DEVELOPMENTS IN THE LAW RELATING TO ‘CONSEQUENTIAL LOSS’
Anthony Jucha, Jucha Legal
1.
DAMAGES
2.
REMOTENESS
3.
HADLEY & BAXENDALE
4.
FIRST LIMB
5.
SECOND LIMB
6.
EXCLUSION CLAUSES
7.
CONSTRUCTION OF ‘CONSEQUENTIAL LOSS’
8.
‘NATURAL MEANING’ AND TWO (WRONG) SCHOOLS OF THOUGHT
9.
THE ‘CROUDACE VIEW’
10.
THE ‘MCGREGOR VIEW’
11.
LAMENT?
12.
UNCERTAINTY
13.
DRAFTING
14.
DRAFTING FOR SUPPLIER
15.
DRAFTING FOR CUSTOMER
16.
POST SCRIPT - A WORD ABOUT EXCLUSIVITY IN SUPPLY AGREEMENTS
1
1.
DAMAGES
1.1
“In contract ‘where a party sustains a loss by reason of a breach of contract, he is, so far as
money can do it, to be placed in the same situation, with respect to damages, as if the contract
had been performed.’”1
1.2
“[35-10] Protection of expectation. It is common, when damages are awarded in contract
cases, for assessment to protect the plaintiff’s expectation of receiving the defendant’s
performance… Thus… the plaintiff is entitled to be placed in the same situation as if the
contract had been performed usually means that the plaintiff will recover an ‘expectation
loss’.”2
1.3
“[35-11] Reliance damages. It is not at all uncommon for a plaintiff to expend money in the
performance of a contract. If the defendant breaches the contract the plaintiff may find that the
expenditure is wasted and may therefore seek to recover the wasted expenditure as damages.”3
1.4
“The main reason that the concept of reliance damages does not figure prominently in the
cases is that generally a plaintiff is adequately compensated by damages awarded on an
expectation basis, for loss of the bargain.”4
2.
REMOTENESS
2.1
“[35-23] The remoteness concept. The plaintiff’s loss or damage, even if caused by the
defendant’s breach, must not be too remote.”5
2.2
“At one time it seems to have been thought that the principles of law governing remoteness of
damage are the same in tort and contract. However, in Koufos v C Czarnikow Ltd the House of
Lords decided that the test of remoteness in contract is narrower than that applied in tort.”6
2.3
“It was necessary that some limitation should be introduced, and this task has been achieved in
Hadley v Baxendale in 1854, the most celebrated case in the field of contract damages.”7
3.
HADLEY & BAXENDALE
3.1
“We think the proper rule in such a case as the present is this: where two parties have made a
contract which one of them has broken, the damages which the other party ought to receive in
1
Robinson v Harman (1848) 1 EX 850 at 855 referred to in J W Carter, E Peden & G J Tolhurst, Contract Law in Australia,
Fifth Edition, LexisNexis Butterworths, Sydney (2007) 809.
2 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007) 811
- 812 (referring to Koufos v C Czarnikow Ltd [1969] 1 AV 350 at 414, 420; Wenham v Ella (1972) 127 CLR 454 at 471;
Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 667, 672; 69 ALR 11).
3 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
812.
4 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
813.
5 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
821.
6 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007) 809
(referring to Addis v Gramophone Co Ltd [1909] AC 488 at 498, Koufos v C Czarnikow Ltd [1969] 1 AC 350, Astley v
Austrust Ltd (1999) 197 CLR 1 at 23, 28; 161 ALR 155; Wylie v ANI Corp Ltd (2000) [2000] 1 Qd R 320 at 335).
7 H McGregor, McGregor on Damages, Eighteenth Edition, Sweet & Maxwell, London (2009) 199 (referring to Flureau v
Thornbill (1776) 2 Wm. Bl. 1078 and Hadley v Baxendale (1854) 9 Ex 341).
2
respect of such breach of contract should be such as may fairly and reasonably be considered
either arising naturally, i.e. according to the usual course of things, from such breach of
contract itself, or such as may reasonably be supposed to have been in the contemplation of
both parties, at the time they made the contract, as the probable result of the breach of it.”8
3.2
“[35-09] General and special damages. Damages under the first limb of the rule in Hadley v
Baxendale are sometimes described as ‘general’ damages, and those awarded under the second
limb ‘special’ damages. Accordingly, ‘general’ damages are those which the law presumes to
flow ‘naturally’ from the breach. ‘Special’ damages are of an exceptional nature and only
recoverable where the defendant had prior knowledge of the likelihood that the loss would be
suffered.”9
4.
FIRST LIMB
4.1
“…arising naturally… according to the usual course of things…”10
4.2
“[35-24] How remote? Under the first limb of the rule in Hadley v Baxendale the damages
claimed must flow ‘according to the usual course of things’ from the defendant’s breach. But
what degree of certainty is actually required? Over the years the courts have tried to
reformulate (or at least paraphrase) Alderson B’s statement, but without any obvious
success…”11
4.3
“serious possibility” 12
4.4
“grave risk” 13
4.5
“reasonably foreseeable”14
4.6
“likely to result”15
4.7
“on the cards”16
4.8
“not unlikely”17
4.9
“liable to result”18
4.10
“serious possibility”19
8
Hadley v Baxendale (1854) 9 Ex. 341 at 354 - 355.
J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
(referring to Hadley v Baxendale (1854) 9 Ex 341 at 354, Stroms Bruks Aktie Bolag v Hutchison [1905] AC 515 at 525,
President of India v La Pintada Compania Navigacion SA [1985] AC 104 at 115).
10 Hadley v Baxendale (1854) 9 Ex. 341 at 354 - 355.
11 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
821 (referring to Hadley v Baxendale (1854) 9 Ex. 341).
12 Monarch SS Co Ltd v A/B Karlshamns Oljefabriker [1949] AC 196 at 233, per Lord du Parcq.
13 Monarch SS Co Ltd v A/B Karlshamns Oljefabriker [1949] AC 196 at 233, per Lord Morton.
14 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 539, 540.
15 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 539, 540.
16 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 539, 540.
17 Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 388, per Lord Reid.
18 Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 406, per Lord Hodson, at 410 - 411, per Lord Hodson.
19 Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 415, per Lord Pearce, at 425, per Lord Upjohn.
9
3
4.11
“real danger” 20
4.12
“The balance of Australian authority would seem to accept Lord Reid’s approach”21 (being:
‘not unlikely’).
4.13
“The discussion in the Koufos case is hardly conclusive in favour of any one of the various
expressions used. It does, however, indicate that a fairly high degree of probability is required
in contract, certainly higher than that applied to damages claims in tort.”22
4.14
“[35-25] Losses in the ‘usual course of things’. Because each contract is unique, in one sense
only limited assistance can be gained from previous cases on what is, or is not, to be regarded
as in the usual course of things.”23
5.
SECOND LIMB
5.1
“[35-27] Degree of knowledge required. A plaintiff who claims in respect of loss or damage
which does not arise in the ‘usual course of things’ must bring the claim within the second
limb of the rule stated in Hadley v Baxendale, by relying on knowledge actually possessed by
the defendant.”24
5.2
“Now, if the special circumstances under which the contract was actually made were
communicated by the claimants to the defendants and thus known to both parties, the damages
resulting from the breach of such a contract, which they would reasonably contemplate, would
be the amount of injury which would ordinarily follow from a breach of contract under these
special circumstances so known and communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the contract, he, at the most, would
only be supposed to have had in his contemplation the amount of injury which would arise
generally, and in the great multitude of cases not affected by any special circumstances, from
such a breach of contract. For, had the special circumstances been known, the parties might
have specially provided for the breach of contract by special terms as to the damages in that
case; and of this advantage it would be very unjust to deprive them. Now the above principles
are those by which we think the jury ought to be guided in estimating the damages arising out
of any breach of contract.”25
5.3
“[35-28] Acceptance of the risk. The most difficult aspect of the second limb of the rule stated
in Hadley v Baxendale is the extent to which the defendant must have agreed to accept the risk
of the damage. At one time it seems to have been thought that there must be a term of the
contract indicating the defendant’s acceptance of the risk. Although this view has been
rejected, there is, of course, nothing to stop the parties expressing their agreement on what is
to be regarded as foreseeable. Where there is no express agreement it has been said that the:
20
Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 415, per Lord Pearce, at 425, per Lord Upjohn.
J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
822.
22 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
822 (referring to Koufos v C Czarnikow Ltd [1969] 1 AC 350 and Astley v Austrust Ltd (1999) 197 CLR 1 at 23, 28).
23 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
822.
24 J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
824 (referring to Hadley v Baxendale (1854) 9 Ex. 341).
25 Hadley v Baxendale (1854) 9 Ex. 341 at 354 - 355.
21
4
‘Basis of the defendant’s liability … is his implied undertaking to the plaintiff to bear it. His actual
knowledge of the special circumstances is relevant as one of the factors from which his undertaking can
be implied. The second factor is also necessary, viz, that he should have acquired this knowledge from
the plaintiff, or at least that he should know that the plaintiff knew that he was possessed of it at the time
the contract was entered into and so could reasonably foresee at the time that an enhanced loss was liable
to result from a breach. Where both these factors are present, the defendant’s conduct in entering into the
contract without disclaiming liability for the enhanced loss which he can foresee gives rise to the
implication that he undertakes to bear it.’”26
5.4
“(1) It is well settled that the governing purpose of damages is to put the party whose rights
have been violated in the same position, so far as money can do so, as if his rights had been
observed. The purpose, if relentlessly pursued, would provide him with a complete indemnity
for all loss de facto resulting from a particular breach, however improbable, however
unpredictable. This, in contract at least, is recognised as too harsh a rule. Hence,
(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of
the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to
result from the breach.
(3) What was at the time reasonably so foreseeable depends on the knowledge then possessed
by the parties, or, at all events, by the party who later commits the breach.
(4) For this purpose, knowledge ‘possessed’ is of two kinds: one imputed, the other actual.
Everyone, as a reasonable person, is taken to know the ‘ordinary cause of things’ and
consequently what loss is liable to result from a breach of contract in that ordinary course.
This is the subject matter of the ‘first rule’ in Hadley v Baxendale. But to this knowledge,
which a contract-breaker is assumed to possess whether he actually possesses it or not, there
may have to be added in a particular case knowledge which he actually possesses, of special
circumstances outside the ‘ordinary course of things’, of such a kind that a breach in those
special circumstances would be liable to cause more loss. Such a case attracts the operation of
the ‘second rule’ so as to make additional loss also recoverable.
(5) In order to make the contract-breaker liable under either rule it is not necessary that he
should actually have asked himself what loss is liable to result from a breach. As has often
been pointed out, parties at the time of contracting contemplate not the breach of the contract,
but its performance. It suffices that, if he had considered the question, he would as a
reasonable man have concluded that the loss in question was liable to result.
(6) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state
of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily
result in that loss. It is enough … if he could foresee it was likely so to result. It is indeed
enough if the loss (or some other factor without which it would not have occurred) is a
‘serious possibility’ or a ‘real danger’. For short, we have used the word ‘liable’ to result.
Possibly the colloquialism ‘on the cards’ indicates the shade of meaning with some approach
to accuracy.”27
6.
EXCLUSION CLAUSES
26
Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 at 1448 cited in J W Carter, E Peden & G J Tolhurst, Contract Law
in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007) 825.
27 Victoria Laundry v Newman [1949] 2 K.B. 528 C.A. at 539 - 540.
5
“In order to rebut the presumption implied by actual knowledge the defendant must show that
there was no acceptance of the risk of liability for the damage. In commercial contracts this
may be achieved by a suitably drafted exclusion clause.”28
7.
CONSTRUCTION OF ‘CONSEQUENTIAL LOSS’
7.1
“In Holt & Co v Collyer Fry J was required to construe the word ‘beerhouse’ in a lease. It was,
he said:
‘Important to the public that the meaning of the word ‘beerhouse’ should be ascertained once for all,
because then persons who have to draw instruments relating to businesses of this sort will know on what
principle to proceed, and counsel who are called upon to advise whether there is or not a case to proceed
upon at law will know how to advise.’”29
7.2
“The passage illustrates a belief that words have ‘absolute and constant referents’.30 It is
seldom ventilated today. If the modern cases on the interpretation of contracts stand for
anything, it is that the meaning of the words in a contractual document vary according to the
context in which they are used. Yet, the cases interpreting the expression ‘consequential loss’
in exclusion clauses come close to emulating the non sequitur of Fry J.”31
7.3
“The starting point for constructing any contract…
…the question to be answered always is, “What is the meaning of what the parties have said?” not,
“What did the parties mean to say?” … it being a presumption juris de jure … that the parties intended to
say that which they have said.” 32
7.4
“The construction rule in relation to expressed intention is therefore a legal presumption ‘that
the parties intended to say that which they have said’. This is not, however, an entirely
promising start.”33
7.5
“Take, for example, the use of labels. Lawyers love labels. They are frequently used in
contracts in the interests of economy of effort. Obvious examples are words such as
‘condition’, ‘licence’, ‘agent’ and ‘indemnity’. Clearly, such words are regarded as having
particular legal significances. Their use is suggestive of an express intention in relation to the
legal effect of the contract. But the usage must be accurate. Merely attaching a label does not
require a court to treat the contract as having the characteristics which might be thought to be
inherent in the legal concept with which that label is frequently (or most naturally) identified.
Conversely, an express denial that a particular legal label can be applied to the parties’
contract (such as ‘lease’) or relationship (such as ‘agency’) may be incorrect. Therefore,
28
J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, Fifth Edition, LexisNexis Butterworths, Sydney (2007)
826.
29 Holt & Co v Collyer (1881) 16 Ch D 718 at 722 cited in J W Carter, 'Exclusion of Liability for Consequential Loss',
Journal of Contract Law, Volume 25, Number 2 (April 2009) 118.
30 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
118 (referring to Pacific Gas and Electric Co v G W Thomas Drayage & Rigging Co Inc, 69 Cal 2d 33 at 38 and Glanville
Williams, ‘Language and the Law - IV’ (1945) 61 LQR 384).
31 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
118.
32 L Schuler AG v Wickham Machine Tool Sales Ltd [1974] AC 235 at 263 quoting Norton on Deed, Sweet & Maxwell,
London, 1906, page 43 cited in J W Carter, 'Commercial Construction and Contract Doctrine', Journal of Contract Law,
Volume 25, Number 1 (February 2009) 89.
33 J W Carter, 'Commercial Construction and Contract Doctrine', Journal of Contract Law, Volume 25, Number 1 (February
2009) 89.
6
although the expressed intention of the parties in relation to the legal effect of a contract may
appear to be clear, a court is not bound to give effect to it.”34
7.6
“There may be a presumption that the parties have chosen the right label, and intend the legal
consequences which flow from that, but the label itself cannot be conclusive. It is probably
more difficult to rebut the presumption in favour of expressed intention in the context of
linguistic meaning than where legal effect is at issue. Although in each context the question is
one of intention, where legal effect is at issue intention must be determined - with due regard
to prior authority - as a matter of substance. Therefore, if a contract described as a ‘licence’
confers a right of exclusive possession it will have the legal attributes of a lease (or agreement
to lease). That will be the legal effect of the contract notwithstanding the intention apparently
expressed by the parties.”35
7.7
“If an exclusion of liability for ‘consequential loss’ is at issue… The use of the word
‘consequential’ would seem to assume that the promisor is accepting liability for some loss or
damage, namely, loss or damage which is not consequential. However, the clause approaches
the issue from a conceptual perspective. The clause assumes, but does not explain, the content
and scope of an underlying concept.”36
8.
‘NATURAL MEANING’ AND TWO (WRONG) SCHOOLS OF THOUGHT
8.1
“There are two schools of thought on the meaning of ‘consequential loss’ in an exclusion
clause.” 37
8.2
“When stated as an abstract proposition, neither view is correct. But for the cases supporting
the two opposing views, ‘consequential loss’ could not be regarded as some sort of legal term
of art attracting a presumption in favour of a particular (legal) meaning. Nor should that
presumptive approach be accepted. The issue is a very important one. An exclusion of liability
for ‘consequential loss’ is very common in modern contracts, especially in contracts for the
supply of goods. The meaning of the expression must depend on the intention of the parties
and can only be determined in reference to the contract in which the expression is used, read
as a whole and considered in light of admissible background material.”38
8.3
“Reliance on ‘natural’ meaning is, of course, in accordance with the general approach which is
nowadays put forward as the basis for interpreting of exclusion clauses. For example, in
Darlington Futures Ltd v Delco Australia Pty Ltd the High Court of Australia said:
[T]he interpretation of an exclusion clause is to be determined by construing the clause according to its
natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to
34
J W Carter, 'Commercial Construction and Contract Doctrine', Journal of Contract Law, Volume 25, Number 1 (February
2009) 90.
35 J W Carter, 'Commercial Construction and Contract Doctrine', Journal of Contract Law, Volume 25, Number 1 (February
2009) 90 (referring to IL Schuler AG v Wickman Machine Tool Sales Ltd [1997] AC 313 and Investors Compensation
Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 914).
36 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
120.
37 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
118.
38 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
119.
7
the context in which the clause appears including the nature and object of the contract, and, where
appropriate, construing the clause contra proferentem in case of ambiguity.” 39
8.4
“Similarly, in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd, Lord Wilberforce said:
‘The relevant words must be given, if possible, their natural, plain meaning’.”40
8.5
“There is, however, a difference between ‘natural meaning’ from the perspective of the
linguistic meaning of an exclusion clause and ‘natural meaning’ from the perspective of its
scope of application. The ‘meaning of consequential loss must depend on the parties’ intention
in relation to the scope of the words. Clearly, that is not a question which can be determined in
the abstract.”41
8.6
“Commercial parties might be expected to use an expression such as consequential loss in a
commercial rather than a legal sense. On that basis it seems right to start with the ‘natural
meaning’ of the expression. That is the starting point of both the opposing views. However,
each comes to a different conclusion. Both the opposing views are, ultimately, ‘English’
views. And in other contexts, English courts have fastened on a third ‘natural meaning’ for
‘consequential loss’. It might be asked, rhetorically, ‘If courts cannot agree on “natural
meaning” how can that be a reliable guide?’”42
8.7
“…the problem with the opposing views is that each adopts a technical - term of art - approach
to the meaning of ‘consequential loss’.”43
9.
THE ‘CROUDACE VIEW’
9.1
“The English cases suggest that ‘consequential loss’ means loss which might (but for the
exclusion) be recoverable under the second limb of the rule in Hadley v Baxendale. Under that
approach, the exclusion is not applicable to any loss recoverable under the first limb of the
rule. Since the modern root of this view is Croudace Construction Ltd v Cawoods Concrete
Products Ltd, it is appropriately described as the ‘Croudace view’.”44
9.2
“One would indeed expect to find support for the Croudace view in the cases applying the rule
in Hadley v Baxendale. Indeed, McGregor’s objection to the Croudace view is that it adopts a
meaning for consequential loss which is contrary to the understanding of the term in the
context of claims for damages. However, none of the modern cases interpreting Hadley v
Baxendale have sought to explain the contrast between the two limbs by reference to whether
or not a particular loss is consequential.”45
39
Darlington Futures Ltd v Delco Australia Pty (1986) 1611 CLR 500 at 510 cited in J W Carter, 'Exclusion of Liability for
Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009) 124.
40 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
124 (referring to Ailsa Craig Fishing Co Ltd v Malvern Fishing Co [1983] 1 WLR 964 at 966).
41 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
124.
42 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
123 (referring to Mediterranean Freight Services Ltd v BP Oil International Ltd (The Fiona) [1994] 2 Lloyd’s Repr 506 at
522)
43 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
123.
44 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
118 (referring to Hadley v Baxendale (1854) 9 Ex. 341 at 354 and Croudace Construction Ltd v Cawoods Concrete Products
Ltd [1978] 2 Lloyd’s rep 55).
45 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
125 (referring to Hadley v Baxendale (1854) 9 Ex. 341 at 354, Croudace Construction Ltd v Cawoods Concrete Products Ltd
[1978] 2 Lloyd’s rep 55 and Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 at 534).
8
9.3
“the rule grades losses according to the contemplation of the parties, not their directness.”46
9.4
“What is wrong with the Croudace view is that the expression ‘consequential loss’ should be
associated with either limb, rather than consequential loss in general.”47
10.
THE ‘MCGREGOR VIEW’
10.1
“Second, the decision of the Court of Appeal of Victoria in Environmental Systems Pty Ltd v
Peerless Holdings Pty Ltd asserts that ‘consequential loss’ refers to any loss which is not a
‘normal loss’. Since, in reaching this conclusion, the court relied on McGregor on Damages,
this may be termed the ‘McGregor view’.”48
10.2
The relevant clause in the contract was:
“8.9 LIQUIDATED DAMAGES AND/OR CONSEQUENTIAL LOSS
As a matter of policy, Environmental Systems does not accept liquidated damages or consequential loss.
Environmental Systems is motivated to achieving agreed milestones through respect for the client’s needs
and the obvious financial advantage gained from completion of projects in the shortest possible period.” 49
10.3
“an oddly worded provision”50
10.4
“This question is a vexed one. The judge’s view accords with a body of English authority
which has been followed in this country on a couple of occasions by judges at first instance. In
point of principle, however, the English authority appears to be flawed.”51
10.5
“It is illogical and fails to make practical sense to confine consequential loss in contract to loss
falling within the second rule in Hadley v Baxendale, being contradictory for one contracting
party to communicate special circumstances to the other so as to fix him with a liability for
loss to which he would not otherwise be subject and at the same time to accept an exclusion of
liability in respect of the selfsame loss.”52
10.6
“Picking up the words of Sedley LJ in the Hotel Services case, McGregor thus proposes that
the conception of consequential loss should be restored to ‘the natural meaning of which
commercial and legal usage in exclusion clauses has long since robbed it’.” 53
10.7
“In my view, ordinary reasonable business persons would naturally conceive of ‘consequential
loss’ in contract as everything beyond the normal measure of damages, such as profits lost or
expenses incurred through breach. Despite the construction which has been put on
‘consequential losses’ by cases such as Millar and Croudace, it would be unrealistic to
46
J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
125 to 126 (referring to Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 at 93).
47 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
127.
48 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
118 to 199 (referring to in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 and H McGregor,
McGregor on Damages, 17th ed, Sweet & Maxwell, London, 2003).
49 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at 366.
50 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
121.
51 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at 386.
52 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at 388.
53 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at 388.
9
suppose that the appellant and the respondent employed the expression ‘consequential loss’ in
clause 8.9 of the agreement advisedly in that sense. It is more likely in this context that they
intended the expression to have its ordinary and natural meaning. Accordingly, I would
construe the expression ‘consequential loss’ in clause 8.9 as intended to have that meaning.
Read in the light of the contract as a whole, and giving due weight to the context in which the
clause appears, including the nature and object of the contract, I see no ambiguity which as a
matter of principle would warrant a departure from that view. It follows as I see it that,
although the judge’s approach in this case was in accordance with the English cases, it was not
correct to construe ‘consequential loss’ as limited to the second rule in Hadley v Baxendale.”54
10.8
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 was applied by
the New South Wales Court of Appeal in Allianz v Waterbrook [2009] NSWCA 224 (10
August 2009).
10.9
“…it is possible to find many examples of cases where courts have sought to solve questions
of legal effect by recourse to natural meaning. Use of the concept is apt to mislead. Consider
the intention of the parties in relation to the operation of an exclusion clause. In
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd the Court of Appeal of Victoria
said that the words ‘consequential loss’ in an exclusion of liability should be given their
‘natural’ meaning. The court found that meaning in successive editions of McGregor on
Damages. That might well be natural to a lawyer, or at least some lawyers, but it is hard to
believe that it was natural to a commercial person.”55
10.10
“It may be difficult to determine what losses “ordinary reasonable business persons would
naturally conceive” as being consequential. As pointed out in earlier cases, on one view, all
loss arising from a breach of contract is “consequential” in that all damages are “caused by, or
consequential on, some breach or default” (Frank Davies at 313; see also Hotel Services at
238). It must be that some narrower meaning is to be given. However, determining that natural
meaning may be difficult in any given case.”56
10.11
“This suggests one advantage of the test arising from the English authorities is that the
classification in terms of the discussion in Hadley v Baxendale is one with which courts are
familiar. Indeed, the rule is, apparently, “known to every law student” (Hotel Services at 240).
In the context of exclusion clauses there is also some guidance from previous authorities. The
test proposed by Nettle JA in Environmental Systems gives rise to a significantly more openended inquiry.”57
11.
LAMENT?
“It is useful to consider the types of losses that English and/or Australian courts have deemed
‘direct losses’ and thus recoverable in an action for breach of contract despite the existence of
a clause excluding liability for ‘consequential losses’. These include:
54
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at 93.
J W Carter, 'Commercial Construction and Contract Doctrine', Journal of Contract Law, Volume 25, Number 1 (February
2009) 87 (referring to David Yates and J W Carter, ‘Export Licences, Standard of Duty and Force Majeure’ (1988) 1 JCL 57,
discussing Pagnan SpA v Tradax Ocean Transportation SA [1987] 2 All ER 565 and Environmental Systems Pty Ltd v
Peerless Holdings Pty Ltd (2008) 19 VR 358).
56 A d'Arville, 'Consequences of Excluding Consequential Loss: Australian Development', Australian Law Journal, (2008) 82
ALJ 693 at 698 (referring to Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289 at 313 and
Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] BLR 235 at 240 - 241).
57 A d'Arville, 'Consequences of Excluding Consequential Loss: Australian Development', Australian Law Journal, (2008) 82
ALJ 693 at 699 (referring to Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358).
55
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





increased production costs and loss of profits caused by defective power station
equipment;58
wasted overheads and loss of profits caused by the destruction of a methanol plant;59
the costs of removing and storing defective mini-bar chiller units and cabinets, and the
loss of profits associated with their use caused by the defective mini-bar systems;60
loss of sales, loss of opportunity to increase margins, loss of opportunity to make staff cost
savings and wasted management time caused by the breach of a contract to supply
computer hardware and software, and associated services;61
increased project costs and the reduced cost benefit of the head contract caused by the
breach of a contract to supply and develop computer software;62 and
loss of revenue caused by the failure to supply a gas energy flow at the contracted amount
for the contract period.”63
12.
UNCERTAINTY
12.1
“Although it seems clearly wrong to treat the scope of the expression ‘consequential loss’ as
determined by the rule of remoteness (the Croudace view), there is no a priori reason for
thinking that the expression is concerned with measure of damage (the McGregor view). From
this perspective, both views are artificial. Each relies on a conceptual approach under which
the expression ‘consequential loss’ is associated with a particular legal effect. Both are wrong
because they approach the expression ‘consequential loss’ from particular legal perspectives
rather than a commercial perspective which will vary from case to case. Neither view has been
adopted by the highest tribunals. And, in relation to the Croudace view it may be significant
that in Caledonia North Sea Ltd v British Telecommunications plc Lord Hoffmann went out of
his way to ‘reserve the question’ whether the construction of ‘indirect or consequential losses’
in cases applying the Croudace view was correct. Whether the High Court of Australia will
approve the adoption of the McGregor view in Environmental Systems also remains to be
seen.”64
12.2
“It is not the function of a court called upon to construe a contract to determine meanings on a
‘once for all’ basis. Nor is it the function of a court to determine all the possible applications
of a clause. The function is to resolve the particular dispute that has arisen. ‘Meaning’ need
only be determined so far as it is necessary to do so, and the only ‘application’ which has to be
determined is the application of the clause to the particular facts which have arisen. Those
who think otherwise make the mistake made by Fry J in Holt & Co v Collyer. Thus,
58
P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 15 (referring to British Sugar plc v NEI Power Projects Ltd (1997) 87 BLR 42).
59 P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 15 (referring to Deepak Fertilizers & Petro Chemical Corp v Davy McKee (London)
Ltd & ICI Chemicals and Polymers Ltd (1991) 1 Lloyds Rep 387).
60 P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 15 (referring to Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] 1 All
ER (Comm) 750).
61 P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 15 (referring to Pegler Ltd v Wang (UK) Ltd (No 1) [2000] BLR 218).
62 P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 15 (referring to GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd
[2003] FCA 50; BC200300200).
63 P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 15 (referring to GEC Alsthrom Australia Ltd v City of Sunshine; City of Sunshine v
GEC Alsthrom Australi Ltd (unreported, FCA, Ryan J, 20 February 1996, BC9600288).
64 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
133 (referring to Caledonia North Sea Ltd v British Telecommunications plc 61 [2002] 1 Lloyd’s Rep 553 at 572).
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notwithstanding that the goal which Fry J set himself in Holt & Co v Collyer was impossible,
courts in both England and Australia seem to be satisfied that it has been largely achieved in
relation to ‘consequential loss’.”65
12.3
“Such factors and considerations influence both the content of the exclusions and the way in
which they are drafted. Given the opposing views on the subject of ‘consequential loss’, it
may be that a supplier is ill-advised to rely on such an exclusion. Indeed, given that 30 years
have elapsed since the decision in Croudace it seems remarkable that English contracts
continue to employ the terminology. If nothing else, this seems good evidence that
commercial people (and many of their lawyers) do not read law reports!”66
13.
DRAFTING
13.1
“Given the uncertainty surrounding the meaning of ‘consequential loss’, the usual advice
given to parties drafting such clauses has been to identify type of loss that is intended to be
excluded. This remains good advice. Where parties have drafted consequential loss exclusion
clauses and expressly excluded liability for certain types of losses, those losses have been
excluded even where they would ordinarily have been considered ‘direct losses’.”67
13.2
“In drafting contractual clauses, care must be taken in excluding “consequential loss”. The
simplest way for parties to avoid the question is to more specifically state in the clause what
precise losses are intended to be excluded.”68
14.
DRAFTING FOR SUPPLIER
14.1
By all means try to exclude liability for ‘consequential loss’, but query whether it is
reasonable to expect agreement to such an exclusion as a norm.
14.2
Extract from my precedent agreement for supply of goods and/or services:
The Supplier will not be liable to the Customer or any other person for any Liability or Claim of any kind
whatsoever arising directly or indirectly (whether under statute, contract, tort, negligence or otherwise) in
relation to any indirect or consequential loss (including but not limited to any loss of actual or anticipated
profits, revenue, savings, production, business, opportunity, access to markets, goodwill, reputation,
publicity, or use) or any other remote, abnormal or unforeseeable loss or any similar loss whether or not
in the reasonable contemplation of the parties.
“Claim” means any actual, contingent, present or future claim, demand, action, suit or proceeding for any
Liability, restitution, equitable compensation, account, injunctive relief, specific performance or any
other remedy of whatever nature and however arising, whether direct or indirect, and whether in contract,
tort (including but not limited to negligence) or otherwise;
“Liability” means any loss, liability, cost, payment, damages, debt or expense (including but not limited
to reasonable legal fees);
65
J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
134 (referring to Holt & Co v Collyer (1881) 16 Ch D 718).
66 J W Carter, 'Exclusion of Liability for Consequential Loss', Journal of Contract Law, Volume 25, Number 2 (April 2009)
133.
67 P Wood & E Bartlett, 'Victorian Court of Appeal recasts the net: consequential loss', Australian Construction Law Bulletin,
Volume 20, Number 2 (March 2008) 17.
68 A d'Arville, 'Consequences of Excluding Consequential Loss: Australian Development', Australian Law Journal, (2008) 82
ALJ 693 at 699.
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15.
DRAFTING FOR CUSTOMER
15.1
Delete references to ‘consequential loss’:
The Supplier will not be liable to the Customer or any other person for any Liability or Claim of any kind
whatsoever arising directly or indirectly (whether under statute, contract, tort, negligence or otherwise) in
relation to any loss of actual or anticipated profits, revenue, savings, production, business, opportunity,
access to markets, goodwill, reputation, publicity, or use.
“Claim” means any actual, contingent, present or future claim, demand, action, suit or proceeding for any
Liability, restitution, equitable compensation, account, injunctive relief, specific performance or any
other remedy of whatever nature and however arising, whether direct or indirect, and whether in contract,
tort (including but not limited to negligence) or otherwise;
“Liability” means any loss, liability, cost, payment, damages, debt or expense (including but not limited
to reasonable legal fees);
15.2
Define ‘Consequential Loss’:
The Supplier will not be liable to the Customer or any other person for any Liability or Claim of any kind
whatsoever arising directly or indirectly in relation to any Consequential Loss.
“Claim” means any actual, contingent, present or future claim, demand, action, suit or proceeding for any
Liability, restitution, equitable compensation, account, injunctive relief, specific performance or any
other remedy of whatever nature and however arising, whether direct or indirect, and whether in contract,
tort (including but not limited to negligence) or otherwise;
“Consequential Loss” means any loss of actual or anticipated profits, revenue, savings, production,
business, opportunity, access to markets, goodwill, reputation, publicity, or use;
“Liability” means any loss, liability, cost, payment, damages, debt or expense (including but not limited
to reasonable legal fees);
15.3
15.4
Carve out specified liabilities such as:

liability for personal injury or death;

liability for fraud or criminal conduct;

liability for ‘wilful misconduct’ or ‘gross negligence’ (though these terms might need to be defined);

liability for claims by third parties (say for infringement of intellectual property rights or disclosure
of confidential information);

liabilities which cannot be excluded at law;

liability for specific indemnities;

liability for liquidated damages;

liability to pay interest;

liabilities which, but for the exclusion, would be insured liabilities under the terms of insurance
policies required under the agreement; and

liability for losses which are recoverable from third parties.
Impose a time limit on the operation of the exclusion.
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16.
POST SCRIPT - A WORD ABOUT EXCLUSIVITY
16.1
If a supply arrangement is exclusive, set this out explicitly in the agreement. Equally, if a
supply agreement is non-exclusive, set this out explicitly in the agreement.
16.2
Extract from practice guide to my precedent agreement for supply of goods and/or services:
If the parties fail to clearly set out the position in relation to exclusivity in the Supply Agreement, the
parties can sometimes develop different expectations about exclusivity and this can lead to disputes. In
particular, if the Principal does not wish to engage the Supplier to be the exclusive supplier of the goods
and/or services, the Supply Agreement needs to state this explicitly. Suppliers can otherwise sometimes
develop expectations of exclusivity.
This Supply Agreement makes it clear that the agreement establishes no exclusivity obligations. The
Supplier will not be the exclusive provider of the goods and/or services to the Principal. Similarly, the
Supplier may provide goods and/or services to other parties. The parties will need to ensure this reflects
the negotiated arrangement.
If it is proposed that the Supplier will be the exclusive provider of the goods and/or services, the Supply
Agreement should state clearly whether or not the Principal is entitled to use the Principal’s own internal
resources to provide the goods and/or services. The Principal might also wish to require the Supplier to
match the cost of any offers provided by other third party suppliers in order to retain the exclusivity
rights.
16.3
Extract from my precedent agreement for supply of goods and/or services:
5.
No Exclusivity
5.1
The Supplier acknowledges:
5.2
16.4
(a)
the Supplier will not be the exclusive provider of the Goods and/or Services to the
Principal;
(b)
any forecast or estimate provided by the Principal to the Supplier in relation to the
Goods and/or Services will not be binding; and
(c)
the Principal may at any time engage any third party, or use any member of the
Principal’s Personnel, to provide goods and/or services to the Principal that are
similar or identical to the Goods and/or Services.
Subject to the Supplier’s obligations in this Agreement, the Supplier may provide goods and/or
services similar to the Goods and/or Services to any other person during the Term.
Extract from my precedent agreement for supply of cartage services:
5.
No Exclusivity
5.1
The Cartage Contractor acknowledges:
(a)
the Cartage Contractor will not be the exclusive provider of the Cartage Services to
the Principal;
(b)
the Principal will not be obliged to provide any Orders to the Cartage Contractor or
engage the Cartage Contractor to provide any Cartage Services;
(c)
the Principal makes no guarantee as to the quantity of Orders or Cartage Services;
(d)
any forecast or estimate provided by the Principal to the Cartage Contractor in
relation to Orders or Cartage Services will not be binding;
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5.2
(e)
the Principal may own and/or operate vehicles to collect Goods from the Collection
Sites (or any other locations) and/or deliver Goods to the Delivery Sites (or any other
locations); and
(f)
the Principal may at any time engage any third party, or use any member of the
Principal’s Personnel, to provide to the Principal services similar or identical to the
Cartage Services.
Subject to the Cartage Contractor’s obligations under this Agreement, the Cartage Contractor
may provide services similar to the Cartage Services to any other person during the Term.
Anthony Jucha
Jucha Legal
0414 216 244
anthony@jucha-legal.com
jucha-legal.com
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