Consequential loss – Do you really know what’s being excluded?
Moray & Agnew Lawyers
Loss and damage are recoverable for breach of contract. As stated in the well-known passage from Robinson v Harman1:
Where a party sustains loss by reason of a breach of contract he is, so far as money can do it to be placed in the same situation, with respect to damages, as if the contract had been performed.
However, there is a limit on the type of damage that is recoverable, in that the damage cannot be too remote. The lead case on remoteness of damage is Hadley v Baxendale2, where the Court identified two types of recoverable damage, with other loss and damage being too remote:
1. damage which arises naturally from the breach of contract itself (First Limb); and
2. damage which may reasonably have been in the contemplation of both parties at the time of contract (Second Limb).
As a general proposition, damages falling within with First Limb are analogous to ‘direct’ losses, whilst damages falling within the Second Limb have historically been referred to as ‘consequential’ losses.
It is quite common for parties to construction contracts to include provisions excluding or limiting liability for ‘consequential loss’, but without defining what that term means, on the expectation that it equates to the Second Limb. This approach effectively leaves it to the Courts to decide what type of losses fall within the expression in the event of a dispute.
One such example is Peerless3, where the Victorian Court of Appeal decided that the meaning of consequential loss was not that stated in the Second Limb. Instead, the Court took the view that it meant loss and damage other than the ‘normal measure of damages’.
Consequential loss included, for instance, lost profits or expenses incurred through the breach. Courts in NSW and WA have followed the Peerless decision.
As a result, there is no longer a clear position on what is included within ‘consequential loss’ where the term is undefined.
More than ever, if you want to exclude a particular category of loss, you must be specific and the drafting must be precise. The Courts will give effect to properly drafted clauses. The recent case of Macmahon Mining Services4 provides an excellent example of effect being given to such a clause.
In that case, Macmahon and Cobar entered into a design and construct contract for the development of a copper mine. Nearly two years into the contract, Cobar issued a purported notice of termination on Macmahon in reliance on a clause allowing Cobar to terminate for breach if, in Cobar’s opinion, the breach was incapable of remedy.
Macmahon claimed the termination was wrongful, accepted the repudiation of the contract, and sued Cobar for loss and damage, including a claim for ‘loss of opportunity to earn profit’ valued at approximately $67 million. This was despite a provision in the contract excluding liability for consequential loss, which was defined to include: any loss or [sic] profits, loss or [sic] production, loss or [sic] revenue, loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, whatsoever, whether direct or indirect Cobar relied upon that provision to deny liability for this head of damage.
The Court ultimately held that the reference to ‘loss of contract’ in the definition of consequential loss included loss of the benefit of the contract and that ‘loss of the benefit would be, ordinarily, a consequence of an accepted repudiation’.
As a result, Cobar had no liability for the ‘loss of opportunity to earn profit’ claimed by Macmahon.
This case is a reminder that clauses limiting or excluding liability can be wide-reaching and very powerful even in instances where they are not properly or carefully drafted. More than ever, therefore, specific and precise drafting is the key to an outcome that reflects the parties’ intentions.