When entering into infrastructure contracts, parties will attempt to negotiate a careful bargain ensuring their risk is minimised. The incorporation of a mutual exclusion of liability for consequential losses is common in many complex and high value projects, as a means of reducing each party’s risk exposure to the other. The types of loss covered by a consequential loss exclusion has been considered on several occasions by State Supreme Courts, both in situations where the term has been defined and undefined in the contract. As seen in the Victorian Court of Appeal decision Environmental Systems v Peerless Holdings1, a broad view can be adopted, and in the State of Victoria, for the types of losses covered by an undefined consequential loss exclusion clause.
Two recent decisions of the New South Wales Supreme Court of MacMahon Mining Services v Cobar Management2 again consider the exclusion of liability of consequential losses in the context of a defined term of “consequential loss” and highlight the importance of precisely drafting the intended extent of coverage of the term.
On 14 October 2011, Macmahon Mining Services Pty Limited (the Contractor) and Cobar Management Pty Limited (the Principal), entered into a contract to design and construct certain works for the development of Cobar’s copper mine at Cobar in NSW.
The Principal issued a notice of “Termination of the Contract” to the Contractor, approximately 2 years into the project’s construction. The Principal relied on clause 22.3(a) which entitled it to terminate for breach if the breach was material and incapable of remedy. The Contractor claimed the purported termination was invalid and as a result, the Principal had repudiated the Contract. However, on 19 June 2013, the Contractor notified the Principal that it accepted the repudiation as discharging the contract and then sued the Principal for damages. The Contractor claimed damages on the basis that had the Contract continued to completion, it would have made substantial profits. It argued that the Principal’s termination had denied it that opportunity, resulting in a “loss of opportunity to earn profit” for the Contractor.
First decision – Macmahon 1
In this decision, the Principal brought a notice of motion for summary dismissal of the Contractor’s claim, on the basis that the damages being sought were clearly an excluded amount under clause 18.5 and the definition of “consequential loss”.
Relevantly, clause 18.5 provided:
Despite anything else in this contract, neither party will be liable to the other for any Consequential Loss.
Consequential Loss was defined in the Contract as:
- any special or indirect loss or damage; and
- any loss or profits, loss or production, loss or revenue, loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, whatsoever, whether direct or indirect.3
The Principal, in making the summary judgment application, argued that the damages sought by the Contractor fell within the meaning of “loss of contract” and were therefore excluded by the Contract.
In opposing the motion, the Contractor argued that if the Principal was correct, and the exclusion of Consequential Loss included damages recoverable for repudiation of the Contract, this would allow the Principal to end further performance of the Contract without exposing itself to liability for compensation. The Court considered this argument and noted termination for repudiation is not without risk, given the Principal under a complex construction or infrastructure contract would need to find another contractor to complete the work and it may be expensive and time consuming.4
Ultimately, the Court considered this dispute as a question of contract interpretation and McDougall J found the clear words of clause 18.5 should not be read down. The following factors assisted this decision, including:
- the category of “loss of contract” under the definition of Consequential Loss covers both loss of the benefit of the current contract between the Principal and the Contractor as well as other third party contracts;5
- the expression “contract” is a shorthand of “benefit of a contract” and both parties must have taken that into consideration when entering into this bargain that Consequential Loss would exclude loss of the benefit of a contract. A loss of the benefit of a contract would cover the consequences of accepted repudiation;6and
- both parties constructed a careful bargain and used clear wording to limit liabilities under the contract.7
Accordingly, as there was a relevant and clear category of loss, being “loss of contract”, the Principal was able to rely on this category to have the Contractor’s loss of contract claim struck out.
Second decision – Macmahon 2
Following the first decision, the Contractor moved for summary dismissal of certain counter claims made by the Principal for damages flowing from various alleged breaches of the Contract discussed above. The Principal claimed the Contractor failed to exercise appropriate standards of care and skill or act consistently with “Good Industry Practice” while performing upper shaft activities. 8
The Contractor relied on clause 18.5 and asserted the claim by the Principal had been excluded given it falls under the “catch-all” mechanism of “any special or indirect loss or damage”. 9
Justice McDougall held that the contractual construction in this application was not as straightforward as in the first decision. His Honour ultimately found the particular aspect of damage claimed by the Principal did not fall plainly within the definition of consequential loss and was not excluded by clause 18.5. It should be noted that His Honour’s decision was without any investigation of the facts10 and relied on the following factors:
- Justice McDougall considered it should be interpreted in accordance to Justice Atkinson in Saint Line Ltd v Richardsons, Westgarth & Co Ltd 11,where his Honour stated:
“Direct damage is that which flows naturally from the breach without other intervening cause and independently of special circumstances, while indirect damage does not so flow”
- in determining the direct or indirect causal relationship between the event and loss claimed, the purpose that is contemplated by the contract must be considered.12
In summary the Contractor was not able to show that the specific category of damages being sought by the Principal, loss caused by a failure to exercise due care and skill, fell within the broad definition of “special and indirect loss” and therefore it could not have the claim struck out summarily
As seen in both cases, the best way to minimise the risk associated with the exclusion of liability for consequential loss when drafting contracts is to include clear and specific language. The clear wording of the Contract in Macmahon 1prevented the Contractor from recovering damages for the loss of profits which it would have obtained if the Contract had been performed. Whereas, in Macmahon 2, the Contractor was not able to rely on the general exclusion for special or indirect loss in its application to have the Principal’s claim for damages dismissed summarily, as what is special or indirect requires consideration of the purpose of the transaction and other surrounding factual matters.