1 November, 2016
In the recent case of Transocean Drilling UK LTD v Providence Resources PLC [2016] EWCA Civ 372, the English Court of Appeal clarified the proper approach to the interpretation of exclusion clauses in the context of carefully negotiated commercial agreements between parties of equal bargaining power. The judgment makes it clear that such parties should be free to decide how losses are to be borne and that the court will uphold contractual provisions providing for such as long as their meaning is clear. The clause in question excluded liability for consequential loss arising from breach of contract. That clause, together with others, contained a detailed and sophisticated scheme for apportioning responsibility for loss and damage of all kinds arising from performance of the contract (in the main, regardless of cause), backed by insurance, sometimes called “knock for knock” provisions. The Court of Appeal relied on the plain and natural meaning of the clause to uphold the exclusion clause, thereby overturning the High Court’s decision. The judgment will be of interest to the construction industry where exclusion clauses are a common feature of construction contracts.
The Facts
Transocean, a contractor, entered into a contract with Providence, the owner of a drilling rig, under which Transocean would use the rig to drill an appraisal well (the Contract). The Contract was based on a standard industry agreement known as the “LOGIC” form.
Six months after commencement, the drilling operations were suspended because, contrary to the terms of the contract, the rig had not been in good working condition on delivery – it was undisputed that the fault was Transocean’s. The delay gave rise to additional spread costs (costs of personnel, equipment and services contracted from third parties) incurred by Providence, resulting from the extended period of work. The issue was whether Providence’s wasted spread costs arising from Tranocean’s breach of contract were “consequential losses” and
therefore excluded by clause 20 of the Contract.
Clause 20 contained mutual undertakings by Providence and Transocean to indemnify each other against, and hold each other harmless from, its own consequential loss, as defined in that clause.The relevant part of the definition of “consequential loss” was as follows:
(i) any direct or consequential loss or damages under English law, and/or
(ii) … 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…”
High Court Ruling
The High Court held that Transocean could not rely on Clause 20 to exclude all liabilities arising from its own breach and that Providence was entitled to recover spread costs for the period of delay. The High Court came to that conclusion after applying various principles which the courts have adopted over the years to assist them to construe exclusion clauses, including:
i) the Contra proferentem principle;
ii) the Gilbert-Ash presumption; and
iii) the Suisse Atlantique presumption.
Court of Appeal Ruling
The Court of Appeal overturned the High Court’s decision and held that the language of Clause 20 was clear and excluded liability for wasted costs in the form of spread costs. Since the meaning of Clause 20 was clear, there was no need, the Court of Appeal said, to apply the various principles of construction as the High Court had. The High Court was making for the parties an agreement which they had not chosen to make and there was no reason in principle, the Court of Appeal said, why commercial parties should not be free to embark on a venture of this kind on the basis of an agreement that losses arising in the course of work will be borne in a certain way and that neither of them should be liable for consequential losses, however they choose to define them.
In its judgment, the Court of Appeal gave useful guidance in respect of the principles commonly applied in the interpretation of exclusion clauses, as follows.
Giving words their ordinary and natural meaning
The Court of Appeal said:
The Courts have recognised that artificial approaches to the construction of commercial contracts are to be avoided in favour of giving the words used by the parties their ordinary and natural meaning.
More recently, the principle that the court should give the language used by the parties the meaning which it would be given by a reasonable person in their position furnished with the knowledge of the background to the transaction common to them both has received support from a series of decisions of the highest authority.
The Supreme Court had recently re-emphasized that particular importance must be given to the language chosen by the parties to express their intentions.
Regarding Clause 20:
“loss of use” naturally refers to the loss of the ability to make use of some kind of property or equipment owned or under the control of Transocean or Providence, as the case may be, but in this case the parties had made it clear by the words in brackets that followed that the scope was intended to be wider than that. For example, it extended to loss of use or cost of use of property, equipment and materials and to the loss of use or costs of use of services provided by contractors, sub-contractors and third parties.
It formed part of the definition of losses which flowed from (in this case) the contractor’s breach of contract, but were not the immediate consequence of it. The parties had gone to lengths to emphasise the width of the clause: twice within the same passage in brackets they had use the expression “without limitation” to make the point.
The mutual nature of Clause 20 and its role as part of the provisions for allocating loss indicated an intention to give the words a broad meaning and the natural meaning of the words used were apt to include wasted spread costs.
Contra proferentem
Rather than first seeking to ascertain the natural meaning of the language used in Clause 20, the High Court had said that the clause was to be construed contra proferentem and therefore against Transocean. The contra proferentem principle states that, when interpreting an ambiguous contractual term, the correct approach is to construe its meaning against the party which proposed or drafted it. The Court of Appeal said that the High Court had been wrong to invoke the contra proferentem principle in this case, as it should only be resorted to when the language chosen by the parties is one-sided and genuinely ambiguous, which was not the case here where the meaning of the clause was clear.
The Gibert-Ash presumption
The High Court had also relied on the Gilbert-Ash presumption, namely that there is a presumption that neither party to the contract intends to abandon any remedies for breach of contract. However, the Court of Appeal said that any such presumption must give way to the language of the contract. In any event, it was clear, the Court of Appeal said, that in agreeing to Clause 20 in this case the parties did intend to give up some of their rights. The specific examples provided in a sub-clause to Clause 20 had the clear intention of capturing consequential losses of all kinds, including the type Providence was seeking to claim, the court of Appeal said.
The Suisse Atlantique presumption
The High Court had also relied on the Suisse Atlantique presumption in coming to its conclusion. That presumption is that where a clause effectively denudes the contract of any meaningful obligations, it is a powerful indication that the parties did not intend the clause to have that meaning.
However, the Court of Appeal held that such a presumption should be seen as a last resort and only applied in cases where the effect of the clause is to relieve one party from all liability for breach of any of the obligations which he has purported to undertake. The principle of freedom of contract, the Court of Appeal said, is still fundamental to commercial law and requires the court to respect and give effect to the parties’ agreement. One of the striking features of the Contract here, the Court said, was the extent to which the parties had agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract.
Conclusion
The Court of Appeal allowed the appeal, having found that the language of Clause 20 was clear, and apt to exclude liability for wasted costs in the form of spread costs which Providence sought to recover.
The above-mentioned principles are frequently resorted to by litigants in construing the meaning of a contractual clause in dispute. However, the scope of their application is sometimes unclear, even to experienced lawyers. This decision usefully reviews the various principles and makes it clear that the starting point for construing exclusion clauses is to give them their ordinary and natural meaning. As the Court of Appeal said, “the court’s task is not to re-shape the contract but to ascertain the parties’ intention, giving the words they have used their ordinary and natural meaning.”
In addition to providing useful guidance on the court’s approach to construing exclusion clauses, the judgment is also a useful reminder of the importance of carefully drafting such clauses in clear and unambiguous language so that there is no doubt about the parties’ true intentions. In respect of consequential losses, parties should also perhaps consider including a carefully worded definition of such so that there is no doubt as to what will constitute such loss.
Justin Yuen, Deacons
justin.yen@deacons.com.hk
