1. Introduction
Consequential or indirect loss can be unpredictable and unquantifiable and this is the reason why parties always seek to exclude or limit liability for such loss. Furthermore, the scope of consequential losses is not settled or exhaustive. This piece looks the meaning of consequential or indirect loss and the judicial interpretation and effect of clauses in contracts that seek to exclude or limit liability for consequential loss.

2. Damages or Losses in Contract
2.1 In the law of contract, damages are recoverable as compensation for breach of contract. However, only losses caused by or attributable to the breach are recoverable. The losses must not be remote and the test was laid down in the seminal judicial authority of Hadley v Baxendale (1854). In that case the Court of Appeal in England held that two kinds of losses flowed from or arose from a breach of contract namely;
(i) Damages or losses which arose or flowed directly and naturally from the breach and were reasonably foreseeable in the ordinary course of events. These are generally regarded as direct loss.
(ii) Damages or losses which arise from a special circumstance and are only recoverable if they are within the reasonable contemplation of the parties at the time of entering the contract. These are generally regarded as indirect losses.

2.2 A clause in a contract, which excludes or limits liability for consequential loss will only apply to those losses which fall within the second category described as indirect losses. Therefore, the crucial question in the interpretation of such exclusion or limitation clauses is whether the losses sought to be avoided are direct or indirect losses. For example, in a contract for the construction of a new hotel, if the structure collapses due to shoddy work that is physical damage and the cost of rebuilding the hotel constitutes direct loss. If the damage to the structure means that, rooms are not ready for occupation in time for a planned conference then the loss of revenue constitutes indirect loss. However, the loss of the revenue from the planned conference will not be recoverable unless the contractor knew that the construction was to be completed in time for the conference. In such a case the loss of revenue would not be remote but be within the reasonable contemplation of the parties. See, Victoria Laundry v Newman Industries (1949),

3. Traditional Judicial Approach in England
3.1 In the case of British Sugar v NEI Power Projects, (1997), the contract contained a clause limiting the seller’s consequential loss to the value of the contract. NEI were engaged by BS to deliver electrical equipment for a contract sum of £106,585. BS alleged that the equipment was defective and caused frequent breakdown in power supply and claimed damages of over £5m from NEI including increased production costs and loss of profit attributable to the breakdown. NEI sought to rely on the limitation clause to defeat the claims in excess of the value of the contract.

3.2 The key question for the court was the meaning of consequential loss. NEI contended that any reasonable businessman would understand consequential loss to include loss of profits. The Court of Appeal looked at previous appellate decisions on the meaning of consequential loss in commercial contracts and concluded that the term had a settled legal meaning, namely that consequential loss referred to indirect losses as laid down in the case of Hadley v Baxendale. The Court held that a reasonable businessman must be taken to have intended the word to have its established legal meaning.

3.3 NEI argued that consequential loss in the context of this contract should be widely interpreted to refer to all losses other than normal losses which might be suffered as a result of breach of contract. This interpretation would clearly mean that BS claims were not normal loss but consequential loss and therefore BS could not recover more than the value of the contract in respect of such losses. BS argued that consequential loss should be narrowly interpreted as being only loss that did not flow directly from the breach of contract. They argued that as increased production costs and loss of profit did flow directly from the breach of contract, they were not consequential losses and the limit on liability therefore did not apply.

3.4 The trial Judge and the Court of Appeal both found in favour of BS and concluded that the parties had agreed to limit NEI’s liability to loss and damage not directly and naturally resulting from the breach of contract. As the BS loss of production costs and loss of profits were directly and naturally arising from NEI’s breach, the limitation clause inserted into the contract was ineffective against the claims. See also, Hotel Services v Hilton International Hotels UK (2000) CA

4. Modern Judicial Approach in England
4.1 The Court of Appeal decision in Transocean Drilling v Providence Resources (2016) espoused the modern approach and held that a claim for spread costs was excluded by a consequential loss exclusion clause in a drilling contract. Clause 20 of the contract excluded liability inter alia for; (i) any indirect or consequential loss or damages under English law; and/or (ii) loss of production, loss of use, business interruption, loss of profit, etc whether or not such losses were foreseeable at the time of entering into the contract and whether the same are direct or indirect.

4.2 Providence hired drilling rigs from Transocean but the rigs developed faults causing Providence to suffer losses from downtime of 27 days. Transocean claimed against Providence for unpaid invoices for hire and reimbursables. Providence in defence stated that it was not liable to pay hire for periods when the rig suffered downtime due to a failure in Transocean equipment. Providence also counter claimed for spread costs (cost of equipment and services incurred during downtime). Transocean then invoked the consequential loss clause to exclude liability for spread costs and argued that they came under loss of use.

4.3 The trial judge found that Providence could claim for spread costs since they fell outside the ambit of the consequential loss clause. Transocean appealed and the Court of Appeal held that the spread costs claimed by Providence were included in the definition of loss of use and Transocean was not liable. The Court of Appeal held that commercial parties should be free to negotiate and agree to terms as they see fit and courts should not intervene unless necessary. The consequential loss exclusion clause was part of a scheme of allocating contractual risks between two parties of equal bargaining power and it was not an exclusion clause which the courts should construe in a restrictive manner contra proferentem. Lord Justice Moore-Bick said,
“I can see no reason in principle why commercial parties should not be free to embark on a venture of this kind on the basis of an agreement that losses arising in the course of the work will be borne in a certain way and that neither should be liable to the other for consequential losses, however they choose to define them.”

5. Judicial Approach in Nigeria
5.1 There are local decisions on the effect of exclusion and limitation of liability clauses. The traditional attitude was the rule of law approach, that where a party has committed a breach of a fundamental term of the contract, such party could not invoke or rely upon any exclusion or limitation of liability clause in the contract to exclude consequential losses. Many judicial decisions in Nigeria still rely upon the traditional approach. See, Mekwunye v Emirate Airlines (2019). The modern attitude is the construction approach, that the intention of the parties must be deduced from the interpretation of the terms of the contract and this will determine if an exclusion or limitation of liability clause may still apply even when there has been breach of a fundamental term of the contract.

5.2 The attitude of the Supreme Court in Narumal v Niger Benue Transport (1989) was the construction approach. The Court relied upon the House of Lords decision in Photo Productions v Securicor (1980), where the House of Lords, affirming the decision in The Suisse Atlantique (1967) which held that,
“the doctrine of fundamental breach by virtue of which the termination of a contract brought it, and with it, any exclusion clause to an end was not good law; that the question whether and to what extent an exclusion clause was to be applied to any breach of contract was a matter of construction of the contract and normally when the parties were bargaining on equal terms they should be free to apportion the risks as they thought fit making provision for their respective risks according to the terms they chose.”

5.3 Where parties are of equal bargaining power in the contract negotiation and both parties have legal counsel then the construction approach should be applied. Where the one party is stronger or the weaker party cannot negotiate the terms then the traditional approach should be applied and the issue of whether the consequential loss exclusion clause is unfair may also arise. The Federal Competition and Consumer Protection Act 2018 (FCCPA) introduced statutory provisions on unfair contract terms in Nigeria. Section 127 of the Act provides that, a party shall not offer to supply or market or enter into any transaction for any goods or services at a price that is manifestly unfair, unreasonable or unjust, or upon terms that are unfair, unreasonable or unjust. Therefore, consequential loss exclusion clauses which are so tightly worded as to avoid liability for any indirect losses may be declared unfair and invalid.

6. Conclusion
6.1 Judicial authority in England traditionally held that where a contract excludes liability for consequential loss, this refers only to losses recoverable under the second limb in Hadley v Baxendale. This approach has been criticized and modern judicial authority has now adopted the construction approach to the interpretation of consequential loss exclusion clauses.

6.2 In the absence of binding appellate authority on the interpretation of consequential loss exclusion clauses, Nigerian courts should adopt the modern judicial approach in England. In any case, Nigerian courts have already adopted the modern construction approach on the effect of fundamental breach on exclusion and limitation of liability clauses

6.3 It is always better for parties and their lawyers when drafting a consequential loss limitation or exclusion clause, to clearly define the types of losses that should be excluded in order to avoid any ambiguity. Furthermore, counsel when reviewing a contract must always look out for exclusion or limitation of liability clauses and how they affect the liability of their clients.

Jide Bodede LLM(Lond)
08035130694
Jide@lawfieldslawyers.com