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Diamond Offshore Drilling Uk Ltd v. Gulf Offshore Ns Ltd [2005] ScotCS CSIH_4 (11 January 2005)

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Kirkwood

Lord Johnston

[2005] CSIH 4

A3617/01

OPINION OF THE COURT

delivered by LORD JOHNSTON

RECLAIMING MOTION FOR DEFENDERS

in the cause

DIAMOND OFFSHORE DRILLING (UK) LIMITED

Pursuers and Respondents;

against

GULF OFFSHORE N.S. LIMITED

Defenders and Reclaimers:

_______

Act: Howie, Q.C., Weir; Paull & Williamsons (Pursuers and Respondents)

Alt: Glennie, Q.C., Smith; Henderson Boyd Jackson, W.S. (Defenders and Reclaimers)

11 January 2005

[1] This is a reclaiming motion at the instance of the defenders against a determination by the Lord Ordinary after a preliminary proof that the defenders' contention that they were protected by certain provisions of charter parties relevant to the case from suit at the instance of the pursuers was unsound.

[2] The matter arises out of a collision between a rig operated by the pursuers ("Diamond") and a tug/supply boat being operated by the defenders ("Gulf"). The claim made by the pursuers against the defenders is based in delict, and in particular against the negligence of the skipper of the tug.

[3] The issue before this court is identified by the sixth plea-in-law for the defenders, which is in the following terms:

"Separatim, esto the pursuers have suffered any loss, injury or damage through the fault of Captain Bradbury (which is denied), the pursuers having agreed to indemnify and hold harmless the defenders in respect of such loss, injury or damage, decree of absolvitor should be pronounced."

[4] At the conclusion of the preliminary proof the Lord Ordinary repelled this plea.

[5] The relationship between the parties in the context of the operation of the rig is complicated. Neither the pursuers nor the defenders own, respectively, the rig or the tug, but both were involved in operating , at least on averment, same under charter parties entered into respectively by them with Texaco North Sea UK Company ("Texaco") who were the licensees of the particular area of the North Sea, where the rig was operating, together with, as will be seen, co-venturers.

[6] With regard to Diamond their relationship with Texaco was governed by an agreement ("the Texaco Charter") (7/3 of process) whereby Texaco chartered the rig from Diamond, who themselves were charterers through a bareboat charter from the owners. The owners have no concern with the present process.

[7] That charter contained inter alia the following provisions:

"17.1.1 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 (sic), agents and Affiliates;

17.1.2 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.

17.1.3 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."

[8] Having defined the scope of the indemnity being offered as such the provisions went on to specify the indemnities in question, particularly under reference to 17.4.1, being both an indemnity and "a hold harmless clause".

[9] It is in the following terms:

"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."

In Clause 17.9 provision is made to deal with third party claims, and in terms of Clause 18 provision is made for the relevant insurance to be in place.

[10] With regard to Gulf who were charterers of the tug from its owners, who have no concern with the present proceedings, they entered into a charter with Amerada Hess Limited as agents for Texaco, ("the Amerada Charter") No. 7/2 of process, which was in effect a call off contract.

[11] The relevant provisions in the Amerada Charter were as follows:

"30.0 Liabilities and Indemnities

a. Charterer [Amerada Hess Limited] agrees to defend, indemnify and hold Owner Indemnified Parties harmless from and against any and all liability, damage, claim or costs (including legal costs and expenses) in respect of sickness of or injury to or death of the Charterer Indemnified Parties' officers, directors, employees, agents and representatives regardless of the cause or reason therefor and regardless of the sole or concurrent negligence, default and/or breach of statutory duty whether active or passive of Owner Indemnified Parties.

b. 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 sickness of or injury to or death of Owner Indemnified Parties' officers, directors, employees, agents and representatives regardless of the cause or reason therefor and regardless of the sole or concurrent negligence, default and/or breach of statutory duty whether active or passive of the Charterer Indemnified Parties.

...

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

[12] The reason for the preliminary proof relates to the fact that both these contracts are said to be governed by English law and accordingly, at that proof, evidence was led from two English Queen's Counsel, Mr. S. Kverndal, Q.C. for the defenders and Mr. N.I.M. Teare, Q.C. for the pursuers, to enable the Lord Ordinary to determine the proper construction to be put upon the contracts in relation to the indemnity provisions and specifically as to the relevance or otherwise of the defenders' plea-in-law to which we have made reference.

[13] At that proof there were two basic issues, firstly relating to the extent to which under English law a third party may benefit from a contract to which he is not a party, both with reference to the common law and also to the Contracts (Rights of Third Parties) Act 1999, to which reference is made in the Texaco Charter but not in the Amerada Charter. Before us it was recognised that this issue had effectively disappeared and we need concern ourselves no longer with it.

[14] Equally before us, at the outset, senior counsel for the reclaimers raised an issue of private international law with regard to the construction of contracts governed by a foreign law, under reference to some well known authorities, but again as the debate developed it became clear that this was not essentially an issue. It was not in dispute that where foreign law regulated a contract, that law would provide this court with the rules of construction as a matter of fact, which it then had to apply to the contract in question as a matter of law. There was no suggestion in the end of the day there was a real difference between English and Scottish rules of construction. In this respect, therefore, we consider that we are entitled to approach this matter purely as a question of construction against the normal rules that would apply so far as relevant in this context in this jurisdiction. This was essentially the approach of the Lord Ordinary whose conclusions were as follows:

"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 given 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 Hoffmann 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 Hoffmann 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."

[15] Although the debate before us at times appeared to be wide ranging, in the end the issue narrowed to a comparatively short but sharp point which turned upon the construction of Clause 17.1.1 of the Texaco Charter.

[16] Senior counsel for the defenders focused on two issues. First he submitted that on a proper construction, with particular reference to the passage (second) within the brackets, Clause 17.1.1 meant that any contractor with Texaco who was offering indemnities to Texaco to hold them harmless against their own actions, was entitled to the protection extended by Clause 17.1.1 and thus could plead a hold harmless clause against Diamond, notwithstanding their own fault. In this respect, counsel relied upon the provisions of Clause 30 of the Amerada charter to which we have made reference.

[17] Secondly, the essential position for the defenders was that in the context of the North Sea there was a general practice whereby a "knock for knock" arrangement existed between all parties involved in a particular operation, even if this was not always capable of being achieved. It was submitted that the pursuers' position in the present case depended upon there being mutuality and reciprocity which was not the case here. Nevertheless the defenders were entitled to rely upon the hold harmless clause. He submitted that the practice was identified by the House of Lords in Caledonia North Sea Limited v British Telecommunications plc and Others (The Piper Alpha case) 2002 SC (HL) 117, in particular with regard to Lord Bingham at p.122, Lord Mackay of Clashfern at p.127 and Lord Hoffmann at p.139. We were also referred to certain passages of the evidence of Mr. Teare, starting at p.207 of Vol.3, with regard to the issue of practice. At the end of the day the position of the defenders in submission was simply that, having regard to the use of the word "similar" in the clause and particularly the passage within the brackets, the test of practice was met having regard to the fact that in the Amerada Charter indemnities were also being offered to Texaco. The Lord Ordinary had accordingly erred in taking too narrow a view of that particular word.

[18] The position adopted by senior counsel for the respondents, was essentially that taken by the Lord Ordinary. He maintained that, properly construed, the word "similar" could not be applied to what was simply a bilateral indemnity offer on the one hand, i.e. in the Amerada Charter, and a multilateral offer on the other hand, i.e. in the Texaco Charter. There was an unbridgeable gap between the two. While he accepted that in principle a third party could benefit from a contract to which he was not a party, the Amerada Charter did not fit the provisions of Clause 17.1.1, and particularly the relevant words in brackets. To hold otherwise would, in effect, mean that Diamond were offering something for nothing i.e. a multilateral indemnity without any restrictive width, but at the same time suffering a loss of the right to sue third parties who were not offering the same. His position did not depend upon mutuality or reciprocity, but simply on an issue of construction. The question of practice within the North Sea was nothing to the point. The Lord Ordinary had in any event not decided the matter on that basis.

[19] In seeking to resolve this matter it is very important to recognise that the real issue, not only between the parties but within the whole context of the operation of this rig and the contracting parties, is the identification and allocation of risk amongst the parties, and thus their underwriters, in terms of loss and damage that would inevitably occur, whether it be damage to property, personal injury or economic loss. Thus in construing the relevant documents this court must have regard to clarification, and to some extent the need for a degree of certainty, as to the nature of the risks being undertaken by the relevant underwriter. Obviously the advice of a broker will be needed to assess the extent to which such risks can be quantified, but the fact that they may be relatively unquantifiable, which is clearly the case here in terms of Clause 17.1.1, is nothing to the point. Nevertheless, the broker should know what he is required to do in giving advice to his client. Furthermore, we do not consider that the question of construction revolves around any question of ambiguity but rather on the basis of seeking clarity in respect of what the draughtsman of the relevant Clause 17.1.1 had in mind.

[20] It is clear, in our view, that the words in the second set of brackets in Clause 17.1.1 qualify the preceding words. Thus there will be some contractors that do not qualify. The word "similar" has a number of connotations. In this respect we consider the word "provisions" in the bracketed part as very important. One is not looking for a similar contract which could be readily satisfied by indemnities being offered both by Diamond and Gulf to Texaco but, rather, for similar provisions to those found in the Texaco Charter. It is immediately clear that there is a large gap between the bilateral indemnities contained in the Amerada Charter and the multilateral indemnities contained in the Texaco Charter. In our opinion, the short answer to this case is that Gulf were not qualifying contractors within the bracketed part of Clause 17.1.1. We also accept that the provisions in Clause 17.9 and Clause 18 remain relevant, as senior counsel for the pursuers pointed out, to third parties in the sense of persons not in any way involved except coincidentally with the rig, against whose claims Texaco required protection. The provisions of the Amerada Charter, which are understandable, go no further than protecting Texaco in respect of anything that Gulf might be able otherwise to claim as damages against Texaco and their associates.

[21] It is not difficult to understand why Clause 17.1.1 should be in the form that it is. Texaco in hiring the rig sought protection from all the risks that may lead to loss and damage to them having regard to the number of contractors and sub-contractors that may be operating there. The fact that the House of Lords in the Piper Alpha case found and determined that the allocation of risk was different from that contemplated by the original underwriters in respect of the relevant contractors, merely confirms how important it is for there to be certainty, so far as it can be established.

[22] In these circumstances we are clearly of the view that the terms of the Amerada Charter do not qualify, in the sense of "knock for knock", any more than Diamond should be regarded as having given up the right to sue in delict a party with whom they have no contractual relationship and who was not offering the same protection to Texaco. We are therefore clearly of the view that the Lord Ordinary came to the correct result and we agree with his reasons, as amplified by this opinion.

[23] The reclaiming motion is accordingly refused. This court will adhere to the interlocutor of the Lord Ordinary.