What is indirect loss and how to compensate it?
Indirect loss is consequential damage.
Indirect loss is typically a disadvantage that appears otherwise than as actual costs. The opposite of consequential damage is direct damage.
Drawing the line between direct and indirect loss can sometimes be challenging.
Indirect loss often appears as a loss of income
Indirect loss can be object, property or personal damage.
Examples of indirect loss
- lost customers
- tarnished reputation
- lost benefit of utilization
- non-gained profit
- decline in net sales
- interruption in production (for example the production stands still because of defect in the goods or supplier’ delay in delivery)
Then indirect loss is also at hand if, for example, a broken or defective object causes more extensive damages in the production.
Therefore and above all, indirect damage appears as a loss of income which can, inter alia, incur from a breach of contract of the other party.
Indirect loss can lead to challenging litigations
The starting point in tort law is that the injured party must show the reimbursable damage caused to him/her, and the causal link between the damage and the incident.
An additional precondition is that the risk of damage must be foreseeable in a sensible way to the party who caused the damage. According to the principles of tort law, objectively speaking, unforeseen damages remain outside the liability. (On the other hand, the details of the damage do not have to be foreseeable, as long as the magnitude and type of the damage will be.)
It will be sufficient to show, that there has been damage that has to be compensated. Instead, the amount of damage can be evaluated within reason by the Court.
How to avoid liability in case of indirect loss?
The parties may limit in advance their liability for indirect loss, for example by means of specific limitation of liability clauses in the contract. This is advisable risk management (anticipating and limiting damage situations).
On the other hand, there is no obligation to compensate for those damages where the injured party has somehow contributed to the damage.
On the other hand, if the injured party neglects his obligation to limit the damage, it may exempt tortfeasor from liability to compensate. Likewise, by showing that the damage has been such remote and unforeseeable one, which is not within the liability.
Furthermore it could be shown, for example, that the injured party has taken such unnecessary measures which cannot be compensated, and which cannot, in a reasonable manner, oblige the other party to the liability for compensation. There might also be other ways to avoid demands. You should consult our lawyer.
Under what conditions are claims for indirect loss successful?
In accordance with the principles of direct loss, the injured party may, under certain conditions, also be entitled to compensation for the costs incurred to him from the measures done for the purpose of avoiding a larger loss of income. It is about buyer’s obligation to try to avoid damage.
If, for example, the injured party had to interrupt the production in order to avoid greater financial damage, it is justified under certain conditions to compensate him for loss of income. (In general, you should try to negotiate reconciliation when possible.)
The author of this article is lawyer Daniéla Jarva