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Session 2001- 02
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Judgments - Caledonia North Sea Limited (Respondents) v British Telecommunications Plc (Appellants) (Scotland) and Others


Lord Bingham of Cornhill Lord Mackay of Clashfern Lord Nicholls of Birkenhead Lord Hoffmann Lord Scott of Foscote









[2002] UKHL 4


My Lords,

    1. The explosive conflagration which destroyed the Piper Alpha oil platform on 6 July 1988 cost the lives of many men and injured many others. The claims made by and on behalf of the victims were fully settled years ago. These proceedings are the contractual aftermath of those settlements, brought to decide who, as between the operator of the platform and the contractor who employed each individual victim, must bear the financial cost of the settlements. As my noble and learned friend Lord Mackay of Clashfern has explained in his summary of the facts, history and issues relevant to these appeals, which I gratefully adopt and need not attempt to repeat or elaborate, only one of seven test cases originally selected for decision is now live before the House.

    2. Operations to exploit the oil and natural gas resources of the North Sea have two prominent features relevant for present purposes. First, such operations are potentially hazardous. It is generally true, as the Lord Ordinary in his judgment said of Piper Alpha, that

    "it is plain beyond doubt that an Oil Platform is a dangerous place unless careful and proper safety precautions are taken. The platform holds contained under pressure large quantities of gas and liquid hydrocarbon material which is explosive, very flammable and most dangerous if control of it is lost. [The president and managing director of the operator] described the operations as being 'potentially hazardous'. This was well recognised before the accident."

The second feature worthy of note is the involvement of many contractors and sub-contractors. This is exemplified by the present case. As Lord Mackay has noted, the Piper Alpha disaster led to claims against 24 different contractors. Of those on board the platform who were killed, 134 were employed by contractors and 31 by the operator. Of those who survived, 55 were employed by contractors and 6 by the operator.

    3. These features are not unique to North Sea oil exploitation. They are also to be found, to a greater or lesser extent, in the nuclear power industry. But the regulatory regime governing the two industries has been very different.

    4. The Nuclear Installations (Licensing and Insurance) Act 1959 made provision for the licensing of nuclear installations, required licensees (but not the Atomic Energy Authority or government departments) to provide cover to meet claims by insurance or otherwise (sections 5 and 9), imposed a strict liability on licensees to secure that no ionising radiations were emitted (section 4(1)) and stipulated that "no person other than the licensee shall be under any liability in respect of any hurt to any person or any damage to any property caused by any ionising radiations to which subsection (1) of this section applies" (section 4(2)). The purpose of this provision and of the governmental exception was explicitly stated by the minister when introducing the bill in the House of Lords (HL Deb, 13 November 1958, cols 504-505, 509):

    "The object of these provisions is to facilitate the settlement of claims, first by ensuring that all claims are channelled to the licensee, thus avoiding a multiplicity of claims between, for example, injured persons and contractors or one contractor and another; and, secondly, by requiring the claimant to prove only that the cause of the injury or damage was radio-activity from the licensee's reactor. The claimant is thus spared the difficult, if not impossible, task of proving that the licensee was negligent in allowing the radio-activity to be given off . . . Unlike licensees, the Authority and Government Departments will be liable even where the injury or damage is attributable to enemy action. On the other hand, they will have a right to sue a contractor whose negligence has given rise to third-party claims against them. It has been necessary to extinguish this right in the case of a licensee in order to avoid litigation which would arise if insurers or other financial guarantors of a licensee tried to exercise any rights they might have against contractors or sub-contractors responsible for building reactors or supplying parts. But the Authority or a Government Department does not normally insure, and, seeing that the taxpayers' money is involved, it is considered proper that in their case the right to sue a negligent contractor should be preserved."

This broad approach was reflected in international conventions made in Paris (1960), Brussels (1963) and Vienna (1963). There followed the Nuclear Installations (Amendment) Act 1965 and the law was consolidated in the Nuclear Installations Act 1965. This revoked the distinction between governmental operators and other licensees (sections 7 to 9), but continued to lay a strict duty on the licensee (section 7) and continued to provide that no liability should fall on any party other than, in effect, the licensee (section 12(1)(b)). The licensee was still obliged to provide cover against claims by insurance or otherwise up to a specified limit (section 19), but there was still to be no right of subrogation. Thus standard forms of nuclear insurance contain a waiver of any subrogation rights by the insurers (Tromans and Fitzgerald, The Law of Nuclear Installations and Radioactive Substances, (1997), pp 146, 149, paras 3-56, 3-60).

    5. Oil exploration in deep offshore waters developed in the early 1960s, at first in the Gulf of Mexico. Operations in the North Sea followed soon after. In December 1965 the offshore self-elevating barge SEA GEM collapsed, capsized and sank some 40 miles east of the mouth of the River Humber. An inquiry was held and in the report which followed (1967) (Cmnd 3409), it was recommended that there be a statutory code supported by credible sanctions to regulate the management of drilling rigs and similar structures offshore (p 24, para 10.2(i)). Effect was given to this recommendation in the Mineral Workings (Offshore Installations) Act 1971. This provided for the appointment of a manager of every offshore installation (section 4(1)), who was to have general responsibility for matters affecting safety, health and welfare (section 5(2)), and the secretary of state was empowered to make regulations for the safety, health and welfare of persons on offshore installations (section 6(1)). The breach of a statutory duty imposed by the Act, if causing death or personal injury, was to give rise to civil liability (section 11). In exercise of his power under section 6 and other provisions, the secretary of state made the Offshore Installations (Operational Safety, Health and Welfare) Regulations 1976 (SI 1019/1976), which imposed duties on the operator of any installation and on the employer of any employee and on "every person while on or near an offshore installation" to comply or ensure compliance with the safety regulations.

    6. When contrasted with the statutory regime applicable to nuclear installations, that applicable to offshore installations displays one important common feature: the operator is answerable for almost any safety failure causing death or personal injury, as the licensee is generally liable for death or personal injury caused by radioactivity. But there are two differences: the operator of an offshore installation is not, like the licensee of a nuclear installation, obliged (save in his capacity of employer) to provide cover against claims by insurance or otherwise; and there is no statutory inhibition of any right of indemnity or subrogation which might arise between the operator or the operator's insurer and any other party.

    7. As would be expected, a market practice has developed to take account of the peculiar features of offshore operations. The standard practice during construction is thus described by Sharp, Offshore Oil and Gas Insurance (1994), p 108:

    "(iv)  Injury or Death of Employees

    The position in respect of employers' liability is invariably dealt with by the exchange of mutual indemnities in respect of injuries to or deaths of employees. There is perhaps a simple reason for this. If an individual is injured he will expect to have a right to sue any party who may have been guilty of negligence leading to the circumstances which caused the injury. This party may be another contractor, the Principal or his employer, or any combination of all three. The issue can become complicated by reason of contributory negligence. Determining liability and awarding costs can be a lengthy process in these circumstances, and this can only add to the anguish of the injured party, or the dependents of the deceased who may have been the sole breadwinner. The employer therefore accepts a responsibility to provide for his employees and will generally give the party with whom he is contracting a full indemnity in respect of any suit or action brought against that other party."

A similar practice is customary when the installation has become operational see Sharp, p 277:

    "Again, in an offshore context, the liability of an oil company for loss of life or personal injury is invariably going to be governed by a contract, either with another party carrying out services in or about the installation or drilling rig, or with an employee, or a party providing consultancy services. It is usual for such contracts to leave the responsibility for damages or compensation with the party employing the injured person. Nevertheless there are many situations where a genuine third party position will exist. A contractor's employee, if injured on a platform as a result of an incident for which he was, himself, blameless, will have an action for damages against the platform owners. The platform owners may, in turn, be indemnified by the contractor, but in the first instance the action lies against the platform owners. Such a position arose in the case of the 'Piper Alpha' casualty, as a result of which compensations were sought from the Operator and its co-venturers for significant amounts. A third party position will also exist as between one contractor's employee and another."

These passages were published before judgment had been given by the Lord Ordinary in these proceedings.

    8. A similar account is given by Daintith and Willoughby, Manual of United Kingdom Oil and Gas Law 2nd ed, (1984), pp 171-172, para 1-845 in a passage describing the operator as "the client":

    "The client will, in any event, normally carry insurance cover for his own employees and his own property and the cost of this insurance would not be reduced if the particular contractor was also required to be insured against the same risks. It is thus normal for the client and the contractor to assume full liability, and give each other mutual indemnities, for claims arising out of death of or injury to their own employees and for loss or damage to their own property . . ., regardless of any negligence or default on the part of the other party or its employees, agents or sub-contractors. It will however, normally be provided that neither the contractor nor the operator will be liable to the other for loss of use of the other's property or any loss of profit or other consequential loss of the other".

Liability for third party claims may also be assumed by either the client or the contractor, though in this case there is commonly an exception to the extent of the negligence of the other; and sometimes the exception is expressed to apply only in the case of the sole negligence of the other (Daintith and Willoughby, p. 172, para 1-846 and footnote 1).

    9. Thus, if a contractor's employee is killed or injured on an offshore installation it would be natural to expect a claim by or on behalf of the victim against the operator, as the party with overall responsibility for safety, followed by a claim by the operator (or the operator's insurer) against the contractor under the indemnity given by him to the operator. That such a course of events is not unusual elsewhere is shown by Fontenot v Mesa Petroleum Co (1986) 791 F 2d 1207, 1209 where Judge Brown, sitting in the US Court of Appeals for the Fifth Circuit, said:

    "This case vividly illustrates how, in the complicated offshore drilling environment with its intricate divisions of responsibility and countless contractors and subcontractors, a simple slip-and-fall can turn into a multiparty morass of contribution cross-claims, third- and fourth-party defendants, reciprocal indemnity agreements, and the ever-popular warranties of workmanlike performance. The plaintiff in this litigation has long since settled and departed but the other parties have chosen to remain on the field of battle to contest the appropriate share of the plaintiff's settlement to be borne by each of them."

At p 1216 he further said:

    "A policy analysis also supports this result. The purpose of the reciprocal indemnity agreement in the Mesa-Rowandrill contract, as it is in so many similar oilfield service contracts, is to divide the responsibility for personal injury/death among the many employers and contractors according to the identity of the injured employee rather than according to which party's fault or negligence caused the injury. In effect, each party assumes the risk of the other's negligence and agrees to be responsible for injuries to its own employees no matter how, or by whom, caused. The purpose of describing the classes of persons in the indemnification provisions is to define those employees for whom each party assumes the risk of injury."

The first issue: construction

    10. In common with the Lord Ordinary, all four judges of the Inner House and all members of this House, I am of the clear opinion that clause 15(1)(c) of the Norton (No 2) contract (cited by my noble and learned friend Lord Mackay) must be construed in the sense contended for by the operators. That is the plain meaning of the words used. It reflects the practice which has developed among those undertaking offshore oil operations. It is understandable that the right to indemnity should be excluded where the negligence or breach of statutory duty of the party seeking indemnity was the sole cause of the death or injury, but that is the limit of the derogation from the rule that each party, operator or contractor, assumes the ultimate responsibility for compensating its own employees regardless of fault. It is a little unclear why the opening paragraph of clause 15(1) was included in the contract at all, but that may explain why a number of contracts omitted it. While one might have expected the operator to require the contractor to insure against any potential liability under the contract, it seems plain that clause 16 (cited by my noble and learned friend) was drafted to give effect to the operator's obligation under the Employers' Liability (Compulsory Insurance) Act 1969 and regulation 6 of The Offshore Installations (Application of the Employers' Liability (Compulsory Insurance) Act 1969) Regulations 1975 (SI 1289/1975).

The second issue: subrogation

    11. I am in full agreement with the conclusions expressed by Lord Mackay on the second (subrogation) issue. The law has long been settled in England and Wales, as (I understand) in Scotland, that an insurer who has fully indemnified an insured against a loss covered by a contract of insurance between them may ordinarily enforce, in the insured's own name, any right of recourse available to the insured: see Randal v Cockran (1748) 1 Ves Sen 98; Mason v Sainsbury (1782) 3 Dougl 61, which Lord Mackay has cited; London Assurance Company v Sainsbury (1783) 3 Dougl 246; Yates v Whyte (1838) 4 Bing NC 272; Dickenson v Jardine (1868) LR 3 CP 639. On an appeal to the House of Lords from the Court of Session in Simpson & Co v Thomson (1877) 3 App Cas 279, 286 Lord Cairns LC reviewed several of these authorities and concluded:

    "My Lords, these authorities seem to me to be conclusive that the right of the underwriters is merely to make such claim for damages as the insured himself could have made, and it is for this reason that (according to the English mode of procedure) they would have to make it in his name; . . ."

In Castellain v Preston (1883) 11 QBD 380, 388 Brett LJ, in his classical exposition of the law, was at pains to emphasise the amplitude of the insurer's right, giving him

    "the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable . . .".

More recently, Lord Templeman restated the principle in Lord Napier and Ettrick v Hunter [1993] AC 713, 732. When the law of marine insurance was codified in the Marine Insurance Act 1906, the relevant rules were expressed in sections 79 and 80, which provide:

    "79(1)  Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.

    (2)  Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.

    80(1)  Where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract.

    (2)  If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the debt."

Although applicable in terms only to marine insurance, these sections express more general principles. And the argument for the contractor seeks to build upon them. In very simplified form the argument runs like this. A claim was made against the operator for the death of Mr Pyman, an employee of the contractor. It was settled by the operator's insurers. The operator itself therefore suffered no ultimate loss and has no claim to be pursued in its name against the contractor. The operator's insurers may have a claim to contribution against the contractor as another party liable (with the insurer) to indemnify the operator but that is not a subrogated claim to be pursued by the insurer in the name of the operator but a claim to contribution from a co-indemnifier to be pursued by the insurer in its own name.

    12. The right of an insurer who has paid a claim to seek contribution from other insurers of the same risk on the same interest in the same property is clearly established: see MacGillivray on Insurance Law, 9th ed, (1997), p 573, para 23-1; Arnould, Law of Marine Insurance and Average, 16th ed (1981), vol 1, p 283, para 407. It is equally clearly established that a surety who is obliged to pay the debt owed by the debtor to the creditor is entitled to contribution from his fellow co-sureties: Rowlatt on Principal and Surety, 5th ed (1999), p 164, para 7-45; Andrews & Millett, Law of Guarantees, 3rd ed (2000), pp 391-392, para 12.01: English Private Law, edited by Birks, (2000), vol 1, Chap 5 ("Security", Lionel Smith), p 463, para 5.176. The question at the heart of this issue in the appeal is, as it seems to me, this: is the present claim, as the operator contends, a subrogated claim properly made in its name by its insurer (who has indemnified it under a policy of insurance) to enforce a contractual right of the operator against the contractor? or is it, as the contractor contends, a claim for contribution by one party liable to indemnify the operator against another?

    13. I am clearly of opinion that the operator's contention is to be preferred, for the reasons given by the judges of the Inner House and also by Lord Mackay. The operator was not obliged to insure itself against adverse claims. Thus the existence of such insurance, prudent though no doubt it was in business terms, is irrelevant to the mutual obligations of the operator and the contractor; in technical language, it was strictly res inter alios acta. It would be wholly anomalous if the operator's voluntary decision to insure itself against the risk to which it was exposed should operate to the advantage of the party against whom its contractual claim for indemnity lay (a party not involved in the decision to insure and not responsible for payment of any part of the premium). The contractor's contention would also, as it seems to me, disturb the very clear apportionment of risk for which the parties have provided by their contract. As already noted, the legislature has not sought in this field to restrain the pursuit by insurers of subrogated claims.

    14. When, in Mason v Sainsbury (1782) 3 Dougl 61, 64, Lord Mansfield CJ asked "Who is first liable?" his question was directed not to any issue of chronology but to establishing where the primary responsibility lay to make good the loss. The terms of the Riot Act 1714 made plain that the primary responsibility lay with the inhabitants of the hundred, and it mattered not that the insurer had indemnified the insured. So in the present case: the contract between the parties and the commercial scheme of which it was part make it plain that primary liability was to fall on the contractor, just as in North British and Mercantile Insurance Company v London Liverpool and Globe Insurance Company (1877) 5 Ch D 569, on very different facts, it was held that the loss should be borne by the wharfinger's insurer because "the primary liability" (per Baggallay JA at p 587) was that of the wharfinger.

    15. The researches of counsel have not disclosed any Scots or English case in which any contention at all similar to the contractor's in this case appears to have been advanced. But courts in the United States have been asked to consider a similar contention. The American cases must be approached with a measure of reserve since courts have on occasion applied a principle of superior equity which has no counterpart in our law. It is nonetheless clear that courts of high standing have adopted an approach close to that outlined in the foregoing paragraphs. In Hall & Long v The Railroad Companies (1871) 80 US 367 Strong J, giving the opinion of the Supreme Court of the United States, said at p 370:

    "It is too well settled by the authorities to admit of question that, as between a common carrier of goods and an underwriter upon them, the liability to the owner for their loss or destruction is primarily upon the carrier, while the liability of the insurer is only secondary. The contract of the carrier may not be first in order of time, but it is first and principal in ultimate liability."

In Chicago St Louis & New Orleans Railroad Co v Pullman Southern Car Co (1891) 139 US 79 at 88 the liability of the railroad company was described as "in legal effect, first and principal" and that of the insurer as "secondary, not in order of time, but in order of ultimate liability". In FH Vahlsing Inc v Hartford Fire Insurance Co (1937) 108 SW 2d 947, 950 the Court of Civil Appeals of Texas adopted a statement in 26 Corpus Juris to this effect:

    "The right of subrogation is not limited to cases where the liability of the third person is founded in tort; but any right of the insured to indemnity will pass to the insurer upon payment of the loss."

In Meyer Koulish Co v Cannon (1963) 28 Cal Rptr 757, 762 a District Court of Appeal in California observed:

    "Appellants were parties to an express contract whereby they assumed responsibility for the loss of the goods of respondents. They thereby accepted primary liability and it cannot be said that appellants stand on equal footing with the insurance company. The equities in this matter do not balance but preponderate in favor of the insurer of the bailor."

The Supreme Court of Washington expressed the point very clearly in Consolidated Freightways Inc v Moore (1951) 229 P 2d 882, 885.

    "That insurance company recoveries, under their right of subrogation, most often flow from tort actions is quite natural, but without significance. Subrogation is an equitable principle and applies to contract rights as fully as it does to tort actions.

    By his contract the appellant bound himself to pay the loss. Respondent has a contractual right to recover it from him. This cause of action is not defeated by the insurance company's payment of the judgment. The insurer is subrogated to appellant's contract right of indemnity. This sustains the cause of action against appellant for the identical reason that subrogation sustains a tort action where the plaintiff has been paid for his loss."

A similar ruling was made in North Central Airlines Inc v City of Aberdeen, South Dakota (1966) 370 F 2d 129, a decision of the United States Court of Appeals.

    16. Reference was made to Albion Insurance Co Ltd v Government Insurance Office of New South Wales [1969] 121 CLR 342. That was a decision of the High Court of Australia, concerned with the right of a co-insurer to contribution. Kitto J (at pp 349-350) referred to the principle that "persons who are under co-ordinate liabilities to make good the one loss (eg sureties liable to make good a failure to pay the one debt) must share the burden pro rata". But his ruling was not directed to the case where the liabilities of the two indemnifiers are not co-ordinate, where (to use different language) one liability is primary. In Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291 the Supreme Court of Western Australia followed the decision of the Inner House in the present case. Ipp J pointed out (at p 312, para 93) that the competing liabilities (one of them arising from a contract of insurance) were intrinsically different and not co-ordinate. Wheeler J, at p 327, paras 167 and 168, shared this view:

    "It appears to me that the status of a policy of insurance as res inter alios acta so far as third parties are concerned, and the cases to which the Court of Session refers where a right of subrogation has been held to exist, suggest that where, as here, there is a contract for services which contains within itself an indemnity provision, together with insurance which may also cover the events the subject of the indemnity, it is generally appropriate to regard the insurance as a secondary rather than a co-ordinate obligation.

    I would not be prepared to suggest that this must invariably be the case; rather, it appears to me that the terms of the particular indemnity provision will be relevant. However, in this case, the works and services contract is, as one would expect, a document dealing in detail with all the rights and liabilities of the parties arising in relation to the work to be performed by Speno. It does appear to me that in the context of that contract, the indemnity clause is, as Lord Sutherland put it, intended 'to allocate primary responsibility'."

I can find no support for the contractor's contention in the terms of the contract, in the commercial context, in principle or in authority. I would accordingly resolve this issue against the contractor, as the Inner House did.

The third issue: consequential loss