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Cite as: [2004] ScotCS 146

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Downhole Technology Ltd v. SPS AFOS International (Branch) Ltd [2004] ScotCS 146 (22 June 2004)

SECOND DIVISION, INNER HOUSE, COURT OF SESSION

Lord Justice Clerk

Lord Kirkwood

Lord Philip

XA107/03

OPINION OF THE COURT

delivered by the LORD JUSTICE CLERK

APPEAL

From the Sheriffdom of Grampian, Highland and Islands at Aberdeen

in the cause

DOWNHOLE TECHNOLOGY LIMITED

Pursuers and Appellants;

against

SPS - AFOS INTERNATIONAL (BRANCH) LIMITED

Defenders and Respondents:

_______

For Pursuers and Appellants: Weir; Paull & Williamsons

For Defenders and Respondents: Kennedy; Shepherd & Wedderburn WS (for Stronachs, Aberdeen)

22 June 2004

[1] This is an appeal from a decision of Sheriff G K Buchanan at Aberdeen Sheriff Court dated 26 June 2003, in which inter alia he assoilzied the defenders from the craves of the initial writ.

[2] The pursuers operate an experimental centre, formerly known as the International Drilling and Downhole Technology Centre, at Bridge of Don, Aberdeen. At the centre there is a drilling rig, wells, and associated plant and equipment.

[3] In about February 2000 the pursuers contracted to provide well hire services to the defenders under a contract that was subject to the pursuers' standard terms and conditions. The contract provided that the pursuers would provide the hire of a well at the centre, together with the appropriate crew, for the purposes of the defenders' "project," namely the testing of a tool called a wireline patroller that was designed by the defenders' engineering manager, Mr George Telfer.

[4] Under clause 4.2 of the contract the pursuers had the right to require the defenders to modify the project in such manner as the pursuers might think fit or to prevent the defenders from proceeding or continuing with it if, in the opinion of the pursuers, the project was potentially damaging to the facilities of the centre.

[5] Clause 8 provided for indemnities and insurance. Clause 8.2.1 provided as follows:

"The Client [sc the defenders] shall indemnify and keep Downhole Technology Ltd fully indemnified against all liabilities, costs and expenses in respect of loss, damage or impairment of any property of any kind (wear and tear excepted) whether that of Downhole Technology Ltd, or the Client or otherwise, excepting well loss or damage, collapse, subsistence (sic) or landslips arising directly or indirectly from the performance of the Project and any consequences of such loss, damage or impairment except to the extent that such loss, damage or impairment arises from the negligence or breach of statutory or contractual duty of Downhole Technology Ltd."

Clause 8.6 was as follows:

"The Client will maintain liability insurance to the extent of its liabilities under Condition 8.1 and 8.2 with a sum insured of not less than £2,000,000 in respect of any one incident but unlimited for employers liability and shall produce evidence of such insurance at any time requested by Downhole Technology Ltd."

[6] The pursuers seek to be indemnified under clause 8.2.1 for outlays incurred by them in consequence of a mishap in the project.

[7] The sheriff held a proof before answer. There was a question of credibility in relation to Mr Telfer and Mr Harry Simpson, the pursuer's facilities manager. They were the parties' respective principal witnesses. The sheriff resolved the question in favour of Mr Simpson. Apart from that, the whole issue related to the scope of the indemnity conferred by clause 8.2.1.

[8] The sheriff found that on or about 2 March 2000 the defenders commenced their hire of the well. They tested the wireline patroller by lowering it into the well on braided line connected to it by a line connector supplied by the pursuers. When the test was being undertaken, Mr Simpson manned the wireline unit while Mr Telfer was stationed on the rig floor. On 3 March 2000 Mr. Simpson undertook two up-weight tests. The first took place before the wireline patroller was lowered into the well. The second took place at the point where the patroller entered water at a depth of about 90 feet. As Mr Simpson winched the patroller out of the well, the braided line parted from the connector, leaving the patroller in the well. The defenders declined to engage the services of a specialist fishing contractor to recover it. On 12 March 2000, Mr Telfer attempted unsuccessfully to fish it out. On 13 March 2000 the defenders left the site.

[9] The pursuers thereafter engaged a specialist firm to fish out the patroller. On 16 March it was extricated from the well. Although the sheriff has not made this a finding in fact, he records in his Note (at para [1]), and the parties now agree, that the mishap did not cause damage to the well. The sheriff's critical finding in fact, from which this appeal arises, is in the following terms:

"(26) The trapping of the wire line patroller in the well arose directly or indirectly from the performance of the project and resulted in well loss in terms of clause 8.2.1 of the pursuers' standard terms and conditions."

The sheriff found in fact and in law that

"the pursuers have not incurred any loss, costs or expenses in respect of which they are entitled to be reimbursed by the defenders in terms of the contract between the parties."

[10] Before the sheriff, and before this court, the short question was whether the trapping of the wire line patroller in the well amounted to "impairment" of the well or amounted to "well loss." Counsel were agreed that if what occurred was "well loss" the defenders were rightly assoilzied. They also agreed that if what occurred was "impairment" of the well, and only that, the pursuers must succeed.

[11] Counsel for the pursuers submitted that well loss could occur only where the well ceased permanently to be useable as such. It was clear that the well was undamaged. It was merely impaired to the extent that it was out of normal use from 3 March to 16 March.

[12] Counsel for the defenders submitted that on a true construction of clause 8.2.1, well loss did not mean the loss of the well, but loss associated with the defenders' use of it. Whatever loss, damage or impairment was covered by the indemnity, it did not cover loss or damage related directly to the use of the well itself. This interpretation made commercial sense. The pursuers operated the centre and supplied the well, the labour and the tools. Clause 4.2 (supra) entitled them to exercise effective control over the project. It was therefore reasonable that the defenders should not be liable for any loss associated with their use of the well.

[13] In our opinion, the sheriff erred in concluding that the pursuers were not indemnified (cf Note, para [3]). In the absence of any special contractual definition of the critical terms that are in issue, we consider that on the basis of the findings that we have summarised, the sheriff was not entitled to hold that a "well loss" had occurred.

[14] We agree with counsel for the pursuers that clause 8.2.1 consists of three discrete elements. The first is the indemnity itself, by which the defenders indemnify the pursuers against "all liabilities, costs and expenses in respect of loss, damage or impairment of any property of any kind (wear and tear excepted) whether that of [the pursuers] or [the defenders] or otherwise ... and any consequences of such loss, damage or impairment ... " The second element is the exception to this general indemnity, namely that the defenders do not indemnify the pursuers in relation to "well loss or damage, collapse, subsistence (sic) or landslips arising directly or indirectly from the performance of the Project." The third element is a limitation on the scope of the indemnity by which the indemnity does not apply "to the extent that such loss, damage or impairment arises from the negligence or breach of statutory or contractual duty of [the pursuers]."

[15] The sheriff found that the loss and damage to which this claim relates did not arise from negligence, or from breach of statutory duty or contractual duty on the part of the pursuers. Those findings are not in dispute.

[16] The short question, therefore, is whether the mishap falls within the scope of the indemnity or within the scope of the exception. That, in turn, becomes the question whether, as the pursuers submit, the mishap was an "impairment of property," the property in question being the well, or, as the defenders submit, a "well loss."

[17] On one view of the clause there may be a difficulty of interpretation. If the exception extends to "well loss or damage," it could be argued that the indemnity, so far as covering "damage," must relate to damage to property other than the well itself. Whatever the answer to that problem, we consider that it does not arise in this case. On the findings of the sheriff it cannot, on any view, be said that there was damage to property of any kind, including the well. The question is whether the temporary blockage constituted impairment of the well. That raises the further question whether the well is within the category of "property of any kind."

[18] Counsel for the defenders conceded that the temporary blockage of the well constituted an "impairment" of it in terms of clause 8.2.1. His argument was that it constituted not only a temporary impairment of the well but also a well loss, in the sense that it was a loss associated with the use of the well. We do not accept that interpretation of "well loss"; but in the light of counsel's concession, which we think was correctly made, we consider that we are entitled to hold that the indemnity applied in this case.

[19] In our opinion, "well loss" connotes some event that causes the well to cease to exist; for example, if the shaft of the well collapses or if the well is destroyed by some movement in the subjacent geology. In this case, there was no damage to the well. When the wireline patroller was retrieved from it, the well remained intact. All that happened was that the well was put out of normal use for about thirteen days. In our view, that was an impairment of the well within the meaning of clause 8.2.1 and therefore the defenders are liable. We consider that this interpretation is the natural and reasonable interpretation of the words of the condition when judged against the findings in fact. It is entirely consistent with the defenders' coextensive insurance obligations under clause 8.6. Moreover, in our view, this interpretation appears to make sound commercial sense. The well was being hired out for the purpose of experimentation by the defenders with a wireline patroller of their own design. While the pursuers had certain rights to have the project modified or discontinued, their state of knowledge as to the patroller and its properties would be limited. Since the experiment might result in blockage of the well for reasons that they could not foresee, it was reasonable, in our view, for the pursuers to require an indemnity of the kind that we have described and to require that it be backed with suitable insurance cover. Their powers under clause 4.2 were not a complete protection in this respect.

[20] If we are right in thinking that the defenders are liable to the pursuers under clause 8.2.1, the result is that the defenders will be liable in damages of £23,709.95, being the total costs incurred by the pursuers in the recovery operation (findings (29) and (31)). That amount is not in dispute.

[21] We shall therefore recall the interlocutors of the sheriff dated 26 June and 29 July 2003, except in relation to his findings of expenses for two discharged diets of 11 May 2001 and 2 December 2002 respectively, and in relation to his certification of one of the defenders' witnesses; sustain pleas in law 1 and 2 for the pursuers; repel the pleas in law for the defenders; and grant decree for £23,709.95. We shall allow interest on that sum from 10 October 2000, the date of citation, and award the pursuers the expenses of both the proof and the appeal.