The recent English Court of Appeal decision in Transocean Drilling UK Ltd v Providence Resources Plc1 on the construction of an exclusion clause within a knock for knock regime illustrates the court’s respect for the principle of freedom of contract – the courts will give effect to the parties’ intentions as long as they are clearly and plainly stated in the contract. It also contains some helpful reminders on the principles of construction. This article follows the case update published in May 20162.
Transocean Drilling U.K. Ltd (Transocean), the owner of a drilling rig, entered into a contract with Providence Resources Plc (Providence) for the provision of a rig to drill an appraisal well off the Irish coast. The contract was based on an amended ‘LOGIC’ form. Drilling operations had to be suspended for more than two months due to the misalignment of part of the blow-out preventer. This delay caused Providence to incur additional overheads, namely costs of personnel, equipment and services contracted from third parties which were wasted as a result of the delay (referred to as “spread costs”). Providence sought to recover these spread costs from Transocean.
First instance decision
At first instance, the court found that Transocean was in breach of the contract because the rig had not been in good working order on delivery and there had been crew negligence. The judge held that Providence was entitled to recover their claim, rejecting Transocean’s reliance on an exclusion clause in the contract which Transocean argued excluded any liability for ‘consequential loss’ of that kind.
Court of Appeal decision
In the Court of Appeal, Transocean appealed against the decision that Providence’s claim was not excluded by the exclusion clause, but there was no appeal in relation to the finding of breach.
Central to the contract was a set of ‘knock for knock’ provisions – a scheme for apportioning responsibility between the parties for certain types of loss and damage, which was to apply irrespective of cause and notwithstanding any negligence, breach of duty of other failure. The exclusion clause which Transocean relied on was part of the ‘knock for knock’ provisions and contained mutual undertakings by the parties to indemnify each other against, and hold each other harmless from, its own ‘consequential loss’ as defined in the contract.
The question for the court was whether the spread costs claimed by Providence were ‘consequential losses’, defined in the contract as “…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…”
The court found that the spread costs fell clearly within the exclusion clause. In this contract, the words ‘loss of use’ were to be given an expansive meaning and their scope was intended to be wider than the loss of the ability to make use of property or equipment owned by the parties to include cost of use of third party property which had been wasted. That this was the intention of the parties was made clear by the words in brackets that follow the words ‘loss of use’ and the repeated use of the words ‘without limitation’.
In reaching their decision, the court reiterated some helpful reminders when construing an exclusion clause:
- The starting point for construing any clause in a contract, including exclusion clauses, must be the language used in the clause itself. Here, the court found that the words ‘loss of use … cost of use of property … services’ in the exclusion clause were plainly apt to cover the spread costs.
- Exclusion clauses are not automatically to be interpreted restrictively nor contra proferentem, namely against the interests of the party who inserted the clause, particularly in this case where the undertakings to accept the risk of consequential loss are mutual, the parties are of equal bargaining power and the meaning of the words used were unambiguous. Furthermore, the mutual nature of the exclusion clause and its role as part of the loss allocation provisions point in favour of an intention to give the words a broad meaning.
- The principle of freedom of contract is fundamental and the courts will respect it and give effect to the parties’ agreement. This is so even if the parties’ agreement may seem unreasonable. In this case, Providence had argued that the whole contract would have no legal content and could not be legally enforceable if no liability followed in the event of a breach of contract. This argument was rejected by the court who found that, rather than excluding all liability for any breach of contract, the clause only excluded liability for certain kinds of loss or damage. More importantly, the argument was rejected as it was contrary to the principle of freedom of contract.
In construing the exclusion clause, the court recognised that one of the striking features of this contract was the extent to which the parties had agreed to accept responsibility for certain losses that might otherwise have been recoverable as damages for breach of contract, which is the centrepiece of the ‘knock for knock’ regime. Apart from giving the words their plain and natural meaning, the court clearly construed the exclusion clause bearing in mind the context of the contract and the parties’ intentions and upheld these in respect of the freedom of contract. This is reassuring in the commercial world where certainty for the contracting parties and, importantly, their insurers, is much desired, and particularly in offshore contracts where ‘knock for knock’ provisions are common place.
This decision is also in line with earlier cases on ‘knock for knock’ provisions, starting with Smit v Mobius3where the judge acknowledged that the knock for knock agreement is a ‘crude but workable allocation of risk and responsibility’, and will be given effect to, even if the apportionment may sometimes appear to be unfair. So if the court will give clear effect to parties’ intentions, it is up to the parties to clearly state their intentions.