Definition of consequential loss included wasted ‘spread costs’
TRANSOCEAN DRILLING UK v PROVIDENCE RESOURCES (CA) [2016]
The Court of Appeal (“CA”) upheld some mutual indemnities applicable to both parties, with the result that a contractor succeeded in excluding liability for certain wasted costs under consequential loss as defined in the contract. The CA relied on the plain meaning of the wording and did not apply restrictive principles of interpretation, commonly used to cut down the effect of limitation clauses.
Facts:
- The owner of a drilling rig entered into a contract with a customer to drill a well in the sea. Drilling operations had to be suspended, mainly due to problems with the rig. The delay gave rise to a dispute between the parties regarding the right of the customer to recover additional overheads, known as 'spread costs', resulting from the extended period of the work. The 'spread costs' were those related to personnel, equipment and services contracted from third parties that were wasted due to the delay.
- Losses arising from the performance of the contract were allocated between the parties, in the main, regardless of the cause of the losses, which is comparatively unusual.
- Clause 20 of the contract created a form of mutual indemnity and defined ‘consequential loss’. It said:
“The expression “Consequential Loss” shall mean:
(i) any indirect or consequential loss or damages under English law, and/or
(ii) to the extent not covered by (i) above … 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 or by third parties) ...
whether or not such losses were foreseeable at the time of entering into the contract and, in respect of paragraph (ii) only, whether the same are direct or indirect ”.
- The clause then went on to say, “The Customer shall save, indemnify, defend and hold harmless the Rig Owner Group from the Customer Group’s own consequential loss and the Rig Owner shall save, indemnify, defend and hold harmless the Customer Group from the Rig Owner Group’s own consequential loss”.
- In summary, the rig owner indemnified the customer from the rig owner's own consequential loss (as defined) and the customer indemnified the rig owner from the customer’s own consequential loss (as defined). Although couched as an indemnity, it was acknowledged that this clause effectively operated as a form of exclusion of liability.
- The High Court (“HC”) found that the delay was caused by breaches of contract on the part of the rig owner and that the customer was entitled to recover the spread costs for the period of delay. The HC decided these were not ‘consequential losses’ within the meaning of clause 20, relying on several principles commonly invoked when Courts give exclusion clauses a strict interpretation.
- The rig owner appealed.
Decision:
- The CA observed that the parties were of equal bargaining power and had entered into mutual undertakings to accept the risk of consequential loss flowing from each other's breaches of contract. The apparent mutuality of the clause was clearly an important factor. However, query whether the clause was truly mutual in practice since the customer would perhaps be expected to be the party most likely to suffer losses of the type described.
- To come to a conclusion different from that of the HC, the CA relied on the plain or natural meaning of clause 20. It said,
- “Particular importance must be given to the language chosen by the parties to express their intentions. The starting point in interpreting clause 20 had to be the language of the clause itself.
- Previous cases in which the expression “consequential loss” have been considered were of little assistance, because, for the purpose of this contract, clause 20 defined losses that were the subject of the indemnity.
- The words “loss of use or the cost of use of property, equipment, materials and services ... provided by contractors or subcontractors or by third parties” in clause 20 were “plainly apt on the face of them” to cover the types of losses claimed. The parties had gone to some lengths to emphasise the width of the clause twice within the same passage in brackets when they used the expression “without limitation” to make the point ”.
- The CA decided that the natural meaning of the words used in clause 20 included the wasted spread costs. Various rules of interpretation which might be applied to justify a different conclusion could not be considered either because they could only be used in cases of ambiguity, or for other reasons, which the CA looked at in turn:
- the so-called contra proferentem rule (which provides that where there is doubt about the meaning of a contractual provision, the Court should opt for the meaning that is less favourable to the party who introduced the provision or in whose favour it operates) should only be used with regard to language that is truly ambiguous ie where there is a genuine choice of meanings;
- the contra proferentem rule is also not applicable to a clause which favours both parties equally, especially where they are of equal bargaining power;
- although there is a presumption that parties do not intend to give up important rights in respect of contractual breaches, that presumption must give way to the plain language of the contract;
- there is a well-established principle of construction that where there is a list of examples following a more general phrase, that list of examples are to be interpreted subject to the general phrase. That is the reason why it is generally ill-advised to exclude loss of profit as an example of indirect or consequential loss (because then only indirect loss of profit is excluded). The CA said that the original judge had failed to have sufficient regard to the words in brackets which followed the expression ‘loss of use’ or to recognise that the purpose of providing the specific examples was to clarify or even expand the meaning of certain words.
- Even if the result of the clause allocating liability was that the parties had effectively agreed to exclude any liability for damages for any breaches, the CA found it difficult to see why the Court should not give effect to their agreement. It said the agreement was not devoid of all legal content just because the parties had agreed that neither should be entitled to recover consequential loss from the other. The CA seemed to suggest that some liability for direct damages for failure to deliver and maintain the rig in good working order could still subsist.
- The precise scope and types of losses covered by indirect and consequential loss clauses has caused difficulties for English lawyers over the years. Consequently, many contracts seek to define what losses constitute ‘consequential and indirect’ losses by giving detailed examples specific to the particular circumstances. Where this is done the CA said it is up to the Courts to interpret the particular wording used in the particular context (our emphasis added).
Points to note:
- Importantly, this case did not have to decide what the phrase ‘consequential loss’ by itself means under English law and therefore it does not shed light on that question. This was a decision based purely on the express definition of loss that the parties had included although the CA did say that it doubted, "whether some of [the past consequential loss] cases would be decided in the same way today ”.
- It must be unlikely but it will be interesting to see whether in the future suppliers draft exclusions of liability as mutual indemnities along the lines of this case rather than as traditional exclusions from liability. This decision would suggest such an approach would have a greater chance of success although whether that would work if it is more probable that the clause will impact upon the customer in practice must be open to question.
- The CA (somewhat at odds with its clear pronouncement that the language chosen by the parties to express their intention is of paramount importance) said that Courts should be willing to recognise that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents. We would venture to suggest that this is a recipe for uncertainty and, if followed, could result in an increase in the number of disputes.
- Drafters would be well-advised not to rely upon the apparent preparedness of the Court in this case to interpret a list of examples beyond the confines of their introductory words. It would still be sensible in our view to expressly exclude particular examples of loss as standalone exclusions so as to ensure that they are not tainted by what comes before or after them.
- As an aside it is worthy of note that having provided a definition of the capitalised term ‘Consequential Loss’, the parties then immediately used the lower case term ‘consequential loss’ within the indemnity itself. In the event none of the parties seems to have taken any point on this but we would always advise that if a term is defined, then that capitalised term should subsequently be used where that is actually the intention. Otherwise the possibility is opened that a party will successfully argue that the change in capitalisation was quite deliberate and that the non-capitalised term means something quite different.