Key Points:

It is important to precisely define exactly what is intended to be covered by the term "consequential loss".

Parties to construction contracts often agree to exclusion clauses seeking to limit or exclude claims by principals (or both contractors and principals) for consequential and/or indirect losses. The recent New South Wales Supreme Court proceedings in Macmahon Mining Services v Cobar Management[1] provided two decisions from opposite perspectives on the meaning and ambit of just such an exclusion clause.

As Justice McDougall observed, " [e]xpressions such as direct loss, and consequential loss, have bedevilled lawyers and courts for many years." In the first decision the judge decided the exclusion clause ruled out the contractor's claim; in the second, the judge was not prepared to dismiss the principal's claim.

The parties enter into a design and construct agreement

Macmahon Mining Services and Cobar Management were parties to a design and construct agreement for the development of Cobar's copper mine in New South Wales. However, less than two years into the contract term, Cobar issued a notice of termination to Macmahon, relying on a contractual provision entitling the party to terminate forthwith for breach, if the breach was material and incapable of remedy.

Macmahon alleged that the termination was invalid, but accepted the repudiation as discharging the contract and promptly sued for damages.

One of the heads of damage claimed by Macmahon was "loss of opportunity to earn profit". Macmahon claimed that if the contract had continued to completion it would have made substantial profits and was entitled to damages of $67m.

The first decision: Cobar relies upon the exclusion clause

In the first application, Cobar moved for summary dismissal of Macmahon's claim relying primarily on the exclusion clause in the contract. It submitted that the claim for "loss of opportunity to earn profit" was a claim for Consequential Loss, and was therefore defeated by clause 18.5. This clause provided "despite anything else in this contract, neither party will be liable to the other for any Consequential Loss."

Consequential Loss was defined to include any "loss or [sic] profits, loss or [sic] production, loss or [sic] revenue, loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, whatsoever, whether direct or indirect."

Justice McDougall's decision came down to a question of contract interpretation. He found that the definition of Consequential Loss encompassed any form of loss, whether direct or indirect, that fell within the defined terms.

He accepted that the correct approach to the interpretation of clauses excluding or limiting liability was laid down authoritatively by the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, which held that:

"the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole, thereby giving weight to the context in which the clause appears including the nature and object of the contract and, where appropriate, construing the clause contra proferentem in case of ambiguity."

Looking specifically at Macmahon's claim for "loss of opportunity to earn profit", Justice McDougall observed that one of the categories under the Consequential Loss definition – "loss of contract" – must have been intended to cover both the loss of third party contracts as well as the loss of benefit of the particular contract at hand (being the contract between Macmahon and Cobar).

One of Macmahon's main arguments was that this construction ascribed to clause 18.5 would leave it open to Cobar to rely upon an asserted but non-existent breach to bring an end to the contract without exposing itself to liability for compensation, and this would defeat the main object of the contract. However, Justice McDougall did not agree that the Principal would escape all liability, as the consequences of accepted repudiation would result in the time-consuming and expensive exercise of finding another contractor to finish the work. It was pointed out that accrued rights and liabilities would remain unaffected and Macmahon still maintained a separate substantial claim for damages.

Justice McDougall acknowledged that the clear wording used by the parties in this contract indicated that this was a carefully constructed bargain, drafted to encompass the variety of ways in which liabilities under the contract would be limited and regulated. On that basis, he did not think the clear words of clause 18.5 should be read down.

The second decision: Macmahon relies upon the exclusion clause

In the second application, Macmahon moved for summary dismissal of certain claims for damages by Cobar for various alleged breaches by Macmahon. Cobar alleged that Macmahon failed to employ "Good Industry Practice" and that this failure delayed progress of the work, causing a greater cost of labour, equipment and materials to be incurred.

Turning again to clause 18.5 and the proper construction of the "Consequential Loss" definition Justice McDougall noted that this clause excluded specified heads of loss, as well as excluding "any special or indirect loss or damage". He referred to this as a "catch all" mechanism.

In considering the appropriate meaning to be given to the phrase "special or indirect loss or damage", Justice McDougall applied the words of Justice Atkinson in Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99:

"indirect loss or damage is simply loss or damage which flows other than naturally from the breach, or which is related to the breach only because of some intervening cause or special circumstance."

Thus, whether a damage is direct or indirect requires consideration of the purpose contemplated by the transaction documents, as well as an understanding of the facts that are proved and found.

Assessing the particularities of this case based on the proper construction of the contract, Justice McDougall concluded that the damage claimed by Cobar could not be said with the necessary degree of confidence to be so plainly within the definition of Consequential Loss that it must be defeated by clause 18.5.

Precise definition the key

What these two decisions highlight is the importance of precisely defining exactly what type of loss is intended to be covered by the definition of "consequential loss". By constructing these types of provisions with care, parties can limit the likelihood of the court interpreting the commercial intention of the parties in a way that might that is inconsistent with their intended bargain.

Eliza Grant