The recent case of Star Polaris v HHIC-Phil Inc [2016] shows the importance of ensuring that in any contract for the sale or purchase of a vessel, the wording regarding the liability is fit for purpose.

Engine failure

The buyer purchased a ship called the Star Polaris.  About eight months after delivery it suffered serious engine failure and had to be towed to a port for repairs, at considerable cost to the buyer.  The buyer sued the seller for breaches of contract and claimed compensation for:

  • the cost of repairs to the ship
  • various costs caused by the engine failure including towage fees, agency fees, survey fees, etc., and
  • the diminution in the value of the ship.

Who is liable?

In order to determine the extent of the seller’s liability the court first had to consider the contract the parties had agreed.  The contract contained:

  • a 12-month guarantee clause against all defects relating to defect materials including design error, construction miscalculation and/or poor workmanship
  • a provision requiring the seller to remedy any physical defects covered by the guarantee
  • a statement that the seller was to have no other liability in respect of delivery of the ship; and
  • a statement that the seller excluded all liability for special and consequential losses.

The seller argued that some of the losses the buyer was claiming for, for example the towage costs, were consequential and special losses, which had been specifically excluded as agreed in the contract.   The buyer disputed this, relying on the case of Hadley v Baxendale which sets out the types of losses recoverable in a breach of contract claim. The rule is that indirect and consequential losses are generally only recoverable if the loss results from special circumstances which are known to the parties.  The buyer argued that they should be able to recover its indirect and consequential losses on this basis.

The court found in favour of the seller, holding that by looking at the contract as a whole, it was clear that the limitation of liability clause was intended to operate as a complete code under which all liability for losses over and above those specifically accepted by the seller were excluded.   The seller was only liable to remedy the defects covered expressly by the guarantee.

Our view

As a result of the court’s ruling, the buyer was unable to recover financial losses it believed it should and was left with all financial responsibility over and above the cost of repairs. This turned out to be a significant amount.  It seems that the courts are more likely to interpret “indirect”, “consequential” or “special” losses in accordance with their natural and ordinary meaning. Although this case does not introduce any new law, it emphasises the importance of looking at the contract as a whole, rather than focussing specifically on one particular clause.

A contract should always be in place for any purchase or sale of this nature.  In the event that that there is no contract, neither the buyer nor seller will have any clarity as to what losses are recoverable and are at the mercy of the courts to decide.

Top tips

When negotiating a contract:

  • ensure that any terms defining your contractual liability are clear and unambiguous – clearly define what liability you accept and what liability you exclude
  • beware the dangers of using precedent wording from another contract as there is no guarantee the courts will apply a similar meaning; and
  • ensure that the contract reflects your expectations and intentions; otherwise there is a risk that the court may apply a different interpretation.

For advice and assistance on limitation of liability clauses, or commercial contracts more generally, please contact Stephens Scown marine team at marine@stephens-scown.co.uk or 01872 265100.