In Macmahon Mining Services v Cobar Management [2014] NSWSC 502, the New South Wales Supreme Court considered the application of a ‘consequential loss’ exclusion in circumstances where the principal had (allegedly) repudiated the contract.

The Court held that the exclusion was effective, such that the contractor was not entitled to claim any ‘consequential loss’ arising from the repudiation. This effectively meant that the principal had the right to simply, and wrongfully, walk away from the contract, with no liability to the contractor for any lost profits. In doing so, the Principal also avoided the operation of a termination for convenience regime which would require it to compensate the contractor.

A harsh result that has swung the balance in favour of the Principal. It can be expected that contractual negotiations over consequential loss provisions will be more protracted in this high stakes game. Otherwise, contractors may similarly put themselves at risk of losing the entire benefit of the contract.

Facts

Macmahon (the contractor) and Cobar (the principal) were party to a contract for the design and construction of works related to Cobar’s copper mine. The contract contained a schedule of rates, however the overall contract price was developed as the work progressed. The intention was that Macmahon would be guaranteed a profit from the contract. In June 2013, Cobar purported to terminate the contract.

To do so, it relied on a contractual provision allowing it to terminate for breach if, in its opinion, the breach was material and incapable of remedy. Macmahon argued the termination was invalid and purported to accept Cobar’s repudiation of the contract.

Macmahon sued for damages, including for ‘loss of opportunity to earn profit being effectively the contractual price’. Cobar applied to summarily dismiss the claim for those losses. It made this application on the basis that ‘Consequential Loss’ was defined to mean ‘(a) any special or indirect loss or damage; and (b) any loss [of] profits, loss [of] production, loss [of] revenue, loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, whatsoever, whether direct or indirect’. Further, clause 18.5 of the contract provided that ‘Despite anything else in this contract, neither party will be liable to the other for any Consequential Loss’.

The contract also allowed Cobar to terminate for convenience. Even though it did not seek to exercise that right in this instance, had it done so then it would have been liable to compensate Macmahon, via an agreed formula, for lost profits.

Decision

The parties agreed that Macmahon’s claim for lost profits was a claim for ‘Consequential Loss’, as defined. The issue was whether clause 18.5 prevented Macmahon from claiming such costs if they arose from repudiation.

Macmahon argued that, if clause 18.5 prevented it from recovering ‘Consequential Loss’ arising from repudiation, then the main object of the contract would be defeated. This was because Cobar could effectively walk away from the contract without any liability for Macmahon’s lost profits, thereby avoiding the liability that would come with a termination for convenience.

McDougall J disagreed, and found in favour of Cobar. His Honour explained the position as follows:

Clause 18.5 was clear in its words and intended operation. In particular, it referred to ‘loss of contract’, which must have included the contract between the parties.

It was not Cobar’s alleged repudiation, but rather Macmahon’s acceptance of that repudiation, that terminated the contract. Macmahon presumably made that choice to accept after considering the implications of doing so.

Clause 18.5 would apply to any claim for damages arising from a ‘normal’ contractual breach that did not amount to repudiation. If that was the case, then the clause should equally apply to a breach that did apply to repudation.

His Honour expressly acknowledged that this outcome might deprive one party of the benefit of the contract. However, whilst there are decisions that provide authority for reading down an exclusion clause to prevent such an outcome (Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] 1 VR 538 and Lime Telecom Pty Ltd v Powertel Ltd (No 1), (No 2) [2008] NSWSC 324), the application of the exception will ultimately depend on the wording of the relevant provision (Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500).