ConsequentiaI Ioss, knock for knock

cIauses and caps on IiabiIity.

Denys Hickey
Ince & Co
Hadley v axendale [1854].
8aron Alderson
CeneraI PrincipIes of ConsequentiaI Loss
0irect and ndirect loss
The Pule in Hcdley v 8cxendcle [1854]
- Limb 1
- Limb 2

CeneraI PrincipIes of ConsequentiaI Loss

The Pule in Hcdley v 8cxendcle [1854]
- Limb 1
- Limb 2
0efinition of 'Consequential Loss'
"..anythny beyond [the] normal measure [oj damayes], such
as rojts lost or exenses ncurred throuyh the breach.j
not too remote."
8ut: Consequential Loss is not necessarily only indirect, ie
Limb 2! t can also be direct, i.e. Limb 1
ExcIusion CIauses and the Contra Proferentem ruIe
Strict construction of clauses which exclude "Consequental
Loss".
Case law approaches this on the basis that 'consequential
loss' is only that falling within the second limb of Hadley v
8axendale.
e. 0nly ndrect consequential loss is excluded, and not
drect consequential loss!
ConsequentiaI Loss excIusions
in popuIar Pro-Forma offshore contracts
The main hire contracts (TUCHPE, T0WC0N and
SUPPLYTVE 89, revised to 05) and HEA7YC0N 08 contain
consequential loss provisions which purport to protect the
parties from claims for 'consequential losses'.
8ut, what sort of consequential loss is actually excluded:
Herdentor. Considered clause 18(J) of the TUCHPE
contract, which provides as follows:
"Save jor the rovsons oj ... nether the Tuyowner nor
the Hrer shall be lable to the other arty jor loss oj
rojt, loss oj use, loss oj roducton or any other ndrect
or consequental damaye jor any reason whatsoever."

ConsequentiaI Loss excIusions

Held:
that if the words are construed by themselves the expression
"cny other ndrect or consequentcl dcmcye" gives content
to the meaning of "loss o] pro]t, loss o] use, loss o]
producton" and suggests that only indirect losses of profit,
use and production were to be excluded together with any
other indirect losses arising.
ConsequentiaI Loss excIusions
n Ecse Fcth ltd v Leons Mcrne Mcncyement [200], cl 18.J
of T0WC0N was considered [same wording as above].
Held: That although "loss of profits" is potentially capable of
being indirect loss the court was clear in its view that clause
18.J was not applicable to a claim for "loss of profit" which
(here) was properly to be considered as a direct loss within the
first limb of Hcdley v 8cxendcle.
So, under a T0WC0N charter, only indirect loss of profit is
effectively excluded by the ref to consequentcl dcmcye, not
a direct loss of profit!

SUPPLYTIhE 8
Clause 12 (c) of the SUPPLYTVE 89 form provides:
"Consequentcl 0cmcyes: Nether pcrty shcll be lcble to the
other ]or, cnd ecch pcrty hereby cyrees to protect, de]end
cnd ndemn]y the other cycnst any consequental damayes
whctsoever crsny out o] or n connecton wth the
per]ormcnce or nonper]ormcnce o] ths Chcrter Pcrty
ncludny but not lmted to, loss o] use, loss o] pro]ts, shut
n or loss o] producton cnd cost o] nsurcnce."
SUPPLYTIhE 8
That exclusion clause has been considered by an arbitration
tribunal (2002).
Held: that even if consequential losses fell under the first
limb in Hcdley v 8cxendcle, (ie not indirect) in any event
they would be excluded by the words "loss of use" in clause
12(c).
Clause 12(c) Supplytime 89 has therefore (arguably)
received a less restrictive interpretation than other similar
consequential loss exclusion clauses in offshore contracts.
SUPPLYTIhE 8
8UT:
Notwithstanding this arbitration decision, there remains a
good chance that a court/tribunal could decide that Clause
12(c) of Supplytime does not operate to exclude recovery of
damages in respect of loss of use, loss of profits, production,
shut in or cost of insurance if it could be said that in the
particular circumstances of the contract those losses were
direct.
This line of authority also appiles to bespoke, non 8VC0
offshore agreements involving FPS0s etc, which purport to
exclude 'consequential loss'.

SUPPLYTIhE 05 and HEAVYCDN 08

Cl 14 (c) of Supplytime 05 and Cl 2J of Heavycon are identical:
"Consequentcl 0cmcyes.
Nether pcrty shcll be lcble to the other ]or cny consequentcl
dcmcyes whctsoever crsny out o] or n connecton wth the
per]ormcnce or nonper]ormcnce o] ths Chcrter pcrty cnd ecch pcrty
shcll protect, de]end cnd ndemn]y the other ]rom cnd cycnst cll such
clcms ]rom cny member o] ts 6roup cs de]ned n Clcuse 14(c).
'Consequental damayes' shall nclude, but not be lmted to, loss oj
use, loss oj rojts, shut n or loss oj roducton and cost oj
nsurance whether or not joreseeable at the date oj ths Charter
arty."
SUPPLYTIhE 05 and HEAVYCDN 08
8roader than the Supplytime 89 equivalent cl 12 (c).
"whether or not joreseeable" could be interpreted as
being intended to exclude direct consequential losses as
well as those falling under limb 2 of Hcdley v 8cxendcle.
However there is also a risk that given that the specific
term used is those clauses is still "consequential loss" a
court/tribunal may interpret the clause as excluding only
limb 2 losses and not any losses falling under limb 1.
Need to amend these clauses to exclude 'direct' or indirect
loss.
Summary
Not all consequentcl loss is regarded in law as indirect. Some
consequential loss is direct, ie typically loss of profit in the
Energy/0ffshore sector.
Therefore, merely excluding consequentcl loss will not
necessarily exclude loss of profits.
The commonly used industry contracts do not, reliably,
exclude direct loss of profits etc., only indirect loss of profits
etc. A lesson to be heeded for offshore bespoke contracts.
Pecommend dealing with this by expressly referring to
'direct' losses in the relevant clauses, if the widest exclusion
is desired.

Knock for Knock cIauses

Use and operation of Knock]orKnock clauses:
Applicability of KnockforKnock clauses when there has been
Negligence.
"Contrcctor shcll not be responsble ]or loss o] or dcmcye to the
property o] the Clents or o] ther contrcctors cnd subcontrcctors
or ]or the personcl n]ury or decth o] the employees o] the Clent
or o] ther contrcctors cnd subcontrcctors crsny out o] or n cny
wcy connected wth the per]ormcnce o] ths cyreement even ]
such loss, dcmcye, n]ury or decth s ccused wholly or pcrtclly by
the cct, neglect, or de]cult o] the Contrcctors ther employees
contrcctors or subcontrcctors..."
Idemnity and hoId harmIess
" The Contrcctor shcll ndemn]y the Clent cnd hold t hcrmless
]rom cnd cycnst cll clcms/losses ]or the ]ollowny when
connected wth ths contrcct:
(c)..cll n]ures to [cnd] decths...o] persons n the Contrcctor
6roup..
(b)..cll dcmcyes to or losses o] the Contrcctor's Property...".
Caps on IiabiIity
Liquidated 0amages.
Partial cap or overall cap:
Caps on liability are construed against the party relying upon
the provision if the clause is ambiguos!
As a contractor it is 7TAL to have an overall liability cap in
the contract, if this can be achieved.
"Notwthstcndny cnythny contcned n ths Ayreement, the
Contrcctor's mcxmum lcblty to the Clent ]or brecch o] ts
oblyctons hereunder, or relctny hereto, whether n contrcct,
tort or otherwse, cnd whether nvolvny neylyence or
msconduct by the Contrcctor, shcll not exceed 0S0 5 mllon, n
cny event".

Thank You