High Court: Financial loss not covered by shipbuilding warranty clause

On 17 November 2016 the High Court ruled that under the warranty clause contained in the shipbuilding contract, the obligation of the Builder after delivery was limited to repair or replace any defects, and excluded any financial losses caused by the defect. This decision is of significant importance in the shipbuilding industry, since it could define the obligations of Builders after delivery and limit the Builder’s exposure to warranty claims more generally. The successful defendant shipyard was represented by Clyde & Co

Star Polaris LLC-v-HHIC-Phil Inc [2016]

The shipbuilding contract in the case was on substantially the SAJ form, with amendments.  The amended Article IX.4 included the wording “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”.

The Vessel suffered an engine breakdown during the warranty period, and while much of the damage was found by the Tribunal to be due to the negligence of the chief engineer, there was a defect underlying that damage that fell within the warranty.  The Buyer claimed for the cost of repairs, all of the lost time and profit during the period of repairs and diminution in value of the Vessel due to those repairs.  The Builder agreed to pay the (limited) costs of repairs, but denied liability for all other losses.

On appeal from an Arbitration Award, the High Court (upholding the view of the Tribunal) dismissed the appeal and held that the reference to “consequential or special loss” in the context of Article IX excluded any and all losses caused by the defect, with the exception of the obligation to repair.

Key elements in the decision were:

  1. It was common ground that, the warranty clause provided a complete code addressing the obligations of the parties after delivery.  The Buyer had to bring itself within that code in order to claim any remedy from the Builder.  This is consistent with the position in The Seta Maru [2000];
  2. In Article IX.3, a distinction was made between necessary repair or replacement, which was for the yard, and any financial consequences such as the costs of bringing the vessel to a repair yard (which would ordinarily be “direct” losses) which were for the Buyer;
  3. Article IX.4(a) contained wording expressly limiting the obligations of the builder to those set out within Article IX.

Discussion

While the decision turned on the particular wording of Article IX.4(a), it potentially has a much wider impact.  The warranty was in substantially the same form as the SAJ contract and Article IX.3 in particular was almost identical to the SAJ form.

The arguments that both the Tribunal and High Court found persuasive apply to wording on an SAJ form, the conclusion being that the warranty clause is not an exclusion clause but is a complete code and it is for the Buyer to establish that any defect or loss falls within that code.  The exclusion in the SAJ form of “consequential loss” is also not simply a reference to consequential losses under Hadley-v-Baxendale, because it expressly includes loss of time and profit, which would otherwise be direct losses.

The conclusion following this decision is that where a shipbuilding warranty clause is on largely the same form as the SAJ contract, and especially where some wording is included to make clear that the warranty clause sets out the full extent of the builders obligations after delivery, it is highly arguable that any financial losses suffered by a Buyer as a result of a defect are excluded.  Significantly, the clause excludes any right to claim damages at common law, so the rules on exclusion of damages do not apply.

On this basis, the exclusion of “consequential loss” is superfluous wording, but in any event can be said to cover both direct and indirect losses, and not merely those losses which fall under the second limb of Hadley v Baxendale as had been suggested.

Deug Rong Lee, Tom Kelly and Paul Collier of Clyde & Co acted for the successful defendant shipyard.

Luke Parsons QC and Gemma Morgan as Counsel

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