- Best practice has always been to ensure a considered definition of “consequential loss” is included in contracts where the parties are seeking to exclude or deal with consequential loss in some way
- Careful attention must also be paid to what types of loss the definition of “consequential loss” is intended to cover in order to avoid the court interpreting the commercial intention of the parties in a way that leads to unintended consequences for one, or both, parties
Recent developments in NSW reinforce the importance of not only expressly defining the term “consequential loss” in contracts, but also carefully considering what categories of losses the exclusion is intended to cover in order to avoid unintended consequences.
Recent historical context
Until recently, it was generally accepted by parties to contracts, and the courts in Australia, that the term “consequential loss” meant those losses falling under the second limb of losses described in Hadley v Baxendale and which Lord Alderson B categorised as “indirect loss” (or subjectively foreseeable loss).
These indirect losses were held to be losses not a direct consequence of the breach, and were therefore not fairly and reasonably considered as “arising naturally” or “in the usual course of things”, from the breach itself. As such, “consequential loss” was not found to encompass damages for loss of profits or expenses incurred to remedy a breach of contract, as these were considered outside of that definition.
In Peerless, the Victorian Court of Appeal departed from previous English authorities and, in so doing, narrowed the ability of parties to recover certain types of damages under a contract excluding liability for “consequential loss”.
Thec provided a judicial definition of the concept of “consequential loss” based on a distinction between:
- “normal loss, which is loss that every plaintiff in a like situation will suffer”; and
- “consequential loss, which is anything beyond the normal measure, such as profits lost and expenses incurred through breach”.
The Peerless decision has been followed in NSW in Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd (“Allianz”) and in SA in Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7)(“Alstom”).
However, while the Peerless decision signalled a shift in some Australian courts’ approach to the interpretation of the term “consequential loss”, the Western Australian decision of Pacific Hydrodemonstrates that the law in this area is far from settled.
In Pacific Hydro, Justice Martin did not follow Hadley v Baxendale or Peerless in attempting to define consequential loss, preferring to construe the clause according to its natural and ordinary meaning, read in light of the contract as a whole, and so as to ascertain the parties’ commercial intention at the time of striking their agreement.
Accordingly, it is clear that at the moment the approach to the interpretation of “consequential loss” in exclusion clauses in Australian contract law is far from settled. This uncertainty has prompted contracting parties, and their advisors, to re-emphasise the importance of incorporating into their contracts an extensive definition of consequential loss. The most recent case on “consequential loss”, however, suggests that even closer attention must be paid to the breadth of the definition itself to avoid potentially unintended outcomes.