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Australia – A Development For ‘Consequential Loss’.

27 November, 2013

 

The term ‘consequential loss’ is commonly used in contractual provisions which limit or exclude liability. A recent decision of the Supreme Court of Western Australia has further clarified the meaning of ‘consequential loss’. The court found that the term should be interpreted by reference to its ordinary meaning when considered in the context of the contract as a whole. The case highlights the need for clear language when drafting limitation and exclusion clauses.


Background


Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC 356 concerned a power purchase agreement (PPA) where Pacific Hydro was to construct build and operate the Ord Hydro Power Station for the supply of electricity to Regional Power for use in the Kimberley region of Western Australia.


In 2006, the Ord Hydro Power Station flooded and became inoperative for two months, during which time Regional Power was required to purchase fuel and maintain diesel generators to continue electricity supply. Regional Power claimed approximately AUD 4 million for Pacific Hydro’s breach of the PPA. The question was whether Regional Power’s losses were consequential losses, and if so, whether those losses were excluded under an exclusion clause in the PPA.


The Reasoning For The Decision


The court held that the definition of consequential loss should not be restricted to its commonly cited legal definition as ‘special damages’ that do not arise in the ordinary course of things (as per the second limb of the test in Hadley v Baxendale), or as damages beyond the normal measure of damages (as discussed in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26).


Instead, the court held that the chosen terminology needs to be considered rationally in the context of the limitation and the contract as a whole. The court also emphasised that each case and each contract needs to be evaluated by reference to its own unique circumstances. 


The court found that Regional Power’s losses were direct losses, as opposed to consequential or indirect, with the effect that the limitation clause did not operate to exclude such loss. The limitation clause, read in the context of the PPA as a whole, envisaged Regional Power’s public responsibility and statutory obligation to maintain consistent and reliable electricity supply to the Kimberley region. Pacific Hydro’s failure to supply anticipated levels of electricity caused Regional Power to pursue alternative means of electricity supply and suffered direct loss from doing so.


Conclusion


The decision represents a further development in the law relating to consequential loss. In light of this decision, parties should ensure that limitation and exclusion provisions are clearly drafted and expressly state those categories of loss and damage that are to be excluded (rather than relying on general phrases such as ‘consequential loss’).

 

Clyde & Co

 

For further information, please contact:

 

Glen Warwick, Partner, Clyde & Co
[email protected]


Rupert Coldwell, Clyde & Co
[email protected]


Luke Carbon, Clyde & Co
[email protected]

 
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