DAMAGES

CONSEQUENTIAL Greater complexity in 98 FCR 289, and more recently

LOSS—WHAT DOES IT construction and infrastructure in Peerless Holdings Pty Ltd v
projects means risk–averse Environmental Systems Pty Ltd
MEAN? contractors and consultants [2006] VSC 194.
Ren Niemann, Senior typically look for contractual
protection from liability for WHAT IS CONSEQUENTIAL
Associate
consequential loss suffered by LOSS?
Rima Hor, Law Graduate the other party or third parties. Although clauses often contain
Despite the frequency that the expressions such as ‘indirect,
Allens Arthur Robinson,
term ‘consequential loss’ is used, special or consequential loss
Sydney
it is not clear to many what it or damage’, judicial authority
means and what types of loss it would indicate that the difference
comprises. This article explores between these terms is more
some of the drafting issues that semantic than real: Hotel
parties need to be aware of when Services Limited v Hilton
contemplating clauses excluding International Hotels (UK) Limited
liability for consequential loss. [2000] BLR 235. In other words,
in practice, consequential loss
HOW DOES IT AFFECT YOU? may be used interchangeably with
• In light of the Australian and indirect loss, or more broadly, it is
English cases on what comprises loss that is a step removed from
‘consequential loss’, considerable the transaction and its immediate
care is required in negotiating effect3 or one step removed from
and drafting clauses that exclude those which flowed naturally from
or limit liability for consequential a breach of contract.4
loss.
However, an overview of cases in
• It is important to be as specific this area reveals that the types
as possible about the type of loss of loss encompassed within
that will not be recoverable. ‘consequential loss’ may vary
• It is important to understand according to the nature and
how an exclusion clause interacts subject matter of the contract.
with the contractual insurance For example, it is sometimes
regime. assumed that loss of revenue,
loss of profit or loss of anticipated
CURRENT LAW— profit will be considered indirect
RECOVERABILITY OF LOSS or consequential loss. However,
It is well established in the United a number of recent cases have
Kingdom and Australia that held that these losses may be
losses can be recovered under classified as a direct loss, and
two limbs,1 namely: therefore recoverable despite
clauses excluding liability for
• the losses arise naturally,
‘consequential loss’.5
according to the usual course of
things, as the result of the breach PRACTICAL ISSUES FOR
(first limb); or CONSIDERATION
• the losses were contemplated Given the need for certainty
by the parties, at the time that and clarity in drafting exclusion
the parties made the contract, as clauses, the following practical
being the probable result of the issues need to be carefully
breach (second limb). considered.
Cases from the United Kingdom • If a party wishes to be certain
indicate that consequential loss of what will be excluded,
is to be equated with the second rather than merely referring to
limb.2 This has been confirmed ‘consequential loss’, it may be
in Australia in Frank Davies v necessary to specifically identify
Container Haulage Group (1989) the types of loss which may not be

34 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007

recoverable, such as loss of profit, it should be made clear that the 3. GEC Alsthom Australia Ltd
loss of production, loss of revenue exclusion of consequential loss v City of Sunshine (Federal
or loss of use. does not affect the recoverability Court, Ryan J, 20 February 1996,
of those liquidated damages. This unreported)
• If there is a list of specific types
is particularly important where
of losses in addition to a generic 4. Peerless Holdings Pty Ltd v
such liquidated damages have
reference to ‘consequential loss’, Environmental Systems Pty Ltd
been calculated based on losses
it is important to ensure that [2006] VSC 194
that may be consequential in
they are not listed in such a way
nature. 5. Deepak Fertilisers and
as to be qualified by the generic
reference. For example, in Pegler • Finally, it is necessary to Petrochemical Corporation v
Ltd v Wang (UK) Ltd (No 1) [2000] consider how the exclusion Davy McKee (London) Ltd and
BLR 218, it was held that the clause interplays with the ICI Chemicals & Polymers Ltd
phrase ‘any indirect, special or insurance regime. In effect, the [1999] Lloyd’s Rep 387; GEC
consequential loss, however party accepting the exclusion Alsthom Australia Ltd v City of
arising (including but not limited of consequential loss liability Sunshine (Federal Court, Ryan
to loss of anticipated profits or is giving a release to the other J, 20 February 1996, unreported)
data)’ still allowed a party to party who has the benefit of the
recover loss of profits that were exclusion. This may affect the first Ren Niemann and Rima Hor’s
direct and not consequential. party’s rights to be indemnified article was previously published
under insurance policies (eg ISR, in Allens Arthur Robinson’s
• If a party wishes to ensure Focus Construction—February
contract works or public liability).
that other parties (eg its agents, 2007. Reprinted with permission.
Accordingly, insurance advice
contractors and related bodies
should be sought to ascertain the
corporate) can avail themselves of
insurer’s position on such clauses
the benefit of an exclusion clause,
and the impact it will have under
clear wording will be required.
the relevant policy.
However, as those parties are
not a party to the contract, the SUMMARY
contract will need to include a Introducing any exclusions of
mechanism to address privity of liability for consequential loss into
contract issues. a contract is legally complex and
• It will also need to be requires careful consideration of
considered whether there should the issues. Without understanding
be carve–outs from an exclusion how the law construes this term
for consequential loss; that is ‘consequential loss’, parties
liability for consequential loss that may find that the subsequent
will not be excluded or limited. interpretation of the exclusion
Such carve–outs may include: clause is at odds with the
intention of the parties (or at least
• liability for third party the party requiring the clause).
liability claims; If there is any ambiguity in the
• liability for amounts the clause, this may be construed
subject of insurance proceeds against the party requiring the
or amounts recoverable or exclusion. Accordingly, when
indemnified under insurance; drafting such clauses, parties
should use clear language in
• liability for criminal acts or
articulating the types of loss that
for fraud; and
will not be recoverable.
• liability for ‘wilful default’
and ‘gross negligence’ (although REFERENCES
as the law does not recognise 1. See Hadley v Baxendale (1854)
these concepts, they will need to 9 Ex 341
be clearly defined).
2. Croudace v Cawoods [1978]
• Additionally, if liquidated 8 BLR 20; BHP Petroleum Ltd v
damages are payable (eg for delay British Steel PLC [1999] 2 Lloyd’s
or failure of performance), then LR 583

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007 35