Consequential loss: Star Polaris LLC v HHIC-Phil Inc  EWHC 2941 (Comm)
What is the meaning of the phrase “consequential or special losses” in the context of a limitation of liability clause?
A shipbuilder entered into a contract with the buyer to build a ship, the Star Polaris. About eight months after delivery, the ship suffered serious engine failure and had to be towed to a port for repairs. The buyer commenced arbitration proceedings against the shipbuilder for breach of contract, claiming compensation for:
• the cost of repairs to the ship
• various other costs caused by the engine failure (including towage fees, agency fees, survey fees, etc)
• the diminution in value of the ship.
The contract guaranteed the ship for 12 months against all defects caused by defective materials, design/construction error and/or poor workmanship (but not various other causes of damage, eg perils of the sea and normal wear and tear). The contract provided that the shipbuilder would have “no liability whatsoever…in connection with any consequential or special losses, damages or expenses unless otherwise stated herein.”
The arbitration tribunal held that the shipbuilder undertook only to repair or replace defects falling within the guarantee – all other financial consequences were to fall to the buyer. The shipbuilder appealed against the tribunal’s award, arguing that “consequential or special losses” should be interpreted in accordance with its established meaning to refer to those losses falling within the second limb of Hadley v Baxendale (1854) 9 Ex 341. Namely, those losses which do not arise naturally from the breach of contract itself (which would fall within the first limb) but rather from some special circumstance that the defaulting party was aware of at the time of the contract.
The Commercial Court dismissed the shipbuilder’s appeal, agreeing with the tribunal that the extent of the shipbuilder’s liability was not to be defined by looking at the exclusion of consequential/special losses in isolation, but instead in the light of the contract as a whole (in particular the guarantee in relation to defects). The contract was clear that there was no liability above and beyond the express obligations undertaken by the shipbuilders. Therefore, “consequential or special losses” in this contract meant any losses resulting from physical damage other than the cost of repair and replacement. Put another way, it did not mean such losses, damages or expenses within the second limb of Hadley v Baxendale but had the wider meaning of financial losses caused by guaranteed defects above and beyond the cost of replacement and repair of physical damage. So, all other financial consequences beyond the repair and replacement of defects falling within the guarantee had to be absorbed by the buyer. This included the claim for diminution of value which was also therefore deemed a “consequential or special loss” and, as such, was excluded.
Why is this important?
This is a useful illustration of the court’s approach to construction of contractual terms and, in particular, that the court will construe limitations of liability in the context of the contract as a whole (especially where the contract sets out a complete code for dealing with liability).
Any practical tips?
Ensure that any terms defining or restricting contractual liabilities are clear and unambiguous. Identify the type of loss that may flow from the contract and set out what liability you will accept and what is excluded.