It is common for manufacturing contracts to limit compensation to direct damages (and exclude consequential damages) and exclusion clauses attempt to limit or exclude liability for indirect or indirect damages. However, Australian law is in a state of uncertainty as to the meaning of the term „consequential damages“ in relation to the liability clauses. The recent case before the Supreme Court of New South Wales in Macmahon Mining Services v. Cobar Management1 contains two decisions on the meaning and scope of exclusion clauses. Conversely, in order to exclude only indirect losses of any kind, the exclusion clause should be worded as follows, so that other descriptive types of losses are read only as examples of indirect losses: insurance companies look for losses that indicate excessive expectations. For example, a bakery that was temporarily closed for repairs after a fire could claim reimbursement of a reasonable amount of lost sales, but not losses that far exceed their usual number. Indirect damage is an indirect negative effect caused by damage to the company`s property or equipment. A business owner can purchase insurance to cover damage to property and equipment, and can also get coverage for secondary losses. A policy or consequential damages clause compensates the owner for this loss of business income.
Additional costs incurred by the plaintiff as a result of the breach of contract are awarded to the plaintiff as indirect damages. In the first application,10 Cobar requested the summary dismissal of Macmahon`s claim for „loss of the opportunity to make a profit“, on the ground that clause 18.5 of the contract excludes liability for consequential damages. Clause 18.5 provided that „notwithstanding the rest of this Agreement, neither party shall be liable to the other for consequential damages“. Consequential loss has been defined as „loss or [sic] profits, loss or production[sic], loss or revenue [sic], loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, regardless of whether direct or indirect“. Counsel for Cobar argued that Article 18.5 was clear and inclusive and that the parties had agreed (i.e., neither was liable for consequential damages as defined). On the other hand, Macmahon`s lawyer argued that if Cobar`s interpretation were correct, this would have the effect that the main subject matter of the contract – that Cobar receives the benefit of the works and Macmahon the benefit of payment – would be nullified – and, furthermore, would give Cobar the right to terminate the contract on the basis of a but not be able to put an end to the existing breach. without exposing himself to liability for damages (as would be the case if he terminated the contract for reasons of convenience in accordance with the provisions of the termination). Macmahon`s lawyer argued that this construction had led to an absurd result.
McDougall J.A.`s decision to dismiss Macmahon`s action boiled down to a question of interpretation relating to the definition of consequential damages and section 18.5. It considered that the definition of indirect damage made it clear that any form of loss, direct or indirect, of the various categories indicated fell within the defined concept. With regard to Macmahon`s claim to „loss of the opportunity to make a profit“, his honour noted that one of the categories covered by the definition of consequential loss – „loss of contract“ – which interpreted his honour as „loss of the advantage of a contract“ was intended to reduce the loss of advantage of the two respective contracts in which the words appear (the contract between Macmahon and Cobar), as well as other third-party contracts.