There is a distinction between an exclusion clause, the effect of which is to either absolve a party for the consequences of a breach of contract or duty or to defi ne substantively the limit of the duty by
negating obligations that the law would otherwise
impose, and a liability cap, the purpose of which is
to limit a party’s exposure up to a pre-determined
amount or percentage of contract value.
Often, these legal mechanisms operate in tandem
with provisions in relation to liquidated damages
(which are not considered to be exclusory,
operating in theory for the benefi t of both parties)
and insurance and indemnity provisions within a
contract, to create a fi nely balanced risk regime.
Such clauses are construed ‘…accordingly to
their natural and ordinary meaning, read in light
of the contract as a whole, thereby giving due
weight to the context in which the clause appears,
including the nature and object of the contract, and
where appropriate, construing the clause contra
proferentum in case of ambiguity…’1
Many contractors rely on such clauses to manage
their risk of damages arising out of the performance
of contracts into which they enter – particularly
in signifi cant process engineering and contract
mining agreements - where exposure to unlimited
damages will be often unacceptable.
If the starting point is that a contractor will not
accept liability for unlimited damages, a number
of different outcomes can be achieved by adoption
of appropriate exclusions, limitations or caps.
Accordingly, it is not uncommon to now see clauses
drafted to ensure that liability for all damages is
capped at a percentage of the contract sum or an
annual amount, in the case of a mining services
contract.
Other than in respect of a provision for liquidated
damages (which itself is likely to be capped at a
Exploring Limitations of Liability and
Exclusions of Categories of Loss By Patrick Mead, Partner
www.carternewell.com
percentage of the contract sum) the contractor may
insist upon a complete exclusion for damages for
loss of profi t, loss of use and business interruption,
or alternatively seek to cap any such exposure to
the limit of any applicable insurance.
Process engineering and process design risks
are of real concern, given the potential for loss
to the client over life of plant from shortfalls in
production in the event that the plant is unable to
meet prescribed performance criteria. Accordingly,
a contractor will commonly seek to cap its total
liability for a shortfall in production to the lesser of
a percentage of the contract value or a fi xed dollar
amount.
Often the principal will insist upon exemptions of
particular matters or losses when faced with a
blanket exclusion. If the contractor agrees to this,
it will often only do so on the basis of a further cap
on liability in respect of the matters not subject to
the blanket exclusion.
In a number of reported cases, parties which had
contracted for the design and installation of plant
and equipment had sought to take the benefi t of
exclusion clauses in their contracts in defence of
claims arising out of the performance of that plant
or equipment.
Often clauses sought to exclude any entitlement
by the principal to pursue recovery in relation to
what has been generically referred to as ‘indirect’
or ‘consequential loss’.
There have been a series of decisions by the
English and Australian Courts in the past two
decades that have affected the interpretation of
these clauses and suggested avenues of recovery,
notwithstanding their inclusion in contracts of this
nature.
Cases such as British Sugar PLC v NEI Power
Product Ltd & Anor (1997) 87 BLR 42, Deepak
Fertiliser & Petro Chemical Corporation v
Davy McKee (London) Ltd & ICI Chemicals and
Polymers Ltd (1991) 1 Lloyd’s Rep 387 and BHP
Petroleum Limited v British Steel & Daimine
(1999) 2 Lloyd’s Rep 523 suggested that fi xed
costs and overheads, increased production costs,
and sometimes even ‘loss of profi ts’ claims would
not be excluded by consequential loss exclusions
commonly found in a number of the standard form
contracts upon which contractors have traditionally
relied.
The case of Pegler Ltd v Wang (UK) Ltd (No 1)
[2000] BLR 218 seemed to widen the scope of
losses claimable as ‘direct and natural losses’.
Loss of sales, loss of opportunity to increase
margins, loss of opportunity to make staff cost
savings and wasted management time were all
considered to fl ow directly from the breach and
were recoverable.
The law in Australia had appeared to be following
a similar path, as demonstrated in the case of GEC
Marconi Systems Pty Ltd v BAP Information
Technology Pty Ltd [2003] FCA in which losses to
a third party such as the benefi t of a head contract
(lost future profi ts) and increased project costs
were considered by Finn J of the Federal Court
to fall within the fi rst limb of Hadley v Baxendale
[1854] 9 Exch 341, and thus were recoverable as
losses directly resulting from the breach.
Recent case authorities
There are, however, a number of more recent
Australian decisions in relation to the interpretation
of so called ‘Consequential Loss’ exclusion
clauses that have dramatically altered the legal
landscape in this country.
It is convenient to start with Environmental
Systems Pty Ltd v Peerless Holdings Pty Ltd
[2008] 19 VR 358; [2008] VSCA 26. In that case,
the Victorian Court of Appeal moved away from the
UK position, which had found that ‘consequential
losses’ in the context of an exclusion clause are
losses that fall within the second limb of the rule
in Hadley v Baxendale [1854] 9 Ex 341; the two
limbs being:
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 contemplation of both parties, at
the time they make the contract, as the probable
result of the breach of it.
In the case of Peerless, the Court interpreted
‘consequential’ by reference to the dichotomy
between ‘normal loss’ and ‘consequential loss’
described in earlier editions of McGregor On
Damages (15th Ed (1988) at [26] and following).
The Court referred to ‘normal loss’ as ‘the loss that
every plaintiff in a like situation will suffer’. Nettle
JA [at 93] saying: ‘‘In my view, ordinary reasonable
business persons would naturally conceive of
‘consequential loss’ in contract as everything
beyond the normal measure of damages, such as
Page 2
www.carternewell.com
profi ts lost or expenses incurred through breach …
it was not correct to construe ‘consequential loss’ as
limited to the second rule in Hadley v Baxendale’.
With respect to His Honour, it has never been
clear to the author why ‘profi ts lost or expenses
incurred through breach’ could not be ‘normal
loss’ depending on the particular circumstances
involved.
The next decision for consideration is that of Bleby
J in 2012 in Alstom Ltd v Yokogawa Australia
Pty Ltd (no 7) SASC 49.
In that case the Judge said [at 281]: ‘To limit the
meaning of indirect or consequential losses and
like expressions, in whatever context they may
appear, to losses arising only under the second
limb of Hadley v Baxendale is in my view, unduly
restrictive and fails to do justice to the language
used. The word ‘consequential’, according to
the Shorter Oxford Dictionary means ‘following,
especially as an effect, immediate or eventual or
as a logical inference’. That means that, unless
qualifi ed by its context, it 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 provided.’
Then [at 289], it was said: ‘Not only do I respectfully
prefer the reasoning of the Victorian Court of
Appeal to that of the English authorities, but as a
matter of precedent I regard it as a more persuasive
authority.’
Then [at 290 and 292]: ‘The expression ‘indirect
….or consequential loss’ appears, in this case, as
part of a freestanding and powerfully expressed
exclusion clause….although it must be read
against the background of the qualifi ed exposure
of YDRML to the exclusive remedies of Liquidated
Damages and reimbursement of Performance
Guarantee Payments. The article in question was
intended to operate in respect of potential liability
for loss incurred by Alstom, which was caused by
breach of contract by YDRML in circumstances
other than those giving rise to the payment of
Liquidated Damages and reimbursement of
Performance Guarantee Payments. The words
must be given their ordinary and natural meaning.
In those circumstances any loss consequential
or following, immediate or eventual, fl owing from
a breach of contract by YDRML is excluded from
recovery by Alstom….In my opinion [it] is suffi cient
to exclude liability for any loss other than in
respect of Liquidated damages and Performance
Guarantee Payments.’
The Judge went on to say [at 293]: ‘Thus far I
have only been concerned with the expression
‘indirect….or consequential loss’ as it appears in
Art 3. The other signifi cant expression in that Article
is ‘economic …loss.’
Then [at 297]: the words ‘economic loss’ appear
as part of the composite expression ‘any indirect,
economic or consequential loss whatsoever’ [the
judge placing weight on the parties using the words
‘any …whatsoever’ as indicating an intention that
the parties adopt ‘that composite expression in the
widest possible terms’].
Then [at 302]: ‘That means that the expression
‘economic loss’ must be given its ordinary
meaning. That is extremely wide. In tort it includes
any fi nancial loss not consequent upon loss of or
damage to property in which the plaintiff has a
proprietary or possessory interest or consequent
upon personal injury to the plaintiff. It is diffi cult to
conceive how any of the claims by Alstom could be
for other than economic loss sustained by Alstom’.
Further [at 303]: ‘Alstom does claim additional
costs incurred in providing additional personnel and
resources in performing….work the responsibility
of YDRML …some of that might be described as
work having to be performed as a result of physical
damage to items of plant. However that does not
mean that Alstom’s claim is not for economic loss.’
And [at 304]: ‘there are no other claims by Alstom
which could be described as for other than
economic loss.’
Then fi nally [at 315]: ‘It follows…..that any
other claim by Alstom [other than for Liquidated
Damages and Performance Guarantee Payments]
for alleged breaches of contract by YDRML cannot
succeed and must be dismissed.’
It is worth noting that the exclusion clause in this
case was in bold and read:
‘Notwithstanding any other Article of this
(subcontract) (YDRML) shall not be liable for
any indirect, economic or consequential loss
whatsoever.’
This can be contrasted with the clause under
consideration in the Peerless case, which provided
‘As a matter of policy, Environmental Systems does
not accept Liquidated Damages or Consequential
Loss.....’.
Another key aspect which emerged is that
‘consequential loss’ must always be read in
the context in which the term arises. Bleby J’s
conclusion was made in light of YDRML’s exposure
Page 3 Constructive Notes - March 2014 © Carter Newell 2014
Constructive Notes - March 2014 © Carter Newell 2014
to the exclusive remedies of Liquidated Damages
and reimbursement of Performance Guarantee
Payments.
The fi rst mentioned point had also been made clear
by Master Sanderson in Valentine Estate Pty Ltd
v SMEC Australia Pty Ltd [2010] WASC 319, in
which the Master said:
‘The phrase ‘indirect, consequential and special
losses’ is not a term of art. It has no fi xed
meaning. The meaning of the phrase depends
on the intention of the parties in the particular
circumstances, as determined by the contract
in which the phrase is used. The contract must
be read as a whole and considered in light of
admissible background material’ : see MGC
Properties Pty Ltd v Tang (2009) QSC 322
(23) - (25) (Douglas J).
That same case on appeal (SMEC Australia
Pty Ltd v Valentine Falls Estate Pty Ltd [2011]
WASCA 138) suggests that the interpretation
of such a clause in a particular factual matrix is
unlikely to be considered as an appropriate matter
to be determined summarily.
When considering the context in which the words
‘consequential loss’ appear, the case of MGC
Properties (referred to above) made a distinction
between the appearance of those words in what
it referred to as ‘an exemption clause’ (noting the
provision of such a clause in the Peerless case;
together with guarantees, penalties and limited
warranties), as opposed to those words being
construed in the context of a provision in an
indemnity.
In that case, the Judge accepted the submission
that there was ‘no good reason’ to limit the
losses indemnifi ed to ancillary losses rather than
the central loss applying from the default by the
principal debtor, and in doing so noted that ‘the
loss covered is consequentially upon the default of
the debtor in the performance of its obligations ...
(which) ... must include ... the loss suffered by nonpayment
of the guaranteed money’s.’
The most recent relevant authority is the decision
of Martin J in Regional Power Corporation v
Pacifi c Hydro Group Two Pty Ltd (No. 2) [2013]
WASC 356.
In that case, Regional Power claimed Pacifi c
Hydro’s failure to operate the power station was
a breach of the agreement and sought damages
for the cost of sourcing alternative power that it
was contractually obliged to supply. In response,
Pacifi c Hydro argued the claimed losses were
‘indirect’ or ‘consequential’ and therefore it was not
liable under the agreement.
The Judge held that the losses were ‘direct losses’
and allowed their recovery.
It has been observed by commentators that
the reasoning is signifi cant, as in confi ning the
defi nition of ‘consequential loss’ in Peerless to the
facts of that case, the Court effectively confi rmed
that the meaning of ‘consequential loss’ had to be
determined on a case by case basis.
Relevantly, the clause under consideration in that
case read:
‘Neither ...[party]....shall be liable to the other
party in contract, tort, warranty, strict liability,
or any other legal theory for any indirect,
consequential, incidental, putative or exemplary
damages or loss of profi ts’.
It was noted by the Judge [at 51] that: ‘The
defendants particularly invoke and seek
protection from the force of the words ‘indirect’
and ‘consequential’ ....to ground their conceptual
resistance to the plaintiff’s claimed economic
damages’.
The damages sought by the plaintiff, which included
the costs of hiring diesel generators to generate
replacement electricity as well as costs of diesel
fuel, travel, accommodation etc, were referred
to by the Judge [at 114] as ‘economic losses or
damages’ [it should be noted that there was no
proscription in that case against the recovery of
‘economic loss or damage’, but rather a specifi c
proscription against recovery of ‘loss of profi t’, the
Judge noting [at 75] that these are ‘....of a genre
loss or damage expressly addressed and excluded
under ..[the clause]...’ ]
Elsewhere his Honour observed [at 58] ‘Arguably
if Hadley v Baxendale were to be decided in
2013 instead of 1854, the plaintiff may well have
succeeded in showing its claim for loss of profi ts
as being within the fi rst limb of that test, that is,
damages arising in the ordinary course’.
Then [at 92], when commenting upon Peerless,
his Honour noted that the observations [from the
decision] ‘... do not explicitly identify what is a
‘normal measure of damages’. Nor would they
explain why, as the sentence...seems to suggest,
‘profi ts lost or expenses incurred through breach’
must invariably fall outside the scope of a ‘normal
measure of damages’’.
And then [at 96]: ‘To reject ....the Hadley v
Baxendale dichotomy as to remoteness of loss,
www.carternewell.com Page 4
Constructive Notes - March 2014 © Carter Newell 2014
only to then replace that approach by a rigid
touchstone of the ‘normal measure of damages’
and which always automatically eliminates profi ts
lost and expenses incurred, would pose equivalent
conceptual diffi culties.’
The Judge made a number of salient observations
about the clause under consideration that appeared
to inform his thinking.
Firstly, his Honour noted that the clause was to be
assessed as a limiting clause, rather than a clause
of complete exclusion, his Honour noting [at 81]
‘Direct losses for breach of the ... [contract] ...are
obviously not excluded by its terms’.
His Honour then noted that the limitation against
liability had been assembled on a ‘mutual basis’,
rather than unilaterally favouring one party over
the other, and accordingly there was potential
on a case by case basis for limitation outcomes
benefi ting either side, depending on the presenting
circumstances of an asserted contractual breach.
The separation of the words ‘consequential’ and
‘incidental’ was thought to be relevant by his
Honour, such that the clause not only limited liability
for indirect losses but also for ‘consequential
losses’ [at 99] and was to be read [at 81] as
‘indirect or consequential damages’ or ‘indirect or
consequential loss’ [his Honour not expressing a
view as to whether there was, in fact, a distinction].
His Honour also thought that a number of features
of the clause demonstrated its ‘discernible width’,
including the use of the word ‘any’ to preface what
followed to the end of the sentence within the
clause.
In reaching his ultimate conclusion [that the
plaintiff suffered ‘direct’ loss], his Honour identifi ed
assistance he had taken from the approach of
Ryan J in GEC Alstom Australia Ltd v City of
Sunshine (No. BC 9600288), 20 February 1996, in
which his Honour had said [at 53 – 55]:
‘In reply, Sunshine has submitted that direct
losses are limited to items of expense to the
extent that they exceed actual income no
element of profi t is recoverable...’. .... I have
concluded that I should not give the phrase
‘direct loss’ the narrow construction suggested
by Sunshine. Rather I regard the indemnity
clause in its context [authors note : note the
possible relevance of this comment being
made in respect of an indemnity clause rather
than a limiting provision] as suffi cient to provide
an indemnity ... In respect of damage directly
fl owing from the breach of the obligation and
as wide enough to include lost revenue.....I do
not regard loss of revenue as consequential
loss.....the term ‘Consequential Loss’ connotes
a loss at a step removed from the transaction
and it’s immediate effects.’
Martin J then went on to say [at 113]:
‘Equally, I do not assess ..... [the claimed
expenditures] ...as being ‘consequential’. At its
widest, the word ‘consequential’ might always
be read as somehow responsive to something,
and thereby encapsulating almost every
economic outlay, following upon a breach.....
but that is not a sensible meaning to attribute
to the word ‘consequential’ when used in...[the
limitation clause]....in overall context.’
And [at 114]:
‘In the end, the character of the economic
losses or damages claimed here by the plaintiff
are properly assessed as direct in nature.’
Principles to be derived from the
decisions
Clauses such as those considered above are either
exclusory in nature or are a limitation clause (in
terms of placing limits on categories of loss which
are recoverable). Before any clause will be found
to have taken away a parties right to damages for
breach of contract, it will have to be clear that this
is its intent.
Many of the cases referenced do not consider a
defi nition of ‘Consequential Loss’ but rather the
meaning and effect of the term in a clause more
broadly under consideration. Accordingly, while
cases that consider the term in isolation will be
relevant in seeking to discern the meaning of that
term, where the defi nition of ‘consequential loss’
extends to a number of other categories of loss,
each will have to be separately considered for its
meaning and effect.
The law in this area is, however, clearly now
attendant with some uncertainty in view of there
being recent superior court decisions in three
different States that appear to have embraced
somewhat differing approaches.
As has been observed, there does not, with
respect, seem to be a reason why ‘profi ts lost or
expenses occurred through breach’ might not, in
certain circumstances, amount to ‘normal loss’,
notwithstanding the seemingly pronoucement to
Page 5
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his own particular circumstances.
© Carter Newell Lawyers 2014
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the contrary by the Victorian Court of Appeal in the
Peerless case.
Two cases referred to in Pacifi c Hydro, which
infl uenced Martin J in arriving at his decision that
direct losses in the contemplation of the parties at
the time of entry into the contract were not excluded
by the ‘indirect, consequential loss or damages’
clause, were concerned with the meaning of the
term ‘consequential loss’ in the context of an
indemnity provision, rather than an exclusory or
limiting provision. The author would query whether
the differing context means differing considerations
should, in fact, apply.
It should be noted that the Judge in the Alstom
case essentially concluded that the expression
‘indirect or consequential loss’ meant [in the
circumstances of that contract; i.e. other than those
giving rise to the payment of liquidated damages
and reimbursement of performance guarantee
payments]:
‘...any loss consequential or following, immediate
or eventual, fl owing from a breach of contract’ [at
290] and was therefore excluded from coverage.
There seems to be little support for that notion in
the judgment of Martin J in Pacifi c Hydro, where
his Honour, while noting that possible construction
stated [at 113]:
‘But that is not a sensible meaning to be
attributed to the word ‘Consequential’ when
used within ... [the limitation clause] … in an
overall context.’
The author respectfully prefers that latter view and
considers that this approach is more likely to fi nd
support going forward.
The expression not considered in the context of the
limitation clause in Pacifi c Hydro was ‘economic’ in
the sense of economic loss or economic damage.
Martin J did however [at 114] seem to characterise
the losses sought to be recovered by the plaintiff in
that case as being ‘economic losses or damages’.
It is not entirely clear whether his Honour in doing
so was merely adopting the characterisation
promulgated by the plaintiff and defendant
For example, earlier at paragraph 52 of the
judgment it is said: ‘The defendants contend the
plaintiff’s para 21 economic loss damages as
pursued must properly be characterised as ‘indirect’
or ‘consequential’ damages [or loss]’.
The expression ‘economic loss’ was however
considered in the Alstom case, with potentially
startling consequences, given that his Honour took
the view that all of the claims by Alstom, including its
claims for breach of contract, including delay costs
and additional costs allegedly incurred by Alstom
were ‘economic’ in nature and that therefore those
claims could not succeed in light of the exclusion
clause and had to be dismissed [at 315].
This seems to be contrary to the approach taken
by Martin J in Pacifi c Hydro (albeit in the context
of a clause containing the expression ‘indirect,
consequential loss and damage’ rather than
‘economic loss or damage’) and if it were to arise
for consideration in the context of a defi nition of
‘Consequential Loss’, would refl ect an outcome not
ordinarily thought to be the result of a clause (and
defi nition) styled in that manner.
It also seems to the author that the reference to
‘economic loss’ when considered in the context of
a clause that specifi cally refers to tortious liability,
may just as readily be construed and understood
as a reference to [pure] economic loss.
