What is the Law in Your Life?

Five things to know about consequential loss

Under Scots law, parties to a contract will not always recover all of their losses. The party in breach of contract will not be liable for losses that are considered too remote. This means that even if it is shown that that party's breach caused the loss, if that loss was sufficiently unusual or unlikely then he will not usually be liable for it unless he was aware of some special or unusual circumstances when he entered into the contract.

1.  Consequential loss or indirect loss is one of two types of loss recoverable under a contract.  Consequential loss is loss that does not arise naturally but that which could have reasonably been contemplated by someone with knowledge of special circumstances outside the usual course of things. This is in contrast to direct loss which is loss that arises naturally, according to the usual course of things, from the breach.

2.  The term "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. However, the legal meaning of the term may be quite different.

3.  The default position is that a party to a contract will be liable for both direct and consequential loss.  However, it is not uncommon for both parties to exclude liability for consequential loss.

4.  It is important to be specific when attempting to exclude a category of loss. Consequential loss is a term that is cloaked in ambiguity.  This can make determining what is a consequential loss as opposed to a direct loss a difficult task

5.  Profit is not always classed as consequential loss and is therefore not always excluded by a clause that excludes this type of loss. The Scottish courts have held that loss of profit can sometimes be a direct loss.