by John Cartwright
The liability of professionals in tort has been uncertain for a number of years, as the general scope of negligence has been developed by the courts through such cases as Anns v Merton London Borough Council [8] AC 728; Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520; D & F Estates Ltd v Church Commissioners for England [1988] 2 EGLR 263. The House of Lords has now clearly set its face against a generous — some would say adequate — scope of liability: see D & F Estates Ltd v Church Commissioners for England; Murphy v Brentwood District Council [1990] 2 All ER 908 and Department of the Environment v Thomas Bates & Son [1990] 46 EG 115.
The consequence has been a growth in the requirement that professionals give clear, contractual warranties to purchasers, tenants and mortgagees to compensate for the absence of tort liability. However, it is becoming common for professionals to limit their liability in such warranties; one particular limitation is an express exclusion of their liability for “economic” and/or “consequential” loss. The legal interpretation of exclusion clauses of this kind can be unclear and some clauses can be deceptively sweeping in their application.
Consequential loss
In Saint Line Ltd v Richardsons, Westgarth & Co Ltd [0] 2 KB 99 Atkinson J said at p 103:
The word “consequential” is not very illuminating, as all damage is in a sense consequential, but there is a definition in the Oxford English Dictionary…: “Of the nature, of a consequence, merely; not direct or immediate; eventual.” It cites the definition of “consequential damages” from Wharton as: “losses or injuries which follow an act, but are not direct or immediate upon it”.
Two different interpretations have been placed on consequential loss in the context of liability for breach of contract.
The second rule in Hadley v Baxendale
A plaintiff in a claim for breach of contract will recover the loss which arises naturally from the breach of contract — ie the loss which the defendant should expect to arise in the usual course of things from the breach. If he incurs additional losses which do not arise naturally from the breach of contract, but arise only out of special circumstances which the defendant could not have been expected to have in contemplation, the plaintiff will be able to recover the additional losses only if the special circumstances were drawn to the defendant’s attention before the contract was made. The losses which arise naturally and from special circumstances are often known respectively as the losses recoverable under the first and second rules in Hadley v Baxendale (1854) Exch 341.
Certain cases have taken the view that consequential loss means the damages which are recoverable under the second rule in Hadley v Baxendale, for example, Millar’s Machinery Co Ltd v David Way (1934-5) 40 Com Cas 204; Saint Line Ltd v Richardsons, Westgarth & Co Ltd (supra) and Croudace Construction Ltd v Cawoods Concrete Products Ltd [8] 2 Lloyd’s Rep 55.
Therefore, if a consultant excludes his liability for consequential loss, he will still be liable for all the plaintiff’s losses which he should have expected to flow in the usual course from his breach of contract. For example, if a building is defective as a result of a consultant’s breach of a collateral warranty which he has executed in favour of a first tenant, the following losses might result:
(i) the cost of remedying the defects;
(ii) the cost of alternative accommodation by the tenant; or the loss of regular rental income by the tenant while the building cannot be sublet;
(iii) the loss of a particularly lucrative subletting arrangement which the tenant had arranged, so that he loses more than usual when the completion of the building is delayed.
Under Hadley v Baxendale the plaintiff would be able to recover (i) and (ii) as losses which arise in the usual course; but (iii) will be recoverable only under the second rule — that is, only if details of the particularly lucrative subletting have been drawn to the defendant’s attention. Therefore, a clause excluding liability for consequential loss would exclude liability for (iii), but not for (i) or (ii).
McGregor’s view
A different interpretation is put in McGregor on Damages, 15th ed 1988 at $$26. McGregor distinguishes between normal loss and consequential loss: “Normal loss is that loss which every plaintiff in a like situation will suffer, the consequential loss is that loss which is special to the circumstances of the particular plaintiff.”
In effect, it seems that normal loss is the basic cost of giving the plaintiff his bargain; consequential loss is the cost of compensating the plaintiff for any other losses he has made or gains he has failed to make by virtue of the breach. This interpretation also has some support in the cases: for example, in P & M Kaye Ltd v Hosier & Dickinson Ltd [2] 1 All ER 121 at p 139, Lord Diplock regarded the loss of the regular profitable use of a building, consequent upon a breach of contract by the contractor, as consequential damage.
Taking the example of the tenant’s losses flowing from a defective building, given in the previous section, McGregor would say that only (i) — the cost of remedying the defects — could be categorised as normal loss. Both (ii) and (iii) — usual and unusual financial losses from being unable to use the building — are consequential.
The mere fact that there are these differing interpretations shows that there is clearly a likelihood of ambiguity in the simple expression consequential loss — and that ought of itself to make one wary of using the expression or acknowledging its use in a commercial document. But another factor to bear in mind is that in the context which we are here discussing, the term is being used in an exclusion clause. Such a clause — and therefore the words used in it — will be construed contra preferentem: strictly against the person seeking to rely on it to limit his liability. This may well have influenced the cases such as Millar’s Machinery, Saint Line and Croudace, referred to above, all of which were exclusion clause cases, which have taken a restrictive view of the meaning of consequential loss.
Economic loss
Some consultants’ warranties and appointments currently in circulation contain an exclusion not only of consequential loss but also of economic loss. This is disastrous for the recipient of the warranty. The essence of contractual liability is that damages are awarded to put the plaintiff into the position, financially, in which he should have been had the defendant not broken his contract, ie it protects his bargain. Contractual damages, therefore, are typically designed to cover economic losses: see Robinson v Harman (1848) 1 Ex 850 at p 855.
An exclusion of liability for economic loss therefore pulls the teeth of the whole warranty. If there is to be any meaning in the term, it must be contrasting economic loss with physical damage, drawing on the ideas of tort. However, we know from tort cases, such as D & F Estates Ltd v Church Commissioners for England and Murphy v Brentwood DC, that the cost of putting right defects in a building should be characterised as economic, rather than physical, damage; it seems, then, that the exclusion of economic loss would preclude even the remedying of defects in the building — the very loss for which the purchaser or tenant will often have taken the warranty.
Conclusion
The main conclusion for all who are drafting consultants’ appointments and warranties is to avoid such terms as consequential loss and economic loss. In particular, any exclusion of liability for all economic or consequential loss is far too wide — in effect it takes away most of the protection which the warranty on its face is designed to confer. There is, of course, much discussion at present in the construction industry about whether professionals should be required to give warranties at all — and if so, of what kind and to whom. The argument that the warranties should be limited to the scope of the (ever receding) tort liability is nonsense; the whole point of taking collateral warranties is to give a direct protection which is not available by simply relying on tort. The market expects professionals to undertake responsibility for their work — extending to remedying defects in buildings for which they are responsible. To enter into a warranty which excludes all liability for economic and consequential loss is giving with one hand, and taking back with the other.
Indeed, such a warranty may even go further. It seems that professionals — unlike contractors — may still have a liability in tort in respect of the cost of repairing the defects in buildings for which they are responsible. In Murphy v Brentwood DC [0] 2 All ER 908 at p 919 the House of Lords approved the decision in Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1, which held that a designer was liable for the cost of remedying defects in a building caused by the defective design.
If a warranty excludes liability for consequential and economic loss — and if it is so drafted as to affect all the professional’s liability (ie in tort as well as in contract) — it may therefore be found to limit what would otherwise have been held to be the liabilities incurred in tort.
Drafting of professionals’ appointments and warranties is the staple diet of the construction lawyer. It is to be hoped that all those involved in drafting such documents will think hard before incorporating such expressions as consequential loss and economic loss into them.
