What types of damages are considered direct or indirect?
GB GAS HOLDINGS (CENTRICA) v ACCENTURE (CA) [2010]
This case was an appeal against the High Court’s (HC) ruling that certain types of losses suffered by C were direct, including ex-gratia payments to customers, and were therefore not excluded by the liability clause set out in the contract. The question for the Court of Appeal (CA) was whether the range of direct losses claimed were indirect instead; if so, they would not therefore be recoverable.
facts:
For the facts see here but essentially A claimed that damages under certain heads of loss were not recoverable by C as they were ‘indirect or consequential’ and therefore excluded by the corresponding exclusion clause within the contract.
decision:
The CA agreed with the HC’s ruling that all of the following heads of damage were not to be excluded because they arose naturally from, and were a very likely consequence of, the breaches in question:
- ex-gratia customer compensation;
- additional wholesale gas charges;
- additional borrowing charges;
- additional staff costs;
- unbilled charges written-off; and
- costs of communicating with customers including stationery expenses.
points to note:
- The case is a plain reminder that by themselves, exclusions of indirect and consequential loss exclude relatively little and suppliers must be much clearer about the losses for which they will and will not accept liability.
- However, this is by no means the end of the story. C has other hurdles to overcome before it can get its hands on any damages. In particular, it will have to establish that these were damages for which A had ‘assumed responsibility’ in line with the Transfield v Mercator [2008] case. The CA declined to rule on that issue at this stage but this has probably always been the best way for A to avoid liability.
- The case is also notable because both Courts have held that breaches can be aggregated to constitute a fundamental breach of warranty, if overall there is a serious adverse effect on the customer’s business.
- The CA decision is not particularly surprising and is consistent with previous case law. It is the application of the decision to the particular facts which highlights the evident risks which suppliers, particularly of financial IT systems, face and leaves A exposed to a very substantial damages claim.
- Suppliers therefore need to find other ways of mitigating their risks, especially by:
- emphasising in the contract the importance of thorough customer acceptance testing and the reduced risks it is prepared to assume responsibility for post-acceptance in live running;
- listing more meaningful categories of loss which the parties should address as being either recoverable or non-recoverable;
- expressly excluding any additional common law rights if that is the intention;
- ensuring that any financial limit of liability is likely to be enforceable by ensuring that it is ‘reasonable’ in context;
- insisting upon and taking advantage of opportunities to remedy allegations of breach even if comparatively minor - there was some suggestion that A failed to take action to deal with complaints raised because it considered them insufficiently serious.