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A consequential ruling

The Naval Architect: May 2017

On 17 November 2016, the High Court ruled that under the warranty clause contained in a shipbuilding contract, the obligation of the builder (shipbuilder HHIC-Phil) after delivery was limited to repairing 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 builders’ exposure to warranty claims more generally. 

 

Star Polaris LLC-v-HHIC-Phil Inc [2016]
The warranty provided by the Builder in the case was on substantially the Shipbuilders’ Associtation of Japan standard contract (SAJ form), with amendments. Perhaps most significantly, the usual wording excluding “loss of time, loss of profit or earning or demurrage” from article IX of the SAJ contract was not included in the warranty clause.   

 

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. 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, damages or expenses unless otherwise stated herein.” 

 

The Vessel (2011-built bulk carrier Star Polaris) 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 (in failing to stop the engine while bearing wear alarms sounded), there was still 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 an alleged reduction 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.  That concept had been raised in an earlier case, Seta Maru, in 2000, but doubts remained as to whether losses that resulted directly from a defect could still be claimed from the builder;
  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 the warranty.

 

Discussion
The argument in court was focussed on the meaning of “consequential loss”.  The general rule in English law is that this wording refers to losses where the parties had to have foreseen or had knowledge of that specific loss at the time of agreeing the contract.  The Buyer therefore argued that this wording did not exclude losses that were caused directly by the defect, such as the lost time and earnings (at the current market rate) for the vessel.

 

The Builder argued (successfully) that the warranty clause was a completely new regime governing liability after delivery of the vessel.  As a “complete code” it excluded all liability for breaches of the contract, and any right by the Owner to claim damages under English law.  Instead, the warranty provided specific obligations for the Builder (to repair/replace defective parts and bear some costs) and unless the Buyer could show that the claim fell within the terms of the warranty, the Builder had no liability at all. 

 

Specifically, the words “consequential loss” were something of a sideshow.  Where all liability for the Builder was excluded by the “complete code”, the specific additional exclusions within the warranty were not necessary.  The Builder is responsible only for what it has expressly agreed to cover after delivery.  What was, and is, crucial therefore is not any specific exclusions, but the establishment of the warranty as a complete code.  Although this concerned specific contract wording, it is likely that the reasoning would apply to most SAJ form warranty clauses, meaning that great care is needed at the drafting stage.   

 

If done correctly, both parties should have no doubts as to what is or is not covered in the event of problems following delivery.

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