British Sugar v NEI Power Plants Projects QBD 20 December 1996 [1997 13 BLISS 4]
"Consequential loss" does not fall within the first limb of the "Hadley v Baxendale" test (losses arising naturally from the breach of contract) but falls within the second limb of the test (losses within the reasonable contemplation of the parties).
In this case, NEI (the seller) wrote a letter which was incorporated into the contract which stated that "the seller will be liable for any loss, damage, cost or expense incurred by the purchaser arising from the supply by the seller of any such faulty goods, or materials, or any goods or materials not being suitable for the purposes for which they are required, save that the seller's liability for consequential loss is limited to the value of the contracts". The contract value was £106,000, but British Sugar (the purchaser) sought damages of £5 million arguing that the limitation applied only to consequential loss and not to loss resulting directly or naturally from the breach of contracNEI, relying upon the textbook McGregor on Damages, counter-argued that consequential loss meant "all loss other than the normal loss which might be suffered as a breach of contract, negligence, or other breach of duty".
The law relating to loss has remained unchanged for nearly 150 years following the case of Hadley v Baxendale in 1854. Hadley v Baxendale refers to two types of loss: that arising "naturally" from the breach of contract, and that asy "may reasonably be supposed to have been in the contemplation of both parties as the probable result of the breach of it". In this case, the court rejected NEI's argument and came to the conclusion that the consequential loss referred to in the contract letter meant loss over and above that which arose as a direct result of the breaches which British Sugar could prove in accordance with the rules in Hadley v Baxendale. Consequential loss was held to approximate to loss which Hadley v Baxendale refers to as "in the contemplation of the parties". Therefore, the cap on liability would not apply to damages which arose within the first limb of the Hadley v. Baxendale test - i.e. loss arising "naturally". Thus, if British Sugar was able to demonstrate that its claims were for damages, arising "naturally" they should not be capped at the value of the contract.
This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
