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This month's e-bulletin is the third in a series about
clauses in commercial contracts which often give rise to disputes
between the parties. We look here at some of the issues associated with
drafting exclusions of "consequential loss".
Broadly, an exclusion clause is a provision in a contract stating that
one party will not be liable for specified types of losses, even if
those losses were caused by that party's breach of contract. These
clauses are often found in commercial contracts; however, as discussed
below, they do not always have the result that the parties intend.
What is "consequential loss"?
In order for an exclusion clause to be effective, it must clearly
identify what losses are being excluded. However, parties often include
a clause that excludes "consequential loss" (or "consequential damage")
without any proper understanding of that term or what the exclusion will
in fact achieve. Consequential loss is often used in everyday language
as shorthand for a broad category of losses including loss of profit,
loss of opportunity, loss of goodwill and so on; but the legal meaning
of the term may be quite different. As a result, a clause that purports
to exclude liability for consequential losses may not in fact achieve
the result that the parties intended or expected.
Common law
"Consequential loss" is a concept that was developed in common law
jurisdictions such as England. It is therefore helpful to look at how
this term is understood under those laws. Even in such jurisdictions, it
will be seen that there is often uncertainty about the meaning and the
effect of a contractual exclusion.
English (and other English-based) laws have traditionally allowed
recovery of two broad categories of loss caused by a breach of contract:
losses that are the natural consequence of the breach (for example, the
direct cost of repairing a defective building) and losses which do not
arise in the natural course of events but which were nevertheless
foreseeable by the particular parties to the particular contract (for
example, lost profits, if both parties knew that failure to complete a
new factory building on time would cause the purchaser to lose a major
manufacturing contract).
Common law Courts have typically held that "consequential losses" are
those that fall in the second of these categories, and therefore that
clauses excluding such losses will not exclude losses arising directly
and naturally from a breach of contract. However, Courts have also held
that loss of profit and similar losses are not necessarily
"consequential losses" in that second category; in some cases, lost
profit may in fact be the direct and natural consequence of the breach.
There is therefore no certainty that exclusion of "consequential loss"
will always lead to exclusion of liability for lost profit. On the
contrary, exclusion of liability for consequential loss will not exclude
liability for lost profit etc, if it is found on the facts of the case
that these losses arose directly in the natural course of events.
Thai law
Section 222 of Thailand's Civil and Commercial Code
addresses the recoverability of damages under Thai law. It does so in
terms that are similar to English common law:
"The claim of damages is for
compensation for all such damage as usually arises from non-performance.
The creditor may demand compensation even for such damage as has arisen
from special circumstance, if the party concerned foresaw or ought to
have foreseen such circumstances." The first paragraph
of Section 222 allows recovery of all damages that are the normal
consequence of a breach of contract. The second paragraph provides a claim
for compensation that has arisen from "special circumstance", where the
party causing the damage foresaw or ought to have foreseen those relevant
circumstances.
As in common law systems described above, losses such as loss of profit
may in some circumstances be considered to be direct losses that fall
within the first paragraph of Section 222, while in other circumstances
they may be considered to be "special circumstance" losses that fall
within the second paragraph of Section 222. Given the further complication
and uncertainty caused by the fact that "consequential loss" is not itself
a concept that is mentioned anywhere in the CCC, so that it is not a
concept with any clear meaning in Thai law, it will be obvious that
clauses purporting to exclude liability for consequential loss run a real
risk of failing to achieve their objective.
Drafting Exclusion Clauses for Thai Law Contracts
General In view of the difficulties and risks
described above, parties should usually avoid general terms such as
"consequential loss" which are uncertain and unreliable. It is preferable
to take more care and to define more clearly what kinds of damage are
intended to be covered by a contractual exclusion of liability.
For example, if you intend to exclude all liability for loss of profit,
you should say so expressly. Possible wording for this could be as
follows:
"…none of the parties shall be
responsible to the other party for any direct or indirect loss of
profits or for any other special, indirect or consequential loss
[etc.]…" Alternatively, you could include in your
contract a definition of Consequential Loss, again in order to spell out
in more detail exactly what is to be excluded.
Other Restrictions
It is important to note that Thai law contains a number of prohibitions
against excluding liability for certain types of losses. These apply to
all types of exclusion clauses, not just to exclusions of consequential
loss, and will be the subject of a later e-bulletin.
As can be seen from this short overview, the term
"consequential loss" can have a very different meaning to that intended
by the parties to commercial contracts. Before negotiating or drafting
an exclusion of consequential loss it is important to be clear as to
what losses are to be covered to ensure that this is properly reflected
in the wording of your clause.
The content of this e-bulletin does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.
Herbert Smith, Gleiss Lutz and Stibbe are three independent firms that have a formal alliance.
© Herbert Smith (Thailand) Ltd 2007
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