The Victorian Court of Appeal has recently considered the
difference between 'normal' loss and
'consequential' loss in the context of
In the decision of Environmental Systems Pty Ltd v Peerless
Holdings Pty Ltd  VSCA 26, the Court heard that
Environmental Systems Pty Ltd (Environmental Systems) had
entered into a contract with Peerless Holdings Pty Ltd
(Peerless) to provide a regenerative thermal oxidiser for the
treatment of odour omissions at Peerless' animal
rendering plant (Contract). When the oxidizer continually
failed to function for over 3 years after supply, Peerless
brought a suit against Environmental Systems for breaches of
the Contract and the Trade Practices Act 1974 (Cth).
An exclusion clause was contained in the Contract which
established that Environmental Systems did not accept
liquidated damages or consequential loss 'as a matter
The previous position
English authorities, led by Hadley v Baxendale (1854) 156 ER
145, have established that losses can be recovered under two
general limbs being:
direct losses, which are those losses that arise
naturally from a breach, and
consequential losses, which are those losses contemplated
as probable by the parties at the time the contract was
The Supreme Court applied Hadley v Baxendale and held at
first instance that the losses suffered by Peerless arose
directly as a result of the oxidizer not working as required
under the Contract. As such, there were no consequential losses
to be awarded.
The new position
The Court of Appeal applied a more literal meaning to the
word 'consequential' in moving away from the
Hadley v Baxendale interpretation of 'consequential
loss'. Instead, it held that losses should be
normal loss, being the loss that every plaintiff in a
like situation will suffer, and
consequential loss, being loss beyond the normal measure,
such as profits lost or expenses incurred.
As such, the Court of Appeal found in favour of Peerless and
awarded damages which included a claim for additional energy
costs incurred as a result of the oxidizer not functioning
What does it mean?
The new distinction between 'normal' and
'consequential' loss is significant as it opens
up the ambit of potential consequential losses. This will now
extend to, for example, lost profits, lost production and
increased production costs. Parties excluding consequential
losses under any contract will now be increasing their exposure
to loss in the event of breach by the other contracting
It waits to be seen how or whether the High Court will
consider the new distinction upon further appeal. However,
until such time, care must be taken to define the precise type
of losses that parties to a contract agree to be included or
excluded from liability.
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.
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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