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.

Niggling points in ship-repair contracts

A few potentially important points in a case decided last week for the benefit of those practising in the recondite but potentially big-money area of shipbuilding and ship-repair. In Saga Cruises BDF Ltd v Fincantieri SpA [2016] EWHC 1875 (Comm), the Saga Sapphire was an elderly cruise liner owned by SC and bareboat chartered to associated company A, who operated her. She went in to Italian repairers for inspection and possible repair of luboil coolers. The repair contract was between SC and the yard. Having come out and recommenced cruising, she suffered a failure of the port cooler: the cruise had to be abandoned, as did a subsequent one. SC assigned its cause of action to A, who claimed damages from the yard. The actual holding was that the yard had been in breach, but nearly all the damages claims failed on causation grounds. Nevertheless the following points are worth a note:

(1) The repair contract, unlike many such contracts such as BIMCO’s excellent Repaircon, contained no term explicitly excluding liability for post-redelivery losses and throwing the owner back on the terms of the guarantee. But the vessel was handed back under a protocol of redelivery saying The Contractor has today completed the Works and the Owner has accepted that the requirements of the Agreement have been complied with pursuant to the provisions of Clause 9 of the Agreement in all respects except as outlined herein.….Each party confirms that, with the exception of the above described matters … it has no other requests or claims against the other party whatsoever. Sara Cockerill QC rightly decided that such losses were therefore recoverable at common law, rejecting a rather desperate argument from the yard that the protocol was sufficient to make up for the lack of a general exclusion.

(2) In so far as the yard accepted a duty to advise on defects in, and necessary repairs to, the coolers, this was a concurrent contract-tort duty and hence susceptible to a contributory negligence deduction in so far as SC had been at fault. This holding, that duties to advise are potentially subject to the contributory negligence legislation, is potentially a very useful weapon in a yard’s armoury.

(3) Even though any loss of profit had been suffered by A and not SC, A could claim as assignee under Offer-Hoar v Larkstore [2006] 1 WLR 2926. In addition it was probable that in any case SC could have sued under the principle in Darlington v Wiltshier Northern [1995] 1 WLR 68.

Small points perhaps, but then it’s attention to small details like this that marks the line between lawyers who are merely competent and those truly excellent.

Third party claims against insurers

The venerable Third Parties (Rights against Insurers) Act 1930 was meant to be suppressed no less than six years ago and supplanted  by its namesake, the Third Parties (Rights against Insurers) Act 2010. Unfortunately, owing to a drafting glitch connected with insolvency law, the 2010 Act could not be brought into force; and so we still have the 1930 Act. But not for much longer. The glitch has now been cured by amendments brought in under the 2015 Insurance Act, and the shiny new 2010 Act comes into force on 1 August this year. A few changes (apart from length: the old Act made do with 5 sections, whereas the new model has 21 and 4 schedules, but that’s life). One is the obviation of the need to raise long-defunct companies from the dead, so as to be able technically to sue the corporate zombie and get judgment against it, so as to be able then to say that it could sue the insurer. Another is the abolition of “pay-to-be-paid”, except in the case of non-personal-injury marine insurance claims; yet another, the curtailment of the right of the insurer to rely on lack of notification by its own insured, provided such notification is given by the claimant.

The new Act makes it clear that it applies to insurance and not to reinsurance.

Details in brief from Clyde & Co’s ever-useful updating service.

The LOGIC of freedom of contract

A ringing vindication of freedom of contract, and of grown-up contract interpretation, from the English Court of Appeal today in Transocean v Providence.

Transocean provided a drilling rig to Providence to explore for oil off the shores of the Emerald Isle. The contract was a bespoke version of the LOGIC offshore construction, etc contract.  Problems arose when operations had to stop for 4 weeks owing to problems with Transocean’s rig, which were found to be due to Transocean’s breach of contract. Providence sued for “spread costs” (accountant-speak for capital equipment left idle) during that time. Transocean countered with a reference to Clause 20, part of a complex and comprehensive knock-for-knock arrangement:

“20. CONSEQUENTIAL LOSS. For the purposes of this Clause 20 the expression “Consequential Loss” shall mean:

(i) any indirect or consequential loss or damages under English law, and/or

(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests whether or not such losses were foreseeable at the time of entering into the CONTRACT and, in respect of paragraph (ii) only, whether the same are direct or indirect. The expression “Consequential Loss” shall not include CONTRACTOR’S losses arising in connection with (1) failure by COMPANY to provide the letter of credit as required by Clause 3.13 of Section III or resulting termination of this CONTRACT or (2) any termination of this CONTRACT by reason of COMPANY’S repudiatory breach.

Subject to and without affecting the provisions of this CONTRACT regarding (a) the payment rights and obligations of the parties or (b) the risk of loss, or (c) release and indemnity rights and obligations of the parties but notwithstanding any other provision of the CONTRACT to the contrary the COMPANY shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the COMPANY GROUP’S own consequential loss and the CONTRACTOR shall save, indemnify, defend and hold harmless the COMPANY GROUP from the CONTRACTOR GROUP’S own consequential loss.”

This seemed comprehensive enough, but Providence still thought it worth arguing the toss. They argued that the clause only covered claims for replacement costs; that it should be aggressively construed contra proferentem; that it was apt to reduce Transocean’s obligations to nil; and that as such the courts should simply disregard it (!).

The judge at first instance accepted some of these arguments and rejected Transocean’s defence. Moore-Bick LJ, who gave the only judgment in the CA, was having none of it. Read in any sensible way the clause covered the loss; contra proferentem was inappropriate in a case of this sort between sophisticated grown-up contractors; and the freedom of parties in situations like this to make unreasonable agreements needed to be preserved.

This is, if one may say so, the sort of entirely well-reasoned and sound decision which gives us continuing confidence in English law and jurisdiction as the best system to adopt if  businessmen want to know where they stand.

See Transocean Drilling v Providence Resources [2016] EWCA Civ 372, available on BAILII.

Fierce exemption clause? That’s tough.

A satisfyingly muscular exemption clause decision from Stuart-Smith J yesterday in Persimmon Homes Ltd & Ors v Ove Arup & Partners Ltd & Anor [2015] EWHC 3573 (TCC) (on BAILII). Arup advised a consortium of capitalists which wanted to bid for derelict land at Barry Docks in Cardiff (not a million miles from where this blog is based). The consortium bought the site and then, having had a nasty contamination surprise when the land turned out to be replete with asbestos, sued Arup for negligence in failing to spot it. Arup told them to go fish, or at least limit their claim, relying on a clause saying: “The Consultant’s aggregate liability under this Agreement whether in contract, tort (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the Consultant’s negligence) shall be limited to £12,000,000.00 (twelve million pounds) with the liability for pollution and contamination limited to £5,000,000.00 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.”

Stuart-Smith J was rightly impatient of the consortium’s attempts to slide out of this clause by interpreting it to death. Such clauses, he said, should be interpreted like any other contractual term: there was no reason not to take this one au pied de la lettre and hold that, as any businessman would have thought who hadn’t been brought up with academic contract lawyers snuffling round his heels, it protected Arup. Interestingly, he suggested that the third “rule” in Canada Steamship (the one about clauses apt to cover negligence not applying to it when there was a conceivable alternative cause of action to tie them to) need not be taken terribly seriously these days, noting that Lord Hope in Geys v Société Générale [2013] 1 AC 523 had (probably deliberately) omitted it in his discussion.