M&A transaction documents often contain an exclusion or limitation of the seller’s liability for ‘consequential’, ‘indirect’ or ‘special’ losses suffered by the purchaser. For instance, a purchase agreement will often provide that the liability of the seller under the warranties does not extend to these types of losses.
It appears that purchasers often agree to an exclusion or limitation of this type on the assumption that such exclusion has a well-established and relatively narrow meaning which excludes only losses which arise in a small minority of cases. This assumption, although historically supported by decisions of the UK courts, has appeared over the past handful of years to be increasingly less tenable.
Historically, UK courts have held that an exclusion for ‘consequential’ or ‘indirect’ or ‘special’ losses has a relatively well-established meaning and excludes only those losses which arise under the second limb of Hadley v Baxendale, being those losses arising from special circumstances communicated by the purchaser to the seller prior to execution of the definitive agreements. However, there have been a number of relatively recent Commonwealth decisions (particularly in Australia, eg, Alstom v Yokogawa Australia Pty Ltd (No.7)  SASC 49; Regional Power Corporation v Pacific Hydro Two Pty Ltd  WASC 356) which have held that the meaning of the terms ‘consequential’, or ‘indirect’, or ‘special’ losses varies depending on the context and should normally be construed to catch, in addition to losses which arise under the second limb of Hadley v Baxendale (losses arising from special circumstances communicated to the seller), other losses (other than diminution in value damages) which arise in the great majority of cases.
It appears that the position taken in these Commonwealth decisions has begun to attract some support in the UK. For instance, in 2016 the UK Court of Appeal in the case of Transocean Drilling UK Ltd v Providence Resources said that it now doubted that the earlier UK cases on the meaning of ‘consequential’ losses would be decided in the same way today. The recent High Court case of Star Polaris LLC v HHIC-Phil Inc. has given further support to the position taken by the Commonwealth courts. In Star Polaris, the High Court expressly stated that in the context of the contract under consideration, a shipbuilding contract, the term ‘consequential losses’ went beyond those losses arising under the second limb of Hadley v Baxendale and extended to financial losses generally. The purchaser of the ship thus appears to have agreed to an exclusion which was far broader than it had anticipated.
There appears to be increasingly less consensus on the meaning of the terms “consequential”, “indirect” and “special” losses in the UK Courts. Some purchasers in M&A transactions may in fact resist agreeing to exclusions for these types of losses on the basis that their ability to claim for damages is already materially circumscribed by common law limitation principles (such as mitigation and the rules in Hadley v Baxendale) and by other common limitations in purchase agreements (such as thresholds, caps and time limits). If purchasers are willing to agree to exclusions for losses of the ‘consequential’, or ‘indirect’, or ‘special’ type, it would be preferable to use more tailored language. For instance, if a purchaser is prepared to exclude losses arising under from special circumstances communicated to the seller (those arising under the second limb of Hadley v Baxendale), wording of the following nature would be preferable to language incorporating terms such as ‘consequential’ or ‘indirect’ losses:
‘The Seller will not be liable for losses recoverable only under the second limb of the rule in Hadley v Baxendale except for….’