To help the reader, a new paragraph has been inserted into the text at this point. so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. In such cases [where the defendant is a carrier] the courts have been slow to allow loss of profit as an item of damage. This was not, it would seem, because a different principle applies in such cases, but because the application of the same principle leads to different results. A carrier commonly knows less than a seller about the purposes for which the buyer or consignee needs the goods, or about other “special circumstances” which may cause exceptional loss if due delivery is withheld. … [the defendants] knew they were supplying the boiler to a company carrying on the business of laundrymen and dyers, for use in that business. The obvious use of a boiler, in such a business, is surely to boil water for the purpose of washing or dyeing. A laundry might conceivably buy a boiler for some other purpose; for instance, to work radiators or warm bath water for the comfort of its employees or directors, or to use for research, or to exhibit in a museum. All these purposes are possible, but the first is the obvious purpose which, in the case of a laundry, leaps to the average eye. If the purpose then be to wash or dye, why does the company want to wash or dye, unless for purposes of business advantage, in which term we, for the purposes of the rest of this judgment, include maintenance or increase of profit, or reduction of loss? (We shall speak henceforward not of loss of profit, but of “loss of business.”) No commercial concern commonly purchases for the purposes of its business a very large and expensive structure like this – a boiler 19 feet high and costing over 2,000l. – with any other motive, and no supplier, let alone an engineering company, which has promised delivery of such an article by a particular date, with knowledge that it was to be put into use immediately on delivery, can reasonably contend that it could not foresee that loss of business (in the sense indicated above) would be liable to result to the purchaser from a long delay in the delivery thereof. The suggestion that, for all the supplier knew, the boiler might have been needed simply as a “standby,” to be used in a possibly distant future, is gratuitous and was plainly negatived by the terms of the letter of April 26, 1946. Swedish text: Av läran om adekvat kausalitet följer att det för skadeståndsansvar inte är tillräckligt att det föreligger ett faktiskt eller logiskt orsakssamband mellan handling och effekt. Det krävs också att sambandet är av viss särskild beskaffenhet eller har viss kvalitet (jfr Håkan Andersson, Skyddsändamål och adekvans, 1993, s. 87 ff., särskilt s. 95 med omfattande hänvisningar). Kausalsambandet måste värderas för att utröna om, som det anförs i förarbetena till skadeståndslagen (se prop. 1972:5 s. 21 f.), skadan har framstått som en beräknelig och i viss mån typisk följd av det skadegörande beteendet. Skadan ska alltså ha varit i någon mening förutsebar (jfr exempelvis NJA 1991 s. 217). Det som ska skäras bort från ett konstaterat skadeståndsansvar är sålunda effekter av den skadegörande handlingen som är så osedvanliga eller osannolika att den skadevållande parten inte borde ha tagit dem i beräkning. Inhouse translation: It follows from the doctrine of adequate causation that it is not sufficient for liability that there is an actual or logical causal link between the act and the effect. It is also
Introduction
1.“The parties exclude liability for indirect or consequential loss” What do these words mean in a Swedishlaw contract? Is there a clear general meaning, or does the answer depend on the circumstances? Is indirect loss and consequential loss the same thing? And how does this wording compare with M&A market practice?s. 543
2.This article considers these various questions by reference to Swedish law sources, and also by reference to English caselaw which is referred to for inter est and inspiration.s. 543
Contract interpretation
1.The principles of contract interpretation under Swedish law are well known. In short, the court or arbitral tribunal follows the joint intention of the parties if such a joint intention can be ascertained. Since that is generally not possible, the court or arbitral tribunal then applies an objective meaning, by making an overall assessment (Sw. en samlad helhetsbedömning), analysing, inter alia, the wording of the contract, the background law, the facts and circumstances before the contract was entered into including the parties’ negotiations, the parties’ behaviour after the contract was entered into, the purpose of the contract, the structure of the contract, and reasonableness.s. 544
2.In contracts where there is an exclusion of liability for indirect or consequen tial loss, parties often use somewhat standard wording, such as the wording set out above. There may sometimes have been a discussion about the wording, but often there is no discussion and no negotiation. In such circumstances, it is of course often impossible to ascertain the parties’ joint intention.s. 544
3.When seeking to ascertain the objective meaning of these words, two points are likely to be particularly important: the background law and any specific circumstances that might affect the meaning of the wording in a particular case.s. 544
Background law
1.Background law comprises written legislation, caselaw and legal principles, and also trade practices. In the present case, background law can be useful for the purposes of determining how the somewhat unclear words “indirect or consequential loss” should be construed.s. 544
2.In these circumstances, the obvious starting point regarding background law is section 67 of the Swedish Sale of Goods Act, which provides a definition of ”indirekt skada” (Eng. “indirect damage”) as follows: Although this definition is almost always referred to in this context, at least as a startingpoint, its application can give rise to considerable difficulties in prac tice. The following points in particular should be noted.s. 545
3.First, it is obvious – but often overlooked – that section 67 of the Swedish Sale of Goods Act applies specifically to the sale of goods. The wording refers expressly to goods, and it is in that specific context that the wording is intended to apply. Further, it is notable that the wording assumes that it is the buyer of the good that has suffered loss by reason of the seller’s breach of contract, not the other way round.s. 545
4.Second, it is important to note that the specific regulation set out in section 67 of the Swedish Sale of Goods Act is not suitable for application in all situations. Different considerations will apply in other contexts. It has been suggested that it is particularly unsuitable to apply the regulation in section 67 of the Sale of Goods Act to transactions concerning the sale of companies.s. 546
5.Third, within the sale of goods context, section 67 of the Swedish Sale of Goods Act has been the subject of considerable criticism. In summary, there is a general consensus that the wording of section 67 is difficult to interpret and to apply. There is particular criticism regarding the general wording ”annan liknande förlust, om den varit svår att förutse” (Eng. “other similar loss, if it was difficult to foresee”) in paragraph 2, item 4, which is considered to be vague and badlyworded. It has also been noted that the parties by their actions can often determine whether the loss is direct or indirect.s. 546
6.Fourth, it was stated in the preparatory works to the Sale of Goods Act, Prop. 1988/89:76, that it would be for the courts to provide guidance for how the distinction should be made between direct and indirect losses in each individual case, by reference to the principles set out by the legislator. However, as yet the Supreme Court in Sweden has not had the opportunity to provide any such guidance.s. 547
7.Fifth, as Former Justice Johnny Herre has noted, some limited guidance can be found from cases in Norway and Finland. Nevertheless, although the legis lation in those countries is similar, the wording is somewhat different and any such references would therefore need to be treated with caution.s. 547
8.In summary, section 67 of the Sale of Goods Act is a starting point, but out with the sale of goods context section 67 should be treated with caution and it will often be necessary to go further to consider the specific circumstances of the particular case.s. 547
Specific circumstances that might affect the
1.meaning of the wording in a particular case When considering these issues in practice, it is often the specific circumstances of the particular case at hand that turn out to be determinative. Thus, although it was clearly thought to be useful to provide specific provisions in the Sale of Goods Act for the categorization of indirect loss, in practice this was always unlikely to provide satisfactory guidance.s. 548
2.Despite the legislator’s best intentions, section 67 of the Sale of Goods Act has not proved to be a success. To quote an English proverb, the road to hell is paved with good intentions.s. 548
3.In considering what the objective meaning of direct and indirect loss may be in a particular case, it may in fact be best to go back to first principles. In this context, it is useful to note what was written in general terms in the preparatory works to the Sale of Goods Act – in particular, at section 2.5.2 of the Govern ment Bill, Prop. 1988/89:76.s. 548
4.The legislator’s proposal was stated in general terms: – Swedish text: Mitt förslag: Den skadeståndsskyldighet som följer av kontroll-s. 548
5.ansvaret skall omfatta näraliggande och typiska förluster på grund av avtal-s. 548
6.sbrottet, medan ansvar för övriga förluster skall förutsätta vållande på dens. 548
7.skadeståndsskyldiges sida. – Inhouse translation: My proposal: The liability for damages which followss. 548
8.from the “control liability” should cover closely-related and typical lossess. 548
9.due to the breach of contract, while liability for other losses should presup-s. 548
10.pose fault on the part of the person liable for damages. It was pointed out that the basis of the seller’s liability to pay damages by rea son of delay or defect is based on the seller’s socalled “control liability” (Sw. ”kontrollansvar”) – i.e. the seller’s liability to pay damages for such matters that lie within the seller’s sphere of control. In this way, the legislator expressly intended to follow the regulation as set out in CISG.s. 548
11.However, if the seller were liable to compensate for all loss falling within his sphere of control, whether or not he was negligent, then such liability would go too far. It is noted that commercial contracts often distinguish between direct and indirect damages, with indirect damages only being payable in cases of gross negligence.s. 548
12.It was against this background that the legislator proposed that a distinction between direct and indirect loss should be included in the legislation. The legis lator noted that he considered direct loss to be losses of such a type and extent that are usual and foreseeable with respect to the particular breach of contract in question. It was suggested that such losses should generally be recoverable, whereas more unusual and less foreseeable losses should only be recoverable in cases of negligence.s. 549
13.The legislator also noted that indirect losses are such losses that largely depend on the individual purchaser’s way of organizing its business and thus are typically difficult for the seller to foresee.s. 550
14.The legislator added that the general wording was added at paragraph 2, item 4, of section 67, since it is obviously impossible to set out a complete and clear definition of all types of indirect loss. It would then be for the courts to provide guidance for how the distinction should be made between direct and indirect losses in each individual case, by reference to the principles set out by the legislator.s. 550
15.It follows that the legislator had some basic principles in mind when consid ering the general distinction between direct and indirect loss. To summarise: • Direct losses are considered to be losses of such a type and extent that ares. 550
16.usual and foreseeable with respect to the particular breach of contract in quess. 550
17.tion. • Indirect losses are considered to be more unusual and less foreseeable lossess. 550
18.that largely depend on the individual purchaser’s way of organizing its busis. 551
19.ness and thus are typically difficult for the seller to foresee. It is notable that this general distinction is largely similar to the distinction between direct and indirect loss that is found in the common law.s. 551
The common law distinction – Hadley v. Baxendale
1.In the common law, the distinction between direct and indirect loss is generally understood by reference to the classic English law case of Hadley v. Baxendale [1854] EWHC J70.s. 551
2.In summary, the plaintiff owned a flour mill which had stopped working due to a broken crank shaft. The defendant was a carrier. The plaintiff hired the defendant to deliver the broken crank shaft to a thirdparty so that the thirdparty could design a new one for them. Until the crank shaft was replaced, the mill could not run, and the plaintiff would lose money. The plaintiff’s representative stressed to the defendant that the crank shaft needed to be delivered urgently, but he did not make it clear to the defendant that the plaintiff would lose money in the meantime. The defendant took 7 days to deliver the crank shaft instead of the 2 days that had been agreed upon.s. 551
3.The plaintiff sued the defendant for breach of contract, claiming damages for lost profits while the mill was not in operation.s. 551
4.The court held that the plaintiff was not entitled to the lost profits, since the plaintiff had failed to inform the defendant of the special circumstances which led to the loss (i.e. that the mill could not operate until the replacement crank shaft was made). The key passage in the judgment is as follows: In summary, there are generally said to be two “limbs” to the rule in Hadley v. Baxendale, as marked by the numbers [1] and [2] which were added to the above quotation: • [1] Loss “such as may fairly and reasonably be considered either arisings. 551
5.naturally, i.e., according to the usual course of things, from such breach ofs. 552
6.contract itself”, and • [2] Loss “such as may reasonably be supposed to have been in the contempla-s. 552
7.tion of both parties, at the time they made the contract, as the probable results. 552
8.of the breach of it,” including – where special circumstances were knowns. 552
9.to both parties – “the amount of injury which would ordinarily follow froms. 552
10.a breach of contract under these special circumstances so known and com-s. 552
11.municated”.s. 552
Loss of profits
1.Does loss of profits constitute direct or indirect loss?s. 552
2.The proper answer is that it depends. It depends on the circumstances of the individual case.s. 552
3.In many cases loss of profits will be an indirect loss. However, in some cases, loss of profits can be a direct loss. A clear example is the English case Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B 528.s. 552
4.The plaintiff purchased a large boiler from the defendant for use in its dying and laundry business. The defendant was aware that the plaintiff wished to put the boiler to immediate use and knew the nature of the plaintiff’s business. The delivery of the boiler was delayed in breach of contract and the plaintiff brought an action for the loss of profit which the boiler would have made during the period in which the delivery was delayed. The claim included a sum for certain particularly lucrative government contracts which the plaintiff lost due to the absence of the boiler.s. 552
5.At first instance, the trial judge denied the claim for loss of profits, on the ground that it was based on special circumstances which had not been drawn to the attention of the defendant and therefore came within the second limb of the rule in Hadley v. Baxendale. However, the Court of Appeal held that the plaintiff could recover losses which were in the reasonable contemplation of the parties, including the loss of profit that could be expected from the lack of use of the boiler. On the other hand, it was held that the plaintiff could not recover for the loss of the particularly lucrative government contracts since the defendant was unaware of those contracts.s. 552
6.Giving judgment in the Court of Appeal, Lord Justice Asquith noted that there was a divergence in the existing caselaw regarding the treatment of loss of profits, with some cases allowing such claims and other cases refusing to do so – in particular, where the defendant was a carrier (as in Hadley v. Baxendale), not a seller. Lord Justice Asquith explained this divergence as follows: In the Victoria Laundry case, however, the defendant was a seller. The defendant sought to argue that it did not know the particular use that the plaintiff intended for the boiler, but this argument was dismissed by Lord Justice Asquith in some what humorous terms, as follows: Could similar arguments be made under Swedish law? Applying the facts of the Victoria Laundry case under Swedish law, could it be suggested that the laun dry’s loss of profits (not including the loss of profits flowing from the particular government contracts) constitutes “a loss of such a type and extent that is usual and foreseeable with respect to the particular breach of contract in question” (to refer to the legislator’s general definition of direct loss as set out in the govern ment bill, Prop. 1988/89:76)?s. 553
7.Of course, there are clear differences between Swedish law and English law in this respect, and in particular there is no direct Swedish law equivalent to the second limb of Hadley v. Baxendale. Nevertheless, it might be argued that a similar result could be achieved under Swedish law, but I suggest that very clear factual circumstances would be required. It would not be sufficient that the supplier of the boiler knew that the boiler would be used by the laundry for business purposes, and that the laundry would suffer a loss of business as a result of a delayed supply. I suggest that it would also be necessary to show that the extent of the loss of business was foreseeable to the supplier, i.e. that the loss constitutes “a loss of such a type and extent that is usual and foresee able with respect to the particular breach of contract in question” (to refer again to the legislator’s general definition of direct loss as set out in the government bill, Prop. 1988/89:76, emphasis added). In other words, it would be necessary to show that the supplier had reason to calculate that it might be liable for such loss of business, and thus that the loss was a “normal and calculable result of the breach of contract giving rise to the liability” (Sw. ”en normal och beräknelig följd av det skadeståndsgrundande avtalsbrottet”).s. 554
8.Regarding foreseeability, reference can also be made to Article 74 of CISG, and to the general Swedish law rules of “adequate causation” (Sw. ”adekvat kausalitet”) in the Swedish law on damages in tort. In this context, useful guid ance was provided by the Supreme Court in Multitotal NJA 2017 p. 9, at para graph 26: In an M&A context, it has been suggested that loss of profits in the target com pany should reasonably be considered to be a direct loss, whereas the purchas er’s loss of profits could be considered to be indirect. See Saalman, Henrik, and Dalemo, Per, Indirekt skada i samband med företagsöverlåtelser, JT 2014–15, p. 726 at p. 732:s. 554
Consequential loss?
1.What then is “consequential loss”?s. 556
2.On one view, the term “consequential loss” is somewhat meaningless, since all loss caused by a breach of contract may be said to be consequential in the sense of having arisen as a consequence of the breach. It has also been noted in England that the term “consequential loss” may mean different things in dif ferent documents.s. 556
3.“Consequential loss” may be translated into Swedish as ”följdskador”, but there is no clear definition of ”följdskador” in Swedish law.s. 556
4.Since it is quite common to refer to “indirect” and “consequential” loss together, it might reasonably be concluded that these terms generally refer to the same thing. However, I suggest it is best to avoid the term “consequential loss”, since the meaning is unclear and could be misconstrued.s. 556
An alternative wording in Swedish M&A practice
1.As the legislator noted, the distinction between direct and indirect loss is often regulated in commercial contracts. However, as will be clear from this article, further explanation is needed.s. 556
2.It is notable that, in modern Swedish M&A practice, reference is often made to “reasonably foreseeable indirect damage”. One current wording in use in the Swedish market is as follows: Pursuant to this wording, indirect damage that was reasonably foreseeable to the contracting parties in the case at hand is recoverable, but other indirect dam age is not. This concept of “reasonable foreseeability” is easier to understand and to apply that the somewhat vaguer concept of “indirect loss”. This wording also has the advantage of corresponding more obviously to the general model as understood internationally in accordance with Hadley v. Baxendale and Arti cle 74 of CISG.s. 556
3.This wording also limits losses to such losses that are “actually incurred”. The general intention behind such wording is to prevent multiples of losses from being recoverable – e.g. where a buyer has valued the target company at several times its EBITDA, and where the EBITDA is reduced by reason of a breach of warranty. However, I suggest that it would be unwise to assume that this word ing is necessarily sufficient to prevent multiples from being recoverable. Not only could it potentially be argued that there is an actual loss in the value of the shares in such a scenario, but the words “actually” and “incurred” do not neces sarily mean what they say.s. 557
4.In the English case Charter Reinsurance Co. v. Fagan [1997] AC 313, there was a dispute about a reinsurer’s liability which turned on the definition of amounts “actually paid” in settlement of claims. The House of Lords found that the words “actually paid” did not mean that the reinsured needed to have actually paid the amounts; it was sufficient that the reinsured was liable to pay them.s. 557
5.In his speech in the Charter Reinsurance case, Lord Hoffmann used charac teristically colourful reasoning, as follows:s. 557
Conclusion
1.This will always be a difficult area of the law.s. 558
2.Legislators, judges and contract drafters seek to regulate these issues, but by their very nature they cannot easily be regulated for the simple reason that much depends on the particular facts and circumstances of each individual case.s. 558
3.In summary, I suggest that contract drafters would be welladvised to make their intentions as clear as possible, although of course I recognise that this may sometimes be difficult in practice. If specific losses are intended to be included, then the nature and extent of those losses should be stated, at least in general terms. Alternatively, if specific losses are intended to be excluded, then those specific exclusions should be set out and explained.s. 558
4.If it is not possible to make such intentions clear in the contract itself, then at the very least clear file notes should be taken, thus providing contemporaneous evidence of any relevant discussions and negotiations.s. 558