In 2008, McCain entered into a £263,500 contract with Eco-Tec, which was to provide a process engineering system to remove hydrogen sulphide from the biogas by-product at its plant in Whittlesey, Cambridgeshire.
The cleansed biogas was then to be used as a source of power generation, with the resulting renewable energy to be utilised within the plant itself and also to generate revenue via Ofgem certificates of renewable energy production.
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However, once installed, the Eco-Tec system proved impossible to commission. Consequently, McCain treated Eco-Tec as being in repudiatory breach of contract. If the courts had found that there was no fundamental breach, McCain’s second line of argument would have been to treat the contract as rescinded.
McCain thus brought a claim for the cost of purchasing an alternative system, plus damages. Eco-Tec counterclaimed for payment of the balance of the contract sum.
Following extensive expert evidence, the Judge agreed with McCain that Eco-Tec was responsible for providing a
system which could not be fully commissioned, and that its failure to meet this contractual requirement left it in fundamental, repudiatory breach of contract.
This decision on the principle then led to the question of the extent of the damages to which McCain was entitled. Eco-Tec relied upon a clause within the contract that specifically excluded all liability for indirect or consequential damages, contending that its only liability was in relation to McCain’s costs of purchasing a replacement biogas cleansing system.
McCain, however, advanced claims totalling £1.9m, of which only £390,000 was attributable to the cost of a replacement system. The further £1.5m comprised McCain’s additional fuel costs incurred because the “free” energy to be generated by the Eco-Tec system was not available, lost external revenue from the certificates of renewable energy production, and management costs.
The judge considered that all of these heads of claim, including the loss of revenue/profit claim, represented direct losses to McCain. They were therefore not “indirect or consequential”, and hence fell outside the scope of the contractual exclusion clause. McCain thus obtained a judgement in its favour for a sum amounting to a little under £1.7m.
Richard Hildrick’s analysis
Whilst the decision on the principle of Eco-Tec’s responsibility for the successful commissioning of its system is unsurprising, the decision relating to the heads and extent of damages payable to McCain was perhaps more of a shock to the defendant, which felt it was sheltered by its exclusion of liability clause.
The fact is that clauses that seek to limit or exclude liability by reference to generic terms such as “indirect” or “consequential” losses will not exclude any losses which are deemed to be foreseeable or to flow directly from the breach of contract.
In this case, the Judge viewed both lost revenue attributable to the non-availability of the system itself, and the additional energy bill incurred due to the failure of the system, as being direct losses which should have been fully foreseeable by Eco-Tec. This approach follows the 1999 ruling of the Court of Appeal in Deepak v ICI, in which loss of profit was held by definition to be a direct loss.
Construction contractors would be well advised to use much more explicit language within their exclusion clauses, or alternatively to include an overall defined cap on liability. This case highlights the risk that in circumstances where a party’s liability in the event of their default is not clearly defined, the damages payable might well run to several times the original contract value.
