Fiona Walkinshaw on the wording of exclusion clauses.

Fiona Walkinshaw is a partner and head of the commercial litigation group at Garretts in London.

Eighteen months after the Court of Appeal's decision in British Sugar v NEI Power Projects, clauses still emerge which purport to limit or exclude a supplier's liability for "consequential loss" but fall short of achieving such protection.

The problems stem from the court's view in that case on the meaning of consequential loss.

The plaintiff, British Sugar, contracted the defendant, NEI Power Projects, for the design, supply, delivery, testing and commissioning of electrical equipment for a price of about £106,000.

British Sugar alleged the equipment was poorly designed and installed, resulting in breakdowns in the power supply, increased production costs and loss of profits, and sued for damages in excess of £5m.

The contract terms contained a clause that NEI would be liable for any loss, damage or cost arising from the supply, "save that their liability for consequential loss would be limited to the value of the contract".

NEI argued that most of British Sugar's claim was for consequential loss, so its liability was limited to the contract value.

British Sugar argued that all loss arose "directly and naturally" from the breach and was not subject to the limitation.

It was for the court to decide which losses were consequential.

Although NEI argued that "consequential losses" were all losses other than "normal" losses, the court felt that such an interpretation was too narrow.

Instead it found, by reference to the remoteness test in Hadley v Baxendale, that other losses such as loss of profit could be a "direct and natural" result of the breach and so not consequential. It went on to find that British Sugar could recover.

Although the decision in British Sugar appears to confuse the relationship between remoteness of damage and types of recoverable damage and would benefit from further clarification, suppliers choosing to ignore this decision do so at their peril.

In trying to limit liability it is no longer safe to refer to generic terms such as direct loss, indirect loss or consequential loss, and suppliers are best advised to describe with precision the types of loss they want to avoid, irrespective of their true categorisation.