When companies do business with one or another there is nearly always a contract involved. Differences often arise between the parties and ultimately one party may deem the other`s behaviour to be such that it has breached the contract and sues the breaching party for losses it has suffered.
However, not all losses that result from a breach of contract are recoverable and there are various restrictions imposed by the Court. These restrictions include causation (there has to be a sufficiently clear causal link between the breach of contract and the loss suffered), contributory negligence (where some of the losses suffered were caused by the actions or inactions of the innocent party) and mitigation (where the innocent party failed to minimise its losses).
Courts will also employ a remoteness test as set out in Hadley -v- Baxendale (1854) to ascertain the extent of the losses that can be recovered resulting from the breach of contract. This test is in two parts:
- Losses arising naturally, according to the normal course of things, from the breach of contract.
- Such losses as may reasonably be supposed to have been in the contemplation of the parties at the time of the contract as a probable result of breach.
Parties frequently insert a limitation clause in their contract to exclude liability for indirect or consequential losses (as described in the second part of the above test) to limit their liability in respect of losses flowing from any breach of contract.
In the recent case of McCain Foods (GB) Limited -v- Eco-Tec (Europe) Limited the High Court made a ruling on the kinds of losses that would fall under the first and second limbs of the remoteness test. The Claimant bought a waste water treatment system that also produced bio gas for them to use as fuel to generate heat and electricity under a contract including a clause excluding indirect liabilities. The system supplied was defective and the Claimant sued for losses including:
- The additional cost of buying electricity instead of generating its own.
- Costs of buying a new replacement system.
- Loss of revenue was to be generated by the system (from selling certificates of renewable energy production).
- Costs of contractors and other employees.
It was accepted by the Defendant that in supplying a defective waste water treatment system it had breached the contract and the cost of replacement was a direct loss but that all other losses were indirect losses flowing from the breach of contract and were consequentially excluded under the liability clause.
However, the Judge held that all of these losses arose naturally in the ordinary course of things and therefore concluded that they were direct losses, for which the Defendant must compensate the Claimant.Conclusion
The case illustrates just what a complex and difficult area of law this is. It also provides a warning to companies that they cannot just rely on an exclusion of liability clause to prevent them from incurring losses.