British Sugar Plc v NEI Power Projects Limited & Anor

In a negotiated commercial contract, a limitation for consequential loss does not ordinarily cap losses flowing directly and naturally from breach in the ordinary course. An established Court of Appeal construction in a materially similar context should be followed unless materially different language or context justifies departure. The fact that loss is described as loss of profits, or falls outside a normal measure of damages, does not by itself determine its character. Direct and natural losses may therefore remain unrestricted, while losses arising from special circumstances, including losses within the second limb of Hadley v Baxendale, may be limited.

British Sugar contracted for the design, supply, delivery, testing and commissioning of electrical equipment. The amended contractual term made the seller liable for loss arising from faulty goods, but limited liability for consequential loss to the value of the contract. British Sugar claimed more than £5 million, mainly for increased production costs and lost profits following power-supply breakdowns.

On a preliminary issue, Alliott J held that the limitation did not apply to loss flowing directly and naturally from breach. NEI appealed, arguing that loss of profits was consequential and relying on the distinction between normal and consequential loss. The central issue was the meaning and effect of consequential loss in the contractual limitation.

Waller LJ gave the judgment of the court. Aldous and Evans LJJ agreed. The appeal was dismissed with costs.

1. The negotiated term imposed liability for loss, damage, cost or expense arising from faulty goods, subject only to a limitation for consequential loss. Its construction had to give effect to both the opening liability words and the subsequent limitation.
2. Millar's Machinery v David Way (1935) 40 Com Cas 204 and Croudace Construction Limited v Cawoods Concrete Products Limited (1978) 2 Lloyd's 55 construed consequential loss in materially similar contractual contexts. The fact that Croudace concerned delay, whereas the present case concerned faulty equipment, was not a material distinction. A later Court of Appeal should follow an established construction unless there is a radical difference in language or context.
3. The court adopted the distinction between loss flowing directly and naturally from breach in the ordinary course and loss arising from special circumstances. The latter category could include loss within the second limb of Hadley v Baxendale. A limitation confined to consequential loss therefore did not capture direct and natural loss.
4. The appellants' proposed division between losses relating to defect remedying under clauses 6(ii) and 6(iii) and all other losses gave insufficient effect to the opening words of clause 6(iv). On the true construction, liability for loss not directly and naturally resulting from breach was limited to the value of the contract, while direct and natural losses were not subject to that cap.

• Court of Appeal (Civil Division) [1997] EWCA Civ 2438: appeal dismissed with costs.
• Queen's Bench Division (Alliott J): a preliminary issue was determined in favour of the construction that consequential loss did not include loss flowing directly and naturally from breach.