Key points
- The courts are adopting conflicting approaches to clauses excluding liability for indirect or consequential loss
- This is highly unsatisfactory and needs resolution by the Supreme Court as quickly as possible
Last summer, this column (“Consequential consequences”, EG, 9 July 2016, p99) welcomed the Court of Appeal’s decision in Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372 to enforce a clause that looked to exclude liability for indirect or consequential loss.
This loss (the terms for which are interchangeable) is different from direct loss, a distinction first made in Hadley v Baxendale (1854) 9 Exch 341. In a construction context, direct loss (which flows from losses that happen in the “ordinary course of things”) is the cost of repairing or rebuilding the building in question. Consequential loss (damage flowing from special circumstances that are outside the “ordinary course of things” but were communicated to the defendant or were otherwise known by the parties) is everything else.
In Transocean, the Court of Appeal held that a clause under which each party to the contract agreed to “save, indemnify and hold harmless” the other from consequential loss was to be enforced. That reflected the traditional jurisprudential analysis of clauses limiting or excluding consequential loss and struck this commentator as being eminently sensible, not least because it gave certainty to what is an increasingly important issue on construction projects. For example, the JCT suite of contracts allow for the possibility of a limitation of liability for consequential loss and it is helpful for parties amending and negotiating JCT contracts to have certainty as to what the possible limitation does and does not cover.
On the other hand
The decision of Sir Jeremy Cooke (sitting as a High Court judge) in Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 294 (Comm) suggests that the law in this area might not be as clear cut as previously thought.
The defendant shipbuilding yard had built a capesize bulk carrier (also called the Star Polaris) – one of the largest ships afloat – for the claimant. It was delivered in November 2011. The following June it suffered serious engine failure and had to be towed to a different shipbuilding yard for repair.
Arbitration
The contract contained an arbitration agreement and the shipowner commenced arbitral proceedings against the shipyard, claiming (1) the cost of repairs and (2) other costs associated with the repair (including towage, agency and various survey and other fees).
Although some elements of the second claim could properly be categorised as consequential loss, others were arguably direct loss (albeit pleaded as being a different type of loss to the actual repair costs). At the arbitration itself, the shipowner also argued in the alternative that it was entitled to damages for the diminution in the value of the ship as a result of the defective engines.
The arbitrators awarded the shipowner the cost of repairs, but allowed a deduction for the contributory negligence of the chief engineer, who ignored various alarms warning that there were problems with the engines. The ship owner’s recovery was limited to the costs of repairing that element of damage which would have been caused had the engineer stopped the ship’s main engine when the alarms sounded.
The arbitrators also had to decide whether the other costs associated with the repair were excluded by a provision in the contract that the defendant would “have no liability or responsibility whatsoever and howsoever arising for or in connection with any consequential or special losses, damages or expenses unless otherwise stated herein.”
They decided that this clause, when read in context, went further than the traditional approach to clauses excluding consequential loss (as recently endorsed in Transocean), and that it meant that all of the other associated costs claimed – including those which, properly considered, were direct loss – were irrecoverable. This is because the word “consequential” was interpreted in what was referred to as a cause and effect sense – that is, those losses actually caused by the engine failure.
The diminution in value claim was defeated because it was properly categorised as consequential loss and caught by the exclusion.
Appeal to the High Court
Sir Jeremy agreed with the arbitrators in relation to their analysis of the exclusion clause. In doing so, he referred approvingly to obiter comments actually made in Transocean and took comfort from the judgment of Teare J in Ferryways NV v Associated British Ports [2008] EWHC 225 (Comm) to the effect that it is possible for parties to a contract to use words that mean that losses over and above those traditionally categorised as consequential loss are excluded. Sir Jeremy held that, when the contract was read as a whole, this is what the parties had agreed to. Interestingly, the use of the phrase “special losses” was not a deciding factor, as there is considerable authority (eg Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99) that, in the ordinary course of events, they are also caught by the second limb of Hadley v Baxendale.
There has been some academic criticism of the traditional approach to clauses excluding consequential loss. The authors of McGregor on Damages argue that the phrase is not given the natural – cause and effect – meaning that most contracting parties would understand it to have.
This decision highlights an area where the differing approach being taken – including High Court judges distinguishing what should be binding Court of Appeal authority – needs to be resolved by the Supreme Court. Until then, contract drafters need to give detailed consideration to what is, and is not, being excluded if the parties are trying to reach agreement on consequential loss.
Stuart Pemble is a partner at Mills & Reeve LLP
