The meaning of “consequential damages” – as always, it depends on the context

Further evidence that English courts are taking a thoroughly pragmatic line with commercial exemption clauses comes from Sir Jeremy Cooke’s decision a few days ago in the shipbuilding case of Star Polaris LLC v HHIC-PHIL Inc [2016] EWHC 2941 (Comm). A new-built vessel still under guarantee suffered engine failure, found to be partly due to construction defects which were the yard’s responsibility. In the light of this finding the yard’s liability for the cost of rectification was not in issue, this being expressly allowed under the terms of its builder’s guarantee. What was disputed was a further claim by the buyers for a residual diminution in value of the vessel allegedly caused by the construction problems. The building was under the venerable SAJ form, which had it been left unaltered would under Art.IX have answered the question unequivocally in the yard’s favour (“The guarantee contained as hereinabove … replaces and excludes any other liability, guarantee, warranty and/or condition imposed or implied by the law …”). But, for reasons unclear, this clause did not appear. The yard, therefore, was thrown back on another provision in Art.IX, excluding liability for “consequential or special losses, damages or expenses”. The yard said that the alleged diminution in value was clearly consequential on the damage directly suffered and was therefore still excluded.

The buyers riposted with a mention of a number of other cases in a non-shipbuilding context, which had construed references to consequential losses as covering merely damages not immediately foreseeable and thus outside the first limb of Hadley v Baxendale (1854) 9 Ex 341. Since in the present case diminution in value had been eminently foreseeable (their argument went), it followed that there was no objection to the present claim.

The arbitrators were not impressed, and neither was the judge. Even with the stripped-down version of the SAJ that the parties had chosen to use, and even accepting the potential applicability of the contra proferentem rule in the context of commercial contracts, the context of the contract made it clear that the guarantee provision was intended to provide a complete code for the determination of the parties’ rights and liabilities, and thus that any further liabilities were to be excluded. And quite rightly too, in our respectful submission. The intention evident in a contract as a whole, rather than any minute interpretation of the words the parties chose to include or exclude, still less any mechanical exercise in substitution of words, ought to govern where interpretation is in issue.