From the 2008 decision of Environmental Systems v Peerless, Australia has progressively moved further away from the English approach to consequential loss. The recent Supreme Court of South Australia case, Alstom Ltd v Yokogawa Australia Pty Ltd & Anor (No 7), is the latest in a growing list of Australian decisions to expand the meaning of consequential loss beyond the narrow English definition.
Alstom was the head contractor for the refurbishment of Playford B power station and subcontracted some of the work to a joint venture (Yokogawa). Delays and completion issues arose under the head contract, leading to Alstom paying a settlement amount to the power station owner, Flinders Power Partnership (FPP).
Alstom then sued Yokogawa for damages arising out of delay to completion and other breaches, including for the recovery of the settlement amount paid to FPP.
The decision involved the contractual construction of complex contracting arrangements and is more than 400 pages long. While the decision provides useful lessons on the complications that arise in project contracts, and the consequences of lazy drafting, this article focuses on the key issues of exclusion of consequential loss and the implication of an obligation of good faith into commercial contracts.
Exclusion of consequential loss
Alstom argued that Yokogawa caused most of the delay and completion issues, and claimed liquidated damages and other amounts under the subcontract.
Importantly, the subcontract contained the following term:
Justice Bleby rejected the English authorities equating "consequential loss" with losses covered by the second limb of Hadley v Baxendale, preferring the approach taken by the Victorian Court of Appeal in Environmental Systems v Peerless, relying on the natural and ordinary meaning of the words based on their context.
His Honour held that the term "consequential loss", unless otherwise qualified, would extend to all damages suffered as a consequence of a breach of contract (an expansion of previous Australian authorities). In the context of the subcontract, his Honour held that the exclusion clause operated to limit Alstom's remedies to those specifically contemplated by the express terms of the subcontract and excluded all others.
Implied obligation of good faith
Yokogawa argued that Alstom breached an implied obligation of good faith by not doing everything necessary to ensure that Yokogawa could perform its obligations under the subcontract, particularly by failing to provide information and preventing Yokogawa from creating and updating an effective project work program. Yokogawa asserted that, as a result, it was unable to comply with the terms of the subcontract.
Justice Bleby considered the authorities as to when a duty of good faith may be implied in commercial contracts and noted that the High Court has not definitively ruled upon these issues. His Honour also referred to Sir Anthony Mason's well-known and often-cited paper setting out three principles of "good faith" in commercial contracts, being an obligation on the parties to:
- cooperate in achieving the contractual objects (loyalty to the promise itself)
- comply with honest standards of conduct, and
- comply with standards of conduct that are reasonable having regard to the interests of the parties.
His Honour's opinion was that a duty of good faith is implied into every commercial contract, noting that some authorities disagree with this view. His Honour held, regardless of whether his view of the universal implication of a duty of good faith into every commercial contract was correct, that the duty must be implied into this contract. This was based on the complexity and interdependencies of the project demanding a high degree of cooperation and reliance upon the good faith of each party. His Honour also found there were implied terms imposing a duty to cooperate and not hinder the other party's performance.
Justice Bleby held that Alstom had breached the implied terms by not providing the information to Yokogawa, resulting in Yokogawa being unable to properly plan its works under the subcontract and to comply with its provisions. Accordingly, Alstom could not rely on the subcontract's liquidated damages regime.
Implications for agencies
This decision highlights the dangers of including a term excluding "consequential loss" without carefully defining the particular type of loss intended to be excluded. As recent Australian decisions have demonstrated, general terms such as "indirect", "consequential" or "economic", whose meanings were long thought settled, are being reinterpreted and resulting in a far broader range of losses being excluded than contemplated before the Peerless decision.
The decision also proposes that obligations of good faith may be implied in every commercial contract. While this question remains unsettled for commercial contractual parties, it adds further weight to the views expressed by the Supreme Court of NSW in NSW Rifle Association Inc v Commonwealth of Australia (see our article How reliable is the doctrine of executive necessity?) that the obligation is likely to be implied into all government contracts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.