The recent English High Court case of Transocean Drilling UK Limited v Providence
Resources Plc[1] has raised important general issues in relation to the court’s interpretation of various commonly used contractual provisions and the application of exclusion and indemnity clauses which are relevant to contractors in the offshore industry.
The dispute arose due to disagreement between Transocean and Providence Resources as to the financial consequences of delays to the Transocean rig “Artic III”, caused by problems with the subsea well control equipment. The rig was to perform drilling services in the Barryroe Field off the south coast of Ireland under a contract based on the LOGIC standard form.
Transocean brought a claim against Providence for US$13 million and GBP3.5 million for unpaid day rates. Providence denied liability and counterclaimed for US$10 million for wasted “spread costs” of personnel, equipment and services, and argued that Transocean had failed to adequately maintain the rig in breach of the terms of the drilling contract.
Transocean argued that it was only required to use “due diligence” and/or “reasonable care” to maintain the rig, which it had done. Transocean further contended that under the contract it was entitled to be paid the contractual day rate irrespective of whether it had committed breaches of contract which caused delays. In relation to the claim for spread costs Transocean argued inter alia that these were irrecoverable by virtue of the consequential loss exclusion clause.
THE JUDGMENT
The Judge made it clear that in interpreting the contract he would give no “special treatment” to drilling contracts (or other offshore contracts) over other contracts for goods and services, and that drilling contracts remained subject to the usual principles of contractual construction.
Following such principles, the judge held that the contract’s remuneration scheme did not, as Transocean contended, provide for a complete code where one of the specified rates would be applicable irrespective of a breach of contract by Transocean. Absent clear wording to the contrary there was a presumption that Transocean would not be paid anything for periods of delay caused by its own breach of contract, i.e. Providence would not be assumed to have agreed to “pay something for nothing”. The reference in the contract to a repair rate covering “any
failure of [Transocean’s] equipment” was not sufficient to oust this presumption. This analysis is likely to be of concern to rig owners (and their financiers) who have previously proceeded on the understanding that payment of day rates (albeit at reduced levels) continues notwithstanding a breach of contract by the contractor.
Equally of concern are the judge’s findings in relation to Transocean’s maintenance obligations. He held that pursuant to the standard LOGIC wording the warranty of condition at delivery was an absolute warranty which would be breached if there was a subsequent breakdown or malfunction of the rig which was not caused by “some abnormal operation of the Rig or some supervening causative event”. This seems a particularly extreme result when one considers the toll that can be exacted on drilling rigs during lengthy drilling programmes in harsh
environments, and will severely limit the contractor’s ability to avoid liability for rig down-time caused by equipment or machinery failures. The judge also held that the maintenance obligation was a continuing warranty to maintain the condition of the rig and not simply an obligation to exercise due diligence as Transocean had argued. Following this analysis the judge held on
the facts that Transocean was in breach of its warranty obligations and that the breach had caused the delays.
The judge rejected Transocean’s arguments that the claims for wasted spread costs were
claims for Consequential Loss which was excluded under clause 20 of the contract. This clause was an amended LOGIC clause providing that neither party would be responsible to the other for inter alia: “….loss or deferment of production, loss of product, loss of use (including without limitation, loss of use or the cost of use of the property, equipment, materials and services
including, without limitation, those provided by contractors or subcontractors of every tier or third parties)…”. The judge held that (1) “loss of use” referred to loss of expected profit or benefit derived from the use of the equipment, materials or service and (2) the additional wording in brackets did not assist Transocean as it related only to equipment specifically hired in by
Providence to mitigate the loss of benefit caused by Transocean’s breaches of contract. He found support for this view from the fact that on Transocean’s reading of the clause it was unable to demonstrate that it would have any liability to Providence for breach of its warranty obligations.
These findings have significant implications for offshore contractors given the potential
exposure to costs that could arise following a delay on a project caused by a breach of contract – a possibility enhanced by a strict interpretation of the contractor’s maintenance obligations.
CONCLUSION
It is possible that certain aspects of the judgment will be appealed but it nevertheless makes
important reading. The judge considered that Transocean as an experienced contractor should have been aware and taken notice of relevant court decisions when drafting and negotiating its contracts and a failure to do so will be no defence. Whilst it may be difficult to achieve in the current market, offshore contractors should seek to minimise the impact of the Transocean judgment through making appropriate amendments to the relevant contractual clauses.