Mutual exclusion clause honoured for freedom of contract

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Mutual exclusion clause honoured for freedom of contract

September 13, 2016 | Company/Commercial, Latest Thinking, News

In the recent case of Transocean Drilling UK Ltd v Providence Resources PLC, the Court of Appeal (“CA”) has reversed the first instance ruling in the construction of a mutual exclusion clause in a hiring contract for a rig used in a drilling project. Instead of narrowing down the meaning of “loss of use” as what the first instance court did, CA honoured the wider meaning as evidenced in writing in the contract based on the principle of “freedom of contract”.

The Exclusion Clause in Dispute

Back in 15th April 2011, Transocean Drilling UK Ltd (“Transocean”) and Providence Resources PLC (“Providence”) entered into a contract where Transocean let one of its rigs to Providence to complete a drilling project taking place at an area off the southern coast of the Republic of Ireland. The contract had incorporated a mechanism commonly known as “knock for knock regime” where both parties would not recover damages of loss from the other party regardless of how the loss was caused, but simply have the losses covered by insurance.

Unfortunately, the project was suspended on 18th December 2011 as a result of the misalignment of part of the blowout preventer, and was resumed on 2nd February 2012. During the suspension, Providence has incurred additional cost of personnel, equipment and services contracted from third parties (“wasted costs”). Transocean accepted the cost was incurred as a result of its breach of Clause 4 of the contract but sought to rely on the mutual exclusion clause that, if held valid, would effectively absolve it of any payment of damages. The clause is as follows, where the CONTRACTOR refers to Transocean and the COMPANY refers to Providence:

“20. CONSEQUENTIAL LOSS

For the purpose of this Clause 20 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 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 CONTRACTOR 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 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 expression “Consequential Loss” shall not include CONTRACTOR’s losses arising in connection with (1) failure by COMPANY to provide the letter of credit as required by Clause 31.3 of Section III or resulting termination of this CONTRACT or (2) any termination of this CONTRACT by reason of COMPANY’s repudiatory breach.

Subject to and without affecting the provisions of this CONTRACT regarding (a) the payment rights and obligations of the parties or (b) the risk of loss, or (c) release and indemnity rights and obligations of the parties but notwithstanding any other provision of the CONTRACT to the contrary the COMPANY shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the COMPANY GROUP’s own consequential loss and the CONTRACTOR shall save, indemnify, defend and hold harmless the COMPANY GROUP from the CONTRACTOR GROUP’s own consequential loss.”

CA’s Ruling

CA made the following observation and decided to reverse the first instance ruling.

  1. There was no unfair dealing between the two parties, where they had equal bargaining power. It was different from the general case of exclusion clause dispute where a company of stronger bargaining power imposes exclusion clause to the disadvantage of customers. Besides, in a contract with a knock for knock regime, there would be a stronger appeal for the Court to hold the parties in equal footing because of the mutuality of the exclusion clause.
  2. According to cases like Photo Production v Securior Transport and Arnold v Britton, the Court was to interpret the clause according to the language of the clause itself instead of making an agreement not intended by the parties.
  3. The case did not involve defining what “consequential loss” means in English law or determining whether a loss was consequential according to Hadley v Baxendale because the contested issue was whether the wasted costs fell within the specific meaning of “consequential loss” in clause 20.
  4. From the wording of Clause 20, it was wrong for the first instance court to say that the phrase “loss of use” was to be given a narrow reading because the bracket following was apparently intended to expand the meaning as wide as possible, in particular with words like “without limitation”. The wasted costs therefore fell within the specific meaning of clause.
  5. The first instance judge was wrong to invoke the use of contra proferentem because the maxim was only applicable in cases where the meaning of a clause is ambiguous. Clause 20 was, in CA’s opinions, sufficiently clear.
  6. At last, the Court reiterated the principle of “freedom of contract” and concluded that the Court should accept the parties’ intention in general unless with vitiating factors or circumstances. It went as far as saying that “if…the parties have effectively agreed to exclude any liability for damages for any breaches, it is difficult to see why the court should not give effect to their agreement”.
  7. In short, the Court found that the first instance judge was making an agreement that both parties did not intend for and thought that the wasted costs fell well within the meaning of Clause 20.

Concluding Remarks

The Court in this case has given a very wide deference to the intention of both parties as to the exclusion of liability. It is uncommon to the usual practice where Court limits the scope of the coverage of an exemption clause. However, this seems to be a more commercially favoured approach where the intention parties with equal footing is honoured and recognized.

Although the Court may have taken a more liberal approach in interpreting the mutual exclusion clause, it seems unlikely that the ruling will take far-reaching effect because the case is very specific as to the dealing of parties and the sophisticated apportionment of responsibilities between both parties. Hence, it is highly improbable that a similar clause in standard consumer contract will be recognized.

If you are unsure whether current contracts or standard consumer contracts will be affected by this ruling, please do not hesitate to contact our Corporate Lawyers at londoninfo@hudsonmckenzie.com.

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