first paragraph of clause 1.15/1.14 provides that neither party shall be liable to the other for loss of use of any works, loss of profit, loss of any contract or for any ‘indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract’, other than under the following clauses:
1 clause 8.8, relating to delay damages;
2 sub‐paragraph (c) of clause 13.3.1, relating to variations by instruction;
3 clause 15.7, relating to payment after termination for Employer's convenience;
4 clause 16.4, relating to payment after termination by the Contractor;
5 clause 17.3, relating to intellectual and industrial property rights;
6 the first paragraph of clause 17.4, relating to indemnities given by the Contractor5 ; and
7 clause 17.5, relating to indemnities given by the Employer.
With the exceptions listed at (a)–(g) above, therefore, neither party is to be liable to the other for the loss of use of any works, loss of profit, loss of any contract or for any ‘indirect or consequential loss or damage’ which may be suffered by the other party in connection with the Contract.
The wording that causes most difficulty, especially to those from a non‐common law background, is the reference to indirect or consequential loss or damage. These expressions are used in the English law of contract to distinguish certain types of loss or damage and the circumstances in which the innocent party may recover compensation for them. Construction, sale and other commercial contracts often contain clauses excluding or limiting liability for consequential or indirect loss resulting from a breach.
English law in general compensates a party for any loss which is a usual consequence of a breach of contract. Thus, if in breach of contract a builder badly installs the windows in a house he is building it is a usual consequence of his breach that damage should result to the surrounding walls by the ingress of rain water; and the building owner may be able to recover the cost of putting right that damage from the builder. Such a loss would be direct loss, flowing naturally or usually from the breach of contract.
In some circumstances the innocent party may be able to recover damages even where a consequence of the breach of contract was unusual. An innocent party may be able to recover damages where the loss was not a usual consequence of the breach if it was, nevertheless, within the reasonable contemplation of both parties at the date of the contract that such a loss may result from the breach. Suppose that in the above example of the defective window installation the owner had intended to let the house once completed and as a result of the builder's breach of contract could not do so for some months later than he would have been able to let the house had the builder complied with the contract. If the builder had been told at the date when the contract was formed that the owner intended to let the house when completed the owner may be able to recover damages equivalent to his loss of rent for an appropriate period on the basis that such a loss was within the reasonable contemplation of both parties at that time. The loss of rental income would be indirect or consequential loss, recoverable because of the special knowledge which the builder possessed at the date of the contract which made that kind of loss within the parties' reasonable contemplation.
The distinction between direct and consequential or indirect loss originates in a policy adopted by the common law of limiting the recoverability of compensation, or damages, for breaches of contract so that the party at fault is not held liable for any and all loss resulting from a breach, however improbable or unpredictable such a loss might be. Loss beyond the limit is regarded as ‘too remote’ to be recoverable. In the famous Victorian case of Hadley v Baxendale (1854) 9 Ex. 341 Baron Alderson said (at [354]):
‘Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.’
‘If the special circumstances were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.’
The rule thus has two limbs:
1 loss or damage which arises naturally, or according to the usual course of things, from the breach of contract; or
2 loss or damage which may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach given the special circumstances known to them at the date of the contract.
An example of the distinction between the first and second limbs of Hadley v Baxendale is Victoria Laundry Ltd v Newman Ltd [1949] 2 KB 528. A laundry company, intending to enlarge its business, ordered a boiler from the defendants, to be delivered on a certain date. Owing to a mishap while the boiler was being dismantled by third parties it sustained damage and delivery to the company was delayed. The defendants were aware of the nature of the plaintiffs' business, and by a letter had been informed that the plaintiffs intended to put the boiler in use in the shortest possible space of time. As a result of the delay the laundry lost certain exceptionally lucrative contracts. It was held that although the defendants were not liable for the loss of profits on these contracts, of which they had no knowledge, they nevertheless knew or must be taken to have known from the circumstances and their position as engineers and business people that there would be a business loss of some kind and were liable for such loss, which would have to be assessed.6
When clause 1.15/1.14 excludes liability for ‘indirect or consequential loss or damage’ it excludes liability in contract for a range of potential losses which would otherwise be recoverable if the parties had the relevant knowledge; it can be seen as confining the recoverable range to the first limb of the rule in Hadley v Baxendale.
2.8.2 Cap on Contractor's Total Liability
The second paragraph of clause 1.15/1.14 in the 2017 editions provides that the total liability of the Contractor to the Employer under or in connection with the Contract, other than:
1 under clause 2.6, relating to Employer‐supplied materials and Employer's equipment;
2 under clause 4.19, relating to temporary utilities;
3 under clause 17.3, relating to intellectual and industrial property rights; and
4 under the first paragraph of clause 17.4, relating to indemnities provided by the Contractor
are not to exceed whatever sum may be stated in the Contract Data or, if no sum is stated, the Accepted Contract Amount (in the Red and Yellow Books) or (in the Silver Book) the Contract Price stated in the Contract Agreement. In this part of clause 1.15/1.14, the Contractor's total liability under or in connection with the Contract is thus limited or capped. The Accepted Contract Amount is defined in clause 1.1.1 of the Red and Yellow Books to mean the amount accepted in the Letter of Acceptance for the execution of the works in accordance with the Contract; the Contract Price is defined
