The NSW Court of Appeal's decision in Allianz v
Waterbrook  NSWCA 224 has confirmed the Victorian Court
of Appeal's decision in Environmental Systems Pty Ltd v
Peerless Holdings Pty Ltd  VSCA 26
(Peerless) as to the interpretation of
"consequential loss" provisions in contracts. The
decision confirms that "consequential loss" should be
given its "ordinary and natural" meaning. Prior to this
decision, there had been considerable debate in legal circles as to
whether New South Wales courts would follow the Victorian courts
lead on this issue.
Consequential loss before Peerless
The term "consequential loss" has no precise meaning.
Before Peerless, it was generally considered to cover the
type of loss encompassed in the second limb of Hadley v
Baxendale; 1854 9Exch 341 that is, loss which the parties, at
the time they made the contract, contemplated as being the indirect
result of a breach of contract.
As a result of this interpretation many clauses merely excluding
"consequential loss" may be rendered ineffective. For
example, in general commercial transactions loss of profit or loss
of production, are considered "consequential", but may
now be held to arise as a natural and direct result of a breach
(i.e. under the first limb of Hadley v Baxendale). As a
result, a clause excluding "consequential loss" that the
parties assumed excluded a loss of profit or loss of production may
be rendered wholly ineffective.
The Victorian Court of Appeal in Peerless held that the
phrase "consequential loss" should be given its
"ordinary and natural" meaning as used by "ordinary
reasonable business persons".
The court described "consequential loss" as losses
which are "anything beyond the normal measure, such as profits
lost or expenses incurred through breach". It conceded that
some consequential loss may well fall within the first limb of
Hadley v Baxendale, i.e. loss arising naturally according
to the usual course from the breach, depending on the circumstances
of each case.
Allianz v Waterbrook
The NSW Court of Appeal confirmed the decision in
Peerless that "consequential loss" may include
loss described in the first limb of Hadley v
The case involved the construction of a retirement village.
Waterbrook purchased the village from the developer and made a
claim under the builder's home warranty insurance policy for
defective work. Allianz (the insurer) disputed liability on the
basis (amongst other things) that the policy excluded liability for
"consequential loss". That is, Allianz submitted that the
loss suffered by Waterbrook was consequential in nature because the
acquisition of the village by Waterbrook (which knew or ought to
have known the existence of defects) brought a different causal
link between the breach of warranty and loss. The Court of Appeal
disagreed with Allianz's submission.
At trial, McDougall J was required to determine whether such a
provision in the policy was inconsistent with the full statutory
entitlement indemnity. In doing so, McDougall J referred to
Peerless and held that the first limb of Hadley v
Baxendale may include consequential loss.
The Court of Appeal agreed with McDougall J.
The endorsement of Peerless by the NSW Court of Appeal
appears to be a step in the right direction in terms of
However, it has brought a new kind of uncertainty for drafters
as to precisely what types of loss are "beyond the normal
Taking into consideration:
the difficulty of knowing precisely what falls within the first
limb of Hadley v Baxendale or what is a "normal loss";
the requirement for certainty when drafting exclusion
provisions in a contract,
it is pointless to include a clause that simply excludes
The implications on drafting post Peerless and
Allianz v Waterbrook remains the same. That is, it is
prudent to specifically identify the types of losses that the
parties wish to be excluded as being "beyond the normal
measure" (for example, loss of profits, loss of revenue and
loss of business opportunities).
Peter Sise explores how your contractual clause for recovery of legal costs might not do what you think it does.
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