Contracts update: consequential loss — it's all in the definition

Recent developments in NSW reinforce the importance of not only expressly defining the term ‘consequential loss’ in contracts, but also carefully considering what categories of losses the exclusion is intended to cover, in order to avoid unintended consequences.

Until recently it was generally accepted by parties to contracts, and the courts in Australia, that the term ‘consequential loss’ meant those losses falling under the second limb of losses described in Hadley v Baxendale and which Lord Alderson B categorised as indirect loss (or subjectively foreseeable loss).

These indirect losses were held to be losses which are not a direct consequence of the breach, and were therefore not fairly and reasonably considered as ‘arising naturally’ or ‘in the usual course of things’, from the breach itself. As such, ‘consequential loss’ was not found to encompass damages for loss of profits or expenses incurred to remedy a breach of contract as these were considered outside of that definition…

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