Australia: Consequential Loss: NSW Court Of Appeal Agrees With Peerless

The NSW Court of Appeal's decision in Allianz v Waterbrook [2009] NSWCA 224 has confirmed the Victorian Court of Appeal's decision in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] 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.

Peerless

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 Baxendale.

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.

Drafting implications

The endorsement of Peerless by the NSW Court of Appeal appears to be a step in the right direction in terms of jurisdictional consistency.

However, it has brought a new kind of uncertainty for drafters as to precisely what types of loss are "beyond the normal measure".

Taking into consideration:

• the difficulty of knowing precisely what falls within the first limb of Hadley v Baxendale or what is a "normal loss"; and
• the requirement for certainty when drafting exclusion provisions in a contract,

it is pointless to include a clause that simply excludes "consequential loss".

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).