Out-Law News 4 min. read

Appeal court: judge wrong to interfere with exclusion clause when wording sufficiently clear

A High Court judge was wrong to override an exclusion clause in a complex contract for the hire of an offshore drilling rig, as the parties were commercial equals and the wording of the clause was sufficiently clear, the appeal court has ruled.

Lord Justice Moore-Bick in the Court of Appeal overturned the High Court's finding that Providence Resources, which owns the Barryroe oilfield off the coast of Ireland, was entitled to claim 'spread costs' covering the money it had wasted on third party equipment and services while a rig it had hired from Transocean was out of commission. Although Transocean had been in breach of contract, the parties had specifically excluded liability for losses of that kind, he said.

The judge said that the clause had "certain characteristics" which distinguished it from a typical exclusion clause. As these are generally used by commercially stronger parties to exclude or limit liability for their own breaches of contract they tend to be interpreted strictly by the courts, but that was not the case here, he said.

"In this case the parties are of equal bargaining power and have entered into mutual undertakings to accept the risk of consequential loss flowing from each other's breaches of contract," he said. "It is not, therefore, a simple exclusion clause of a kind which at one time the courts were willing to construe restrictively in order to avoid commercial oppression."

"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," he said.

Providence Resources must now repay around $7 million to Transocean to reflect the amount it was not entitled to claim, according to a statement on the company's website.

Richard Dickman, an expert in complex commercial disputes at Pinsent Masons, the law firm behind Out-Law.com, said that the contract was typical of those used in the offshore oil and gas industry, where 'knock-for-knock' clauses are often used to limit claims for a wide range of potential losses.

"The 'knock-for-knock' regime was a response to the complexity, risks and substantial costs involved in offshore oil and gas exploration and production," he said. "If parties were potentially liable for massive loss or damage claims, the insurance costs could be prohibitive. For the companies involved, which tended, at least historically, to be large and well-resourced, it was more convenient to allocate risk on a 'knock-for-knock' basis, regardless of negligence or fault."

"I often see companies looking for ways to recover for losses when offshore contracts have gone wrong, only to be stymied by the 'knock-for-knock' regime. However, they usually recognise that the sharing of risk the 'knock-for-knock' regime entails is reflected in the commercial terms agreed. If companies wish to preserve the right to recover for certain losses then they may have to contract on different, and no doubt more costly, terms," he said.

Providence Resources had hired Transocean to drill an appraisal well in the Barryroe field, using an adapted form of the standard industry 'LOGIC' contract. The contract contained many complex provisions, including ones that allocated losses arising from or relating to the performance of the contract between the two parties, for the most part regardless of cause. For example, Transocean accepted responsibility for loss or damage to its own property and personal injury to any of its employees, while Providence did the same.

The dispute in this case related to a particular clause which indemnified each party against the other's "consequential" losses. The judge had to decide whether the 'spread costs' of personnel, equipment and services contracted from third parties which could not be used by Providence while Transocean's equipment was out of commission came under this category of loss. Although the original judge ruled that claims for these losses were not excluded under the terms of the contract, the Court of Appeal disagreed.

The High Court judge had attempted to interpret the clause using the 'contra proferentem' principle, which allows the court to choose the meaning that is less favourable to the party that introduced the clause to the contract or in whose favour it operates. However, the Court of Appeal said that this principle could only be used "when the language chosen by the parties is one-sided and genuinely ambiguous". This was not the case here, while it was also relevant that the provision was "a bilateral clause with mutual exclusions", Lord Justice Moore-Bick said.

"I fully accept that where the language of an exclusion clause leaves room for doubt as to its meaning, the [contra proferentem] principle ... 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," he said. "But it does not in my view provide sufficient justification for overriding the parties' intention where that has been clearly expressed."

The Court of Appeal also had to consider whether it should override the clause entirely on the basis that it relieved Transocean from all liability for breach of any of the obligations it purported to undertake as part of the contract. It found that this was not the effect of the clause at all: rather, the clause merely excluded liability for certain types of loss and damage, albeit wide-ranging ones.

"Even though the types of loss and damage excluded were extensive, Transocean could not simply repudiate the contract with impunity for commercial reasons before the rig had even been delivered," said complex commercial disputes expert Richard Dickman. "Lord Justice Moore-Bick was satisfied that the contract included many obligations relating to performance of work and was not devoid of legal content just because the parties had agreed to exclude recovery of consequential loss."

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