Last week, the Court of Appeal handed down its decision in Transocean Drilling UK Ltd v Providence Resources Plc, overturning a High Court judge's narrow interpretation of an exclusion clause. The Court of Appeal found that the clause, which excluded damages for "loss of use", should have been given its natural meaning, as that is what the words of the clause required. The case further emphasizes the importance of clarity when drafting exclusion clauses in contracts.
Providence hired Transocean to drill an appraisal well in an oilfield off the coast of Ireland. Drilling operations had to be suspended after there was an issue with Transocean's rig. The delay gave rise to a number of disputes between the parties, in particular, about whether Providence was entitled to recover additional overheads, known as "spread costs", resulting from the delay. The "spread costs" included the costs of equipment and services contracted from third parties, which were wasted as a result of the delay.
The parties used an adapted form of the industry standard 'LOGIC' contract. The contract contained a complex "knock for knock" liability regime (which basically involved each party accepting responsibility for loss or damage to its own property, as well as injury to its own personnel, regardless of cause). As part of the liability regime, each party was required to indemnify (and hold harmless) the other party in respect of consequential losses suffered by the first party. While this clause was drafted as an indemnity, this was, in effect, an exclusion of liability.
The clause excluded each party's liability to the other for:
"(i) any indirect or consequential loss or damages under English law, and/or
(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, 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, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests…".
High court decision
The High Court judge found that Transocean had breached its contract with Providence as the rig was not in good working condition and a member of its crew had failed to tighten a plug properly. Transocean did not appeal this part of the judge's decision.
The judge also held that Providence was entitled to recover "spread costs" for the period of the delay. In reaching his decision, the judge relied on the following arguments:
- The exclusion clause should be interpreted against Transocean as it was the party seeking to rely on it (i.e. the clause should be interpreted contra proferentum).
- There is a presumption that, in the absence of clear words to the contrary, a party to a contract does not intend to abandon any remedies for its breach.
- In light of the above points, the reference to "loss of use should be interpreted to mean "loss of expected profit or benefit to be derived from the use of property or equipment". According to the judge, Providence did not lose use of the property or equipment which was the subject of the spread costs, as such property and equipment remained available to it (which is why Providence incurred wasted expenditure in paying for it). As a result, the spread costs did not fall within the meaning of "loss of use".
- If the exclusion clause was given the wide interpretation contended for by Transocean, it would, in conjunction with the rest of the "knock for knock" liability regime, effectively exclude all losses which Providence might conceivably suffer as a result of a breach by Transocean.
It was this interpretation of the exclusion clause that was subject to appeal by Transocean.
Court of Appeal decision
The Court of Appeal found that the High Court judge had incorrectly interpreted the exclusion clause. It relied on the following factors in reaching its decision:
- The correct starting point for interpretation of the exclusion clause was the natural and ordinary meaning of the language itself.
- The contra proferentem principle should not have been invoked in this case. This was because:
- the meaning of the words in the exclusion clause was clear;
- the parties were of equal bargaining power;
- the exclusion clause was bilateral (i.e. it did not favour any particular party); and
- the exclusion clause was an integral part of a complex scheme of allocating losses between the parties.
- By itself, "loss of use" may refer to a loss of expected profit or benefit to be derived from the use of property or equipment (as suggested by the High Court judge). However, in this case, specific examples were given in the brackets following "loss of use". The purpose of these examples was to flesh out the meaning of "loss of use" and expand it to include loss of use of property or equipment provided by third parties. The Court of Appeal considered that such words were plainly capable of covering the spread costs.
- The principle of freedom of contract requires courts to give effect to parties' intentions. If, through a complex liability regime, 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 Court of Appeal did not accept that the exclusion clause was so wide as to relieve Transocean of all liability for breach of any of its obligations.
On this basis, the Court of Appeal held that Providence was not entitled to recover its spread costs.
This is a welcome decision from the Court of Appeal. The ruling is in keeping with a line of judicial thinking (beginning with Photo Production Limited v Securicor Transport Limited  AC 827) that the courts should be reluctant to interfere where a contract is the result of extensive negotiations between experienced and well-represented commercial entities of equal bargaining power. The Court of Appeal's decision provides assurance to those entities that their carefully drafted liability clauses will be interpreted in accordance with the words written on the paper and not abstract legal principles.
The case does, however, remind lawyers that liability clauses need to be clearly drafted in order to avoid unintended consequences. If there is a particular category of loss which is intended to be excluded, then that category of loss should be expressly identified and excluded. Fortunately for Transocean, the exclusion clause was drafted with enough specificity so as to prevent the spread costs from being recoverable. In the absence of such specificity (e.g. removal of the bracketed examples of "loss of use"), the outcome of this case may have been different.