Limiting liability against consequential losses.
A fundamental clause in any commercial contract is the limitation of liability clause most commonly inserted by a supplier as a means of protection to limit the extent of liability to a maximum amount or even to exclude particular types of loss in the event that something goes wrong.
Such a party to a commercial contract will almost certainly try to exclude indirect or consequential losses. These are losses which would not normally flow from a breach of contract and would be a special type of loss where the party in breach was made aware of the impact of the type of loss that would have arisen. There would also be attempts to exclude loss of profit, revenue and even goodwill.
In relation to the losses such as the loss of profits, the courts have held the view that such financial losses depend on context to determine whether they could be considered to be a direct or indirect loss.
The High Court has again reviewed the definition of “consequential loss” in the case of Star Polaris LLC v HHIC-Phil Inc (2016). EWHC 2941 (Comm).
The matter concerned a ship (Star Polaris) which after 8 months of being delivered suffered serious engine failure. This required extensive repairs. Compensation was sought by the ship’s buyers as a result. The claim for compensation was to include not only the costs of repair, but also the loss in value incurred to the ship, the costs to tow the ship as well as the agency and survey costs.
The contract which the buyers entered into with the ship’s builders included a guarantee of 12 months. Further that the ship’s builder’s were to be required to have certain obligations to remedy any physical defects. However, the contract also contained clauses stating that ship’s builder’s liability were to be expressly excluded after making delivery in respect of any “consequential or special losses, damages or expenses unless otherwise stated herein.”
The interpretation of what was meant by consequential loss was a major source of argument between the parties. The arbitrators stated that the wording used would suggest that, with the exception of making a repair or a replacement, all other financial losses would be excluded.
High Court Decision
The matter ultimately reached the High Court which agreed the arbitrators interpretation. The High Court ruled that when considering the meaning of “consequential loss”, consideration must be given to the context of how it is used in the contract.
It was found that the intention of the parties in this context was to have the phrase to be interpreted in the context of “cause and effect”.
The outcome of this matter is particularly significant, as it shows that when interpreting the meaning of “indirect or consequential loss”, consideration must first be given to the context in which it had been applied.
When entering into a contract both parties should ensure that the contract is well drafted and that they are both fully aware of the terms that they are agreeing to in order to avoid future disputes, which could costly. Nath Solicitors can help with commercial contracts to save you costly disputes.
Please note that the above does not constitute as legal advice. Should you have any queries, please do not hesitate to contact us.