02 July 2015

Vision Eye Institute Ltd v Kitchen (No 2) [2015] QSC 66

In this case, the Queensland Supreme Court awarded a significant amount of damages for contingent loss of income flowing from a breach of contract, in circumstances where the parties had not excluded damages for indirect or consequential losses.

Key learnings

This case is a timely reminder that, on ordinary contractual principles, a plaintiff may recover contractual damages to compensate for loss of revenue or other contingent losses flowing from a breach. If a service provider does not wish to be exposed to the risk associated with a customer’s business losses, then it is critical that they include an effective exclusion provision in their contract with the customer. For the strongest protection, this should include specific exclusions for loss of profit and revenue, as well as a general exclusion of indirect and consequential loss.

Case note

The plaintiff in this case was Vision Eye Institute Ltd, Australia’s largest provider of ophthalmic care. It agreed to employ an ophthalmologist for a period of at least five years. After just three years, the employee wrongfully terminated the contract of employment, setting up new practices. Given the low number of experienced persons in the profession, Vision Eye was forced to close down two eye clinics as a result of the loss of the employee.

One of the most important issues in the case was the quantum of compensatory damages to be awarded to Vision Eye. Applegarth J did not hesitate to include the value of the lost opportunity to derive earnings from the two clinics in that figure. In calculating that value, he entered into a complex consideration of what might have transpired in the event that the employee hadn’t terminated the contract. This included a determination of what set of events was most likely to have occurred (including the taking up of a new form of treatment for macular degeneration), a projection of profits based on that set of events and on the past financial performance of the two clinics, as well as appropriate discounting to reflect the possibility that other contingencies might have eventuated. The figure he arrived at was $10,845,476.

On first principles, damages flowing from a breach of contract are recoverable if they either flow naturally from the breach or would have been in the reasonable contemplation of the parties at the time of entering into the contract as the likely result of a breach. The outcome achieved by Vision Eye in this case is a vivid illustration of the scope of losses that may be swept up in the second limb of this formulation. Not only was Vision Eye able to recover damages for loss of income that it would have generated if it had been able to keep the two clinics open, in assessing that loss it was appropriate to have regard to the new forms of treatment that the parties may have been able to contemplate at the time of entering the contract in question.

Typically, a commercial service provider will not want to be exposed to losses which might be suffered by their customer’s business in the event of any service default or failure, on the basis that such losses are difficult to scope and price. Accordingly commercial service providers will seek to safeguard themselves by excluding liability for ‘consequential’ or ‘indirect’ losses that may flow from a breach of their contract with the customer. While recent case law has created some uncertainty as to how such terms will be interpreted, it is clear that exclusions of this nature are critical for those seeking to avoid finding themselves in a situation like the defendant in the Vision Eye case. A provision excluding liability for indirect and consequential loss may well have prevented Vision Eye from recovering damages for losses that were contingent on the ongoing operation of the affected clinics and the introduction of new treatment methods. Better still, at least from the defendant’s perspective, would have been an express exclusion of liability for lost profits or revenue or other opportunity costs, whether flowing directly or indirectly from the breach.

The outcome in this case should give service providers reason to revisit their standard contracting terms to ensure that they include an appropriately robust position on liability and should dispel any notion that consequential loss is just one of those theoretical issues which lawyers like to harp on about.

To see the full judgment of this case, please click here. For the judge’s appraisal of damages, please click here.

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