UK Law and Practice Contributed by: Richard Brown, Louisa Chambers, Adam Wyman and Michael Ross, Travers Smith LLP
of things or “ordinary circumstances”. Indirect (or consequential) loss refers to loss that does not arise naturally but could have reasonably been foreseen by the parties because of special circumstances made known at the time of entering into the contract. If a supplier breaches the terms of an outsourcing contract and the breach directly results in loss to the customer (including loss of business or profits), or if the customer incurs expenses in remedying the breach or obtaining replacement services, such loss is likely to be recoverable by the customer as direct loss. If, however, the supplier’s breach results in the customer incurring liability towards a third party under a separate contract – the terms of which were brought specifically to the supplier’s attention during a tender process or during pre-contractual negotiations (but which would not otherwise have been in the reason - able contemplation of the supplier upon entering into the contract) – then the loss incurred by the customer under the third-party contract is likely to be catego - rised as indirect loss. Whether a loss is a direct loss or an indirect loss is ultimately a question of fact. This has important impli - cations for both customers and suppliers, as set out here. Market Practice The customer in an outsourcing arrangement will usually try to ensure that it is able, under the con - tract, to recover all direct loss incurred by it (including direct loss of profit, business and revenue). It is often sensible to expressly set out particular heads of loss that are recoverable, so as to evidence that these are agreed to constitute direct loss. The supplier, on the other hand, will usually seek to exclude liability for: • indirect, special or consequential loss; and • loss of business, profit or revenue (including where these constitute a direct loss). Market practice by suppliers is to list specific types of loss that are wholly excluded, with the most common being loss of revenue, loss of actual or anticipated profit, and loss of reputation or goodwill.
It is important to note that loss of profits (together with the aforementioned other categories of loss) can amount to a direct or indirect loss. Therefore, if a con - tract excludes the right to recover indirect, special or consequential loss, the innocent party may still be entitled to recover loss of profits that arise naturally and directly from the breach (ie, direct loss). As such, if a supplier wishes to exclude its liability for loss of profits, this should be done expressly and separately from any exclusion of indirect, special or consequen - tial loss. In practice, the types of loss recoverable under the contract will typically be a matter for negotiation between the parties. Categories of Loss Not Typically Subject to Any Limitation of Liability Most outsourcing contracts will be subject to the Unfair Contract Terms Act 1977 (UCTA). Where UCTA applies, the parties to a contract cannot exclude or limit liability for death or personal injury that arises from negligence. This rule applies under all circumstances, regardless of whether the contract was entered into on one party’s standard terms and regardless of the relative bargaining power of the contracting parties. It is possible to limit or exclude other types of loss caused by negligence (ie, other than personal injury or death), provided that the clause meets the test of “reasonableness” set out in UCTA (which requires the court to assess a range of factors). If the contract is on standard terms, further provisions of UCTA may also be need to be considered. However, many outsourc - ing agreements are relatively “bespoke” contracts that have been subject to significant negotiation between the parties – in which case, these further provisions are unlikely to be relevant. In practice, however, the courts are generally reluctant to intervene under UCTA unless they consider that there is either: • a significant imbalance between the parties in terms of bargaining power; or • the clause leaves the innocent party with no meaningful remedy for the most significant types of breach likely to occur under the contract.
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