Refurbishment contract interpreted to shield shipyard from consequences of failure to replace a vital part
A 1981 built cruise ship was refitted by the defendant shipyard for some 14m Euros pursuant to a written contract, the salient terms of which were:
“Works” means repair, refurbishment and the other works and services specified in the specification and any and all works undertaken pursuant to any modifications, alterations and additions to the specification agreed in accordance with clause 8 and any and all proprietary and ancillary and other works which are necessary to be performed in order for the contractor to perform its obligations under this agreement or otherwise in connection with the same…
2.1 The contractor shall perform and undertake the works in accordance with, subject to and upon the terms and conditions of this agreement.
6.1 (a) At all times during the works period the owner shall have in attendance at the yard nominated superintendents. The superintendents shall supervise and approve stages of the works on behalf of the owner.
(b) The exercise of the superintendents of the right to supervise and approve the stages of the works shall not in any respect release the contractor from any of its obligations under this agreement.
6.6 (a) If the superintendent discovers any construction, material or workmanship which does not or will not, conform with the requirements of this agreement, he shall notify the contractor in writing as soon as reasonably practicable of that non-conformity using a “notice of non-conformity” as set out at appendix 10.
9.2 (b) The ship shall be redelivered by the contractor to the owner following completion of the works on the completion date safely afloat and in a seaworthy condition at a quay or anchorage at the yard (emphasis added).
(c) Completion of the work shall be evidenced by the execution by the owner and the contractor of a protocol of completion.
12.1 (b) The contractor shall use all reasonable endeavours to procure (for the benefit of the owners) from subcontractors performing the works, guarantees of 12 months.
(c) Without prejudice to (a) and (b) above, the contractor shall for the period of 6 months after the completion date (“the guarantee period”), guarantee all the works against all defects occurring within the guaranteed period which are due to defective design works (other than designs specified by the owner) and/or materials and/or poor workmanship or negligent or other improper acts or omissions on the part of the contractor, its employees, agents or subcontractors.
12.2 (a) The contractors’ guarantee pursuant to clause 12.1 shall not apply to any defect resulting from any accident, ordinary wear and tear, misuse, mismanagement, negligent or improper acts or omissions or neglect on the part of the owner.
(b) The contractor shall not be liable pursuant to clause 12 for any consequential losses suffered by the owner arising out of or in connection with any defect to which the guarantee in clause 12.1 applies.
Removal and reconditioning of two main engine lube oil coolers
Priority must be given to the port cooler first
Specification of work
When the vessel is in service it is possible to clean the water side of these coolers quite regularly. However the extremely restricted access renders it almost impossible to clean or overall the oil sides of the coolers within a sensible time frame with the vessel in service.
Giving priority to the port cooler yard to supply labour tools and materials to remove main engine lube oil coolers and land to workshop for overall of water and oil sides.
Access and space for removal is very restricted and therefore it maybe more practical to overall in place by withdrawing the tube stack as far as possible within the restricted space.
After completion of overall work pressure test be carried out to the requirements of attending class surveyor.
Indicative price 19,260 Euros
Assuming cleaning by chemical and pressure test for checking leakages.
Re-tubing if required will be quoted a part (emphasis added)
Change order no.55 was later agreed as follows:
“Change to contractual obligations requires cost reduction of 50%. No exclusion specified for removing the coolers from the machinery spaces to the workshop for cleaning. Hence due to the difficult access and restricted space for removal of the coolers, cleaning in situ should reduce the cost by an estimated 50%”.
Work on the lube oil coolers was performed by a subcontractor.
By agreement, the scheduled completion date was postponed to 2 March 2012. Despite this the vessel was delivered on 16 March 2012.
On 1 February 2012, the owners concluded a bareboat charter with another company in the same group of companies with the purpose of the vessel being operated as a cruise ship.
As the vessel prepared to depart from Valencia during its inaugural cruise, on 12 April 2012, she suffered a serious failure of the port main engine lube oil cooler. Both lube oil coolers were found to be heavily corroded and were replaced.
Expert evidence was lead that the endplates of the coolers were corroded, consistent with long term neglect including failure to add inhibitor to the water used in the coolers. One expert gave evidence that any competent engineer viewing the coolers would regard them as in need of re-tubing.
Despite the fact that the contract required the shipyard to refurbish the vessel and overall the lube oil coolers, the Court found that the shipyard’s obligations were limited to placing information before the owners and leaving the decision whether to re-tube to them.
The court also found that limitations agreed upon relating to the nature and extent of the work to be carried out meant that insufficient information would become available to make an informed decision.
On this basis it was found that the shipyard was not liable for losses suffered by the charterers relating to the earning capacity of the vessel as a cruise ship.
The Court found, however, that the owners would succeed on their claim for liquidated damages for late delivery.
On the question of liquidated damages for late redelivery, the shipyard contended that because the owners were responsible for some delay, that that period of delay had to be taken into account when extending the scheduled date of redelivery or completion. The Court applied the principle extracted by Hamblen J in Adyard Abu Dhabi v SE Marine Services  EWHC 848 (Comm) of culpable delay and causation – if the contractor’s culpable delay caused an overrun of time allowed for completion, the fact that owners were responsible for delay occurring within that period is irrelevant.
The shipyard was appointed for its expertise. In this context, an interpretation of the contract excusing them from detecting the severe corrosion of the coolers and recommending re-tubing seems unreasonable.
A number of interesting points were decided in the event of an appeal.
On the question of contributory negligence, the judge decided that clause 6.1 did not absolve the owners from co-responsibility for the failure to re-tube despite the explicit provisions of the clause.
She referred to the judgment of Hobhouse J at first instance in Forsikringsaktieselskapet Vesta v Butcher  2 Lloyds Rep 179 where he considered three possible permutations of the overlap between claims based on breach of contract and negligence: where liability does not depend on negligence but arises on breach of a strict contractual duty; where liability arises from breach of a contractual obligation expressed in terms of the exercise of reasonable care, but does not correspond to the common law duty of care which would exist independently of the contract; and where the defendant’s negligent breach of contract would have given rise to liability in the tort of negligence independently of the existence of the contract.
Only in the third category could damages be reduced for the claimant’s contributory negligence. This view was endorsed by the Court of Appeal (the case went on to the House of Lords on the question of the applicable law, English or Norwegian).
The judge held that if this point were to have arisen she would have found the owners 50% to blame because of the role played by the superintendents in taking the short cuts which led to the failure to recognize the necessity of re-tubing.
Insofar as clause 12.2(b) excluded “consequential damages”, the judge referred to Croudace Construction Ltd v Cawoods Concrete Products Ltd  2 Lloyd’s Rep 55 as authority for the proposition that “consequential damages” meant special damages as defined in the second part of the Rule in Hadley v Baxendale. Loss of profits on the cruises, which could not take place, flowed naturally and directly from the breach and so was recoverable under the first part of the Rule in Hadley v Baxendale.
Insofar as the second Claimant, the cruise ship operators, did not have a contract with the shipyard, the question arose whether they had standing to claim. Although they had been assigned the owners’ rights, the fact remained that the owners themselves had not suffered damages in respect of the cruises. The judge referred, inter alia, to Offer-Hoar v Larkstore  1 WLR 2926 and quoted Rix LJ as follows:
“in order to prevent the loss caused by a Defendant’s breach disappearing into the proverbial black hole, the Courts are nowadays willing to go far to create a working, and developing, analysis which will accommodate a claim for substantial damages. Those cases also demonstrate, in my judgment, that if substantial damages may be claimed by the assignor in such circumstances, then there can be no objection to a claim brought by an assignee of a valid assignment, in which both cause of action and loss unite in the same party. In all these cases can be heard the drumbeat of a constant theme, which could possibly be described as ubi ius ibi remedium, the maxim that where there is a right there is a remedy; but it could also be said that the Courts are anxious to see, if possible, that where a real loss has been caused by a real breach of contract, then there should if at all possible be a real remedy which directs recovery from the Defendant towards the party which has suffered the loss”.
As the facts in the case were on all fours with those in Offer-Hoar, the cruise ship operators would have been entitled to recover substantial damages.
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