You might be forgiven for thinking that the meaning of “consequential loss” had been settled years ago. English court decisions going back over 80 years have said that it describes indirect losses under the second limb of Hadley v Baxendale. But a case about a shipbuilding contract reminds us that, in every case, you need to look at the words actually used because the answer might just turn out differently.
An article in a shipbuilding contract set out a code, containing a guarantee by the shipyard, in respect of defects directly caused by defective materials, design error, construction, miscalculation and/or poor workmanship, and replacing and excluding liabilities imposed by statute, common law, custom or otherwise. In particular, the code said the shipyard had “…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.” The parties agreed that the article provided a complete code for determining liability and, on that basis, the court ruled that the article made it clear that the shipyard had no liability beyond its express obligations. Financial losses consequent upon physical damage were not therefore covered by the guarantee and could not be recovered. “Consequential or special losses, damages or expenses” did not mean losses or damages under the second limb of Hadley v Baxendale but had a wider meaning of financial losses caused by guaranteed defects, beyond the cost of replacement and repair of physical damage, and were therefore excluded.