Scottish Court of Session Decisions

[1] In this action the pursuer seeks damages from the defender in respect of an alleged breach of contract. The whole background to the dispute is narrated clearly and succinctly in the Opinion of the Lord Ordinary. Neither party challenged the narrative by the Lord Ordinary of the background. We need not repeat it here. It is unnecessary to do more for the purposes of this reclaiming motion that to give a very brief summary.

[2] The pursuer claims damages under seven different heads. All the claims for damages derive from the pursuer's averment that the defender is in breach of a contract, contained in a management agreement, in terms of which the defender appointed the pursuer as the defender's exclusive manager of a semi-submersible drilling unit (of the 3^rd generation type), the "Kan Tan IV", owned by the defender. The contract was to endure while that vessel was located outside of the People's Republic of China, but otherwise there was no defined time limit; and it could be terminated (other than by agreement) only in the limited circumstances specified in Clause 1. The pursuer's responsibility, put shortly, was to manage and maintain the vessel as specified in the contract and to ensure the best possible marketing of the vessel, so that it might be hired out to oil operators on the most advantageous terms that might be obtained both in relation to daily hire rates and periods of hire, subject to the need to take the vessel out of operation from time to time for maintenance and other service.

[3] We were informed that the pursuer took over the management of the vessel in July 1999. It was then "hot stacked" at Invergordon, i.e. it was laid up, but maintained in such a condition that it was ready for hiring out and for drilling operations if an operator contracted for its hire. By March 2000 no drilling contract had been secured; and the defender sought to terminate the management contract with the pursuer. The attempts to do so gave rise to the dispute that lies behind this action and another action in the Court of Session by the defender against the pursuer.

[4] In the present action the pursuer founded jurisdiction by arrestment of the vessel ad fundandam jurisdictionem. An arrestment in security on the dependence was also laid. The defender enrolled a motion before the Lord Ordinary for recall of the arrestment on the dependence. The Lord Ordinary after sundry procedure decided that the arrestment on the dependence should be recalled but only on condition that the defender provided caution amounting in total to US $15 million. The defender reclaimed against that decision and the pursuer cross-appealed. The defender withdrew the original reclaiming motion. However, the pursuer maintained the cross-appeal and amended the grounds of appeal before the Inner House hearing. In the result, the pursuer and reclaimer sought to persuade this court to recall the Lord Ordinary's interlocutor to the extent of varying the condition imposed by him by increasing the amount for which caution would require to be found for the release of that arrestment..

[5] For reasons that the Lord Ordinary makes clear, it was not ultimately in dispute before him that, if the court were to decide that as a necessary condition for the recall of the arrestment in security caution be found for a substantial sum, that sum should include a total of approximately $ 2.2 million in respect of the sums of damages concluded for in conclusions 1,2,3,4 and 7 and a further sum in respect of conclusion 5, yielding a total in respect of those six conclusions of $3.74 million. It was a figure intended, in the Lord Ordinary's words, to secure the pursuer's claims "for the full amount of those [claims] contained in conclusions 1 to 5 inclusive and conclusion 7". The figure of $15 million determined by the Lord Ordinary in respect of all seven conclusions therefore included that $3.74 million;.

[6] Having dealt with the other matters in issue before him (none of which is raised again in this reclaiming motion) the Lord Ordinary turned to consider what sum of caution the defender should provide in respect of the conclusion 6 claim. The nature of that claim is clear from the pleadings. Article 5 of the condescendence, having narrated the basis of the claims up until September 2001, continues, in respect of the period commencing in September 2001, in the following terms:

[We have not attempted to correct the errors in this narrative.]

The Lord Ordinary makes it clear that, before him, the remaining "essential quarrel is in respect of the amount of security demanded by the pursuer in respect of conclusion 6 (for US$23.29 million), being damages claimed by it in respect of the period from September 2001 until the end of 2005."

[7] The Lord Ordinary proceeds in his Opinion to discuss what might be the correct approach to take to the fixing of an appropriate sum for caution in respect of the claim lying behind conclusion 6. He first discusses the basis of the claim as formulated in the pleadings cf. para. [15]. In paragraphs [16] and [17] he summarises the submissions of the parties. In paragraph [18] he distinguishes the conclusion 6 claim from certain other types of claim and concludes that the conclusion 6 claim is not for a "random" sum "as in an action of count, reckoning and payment (where the claim does not ordinarily proceed upon any calculation of loss) - (emphasis added)". He also recognises that the claim in issue is to be distinguished from the type of claim made in defamation actions or in certain other claims for damages. In the result, he concludes that the correct approach to the fixing of an appropriate sum in respect of the conclusion 6 claim is to attempt to calculate the damages that the pursuer might receive in respect of this claim if damages fall to be awarded, and have to be assessed at some date in the future after appropriate procedure and proof. Such a calculation would ultimately have to be based upon the material placed before the trial judge both as to the history of past profits from drilling contracts and also as to the forecasts made at the date of the proof by experts in the industry. It could be said that the Lord Ordinary had to make a pre-estimate of the sum that might eventually be awarded in respect of an uncertain future loss of profits after a proof in 2001 or 2002. Thus the Lord Ordinary makes it clear that, in his view, assessing any "future damages....may involve material discounts to reflect the uncertainties necessarily inherent in [uncertain forecasts]". Paragraph [20] encapsulates the essence of his conclusion as to the approach that he is required to take. It reads:

[8] The approach of the Lord Ordinary up to this point was not challenged by either party, for the purposes of this reclaiming motion. The respondent has no grounds of appeal; the reclaimer, in the amended grounds of appeal, which are very clearly stated, urges only that the Lord Ordinary has erred in the calculation that he has made. The errors, it is suggested, lie in his selecting the figures to be put into the calculation in respect of (1) the likely duration of the period starting in September 2001 during which the drilling rig contracts could be expected to yield a profit in which the pursuer would have a defined share (viz 13% of net profit); and (2) the percentage of each year, during that period, for which the vessel could be expected to be the subject of a profitable drilling contract; but not (3) the likely day rates that the operators would have to pay in order to secure the hiring of the vessel when it was hired out to them during the period. There is a supplementary, albeit material, criticism that, in expressing the conclusions that he has reached on such central matters, the Lord Ordinary has not disclosed proper, adequate and intelligible reasons such as would satisfy the well-known test formulated by the Lord President (Emslie) in Wordie Property Co. Ltd. v Secretary of State for Scotland 1984 S.L.T. 345, at p. 348. Reference is also made to material not placed before the Lord Ordinary, being material that has only recently become available and which, it is said, sheds light upon the soundness of the decision made by the Lord Ordinary. The Lord Ordinary fixed the amount of further caution to be found in relation to the conclusion 6 claim at $11.3 million; it was submitted on behalf of the pursuer and reclaimer that that figure should be increased to $17 million, so that the total caution required to be found would be $20.7 million.

[9] The grounds of appeal deal with the three elements to be put into the calculation which the Lord Ordinary required to make under the three heads, "(a) duration, (b) rig utilisation and (c) day rates". Ground of Appeal 5 reads:

(The period "left out of account by the Lord Ordinary" is the period derived by adding 1.25 years to the 3 years selected by the Lord Ordinary - cf. paras. [13] to [15] below.) We shall, however, deal first with (b) rig utilisation.

[10] As paragraph 8 of the amended grounds of appeal makes clear, there is a distinction to be drawn between the success of a rig owner/manager in hiring out any specific rig to an oil operator and the overall utilisation of all comparable rigs available for hiring in a specified market, such as the waters around the British Isles. The Lord Ordinary was given figures relevant to both matters; but it is submitted that he erred in that he left out of account the considerable success that this particular vessel had enjoyed, which was said to have resulted in a 92% "ten-year average utilisation (through variations in the market)...to the date of the hearing (emphasis added)." In his submission to this court, however, Mr. Stewart, Q.C., for the pursuer and reclaimer, indicated that the period referred to was in fact a period of just over eleven years, from 11 April 1988 to 22 April 1999: a calendar of the vessel's hiring history was produced in support of the 92% figure. The pursuer, we were informed, had taken over as manager of the vessel after the latter date and while the vessel was "hot stacked". Counsel acknowledged that the vessel had been "hot stacked" since April 1999, but submitted that, until then, it had a known history of high utilisation, a history which had been reflected in the making by the previous manager, over a four-year period within that eleven-year period, of a profit of $25 million. These submissions lay behind the summary contained in paragraph [16] of the Lord Ordinary's Opinion, although that paragraph perhaps did not state sufficiently clearly the distinction between information relevant to the utilisation throughout the industry (for example from Petrodata Limited, an oil industry analyst) and information relating to the history of, and inferentially the prospects for, this specific vessel, the Kan Tan IV. The Lord Ordinary, in paragraphs [19] and [21], had dealt with the market information generally but failed properly to take account of the historical material relating to the vessel itself. Counsel drew attention to the tables of information regarding the market position in The Bassoe Offshore Monthly, dated May 2000, relating to similar vessels and also to the Petrodata Report, Issue 170, April 30, 2000, the Petrodata Report, Issue 172, June 30, 2000, as well as to relevant data in document 3 in the Appendix, the Petrodata report issued in December 1999, especially paragraph 5.6.3 and pages 29 to 32. The latter document had been before the Lord Ordinary. Although the Lord Ordinary had not expressly referred to the particular tables and paragraphs to which his attention had been drawn, it was plain when one looked at the figures that he had used for day rates and for utilisation that he was proceeding solely upon the basis of this material in fixing a percentage for rig utilisation. He had not properly taken account of the 92% figure derived from the history of the vessel itself. It was a matter of criticism that the Lord Ordinary had not expressly shown the source of each figure which he used, notably in paragraph [21]. He had not shown precisely where the figures of 85% and 80% had come from and had not explained why these figures had been preferred against the 92% to be derived from the history of the vessel itself.

[11] In response on this point Mr. Brodie, Q.C. reminded the court that the Lord Ordinary had been dealing with an interlocutory matter at an interim stage, not upon the basis of evidence but upon the basis of material which would be likely to change before any award of damages came to be assessed. Such information was bound to change and the material was bound to be affected by unpredictable happenings, including possible changes in the price of oil. The Lord Ordinary had therefore been entirely right to hold that "the market for the profitable use of rigs such as the Vessel can be highly volatile". The Lord Ordinary had gone on, in paragraph [19], to refer to the relevant factors and to conclude that if the court came to assess damages in due course, after enquiries, it would

This court required to approach the Lord Ordinary's Opinion upon the basis that it was for him to make the best judgment that he could properly make on the basis of the whole materials and arguments presented to him. His judgment had to reflect the volatility and uncertainty to which he had properly made reference. This court should also accept, as the Lord Ordinary had stated, that he had had regard to the whole materials and arguments presented to him. The materials and the arguments were expressly referred to in paragraphs [16]and [17] of his Opinion. In relation to the material relating both to the market for the hiring of rigs and the day rates in the relevant period the Lord Ordinary had clearly had regard to the Petrodata Limited materials placed before him by the pursuer and had studied the tables in, and text of, the Petrodata Limited report which supported the figures at which he arrived. The Lord Ordinary had not started with a figure of 92% and gone on to discount it in the light of other material. What he had sought to do was to use the Petrodata Limited data to predict market utilisation for the relevant period. He had built up his figures from all the available data. So far as the history of the particular vessel was concerned, it was by no means inevitable that the vessel's successful record of being hired in the 1990's would be continued in the future. In point of fact, it had been "hot stacked" since before the pursuer became the manager, and now for a period well exceeding one year. As the period to which the conclusion 6 claim related was a period beginning late in 2001 and ending at the end of 2005 it was entirely appropriate to look at the predicted general market position. That was what the Lord Ordinary had done. It was perfectly clear from his Opinion that he had done that and properly had regard to the materials before him. It was not necessary for him to quote each figure, each table or each passage of text to which he had made reference, particularly having regard to the interim character of the matters with which he was dealing.

[12] In our opinion, the Lord Ordinary's approach on the matter of rig utilisation is not to be faulted. The period founded upon by the pursuer is a period which does not start until September 2001. In our view, the Lord Ordinary was entirely right to proceed upon the basis that he has expressly stated, to the effect that the market for the profitable use of rigs such as the vessel can be highly volatile and that predictions are subject to fluctuations and uncertainties. The argument for the pursuer and reclaimer based upon the history of their particular rig and its 92% success rate over the eleven-year period referred to would have been more impressive if, as originally stated in the grounds of appeal, that history had endured up until the time when the Lord Ordinary had to consider the matter. However, as we have pointed out, that is not so. Furthermore, no attempt was made to persuade the Lord Ordinary, or us, that this particular vessel had been successfully hired out throughout the eleven-year period at a greater rate of utilisation than other comparable rigs then in the market. In our view, the Lord Ordinary was entirely justified in approaching the matter in the way he did. We do not see him as having found unstated means of reducing the prediction from 92% to the two figures shown by him. In our view, what he has done is to use the materials laid before him by counsel at the hearing in order to make a prediction of the very same character as a judge would require to make if called upon to assess damages on the basis of evidence. There is nothing to indicate that the Lord Ordinary decided to ignore the pursuer's submissions in support of the 92% figure; he refers to them in paragraph [20]. In estimating a figure for the likely utilisation of Kan Tan IV in the period commencing in September 2001, he has used the materials before him in the same way as he would have had to do if he had been assessing damages for immediate payment. The rig utilisation calculation here (linked with the day rate estimate) is not discounted for any uncertainty or imponderable that a judge assessing damages after enquiry would not have had to take into account.

[13] In relation to the period to be taken for the purposes of the calculation, the pursuer and reclaimer points out that the contract was without limit of time. It was plain from the management agreement itself, printed in the Appendix, that the contract could not be terminated except in very limited circumstances. The contract expressly provided, "For the avoidance of doubt the Agreement cannot be terminated solely with the intent to award the management of the Vessel to another contractor." It was recognised that clause 1(E) permitted the owner to give appropriate notice of termination in the circumstances there specified, namely that the owner was "not satisfied with his co-operation with the manager and/or the manner in which the manager is executing his duties and obligations as stipulated by this Agreement..."; but, as the Lord Ordinary had quite properly proceeded upon the basis that the likely damages would fall to be calculated on the basis of a successful hiring out of the vessel at substantial rates over a period of several years, it would be highly unlikely that the owner would be able to avail himself of this provision to terminate the contract or indeed that he would want to do so. In any event, counsel for the reclaimer argued, there was clearly an implied term that would prevent the owner from arbitrarily terminating the agreement; he certainly could not do so simply to bring in a replacement manager. Against this background, it followed that the period selected by the pursuer, of 4.25 years, being a period for which reliable forecast data was available, was itself a restriction upon the claim that took account of the imponderables. The Lord Ordinary had no sound basis for restricting that period further. This was not a suitable type of case in which to use a multiplier of the kind commonly used in ordinary claims for damages in respect of predicted future loss. There was no basis for departing from the pursuer's selected period, being the period for which reliable forecasts were available. Furthermore, the Lord Ordinary had given no reason whatsoever for departing from that period and thus failed in his duty to give intelligible reasons for taking what was a very important decision indeed. If the Lord Ordinary arrived at too high a figure for caution, it could be reduced if circumstances changed. It could not, however, be increased effectively. By selecting a period of three years as a "multiplier" the Lord Ordinary had reduced the sum to be produced by the calculation by 30%. As he was also making some reduction in relation to day rates and utilisation there was an element of double or even triple discounting in making allowances for the uncertainties.

[14] Mr. Brodie, for the respondent, found it more difficult to justify the Lord Ordinary's approach to this matter. He argued, however, that the approach was entirely justified on the basis which the Lord Ordinary had stated in the paragraphs already referred to, namely the factors affecting an uncertain future, volatility and the many imponderables.

[15] In our view, there is substance in the reclaimer's criticism of the Lord Ordinary's approach in this respect. The Lord Ordinary does not expressly say why he took a "multiplier" of three years instead of using the whole period of 4.25 years. This is not properly speaking a case of making a present estimate of future loss and using a multiplier in the traditional way or on the kind of basis discussed in Wells v. Wells 1999 1 AC 345. Although the Lord Ordinary narrates, in paragraph [17], the submission for the defender that the management Agreement provided for termination in a number of events, he has not expressly said that he regarded such possible termination as being a factor bearing upon the decision to prefer a three year multiplier to a 4.25 multiplier. In our view there is considerable force in the argument for the reclaimer, that as the Lord Ordinary was prepared to assume an 80% plus utilisation over a period of years at what are clearly highly profitable rates, there does not seem to be any sound basis for concluding that either party would wish, or even be able, to terminate the contract. In these circumstances we have come to be of the view that the Lord Ordinary has not provided any satisfactory justification for putting a three year figure into his calculation, rather than the figure suggested by the pursuer, of 4.25. It would have been appropriate to use 4.25 years as one element of the calculation.

[16] That, however, is not an end of the matter. The Lord Ordinary, in our opinion, properly took the view that he should make some allowance by way of deduction in respect of the imponderables to which he has referred in his Opinion. In our view, as we have said, the figures which the Lord Ordinary has chosen both for rig utilisation and day rates are realistic figures which make no material allowance for the volatility and imponderables that, at the stage at which he was considering the matter, he was required to take into account; the figures he chose appear to us to be based upon the materials presented by counsel, notably by counsel for the pursuer, to the Lord Ordinary. We consider that the Lord Ordinary was entitled, and indeed obliged, at some stage in his decision-making, to make allowance for the various imponderables. Ideally we should have preferred the Lord Ordinary to have made the calculation using the estimated rig utilisation percentage and day rates, and 4.25 years, and then to have made a material deduction in respect of the imponderables referred to. He has not expressly approached the matter in that way. It appears to us, however, that what in effect he has done is to make allowance for these imponderables by selecting the "multiplier" of three years. That represents a 30% deduction approximately from the forecast of damages upon which the pursuer sought to rely in making submissions to the Lord Ordinary.

[17] We have come, therefore, to be of the view that, although the Lord Ordinary could and should have approached his calculation in a different way, by taking a figure of 4.25 years and making an overall deduction only after completing his calculations, the end result is one which he was perfectly entitled to arrive at and is a result which properly reflects the whole material before him in making a forecast of damages well in advance of any hearing of evidence. We consider that a 30% deduction in respect of the necessary uncertainties would be entirely justified. In these circumstances we conclude that the overall decision at which the Lord Ordinary has arrived is a decision which was properly within his jurisdiction and is not a decision with which we would be entitled to interfere.

[18] In relation to the new material which is referred to in the reclaimer's amended grounds of appeal, we should be most reluctant to look at that material as providing any basis for criticising the decision of the Lord Ordinary based upon the materials placed before him. Mr. Stewart, for the reclaimer, claimed no more than that it illustrated that the Lord Ordinary's decision was pessimistic; the new material simply helped to illustrate that the Lord Ordinary had indeed erred. Mr. Brodie, for the respondent, had had no notice of the additional material and invited the court to decide the matter upon the basis of the materials before the Lord Ordinary; relevant matters could change from day to day.

[19] In our view, it would not be appropriate to give weight to the new material in determining whether or not the Lord Ordinary had erred in fixing a sum for caution upon the basis of the material and arguments presented to him. However, we have not shut our eyes to the fact, which is notorious, that the world price of oil has risen dramatically within the last few months. We understand perfectly well that any sustained rise in the price of oil would be bound to have a beneficial effect on the business dealings of those who have available for hire vessels such as Kan Tan IV. We also regard it as notorious that any substantial and sustained rise in the price of oil is of particular benefit to oil fields such as those surrounding the British Isles where the marginal costs of recovering oil are higher than those obtaining in the world's main producing countries. It is not our view, however, that the recent rise in oil price removes the elements of volatility and uncertainty to which the Lord Ordinary has made reference and which we consider he was bound to take into account. It is notorious that oil prices fluctuate for many reasons. Some members of OPEC may break ranks and reduce their prices; that has happened repeatedly in the past. Oil producing countries may become involved in wars or be subjected to sanctions (as in the case of Iraq) and thus go out of the market as major producers and exporters. Conversely, circumstances affecting countries subject to sanctions or warfare or insurrections can change very quickly and result in increasing oil supplies. There are other circumstances that can affect the world price of oil. It would be difficult, in our view, to treat the recent rise in the price of oil as removing volatility and uncertainty in respect of the 4.25 year period commencing in September 2001. The new material referred to by counsel for the reclaimer is not therefore of such a character that it leads us to alter the conclusion we have reached about the Lord Ordinary's decision.

[20] For the foregoing reasons the reclaiming motion is refused.