Oil & Gas: Transocean overturns “spread costs” decision

The Court of Appeal has overturned the High Court’s decision in Transocean Drilling UK Ltd v Providence Resources plc [2014] EWHC 4260 (COMM), by deciding that a “consequential loss” clause prevented a claim for “spread costs” from being brought against a contractor. The decision is significant for the supply chain activities of Exploration & Production companies and their contractors in the Oil and Gas industry.

Facts

Transocean Drilling UK Ltd (“Transocean”) provided the drilling unit GSF Arctic III (“the Rig”) to Providence Resources plc (“Providence”) pursuant to a drilling contract dated 15 April 2011 (the “Contract”). The Rig was a six-leg semi-submersible drilling unit built in 1984. The dispute related to the financial consequences of delays which occurred to the drilling of an appraisal well in the Barryroe Field off the south coast of Ireland between November 2011 and March 2012.

The delays occurred following problems with the Blow Out Preventer (“BOP”) stack, between 18 December 2011, when operations were first interrupted as a result of problems with the alignment of the BOP, and 2 February 2012 when the Rig was ready to resume operations. This period was described by the parties as “the Disputed Period”.

Transocean claimed remuneration of US$13,035,083.97 and £3,516,758.45 in accordance with the rates provided for in the Contract together with reimbursables. Only a small part of this amount arose in respect of the Disputed Period.

Providence contended that (1) in respect of the remuneration claim for the Disputed Period, it was not liable for periods of delay caused by breaches of contract by Transocean and (2) in respect of the balance of the remuneration claim, it was entitled to set off its counterclaim, which was for wasted costs comprising spread costs of other contractors left idle during the Disputed Period.

The High Court found for Providence on both points. Transocean was not entitled to payment during periods when it was not providing the Work due to breakdown of the BOP. Further, Providence was entitled to set-off spread costs. Transocean appealed the spread costs set-off issue.

The Appeal Decision

The appeal focussed on the term excluding liability for consequential losses (clause 20 of the Contract), that provided that recovery by either party of the following liabilities was excluded:

“(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 [Transocean] 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”

Providence sought to argue that the High Court’s interpretation of clause 20 was correct. The exclusion contained in clause 20 did not apply, as there was no “loss of use” of the spread costs. The other contractors providing the “spread” were still available and required for the functioning of the Rig. Providence argued that the correct interpretation was that these were wasted costs which were not caught under the exclusion. It was also suggested that, if a broader interpretation of the clause was adopted, it would have the consequence of denying Providence of any remedy for breach of the Contract, as Providence would not be entitled to claim for any “loss of use” of the Rig, including if Transocean were to wrongfully terminate the Contract.

The Court of Appeal rejected Providence’s arguments. In doing so it made some important points concerning the construction and interpretation of “consequential loss” exclusion clauses:

1. The starting point to interpreting all clauses is the natural and ordinary meaning of the words used;
2. The contra preferentum principle has no part to play where the meaning of the words is clear and the clause is not “one-sided”;
3. The principle in Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Limited [1974]AC 689, that a party should not be taken to have surrendered valuable contractual rights in the absence of clear language, is to say no more than that the surrender of rights must be apparent from the language used (fairly construed).

In considering the wording of the particular clause in question, it was not clear to the Court of Appeal “why the nature of the clause calls for a narrow construction in order to limit its scope”. It considered the construction of the clause adopted by the High Court “strained” and thought it “wrong to treat the words in brackets as limited by the general expression” (ie loss of use). On the contrary, the Court of Appeal considered that the words in brackets were to “clearly explain and amplify the meaning of the expression”. The natural and ordinary meaning of the words used in the brackets accurately described “spread costs” in this scenario and therefore Transocean’s liability for these losses should be excluded, consistent with the agreement of the parties.

The Court of Appeal considered Providence’s argument that a broad interpretation of the clause might exclude all losses. It held that it was open to contracting parties to exclude all losses should they elect to do so, and that such an argument would have no impact on an express agreement to exclude "loss of use or cost of use of property… etc".

Comment

It is not entirely apparent from the Court of Appeal’s decision whether the words in brackets, following the words “loss of use”, that Transocean argued were a description of spread costs, were determinative of the dispute. It seems likely that they were. The issue is important, as “loss of use” is excluded in numerous drilling unit contracts. However, the specific words in brackets were incorporated through special conditions and are, perhaps, less usual. (It seems likely that they were copied from the International Association of Drilling Contractors model form more widely used in the United States and inserted into a clause that otherwise followed the LOGIC model form).

In any event, it will be interesting to see if there is a further appeal to the Supreme Court. The decision is doubtless of importance to the oil and gas industry and there are many disputes of a similar nature in the market. Further, there are elements of the decision that could be subject to debate. An example is likely to be the suggestion that clause 20 was for the mutual benefit of the parties. It is initially difficult to see how Providence benefited from, at least, the words in brackets.

In the interim, the decision will be doubtless of relief to Transocean. However, it may not be determinative of the interpretation of “consequential loss” exclusion clauses that do not contain similar words to those in brackets. As a consequence, this area of law will doubtless continue to develop.

Please click here for a copy of the judgment.