John Moodie & Co & Ors v. Coastal Marine (Boatbuilders) Ltd [2002] ScotCS 263 (19 September 2002)

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URL: http://www.bailii.org/scot/cases/ScotCS/2002/263.html
Cite as: 2003 SCLR 56, [2002] ScotCS 263

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OUTER HOUSE, COURT OF SESSION

CA71/01

OPINION OF LORD MACFADYEN

in the cause

JOHN MOODIE & CO and OTHERS

Pursuers;

against

COASTAL MARINE (BOATBUILDERS) LTD

Defenders:

________________

Pursuers: Stewart, Q.C.; Morton Fraser

Defenders: A.M. Clark; Henderson Boyd Jackson, W.S.

19 September 2002

Introduction

This action arises out of a boatbuilding contract (No. 6/1 of process) in terms of which the defenders contracted to build a fishing vessel for the pursuers. The pursuers aver that in three respects the defenders were in breach of that contract, and conclude for payment of three corresponding sums of damages. The allegations of breach of contract may be summarised as relating to (1) contamination of the vessel's fresh water tanks, (2) failure of the main engine/gearbox coupling, allegedly because bolts of incorrect length had been fitted during installation and (3) fracture or failure of various parts attached to the engine because of excessive vibration. The defenders found on Clause 12.7 of the contract, which bears to provide for exclusion of liability for certain consequential losses including loss of fishing. They contend that parts of the pursuers' claims are in respect of consequential losses for which liability is excluded by Clause 12.7, and that those parts of the claims are irrelevant. The pursuers, on the other hand, maintain that Clause 12.7 is of no application to their claims, and that the defenders' pleadings, so far as founded on that clause, are irrelevant. The case was appointed to debate, principally on those related issues.

The pursuers' pleadings

The pursuers conclude first for payment of £107,357.31, with interest. In support of that conclusion they aver, in article 3 of the condescendence, that in the course of the vessel's maiden voyage, which began on 30 October 2000, her fresh water tanks were found to be contaminated. The water contained in those tanks was required as drinking water for the crew, to feed the on-board ice-making facility, to wash down the vessel including the fish storage areas, and for purposes of crew hygiene. Various measures were taken to solve the contamination problem. These included repeated flushing out the tanks, having them cleaned by specialist tank cleaners appointed by the defenders, analysis of the contaminant material, and sterilisation and repainting of the interior of the tanks. The pursuers aver, in article 6, that the contract was a contract for the transfer of goods within the meaning of section 11A of the Supply of Goods and Services Act 1982 ("the 1982 Act"). They aver that the state of the fresh water tanks constituted a failure on the defenders' part to comply with the implied term that the goods supplied under the contract would be of satisfactory quality (section 11D(2) of the 1982 Act). In article 7 the pursuers set out the various heads of loss which they allege that they suffered as a result of that alleged breach of contract, but in the light of the position adopted by the defenders in relation to this aspect of the action it is unnecessary to examine the averments of loss in detail.

The second conclusion is for payment of £31,638.60, with interest. In article 4 of the condescendence, the pursuers aver that on 4 January 2001 the main engine/gearbox coupling of the vessel failed, and that the failure was found to have been due to the fitting, during installation, of bolts of incorrect length. That too is said, in article 6, to have constituted a breach of the implied term that the goods supplied would be of satisfactory quality. The averments of loss in article 8 refer to (i) loss of fishing (8 days at £3000 per day = £24,000), (ii) harbour dues of £138.60 and (iii) towage costs of £7500.

The third conclusion is for payment of £94,868.34. In article 5 the pursuers aver that in March 2001 the engine of the vessel developed excessive vibration. As a result parts connected to the engine fractured or failed. The damage was due to the use of insufficiently flexible connectors and isolators between the engine and the connecting pipework. Several incidents when pipework or bolts fractured are specified. These incidents too are said, in article 6, to have constituted a breach of the implied term that the goods would be of satisfactory quality. The averments of loss are in article 9. The items specified are: (i) towage charges on two occasions, totalling £4800, (ii) the cost of replacement oil, the purchase of repair materials and the cost of repairs, totalling £2423.32, (iii) the cost of investigating the vibration problem, which amounted to £645.02 and (iv) loss of fishing (29 days at £3000 per day = £87,000).

Clause 12

The provision of the contract on which the defenders rely in contending that part of the pursuers' claim is irrelevant is Clause 12.7. It is, however, convenient to quote the whole of Clause 12 so that the context in which Clause 12.7 appears may be seen:

"12	GUARANTEE
12.1	During the period of 12 months after the Delivery Date, the Contractor [the defenders] shall be responsible for the rectification, at the Contractor's cost, of any defect, failure or breakdown of the Vessel and/or its equipment caused by faulty materials or workmanship supplied by the Contractor or any Sub-Contractor.
12.2	The Contractor shall not be responsible for:-
	(a)	damage caused by fair wear and tear, lack of maintenance, alteration or addition to the Vessel by the Purchaser [the pursuers] or negligent operation of the Vessel; or
	(b)	faults arising from the construction design with the exception of items designed by the Contractor or any Sub-Contractor.
12.3	The Purchaser will notify the Contractor in writing within 10 days after any defect, failure or breakdown has occurred.
12.4	In the event of any dispute about whether a defect, failure or breakdown has occurred for which the Contractor is responsible under clause 12.1, the Vessel will be inspected by the SFIA [Sea Fish Industry Authority] whose decision on the dispute shall be binding on the parties. The parties shall have the right to be present at such inspection. All costs of such inspection shall be borne by the Contractor in the event that the SFIA
	decides that the defect, failure or breakdown is the Contractor's responsibility under clause 12.1. In all other cases, the said costs shall be borne by the Purchaser.
12.5	The Contractor shall have the right to carry out any rectification work required under clause 12.1 at the Shipyard [i.e. the defenders' shipyard in Eyemouth] or another shipyard nominated by the Contractor. The Contractor shall meet the cost of sailing or towing the Vessel to the Shipyard or such other shipyard including the cost of fuel, oil, crew and flights, where appropriate. If it is inconvenient for the Purchaser for the said work to be carried out at the Shipyard or at the other shipyard nominated by the Contractor and the cost of the said work is estimated not to exceed £20,000, the said work may, subject to prior notification of the cost being given to the Contractor, be carried out at a shipyard selected by the Purchaser. In that event, the Contractor shall pay for said work or, on demand, reimburse the Purchaser for the cost of said work.
12.6	In the case of machinery not manufactured by the Contractor, the Contractor's guarantee under clause 12.1 will be extended or limited (as the case may be) to the equivalent of any guarantee which may be given by the manufacturer of that machinery except that the Contractor's guarantee as regards work in adapting or installing the machinery shall not be restricted in any way. The Contractor shall notify the Purchaser of the guarantee period relating to such machinery not manufactured by it at least 3 months prior to the Delivery Date, failing which the Contractor's guarantee under clause 12.1 shall apply.
12.7	In no circumstances shall the Contractor be liable for any losses consequential on any breakdown or machinery failure including but not limited to loss of fishing."

The parties' averments about Clause 12.7

In answer 7 the defenders, after quoting Clause 12.7, aver:

"Accordingly, the defenders are not liable for the consequential losses claimed by the pursuers."

In Answer 8, they aver:

"In terms of clause 12.7 the defenders are not liable for any of the losses in relation to the failure of the engine/gearbox coupling."

In Answer 9, they make substantially the same averment in relation to "any of the losses consequential upon any failures allegedly caused by excessive vibration". Their fourth plea-in-law is in the following terms:

"The defenders not being liable for the losses claimed by the pursuers in terms of the contract between the parties, the defenders should be assoilzied."

The pursuers, in each of articles 8 and 9, make the following averments:

"With reference to the defenders' averments in answer, clause 12.7 of the parties' contract is referred to, under explanation that that clause is not effective to exclude liability for the losses condescended upon, being directed only at restriction of the liability of the defenders under the express contractual warranties, and not restriction of their liability under the general law."

The defenders' submissions

Mr Clark, who appeared for the defenders, accepted that he could not maintain at this stage that the averments of consequential loss in support of part of the first conclusion were irrelevant. Clause 12.7 was confined in its scope to "losses consequential on any breakdown or machinery failure". The pursuers did not aver that the fresh water contamination resulted from any "breakdown or machinery failure". It was therefore not evident on the face of the pursuers' pleadings that the consequential losses to which reference is made in article 7 of the condescendence fell within the scope of Clause 12.7. Mr Clark therefore accepted that the averments in articles 3 and 7 required to be admitted to proof before answer.

Mr Clark submitted, however, that it was clear that the pursuers' averments in article 4 (about engine/gearbox coupling failure) and article 5 (about fractures due to excessive vibration) were concerned with "breakdown or machinery failure" within the meaning of Clause 12.7. It followed, he submitted, that in so far as the losses which the pursuers sought to recover in the second and third conclusions were "consequential losses", they were losses in respect of which Clause 12.7 excluded any liability on the defenders' part. The averments relating to such consequential losses were therefore irrelevant, and should be excluded from probation.

The proposition which was central to Mr Clark's submissions was that Clause 12.7 applied to exclude any losses which were "consequential on any breakdown or machinery failure", irrespective of the ground on which recovery of the losses was sought. Clause 12.7 was not confined in its applications to claims made under the guarantee provided for in the other parts of Clause 12. It applied inter alia to claims made on the basis of breach of the statutory implied term provided for in section 11D(2) of the 1982 Act, and relied on by the pursuers in the present action.

To provide a framework for the development of his submissions Mr Clark made reference to a number of authorities. He submitted that the proper approach to clauses which did not wholly exclude, but merely limited, liability for breach of contract was explained in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd 1982 SC (HL) 14. Lord Wilberforce said (at 57):

"Whether a clause limiting liability is effective or not is a question of construction of that clause in the context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and unambiguously expressed, and in such a contract as this [i.e. a standard form contract], must be construed contra proferentem. I do not think that there is any doubt so far. But I venture to add one further qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I think the appellants have striven to do. The relevant words must be given, if possible, their natural plain meaning. Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion: this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives, and possibly also the opportunity of the other party to insure."

Lord Fraser of Tullybelton said (at 60-61):

"The question whether Securicor's liability has been limited falls to be answered by construing the terms of the contract in accordance with the ordinary principles applicable to contracts of this kind. The argument for limitation depends upon certain special conditions attached to the contract prepared on behalf of Securicor and put forward in their interest. There is no doubt that such conditions must be construed strictly against the proferens, in this case Securicor, and that in order to be effective they must be 'most clearly and unambiguously expressed' - see Pollock & Co v Macrae 1922 SC (HL) 192, 199 per Lord Dunedin. ...

There are later authorities which lay down very strict principles to be applied when considering the effect of clauses of exclusion or indemnity - see in particular ... Canada Steamship Lines Ltd v The King [1952] AC 192, 208 ... [and] Smith v UMB Chrysler (Scotland) Ltd 1978 SC (HL) 1. In my opinion these principles are not applicable in their full rigour when considering the effect of clauses merely limiting liability. Such clauses will of course be read contra proferentem and must be clearly expressed, but there is no reason why they should be judged by the specially exacting standards which are applied to exclusion and indemnity clauses. ... It is enough in the present case that the clause must be clear and unambiguous."

Further support for giving the language of a limitation clause its natural meaning and avoiding the discovery of ambiguity by a process of strained construction was to be found in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, per Lord Bridge of Harwich at 813H-814A.

Apart from those authorities on the general approach to the construction of limitation clauses, Mr Clark referred to two cases which concerned the phenomenon of the appearance of a limitation clause in the midst of provisions dealing with other matters, such as (in the first case cited) a guarantee or defects liability clause, or (in the second case cited) provisions regulating payment. The first case to which he referred was BHP Petroleum Ltd v British Steel plc [2000] 2 Lloyd's Rep 277. The clause under construction in that case (Clause 17.5), in its amended form, obliged the supplier to remedy defects due to faulty design, materials or workmanship appearing within a stated period, "at which time all liability of the Supplier relating to the Work shall terminate" (the amendment comprising the words quoted). The clause went on to cap the amount of the supplier's liability under the clause at 15% of the contract price by line item. May LJ said (at 288-289):

"70. Clause 17.5 in its standard unamended form was an orthodox defects liability clause ... Clauses of this kind do not limit or exclude liability. Typically they confer additional rights and obligations requiring the contractor or supplier to undertake additional work to rectify defects which appear within a defined time after completion without additional payment. They may be seen as benefiting both parties.

71. ... The amended clause was no longer only a defects liability clause. Whatever its precise meaning, it contained limitations of liability. It was not a clause which excluded all liability. It was to be construed in accordance with the principles which Lord Justice Evans has referred to... [His Lordship then quoted passages from the speeches of Lord Wilberforce and Lord Fraser in Ailsa Craig v Malvern.] ...

74. In my judgment, the meaning of cl. 17.5 is as follows. The first part of the first sentence obliged and entitled British Steel to remedy, at their own expense at the contracted point of delivery, defects in the Work due to faulty design, materials or workmanship which appeared within ... 18 months of the date stated in the Purchase Order. ... The words 'at which time all liability of the Supplier relating to the Work shall terminate' mean what they clearly say. 'All liability ... relating to the Work' embraces all liability arising out of the contract and its performance. It is true that the words appear in a sentence dealing with the supplier's obligation to remedy defects and that the next sentence deals with the same subject matter. But they are part of a clause whose evident purpose is to limit British Steel's liability within commercially acceptable bounds. The words themselves are not apt to limit only the liability imposed on British Steel by cl. 17.5 itself, which is limited in time anyway without them. Nor are these clear words to be tortured so as not to apply to exclude liabilities of British Steel which might be framed in negligence."

The second case of this type cited by Mr Clark was Loudonhill Contracts Ltd v John Mowlem Construction Ltd 2002 SLT 253. The case was concerned with the effect of Clause 15(6) of the ICE General Conditions of Contract (June 1973). That clause was in the following terms:

"The Contractor shall not be liable to the Sub-Contractor for any matter or thing arising out of or in connection with this Sub-Contract or the execution of the Sub-Contract Works unless the Sub-Contractor has made a written claim in respect thereof to the Contractor before the Engineer issues the Maintenance Certificate in respect of the Main Works, or, where under the Main Contract the Main Works are to be completed by sections the Maintenance Certificate in respect of the last of such sections in which the Sub-Contract Works are comprised."

The earlier provisions of Clause 15 regulated the procedure by which the sub-contractor was to be paid for his work under the sub-contract. The arbiter accepted the sub-contractor's argument that Clause 15(6) was not of general application, but was restricted by its context to claims for payment under Clause 15, and thus did not apply to the claims made in the arbitration. In reaching the opposite conclusion, the Court observed (at 255 and 256 in paragraphs [7] and [9] of the Opinion of the Court delivered by Lord President Rodger):

"The language of cl 15(6) is wide and, we must assume, deliberately so. The contractor is not to be liable 'for any matter or thing arising out of or in connection with' [emphasis added] the subcontract or the execution of the subcontract works. The use of the word 'any' coupled with the phrase 'in connection with' is designed to give the subclause a broad application. Indeed counsel for the claimants accepted that, were it not for its position at the end of cl 15, there would be nothing to suggest that the scope of the provision was limited in such a way as to make it inapplicable to the claims in the arbitration. He argued, however, that the subclause should not be read in isolation, but in its context in cl 15. So read, he said, it applied only to claims made by a subcontractor for payment under cl 15 and therefore not to the kinds of claim put forward here. ...

... The only question is whether the immediate context of the provision has the effect of narrowing its scope so that it covers only claims under that clause. Counsel for the claimants suggested that, if the provision had been intended to apply not merely to claims under cl 15 but more generally to all claims, then it would, more naturally, have been found as a separate clause. We see some force in the view that a separate clause might have been appropriate. But, inevitably, his argument amounts to saying that the same provision would have been of general application if it had been formulated as a separate clause, but is of only limited application because it occurs as a subclause in cl 15. While less generous words might indeed be cut down by their position within cl 15, we are unable to hold that the context has the effect of limiting cl 15(6), worded as it is, to claims under cl 15(1). Had the draftsman of the contract form intended to limit the subclause in this way, we should have expected it to refer back specifically to cl 15(1)."

The first consideration put forward by Mr Clark in support of his submission as to the scope of Clause 12.7 was that that clause contained no cross-reference to the earlier parts of Clause 12, and thus no express declaration that the scope of the exclusion was limited to claims made under the express contractual guarantee contained in those earlier parts of the clause. He contrasted that absence of cross-reference with numerous other provisions in the contract, where cross-references were made when it was intended to tie one provision to another. Within Clause 12 itself, such cross-references occurred in Clause 12.4, 12.5 and 12.6. Other examples could be found scattered throughout the contract (Clauses 2.3, 5.1, 6.2, 7.5, 8.2, 9.2, 10 (passim) and 11.2). It could therefore be inferred that no limitation on the scope of Clause 12.7 to claims based on the express guarantees provided for in Clause 12.1 to 12.6 was intended.

Secondly, Mr Clark submitted that the ordinary natural meaning of the language used in Clause 12.7 was that it contained a generally applicable exclusion of liability for consequential losses arising from the limited class of events to which it referred, namely breakdown or machinery failure. The opening words "In no circumstances ..." were emphatically general, and were reinforced by the repeated use of the word "any". There was no such identity of language, when Clause 12.7 was compared with the earlier parts of Clause 12, as would compel the inference that the scope of Clause 12.7 was intended to be limited to claims arising under the earlier parts of the clause. The Clause 12.1 guarantee applied to "any defect, failure or breakdown of the Vessel and/or its equipment" caused by faulty materials or workmanship supplied by the defenders or any subcontractor. The same phrase appeared in the related procedural provisions in Clauses 12.3 and 12.4. Clause 12.7 was expressly of different scope, since it limited liability in respect of losses consequential on "any breakdown or machinery failure". It did not apply where there was a defect, but no failure or breakdown; and it applied only to machinery failure, not to any failure of the vessel or its equipment.

So far as the position of Clause 12.7 in the structure of the contract was concerned, Mr Clark sought to rely on Loudonhill. The mere fact that it appeared as part of Clause 12 did not justify applying a restriction of its scope which was not present by virtue of the language used. There was no other place in the structure of the contract to which Clause 12.7 obviously belonged. As in Loudonhill, it might appropriately have been expressed as a free-standing clause, separate from Clause 12, but the fact that that had not been done was insufficient to result in restriction of its scope.

In order to test the pursuers' contention that Clause 12.7 restricted liability arising under Clause 12, but not liability arising otherwise, Mr Clark analysed the provisions of Clause 12. The essential feature of Clause 12.1 was that it placed on the defenders a performance obligation rather than a payment obligation. Under Clause 12.1 the defenders undertook an obligation to rectify at their own cost certain defined categories of defect, failure or breakdown. They did not undertake any obligation to compensate the pursuers in money for any loss that might arise from defect, failure or breakdown. The defenders were to put the defect right, not pay for loss arising because of it. Clause 12.7 could not be intended as an exclusion of consequential loss from claims under Clause 12.1, when Clause 12.1 did not impose any liability for consequential loss. Clause 12.6, in terms of which the defenders undertook in relation to machinery which they had not themselves manufactured (and subject to the qualification about adaptation or installation) responsibility commensurate with the manufacturer's guarantee, might, Mr Clark accepted, involve the assumption on the defenders' part of liability for consequential losses if the manufacturer's guarantee provided for such liability. It was, however, impossible to reconcile the width and generality of the terms of Clause 12.7 with the contention that its sole purpose was to exclude liability for such consequential loss as might otherwise be assumed by virtue of a manufacturer's guarantee read with Clause 12.6.

Mr Clark further submitted that, if the pursuers were right about the scope of Clause 12.7, the commercially implausible result would be that liability for consequential loss would have been excluded if a particular claim was presented as a claim under Clause 12.6 based on the terms of a manufacturer's guarantee, but liability for the same consequential loss would not be excluded if the same claim could be presented on the basis of the implied term incorporated into the contract by virtue of section 11D(2) of the 1982 Act.

On the basis of those submissions, Mr Clark's motion was for a proof before answer with certain of the pursuers' averments excluded from probation. All three elements of the loss claimed in the second conclusion on the basis of the failure of the engine/gearbox coupling were elements of "loss consequential on ... breakdown or machinery failure", and accordingly fell within the exclusion of liability provided for in Clause 12.7. It followed that the whole of that claim was irrelevant, that articles 4 and 8 of the condescendence should be excluded from probation, and that decree of dismissal should be pronounced in respect of the second conclusion. So far as the averments of loss in support of the third conclusion were concerned, Mr Clark accepted that certain items (namely items (ii) and (iii) identified in paragraph [4] above) were direct rather than consequential losses, and that recovery of them was not excluded by Clause 12.7. The other losses (namely items (i) and (iv), towage and loss of fishing) were consequential losses and therefore by virtue of Clause 12.7 did not form a relevant part of the pursuers' claim. In order to restrict the pursuers to the relevant part of the claim advanced in the third conclusion, therefore, there should be excluded from probation the following passages in article 9, namely -

from the words "the owners of the fishing vessel ..." in the first line of the article to the words "... assistance to the 'Sharon Rose'. In addition" in the seventh line; and
from the words "The pursuers were, further, unable ..." beginning in the twelfth line of the article to the end of the article.

The pursuers' submissions

Mr Stewart for the pursuers identified the principal issue as being whether Clause 12.7 was a free-standing limitation of liability of general application, habile to limit the damages recoverable for breach of the statutory implied term on which the pursuers' claims were founded, or operated merely to qualify the contractual remedies available under Clause 12 of the contract. If Clause 12.7 was to be read in the latter sense, as the pursuers contended, it did not afford a relevant defence to any part of the pursuers' claims in this action, because the pursuers did not seek rectification of defects in implement of the obligations imposed on the defenders by Clause 12, but rather sought damages for breach of the statutory implied term that the goods supplied would be of satisfactory quality.

Mr Stewart submitted that, in the absence of clear and unambiguous language so providing, it was not fair or reasonable to suppose that the common intention of the parties to the contract was that a guarantee or defects rectification clause should operate to displace the remedies which would normally be available to a party in respect of breach of the contract. The contractual remedy provided by Clause 12.1 was available for the limited period of twelve months after the delivery date. It was conditional on notice being given within ten days of the occurrence of the defect, failure or breakdown (Clause 12.3). Any dispute as to whether a defect, failure or breakdown was the responsibility of the defenders under Clause 12.1 was to be resolved by the SFIA (Clause 12.4). The contractual remedy was limited to defects rectification; there was no reference to the other remedies for breach of contract available at common law, such as rejection, abatement of price or damages. The contractual remedy was limited to fault-based defects; there was no reference to defects which arose independently of fault on the part of the defenders or their subcontractors. There was express exclusion of certain design defects for which a third party was responsible (Clause 12.2(b)). In all these ways, Clause 12 was concerned to provide an additional, but narrowly defined, contractual remedy. In contrast, if Clause 12.7 was to be construed as being of general application, its scope was very wide indeed.

Mr Stewart accepted that Clause 12.7 was not a clause which purported to exclude liability. It merely limited the categories of loss that might be recovered. The dispute was as to the scope within which it did so. A defects rectification clause ordinarily conferred extra rights, without excluding the ordinary remedies available in respect of breach of contract (BHP Petroleum Ltd, per May LJ at 288, paragraph 70). Clause 12 as a whole bore to be of that character. It comprised a bundle of guarantee provisions. In its heading (and in the index to the contract) it was labelled "GUARANTEE". Clause 12.1 provided for rectification at the defenders' cost of "any defect, failure or breakdown" caused in specified ways. Clause 12.7, whatever its scope might be in other respects, did not cover losses consequential on "defects". It only applied to losses consequential on "breakdown or machinery failure". It should therefore be seen as cutting down the extent of the liability that the earlier parts of the clause would otherwise impose. Mr Clark had pointed out that Clause 12.1 did not give rise to liability for losses, but Clause 12.6 might do so. Clause 12.6 should be seen as the antecedent provision which Clause 12.7 served to qualify or restrict. Clause 12.6, like Clause 12.7, was concerned specifically with machinery. The two provisions thus shared a common subject matter. Clause 12.6, in its reference to manufacturers' guarantees, had the potential to extend the defenders' liability beyond that which would arise under Clause 12.1, and in particular to extend it to the payment of compensation for losses. The purpose and effect of Clause 12.7 was therefore to impose a limit on any such imported liability to pay compensation. If, on the other hand, Clause 12.7 fell to be read as the defenders contended, it would extend so far as to exculpate them in respect of losses flowing from failures that might be due to their own negligence. Moreover, if it fell to be read in that way, it was difficult to find any cogent explanation for the fact that Clause 12.7 applied only to losses consequential on breakdown or machinery failure, and not to losses of the same nature that might flow from equally serious failures of other kinds, such as hull failure. On the pursuers' construction, however, an explanation for that limitation of the scope of the clause was to be found in the fact that it served as a qualification of Clause 12.6 which likewise dealt with machinery.

In discussing Loudonhill, Mr Stewart made, in particular, two points of distinction. In the first place, he emphasised the penultimate sentence quoted in paragraph [13] above. That, he submitted, showed the importance of the language of the particular provision under construction. In the present case, the link between Clause 12.6 and 12.7 provided by their common reference to machinery, afforded a justification, of the sort which was absent in Loudonhill, for regarding the limitation clause as applying only to claims arising under the bundle of provisions of which it formed part. Secondly, in Loudonhill the Court had referred, at paragraph [11], to the consideration that the construction favoured appeared to accord with the intention behind the clause. There was no such consideration in favour of the defenders' contention in the present case. Mr Stewart submitted that it would have been easy by express provision to make it clear, either that Clause 12.7 was to have the scope contended for by the pursuers or that it was to have the scope contended for by the defenders. The absence of such express provision was therefore neutral, and could not be prayed in aid by the defenders in support of their contention.

On the hypothesis that Clause 12.7 was to have the wide application contended for by the defenders, Mr Stewart further submitted that since it applied only to "losses consequential on any breakdown or machinery failure", it did not apply to losses consequential on a defect per se. In article 5 of the condescendence the pursuers founded on a defect, namely excessive vibration. That defect resulted in breakdown or machinery failure in so far as parts connected to the engine fractured or failed because of the excessive vibration. Some, at least of the losses averred in article 9 however, related not to any specific breakdown or machinery failure, but rather to the underlying defect, the vibration problem. The article as a whole purported to define the losses suffered "as a result of the vibration problem". Characterised in that way, those losses were consequential on the underlying defect, not on any specific breakdown or machinery failure, and were therefore not within the scope of Clause 12.7.

Mr Stewart then submitted that a distinction was drawn in Clause 12 between costs and losses. Costs were referred to, and contractual liability to bear them was specifically allocated, in Clauses 12.4 and 12.5. It followed, he submitted, that when the expression "losses" came to be used in Clause 12.7, it was used in a narrow sense, excluding costs. Losses included income not received, or property destroyed, but did not include expenditure incurred. Clause 12.7, even if it was to be construed as the defenders contended, thus did not exclude liability in respect of all the items which the pursuers claimed. It would exclude the loss of fishing claims, but not the other items, since they were costs rather than losses.

Next, Mr Stewart submitted that the averments contained in the last three sentences of answer 4 were irrelevant. Those averments are in the following terms:

"Explained and averred that the engine, its gearbox coupling and the said bolts were not designed by the defenders. The defenders installed the engine/gearbox coupling entirely in accordance with the engine manufacturer's specification. The defenders were under no obligation, when installing the engine, to check the length of the hole in the flywheel."

The exclusion of responsibility for design faults contained in Clause 12.2(b) did not, however, extend to items designed by "any Sub-Contractor". The engine manufacturer was a subcontractor within the meaning of that expression as defined in Clause 1.1. Those averments should therefore be excluded from probation.

Finally, Mr Stewart submitted that the averments in answer 7 relating to the Terms and Conditions for Construction of a Fishing Vessel adopted by the British Boatbuilders Association were irrelevant. The averments follow upon the defenders' initial reference to Clause 12.7 and are in the following terms:

"Clauses in similar terms are common in contracts for the construction of fishing vessels. The Terms and Conditions for Construction of a Fishing Vessel as adopted by the British Boatbuilders Association exclude liability for consequential loss."

Those averments, Mr Stewart submitted, had no bearing on the issue of the proper construction of Clause 12.7, and should therefore be excluded from probation.

In the light of those submissions, Mr Stewart's motion was for a proof before answer to be allowed, but with certain of the defenders' averments excluded from probation. The passages which he sought to have excluded were:

in relation to the Clause 12.7 defence,

the fourth and fifth sentences of answer 7,
the third and fourth sentences of answer 8, and
the third and fourth sentences of answer 9;

the last three sentences of answer 4 (i.e. the passage quoted in paragraph [25] above); and
the sixth and seventh sentences of answer 7 (i.e. the passage quoted in paragraph [26] above).

Discussion

The principal issue between the parties at this stage of this case is whether Clause 12.7 of the contract is properly to be construed (1) as a limitation clause of general application, excluding liability on the defenders' part for losses consequential on any breakdown or machinery failure, irrespective of the ground on which the claim for such losses is made, or (2) as an integral part of Clause 12, excluding liability for such consequential losses only where they are claimed on grounds arising from an earlier provision of that clause. Neither party suggested that it was necessary to have evidence of the surrounding circumstances before the task of construing Clause 12.7 could be undertaken.

It was, I think, common ground between counsel that a clause which purports to limit a party's liability, although not to exclude it altogether, requires to be clearly and unambiguously expressed (Ailsa Craig v Malvern, per Lord Wilberforce at 57 and Lord Fraser of Tullybelton at 61). In applying that test, however, it is wrong to "strive to create ambiguities by strained construction" (per Lord Wilberforce, loc. cit.; see also Mitchell, per Lord Bridge of Harwich at 814A), or to "torture" the clear words of the clause (BHP Petroleum, per May LJ at 289, paragraph 74). The proper starting point is to read the relevant words and give them their natural plain meaning (per Lord Wilberforce, loc. cit.).

Clause 12.7 provides:

"In no circumstances shall the Contractor be liable for any losses consequential on any breakdown or machinery failure including but not limited to loss of fishing", (emphasis added).

It seems to me that the plain meaning of the words of that clause is that it excludes liability on the defenders' part for losses of the type to which it refers, irrespective of the circumstances in which, or the ground on which, a claim may be advanced against them for recovery of such losses. The words "In no circumstances" and "any losses" emphasise the generality of the provision. There is nothing in the language of the clause which compels the reader to look elsewhere for assistance in understanding its meaning. It is not a provision that can only be given an understandable meaning by reference to its context.

It is undoubtedly the case that, as a matter of the structure of the contract, Clause 12.7 forms part of Clause 12. It is also undoubtedly the case that the other parts of Clause 12 are concerned with regulating the imposition of additional liabilities on the defenders. It is, however, clear from BHP Petroleum and Loudonhill that the mere fact that a limitation clause appears as part of a bundle of provisions dealing with another matter does not inevitably yield the inference that the limitation clause is intended to operate only within the scope of that bundle of provisions.

In my view the most telling consideration against the pursuers' contention that Clause 12.7 must be regarded as limiting liability for consequential losses only in claims made under Clause 12 is that Clause 12 is not primarily concerned with the imposition of liability to pay compensation at all. That is most clearly so in relation to Clause 12.1. That clause imposes on the defenders an obligation to rectify defects, not to pay compensation for defects. It therefore does not provide a context in which a limitation clause excluding liability for consequential losses can have any application. In the absence of any plausible answer to that point, the pursuers are compelled to narrow their argument, and submit that Clause 12.7 is a limitation on liability under Clause 12.6. It is no doubt right that it is theoretically possible that a manufacturer's guarantee might be so generously expressed as to give not merely a right to rectification of defects, but also a right to compensation for consequential losses, so as to make an exclusion of consequential losses necessary if the defenders are to avoid indirectly incurring such liability by way of the manufacturer's guarantee and Clause 12.6. That does not strike me as a commercially realistic scenario, but I do not require to rely on that view for my conclusion. What seems to me to be clear is that, even if in that hypothetical possibility a reason can be identified for having an exclusion of liability for consequential losses arising by virtue of the combined effect of the manufacturer's warranty and Clause 12.6, the language of Clause 12.7 is much more general than is required merely to meet that case. Indeed it seems to me that the words "In no circumstances ... any losses ..." are inconsistent with the proposition that Clause 12.7 has the restricted effect of operating as a proviso to Clause 12.6.

While Mr Stewart was no doubt right in his submission that the soundness of either construction of Clause 12.7 could have been put beyond doubt by additional words, I do not agree with him that it follows that the absence of more specific identification of the scope of Clause 12.7 is a neutral consideration. Very little help can, in my view, be obtained by pointing to other occasions within the contract where, when one provision relates to another an express cross-reference to the other provision by clause number is made. As Mr Stewart pointed out, examples can also be found where clauses are related in that way, but no cross-reference by clause number is expressed. But it seems to me that, where the contention is that Clause 12.7 is intended to operate only in relation to claims for consequential losses which might otherwise arise by virtue of Clause 12.6, it is relevant to note that the clearly available opportunity to make that plain has not been taken. The construction for which the pursuers contend could have been made clear beyond doubt, either by incorporating the text of Clause 12.7 in Clause 12.6 as a proviso to it, or by modifying Clause 12.7 to read: "In no circumstances shall the Contractor be liable by virtue of Clause 12.6 for ...". I note that the absence of such a cross-reference was regarded as a material consideration in Loudonhill.

Clause 12.7 is of narrower scope than Clause 12.1 in that the former refers to losses consequential on "any breakdown or machinery failure" while the latter refers to "any defect failure or breakdown of the Vessel and/or its equipment". Given, however, the fact that no claim for consequential losses can arise under Clause 12.1, I do not consider that any additional support for the defenders' contention can be drawn from that difference of scope. Equally, I do not consider that in face of the considerations which I have already discussed, it can be maintained that the fact that Clauses 12.6 and 12.7 both refer to machinery supports the pursuers' construction. In fact Clause 12.7 refers to machinery failure generally, whereas Clause 12.6 refers to machinery not manufactured by the defenders, so their scope is in any event different. The fact that the scope of the exclusion of liability effected by Clause 12.7 is restricted to "breakdown or machinery failure" does not seem to me, by itself, to constitute a material obstacle in the way of adoption of the defenders' construction, or a compelling consideration in favour of the pursuers' construction.

Although I do not regard it as of determinative significance, there is also in my view force in the point made by Mr Clark which I have recorded in paragraph [17] above.

On the principal issue, I conclude that on a sound construction of Clause 12.7 it operates as a limitation of liability in respect of any claim for consequential losses of the sort mentioned in the clause, irrespective of the ground on which the claim is made. In particular, I am of opinion that Clause 12.7 can relevantly be pled in defence to claims advanced under the implied term that the goods would be of satisfactory quality.

I turn therefore to Mr Stewart's other arguments. The distinction which he sought to make between losses consequential on "breakdown or machinery failure" and losses consequential on a "defect" in the vessel but not actual breakdown or machinery failure, is a narrow one. Nevertheless, the applicability of Clause 12.7 to any particular loss must be determined by the application of the language of the clause to the character of the loss. Mr Stewart was going too far, it seems to me, in submitting that the whole loss claimed in article 9 was attributable to a defect rather than a breakdown or machinery failure. It seems to me that the towage charges claimed are plainly losses consequential on machinery failure ("failure of the fuel line" and "failure of the bolts"). On the other hand, the principal consequential loss, the fishing loss, is said to have been "due to the breakdown of 29^th June condescended upon, and the subsequent withdrawal of insurance cover because of the vibration problem". It seems to me to be possible that in part at least the fishing loss may be held to have been attributable to the underlying vibration problem rather than any specific breakdown or machinery failure. On the other hand, it may turn out that there is no practical merit in Mr Stewart's distinction between defects and breakdown or machinery failure. The matter is, in my view, best left to be resolved after proof. I shall therefore not exclude from probation the averments of fishing loss in article 9.

Having dealt with that point, I can now return to the task of identifying, in light of my construction of Clause 12.7, which averments should be excluded from probation. Since I hold that the defenders' construction of the clause is sound, I shall not exclude from probation the averments identified in paragraph [27](1) above. Since all of the averments of loss in article 8 are averments of "losses consequential on breakdown or machinery failure", it follows that liability in respect of them is excluded by Clause 12.7, and that the whole of article 8 falls to be excluded from probation. It follows that no relevant loss is said to have followed from the failure of the engine/gearbox coupling, and that the averments in article 4 are therefore also irrelevant and should be excluded from probation. It further follows that the defenders are entitled to decree of dismissal in respect of the second conclusion. In article 9, the towage charges are losses falling within the scope of Clause 12.7 and the relative averments should therefore be excluded from probation. The averments about fishing losses in that article require to be admitted to probation for the reasons given in paragraph [37] above. The other averments of loss are not of consequential losses, and therefore require to be admitted to probation.

There is, in my view, no merit in Mr Stewart's argument that "losses" in Clause 12.7 is to be construed as exclusive of costs. In ordinary use, the concept of loss covers expenditure incurred. There is in my view nothing in Clause 12 to narrow the meaning of losses in Clause 12.7. The references to costs in Clauses 12.4 and 12.5 are to costs incurred in operating the guarantee procedure. Provision is made regulating how such costs are to be borne. The fact that such provision is made does not in my view support the conclusion that a distinction has been made between costs and losses, or that an unusually narrow meaning should be attached to "losses".

In my opinion, Mr Stewart was correct in his submission that the averments contained in the last three sentences of answer 4 are irrelevant. I did not understand Mr Clark to maintain that those averments amounted to a defence to any part of the pursuers' claims. I would therefore have been inclined to exclude them from probation. Since, however, I am excluding article 4 of the condescendence from probation, I do not consider it necessary to deal separately with averments in the corresponding answer.

I am also of opinion that Mr Stewart was correct in his submission that the averments quoted in paragraph [26] above are irrelevant. I shall also exclude them from probation.

Result

[42] For the reasons which I have explained above, I shall therefore -

exclude from probation

the whole averments in articles 4 and 8 of the condescendence,
the averments in the first three sentences of article 9 of the condescendence beginning with the words ""the owners of the fishing vessel ...", and ending with the words "... assistance to the 'Sharon Rose'. In addition", and
the averments in the sixth and seventh sentences of answer 7 beginning with the words "Clauses in similar terms ..." and ending with the words "... liability for consequential loss";

grant decree of dismissal in respect of the second conclusion of the summons; and

quoad ultra allow a proof before answer.

I shall put the case out By Order for the purpose of fixing a diet of proof and regulating any further procedure required in preparation for it. I shall reserve the expenses of the debate.

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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> John Moodie & Co & Ors v. Coastal Marine (Boatbuilders) Ltd [2002] ScotCS 263 (19 September 2002) URL: http://www.bailii.org/scot/cases/ScotCS/2002/263.html Cite as: 2003 SCLR 56, [2002] ScotCS 263