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Cite as: [2000] EWCA Civ 74

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Case No: QBENF 1998/1259/A2

Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday 15th March, 2000
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)

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Mr. T. Etherton QC and Mr. P.J. Kirby (instructed by Memery Crystal London WC1B 5HT for the Appellant)
Mr. P. Naughton QC and Miss McCredie (instructed by Goldsmiths London SW1Y 6SE for the Respondent)
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As Approved by the Court
Crown Copyright ©


This is the judgment of the court.
1. In the minibar to be found in many hotel bedrooms unimagined problems lurk. The honesty minibar, which depends on guests accounting for what they have used, generates forms of dishonesty ranging from leaving without paying to refilling bottles with water or other suitably coloured fluids. One answer to this problem was the Robobar, a device developed and marketed by the appellants, which electronically registered on the guest's account any incursion into its contents. The respondents, a large hotel chain, between 1986 and 1996 used the appellants' Robobars in a number of their hotels. But the Robobars themselves proved problematical: their chillers leaked ammonia which both corroded the equipment and created a risk (albeit a very small one) of injury or even fatality to guests. Repeated endeavours to correct the malfunction failed.
2. We are concerned in this appeal with a single action brought by the hotel chain (Hilton) in respect of two of its hotels, the Park Lane Hilton and the Langham Hilton, both in London. In each of these the respondents (Hilton) in 1990-1 installed Robobars rented, generally on 10-year fixed-term agreements, from the appellants (HSL). At the end of 1995 all the Robobars were switched off in Hilton's UK hotels. They were dismantled and removed, but those in the Park Lane and Langham Hiltons, where alone they had been showing a profit, were reinstalled without their chillers and from February to May 1996 remained in use. But, functioning now at room temperature, they ceased to show a profit and in June 1996 were finally replaced.
3. Hilton had by then issued proceedings alleging repudiatory breach of an implied term of merchantable quality and claiming damages. In the Official Referee's Court His Honour Judge David Wilcox found for Hilton on liability in the action relating to the Langham and Park Lane hotels and awarded them damages, with interest, under the following heads:
* Rental either overpaid or paid on a failed consideration
* Cost of removal and storage of the chiller units and cabinets
* Loss of profit on the minibars.
4. This appeal is about the last two of these heads of damage. They amounted respectively to £151,065 (together with interest) and £127,000. The appeal, which concerns not their quantification but their recoverability, turns almost entirely on the exemption clause in both rental contracts:
(1) The Company [HSL] will not in any circumstances be liable for any indirect or consequential loss, damage or liability arising from any defect in or failure of the System or any part thereof or the performance of this Agreement or any breach hereof by the Company or its employees.
(2) Without prejudice to paragraph (1) above all and any liability on the Company's part arising in contract or tort (including negligence) or otherwise, howsoever, for any loss, damage, liability or injury of whatsoever nature arising in any way whatsoever from or in connection with this Agreement and/or the System and any part thereof (including without limitation the use, supply, possession, installation, repair or presence of the same) shall be limited to the net value of the System and the Company's performance of its obligations under Section 9.
(3) The limitation on and exclusions from liability contained in this Section shall not apply to or affect the Company's liability for death or personal injury caused by the negligence of the Company or its employees for which it is legally liable.
5. Pleaded by way of defence, the exemption clause was met with a bare denial that HSL could rely on it; and, having been barely alluded to in argument, it played no part in the judgment. Before us, Mr. Terence Etherton QC for HSL contended that once the validity of the clause was admitted (as it was) he was entitled to succeed without more, there being no pleaded ground for excluding Hilton from its effect. Moreover, he submitted, the applicability of the words "indirect or consequential" is fact-sensitive, and there are no relevant fact findings. For Hilton, Mr Philip Naughton QC contends not only that he can properly argue the inapplicability of the exemption clause to the two material heads of damage but that Mr Etherton's ground of appeal is not large enough to allow him to argue, as he has to, that the damage comes within the second limb of Hadley v Baxendale. For reasons which we hope will be apparent from what follows, the court was attracted by neither submission and heard out the arguments.
6. For HSL Mr Etherton submitted (a) that the law on exemption clauses has taken a wrong turning from which it is not too late for this court to retrieve it; but (b) that even on its present path of error the law exempts HSL under the clause. Mr Naughton for Hilton contested both propositions and submitted that on any view both contentious heads of loss fall outside the exemption clause.
7. Before turning to the decided cases, it is relevant to look at the letter of 29 April 1988 from HSL which opened the negotiations:
"...We believe Robobar presents a very viable opportunity for your Hotel to increase it's Food and Beverage profit as is already the case at many Hotels throughout the World."
8. It is clear from the evidence that Hilton thereafter rented Robobars in order to sell drink at a profit, and preferably an improved profit. It does not follow, for example, from the fact that most of its Robobars in the event made steady losses that Hilton's aim was simply to increase the hotels' overall profitability by using the Robobars as a loss leader. In this situation we see nothing wrong with the simple conclusion that both the cost of having to get and keep the equipment out of the hotel bedrooms and the loss of any profits which it would otherwise have been earning were direct or natural consequences of the dangerous unserviceability of the equipment and therefore untouched by an exemption clause which (since all recoverable loss is literally consequential) plainly uses "consequential" as a synonym of "indirect".
9. But nothing, at least in this area of the law, is so simple. Mr Naughton contends that a solid body of authority treats "indirect or consequential" damage as loss arising out of mutually known special circumstances, leaving all naturally occurring loss in the category of direct or immediate damage. Mr Etherton submits that this simplistic allocation of contractual intent between the two limbs of Hadley v Baxendale is erroneous. He takes his stand on the different taxonomy adopted by Mr Harvey McGregor QC in the leading textbook on damages. In his first chapter (paragraph 25) McGregor rejects the distinction between general and special damage in favour (paragraph 26) of "normal" and "consequential" losses: the former he describes as those which every claimant in a like situation will suffer, the latter as those peculiar to the particular claimant's circumstances. As an instance of normal damages he gives the net market value of a benefit lost by the breach. Then:
"Consequential losses are anything beyond this normal measure, such as profits lost or expenses incurred through the breach, and are recoverable if not too remote. The distinction is not the same as that between the first and second rules in Hadley v Baxendale: a consequential loss may well be within the first rule."
10. If consequential losses include profits lost or expenses incurred through breach, it is unsurprising that such loss may come within the first rule in Hadley v Baxendale. What we find more problematical than the conclusion is the premise that such losses cannot be normal losses in the author's own sense of losses which every plaintiff in a like situation will suffer. Whether they do, it seems to us, must depend on the facts - and to this extent Mr Etherton is right to submit that the question is fact-sensitive. McGregor, by contrast, derives his meaning of "consequential" from the more catholic usage to be found in cases such as Mondel v Steel (1841) 8 M&W 858. This was an unsuccessful demurrer to an action for damages for consequential loss brought by a plaintiff who had already succeeded in setting off damages for failure to meet the contractual specification in an action against him for the contract price. Parke B spoke differentially of loss in market value and "any consequential damage". This is of course a legitimate usage which, to the extent that it cuts across the two Hadley v Baxendale categories, simply requires cases to be decided in a different vocabulary. The difference barely affects the recoverability of damages, since both normal and consequential damages are in Mr McGregor's scheme recoverable so long as they are not too remote; but while in relation to damages this represents a continuum, its effect on exclusion clauses is to require a knife to be inserted between the two kinds of loss. This no doubt is why, in a note contained at present in his supplement, Mr McGregor reflects:
"It may be that there is justification for the courts to construe the term consequential loss more narrowly where exclusion clauses are concerned - exclusion of liability for consequential loss is a common feature of commercial contracts - but the argument in the text as to the term's proper meaning is still adhered to. Ideally one would wish it to be possible to construe consequential loss narrowly where exclusion clauses are concerned but resort to the contra proferentem rule and widely in all other cases; but two competing interpretations of this nature may be difficult to achieve."

We may perhaps add that we are not convinced by the passage in which Mr McGregor goes on argue that those authorities which appear to confine the meaning of consequential loss to the second limb of Hadley v Baxendale lack logic. Not only do we have some difficulty in accepting the reasoning (namely that it is contradictory first to communicate special circumstances and then to accept an exclusion of liability for damage arising out of them: all worthwhile exclusions are contradictory); we find difficulty in allowing a substituted meaning of "consequential", even if it is analytically more satisfactory, to colour decisions based on a different and usage-based meaning.

11. It may be thought, however, that the source of the difficulty is not the need to find a differential rule for the ascertainment of liability and the construction of exclusion clauses respectively but the underlying distribution of losses between the normal and the consequential. One would like to say simply that all consequential losses are recoverable provided they were either objectively or subjectively foreseeable by the parties; but to do this is to restore to the word "consequential" the natural meaning of which commercial and legal usage in exclusion clauses has long since robbed it. Instead one has to go back to the language of the clause in its documentary and factual context and try to see what it means. In this exercise we have found no real help in the other parts of the contract, save that Section 18, dealing with force majeure, excludes liability for "any direct or indirect loss", thereby emphasising the familiar distinction.
12. Both parties, however, argue for a meaning which is heavily qualified - in fact determined - by case-law. Mr Etherton, following McGregor, founds upon Mondel v Steel, adopting it, however, not simply as a suitable description of conventional heads of damage but as an exclusionary principle. He finds its categories reproduced in Mellowes Archital Ltd v Bell Projects Ltd (1997) 87 BLR 26, where, adopting earlier decisions in Oastler v Pound (1863) LT(NS) 852 and Davis v Hedges (1871) LR 6 QB 687, this court held that abatement of price was restricted to diminution in value of "the thing itself", any other loss having to be recovered by equitable set-off or action. "In most contractual relationships," said Hobhouse LJ (at 40), "there would be no need to draw a distinction between the two types of defence. But under DOM/1 [a form of contract limiting the right of set-off but not of abatement] it is necessary to do so." Even so, in P and M Kaye Ltd v Hosier and Dickinson Ltd [1972] AC 146, one sees Lord Morris of Borth-y-Gest (at 153), Lord Wilberforce (at 156) and Lord Diplock (at 169) using "consequential" to describe damage in the sense espoused by McGregor. So too in the judgment of this court delivered by Sir Raymond Evershed MR in George Cohen, Sons and Co Ltd v Docks and Inland Waterways Executive (1950) 84 Ll LR 97.
13. This is the path of rectitude in Mr Etherton's argument. It leads, he submits, to the exclusion by virtue of Section 14(1) of the contract of both contentious heads of damage. But for reasons we now turn to there seems to us to be an initial difficulty in following Mr Etherton down this road; and a second difficulty is that, if one goes that way, the losses in issue in this court appear still to come fairly within McGregor's class of "normal" damage. An example of consequential loss might be injury to the profitability of the hotel itself. But where the contract is one of hire, the "thing itself" is not the equipment but the use of the equipment, and if through breach of contract it becomes unusable and dangerous the natural or immediate loss is, it seems to us, the profit (if any) which it would otherwise be yielding and the cost of neutralising the danger. The latter, in fact, is as much for HSL's as for Hilton's benefit in view of the provision of clause (3) of Section 14.
14. The rule in Hadley v Baxendale (1854) 9 Ex 341, known to every law student, is this:
"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it." (per Alderson B at 354).
15. This is not a dichotomous but a continuous classification, bringing into the region of recoverability all loss which the parties must in the nature of things or for known reasons have anticipated. It is the framing of exclusion clauses which has made it necessary to divide up its elements in order to keep the contractual effects within acceptable bounds. Thus in Millar's Machinery Co Ltd v David Way and Son (1935) 40 Com. Cas. 204 a clause excluding "responsibility for consequential damages" was read down by this court so as not to exclude liability for damage occurring naturally or directly. In an inadequately reported decision upholding Branson J, Maugham LJ is recorded in indirect speech as having held that "the word `consequential' had come to mean `not direct'," and Roche LJ as having applied this reading to the contract. We do not accept Mr Etherton's submission that Millar's Machinery was in truth an abatement case and was decided, for want of reference to such cases as Mondel v Steel, per incuriam. In the present case, it will be recalled, the phrase is "indirect or consequential" - as it was in Saint Line Ltd v Richardsons, Westgarth and Co Ltd [1940] 2 KB 99 where Atkinson J, construing a byzantine exclusion clause which included the same phrase as in the present case, said:
"Direct damage is that which flows naturally from the breach without other intervening cause and independently of special circumstances, while indirect damage does not so flow. The breach certainly has brought it about, but only because of some supervening event or some special circumstances. The word `consequential' is not very illuminating, as all damage is in a sense consequential..."
Having considered both the dictionary and the decision in Millar's Machinery, he concluded:
"In my judgment the words `indirect or consequential' do not exclude liability for damages which are the natural result of the breaches complained of. ... If one takes loss of profit, it is quite clear that such a claim may very well arise directly and naturally from the breach based on delay."
16. We do not know whether Atkinson J would, or might, have excluded damage flowing from special facts known to the parties; but how difficult it can be to draw a bright line between this and damage flowing naturally from a breach is illustrated by the classic decision in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 where, adopting the Hadley v Baxendale description of recoverable damage, this court reversed the trial judge's decision that loss of profit was a special circumstance not drawn to the defendants' attention as a potential consequence of breach. It held that, knowing what they did of the plaintiffs' business, the defendants must be regarded as having known that some loss of profit was liable to result from their breach, though not profit on other contracts of which they knew nothing. Speaking for the court, Asquith LJ said of the likelihood that delay in delivering the boiler would cause a loss of profits and impede the extension of the plaintiffs' business:
"It was surely not necessary for the defendants to be specifically informed of this as a precondition of being liable for loss of business. Reasonable persons in the shoes of the defendants must be taken to foresee, without any express intimation, that a laundry which, at a time when there was a famine of laundry facilities, was paying 2,000l. odd for plant and intended at such a time to put such plant "into use" immediately, would be likely to suffer in pocket from five months' delay in delivery of the plant in question, whether they intended by means of it to extend their business, or merely to maintain it, or to reduce a loss"
One sees readily why McGregor is ready to allow that consequential loss in the sense adopted by him may be within the first limb of Hadley v Baxendale. But the passage also illustrates the difficulty of allocating loss of profit and removal and storage charges in a case such as the present to the region of indirect loss; and, like Atkinson J, we would regard consequential loss, where the two are bundled together, as synonymous with it.
17. If, contrary to our view, the issue in this appeal depends not on first principles but on authority, it is necessary to consider four further decisions of this court. In Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 8 BLR 20 the distinction drawn at first instance by Parker J between consequential loss and natural or direct loss for the purposes of an exclusion clause was held to be correct. Megaw LJ considered the court to be bound by Millar's Machinery - which in any event he considered rightly decided. In British Sugar plc v Projects Ltd (1997) 87 BLR 42 Waller LJ (with whom Evans and Aldous LJJ agreed) rejected the submission that "consequential" loss, to a reasonable businessman, would include loss of profits. Among his reasons was that Croudace Construction and Millar's Machinery were on closely similar exclusion clauses, and that:
"... once a phrase has been authoritatively construed by a court in a very similar context to that which exists in the case in point, it seems to me that a reasonable businessman must more naturally be taken to be having the intention that the phrase should bear the same meaning as construed in the case in point."
18. Most recently, in Deepak Fertilisers Ltd v ICI Chemicals and Polymers Ltd [1999] Ll.L.R.387 this court, construing a clause which expressly excluded liability for loss of profits as well as "indirect or consequential damage", held (at 403):
"The direct and natural result of the destruction of the plant was that Deepak was left without a methanol plant, the reconstruction of which would cost money and take time, losing for Deepak any methanol production in the meantime. Wasted overheads incurred during the reconstruction of the plant, as well as profits lost during that period, are no more remote as losses than the cost of reconstruction. Lost profits cannot be recovered because they are excluded in terms, not because they are too remote. We consider that this court is bound by the decision in Croudace where a similar loss was not excluded by a similar exclusion and considered to be direct loss."
19. We venture the comment that the reasoning in this passage would be no less potent without its final sentence. That the issue is still not problem-free is illustrated by the subsequent decision of Rix J (who had been overset in Deepak Fertilisers) in BHP Petroleum Ltd v British Steel plc [1999] Ll.L.R. 583, an incisive judgment which merits close reading, especially (for present purposes) in relation to the need for special knowledge (at 600-602). For the present it is sufficient to record his conclusion, in the light of the same authorities as we have been considering, that:
"...the parties are correct to agree that authority dictates that the line between direct and indirect or consequential losses is drawn along the boundary between the first and second limbs of Hadley v Baxendale."
20. This conclusion has the virtue of practicality; but - as Rix J's judgment itself illustrates - it does not automatically tell one on which side the line a case falls. Although we would if necessary adopt Waller LJ's position in relation to decided cases on similar words (not forgetting the cautionary remarks of Sir George Jessel MR in Aspden v Seddon (1875) 10 Ch.App. 394, 397 n.1 about the risks of this mode of construction), one has to be continuously alive to differences of surrounding fact. We prefer therefore to decide this case, much as Victoria Laundry was decided, on the direct ground that if equipment rented out for selling drinks without defalcations turns out to be unusable and possibly dangerous, it requires no special mutually known fact to establish the immediacy both of the consequent cost of putting it where it can do no harm and - if when in use it was showing a direct profit - of the consequent loss of profit. Such losses are not embraced by the exclusion clause, read in its documentary and commercial context. We would accordingly dismiss this appeal.

Order: Appeal dismissed, with costs Leave to appeal to House of Lords refused.
(Order does not form part of the approved judgment)

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