Losses falling within the second limb of the rule in Hadley v Baxendale [1854], being losses "in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of contract", are generally called 'consequential' or 'indirect' losses.
Whether any particular loss falls within the category of loss defined by the second limb of Hadley v Baxendale, or within the first limb (loss which is a direct and natural consequence of the breach), is not always immediately clear and often the subject of judicial interpretation.
The NSW Court of Appeal has recently endorsed the same broader consideration of the term "consequential loss" applied by its Victorian counterpart in Environmental Systems Pty Limited v Peerless Holdings Pty Limited [2008] (Peerless).
In Peerless, consequential loss, it was held, should be given its "ordinary and natural" meaning. The Court considered the distinction between normal loss, which one might ordinarily expect a plaintiff to suffer, and consequential loss, to be "anything beyond the normal measure, such as profits lost or expenses incurred through the breach".
Waterbrook at Yowie Bay Limited (Waterbrook) purchased a retirement village from the developer, Yowie Pty Limited. The development was residential building work for the purposes of the Home Building Act 1999 (NSW) (the Act). Allianz issued a builder's home warranty insurance policy in respect of the development. The builder was subsequently placed into liquidation.
The policy issued by Allianz included a clause purporting to exclude cover for "consequential loss arising directly or indirectly out of any event listed in the building owner's indemnity..."
McDougall J, at first instance, found Allianz's purported exclusion of consequential loss to be inconsistent with Waterbrook's statutory entitlement to cover under the Act and Regulations. Significantly, his Honour decided that consequential loss may fall within the first limb of Hadley v Baxendale (loss which is a direct and natural consequence of the breach), following the Victorian Court of Appeal's decision in Peerless.
The Court of Appeal agreed with McDougall J.
Since the NSW Court of Appeal's decision in Waterbrook, there is arguably less uncertainty surrounding judicial interpretation of consequential loss and therefore 'a better road map' for parties to follow in their endeavour to exclude (contractually) a particular liability.
The drafting implications remain as they did following the Peerless decision – it is prudent to identify with as much specificity as possible, the types of losses intended to be excluded.
Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224
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