In a recent case the High Court held that, where liability for consequential loss is excluded, such exclusion will not be interpreted any more widely than was specifically stated in the contract. If consequential loss had been construed as widely as was asserted, it would have rendered the primary performance obligations in the contract effectively devoid of contractual content, there being no sanction for non-performance. It is now clear that the courts will not readily accept such a construction.

Providence, the licensee of an oil field, contracted with Transocean for the drilling of an appraisal well. Drilling delays were incurred and Transocean brought a claim against Providence in accordance with the day rates payable under the contract. Providence argued that the drilling rig and Transocean’s performance were defective and that it should not have to pay for delays caused by Transocean’s breach of contract. Providence also counterclaimed against Transocean for wasted costs incurred during the delay period. However, the contract included an exclusion from liability for consequential loss, upon which Transocean sought to rely.

Consequential (or indirect) loss is loss that arises from a special circumstance of the case. Under the long established rule of Hadley v Baxendale such a loss will be recoverable if it may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as a likely result of the breach.

The Court construed the consequential loss provision against Transocean (as the party which drafted it), despite the fact that the clause in question contained mutual exclusions and indemnities. Whilst acknowledging that parties to commercial contracts are entitled to apportion risk of loss as they see fit, the Court held that:

  • A party relying on an exclusion clause must establish that the words show a clear intention to deprive the other party of a remedy to which he would otherwise be entitled
  • There is a presumption that no party intends to abandon any remedies for breach by another arising by operation of law. Clear words must be used in order to rebut this presumption
  • An argument advanced by Transocean, to the effect that the exclusion covered any possible loss that Providence might conceivably suffer, was rejected on the grounds that there would then be no sanction for non-performance by Transocean. For example, Transocean had warranted that oil rig would be adequate to conduct the work and be in good condition. The Court determined that such warranties were clearly intended by the parties to have force. The parties would not have included such warranties if they had intended the exclusion to cover all loss

Transocean Drilling UK Limited -v- Providence Resources PLC (The Arctic III) [2014] EWHC 4260 (Comm)

  • In the face of oil price volatility oil companies are not afraid to dispute contract wording that has previously been understood to have widespread industry acceptance
  • Precedents such as the LOGIC model form of drilling contract, which was used in this case, require careful tailoring to meet the needs of the parties and avoid later disputes as to interpretation