Exclusion of Liability for Consequential Loss and the Role of the Contra Proferentem Rule
Published 23 June 2016
In the recent case of Transocean Drilling U.K. Ltd v Providence Resources plc (2016) EWCA Civ 372 upheld the allocation of risk provisions and exclusion clauses contained within a freely negotiated contract by parties of equal bargaining power. The court placed limits on the application of the contra proferentem rule (which provides that where the effect of an exclusion clause is ambiguous it is construed against the party seeking to limit its liability).
Transocean, the owner of a semi-submersible drilling rig, entered into a contract with Providence Resources for the hire of a drilling rig. The contract included an obligation to provide the rig in good working condition. As a consequence of a defect in the rig the drilling works being undertaken by the hirer fell into delay by 27 days.
Whilst the parties used an industry standard form of contract, it had been the subject of considerable amendment by the parties, who were of equal bargaining position. Clause 18 contained a complex series of provisions which sought to allocate losses arising from or relating to the performance of the contract, irrespective of the actual cause of the loss. Clause 19 contained an obligation on the contractor to take out and maintain insurance of the type described for the benefit of both parties.
Clause 20 went on to provide that:
- Transocean would save Providence from, and indemnify Providence against, Transocean's "consequential losses" (which term was specifically defined); and
- Providence would save Transocean from, and indemnify Transocean against, Providence's "consequential losses",
(otherwise known as a "knock-for knock" clause the effect of which is that loss suffered by a party is to rest with that party regardless of fault).
The drilling rig supplied by Transocean was defective. Providence sought to recover what was referred to as "spread costs" by reason of the delay suffered to the project. These costs included the cost of personnel, equipment and services contracted from third parties which were wasted by reason of the delay. Transocean argued that liability for these losses were excluded pursuant to clause 20.
- Although drafted as an indemnity, clause 20 was in effect an exclusion clause.
- However, clause 20 was not a typical exclusion clause in that there were mutual undertakings to accept the risk of losses flowing from the other's breaches of contract.
- Similarly, the contract contained a series of complex allocation of risk provisions that had been negotiated by parties of equal bargaining power.
- The meaning of the term "consequential loss" had been defined by the terms of the contract. Accordingly, it was not necessary to interpret what was meant by that term by reference to previous case law.
- The spread costs suffered by Provident fell within the definition of consequential loss.
- The original trial judge had erred in that rather than seeking to interpret the bond by giving effect to the natural meaning of the contract, he had sought to invoke the contra proferentem rule. Whilst resort to that rule is appropriate where the meaning of a contract is ambiguous and capable of having more than one meaning, where the commercial intent of the parties was clear from the words of the contract, the contra proferentum rule should not be used to override the clear commercial agreement of the parties.
- This was not a case where one party sought to exclude the consequences of its breaches of contract and, in doing so, effectively excludes that party from any meaningful obligations.
The Court of Appeal has given useful guidance on the interpretation of exclusion clauses. The traditional approach of interpreting such a clause against the party seeking to rely upon it will not be adopted in cases where the wording of the clause is clear and unambiguous and the parties have freely negotiated their allocation of risk provisions. The court will respect, and give effect to, the agreement of commercial parties, particularly in situations where the parties are of equal bargaining power and where the terms of the contract have been the subject of negotiation.
Chris Doran, Partner