England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBCMF 98/0139/3

IN THE COURT OF APPEAL (CIVIL DIVISION ) QBCMF 98/0140/3

ON APPEAL FROM THE HIGH COURT OF JUSTICE QBCMF 98/0154/3

(MR JUSTICE RIX )

Royal Courts of Justice

Strand

London W2A 2LL

Thursday 12th November 1998

B e f o r e

LORD JUSTICE STUART-SMITH

LORD JUSTICE OTTON

LORD JUSTICE TUCKEY

DEEPAK FERTILISERS AND PETROCHEMICAL CORPORATION

v.

(1) DAVY MCKEE (LONDON) LTD

(2) ICI CHEMICALS & POLYMERS LTD

(Handed down transcript of

Smith Bernal Reporting Limited, 180 Fleet Street

London EC4A 2HD Tel: 0171 421 4040

Official Shorthand Writers to the Court)

MR MARK HAVELOCK-ALLAN QC and MR ANDREW BAKER (instructed by Rosemary S. Crump) appeared on behalf of the Deepak.

MR TERENCE MOWSCHENSON QC (instructed by Messrs Herbert Smith) appeared on behalf of ICI.

MR RICHARD WILMOT-SMITH (instructed by Messrs Berrymans Lace Mawer) appeared on behalf of Davy.

J U D G M E N T

(As approved by the court)

©Crown Copyright

LORD JUSTICE STUART SMITH:

1. This is the judgment of the Court to which all three members have contributed. There is before the Court an appeal by Davy McKee (London) Ltd. (‘Davy’) who are defendants in the action against part of the judgment of Rix J. dated 19 December 1997. The plaintiffs in the action Deepak Fertilisers and Petrochemicals Ltd. (‘Deepak’) appeal against other parts of the judgment. Imperial Chemical Industries plc (‘ICI’) are also defendants in the action. They support Davy’s appeal and are respondents to Deepak’s appeal. It is a regrettable feature of the case that it took the judge over 18 months from the hearing in April 1996 to deliver judgment. That delay is wholly unacceptable. It entirely defeats one of the principal aims of the Commercial Court which is to give quick answers so that the parties can resolve their differences expeditiously. Having said that, it is right to say that the judge’s judgment is exceptionally full, detailed and careful, and runs to over one hundred pages of transcript. It is reported at (1998) 2 LLR 139.

2. In his judgment Rix J. answered ten preliminary issues on the construction of a contract, dated 22 May 1987, between Deepak and Davy (‘the contract’). The contract was for the sale by Davy of a process licence, process design and know-how in connection with the proposed design, construction (by others, in fact an associated company of Davy in India) operation and maintenance of a 300 metric ton per day low pressure methanol plant at Taloja in India. The material parts of the contract as set out and summarised by the judge at 2 LLR 145-148 (with minor omissions and additions), are set out in the Appendix to this judgment. The plant was built between January 1988 and September 1991. It was commissioned in October 1991. After the plant had been operating for four months a letter of acceptance was issued and dated 6 February 1992. The plant exploded on 30 October 1992. Fortunately no-one was hurt; but much damage was caused and the plant had to be rebuilt. The claims in the actions amount, with interest to over £100m.

3. The preliminary issues were ordered to ascertain whether Davy’s contractual answers to the claim were valid. If they were then the claim against them would fail. The preliminary issues also affected the position of ICI. There was no contractual relationship between ICI and Deepak. But by a licence agreement, dated 11 November 1981, ICI had licensed Davy to use its technology. By its terms ICI agreed to comment on Davy’s design, provide information, advise and assist on the start up and operation of plants using the process and gave some guarantees. But those obligations were accompanied by stringent exclusion of liability clauses. It is unnecessary to consider the effect of the licence agreement in any detail.

4. Deepak initially sued only ICI by writ issued on 7 September 1993. The claim was for negligence, negligent misrepresentation and breach of collateral warranties, the warranties being in identical terms to the misrepresentations. On 14 January 1994 ICI issued third party proceedings against Davy, following which Deepak issued a writ against Davy. The actions were consolidated and in June 1995 a consolidated Points of Claim was served in which the claims against ICI and Davy are set out. The claims based on negligence, negligent misrepresentation and breach of collateral warranty against Davy are broadly the same as those against ICI. In addition there are claims based on alleged breaches of express or implied terms of the contract. There is a Limitation issue so far as Davy is concerned; but that is not presently before the Court.

5. Although there is a dispute on the facts as to the cause of the explosion, it being Davy’s case that Deepak ran the plant at dangerously high temperatures, for the purpose of determining the preliminary issues, the facts alleged in the statement of claim were accepted as correct. They were set out in two documents, ‘Statement of facts to be assumed from the points of claim’ and ‘Statement of additional agreed facts’. The judge summarised the assumed facts at 2 LLR pp.142-144 and Transcript.3-9 (CBB.386-392). For the purposes of this appeal it is sufficient to set out the allegations in the manner helpfully summarised by Mr Wilmot-Smith QC in his skeleton argument on behalf of Davy. References are to paragraphs in the Amended Consolidated Points of Claim to be found at pp.197-230 of CBA.

6. The contract is pleaded at paragraph 3. In paragraph 10 it is alleged that eight representations were made by ICI or Davy. These relate to the track record of the technology when applied in other plants and the satisfactory nature and performance of tube-cooled methanol converters, and the back-up service provided by ICI. The representations are said to have been made:

(a) In a ‘contract proposal’ submitted jointly by Davy and Davy Powergas India Pte Ltd. (DPGIL) in December 1986.

(b) A telex from DPGIL, dated 13 February 1987.

(c) An oral representation by an ICI employee at Billingham, Tyne and Wear, on 29 July 1987.

(d) A letter from Davy to Deepak, dated 17 August 1987.

7. It is alleged that these representations amounted to collateral warranties in consideration of which Deepak entered into the contract (para.11), though it should be noted that the representations in (c) and (d) are after the contract date.

8. It is alleged that ICI and Davy owed Deepak a duty of care in making the representations or causing or permitting them to be made on their behalf (para.13); the representations were negligently made by ICI and Davy (para.15); and it is said that the representations were inaccurate and misleading (para.16). If they had known the true position Deepak would have installed a different type of methanol converter (para.17).

9. In paragraph 18 it is alleged that ICI were under a duty of care in the preparation of the design, design parameters, the approval of the mechanical and /or scheme drawings, and the process design for the methanol converter.

10. Paragraph 18A somewhat incongruously alleges ‘a like duty’ on Davy which presumably means a like duty of care and express (or implied) contractual obligations (which are not qualified by a duty to take care) to prepare and supply to Deepak all necessary drawings, data and information to enable Deepak to set up and run the plant safely, and all design and engineering drawings and technical information for a tube-cooled methanol converter. In further and better particulars supplied in the course of argument, Mr Havelock-Allan QC for Deepak identified the terms of the contract relied upon as Articles 3.2.1; 3.2.2; 3.2.5.2; and clauses 1, 3 and 12 of Annexure IV.

11. Breaches of the collateral warranties referred to in paragraphs 10 and 11 are alleged against ICI in paragraph 21.

12. In paragraph 22 it is alleged that ICI were told that Deepak were experiencing difficulties in operating the plant and sought their assistance and that as a result ICI were under a duty of care to assist Deepak in solving and correcting the difficulties or to warn that continued operation of the plant might be dangerous. Breach of the duty of care on the part of ICI are alleged in paragraph 23.

13. In paragraph 23A it is said that Davy owed a like duty of care to that alleged against ICI in paragraph 22. Further express (or implied) contractual obligations are alleged: (a) to provide qualified and experienced personnel to supervise the operation of the plant, assist Deepak in solving and correcting the difficulties encountered in operation and to warn of dangers that might arise (Articles 3.7.1; 5.3.1; 6.5.5.1.(i)(a) and 6.7.3 were particularised by Mr Havelock-Allan); and (b) a duty to communicate details of improvements to the process (Article 10.5.3). Breaches of those duties and obligations are alleged in paragraph 23B.

14. The explosion is alleged to have been caused by breaches of the duties of care alleged against ICI and Davy in paragraphs 18 and 18A, and breach of the contractual obligations set out in paragraph 18A by Davy (para.25). Alternatively the explosion is said to have been caused by the breaches by ICI of warranty and duty alleged in paragraphs 21 and 23 or Davy’s breach of warranty, duty or contract alleged in paragraphs 21 and 23B (para.26). It is then alleged that the breaches of warranty, duty, contract or misrepresentations caused the loss and damage alleged.

15. It can therefore be seen that claims are brought on the express terms of the contract against Davy and against both defendants:

(a) In breach of a duty of care to act in a certain way

(b) In negligent misrepresentation

(c) For breach of collateral warranties alleged to derive from the representations .

16. It is Davy’s case that all these liabilities are specifically excluded by the express provisions of the contract. In particular:

(a) All liability for breach of express (or implied) terms of the contract is excluded or released by the combined effect of a letter of acceptance, dated 6 February 1992, and Article 7 of the contract. The judge rejected this submission.

(b) All liability in respect of negligence and negligent misrepresentation and/or collateral warranty is excluded by Article 6.8 and/or 10.16. The judge accepted this submission so far as negligence and breach of collateral warranty is concerned. He rejected it in relation to negligent misrepresentation.

(c) That if they are wrong about (a) and (b), there is an overall limit of liability of £100,000 (Article 6.7.1) and such additional and limited liability under Article 6.7.3. The judge rejected this submission.

(d) That Deepak agreed to indemnify Davy in respect of all liabilities in tort (including negligent misrepresentations) and collateral warranties for loss or damage to Deepak’s property; therefore no claims based on these liabilities are maintainable (Article 10.10.2). The judge accepted this submission in relation to negligence; but not negligent misrepresentation or breach of collateral warranty.

(e) That Davy were entitled to be regarded as co-insured on Deepak’s policy which insured the plant inter alia against fire and explosion. This was a property insurance. Therefore, Deepak (or their insurers), could not make any claim against Davy in respect of the money that had been received from insurers in respect of the cost of reconstructing the plant (Article 10.10.2). The judge accepted this submission.

(f) That all losses other than the cost of reconstructing the plant are excluded by Article 6.8. The judge accepted this submission.

The effect, therefore, of the judge’s decision is that Deepak’s claims against Davy are maintainable for breach of express contractual obligations and negligent misrepresentation but only to the extent, which is substantial, that the cost of replacing the plant exceeded that which Deepak had recovered from their insurers and any other direct damage to Deepak’s property.

17. By their appeal Davy submit that the judge was in error in finding that any liability survived. Deepak, on the other hand, appeal all those findings which the judge made against them, save only that they accept that claims in negligence (as opposed to negligent misrepresentation) are excluded by Article 6.8.

18. ICI also contended that they should not be held liable to Deepak for the following reasons:

(a) ICI is entitled to the same indemnity as Davy in respect of any liability for negligence (including negligent misrepresentation) and breach of collateral warranty resulting in damage to Deepak’s property (Article 10.10.3). The judge accepted this construction of the clause so far as liability in negligence was concerned, but not in respect of negligent misrepresentation or breach of collateral warranty.

(b) That ICI are entitled to be regarded as co-insured with Deepak on their insurances of the plant. They advanced the same argument as Davy in paragraph 16(e) above. The judge accepted this argument.

(c) That Davy were entitled to enforce the obligation in Article 10.10.3 so as to restrain Deepak from suing ICI in breach of that article. The judge accepted this submission.

The effect of the judge’s judgment, therefore, is that ICI remain liable to Deepak for negligent misrepresentation and breach of collateral warranty, but so far as damage to the plant is concerned the damages are limited to the cost of replacement not recovered from Deepak’s insurers.

19. ICI support Davy’s appeal that on its proper construction Article 10.10.2 (and hence also Article 10.10.3) excludes liability on the part of ICI for negligent misrepresentation and collateral warranty. Deepak, for their part, appeal the judge’s conclusion in paragraph 18(a) in so far as it relates to ICI’s negligence and his conclusions in paragraphs 18(b) and (c).

20. The judge reached the conclusions which we have set out above in his answers to the 10 preliminary issues. We propose to consider the answer to these issues, but not in the order of their enumeration. First, however, it is necessary to state what should be in the Court’s approach to the construction of exclusion or indemnity clauses. The authoritative statement is to be found in the speech of Lord Diplock in Photo Production v Securicor Ltd. [1980] AC 827 at p850E:

"My Lords, an exclusion clause is one which excludes or modifies an obligation, whether primary, general secondary or anticipatory secondary, that would otherwise arise under the contract by implication of law. Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within the limits that the agreement must retain the legal characteristics of a contract; and must not offend against the equitable rule against penalties; that is to say, it must not impose upon the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation. Since the presumption is that the parties by entering into the contract intended to accept the implied obligations exclusion clauses are to be construed strictly and the degree of strictness appropriate to be applied to their construction may properly depend upon the extent to which they involve departure from the implied obligations. Since the obligations implied by law in a commercial contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the court’s view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than other, is a relevant consideration in deciding what meaning the words were intended by the parties to bear. But this does not entitle the court to reject the exclusion clause, however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only.

My Lords, the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses, mainly in what today would be called consumer contracts and contracts of adhesion. As Lord Wilberforce has pointed out, any need for this kind of judicial distortion of the English language has been banished by Parliament’s having made these kinds of contracts subject to the Unfair Contract Terms Act 1977. In commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.”

21. The contract was governed by Indian law. Before Rix J. there was an issue as to whether Indian law affected the construction of the contract: he decided that it did not. There is no appeal on that point. The Court has therefore approached the question of construction on the basis that Indian law is the same as English law.

22. Whether, pursuant to Article 7, the issue of the Letter of Acceptance, dated 6 February 1992, released Davy from all its obligations and liabilities to Deepak under the contract dated 22 May 1987?

The judge’s answer was ‘No, because upon the facts presently assumed, the necessary condition for the release, namely a successful performance test, has not been established’.

23. The letter of acceptance is signed on behalf of both parties and is in the following terms:

"This letter is issued by DEEPAK FERTILISERS PETROCHEMICALS CORPORATION LIMITED (“DEEPAK”) pursuant to Article 7 of the Contract with DAVY McKEE (LONDON) LIMITED (“DAVY”) dated the 18th day of January 1988 and relating to a 300 MTPD Methanol Plant at Taloja in Maharashtra in the Republic of India.

DEEPAK hereby certifies:

1. That the PLANT has demonstrated acceptable quality and capacity, however, malfunctions in certain areas affects performance parameters.

The PLANT is accepted subject to a retention of £50,000.

2. That:

- 1/3 of the Licence Fee pursuant to Article 9.1.3 and 1/3 of the Basic Engineering Fee pursuant to Article 9.2., however with a retention of £50,000 namely a total of £397,000.

- 10% of the Procurement Fee namely £18,455 pursuant to Article 9.3.3

as certified in Davy’s invoices are now payable by DEEPAK to DAVY."

No point is taken that the contract date is not 22 May 1987. There was apparently some extension.

Article 7.1. provides as follows:

"When Davy has successfully fulfilled all its performance Guarantees under Article 6 and/or has paid liquidated damages as stipulated therein, Deepak will issue a letter of acceptance to Davy and Davy shall be released from its obligations under this contract."

24. The judge effectively gave three reasons for the conclusion to which he came:

(a) the letter of acceptance was ineffective because the necessary precondition for the release under Article 7, namely a successful performance test had not, on the assumed facts, been established.

(b) that if it was said by Davy that the letter of acceptance amounted to a waiver of the performance test, this was not pleaded and should have been.

(c) that by its terms the acceptance was qualified and that was not sufficient to obtain a release.

25. Mr Wilmot-Smith submits that the judge’s conclusions were erroneous. The letter of acceptance was issued by Deepak and was expressly stated to have been issued pursuant to Article 7. The letter itself triggers the release; it makes no sense to require proof of a successful performance test as an additional condition precedent to the release. The letter itself is to be taken as either proof that the performance test has been carried out or that it has been waived. He submits that the letter is akin to a final certificate under a building contract, though stronger in its effect because it is signed by both parties. The issue of the letter permits there to be a clear time at which Davy get their release so as to enable it to order its affairs thereafter.

26. As to the judge’s requirement that waiver should have been pleaded, Mr Wilmot-Smith submits that this is not so. All that was required to be pleaded was the letter and its effect of releasing Davy from liabilities under the contract. No facts are relied upon other than the letter itself coupled with the terms of Article 7 to effect the release. Waiver, he submits, is implied in the pleading.

27. Mr Wilmot-Smith submitted that the letter is not a qualified acceptance in the sense that the main purpose of the letter, namely to effect the release, is negated. The words, ‘however malfunctions in certain areas affect performance parameters. The plant is accepted subject to retention of £50,000’, should not be construed so as to avoid the central intention of the letter, namely to provide the release pursuant to Article 7. The letter makes it clear that £50,000 is retained against these malfunctions; if they are corrected, Davy was entitled to the £50,000; if not, that is the limit of their liability for failure to achieve the performance parameters.

28. We agree with Mr Wilmot-Smith’s submissions. It makes no sense to require further proof of performance tests as a condition precedent to release. It is the purpose of the letter to show that the condition precedent has been fulfilled or not insisted on. We are of the opinion that Davy’s pleading was sufficient. The material facts and the effect of the document were enough to satisfy RSC order 18 r.7(1) and (2). Deepak furthermore ‘certify that the Plant had demonstrated acceptable quality and capacity’. It is plain that the malfunctions, which must have been regarded as minor, were not to affect the acceptance as a whole. Davy would be paid a further £50,000 if and when they were corrected; if they were not £50,000 would be the limit of Davy’s liability under the contract.

29. Two further points should be mentioned. The parties’ motivation for signing the letter of acceptance is irrelevant; it is neither here nor there that Deepak signed it because they did not wish to obtain an extension of the letter of credit from their bankers. At the time Davy contended that the release effected by the letter was against all liabilities including those for breach of collateral warranty and negligence. The judge rejected this submission and was clearly right to do so. The release is confined to the contractual obligations and liabilities pleaded. In our judgment the answer to Issue 1 is yes, but they are not thereby released from claims in negligence or breach of collateral warranty. Nor does it release Davy from its obligations under Article 10.5.3 which may have arisen after the date of the letter of acceptance for the balance of the seven years from 22 May 1987, that is to say between 6 February 1992 and 22 May 1994.

30. Whether any duty of care or obligation under collateral warranty owed by Davy to Deepak was excluded or contracted out by the provisions of Article 6.8 and/or Article 10.16 of the contract?

The judge’s answer was:

‘(i) Article 6.8 excludes the pleaded claims against Davy in the tort of negligence but not other claims such as negligent misrepresentation or collateral warranty.

(ii) Article 10.16 does not exclude Davy’s liability to Deepak for misrepresentation, but does exclude liability to Deepak for collateral warranties given by or on behalf of Davy.’

31. Article 6.8 provides:

“Davy does not assume any liability except as expressly set out in the contract and in no event shall Davy, by reason of its performance or obligation under this contract, be liable in tort or for loss of anticipated profits, catalyst, raw material and products or for indirect or consequential damages.”

Article 10.16 provides:

“This contract comprises the entire agreement between the parties, as detailed in the various Articles and Annexures and there are not any agreements, understandings, promises or conditions, oral or written, expressed or implied, concerning the subject matter which are not merged into this contract and superseded hereby. This contract may be amended in the future only in writing executed by the parties.”

32. Davy submit that the judge was wrong to hold that Article 6.8 did not exclude liability for negligent misrepresentation. This is an action in tort and the damage alleged to flow from the negligent misrepresentation is due to the performance of Davy of the contract which caused the explosion. The judgment of Rix J. at LLR p167 seems to suggest that the sole issue on Article 6.8 was whether an action for negligent misrepresentation was an action in tort (see LLR 2 at p167). In our judgment it plainly is; and that argument now seems to be conceded on behalf of Deepak. The judge was therefore clearly wrong on this point.

33. Mr Havelock-Allan submitted before us, and he says he made the same submission to the judge, that negligent misrepresentation was not a liability arising ‘by reason of Davy’s performance or obligation under the contract’, which governs the subject matter of Article 6.8. We do not accept this submission. It may be that the representation is extraneous to the contract, but the breach of the duty of care and the resultant loss are founded upon Davy’s performance of the contract.

34. As to Article 10.16 Rix J. was plainly correct to hold that this excluded liability in respect of collateral warranty. The combination of the opening words, coupled with ‘and there are not any agreements, understandings or promises oral or written’ clearly covers such a warranty. Mr Wilmot-Smith also submits they cover misrepresentations; furthermore, he submits that it is highly technical to draw a distinction between misrepresentations and collateral warranties based on the self same representations. But we do not think the opening words themselves exclude misrepresentations and they cannot be brought within the specific words. In our judgment the judge was right on his construction of Article 10.16.

35. The effect of our conclusions on issues 1 and 9 is that Davy are under no liability to Deepak either upon the contract, in negligence, negligent misrepresentation or breach of collateral warranty.

36. It is convenient to consider this issue at this point, because it is Davy’s case that if they do not have a complete exclusion of liability under other provisions of the contract, then there is an overall cap under Article 6.7.1 and 6.7.2 on such liability as remains. Although, therefore, issue 7 is framed in relation to issues 1 and 2, it is equally relevant to issue 9.

Issue 7 is in these terms: If the answer to issues 1 and 2 is ‘no’ whether Davy’s liability to Deepak under the contract dated 22 May 1987 is limited to the sum of £315,000 specified in Article 6.7.1 and 6.7.2.

37. Article 6.7 is in these terms:

Overall limit of Davy’s liabilities:

Davy’s total liability under this contract shall be as follows:

6.7.1 Under this Article 6 for liquidated damages also including Davy’s contribution to the modification as replacement of wrongly specified equipment at the rate of 10% of the cost of such modification or replacement per item, a total aggregate liability for all causes of Pounds Stg. 100,000 other than what is stated in Article 6.7.2.

6.7.2 Under Article 10.5.4 and 10.5.5 and for the recommendation of catalyst volume made by ICI as owners of such patents and the process, a total aggregate liability of Pound Stg. 215,000.

38. The judge’s answer was: No, Davy’s liability under the contract is not limited to the sum of £315,000 specified in Articles 6.7.1/2. In particular, Article 6.7.1 does not relate to breach of absolute guarantee and in any event liability continues under 6.7.3. Article 6.7 does not purport to limit liability in respect of non-contractual liabilities or liabilities for breach of contractual warranties.

39. Mr Wilmot-Smith criticises the judge’s reasoning. He points out that the heading, ‘Overall limit of Davy’s liabilities’ and the expression, ‘Davy’s total liability under this contract’ mean what they say; that Article 6.5.5.1(i), which is the clause which deals with absolute guarantees (ie. those that cannot be satisfied by payment of liquidated damages) is specifically stated to be subject to Article 6.7.1; finally he submits that the fact that liabilities survive under 6.7.3 does not prevent all other liabilities being capped under 6.7.1 (or 6.7.2 which relates to liability under patents and does not arise). There is a good deal of force in these submissions.

40. On the other hand it is difficult, if not impossible, to reconcile the provision of Article 6.5.5.1(i) that ‘Davy shall pay the costs of all incorrectly specified equipment supplied and installation (sic) at site, should a substitution or replacement of equipment be necessary’, with the limitation to 10% of those costs in Article 6.7.1. Moreover, as the judge pointed out, it is strange to say the least that the overall cap for failure to perform the absolute guarantees required in Article 6.5.5.1 is not more than the maximum figure payable as liquidated damages for failure to comply with the penalisable guarantees under Article 6.5.5.2.

41. The judge dealt with the question and the interrelationship of Article 6.5 and 6.7 at considerable length on pages 150-154. in his analysis of the structure of the contract, and again at 166 and 167. In the light of our conclusions on issues 1 and 9, and also issue 2, on the construction of the indemnity clause in Article 10.10.2, to which we shall shortly come, we do not think it is necessary to take time on the finer points of detail in relation to the construction of Article 6.7. Suffice it to say that, in our judgment, we do not consider it is sufficiently clear to afford an overall cap of £100,000 on all Davy’s liabilities (other than those under 6.7.3) whether under the contract or otherwise. Issue 8, which was dependent on the answer to issue 7, does not arise.

42. This issue is concerned with the construction of Article 10.10.2. Although the Article must be read as a whole, and also in the context of Article 10.10.1 and 10.10.3, it is concerned with three separate things. First, and foremost, a provision whereby “Deepak indemnify and hold Davy......harmless from and against all liabilities.....for loss of or damage to the property of Deepak”. Secondly, a provision requiring “Deepak to cause to be named as coinsured on all policies of insurance effected in respect of the plant”; and thirdly, a provision whereby rights of subrogation against Davy are to be waived. The first two provisions, indemnity and insurance can conveniently be considered separately.

43. Issue 2(i) is in these terms: “If the answer to issue 1 is ‘No’, whether Davy has a complete defence to Deepak’s claims because: (i) Davy can rely upon the express indemnity contained in Article 10.10.2 of the contract.” The judge’s answer was as follows: ‘No, Davy do not have a complete defence to Deepak’s claims by reason of the express indemnity contained in Article 10.10.2. Davy are not protected by that indemnity in respect of breach of their contractual obligations, and in respect of liabilities for breach of collateral warranties or negligent misrepresentation. They are, however, otherwise protected against extra-contractual claims brought in negligence.’

44. Before Rix J. both Davy and Deepak made submissions which they no longer support. Davy claimed that the indemnity was so wide in its scope that it excluded liability in respect of breach of express contractual obligations. Deepak, on the other hand, submitted that it extended neither to express contractual obligations nor negligence. They relied on the statement of law to be found in the speech of Lord Morton in Canada Steamship Lines Ltd v The King [1952] AC 192 at p208 to the effect that if the words of the clause are wide enough, “the Court must consider whether the head of damage may be based on some ground other than that of negligence; but the other ground must not be so fanciful or remote that the proferens cannot be supposed to have desired protection from it”. Deepak put forward a number of such other grounds of liability. But the judge rejected the argument on the grounds that they were fanciful and remote.

45. The judge’s conclusions on these points, which occupied a considerable part of his judgment on this issue, are no longer challenged. Despite the wide wording ‘against any and all liabilities’ the language is not in our judgment appropriate to provide an indemnity against the consequences of Davy’s breach of express contractual obligations.

46. It is convenient to consider first Deepak’s appeal on the issue. Mr Havelock-Allan submits that the indemnity afforded by Article 10.10.2 was much more limited than the judge found and afforded protection to Davy:

(a) only against extra-contractual liabilities to Deepak arising otherwise than by reason of performance by Davy of its obligations under the contract.

(b) until such time as construction and commissioning of the plant was completed.

47. In support of the first of these propositions Mr Havelock-Allan cited a passage from the judgment of Rix J. at [1998] 2 LLR 159:

"...an indemnity clause such as that with which I am faced should not be construed as intending to protect a party against a liability to his contractual partner....when that liability is due to a breach of his own contractual obligations, whether or not those obligations lie in negligence or are strict obligations , in the absence of express language which covers the matter or unless the logic of the clause and contract otherwise compels such a construction." (emphasis added)

48. Mr Havelock-Allan submitted that the judge found no express language or compelling logic which suggested to him a different construction and his provisional view should have been his final one. But it is not clear to us what the judge intended by the underlined passage. In many contracts the relevant obligation may simply be to take reasonable care, for example in providing medical services or legal advice. In such cases the contractual and tortious duties are co-extensive. But in this case the duties of care alleged are, as we have pointed out in paragraph 10, quite different from the express contractual provisions.

49. Mr Havelock-Allan sought to support his submission by a number of arguments. First it is said that Article 10 of the contract is headed “Miscellaneous”. It contains an assortment of clauses addressing matters not already addressed in the contract. Prima facie, Article 10.10 is a clause which provides cross-indemnities in respect of liabilities between Deepak and Davy not already made the subject of exclusions from liability elsewhere. The major liabilities and exclusions of liability of Davy to Deepak are first addressed in Article 6. By Article 6.8, all liability of Davy to Deepak in tort by reason of Davy’s performance of its obligations under the contract is expressly excluded. But contractual liability of Davy to Deepak is not excluded (save for indirect or consequential damages).

50. We do not consider there is much, if any, force in this argument. Article 10 contains a number of very important provisions. Although to some extent Article 10.10.2 mirrors Article 10.10.1, it goes much further and is likely to be of greater value to Davy than 10.10.1 is to Deepak since Davy are unlikely to have much property that could be affected by Deepak’s activities. Moreover, there is no reason to restrict the effect of Article 10.10.2 to matters not dealt with elsewhere. While the Court will strive to give effect to words in a contract, there is no presumption against overlapping provisions. And it is important to remember that ICI’s protection is to be found solely in the application of Article 10.10.2 to them by way of Article 10.10.3.

51. Then it is said that if, as the judge held, the indemnity was not apt to cover express contractual obligations, it would be incongruous if it had the effect of excluding liability of Davy to Deepak for breaches of duties in tort running parallel to Davy’s contractual obligations. It is not clear what is meant by this expression. As we have pointed out, it is not a case of the same duties of care arising in contract and tort. On the contrary Deepak seek to allege some additional duty to take care which is over and beyond its strict contractual obligations.

52. Finally it is said that the true ambit of indemnity is extra-contractual liabilities of Davy to Deepak arising otherwise than by breach of performance of its obligations under the contract because the language concentrates on death, illness or injury of employees of Deepak. The overwhelming probability is that such injury or death would occur during the procurement for and construction and commissioning of the plant rather than after the plant was complete. It is said to be the mirror image of Davy’s indemnity under Article 10.10.1. This seems to be an attempt to limit the scope to some casual act of negligence, such as discarding a lighted cigarette or dropping a brick in the course of construction. We can see no warrant for limiting the indemnity in this way. The temporal argument impinges upon Mr Havelock-Allan’s next submission.

53. As to the second submission in paragraph 47 (the temporal limit) Mr Havelock-Allan contended that the language of the indemnity in Article 10.10.2 is not consistent with an obligation on the part of Deepak to indemnify Davy against liability to Deepak for damage to the plant occurring after the completion of its construction and commissioning. The contract is for the provision by Davy of services enabling the construction of Deepak’s methanol plant and services in connection with the construction and commissioning of that plant. In such a contract, in the absence of language expressly so indicating, the natural inference is that the indemnity in Article 10.10.2 was not intended to apply after the completion of construction and commissioning of the plant. An indemnity for the full life of the plant, for which Davy must be contending, would be a very surprising provision. This conclusion is reinforced by:

(1) Article 10.10.1

(2) the “benefit of insurance” element of Article 10.10.2

(3) Article 4.2.3.

54. So far as Article 10.10.1 is concerned it is perfectly true that it is in similar terms so far as the indemnity is concerned, but while it may be less likely that Davy’s employees or property will be in a position to be harmed after completion of the plant, it is by no means impossible. In fact the indemnity in Article 10.10.1 is wider in that it extends to ‘Deepak’s agents, successors and assigns and persons for whom Deepak is responsible’, which suggests a longer temporal scope than simply the duration of the construction and commissioning plant.

55. We deal with Deepak’s argument on the scope of the insurance provision in Article 10.10.2 later in this judgment. Suffice it to say that it is quite clear that the insurance provision is not intended to be coterminous with the indemnity, the latter covering far wider scope than damage to the plant, which is the subject matter of the insurance provision. Since the scope of the two provisions are quite different, there seems to be no reason to limit the period of indemnity to that of the insurance, especially as Deepak would take out different insurance policies to cover the two risks.

56. Article 4.2.3 required Deepak to take out ‘transit and storage-cum-erection insurance against the risk in transit from the time of transfer of ownership of imported items to site and during the period of their storage, erection and commissioning of the plant’. Davy were to be coinsured on the policy. Imported items are equipment and materials from sources outside India. It is clear that such insurance only extends until commissioning. Mr Havelock-Allan submits that that is an indication that the indemnity under Article 10.10.2 is also so limited. We do not follow the logic of this argument. There is no connection either by express reference or by content between the indemnity in Article 10.10.2 and the insurance provision in Article 4.2.3. As the judge pointed out (1998 2 LLR 158) it would be extremely difficult to know what was the terminus ad quem for the indemnity. In our judgment Rix J. was right to hold that there was no implied limitation on the temporal scope of the indemnity. We therefore reject Mr Havelock-Allan’s submissions on this point.

57. We turn to consider Mr Wilmot-Smith’s submission, in which he was supported by Mr Mowschenson QC for ICI, that the judge was wrong to exclude liability for negligent misrepresentation and breach of collateral warranty from the scope of the indemnity. Since we have held that Article 6.8 excluded Davy’s liability for negligent misrepresentation and Article 10.16 their liability for breach of collateral warranty, the question is primarily of interest to ICI. The judge approached the matter on the basis that breach of collateral warranty was not within the indemnity and therefore negligent misrepresentations founded upon the same representations were not either.

58. But it seems to us that it is possible to approach the question from the other direction. The words ‘any and all liabilities...for loss or damage to the property of Deepak’ are very wide and, as is now accepted by Deepak, are wide enough to include negligence (though they seek, unsuccessfully as we have indicated, to confine its scope to negligence other than in performance of the contract). In our judgment it is difficult to see why the words should be wide enough to cover one sort of negligence and not another. It is clearly alleged in the points of claim that the negligent misrepresentations resulted in the damage to the plant. If this is correct, it is equally difficult to see why liability for breach of collateral warranty founded upon the same representation should not equally be covered. As we have already indicated, the fact that these liabilities are excluded by Articles 6.8 and 10.16 does not affect the scope of the indemnity, especially as ICI cannot claim the advantage of these articles, but can, as the judge held, indirectly obtain the benefit of the indemnity. It is not unreasonable in a commercial contract such as this to place the risk of damage to the plant and other property of the employer on him, a risk which would normally be covered by insurance.

59. Issue 2 (ii),(iii) and (iv) are in these terms:

ii) the action by Deepak against Davy is one of subrogation founded upon a contract or contracts of insurance the benefit of which flows to Davy; or

iii) if and to the extent that Davy does not have the benefit of contracts of insurance because of the terms thereof or because they do not exist, then Deepak is in breach of contract and the damages (and interest) consequent thereon are co-extensive with Davy’s liability, if any, to Deepak - i.e. there is circuity of action; or

iv) the damages claimed by Deepak arise out of Deepak’s breach of an implied term of the contract not to permit any subrogated claim to be brought against Davy or ICI and are therefore irrecoverable.

60. The Learned Judge concluded that Davy (and ICI) had an insurable interest in the plant:

"As long as they are arguably responsible for damage to it. Since it was Deepak’s case that Davy and ICI were responsible for the explosion, even though it occurred after a time which Deepak accept saw completion of the plant, there was no reason in principle why Davy and ICI should not be entitled to insure against their potential liability."

61. Mr Havelock-Allan seeks to impugn that finding. He contends that a party, having no proprietary or possessory interest in a property, does not have an insurable interest in that property merely because loss of or damage to that property may result from a breach of contract or duty on its part giving rise to a liability in damages to the owner of the property. Alternatively, if the contractor or sub-contractor engaged in connection with the construction of a building ever has an insurable interest in the building itself, he does not have such an interest after construction of the building has been completed merely because the building may suffer loss or damage thereafter as a result of some breach of contract or duty on his part.

62. Mr Wilmot-Smith for Davy (and Mr Mowschenson on behalf of ICI) submit that there was no reason why Davy should not have an insurable interest in the plant which existed during the period of construction the commissioning (which was completed on the 31 January 1992) and beyond the 10 August 1992 when the construction of the plant was complete.

63. Thus the question to be determined is whether Davy would have had an insurable interest in the plant itself. In the absence of such interest no question could arise of Davy insuring the plant or Deepak doing so on Davy’s behalf. In our judgment, the answer to this issue is not complex. Davy may well have had an insurable interest in the plant whilst it was under construction and commissioning.

64. In MacGillivray on ‘Insurance Law’ (9th Edition) at 1-150 it is stated:

"Where a contractor undertakes work and his right to payment is dependent upon the completion of the work, he has an insurable interest in the subject matter of the contract whether it be in his possession or not, because the destruction of the subject matter would prevent him from earning his remuneration under the contract. He has an insurable interest up to the value of the work done and materials expended, and on his expected profits if specifically insured...

1-151 Sub-Contractors. It has been held in cases concerned with the right of an insurer to sue an insured sub-contractor in the name of co-assured that each sub-contractor engaged under a building or engineering contract is entitled to insure the entire contract works for their full value, and to claim on the policy for damage to a part of the works which is neither his property nor at his risk."

See also: Petrofina (UK) Limited v Magnaload Limited [1984] 1QB 127, Stone Vickers Limited v Appledore Ferguson Ship Builders Limited [1991] 2 Lloyds Rep. 288 and National Oil Wells (UK) Limited v Davy Off-Shore Limited [1993] 2 Lloyds Rep. 582. In each case the insurable interest subsisted during construction and commissioning.

65. In our judgment Davy undoubtedly had an insurable interest in the plant under construction and on which they were working because they might lose the opportunity to do the work and to be remunerated for it if the property or structure were damaged or destroyed by any of the “all risks”, such as fire or flood. Thereafter Davy would only suffer disadvantage if the damage to or destruction of the property or structure was the result of their breach of contract or duty of care. In order to protect the contractor and sub-contractors against the risk of disadvantage by reason of damage or destruction of the property or structure resulting from their breach of contract or duty they would, in accordance with normal practice, take out liability insurance or, in the case of architects, professional indemnity insurance. We consider Mr Havelock-Allan’s submission is well founded; what they cannot do is persist in maintaining an insurance of the property or structure itself. Two dates are critical. The commissioning of Deepak’s plant was completed on 31 January 1992. Davy continued to work on the plant thereafter to rectify construction defects but, by 10 August 1992, all known construction defects had been rectified and rectification work had been inspected. At the latest the construction of the plant was complete by the 11 August. Thereafter, with effect from 11 August 1992, Deepak transferred the insurance of the plant from the Marine-cum-Erection Policy (under which Davy and “other Contractors and Sub-contractors appointed from time to time” had been named as co-assured) to the conventional property insurance policy under which the existing ammonia plant was already insured (i.e. the “Fire Policy”). Davy was not named as a co-insured under this policy. Thus by the time the insurance of the plant was switched to the ‘Fire Policy’, Davy was no longer bound to be prejudiced if the plant was damaged or destroyed by an insured peril.

66. Accordingly, we must differ from the approach adopted by the Learned Judge. He held that he could see no reason why Davy (and ICI) should not have an insurable interest in the plant so long as they were arguably responsible in some way for damage to it. He posed the question:

"Why should not an architect or any technical designer or constructor be able to insure himself against his liability for damages to a structure due to his fault, even though the structure fails after its completion?"

67. They could, of course, do so. This would be by means of liability insurance. Even if Davy (and ICI) or any of the sub-contractors had been named in the subsequent ‘Fire Policy’ they would not have been covered in respect of their breach of contract or duty under that policy. We therefore reverse the Judge’s findings on this issue and hold that Davy had no insurable interest in the plant on 30 October 1992, the date of the explosion, giving rise to Deepak’s claims.

68. The co-insurance provision in 10.10.2 provides:

"Deepak. ..... shall cause Davy to be named as co-insured in all policies of insurance effected in respect of the Plant all rights of subrogation against Davy having been waived."

The Learned Judge found:

"The most that has been achieved by the benefit of insurance provisions is that to the extent of cover provided by the Transit, Storage and Erection policy referred to in Article 4.2.3 and any other policies of insurance that may have been effected in respect of the Plant pursuant to Article 10.10.2 ....., the risk of damage to the Plant has been transferred to the insurer, or to Deepak, if Deepak had failed to procure for Davy the benefit of such insurance without rights of subrogation against them."

69. The Learned Judge had earlier held that Article 10.10.2 (unlike Article 4.2.3) imposed no obligation on Deepak to insure the Plant. It only obliged Deepak to name Davy as co-insured in any policy of insurance which was in fact taken out. Davy has not appealed this part of the judgment.

70. Deepak has always conceded that in so far as the co-insurance provision under Article 10.10.2 was effective at the date of explosion, it would confer a defence on Davy to the extent of any insurance indemnity received by Deepak from the insurers of the Plant. It must follow, that if Davy had no insurable interest in the Plant on the date of the explosion the co-insurance term could not still have been effective. Consequently, in our judgment, the Learned Judge should have held that the co-insurance term did not afford Davy a defence to Deepak’s claims at all.

71. The judge summarised the questions posed by these issues as

" Do Articles 10.10.2/3 similarly purport to protect ICI against all claims and if so can ICI claim direct protection as a party with privity of contract with Deepak, or can Davy enforce Deepak’s promises for the benefit of ICI ? "

72. Before the judge and on this appeal Deepak accepted that Article 10.10.3 conferred the same benefit on ICI as Article 10.10.2 conferred on Davy, subject to a point as to whether it extended to ICI’s subsidiary ICI C+P. ICI accepted on this appeal that it had no right to claim direct protection against Deepak. These points were the subject of issues 4, 5 and 6 which are not therefore in contention on this appeal.

73. The issue before us and the real issue before the judge was whether Davy could enforce Deepak’s promises for the benefit of ICI. This was issue 3 which asked :

"Whether Davy may restrain Deepak from pursuing claims against ICI C+P and ICI Plc on the grounds pleaded in paragraphs 49 - 53 of Davy’s counterclaim ? "

The judge’s answer was :

"Subject to Deepak’s contention that the reference to ICI in Article 10.10.3 is a reference to ICI Plc and not also a reference to ICI C+P Davy are entitled to a stay of any significant part of Deepak’s claims against ICI C+P and ICI Plc which is in breach of Deepak’s promise to Davy to indemnify ICI C+P and ICI Plc, alternatively Davy are entitled to specific performance of that promise, the extent of which promise is identified by answers to 2 (i) to 2 (iii) above, mutatis mutandis, ICI for Davy."

74. Although Davy had asked for Deepak’s claims against ICI to be restrained, it was common ground before the judge that if they were entitled to relief it should be by way of stay under the provisions of section 49 (3) Supreme Court Act 1981 even though the court may now restrain proceedings as an alternative to stay.

75. Deepak’s issue 3 appeal raises the question of when a promise by A (Deepak) to B (Davy) that A will indemnify and hold harmless C (ICI) will be enforced at the suit of B for the ultimate benefit of C. Deepak submit that there are two cumulative requirements for such a promise to be so enforced.:

(a) The promise involves, expressly or impliedly, a promise by A not to sue C, and

(b) B has a substantial interest of his own in the enforcement of the promise.

Neither requirement, they submit, is met in this case.

76. Davy and ICI submit that the indemnity given to ICI in Clause 10.10.3 contains an implied promise that Deepak will not sue ICI and that there is no requirement for Davy to show a substantial interest but, if there is, they have one.

77. The judge dealt with the first of Deepak’s points by saying :

"A promise to hold harmless is wholly incompatible with a right to sue "

We agree. An agreement to indemnify and hold harmless contains within it by necessary implication an implied term not to sue. It meets any or all of the well known tests for implication of terms. It would be absurd to allow Deepak to sue ICI with the consequence that ICI sues Davy and Davy then have to sue Deepak for acting in breach of Article 10.10.3 by suing ICI.

78. In support of his submission that the applicant for a stay in Davy’s position had to show a substantial interest of his own Mr. Havelock-Allan referred us to Gore v Van Der Lann [1967] C.A. 2QB 31, the Elbe Maru [1978] 1 Lloyds Rep. 206, European Asian Bank v Punjab and Sind Bank [1982] C.A 2 Lloyds Rep. 356 and The Chevalier Roze [1983] 2 Lloyds Rep. 438.

79. From these cases ( the facts of which do not matter ) we think the following propositions emerge.

1. Equitable fraud (something which is unconscionably unfair) is the basis upon which the courts will restrain or stay the proceedings on the application of a stranger to those proceedings. The power to do so is discretionary.

2. Something more than a promise not to sue is required. The applicant must show that he has some interest of his own to protect. This has been expressed in various ways viz.: “Some other good reason”, “the real possibility of prejudice” and “some legal or equitable right to protect such as an obligation to indemnify the defendant”.

3. Whether the applicant has shown that he has such an interest depends upon the facts of each case. Where for example there is an issue as to whether the applicant will be required to indemnify the defendant if the proceedings continue the court must consider the likelihood of a claim for indemnity being made and its merits if it is said to be obviously unsustainable, but no prolonged investigation of the issues or potential issues is called for.

80. We do not think the decision of The House of Lords in Beswick v Beswick (1968) AC 58 casts any doubt on these propositions. It was cited by counsel for ICI as authority for the proposition that it is not necessary for the applicant to show that he has a financial interest in the outcome of the proceedings which he is seeking to restrain. We agree that the authorities do not go this far although in commercial cases it is likely that the applicant will not establish that he has a sufficient interest unless it is a financial one. On any equitable view of the facts in Beswick the widow as administratrix of her husband’s estate did have a substantial interest in enforcing the agreement which the defendant had made with her husband to pay her an annuity after his death.

81. So can Davy show on the facts of this case a sufficient interest of their own so as to entitle them to restrain Deepak’s claim against ICI insofar as it is within the scope of the indemnity provided by clause 10.10.3? The judge held that they could because a claim for indemnity had actually been made by ICI against Davy in the proceedings and that it raised serious issues to be tried.

82. Deepak say that this was the wrong approach. The mere fact that a claim for indemnity had been asserted got Davy nowhere. The court should have asked whether it disclosed a cause of action and concluded (with one exception) that it did not. In support of this submission Mr Havelock-Allan relied on an analysis of the third party notice from which he invited the court to reach that conclusion.

83. ICI’s third party notice claims against Davy

(a) Contractual indemnity under the licensing agreement;

(b) Indemnity in respect of ICI’s liability to Deepak for negligent mis-representation or breach of collateral warranty on the ground that such representations and warranties are to a large extent alleged by Deepak to have been made by Davy on behalf of ICI and Davy had no authority to make or give them ; and

(c) Contribution under the 1978 Act .

Based upon a detailed analysis of the licensing agreement Mr Havelock-Allan submits that Davy did not give any relevant indemnities to ICI and this part of the claim is demurrable. As to b) however he concedes that to the extent that clause 10.10.3 provides indemnity against liability for negligent mis-representation and breach of collateral warranty Davy would have a real interest in enforcing Deepak’s promise potentially sufficient to justify a stay as regards the full extent of Deepak’s mis-representation and collateral warranty claims against ICI. Mr Havelock-Allan submits and we accept that c). is irrelevant for present purposes.

84. In the present case there is a claim for an indemnity by ICI against Davy. Like the judge we think this of itself gives Davy a sufficient interest of their own unless the claim against them is obviously bad. No such claim had actually been made in any of the cases to which we were referred. We do not think we are required to embark upon a detailed analysis of ICI’s claims. It is ICI’s case that the licence provided that they were to be under no liability to Davy’s customers and so if they are under such liability it is because Davy made representations on their behalf without their authority. We do not think these allegations are demurrable. In any event in the light of our finding that the indemnity in clause 10.10.2 (and therefore 10.10.3) extends to Deepak’s misrepresentation and collateral warranty claims, Davy do have a real interest in enforcing Deepak’s promise not to sue as Mr. Havelock-Allan conceded.

85. It follows that we think that Davy do have a sufficient interest of their own in restraining Deepak’s claim against ICI. As both of the requirements for obtaining a stay are satisfied in this case, we conclude that the Judge was right to hold that Davy were entitled to one.

86. Deepak contend that this conclusion means that the stay should only ex tend to claims against ICI in respect of representations made by Davy purportedly on behalf of ICI. We do not agree. Clause 10.10.3 gave ICI the same benefit as Clause 10.10.2 and it is accepted or we have held that the latter clause provides indemnity against liability in negligence including negligent mis-statement and for breach of collateral warranty so the indemnity covers the entirety of Deepak’s claim against ICI. We think the stay likewise should extend to the whole promise. It follows that Deepak’s appeal on this issue should be dismissed.

87. The judge’s answer to the question raised by Issue 3. is linked to his answers to questions 2(i) to (iii) and refers in the alternative to specific performance which he described in his judgment as “the other side of the equity”. Since a stay of the proceedings against ICI in respect of the claims to which the indemnity contained in clause 10.10.3 relates gives Davy all the relief to which they are entitled and there is no question of ICI obtaining the benefit of Deepak’s insurance recoveries, we wonder whether the answer to this question need refer to specific performance. However unless the parties are agreed that the question can be answered in a simpler way the answer the judge gave will stand.

88. Whether the losses claimed by Deepak from Davy are excluded from recovery by reason of Article 6.8.

For the purposes of this issue the critical words of Article 6.8 are:

"... and in no event shall DAVY by reason of its performance or obligation under this CONTRACT be liable ... for loss [of] anticipated profits, catalyst, raw-material and products or for indirect or consequential damages."

The Learned Judge held that subject to the ruling in relation to Article 6.8 under Issue 9, all Deepak’s heads of claim against Davy are excluded by Article 6.8, except the claim in respect of the cost of reconstructing the Plant.

89. On behalf of Deepak, it is said that the Learned Judge fell into error in so deciding. In relation to causes of action falling within Article 6.8 it excludes liability for (i) loss of anticipated profits, (ii) loss of catalyst, (iii) loss of raw-material, (iv) loss of products, and (v) indirect or consequential damages. The heads of claim are in respect of fixed costs and overheads referable solely to the methanol plant during the period from the explosion to the resumption of commercial production, and loss arising from the fact that the reconstructed plant used more catalyst per charge than the original, respectively. It is said that neither head of claim falls within any of (i)-(v). In particular, as regards (v), “indirect or consequential damages” are losses other than direct loss naturally arising from the breach of contract or duty under consideration, and neither of the heads of claim at issue arose other than directly and naturally from the breaches of contract or duty alleged. Davy submit that these claims are excluded under the language of “indirect or consequential” damages, or in the case of the last head of claim under the word “catalyst”. Croudace Construction Limited v Cawoods Concrete Products Limited [1978] 2 Lloyds Rep. 55 concerned the late delivery of masonry blocks which the buyers required for the construction of a school. The contract of sale provided that the sellers were:

"Not under any circumstances to be liable for any consequential loss or damage caused or arising by reason of late supply ...."

Parker J held that the word “consequential” did not cover any loss which directly and naturally resulted in the ordinary course of events from late delivery. He held that losses which began to “clock up at once”, (namely the cost of idle men and plant etc.) were to be regarded as direct and not consequential. His decision and reasoning were upheld by the Court of Appeal. The Learned Judge having considered this decision stated that he did not find the citation of much assistance in determining the application of Article 6.8 to the individual heads of damage and to their constituents. He continued:

"In this contract it seems to me that the direct loss contemplated was the cost of getting the plant right, not the indirect or consequential losses flowing from getting the plant wrong."

He accordingly rejected the claim for fixed costs and overheads.

90. We are unable to accept that conclusion. The direct and natural result of the destruction of the plant was that Deepak was left without a Methanol plant, the reconstruction of which would cost money and take time, losing for Deepak any methanol production in the meantime. Wasted overheads incurred during the reconstruction of the plant, as well as profits lost during that period, are no more remote as losses than the cost of reconstruction. Lost profits cannot be recovered because they are excluded in terms, not because they are too remote. We consider that this Court is bound by the decision in Croudace where a similar loss was not excluded by a similar exclusion and considered to be direct loss. Accordingly we cannot agree with the Learned Judge’s conclusion:

"In essence, therefore, loss of profits and overhead expenses thrown away are too closely related elements of the consequential loss which flows from a break in production."

We have come to the conclusion that this was an error in law and that the finding of the Judge on this issue must be reversed.

91. We find the extra catalyst cost more difficult. The Learned Judge said:

"As to the extra Catalyst claim, I think that in the absence of any guarantee concerning Catalyst, that is also covered by the exclusion of indirect or consequential damages, even if it be not within ‘catalyst’."

92. On behalf of Davy, Mr Wilmot-Smith contends that it must be appropriate to exclude the consequential losses regardless of the source of liability such losses, being, as a matter of construction all the losses claimed save for the cost of reconstructing the plant. The approach to the clause in separating out such losses as being the cost of “getting the plant wrong”, as opposed to the cost of putting the plant right, is he submits an appropriate one. In our view, just as the Judge’s distinction between the “cost of getting the plant right” and loss suffered as a result of Davy’s “getting the plant wrong” lead him into error in regard to the claim for wasted overheads (and loss of profits) he has mistakenly applied the same reasoning to the extra catalyst cost. In our opinion, the extra cost claimed is not (as contended by Mr Wilmot-Smith) ‘a loss of profit claim by another name’. The extra cost claimed is the cost which has now become necessary in order to ensure and enable the plant safely to produce the methanol in those quantities which the plant was supposed to. In other words, we would hold that this extra cost is akin to any other cost (such as an additional piece of plant or part) which achieved the same result. This could not be categorised as an indirect or consequential loss or damage nor could its cost be categorised as constituting a loss of profit.

Accordingly, we would reverse the Learned Judge’s conclusion on this aspect also.

93. Mr Wilmot-Smith also contends without total enthusiasm that the proper construction of Articles 6.8 coupled with Articles 6.7 and 7 is such that even the cost of re-construction is excluded. We reject this argument; the Judge was correct to find that this head of claim was sustainable.

Appendix

In the preamble it is stated

WHEREAS

1. DEEPAK intends to install a Methanol Plant at Taloja in Maharashtra in the Republic of India for the production of 300 Metric Tonnes per day of Grade AA Methanol.

2. IMPERIAL CHEMICAL INDUSTRIES LIMITED, a body with offices in London, England (hereinafter referred to as “ICI”) has developed a low pressure process for the production of Methanol.

3. Under a subsisting agreement between ICI and DAVY, DAVY has access to Technical Know-How relating to ICI Process and is authorised to grant licences to use such process in the design, construction, operation and maintenance of methanol plants”.

Article 2 is headed “Design Basis and Battery Limits” and provides in part that

“2.1 The PLANT shall be one which is reliable, energy efficient and capable of continuous, smooth un-interrupted operation, producing a minimum of 300 MPID Methanol Grade AA with natural gas and CO2 as raw- material. It shall have proper ease of operation and maintenance for operating a minimum of 330 days a year.”

Article 3 is headed “Obligations of Davy” and provides by article 3.1 for the grant to Deepak of a process licence for the plant, including know-how which “may be available to DAVY in future by way of IMPROVEMENTS”. Article 3.2 covers the supply of technical know-how and basic engineering. It provides:

3.2.1 DAVY shall prepare and deliver to DEEPAK Technical Know-How and Basic Engineering package comprising of design and engineering drawings, documents and technical information for the PLANT as described in ANNEXURE IV.

3.2.2 DAVY undertakes that the Technical Know-How and Basic Engineering shall be such as would enable the PLANT to produce Grade AA Methanol of quantity and quality specified in Article 6.

"3.2.5 The said Technical Know-How and Basic Engineering shall be such as will ...

3.2.5.2 Enable DEEPAK, subject to the said detailed engineering

and procurement, to set up a PLANT for the manufacture of Grade AA Methanol with the capacities, quality, properties, raw material and utility consumption as per Article 6, taking into consideration the site conditions at Taloja and the raw materials and utilities as per ANNEXURE II.

Article 3.3 is concerned with the supervision and approval of detailed engineering and provides:

"3.3.1 The Detailed Engineering and indigenous procurement for the

PLANT shall be done by DPG."

"3.3.2 In order to comply with PERFORMANCE GUARANTEES of the

PLANT, DAVY shall supervise and give its approval or advice and comments as the case may be on the drawings and documents submitted by DPG as described in ANNEXURE V within 21 days of receipt."

Article 3.7 provides:

"3.7.1 DAVY shall provide agreed number of supervisory personnel,

suitably qualified and experienced for assistance in supervision of erection, mechanical testing, and for supervision of start-up and initial operation of the PLANT. The particulars relating to the estimated number, category and duration of stay of DAVY’s personnel is given in ANNEXURE VII. DAVY shall also arrange for deputation of respective vendor’s personnel as required by DEEPAK for supervision of erection, start-up of individual equipment. All such personnel shall be governed by terms and conditions as given in ANNEXURE VIII.."

Article 3.8 deals with “Other Obligations of DAVY” and begins-

"3.8.1 DAVY shall also:

a) Undertake guarantees and liabilities as given in Article 6."

Deepak’s obligations (other than payment of the price, which is dealt with in article 8) are dealt with in article 4. Article 4.2.3 contains the only contractual provision obliging Deepak to take out any insurance, as follows:

"4.2.3 Taking out transit and storage-cum-erection insurance against the

risk in transit from the time of transfer of ownership of IMPORTED ITEMS to SITE and during the period of their storage, erection and COMMISSIONING of the PLANT. DEEPAK shall name DAVY as an additional insured under policy(ies) and shall cause the insurer to waive the right of subrogation under this policy(ies)."

Article 5 deals inter alia with the performance test which was to follow mechanical completion and form part of the commissioning of the plant. Article 5.3 under the head ‘Start-up and Commissioning’, provides:

"5.3.1 Upon the MECHANICAL COMPLETION Certificate being issued,

DEEPAK shall put the PLANT or any section thereof into operation under DAVY’s instructions.

(Start-up the PLANT shall be deemed to have been provisionally achieved when it has operated successfully for at least three days with an average production not less than 80% of the guaranteed daily production capacity.)

During this period, DEEPAK shall make to the PLANT such changes, additions, deletions and/or modifications as deemed necessary by DAVY to achieve the guaranteed production capacity, and product quality as per Article 6.5.1."

Article 5.4, headed ‘Performance Test’ provides:

"5.4.1 DAVY shall demonstrate through a PERFORMANCE TEST that the

PLANT is capable of achieving all the Performance Guarantees and requirements specified in Article 6. Such PERFORMANCE TEST shall be of 120 hours continuous duration.

5.4.3 PERFORMANCE TESTS shall be carried out in accordance with the procedure set out in ANNEXURE XIII."

Thus Davy’s obligations under article 3 and the performance test provisions of article 5 both refer forward to article 6. Article 6, headed “Warranties, Guarantees and Liabilities” provides inter alia as follows:

"6.5 Performance Guarantees:

6.5.1 Provided that DEEPAK has fulfilled its obligations under this CONTRACT in a satisfactory manner and the PLANT is operated and tested in accordance with DAVY’s instructions and [ sc Deepak] operates the PLANT by skilled operators, DAVY guarantees the quality of the final product, capacity of the PLANT, consumption of raw-materials and utilities and that the treated effluents shall meet the current requirements of Maharashtra Water Pollution Control Board given in ANNEXURE II, all as specified in this Article.

6.5.2 The PLANT shall be capable of sustained, steady and continuous operation and of meeting the full requirement as stated below, all of which are guaranteed by DAVY, which shall be proven and demonstrated by the PERFORMANCE TEST.

6.5.3 Based on ambient and meteorological conditions, the raw material and utilities conforming to the data and specifications as per basis of design given in Annexure II, DAVY guarantees... [There follow guarantees of production capacity, product quality, and consumption of raw materials and utilities].

6.5.4 The guarantees outlined in 6.5.3 are divided into absolute guarantees and penalizable guarantees.

6.5.4.1 Absolute guarantees are defined as those guarantees which

DAVY shall establish without limitations as they cannot be satisfied by the payment of liquidated damages. These include the following:

a) Minimum 95% of the guaranteed Production Capacity of the PLANT.

b) Product quality as per Article 6.5.3.2.

c) Specific raw-material consumption within 102.75% of the guaranteed consumption.

d) Specific Utilities consumption within 110% of the guaranteed utilities consumption.

6.5.4.2 Penalizable guarantees shall be defined as those

guarantees which can be satisfied by DAVY on payment of liquidated damages as per Article 6.5.3.2. [ sc 6.5. 5.2]. These shall include the following:

a) Capacity of the PLANT if below 100% but not less than 95% of the guaranteed capacity.

b) Specific raw-material consumption between 100% and 102.75% of the guaranteed consumption.

c) Specific utilities consumption between 100% and 110% of the guaranteed figures, for utilities.

6.5.5 Liability for non-fulfilment of performance Guarantees:

6.5.5.1

(i) In the event that due to mistake or negligence or omission in the process and/or in the engineering performed by DAVY and or DAVY’s specifications, DAVY is unable to demonstrate the absolute guarantees, DAVY shall ask DEEPAK to proceed to effect the rectifications, modifications, replacements and/or changes which in DAVY’s professional judgement are necessary to eliminate the defects and/or parts and thereby to achieve the specified guarantees, DAVY shall provide free of charge to DEEPAK the engineering, drawings, procurement, inspection as well as supervision services which are in DAVY’s scope of work under the CONTRACT. In addition, and subject to the provisions of Article 6.7.1, DAVY shall pay for all costs of incorrectly specified equipment supplied and installation at SITE, should a substitution or replacement of equipment be necessary or shall reimburse such costs to DEEPAK if such payments have been made by DEEPAK. After the changes, additions and/or modifications, a new PERFORMANCE TEST shall be conducted.

(ii) If DAVY has neglected or refused to take necessary measures to ensure the elimination of the defects and/or faults in its services within a reasonable time, then DEEPAK may take such remedial steps for the engineering, procurement, inspection and supervision of erection of new equipment to rectify the defects and all costs of such remedial services taken by DEEPAK shall be to DAVY’s account and will constitute a debit due from DAVY to DEEPAK.

6.5.5.2

In the event that the absolute guarantees have been successfully demonstrated but the penalizable guarantees are not met, DAVY shall either take similar action as given in Article 6.5.5.1 (i) to execute the required modifications to the PLANT or at its option pay the liquidated damages as below:

(a) For non-fulfilment of absolute guarantees at 100% capacity but subject always to fulfilment of absolute guarantees at 95% capacity, a sum of Pound Stg. 20,000 for each 1% of production less than 100% capacity will be payable by DAVY as penalty.

(b) For calculating the liquidated damages for excess consumptions of raw material and utilities as stipulated in Article 6.5.3.3, both the actual and guaranteed costs based on unit cost in Indian Rupees for raw material and for total utilities will be considered individually. The difference in the actual and guaranteed costs for the above will be the criterion and the following shall be paid by DAVY as penalties:

(i) For every Rs.5/- increase in total cost of raw-material per tonne of Methanol over the figures given in 6.5.3.3(i) up to a total increase of Rs.10/-, a sum of Pound Stg.5000 (Pound Sterling five thousand only).

(ii) For every Rs.5/- increase in total cost of raw material per tonne Methanol beyond what is stated in (i) above, a sum of Pound Stg. 20,000 (Pound Sterling twenty thousand only).

(iii) For every Rs.2.5 increase in the total utilities cost per tonne of Methanol over the figure given in 6.5.3.3(ii) above, a sum of Pound Stg. 10,000 (Pound Sterling ten thousand only).

6.7 Overall limit of DAVY’s liabilities:

DAVY’s total liability under this CONTRACT shall be as follows:

6.7.1 Under this Article 6 for liquidated damages also including DAVY’s contribution to the modification or replacement of wrongly specified equipment at the rate of 10% of the cost of such modification as [ sc or] replacement per item, a total aggregate liability for all causes of Pound Stg. 100,000 other than what is stated in Article 6.7.2.

6.7.2 Under Article 10.5.4 and 10.5.5 and for the recommendation of catalyst volume made by ICI as OWNERS of such patents and the PROCESS, a total aggregate liability of Pound Stg. 215,500.

6.7.3 Additionally, DAVY shall, in respect of defects or omissions in its technical documentation remedy or complete such documentation and provide such additional supervisory services as may be necessary to DPG to permit the PLANT to meet the absolute guarantees without any charge to DEEPAK.

6.8 DAVY does not assume any liability except as expressly set out in the CONTRACT and in no event shall DAVY by reason of its performance or obligation under this CONTRACT be liable in tort or for loss [ sc of] anticipated profits, catalyst, raw material and products or for indirect or consequential damages.”

Article 7 next deals with the subject of “Acceptance of the Plant” and provides:

“7.1 When DAVY has successfully fulfilled all its Performance Guarantees under Article 6 and/or has paid liquidated damages as stipulated therein, DEEPAK will issue a letter of acceptance to DAVY and DAVY shall be released from its obligations under this CONTRACT.

“7.2 If the PERFORMANCE TEST cannot be carried out and/or accomplished within 36 months from the EFFECTIVE DATE due to reasons for which DAVY is not responsible, the PLANT shall be deemed accepted for the purpose of payments under the CONTRACT.

“7.3 Notwithstanding what is stated in Article 7.2, DAVY shall, for a period of 42 months from the EFFECTIVE DATE, continue to have obligations under the CONTRACT for start-up, COMMISSIONING and PERFORMANCE TEST of PLANT and shall remain liable to pay liquidated damages for any deficiencies in performance and if need be reperform its engineering, all as prescribed in Article 6, if so requested by DEEPAK.”

Article 8 sets out the prices of fees payable to Davy for their various services, namely £431,000 for the Process Licence, £910,000 for the supply of Know-How and basic engineering and supervisory services, £300,000 for the services in procuring imported items, and an estimated £316,000 for the supervision of construction, commissioning and performance test. Article 9 provided for payment of various percentages of these fees on acceptance of the plant pursuant to Article 7.

Article 10, headed “Miscellaneous”, provided by Article 10.2 that the contract should be governed by Indian law. Article 10.5.3 contained a mutual clause relating to improvements, whereby each party was to remain liable for 7 years from the effective date of the contract to communicate to the other party any improvements which the first party became aware of or acquired. Article 10.10 contained “indemnity” provisions, as follows:

“10.10.1

DAVY shall indemnify and hold DEEPAK, its employees and agents, successors and assigns and persons for whom DEEPAK is responsible, harmless from and against any and all liabilities for death, illness or injury to any employee of DAVY or for the loss of or damage to the property of DAVY or the property of its personnel.

“10.10.2

DEEPAK shall indemnify and hold DAVY and its employees harmless from and against any and all liabilities for death, illness or injury to any employee of DEEPAK or its associated or subsidiary companies or contractors or for loss of [ sic] damage to the property of DEEPAK or the property of its personnel and shall cause DAVY to be named as co-insured in all policies of insurance effected in respect of the Plant all rights of subrogation against DAVY being waived.

“10.10.3

For the purposes of this Article DAVY shall include the licenser ICI and their employees and DEEPAK shall include all associated organisations, its contractors and their personnel.”

Finally, Article 10.16 contained an “Entirety of Agreement” clause as follows:

“10.16 Entirety of Agreement

This CONTRACT comprises the entire agreement between the PARTIES, as detailed in the various Articles and Annexures and there are not any agreements, understandings, promises or conditions, oral or written, expressed or implied, concerning the subject matter which are not merged into this CONTRACT and superseded hereby. This CONTRACT may be amended in the future only in writing executed by the PARTIES.”

Article 5.4.3 had referred to Annexure XIII as containing the procedure for carrying out the performance test. Detailed provisions for that procedure are there laid down. Of particular note are the following:

“2.1 General

...If there is a failure of the PLANT to operate as specified, DAVY shall have the right to modify the operating conditions and instructions within safe and stable operation of the equipment.

“2.4 Fulfilment of Guarantees

Within seven (7) days after receipt of the PERFORMANCE TEST RESULTS, chemical analyses, and DAVY’S evaluation, DEEPAK shall signify in writing its agreement or specify in what respect the guarantees have not been met. In the event DAVY has not received a letter of acceptance or rejection within seven (7) days of the receipt by DEEPAK of said results, all guarantees pertaining shall be deemed to have been satisfied and DEEPAK shall forthwith issue to DAVY a Certificate of Acceptance for the PLANT.

“2.5 Additional PERFORMANCE TESTS

If, through fault of DAVY, any parts of the Performance Guarantees are not satisfied, additional PERFORMANCE TESTS may be necessary to permit the PLANT to satisfy its guarantees...

“Failure on the part of DEEPAK to conduct operations as provided herein or failure on the part of DEEPAK, in reasonable time, to make such alterations as recommended or to repeat the PERFORMANCE TEST as Contractor may request, shall constitute a waiver of the requirement for such PERFORMANCE TEST and thereupon the Performance Guarantees with respect to the PLANT shall be deemed to have been satisfied and the Certificate of Acceptance issued.

“2.7 Waiver of Acceptance Test

DEEPAK may, at its option, elect to accept the PLANT without a successful Acceptance Test at any time, in which event all liabilities to DAVY as to Performance Guarantees for the PLANT shall terminate. If the PLANT is accepted in this manner, DEEPAK shall give DAVY written notification.”

Order: Appeal dismissed; Davy to have 70% of costs below

and 50% in the appeal; application for leave to appeal

to the House of Lords refused.