One of the expressions which has caused particular difficulty for English lawyers is “consequential loss”, mainly as a result of attempts to define its meaning in the interests of commercial certainty. A common approach to deal with what can be quite a slippery concept is to draft a clause which excludes “indirect or consequential loss or damage” and to accompany this general exclusion with a non-exhaustive list of specific exclusions. Even this approach, of course, still leaves the door open for disputes about whether particular events are or are not covered by the definition of “consequential loss”.  

One such dispute is the subject of a recent decision of the Court of Appeal in Transocean Drilling UK Limited v Providence Resources Plc [2016] EWCA Civ372. In this case, the clause in question (clause 20) is contained in a highly-negotiated contract based upon an industry standard form known as the “LOGIC” form. The LOGIC standard forms are commonly used in the off-shore industry and indeed the contract in question here concerns the hire of a semi-submersible rig. As a result of a suspension of drilling operations following an incident which, it was agreed, was Transocean’s responsibility under the contract, a claim was lodged by Providence for costs which it sought to recover from Transocean. These included what were known as “spread costs”.  

The contract between the parties contained a number of inter-related clauses and the ones of particular interest are clauses 18 to 20. Clause 18 allocated losses via a complex series of indemnities arising from or relating to the performance of the contract between the two parties. Clause 18.8 expressly stated that the exclusions and indemnities which clauses 18 and 20 provided were to apply irrespective of cause and notwithstanding the negligence, breach of duty or other failure of the indemnified party and irrespective of any claim that might otherwise arise in law. Clause 20 contained mutual undertakings by the company and the contractor to indemnify each other against and hold each other harmless from its own consequential loss as defined in that clause. Although couched in the form of an indemnity it was common ground that the effect of clause 20 was to exclude liability for losses of that kind. These clauses formed what is sometimes known as a “knock for knock” arrangement, a not uncommon feature of off-shore contracts though less common in the on-shore construction sector, at least for the time being.

Clause 20, as I have already mentioned, dealt with consequential loss and was structured in the usual way, defining consequential loss first as “any indirect or consequential loss or damages under English Law” and then providing a non-exhaustive list of specific examples of consequential loss which included loss or deferment of production, loss of product, loss of use, loss of business and business interruption. Clause 20 concluded with a mutual hold harmless and indemnify provision. The issue on appeal was fairly short: whether Providence’s wasted spread costs arising out of Transocean’s breaches of contract were “consequential losses” within the meaning of clause 20. Specifically, did they fall within that part of the definition which encompassed “…loss of use (including, without limitation, loss of use or the cost of use of property, equipment, material and services including without limitation, those provided by contractors or sub-contractors of every tier or by a third party), loss of business and business interruption…” ?

The Court decided that spread costs were included within the definition of “consequential loss”. In doing so the Court reversed the decision reached by the Judge at first instance. What is interesting about this case, however, and what has a wider application to construction and commercial contracts generally, are the observations made by the Court of Appeal about the way the Courts should treat highly negotiated commercial contracts of this sort.

The first observation made by the Court was that although clause 20 was described as “an exclusion clause” it was not entirely accurate to characterise it in this way. A typical exclusion clause would be a provision by which a commercially stronger party seeks to exclude or limit liability for its own breaches of contract. In this case the parties were of equal bargaining power and entered into mutual undertakings to accept the risk of consequential losses flowing from each other’s breaches of contract. As such the clauses have to be seen as an integral part of a broader scheme allocating losses between the parties and not a simple exclusion clause of a kind which at one time Courts were willing to construe restrictively in order to avoid commercial oppression.

Courts should in any event strive to give the language used by the parties the meaning which it would be given by a reasonable person in their position furnished with the knowledge of the background to the transaction. In short, context is important, as is the language chosen by the parties to express their intentions. Consequently, the same word or phrase may mean different things in different documents. This approach means that some of the older cases which struggled with the meaning of “consequential loss” might be decided differently nowadays.

The Court’s approach to the construction of clause 20 is helpfully summarised in paragraph 28 of the judgment:

“I fully accept that where language of an exclusion clause leaves room for doubt as to its meaning, the principle applied in these cases may provide a valuable tool for ascertaining its correct meaning and in some cases it may lead to the conclusion that a restricted meaning must be given to the clause in question in order to achieve the parties’ common objective. But it does not in my view provide sufficient justification for overriding the parties’ intention where that has been clearly expressed. The principle of freedom of contract, which is still fundamental to our commercial law, requires the court to respect and give effect to the parties’ agreement. One of the striking features of this contract… is the extent to which the parties have agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract. If, as a result of incorporating several different provisions of that kind, the parties have effectively agreed to exclude any liability for damages for any breaches, it is difficult to see why the court should not give effect to their agreement.”

The Judge at first instance adopted a restricted construction of clause 20 so as to ensure that Transocean’s various undertakings in the contract had some legal content. The Court of Appeal took the view that the lower Court was in these circumstances “making for the parties an agreement which they had not themselves chosen to make”. The contract could not be said to be “devoid of legal content” simply because the parties had agreed that neither of them would be entitled to recover consequential losses from the other. There was 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 from the course of the work will be borne a certain way and that neither should be liable to the other for consequential losses, however they choose to define them.  

The Court of Appeal also made a number of interesting comments in relation to the operation of what is known as the contra proferentem principle. The Court took the view that the Judge had been wrong in the first instance to approach the construction of clause 20 by construing it contra proferentem (and therefore against Transocean) despite the fact that it was a bilateral clause with mutual exclusions. The Judge had done so by reference to the famous observation in Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] AC689 that there is a presumption that neither party to a contract intends to abandon any remedies for its breach and that consequently clear words are required to rebut such a presumption.

This in the view of the Court of Appeal was not the correct approach in these circumstances. Using the contra proferentem principle was an approach to construction of the contract “to which resort may probably be had when the language chosen by the parties is one-sided and genuinely ambiguous, that is, equally capable of bearing two distinct meanings. In such cases the application of the principle may enable the court to choose the meaning that is less favourable to the party who introduced the clause or in whose favour it operates.” It would appear, however, that the operation of this principle is now considered by some to be synonymous with the principle in Gilbert Ash although in fact the two are quite distinct. Consequently, the contra proferentem principle “has no part to play… when the meaning of the words is clear… nor does it have a role to play in relation to a clause which favours both parties equally, especially where they are of equal bargaining power”. The Court in Gilbert Ash was considering whether the contractor had agreed to forego its right of abatement or set off under the general law. This is a very different position from the clearly agreed mutual indemnities contained in clause 20, where the parties obviously did intend to give up some of their rights.

The decision in Transocean is instructive as a reminder of the reluctance of the Courts to interfere in highly negotiated, complex commercial contracts entered into between sophisticated parties of equal bargaining power. As such, this case sits with recent decisions in relation to equally highly-negotiated contracts such as Portsmouth City Council v Ensign Highways Limited [2015] EWHC 1969 and African Export-Import Bank and Others v Shebah Exploration & Production Company Limited and Others [2016] EWHC 311. Although based upon very different facts and involving very different contractual structures, all three decisions are underpinned by the same fundamental principle: that under English law the parties are able to make such bargains as they please free of constraint unless the bargain they make is illegal or void for public policy reasons (whatever they may be).