TRANSOCEAN DRILLING UK LTD V PROVIDENCE RESOURCES PLC [2016] EWCA CIV 372

Moore-Bick, McFarlane and Briggs LLJ

The Court of Appeal (‘CA’) has allowed an appeal against a judgment of the High Court holding that liability for ‘spread costs’ was not excluded by a ‘consequential loss’ clause in a drilling contract on an amended LOGIC form.

The CA’s judgment has important, and potentially far reaching, implications for parties engaged in exploration and production activities in the energy sector. It has particular significance for contracts containing ‘knock for knock’ provisions which include provisions excluding liability for ‘consequential loss’.At the heart of the judgment is a robust, and welcome, reaffirmation of the freedom of commercial parties to determine the terms on which they wish to do business.

The facts

Transocean Drilling UK Ltd (‘Transocean’) provided a semi- submersible drilling rig (the ‘GSF ARCTIC III’) to Providence Resources plc (‘Providence’) pursuant to a drilling contract based on an amended ‘LOGIC’ form.The rig was provided in order to drill an appraisal well in the Barryroe field off the southern coast of Ireland.

Drilling operations were suspended between December 2011 and February 2012 as a result of the misalignment of part of the blow- out preventer.The dispute in the High Court had centred on whether that suspension had been caused by breaches of contract by Transocean.The High Court held that the rig had not been delivered in good working condition (due to a build-up of debris in the ‘stinger’) and that Transocean was therefore in breach of contract.The High Court dismissed Transocean’s claims for unpaid invoices for hire and reimbursables during the disputed period.There was no appeal against that part of the High Court’s judgment.

The appeal centred on the High Court’s further finding that Providence was entitled to recover as damages wasted costs comprising ‘spread costs’ for the suspension period.The spread costs in question were costs of personnel, equipment and services contracted by Providence from third parties which were wasted as a result of the delay. Transocean contended that their liability for such costs was excluded under a ‘consequential loss’ clause. Its appeal on that point succeeded.

The CA’s judgment

The consequential loss clause excluded recovery by either party of the following liabilities:

‘(i) any indirect or consequential loss or damages under English law, and/or

(ii) to the extent not covered by

(i) above, loss or deferment of production, loss of product, 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), loss of business and business interruption, loss of revenue... loss of profit or anticipated profit, loss and/or deferral of drilling rights and/ or loss, restriction or forfeiture of licence, concession or field interests …’

The CA began by emphasizing the language chosen by the parties.The critical words were those set out in bold above.The CA accepted that ‘loss of use’ naturally referred to the loss of the ability to make use of some kind of property or equipment owned or under the control of the relevant party. However, it held that the words between brackets that followed immediately after that phrase were ‘plainly apt’ to cover wasted spread costs. Moore-Bick LJ (with whom McFarlane and Briggs LLJ agreed) noted that the parties had used the expression ‘without limitation’ on two occasions in the text in brackets, thereby emphasizing the intended width of the exclusion. The CA rejected Providence’s submission that ‘loss of use’ limited the scope of the words in brackets.

On the contrary, the CA held that the words in brackets were to be construed as expanding and amplifying the expression ‘loss of use’ (paras [18] and [25]).

The CA held the High Court had fallen into error in its application of three well-known principles of contractual interpretation. First, the High Court had been wrong to apply the contra proferentem principle (i.e. the principle that where there is a doubt about the meaning of a contract, the words will be construed against the person who put them forward).That was because the consequential loss clause was not, in the CA’s view, ambiguous and because the contra proferentem principle had no role to play ‘in relation to a clause which favours both parties equally, especially when they are of equal bargaining power’ (para [20]).

Second, the CA held that the High Court had been wrong to apply the presumption (which it said was ‘quite distinct’ from the contra proferentem principle) that neither party will be taken to intend to abandon remedies for the other’s breach unless clear words are used (see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC, 689, 717H).The CA held that that presumption is to say ‘no more than their intention [to abandon remedies] must be apparent from the language they have used, fairly construed’ (para [21]). Since the language was held to be clear, the presumption had to give way to the language of the contract.

Third, the High Court had been wrong to apply the ejusdem generis principle (i.e. the principle that general words may be given a limited meaning when they follow a list of specific matters which are of a similar kind).This was not a proper case to apply that principle because the purpose of the words in brackets was to ‘flesh out’ the expression ‘loss of use’ (para [24]).

Finally, the CA rejected Providence’s argument that the broad interpretation of the consequential loss clause for which Transocean contended should be rejected because it would denude the contract of legal content and the court was entitled to disregard a clause which relieved a party from liability for any breach of the contract.The CA rejected that argument on the facts (preferring not to decide the issue of principle – see [31]) and found that the contract would not be devoid of legal content ‘just because the parties have agreed that neither should be entitled to recover from the other consequential, as opposed to direct, loss’ (para [35]).The CA placed particular emphasis on the principle of freedom of contract which it said was ‘still fundamental to our commercial law’ and which required the court to respect, and give effect to, the parties’ agreement (para [28]). Moore-Bick LJ could see ‘no reason in principle why commercial parties should not be free to embark on a venture of this kind on the basis of an agreement that losses arising in the course of the work will be borne in a certain way and that neither should be liable to the other for consequential losses, however they choose to define them’ (para [35]).

Comment

Clauses excluding liability for ‘loss of use’ are common in standard-form drilling contracts as well as many other contracts in the energy sector (see, for example, Ease Faith Ltd v Leonis Marine Management Ltd [2006] 1 Lloyd’s Rep. 673 at [142]-[144] and Scottish Power UK Plc v BP Exploration [2015] EWHC 2658 (Comm) at [177]-[186]).The scope of such exclusions will inevitably turn on the specific wording of the relevant clause in each case.That is all the more so in a case such as the present where ‘loss of use’ was (according to the CA) expanded and amplified by the words between brackets.

It is worth noting that the consequential loss clause in this case formed part of a ‘detailed and sophisticated scheme for apportioning responsibility for loss and damage of all kinds’ (para [9]).The CA’s robust endorsement of the principle of freedom of contract when construing, and giving effect to, such a ‘knock for knock’ regime is to be welcomed.The judgment makes clear that in construing ‘knock for knock’ provisions, English law will give primacy to the language chosen by the parties, thereby underlining the function of such regimes as a ‘crude but workable allocation of responsibility’ (Smit International (Deutschland) GmbH v Josef Mobius Baugesellschaft GmbH & Co [2001] 2 All E.R. (Comm) 265 at [19]).

However, even if primacy is given to the language chosen by the parties, the words between brackets were arguably more ambiguous than the CA suggested. Even assuming (as the CA held) that the purpose of those words was to ‘explain and expand’ the expression ‘loss of use’, that language can be read as excluding spread costs. For example, the words ‘cost of use’ may be read as referring to costs incurred as a result of ‘loss of use’ of property or equipment. Moore- Bick LJ said that that construction was ‘strained’ (at [25]), but did not explain why. Curiously, he did accept that the words between brackets read ‘in a slightly odd manner’ (para [25]), but evidently did not believe that that detracted from what he regarded to be the clarity of the language used.

Finally, the judgment in this case illustrates the pitfalls of applying canons of construction.The CA suggested that doing so is what had led the High Court astray.That being said, it is not easy to reconcile Moore-Bick LJ’s statement (at [20]) that the contra proferentem principle has no role to play ‘in relation to a clause which favours both parties equally’ with Briggs LJ’s earlier dicta, in a judgment handed down three weeks earlier, that the contra proferentem principle did apply to a contract containing mutual exclusions (Nobahar- Cookson v The Hut Group Ltd [2016] EWCA Civ 128 at [20]).As Briggs LJ held in the latter case, the contra proferentem principle can be deployed to resolve ambiguities in mutual clauses in either direction (i.e. depending on which party was seeking to rely on it).

Since Briggs LJ was also member of the CA in Transocean, in which he expressed his agreement with Moore-Bick LJ’s judgment, it is perhaps unfortunate that that apparent contradiction was neither addressed nor explained.