Notes · Damages · exclusions
What “consequential loss” really means
Contracts exclude “consequential loss” all the time — and almost everyone reads it as “everything that flows on.” The courts don't. It means only the second limb of Hadley v Baxendale, so normal, direct losses (even lost profit arising naturally) survive the exclusion. A blueprint of what the words actually carry.
What “consequential loss” actually means
The phrase turns up in almost every set of conditions, usually to include or exclude a head of liability — and almost everyone reads it like the dictionary: events that follow. The courts do not. In British Sugar v NEI Power Projects (1997) the Court of Appeal anchored it to Hadley v Baxendale (1854), which splits recoverable damage into two limbs: the first limb — losses arising naturally, in the usual course of things (direct, normal losses) — and the second limb — special losses that were in both parties’ contemplation at the time of contracting. Consequential loss is the second limb only.
Why the exclusion is narrower than it looks
It follows that an exclusion of “consequential loss” does not bar the normal, direct losses — even large ones. In Hotel Services v Hilton(2000) the malfunctioning “Robobars” produced overpaid rental, removal and storage costs and lost profit; all were held to be normal, first-limb losses, outside the exclusion, and recoverable. In McCain v Eco-Tech (2011) the lost electricity sales from a failed gas-treatment system were likewise first-limb losses, not consequential. Normal losses survive the clause.
On a railway — a worked example
Take a supply contract for the signalling and interlocking system, with a clause excluding “indirect or consequential loss.” The equipment arrives defective, fails its Site Acceptance Test, and has to be stripped out and reworked — delaying commissioning. Split what the Contractor loses across the two limbs:
| 1st limb — normal (recovered) | 2nd limb — special (excluded) |
|---|---|
| Stripping out, rectifying and replacing the defective equipment. | The early-completion bonus the Contractor would have earned under its separate head contract with the Employer. |
| Repeating the Site Acceptance Test and commissioning. | The profit on another line its track-laying fleet was booked to move to, lost because it was held on this one. |
| The commissioning team and the booked possession standing idle. | — |
| The prolongation and site running costs of the delay. | — |
The losses on the left arise naturallyfrom any defective supply — every contractor in that position suffers them — so they are first-limb losses and survive the exclusion, however large they run. The losses on the right are peculiar to this Contractor’s particular arrangements; the supplier is liable for them only if it knew of them when it contracted. They are the second limb — and it is those, not the obvious ones, that the exclusion actually bites.
Put the other way round, the clause does the opposite of what most people assume. It does notshield the party in breach from the big, everyday losses — the rework, the repeated testing, the idle crews, the prolongation. Those all get through and stay recoverable, however large they run. All it quietly removes are the narrower, less obvious “special” losses — the missed bonus, the profit on the other line. So relying on a “consequential loss” exclusion to cap your real exposure is a mistake: it trims the small, unusual claims and leaves you fully on the hook for the large, ordinary ones.
The FIDIC point
This is exactly why FIDIC does not rely on the word alone. Sub-Clause 17.6 (Limitation of Liability) expressly names loss of use, loss of profit, loss of any contract and indirect or consequential loss. That belt-and-braces list exists becausethe case law says “consequential” on its own would not have caught normal losses like lost profit. So read 17.6 as a list of named heads, not as a single synonym — and when a bespoke clause simply excludes “consequential loss,” read it against the two limbs, not the dictionary.
Consequential loss is not everything that follows — it is Hadley’s second limb, and little else. If you are relying on (or fighting) an exclusion, test the loss against the two limbs, not the ordinary meaning of the word.