Parties to drilling contract entitled to allocate risk as they see fit

13/04/16

The Court of Appeal has today upheld an appeal from a judgment of Popplewell J concerning the construction of certain exclusion clauses in an offshore drilling contract.

The semi-submersible drilling rig “Arctic III” was provided by Transocean Drilling UK Ltd to Providence Resources plc for the purposes of drilling an exploratory well offshore from Ireland. The project was subject a period of downtime of some 27 days when repairs to the Rig were required, which were held to have been caused by maintenance failures.

Providence pursued a claim in damages in respect of its ‘spread costs’ during the period of downtime. (‘Spread costs’ is the industry term for the costs of services and equipment provided to rig operators, such as well logging, geological services, weather services, divers and so on.) The lost spread costs over the period of downtime amounted to approximately $7 million. 

Popplewell J held that Providence was entitled to maintain this claim, notwithstanding a provision of the contract which expressly excluded liability in respect of “loss of use or the cost of use of property, equipment, materials and services including … those provided by contractors or subcontractors … or by third parties”. In doing so he upheld Providence’s submission that if the clause was given the construction for which Transocean contended, the contract would effectively be reduced to a mere declaration of intent.

The Court of Appeal disagreed. It held that there were various provisions of the contract (such as the knock-for-knock provisions) which would continue to have legal effect, irrespective of the meaning of the exclusion clause, and that the exclusion clause was not apt to cover a deliberate repudiation. The Court of Appeal also expressed the view, however, that even if as a result of the incorporation of several exclusions of liability, the parties had agreed to exclude all liability in damages for any breaches, the Court should give effect to that agreement. Commercial parties were “free to embark on a venture of this kind on the basis of an agreement that losses arising in the course of the work will be borne in a certain way, and that neither should be liable to the other for consequential losses, however they choose to define them”. It was not for the Court to make for the parties a different agreement than the one they had made for themselves, and there was no justification for adopting a strained construction of the contractual language.

The judgment can be found here.