Transocean Drilling UK Limited v Providence Resources PLC [2016] EWCA Civ 372

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This case involved a claim for loss of use by Providence of oil exploration rigs off the coast of Ireland.  Despite the somewhat uninspiring facts, the key question for determination revolved around an issue of concern to all IT and commercial lawyers;  did the construction of the exclusion clause work to exclude Providence's claim?

At first instance, the judge held it did.  In the Court of Appeal, that decision was reversed.  In doing so, the Court of Appeal provided guidance on a number of points relating to interpretation of exclusion clauses.

1.  Contra Proferentem – the interpretation of exclusion clauses.  Until recently, most lawyers would have assumed exclusion clauses should be construed contra proferentem, that is against the party seeking to rely on it.  That was also the interpretation given by the judge at first instance.  In the Court of Appeal,  Lord Justice Moore Bick, who gave the leading judgement (with whom the others agreed), noted that :

(a)          the agreement was a sophisticated arrangement which was drawn up for parties of equal bargaining power.  The exclusion clause in particular, was one which benefitted both parties, further it was part of a series of cross indemnities which was an integral part of a scheme for allocating losses between the parties.  As such, it was not a simple exclusion clause. 

(b)          In any case, since Photo Productions v Securicor courts have recognised the need to avoid artificial interpretations in favour of giving words their ordinary and natural meaning.  This approach has recently been confirmed by the Supreme Court in Arnold v Britton, which emphasised the need to give particular importance to the language used by the parties to express their intentions.

The Court of Appeal noted:

"…the judge was wrong to invoke the contra proferentem principle in this case. It is an approach to construction to which resort may properly be had when the language chosen by the parties is one-sided and genuinely ambiguous, that is, equally capable of bearing two distinct meanings….. It has no part to play, however, when the meaning of the words is clear, as I think they are in this case; nor does it have a role to play in relation to a clause which favours both parties equally, especially where they are of equal bargaining power. "

2.   Redefining Consequential Loss.  The exclusion clause in the agreement took the approach of specifically defining what was meant by consequential loss.  In this context, the trial judge referred to "a specifically defined incursion into the territory of the first limb of Hadley v Baxendale",  which should be narrowly construed to limit its scope to specific categories of loss narrowly defined rather than being treated as a widespread redefinition of excluded loss.   The Court of Appeal took the view that such a construction had no foundation in law and was expressly disapproved: 

"Such an approach would be appropriate only if there were grounds for seeking by means of construction to reduce the scope of the clause beyond that which the parties had agreed. As I have already said, however, the court's task is not to re-shape the contract but to ascertain the parties' intention, giving the words they have used their ordinary and natural meaning."

3.  Application of the ejusdem generis principle – that is the 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.  At first instance, the trial judge used the ejusdem generis principle to construe what was meant by "loss of use".  The relevant clause referred to:

"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)."            

It was suggested that because the words in brackets were "included" within loss of use, then everything within the brackets had to be a type of loss of use.  The Court of Appeal rejected this approach:

"I think it is wrong to treat the words in brackets as limited by the general expression; their purpose is clearly to explain and amplify the meaning of that expression."

In particular, the use of "without limitation" seems to have worked to reject any suggestion that the ejusdem generis rule should apply.

4.            Consequential and indirect loss.  It is worth noting in passing a comment made in relation to a long established line of cases which have been used to define what is meant by consequential and indirect loss.  The Court of Appeal stated:

"It is questionable whether some of those cases would be decided in the same way today, when courts 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."

Does this suggest a reconsideration of the meaning of indirect and consequential loss may not be too far away?  If this is the case, it makes all the more sense to define what we mean by indirect and consequential loss in our agreements and likewise, as is very common in IT contracts, to define precisely what we mean by direct loss or losses which are recoverable.

5.            Freedom of Contract.  Finally it is worth noting the emphasis placed by the Court of Appeal on freedom of contract.  In the view of the Court of Appeal, this meant that if for example the parties had expressed their intention in the contract that neither party should have any liability under it, the court would be obliged to give effect to that intention:

"The principle of freedom of contract, which is still fundamental to our commercial law, requires the court to respect and give effect to the parties' agreement. One of the striking features of this contract, to which I have already adverted, is the extent to which the parties have agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract. If, as a result of incorporating several different provisions of that kind, the parties have effectively agreed to exclude any liability for damages for any breaches, it is difficult to see why the court should not give effect to their agreement."

The approach taken in the Court of Appeal is similar to that taken by the TCC recently in Persimmon Homes v Ove Arup & Partners.  In that case the court noted:

(a)          the rules of interpretation of exclusion clauses is essentially the same as that for any other provision of the agreement;

(b)          the purpose of construction is to determine "what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant;" and

(c)           the contra proferentem rule should be used only where there is ambiguity in circumstances where the usual process of interpretation has not been sufficient to enable the true meaning to be determined.  In that sense it is a measure of last resort only.