‘Indirect loss excluded’ doesn’t equal ‘no loss of income claims allowed’

Scenario: Your standard contract says you aren’t liable for ‘indirect or consequential loss’. Does that guarantee a business customer can’t sue you for loss of revenue if things go wrong?

No, it doesn’t. You might still be responsible for loss of income or profits.

To understand, we need to talk about words like ‘direct’ loss and ‘indirect’ or ‘consequential’ loss.

Direct loss

Direct loss is sometimes also called ‘normal loss’. It means the loss that a certain breach of contract would cause every person who suffered that breach, or at least every person in the same situation.

An example: Let’s say I sell you a wireless router for $200 that’s rated to carry signal 30 metres in normal circumstances. But in fact, it carries just 20 metres, and customers could have achieved that by spending just $100 on a less powerful router.

Everyone who buys the router is paying $200 for a device that is as useful as a $100 device. Every one of them has wasted $100 the moment they pay their money. That’s the ‘direct’ or ‘normal’ loss they all suffer.

Indirect loss

Now, think of a business that buys the router. It can’t get it to work over 25 metres, and thinks it must be doing something wrong. It calls in a techie, who spends a few hours trying to get it to work, and eventually learns from a forum that the model is underpowered. He charges $180 for his time, and the business loses $1,000 in sales revenue because its staff were offline for the day.

Now, you certainly can’t say that every purchaser will end up out of pocket by the extra $1,180. So it isn’t ‘direct’ or ‘normal’ loss.

They call it ‘indirect’ or ‘consequential’ loss. They mean the same thing.

Let’s see if you get the difference

Imagine I sell you an EFTPOS terminal, and promise 6 hour fix time on breakdowns. And imagine your business loses revenue for a day when it fails, and I don’t respond for 24 hours.

Now, the sole purpose of an EFTPOS terminal is to take revenue. If it breaks and isn’t fixed on time, it’s a given that you will lose some income. How much you lose remains to be seen. And the law might require you to try and reduce the loss e.g. by getting a temporary replacement unit. But if you suffer loss of income, it has to be counted as the direct result of my contract breach. Everyone with an EFTPOS unit that fails can be expected to lose revenue.

So in that case, loss of business revenue would probably count as direct loss. But in our earlier example, the wireless router, loss of business revenue would probably count as indirect, or consequential, loss.

Get it ?

To summarise so far

Direct, or normal, loss is loss from a contract breach that everyone in the same position would suffer.

Everything else is indirect, or consequential, loss.

Where loss of income meets the test of being a loss all similar users would be expected to suffer, it can qualify as ‘direct’ loss. If it’s something extra, it counts as ‘indirect’ or ‘consequential’ loss – even if the parties both knew it was likely to apply to a particular customer.

Conclusion

If your contract says ‘indirect and consequential loss are excluded’, that’s good (but see the important note below). As a service provider, you want them to be excluded. But don’t let anyone tell you that this always excludes loss of income or profits. Those things can count as ‘direct’ loss in some cases.

Important note: Be careful about these ‘limitation of liability’ clauses … some laws ban some kinds of limitations. If you go too far in trying to limit liability, the limitation doesn’t work.

Liability clauses are no place for amateurs. 99% of amateurs (and plenty of lawyers) get them seriously wrong.

Legal references:

See Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 (26 February 2008) for recent law on this topic.