Australia: Two little words - one big impact: an undefined "consequential loss" exclusion can be an unknown risk in construction contracts

When negotiating a contract, parties will attempt to negotiate the terms to match their risk profiles; concluding those risks they are willing to accept and resisting those they are not. In this context certainty is very much the aim of the game. One key area where there is the potential for risk allocation to be made uncertain relates to the use of the term "consequential loss".

The all too common undefined exclusion for consequential loss has been the subject of academic and judicial debate since 2008, and has been reconsidered recently in the case of Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356 (Regional Power). The Regional Power decision has placed a very different interpretation to the cases that preceded it as to what is covered by "consequential loss".

What does "consequential loss" actually exclude?

Since the decision of the Victorian Court of Appeal in Environmental Systems v Peerless Holdings1 (Peerless) in 2008, several state courts have moved towards a broad view of the types of loss covered by an undefined exclusion of consequential loss. This is because the Peerless case saw a departure from the existing judicial understanding of consequential loss, based on the second limb of the Hadley v Baxendale test for remoteness, towards the creation a broader test encompassing all the loss which could not be said to be "naturally and ordinarily" flowing from a breach of contract and expressly including loss of profits as consequential loss.

Peerless considered the types of loss excluded by the term consequential loss in the context of an equipment supply and install contract. It was held that the exclusion for consequential loss meant that where the equipment was faulty, the plaintiff was only able to recover the loss associated with installing and commissioning the new equipment as well as repairing the old equipment which was to be replaced, but had to be used in the meantime.2 The additional labour costs to make the new equipment functional, as well as the additional energy costs of continuing to use the old equipment were not claimable as they were characterised as "consequential loss".3

The Peerless case has not been considered by the High Court but has been applied or cited by other state courts when deciding what is meant by "consequential loss".4 A recent application of the Peerless approach was in the 2012 South Australian Supreme Court decision of Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7) [2012] SASC 49 (Alstom v Yokogawa), which considered an undefined exclusion for consequential loss within a construction contract for the refurbishment of a power station.

Alstom v Yokogawa accepted the reasoning in Peerless was to be the preferred approach when interpreting the meaning of consequential loss,5 and arguably took one step further by finding that in the circumstances of the case the term excluded the ability to claim all loss other than liquidated damages and damages associated with performance guarantees payments, which were expressly provided for in separate clauses of the contract.6

Regional Power – a narrower view of consequential loss?

In Regional Power Justice Martin of the Western Australian Supreme Court casts doubt on whether the decision in Peerless was intended to create a new test for determining what loss should be excluded as "consequential".


Regional Power considered the consequential loss exclusion under a Power Purchase Agreement (PPA) between a Contractor and the State Energy Commission of Western Australia (SECWA). The PPA was signed in 1994 and provided that the Contractor build a hydro power station and once operational, supply the energy produced. In exchange, SECWA agreed to purchase a minimum amount of electricity from the power station. SECWA, a statutory entity, had statutory obligations to provide and maintain an "efficient, coordinated and economical supply of electricity".

The PPA contained an exclusion clause, clause 26.1, which stated:

"Neither the Project Entity nor SECWA shall be liable to the other party in contract, tort, warranty, strict liability, or any other legal theory for any indirect, consequential, incidental, punitive or exemplary damages or loss of profits."

In 2006, the power plant suffered a major flooding event and was unable to generate power for two months. It was accepted that the flooding event was the result of the Contractor's breach of the PPA. During the two month shutdown, SECWA arranged for two diesel generators to be delivered to site, along with sufficient diesel fuel and technicians to operate the generators and cranes to mobilise/demobilise the power station.

The Contractor argued that these costs were not recoverable under the PPA, as on the authority of Peerless, they were captured by the exclusion for "consequential loss".


Justice Martin considered the previous authority on this topic and, citing academic opinion, concluded that both the Hadley v Baxendale approach and the Peerless approach were wrong, as they resulted in applying a legal perspective rather than approaching the question of what is meant by "consequential loss" from a commercial perspective.7

The correct approach, the Judge reasoned, was to follow the general principles of interpretation as set out by the High Court in Darlington Futures v Delco,8 which provides that the words in an exclusion clause are to be given their "natural and ordinary meaning, read in light of the contract as a whole" and, in the case of any ambiguity to be read against the party trying to rely on the clause.9

Considering the words in clause 26.1 in the context of the PPA generally, Justice Martin decided that the costs sought in relation to the provision of diesel generators, the diesel fuel and operators etc., were direct costs flowing from the breach and were therefore not capable of falling within the meaning of the term "consequential loss".10

There were several factors which assisted this decision, including:

  • the PPA was a bespoke contract arrangement attempting to capture the nature of this project;11
  • the long term nature of the PPA (between 1994 and 2021) showed the arrangement was grounded on assumptions about the reliability of the power station;12
  • there were clauses in the PPA indicating that the parties were aware that SECWA may be required to generate its own electricity if the power plant stopped operating;13
  • the fact that SECWA's obligations to provide energy were not just commercial, but statutory put it in a more vulnerable position than a commercial commodities trader if there was a shortfall in supply. SECWA's statutory obligations also meant that at the time they entered into the PPA, the parties knew that if there was a loss in power generation, SECWA would have to obtain an alternative power source in order to meet its statutory obligations;14 and
  • a more plausible scope for what is meant by "consequential" in the context of this contract, are those losses suffered by third parties, such as shop owners, who would suffer a loss where they do not receive an electricity supply.15

Justice Martin's approach in Regional Power resulted in a significantly narrower interpretation of the types of loss covered by the term "consequential loss" than in Peerless or Alstom v Yokogawa. At this stage the Regional Power decision has yet to be considered by any other courts. It will be interesting to see whether other courts will prefer Justice Martin's approach resulting in a shift away from the broad Peerless approach, or whether the Peerless approach will continue to be preferred.

Minimising your risk associated with consequential loss

The best way to minimise this risk is to include a detailed definition of consequential loss when drafting contracts. The more specific the definition is in relation to the project the better – as this will leave less room for judicial interpretation regarding what the parties intended to be consequential losses. In some instances, it may be appropriate to draft "carve ins" (those risks a party will accept), as opposed to "carve outs" (those things a party will not accept).

This issue is a reminder that the more time spent thinking about the types of risks which are likely to occur prior to signing the contract and ensuring that they are dealt with specifically, the greater the certainty around which types of loss a party has or has not accepted.


1Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 (Peerless).
2Peerless at [122] – [124].
3Peerless at [122], [125].
4See Waterbrook at Yowie Bay Pty Ltd v Allianz [2008] NSWSC 1451 and approved on appeal in Allianz v Waterbrook [2009] NSWCA 224.
5Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7) [2012] SASC 49 at [289].
6Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7) [2012] SASC 49 at [292].
7Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356 (Regional Power) at [95] .
8(1986) 161 CLR 500.
9(1986) 161 CLR 500, 510 as applied in Regional Power at [68], [97].
10Regional Power at [112] –[114].
11Regional Power at [99].
12Regional Power at [110] – [101].
13Regional Power at [102] – [103].
14Regional Power at [104] – [108].
15Regional Power at [110].

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.