Sir Jeremy Cooke:
Introduction
- This is an Appeal from an Award dated 12 November 2015 ("the Award") of a Tribunal consisting of Mr Michael Collins QC, Mr Richard Siberry QC and Sir David Steel ("the Tribunal"). Permission to appeal was granted on 25th April 2016.
- The appeal raises two questions of law, as follows:
i) What is the correct construction of the phrase "consequential or special losses, damages or expenses" in Article IX.4(a) of the shipbuilding contract in issue herein. In particular, does that phrase mean such losses, damages or expenses as fall within the second limb of Hadley v Baxendale (1854) 9 Ex 341 ? Alternatively, does the phrase have a "cause and effect" meaning, as held by the Tribunal?
ii) If the Tribunal is right as to the meaning of "consequential or special losses, damages or expenses", on a proper construction of Article IX(4)(a), does diminution in value constitute a "consequential or special loss"?
The background facts and the Award
- The Claimant ("the Buyer") set out, in its skeleton argument the following which was accepted as an accurate description of the background facts. STAR POLARIS ("the Vessel") was built by the Defendant ("the Yard") under a contract dated 6 April 2010 ("the Contract") and delivered to the Buyer on 14 November 2011. On 29th June 2012 the vessel suffered a serious engine failure. On 2nd September 2012 the Vessel was towed to STX Gosung in South Korea for repairs.
- The Yard denied all liability for the incident. The Buyer commenced arbitration against the Yard contending that the engine failure was caused by the Yard's breaches of contract, and claimed compensation. The compensation claimed by the Buyer 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.
- In addition, at the hearing, the Buyer indicated that it wished to make a claim for diminution in value of the vessel in addition to the claims already made. In the event, for reasons which appear below, the Tribunal determined that such a claim would fail if made.
- The Tribunal published its Award on 12 November 2015. That Award was an Interim Final Award and left open various issues of quantum. In summary, the Tribunal 's findings, as set out by the Buyer, were as follows:
i) There was a causative breach of the Yard's warranty of quality, because there were weld spatters in the pipework at delivery;
ii) However, the chief engineer was negligent in not reacting to various alarms sooner (and not reducing speed to slow ahead or dead slow ahead at or about 11:31 on 29 June 2012 and not stopping the main engine by 11:46 on 29 June 2012), which negligence broke the chain of causation between the breach and that part of the Buyer's loss that would not have been suffered if the engine had been reduced to slow/dead slow ahead at or about 11:31 on 29 June 2012 and stopped by 11:46;
iii) The list of works necessary to repair the damage that would have been suffered if the engine had been stopped by 11:46 are those set out in para 188 of the Award and the issue as to what work was required to repair the damage is not to be reopened. Such losses are recoverable by the Buyer, but the cost of such works remains to be determined;
iv) As to the Buyer's other claims, by Art IX (4) (a) the Contract excluded liability for "consequential or special losses, damages or expenses" (see generally paragraphs 192-212 of the Award titled "Consequential Loss" and Declaration (B) at page 55 of the Award).
v) "The word 'consequential' was used by the parties in this agreement in its cause-and-effect sense, as meaning following as a result or consequence" (para 209).
vi) As the remaining losses were all losses that were consequential in the above sense, on the true construction of Article IX, they are not recoverable (paras 194 and 205-212).
vii) A claim for diminution in value would also be a claim for consequential loss (para 194).
- The Yard submitted that this description did not fully reflect the Award, nor the Tribunal 's decision because the Tribunal made it clear in the Award that they were construing the phrase consequential and special losses as part of Article IX of the Contract and the phrase had to be understood in that context. The Yard maintained that the Tribunal had held that the Yard's responsibility under the Guarantee provisions of Article IX was limited to the repair of defects (due to defective materials, design error, construction miscalculation, and/or poor workmanship) and to physical damage caused thereby, whilst financial loss consequent on physical damage was excluded. The Tribunal, in its Award, emboldened the second and third sentences of Article IX.4(a) construing the phrase in the context of the Article as a whole.
The contract.
- Under the terms of the Contract, the Yard agreed to construct and sell, and the Buyer agreed to buy, the Vessel, a Capesize bulk carrier subsequently named "STAR POLARIS". The Contract provided, inter alia, as follows:
"ARTICLE IX
1. Guarantee of Material and Workmanship
The Builder, for the period of twelve (12) months from the date of delivery of the VESSEL to the BUYER, guarantees the VESSEL and all parts and equipment thereof that are manufactured or furnished by the BUILDER under this CONTRACT or its Subcontractors or its suppliers against all defects which are due to defective materials, design error, construction miscalculation and/or poor workmanship, provided such defects have not been caused by perils of the sea, rivers or navigation, or by normal wear and tear, overloading, improper loading or stowage, fire, accident incompetence, mismanagement, negligence or wilful neglect by the BUYER or by alteration or addition by the BUYER not previously approved by the BUILDER, unless such an event was caused by an act or omissions of the BUILDER.
The BUILDER will be responsible for all machinery or parts of machinery and all constructions which are supplied by sub-contractors and will guarantee the above mentioned for a period of twelve (12) months on the basis as laid down in this Paragraph...
2. Notice of Defects
The BUYER or its duly authorized representative will notify the BUILDER in writing by facsimile or email as soon as possible after discovery of any defect for which a claim is to be made under this guarantee.
The BUYER'S written notice shall include full particulars as to the nature of the defect and the extent of the damage caused thereby, but excluding consequential damage as hereinafter provided ...
3. Remedy of Defects
(a) The BUILDER shall remedy, at its expense, any defects against which the VESSEL is guaranteed under the Article, by making all necessary repairs or replacements at the SHIPYARD, if reasonably practicable or elsewhere as provided for in herein below.
(b) In any cases, removal of the VESSEL to the location at which the repair or replacements are to be effected, shall be at the BUYER's risk and expenses. If it is impractical (which shall include, but not limited to, an emergency) to bring the VESSEL to the SHIPYARD, the BUYER may cause the necessary repairs or replacements to be made elsewhere which is deemed by the BUYER with the consent of the BUILDER which shall not be unreasonably withheld, and shall not be conditioned and shall be promptly responded to, to be suitable for the purpose, provided that, in such event, the BUILDER may forward or supply replacement parts or materials to the VESSEL, under the terms described in sub-paragraph (c) below unless forwarding or supplying thereof to the VESSEL would impair or delay the operation or working schedule of the VESSEL. In the event that the BUYER proposes to cause the necessary repairs or replacements to be made to the VESSEL at any shipyard other than the SHIPYARD, the BUYER shall first (but in all events as soon as reasonably possible) give the BUILDER notice in writing by email or by facsimile of the time and place such repairs will be made, and if the Vessel is not thereby delayed, or her operation or working schedule is not thereby impaired, the BUILDER shall have the right to verify by its own representative(s) the nature and extent of the defects complained of. The BUILDER shall, in such case, advise the BUYER by email or facsimile within seven (7) business days, after such examination has been completed, of its acceptance or rejection of the defects as ones that are covered by the guarantee herein provided. Upon the BUILDER's acceptance of the defects as justifying remedy under this Article, or upon award of the arbitration so determining, the BUILDER shall compensate the BUYER an amount equal to the cost of making the repairs and/or replacements. Furthermore, the BUILDER shall compensate the BUYER for any documented expenses incurred by the BUYER in the process.
...
4. Extent of BUILDER's Liability
(a) After delivery of the VESSEL the responsibility of the BUILDER in respect of or in connection with the VESSEL or this CONTRACT shall be limited to the extent expressly provided in the Paragraph 4 of this Article. Except as expressly provided in this Paragraph, in no circumstances and on no ground whatsoever shall the BUILDER 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 shall have 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. Any liability to any third party or any fine, compensation, penalty or other payment or sanction incurred by or imposed upon the Buyer or any other party whatsoever in relation to or in connection with this CONTRACT or the VESSEL until the delivery and acceptance of the VESSEL shall be burdened with the BUILDER. [The sentences emboldened were those which were emboldened by the Tribunal in its Award.]
...
(c) The BUILDER shall under no circumstances be liable for defects in the VESSEL or any part of equipment thereof caused by perils of the sea, or rivers or navigation, or normal wear and tear, or fire or accidents at sea or elsewhere or by mismanagement, negligence, wilful neglect, alteration or addition on the part of the BUYER, its employees or agents on or doing work on the VESSEL, including the VESSEL's officers, crew and passengers which has not been approved by the BUILDER...
(d) The liability of the BUILDER provided for in this Article shall be limited to defects directly caused by defective materials, design error, construction miscalculation and/or poor workmanship as above provided. The BUILDER shall not be obliged to repair, nor be liable for, damage to the VESSEL or any part of the equipment thereof, which after delivery of the VESSEL, is caused other than by the defects of the nature specified above. The guarantees contained as hereinabove in this Article replace and exclude any other liability, guarantee, warranty and/or condition imposed or implied by statute, common law, custom or otherwise on the part of the BUILDER by reason of the construction and sale of the VESSEL for and to the BUYER."
Principles of Construction.
- There were no real issues as to the principles of construction to be applied here, save for different degrees of emphasis. The Buyer submitted that, as with any question of contractual construction, the starting point must be the words used by the parties, viewed against the relevant factual matrix: see Chartbrook v Persimmon Homes [2009] 1 AC 1101, at paragraph 14; Arnold v Britton [2015] AC 1619, at paragraphs 15 to 22. The Buyer maintained that there were various matters relating to the matrix which are relevant.
i) the relevant matrix included the fact that the words that the parties had chosen to use (consequential losses) had, at the time that the parties entered into the contract, an established meaning as a matter of law, established over many years, namely losses which fell within the second limb of the rule in Hadley v Baxendale.
ii) in this context, the words consequential losses did not stand alone in the exclusion clause in question. They were paired with the words special losses. The term special losses or special damages also means Hadley v. Baxendale second limb losses, as other authorities show, with the result that this strongly indicates that it is this meaning of consequential loss that was intended.
iii) the contract in issue was a variant of the standard form SAJ form, with a deletion of the exclusion of damages for loss of use.
- Before considering such matrix issues, two other features of contractual interpretation fall to be set out. The first is the general principle that if an exclusion clause is ambiguous it will provide no protection, because of the contra proferentem rule. Although it can no longer be said that exclusion clauses are to be read narrowly when they appear in commercial contracts between sophisticated parties - the wording must be given its ordinary meaning - where there is ambiguity the contra proferentem rule may play a role. The second, and in my judgement, highly significant point is the agreement of the parties that Article IX of the Contract provides a complete Code for the determination of liability, as the last sentence of Article IX.4(d) makes plain. It is not therefore a question of simply determining what liability is excluded, but ascertaining what liability is undertaken. This I regard, as did the Tribunal, as being of fundamental importance in considering the ambit of Article IX.
- As to the first of the matrix issues, the established meaning of consequential losses, the Buyer relied on a series of authorities which are summarised in Lewison on the Interpretation of Contracts (5th Ed.) in section 12.14: "The cases lay down the principle of interpretation that a clause which excludes liability for consequential loss excludes liability only for damages falling within the second limb of the rule [in Hadley v. Baxendale] …". And later: "It may be taken to be settled that at least at the level of the Court of Appeal similar clauses will be construed in similar fashion..." Chitty on Contracts (31st Ed.) summarizes the position as follows at para 15-009: "The exclusion of liability for "consequential loss or damage" will not cover loss which directly and naturally results in the ordinary course of events from the breach, but only loss which is less direct or more remote."
- The leading authorities in this regard are Millers Machinery v David Way (1934) 40 Com Cas 204, at 210; Saint Line v Richardson [1940] 2 KB 99, at 103-104; Croudace v Cawoods [1978] 2 Lloyd's Rep 55, at 62; British Sugar PLC v NEI Power Products Ltd [1997] CLC 622, at 48-51; Deepak v ICI [1999] 1 Lloyd's Rep 387, at paras 88-93; and Hotel Services v Hilton International [2000] BLR 235 (CA) at paras 7-8 and 14-20.
- Mr Christopher Hancock QC for the Buyer submitted that this was highly relevant because, although some doubt has been expressed in some recent cases as to the whether those cases would be decided in the same way now, and as to whether the cases require revisitation (Lord Hoffman in Caledonia North Sea v British Telecommunications [2002] BLR 139 (HL) at para 100-101, and Moore-Bick L.J. in Transocean Drilling v Providence Resources [2016] BLR 360 at para 15), the authorities in support of the established meaning include a number at Court of Appeal level and it is not open to a first instance Court to hold that the words, taken alone, have a different meaning. Indeed, that established meaning has been accepted in a number of cases since the dictum in Caledonia North Sea v British Telecommunications.
- Further, although, as the Tribunal indicated, a decision of a prior court on the meaning of words in a different contract is not binding on a later court, because the words in the contract in question may have to be construed together with other words which were absent in the first case, or against the background of an entirely different context, absent such considerations, it would be presumed that the parties intended the words to have the meaning that had traditionally been ascribed to them: see British Sugar PLC v NEI Power Projects Ltd at page 50. As Teare J put it in the case of Ferryways NV v Associated British Ports [2008] 1 CLC 117, at paragraphs 82-84, having considered the authorities that establish the normal meaning of "indirect or consequential loss":
"Although it can be seen from the above cases that the words 'indirect or consequential' appear to have acquired a well- recognised meaning, the scope of the excepted losses in clause 9 must depend on the true construction of that clause. Unless this clause has been the subject of decision (which it has not) previous decisions cannot bind this court in construing the particular words or phrases in clause 9.
Where a party seeks to protect himself from liability for losses otherwise recoverable by law for breach of contract he must do so by clear and unambiguous language ... In the light of the well- recognised meaning which has been accorded to such words in a variety of exemption clauses by the courts from 1934-1999 it would require very clear words indeed to indicate that the parties' intentions when using such word was to exclude losses which fall outside that well recognised meaning."
- The parties must therefore, in the Buyer's submission, be taken to have contracted against the background of the well-established meaning of consequential losses and it is pointed out that the doubts expressed by Moore-Bick LJ were expressed after the Contract was concluded.
- Secondly, in the context of matrix, it is contended that the words "consequential losses" do not stand alone in the exclusion clause in question. They are paired with the words "special losses". The term "special losses" or "special damages" is also taken to mean the second limb of Hadley v. Baxendale losses, as appears, for example, from the cases of Saint Line at page 104, British Sugar at page 51, and Hilton Hotels at para 20, and this therefore strongly indicates that it is this meaning of "consequential loss" that was intended.
- Last, it is said that the contract in issue was a variant of the standard form SAJ form, with a deletion of the exclusion of damages for loss of use and the courts can pay regard to this deletion in ascertaining the meaning of the contract- see in particular Dreyfus v Parnaso [1959] 1 QB 498 at p 513. The Buyer cited Lewison on the Interpretation of Contracts, at paragraph 3.04, where the headline runs thus: "Despite older authority to the contrary, the court will nowadays often look at words which the parties have deleted from their contract in order to construe the words which remain, although they are an unsafe guide to meaning."
- In my judgment Teare J has expressed the position accurately as a matter of the general approach of the courts when construing a contract with phraseology of the kind found here and the Yard did not seek to persuade me otherwise. What is said by Mr Parsons QC for the Yard, however, is that the Contract shows that this well- recognised meaning was not the intended meaning of the parties and that the line of authorities is therefore nothing to the point. Further, the reality is that the terms of Article IX are significantly different from those of the SAJ form and no inferences can be drawn from some similarities and the non- appearance of the words "loss of time, loss of profit or earning or demurrage". The Article in its substantially changed form must be construed on its own wording. As appears hereafter, I accept both of those submissions.
The Award
- At paragraph 196 of the Award, in dealing with the construction arguments, the Tribunal began, after setting out the relevant provisions of Article IX, by referring to the common ground between the parties that this Article, headed Warranty of Quality was a complete code which meant that, in order to succeed, the Buyer had to bring its claim within its terms. That is key to the Tribunal's decision making process.
- The Award set out the parties' contentions recording the Buyer's submission that the Article imposed liability on the Yard for direct losses and thus for hire lost whilst the Vessel was under repair, pointing out that there was no express exclusion of that in the provision. The Buyer submitted that the absence of any express assumption of liability in that regard was nothing to the point, because clear words were required for any such exclusion to be operative.
- The Award also referred to the decision of Thomas J (as he then was) in The Seta Maru [2000] 1 Lloyd's Law Reports 367, where the last sentence of Article IX.1 there specifically limited the Builders' obligations to the repair and replacement, at its cost, of all defects against which the guarantee was given in the Article. As no such wording was to be found in the Contract here, the Buyer submitted that there was no basis for the remedy set out in Article X1.3 to be considered as exclusive.
- The Tribunal then quoted what they referred to as the critical words in Paragraph 4(a): "the BUILDER shall have 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" and then set out the express terms which identified what losses were covered in the 12 month period of the guarantee, which were to be found, not in Article IX.4 but in Article IX.3. The Tribunal set out the obligations expressly undertaken by the Yard as follows
i) To make all necessary repairs or replacements in respect of defects directly caused by defective materials, design error, construction miscalculation and/or poor workmanship at its expense (either at the shipyard or elsewhere) (Paragraph 3(a)): or
ii) Alternatively, to compensate the Buyer in an amount equal to the cost of making the repairs and/or replacements (Paragraph 3(b)); and
iii) To compensate the Buyer for any documented expenses incurred by them in this process (Paragraph 3(b)).
- In referring to the terms of Article IX.4 which provides that, "except as expressly provided in this Paragraph, in no circumstances and on no ground whatsoever shall the BUILDER have any responsibility or liability whatsoever or howsoever arising", the Tribunal drew attention to the Buyer's argument which lay at the root of its submissions, namely that these words required any liability in connection with the Vessel or the Contract to be found in that Paragraph (i.e. Paragraph 4 of Article IX) and not in Article IX in its entirety. It was said that the Tribunal effectively rewrote the wording to read "Paragraph" as "Article". The Tribunal, however, expressly went on to say that, in its judgement, on a proper reading of Paragraph 4, the extent of the Yard's liability was governed by Article IX as a whole.
- In the Award, the Tribunal accepted that, on the authorities, the meaning of "consequential loss" in an exemption clause, usually meant the exclusion of losses falling within the second limb of Hadley v Baxendale, but unless the particular contractual provision with which they were concerned had been the subject of specific judicial consideration, they were not bound to follow such decisions. Any particular clause fell to be construed on its own wording in the context of the particular agreement as a whole and its particular factual background. As Article IX Paragraph 4(a), neither in isolation, nor in the context of Article IX had been the subject of judicial consideration, the Tribunal had to construe the words in their own context. Criticism is made of this approach by Mr Hancock QC because, he submits, it does not give due weight to the fact that the parties must be taken to have contracted against the background of the known interpretation of these words in the line of authorities, relying on such dicta as that of Teare J, cited above. He contended that it would need other very clear words for a different meaning to be ascribed to "consequential losses" than that which the authorities decided.
- The Tribunal, however, went on to say that in the context with which it was concerned, the word "consequential" was not used in that sense, but in a cause and effect sense. The reasons for this conclusion appear in paragraphs 209-212 of the Award, but in essence it comes down to this. The obligations undertaken by the Yard in respect of the guarantee were only to repair or replace defective items of the kind described in the Article and the physical damage caused thereby, with all other financial consequences falling on the Buyer. The Tribunal read Article IX as a whole in coming to this conclusion, but did focus on Paragraph 4(a) and on Paragraph 4 as a paragraph when they said that "on a proper reading of Paragraph 4, it is clear that the extent of the Yard's liability is governed not just by Paragraph 4 but by Article IX as a whole."
The Proper Construction of the Contract.
- An analysis of Article IX reveals that Article IX.1 sets out the 12 month guarantee of material and workmanship which represents the warranty of quality to which the heading to the Article refers. The guarantee extends to defects of the types referred to (defective materials, design errors, construction miscalculation and/or poor workmanship) provided that the defects are not caused by perils of the seas, normal wear and tear or mismanagement of the vessel in the manner described in the paragraph. What is not provided in that paragraph is any description of the actual liability of the Yard under the guarantee in respect of those matters. What is it that the Yard is undertaking to do? That, it will be seen, is to be found in Paragraph 3.
- In Paragraph 2 of the Article, there is a provision for notice which suggests what is in fact undertaken by the Yard in the succeeding paragraphs. Notice is to be given by the Buyer with "full particulars of the defect and the extent of the damage caused thereby, but excluding consequential damage, as hereinafter provided." A contrast is there being drawn between physical defects and damage on the one hand and consequential damage on the other.
- In Paragraph 3 the positive obligations of the Yard under the guarantee of defects are set out. In sub-paragraph (a) the Yard's obligation to "remedy, at its expense, any defects against which the VESSEL is guaranteed" is spelt out. This is to be done by "making all necessary repairs or replacements at the SHIPYARD, if reasonably practical or elsewhere", in the circumstances set out in sub-paragraph (b). That is the extent of the obligation undertaken at the Yard or elsewhere.
- The Buyer is to be compensated for any documented expenses incurred in the process of repair and replacement elsewhere than at the Yard, where it is impractical to take the Vessel to the Yard, but not for anything else. As the Arbitrators pointed out in the Award, sub-paragraph (a) covers repair and replacement alone at the Yard itself, whilst sub-paragraph (b) shows that only the cost of repair and not the time taken in repair is to be the subject of the guarantee. Removal of the vessel to the Yard is to be at Buyer's risk and expense and the provisions which allow the Yard to forward replacement parts or send a representative to another Yard, when the work has to be done there, as long as this does not delay the operation of the vessel, show that the guarantee does not cover any loss of time or loss of use of the vessel.
- When reference is made to Paragraph 4 itself, it is clear that the Tribunal is right in saying that the Yard's liability is not to be found in that paragraph alone. Paragraph 4(a) provides in terms, in the first sentence, that the responsibility of the Yard is to be limited to the extent expressly provided in Paragraph 4 itself. The second sentence emphasises this in saying that "except as expressly provided in this Paragraph", the Yard shall be under no liability whatsoever after delivery of the vessel. The search must then be for any express provision imposing liability upon the builder in Paragraph 4. The third sentence goes on to say, "without in any way limiting the generality of the foregoing" (namely the first and second sentences) that the Yard is not to be liable in any way for "any consequential or special losses, damages or expenses unless otherwise stated herein". It is therefore clear that the third sentence does not set out any positive obligation on the Yard at all but sets out a further and particular limitation of liability above and beyond that set out in the first and second sentences.
- The fourth sentence of Paragraph 4(a) provides that prior to delivery and acceptance of the vessel, the Yard is to be responsible for any fines, compensation and other payment or sanction incurred by or imposed upon the Buyer in relation to the Contract and Vessel, making it plain that there is distinction between pre-delivery and post-delivery regimes.
- Paragraph 4(b) provides a wholesale exclusion of liability in respect of defects discovered after the expiration of the 12 month period of guarantee and any deterioration of defects after that date, but refers to Paragraph 3 of Article IX which is the Paragraph which sets out the positive obligations of the Yard. Paragraph 4(c) provides a further express exclusion of liability in respect of defects in the Vessel and equipment caused by perils of the sea and the same factors set out in Article IX.1.
- Paragraph 4(d) does refer to the obligations of the Yard in respect of the guarantee. There it is provided that "the liability of the [Yard] provided for in this Article" is to be limited to the list of defects set out in Article IX.1 "as above provided". That can only be a reference to the obligations undertaken by the Yard in Article IX.1 and Article IX.3 which provide the positive obligations to repair or replace defects and physical damage caused by them. The point is reinforced by the following sentence of Paragraph 4(d) where it is stated that the Yard "shall not be obliged to repair, nor be liable for damage to the vessel or any part of the equipment thereof, which after delivery of the vessel, is caused other than by the defects of the nature specified above". It is clear therefore, as the Tribunal held, that a proper reading of Paragraph 4 makes it clear that the extent of the Yard's liability is governed not just by that paragraph but by the earlier paragraphs in Article IX. Paragraph 4(d), in stating the negative, namely that the builder shall not be obliged to repair nor be liable for physical damage to the Vessel caused by excluded defects reinforces the positive obligation, which is only to be found in Paragraph 3, to remedy any defects by making all necessary repairs or replacements in respect of them and damage to the Vessel caused thereby.
- Because Article IX sets out a code, excluding other liabilities imposed by statute, common law, custom or otherwise, the extent of the Yard's guarantee is set out in Article IX.4 and IX.3 to which it refers. The only express provision in Article IX.4 of responsibility and liability on the Yard post- delivery of the vessel (as referred to in the second sentence) is the liability of the Yard referred to in Paragraph 4(d) for defects directly caused by defective materials, design error, construction, miscalculation and/or poor workmanship "as above provided". That can only refer to Article IX.3 and the obligation to repair physical damage, as the following sentence of Paragraph 4(d) makes plain.
- It is not possible to read the third sentence of Paragraph 4(a) which begins with the words "Further, but without in any way limiting the generality of the foregoing" as imposing a liability on the Yard under the guarantee for everything other than "consequential or special losses, damages or expenses" whatever that phrase might mean.
- The Arbitrators held, in the context of this contract where the only positive obligations assumed under the guarantee were the repair or replacement of defects and physical damage caused by such defects, that consequential or special losses had a wider meaning than the second limb of Hadley v Baxendale. They reached this conclusion essentially by the route set out above.
i) They had regard to the obligations expressly undertaken by the Yard in Article IX.3 and to the exclusion of all losses "whatsoever or howsoever arising after delivery" except as expressly provided in Article IX.4. They pointed out that, in such circumstances, the word "consequential" had to mean that which follows as a result or consequence of physical damage, namely additional financial loss other than the cost of repair or replacement.
ii) This followed from the structure of the obligations expressly undertaken and the exclusion of everything else. The contract differentiated between the cost of repair or replacement, on the one hand, and the broader financial consequences occasioned by the need for a repair or replacement on the other.
iii) The cost of removal of the Vessel to the place of repair which should fall within the first limb of Hadley v Baxendale was expressly excluded. Similarly, there would be no need for a provision giving the Yard a conditional right to inspect the alleged defects, only if the Vessel was not thereby delayed or her working schedule impaired if any loss of time was to be borne by the Yard in any event. It was clear to the Arbitrators that, reading Article IX as a whole, the parties did not intend the Yard's liability to extend beyond the obligation to remedy any defect by making all necessary repairs and replacements. In short, the parties had agreed objectively that financial loss consequent upon physical damage was excluded.
- It is not therefore necessary to read the words in the second sentence of Paragraph 4(a) "except as expressly provided in this Paragraph" as reading "except as expressly provided in this Article" as the effect of the provisions of Paragraph 4 is to refer the reader to the express obligations undertaken in Paragraph 3. Furthermore, taking the provisions of the Article as a code, if there is no express undertaking of liability by the Yard, no liability devolves upon it. If paragraph 4 did not have any express provision for liability by cross-reference to Paragraph 3, there would be no express provision of liability within that Paragraph at all, save in respect of pre-delivery fines imposed on the Buyer and the like.
- In my judgment, as in that of the Arbitrators, when Article IX.4 is properly read, the Yard's liability is limited by it and the positive obligations undertaken in Article IX.3. What Article IX.4(a) does is to make it plain that there is no liability above and beyond the express obligations undertaken by the Yard and, in particular, without prejudice to that, financial losses consequent upon physical damage are not covered by the guarantee. The reality is that there is no express provision that the Buyer can point to which gives rise to a claim for financial loss, lost profit or diminution of value. Although there is no form of words which follows that set out in the clause in the Seta Maru (ibid.) to which I have earlier referred, the effect is the same.
The two questions of law
- In my judgment therefore, as in the judgment of the Arbitrators, "consequential or special losses, damages or expenses" does not mean such losses, damages or expenses as fall within the second limb of Hadley v Baxendale but does have the wider meaning of financial losses caused by guaranteed defects, above and beyond the cost of replacement and repair of physical damage.
- In such circumstances, the claim for diminution of value is also a claim for "consequential or special loss". The Buyer wished to argue that repair to the crank shaft, crank case bearings and journals would not have restored the Vessel to the condition it would have been in but for the existence of guaranteed defects, with the result that the Vessel's value would have been diminished. However, the Arbitrators found that it would be inappropriate to allow either party to re-open the question of what work would have been required to be done in order to repair the damage that the main engine would have suffered as a result of the guaranteed defects, without the causative further negligence of the chief engineer, so that this point would not appear to be open to the Buyer in any event. Regardless of this however, such a claim is excluded, even though it might well have fallen within the first limb of Hadley v Baxendale. The obligation to repair/replace is exhaustive and nothing else is recoverable above and beyond that. Diminution in value does therefore constitute a "consequential or special loss" but, as the Arbitrators held, the obligation of the Yard is only to replace or repair or bear the cost thereof.
Conclusion
- In these circumstances the appeal must fail and, inevitably, costs must follow the event.
