The recent Supreme Court of Western Australia case Regional Power Corporation v Pacific Hydro Group Two Pty Ltd once again confirmed that the terms “consequential” or “indirect” loss lacked a reliable meaning.

Are your limitation of liability provisions in contracts clear?

Why being explicit and not relying on loaded terms like “consequential loss” can make all the difference.

Lawyers and non-lawyers have long assumed that the term “consequential” carries some mysterious legal meaning and that an exclusion of liability of “consequential” losses would somehow protect parties to the contract from significant exposure if things go wrong.  A recent Supreme Court of Western Australia case provides a sobering reminder not to rely on such assumptions but instead to make your contracts clear.

In this particular case, Regional Power Corporation v Pacific Hydro Group Two Pty Ltd, it was found that the terms “consequential” or “indirect” loss contained in a contract between the two organisations lacked a reliable meaning.

The cause of the dispute

Pacific Hydro had originally agreed to construct a power station and then supply electricity from it to Regional Power Corporation. In August 2006 however, the power station suffered an outage which resulted in flooding, and in turn led to the power station becoming inoperative for two months. During this period, in order to comply with its statutory duty to provide electricity to the local communities, Regional Power Corporation had to arrange alternative sources of power supply which cost the organisation approximately $4m. Regional Power Corporation then claimed these costs from Pacific Hydro.

In its defence against the claim, Pacific Hydro relied on the following exclusion of “consequential” and “indirect” losses contained in the contract:

Neither party shall be liable to the other party in contract, tort, warranty, strict liability, or any other legal theory for any indirect, consequential, incidental, punitive or exemplary damages or loss of profits.

The judge considered and rejected various judicial interpretations of the terms “consequential” and “indirect” losses as being rigid and legalistic. Instead, the judge said that the words must be given their natural and ordinary meaning in the context of the relevant transaction. In this context, the judge said that Regional Power Corporation had no choice but to procure alternative power supplies to comply with its well-understood statutory duties and its costs in doing so were a direct loss, that is, the liability for which was not excluded by the above provision.

What does this mean for other contract arrangements?

The Pacific Hydro case once again confirms that parties to a contract cannot rely on vague terms such as “consequential” and “indirect” losses. If parties want to exclude liability for a particular type of loss, then they should do so expressly. For example, if Pacific Hydro wanted to insulate itself from the liability of covering the (significant) costs of replacement power in the event of the power station being inoperative, then it should have expressly excluded such liability.

We know that this is easier said than done because it may be difficult to foresee what kind of loss may flow from a default. Also, provisions excluding and limiting liability are often heavily debated and can add significant time and cost to negotiations.

For more information on this case or assistance with contract reviews and negotiations, contact Stanislav Roth on 0428 328 452 or email stanislav.roth@sourcelegal.com.au.

Downlaod a print ready version of the Consequential loss article

By | Published On: 2nd March, 2014 | Categories: Contract law, Guides |