Contractual Limitation: High Court narrows “consequential loss”


In Star Polaris LLC v HHIC-Phil INC [2016] EWHC 2941 the High Court considered the correct construction of the phrase

consequential or special losses, damages or expenses

in a shipbuilding contract which contained a limitation of liability clause.

Overview

The case is of wider interest as lessons can be drawn generally regarding contractual terms and conditions, and letters of engagement, it

  • shows a clear departure from traditional interpretations of “consequential loss” in contract clauses seeking to limit or exclude loss
  • introduces a new approach in considering the meaning of the phrase by taking into account the context of the contract as a whole and the intention of the parties at the time of entering into the contract.
  • demonstrates that a limitation of liability clause setting out an exclusive code of damages may be effective if drafted in clear language

Background

The Claimant, Star Polaris LLC (the “Buyer”) entered into a shipbuilding contract with the Defendant, HHIC-PHIL INC (the “Builder”) for the purchase of a bulk carrier vessel named the POLARIS STAR (the “Vessel”).

Article.XI of the contract made detailed provision for the Builder’s liability for any defects in the ship. Article.XI.1 of the contract imposed an obligation on the Builder to guarantee the Vessel for a period of 12 months against

all defects due to defective materials, design error, construction miscalculation and/or poor workmanship

Following written notification of any defects covered by the guarantee, Article.XI.3 required the Builder to make the necessary repairs or replacements at its shipyard or reimburse the cost thereof.

Most importantly, Article.IX.4(a) of the shipbuilding contract contained a limitation of liability clause which specifically excluded the Builder’s liability for “consequential or special losses, damages or expenses”.

The Vessel was delivered to the Buyer on 14 November 2011; however, on 29 June 2012 the Vessel suffered from a serious engine failure and had to be towed to STX Gosung in South Korea for repairs.

The Builder denied all liability for the incident and as a result the Buyer commenced arbitration proceedings against the Builder for breach of contract. The buyer’s claim included:

a) the cost of repairs to the Vessel; and

b) towage fees, agency fees, service fees, off-hire and off-hire bunkers caused by the engine failure.

During the hearing, the Buyer also indicated that it wished to claim for diminution in the value of the Vessel.

In summary, the tribunal ordered an Interim Final Award on 12 November 2015 on the basis that there had been a causative breach of the Builder’s express warranty of quality. However, the Tribunal found that the Buyer’s chief engineer had failed to react to various warnings to reduce the speed of the Vessel and had failed to stop the Vessel’s main engine in sufficient time. It was held that these omissions contributed to the Vessel’s damage and amounted to a break in the chain of causation and therefore not all the repair costs were recoverable by the Buyer.

When assessing the remainder of the Buyer’s claim, the Tribunal considered Article.IX.4(a) of the shipbuilding contract which contained the limitation of liability clause.

Article.IX.4(a) – “Except as expressly provided in this Paragraph, in no circumstances and on no grounds whatsoever shall the Builder have any responsibility or liability whatsoever or however 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, damage or expenses unless otherwise stated herein”.

The Tribunal’s interpretation was that the word “consequential” was intended to be used by the parties in its “cause-and-effect sense”, as meaning “following as a result or consequence”. Accordingly, the losses set out at section (b) above were not recoverable by the Buyer.

It followed that any claim for diminution in value of the Vessel would also be a claim for consequential loss and as such, would be excluded from the Builder’s liability.

High Court Appeal

The Buyer appealed against the Tribunal’s decision on the basis that the phrase

“consequential or special losses”

should be interpreted in accordance with the second limb of the classic test for recoverable loss established in the leading case of Hadley v Baxendale [1854] EWHC 9 Exch 341.

In Hardley v Baxendale it was held that damages available for breach of contract could be pursued under two separate limbs:

  1. Direct loss – those which may fairly and reasonably be considered arising naturally from the breach of contract.
  2. Consequential loss – such damages as may reasonably be supposed to have been in the contemplation of both the parties at the time the contract was made.

The Buyer maintained that at the time the parties entered into the contract, the phrase “consequential or special losses” had a very well-recognised meaning as a matter of law. Furthermore, as other authorities suggest, the fact that both the words “consequential” and “special losses” where paired together in Article.IX.4(a) was a strong indicator that the parties intended the meaning of consequential loss as set out in the second limb of Hardley v Baxendale to apply to the contract.

High Court Judgment

Sir Jeremy Cooke, sitting as a High Court Judge decided in favour of the Builder, that Article.IX of the contract provided a comprehensive code for the determination of liability. He was therefore of the view that the limitation of liability clause should be construed in the context of Article.IX as a whole, including the guarantee in relation to defects.

On an analysis of Article.IX, the judge agreed with the Tribunal that on entering into the contract, the parties did not intend the Builder’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”.

At paragraph 39 of his judgment, the judge held that

“consequential or special losses, damages or expenses does not mean such losses, damages or expenses as fall within the second limb or Hadley v Baxendale but does have the wide meaning of financial losses caused by guaranteed defects, above and beyond the costs of replacement and repair of physical damage”

Comment

The Judge decided that the construction of the Article showed the Builders had guaranteed to repair defective items for 12 months, but excluded all other financial consequences, which were the responsibility of the Buyer.

This decision highlights the importance of ensuring that caution is taken when entering into or negotiating a contract and that the contractual terms reflect the true intention of the parties, particularly when one party is attempting to limit or exclude its potential liability.

This case suggests a move towards a more flexible approach when interpreting the meaning of limitation/exclusion clauses, rather than being bound by traditional interpretations. Courts may now be more inclined to consider such clauses on a case-by-case basis, taking into account the whole of the contract that the clause appears in and the intentions of the parties at the time that the contract was entered into. For this reason, contracting parties should also check for any inconsistencies between the limitation/exclusion clause and the contract as a whole.

The decision indicates the conventional Hadley v Baxendale approach is secondary to the wording and construction actually used by the parties.

Action Points

  • Businesses providing goods or services, including professional services, should regularly review their Terms and Conditions and Letters of Engagement to ensure they accord with current practice, law and legislative requirements.
  • Limitation clauses can be included in retainer letters or disclaimers to limit liability, including regarding third parties. A properly drafted clause could substantially affect overall liability.
  • Parties should carefully identify the type of loss that may arise from their contract, and describe clearly what liability the party accepts, and excludes.
  • The court will review the whole agreement in the event of a dispute, to decide on what the parties intended.
  • Consider reviewing your Contracts, Agreements, Terms and Conditions and Letters of Engagement (especially limitation clauses) in light of the trend highlighted in the Star Polaris judgment

Previously published at http://social.luptonfawcett.com/blog/contact-limitation-clause-high-court-limits-consequential-loss

Daughter cut out of will loses to animal Charities

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Supreme Court landmark decision:

The long awaited judgment in the saga of Ilott v Mitson & Ors[i] is a landmark decision by the Supreme Court. The result overturns the previous Court of Appeal judgment, which itself had caused shockwaves. It appeared to give almost no weight to the clearly expressed views of the late Mrs Jackson who did not want her only child, Mrs Illott to benefit from her £500,000 estate. Instead, she left everything to the animal charities. In a decision that will attract considerable attention, the Supreme Court has largely upheld the wishes of Mrs Jackson, and made serious criticisms as to the confused state of the present law, which led to such prolonged proceedings.

Background

In 2004, Mrs Melita Jackson died leaving a Will giving most of her £500,000 estate to Animal Charities. She had one daughter, Heather Illott. They had been estranged for 26 years. Heather had left home aged 17 to live with her boyfriend. Mrs Jackson disapproved. Mrs Jackson had left a detailed letter for her executors, explaining her decision to exclude Heather from her Will and that she had made it clear to Heather that she would receive anything under the will.

By the time of the latest hearing, Heather was in her 50’s and her husband had been made redundant. They were in receipt of benefits of around £13,000 a year, and their annual income totalled £4,665. The Court of Appeal said Mrs Jackson had been “…unreasonable, capricious and harsh.”

The Court of Appeal Decision

Mrs Illott was awarded £143,000 to buy the rented home she lived in. A further £20,000 was granted as ‘additional income’. This was a substantial increase beyond the £50,000 granted on an earlier hearing by a District Judge. She succeeded on her application for an award for maintenance under the Inheritance (Provision for Family and Dependants) Act 1975 (“IPFD”). The Court of Appeal stated that it was applying the law as set out in the statute, including considering all relevant factors under s.3, such as:

  • Financial resources and needs of claimant;
  • Financial resources and needs of any other claimant;
  • Financial resources and needs of beneficiaries;
  • Obligations and responsibilities of deceased towards claimants and beneficiaries;
  • Size and nature of estate;
  • Disabilities of claimants and beneficiaries;
  • Any other matter

Supreme Court Judgment

The Supreme Court highlighted errors in the approach by the Court of Appeal. Their order was set aside and the District Judge’s order restored.

Lady Hale in her judgment reviews the history of the Act and preceding legislation. She comments on the unsatisfactory state of the law, giving as it does no guidance as to the weight of the factors to be taken into account in deciding whether an adult child is deserving or undeserving of reasonable maintenance. The approach under the Act invariably involves a value judgment, which may be problematic as there is a wide range of opinion among the public and the judiciary about the circumstances in which adult descendants ought or ought not to be able to make a claim on an estate which would otherwise go elsewhere.

For an applicant other than a spouse or partner, reasonable financial provision is limited to what it would be reasonable for her to receive for maintenance only. This is an objective standard, to be determined by the court. The limitation to maintenance provision represents a deliberate legislative choice and demonstrates the significance attached by English law to testamentary freedom. Maintenance cannot extend to any or everything which it would be desirable for the claimant to have, but is not limited to subsistence level. The level at which maintenance may be provided is clearly flexible and falls to be assessed on the facts of each case, as at the date of hearing.

Although maintenance is by definition the provision of income rather than capital, it may be provided by way of a lump sum. As to the first suggested error, the process suggested by the Court of Appeal is not warranted by the Act. The Act does not require the judge to fix some hypothetical standard of reasonable provision and then increase or discount it with reference to variable factors. All of the s.3 factors, so far as they are relevant, must be considered, and in light of them a single assessment of reasonable financial provision should be made.

The District Judge worked through each of the s.3 factors, and was entitled to take into account the nature of the relationship between Mrs Jackson and Mrs Ilott in reaching his conclusion. As to the second suggested error, the District Judge specifically addressed the impact on benefits twice. The Court of Appeal’s criticism that his award was of little or no value to Mrs Ilott was unjustified.

Reasonable financial provision can in principle include the provision of housing, but ordinarily by creating a life interest rather than a capital and inheritable sum, which possibility appeared not to have been considered by the Court of Appeal.

To the extent that the benefits means test was relevant, it was likely to apply also to the additional sum of £20,000 apparently awarded with a view to avoiding that test. The statement in the Court of Appeal that a claimant in receipt of benefits should be treated in the same way as a disabled claimant was problematic; what must have been meant was that receipt of means tested benefits is likely to be a relevant indication of a claimant’s financial position. Finally, the Court of Appeal’s order gave little weight to Mrs Jackson’s very clear wishes and the long period of estrangement. The Court of Appeal’s justification for this approach was that the charities had little expectation of benefit either.

Lady Hale said this approach should be treated with caution, given the importance of testamentary bequests for charities, and because the testator’s chosen beneficiaries, whether relatives, charities or otherwise, do not need to justify their claim either by need or by expectation.

COMMENT

Media comment had seized on the Court of Appeal decision, fearing that people’s wishes in their Will are not being followed. The Supreme Court judgment should now reassure those concerned that the courts were unduly interfering in the wishes of testators about who should inherit. The judgment provides more clarity for those involved who may object to a decision made by a relative to exclude them from the Will and also for those, executors and beneficiaries alike, involved in issues concerning “reasonable financial provision” when a challenge to a Will is being considered.

The Court has to decide whether the Will makes

“reasonable financial provision”

according to IPFD, for the adult child of the deceased. The trial judge is not exercising a discretion in reaching a decision, but making a value judgment based on an assessment of the statutory provisions which have to be taken in to account. It is solely the Act which sets out the factors for the exercise of the court’s decision.

  • Based on this judgment, people are still entitled to cut their children out of their Will if they wish. However, there will have to be good reason shown. How and why they are making other provision needs to be explained, and what their connection is to any particular charity to which they wish to leave their estate.

In view of the Supreme Court’s guidance on IPFD:

  • The upshot is likely to be that adult children who have been excluded may now be less encouraged than suggested by the Court of Appeal decision to dispute a Will by arguing that they have not been left reasonable financial provision.
  • The Court will still take in to account any accompanying letter of wishes. If anything, these may now be more important than before, and this case can be seen in the context of its own particular and quite unusual circumstances.

 


[i] https://www.supremecourt.uk/cases/docs/uksc-2015-0203-judgment.pdf

This piece has previously appeared at http://social.luptonfawcett.com/blog/daughter-cut-out-will-loses-animal-charities

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