Understanding Consequential Loss in a Contractual Context

There has been some confusion within the South African legal profession in relation to the concepts of direct and consequential damages. The diverse terminology used by legal professionals has only served to exacerbate the uncertainty.

Direct damages have been referred to as direct loss and general damages, while consequential damages have been referred to as consequential loss and special damages thereby resulting in difficulties with interpretation and application of these concepts.

An example of the difference between direct and consequential damages would be where, for example, a taxi is damaged, the actual repairs to the taxi would constitute direct damages, whilst the loss of profit due to the taxi being inoperative would constitute consequential damages.

As will be noted from the taxi example referred to above, direct damages are those which flow naturally and generally from the breach (the foreseeability principle) and the law presumes the breach to be within the contemplation of the parties (the contemplation principle) at the time the contract is concluded. On the other hand, consequential damages are those which, whilst arising out of the breach, are more remote and usually flow from the direct consequences of the breach rather than the breach itself. In MV Snow Crystal case, Scott JA set out the following test in relation to direct damages:

‘to answer the question whether damages flow naturally and generally from the breach one must inquire whether, having regard to the subject matter and terms of the contract, the harm that was suffered can be said to have been reasonably foreseeable as a realistic possibility’.

In relation to consequential damages the claimant must satisfy both the foreseeability and contemplation principles.

Corbett JA in Holmedene Brickworks case contrasted both concepts of damages in light of the abovementioned principles as follows:

‘To ensure that undue hardship is not imposed on the defaulting party… the defaulting party’s liability is limited in terms of broad principles of causation and remoteness, to (a) those damages that flow naturally and generally from the kind of breach of contract in question and which the law presumes the parties contemplated as a probable result of the breach, and (b) those damages that, although caused by the breach of contract, are ordinarily regarded in law as being too remote to be recoverable unless, in the special circumstances attending the conclusion of the contract, the parties actually or presumptively contemplated that they would probably result from its breach.’

Although the above principles are well established, they have been criticised as potentially being too restrictive as to damages that can be claimed by an innocent party. Therefore, if the parties, when concluding a contract, contemplate or intend some form of recovery for consequential damages then this should be dealt with at the time the contract is concluded.

Most contracts include limitations of liability provisions or contain an exclusion of liability in relation to consequential damages. Close scrutiny should therefore be paid to such provisions when contracts are concluded.

The outcome in applying the foreseeability and contemplative principles, as mentioned above, will vary on the basis of the facts and circumstances of each case, thereby affecting the final determination of whether the consequences can be identified as a direct or consequential damage.

From a practical perspective, parties entering into contracts should be wary not to expose themselves up to unintended liability and should take cognisance of the abovementioned principles before entering into a contract.

“Contracts only become relevant when something goes wrong” – Quintus van der Merwe.

 

Written by:

Wesley Rajbansi- Candidate Attorney

Siphesihle Ngubane- Candidate Attorney