Losses falling within the second limb of the rule in Hadley
v Baxendale , being losses "in the contemplation of
both parties, at the time they made the contract, as the probable
result of the breach of contract", are generally called
'consequential' or 'indirect' losses.
Whether any particular loss falls within the category of loss
defined by the second limb of Hadley v Baxendale, or within the
first limb (loss which is a direct and natural consequence of the
breach), is not always immediately clear and often the subject of
The NSW Court of Appeal has recently endorsed the same broader
consideration of the term "consequential loss" applied by
its Victorian counterpart in Environmental Systems Pty Limited
v Peerless Holdings Pty Limited  (Peerless).
In Peerless, consequential loss, it was held, should be given
its "ordinary and natural" meaning. The Court considered
the distinction between normal loss, which one might ordinarily
expect a plaintiff to suffer, and consequential loss, to be
"anything beyond the normal measure, such as profits lost or
expenses incurred through the breach".
Waterbrook at Yowie Bay Limited (Waterbrook)
purchased a retirement village from the developer, Yowie Pty
Limited. The development was residential building work for the
purposes of the Home Building Act 1999 (NSW) (the
Act). Allianz issued a builder's home warranty
insurance policy in respect of the development. The builder was
subsequently placed into liquidation.
The policy issued by Allianz included a clause purporting to
exclude cover for "consequential loss arising directly or
indirectly out of any event listed in the building owner's
McDougall J, at first instance, found Allianz's purported
exclusion of consequential loss to be inconsistent with
Waterbrook's statutory entitlement to cover under the Act and
Regulations. Significantly, his Honour decided that consequential
loss may fall within the first limb of Hadley v Baxendale
(loss which is a direct and natural consequence of the breach),
following the Victorian Court of Appeal's decision in
The Court of Appeal agreed with McDougall J.
Since the NSW Court of Appeal's decision in Waterbrook,
there is arguably less uncertainty surrounding judicial
interpretation of consequential loss and therefore 'a better
road map' for parties to follow in their endeavour to exclude
(contractually) a particular liability.
The drafting implications remain as they did following the
Peerless decision – it is prudent to identify with as
much specificity as possible, the types of losses intended to be
Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay
Pty Ltd  NSWCA 224
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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