The Meaning of “Consequential Damages”

In the just published Sea Venture 28 from Steamship P&I Club Jasmin Sandhu Syndicate Executive Eastern Syndicate (jasmin.sandhu@simsl.com) discussed the meaning of “consequential and special damages” according to English case law.

Sandhu noted that consequential loss had been construed by the English courts as applying only to loss which was not ordinarily foreseeable, and which would be recoverable only if the special circumstances out of which the loss arose were known to the parties when contracting.

In a High Court decision in late 2016 Mr Justice Cooke considered the construction and meaning of the term “consequential and special damages” in the context of a limitation of liability clause included in a standard form SAJ shipbuilding contact.

That a loss needed to be not ordinarily foreseeable, and recoverable only if the special circumstances out of which the loss arose were known to the parties when contracting, was the well-known second limb of Hadley v Baxendale. Therefore, said Sandhu, a clause excluding consequential loss would only exclude that which would not be recoverable in any event.

However the conclusion of Cooke J was that these words were not necessarily confined to this well-settled meaning and would depend on the specific context.

In Star Polaris LLC and HHIC-PHIL Inc [2016] EWHC 2941 (Comm) the claimant, Star Polaris LLC (the Buyer), entered into a shipbuilding contract dated April 6th, 2010 on an amended SAJ form (the Contract) with the defendant, HHIC-PHIL INC (the Yard) for the building and purchase of bulk carrier Star Polaris.  The Vessel was delivered to the Buyer on November 14th, 2011. On or around June 29th, 2012 she suffered a serious engine breakdown, which necessitated towage to South Korea for repairs.

The Buyers commenced arbitration against the Yard, and claimed:

  • The cost of repairs to the Vessel;
  • The costs caused by the failed engine, including towage fees, agency fees, survey fees, off-hire and off-hire bunkers;
  • Diminution in value of the Vessel.

A key aspect of this case was the parties’ understanding of the meaning of “consequential or special losses”. Hadley v Baxendale identified the circumstances in which a party could recover losses, before becoming too remote, namely:

  • Direct losses (limb 1): losses which are reasonably in contemplation of both parties at the time the contract was made i.e. losses which a reasonable person might expect to result from the breach in ordinary circumstances;
  • Consequential losses (limb 2): actual knowledge of special circumstances outside the ordinary course of things, but which were communicated to the defendant or otherwise known by the parties.

Since Hadley v Baxendale there had been a number of decisions attempting to define the meaning of “consequential loss”. In particular, in the GSF ARCTIC III case, Moore-Bick LJ observed that “It is questionable whether some of those cases would be decided in the same way today, when courts are more willing to recognize that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents”.

The Buyer’s claim was based on an argument that the losses claimed were not excluded as they were all direct, ordinarily foreseeable and, therefore, within ‘limb 1’ of Hadley v Baxendale, and were not “consequential or special losses”.

The Tribunal decided in favour of the Yard, holding that Article IX was a “complete code” defining the context in which the Yard’s responsibility was to be understood. Therefore, the Yard’s obligations were limited to the express wording contained within the contract.

The Tribunal went on to state that by virtue of the express exclusion in clause IX(4)(d) it was clear that the Yard had not assumed any responsibility for any losses other than the remedy of defects, financial or otherwise.

As a result of this the Buyer’s claims for items (ii) and (iii) were dismissed.

The Buyer appealed the award to the High Court on two grounds:

  1. The words “consequential and special losses” excluded liability only for damages falling within the second limb of the rule in Hadley v Baxendale and therefore claims (ii) and (iii) fell within the first limb. To exclude losses falling outside that well recognised meaning, would require very clear and unambiguous wording.
  2. The words “special losses” when used with the words “consequential losses” were indicative of an intention to refer to the specific losses falling within the second limb of Hadley v Baxendale.

The High Court agreed with the Tribunal’s decision, concluding that the words “consequential loss” or “special loss” had a cause and effect meaning, and were intended to have a much wider meaning than the limited context argued by the Buyer. The Court said that, “in such circumstances, the word ‘consequential’ had to mean that which follows as a result or consequence of physical damage, namely additional financial loss other than the cost of repair or replacement” (Cooke J).

Therefore, the Yard’s liability was limited by the positive obligations in Article IX (3) to remedy any defects and Article IX (4) made it plain that the Yard has no liability above and beyond those express obligations. When considered as a whole, the contract expressly excluded financial losses which resulted as a consequence of the engine failure (beyond the costs of replacement and repair of physical damage to the engine).

The obligation to repair and replace was exhaustive and the Buyer’s appeal was, therefore, dismissed.

Sandhu commented that, although unlikely to alter the English law interpretation of the meaning of “consequential and special losses”, the Cooke J decision did suggest that, dependent on the wording of the relevant clause or clauses of a particular contract, the term might have a much wider meaning. As such, said Sandhu, the decision underlined the need for careful consideration when drafting and negotiating exclusion and/or limitation clauses.

“To avoid ambiguity, wherever possible parties should set out expressly the losses they agree to be responsible for, and those which are expressly excluded. Parties should also bear in mind the contra proferentem rule – where there is ambiguity in a contract the words will generally be construed against the party who seeks to rely on them”, said Sandhu.

Postscript:

In the recent case of Transocean Drilling UK Ltd v Providence Resources PLC the Court of Appeal considered how consequential loss clauses should be interpreted in the context of a drilling contract. In that case it was held that sophisticated commercial parties were free to enter into contracts which limit or exclude liability in the event of breach, and in such circumstances the well-recognized meaning of the term consequential losses may not be appropriate, especially in light of the particular context in any given contract.

Article originally published on Steamship Mutual website May 2017.

https://www.steamshipmutual.com/Downloads/Sea-Venture/SeaVenture_28.pdf