The language of an exclusion clause made between commercially equal parties was clear in excluding liability for consequential losses in the form of “spread costs”. Freedom of contract meant the court had been wrong to impose a restricted construction on the clause where the parties had agreed that neither should be liable to the other for consequential loss.
The owner of a semi-submersible oil-drilling rig appealed against that part of a judgment ([2014] EWHC 4260 (Comm)) which had found that the hirer was entitled to recover consequential losses for a period of delay caused by the owner’s failure to provide the rig in good working order.

A defect in the rig caused a delay of 27 days. Clause 18 of the contract contained a complex series of indemnities by which losses were allocated between the two parties, and cl.20 contained mutual undertakings by the owner and the hirer to indemnify each other against its own consequential losses. The contract thus contained a sophisticated scheme for apportioning responsibility for losses of all kinds, backed by insurance. The “spread costs” which the hirer sought to recover, were the wasted costs of third party equipment and services which had been supplied and paid for. The issue was whether the wasted spread costs incurred by the hirer as a result of the owner’s established breaches of contract were “consequential losses” within the meaning of cl.20. The terms of the clause, the nature of the costs, and the circumstances in which they came to be incurred suggested they were, but the judge held otherwise as a result of the application of various principles which the courts had adopted over the years to assist in the construction of exclusion clauses. 

The hirer submitted that (1) the judge erred by applying those principles incorrectly and without having adequate regard to the specific words that the parties had chosen to use; (2) it was entitled to recover spread costs by setting them off against hire pursuant to the contract.

HELD: (1) Consequential loss:

Clause 20 was not a typical exclusion clause by which a commercially stronger party sought to exclude liability for its own breaches of contract. The parties were of equal bargaining power and had freely entered into mutual undertakings to accept the risk of consequential loss flowing from each other’s breaches of contract. The purpose of the words “loss of use” in cl.20 was to expand it to include the costs of services from third parties. Its mutual nature showed an intention to give the words a broad meaning which was apt to include wasted “spread costs” (see paras 14-18 of judgment).

The judge had been wrong to invoke the contra proferentem principle. That principle was appropriate when the language chosen by the parties was one-sided and genuinely ambiguous, in order to enable the court to choose the meaning that was less favourable to the party who had introduced the clause, or in whose favour it operated. It was inappropriate where the meaning of the words was clear, or where a clause favoured both parties equally, especially where they were of equal bargaining power (para.20).

Where the language of an exclusion clause left doubt as to its meaning, and appeared to denude a contract of any meaningful obligations, then it might on principle be “a mere declaration of intent” rather than a contract, Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 A.C. 361 followed and Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38, [2013] 2 Lloyd’s Rep. 270 considered. However, that principle was one of last resort and applied only where the effect of a clause was to relieve one party from all liability for breach of any of the obligations which he has purported to undertake, Great North Eastern Railway Ltd v Avon Insurance Plc [2001] EWCA Civ 780, [2001] 2 All E.R. (Comm) 526 applied. Under the instant contract, direct loss was recoverable so cl.20 did not deprive it of all legal content (paras 27-35). One of the striking features of the instant contract was the extent to which the parties had agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract, and it was difficult to see why the court should not give effect to their agreement. The language of cl.20 was clear and excluded liability for wasted costs in the form of the spread costs which the hirer sought to recover. The principle of freedom of contract required the court to give effect to the parties’ agreement (paras 28-35).

(2) Set off:

This ingenious argument was unacceptable. Clause 13.8 did not give rise to substantive rights but merely provided machinery for the hirer to withhold disputed sums pending resolution of a dispute. Clause 20, on the other hand, did give rise to substantive rights, so the right to withhold payment under cl.13.6 could not be given priority over the right of indemnity. Even purely in terms of equitable set-off it was necessary for the hirer to have a right to recover a sum of money, whether a debt or damages, but the effect of cl.20 was to eliminate any such right (paras 40-41).

Appeal allowed

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