, revenues or savings.
- Here, the claimant claimed damages for the defendant’s failure to provide a functioning patient IT system. The defendant argued that the claimant’s losses (aside from its mitigation costs) should properly be characterised as loss of revenue, profits or other benefits which would have offset its project costs.
- The court rejected this characterisation. There is a distinction between pecuniary and non-pecuniary contractual benefit, the latter being where the anticipated contractual benefit is not a financial gain that can offset the claimant’s costs under the contract. The court held that non-pecuniary benefits are not lost profits since they do not offer any financial gain.
- The court conceded that contractual benefit is normally pecuniary, since in most commercial cases there is a defined financial benefit that can be expected to offset the costs incurred. However, in this case the claim was for non-pecuniary benefit only: the claimant’s use of a functioning IT system.
- In cases where the party does not expect to make a financial gain from a contract, the non-pecuniary benefit is assigned a notional value equivalent to at least the amount of wasted expenditure; wasted expenditure constitutes any costs incurred by the claimant which would have been required for performance of the contract. However, the court rejected any argument that this presumption can transform a claim for non-pecuniary benefit into a claim for loss of any additional financial gains that might have flowed from that benefit.
- The court confirmed that it was open to the defendant to defeat the claim for wasted expenditure by (i) establishing that the expenditure exceeded any benefit to be gained from the contract; or (ii) showing that any steps taken by the claimant in mitigation obtained benefits that should be offset against the loss which would otherwise have been sustained.
What this means
- An exclusion of liability for lost profits will not encompass liability for non-pecuniary losses. A party that has suffered a non-pecuniary loss should not be deflected from making a claim by the presence of such an exclusion clause in the relevant contract.
- Drafters should consider what form of loss might arise in relation to a contract. Is there a risk of non-pecuniary loss?
- If so, care must be taken when drafting the contract’s liability provisions to specify whether the parties intend to exclude damages claims for non-pecuniary losses.