By Michael Weatherall and Craig Wheatley
Solicitors, Simpson Grierson
Standard form construction contracts in New Zealand such as NZS 3910:2003 often do not expressly exclude liability for consequential losses. As a result, it has become increasingly common for contractors to ‘tag’ their tenders requiring a clause stating that neither party can claim indirect or consequential losses against each other. But is such an exclusion clause really necessary?
Even in the absence of such a clause, the general law precludes liability for certain indirect and consequential losses.
This article looks at the steps taken by courts in New Zealand to determine what losses are viewed as direct or indirect, and the decision of the High Court in Oceania Furniture Ltd v Debonaire Products Ltd – the first binding decision in New Zealand on the meaning of consequential loss.
Most industry professionals will be familiar with clauses which limit recovery for ‘consequential’ or ‘indirect’ loss. In most cases such clauses will be worded along the following lines: “X is not responsible for any consequential, indirect or special damage or loss of any kind.”
However, the absence of such clauses does not mean the contracting parties will necessarily be liable for such losses. The general law affords some protection, albeit limited.
The starting point for any discussion on consequential or indirect loss is the 19th Century English Court of Appeal case of Hadley v Baxendale.
The decision in Hadley has long been held as the benchmark when addressing the issue of damages for direct and indirect/consequential loss. It set out a two-limbed test, categorising damages which may be recoverable for breach of contract as those which can be either:
-
Fairly and reasonably categorised as arising naturally – that is, according to the usual course of things – as a result of the contractual breach (direct loss); or,
-
Reasonably supposed to have been in contemplation of all contracting parties at the time they made the contract, as the probable result of its breach (indirect/consequential loss).
The second limb therefore deals with indirect losses – i.e. those losses which do not arise in the ordinary course of things, but were reasonably within the contemplation of the parties. Losses which fall outside of the 'second limb' are generally not claimable.
However, this is not always clear cut. For example, damage to reputation, not always a type of loss which arises in the ordinary course of things, has traditionally been construed as falling within the second limb of Hadley (and therefore claimable). Yet this approach has been criticised in many quarters.
The High Court of New Zealand, in the Oceania v Debonaire case, was one such critic.
That case considered the relationship between Debonaire, a furniture wholesaler and supplier, and Oceania, a New Zealand-incorporated company who had agreed under a supply agreement to provide Debonaire with furniture componentry from China. An essential term of the contract was that Oceania delivered the componentry to Debonaire “in a timely fashion and in good order”.
The parties’ relationship deteriorated following delays in the supply of orders from Oceania to Debonaire, and Debonaire’s refusal to pay for those orders. Subsequent legal action followed, with Oceania seeking summary judgment for unpaid purchase moneys owed by Debonaire for 10 container loads of furniture componentry. Debonaire counterclaimed for loss of profit; both in the direct sense (Debonaire’s inability to make a profit on items it did not receive) and for loss resulting from a decrease in orders caused by damage to its reputation due to Oceania’s breach of its supply agreement.
The High Court balanced the English approach to consequential losses – i.e. placing them within the second limb of Hadley v Baxendale – against the approach of the Victoria Court of Appeal in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd. There, the court held that the true distinction when dealing with direct and indirect loss was between loss that every plaintiff in a like situation will suffer, and loss which is anything beyond the normal measure such as profits lost or expenses incurred through breach.
In Oceania, the High Court followed the reasoning of the Victoria Court of Appeal, and held that the ordinary meaning of the terms ‘indirect’ and ‘consequential’ had to be considered in the context of the particular contract.
The court was satisfied that the ordinary and natural meaning of the exclusion of liability for indirect and natural losses covers all losses other than those rising directly from, or immediately associated with, the obligations that the party in breach had taken on.
Considering the ‘loss of reputation’ question, the court confirmed that lost profit from the loss of sales flowing from damages to Debonaire’s reputation would have been recoverable in the absence of an express exclusion clause. Debonaire, however, could not recover such losses as its ability to do so was excluded by the exclusion provision in the supply agreement between the parties.
Oceania v Debonaire represents the first binding decision in New Zealand on the meaning of consequential loss. Clauses limiting such loss must be given their ordinary, natural and commercial meaning. Whilst in many cases loss of profit stemming from damage to reputation will be classed as indirect – and under a standard exclusion of liability clause cannot be recovered – this may not always be the case. In some instances, applying an ordinary commercial meaning of a contract may mean that loss resulting from damage to reputation is classed as direct loss and will be recoverable.
So, the Hadley v Baxendale approach does afford some protection from liability for indirect and consequential losses. But the extent of such protection is unclear.
Contractor Vol.34 No.6 July 2010
All articles on this website are copyright to Contrafed Publishing Co. Ltd.
