The High Court has looked at what is meant by the phrase ‘consequential or special losses, damages and expenses’ in a limitation of liability provision. The court concluded that this wording should be interpreted with a wider meaning than the second part of the test established in the case of Hadley v Baxendale. This test relates to special circumstances, where losses are only recoverable if the defendant knew of the special circumstance when the contract was entered into, and / or if this was communicated to the defendant.
The limitation clause in question intended to limit the liability of a shipbuilder. The ship had experienced a serious engine failure and in order to repair it, the purchaser suffered substantial losses.
The contract contained a 12 month guarantee for workmanship and material. However, it excluded any responsibility for ‘consequential or special losses, damages and expenses’.
The dispute was first dealt with in arbitration proceedings, which were decided in favour of the shipbuilder. The arbitral tribunal decided that the shipbuilder was only obliged to repair or replace any defective items and the physical damage caused by any defects. However, any other financial losses consequent on physical damage were excluded, and were the buyer’s responsibility.
The buyer appealed and submitted that such consequential losses were recoverable as ‘consequential and special losses’ involved those falling within the second part of Hadley v Baxendale (1854) (‘H v B’). This established a test of foreseeability. That is, the loss will only be recoverable if it was in the contemplation of the parties. The loss must be foreseeable not only as being possible, but as not unlikely.
The knowledge that is taken into account when assessing what is in the contemplation of the parties comes in two parts:
- Firstly, the knowledge of what happens “in the ordinary course of things”, which the parties are deemed to have known about (whether or not they knew it); and
- Secondly, actual knowledge of special circumstances outside the ordinary course of things, but communicated to the defendant, or otherwise known by the parties.
The buyer maintained that the losses they had claimed were aligned with the H v B consequential losses. They argued that the exclusion clause would not apply to such losses as the shipbuilder had knowledge of the circumstances of the losses and, therefore, they were recoverable.
The High Court agreed with the arbitral tribunal and found that there was no clear intention in the contract for the wording to carry the meaning in H v B. It held that the wording of the clause as a whole prevented H v B from applying because it clearly intended to operate as a complete code for damages that did not allow for the recovery of special losses. The wording had a wider application than the specific meaning of the consequential losses in H v B, and applied to all financial losses caused by guaranteed defects, except for the actual cost of repairs for physical damage.
This case demonstrates that courts will not interpret recoverable damages as those falling within the established authority of H v B, or any other authorities, if it considers there is clear wording to the contrary in the contract. This emphasises the need for accurate drafting in contracts so that it is absolutely clear what liabilities are borne by each party and what is excluded.
This blog post was written by Gemma Wilson. For further information, please contact:
Gemma Wilson, associate, Construction
T: 0161 839 7884
 Star Polaris LLC v HHIC-Phil Inc (2016)