Lawyers are frequently asked to advise upon the legal effect and scope of exclusion clauses. Back in June 2016, we reported upon the decision in Transocean Drilling UK Limited v Providence Resources PLC  EWCA Civ 372 in which the court upheld the exclusion of liability provisions contained in a freely negotiated contract between sophisticated parties of equal bargaining power. The Court of Appeal also cast doubt on the previously held belief that the meaning of the term "consequential losses" in the context of an exclusion clause merely excluded liability losses falling within the second limb of Hadley v Baxendale (namely, losses that were not the natural result of a breach of contract, but would, nevertheless, have been within the reasonable contemplation of the parties, at the time the contract was entered into, as the probable result of a breach).
In the recent decision of Star Polaris LLC v HHIC-PHIL INC  EWHC 2941 (Comm), the High Court was yet again asked to consider the effect of an exclusion clause and in particular the meaning of the term "consequential losses". The court rejected a contention that the term must be given the meaning attributed to it in a number of previous court decisions (namely, that it merely covered losses falling within the second limb of Hadley v Baxendale), as the parties would have contracted against the background of those previous decisions. The court gave the term (and, therefore, the exclusion of liability) a broader meaning so that it excluded all losses that were factually caused by a breach of contract, save as otherwise expressly permitted by the terms of the contract. The court emphasised the true meaning of any words contained within a contract depended upon the wording of the exclusion clause in question in the context of the contract as a whole.
The Claimant ("the Buyer") purchased a ship from the Defendant ("the Seller"). Following delivery, the ship suffered a serious engine failure and was towed to Korea for repairs. The Buyer sought damages which included:
i.The cost of repairs to the vessel;
ii.Towage fees, agency fees, survey fees, off hire and off hire bunkers caused by the engine failure.
The Buyer subsequently indicated that it intended to amend its claim to include a claim for diminution in the value of the vessel by reason of the defects.
The arbitral tribunal held that the seller was in breach of contract in failing to deliver a vessel that complied with the contractual standard of quality. Nevertheless, the Buyer's chief engineer had been negligent in not reacting to various alarms sooner. If he had done so, certain losses that had been incurred by the Buyer would not have been suffered. In the light of that finding, the arbitral tribunal decided that the negligence of the Buyer's employee broke the chain of causation between the Seller's breach of contract and that part of the Buyer's loss that would not have been suffered had the chief engineer reacted to the various alarms sooner. However, the Seller was liable for all other losses save as otherwise excluded by the terms of the contract.
The terms of the contract provided:
That the Seller would remedy, at its expense, any defects by making all necessary repairs and replacements either in its shipyard or elsewhere.
That the removal of the vessel to the location at which the repair or replacements was to take place would be the Buyer's risk.
"Except as expressly provided in this Paragraph, in no circumstances and on no ground whatsoever shall the BUILDER [Seller] 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 [Seller] shall have no liability or responsibility whatsoever or howsoever arising for or in connection with any consequential or special losses, damages or expenses otherwise dated herein".
The Buyer contended that its claims (including its claim for diminution in value) were recoverable. The arbitral tribunal allowed the Buyer to claim the cost of repairing the vessel but held that the Seller's liability to the Buyer for all other losses (such as the claim for diminution in value) was excluded as they constituted "consequential and special losses". The Buyer appealed that finding to the court.
The issue that the court was asked to decide was whether the arbitral tribunal had been correct in determining that the seller's liability for diminution in value was excluded by the terms of the contract. The answer to that question depended upon whether:
The term "consequential losses" worked to exclude all losses that were caused by a breach of contract (as the Seller contended); or
The Term merely sought to exclude liability losses that fell within the second limb of Hadley v Baxendale.
Whilst acknowledging that a decision of a prior court on the meaning of words in a different context is not binding on a subsequent court, the Buyer contended that as the meaning of the term "consequential losses" had been defined in a number of previous decisions and was generally understood to be referring to losses that fell within the second limb of Hadley v Baxendale (namely, losses that would have been within the reasonable contemplation of the parties, at the time the contract was entered into, as the probable result of a breach), the words had to be construed against that background and should be given that meaning. Accordingly, the exclusion of liability for "consequential losses" should not be interpreted so as to exclude liability for losses considered to be naturally arising from a breach of contract in the usual course of things (i.e. losses falling within the first limb of Hadley v Baxendale). As a diminution in value was the direct and natural result of the breach of contract (and which fell within the first limb of Hadley v Baxendale), the claim should succeed.
The Seller contended that when the contract was read as a whole, it was clear that it provided a complete code of what losses were, and were not, recoverable. In that context, the term "consequential losses" should not be given the meaning attributed to it in previous decisions, but should be interpreted to mean losses that were simply caused by a breach of contract.
The Court upheld the Seller's interpretation. It rejected the Buyer's contention that the term "consequential loss" had been settled as a matter of law by previous decisions.
The Court pointed out that the meaning given to the term "consequential losses" had to be interpreted in the context of the contract in question. As the contract:
Imposed a liability on the Seller for defects and all repair and replacement costs;
Expressly provided for the Buyer to be responsible for the removal costs to the Seller's shipyard or other port; and
Stated that the buyer would have no responsibility or liability for breach of contract after delivery of the vessel, save as provided by the terms of the contract;
the contract provided a complete code for contractual liability. In order to succeed the Buyer had to bring its claim within the terms of the contract. As the particular losses for which the Seller would be responsible were listed in the contract, and as there was no express provision allowing the Buyer to make a claim for financial loss, the loss of profit or diminution in value, such losses were not recoverable.
In those circumstances, the Court agreed with the Tribunal's decision that the term "consequential losses" was used in a cause an effect sense. It excluded liability for all financial losses that were caused by a breach of contract, save for the cost of replacement and repair, and not merely those losses that fell within the second limb of Hadley v Baxendale. The claim for diminution in value was, therefore, excluded.
This was another decision in which the court rejected an attempt to interpret an exclusion clause narrowly in a commercial context between sophisticated commercial organisations. The courts will construe contracts to give effect to the parties' intention, and will not strain to limit the scope of an exclusion clause if its true commercial intention can be ascertained.
The decision also highlights the need to take great care to ensure that when drafting exclusion and limitation clauses. References to "consequential losses" may not suffice to merely exclude losses that would otherwise fall within the second limb of Hadley v Baxendale, but may, depending upon the wording of the contract, be construed more broadly. It will be imperative for those responsible for drafting contracts to take care to ensure that the allocation of risk provisions and any limitation or exclusion clauses reflect the expectations of the parties.