Australian courts have consolidated the adoption of a different approach to consequential loss than the classic English focus upon the second limb in Hadley v Baxendale1. The approach first adopted by the Victorian Court of Appeal in Peerless2, then accepted in NSW in Waterbrook3 has now extended over the border into South Australia, in Alstom4. This article considers the Court’s decision in Alstom and its implications.

Recent ‘consequential loss’ developments in Australia

The traditional approach to defining ‘consequential loss’ is borrowed from the leading authority on remoteness of damage.

A key principle for contractual damages is that damages are not recoverable for losses that are too remote. The classic test for remoteness has been well established since Hadley v Baxendale, in which it was held thatthe damages recoverable in respect of a breach are at common law:

  1. losses such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract itself; or
  2. losses such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

Australian courts have traditionally followed a line of English cases5, and have found that ‘consequential losses’ in the context of exclusion clauses are losses that fall within the second limb of the rule in Hadley v Baxendale

The 2008 Victorian case of Peerless marked a dramatic shift in Australian courts’ approach to the interpretation of the term ‘consequential loss’.  In Peerless, the Court drew a distinction between:

  1. ‘normal loss, which is loss that every plaintiff in a like situation will suffer’; and  
  2. ‘consequential loss, which is anything beyond the normal measure, such as profits lost and expenses incurred through breach’.

Consequential loss thereby captured a broader range of losses than the second limb in Hadley v Baxendale and narrowed the types of recoverable damages under a contract excluding liability for ‘consequential loss’. 

The recent South Australian Supreme Court decision in Alstom marks a further move by the Australian courts away from the traditional English position. On one view, Bleby J’s decision in Alstom takes an even broader approach to the concept of ‘consequential loss’ than was taken in Peerless

At the very least, the Alstom decision serves as a further reminder to contracting parties that clarity is a paramount consideration when negotiating and finalising contractual agreements. Exclusion clauses must be drafted clearly to properly give effect to the specific types of damages that the parties seek to exclude from recovery. 

Facts

The case concerned the interpretation of a subcontract between the plaintiff (Alstom) and a joint venture (YDRML) for part of the refurbishment of the Playford B Power Station in Port Augusta (Playford), owned by the Flinders Power Partnership (FPP).

The head contract was a turnkey refurbishment contract entered into by FPP and Alstom on 12 March 2002 for the refurbishment of Playford. Disputes arose under the head contract which were resolved by a 2005 settlement in which Alstom paid $20.5 million.

Having entered into the 2005 settlement with FPP, Alstom commenced proceedings against YDRML to recover amounts paid to FPP resulting from YDRML’s alleged breaches of contract and duty of care. YDRML counterclaimed and itself sought to recover certain losses.

Summary of decision

The Court ultimately dismissed Alstom’s claims, finding in favour of YDRML. In a 461 page judgment, Bleby J discussed a broad spectrum of issues including whether a clause in the subcontract excluding consequential loss operated to defeat Alstom’s claims (the focus of this note). Other issues considered included the law relating to implied terms and good faith.

The subcontract contained the following exclusion clause:

'Notwithstanding any other Article of this …Contract, the Subcontractor shall not be liable for any indirect, economic or consequential loss whatsoever’.6

Alstom contended that the exclusion of consequential loss in the above clause was restricted to damages falling within the second limb of Hadley v Baxendale.7

Bleby J acknowledged that the line of English cases on which Alstom relied represents the current approach of the English Courts to the interpretation of the term ‘consequential loss’, but found that those cases ‘failed to properly construe those words in the context in which they appear’.8 He considered that limiting ‘consequential loss’ to the types of losses covered in the second limb of Hadley v Baxendale was ‘unduly restrictive’ and failed ‘to do justice to the language used’.9

Instead, Bleby J looked to the definition of ‘consequential’ in the Shorter Oxford English Dictionary to arrive at the conclusion that ‘unless qualified by its context, [consequential loss] would normally extend to all damages suffered as a consequence of a breach of contract’.10

His Honour also reviewed the recent Australian case law on the issue, highlighting in particular, that the Victorian Court of Appeal in Peerless considered the prevailing English authorities on ‘consequential loss’ to be ‘flawed’.11 Bleby J preferred the reasoning of the Victorian Court of Appeal in Peerless to that of the English authorities.12

In light of this, his Honour concluded that the term ‘consequential loss’ must be given its ordinary and natural meaning but must be read against the context in which the term appears in the contract.13 In this contract, there was little which justified restricting the natural meaning of the term.

The operation of the exclusion was such that apart from specified liquidated damages, ‘any loss consequential or following, immediate or eventual, flowing from a breach of contract by YDRML [was] excluded from recovery by Alstom’.14

Key takeaways for contracting parties

The Peerless decision has effected a significant shift in the recoverability of damages in Australia. Where consequential loss is excluded, the party taking the benefit of that exclusion now has far greater protection than they once did. The law in Australia, at least until considered by the High Court, must now be that the term ‘consequential loss’ means any losses beyond those that every plaintiff would suffer in a like situation. What this means in practice is difficult to predict, and more judicial consideration is clearly required to give the new test clear and practical expression. Categories of such naturally occurring ‘consequential loss’ could readily fall within the first rule in Hadley v Baxendale.

This approach has sensibly prompted contracting parties to expressly set out the types of damages the contract seeks to exclude from recovery or alternatively, incorporate into their contracts an elaborate definition of consequential loss. 

The wide language employed by Bleby J in his judgment may be of particular concern to contracting parties going forward.  By equating ‘consequential loss’ to ‘any loss consequential or following, immediate or eventual, flowing from a breach of contract’ as opposed to ‘normal loss’ as defined in Peerless, his Honour is arguably narrowing once again the scope of remedies recoverable under a contract which excludes liability for ‘consequential loss’.

‘Consequential loss’ must always be read against the context in which the term arises.  Bleby J’s conclusion was made in light of YDRML’s exposure to the exclusive remedies of liquidated damages and reimbursement of performance guarantee payments. 

The key takeaways from the Alstom decision are:

  1. the decision reinforces the Australian Courts’ departure from the traditional position that ‘consequential loss’ is a reference to losses falling within the second limb of Hadley v Baxendale;
  2. the term ‘consequential loss’ may now extend to ‘any loss consequential upon breach’, further narrowing the scope of remedies recoverable under a contract which excludes ‘consequential loss’, but will ultimately depend on the context in which the term arises; and
  3. until guidance on the interpretation of the term ‘consequential loss’ is provided by the High Court, contracting parties should ensure that exclusion clauses are drafted clearly, setting out the specific types of damages that are to be excluded from recovery under the contract.