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Written by Julian Ong
Case Facts
Star Polaris LLC (the “Purchaser”) entered into a contract with HHIC-Phil Inc (the “Yard”) for the construction of a cargo ship. The vessel experienced a major engine breakdown around eight (8) months later. The Yard denied liability for the failure and the Purchaser commenced arbitration proceedings to recover: (a) the cost of repairs to the vessel; (b) the costs caused by the engine failure, including towage fees, agency fees, survey fees, off-hire and off-hire bunkers; and (c) a further claim for the diminution in the vessel’s value.
Issue of Law
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What is the correct interpretation of the phrase “consequential or special losses, damages or expenses” and does this fall within the second limb of Hadley v Baxendale?
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If the phrase is taken to have a cause-and-effect meaning, does the diminution in value of the ship fall within this meaning?
Arguments by HHIC-Phil Inc:
The Yard relied on an exclusion for “consequential or special losses, damages or expenses” in the shipbuilding contract. Since the provision was expressly intended to supersede all other duties and liabilities of the Yard under the contract or at common law, the Yard claimed that the term “consequential” was used in a cause-and-effect meaning, excluding any losses caused as a knock-on effect of the engine failure.
Arguments by Star Polaris LLC
The Purchaser argued that the term “consequential or exceptional losses” in the exclusion clause should be read in light of Hadley v Baxendale’s second limb (i.e. losses outside the ordinary course). This is in contrast with the Yard’s argument that the term should be interpreted in light of the context of the contract.
Decision of the Arbitrational Tribunal
The Tribunal held that, in the context of the agreement, the reference to consequential losses was used in the “cause-and-effect sense”, meaning following as a result or consequence, rather than having the narrower meaning under the second limb of Hadley v Baxendale. This meant that only the costs of repair of the ship were recoverable as the other losses were consequential losses in the above “cause and effect sense”.
Decision of the Commercial Court (on appeal)
Interpretation of “consequential loss”
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The Commercial Court disagreed with Star Polaris’ interpretation and held that Star Polaris could only claim the costs of the repair works. The remaining losses fell within the consequential loss exclusion and were not recoverable.
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The Court concurs that the Builder’s liability under Article IX.4 of the contract should not be construed in isolation, but rather in light of the entirety of Article IX. Article IX.4(a) made it clear that the Builder was not liable for anything other than the express obligations set forth in the contract.
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Since the sole positive obligations under the guarantee were only to repair and replace defects and physical damage caused by such defects, “consequential or exceptional losses” did not include losses, damages, or costs falling under Hadley v Baxendale’s second limb.
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Court agreed with the tribunal’s reasoning that the liability clause provided a “complete code” for the losses to be recoverable. In other words, the contract was drafted so that it was not a question of determining what liability was excluded, but ascertaining what liability was accepted by the Builder.
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Court opined that the extent of the shipyard’s guarantee was expressly set out in the contract. The court also explained that the exclusion clause set out a code, excluding other liabilities imposed by statute, common law, custom or otherwise. By taking the provisions of the Article as a code, if there is no express undertaking of liability by the Yard, no liability devolves upon it.
The claim for diminution of value
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The court held that the Buyer could not point to any express clause giving rise to a claim for pecuniary loss or lost profit.
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As a result, the claim for diminution of the vessel’s worth constituted a claim for “consequential or special loss”, given that the obligation of the Builder to repair the vessel was exhaustive, nothing further was recoverable.
Analysis
This case demonstrates the court’s willingness to depart from the traditionally strict interpretation of “consequential loss,” defined as those damages falling within the second limb of Hadley v Baxendale and decides in favour of a more fluid contractual construction that takes the entirety of the contract into account.
Additionally, it emphasises that the contractual context is key – an identical clause in another contract may possibly be interpreted differently. It is crucial for parties to craft their contractual liability in plain and unambiguous language, clearly stating which liabilities are excluded and which are accepted.
This case is consistent with the modern approach to contract interpretation – to interpret the words of the clause in the context of the contract as a whole in light of the relevant factual matrix.