28 October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

The recent Western Australian Supreme Court decision of Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2] 1 included an examination of a ‘consequential loss’ exclusion clause in a contract. Notably, the interpretation of ‘consequential loss’ by the Court diverges from the interpretation which has been applied by the Australian Courts in recent years.


The Court also determined that a party is only restricted from seeking common law damages beyond the contract, if the contract contains a clear unambiguous statement to that effect.


Key facts of the case


The case involved an action brought by Regional Power Corporation (RPC) against Pacific Hydro Group Two Pty Ltd (and others) (Pacific Hydro) for breach of a Power Purchase Agreement (PPA). Under the PPA, Pacific Hydro agreed to construct the Ord Hydro Power Station and then supply electricity from the power station to RPC (the statutory successor to the State Energy Commission of Western Australia (SECWA)).


In 2006, the power station suffered an outage which resulted in flooding. This led to the power station becoming inoperative for 2 months. The power outage was caused by the hydro generators losing power and going off-line, and failure of the emergency generator to start automatically. RPC was required to arrange alternative power to meet its supply obligations subsequent to the outage.


Issues considered by the Court


RPC contended that Pacific Hydro had breached the PPA by failing to operate the power station in accordance with the PPA. The economic loss claimed by RPC included outlays incurred in the generating of replacement electricity by running hired diesel generators during the 2 month outage. Pacific Hydro argued that the PPA contained a number of express terms which strictly constrained RPC’s rights of recovery of damages, including where the loss was characterised as consequential or indirect loss.


In making its decision, the Court considered 2 main issues:


Issue 1 – Did the express terms and remedies under the PPA apply exclusively in relation to a breach of the PPA, or were common law damages also available?


Pacific Hydro argued that the PPA set out an exclusive contractual code of relief applicable for any breaches of the PPA, and that RPC did not have further rights to pursue common law damages. RPC opposed this stance and argued that the PPA was merely a contractual supplementation to the rights to pursue common law breaches.


The Court found that while the PPA’s entitlement for RPC to claim liquidated damages, or pursue other relief for breach of the PPA was comprehensively addressed in the PPA, a parties ability to seek common law damages for breach of contract could only be excluded from a contract by clear words to that effect. As the PPA did not include such an unequivocal statement, the Court concluded the parties intended to retain their rights to pursue common law damages for breach of contract.


Issue 2 – Did the consequential loss exclusion clause in the PPA operate to exclude RPC’s economic loss for the power outage?


Background to ‘consequential loss’ interpretation


The English case of Hadley v Baxendale has long been the leading authority for classifying compensatory damages after a breach of contract. The case decided that damages are recoverable for breach of contract where:


  • the losses arise naturally from the breach (first limb); or
  • the losses were contemplated by the parties at the time they made the contract, as the probable result of the breach of the contract (second limb).

A party needs to satisfy either limb in order to succeed in a claim for damages, but ‘consequential loss’ is deemed to be those which fall within the second limb of the rule.


However, recently there has been a shift in the interpretation of ‘consequential loss’ by Australian Courts3. In the case of Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd 4 the Victorian Supreme Court decided that ‘consequential loss’ means ‘everything beyond the normal measure of damages, such as profits lost or expenses incurred through the breach’. In contrast, the more recent case of Electricity Generation Corporation t/as Verve Energy Woodside Energy Ltd 5restored the approach set out in Darlington Futures Ltd v Delco Australia Pty Ltd 6, interpreting a limitation clause based on ‘its proper construction’.


Issue 2 decision


The PPA contained a clause which restricted, among other things, liability for any ‘indirect, consequential…damages or loss of profits’.


RPC argued that the Court should interpret the meaning of ‘consequential loss’, in the context of the particular exclusion clause, on the basis of the second limb of Hadley v Baxendale. RPC considered that approach was consistent with the understood legal meaning at the time the PPA was entered into. Conversely, Pacific Hydro contended that the interpretation used in Environmental Systems should apply.


The Court disagreed with both parties, refusing to apply either Hadley v Baxendale orEnvironmental Systems. Both methods were considered to be artificial, approaching the question of construction according to a predisposition, in one case based on remoteness and in the other, a measure of damages. Instead, the court adopted the approach set out in Darlington Futures Ltd v Delco Australia Pty Ltd 7 as applied recently in Electricity Generation Corporation t/as Verve Energy Woodside Energy Ltd8. The Court considered that the meaning of an exclusion or limitation clause should be ‘determined by construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole’.9 Interpretation should depend on the proper construction of the clause, rather than the application of a general rule, without consideration of the commercial terms agreed between the parties.10


In interpreting the natural and ordinary meaning of the PPA exclusion clause, the Court began with the ‘words themselves’, read in the ‘context of the PPA as a whole’. The Court emphasised that the parties were both sophisticated entities and accordingly, weight should be given to the commercial terms agreed between them. Both parties contracted under the PPA with the knowledge that RPC was subject to statutory obligations to supply electricity to its customers. Because of its statutory obligations, and the unique and essential nature of the electricity service, RPC was required to ensure consistent and reliable supply of electricity to its customers. Relevant provisions of the PPA also acknowledged that replacement energy may be required in circumstances where the electricity generated by the power station was insufficient.

 

In light of such factors, the Court concluded that the losses suffered by RPC were properly categorised as direct loss (and not ‘indirect’ or ‘consequential’). The Court considered the parties were likely to have appreciated at the time of entry into the PPA, that if the power station failed to generate electricity to RPC (and therefore its customers), steps to secure replacement electricity would be required. Accordingly, the loss suffered was not consequential in nature and was not caught by the relevant exclusion clause.

 

Conclusion


The implication of this decision is that, even where a contract provides for comprehensive provisions and remedies in respect of a breach of contract, common law damages may still be available. Parties intending to exclude common law damages under a contract should use unequivocal language to that effect.

 

Additionally, while it remains to be seen whether this decision will be followed by other Australian Courts considering contractual exclusions of ‘consequential loss’, it is a useful reminder for parties to be mindful of the drafting of an exclusion clause which seeks to exclude ‘consequential loss’ in a general manner. Contracting parties are urged to draft exclusion clauses carefully by meticulously spelling out exactly what types of loss are intended to be excluded under a contract, to ensure no ambiguity exists.


The full judgement is available online.11

 

Endnotes


  1. [2013] WASC 356.
  2. (1854) 9 Ex 341 at 354.
  3. Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26;Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224; Alstom v Yokogawa Australia (No 7) [2012] SASC 49.
  4. [2008] VSCA 26.
  5. [2013] WASCA 36.
  6. [1986] HCA 82.
  7. [1986] HCA 82.
  8. [2013] WASCA 36.
  9. Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82.
  10. Electricity Generation Corporation t/as Verve Energy Woodside Energy Ltd [2013] WASCA 36.
  11. Full Judgment

 

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