Challenging The Traditional Meaning Of Consequential Loss

The correct construction of the phrase 'consequential or special losses, damages or expenses' has been considered by the High Court.

It was held that, in the context of this particular limitation of liability clause, the term had a wider meaning than the traditional narrow interpretation set out in Hadley v Baxendale.

The judgment is in line with the shift towards the courts construing the plain meaning of words in the context of the contract as a whole. It highlights the need for extra care when drafting exclusion clauses, in particular when using phrases with well-established meanings, to ensure that the terms reflect the true intention of the parties.

Background – the traditional meaning of 'consequential loss' The two limb test set out in Hadley v Baxendale has traditionally been used by the courts to establish whether losses for breach of contract are recoverable:

Direct losses which arise naturally in the ordinary course of events flowing from the breach are recoverable and not too remote. Indirect losses and consequential losses which are likely to arise from the special circumstances of the case are foreseeable and recoverable if the defaulting party was made aware of the special circumstances when entering into the contract. If not, they are too remote. In traditional case law, it is well established that where a contract excludes a party's liability for 'consequential loss', this refers only to losses recoverable under the second limb in Hadley v Baxendale. This interpretation has often been criticised as contrary to the natural meaning of the phrase. Last year the Court of Appeal in Transocean Drilling UK Ltd v Providence Resources Plc [2016] EWCA Civ 372 also questioned whether some consequential loss cases would be still decided the same way today, acknowledging that these days "courts are more willing to recognise that words take their meaning from their particular context".

The Star Polaris case In brief, the facts of Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm) were that the buyer contracted with a shipbuilder to build the Star Polaris. Within a year of delivery, the ship had to be towed to port for repairs due to engine failure. The buyer brought arbitration proceedings against the shipbuilder claiming compensation for the cost of repairs to the ship, together with various costs due to engine failure (such as towage fees) and the diminution in the value of the ship.

The contract provided that the shipbuilder...