Consequential loss refers to losses that may arise indirectly from a breach of contract, and allocating liability for consequential loss can be a highly negotiated point when parties agree to the terms of a contract. Excluding liability for consequential loss can be a good starting point to limit a breaching party’s liability under a contract and is hence often a negotiating point. This article will outline consequential loss and how to deal with it in your contract if you provide services to another party.
What is Consequential Loss?
Generally speaking, consequential losses are indirect losses that do not naturally flow from the breach of contract itself. Some examples of consequential losses that are typically excluded from a party’s liability in a contract include:
- loss of revenue;
- loss of profit;
- loss of benefit;
- loss of reputation;
- loss of contract;
- loss of opportunity; and
- loss or corruption of data.
These consequential (or indirect) losses contrast to direct losses, which naturally and directly flow from the breach.
Example
Party A grows apples and sells them to various bakeries in the local area. Party A engages you to deliver their apples to Party C, who makes and sells apple pies at their local bakery. You fail to deliver the apples to Party C, and Party C requests a refund from Party A for the apples. In this example, the direct loss will likely be Party A’s loss from issuing the refund to Party C. The indirect loss might be a liability for Party A’s loss of reputation and loss of contract. Party C could also ask Party A for the loss of profits they have suffered as they were not able to sell the pies. This would be considered an indirect loss.
Continue reading this article below the formConsequential Loss in Australia
In Australia, the courts have no firm decision on what exactly comes under the scope of consequential loss.
As such, consequential loss is open to a broad or narrow interpretation depending on the particular facts of each case.
Why Exclude Consequential Loss?
Consequential loss is typically excluded from commercial contracts because it can open parties to unquantifiable liability under the contract. For example, it is very difficult to know the exact amount a breaching party would be liable for if they were liable for a loss of reputation or goodwill.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
How Should I Deal with Consequential Loss in my Contract?
Due to the uncertainty of what might constitute consequential loss in your contract, you must first consider the types of losses that may arise due to the breach of your obligations under the contract. Secondly, be as prescriptive as possible about what is being excluded from your liability.
Be as clear and explicit as possible about the types of losses that you are excluding from your liability.
For example:
| DO NOT | “All consequential loss is excluded from this Agreement” |
| DO | “The Parties exclude all liability under this Agreement for loss of profit, loss of business, loss of reputation, loss of revenue and loss of opportunity” |
However, if you are providing services (for example, as a consultant), a broader exclusion of consequential loss is ideal. This is because, generally, you, as a consultant, are more likely to be liable for consequential loss than the party to whom you are providing the services.
Key Takeaways
Excluding consequential loss can be a good starting point to exclude a breaching party’s liability under a contract. However, the types of losses you are excluding should be clearly and explicitly outlined in the agreement. Otherwise, you risk being liable for losses that you otherwise assumed were indirect.
If you need help negotiating a consequential loss clause in your contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Consequential loss generally refers to indirect losses that flow from the breach of a contract. This is, in contrast, to direct or natural loss, which results directly from the breach.
When negotiating a contract, you should be as prescriptive as possible about the kinds of losses you are excluding from your liability and avoid using a general catch-all phrase to exclude consequential losses.
We appreciate your feedback – your submission has been successfully received.
