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Diamond Offshore Drilling (UK) Ltd V. Gulf Offshore NS Ltd [2003] ScotCS 243 (05 September 2003)

OUTER HOUSE, COURT OF SESSION

A3617/01

OPINION OF LORD MENZIES

in the cause

DIAMOND OFFSHORE DRILLING (UK) LIMITED

Pursuers;

against

GULF OFFSHORE N.S. LIMITED

Defenders:

________________

Pursuers: Howie, Q.C., Weir; Paull & Williamsons

Defenders: Glennie, Q.C.; Henderson Boyd Jackson, W.S.

5 September 2003

1. INTRODUCTION
[1] In this Admiralty Action in personam the pursuers seek damages from the defenders for losses which they aver to have arisen as a result of a collision which occurred in the North Sea on 20 April 2000 between the "Torm Heron", a tug/supply vessel, and the "Ocean Guardian", a semi-submersible drilling rig. The pursuers aver that they are the bareboat charterers of the "Ocean Guardian", and that the defenders are the managers of the "Torm Heron". The pursuers aver that the collision occurred through the fault and negligence of the master of the "Torm Heron", for whose acts and omissions in the course of his employment with them the defenders are liable.

[2] One of the lines of defence stated by the defenders is to the effect that esto the pursuers have suffered any loss, injury or damage through the fault of the captain of the "Torm Heron" the pursuers have agreed to indemnify and hold harmless the defenders in respect of such loss, injury or damage. The defenders aver that on 20 April 2000 the "Ocean Guardian" was on charter to Texaco North Sea UK Company ("Texaco") in terms of a charter between Texaco and the pursuers dated 16 and 22 March 2000 ("the Texaco Charter"). They further aver that at the material time the "Torm Heron" was operated under bareboat charter to the defenders and was chartered to Amerada Hess Limited under a booking letter dated 14 April 2000 on the terms of the Amerada Hess Call Off Contract No. 92400/BSV/CRK ("the Amerada Charter"). They aver that Amerada Hess Limited had entered into the Amerada Charter as agents for Texaco, in terms of the Vessel Co-ordination Agreement between Amerada Hess Limited, ELF Enterprise Caledonia Limited and Texaco ("the Vessel Co-ordination Agreement"). The defenders go on to aver that accordingly Texaco were the joint operators of the "Torm Heron" under the Amerada Charter and the defenders were Texaco's contractors. The defenders aver that by reason of the terms of the Texaco Charter, and in particular the terms of Clause 17 thereof, the pursuers have agreed to indemnify and hold harmless the defenders in respect of any loss and damage sustained in the collision.

[3] The pursuers deny that the defenders fall within the class of beneficiaries intended to benefit from the indemnities in Clause 17 of the Texaco Charter. Both parties agreed that the dispute as to whether the indemnity in the Texaco Charter extended to the defenders falls to be determined according to English law. The matter came before me by way of preliminary proof before answer of parties' respective averments on Record regarding English Law.

THE RELEVANT PROVISIONS OF THE CHARTERS

[4] (a) The Texaco Charter

In the Texaco Charter, Texaco are referred to as "the Company" and the pursuers are referred to as "the Contractor". The dispute before me focused principally on Clause 17, the relevant passages of which are as follows:-

"17. LIABILITIES AND INDEMNITIES

For the purposes of the indemnities in favour of Company in this Article 17 "Company" shall be deemed to include the Co-Venturers, Company's other contractors (excluding contractors providing air transportation) at the Worksite (who enter into or give a written undertaking to Company that they are prepared to enter into a contract with Company incorporating similar contractual provisions to that contained within this Article 17.1), their sub-contractors and their respective employees, agents, and Affiliates, and the indemnities given by Contractor hereinafter contained shall be deemed to be given for the benefit of Company, the Co-Venturers, the said Company's other contractors their sub-contractors and their respective employee's agents and Affiliates;
For the purposes of the indemnities in favour of Contractor in this Article 17 "Contractor" shall be deemed to include Contractor's sub-contractors and their respective employees agents, and Affiliates and the indemnities given by Company hereinafter contained shall be deemed to be given for the benefit of Contractor, Contractor's sub-contractors and their respective employees, agents and Affiliates.
'Company and Contractor intend to create directly enforceable third party rights in respect of the indemnities in this Article 17 for the benefit of the third parties identified in Articles 17.1.1 and 17.1.2 pursuant to the Contracts (Rights of Third Parties) Act 1999. The parties agree that, except as provided in this Article 17.1.3, no other directly enforceable third party rights shall be created pursuant to this Agreement and that the provisions of this Agreement (including the third party rights created pursuant to this Article 17.1.3) may be amended, varied and the Agreement novated or assigned in accordance with the provisions of this Agreement without the consent of, or notice to, the third parties identified in Articles 17.1.1 and 17.1.2'.

17.3 The Company's Indemnity in Respect of Personnel and Property

Company shall indemnify, defend and hold harmless the Contractor
from and against any and all claims, actions, demands, proceedings, liabilities, losses, damages, costs, and expenses (including legal expenses) whatsoever arising directly or indirectly out of or as a consequence of the death or illness of or injury to any employee or invitee of the Company or the loss or destruction of or damage to any equipment or property of the Company or any of its employees arising out of or as a consequence of the performance, non performance or misperformance of this Agreement from any cause whatsoever.

Liability for Contractor's Equipment

17.4.1 Save only as provided in Clause 17.4.2, the Contractor shall bear all

risk and responsibility for and shall indemnify and hold harmless the
Company in respect of any damage to or loss or destruction of the Rig or other Contractor's Equipment or other property or equipment of the Contractor, any of its sub-contractors, or its or their respective Affiliates, or any employee or invitee of any of the aforementioned, and (save only as aforesaid) the Company shall be under no liability whatsoever to reimburse the Contractor in respect of any such damage, loss or destruction. In particular and without limitation to the foregoing the Contractor shall indemnify and hold the Company harmless for all loss or damage to the Rig or other Contractor's Equipment arising out of the performance of towing and/or moving with a Company chartered tug or supply/tow boat.

Except where specifically otherwise provided in this Clause 17 the
indemnities given by the Company to the Contractor or vice versa under this Clause 17 are applicable in all circumstances including the sole negligence of the Company or the Contractor (whichever is the indemnified party) or any third party (and/or any of their respective officers, directors, employees and/or agents) or the concurrent negligence of any combination of the Company or the Contractor and/or any third party (and/or any of their respective officers, directors, employees and/or agents) whether such negligence be active, passive, gross , or wilful or any breach of statutory duty or where liability for such personal injury or death or property damage with or without fault is imposed on any theory of strict liability by operation of law or any other theory of legal liability without limit and without regard to the cause or causes thereof, including breach of representation or warranty (express or implied) (except that to the extent that any such indemnification is contrary to the law governing this Agreement, this provision, to such extent (and only to such extent), is void or voidable.)

INSURANCE

Contractor's Insurance

Without prejudice to the liabilities and responsibilities of the
Contractor under the provisions of Clause 17, the Contractor shall, to cover liabilities and responsibilities assumed herein, effect and maintain in force with respect to and for the duration of this Agreement and the indemnities hereunder (including mobilisation/demobilisation periods) the following insurances:-

All risks hull and machinery insurance, on full conditions,
including war risks and full collision liability, with a limit of not less than the declared value of the Rig (as agreed between Contractor and its insurance company or underwriters) and all other equipment of any description to be furnished by the Contractor for or in connection with this Agreement;
EITHER

Protection and Indemnity insurance, including coverage
for removal of wreck or debris and pollution liability, with a limit of not less than Fifty Million US Dollars (US$ 50,000,000) for any incident or series or incidents arising out of one event;

Comprehensive General Liability insurance, with the
water craft exclusion deleted and including coverage for removal of wreck or debris and pollution liability, with a limit of not less than Fifty Million US Dollars (US$ 50,000,000) for any one incident. (The appropriate insurance cover required under this Clause (ii) shall be primary to any insurance carried by Company and shall be endorsed designating Company as additional named insured);"

[5] The only other passage which is perhaps relevant is the definition of Co-Venturers, which, by virtue of Clause 1.1.,

"means all companies or other legal entities for the time being (including where applicable the Company or any Affiliate of the Company) holding interests under or in respect of any area where Operations are carried out under this Agreement for which and on whose behalf the Company is designated as operator;"

[6] (b) The Amerada Charter

The parties to the Amerada Charter were the defenders "acting as consortium co-ordinator and as vessel owner or as agent to vessel owner", Swire Pacific Offshore (North Sea) Limited "as vessel owner or as agent to vessel owner", Trico Supply (UK) Limited "as vessel owner or as agent to vessel owner" (each of the above three parties being referred to as "owner") and Amerada Hess Limited, referred to as "charterer". The issues before me focused principally on Clause 30 of Part 2 of the Amerada Charter, and in particular the following provisions:-

"c. Owner agrees to defend, indemnify and hold the Charterer Indemnified Parties harmless from and against any and all liability, damage, claim or costs (including legal costs and expenses) in respect of loss of, damage to or loss of use of Owner Indemnified Parties' equipment or property regardless of the cause or reason therefore and regardless of the sole or concurrent negligence, default and/or breach of statutory duty whether active or passive of the Charterer Indemnified Parties. For the purpose of this Article Owner Indemnified Parties' equipment or property shall be deemed to include all equipment owned, hired or being provided by Owner Indemnified Parties pursuant to the Agreement.

Owner shall bear all consequential or indirect losses suffered by Owner Indemnified Parties and Charterer shall bear all consequential or indirect losses suffered by Charterer Indemnified Parties and each shall indemnify and hold harmless the other for any liability therefor. Consequential loss shall include, but not be limited to loss of production, profits, use or any other economic loss.

For the purpose of the indemnities provided to Charterer under this

Article 30.0 Charterer Indemnified Parties mean Amerada Hess Limited, it Co-Venturers, Joint Operators, its and their parents, and Affiliates together with its and their respective officers, directors, employees, agents and representatives.

For the purpose of the indemnities provided by Charterer under this Article 30.0. Charterer Indemnified Parties mean Amerada Hess Limited, its Co-Venturers, Joint Operators, Other Operators, its and their parents and Affiliates together with its and their respective officers, directors, employees, agents and representatives."

[7] By virtue of Clause 1, the terms "Co-Venturers", "Joint Operator" and "Other Operator" are defined as follows:-

" 'Co-Venturers' shall mean that group of companies, their successors and assignees, who together with Charterer or its Affiliates hold an interest in production licenses covering Blocks served by this Agreement and operated by Charterer or its Affiliates, and who join with Charterer or its Affiliates for the purpose of oil and gas exploration and development.

'Joint Operator' means other oil and gas exploration and production operators and their respective co-venturers its and their Affiliates together with its and their respective officers, directors, employees, agents and representatives who, jointly with Charterer utilise the Vessel, by virtue of the Charterer entering into this Agreement for itself and as agent for such Joint Operators.

'Other Operators' means other oil and gas exploration and production operators and their respective co-venturers, its and their Affiliates together with its and their respective officers, directors, employees and agents and representatives who, with the consent of Charterer or its Affiliates, share the Vessel other than a Joint Operator."

THE EVIDENCE AT THE PRELIMINARY PROOF

[8] It was agreed between the parties that the defenders should lead at the preliminary proof. They led one witness, namely Mr Simon Kverndal, QC of the English Bar, who spoke to the terms of his Opinion dated 9 June 2003 (No 7/5 of process). The pursuers also led only one witness, namely Mr Nigel Teare, QC, of the English Bar, who spoke to his opinion dated 14 April 2003 (No 6/3 of process).

[9] For the defenders, Mr Kverndal was of the opinion that the contractual provisions contained in Article 17.1 of the Texaco Charter were similar (in the sense comprehended by Article 17.1.1 of the Texaco Charter) to the contractual provisions contained in section 30 of the Amerada Charter. He proceeded on the basis that the defenders qualified as one of Texaco's "other contractors at the work site", because this phrase should be widely interpreted to include all contractors working at the site and not just those with whom Texaco have direct contractual relations. He was of the opinion that Clause 30 of the Amerada Charter contained similar contractual provisions to that contained within Article 17.1 of the Texaco Charter, notwithstanding that the terms of Clause 30 of the Amerada Charter did not extend the classes of beneficiaries of the indemnity therein to the pursuers.

[10] Mr Kverndal approached the task of construing the word "similar" first by looking at dictionary definitions, which appeared to treat it as synonymous or near-synonymous with words such as "alike", "like", or "resembling", and not to be synonymous with "equivalent", "co-extensive" or requiring mutuality or reciprocity. Having regard to the commercial context of the word, he was unaware of any standard form indemnity provisions in the offshore industry which are replicated from contract to contract - the intention of Article 17.1.1 of the Texaco Charter was in his view to require that the reflective indemnity provision should apply to similar (but not reciprocal or identical) classes of beneficiaries, and should be similarly (but not identically or co-extensively) enforceable at the suit of those parties. The contractual context of the Texaco and Amerada Charters was different, one relating to an oil rig and another to a supply vessel - it would be surprising to find identical classes of third party beneficiaries given that the classes of persons potentially involved in the operation of a rig are bound to be different from those potentially involved in the operation of a tug. Rigs and tugs do different things, so it would be surprising to find identicality in indemnity provisions in their charters. In any event, Article 17.1.1 of the Texaco Charter did not require identicality, but merely similarity - this allowed for differences.

[11] Mr Kverndal stated in his Opinion (at paragraph 20 of No. 7/5 of process) that it was important that the Texaco Charter did not require similarity with the whole of the provisions of Article 17, nor, for example, with the provisions of Article 17.4.1 or 17.11, but merely similar contractual provisions to that contained "within this Article 17.1". In his Opinion, and originally when he dealt with this in his evidence, Mr Kverndal maintained that similarity was not required with regard to the nature or scope of the indemnities, but only the classes of beneficiaries and the intention that the beneficiaries should have directly enforceable rights. However, he accepted in the course of cross-examination that the requirement for similarity must go beyond merely the categories of beneficiaries, and that one must have some regard to the nature or scope of the indemnities in order to avoid making a nonsense of Article 17.1.1. He took the view that although the provisions regarding sub-contractors and other contractors at the work site were not replicated in Clause 30 of the Amerada Charter, the classes of beneficiaries were similar. Indeed, there was another class of beneficiary in the Amerada Charter, namely "other operators" which, in the context of a supply vessel charter might be regarded as equivalent to the class of "other contractors at the work site".

[12] Mr Kverndal disagreed with the view expressed by Mr Teare (at paragraph 11 of No.6/3 of process) that it was a requirement of the Article 17.1 indemnity that the contractor must enter into or agree to enter into a contract with Texaco incorporating similar contractual provisions to that contained within this Article 17.1. Mr Kverndal did not regard this as a requirement - the words in brackets in Article 17.1.1. could be a proviso or could be descriptive. If the pursuers were seeking to achieve mutuality or reciprocity, it was surprising that they did not seek to achieve this with regard to other categories of beneficiary such as co-venturers, sub-contractors and their respective employees, agents and affiliates. Why should the requirement for reciprocity be made only of Texaco's other contractors at the worksite?

[13] Mr Kverndal expressed the view that his approach to the construction of this Article started with the words themselves, and proceeded to look at the matrix of fact (as referred to in the well-known passage in the speech of Lord Hoffman in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at 912), whereas Mr Teare's approach to construction started with his understanding of the factual matrix and applied this to colour the words. The over-riding intention of the contractual scheme was that the parties should bear their own physical loss; although he could see the force of the "commercial sense" arguments made in paragraph 11(iii) of Mr Teare's Opinion, it did not follow that this is what the words mean in this contract. The construction of the contract which Mr Kverndal favoured did not result in commercial nonsense; it made perfect commercial sense. If the parties had wished to provide for a requirement of mutuality or reciprocity, they could easily have used words which would have achieved this purpose. The words which they did use do not have this effect.

[14] Mr Nigel Teare, QC, for the pursuers expressed a different view of the law of England on this matter, both in his Opinion (No. 6/3 of process) and in his parole evidence. He was of the opinion that the words "Company's other contractors ... at the Worksite (who enter into or give a written undertaking to Company that they are prepared to enter into a contract with Company incorporating similar contractual provisions to that contained within this Article 17.1)" amounted to a proviso rather than a description - if it is a description, it is one with which the Company's other contractors must comply if they are to seek to benefit from it. However this is categorised, the words in parenthesis must be satisfied if the other contractors are to benefit.

[15] Mr Teare was of the opinion that the word "similar" in this context requires that the contract made by the contractor of Texaco must provide protection for the pursuers similar to the protection conditionally provided to the defenders as contractors of Texaco - ie there must be mutuality or reciprocity of indemnities between contractors of Texaco. There would be such mutuality or reciprocity of indemnities if two contractors of Texaco at the work site have each agreed to hold the other harmless in the event of damage to his equipment at the work site. He gave three main reasons for reaching this conclusion:

The contract had to be construed against the background of the off-shore industry, in which mutuality or reciprocity of indemnities between contractor and client is a standard feature or practice. In support of this he referred to paragraphs 7 and 8 of the speech of Lord Bingham of Cornhill in Caledonia North Sea Limited v British Telecommunications Plc 2002 SC (HL) 117 at 121/2 (and also to the speech of Lord Hoffman at paragraphs 81 and 82 of the same case). "Similar" is an ordinary English word which takes its colour from its context. It is necessary to look to its commercial context in order to construe it. In this case one must take account of the practice in the North Sea oil industry of mutuality of indemnities when deciding the meaning of the word. The word is intended to provide that the indemnity should extend to other contractors of Texaco who have themselves extended a similar indemnity to beneficiaries including the pursuers. The defenders did not fall into this category, because the extent of the indemnity in Clause 30(i) of the Amerada Charter did not include contractors of Texaco or Amerada, so the pursuers were not in the class of beneficiaries.
Mutuality or reciprocity of indemnities is a key feature of the relationship between the pursuers and Texaco, and where an intention is expressed to extend the pursuer's indemnity to contractors of Texaco, it would be consistent with that key feature to construe "similar contractual provisions" as reflecting an intention to require mutual indemnities between the pursuers and Texaco's contractors.

(iii) The phrase "similar contractual provisions" ought to be given a meaning which makes commercial sense. It makes commercial sense for the pursuers to agree not to sue another contractor of Texaco so long as that other contractor extends an indemnity to the pursuers.

[16] Mr Teare disagreed with Mr Kverndal's opinion (as contained in his written opinion and as advanced initially in evidence) that one should only look to similarity as between classes of beneficiaries, and not to the scope or ambit of the indemnities. Mr Teare emphasised the opening words of Article 17.1.1 - "For the purposes of the indemnities in favour of Company in this Article 17...". These words direct the reader's attention to the scope and ambit of the indemnities contained in the rest of Article 17, from 17.2 to 17.11 inclusive. If the beneficiaries in the Amerada Charter were the same as those in the Texaco Charter but the scope and ambit of the indemnities granted in the Amerada Charter were significantly narrower than those in the Texaco Charter, it could not be argued that the contractual provisions were similar. In construing the words "similar contractual provisions", it was necessary to look first to the commercial context or matrix of facts in which the words were written; this was part of the "background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract" in the words of Lord Hoffman in the Investors Compensation Scheme case (supra). The requirement to construe the phrase consistently with business common-sense, which Mr Teare listed as the third reason above, was supported by Lord Hoffman's fifth point, and by Lord Diplock's observations referred to therein in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201.

[17] Mr Teare agreed that the fact that the requirement for mutuality or reciprocity only applied to the Company's other contractors, and not to co-venturers, sub-contractors etc was something which caused him to pause for thought. However, Texaco was at the hub of the oil operation; it was not surprising that Texaco, and the pursuers as contractors of Texaco at the work site should consider and make specific provision for mutuality of indemnities at the level of Texaco's contractors at the work site but make no such provision for more remote persons or parties without a direct contractual relationship with Texaco. There might be very large numbers of persons in the categories of sub-contractors and their respective employees, agents and Affiliates, which might render it impracticable to obtain or aspire to reciprocity of indemnity with each of them. The effect remained that the parties to the contract had considered expressly the situation of Texaco's other contractors at the work site, and for the reasons given earlier there is a requirement for mutuality or reciprocity for other contractors at the work site.

[18] With regard to the classes of beneficiaries of the indemnities under the Amerada Charter, Mr Teare observed that they might be different from the classes in the Texaco Charter, or wider than them - the important consideration for present purposes was whether they included contractors of Texaco such as the pursuers. If they did, this would coincide with the practice in the North Sea industry of reciprocity, and even though they were not identical to the provisions in the Texaco Charter, they would be sufficiently similar to fall within the proviso in Article 17.1.1 of the Texaco Charter. Under reference to paragraph 21 of Mr Kverndal's Opinion, Mr Teare was of the opinion that the important omission in the Amerada Charter was not the class of "other contractors at the work site" but that of "other contractors of Texaco". As Lord Bingham of Cornhill observed in Caledonia North Sea Limited (supra), one of the features of the North Sea oil industry is that there are a lot of contractors. Texaco is at the hub of these. Just as the pursuers would know that Texaco would be likely to have other contractors, so would the defenders be likely to know this. It is therefore a significant omission in the Amerada Charter that it does not include other contractors of Texaco such as the pursuers. If Mr Kverndal's construction is correct, the defenders are protected by indemnity in the collision which occurred, and the pursuers are not; this is neither consistent with the practice in the North Sea industry nor with business commonsense. Mr Kverndal's Opinion did not attach sufficient weight to the practice of the North Sea oil industry, nor to business commonsense.

[19] In cross-examination, Mr Teare accepted that his knowledge of the practice of the North Sea oil industry was confined to giving legal advice in other situations, and to statements in textbooks and the observations of the House of Lords in the Caledonia North Sea case. His understanding of this practice was that it was a regular practice that all parties in the North Sea entered "knock for knock agreements", and this was extended to reciprocity to third parties because of a desire to reduce the overall costs of insurance. He accepted that the textbooks and reported cases do not extend to reciprocity to third parties, but he applied the same reasoning to this situation. He was referred to Article 18 of the Texaco Charter, which required the contractor to take out insurance to cover liabilities to third parties, and he recognised that it was possible that the contractor might remain liable for damage to third parties' property, but he observed that the presence of the indemnity in Article 17.1 might still reduce the cost of insurance. There was a clear lack of mutuality or reciprocity in Article 17 with regard to sub-contractors, agents, and co-venturers, and these might be covered by the Article 18 insurance. He was asked why, if there was no requirement for mutuality or reciprocity with regard to some categories such as sub-contractors, co-venturers or Affiliates, it would make commercial nonsense not to require reciprocity or mutuality with regard to other contractors at the work site; Mr Teare conceded that this was a matter which had to be taken into account when construing Clause 17.1, but reiterated that the parties had specifically considered this question with regard to other contractors at the work site, and this was perhaps an example of the situation where 100% efficacy has not been obtained. Because the parties have not achieved 100% efficacy in reaching a "knock for knock arrangement" is no reason for disregarding business commonsense, nor the practice of the North Sea industry, nor the attempt at mutuality in this case. The words in parenthesis in Article 17.1.1 were not merely a statement of fact for which the pursuers could sue Texaco if incorrect; they identified those contractors who were intended to have the benefit of the indemnities. There was no need for the pursuers to be expressly mentioned in the Amerada Charter, but the absence of words identifying a category of which the pursuers were a member rendered the Amerada Charter dissimilar from Article 17.1. Article 17.1 was attempting to secure a network of "knock for knock agreements" between the pursuers and other contractors of Texaco at the work site.

SUBMISSIONS FOR THE PARTIES

[20] (a) Submissions for the Defenders

Inevitably the submissions for each of the parties bore a close similarity to the evidence led. For the defenders, Mr Glennie submitted that if the defenders' argument on Article 17.1.1 of the Texaco Contract was successful, in the event that the defenders succeeded in proving their factual averments at pages 14D to 15B of the Closed Record, this would result in their sixth plea-in-law ultimately being sustained. He accepted that this plea-in-law could not be sustained at this stage of the proceedings and so he invited me to give my opinion on the parties' respective averments on record regarding English Law, and thereafter to put the case out By Order for discussion as to further procedure.

[21] He submitted that my task was to identify the principles of construction which an English court would apply to these charters, and then to apply these principles. He referred me to Lord Hoffman's speech in the Investors Compensation Scheme case referred to above, and to the speech of Lord Clyde in BCCI v Ali [2002] 1 AC 251, particularly at paragraph 78. He accepted that if one construction was wholly unbusinesslike or flouted business commonsense, that construction must yield to commonsense; however, the situation in which the parties found themselves now did not arise from a mistake, but from a deliberate and carefully worded provision in the Texaco Charter. He submitted that paragraph 11 of Mr Teare's opinion depended too heavily on his perception of the business context in the North Sea. In reality, it was not going to be possible to obtain a complete and comprehensive network of knock for knock agreements. Neither expert witness was able to give evidence as to the practice as to third party indemnities in the North Sea oil and gas industry - their evidence relied on the observations and texts referred to by Lord Bingham of Cornhill at paragraphs 7 and 8 of the Caledonia North Sea case. These only went as far as suggesting a regime of mutuality between contracting parties. They did not go so far as to suggest a regime of mutuality as between third party claims, and neither party had adduced evidence as to such practice, nor as to the practice of insurers in relation to such claims. It is clear from Article 17.1.1 that the pursuers have unrestricted liability towards certain categories of third parties, such as sub-contractors and their respective employees, agents, and Affiliates, and this is reinforced by Article 17.9. He submitted that the Court could not infer that Article 17 of the Texaco Charter went beyond the practice identified by Lord Bingham; there was no evidence of a practice of "knock for knock" agreements for third parties, and it is clear when one looks to the terms of the Texaco Charter that this was neither envisaged nor provided for.

[22] Mr Glennie submitted that if it had been the intention of the parties to the Texaco Charter that the pursuers could maintain that it was a precondition that potential third party beneficiaries of the indemnity should give a mutual or reciprocal indemnity in favour of the pursuers, it would have been easy to provide for this. In that event, first, Article 17.1.1 would not have required mutuality or reciprocity only in respect of the company's other contractors at the work site, but would have made this requirement of all possible beneficiaries, including sub-contractors, agents, Affiliates etc. Second, words clearly requiring mutuality or reciprocity could easily have been used, along the lines of "provided that there shall be no indemnity in favour of such categories unless they have also given an indemnity in favour of Contractor" or similar words. He pointed out that it might be simply a matter of chance whether the defenders were a contractor or a sub-contractor, just as it might be a matter of chance whether a visiting engineer was a contractor or a sub-contractor. The distinction between contractor and sub-contractor in such a situation was wholly artificial, and in the case of the defenders might depend on extraneous matters such as whether they were the charterer of the vessel or the owner of the vessel.

[23] Mr Glennie submitted that when one looks beyond Article 17.1 to other provisions of the Texaco Charter, it becomes clear that it was not envisaged that there would be a comprehensive network of "knock for knock" agreements relating to third parties, based on reciprocity or mutuality. Article 17.9 reduced the scope for a claim against Texaco by a third party, and increased the pursuer's potential liability for such a claim. Clause 18 recognised that the pursuers might be exposed to claims by third parties, and required them to take out insurance against this eventuality, again indicating that Mr Teare's assumption of a scheme based on mutuality breaks down. One can only use the assumption of mutuality or reciprocity as a means of helping to construe the words in Article 17.1.1 if one can find a regime wherein the parties clearly contemplated that the pursuers would not be liable for damage to third party equipment. That regime has not been established, as is evidenced (a) by the exclusion of sub-contractors, agents, Affiliates etc from any such regime, (b) by the terms of Article 17.9, (c) by the terms of Article 18.1, and (d) because it may be a matter of pure chance whether a person is a contractor or a sub-contractor, thereby making it improbable that the pursuers were insisting on a strict code of mutuality in once case and not the other. On this last point, Mr Glennie suggested that a third party could be both a contractor and a sub-contractor of the company, in which case the pursuers' argument would require mutuality of indemnity in one capacity but not in the other.

[24] If he was correct in undermining the assumption that there was a "requirement" for mutuality or reciprocity, Mr Glennie submitted that other points clearly favoured the construction contended for by the defenders. The Texaco Charter could easily have used clearer language, such as "provided that". If the words in brackets were intended to be a proviso, there was no business sense in limiting this to contractors - it would have made sense for this proviso to include all third parties. The provision has a meaning without it being a proviso, because of the terms of Article 17.9. He submitted that the word "similar" does not have a precise meaning. One has to read the relevant words in Article 17.1.1 of the Texaco Charter as they would have been read by a businessman in the situation of the parties at that time. They would have assumed that they were talking about contracts between Texaco and other contractors containing knock for knock agreements, and that is all that they would have been interested in. There is no dispute that the Amerada Charter does contain a knock for knock agreement, albeit that the pursuers are not a beneficiary of it - otherwise the knock for knock agreements are broadly similar. There was no requirement for the two indemnities to be identical, either in ambit or scope or in beneficiaries, as long as they were similar.

[25] (b) Submissions for the Pursuers

For the pursuers Mr Howie moved me to repel the defenders' sixth plea, because on the material before me he submitted that I could do so at this stage, and thereafter to put the case out By Order for further procedure. He observed that the defenders sought to escape liability on the basis of the indemnity provided in Article 17 of the Texaco Charter. In order to do so, they must do so under the terms of the Contracts (Rights of Third Parties) Act 1999, because Article 17.1.3 obliges them to do so. In order to avail themselves of the 1999 Act, they must aver themselves within a class of beneficiaries under Article 17.1.1 of the Texaco Charter. In order to assess whether they succeed in this, it is necessary to look to Clause 30(c) and 30(i) in the Amerada Charter, and to compare these with the indemnities in the Texaco Charter. He invited me to proceed on the assumption that Texaco were in a contractual relationship with the defenders, so that the defenders were comprehended by the category of "Texaco's other contractors at the work site".

[26] As to how to categorise the words in the second set of brackets in Article 17.1.1 of the Texaco Charter, he submitted that it mattered not whether these were a proviso or a description; the important point was that they amounted to a qualification of the words "other contractors... at the work site", and formed a description to which one must answer if one is to become part of that subset of contractors who can rely on the indemnity. The words in brackets are clearly intended to include some contractors and to exclude other contractors. They refer to contractors, not to Texaco. This means not just that those contractors must have given indemnities to Texaco, but that they must have given indemnities which give rise to directly enforceable third party rights. It matters not that there is no such qualification with regard to sub-contractors - there is such a qualification with regard to contractors, and if contractors are to benefit from the indemnity they must come within the qualification.

[27] With regard to the central issue in this preliminary proof, namely how the words "similar contractual provisions" should be construed, Mr Howie accepted the rules of construction set out in the Antaios and Investors Compensation Scheme cases. He accepted that it was relevant to have regard to the terminology of the words used, but the context in which they were used could affect the shades of meaning to be attributed to words. As Mr Kverndal had accepted, it was not enough just to look to see who the beneficiaries of the indemnities were in the present case - the pursuers were interested both in who was covered by an indemnity, and what is covered by an indemnity. In considering what is meant by "similar contractual provisions" the real question which must be asked is whether that which is indemnified in the Amerada Charter, and those to whom the indemnity is extended, is similar to what is indemnified and who are indemnified in the Texaco Charter. This must be assessed in light of what is known of the practice in the North Sea oil and gas industry, and in light of business commonsense. The reason that the word "similar" has been used, instead of "identical" or "matching", was simply to avoid disputes about minor drafting differences, or the situation where the second indemnity is wider than the first indemnity, in which case it would satisfy the requirement of "similarity".

[28] In assessing the necessary degree of similarity, Mr Howie suggested that the English language did not help - it was necessary draw a line beyond which provisions were not similar. The obvious line from the contractors point of view that that the indemnity provided by the third party was mutual and reciprocal: all the contractor was concerned with was whether he was protected by the third party's indemnity. Commercial logic required that the classes of beneficiaries in the Amerada Charter must include the pursuers, otherwise the provisions will not be "similar".

[29] With regard to the observations of Lord Bingham of Cornhill at paragraphs 7 and 8 of the Caledonia North Sea case, benefits would accrue to both the pursuers and other qualifying contractors at the work site as a result of mutual or reciprocal indemnities, by resolving disputes more quickly, avoiding legal fees and reducing insurance premiums. Mr Howie accepted that Lord Bingham of Cornhill was not referring to third party indemnities in that case, but as Mr Kverndal had accepted in evidence, the overriding intention was that each party should bear his own physical loss, and there was no obvious reason to restrict this intention to parties in a direct contractual relationship - parties might be related through a chain of contracts, and the further the net of mutual or reciprocal indemnities was spread the better. Mr Howie asked why should the pursuers unconditionally give up rights which they had at common law against the defenders, even when the defenders had given nothing in return? It was proper for the Court to ask this question, because it leads to the conclusion that the construction argued for by the defenders resulted in business nonsense. The true position was that the pursuers wanted the same protection from the defenders as they were themselves offering; the pursuers could not force the defenders to give this protection, so their offer of indemnity was conditional on their being protected by a similar indemnity by the defenders. The arguments for the defenders based on Articles 17.9 and 18 of the Texaco Charter, and the fact that sub-contractors were not subject to such a qualification, did not undermine the pursuers' construction, nor were they inconsistent with it.

[30] Sub-contractors may have been omitted from the "knock for knock" scheme per incuriam - for example, they may have been inserted into Article 17.1.1 at a late stage. They may constitute a gap in the scheme, but it would be wrong to disregard the whole scheme just because it contained imperfections. Moreover, sub-contractors could be all manner of people. The persons likely to bring property to the work site, and so to fall within the ambit of a "knock for knock" scheme, are other contractors of Texaco, and it is for this reason that they were dealt with by this proviso or condition. Moreover, their contract would have a reciprocal version of Article 17.4.1 in the Texaco Charter, so the damage covered will be not only the contractor's property, but also the sub-contractor's property. Article 18 required the contractor to effect insurance for the period of the indemnity, so that if the defenders were indemnified, the pursuers would be covered by the Article 18 insurance. Article 18 therefore provided a useful and rational function which was consistent with the construction favoured by the pursuers.

[31] In conclusion, Mr Howie asked whether the provisions in the Amerada Charter covered the negligent damaging of the defenders' property by the pursuers, equivalent to or similar to Article 17.4 or 17.11 of the Texaco Charter. The pursuers were only interested in what indemnity the defenders would give to them - it was not relevant to look to what different beneficiaries might be indemnified against, because the concept of similarity must mean that the indemnity extended towards the pursuers. Because the defenders accept that the pursuers are not within the class of beneficiaries of the indemnities in the Amerada Charter, the contractual provisions are clearly not similar.

5. DECISION
[32] It might be thought that there is an element of artificiality in the task which I face, which is to determine as a matter of fact what the law of England is in relation to the construction of contractual provisions of a type which are not unknown to the law of Scotland, and to decide this on the basis of evidence from only two eminent expert witnesses, each of whom has reached a substantially different view as to the law of England on this matter. Whatever the artificialities of the proceedings before me, I am persuaded on the basis of the evidence and submissions that the construction contended for by the pursuers is the correct construction according to the law of England, and is to be preferred to that for which the defenders argue. I have reached this view having regard to the following considerations (which I do not list in any order of importance):-

(i) However one categorises the words which appear in the second set of brackets in Article 17.1.1 of the Texaco Charter, I agree with Mr Howie that the effect of these words is that they must be satisfied if the other contractors at the work site are to benefit from the indemnities given by the pursuers. The words are more than merely a description, and focus on the other contractors rather than on Texaco. They amount to a proviso, and have the effect that any indemnity granted by the pursuers is conditional upon these words being satisfied.

(ii) I do not consider that the words "Company's other contractors... at the Work site" should be give the wide construction contended for by Mr Kverndal as meaning all contractors at the site, whether or not they have a direct contractual relationship with Texaco. If this construction were correct, it would follow that the words "sub-contractors and their respective employees, agents and Affiliates" would be otiose, and indeed any distinction between contractors and sub-contractors might be negated. I consider that the term relates only to those persons in a direct contractual relationship with Texaco.

(iii) The task of construing the phrase "similar contractual provisions" must involve taking account of the relevant background from the outset. There may not in fact have been much dispute between the two witnesses on this point; however, I understood Mr Kverndal to approach the task of construction by starting with the dictionary definitions of "similar", and then to consider the "matrix of fact", whereas Mr Teare had regard to the background circumstances, including what he knew of the practice of the North Sea oil and gas industry and also business commonsense, before reaching any view as to the meaning of the phrase. This latter approach appears to me to be wholly consistent with the principles of construction of contractual documents given by Lord Hoffman in the Investors Compensation Scheme case at pages 912/913. Considerations of business commonsense and the practices of the particular field of business in which the parties were engaged are matters which fall to be considered at the very outset of the exercise.

(iv) While the word "similar" does not equate to "precisely identical" or "co-extensive", having regard to business commonsense (and, so far as it is possible to do so, the practice of the North Sea oil and gas industry), it seems to me that contractual provisions for indemnity in another contract must at least include the class of beneficiaries which comprehends the pursuers in order to be categorised as "similar". The reason that the word "similar" was used in Article 17.1. of the Texaco Charter, instead of identical, co-extensive or some other such term, was probably to avoid arid exercises in comparison of precise wordings to see if a minor point of discrepancy could be found in the scope of an indemnity to render it not identical. Moreover, the word "similar" has the advantage that it may include contracts which contain indemnities wider in their ambit and scope or in their classes of beneficiaries than the indemnities in the Texaco Charter; such contractual provisions would not be identical to those in Article 17.1.1, but would be similar to them. Contractual provisions which confer no benefit by way of directly enforceable right of indemnity to one of the parties to the Texaco Charter cannot in my view be described as "similar".

(v) I have had some doubts as to whether there has been adequate evidence before me as to the practice in the North Sea oil and gas industry as to directly enforceable third party rights of indemnity to enable me to reach a view as to the existence or otherwise of such a practice. As indicated earlier, the only evidence before me has come from two eminent English Queen's Counsel. They have given evidence as to their own experience in giving advice in the context of the North Sea oil and gas industry, and to their knowledge of English law insofar as it casts light on any such practice. Each referred me to the same passages in the speeches of Lord Bingham of Cornhill and Lord Hoffman in Caledonia North Sea Limited v British Telecommunications Plc 2002 SC (HL) 117, at paragraphs [7] and [8] and [81] and [82] respectively. Their Lordships referred to a market practice having developed to take account of the peculiar features of off-shore operations, and make reference to certain textbooks, but they were addressing the question of indemnities as between parties to a contract, and they were not directly concerned with contracts which conferred a directly enforceable right of indemnity upon third parties who have no contractual relationship. However, looking to the terms of the Texaco and Amerada Charters, and the evidence of both witnesses before me, and also to the observations in the Caledonia North Sea case, I have reached the view that there is sufficient material before me to entitle me to conclude that there is a practice within the North Sea oil and gas industry of seeking to achieve mutual and reciprocal and directly enforceable third party rights of indemnity, even if this is not 100% successfully achieved in every case. The reasoning behind this practice in relation to third parties is the same as the reasoning behind indemnities in favour of contracting parties, namely reduced insurance premiums, swifter resolution of disputes, and the other reasons given in the Caledonia North Sea case. Mr Teare gave evidence that, in his experience, there was such a practice which extended to third parties not in a contractual relationship. I am prepared to accept this evidence. However, I should make it clear that the existence of any such practice is not central to my decision, and that I would have reached the same conclusion that I have reached without any evidence of such a practice.

(vi) The arguments advanced on behalf of the defenders based on the terms of Articles 17.9 and 18.1 of the Texaco Charter do not appear to me to detract from the counter arguments for the pursuers, nor from the benefits to be found in any such practice in the North Sea oil and gas industry. These provisions still have content and purpose if the construction favoured by the pursuers is correct.

(vii) Mr Teare conceded that the distinction between contractors at the work site (to whom this proviso applied) and other categories such as sub-contractors caused him to pause for thought. While no doubt he was correct to pause to reflect, I am of the view that he was also right to conclude on reflection that this did not affect the construction for which he contends. It may be, as was suggested, that this distinction may have been created as a result of a last minute adjustment to which insufficient thought was given, or that it is merely an example of the proposition that the network of "knock for knock agreements" has not been effected with 100% success. The more likely cause in my view is that Texaco are to be seen as being at the hub of the oil and gas operation and at the centre of a web of contracts; the parties to the Texaco Charter recognised that it would be a hopeless task to attempt to achieve "knock for knock agreements" with all the many different types and categories of sub-contractors, agents, Affiliates etc. In order to achieve a manageable and effective system of mutual indemnities, it makes sense to have a "cut off point" whereby the pursuers are entitled to expect that Texaco will see to it that the pursuers are protected by knock for knock agreements in Texaco's contracts with their other contractors at the work site.

(viii) Mr Kverndal made the point that similarity was only required with the provisions contained "within this Article 17.1", and suggested originally that this had the result that any exercise in comparing contractual provisions was not concerned with the scope or ambit of indemnities but only with classes of beneficiaries. However, he departed from this position in evidence (correctly in my view) and accepted that, taken to its conclusion, this would make a nonsense of Article 17.1.1. I am further of the view that the opening words of Article 17.1.1 focus the reader's attention not just on the classes of beneficiaries, nor even on Article 17.1.1 itself, but on the indemnities contained in the whole of Article 17.

[33] As may be observed in almost every dispute about contractual terminology, with the benefit of hindsight clearer words could have been used to indicate beyond doubt that the indemnity provided by the pursuers was conditional on a reciprocal or mutual indemnity in favour of the pursuers having been granted by a third party. However, taking the above factors into account, I am satisfied that the effect of English law in the circumstances of this action is as contended for by the pursuers. I do not consider that the provisions of the Amerada Charter regarding indemnity of third parties can properly be regarded as "similar contractual provisions" to those contained in Article 17.1 of the Texaco Charter, principally because the pursuers, as Texaco's contractors, are not within a class of beneficiaries of the indemnity provided by the Amerada Charter. Although the provisions of the Amerada Charter do not have to be identical nor precisely co-extensive in every respect with those of the Texaco Charter, I consider that in order to be "similar" in the sense in which this word is used in the Texaco Charter, they would have to confer some directly enforceable right of indemnity on a class of beneficiaries which included Texaco's contractors such as the pursuers. I cannot see any other purpose for the words in the second set of brackets in Article 17.1.1 of the Texaco Charter; the construction for which the defenders contend sits uneasily with the words used, and flies in the face of business commonsense. I am satisfied on the basis of the evidence which I have heard that this is not the proper construction of the relevant provisions of Article 17.1.1 of the Texaco Charter under English law.

[34] As agreed by both parties at the preliminary proof, this matter will be put out By Order in early course to enable parties to address me as to further procedure in light of my decision.