The recent Court of Appeal decision in Transocean Drilling UK Ltd v Providence Resources Plc regarding the construction of a consequential loss clause provides guidance on how the court will interpret such provisions in drilling contracts and commercial contracts more generally.

The Commercial Court decision

On 15 April 2011 Transocean (the owners of the rig) entered into a contract with Providence to drill a well off the southern coast of Ireland.

On 18 December 2011 drilling operations were suspended as a result of the misalignment of part of the blow-out preventer.They resumed 2 February 12012 when the rig was able to continue work again.The delay gave rise to disputes regarding the remuneration payable to Transocean during that period and the right of Providence to recover spread costs resulting from the extended period of work.

The Commercial Court found that the rig had not been in good working condition (causing 27 days of delay) and that there were certain operational failures on the part crew (causing a further 10 hours of delay).Transocean were found to be in breach of contract in both respects.There was no appeal against that part of the Commercial Court's decision.

The Commercial Court held in those circumstances that Providence was entitled to recover spread costs for the period of delay, notwithstanding the terms of the contract which Transocean relied upon as excluding any liability for losses of that kind.Transocean appealed against that part of the decision.

The Court of Appeal decision

The Court of Appeal overturned the Commercial Court's decision and held that Providence were not entitled to recover the spread costs.

As is customary, the drilling contract contained a series of indemnities and hold harmlesses as between Transocean as "the company" and Providence as "the contractor".The result of the mutual undertaking in clause 20 was to effectively exclude liability for consequential loss a defined in that clause.Such loss included:

"…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)…"

It was Transocean's position that the spread costs fell within this definition of consequential loss and were, therefore, essentially excluded.The Court of Appeal agreed, and in doing so noted the following:

  • The starting point in construing clause 20 must be the language of the clause itself.The wording of the clause was clear in terms of what loss of use was to encompass.Furthermore, the words "without limitation" had been used twice to emphasise the breadth of clause 20's limitation.
  • Clause 20 favoured each party equally, and there was no need to resort to principles of contra proferentem.Especially in circumstances where the parties are of equal bargaining power.

The Court of Appeal was not swayed by Providence's counsel's suggestion that an exclusion clause which effectively excluded liability for all breaches of the contract could not be regarded as legally enforceable.The Court of Appeal took the view that the fundamental principles of freedom of contract should be respected.If parties effectively agree to exclude all liability there is no reason why the court should not give effect to that agreement.

Comment

Offshore drilling and construction project contracts will commonly contain very widely drafted knock-for-knock provisions by which the parties agree to indemnify one another for a broad range of damage/loss.In determining what has been excluded with reference to definitions contained within such contracts, the Court of Appeal has confirmed that the first step is to give those definitions their ordinary meaning when clear and unambiguous wording has been used by the parties.This is so notwithstanding the English court's historical consideration of what constitutes "consequential loss".

Contracts which employ clear and unambiguous wording to define the particular types of loss which are excluded, such as the wording contained within the brackets after "loss of use" in clause 20, will be enforced by the English courts. Offshore operators and those with whom they contract should bear this in mind when drafting their contracts and ensure they know precisely what rights of recovery they are waiving.