We are all familiar with clauses which seek to exclude or limit liability for indirect or consequential losses, however many contracting parties do not appreciate what these terms mean and their significance. This article aims to provide a refresher on the subject.
At common law, general damages cannot be recovered if the loss suffered is too remote from the corresponding breach of contract.
As such, parties must consider whether the loss falls within the limbs of the “remoteness test” contained in the well-known British case of Hadley v Baxendale.1
First limb – losses that may fairly and reasonably be considered as arising naturally from the breach of contract; or
Second limb – losses that may reasonably have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach.
Losses which fall within the first limb became known as “direct or normal losses”. The losses described in the second limb were known as “indirect or consequential losses”.
In more recent times, the Victorian case of Peerless2 drew a distinction between:
- “normal loss, which is loss that every plaintiff in a like situation will suffer”; and
- “consequential loss, which is everything beyond the normal measure of damage, such as profits lost and expenses incurred through breach”.
This had the effect of broadening the range of losses recoverable under the second limb of Hadley v Baxendale and signified a move away from the traditional formulation.
Since Peerless, a number of other courts have considered clauses which purport to exclude consequential loss. In Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7)  SASC 49 the South Australian Supreme Court noted that:
“…unless qualified by its context [the word “consequential”]… would normally extend, subject to rules relating to remoteness, to all damages suffered as a consequence of a breach of contract. That is not necessarily the same as loss or damage consequential upon a defect in material where other remedies are also provided.”3
As Alstom ultimately concluded that the term “consequential loss” must be given its ordinary and natural meaning, it is considered by some commentators as reflecting an even broader approach than Peerless to consequential loss.
The most recent Western Australian Supreme Court decision regarding the interpretation of exclusion clauses and consequential loss is the single judge decision in Regional Power Corporation v Pacific Hydro Two Pty Ltd  WASC 356.
In this case, the Court held that the words “indirect or consequential” do not have a fixed meaning and ought instead to be construed in light of their context according to general principles of construction.4
His Honour (Martin J) allowed (as direct damages for a flooding of a gas fired power station) the costs of replacement diesel generators and accommodation and travel costs for the necessary personnel to operate the power station on that basis.
In reaching this decision, Martin J considered both the traditional and modern approaches to interpreting the term “consequential loss” and concluded that both were artificial. He observed that they dealt with the question of construction according to a predisposition, in one case (Hadley v Baxendale), based on remoteness and in the other (Peerless), a measure of damages, as follows:
“…ordinary businesspersons would naturally conceive of ‘consequential loss’ in contract as everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach”5