Saturday, 3 April 2010

Limiting liability: what is a direct loss?

The differnce between direct, indirect and consequential loss always bothers me. I probably didn't pay enough attention to Professor Atiyah back in 1975. In a recent case (GB Gas Holdings v Accenture [2009] EWHC 2734 (Comm) (06 November 2009)  the Commercial Court considered  limitation of liability clause in the contract which provided:
16.2 Consequential Loss
Subject to Clause 16.7 or as otherwise expressly provided in this Agreement, in no event shall either Party be liable whether in contract, tort (including negligence) or otherwise in respect of any of the following losses or damages:
16.2.1 loss of profits or of contracts arising directly or indirectly;
16.2.2 loss of business or of revenues arising directly or indirectly;
16.2.3 any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential or punitive;

It was common ground that the words "directly" and "indirectly" in Clause 16.2 referred respectively to the first and second limb of the rule in Hadley v Baxendale (1854) 9 Exch. 341:
    Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of it.
    The Court found that Centrica could claim as direct losses:

    • sums paid by Centrica to gas distributors based on incorrect data about customers' gas consumption provided by the IT system;
    • compensation paid to Centrica's customers for the poor service and billing problems;
    • additional borrowing charges incurred to finance the business due to late billing or non-billing;
    • the cost of chasing customer debts which were not actually due; and
    • additional stationery and correspondence costs required to keep customers up to date on fixing the issues.
    ... which was, in effect,  everything that Centrica had claimed.  So, a generous definition of direct losses and, although the judgment simply reiterates the Rule in Hadley v Baxendale, it's useful to have clarification, although perhaps my classmates got this first time round.

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