Isn’t all loss consequential?. A review of recent case law and its relevance to contractual practices within the built environment

• Author: Adam Connell, Jim Mason
• Position: University of Salford, Salford, UK; University of the West of England, Bristol, UK
• Pages: 176-194

Isn’t all loss consequential?

A review of recent case law and its relevance

to contractual practices within the

built environment

Adam Connell

University of Salford, Salford, UK, and

Jim Mason

University of the West of England, Bristol, UK

Abstract

Purpose – The purpose of this paper is to demystify the meaning of the term “consequential loss” in

relation to the practice of construction law. Parties may have different understandings of the term and

typically an exclusion clause will not solely relate to consequential loss, but will also include other heads of

losses for which the party will not be liable for, such as loss of prot, loss of revenue and loss of business.

Design/methodology/approach – The question emerges as to whether the term consequential loss

has a denitive legal meaning in its own right. This study seeks to ascertain the denition of the term

consequential loss within the construction industry through a review of the legal position regarding

liability for breach of contract and consequential loss through the consideration of the case law relating

to this topic and the associated secondary sources of information.

Findings – The study concludes by elucidating a clear interpretation of the term consequential loss

and guidance of how it should be used in contract law.

Originality/value – Recent cases and established authorities are considered together for the rst time

in this work which assists in the development of legal principles of direct and indirect losses and the

determination of how they apply to the built environment.

Keywords Damages, Consequential loss, Contract law, Exclusion clauses

Paper type Research paper

Introduction

Parties who enter into contracts are seeking to balance the risk and reward derived from

that contract. The normal remedy for breach of contract in English law is to pay

damages. Oliver Wendell Holmes wrote “the duty to keep a contract at common law

means a prediction that you must pay damages if you do not keep it-and nothing else”

(Wendell Holmes, 1897).

However, the ability to recover damages for all losses is likely to discourage commercial

transactions (Collins, 1993). Therefore, it is common when negotiating contracts that the

party providing goods or services will seek to limit their liability arising from a breach. This

is where the problem develops though, as according to Forfaria “the law of damages […]

suffers from an abundant terminology. In many cases, the words have lost their original

meaning [and] require some elucidation” (Forfaria, 2006).

There are various ways in which liability can be limited. It may be by way of

providing a nancial cap on liability or by dening the types of losses that the party will

be liable for as a result of a breach. Adopting the latter option, in dening the type of

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1756-1450.htm

IJLBE

7,3

176

Received 20 January 2014

Revised 20 January 2014

Accepted 24 April 2014

InternationalJournal of Law in the

BuiltEnvironment

Vol.7 No. 3, 2015

pp.176-194

©Emerald Group Publishing Limited

1756-1450

DOI 10.1108/IJLBE-01-2014-0002

losses that the party will be liable for, the traditional approach is to dene liability by

exclusion. However, in doing this, the parties “often rely on concepts and terminology

which are not readily understood […] [and] […] are not necessarily relevant to the

commercial risks of that particular deal” (Sumroy et al., 2010).

One such particular concept is that of consequential loss, which would appear to be a

type of loss a party commonly seeks to exclude from their liability. The hypothesis

examined in this paper is that the denition of the term consequential loss, and the type

of losses to which it relates, is unclear, or not understood at all. Therefore, clarication is

required in order that its use is benecial to those negotiating contracts can do so from

an informed position.

Aim and objectives

The aim of this research is to investigate the legal interpretation of the term

consequential loss and to establish whether case law supports a common denition of it.

To full the aim of this research, it is necessary to rstly identify the legal position in

respect of the extent of liability for breach of contract generally and how it has developed

over time. Secondly, the various alternative legal approaches and challenges to the

interpretation of the term consequential loss need to be considered. Thirdly, it is

necessary to establish whether the term consequential loss can be dened, whether by

type of loss or by the circumstances relating to the loss incurred, and whether the

incorporation of such a term is benecial to the drafting of a contract.

Methodology

Existing published information is a key element to this study, and predominantly

consists of primary source material of existing case law. Secondary sources such as

journals and articles can be used to supplement this and broaden the understanding.

The research that has been adopted is therefore predominantly of a qualitative nature,

and analyses the existing material available.

Qualitative research of a legal nature has two elements to it (Chynoweth, 2008). The

rst of these is doctrinal research, which is research in the law, and the other is

interdisciplinary research, which is research about the law.

Doctrinal research is “concerned with the formulation of legal ‘doctrines’ through the

analysis of legal rules” (Chynoweth, 2008), and has traditionally formed the research

method adopted in studying law. This type of research involves the study and analysis

of legal precedents, texts and publications through a normative, subjective and

argument-based process and is similar to research within the humanities. Other areas of

the built environment adopt the quantitative and causal research techniques that are

usually used in the natural sciences. Due to the heavy reliance on the analysis of written

texts, doctrinal legal research is often referred to as “black letter law” and the type of

questions considered seek to ask “what is the law?” in a particular context.

The general principle of liability for breach of contract

Prior to investigating the legal situation with regard to consequential loss, it is

necessary to understand the general principle regarding liability for breach of contract,

and the extent of that liability.

Where a party to a contract is in breach of that contract, they shall be liable to the

other party for nancial compensation by an award of damages (Barrett, 2008). This

principle was conrmed in the case of Robinson v. Harman (1848)1 Ex 850, where the

177

A review of

recent case

law