Well, not quite shock.
Two cases from November 2016, from different divisions of the High Court, have stood out as providing specific advice, or more accurately warnings, to contract drafters, be they solicitors or not. The cases concern very different industries, but each contain an important message to contract drafters and clients: in all elements of commercial contract work, be as clear as possible when drafting your contract, if you want to avoid costly disputes.
The Star Polaris case concerned the construction and purchase of a new bulk carrier, the Star Polaris, by the defendant shipyard. It was delivered to the claimant purchaser in late 2011, but only seven months later it suffered a serious engine failure, and had to be towed to South Korea for repairs.
The purchaser claimed for, amongst other heads of claim, the cost of repairs to the vessel, the cost of towage to South Korea, loss of hire opportunity, and diminution in value of the vessel.
An initial arbitration determined that the shipyard was responsible for the engine failure, which was not disputed in front of the High Court. The key question for the court was: in the particular circumstances of the case, what was the correct interpretation of the phrase “consequential or special losses …”? Was it:
(a) losses which fall within the second limb of Hadley v Baxendale (which are otherwise called indirect losses, and sometimes referred to as consequential losses), as commercial parties and their solicitors might reasonably expect, given a long history of case law to that effect; or
(b) the more natural meaning of the term ‘consequential’, i.e. losses which were a consequence of the engine failure?
Perhaps unexpectedly, the court agreed with the three very experienced arbitrators, that the correct answer was (b) above. The purchaser was only entitled to recover the costs of repair, and all other claimed losses were excluded, including towage costs, loss of hire, and diminution in value. The fundamental reason for this was that the contract provided a complete code under which the parties could determine the shipyard’s liability. In that code, the shipyard effectively only undertook liability after redelivery of the vessel for:
(a) repair of defects due to defective materials, design error, construction miscalculation, and/or poor workmanship by the shipyard;
(b) physical damage caused by such defect,
and excluded all other losses which arose as a consequence of the defect.
Dooba Developments v McLagan Investments
Dooba owned a piece of land that it agreed to develop into a retail superstore on behalf of McLagan, which is a subsidiary of, and referred to in the case as, Asda. Subject to the fulfilment of certain conditions by Dooba, Asda would purchase the property, with a headline price of £12m.
The case turned on the satisfaction of certain conditions by a longstop date, the importance of which being that Asda had rescinded the contract because in its view, the conditions were not satisfied in accordance with the contract. The case was about whether Asda was right in its view of which conditions had to be fulfilled, and therefore whether Asda was right to rescind the contract.
The provision which was at the centre of the case was:
“2.1 On the date on which all of the Conditions have been discharged (…) this Agreement will become unconditional (…)
2.2 If any of the Conditions have not been discharged by satisfaction by the date they are stipulated in this Agreement to be discharged by or waived (…) the party entitled to rescind this Agreement in accordance with the relevant paragraph (…) may rescind this Agreement by giving to the other not less than ten working days’ notice to that effect (….)
2.3 (…) if all of the Conditions have not been discharged in accordance with this Schedule by the Longstop Date, then either Asda or Dooba may rescind this Agreement by giving to the other not less than ten working days’ written notice to that effect.”
The High Court had to consider whether the right to rescind arose:
The judge described the question as finely balanced. He acknowledged that, in modern English, the formula “if all … have not …” is sometimes used to mean “if not all … have …”, and acknowledged instances of this interpretation being used in other Chancery judgments and even in statute. He also discussed other examples of words or phrases having recognised meanings which were not literal: for instance, “a person who says that he will hopefully go to Birmingham is describing his expectation that he will be able to travel there, not his state of mind when undertaking the journey”.
Whilst the title of this article is intended to be flippant, both of these cases raise issues and consequences which were very serious to the parties concerned, and potentially to whoever drafted the contracts.
The Star Polaris case is unlikely to redefine the broader use of the term ‘consequential loss’ in commercial contracts, and is only likely to be followed where a contract contains a similar type of complete code which deals with all liability of the parties, or at least of the defendant party. However, it drives home the point that even terms or phrases which have a relatively well settled meaning in English law should not be used mechanistically and need to be given careful consideration to every time they are used, based on the circumstances which arise in the specific contract. If possible, such terms should be defined to show what the parties intended.
The Dooba Developments case shows, if more evidence were needed, that the wording in a contract will be interpreted in the context of the other terminology and drafting that surrounds it in the contract. Whilst all words and phrases should generally be given their natural meaning, if there is some ambiguity, of which there was a lot in Dooba Developments, the wider contract can give a meaning to a word or phrase, which may be subtly different from that which one or both of the parties may have been intended in a particular clause.