England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		05/10/2011

Mr Justice David Steel :

Introduction

1. The Claimant ("Acergy") is part of a multi-national offshore engineering group. The Defendant ("Sobrena") runs a ship repair Yard in Brest, France. The Acergy Falcon ("the vessel"), owned by Acergy, is a very valuable pipe laying vessel used for offshore oil and gas exploration.
2. Acergy needed to perform maintenance works on the vessel in dry-dock. To this end, on 22 December 2009, Acergy concluded a contract, based on an Acergy standard form, for the provision of dry-docking services with Sobrena. The vessel arrived at Sobrena's yard at Brest, France, on 5 January 2010 and was dry-docked the next day. She has a "Carousel", a large hollow drum around a hub from around which pipes are unwound, in Hold No. 3 aft ("the carousel hold"). The work to be undertaken by Sobrena included deck plating work on limited parts of the deck above the carousel hold. In the early morning of 13 January 2009, a fire started when welding material residue or melted steel from the deck plating work dropped down to the bottom of the carousel and ignited combustible materials.
3. The contract contains, in Article 10 of Attachment 2, a set of reciprocal indemnity provisions in respect of damage to property or personal injury. They read as follows:

10. Indemnity

10.1 Supplier shall be responsible for and shall indemnify and hold harmless Buyer's Group and Client Group from and against all claims, losses, damages, costs (including legal costs), expenses, liabilities howsoever arising related to:

- Disease of or injury to or death of any person employed or provided by Supplier's Group;

- Damage to or loss of Supplier's Group's property

And which arises out of or is in connection with the performance of the Contract.

10.2 Except as provided in Article 10.3, Buyer shall be responsible for and shall indemnify and hold harmless Supplier's Group from and against all claims, losses, damages, costs (including legal costs), expenses and liabilities howsoever arising related to:

- Disease or injury to or death of any person employed or provided by Buyer's Group or Client Group.

- Damage to or loss of Buyer's Group and Client's Group's property.

and which arises out of or is in connection with the performance of the Contract.

However, Buyer's indemnity for Client Group personnel and property set out above is limited to and applies only in the event and to the extent of an enforceable indemnity given by Client on behalf of Client Group under the Main Contract.

10.3 From start of the Works and until issue of the Delivery Certificate or, if later, the date when actual physical delivery of the Works to Buyer takes place, Supplier shall be responsible for loss or damage to the Works and shall carry out necessary measures to ensure that the Works are completed in accordance with the Contract. The cost of carrying out such measures shall be borne by Supplier and Supplier shall indemnify and hold Buyer's Group and Client Group harmless from and against all claims, losses, damages, costs (including legal costs) expenses and liabilities howsoever arising of Buyer's Group or Client Group in relation to the loss and damage to the Works. The same applies to loss or damage, while in Supplier's custody and care, to any Free Issue items, to other Materials or items which are part of Buyers deliverables under the Main Contract or to any property on which Supplier performs work. Buyer agrees to extend to Supplier the benefit and protection of any insurance coverage or indemnity for Buyer's Suppliers provided by the Client under the Main Contract. Supplier remains liable for any deductible.

10.4 The indemnities contained in this Article 10 shall apply irrespective of cause and notwithstanding the negligence or breach of duty (whether statutory or otherwise) of the indemnified party or any other entity or party and shall apply irrespective [of] any claim in tort, under contract or otherwise at law.

4. The contract also contains a liability cap of €30 million at "new" Article 10.3, added by the Special Terms and Conditions at Attachment 1. It is common ground that this new Article 10.3 which is set out later in this judgment is additional to and not a substitution for old Article 10.3. This cap is of some significance since the damage sustained in the fire may have amounted to over €30 million. There is also a claim for liquidated damages for delay in the sum of about €1 million.
5. There is an underlying dispute, not for determination at this hearing, about how the fire was caused and whose fault it was. Acergy says the fire was caused because Sobrena's subcontractors failed to take sufficient care in respect of the fire risks during the deck plating works. Sobrena says that the fault was Acergy's, in particular because Acergy left combustible materials in the hold, removed protective sheeting which Sobrena's sub-contractors had put on that material, and moved the combustible material into the proximity of the deck plating works without informing Sobrena. Thus each party claims the fire damage was caused by the other's breach of contract.
6. But since Article 10.4 precludes consideration of cause, fault or underlying legal claims, it is common ground that the application of the indemnities is decisive (subject to the effect of the insurance provisions). Accordingly the court ordered that the following preliminary issues be tried:

The first and second sentences of 'Old' Article 10.3

1. In respect of what loss or damage caused by the fire to the Vessel is the Defendant liable to indemnify the Claimant under the first two sentences of 'Old' Article 10.3? Specifically, is the Defendant liable thereunder to indemnify the Claimant in respect of:

1.1 The loss or damage caused by the fire to the work in respect of the steel plating above the carousel hold which had been performed by the time of the fire;

1.2 The loss or damage caused by the fire only to all parts of the Vessel on which the Defendant was to perform work under the Contract, irrespective of whether the Defendant had in fact performed or had yet to perform such work by the time of the fire; and/or

1.3 All loss or damage caused by the fire to the Vessel?

The third sentence of 'Old' Article 10.3

2. Is the Defendant liable under the third sentence of 'Old' Article 10.3 to indemnify the Claimant in respect of loss and damage caused by the fire to the Vessel or part of her? More specifically:

2.1 Did the Vessel as a whole or any part of her constitute property in which the Defendant "performs work" within the meaning of the third sentence of old article 10.3?

2.2 Was the Vessel as a whole or any part of her in which the Defendant "performs work" in the Defendant's "custody and care" at the time of the fire?

The fourth and fifth sentences of 'Old' Article 10.3

3. Is the effect of the fourth and fifth sentences of 'Old' Article 10.3 that the Claimant is precluded from claiming against the defendant in respect of losses covered by the Claimant's insurance save to the extent that they fall below the deductible?

Article 10.2

4. Does the indemnity in Article 10.2 apply, so that the Claimant is obliged to indemnify the Defendant in respect of the loss and damage which is the subject of the Claimant's claims in this action?

The ambit of the limit of indemnity in 'New' Article 10.3

5. On the true construction of the Contract, if the Claimant is otherwise entitled to liquidated damages as claimed, is it entitled to such damages in addition to he limit of indemnity in 'New' Article 10.3 or are such damages caught by that limit of indemnity?

7. As appears, preliminary Issues 1, 2, and 4 are directed to the resolution of the proper application of the indemnities. In addition there are in short the two other questions of principle: Issue 3: whether Acergy's claim is defeated by the insurance provisions in the last two sentences of old Article 10.3 and Issue 5: whether Acergy's claim for liquidated damages is caught by the liability cap of €30m in new Article 10.3.

Contractual background

8. The contract was entered into against the background of a specification dated September 2009. The contract was formed of a number of attachments. The primary terms were set out in Attachment 2. Article 1 provided that "Works" should mean all work performed by Sobrena pursuant to the contract and "Worksite" meant "any place where the Works are to be executed". Article 4.2 provided for liquidated damages in the event of delay in the performance of the Works by Sobrena. This was amplified in Attachment 5 which determined that the amount payable was 1% of the contract price for each day of delay.
9. Attachment 2 further provided as follows:

"23.1 As and when it is necessary for [Sobrena's] employees…to go on the premises of [Acergy], [Sobrena] agrees too assume full responsibility for the proper and safe conduct of employees to comply with all statutory requirements, site rules, Health, Safety and Environmental rules and regulations.

24.1 [Sobrena] shall not claim any lien or attachment on any part of the Works or on any property of [Acergy] in possession of [Sobrena] at the Worksite.

25.1 This contract and any dispute of claim arising out of or in connection with it … shall be governed by and construed in accordance with the laws of England

27.1 Save to the extent of any indemnity provided under the Contract and liquidated damages, each party waives any claims against the other party and its Group for, and shall be responsible for, and shall indemnify and hold harmless the other party and its Group for any special, indirect, incidental or consequential damages… "

10. Attachment 7 was concerned with various procedures including in particular HSE procedures. Article 5 required Sobrena to comply with the terms of an Acergy document on the topic which was added as an appendix. Sobrena was also required to comply with "any local worksite rules". The Article went on to provide:

"[Acergy] operations may be on going at the same time as [Sobrena] operations. [Acergy] therefore requires collaboration and good communication between the 2 Safety Management Systems that therefore will exist on site….An office will be required for the single point of issue for the two Permit to Work systems will be required (sic) to be supplied by [Sobrena]. "

11. The appendix contained the following provisions:

"1.1 …This site HSES Focus level has been established following [Acergy] Group procedure … and means that [Sobrena] is not working on a site managed by [Acergy] but HSES is of significant importance.

2. [Sobrena] shall be responsible for the health and safety of those personnel employed on work areas that are under their direct control whether they are direct employees .. or visitors.

3.1 [Sobrena] shall .. be fully responsible for compliance with:

Relevant local, national and international laws and regulations

3.2 … [Sobrena] shall demonstrate that fit for purpose Safe Working Procedures are in place for the scope of the work, such as but not limited to:

…Fire protection.

4.1 [Sobrena] shall document a … plan which shall bridge [Sobrena's] HSES management system to the project HSES requirements..."

12. On the eve of the arrival of the vessel at the yard, a meeting took place between representatives of the parties to discuss safety matters. One outcome was the execution of a Safety Agreement as required as a matter of French law pursuant to Decree no. 77–1321 of November 1977. For this purpose Sobrena was the "Entreprise Intervenante" and Acergy was the "Entreprise Utilisatrice". The signatories were the Master and M L'Hostis (described as Sobrena's Ship Manager).
13. The introduction set out various ground rules:

"EU-EI Coordination

The Master [Sobrena's head of EI] is responsible for the coordination of the measures he has decided and the measures set up by [Ship Manager]

Inspection in common

Before the beginning of any works a common inspection must take place concerning the work areas the fittings which stand there and the equipment that may be handed over. During this inspection the Master … defines the zone of intervention, marks out the limits of areas which can be dangerous … and indicates the passageways"

14. The document went on to list the scope of the work to be performed by Sobrena together with a safety check list. As regards hot work, authorisation for this was to be issued by the Harbour Master "with the agreement of the Master."

The Works and the fire damage

15. As already noted the Works were defined in Article 1.23 as all work which Sobrena was required to perform under the contract. The initial scope of Works was set out in Acergy's specification of September 2009 to which Sobrena had responded by a quotation dated 11 December 2009. Sobrena's specified Works were scattered round the vessel, e.g. work on the hull bottom, propeller polishing, and work on the helideck. The Works also included work on a number of major and valuable items of machinery which Sobrena was to take off the vessel, work on in its workshops, and return to the vessel, such as the HPU systems and thrusters. Acergy and its own subcontractors were going to be engaged in a range of separate works at various separate places around the vessel.
16. At the time of the fire, Sobrena was engaged on Job 300 which involved cutting out and replacing part of the main deck above the carousel hold. A Hot Work Permit had been duly issued on 11 January 2010. It was expressly authorised and signed by the yard foreman and the ship safety officer. It was revalidated the next day although not signed by the yard foreman It prescribed various safety precautions including fire blankets, extinguishers and a watchman. The work required the erection of scaffolding in the hold to give access to the deckhead. The cutting work was undertaken with blow torches.
17. The fire caused damage to the carousel hold and to some of the surrounding spaces, such as the ROV control room and HPU room. The only parts of the vessel on which Sobrena were working at the time of the fire which was damaged was the deck plating above the carousel hold. There was also damage to some pipe work which Sobrena had already installed in the carousel hold. Sobrena was not working in the spaces adjoining the carousel hold which suffered damage.
18. The fire damage was repaired in part by Sobrena under a separate "Repaircon" dated 8 April 2010. Although the original contract Works were completed on 15 March 2010, the repair works were not completed until 8 July 2010. Acergy's claims in this action, however, are based on the entirety of the repair works repaired under the Repaircon, by Acergy itself, and by Acergy's subcontractors.

Construction of Article 10

19. The preliminary issues raise short questions of construction or interpretation of the repair contract and in particular Article 10.3. This of course involves determining the meaning that the contract would convey to a reasonable person having the available background knowledge. To this end the issues have been exposed over a prolonged period to detailed pleadings and extensive oral and written submissions. In this regard Sobrena was justified in my judgment in drawing attention to Acergy's continually evolving case in the long lead up to the hearing, including significant amendments only served ten days before the trial, as indicating that the various formulations proposed by Acergy were difficult to categorise as a natural and reasonable reflection of the parties' intentions.

Second sentence

20. Acergy's primary case came to rely on the second sentence of Article 10.3. Acergy was entitled, it was submitted, to be indemnified by Sobrena for all the fire damage because it constituted "losses … howsoever arising … in relation to loss and damage to the Works". In short the argument ran as follows:

a. The fire occurred during the performance of Job 300

b. This job concerned steelwork on corroded deck plating in the way of the carousel hold

c. This included the erection of scaffolding in the hold, the maintenance of a fire watch and the provision of fire protection and extinguishing equipment

d. The fire damaged the deck plating, the scaffolding, the fire protection equipment and part of the piping in the hold (which was another part of the Works)

e. The fire (together with smoke and extinguishing water) spread from these "Works" and caused damage to the adjacent areas

f. All this additional damage was "in relation to" the damage to the Works in that it all arose from one event and was proximately caused by the fire.

21. In considering this proposition it is necessary to start with an overview of Article 10. Articles 10.1 and 10.2 (taken with Article 10.4) provide what has usefully been described as a "knock for knock" arrangement. Regardless of cause, losses to Acergy's property or personnel are allocated to and borne by Acergy. Likewise, losses to Sobrena's property or personnel are allocated to and borne by Sobrena.
22. There is however an exception to this arrangement. Article 10.2 is expressly subject to Article 10.3. The scope of this proviso is usefully illustrated, in my judgment, by Article 13. This provides that title to the "Works" passes to Acergy on their commencement, but Article 13.2 states:

"Notwithstanding transfer of title, the risk of loss or damage of the Works shall remain with [Sobrena] as set out in Article 10.3"

Likewise, it should be noted in passing, Article 13.5 provides that all equipment supplied by Acergy remains its property albeit risk remains with Sobrena under Article 10.3 until custody is restored to Acergy.

23. In short, Articles 10.1 and 10.2 allocate responsibility for damage to the contractual parties' property to the relevant proprietor "howsoever arising" in connection with the performance of the contract. The exception in Article 10.3 only applies to the "Works". If the second sentence of Article 10.3 encompasses all losses to the property arising during the performance of the contract and not just relating to the "Works", the proviso effectively eliminates the scope of the governing clause.
24. Furthermore the contrary view is inconsistent with the elimination of considerations of cause pursuant to Article 10.4. Indemnities are furnished in regard to property interests. Clause 10.3 merely furnishes an exception with regard to the "Works". It is not consistent with any reasonable interpretation of the clause that where Acergy's property (other than the Works) is damaged nonetheless the loss sustained falls within the Article 10.3 proviso if it was "caused" by damage to the Works.
25. On Acergy's submission, the philosophy of Article 10 has to be that it was not "knock for knock" but a modified system of layered insurances whereby if Acergy demonstrated loss or damage to property on which Sobrena was working, such losses could be recovered subject to the overall cap of €30 million. On this basis Acergy was only liable from €30 million upwards.
26. In my judgment this wholly mischaracterises the new Article 10.3 which reads as follows:

"Except in case of death or personal injury caused by SOBRENA's negligence, Sobrena's liability under connection with a Contract, whether arising in contract, tort, negligence, breach of statutory duty or otherwise, shall not exceed an amount equal to EURO 30,000,000 (thirty millions Euros) during the calendar year in which the event or cause out of which liabilities arise. Where, in any one calendar day, there is more than one event or cause giving rise to liability on the part of SOBRENA, SOBRENA's aggregate liability in respect of all such events or cause shall be limited to Euro 30,000,000 (thirty millions Euros) for the event occurring during that calendar year. Buyer shall be responsible and hold Supplier Group harmless from and against liabilities above such amount."

27. This simply provides an overall cap. It does not address the basis upon which any such exposure might accrue. The cap remains a valuable entitlement regardless of the value of the "Works". It furnishes a limit to exposure to third party claims. It also provides a restriction on any exposure to Acergy arising from its custody of valuable specialised equipment. It no doubt represented the extent of Sobrena's insurance cover but such is irrelevant. The insurance (procured in compliance with Article 11) was not for Acergy's benefit.
28. I conclude that there is no right of indemnity under the second sentence.

Third sentence

29. Acergy's first alternative case was that the losses fell within the third sentence of Article 10.3 on the basis that they were sustained by "property on which Sobrena was performing work" that is to say the vessel or alternatively the carousel hold being in the custody and care of Sobrena.
30. It is a necessary prerequisite of this argument that "property" within Article 10.3 includes the vessel itself or any part of it. In my judgment it does not. Article 10.2 is the essential underlying clause for allocating responsibility for damage to the vessel. This would be wholly undermined if the vessel (or any part of it still in situ) was within Article 10.3. There would be nothing left to which Article 10.2 would apply.
31. This view is fortified by the context. The sub-clause focuses on "Free issue items" (as defined) and Acergy's deliverables. The perception of the reasonable man would be that "property" in this context was of a like kind separate from the fabric of the vessel. This is all the more so where the item is "property on which the supplier performs work". This is inapt to refer to the vessel or part of it.
32. In case this is wrong I must turn to consider whether Sobrena had custody and control of:

a. The vessel, or

b. The carousel hold

33. As regards custody and care of the vessel, Acergy pointed to the following matters:

a. As far as the contractual documents were concerned, attachment no. 7 of the agreement set out provisions as to "contract procedures" which required Sobrena to comply with Appendix 1 as regards HSE. One of the requirements in Appendix 1 was the preparation of a "bridging agreement" between its own system and the requirements of the project.

b. In this regard the bridging agreement had various provisions which proceeded on the basis that the vessel was a Sobrena "worksite" or was to be treated as Sobrena's premises e.g. Clause 1.2: "As the Acergy Falcon will be considered a Sobrena shipyard worksite, Sobrena shipyard will be responsible for the work and Health and Safety of all personnel working at the yard and those contracted to them."

c. The vessel was in a dry-dock leased by Sobrena and could only leave once Sobrena took steps to flood the dock. Until that time the ship was dependent on shore services. Sobrena supervised and controlled entry into the dockyard.

d. Sobrena had quoted for fire-watches and duly furnished fire guards during working hours.

e. Although Acergy was also performing work on the vessel this was on a much smaller scale than the work contracted for by Sobrena.

34. Although it might be that Sobrena had a sufficient degree of possession or control as to be able to exercise a lien if required (in any event any such lien was not exercisable under the terms of the contract), I am unable to accept that Sobrena had custody and care of the vessel as that term is used in Article 10.3.
35. There was no contractual agreement in my judgment that the vessel was a Sobrena worksite. Even treating the bridging agreement as having been entered into by way of addendum to the main contract, it is only concerned with identifying the relevant HSE policy. The outcome was that Sobrena HSE policy would apply to work being performed by the yard whilst, as prescribed by Clause 2.3, Acergy HSE policy would apply to work undertaken under the supervision of Acergy.
36. In any event I am not persuaded that there was any concluded contract on the terms of the bridging agreement. It was simply a protocol produced by Sobrena as required of it. The drafting had an odd history which adds little. Following the preparation of the first draft, Sobrena requested that there should be incorporated a provision to the effect that: "The master will retain the overall responsibility for the security and safety of the Vessel". This led to Acergy responding with a revised version: "The master will retain responsibility for the security and safety of Acergy personnel upon the Vessel".
37. The later version was signed by Sobrena on 8 January but it was not returned in that form to Acergy. After the fire on 14 January Sobrena was requested to forward the signature page and duly did so. It was never executed by Acergy. Indeed in my judgment such was never contemplated. Sobrena were simply complying with their obligation to make provision for the concurrent application of two HSE systems. This did not bear on the question of care and custody.
38. The reality is that the vessel remained fully crewed throughout and the master remained in command. The master retained his authority to close off parts of the vessel to Sobrena and did so in regard to the engine room and accommodation. In my judgment he was responsible for the security and safety of his ship and its crew and in addition any other Acergy personnel on board from time to time. The crew continued to maintain firewatches on the vessel as a whole albeit Sobrena provided safety and fire patrols in way of places where Sobrena was actually working. In particular permits in respect of Sobrena's hot work were required for presentation and signature by the responsible Acergy personnel whilst in contrast any permits issued in respect of Acergy work were not even copied to Sobrena.
39. I turn now to the question of "custody and care" of the carousel hold itself. Acergy in this connection put emphasis on the prescribed content of Job 300. It involved hot work and the hot work permit called for scaffolding, fire blankets, foam extinguishers and watchmen. This was signed on behalf of Sobrena, the subcontractors ASG and the ship's safety officer. While the "precise work location" was described as "main deck starboard side (top of carousel)", Sobrena's daily meeting note affirmed that "Sobrena will take care and protect all the equipment in way of the works".
40. In order to undertake the work scaffolding was constructed within the carousel. The workers stood on the platform on top of the scaffolding together with the fire watchmen. The equipment on the platform included fire extinguishers, fire blankets and water hoses (the oxygen and acetylene for the torches was on the berth). At the bottom of the carousel there was an additional extinguisher together with fire blankets to catch sparks. It was thus submitted that the situation amounted to Sobrena having custody and care of the hold.
41. Whilst the contention is nearer the mark, I am unable to accept it. Access to the hold was available to the crew throughout and indeed was exercised. All that had occurred was that Sobrena sought to comply with its obligations to take responsibility for safety in regard to the works that it was actually conducting. The carousel and carousel hold remained part of the vessel which was under the custody and care of Acergy.

First sentence

42. Acergy put forward a further alternative case under the first sentence of Article 10.3. In essence the argument ran as follows:

a. Sobrena was obliged to carry out "necessary" measures to complete the works

b. The costs of "such" measures were to be born by Sobrena

c. These measures must be regarded as extending to undertaking any further work over and above the works which needed to be performed so as to complete the works;

43. I am not certain that this argument was in the end pressed with much vigour. If it is alive, the premise for the argument is that Sobrena is only responsible for the loss and damage to the Works. It is not arguable, in my judgment, that the obligation to take such steps as are needed to complete the Works imports with it an indemnity for the entire damage (howsoever caused) sustained in way of the Works. Such would be inconsistent with Article 10.2.

French law

44. These conclusions render it unnecessary to deal with the issues of French law raised by Sobrena. The focus of the French law experts' reports was on the contention by Sobrena that the documents relied upon by Acergy could not impose overall safety responsibility for the vessel on Sobrena since to do so would be contrary to French law and Article 2.1 of the Bridging document expressly stated that: "All Work shall be conducted in accordance with French Legislation". This in turn was based on the terms of Decree No 77 of 1977. But the Safety Agreement executed on 5 January 2011 establishes on its face that the master retained overall responsibility as indeed required by French law. And the Bridging document, as I have found, is not inconsistent with that position.

Insurance

45. As regards to the provision in regard to insurance, I reject Sobrena's contention that the penultimate sentence affords an entitlement to Sobrena to have the benefit of Acergy's insurance cover. Again, it is not necessary for me to deal with this point in any detail. I simply observe that Sobrena was required to put in place its own ship repairer's cover. The sentence relied on only had effect if there was a "Client under the Main contract". Such was not the situation.

The cap

46. Although the point does not now arise, the cap, in my judgment, does also apply to liquidated damages for delay in performance. The limit is concerned with an aggregate contractual liability. Although somewhat uncomfortably positioned as an add-on to Article 10, it is not restricted to insured claims.