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Cite as: [2006] CSOH 104, [2006] ScotCS CSOH_104

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OUTER HOUSE, COURT OF SESSION

[2006] CSOH 104

OPINION OF LORD GLENNIE

in the cause

GAVIN SLESSOR

Pursuer;

against

VETCO GRAY UK LIMITED &C

Defenders:

________________

Pursuer: No Appearance; Anderson Strathern, WS

Defenders: R. Smith, QC, Gardner; Simpson & Marwick, WS

Third Party: Armstrong, QC; HBM Sayers

7 July 2006

Introduction

[1] This is a preliminary proof on the construction of an indemnity clause in a contract between the defender and the third party.

[2] The issue arises in the following circumstances. The defenders have been sued in this action by the pursuer, who was employed by them as a mechanical fitter. He claims that he was working at the defenders' premises in Aberdeen, assisting with lifting a control module by crane. The control module weighed about 1.7 tonnes. The pursuer avers that he was guiding the control module into a hole in a structure known as a Christmas Tree. To do this he had to stand on the Christmas Tree next to the hole. He avers that the defenders were using lifting adaptors of the wrong size. As a result, he says, the control module was not properly secured to the crane, so that it fell from the crane and struck him, causing him serious injury. In their Answers, the defenders aver that the control module and lifting adaptor were supplied to them by the third party and that the third party was responsible for the installation of the control module. They criticise the third party's field service engineer for not checking that the lift adaptor was the correct size and for not supervising the lifting operation. They say that if the accident occurred because the wrong lifting adaptor was used to lift the control module, then the accident was caused by the fault and negligence of the third party and/or their breach of statutory duty. It was also caused, they say, by the fault and negligence of the third party's field service engineer. They claim, in consequence that they are not liable to the pursuer, alternatively that they are entitled to damages from the third party in the full amount of any such liability and/or are entitled to a contribution from the third party in terms of section 3 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940.

[3] In answer to the defenders' claim against them, the third party relies upon the Consortium Agreement between the defender, the third party and another company, and in particular clause B13 which provides as follows:

"LIABILITY FOR DAMAGE TO PROPERTY OR PERSONAL INJURIES

The Parties hereto mutually and irrevocably undertake to release, defend and indemnify each other for damage to any property and/or injury to/or death of the personnel of the others, arising out of or in connection with the Work, howsoever caused."

The third party contends that in terms of this clause the defenders have, in effect, agreed not to claim against them for the injury to the pursuer.

The Consortium Agreement

[4] The Consortium Agreement embraces engineering, project management and supply of sub sea equipment, test facilities and related services from each of the three parties thereto. In terms of the Agreement the parties agree to act as one entity, with the Contractor, (the third party), as the single point of contact with the Customer. The Agreement has elements in it of a joint venture, with detailed provisions for a profit split ("Risk and Reward Shares") from any work carried out under the agreement. However, in performing any work for a Customer, each of the parties to the agreement was to be responsible for its part of the relevant contractual duties, and was to provide such personnel and services as might be required for its performance thereof. As is to be expected, the agreement contains detailed provisions about allocation of responsibility where one of the parties to the Agreement is at fault. For example, clause B5.6 provides that the Contractor will bear such reduced revenues or additional costs as arise from its own negligence, errors or misjudgement in its leadership roll. In terms of clause B10, which is headed "Liability - General Principals" it is provided that each party shall carry out, be responsible for and bear the technical, commercial and financial risks for its part of the supply unless otherwise set out in the Agreement. Clause B11 deals with "Liability for Technical Information and Disturbances". It provides that if one of the parties to the Agreement has furnished insufficient technical information which has been identified as the basis for part of the supply to be provided by another party, then that first party should carry the extra costs incurred by the other. Similarly, if one party negligently causes disturbances in the work of the other, that party is to be liable for the extra costs incurred. Clause B12 deals with "Liability for Defects". Under this provision each party is required to remedy defects in its performance at its own cost. However, if a defect cannot properly be identified as being related to performance by one of the parties, the costs of rendering the defect will be borne by all three parties in accordance with their respective shares of risk and reward. A modified version of this same approach is to be found in clause B20 which deals with "Cancellation or Termination" of a contract by a customer because of default by any party to the Agreement; each party bears its own costs and losses incurred by it, but the party in default pays the first tranche of any damages payable to the Customer, the remainder being split between the parties in accordance with their respective shares. Finally, I should mention the insurance provision, clause B21, which provides that each party should take out the insurance policies which it finds necessary but goes on to say that the parties should investigate together whether it might be advantageous to arrange joint insurance cover. In clause B21.3 it is provided that

"Each Party shall endeavour to obtain from its insurance company a waiver of the right of recourse towards the other Parties, with respect to insurance policies taken out specially for the Project",

the "Project" meaning all the supplies and services necessary to fulfil any particular contract with a customer.

Submissions of the parties

[5] For the defenders, Mr Smith QC put forward two arguments as to the effect of clause B13. He submitted first, that the clause was too uncertain to be enforceable. His second submission was that it could not be interpreted so as to provide an indemnity or release for the third party in the circumstances of the present case.

[6] The argument on uncertainty proceeded, as I understood it, on the basis that clause B13 did not identify with sufficient clarity the personnel in respect of whose injury or death the release or indemnity was given. If it applied to all personnel in the employment of all three parties, then the mutual indemnity was circular and, in effect, meaningless. He submitted that clause B13 could be ignored on this ground without invalidating the contract. He submitted that one test of whether clause B13 was too uncertain to be enforceable was to ask whether it would be possible to frame a decree of a specific implement so as to give effect to it. He referred me in this context to McArthur v Lawson 1877 4R 1134 and to the recent "keep open" cases.

[7] In support of his argument that the clause could not be interpreted so as to provide an indemnity in favour of the third party in the present case, he submitted that clear language is required in any clause to its exclude liability which ordinarily falls upon the proferens. In support of this contention he referred me to the well known cases of Canada Steamship Lines Ltd v The King [1952] AC 1952 and Smith v U.M.B. Chrysler (Scotland) Ltd 1978 SC(HL)1. Those cases were concerned with whether the wording in an exemption or indemnity provision covered negligence. Mr Smith accepted that the words "howsoever caused" in clause B13 included a case where the injuries were caused by the negligence of the party seeking the indemnity. However, he sought to draw from those cases the more general proposition that very clear words are needed to exempt a party from the consequences of his own negligence, and that the approach in the cases to which I have referred applied not only to the degree of blameworthiness in respect of which exemption was given but also as to the ambit of the circumstances to which that exemption applied.

[8] For the third party, Mr Armstrong QC argued that clause B13 was effective and operated in favour of the third party. He submitted that the clause conferred an indemnity in favour of the third party in respect of the circumstances averred by the pursuer, notwithstanding any fault or breach of statutory duty on the part of the third party. He submitted, under reference to authorities, that the role of the court in construing the contract was to determine the intention of the parties from the words used by them, in the context of the whole contract. He submitted that the court should not adopt a strained construction. He submitted that it was common in the offshore industry for parties to enter into "knock for knock" agreements under which, in effect, they agreed to bear the responsibility for loss or damage to their own property and for injury or death to their own employees. He referred me in this context to Caledonia North Sea Ltd v London Bridge Engineering Ltd 2000 SLT 1123 at 1150-1151. He also submitted, in relation to the argument on construction, that the contra proferentem rule had less force in a case where the exclusion or indemnity was mutual or reciprocal. The rule applied because of an inherent improbability that one party to the contract had intended to absolve the other party from the consequences of the latter's own negligence: see Gillespie Bros & Co Ltd v Roy Bowls Transport Ltd [1973] QB400, per Buckley LJ at 419. That reasoning was less persuasive in a case where both parties had agreed to absolve the other in similar circumstances. He noted that this point had been left open by an Extra Division in Nelson v Atlantic Power and Gas Ltd 1995 SLT 102 at 104 D - B. In any event there were sound reasons for the parties agreeing this type of mutual indemnity. These are set out in Caledonia North Sea, and in Nelson at 104 B-C.

Decision
[9] Despite the wide ranging arguments and the extensive citation of authority, the point at issue here appears to me to be a relatively straightforward question of construing the words used by the parties in clause B13, having regard to the surrounding circumstances and, in particular, to the whole of the contract in which they appear. The particular words in question are "the personnel of the others". The parties mutually undertake to indemnify each other for injury or death to "the personnel of the others". To my mind that wording admits of only one interpretation. The expression "the others" is a reference to the parties other than the party giving the indemnity. This is consistent with the phrase "each other" earlier in the sentence. The plural in "others" seems to be necessitated by the fact that there are three parties to the Consortium Agreement. The clause, therefore, means that party A undertakes to indemnify the other parties (i.e. parties B and C) for injury or death to the personnel of those other parties (parties B and C). Similarly party B gives an indemnity to parties A and C in respect of injury or death to their personnel, and party C does likewise.

[10] It follows that clause B13 gives no assistance to the third party in the present case, where the injured party (the pursuer) was employed by the defenders and not by the third party. The defenders' agreement was to indemnify the third party against injuries to the third party's employees, not injuries to employees of the defenders.

[11] I am conscious that this is not the same as the usual "knock for knock" agreement commonly found in contracts relating to the offshore industry. However, the other provisions of the Consortium Agreement, to which I have referred earlier in this Opinion, do not suggest that in this Agreement the parties have necessarily intended to follow the practice of each being responsible for damage to their own property and personnel. But in any event, it seems to me that the wording of the clause B13 admits of no other construction. Mr Armstrong valiantly sought to argue that "the personnel of the others" referred to the personnel of the party granting the indemnity. I cannot accept that argument. It seems to me that the plain meaning of the words is against it. As I was reminded by both parties, the court is not entitled to rewrite the parties' agreement. Had the parties intended an indemnity clause reflecting the "knock for knock" type indemnity commonly found in contracts relating to the offshore industry, they could easily have achieved this by replacing the expression "the personnel of the others" with an expression such as "their own personnel".

[12] In light of this, it is not necessary to address in detail the other points made by reference to authority in course of argument. I simply say this. I accept Mr Armstrong's submission that the contra proferentem approach, which in any event only applies in a case of ambiguity, has much less impact where the exemptions and indemnities are mutual or reciprocal. Both parties are, in a sense, the proferens; and it makes little sense to construe the clause against each one of them leaving the possibility of a hole in the middle.

[13] I was at one stage concerned that the construction which, as it seemed to me, parties had intended was not supported by any commercial or business commonsense such as underlies the "knock for knock" type of provision to which I referred. Further, it may be thought to run counter to the aspiration in clause B21.3 that the parties should endeavour to obtain from their insurance companies a waiver of any right of recourse towards the other parties. I suppose that if such waiver were obtained from the insurance companies, then it would have the effect of preventing claims being made under the indemnity provision in clause B13, and it would also effectively preclude a claim such as by the defenders in the present case; but the possibility of some future agreement along these lines should not deflect the court from the natural construction to be given to clause B13. I asked Mr Smith, during his argument, whether there was any commercial reason that he could think of why the parties would make an agreement under which, for example, the defenders undertook to indemnify the third party against injury or death of the third party's employees. He suggested that such injury or death might have been occasioned whilst that employee was on the defenders' premises. Mr Armstrong accepted that this was least a possibility. I had no evidence which would tend to support or contradict such a possibility. I suppose in such a case the defenders' insurance might be expected to answer the claim even if the injury was caused by the third party's negligence. But, ultimately, it does not matter even if no business like explanation could be suggested, since the words used by the parties' indemnity provision are clear.

[14] I will give effect to my decision by excluding from probation the third party's averments at page 12D to 13A of the Record in which they rely upon the terms of clause B13.