Last week’s Law-Now “LOGIC – remedying default to the innocent party’s satisfaction” (click here to view) related to termination for failure to remedy defects to the company’s satisfaction under LOGIC contracts. In the same case, the High Court expressed some views on whether a LOGIC contract would entitle the innocent party to claim “loss of profits” in the event that the contract was wrongfully terminated.
Although this aspect of the decision is not binding, the court suggested that the innocent party would not be able to claim loss of profits – potentially leaving it without a remedy.
On 26 March 2007, Bluewater entered into a sub-contract with Mercon for the fabrication of a tower based soft yoke system (“SYMS”) for installation as part of the development of the Yuri Korchagain Field in the Caspian Sea.
The Contract contained the usual LOGIC exclusion for Consequential Loss that stated:
“For the purpose of this Clause 25 the expression “Consequential Loss” shall mean loss and/or deferral of production, loss of product, loss of use, loss of revenue, profit or anticipated profit (if any), in each case whether direct or indirect, and whether or not foreseeable at the EFFECTIVE DATE OF COMMENCEMENT OF THE CONTRACT.
Notwithstanding any provision to the contrary elsewhere in the CONTRACT and except to the extent of any agreed liquidated damages provided for in the CONTRACT, BLUEWATER shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the BLUEWATER GROUP’s own Consequential Loss and the CONTRACTOR shall save, indemnify, defend and hold harmless the BLUWATER GROUP from the CONTRACTOR GROUP’s own Consequential Loss.”
The issue arose, if Bluewater had wrongfully terminated the contract, was Mercon entitled to its lost profits.
In the event, the High Court decided that Bluewater had not wrongfully terminated the contract, so the issue did not form an important element of the court’s decision.
However, the court did offer the view, obiter, that:
- The parties had sought to agree their own definition of “Consequential Loss” for the purpose of Clause 25.
- It follows that the meaning of consequential loss must be found from within the contract, rather than cases relating to “indirect loss” under Hadley v Baxendale.
- The parties had broadened the definition to avoid any distinction between direct or indirect loss and had therefore eliminated any requirement for the loss to be foreseeable.
- The parties carefully chose that definition which, on its face, clearly applied to loss of profit or anticipated profit by Mercon which arose from a wrongful termination of the Contract.
- In those circumstances, even if the court had found that there was a repudiatory breach arising from the wrongful termination of the Contract, it did not consider that Mercon could recover loss of profit or anticipated profit.
- Equally, Bluewater could not claim any loss of profit arising from Mercon’s breach of contract.
The High Court’s decision is arguably in contrast to recent Court of Appeal decisions that have sought to limit the scope of exclusion clauses relating to consequential loss. The arguments in relation to this point seem to have been limited, and it is not apparent whether the full gambit of cases relevant to this issue were considered.
For example in Kudos Catering (UK) Limited v Manchester Central Convention Complex Ltd.  EWCA Civ 38, the Court of Appeal decided that the words “ … shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits… suffered by [Kudos] or any third party in relation to this Agreement…” did not exclude loss of profits for failure to perform the contract, as it would render the agreement devoid of contractual content.
Other recent developments include:
- Energy Sector: ‘consequential loss’ clause may impact on injunctive relief (click here to view the full article).
- Oil and Gas Contracts: Excluding “Loss of Profits” (click here to view the full article).
This remains a developing area of law and parties should consider the potentially wide impact of “Consequential Loss” clauses before agreeing to them.
For the full case please click here.