Previously we discussed the potentially disastrous financial consequences that a party could face by failing to agree a contract (see Arcadis v Amec – have you effectively limited your liability?). In this note we will consider, in the context of liability for indirect and consequential losses, the risks that can arise where the parties do sign an agreement, but the wording isn’t quite fit for purpose.
The recent case of Star Polaris LLC v HHIC-Phil Inc  EWHC 2941 illustrates the willingness of the courts to apply a flexible interpretation to the meaning of “consequential” or “special” losses which might not necessarily be in-line with the understanding of the contracting parties. We would strongly advise ensuring that when you are negotiating a contract your intentions are clearly stated, especially in relation to liability.
The Buyer purchased a ship, the Star Polaris, from the Seller. Soon after delivery, the ship suffered serious engine failure and had to be towed to a port for repairs. The Buyer subsequently sued the Seller for breaches of contract and claimed compensation for:
- the cost of repairs to the ship
- various costs caused by the engine failure including towage fees, agency fees, survey fees, etc
- the diminution in the value of the ship
The contract provided a 12 month guarantee against all defects relating to defective materials including design error, contraction miscalculation and/or poor workmanship. The contract further stipulated certain positive obligations that the Seller would perform, for example, to remedy those physical defects covered by the guarantee. The contract emphasised that the Seller was to have no other liability in respect of the ship after delivery, and expressly excluded any consequential or special losses, damages or expenses unless otherwise stated in the contract.
At first instance, the Tribunal found in favour of the Seller. The Buyer appealed to the High Court alleging that “consequential” or “special” losses should be interpreted in accordance with the well established case of Hadley v Baxendale.
Hadley v Baxendale sets out the two limbs of losses recoverable in a breach of contract claim, being either direct losses (losses that flow naturally from the breach) or indirect and consequential losses (losses that result from special circumstances, which will only be recoverable if the defaulting party knows of these circumstances). The Buyer alleged that their indirect or consequential losses falling under the second limb of Hadley v Baxendale should be recoverable.
The High Court found in favour of the Seller and dismissed the appeal. The court held that by looking at the contract as a whole, it was clear that the limitation of liability clause was intended to operate as a complete code under which all liability for losses over and above those specifically accepted by the Seller were excluded. Therefore, the Buyer’s claims above and beyond the cost of repair and physical damage were excluded. The word “consequential” was interpreted in accordance with its natural, not legal, meaning and applied in its cause-and-effect sense.
As a result of the court’s ruling, the Buyer was unable to recover financial losses it believed it should and was left with all financial responsibility over and above the cost of repairs. This case shows a willingness of the courts to adopt a more flexible approach and to give contract terms and phrases their ordinary and natural meaning. Although this case does not introduce any new law, it emphasises the importance of looking at the contract as a whole, rather than focussing specifically on one particular clause.
We would recommend that when negotiating a contract:
- you ensure that any terms defining your contractual liability are clear and unambiguous – clearly define what liability you accept and what liability you exclude
- beware the dangers of using precedent wording from another contract as there is no guarantee the courts will apply a similar meaning
- ensure that the contract reflects your expectations and intentions, otherwise there is a risk that the court may apply a different interpretation
For further advice on limitation of liability clauses and commercial contracts generally, please contact Stephen Scown’s corporate team at firstname.lastname@example.org.