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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Caledonia North Sea Limited v. British Telecommunications Plc (Scotland) and Others [2002] UKHL 4 (7th February, 2002)
URL: http://www.bailii.org/uk/cases/UKHL/2002/4.html
Cite as: [2002] CLC 741, [2002] 1 Lloyd's Rep 553, 2002 SCLR 346, [2002] BLR 139, [2002] Lloyds Rep IR 261, [2002] UKHL 4, [2002] 1 LLR 553, 2002 GWD 6-178, [2002] Lloyd's Rep IR 261, [2002] 1 All ER (Comm) 321, 2002 SLT 278, 2002 SC (HL) 117

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Caledonia North Sea Limited v. British Telecommunications Plc (Scotland) and Others [2002] UKHL 4 (7th February, 2002)

HOUSE OF LORDS

Lord Bingham of Cornhill Lord Mackay of Clashfern Lord Nicholls of Birkenhead Lord Hoffmann Lord Scott of Foscote

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

    CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v BRITISH TELECOMMUNICATIONS PLC (APPELLANTS) ( SCOTLAND)
CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v KELVIN INTERNATIONAL SERVICES LIMITED (FORMERLY KELVIN CATERING LIMITED) (APPELLANTS) (SCOTLAND) CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v LONDON BRITISH ENGINEERING LIMITED (APPELLANTS) (SCOTLAND) CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v NORTON (NO 2) LIMITED (IN LIQUIDATION) (APPELLANTS) (SCOTLAND) CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v PICKUP NO 7 LIMITED (FORMERLY NORTHERN INDUSTRIAL & MARINE SERVICES COMPANY LIMITED) (APPELLANTS) (SCOTLAND)
    CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v STENA OFFSHORE LIMITED (APPELLANTS) (SCOTLAND)

    CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v WOOD GROUP ENGINEERING CONTRACTORS LIMITED (APELLENTS) (SCOTLAND)

    (CONSOLIDATED APPEALS)

ON 7 FEBRUARY 2002

[2002] UKHL 4

LORD BINGHAM OF CORNHILL

My Lords,

1. The explosive conflagration which destroyed the Piper Alpha oil platform on 6 July 1988 cost the lives of many men and injured many others. The claims made by and on behalf of the victims were fully settled years ago. These proceedings are the contractual aftermath of those settlements, brought to decide who, as between the operator of the platform and the contractor who employed each individual victim, must bear the financial cost of the settlements. As my noble and learned friend Lord Mackay of Clashfern has explained in his summary of the facts, history and issues relevant to these appeals, which I gratefully adopt and need not attempt to repeat or elaborate, only one of seven test cases originally selected for decision is now live before the House.

2. Operations to exploit the oil and natural gas resources of the North Sea have two prominent features relevant for present purposes. First, such operations are potentially hazardous. It is generally true, as the Lord Ordinary in his judgment said of Piper Alpha, that

The second feature worthy of note is the involvement of many contractors and sub-contractors. This is exemplified by the present case. As Lord Mackay has noted, the Piper Alpha disaster led to claims against 24 different contractors. Of those on board the platform who were killed, 134 were employed by contractors and 31 by the operator. Of those who survived, 55 were employed by contractors and 6 by the operator.

3. These features are not unique to North Sea oil exploitation. They are also to be found, to a greater or lesser extent, in the nuclear power industry. But the regulatory regime governing the two industries has been very different.

4. The Nuclear Installations (Licensing and Insurance) Act 1959 made provision for the licensing of nuclear installations, required licensees (but not the Atomic Energy Authority or government departments) to provide cover to meet claims by insurance or otherwise (sections 5 and 9), imposed a strict liability on licensees to secure that no ionising radiations were emitted (section 4(1)) and stipulated that "no person other than the licensee shall be under any liability in respect of any hurt to any person or any damage to any property caused by any ionising radiations to which subsection (1) of this section applies" (section 4(2)). The purpose of this provision and of the governmental exception was explicitly stated by the minister when introducing the bill in the House of Lords (HL Deb, 13 November 1958, cols 504-505, 509):

This broad approach was reflected in international conventions made in Paris (1960), Brussels (1963) and Vienna (1963). There followed the Nuclear Installations (Amendment) Act 1965 and the law was consolidated in the Nuclear Installations Act 1965. This revoked the distinction between governmental operators and other licensees (sections 7 to 9), but continued to lay a strict duty on the licensee (section 7) and continued to provide that no liability should fall on any party other than, in effect, the licensee (section 12(1)(b)). The licensee was still obliged to provide cover against claims by insurance or otherwise up to a specified limit (section 19), but there was still to be no right of subrogation. Thus standard forms of nuclear insurance contain a waiver of any subrogation rights by the insurers (Tromans and Fitzgerald, The Law of Nuclear Installations and Radioactive Substances, (1997), pp 146, 149, paras 3-56, 3-60).

5. Oil exploration in deep offshore waters developed in the early 1960s, at first in the Gulf of Mexico. Operations in the North Sea followed soon after. In December 1965 the offshore self-elevating barge SEA GEM collapsed, capsized and sank some 40 miles east of the mouth of the River Humber. An inquiry was held and in the report which followed (1967) (Cmnd 3409), it was recommended that there be a statutory code supported by credible sanctions to regulate the management of drilling rigs and similar structures offshore (p 24, para 10.2(i)). Effect was given to this recommendation in the Mineral Workings (Offshore Installations) Act 1971. This provided for the appointment of a manager of every offshore installation (section 4(1)), who was to have general responsibility for matters affecting safety, health and welfare (section 5(2)), and the secretary of state was empowered to make regulations for the safety, health and welfare of persons on offshore installations (section 6(1)). The breach of a statutory duty imposed by the Act, if causing death or personal injury, was to give rise to civil liability (section 11). In exercise of his power under section 6 and other provisions, the secretary of state made the Offshore Installations (Operational Safety, Health and Welfare) Regulations 1976 (SI 1019/1976), which imposed duties on the operator of any installation and on the employer of any employee and on "every person while on or near an offshore installation" to comply or ensure compliance with the safety regulations.

6. When contrasted with the statutory regime applicable to nuclear installations, that applicable to offshore installations displays one important common feature: the operator is answerable for almost any safety failure causing death or personal injury, as the licensee is generally liable for death or personal injury caused by radioactivity. But there are two differences: the operator of an offshore installation is not, like the licensee of a nuclear installation, obliged (save in his capacity of employer) to provide cover against claims by insurance or otherwise; and there is no statutory inhibition of any right of indemnity or subrogation which might arise between the operator or the operator's insurer and any other party.

7. As would be expected, a market practice has developed to take account of the peculiar features of offshore operations. The standard practice during construction is thus described by Sharp, Offshore Oil and Gas Insurance (1994), p 108:

Injury or Death of Employees

A similar practice is customary when the installation has become operational see Sharp, p 277:

These passages were published before judgment had been given by the Lord Ordinary in these proceedings.

8. A similar account is given by Daintith and Willoughby, Manual of United Kingdom Oil and Gas Law 2nd ed, (1984), pp 171-172, para 1-845 in a passage describing the operator as "the client":

Liability for third party claims may also be assumed by either the client or the contractor, though in this case there is commonly an exception to the extent of the negligence of the other; and sometimes the exception is expressed to apply only in the case of the sole negligence of the other (Daintith and Willoughby, p. 172, para 1-846 and footnote 1).

9. Thus, if a contractor's employee is killed or injured on an offshore installation it would be natural to expect a claim by or on behalf of the victim against the operator, as the party with overall responsibility for safety, followed by a claim by the operator (or the operator's insurer) against the contractor under the indemnity given by him to the operator. That such a course of events is not unusual elsewhere is shown by Fontenot v Mesa Petroleum Co (1986) 791 F 2d 1207, 1209 where Judge Brown, sitting in the US Court of Appeals for the Fifth Circuit, said:

At p 1216 he further said:

The first issue: construction

10. In common with the Lord Ordinary, all four judges of the Inner House and all members of this House, I am of the clear opinion that clause 15(1)(c) of the Norton (No 2) contract (cited by my noble and learned friend Lord Mackay) must be construed in the sense contended for by the operators. That is the plain meaning of the words used. It reflects the practice which has developed among those undertaking offshore oil operations. It is understandable that the right to indemnity should be excluded where the negligence or breach of statutory duty of the party seeking indemnity was the sole cause of the death or injury, but that is the limit of the derogation from the rule that each party, operator or contractor, assumes the ultimate responsibility for compensating its own employees regardless of fault. It is a little unclear why the opening paragraph of clause 15(1) was included in the contract at all, but that may explain why a number of contracts omitted it. While one might have expected the operator to require the contractor to insure against any potential liability under the contract, it seems plain that clause 16 (cited by my noble and learned friend) was drafted to give effect to the operator's obligation under the Employers' Liability (Compulsory Insurance) Act 1969 and regulation 6 of The Offshore Installations (Application of the Employers' Liability (Compulsory Insurance) Act 1969) Regulations 1975 (SI 1289/1975).

The second issue: subrogation

11. I am in full agreement with the conclusions expressed by Lord Mackay on the second (subrogation) issue. The law has long been settled in England and Wales, as (I understand) in Scotland, that an insurer who has fully indemnified an insured against a loss covered by a contract of insurance between them may ordinarily enforce, in the insurer's own name, any right of recourse available to the insured: see Randal v Cockran (1748) 1 Ves Sen 98; Mason v Sainsbury (1782) 3 Dougl 61, which Lord Mackay has cited; London Assurance Company v Sainsbury (1783) 3 Dougl 246; Yates v Whyte (1838) 4 Bing NC 272; Dickenson v Jardine (1868) LR 3 CP 639. On an appeal to the House of Lords from the Court of Session in Simpson & Co v Thomson (1877) 3 App Cas 279, 286 Lord Cairns LC reviewed several of these authorities and concluded:

In Castellain v Preston (1883) 11 QBD 380, 388 Brett LJ, in his classical exposition of the law, was at pains to emphasise the amplitude of the insurer's right, giving him

More recently, Lord Templeman restated the principle in Lord Napier and Ettrick v Hunter [1993] AC 713, 732. When the law of marine insurance was codified in the Marine Insurance Act 1906, the relevant rules were expressed in sections 79 and 80, which provide:

Although applicable in terms only to marine insurance, these sections express more general principles. And the argument for the contractor seeks to build upon them. In very simplified form the argument runs like this. A claim was made against the operator for the death of Mr Pyman, an employee of the contractor. It was settled by the operator's insurers. The operator itself therefore suffered no ultimate loss and has no claim to be pursued in its name against the contractor. The operator's insurers may have a claim to contribution against the contractor as another party liable (with the insurer) to indemnify the operator but that is not a subrogated claim to be pursued by the insurer in the name of the operator but a claim to contribution from a co-indemnifier to be pursued by the insurer in its own name.

12. The right of an insurer who has paid a claim to seek contribution from other insurers of the same risk on the same interest in the same property is clearly established: see MacGillivray on Insurance Law, 9th ed, (1997), p 573, para 23-1; Arnould, Law of Marine Insurance and Average, 16th ed (1981), vol 1, p 283, para 407. It is equally clearly established that a surety who is obliged to pay the debt owed by the debtor to the creditor is entitled to contribution from his fellow co-sureties: Rowlatt on Principal and Surety, 5th ed (1999), p 164, para 7-45; Andrews & Millett, Law of Guarantees, 3rd ed (2000), pp 391-392, para 12.01: English Private Law, edited by Birks, (2000), vol 1, Chap 5 ("Security", Lionel Smith), p 463, para 5.176. The question at the heart of this issue in the appeal is, as it seems to me, this: is the present claim, as the operator contends, a subrogated claim properly made in its name by its insurer (who has indemnified it under a policy of insurance) to enforce a contractual right of the operator against the contractor? or is it, as the contractor contends, a claim for contribution by one party liable to indemnify the operator against another?

13. I am clearly of opinion that the operator's contention is to be preferred, for the reasons given by the judges of the Inner House and also by Lord Mackay. The operator was not obliged to insure itself against adverse claims. Thus the existence of such insurance, prudent though no doubt it was in business terms, is irrelevant to the mutual obligations of the operator and the contractor; in technical language, it was strictly res inter alios acta. It would be wholly anomalous if the operator's voluntary decision to insure itself against the risk to which it was exposed should operate to the advantage of the party against whom its contractual claim for indemnity lay (a party not involved in the decision to insure and not responsible for payment of any part of the premium). The contractor's contention would also, as it seems to me, disturb the very clear apportionment of risk for which the parties have provided by their contract. As already noted, the legislature has not sought in this field to restrain the pursuit by insurers of subrogated claims.

14. When, in Mason v Sainsbury (1782) 3 Dougl 61, 64, Lord Mansfield CJ asked "Who is first liable?" his question was directed not to any issue of chronology but to establishing where the primary responsibility lay to make good the loss. The terms of the Riot Act 1714 made plain that the primary responsibility lay with the inhabitants of the hundred, and it mattered not that the insurer had indemnified the insured. So in the present case: the contract between the parties and the commercial scheme of which it was part make it plain that primary liability was to fall on the contractor, just as in North British and Mercantile Insurance Company v London Liverpool and Globe Insurance Company (1877) 5 Ch D 569, on very different facts, it was held that the loss should be borne by the wharfinger's insurer because "the primary liability" (per Baggallay JA at p 587) was that of the wharfinger.

15. The researches of counsel have not disclosed any Scots or English case in which any contention at all similar to the contractor's in this case appears to have been advanced. But courts in the United States have been asked to consider a similar contention. The American cases must be approached with a measure of reserve since courts have on occasion applied a principle of superior equity which has no counterpart in our law. It is nonetheless clear that courts of high standing have adopted an approach close to that outlined in the foregoing paragraphs. In Hall & Long v The Railroad Companies (1871) 80 US 367 Strong J, giving the opinion of the Supreme Court of the United States, said at p 370:

In Chicago St Louis & New Orleans Railroad Co v Pullman Southern Car Co (1891) 139 US 79 at 88 the liability of the railroad company was described as "in legal effect, first and principal" and that of the insurer as "secondary, not in order of time, but in order of ultimate liability". In FH Vahlsing Inc v Hartford Fire Insurance Co (1937) 108 SW 2d 947, 950 the Court of Civil Appeals of Texas adopted a statement in 26 Corpus Juris to this effect:

In Meyer Koulish Co v Cannon (1963) 28 Cal Rptr 757, 762 a District Court of Appeal in California observed:

The Supreme Court of Washington expressed the point very clearly in Consolidated Freightways Inc v Moore (1951) 229 P 2d 882, 885.

A similar ruling was made in North Central Airlines Inc v City of Aberdeen, South Dakota (1966) 370 F 2d 129, a decision of the United States Court of Appeals.

16. Reference was made to Albion Insurance Co Ltd v Government Insurance Office of New South Wales [1969] 121 CLR 342. That was a decision of the High Court of Australia, concerned with the right of a co-insurer to contribution. Kitto J (at pp 349-350) referred to the principle that "persons who are under co-ordinate liabilities to make good the one loss (eg sureties liable to make good a failure to pay the one debt) must share the burden pro rata". But his ruling was not directed to the case where the liabilities of the two indemnifiers are not co-ordinate, where (to use different language) one liability is primary. In Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291 the Supreme Court of Western Australia followed the decision of the Inner House in the present case. Ipp J pointed out (at p 312, para 93) that the competing liabilities (one of them arising from a contract of insurance) were intrinsically different and not co-ordinate. Wheeler J, at p 327, paras 167 and 168, shared this view:

I can find no support for the contractor's contention in the terms of the contract, in the commercial context, in principle or in authority. I would accordingly resolve this issue against the contractor, as the Inner House did.

The third issue: consequential loss

17. In agreement with my noble and learned friend Lord Mackay, and for reasons given by him, I would reject the contractor's argument on the third (consequential loss) issue. The claim against which the operator seeks indemnity against the contractor under clause 15(1)(c) arises from the death of the contractor's employee Mr Neil Pyman. The claim thus relates to the "death of persons employed by . . . the Contractor" and falls squarely within the express terms of the clause. Had the claim been presented against the operator in Texas, as it well might have been, and settled there, it could not have been argued that the loss fell outside the clause. In the event, the claim was made and settled in Scotland, although the settlement was agreed at a level higher than would have been awarded in a Scottish action. The settlement is accepted as reasonable. The fact that the level of damages agreed was higher than a Scottish court would have awarded cannot in my opinion alter the character of those damages: they were fatal injury damages, not relating to "indirect or consequential losses suffered, including but not limited to, loss of use, loss of profits, loss of production or business interruption" within the terms of clause 21, which Lord Mackay has cited.

18. For these reasons, as well as those given by my noble and learned friends Lords Mackay and Lord Hoffmann, I would dismiss this appeal and make the order which Lord Mackay proposes.

LORD MACKAY OF CLASHFERN

My Lords,

19. These seven conjoined appeals arise from an explosion which occurred in module C of the Piper Alpha oil platform in the North Sea on 6 July 1988. The initial explosion led to a series of explosions and fires. Of the 226 persons employed on the platform, 165 were killed and 61 were injured. Two rescuers were also killed.

20. At the time of the disaster the operator operated the platform on behalf of a consortium of companies (including the operator) known as the participants. The operator had 37 of its own employees on the platform. The remaining 189 were employees of a number of contractors hired to carry out specific tasks on the platform.

21. The operator acting on behalf of the participants entered into separate contracts with each contractor in relation to the particular services to be provided on the platform by that contractor. The operator on behalf of the participants raised 147 individual actions against 24 contractors, including the seven contractors who are the appellants in these appeals for indemnity under indemnity provisions in the contract. The operator and the other participants sought to be indemnified by the contractors for payments made in the settlement of death and personal injury claims in respect of these contractors' employees killed or injured in the disaster. These claims were made on the basis of provisions in the contracts entered into between the parties.

22. Prior to the commencement of the proof it was agreed that seven test actions proceed to final judgment and the other actions be sisted. The seven test actions were selected as representative of all the actions so that the final decision on matters in dispute could be applied to the other actions. The value of all the actions dependent upon the outcome of the conjoined appeal in the seven test cases is £82,011,254.48 exclusive of interest and expenses. The accrued interest is now about equivalent to the principal sum.

23. During the hearing of the appeal before your Lordships it was intimated that all the cases had been settled except the appeal involving Norton (No 2) Ltd (in liquidation). The principal sum in this action is £1,168,382.95.

24. The parties agree that the contract requires to be considered against the background of the regulatory regime governing activities on offshore platforms in the North Sea. The regulatory regime imposed statutory liabilities on the operator and the other participants as well as on contractors and their employees. The contractor agrees that it was the practice in the oil industry for a contractor engaged on work on an oil platform to agree to give an indemnity to relieve the platform operator of liability in the case of the death or of injury to the contractor's employees, whether or not the contractor was responsible for the loss.

25. The initial explosion which led to the disaster was caused by the emission of an escape of hydrocarbon. The source of ignition has never been ascertained. The hydrocarbon escaped through a gap or gaps between the blind flange and pipe work in module C. Had the blind flange been fitted securely, the hydrocarbon would not have escaped. The failure to fit the blind flange securely was the responsibility of an employee of Score (UK) Ltd who were employed by the operator as specialist valve contractors to carry out work on the valves in the pipe work. An employee of the operator was at fault in allowing hydrocarbon to enter the relevant pipe work in the then state of the pipe work.

26. Because of the scale of the disaster there were hundreds of individual claimants whose interests required to be represented. Solicitors acting for claimants formed groups to represent them. By far the largest of these groups was the Piper Alpha Disaster Group (PADG). PADG made claims for compensation against the operator and the other participants on behalf of many claimants. The levels of compensation sought were in excess of normal Scottish levels of damages. PADG asserted that if the claims were not settled by payment of sums in excess of Scottish levels of damages then the claims would be pursued in the United States, and in Texas in particular, where the levels of damages awards were much higher.

27. The operator and the other participants and their respective insurers settled the claims at levels greater than would have been awarded by a Scottish court but less than would have been awarded in Texas. Those involved in the negotiations on behalf of the participants and their insurers recognised that there was a risk the claims might be pursued successfully in Texas. If settlement terms ultimately offered had not been offered at least a substantial number of claimants would have pursued their claims in Texas.

28. The majority of claims were settled fairly quickly after the disaster, although at that time the reasons for the disaster had not been clearly established. In the fatal accident cases the principles underlying the settlements were agreed by the end of 1988. After the settlement figures had been agreed with the claimants, the contractors were called upon to indemnify the operator and the other participants. They declined to do so. The operator and the other participants had in place multiple layers of insurance. The insurers of the operator and the other participants paid the whole of the settlement which had been agreed with the claimants, apart from a small uninsured element amounting to some £15,000 to which I will not again refer.

29. The proof in the seven test actions commenced on 1 March 1993 before the Lord Ordinary, Lord Caplan, and was concluded on 31 October 1996. The Lord Ordinary issued his opinion on 2 September 1997. By an interlocutor of that date he refused the claims and reserved the question of expenses. By an interlocutor dated 10 December 1997 he found no expenses due to or by either party.

30. The operator reclaimed and the contractor cross-appealed. The hearing before their Lordships of the First Division (Lord President, Lord Sutherland, Lord Cousland and Lord Gill) commenced on 13 October 1998 and was concluded on 28 April 1999. Their Lordships issued their opinions on 17 December 1999 and by an interlocutor dated 1 February 2000 allowed the reclaiming motion, refused the cross-appeal and made an order finding the operator entitled to payment of the sums that had been paid in settlement of the claims made in the seven test actions: [2000] SLT 1123

31. Many of the issues canvassed before the Lord Ordinary and some of the issues canvassed before the Inner House are no longer in dispute between the parties. The remaining issues argued in this appeal were:

(1) whether, on a proper construction of the contract between the parties, the operator is entitled to indemnity in respect of claims arising from the death or injury of the contractor's employees in circumstances where the contractor was not liable at common law or for breach of statutory duty in respect of the death or injury in question?

(2) whether, the operator and the other participants are entitled now to indemnity under the contract between the parties in respect of the claims arising from the death or injury of the contractor's employees having regard to the payments made by their insurers? Furthermore, in Scotland can insurers sue for relief in the name of the insured? and

(3) whether, on a proper construction of the contract between the parties, recovery of the excess above the Scots law value of the claims is excluded by article 21? In the answer to this question, it is to be assumed that jurisdiction to entertain the claims against the operators would have been sustained as found by the Lord Ordinary and there being an agreement between the parties about the proportion of the sums paid which would have been appropriate if the Scottish level of damages had been applied.

I turn now to the first of those questions:
Construction of the contract

    32. The term of the contract which is to be considered is clause 15 - the operator is referred to as "the company":

"Indemnities

15(1) Contractor's Indemnities Contractor shall indemnify, hold harmless and defend the company and its parent, subsidiary and affiliate corporations and Participants, and their respective officers, employees, agents and representatives from and against any and all suits, actions, legal or administrative proceedings, claims, demands, damages, liabilities, interest, costs (including but not limited to the cost of litigation) and expenses of whatsoever kind or nature whether arising before or after completion of the work hereunder and in any manner directly or indirectly caused, occasioned or contributed to in whole or in part, by reason of omission or negligence whether active or passive of contractor, or of anyone acting under contractor's direction, control or on contractor's behalf in connection with or incidental to the work. Provided always that the contractor's total liability arising pursuant to this indemnity shall not exceed one million pounds sterling (£1,000,000) per occurrence.

Without prejudice to the foregoing generality, the contractor shall indemnify, hold harmless and defend the company and its parent, subsidiary and affiliate corporations and participants, and their respective officers, employees, agents and representatives from and against any claim, demand, cause of action, loss, expense or liability (including but not limited to the costs of litigation) arising (whether before or after completion of the work hereunder) by reason of:
(a)
Non-compliance with laws

Claims by governmental authorities or others of any actual or asserted failure of the contractor to comply with any law, ordinance, regulation, rule or order of any governmental or judicial body; and
(b)
Intellectual property infringement (including patents and copyrights)

Actual or asserted infringement or improper appropriation or use by the company, participants or contractor of trade secrets, proprietary information, know-how, copyright rights (both statutory and non-statutory), or patented or unpatent inventions or for actual or alleged unauthorised imitation of the work of others, arising out of the use of methods, processes, designs, information or other things originating with the contractor, its employees, agents, vendors or sub-contractors, and furnished or communicated to the company by the contractor or used by the contractor in connection with performance of the work and which have not been specified by the company; and
(c)
  Injury to employees and damage to property of contractor

Injury to or death of persons employed by or damage to or loss or destruction of property of the contractor or its parent, subsidiary or affiliate corporations, or the contractor's agents, sub-contractors or suppliers, irrespective of any contributory negligence, whether active or passive, of the party to be indemnified, unless such injury, death, damage, loss or destruction was caused by the sole negligence or wilful misconduct of the party which would otherwise be indemnified; and
(d)
Third party injury and property damage

Injury, death or property damage, loss or destruction other than such as is described in sub-articles 15(1)(c) and 15(2)(a) and (b), and arising directly or indirectly out of the acts or omissions of the contractor or its sub-contractors, suppliers or their respective employees or agents, irrespective of any contributory negligence, whether active or passive, of the party to be indemnified, unless such injury, death, damage, loss or destruction was caused by the sole negligence or wilful misconduct of the party which would otherwise be indemnified; and
(e)
Pollution.

Waste, debris, rubbish, liquid or non-liquid discharge or pollution of whatever nature which is dropped, seeped, discharged, spilled, blown out or leaked from equipment, apparatus, machinery, facilities or other property of the contractor or its sub-contractors, suppliers, employees or agents, irrespective of any contributory negligence, whether active or passive, of the party to be indemnified except to the extent that the foregoing was caused by the sole negligence or wilful misconduct of the party which would otherwise be indemnified."

    33. Clause 15(2) contains indemnities in similar terms in favour of the contractor in respect of claims arising from injury to or death of persons employed by or damage to or loss of or destruction of property of the company against claims for pollution arising from the company's facilities and against claims in respect of the loss of or the damage to the well. Clause 15(3) contains a definition of wilful misconduct. Clause 16 deals with insurance and as some points were raised in respect of it I should set out part of it.

    34. "16. Insurance

16.1  Contractor shall, at its sole cost and expense, procure and maintain (and shall require its subcontractors to maintain in effect) during the contract period, insurance coverage with insurers under forms and policies satisfactory to company as specified in sub-article 16.2 hereof. All such policies may be suitably endorsed as to territorial and/or navigational limitations to include the entire scope of operations contemplated by this contract. Further, such policies other than workers' compensation and employers' liability must include company and the participants as additional insureds and shall provide that the policies will indemnify the additional insureds against claims brought by any other of the insureds.

Such policies other than workers' compensation and employers' liability must also provide that these insurances shall be primary and not contributing with any other insurance available to company or its participants.

16.2  The following insurance coverage is to be maintained by contractor:

"(i) Employer's Liability and Workers' Compensation Insurance to comply with the statutory requirements.

(ii) General public liability insurance in respect of the persons and property of third parties to the extent of at least US$ 5 million for each incident arising out of the performance of the work. In addition, if applicable, contractor shall provide automobile insurance to not less than the statutory requirements.

(iii) Professional negligence cover to the extent of at least £1 m per occurrence.

The remainder of clause 16 deals with certificates of insurance; and administration and communications.

    35. The contention of the contractor is that the principal provision in question, namely clause 15(1)(c), should have implied into it a provision that the indemnity is not to apply unless the contractor is liable at common law or for breach of statutory duty in respect of the death or the injury in question.

    36. In support of this contention the contractor submits that the clause was put forward by the operator and therefore should be construed where there is ambiguity against his interest. It is agreed that the clause was put forward by the operator with the consequence contended for.

    37. The contractor submits that the lengthy provision at the beginning of clause 15(1) and preceding the words "without prejudice to the foregoing generality" is in the nature of an umbrella of which the following clauses (a) - (e) are particular examples with the consequence that the requirement in that opening provision that the indemnity is to apply only when the subject matter is "in any manner directly or indirectly caused, occasioned or contributed to in whole or in part, by reason of omission or negligence" of the contractor or those for whom he is responsible, is carried into the clauses (a) - (e).

    38. In my opinion the phrase "without prejudice to the foregoing generality" means that nothing in the provisions of the clause following that phrase are to cut down or exclude any matter that would fall within the provision before that phrase but does not carry the implication, particularly in the circumstances of this clause, that what follows are but particular examples within the generality. It is hard to regard the subject matter of sub-clause (a) and sub-clause (b) as included in the opening general words of the clause.

    39. The contractor pointed out that it is not easy to identify particular examples that would fall within the opening words of the clause which are not specifically in the later provisions. The most convincing example put forward by the operator's counsel in argument was the possibility of shutdown orders made in respect of the platform by a government department, the relevant department at the time of the disaster, being the Department of Energy which, although not based on any actual or asserted failure of the contractor, turned out after investigation to have been occasioned by circumstances caused or materially contributed to by the fault of the contractor. However,even if no substantial content could be found for the opening words of clause 15 which were not already covered in the particular sub-clauses (a) to (e) this does not in my opinion assist the contractor in his contention that the opening provision must be carried forward by implication into clause 15(1)(c).

    40. It was contended further that the use in 15(1)(c) of the phrase "contributory negligence" signified negligence of the operator contributory to the cause of the death or injury with negligence or breach of statutory duty on the part of the contractor. While the phrase "contributory negligence" is frequently used in the context of negligence by a pursuer which has contributed with the negligence of the defender to the causation of an accident the subject of the pursuer's claim, in the context of the present clause I consider it perfectly natural to read the phrase "contributory negligence" as negligence contributing to the cause of the accident and to be contrasted with sole negligence which, under the clause, will be a good answer to a claim for indemnity.

    41. It was further submitted that the insurance provisions in clause 16(2) did not fit with the construction of clause 15(1)(c) contended for by the operator since the insurance provided under clause 16(2) would not cover the contractor in respect of the indemnity provided by clause 15(1)(c) on that construction. However, as counsel for the operator pointed out there is a statutory obligation on the operator to secure that employer's liability and public liability insurance are maintained by the contractor.

    42. It was also submitted on behalf of the contractor that the evidence of practice with regard to the allocation of risk in North Sea contracts was that the whole risk of death or injury to an employee was carried by the employer. This had the effect of eliminating litigation between the parties working on a North Sea platform about negligence in respect of such claims of death or injury. In contrast, in this case, there was an exclusion of indemnity in respect of sole negligence or wilful misconduct of the party claiming indemnity. Therefore, so it was submitted, this is not an example of the practice in the North Sea spoken to in evidence and accepted by the Lord Ordinary, since the whole responsibility for death or injury in respect of an employee is not here passed to the employer. In my view, although this is not an example of that practice fully carried out, it is not altogether surprising that there should be an exception in respect of sole negligence or wilful misconduct recognising this would be an extreme situation in which to pass liability to the contractor.

    43. In my view the words of clause 15(1)(c) are clear and unambiguous and none of the reasons put forward seem to me a sufficient basis on which to imply into the clause the condition contended for which would render the exception in respect of sole negligence unnecessary. I conclude therefore that this aspect of the appeal should be refused in accordance with the judgment of the Lord Ordinary and the four judges of the Inner House of the Court of Session.
Is the operator entitled to indemnity?

    44. I turn now to the second question whether the operator is entitled now to indemnity under the contract between the parties in respect of the claims arising from the death or injury of the contractor's employees having regard to the payments made by the operator's insurers. The submission for the contractor is that an indemnity insurer who pays an indemnity in respect of the loss of an insured cannot then claim to be subrogated to a claim for indemnity in respect of the same loss which the insured had contracted for with another indemnifier.

    45. It is accepted that the payments which were the subject of this action in respect of the death of or injury to employees of the contractor were settled by insurers acting on behalf of the operator. This was done at a time before the issues with regard to causation of the disaster were settled and at a time when the contractor was not willing to admit liability to indemnify the operator against these claims.

    46. As is apparent from the dates I have already recited, it would have been utterly unreasonable to delay settlement of the claims in respect of death of or injury to the contractor's employees until these issues had been settled.

    47. This issue must be considered against the background of the highly complicated nature of North Sea development, involving as it does many parties as licence holders, operators, contractors, many different forms of equipment with many risks involved in the operation, and with a very detailed regulatory background. It would therefore be entirely natural that any party involved might seek to protect himself from loss in connection with these activities by arranging insurance indemnifying him against such loss. As I noted in the previous section there are provisions for insurance in the contract between the parties requiring the contractor to arrange such insurance in respect of employers' liability and workmen's compensation, general public liability and professional negligence. It is further provided that such insurances should be under forms and policies satisfactory to the company and except for workers' and employers' liability that these insurances must include the company and participants as additional insureds and shall provide that the policies will indemnify the additional insured against claims brought by any other of the insurers. It also provides that such policies other than the workers' compensation and employers' liability policies must provide that these shall be primary and not contributing with any other insurance available to the company or its participants. There is no provision in the contract requiring the operator to take out insurance covering his liabilities in respect of the claims covered by clause 15(1)(c) of the contract and therefore obviously no provision including the contractor as an insured or interested party in any such insurance.

    48. There is no objection taken to the title of the operator to sue this action. The objection is taken to the relevancy of the action on the basis that since the claims in issue were settled by the indemnity insurers of the operator, the operator cannot now make a relevant case for payment to him of the amounts covered by indemnity granted by the contractor under clause 15(1)(c) of the contract. It is not disputed on the basis on which this part of the case is argued that if the operator had paid these sums he would be entitled to repayment from the contractor. The sole reason that this claim is not a good claim in law it is asserted is that the sums were paid by an indemnity insurer of the operator and that this defeats the claim for repayment from the contractor. The submission is that here we have the operator entitled to the benefit of two indemnities in respect of the claims on which the action is founded, the indemnity from the contractor and the indemnity covering exactly the same claims from the operator's insurers. It is not permissible to be indemnified twice in respect of the same loss and therefore it is not permissible for the indemnity insurer, by suing in name of the operator, to pass his liability on to the contractor. It is said that if the operator's insurer is entitled to pass his claims on to the contractor, if the contractor paid the claims he would be equally entitled to pass his liability to the operator's insurer, thus producing a deadlock which would have to be resolved on other principles. The argument is further elaborated by saying that in truth the operator's insurance company as its indemnifier in respect of these claims is entitled only to an action of relief against the contractor. It was this aspect of the case that raised the question whether this action could be treated as an action of relief and whether an action of relief could be raised in name of the indemnified. If the claim of the operator in this action is well founded in law as an action for payment, this second question which was considered in detail particularly in the opinion of the Lord President in the Court of Session would not arise.

    49. From the argument it appears that this precise question has never been raised by the Bar or Bench in Scotland nor England for 200 years although the propriety of such a claim has been assumed by persons of the highest standing in the field of commercial law.

    50. The question however has now been raised and it is necessary for your Lordships to consider it.

    51. Since it seems to me to raise sharply an issue of principle I consider it useful to start consideration of it with the early leading case of Mason v Sainsbury (1782) 3 Dougl 61 in which Lord Mansfield laid down the relevant principles in a way which I believe has been accepted ever since both in the law of Scotland and the law of England.

52. The case was an action on the Riot Act to recover damages sustained by the demolition of a house in the riots of 1780. There was a verdict for the plaintiff, with £259 damages, subject to the opinion of the court, on a case which stated that the plaintiff had insured the house with the Hand-in-Hand Fire Office, which had paid the loss, and that this action was brought in the plaintiff's name, and with his consent for the benefit of the insurance office. In giving judgment, Lord Mansfield said, at p 64:

All the other judges agreed. I need only quote from Buller J:

53. The central question posed by Lord Mansfield - "Who is first liable?" - is the appropriate question to pose in the present case. Putting the matter another way - was the hundred liable only if the insurance office failed to pay the plaintiff or was the insurance office liable to indemnify the plaintiff only if the hundred failed to pay? It is interesting that under the present form of the statute, the Riot Damage Act of 1886, the police authority comes in place of the hundred but there is a provision that the police authority is not liable if the property in question is insured. In other words under the new legislation where there is an insurance company indemnifying the property owner, the insurance company is first liable.

54. Applying this approach, in the present case therefore the question is: "is the contractor liable to indemnify the operator only if and to the extent that the operator's insurer fails to do so, or is the operator's insurer liable to indemnify the operator only if and to the extent that the contractor fails to do so?"

55. Since there is no provision in the contract requiring the operator to have insurance I cannot see any ground on which it can be said that the contractor's indemnity is limited to indemnifying the operator if and to the extent that the operator's insurer fails to do so.

56. I consider that support for this view is obtained from the clause dealing with insurance which I have already quoted in which it is provided that the insurances required by the contract other than workers' compensation and employer's liability should include the operator as a co-insured thus giving the operator a right against the insurer as an insured and the further provision that such policies must also provide that they are to be primary and not contributing with any other insurances available to the operator. This is a strong pointer to the conclusion that indemnities stipulated for in the contract are to be primary obligations and that any other insurance available to the operator is to be secondary.

57. An interesting illustration of similar principles in the field of suretyship is provided by the decision of the Privy Council in Scholefield Goodman & Sons Ltd v Zyngier [1986] AC 562 in which by a mortgage executed in favour of the bank Mrs Zyngier covenanted to pay to the bank any sums which might be owed to it either by herself or by a named company, including any amounts for or in respect of any bills of exchange on which the company might be liable "either primarily or only in the event of any other person failing to duly pay the same". Lord Brightman giving the judgment of the board said, at p 574:

and at p 575 he continues:

Although this is in a different field from indemnities I think it is helpful in considering whether a particular liability under a contract is primary or secondary. There is no reason in the present case why the contract between the operator and the insurance company should be construed as placing the insurance company on an equal footing with the parties to the contract, and I think the analogy of the relationship in this case between the contract and the indemnity insurance and that between the bill of exchange and the surety in the Zyngier case would suggest that similar reasoning would apply. There is no reason, as it seems to me, why the operator and the insurer should have the intention that the insurer should put himself on an equal footing with the contractor in respect of the indemnity which the contractor had given under the contract. Indeed the evidence of practice that the rates which contractors quote in respect of work to be undertaken in the North Sea includes an allowance in respect of the indemnity would to my mind be a clear indication to the contrary.

58. For these reasons I am of opinion that this appeal fails on the second issue.

59. Your Lordships were treated to a very well prepared and forcefully presented argument on behalf of the contractor and if the indemnities granted by the contractor and the operator's insurers were truly to be regarded as on an equal footing or co-ordinate I think the result for which counsel argued might be appropriate. For the operators we were treated to an equally persuasive argument in which the principles underlying the relationship of insured and insurer and insured and third parties were clearly laid before your Lordships and in which the crucial question first posed by Lord Mansfield was demonstrated to be the critical question for your Lordships. The doctrine of subrogation with its incidents available against third parties in both situations in which the claims of the assured arise in contract and in tort or delict were illustrated by authorities in England, Scotland and the United States of America, as well as in Australia. Among the cases from England and Scotland

Yates v Whyte (1838) 4 Bingham NC 272; Dickenson v Jardine (1868) LR 3 CP 639; Simpson & Co v Thomson (1877) 5 R (HL) 40 and Esso Petroleum Co Ltd v Hall Russell & Co Ltd [1989] AC 643

may be referred to as examples.

60. The American cases cited came from different levels of court and were spread over 200 years. I mention Atlantic Mutual Insurance Co v Cooney (1962) 303 F 2d 253 particularly. The authorities in the United States support the same principle, subject to a somewhat greater flexibility in that jurisdiction arising from the doctrine of superior equity where subrogation may be denied on the basis that the person who is under obligation to the insured has a greater equity in his favour than that which is available to the person seeking the subrogation.

61. From Western Australia I refer to Speno Rail Maintenance Australia Pty Ltd Ano v Hamersley Iron Ltd [2000] WASCA 408 when the Supreme Court followed the decision of the Inner House in the present case.

62. These cases show that generally liabilities incurred in tort or delict, or in contract will be primary while the liability of the indemnity insurer of the injured party will be secondary. In cases relating to marine insurance, section 79 of the Marine Insurance Act 1906 is statutory authority to this effect.

63. Sickness and Accident Assurance Association v General Accident Assurance Corporation Limited (1892) 19 R 977 dealt with the situation in which an insurance company, after paying to a tramway company a sum due under a policy insuring against loss by accident, raised an action in its own name against another insurance company for contribution on the ground that it had insured the same risk, which is the situation as it was presented in the contractor's argument in the present case. Where there are co-ordinate indemnities for the same loss it is clear that the doctrine of subrogation cannot provide an answer, and that where one of the indemnifiers pays, the way their liabilities inter se are decided is by an action of relief. The principle of res inter alios acta will not be of relevance in that situation where the overriding principle is that a person cannot be indemnified twice over for the same loss, and therefore if one indemnifier has made good the loss to the indemnified the rights of the indemnified are no longer useful in deciding questions between the indemnifiers.

64. The absence of any case directly deciding the present question is because I believe it has always been assumed that a contractual indemnity will be the primary indemnity in situations where the other indemnity is provided by an insurer of a party to a contract where there is no obligation on the party to make any insurance arrangement, and where in consequence the insurance arrangements are res inter alios acta so far as the other parties to the contract are concerned.

65. I think in fairness to the argument for the contractor it has to be said that it is not based on any particular specialty of insurance law, but is rather based on the submission which I have held to be unfounded that here we are dealing with co-ordinate indemnities.

66. The Lord Ordinary accepted the contractor's argument. After an extremely long and heavy proof, this point being raised at a very late stage was not discussed by reference to a full range of authorities and it is not surprising therefore that the true issue did not present itself clearly to the mind of the Lord Ordinary. In my view the unanimous judgment of the Inner House on this aspect of the case should be affirmed and the appeal refused.

Consequential Loss

67. I now turn to the third question. This is whether, on a true construction of the contract between the parties, recovery of the excess above the Scots Law value of the claims is excluded by article 21. For the purposes of this argument it is to be assumed that jurisdiction to entertain the claims against the respondent in Texas would have been sustained as found by the Lord Ordinary, and that there is an agreement between the parties about the proportion of the sums paid which would have been appropriate if the Scottish level of damages had been applied.

68. In answer to my noble and learned friend, Lord Nicholls of Birkenhead, in the course of the hearing counsel for the contractor accepted that these claims as settled were covered for the purposes of this part of the argument by the provision in clause 15(1)(c) for an indemnity, but he argued that notwithstanding that position, article 21 excluded the excess above the Scots Law value of the claims.Article 21 is in these terms:

21

Consequential loss

69. It is to be noted that the primary liability in question in the valuation of these claims was liability to the relatives in relation to death claims and to the injured person in relation to the claims for injury. To these claims therefore article 21 does not apply. However, the argument was that insofar as these are part of the amounts falling due by the contractor to the operator under the indemnity they are excluded by article 21. It is clear that the sums in dispute are neither loss of use, loss of profits nor loss of production or business interruption and it is said that they are indirect or consequential. No authority was cited in which a matter of mere quantification has been held to come within that description, although it is possible that a basis of quantification can be excluded on this ground as in Duff & Co v The Iron and Steel Fencing and Buildings Co [1891] 19 R 199. This decision was that the particular use of the goods in question on which the pursuers' claim for loss was based was a use which was not within the contemplation of the parties to the contract at the time it was made, and therefore the proper level was that depending on the ordinary use of the goods. No such basis exists in the present case and, in my opinion, there is no reason for excluding the uplift from the operation of the indemnity in the present case. On this part of the case also, in my opinion, the judgment of the Inner House of the Court of Session was sound and the Lord Ordinary's judgment to the contrary was rightly set aside.

Conclusion

70. I am therefore of opinion that all three chapters of the contractor's appeal fail, and that the appeal should be dismissed with costs. In the other six cases that have been settled parties are agreed that an order should be made remitting the cases to the Inner House to give effect to the settlement.

LORD NICHOLLS OF BIRKENHEAD

My Lords,

71. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Bingham of Cornhill, Lord Mackay of Clashfern and Lord Hoffmann. For the reasons they give, and with which I agree, I too would dismiss this appeal.

LORD HOFFMANN

My Lords,

72. On 6 July 1988 there was a severe explosion on the Piper Alpha North Sea oil platform. 165 people were killed and another 61 injured. The cause of the accident was the combined negligence of two men. The first was Mr Vernon, an employee of Occidental Petroleum (Caledonia) Ltd, the operators of the platform ("the operators"). He started a pump without having noticed that one of the pressure safety valves had been removed. The other was a Mr Sutton, who was employed by Score (UK) Ltd, specialist valve contractors. They had removed the valve for maintenance purposes. It was Mr Sutton's duty to fit a blind flange over the place where the valve had been, to prevent condensate in the system from escaping. But he did not make the flange sufficiently secure and, when the pump was used, condensate escaped and ignited. There would have been no explosion if either the pump had not been used or the flange had been securely fitted.

73. By regulation 32(3) of the Offshore Installations (Operational Safety, Health and Welfare) Regulations 1976 (SI 1019/1976) it is the duty of every person on an oil platform not to do anything likely to endanger the safety or health of himself or other persons on the platform. So Mr Vernon and Mr Sutton were both in breach of this statutory duty. And by regulation 32(1) it is the duty of the operator to ensure that the provisions of the Regulations are complied with. The operator was therefore also in breach of statutory duty and liable for all the deaths and injuries caused by the explosion.

74. The operators were insured against such liability (save for a small layer which was uncovered) and they and their underwriters settled the claims of the victims. About 37 of them were the operator's own employees. But the rest worked for contractors who had been engaged, like Score (UK) Ltd, to do specialist work on the platform. One such contractor was Eastman Christensen Ltd ("the contractors"), now called Norton (No 2) Ltd. They had been employed to provide directional drilling services. Neil Pyman, whose claim has been used as a test case, was an employee of the contractors killed by the explosion.

75. Clause 15 of the contract between the operator and the contractors dated 23 February 1987 contained cross-indemnities. By subclause 15.1, the contractors agreed to indemnify the operator against -

76. The subclause then went on:

77. The relevant head was c:

78. Subclause 15.2 contained a cross-indemnity from the operator to the contractors in respect of injury or death to employees of the operator or damage to or loss of its property, in terms similar to subclause 15.1.c.

79. The operator (now known as Caledonia North Sea Ltd) raised actions in the Court of Session against a number of companies claiming indemnity under clause 15.1.c (or the equivalent in other contracts) for the compensation paid to their dead or injured employees. The terms of the indemnities in the various contracts were not all the same, but all the actions, with the exception of that against these contractors, were settled in the course of the hearing before your Lordships. It is therefore unnecessary to refer to the terms of any other contract.

80. In this appeal, the contractors have relied upon three defences. The first was that, as a matter of construction of the clause, they could not be liable to indemnify the operator unless they had themselves been liable to their employee, on grounds of negligence or breach of statutory duty. It is the case that the contractors were in no way responsible for the accident. But the difficulty in the way of their argument, which was rejected the Lord Ordinary (Lord Caplan) and by the Inner House, is that the indemnity says nothing about the contractors having to be liable to the employee. It imposes a general liability to indemnify the operator against any liability in respect of their own employees, with an exception only in a case in which the accident is attributable to the sole negligence or wilful misconduct of the operator. The existence of this exception is in itself an indication that no liability on the part of the contractors is required, because it is hard to see how such liability could ever be consistent with the accident being attributable to the sole negligence or wilful misconduct of the operator.

81. The existence of the cross-indemnity and the findings of industry practice made by the Lord Ordinary dispel any concern that it would be unreasonable to require the contractors to indemnify the operator against loss for which the contractors were not responsible. These are summarised in a passage in Daintith and Willoughby, Manual of United Kingdom Oil and Gas Law (1984), para 1-845:

82. More than one reason is given for this practice. Daintith and Willoughby say that it reduces insurance costs because each party knows that he need insure only in respect of his own property and employees. In the present case, the operator prudently insured in respect of the contractors' employees as well, but no doubt the existence of the indemnity reduced the premium. David Sharp, in Offshore Oil and Gas Insurance, says (at p 108) that the practice enables compensation to be paid quickly without waiting for disputes over liability to be resolved; delay "can only add to the anguish of the injured party, or the dependants of the deceased". That was achieved here by the operator and its underwriters accepting primary liability to the victims and settling their claims before the question of liability on the indemnities had been resolved.

83. Mr Currie QC, who appeared for the contractors, pointed out that clause 15.1.c does not embody the industry practice in its pure form because it contains the exception for the sole negligence or wilful default of the party claiming indemnity. To that extent, it does not produce that clear-cut distribution of liability which the practice is intended to achieve. That is true. The exception no doubt reflects the give and take of negotiation between the parties. But that is no reason for implying a further exception for cases in which there was no direct liability on the part of the contractors.

84. Mr Currie observed that if the intention was, in accordance with the industry practice, to require the contractors to insure against death or injury in respect of their employees, the contract did not expressly require them to do so. Clause 16.2 required them to have employer's liability and workmen's compensation insurance as required by statute and general public liability insurance for at least US $5m for any one incident. But there was no obligation to have insurance cover to the full extent of potential liability under clause 15.1.c.

85. In my opinion no inferences can be drawn from these features of the contract. The provisions of clause 16.2 were intended to ensure compliance with statutory and other requirements. The incentive to the contractors to insure against the indemnity liability arose simply from the existence of the potential liability. Even if the indemnity had been limited in the way that the contractors suggest, there would still have been a potential liability for which the contract made no express insurance provision. I therefore regard the insurance provisions as neutral.

86. Mr Currie drew attention to the general indemnity in the first part of clause 15.1 against loss or damage caused by the "omission or negligence" of the contractor, limited to £1m per occurrence. He argued that the five individual heads of indemnity which followed should be treated as species of the general indemnity and also subject to the requirement that there should have been an omission or negligence on the part of the contractors. He said that the words "without prejudice to the foregoing generality" supported this construction.

87. In my opinion, the words in question are rather indicative of an intention that each clause should be read independently. They mean that nothing said under the five heads is to be treated (for example, on an inclusio unius, exclusio alterius basis) as restrictive of what would otherwise be the normal construction of the first general indemnity. They do not mean that anything said in the general indemnity is to be treated as restrictive of what would otherwise be the normal construction of the five heads. In any case, it is not easy to see how matters such as infringement of intellectual property rights (head b) can be squeezed into a general principle which requires an "omission or negligence".

88. Finally, Mr Currie drew attention to the words "irrespective of any contributory negligence" in clause 15.1.c. "Contributory to what?" he asked. He suggested that it must mean contributory to negligence or breach of statutory duty on the part of the contractor. But in my opinion it means negligence contributing to the loss, as opposed to "sole negligence" causing the loss. It is quite neutral as to what the other contribution to causing the loss might be.

89. The contractors' second defence is that insofar as the action is a subrogated claim, their liability to the operator has been discharged by the payments made by the underwriters. This is at first sight a bold argument, because it has been settled law for over two centuries that payment under an insurance policy does not relieve the liability of a third party against whom the insured has an action in contract or tort to recover the insured loss: see Mason v Sainsbury (1782) 3 Dougl 61. By right of subrogation the insurer may prosecute the claim in the name of the insured.

90. Mr Keene, who argued this point on behalf of the contractors, accepted the general principle but said that there was an exception when the claim against a third party is, like the claim against the insurer, a claim to indemnity. In such a case, the two indemnifiers stand upon an equal footing. Payment by either discharges the liability of the other. The one who has paid the whole loss may have an action for relief against the other for a contribution which may in an appropriate case amount to a complete counter-indemnity. But there cannot be a subrogated claim in the name of the party indemnified.

91. In support of this principle, Mr Keene relied upon a number of cases of high authority which state that a person who has a right to be indemnified by more than one person cannot recover more than once. So, for example, in Sickness and Accident Assurance Association Ltd v General Accident Assurance Corporation Ltd (1892) 19 R 977, 980 Lord Low, in a judgment approved on appeal by the Inner House, said:

92. Mr Keene deduces from this and other similar statements his general rule that when two or more persons have separately agreed to indemnify someone against the same risk, payment by one discharges the others. But in my opinion, that is not what Lord Low meant. It is certainly a general principle, as he says, that a person who has more than one claim to indemnity is not entitled to be paid more than once. But there are different ways of giving effect to this principle. One is to say that the person who has paid is entitled to be subrogated to the rights against the other person liable. The other is to say that one payment discharges the liability. The authorities show that the law ordinarily adopts the first solution when the liability of the person who paid is secondary to the liability of the other party liable. It adopts the second solution when the liability of the party who paid was primary or the liabilities are equal and co-ordinate.

93. It was therefore an essential part of Lord Low's reasoning, in coming to the conclusion that a right of contribution existed, that not only was insurance a contract of indemnity but also that the policies could be regarded as "truly one insurance." Or, as Barwick C.J. said in Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342, 350, they were "co-ordinate liabilities". On the other hand, in Mason v Sainsbury (1782) 3 Dougl 61, when insurers who had paid the loss on a house damaged by rioters made a subrogated claim under a statute which made the hundred liable for riot damage, Lord Mansfield said, at p 64:

94. The liability of the hundred was held to be primary and therefore not discharged by the insurance payment. Similarly in North British and Mercantile Insurance Co v London, Liverpool and Globe Insurance Co. (1877) 5 Ch D 569 the customary strict responsibility of a wharfinger for the safe custody of goods entrusted to him by customers was held to be primary and his liability for the loss of the goods by fire was not discharged by a payment under the customer's insurance policy.

95. Mr Keene submitted that these cases were distinguishable because the liability of the party held to be primarily liable was not truly one of indemnity. But what is a liability for an indemnity? It surely includes a liability to make good a loss. The question cannot turn upon whether the contract uses the word indemnity. That would be an extraordinary technicality in a branch of commercial law based upon principles of fair dealing. In my view the hundred was liable to indemnify the house owner against riot damage to his house and the wharfinger was liable to indemnify the owner of the goods against damage. The judges in the North British case, faced with an argument similar to that now advanced by Mr Keene, did not deny that the liability of the wharfinger was a liability to indemnify. They said that it was not a contract of insurance. So James LJ said (at p 581) that the rule of contribution "only applies where there is the same person insuring the same interest in more than one office" and cited Mason's case as an example of primary and secondary liability. Mellish LJ said (at p 584) that the liability of the bailee was "the terms of the contract of bailment" and "not a contract of insurance".

96. Further authority is in my view unnecessary, but it is worth observing (as did the First Division) that in Larrinaga Steamship Co Ltd v The King [1944] KB 124; [1945] AC 246, three very eminent commercial judges (Mackinnon LJ and Lords Wright and Porter) seem to have thought it went without saying that a ship owner's underwriters would be entitled to be subrogated to his claim for indemnity against a charterer in respect of losses caused by the master's compliance with the charterer's orders as to the employment of the ship, under a standard term of a charterparty. Sir Sydney Kentridge QC, who appeared for the operators, also referred us to a number of cases in the United States in which insurers were held entitled to be subrogated to a contractual right of indemnity (expressly so called) to which the insured was entitled under the terms of a commercial arrangement. The latter was held to be the primary liability.

97. Likewise in this case, I am of opinion that the indemnity under clause 15.1.c. was not secondary to or co-ordinate with any insurance that the operators might choose to obtain in respect of the same losses. I suppose that it would have been theoretically possible to frame the clause to confer an indemnity only insofar as the operator was unable to recover from its insurers, although one cannot imagine the parties in practice entering into such a contract. But this contract did not require the operator to take out any insurance at all. It therefore follows that the contractual indemnity was a primary liability and the underwriters were entitled to be subrogated.

98. The contractors third and final defence was that part of their liability was excluded by clause 21 of the contract, which provided that they should not be liable for "indirect or consequential losses suffered". This defence was based on the fact that the amounts of compensation agreed with the claimants was at a level higher than would have been awarded in a Scottish court. The increase reflected the possibility that, in the absence of a settlement, the claimants might have brought proceedings in Texas, where the levels of damages would have been a good deal higher still. The Lord Ordinary held that it was reasonable for the operator to settle at the agreed level because there was a real possibility that the claimants might have been able to sue in Texas. Although the operator was an English company, it had commercial links with Texas which might have been sufficient to found jurisdiction there. The Lord Ordinary also found that the contractors would not have been aware of these links.

99. Mr Currie submitted, on the basis of a number of decisions in the English Court of Appeal, that "indirect or consequential losses" should be construed to mean losses which would have been recoverable, if at all, under the "second rule in Hadley v Baxendale (1854) 9 Ex 341". Indirect or consequential loss, it was said, means loss which does not follow in the natural course of things from the breach of contract, or loss which might reasonably have been supposed to have been within the contemplation of the parties. It is loss which follows from special circumstances such as the links with Texas. If the contractors had known about these links, the extra damages would in principle have been recoverable under the second rule. But the effect of clause 21 is altogether to exclude recovery, whether the contractors knew or not: see Hotel Services Ltd v Hilton International Hotels Ltd [2000] BLR 235.

100. My Lords, I would wish to reserve the question of whether, in the context of the contracts in the Hotel Services and similar cases, the construction adopted by the Court of Appeal was correct. But I do not think that they have any application to this case. Clause 21 limits the liability of the parties for losses caused by breach of contract. Certain kinds of loss are excluded. But this is not a claim for breach of contract. It is a claim to an indemnity for a liability incurred by the operator outside the contract. In my opinion clause 21 has no application to such a claim. The liability either falls within the scope of the indemnity or it does not. The kind of loss for which indemnity was claimed fell within the indemnity simply because it was loss arising out of liability for death or injury in respect of the contractor's employees. As for quantum, the Lord Ordinary's finding that it was reasonable to settle at the agreed level is sufficient to make the sums which were paid recoverable.

101. In any case, even if the Hadley v Baxendale dichotomy had any relevance, I do not think that the increase in the quantum of damages can be regarded as a different kind of loss from the amount which would have been recoverable in Scotland. It remains compensation for death or injury. If such compensation falls in principle within the scope of the indemnity, I do not think that it matters that, perhaps for reasons of which the indemnifier was unaware, it turns out to be greater than he might have expected.

102. For these reasons as well as those given by my noble and learned friend, Lord Mackay of Clashfern, I would dismiss the appeal.

LORD SCOTT OF FOSCOTE

My Lords,

103. I have had the advantage of reading in draft the opinion prepared by my noble and learned friend, Lord Mackay of Clashfern. I agree that for the reasons he gives the appeal involving Norton (No. 2) Limited (In liquidation) should be dismissed.