The clause everyone uses, and misreads
An exclusion of any indirect or consequential loss including loss of profits appears in countless contracts. The assumption behind it is that all loss of profits is excluded. English law does not read it that way, and the gap between what drafters intend and what the clause achieves has produced decades of litigation.
The reason is that consequential loss is not a plain-English phrase to an English court. It is a term of art tied to the rules on remoteness of damage.
The Hadley v Baxendale two limbs
Recoverable losses split into two categories under Hadley v Baxendale (1854) 9 Exch 341. The first limb is direct loss: loss arising naturally, in the ordinary course, from the breach - foreseeable to anyone in the parties' position. The second limb is indirect or consequential loss: loss arising from special circumstances known to both parties at the time of contracting.
English courts read consequential loss in an exclusion clause as meaning second-limb loss only. So an exclusion of consequential loss removes the special, out-of-the-ordinary losses - but not the losses that flow naturally and directly from the breach, even when those are lost profits.
When loss of profits is direct: British Sugar and Watford
Loss of profits can fall in either limb. If a supplier delivers a defective billing system and the client cannot bill its customers, the lost revenue is direct - the natural consequence of a broken billing system. In British Sugar plc v NEI Power Projects Ltd [1997] EWCA Civ 2438, defective power-station equipment disrupted production; the Court of Appeal held that losses flowing directly and naturally from the breach were not consequential, even though they were lost profits, so the consequential-loss clause did not protect the supplier.
Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317 confirmed the approach: indirect or consequential losses meant second-limb Hadley loss, so the exclusion did not cover direct loss of profits from defective software. (Those direct losses were, however, caught by a separate cap at the contract price - a reminder that the exclusion and the cap do different jobs.)
When loss of profits is consequential
The other side of the line: profits that depend on special circumstances are second-limb, and an exclusion will catch them. If you hire a car and the company fails to provide it, profit you would have made using it for an undisclosed side business is consequential - it turns on facts the other side did not know. Tell them at contracting, and it may become recoverable; leave it unsaid, and the exclusion and remoteness defeat it.
So the same head of loss - lost profit - can be direct in one contract and consequential in another. What decides it is whether the loss flows naturally from the breach or depends on special, communicated circumstances.
Drafting an exclusion that does what you mean
If you want to exclude all loss of profits, do not rely on consequential loss including loss of profits. Say it directly: exclude loss of profits, revenue, or anticipated savings (whether direct or indirect) as its own limb, then exclude any other indirect or consequential loss separately. The phrase whether direct or indirect is what stops a court reading your listed losses as mere examples of consequential loss.
If you want to exclude only genuine consequential loss and keep direct loss of profits recoverable, say that too: exclude indirect or consequential loss and add that, for the avoidance of doubt, this does not exclude direct loss of profits arising naturally from the breach. In review, treat any consequential-loss list as a trap, and check whether the losses you care about are direct.
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Practical checklist
- Do not assume excluding consequential loss excludes all loss of profits - it usually means second-limb Hadley loss only.
- Remember direct loss of profits, flowing naturally from the breach, can survive a consequential-loss exclusion (British Sugar [1997] EWCA Civ 2438; Watford [2001] EWCA Civ 317).
- To exclude all profit loss, list loss of profits, revenue, or savings (whether direct or indirect) as its own limb.
- To keep direct loss of profits recoverable, exclude only consequential loss and say so expressly.
- Treat consequential loss including loss of profits as ambiguous - the including can narrow it.
- Identify whether the losses you actually fear are direct or consequential before relying on the exclusion.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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