Scottish Court of Session Decisions

Pursuers: Clark QC; H B J Gateley Wareing

Defenders: Howlin; Paull & Williamsons

23 April 2008

Background

[1] The pursuers were the owners of the oil rig supply vessel, MV Far Service, when it was damaged by fire while berthed in Peterhead harbour on 7 July 2002. The pursuers sue the defenders, which are a service company, for damages, averring that the fire resulted from the negligence of the defenders' employees when they removed residue from the starboard base oil tank. It is averred that the fire started when the defenders' employees disconnected their pipes; base oil flowed back from the pipes and ignited on coming into contact with a hot engine after the vessel's main engines had been started up.

[2] The defenders, as well as averring contributory negligence against the pursuers' employees, seek a contribution from the third party which was the charterer of the vessel, averring that the third party failed in its duty as charterer and base operator to direct and supervise the operations carried out on the vessel while the vessel was in port. Although it is not expressly averred, the pleadings imply that the third party failed in its duty to the pursuers to take reasonable care to avoid causing physical damage to the vessel. In the event that they are found liable in damages to the pursuers, the defenders seek to recover from the third party a contribution in terms of section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940.

[3] The pursuers in clause 33(5) of their charterparty with the third party dated 4 February 1994 granted the third party an indemnity in the following terms:

[4] The pursuers, accepting their obligation to indemnify the third party, appeared on behalf of the third party at a Procedure Roll debate and sought to argue that the defenders could not recover a contribution from the third party under section 3(2) of the 1940 Act. They submitted that by virtue of the indemnity the third party was not a person from whom the pursuers could recover damages, if sued. The debate therefore focused on whether the contractual obligations into which the pursuers entered before the occurrence of the fire prevented the defenders from obtaining a contribution from the third party under section 3(2) of the 1940 Act.

[5] The debate raises essentially two questions, one of statutory interpretation and the other of the construction of the clause in the charterparty.

[6] Section 3 of the 1940 Act provides:

[8] Parties referred to a number of Scottish authorities on section 3(2) of the 1940 Act. The case law may be summarised in six points as follows. In the summary I refer to the injured party as A, the person who has paid, or may have to pay (viz. Beedie v Norrie 1966 SC 207), damages to the injured party as B and the person from whom a contribution is sought as C.

[9] The first two points relate to the phrase in section 3(2) "in which he has been found liable in any such action". This phrase refers back to the words in section 3(1) "any action of damages in respect of loss or damage...". First, section 3 of the 1940 Act is available only in relation to actions of damages which are raised in the Scottish courts. Secondly, for B to be entitled to claim a contribution from C it is not necessary that A should have obtained a contested judgment against B. If B settles A's claim, he may seek a contribution from C, but the agreed quantification of damages is not binding in a question between B and C. The court has a discretion under section 3(2) to order the payment of such contribution as may seem just. For these points see the decision of the House of Lords in Comex Houlder Diving Ltd v Colne Fishing Co Ltd 1987 SLT 443.

[10] The other four points relate to the position of C and in particular the phrase in section 3(2), "any other person who, if sued, might also have been held liable". Thus, thirdly, the expression, "if sued", means if sued to judgment and so if A abandons an action against C, B can still seek contribution from C relying on section 3(2): Singer v Gray Tool Co (Europe) Ltd 1984 SLT 149. Fourthly, if A, having sued B, thereafter pursues a claim against C which by then is time-barred, A's belated action against C does not prevent B from invoking section 3(2) against C: Taft v Clyde Marine Motoring Co Ltd 1990 SLT 170 and Dormer v Melville Dundas & Whitson Ltd 1990 SLT 186. This is because, as the First Division stated in the latter case (at p.188L), "since 1949 the Scottish courts have consistently taken the view that on a proper interpretation of section 3(2) it was never within the power or whim of an injured party to determine by his own actings whether or not one joint wrongdoer would be liable to relieve another in respect of damages payable to the injured party".

[11] Fifthly, and similarly, where B seeks a contribution from C, it is not necessary that A has raised an action timeously against C to comply with a time limit such as that which was formerly imposed in the Public Authorities Protection Act 1893 because the words "if sued" assume that C has been "relevantly, competently and timeously sued" by A and that all the essential preliminaries to a determination of C's liability on the merits have been satisfied: Central S.M.T. Company Ltd v Lanark County Council 1949 SLT 310, Lord Keith at p.314. This expression of Lord Keith in 1949 was picked up by the judges in Singer, Taft and Dormer and has the authority of the Inner House in the latter case. Mr Howlin, for the defenders, founded on this formulation, submitting that section 3(2) postulated merely a hypothetical action by A against C. The hypothetical action, he submitted, was to be treated as relevant, competent and timeously raised.

[12] Sixthly, and finally in this summary, it is clear from the decision of the First Division in Dormer, which is binding on me, that the assumption that C has been sued "relevantly, competently and timeously" is not a hypothesis which is wholly removed from the facts but is one the possibility of which falls to be tested against the facts at a particular time. The hypothesis has to be tested in the ordinary case at the date when A sued B. If at that date A could have sued C, then B can seek a contribution from C, whether or not A's claim against C was time-barred thereafter. See Dormer at p.188C-F. This approach is consistent with the speech of Lord Reid in George Wimpey & Co Ltd v British Overseas Airways Corporation [1955] AC 169, to which I was also referred and in which the House of Lords was interpreting similar words in section 6 of the Law Reform (Married Women and Tortfeasors) Act 1935. In that case Lord Reid expressed the view that the words "if sued" had to have a temporal connotation where a person might be held liable if sued at one time but not if sued at another time (p.186). Mr Clark QC, for the pursuers, founded on this approach, submitting that the hypothesis had to be tested against the facts and that, in the present case, it was relevant to consider whether C had a defence against an action raised by A.

[13] The courts have not addressed directly the difficult issues which may arise where A's action against C is time-barred before he commences his action against B. If the timeliness of a hypothetical claim against C falls to be tested at the date at which A sues B, there may be circumstances in which A's actions or inactivity after the date of the injury might affect B's ability to seek contribution from C. It is possible to interpret section 3(2) more broadly than the Inner House did in Dormer when it was considering the ordinary case in which actions against several wrongdoers were subject to the same time limits. Lord McCluskey in the Outer House in Dormer (1989 SLT 310, at p.313H-I) took the view that the words, "any other person who, if sued", referred to any person whom the pursuer could have sued at any time after the accident. Lord Dervaird concurred with that interpretation in Taft (at p.175F). The First Division in Dormer have not closed the door on this view as they reserved their opinion on the correct time at which to test the hypothesis that a person had been timeously sued where different time bars affected claims against different defenders. On that interpretation, if A failed to sue C and his claim against C was time-barred before he sued B, an entitlement to contribution might exist under section 3(2) although it was the time bar and not B's payment of damages which freed C from his obligation to make reparation to A. It would nevertheless be broadly consistent with the basis of the common law claim of relief referred to in paragraph 16 below where A had decided to seek his remedy from B alone and therefore had chosen not to sue C. But that interpretation of section 3(2) of the 1940 Act would not assist the pursuer in this case if the indemnity bars the pursuers' claim as the indemnity pre-dated the accident.

[14] In this case we are not concerned with an issue of prescription or time bar, but with the question whether, on the hypothesis that the pursuers had sued the third party timeously, the third party would have been held liable. The pursuers submit that the third party would not, because of the indemnity. The defenders contend that the third party would have been held liable (a) because the hypothesis is that it would have been relevantly and competently sued, (b) because the third party is liable in the sense that it is exposed to a finding that it is a wrongdoer even if the indemnity prevents the pursuers from obtaining damages from it and (c) because the injured party does not have the power to determine whether one wrongdoer can claim contribution from another.

[15] I am not persuaded that the hypothesis of a relevant action allows the court to ignore anything which might prevent the pursuers from succeeding on the merits against the third party. The assumption of a relevant claim by A against C is merely, in Lord Keith's words, an essential preliminary and can be countered by the existence of a defence on the merits which is available to C. The statutory words "if sued" are followed by the words "might also have been held liable". Those words are important. If C had and pleaded a good defence on the merits, he would not be held liable to A and so B could not recover contribution from him. I am also not persuaded that, where the subsection states that C "might also have been held liable", that reference to liability is a reference to a finding that a person is a wrongdoer rather than a liability in damages or expenses. It is in my opinion clear from the opening words of section 3(2) ("Where a person has paid any damages or expenses in which he has been found liable in any such action as aforesaid") that the subsequent words (referring to C), "who, if sued, might also have been held liable in respect of the loss or damage", are a reference to liability in damages or expenses in the action of damages. It would be strange if the subsection allowed B to recover from C a contribution towards B's liability to A on the basis of an action of relief if C had a good defence on the merits which prevented A from obtaining a decree for the payment of damages against him.

[16] I am supported in this view by a consideration of the common law which predated the 1940 Act. A wrongdoer who has been held jointly and severally liable with another wrongdoer in damages to an injured party and who has paid the injured party can seek pro rata relief from the other wrongdoer. See Palmer v Wick and Pulteneytown Steam Shipping Co (1894) 21 R (HL) 39, to which Lord Keith of Kinkel made reference in Comex Houlder at p.445 F-K. In Palmer (at p.45) Lord Watson explained the right of relief in the following terms: "The claim of relief rests ... upon the fact, as Lord Bankton puts it, that by the use of [the claimant's] money the rest have been freed from their obligation - a circumstance which, in ordinary cases, is sufficient, according to the law of Scotland, to raise a right of relief". See also Glasgow Corporation v John Turnbull & Co 1932 SLT 457.

[17] Section 3(1) of the 1940 Act innovated on the common law by enabling the court to apportion the liability of defenders, who had been found liable to the pursuer jointly and severally, among themselves in such proportions as might seem just. Section 3(2) enabled a defender who had been found liable in damages in an action to recover a just proportion of the damages he had paid from any other person who, if sued, might also have been held liable in damages for the same loss. In my opinion the Act did not go further and allow B to recover a contribution from C in circumstances where C had no obligation to pay damages to A because he had a good defence on the merits. In such circumstances B's payment of the damages could never free C from an obligation to A. Thus on Lord Watson's approach in Palmer the basis for a claim for relief would be absent.

[18] Mr Howlin founded on the statement of principle in the decision of the First Division in Dormer (p.188L) that it was not within the power or whim of an injured party to determine by his own actings whether or not one joint wrongdoer should have a right of relief against another. He submitted that the indemnity was res inter alios acta in a question between the defenders and the third party. In my opinion, however, the statement of principle in Dormer addresses the situation in the ordinary case where B has a claim for relief against C when A raises an action against him and it prevents A by his actings thereafter from defeating that claim. That is consistent with the common law rule that a pursuer's discharge of one of two defenders who have been sued jointly and severally to pay damages for negligence does not prevent the other defender, on paying damages, from claiming pro rata relief (Douglas v Hogarth (1901) 4 F 148). If the principle is held to go further so that it prevents A through dilatoriness in suing C at any time after the accident from defeating B's right to claim a contribution from C (see paragraph 13 above), that would not assist the defenders in this case.

[19] Where by a contractual arrangement which pre-dated the occurrence of loss or damage parties have regulated their affairs in good faith in a way which excludes the liability of C to A in damages arising from wrongful acts or negligent acts or omissions, the basis for a common law claim of relief is absent. That is because B's payment of damages would not free C from liability to A. I do not interpret the statutory provisions as innovating on the common law in this regard or as overriding the effect of the contractual indemnity in a question between A and B. Section 3(3), which protects contractual rights of relief or indemnity, supports this view.

[20] I turn therefore to the question of the construction of the indemnity.

[21] Having regard to the view which I have reached on the question of statutory interpretation, the issue becomes whether the indemnity in the charterparty prevents the third party from being liable in damages or expenses to the pursuers. The relevant words are "defend, indemnify and hold harmless".

[22] Mr Howlin submitted (a) that the words "indemnify" and "hold harmless" bore the same meaning and the latter added nothing to the former and (b) that in Scots law there was no rule against circuity of actions such as existed in English law which, as a result of the indemnity, would bar a claim by A against C .

[23] Mr Clark QC invited me to give the words of clause 33.5 their ordinary and natural meaning: Caledonia North Sea Ltd v British Telecommunications plc 2002 SC (HL) 117. He submitted that the proper approach was to give effect to every word in the contractual provision if that were possible: Crosse v Bankes (1886) 13 R (HL) 40, Lord Halsbury LC at p.41. The clause was part of a contract in which the parties allocated risks and thereby took on responsibility to insure against the allocated risks. While, in the context of joint wrongdoing, the consequence might be that one party would require to bear the entire financial consequences of an accident even though another was also at fault and that was arguably inequitable, that was the result of the clear terms of the contract. He submitted that "hold harmless" clauses were a well-known feature of charter agreements and the defenders could have made appropriate provision for their protection in their contract with the third party.

[24] The words "hold harmless" may in some circumstances be equated with "indemnify" but I am not persuaded that they add nothing to an obligation to indemnify. Mr Clark referred to Majkowski v American Imaging Management Services LLC 2006 WL 3627111 (Del Ch), in which the plaintiff sought to argue that a contractual obligation by a company to hold harmless an executive employee entitled the employee to payment of his litigation expenses as they were incurred regardless of whether he was ultimately entitled to indemnification in respect of the underlying claim. Vice Chancellor Strine in his opinion stated that Delaware law recognized that indemnification and advancement were two distinct and different legal rights and so held that the obligation to "indemnify and hold harmless" did not encompass advancement rights. That is an issue with which we are not concerned in this case. But in his discussion he stated (in paragraph 12) that the terms "indemnify" and "hold harmless" had a long history of joint use in Anglo-American legal practice and appeared in countless types of contracts. He stated that modern authorities confirmed that "hold harmless" had little if any different meaning from the word "indemnify". However in footnote 55 of his opinion he stated that the terms "while having similar, if not identical meanings, are typically used in subtly different contexts. In the abstract, the word indemnify generally grants rights, and the phrase hold harmless generally limits liability".

[25] Counsel agreed that there was no guidance on the meaning of "hold harmless" in English law dictionaries. In (the American) Black's Law Dictionary (8^th ed. 2004), to which Vice Chancellor Strine referred, there is the following definition:

[26] The pursuers by agreeing to "defend, indemnify and hold harmless" the third party from all liabilities resulting from damage in relation to the vessel not only agreed to indemnify the third party against any loss which it might incur from such liability to another but also renounced any right to claim damages from the third party in the circumstances which have arisen in this case. On that basis, the third party was not someone who, if sued, would be held liable in damages to the pursuer in terms of section 3(2) of the 1940 Act.

[27] As I have reached the view that the obligation to "hold harmless" goes beyond an obligation to reimburse, Mr Howlin's point about circuity of proceedings does not arise. In any event, if the obligation on the pursuers in clause 33.5 were simply an obligation to reimburse the third party, that obligation, if pleaded against them, would prevent the pursuers from obtaining a decree against the third party for payment of damages in the circumstances of this case. On either approach therefore the contractual provision would prevent the pursuers from obtaining damages from the third party and, as a result, exclude the defenders' right to obtain contribution from the third party.

[28] Mr Clark referred to the Civil Liability (Contribution) Act 1978 which applies in the rest of the United Kingdom and to the decision of the House of Lords on that Act in Co-operative Retail Services Ltd v Taylor Young Partnership Ltd [2002] 1WLR 1419. As the statutory provisions are materially different from those of the 1940 Act I derive little assistance from the case in interpreting the latter Act. However I note that the House of Lords in that case accepted that a contractual arrangement between the injured party on the one hand and the party which was in breach of contract (or a tortfeasor) on the other could prevent a third party from seeking contribution under the 1978 Act from the latter. That is a result with which my interpretation of section 3(2) of the 1940 Act is consistent.

[29] Mr Clark referred to various cases in which parties had entered into contracts which allocated risks between them and thus excluded or limited liabilities which would otherwise arise. He referred to Caledonia North Sea Ltd (above), Scottish Special Housing Association v Wimpey Construction (UK) Ltd 1986 SC (HL) 57 and Balfour Beatty Ltd v Gilcomston North Ltd 2006 SCLR 717. It appears to me that parties who require to work together may obtain significant benefits by allocating risks between themselves and thereby determining who has the responsibility to insure against the allocated risks. Parties may avoid the need to prove fault or breach of contract in the event of a mishap and there may be savings in the costs of insurance by avoiding duplication of cover. In this case, as Mr Howlin submitted, an obligation on the third party to contribute to the defenders would not subvert the contractual arrangements as the third party could claim reimbursement from the pursuers under the indemnity. But there are many contractual provisions which allocate responsibility which do not rely on indemnities and in which the allocation of risk would be subverted if a party freed from a risk in a question with A were required to contribute to B as a joint wrongdoer. The contractual provisions in Co-operative Retail Services Ltd (above) are one such case.

[30] Section 3(2) of the 1940 Act respects such contractual allocations of responsibility by providing that the statutory right to contribution is available only if A could at some time after the accident have held C liable for the loss in respect of which B has paid damages. B's statutory right to contribution therefore does not trump the contractual allocation of risk between A and C.

[31] While this may on occasion give rise to what appears to be an inequitable result as a party who has only a minor responsibility for causing an accident may have to bear the entire financial loss, that eventuality is something which a contractor needs to take steps to guard against.

[32] I am satisfied that the pursuers at the time of the accident and thereafter did not have a right to obtain damages from the third party in relation to the damage which the vessel suffered in the fire and that as a result the defenders are not entitled to a contribution from the third party under section 3(2) of the 1940 Act. I therefore uphold the first plea-in-law for the pursuers by (a) excluding from probation the averments in Answer 4 on page 4 of the defences in the two sentences from "Separatim, it was the duty" to "materially contributed to the accident" and the last two sentences in Answer 5 on page 8 commencing "Further explained" and (b) repelling the fifth plea-in-law for the defenders.