There was some relief for offshore contractors when the Court of Appeal recently handed down its judgment on the construction of a consequential loss exclusion clause in a drilling contract on an amended LOGIC form between Transocean Drilling UK Limited and Providence Resources Plc.¹
The original dispute concerned the allocation of financial risk for the delays that occurred in the drilling of an appraisal well by the “GSF Artic III” rig caused by problems with subsea well control equipment.
Transocean claimed under the contract for the applicable day rate remuneration notwithstanding that during the period in question the rig was not able to carry out any drilling activities due to the breakdown of the well control equipment. For their part Providence denied liability for any day rate remuneration and also sought to recover their wasted “spread costs”, that is, the cost of the equipment and third party contractor costs which they incurred during the period of downtime.
At first instance Popplewell J held that Transocean had breached both its warranty as to the condition of the rig, which was absolute, and its maintenance obligation which amounted to a continuing warranty to maintain the condition of the rig. The judge further held that Transocean were not entitled to be paid for the periods of delay where these arose as a consequence of their breach of contract. The judge also found that Providence was entitled to recover spread costs for the period of delay despite the mutual exclusion of claims for consequential loss in the contract.
Whilst Transocean accepted the judge’s decision regarding their entitlement to day rate remuneration, not unexpectedly, they appealed the decision on the interpretation of the consequential loss clause. The Court of Appeal reversed the decision below and held that Providence’s wasted spread costs fell within the terms of the mutual exclusion for consequential losses and that any liability that Transocean might have for these losses was excluded.
The only judgment in the Court of Appeal was delivered by Moore-Bick LJ with whom the two other judges agreed. His judgment is important since it once again revisited the English Court’s approach to the construction of exclusion clauses in commercial contracts. His starting point was that the mutual exclusion clause in respect of consequential losses was part of a clear scheme under the contract for apportioning losses between the parties on a knock for knock basis regardless of cause or fault. It had been agreed that both parties would generally be responsible for their own losses and they would arrange their insurances on this basis.
The Court also took the view that the consequential loss clause in the contract was not a typical situation where exclusion clauses are often considered. The clause was to the benefit of both parties who were of equal bargaining power and who had entered into mutual undertakings to accept the risk of any consequential losses flowing from each other’s breaches of contract. As such this was not the type of exclusion clause that the courts should feel compelled to construe restrictively in order to avoid the risk of commercial oppression.
In construing the clause the starting point was to consider the language chosen by the parties to express their intentions. So the main question in the case was whether the language of the exclusion was apt to encompass the spread costs. The critical words were: “loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties). . . ”.
The Court was of the view that the words “.. the cost of use of property, equipment, materials and services ..” were apt to cover spread costs. Moreover, the purpose of these words “was clearly to catch consequential losses of all kinds: one obvious example of consequential loss is expenditure on goods or services from which no benefit can be obtained, as in this case.”
The trial judge’s interpretation of the clause was held not to be correct and, in particular, it was held that he was wrong to treat the words in brackets in the clause as being limited to the general term “loss of use” which appeared immediately before the bracket. The Court of Appeal’s view was that the words in brackets were clearly intended to expand the meaning of “loss of use”, particularly where the parties used the expression “without limitation”.
Further the Court held that the contra proferentem principle (where wording is interpreted against the party who provided it) should only apply where the wording is ambiguous and favours one party. The wording in this case favoured both parties, possessing equal bargaining power, and was clear. Thus the actual words used by the parties can override any presumption that a party intends to give up their rights. In this specific case the Court determined that this did not have the effect of depriving Providence of any effective remedy arising from Transocean’s breach but rather it was a specific agreement reached between the parties that dealt with a specific type of loss, namely consequential losses.
The Court of Appeal’s judgment is an important restatement of the rules of construction relating to contracts in offshore sector where risk is commonly allocated on a knock for knock basis with a mutual exclusion for consequential losses.
The decision is also important because the Court of Appeal emphasised once again the freedom of parties to contract on their own terms without unnecessary interference from the courts, particularly where they are sophisticated commercial entities with equal bargaining power. As Mr Justice Moore-Bick said “the Court’s task is not to re-shape the contract but to ascertain the parties’ intention, giving the words they have used their ordinary and natural meaning.”
The judgment should provide welcome relief for offshore drilling contractors. It makes clear that the English Courts will give effect to clearly worded clauses excluding liability for particularly types of losses. Yet, as is made clear throughout the judgment, the key issue was the precise wording used by the parties. The clause here expanded upon the term “loss of use” so that it clearly included spread costs. It is not entirely clear whether the words “loss of use” would without further definition cover spread costs. Although such costs may be covered within a clear knock for knock and indemnity regime the lesson of this case may be not to take the risk and to make the position clear.
Thus parties negotiating offshore drilling contracts would be well advised to include a specific reference to spread costs as coming within category of any “loss of use” claims in any clause excluding liability for consequential loss.
It is yet to be seen whether this case will be taken further to the Supreme Court.