Q&As

What is the meaning of ‘consequential loss’ or ‘indirect loss’?

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Produced in partnership with Coral Peutrill of Harrison Clark Rickerbys
Published on LexisPSL on 16/05/2017

The following Commercial Q&A produced in partnership with Coral Peutrill of Harrison Clark Rickerbys provides comprehensive and up to date legal information covering:

  • What is the meaning of ‘consequential loss’ or ‘indirect loss’?

What is the meaning of ‘consequential loss’ or ‘indirect loss’?

In the absence of any agreed definition, where the phrase 'consequential loss' (or 'indirect loss') is used in a commercial contract, it has generally been regarded as referring to losses within the second limb of Hadley v Baxendale.

The court in Hadley v Baxendale held that damages for breach of contract:

‘should be such as may be fairly and reasonably considered either arising naturally, that is 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 the breach of it’

The court created a ‘two limb test’ to understand whether a loss is too remote to be consequential, and therefore not recoverable. The first limb is the knowledge of what happens in the ordinary course of things, which is imputed to the parties whether or not they knew it. The second limb is actual knowledge of special circumstances outside the ordinary course of things, so long as knowledge of the special circumstances was communicated to the parties or was otherwise known by the parties. If a loss falls under the second limb of the Hadley v Baxendale test, then it may be recoverable as a consequential loss.

Accordingly,

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