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Compensation for financial losses under shipbuilding contract warranty

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Star Polaris LLC v. HHIC-PHIL INC (Star Polaris) [2016] EWHC 2941 

The Commercial Court has recently considered the meaning of “consequential or special losses, damages or expenses” in a shipbuilding contract warranty. Did the phrase have the traditional English law meaning or a particular meaning of its own? 

The background facts 

The Buyers took delivery of m.v. Star Polaris from the yard on 14 November 2011. On 29 June 2012, the vessel suffered a serious engine failure. 

The Buyers alleged that this was caused by particles in the pipework for which the yard was responsible under the shipbuilding contract. The yard denied liability on the basis that the particles had not emanated from the yard and so the Buyers carried out the repair work themselves. 

The arbitration 

The Buyers claimed for the repair work and lost time/bunker consumption in London arbitration under Article IX of the shipbuilding contract, which provided as follows:  

  • Paragraph 1 set out a 12-month guarantee of the yard’s material and workmanship.
  • Paragraph 2 required the Buyers to give notice of defects. 
  • Paragraph 3 set out the yard’s obligation to remedy defects at its expense by “making all necessary repairs or replacements [at the yard or elsewhere]”
  • Paragraph 4(a) stated that the yard’s post-delivery responsibility “shall be limited to the extent expressly provided in the Paragraph 4 of this Article. Except as expressly provided in this Paragraph, in no circumstances and on no ground whatsoever shall the BUILDER have any responsibility or liability whatsoever or howsoever arising in respect of or in connection with the VESSEL or this CONTRACT after the delivery of the VESSEL. Further, but without in any way limiting the generality of the foregoing, the BUILDER shall have no liability or responsibility whatsoever or howsoever arising for or in connection with any consequential or special losses, damages or expenses unless otherwise stated herein.” 
  • Paragraph 4(d) stated that “The liability of the BUILDER provided for in this Article shall be limited to defects … as above provided. The BUILDER shall not be obliged to repair, nor be liable for, damage to the VESSEL or any part of the equipment thereof, which after delivery of the VESSEL, is caused other than by the defects of the nature specified above.”

With respect to the claim for lost time/bunker consumption, the Buyers argued that: 

  • By way of relevant factual matrix background evidence, “consequential losses”“special losses” and “special damages” in paragraph 4 had a well-established meaning under English Law which the parties should be presumed to have had in mind, namely Hadley v. Baxendale ‘second limb’ losses, which were not foreseeable and of which the contract breaker was aware purely because its attention had been drawn to their possibility at the date of the contract. However, the lost time/bunker consumption were ‘first limb’ (foreseeable) losses which were therefore not excluded by this phrase. Furthermore, very clear words were required to give the words a different meaning (see Ferryways v. Associated British Ports [2008] EWHC 225). 
  • Whilst the SAJ standard form named loss of use as an excluded loss, paragraph 4(a) notably did not so. 
  • Moreover, since the words excluded the yard’s liability for certain types of losses, they had to be read restrictively against the yard (the contra proferentem rule). 

The Tribunal, whilst accepting that the yard was liable for the particles/damage, rejected the Buyers’ claim for lost time/bunker consumption (and for a diminution in value) on the basis that they were excluded “consequential or special losses, damages or expenses” which the Tribunal, reading Article IX on the whole, considered to be cause-and-effect losses rather than ‘second limb’ losses. 

The Commercial Court decision 

The Buyers appealed to the High Court. 

The Buyers argued that:

  • one should not read Article IX on the whole to give meaning to “consequential or special losses, damages or expenses” because paragraph 4’s opening words said that the yard’s responsibility “shall be limited to the extent expressly provided in [paragraph 4]”; and so 
  • one looks only to paragraph 4 in order to construe the phrase which, in that context, has its established meaning. 

However, the Court felt that, in fact, paragraph 4 required it to look elsewhere in the Article: 

  • If one only looked to paragraph 4 for the yard’s liability, it must set out a positive obligation on the part of the yard to do specific things. 
  • However, paragraph 4 (despite its opening words and exclusion of liability phrase) did not do so. Whilst sub-paragraph (d) recognised in negative terms that the yard would be liable for damage caused by “defects of the nature specified above” (as the Buyers had argued), it contained no positive obligation. 
  • On the contrary, the Court considered that “defects of the nature specified above” in sub-paragraph (d) was a reference to paragraph 3 (not to paragraph 4’s previous words). 

The Court concluded that, since paragraph 4(d) referred to paragraph 3, which set out  the yard’s positive obligation to repair/replace, the words “consequential or special losses, damages or expenses” must refer to losses suffered by the Buyers as a result of the defects which the yard had to repair/replace, not to Hadley v. Baxendale ‘second limb’ losses. 

Comment 

The Court’s decision is an illustration of how the meaning of words may be shaped by their context and illustrates how the term “consequential or special losses, damages or expenses” has on this occasion been given its own particular meaning in a specific context. 

Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

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