8 August, 2012
Legal News & Analysis – Asia Pacific - Australia – Dispute Resolution
Alstom Ltd v Yokogawa Australia Pty Ltd & Anor (No 7)  SASC 49
Alstom v Yokogawa continues the shift in Australian case law away from the traditional approach of aligning consequential loss with the second limb of Hadley v Baxendale.
The court also considered that a duty of good faith is to be implied into every commercial contract despite doubts expressed in some earlier cases that it was to be implied as a universal term.
An implied duty of co-operation may also be found pursuant to which each party agrees to do all such things necessary to enable the other party to have the benefit of a contract. A corollary is the implied obligation not to prevent or hinder performance by the other party to a contract.
The case related to the refurbishment and automation of the Playford B Power Station in Port Augusta, South Australia. The head contract was a turn-key contract worth $148.5 million, which was entered into by the power station owners, Flinders Power Partnership (FPP) and the head contractor, Alstom Power Limited (Alstom).
Alstom subcontracted the electrical, control and instrumentation works worth $34 million to a joint venture between Yokogawa Australia Pty Ltd and Downer EDI Engineering Pty Ltd (YDRML). The subcontract was drafted as a back-toback agreement which incorporated the terms of the head contract along with provisions that were expressed to take precedence over the head contract. Delays and performance issues arose under the head contract which led to FPP and Alstom entering into settlement agreements in 2002, 2003 and 2005 and Alstom paying damages to FPP. Alstom then commenced proceedings against YDRML, claiming among other things, liquidated damages for delays in the project, performance guarantee payments and damages for breach of duty of care.
YDRML counterclaimed to recover damages for losses resulting from breach of contract by Alstom, and alleged that Alstom’s failure to provide certain information was in breach of its implied obligations to co-operate, not to prevent or hinder YDRML’s performance of the subcontract and to act in good faith.
Relevant subcontract provisions
The subcontract was drafted as a back-to-back agreement with a range of amendments to the head contract. It contained the following exclusion clause:
Notwithstanding any other Article of this Electrical and C & I Contract the Subcontractor shall not be liable for any indirect, economic or consequential loss whatsoever.
The court was called upon to consider the interaction between the exclusion clause and the claim by Alstom against YDRML for liquidated damages and performance guarantee.
The Australian approach to consequential loss
The aim of damages for breach of contract is to put the innocent party in the same position it would have been in had the contract been erformed. This is subject to the rule that damages will not be recoverable if they are too remote.
The test for remoteness of damage was laid down in Hadley v Baxendale
(1854) and has two limbs:
1. losses such as may fairly and reasonably be considered as arising naturally (that is, according to the usual course of things) from the breach; and
2. losses such as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as the probable result of its breach.
Until recently, it was thought that consequential loss is to be equated with the second limb of Hadley v Baxendale. This is based on English cases including Millar’s Machinery Co Ltd v David Way & Sons (1935), British Sugar Plc v NEI Power Projects Ltd (1997) and Hotel Services Ltd v Hilton International Hotels (UK) Ltd .
In Australia, there has been a shift in thinking where courts in Victoria and New South Wales have expressed the view that it is incorrect to equate “consequential loss” with the second limb of Hadley v Baxendale.
In Alstom v Yokogawa the court was called upon to consider the English approach and recent Australian authority in this area. According to the court:
- To limit the meaning of indirect or consequential loss to losses arising under the second limb of Hadley v Baxendale is unduly restrictive and fails to do justice to the language used.
- The Shorter Oxford English Dictionary meaning of “consequential” is “following, especially as an effect, immediate or eventual or as a logical inference”. This means that unless qualified by its context, consequential loss would normally extend, subject to the rules of remoteness, to all damages suffered as a consequence of a breach.
- The English authorities on consequential loss have not been considered by the House of Lords or the UK Supreme Court. Additionally, Lord Hoffman in Caledonia North Sea Ltd v British Telecommunications Plc  has expressed the view that he would wish to reserve for future consideration the question of whether the English approach is correct.
- The recent Australian cases in this area should be preferred. In particular, Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd  which held that consequential loss means “anything beyond the normal measure, such as profits lost or expenses incurred through the breach”.
- The words used by the parties must be given their “ordinary and natural meaning” and regard may be had to the contractual context in which the relevant clause appears.
Looking at the contractual context, it was held that the clause excluded “any loss consequential or following, immediate or eventual, flowing from a breach of contract” by YDRML.
Good faith and other implied terms
YDRML claimed that Alstom had not done everything necessary to ensure that YDRML could perform its obligations under the subcontract, and this included not providing adequate information for YDRML to exercise its rights under particular clauses.
The court considered the law relating to the implication of obligations to cooperate, not to prevent or hinder the fulfilment of a contract and to act in good faith.
A. Implied duty to co-operate
According to the court, the implied duty to co-operate is well recognised and
includes the following principles:
- It is a general rule, applicable to every contract, that each party agrees, by implication, to do all such things as are necessary on its part to enable the other party to have the benefit of the contract.
- Where, in a written contract, both parties have agreed that something shall be done which cannot be effectually done unless both concur in doing it, the proper construction of the contract is that each party agrees to do all things necessary to be done on its part.
- Where the performance of obligations under a contract equires cooperative acts, the parties have mutual duties to comply with the reasonable requests for performance made by the other.
The implied duty to co-operate is subject to there being no express terms to the contrary. In this case, there were none and the duty was found to exist.
B. Implied obligation not to prevent or hinder performance
The implied obligation not to prevent or hinder performance of a contract is a corollary of the duty to co-operate. Generally, the duty may be implied where one party’s ability to perform depends on the other not preventing that performance.
The principle is that:
If a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative. (1 Stirling v Maitland (1864) 122 ER 1043 at 1047 per Cockburn CJ.)
Depending on the application of the duty, one party’s prevention may relieve the other party of its obligation to perform and may also constitute a breach of contract.
Once again, the implication of such an obligation is subject to there being no express terms to the contrary. In this case, there were none and the obligation was found to exist.
C. The obligation to act in good faith
The court reviewed the authorities on the implication into commercial contracts of an obligation to act in good faith. Good faith is a concept which is difficult to define. A number of cases have referred to the extra-curial writings of Sir Anthony Mason which favour that good faith encompasses three related notions:
- an obligation on the parties to co-operate in achieving the contractual object (loyalty to the promise itself);
- compliance with honest standards of conduct; and
- compliance with standards of contract which are reasonable having regard to the interests of the parties.
The existence of an implied obligation to act in good faith has not been considered by the High Court. A number of courts at State and Federal levels have found such an obligation, while other cases have disagreed. In Alstom v Yokogawa the court found that good faith is to be implied into every commercial contract, despite doubts which have been expressed to the contrary.
In this case, the court noted that the complexity and interdependencies of the project demanded a high degree of co-operation and reliance upon the good faith of each party without which their relationship would break down and the project would fail. This was a “compelling indication of the existence of an implied obligation to act reasonably and in good faith”.
Alstom was found to be in breach of the obligation to act in good faith, as well as the obligations to co-operate and not prevent or hinder YDRML’s performance of the subcontract. Alstom had failed to provide information to YDRML which was essential for YDRML exercising its rights and meeting its obligations under the subcontract.
Lessons for contracting parties
Under Australian law, “consequential loss” may include losses within both the first and second limbs of Hadley v Baxendale. If a party is to exclude its liability for consequential loss under a contract, this is potentially much broader in Australia than if the contract was governed by English law.
A party that agrees to allow a counterparty to exclude its liability for consequential loss should not leave that term undefined. To do so would leave only a narrow category of losses that may be recoverable. Depending on the type of contract that is entered into, consideration should be given to whether to include in the definition of “consequential loss” such matters as loss of profits, revenue, business, goodwill and data.
Another consequence of this decision is that parties should be aware of the potential for duties of co-operation, non-prevention and good faith to be implied into their contracts. However, care should be exercised in respect of the finding that good faith is to be implied into all commercial contracts given the divergence of views expressed elsewhere and the High Court is yet to consider this issue.