The Contracting Compass initiative provides insight on English Law issues relevant to oil & gas contracts. The initiative comprises a series of seminars each accompanied by a dedicated White Paper.
In the most recent edition of the Contracting Compass series we focus on Consequential Loss.
The White Paper begins by asking "what is "consequential loss"?" - a question which has been widely debated in the oil & gas industry.
In an inherently hazardous industry, protection from risks associated with losses which arise under commercial contracts is crucial. Therefore, the importance of a provision for "consequential loss" is certain; it is the meaning of the term which is uncertain.
The Paper therefore attempts to unravel the shroud of uncertainty by undertaking to answer the question in two parts:
- Examine the narrow meaning of "consequential loss" at law and consider the risks of relying on the meaning at law by using "naked language", undefined in the contract.
- The Paper then considers, from the same two perspectives, its definition in contract and the "blanket of protection" this provides.
Beginning with the landmark judgment of Hadley v Baxendale, the Paper traces the subsequent evolution of the law and the contemporary interpretation of "consequential loss". Part 1 concludes that "consequential loss" has a very narrow meaning at law and the uncertainty surrounding the "naked language" is unlikely to offer much protection.
In Part 2 the focus is more on the definition of "consequential loss" and its development in contract and practice.
The Paper considers its evolution within LOGIC contracts following recent case law.
The original wording in the LOGIC contracts is recognised as inadequate to provide a "blanket of protection" that excludes the type of direct losses that will typically arise from a breach of an oil and gas contract. However, despite a near perfect definition in the new LOGIC contracts, uncertainty still exists at common law. This therefore emphasises the importance of defining "consequential loss" and adopting best practice in drafting.
In consideration of the main points addressed in the Paper, a practitioner should address the following when drafting a provision for "consequential loss":
- The naked language "consequential" or "indirect" will not be enough;
- Include specific heads of loss relevant to the losses the parties anticipate may arise;
- Make it clear that specific heads of loss are included whether they arise directly or indirectly;
- Expressly address foreseeability to avoid issues of recovery of damages in tort