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

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    52. The case was an action on the Riot Act to recover damages sustained by the demolition of a house in the riots of 1780. There was a verdict for the plaintiff, with £259 damages, subject to the opinion of the court, on a case which stated that the plaintiff had insured the house with the Hand-in-Hand Fire Office, which had paid the loss, and that this action was brought in the plaintiff's name, and with his consent for the benefit of the insurance office. In giving judgment, Lord Mansfield said, at p 64:

    "The facts of this case lie in a narrow compass. The argument turns much on want of precision in stating the case, as most arguments do. The office paid without suit, not in ease of the hundred, and not as co-obligors, but without prejudice. It is, to all intents, as if it had not been paid. The question, then, comes to this, can the owner, having insured, sue the hundred? Who is first liable? If the hundred, it makes no difference; if the insurer, then it is a satisfaction, and the hundred is not liable. But the contrary is evident from the nature of the contract of insurance. It is an indemnity. Every day the insurer is put in the place of the insured. In every abandonment it is so. The insurer uses the name of the insured. The case is clear: the Act puts the hundred, for civil purposes, in the place of the trespassers; and, upon principles of policy, as in the case of other remedies against the hundred, I am satisfied that it is to be considered as if the insurers had not paid a farthing."

All the other judges agreed. I need only quote from Buller J:

    "The better way is to consider this as a contract of indemnity. The principle is, that the insurer and insured are one, and, in that light, paying before or after can make no difference. I am, therefore, clearly of opinion, that the hundred cannot avail themselves of this defence."

    53. The central question posed by Lord Mansfield - "Who is first liable?" - is the appropriate question to pose in the present case. Putting the matter another way - was the hundred liable only if the insurance office failed to pay the plaintiff or was the insurance office liable to indemnify the plaintiff only if the hundred failed to pay? It is interesting that under the present form of the statute, the Riot Damage Act of 1886, the police authority comes in place of the hundred but there is a provision that the police authority is not liable if the property in question is insured. In other words under the new legislation where there is an insurance company indemnifying the property owner, the insurance company is first liable.

    54. Applying this approach, in the present case therefore the question is: "is the contractor liable to indemnify the operator only if and to the extent that the operator's insurer fails to do so, or is the operator's insurer liable to indemnify the operator only if and to the extent that the contractor fails to do so?"

    55. Since there is no provision in the contract requiring the operator to have insurance I cannot see any ground on which it can be said that the contractor's indemnity is limited to indemnifying the operator if and to the extent that the operator's insurer fails to do so.

    56. I consider that support for this view is obtained from the clause dealing with insurance which I have already quoted in which it is provided that the insurances required by the contract other than workers' compensation and employer's liability should include the operator as a co-insured thus giving the operator a right against the insurer as an insured and the further provision that such policies must also provide that they are to be primary and not contributing with any other insurances available to the operator. This is a strong pointer to the conclusion that indemnities stipulated for in the contract are to be primary obligations and that any other insurance available to the operator is to be secondary.

    57. An interesting illustration of similar principles in the field of suretyship is provided by the decision of the Privy Council in Scholefield Goodman & Sons Ltd v Zyngier [1986] AC 562 in which by a mortgage executed in favour of the bank Mrs Zyngier covenanted to pay to the bank any sums which might be owed to it either by herself or by a named company, including any amounts for or in respect of any bills of exchange on which the company might be liable "either primarily or only in the event of any other person failing to duly pay the same". Lord Brightman giving the judgment of the board said, at p 574:

    "The fundamental question in the present case, therefore, is whether upon the true construction of the bargain between the bank and Mrs Zyngier, Mrs Zyngier placed herself, as regards bills of exchange accepted by Zinaldi and thereafter dishonoured, in the position of a co-surety alongside the drawer or indorser; or whether, upon the true construction of the bargain, her liability to the bank upon a bill was intended to be limited to a case of default by the parties liable upon the bill. If it were the true meaning of the mortgage that the bank was required to call upon the parties to the bill before it called upon Mrs Zyngier to make good her default, then ex hypothesi no injustice ensued to the drawer upon the bank's adoption of that course and no case for the intervention of a court of equity could arise. If a third party (in the instant case Mrs Zyngier) guarantees a bill of exchange for the benefit of a bank which discounts it, the normal understanding will be that the surety guarantees that payment will be made by one or other of the parties to the bill who are liable upon it, whether as acceptor or drawer or indorser. It will not be the normal understanding that the surety intends to place himself on a level with the drawer, so as to be answerable equally with the drawer if the acceptor defaults. There is no reason why he should. There is no reason to suppose that, in a contract between the bank and the surety, the surety desires to confer a benefit on the drawer and to share with him the responsibility for a dishonoured acceptance. Nor is there any reason why the bank should wish to call upon the surety for payment until the parties to the bill have defaulted."

and at p 575 he continues:

    "Contribution is founded on the principle that equality is equity, and there is no room for the application of this doctrine unless the surety against whom contribution is claimed has placed himself on the same level of liability as the surety who claims contribution from him. It would be possible for a bank guarantee to be so worded that the surety deliberately places himself upon an equal footing with the drawer or indorser of the bill discounted by the bank, but it would produce an irrational result. It is not a construction to be adopted unless the intention is clear, because there is no reason why the bank and the third party who gives the guarantee to the bank should have such an intention."

Although this is in a different field from indemnities I think it is helpful in considering whether a particular liability under a contract is primary or secondary. There is no reason in the present case why the contract between the operator and the insurance company should be construed as placing the insurance company on an equal footing with the parties to the contract, and I think the analogy of the relationship in this case between the contract and the indemnity insurance and that between the bill of exchange and the surety in the Zyngier case would suggest that similar reasoning would apply. There is no reason, as it seems to me, why the operator and the insurer should have the intention that the insurer should put himself on an equal footing with the contractor in respect of the indemnity which the contractor had given under the contract. Indeed the evidence of practice that the rates which contractors quote in respect of work to be undertaken in the North Sea includes an allowance in respect of the indemnity would to my mind be a clear indication to the contrary.

    58. For these reasons I am of opinion that this appeal fails on the second issue.

    59. Your Lordships were treated to a very well prepared and forcefully presented argument on behalf of the contractor and if the indemnities granted by the contractor and the operator's insurers were truly to be regarded as on an equal footing or co-ordinate I think the result for which counsel argued might be appropriate. For the operators we were treated to an equally persuasive argument in which the principles underlying the relationship of insured and insurer and insured and third parties were clearly laid before your Lordships and in which the crucial question first posed by Lord Mansfield was demonstrated to be the critical question for your Lordships. The doctrine of subrogation with its incidents available against third parties in both situations in which the claims of the assured arise in contract and in tort or delict were illustrated by authorities in England, Scotland and the United States of America, as well as in Australia. Among the cases from England and Scotland

Yates v Whyte (1838) 4 Bingham NC 272; Dickenson v Jardine (1868) LR 3 CP 639; Simpson & Co v Thomson (1877) 5 R (HL) 40 and Esso Petroleum Co Ltd v Hall Russell & Co Ltd [1989] AC 643

may be referred to as examples.

    60. The American cases cited came from different levels of court and were spread over 200 years. I mention Atlantic Mutual Insurance Co v Cooney (1962) 303 F 2d 253 particularly. The authorities in the United States support the same principle, subject to a somewhat greater flexibility in that jurisdiction arising from the doctrine of superior equity where subrogation may be denied on the basis that the person who is under obligation to the insured has a greater equity in his favour than that which is available to the person seeking the subrogation.

    61. From Western Australia I refer to Speno Rail Maintenance Australia Pty Ltd Ano v Hamersley Iron Ltd [2000] WASCA 408 when the Supreme Court followed the decision of the Inner House in the present case.

    62. These cases show that generally liabilities incurred in tort or delict, or in contract will be primary while the liability of the indemnity insurer of the injured party will be secondary. In cases relating to marine insurance, section 79 of the Marine Insurance Act 1906 is statutory authority to this effect.

    63. Sickness and Accident Assurance Association v General Accident Assurance Corporation Limited (1892) 19 R 977 dealt with the situation in which an insurance company, after paying to a tramway company a sum due under a policy insuring against loss by accident, raised an action in its own name against another insurance company for contribution on the ground that it had insured the same risk, which is the situation as it was presented in the contractor's argument in the present case. Where there are co-ordinate indemnities for the same loss it is clear that the doctrine of subrogation cannot provide an answer, and that where one of the indemnifiers pays, the way their liabilities inter se are decided is by an action of relief. The principle of res inter alios acta will not be of relevance in that situation where the overriding principle is that a person cannot be indemnified twice over for the same loss, and therefore if one indemnifier has made good the loss to the indemnified the rights of the indemnified are no longer useful in deciding questions between the indemnifiers.

    64. The absence of any case directly deciding the present question is because I believe it has always been assumed that a contractual indemnity will be the primary indemnity in situations where the other indemnity is provided by an insurer of a party to a contract where there is no obligation on the party to make any insurance arrangement, and where in consequence the insurance arrangements are res inter alios acta so far as the other parties to the contract are concerned.

    65. I think in fairness to the argument for the contractor it has to be said that it is not based on any particular specialty of insurance law, but is rather based on the submission which I have held to be unfounded that here we are dealing with co-ordinate indemnities.

    66. The Lord Ordinary accepted the contractor's argument. After an extremely long and heavy proof, this point being raised at a very late stage was not discussed by reference to a full range of authorities and it is not surprising therefore that the true issue did not present itself clearly to the mind of the Lord Ordinary. In my view the unanimous judgment of the Inner House on this aspect of the case should be affirmed and the appeal refused.

Consequential Loss

    67. I now turn to the third question. This is whether, on a true construction of the contract between the parties, recovery of the excess above the Scots Law value of the claims is excluded by article 21. For the purposes of this argument it is to be assumed that jurisdiction to entertain the claims against the respondent in Texas would have been sustained as found by the Lord Ordinary, and that there is an agreement between the parties about the proportion of the sums paid which would have been appropriate if the Scottish level of damages had been applied.

    68. In answer to my noble and learned friend, Lord Nicholls of Birkenhead, in the course of the hearing counsel for the contractor accepted that these claims as settled were covered for the purposes of this part of the argument by the provision in clause 15(1)(c) for an indemnity, but he argued that notwithstanding that position, article 21 excluded the excess above the Scots Law value of the claims.Article 21 is in these terms:

    21 Consequential loss

    Notwithstanding any other provision of this contract, in no event shall either the contractor or the company be liable to the other for any indirect or consequential losses suffered, including but not limited to, loss of use, loss of profits, loss of production or business interruption.

    69. It is to be noted that the primary liability in question in the valuation of these claims was liability to the relatives in relation to death claims and to the injured person in relation to the claims for injury. To these claims therefore article 21 does not apply. However, the argument was that insofar as these are part of the amounts falling due by the contractor to the operator under the indemnity they are excluded by article 21. It is clear that the sums in dispute are neither loss of use, loss of profits nor loss of production or business interruption and it is said that they are indirect or consequential. No authority was cited in which a matter of mere quantification has been held to come within that description, although it is possible that a basis of quantification can be excluded on this ground as in Duff & Co v The Iron and Steel Fencing and Buildings Co [1891] 19 R 199. This decision was that the particular use of the goods in question on which the pursuers' claim for loss was based was a use which was not within the contemplation of the parties to the contract at the time it was made, and therefore the proper level was that depending on the ordinary use of the goods. No such basis exists in the present case and, in my opinion, there is no reason for excluding the uplift from the operation of the indemnity in the present case. On this part of the case also, in my opinion, the judgment of the Inner House of the Court of Session was sound and the Lord Ordinary's judgment to the contrary was rightly set aside.

Conclusion

    70. I am therefore of opinion that all three chapters of the contractor's appeal fail, and that the appeal should be dismissed with costs. In the other six cases that have been settled parties are agreed that an order should be made remitting the cases to the Inner House to give effect to the settlement.

LORD NICHOLLS OF BIRKENHEAD

My Lords,

    71. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Bingham of Cornhill, Lord Mackay of Clashfern and Lord Hoffmann. For the reasons they give, and with which I agree, I too would dismiss this appeal.

LORD HOFFMANN

My Lords,

    72. On 6 July 1988 there was a severe explosion on the Piper Alpha North Sea oil platform. 165 people were killed and another 61 injured. The cause of the accident was the combined negligence of two men. The first was Mr Vernon, an employee of Occidental Petroleum (Caledonia) Ltd, the operators of the platform ("the operators"). He started a pump without having noticed that one of the pressure safety valves had been removed. The other was a Mr Sutton, who was employed by Score (UK) Ltd, specialist valve contractors. They had removed the valve for maintenance purposes. It was Mr Sutton's duty to fit a blind flange over the place where the valve had been, to prevent condensate in the system from escaping. But he did not make the flange sufficiently secure and, when the pump was used, condensate escaped and ignited. There would have been no explosion if either the pump had not been used or the flange had been securely fitted.

    73. By regulation 32(3) of the Offshore Installations (Operational Safety, Health and Welfare) Regulations 1976 (SI 1019/1976) it is the duty of every person on an oil platform not to do anything likely to endanger the safety or health of himself or other persons on the platform. So Mr Vernon and Mr Sutton were both in breach of this statutory duty. And by regulation 32(1) it is the duty of the operator to ensure that the provisions of the Regulations are complied with. The operator was therefore also in breach of statutory duty and liable for all the deaths and injuries caused by the explosion.

    74. The operators were insured against such liability (save for a small layer which was uncovered) and they and their underwriters settled the claims of the victims. About 37 of them were the operator's own employees. But the rest worked for contractors who had been engaged, like Score (UK) Ltd, to do specialist work on the platform. One such contractor was Eastman Christensen Ltd ("the contractors"), now called Norton (No 2) Ltd. They had been employed to provide directional drilling services. Neil Pyman, whose claim has been used as a test case, was an employee of the contractors killed by the explosion.

    75. Clause 15 of the contract between the operator and the contractors dated 23 February 1987 contained cross-indemnities. By subclause 15.1, the contractors agreed to indemnify the operator against -

    "all suits, actions, legal or administrative proceedings, claims, demands, damages, liabilities, interest, costs (including but not limited to the cost of litigation) and expenses of whatsoever kind or nature…and in any manner directly or indirectly caused, occasioned or contributed to in whole or in part, by reason of the omission or negligence whether active or passive of Contractor, or of anyone acting under contractor's direction, control or on contractor's behalf in connection with or incidental to the work. Provided always that the Contractor's total liability arising pursuant to this indemnity shall not exceed [£1m] per occurrence."

    76. The subclause then went on:

    "Without prejudice to the foregoing generality, the contractor shall indemnify…[the operator]…against any claim, demand, cause of action, loss, expense, or liability (including but not limited to the costs of litigation) arising…by reason of- "

    and the subclause then listed five heads under which indemnity could be claimed. For example, head b included:

    "Actual or asserted infringement…by the…contractor of…copyright rights…or patented or unpatent inventions…arising out of the use of methods, processes, designs, information or other things originating with the contractor…"

    77. The relevant head was c:

    "Injury to or death of persons employed by or damage to or loss or destruction of property of the contractor…irrespective of any contributory negligence, whether active or passive, of the party to be indemnified, unless such injury, death, damage loss or destruction was caused by the sole negligence or wilful misconduct of the party who would otherwise be indemnified."

    78. Subclause 15.2 contained a cross-indemnity from the operator to the contractors in respect of injury or death to employees of the operator or damage to or loss of its property, in terms similar to subclause 15.1.c.

    79. The operator (now known as Caledonia North Sea Ltd) raised actions in the Court of Session against a number of companies claiming indemnity under clause 15.1.c (or the equivalent in other contracts) for the compensation paid to their dead or injured employees. The terms of the indemnities in the various contracts were not all the same, but all the actions, with the exception of that against these contractors, were settled in the course of the hearing before your Lordships. It is therefore unnecessary to refer to the terms of any other contract.

    80. In this appeal, the contractors have relied upon three defences. The first was that, as a matter of construction of the clause, they could not be liable to indemnify the operator unless they had themselves been liable to their employee, on grounds of negligence or breach of statutory duty. It is the case that the contractors were in no way responsible for the accident. But the difficulty in the way of their argument, which was rejected the Lord Ordinary (Lord Caplan) and by the Inner House, is that the indemnity says nothing about the contractors having to be liable to the employee. It imposes a general liability to indemnify the operator against any liability in respect of their own employees, with an exception only in a case in which the accident is attributable to the sole negligence or wilful misconduct of the operator. The existence of this exception is in itself an indication that no liability on the part of the contractors is required, because it is hard to see how such liability could ever be consistent with the accident being attributable to the sole negligence or wilful misconduct of the operator.

    81. The existence of the cross-indemnity and the findings of industry practice made by the Lord Ordinary dispel any concern that it would be unreasonable to require the contractors to indemnify the operator against loss for which the contractors were not responsible. These are summarised in a passage in Daintith and Willoughby, Manual of United Kingdom Oil and Gas Law (1984), para 1-845:

    "It is…normal for the client [ie the operator] and the contractor to assume full liability, and to 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."

    82. More than one reason is given for this practice. Daintith and Willoughby say that it reduces insurance costs because each party knows that he need insure only in respect of his own property and employees. In the present case, the operator prudently insured in respect of the contractors' employees as well, but no doubt the existence of the indemnity reduced the premium. David Sharp, in Offshore Oil and Gas Insurance, says (at p 108) that the practice enables compensation to be paid quickly without waiting for disputes over liability to be resolved; delay "can only add to the anguish of the injured party, or the dependants of the deceased". That was achieved here by the operator and its underwriters accepting primary liability to the victims and settling their claims before the question of liability on the indemnities had been resolved.

    83. Mr Currie QC, who appeared for the contractors, pointed out that clause 15.1.c does not embody the industry practice in its pure form because it contains the exception for the sole negligence or wilful default of the party claiming indemnity. To that extent, it does not produce that clear-cut distribution of liability which the practice is intended to achieve. That is true. The exception no doubt reflects the give and take of negotiation between the parties. But that is no reason for implying a further exception for cases in which there was no direct liability on the part of the contractors.

    84. Mr Currie observed that if the intention was, in accordance with the industry practice, to require the contractors to insure against death or injury in respect of their employees, the contract did not expressly require them to do so. Clause 16.2 required them to have employer's liability and workmen's compensation insurance as required by statute and general public liability insurance for at least US $5m for any one incident. But there was no obligation to have insurance cover to the full extent of potential liability under clause 15.1.c.

    85. In my opinion no inferences can be drawn from these features of the contract. The provisions of clause 16.2 were intended to ensure compliance with statutory and other requirements. The incentive to the contractors to insure against the indemnity liability arose simply from the existence of the potential liability. Even if the indemnity had been limited in the way that the contractors suggest, there would still have been a potential liability for which the contract made no express insurance provision. I therefore regard the insurance provisions as neutral.

    86. Mr Currie drew attention to the general indemnity in the first part of clause 15.1 against loss or damage caused by the "omission or negligence" of the contractor, limited to £1m per occurrence. He argued that the five individual heads of indemnity which followed should be treated as species of the general indemnity and also subject to the requirement that there should have been an omission or negligence on the part of the contractors. He said that the words "without prejudice to the foregoing generality" supported this construction.

    87. In my opinion, the words in question are rather indicative of an intention that each clause should be read independently. They mean that nothing said under the five heads is to be treated (for example, on an inclusio unius, exclusio alterius basis) as restrictive of what would otherwise be the normal construction of the first general indemnity. They do not mean that anything said in the general indemnity is to be treated as restrictive of what would otherwise be the normal construction of the five heads. In any case, it is not easy to see how matters such as infringement of intellectual property rights (head b) can be squeezed into a general principle which requires an "omission or negligence".

    88. Finally, Mr Currie drew attention to the words "irrespective of any contributory negligence" in clause 15.1.c. "Contributory to what?" he asked. He suggested that it must mean contributory to negligence or breach of statutory duty on the part of the contractor. But in my opinion it means negligence contributing to the loss, as opposed to "sole negligence" causing the loss. It is quite neutral as to what the other contribution to causing the loss might be.

 
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