When a party breaches a contract, they may find themselves liable for any losses caused. Parties are encouraged to be specific when defining the consequential losses they intend to exclude in their contracts to protect themselves from lawsuits. However, parties often struggle to understand what constitutes consequential loss because its interpretation remains so ambiguous in Australian law.
Hadley v Baxendale
Firstly, the judgement in Hadley v Baxendale  defined ‘direct loss’ as loss arising from ‘the usual course of things’ after a breach of contract. In contrast, ‘consequential loss’ was viewed as probable consequences or losses reasonably contemplated by parties at the time of agreement. It included non-dominant losses such as future profits, opportunity, reputation, and credit rating.
Environmental Systems v Peerless Holdings
Yet, in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd  (Peerless), such distinctions between direct and consequential loss were blurred. Judge Nettle held that ‘ordinary reasonable business persons’ would naturally conceive consequential loss as ‘everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach’. He used the example of a breach of contract from failure to supply goods or services. In that situation, the direct loss would be the difference between contract price and market price of the goods or services whilst the consequential loss would be naturally interpreted as any loss beyond the measure of that direct loss.
The more recent case of Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2)  (Pacific Hydro) strayed from both approaches in Hadley v Baxendale and Peerless. Judge Martin emphasised that ‘consequential damages’ should be given their ‘natural and ordinary meaning’. Exclusion clauses were to be read within the context of the contract as a whole and each contract should be evaluated according to its own circumstances. Hence, where the defendant breached a contract to supply the plaintiff with electricity so they could subsequently supply it to customers, the economic expenses incurred by the plaintiff having to source electricity from elsewhere was still a ‘direct loss’. It was because the defendant would have been aware that the plaintiff was obliged to supply electricity to customers at the time of agreement. The economic losses were not beyond the measure of the defendant’s breach which resulted in a loss of electricity supply.
The best practice for contractors is to ensure that any exclusion clauses clearly define consequential loss within the intentions of the parties. If you require any clarification on exclusion clauses or need help with your contract, seek legal advice from our experts at OpenLegal. Fill in the form below or call 1300 337 997.