Desktop version

Home arrow Sociology arrow A short guide to contract risk

CLAUSES DEALING WITH CONSEQUENTIAL LOSS

there are two different situations where liability for consequential losses may arise: either by express terms (specific undertakings in the contract) or by implied terms (default rules). the latter are harder to recognize, as they cannot be detected by simply reading the contract. they are "invisible terms.” Because accepting liability for such losses involves the acceptance of risks that are hard to assess, consequential losses are customarily excluded from contractual liability.

The simplest limitation of liability clause addressing consequential loss may state: "In no event shall the parties be liable for any consequential loss.” or "In no event shall the Supplier be liable to the Purchaser for any consequential loss.” But what do these clauses actually mean? While there is a general understanding that you should usually attempt to exclude liability for consequential loss, there is no universal, global truth as to what "consequential loss” means.

In some countries and situations, loss of profits is consequential loss; in others it is not. Laws differ considerably. The CISG, for example, does not mention consequential loss. Instead, it states that all foreseeable losses caused by the breach, including loss of profit, need to be compensated. It is therefore safest to "make your own law” through your contract and clarify what kinds of losses you want to exclude.

To provide more clarity about consequential loss, many limitation clauses list the damages and losses that are excluded—for example, "loss of revenue, loss of profit, loss of contract, loss of business, loss of use, loss of production, interruption of business, loss of operation time, costs of capital, cost in connection with interruption of operation, economic loss,” with the addition "or any special, incidental or consequential loss or damage howsoever caused.” A nonexhaustive list of examples is typically part of a supplier's contract terms. A buyer would typically want a shorter list. In addition to a clause excluding liability for consequential loss, a supplier would normally want to have a monetary cap for damages relative to the purchase price.

 
Source
< Prev   CONTENTS   Source   Next >

Related topics