When running a business, contracts are an important part of operating smoothly. To protect itself from lawsuits, business’ try to avoid causing losses. However, when a party to a contract breaches the contract, causing a loss, it may find itself liable to the other party. The scope of these losses in not always as obvious as it first appears; parties can have consequential losses which are related to the principal loss.
What is Consequential Loss?
A party may be liable to pay damages if they breach a contract. Damages is the monetary compensation to the party who has suffered loss or damage as a result of the breach.
Consequential loss doesn’t have a precise definition in Australian law. This is because what constitutes consequential loss depends on the context of the contract. Generally, consequential loss (also called indirect loss) is the non-dominant loss from a breach of contract. They are probable consequences or losses contemplated by the parties at contract formation. In contrast, normal loss (or direct loss) naturally arises from a breach.
To illustrate this concept, we can look at a breach of contract between a business and a contractor for services. If the contractor enters a contract to perform a service to deliver something, and doesn’t deliver by a specified time, they have breached their contract. A normal loss for the business could be lost revenue from the person receiving the package. However, a consequential loss could be a lack of distrust from the business client, which leads to a loss of future business with them.
Other examples of consequential losses, depending on the context of the contract and the loss associated, includes loss of:
- future profits
- access to markets
- business reputation
- credit rating.
Payment of damages for consequential loss doesn’t necessarily have to happen. Breaching parties are excluded from paying damages if there is an exclusion clauses in the contract protecting against the loss. Australian common law has established that excluding liability for consequential loss must not be too broad. It must also not be too specific in order to properly protect a party in case an exclusion clause can’t reasonably cover the loss incurred.
Common law also settles that contract terms are given their ‘natural and ordinary meaning’. When courts interpret the natural and ordinary meaning of words, they look at what the words expressly written in the contract means. As a further step, they go on to put the words into the context of what the parties intended by the words used. An exception clause should plainly communicate a party’s intention to be exempt from liability. Therefore, exemption clauses should be carefully worded to ensure consequential losses are evident, and intended to be excluded from liability. Always speak to a contract lawyer when drafting a contract to expressly exclude your consequential losses, and make sure there is a clear intention to exclude your business from liability.
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