Loss of profit, is it a direct or indirect loss?


Parties to contracts especially in construction, often include clauses in their contracts seeking to exclude claims for indirect and consequential losses, believing that such clauses are likely to prevent claims for loss of profit.

Whether loss of profit is a direct or indirect depends on the actual facts of the case. When we review a contract we will always try and protect our client from any indirect or consequential loss that has arisen from any breach they have committed. As a loss of profits can be a direct or indirect loss, the parties need to be clear whether they want to exclude all loss of profit claims and that the contract is clear on this intention.

In Croudace Construction Ltd v Cawoods Concrete Products Ltd, the judge held that the word ‘consequential’ did not cover any loss that directly resulted from the late delivery of masonry blocks for a construction project. The contract stated that the suppliers were not under any circumstances liable for any consequential loss arising from late supply. The judge held that the losses began straight away following the breach of being late and were to be regarded as a direct loss.

In the case Polypearl Limited v E.On Energy Solutions Limited the court found that a clause which limited the liability of the parties for breach of contract including loss of business and loss of profit was ambiguous and not clear whether loss of profit etc covered all loss of profit claims or only indirect loss of profit claims. The court held that E.On’s failure to meet the minimum purchase obligation would be a direct loss of profit and that it was unlikely that anyone in business would agree to exclude a direct loss of profit and therefore E.On was liable.

In the same contract there was a limit of liability set at £1,000,000 which the court ruled was clear and unambiguous and therefore this was the maximum amount of damages to be awarded and not the £6.4 mil E.On was claiming.

These cases are a useful reminder that it is important when drafting exclusion clauses they must be expressed clearly and without ambiguity. If there are losses likely to result directly from a breach, then limiting your liability for indirect or consequential loss is not enough.