In an important decision for the oilfield services industry, the English Court of Appeal has overturned a Commercial Court decision restricting the scope of risk allocation provisions in drilling rig hire contracts, in a move which provides certainty for commercial parties and reinforces the principle of freedom of contract.
Rig hire contracts, which are usually based on standard industry agreements such as the LOGIC form, generally include mutual undertakings by the oil company and the rig owner to indemnify and hold each other harmless in respect of all consequential loss. Such undertakings form part of a wider scheme for apportioning responsibility for loss and damage of all kinds, backed by insurance—so-called "knock for knock" provisions.
The Court of Appeal's decision in Transocean Drilling UK Ltd v Providence Resources Plc confirms that commercial parties are free to agree to exclude liability for loss and damage, and provisions to that effect should be given their ordinary and natural meaning. The decision will, of course, be welcomed by rig owners who have for many years contracted on the expectation that liability for spread costs incurred as a result of rig downtime can be validly excluded by agreement, and have calculated their day rates on the basis of this understanding of the allocation of risk between the contracting parties.
The dispute related to an adapted LOGIC contract by which Transocean agreed to hire a semi-submersible drilling rig to Providence for the purposes of drilling an appraisal well in an oilfield off the south coast of Ireland. The dispute centred on whether:
- the suspension of drilling operations and delay resulting from the misalignment of part of the blow-out preventer was caused by breaches on the part of Transocean, and
- providence could recover the cost of personnel, equipment, and services contracted from third parties which were wasted as a result of the delay (referred to as "spread costs").
The judge at first instance found that the delay was caused by Transocean's breach and this was not challenged by Transocean on appeal. As to the second question, it was held that Providence was entitled to recover its spread costs for the period of delay, despite indemnity provisions in the contract which purported to exclude the parties' respective liability for consequential loss.
Court of Appeal's decision
Overturning this decision on the issue of spread costs, the Court of Appeal held that it was important to construe the exclusion clause in its proper context – that the parties were of equal bargaining power and had entered into mutual undertakings to accept the risk of consequential loss flowing from each other's breaches of contract, as part of a broader "knock for knock" scheme for allocating losses between the parties.
Against that background, and in circumstances where the language of the exclusion clause was – in the opinion of the Court of Appeal – clear and unambiguous, it was not necessary or appropriate to construe that exclusion clause restrictively in order to avoid commercial oppression. As such, the court confirmed that primacy will be given to the language chosen by the parties to express their intentions.
As to Providence's argument that such an interpretation would leave it without a remedy for Transocean's breach of contract and relegate the contract to a mere "declaration of intent," the presiding judge, LJ Moore-Bick, emphasised that, "it cannot be said that the contract is 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."
A copy of the Court of Appeal's judgment can be found here.