CMS Guide to Consequential Loss in India

The expression “consequential loss” is not statutorily defined under the Indian law. The concept is addressed through judicial rulings in the context of Section 73 of the Indian Contract Act, 1872 (“Act”). Section 73 of the Act is based on English common law principles and is considered as a statutory embodiment of the rule in Hadley v. Baxendale. [1]

Section 73 of the Act provides that:

“When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.”

Indian courts have consistently interpreted Section 73 of the Act as embodying the two-limb test set out in Hadley v. Baxendale, which distinguishes:

• losses that arise naturally in the ordinary course of events from the breach — commonly referred to as direct loss; and
• losses that may reasonably be supposed to have been within the contemplation of both parties at the time of contract formation as a probable result of the breach. Consequential loss generally falls within this second limb.

Consequential loss is typically understood to mean losses beyond the immediate consequences of a breach. Generally, the second limb of Section 73 of the Act includes losses in nature of – loss due to interruption of business (say, due to failure of an equipment supplied under a contract), loss of future profits, loss of future opportunities, or reputational harm; provided such losses were within the contemplation of the parties and satisfy the tests of causation and remoteness.

The Indian Law generally does not provide for damages for everything that follows a wrongful breach; it does not provide for compensation for loss caused by ‘cause of causes’, or ‘consequence of consequences’. [2]  of a breach. These would be considered as remote and indirect losses. [3]  

Yes. Exclusion clauses referring to “consequential loss”, “indirect loss”, or “special damages” are widely used in commercial contracts across industries and sectors. The intent is to limit the liability to direct losses and exclude claims for other losses.

Indian courts have recognized and enforced such clauses in several decisions. The courts have refused to grant any compensation for consequential losses.

Notable examples include:

• First, in Bharathi Knitting Company v. D.H.L. Worldwide Express Courier Division of Air Freight Ltd., [4]  the contract in question included the following clause:

“Clause 7: Consequent damages excluded: DHL shall not be liable in any event for any consequential or special damages or other indirect loss however arising whether or not DHL had knowledge that such damage might he incurred including but not limited to loss of income, profits interest, utility or loss of market.”

• Second, in Oil & Natural Gas Corporation Ltd. v. Comex Services SA, [5]  the contract between ONGC and the contractor included the following clause:

“27. CONSEQUENTIAL DAMAGES. The company shall in no event be responsible for or liable to the contractor or his sub-contractors for consequential damages suffered by the contractor or his sub-contractor including without limitation, business interruption or loss or profits, whether such liability is based or claimed to be based upon;

i) any breach by the company of its obligations under the contract;

ii) any negligent act or omission on the part of the company or any of its employees, agents or appointed representatives in connection with the performance of the works.”

• Third, Gujarat Urja Vikas Nigam Limited v. Essar Power Limited. [6]  Power Purchase Agreements (PPA) frequently include similar exclusionary language for consequential losses. Article 10.1 of the PPA in this case stated:

“Neither party shall be liable to the other party in contract, tort, warranty, strict liability or any other legal theory for any indirect, consequential, incidental, punitive or exemplary damages. Neither party shall have any liability to the other party except pursuant to, or for breach of this agreement….”

• Fourth, Mcdermott International Inc. v. Burn Standard Co. Ltd. & Ors. [7]  The main contract between Mcdermott and BSCL included the following:

“37. Indirect and consequential damages. — Neither company nor contractor shall be liable to the other for any consequential damages, which shall include but not be limited to loss of revenue/profits, loss or escape of product, etc.”

Under the Indian Law, exclusion clauses are interpreted restrictively. When a clause in a contract provides for exclusion of damages for “consequential loss”, it generally means and refers to indirect and remote losses; referrable to only the second limb of Section 73 of the Act.  Based on the examples cited above, contracts that use the term “consequential loss” or “consequential damages” generally refer to losses that are not the immediate and natural consequence of a breach (the first limb of Section 73 of the Act) but arise as a secondary or an indirect effect. These may include, in most (but not all) instances, loss of profit, loss of market, loss on account of business interruption, or loss of opportunity and the like.

In practice, Indian courts have interpreted “consequential loss” in exclusion clauses in a manner that aligns with the common law understanding, treating it as distinct from direct or proximate loss.

Indian courts adopt the principles of contractual interpretation with a view of giving effect to the intention of the parties, reading the clauses harmoniously and contextually, and avoiding any interpretation that would lead to an absurd or overly restrictive outcome.

For instance, where a clause excludes “loss of profit, indirect loss, or consequential loss”, the courts may interpret “consequential loss” ejusdem generis with the other enumerated heads of loss —particularly where such terms are commonly understood to denote indirect or remote losses.

In general, courts have recognized and upheld the freedom of parties to agree to exclude such consequential losses as they specify in the contract. Courts have found such clauses to be valid and enforceable, including in respect of heads of loss that are expressly excluded. For example, in one case, the court held that a contractor could not claim compensation for damage to unburnt bricks caused by the other party’s breach, and as such claims were explicitly excluded under the contract. The court observed that the contractor cannot go back on his agreement and claim compensation for breach of contract merely because it was unsuitable for it to abide by the terms of the contract. However, a complete exclusion of liability for breach has been held to be invalid, [8]  or has been read down to allow damages under the first limb of Section 73 of the Act.

Courts have also clarified that the applicability of an exclusion clause must be assessed based on the true construction of the contract and the surrounding circumstances. [9]

Generally, exclusion clauses pertaining to consequential losses do not impact equitable or non-damages remedies such as injunctions or specific performance. However, in disputes relating to commercial contracts, where a party is excluded from claiming consequential losses, courts may be more inclined to grant injunctive relief on the ground that damages would not constitute an adequate remedy.