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The importance of distinguishing between direct and indirect losses
A recent case before the High Court in the UK, GB Gas Holdings Limited v Accenture, provides a useful insight into the distinction between direct and indirect losses and it serves as a reminder that when parties are seeking to exclude their liability, it is important to expressly exclude such liability rather than relying on the general exclusion for indirect losses or for loss of profits. In this case the High Court assessed whether certain items of loss were direct or indirect losses or whether such losses could be categorised as “loss of profits” and whether GB Gas Holdings Limited (“GB Gas”) could recover despite the existence of an exclusion clause in the contract with Accenture.
GB Gas entered into a contract pursuant to which Accenture agreed to design, supply, install and maintain a new IT system which included an automated billing system. During the roll-out of the system a number of problems occurred resulting in severe disruption to the GB Gas billing system. Bills sent to GB Gas customers were inaccurate and delayed which resulted in a significant number of customers terminating their contracts with GB Gas.
GB Gas commenced proceedings against Accenture seeking damages for breach of contract. The contract included an exclusion clause which provided that in no event would either party be liable in contract, tort or otherwise in respect of any of the following losses or damages:
- loss of profits or of contracts arising directly or indirectly;
- loss of business or of revenues arising directly or indirectly;
- any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential or punitive.
The High Court considered whether the specific items of loss claimed by GB Gas were irrecoverable due to the exclusion clause. The Court held as follows:
This case serves as a reminder of the difficulty of categorising loss into direct and indirect losses. It also emphasises the need for the parties to a contract to consider the possible and likely results of a breach of contract at the negotiation and drafting stage. This will enable parties to a contract to expressly exclude liability for certain and agreed types of loss.
Gas distribution charges (in the region of £18,700,000)
The judge held that this loss had arisen as a direct result of the automation error in the billing system. It was not a claim for revenue but for charges which GB Gas had paid, which it would not have paid but for the alleged automation error. This item was therefore not irrecoverable under the exclusion clause.
Compensation paid to customers (£8,000,000)
GB Gas alleged that it paid eight million pounds in compensation to its customers to reflect the billing difficulties and poor customer service they had received. It was held that this was a direct loss and that Accenture had assumed responsibility for losses in terms of compensation if the billing system failed to perform as it was intended it should perform. The judge referred to the recitals to the contract which made it clear that the new billing system was to improve customer relations.
Additional Borrowing Charges (£2,000,000)
GB Gas claimed that its revenue was reduced due to late billing and non-billing of customers as a result of the breach of the contract and that it was forced to incur two million pounds in additional borrowing to finance its business. This was held to be a direct loss as a result of the breach and was not excluded by the contract.
Cost of chasing the debt not due (£387,287)
GB Gas claimed it incurred money chasing debt from customers which in fact was not due. Accenture claimed this loss was indirect. However, it was held that this was a direct loss as it flowed naturally from the breach of contract.
Additional stationary and correspondence costs (£107,120)
GB Gas claimed it had to write to its customers in relation to the errors in the billing system and to update them on the progress of repairs. This was found not to be an excluded loss under the contract for the same reasons as given in relation to the compensation paid to customers.