The Contractual Grey Area You Need to Know About (Yes, You)

Let’s talk Consequential Loss: the loss that occurs as an indirect result of a breach of contract. A result that’s within the contemplation of both parties when the contract is entered into, but not a direct consequence of the breach itself. 

?Sounds simple enough so far, right?

But properly protecting yourself against Consequential Loss can be a lot trickier than it looks. In the points below, I’ll be exploring my top four tips on this tricky term – and how it can mean make or break. 

Of course, as part of this article, there’ll be legal stuff. Intended as context, this information is not intended to be interpreted as legal advice. If you’re in need – let me know: [email protected].

1. Consequential Loss is a grey area at the moment. Here’s why. 

• It used to be that the Courts supported a clear distinction between Direct Loss (loss that would happen as a natural consequence of a breach) and Consequential Loss 
• However, there’s no consistency – other decisions have given Consequential Loss a broader meaning
• For example, in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7), the South Australian Supreme Court decided that the subcontractor was not liable for losses that would have otherwise been considered Direct, because its Consequential Loss clause was found to protect it against “any indirect, economic or consequential loss whatsoever”
• Most lawyers agree that there is no clear trend at the moment, so we need to tread carefully

2. If you want to define it, define it well – and I mean, really well!

• In your contract, you can exclude liability for Consequential Loss, which could mean an extra layer of protection in the event of a breach – so far, so good!
• BUT, the Courts have historically not been keen to enforce general Consequential Loss clauses that don’t specify particular types of loss
• So, make sure if you do define the term, that you specifically include every foreseeable type of consequential loss, be it loss of profit, revenue, opportunity, production and so on

3. Make sure the scope of work is considered each time.

• Consequential Loss is, unfortunately, not a one-size-fits-all situation
• Trying to define it in general terms is likely to cause problems down the track
• Consider types of loss specific to this project – everything from loss relating to the types of transport that will be used for goods or personnel, to the type of IT systems being used to record project data
• It can help to do this collaboratively to ensure that nothing is missed

4. Get an expert on board. 

• A lawyer or claims expert will be an invaluable asset when it comes to defining Consequential Loss properly in your contract
• When it comes to the crunch, general advice is unlikely to cut it
• It’s possible that a precedent will emerge in the future, in which case an expert will know and be able to advise you accordingly

So there you have it: my top four tips on Consequential Loss. 

So if you’re wondering what the key takeaway is, it’s this: please make sure you get advice specific to your situation and your project.

Or else, there’ll be consequences. 

(Sorry, not sorry.)