If you are drafting a commercial contract for a supplier or contractor you will often have to seek to exclude or limit liability as far as (commercially and legally) possible. But, in common law situations you cannot simply use general wording to deal with liability. You must be precise and detailed in the wording to effectively exclude liability.
This fact was again clearly illustrated in a recent decision from the Court of Appeal in England. The question considered in Transocean Drilling UK Ltd v Providence Resources Plc ,  EWCA Civ 372 (April 2016) related to how “loss of use” was to be interpreted.
The customer in the case (Providence) hired the contractor (Transocean) to drill a test well in a potential oilfield. The work was suspended because of difficulties with the drilling rig supplied by Transocean. The resulting delay caused several disputes between the parties, including, in particular, the issue of whether the contract wording allowed Providence to recover additional overheads ( so-called “spread costs”) resulting from the delay under the concept of loss of use. “Spread costs” included items such as costs for hiring equipment and services contracted from third parties. In the present case, the third party equipment and services were made available but could not be effectively used as intended as a result of the Transocean delays. Nevertheless, Providence still had to pay for these third party goods and services. The particular wording in the contract was:
[Neither party shall not be liable for…]
(i) any indirect or consequential loss or damages under English law, and/or
(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, 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, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests….
In the first instance the High Court held that Transocean’s liability for spread costs (i.e. unused third party goods and services) was not excluded because:
- the exclusion clause should be interpreted against Transocean as it was the party seeking to rely on it (i.e. the clause should be interpreted contra proferentum).
- therefore, the reference to loss of use should be interpreted to mean only “loss of expected profit or benefit to be derived from the use of property or equipment”.
- in this case, according to the judge, Providence did not lose use of the property or equipment under the spread costs; this third-party property and equipment remained available to it (which is why Providence incurred wasted expenditure in paying for the unused equipment). As a result, the spread costs did not fall within the meaning of “loss of use” and liability was, as a result, not excluded.
However, the Court of Appeal disagreed stating that Transocean’s liability was covered by the clause (and therefore excluded) for the following reasons:
- any interpretation of the exclusion clause must be according to common sense and the natural and ordinary meaning of the language itself.
- the contra proferentem principle should not have been used in this case because
- the meaning of the words in the exclusion clause was clear;
- the parties were of equal bargaining power;
- the exclusion clause was bilateral (i.e. it did not favour any particular party);
- having regard to the above, “loss of use” may refer only to a loss of expected profit or benefit to be derived from the use of property or equipment (as suggested by the High Court judge), in this case, however, specific examples were given in the brackets following “loss of use”. The purpose of these examples was clearly to detail and illustrate the meaning of “loss of use” and expand it to include expenditure wasted due to unused property or equipment provided by third parties. Thus, this wording covered (and therefore excluded liability for) the so-called spread costs.
This case shows that, unless the specific circumstances require otherwise, generally the courts will try to interpret wording in accordance with the intention of the parties. But, in order to do so, the guidance of precise and detailed language (with concrete examples where necessary) is essential. General principles alone are not enough.