Exclusions for “loss of use” in construction contracts

A recent Commercial Court decision has decided that an exclusion clause for “loss of use” did not preclude a claim for wasted costs arising from another party’s culpable delay. Although the case concerned a drilling services contract, “loss of use” exclusions are often found in construction contracts and the decision will provide useful guidance for parties considering the scope of such clauses in the future.

Transocean Drilling v Providence Resources

Transocean hired a drilling rig to Providence and claimed payment at the daily rates of hire specified in the contract. Providence claimed that the hire period was prolonged due to problems with the rig in breach of Transocean’s obligations under the contract and that it should not be liable for the daily rates of hire during these periods of delay. Providence also counterclaimed for the costs of its personnel, equipment and third party services (“spread costs”) wasted as a result of the delay.

Transocean argued that spread costs were excluded losses under clause 20 of the contract. The clause excluded (among other things):

“… 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, …”

Transocean argued that the spread costs were “loss of use” because they were claims for loss of use (or the cost of use) of the property, equipment, materials and services provided by contractors, subcontractors and third parties.

The court interpreted the clause contra proferentem (whereby if the contractual interpretation is not clear, the provision is construed against the person seeking to rely on it), even though the clause was bilateral with mutual exclusions. The court acknowledged that parties to commercial contracts are entitled to apportion risk of loss as they see fit and any provisions excluding or limiting liability are to be construed according to the same principles as other terms. Nonetheless, it held that the correct approach was to begin with a presumption that neither party intended to abandon remedies for breach of contract by the other and that clear words were needed to rebut that presumption (known as the Gilbert Ash line of authority).

Adopting this approach, each type of loss in clause 20 was construed narrowly to limit the parameters of excluded loss. In the context of other exclusions for losses of income or benefit, “loss of use” was read as the loss of expected profit or benefit to be derived from the use of property or equipment. It was held that spread costs did not fall into this definition as the costs were for equipment and services which were provided. The use of the equipment and services were not lost by Providence. They remained available at all times, even though they could not be used productively by Providence.

Conclusions

The decision provides helpful guidance to those seeking to assess the implications of “loss of use” exclusions in construction contracts. The use of such words on their own is unlikely to be sufficient to exclude claims for prolongation, non-productive overtime or other categories of costs arising from delay.

The decision also appears to signify a growing judicial willingness to construe exclusion clauses narrowly where the provisions are unclear. The court’s application of the Gilbert Ash line of authority and the contra proferentem rule is at odds with some recent authorities which had suggested a more liberal approach unfettered by such rules. This narrow and more traditional approach to exclusion clauses may now be regaining favour and parties would be wise to draft exclusion clauses in particularly clear and unequivocal language if they wish to benefit from them in the future.

Reference: Transocean Drilling U.K. Limited v Providence Resources plc the Arctic III [2014] EWHC 4260 (Comm)