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Court allows drilling contractor the benefit of an exclusion of liability for spread costs

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Summary: The Court of Appeal has overturned the High Court’s decision in Transocean Drilling UK Ltd v Providence Resources plc [2014] EWHC 4260, by deciding that a consequential loss exclusion clause prevented a claim for spread costs from being brought against a drilling contractor. This decision has immediate implications for oil services contracts.

The UK Court of Appeal has overturned the High Court’s decision on spread costs in the case of Transocean Drilling v Providence Resources [2014] EWHC 4260.

In its decision ([2016] EWCA Civ 372), the Court of Appeal confirmed that the consequential loss exclusion set out in the drilling contract between the parties (an adapted LOGIC form) was sufficient to exclude Transocean’s liability for spread costs.

The decision also strongly indicates that the courts should, in future, give effect to the intentions of the parties in similar circumstances and avoid overly narrow interpretations of liability regimes that would be inconsistent with this.

This decision is significant for all oil and oilfield services companies. It has immediate implications for the drafting of drilling and other services contracts and is likely to be cited regularly in disputes concerning the exclusion of consequential loss and the application of “knock for knock” liability regimes.

Background

  • The case concerned a contract for the drilling of an appraisal well, offshore Ireland.
  • During the period of the contract, there was a delay of over 27 days due to Transocean’s breach of contract and a dispute arose as to the entitlements of the parties in relation to the period of delay.
  • A key issue in this dispute was whether Providence was entitled to recover its “spread costs” incurred during this period. 

What are “Spread Costs”?

  • The “spread costs” claimed by Providence were the costs of personnel, equipment and services contracted from third parties which were wasted as a result of the delay.
  • Examples included well logging, well testing and cementing, mud engineers and mud logging services, geological services, diving and ROV (remotely operated vehicle) services, weather services, directional drilling services, and running casings.

What was the Court’s Decision?  

In a nutshell, the Court of Appeal decided that the words used in the contract clearly excluded Transocean’s liability for spread costs.

Those words, in the definition of “Consequential Loss”, were as follows:

"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…"

This decision will come as a relief to many drilling and oilfield services companies who had, following the previous High Court decision, questioned how they could be any more clear in excluding liability for spread costs.

While largely decided on the clear words of the contract, the decision also considered (and dealt with) the various legal arguments favoured by the judge in the High Court and advanced by counsel in the appeal. This all makes for interesting reading for lawyers, but is ancillary to the key thrust of the judgment, which is that the court considered the intended meaning of the clause to be clear and was prepared to give effect to this.

More generally, and of broad importance to oil and oilfield services contracts, the court also made the following comments:

"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.

I can see no reason in principle why commercial parties should not be 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."

What does this mean for Companies and Contractors?

  • Clear words should be used to set out precisely which types of losses are excluded in any particular contract.
  • As far as spread costs are concerned, the formulation from this case may be used as a base and seems likely to be improved upon, perhaps by including specific reference to “spread costs”.
  • When tendering and contracting, both Contractor and Company need to be absolutely clear as to who will bear responsibility for spread costs. This risk can then be priced and, where appropriate, managed in the contracts with subcontractors.

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