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Court of Appeal in Transocean interprets limitation and exclusion clause

The judicial task is one fraught with difficulty: the complexity of the issues, the evolving nature of the common law, and the risk of appeal all figure large. This is particularly the case when judges turn to consider the correct interpretation of limitation and exclusion clauses, for two principal reasons:

These difficulties were aptly demonstrated recently in Transocean Drilling UK Ltd v Providence Resources plc.

Transocean Drilling UK Ltd v Providence Resources plc

Transocean, the owner and operator of a drilling rig, entered into a hire contract with Providence to drill a well off the southern coast of Ireland. Eight months into the contract, drilling was suspended and the consequent delay gave rise to various disputes.

At first instance, Popplewell J held that the delay had been caused by the rig not being in good working condition, with further delay caused by a member of the crew failing to properly tighten part of the fixture. He held that Transocean was in breach of contract in both respects, and so concluded that Providence was entitled to recover spread costs. The spread costs in question were the wasted costs of support vessels supplied by third parties. Transocean appealed against the spread costs award, relying on an exclusion clause.

The parties’ contract was based on a LOGIC standard form and contained extensive provisions relating to indemnities and exclusions of liability on a “knock for knock” basis: each party agreeing to hold the other harmless for consequential losses. The issue for the court was whether Providence’s wasted spread costs fell within the definition of excluded consequential losses.

The relevant contract clause defined consequential loss as:

“(i) any indirect or consequential loss or damage […] 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 of every tier or by third parties)…”

Therefore, the key issue was whether the spread costs were covered by the wording “loss of use” in (ii) above.

Moore-Bick LJ in the Court of Appeal considered the authorities and determined that it was of vital importance when interpreting limitation and exclusion clauses to start at the right place.

Where to begin…

Following the well-known precedents of Photo Production Ltd v Securicor Transport Ltd and Arnold v Britton, the Court of Appeal held that:

“…the starting point in construing [the clause] must be the language of the clause itself.”

Practically, this involved determining the natural meaning of the language. The Court of Appeal considered that the words in brackets were intended to “flesh out” the meaning of “loss of use” by giving examples of what that included, and those words were apt to include wasted spread costs as falling within the meaning of “loss of use”. Therefore, Transocean was able to rely on the clause to exclude its liability for the wasted spread costs.

In its judgment, the Court of Appeal gave helpful guidance on the application of the “special” rules that are often cited and can cause uncertainty.

The first was contra proferentem. At first instance:

“…rather than first seeking to ascertain the natural meaning of the language, [the Judge] began by accepting [the submission] that the clause was to be construed contra proferentem and therefore against Transocean.”

The Court of Appeal did not agree that this case was appropriate for the contra proferentem principle to be invoked. That principle may be considered when the language chosen by the parties is one-sided and genuinely ambiguous, but it has no part to play:

“…when the meaning of the words is clear [… nor…] in relation to a clause which favours both parties equally, especially where they are of equal bargaining power.”

Indeed, in this case, it was not possible to say who would be the proferens and who would be the proferee. Further, the knock-for-knock basis of the clause meant it applied to both parties equally and was part of a complex web of interrelated limitation and indemnity clauses. And, perhaps most importantly, in any event, the words were clear.

This echoes Stuart-Smith J’s decision in Persimmon Homes Ltd v Ove Arup & Partners, which also related to the interpretation of an exclusion clause. There the judge noted that:

“…the Court should not strain to find ambiguity where none exists. If at the end of the normal interpretative process, the meaning remains unclear and ambiguous, the Court has as a last resort various presumptions to assist it, such as the contra proferentem rule. But such presumptions, as it seems to me, only fall to be applied if the true meaning of the contract has not emerged from the normal iterative process of interpretation.”

In Transocean, the Court of Appeal also rejected reliance on the observation Lord Diplock made in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd that when construing a contract there is a presumption that neither party intends to abandon any remedies for its breach, and clear express words must be used in order to rebut this presumption. Moore-Bick LJ appeared to consider that relying on the Gilbert-Ash observation is a little outdated. In particular, the concern in Gilbert-Ash that particular protection was required for parties against the dangers of exclusion or limitation clauses predates Photo Production and the Unfair Contract Terms Act 1977, which offers some protection against exclusion clauses. Photo Production diminishes the role of any presumption in favour of an analysis of the language of the contract and, while it has not been evenly applied by the courts in the intervening 36 years, it has now returned to the fore. Some criticism was also made by the Court of Appeal of the habit of conflating the contra proferentem principle and the Gilbert-Ash observation: “[T]he two are in fact quite distinct”, although it seems that it is time for both to be marginalised.

Clarity of expression

The decision in Transocean should assist both future first instance judges, parties and their legal advisors. It is another pronouncement, following Arnold v Britton, that the task of interpretation is not to dive straight into the factual matrix or apply special rules found in authorities from the early half of the last century. Instead, the words the parties used in their agreement are primary.

This trend is to be welcomed in both the onshore and offshore construction worlds. It promotes certainty. In commercial construction contracts involving sophisticated parties, well-advised and backed by insurance, any analysis that prioritises special rules over the clear meaning of the words used risks upsetting or fundamentally re-ordering the parties’ commercial bargain. Those aged rules should only be used as a “last resort” where the wording is not clear.

In other words, the Court of Appeal has held that in order to begin, start with the natural meaning of the language used. In most cases, that will also be where you can end.

Keating Chambers Paul Bury

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