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What is Consequential Loss and How Do I Deal With It in My Contract?

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Consequential loss is a term often seen in contracts that represents any indirect loss resulting from a breach of contract. Managing consequential loss within contracts holds significant weight for small businesses and startups in New Zealand. This article explains what constitutes a consequential loss and provides insights into effectively addressing it within your contractual agreements, especially if your business is a service provider.

What is Consequential Loss? 

When entering into contract negotiations, it is essential to understand consequential loss so you can consider a suitable exclusion clause. 

In simple terms, consequential loss refers to indirect losses that arise from a contractual breach. However, these losses are not the direct result of the breach but the subsequent losses incurred, making them indirect.

An Example

For example, Party A, a software company, contracts you to develop a new mobile app for their clients.  However, you fail to deliver the app on time due to delays in the development process. As a result, Party A faces direct losses by having to compensate its clients for the delayed delivery of the app. 

The indirect losses might involve a tarnished reputation for Party A in the market, potentially leading to a loss of future contracts. Additionally, Party A might incur indirect losses as their clients experience setbacks in their business strategies due to the absence of the expected app, causing potential loss of revenue or missed opportunities. These are likely consequential losses.

Common Examples of Consequential Losses

Loss of profit or revenueWhen a breach of contract results in decreased revenue or profits. 

For example, a contractual breach due to cancelled or unmet orders, leading to decreased overall revenue. 
Reputational damage When the business’s reputation or company brand is negatively impacted due to a contractual breach. 

For example, a breach impacting the quality of goods or services resulted in adverse publicity and dissatisfied customers, ruining the company’s reputation. 
Loss of benefitWhen there is a contractual breach preventing a party from receiving their benefit under the contract. 

For example, there is a delay in delivering a website to a client, resulting in them missing the launch of new products, breaching the contract, and leading to a loss of benefit. 
Loss of opportunity When there is a breach of contract, and the company misses out on business opportunities. 

For example, a new business partnership was contingent on the timely delivery of services, but a breach of contract from failing to deliver by the deadline meant the company lost the opportunity for further growth. 

Consequential Loss in New Zealand 

In New Zealand, the contractual interpretation and scope of consequential loss within contracts often depend on the specific circumstances and obligations outlined in the contract. New Zealand courts tend to determine consequential loss on a case-by-case basis, as there is no fixed direction, resulting in broad or narrow interpretation.  

This assessment depends on the context of the breach and the terms and obligations of the agreement between the parties involved. Therefore, determining consequential loss in New Zealand remains open for discussion and is subject to assessment based on individual circumstances in each case. 

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Why You Should Consider Excluding Consequential Loss?

Many parties and individuals have opted to exclude consequential loss in contracts to avoid the risk of an unquantifiable amount of liabilities for the involved parties. This is very common in cases involving reputational loss and goodwill, as it is very hard to quantify the extent of liability a breaching party would face. 

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How Do You Deal with Consequential Losses in Contracts? 

As there is no set definition for what constitutes a consequential loss, you should ensure your contract identifies the types of losses that may arise if you breach your obligations under the contract. 

For example: 

  • AVOID: “This Agreement excludes all consequential damages”; and  
  • USE: “The Parties explicitly waive liability for any remote or indirect damages, such as loss of earnings, client relationships, or potential future earnings, arising from a breach of this Agreement.”

You should also avoid using a general phrase to exclude losses if you provide goods. 

A broader exclusion of consequential loss is ideal if you provide services. For example, as a software developer, consultant or marketing associate, you are more likely liable for consequential loss than the party to whom you provide the services.

Key Takeaways

In summary, you should carefully review consequential losses within contracts as there is a bit of ambiguity in that area of the law. Excluding consequential loss can be a practical initial step to limit a breaching party’s liability in a contract and act as a great negotiating point. However, it is essential to explicitly and precisely set out the types of losses excluded in your contract, or you may be held accountable for indirect losses you presumed were excluded. 

If you need help navigating a consequential loss clause in your contract, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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