Star Polaris LLC v HHIC-Phil Inc

An exclusion of “consequential or special losses” does not invariably refer to losses within the second limb of Hadley v Baxendale. Its meaning depends on the contract read as a whole. Where a warranty clause forms a complete code and expressly undertakes only repair, replacement and related documented expenses, financial losses caused by guaranteed physical damage may be excluded, even if they would otherwise fall within the first limb of Hadley v Baxendale. A claim for diminution in value is such an excluded financial loss where the repair or replacement obligation is exhaustive.

The Buyer appealed under the Arbitration Act 1996 against an award concerning an engine failure in a vessel constructed by the Yard. The tribunal found a breach of the contractual warranty of quality, but held that the contract excluded the Buyer’s remaining financial losses, including any diminution in value.

The appeal concerned the construction of Article IX.4(a) of the shipbuilding contract. The questions were whether “consequential or special losses, damages or expenses” meant only second-limb Hadley v Baxendale losses, and whether diminution in value fell within that exclusion.

1. Appeal dismissed. The tribunal’s construction of Article IX was upheld.
2. Article IX constituted a complete contractual code governing the Yard’s post-delivery liability. The court had to identify the liability expressly undertaken, not merely determine which liabilities had been excluded. The contra proferentem principle could apply only if genuine ambiguity remained.
3. Article IX.3 imposed positive obligations to repair or replace defects covered by the warranty, or to pay the cost of doing so, together with documented expenses incurred in the repair or replacement process. The provisions did not undertake liability for loss of time, loss of use, lost profit or other financial consequences.
4. Article IX.4 had to be read with Article IX.3. Its references to liability being limited to what was expressly provided, and its exclusion of liability for consequential or special losses, reinforced the conclusion that the Yard’s liability did not extend beyond the express repair and replacement obligations.
5. In this contractual context, “consequential or special losses, damages or expenses” meant financial losses caused by guaranteed defects beyond the cost of repairing or replacing physical damage. The phrase therefore had a wider meaning than the second limb of Hadley v Baxendale.
6. Diminution in value was excluded. The obligation to repair or replace was exhaustive, so no additional recovery was available for diminution in value, even if that loss might otherwise have fallen within the first limb of Hadley v Baxendale. Costs followed the event.

High Court (Commercial Court): The appeal from the tribunal’s Interim Final Award dated 12 November 2015 was dismissed. Permission to appeal had been granted on 25 April 2016.