What 'consequential loss' actually means
A clause excluding indirect and consequential loss does far less than drafters expect. Since British Sugar plc v NEI Power Projects (1998) 87 BLR 42, the courts have held that consequential loss means only losses under the second limb of Hadley v Baxendale (1854) 9 Exch 341 - losses from special circumstances communicated at the time of contracting. Losses arising naturally from the breach (the first limb), including direct loss of profits, remain fully recoverable despite the exclusion.
So a SaaS provider whose platform fails for a week, or a supplier whose defective parts halt a customer's production line, can remain exposed to the customer's entire first-limb loss of profits even where the contract excludes indirect and consequential loss. There is judicial unease with this line - Transocean Drilling v Providence Resources [2016] EWCA Civ 372 called it questionable - but 2 Entertain v Sony [2020] EWHC 972 (TCC) confirms it still holds.
Soteria: wasted expenditure is not 'lost profit'
The trap deepened in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440. A major IT system was never delivered, and the customer claimed its wasted expenditure. The exclusion clause barred liability for indirect or consequential loss, and for loss of profit, revenue, and savings - but the Court of Appeal held that wasted expenditure was a different head of loss entirely and was not caught, awarding a substantial sum.
Wasted expenditure, the court reasoned, is the cash you actually burned (being worse off), not the profit you hoped to make (being better off). Excluding the latter does not exclude the former.
Enumerate every excluded head
After Soteria, a loss-of-profit exclusion is not enough. To exclude a head of loss you must name it. List each excluded category expressly - loss of profits, revenue, anticipated savings, wasted expenditure, cost of re-procurement, cost of cure, loss of goodwill, and loss of data - with a qualifier such as whether direct or indirect, and whether or not foreseeable.
An alternative, used in energy-industry model forms, is to define consequential loss contractually rather than relying on its narrow common-law meaning. Either way, do not assume the words indirect or consequential do the work.
Remoteness can narrow general damages: The Achilleas
General damages are limited not only by exclusions but by remoteness. Beyond the Hadley v Baxendale two-limb test, The Achilleas [2008] UKHL 48 added an assumption-of-responsibility limit: even a foreseeable loss may be irrecoverable if the defendant cannot reasonably be taken to have assumed responsibility for that type of loss. A charterer redelivering a vessel a few days late was not liable for the owner's loss on a follow-on fixture at a swung market rate.
This is an additional limiting principle for exceptional cases, not a replacement for Hadley - but in volatile markets (commodities, energy, technology licensing) it can materially restrict the general damages recoverable for delay or non-performance.
Why this makes LD clauses valuable
Put together, the general-damages fallback is uncertain: narrowed by remoteness, capped by the mitigation duty, and shaped by exclusion clauses whose legal meaning may diverge from their perceived effect. That is exactly why a well-drafted LD clause - fixing the sum, removing the evidential burden, and side-stepping remoteness arguments - is so valuable.
It also cuts both ways: a party resisting an LD clause on the basis that general damages would be lower should check whether The Achilleas and the exclusion clause actually support that, or whether the LD figure is in fact the more favourable outcome. An LD clause is only as good as the exclusion clause beside it - and the fallback may be worth less than either side assumes.
Use at the desk
Practical checklist
- Do not assume an 'indirect/consequential loss' exclusion covers direct loss of profits - it does not (British Sugar (1998) 87 BLR 42).
- Exclude wasted expenditure expressly - a loss-of-profit exclusion does not catch it (Soteria v IBM [2022] EWCA Civ 440).
- Enumerate every excluded head of loss with 'whether direct or indirect, and whether or not foreseeable'.
- Consider defining 'consequential loss' contractually rather than relying on its common-law meaning.
- Remember remoteness and assumption of responsibility can narrow general damages (The Achilleas [2008] UKHL 48).
- Weigh the LD clause against the exclusion clause and the general-damages fallback - the fallback may be worth less than assumed.
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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