Are wasted spread costs considered âconsequential lossesâ within the context of a contractual exclusion clause?
Transocean Drilling UK Limited v Providence Resources PLC [2016] EWCA Civ 372
Transocean (Owner of the rig âGSF Arctic IIIâ), entered into a drilling contract with Providence for the hire of a semi-submersible drilling rig. The contract was based on a standard industry agreement âLOGICâ form, with agreed adaptions. There was a loss time of over 27 days due to defects in the rig and also a further 10 hourâs delay because of failure of a crew to tighten a blanking plug properly.
Consequently, there were various disputes between the parties pertaining to remuneration payable to Transocean in respect of what became known as the âdisputed periodâ. Providence claim against Transocean for spread costs, comprising the costs of personnel, equipment and services contracted from third parties, which it alleged were wasted as a result of the delay.
At first instance, Mr Justice Popplewell (âthe Judgeâ) held that Transocean was in breach of contract and that Providence was entitled to recover the spread costs. Transoceanâs appeal against the latter part of the Judgeâs decision as they content that spread costs was excluded by virtue of Clause 20 of the contract.
Clause 20Â
Clause 20 defined Consequential Loss as â . . . loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption . . . â.
The closing paragraph of Clause 20 (ii) sub-paragraph 3 provide that the each of party was to âsave, indemnify, defend and hold harmlessâ the other for its own consequential loss.
The Court of Appeal (âCAâ) had to decide whether wasted spread costs incurred by Providence as a result of Transoceanâs breaches of contract are âconsequential lossesâ within the meaning of clause 20â.
Held
Lord Justice Moore-Bick (with whom the other two Lord Justices agreed) concluded that the language of clause 20 is clear and is apt to exclude liability for wasted costs in the form of the spread costs which Providence seeks to recover in this case.
Main Points of the CAâs decisionÂ
Clause 20 - The starting point in construing clause 20 is the language of the clause itself. Clause 20 is different from a typical exclusion clause as the parties are of equal bargaining power and have mutually agreed to accept the risk of consequential loss flowing from each otherâs breaches of contract. The clause is to be seen as an integral part of a broader scheme for allocating losses between the parties as in the knock for knock regime of Clause 18.
Importance of Language chosen by Reasonable Person - Artificial approaches to the construction of commercial contracts are to be avoided in favour of giving the words used by the parties their ordinary and natural meaning [1] given by a reasonable person in their position furnished with the knowledge of the background to the transaction common to them [2]. Particular importance must be given to the language chosen by the parties to express their intentions [3].
Consequential loss - The âcourts are more willing to recognise that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents.â It is doubted whether some of the older cases [4] involving âconsequential lossâ would be decided similarly today.
The rule in Hadley v Baxendale - It was not necessary to discuss whether the clause derogates from one or other or both limbs of the rule in Hadley v Baxendale as the only question was whether its language is apt to encompass the spread costs.
Contra Proferentem Principle - The Judge was wrong to invoke the contra proferentem principle as it was inapplicable in the present case where (a) the meaning of the words in the clause is clear, (b) the mutual clause is between parties of equal bargaining power and it is impossible to distinguish who is the proferens or proferee. By agreeing to clause 20 the parties did intend to give up some of their rights and the only question is whether Providence intended to give up its right to recover damages in the form of wasted or additional spread costs.
Presumption in Mutual Indemnities Clause - The decision in E. E. Caledonia Ltd v Orbit Valve Co. Europe [5] whereby the presumption in mutual indemnities clause is that parties did not intend to release each other from the consequences of negligence is of no assistance as the question is different and one which does not arise in this case.
Ordinary and Natural meaning of words used - The CA disagree with the Judge that subparagraph (ii) of clause 20 should be construed narrowly to limit its scope to specific categories of loss narrowly defined as âit is an incursion into the territory of the first limb of Hadley v Baxendaleâ. They added that the courts should not re-shape the contract but ascertain the partiesâ intention by construing the words they have used their ordinary and natural meaning
Eiusdem Generis - This was also not a proper case for the application of the eiusdem generis principle of construction [6] as the expression âloss of useâ is shaped by its context. The Judge had not given sufficient regard to the words in brackets which follow the expression âloss of useâ or to recognise that the purpose of providing specific examples is to flesh out its meaning.
Loss of Use
Lord Justice Moore-Bick emphasized that the critical words are:
 â ⊠loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption âŠ
Providenceâs counsel submitted that:
(a) The words âloss of useâ which precede the words in brackets limit the scope of the words that follow, so that they must all be understood to refer only to loss of use in the ordinary sense and
(b) The words in brackets are directed to the cost of equipment and services obtained to mitigate the effects of a breach of contract on the part of the contractor which has deprived the company of the use of equipment or services that would otherwise have been available to it.
Lord Justice Moore-Bick disagree and said inter alia that while âLoss of useâ naturally refers to the loss of the ability to make use of some kind of property or equipment owned or under the control of the contractor or the company, as the case may be, the parties have made it clear by the words in brackets that follow that its scope is intended to be wider than that.
The purpose of those words is to explain and expand the simple phrase âloss of useâ by examples expressed in the widest possible way (âwithout limitationâ). Also, the mutual nature of clause 20 and its role as part of the provisions for allocating loss favours an intention to give the words a broad meaning to include wasted spread costs.
Cost of use
The CA rejected the Judgeâs view that the expression âcost of useâ is limited to costs incurred in consequence of, and in order to mitigate, the loss of use of some other property or equipment. They said that clause 20 contains no reference to mitigation and the purpose of sub-paragraph (ii) was clearly to catch consequential losses of all kinds and one obvious example of consequential loss is expenditure on goods or services from which no benefit can be obtained.
 Freedom of Contract
The CA highlighted that the principle of freedom of contract requires the court to respect and give effect to the partiesâ agreement. The CA also referred to the distinction between a clause which purports to relieve one party from all liability for breach of any of its obligations and a clause which excludes all liability for certain kinds of loss and damage. In the former case there may well be a dispute about the true scope of the clause, whereas in the latter the court is concerned to identify the kind of loss to which the clause applies.
 Cases referred to:
[1] Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827
[2] Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 A.C. 1101 to Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619
[3] Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619, paras 15-20
[4] Saint Line v Richardsons Westgarth & Co Ltd [1940] 2 K.B. 99, Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 8 B.L.R. 20 and Deepak Fertilisers Ltd v ICI Chemicals and Polymers Ltd [1999] Lloydâs Rep. 387
[5] E. E. Caledonia Ltd v Orbit Valve Co. Europe [1994] 1 W.L.R. 1515
[6] Eiusdem generis principle of construction is a rule by which general words may be given a limited meaning when they follow a list of specific matters (often causes or events) which can be seen to be of a similar kind.
Some thoughts:Â
There is still no unanimous definition in the English law context for the term âconsequential or indirect lossâ â In this case the ratio of legal minds that differs are 2 to 4 (Transoceanâs Counsel + Mr. Justice Popplewell as against Providenceâs Counsel and the 3 Lords of Appeal).Â
Even though âwasted spread costsâ can presently be excluded by a properly worded consequential loss clause, the saga is far from over as the construction of relevant clause will continue to depend on the language and judicial interpretation of the same. Consequently, the contest of wit between the drafter of such clauses and litigators lingers on.
