Seadrill Management Services Ltd & Anor v OAO Gazprom [2010] EWCA Civ 691

[2010] EWCA Civ 691Case No A3/2009/2111
IN THE COURT OF APPEAL (CIVIL DIVISION)
[2009] EWHC 1530 (Comm)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
(Mr. Justice Flaux)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 17 June 2010
Before
LORD JUSTICE WARDLORD JUSTICE LLOYDLORD JUSTICE MOORE-BICK
Between
(1) SEADRILL MANAGEMENT SERVICES LIMITEDClaimants/(2) SEADRILL LARISSA LIMITEDAppellantsOAO GAZPROMDefendant/Respondent
Mr. Richard Jacobs Q.C. and Mr. Nigel Eaton (instructed by Holman Fenwick Willan LLP) for appellantsMr. Simon Rainey Q.C. and Mr. Nigel Cooper Q.C.(instructed by Herbert Smith LLP) for respondentHearing Hearing dates : 27 th and 28th April 2010
Judgment

Background

[1]This is an appeal on limited grounds against the judgment of Flaux J. following a trial at which the judge determined many issues of fact and law then outstanding between the parties. The circumstances which gave rise to the dispute are described fully in the judgment below and since the judge’s findings of fact are not challenged, it is sufficient for the purposes of the appeal to describe them briefly. Anyone who wishes to gain a fuller understanding of the dispute and the judge’s findings can obtain it from his judgment: [2009] EWHC 1530 (Comm), [2010] 1 Lloyd’s Rep. 543.[2]The appellants, to whom I shall refer collectively as “Seadrill”, were the owners and operators of a jack-up drilling rig. The respondent (“Gazprom”) is a Russian company which specialises in exploring for and exploiting gas deposits. On 10th September 2005 Gazprom entered into a contract with Seadrill on the terms of the International Daywork Drilling Contract-Offshore (“IDDCO”) form published by the International Association of Drilling Contractors under which Seadrill agreed to furnish the rig for the purposes of drilling an exploratory well in the Bay of Bengal. The rig is effectively a floating barge with three legs capable of being lowered onto the sea bed in order to provide the support required for drilling operations. Once in position the entire weight of the rig is borne on the legs and the body of the rig is raised above sea level for the purposes of operations.[3]The process of settling the legs in the sea bed is called “pre-loading”. Depending on the nature of the sea bed, the legs can be expected to penetrate the surface to a greater or lesser extent as the weight of the rig is transferred from the sea itself (when the rig is floating) to the sea bed. In order to ensure sufficient stability for safe operation, the legs must be driven into the soil of the seabed, first by the weight of the rig itself and then by the use of seawater ballast to provide additional weight. The operation is carried out in several stages using increasing amounts of ballast. If the operation is carried out properly the rig will come to rest on an even keel at its maximum level of penetration and will not sink further during operations. In this case the nature of the drilling location meant that the legs could be expected to penetrate the sea bed to an unusual depth, but, as the judge found, the properties of the soil were as had been predicted by earlier surveys. Most importantly, the load-bearing capacity of the soil increased in a linear fashion as the depth increased.[4]Pre-loading began on 2nd January 2006 and was still continuing on the morning of 9th January. Between 0200 hours and 0600 hours the stern legs (port and starboard) penetrated the sub-sea soil significantly with uneven and excessive trim to the stern. As a consequence, the legs became jammed and could not be moved up or down. Over the following two days the crew carried out a number of recovery operations which resulted in damage to the rig, her legs and jacking systems. She was subsequently towed to a shipyard in Singapore for repairs.[5]Gazprom considered that the casualty had been caused by negligence on the part of the master and crew in carrying out the pre-loading operation and on 16th May 2006 it wrote to Seadrill terminating the contract for repudiation. Seadrill rejected the suggestion that it had repudiated the contract and asserted that Gazprom was itself in repudiation by purporting to treat the contract as discharged. At that stage Gazprom had not paid any hire under the contract and it continued to withhold payment thereafter. On 10th July 2006, Seadrill wrote to Gazprom terminating the contract for repudiation and purporting to exercise its right to terminate the contract for non-payment of hire. Gazprom eventually drilled the well using a semi-submersible unit provided by another contractor and after completion of repairs the rig went into service with another operator.[6]In August 2007 Seadrill started proceedings against Gazprom seeking to recover hire for the period from November 2005 to July 2006, together with certain uninsured losses which it said it was entitled to recover under the contract. Gazprom accepts that, subject to its counterclaim for damages, hire is payable from 9th December 2005, when the rig was loaded onto the vessel carrying it to the drilling area, until the time of the incident, but says that no hire became payable before 9th December 2005 and that it ceased to be liable for hire after the incident occurred. Gazprom’s case is that Seadrill was in breach of an obligation to operate the rig with reasonable skill and care and that if any hire became due following the casualty, it is entitled to recover it as damages for breach of contract. It also claims to recover damages for other loss and damage which it says it has suffered as a result of the breach.[7]In paragraph 23 of his judgment the judge summarised twelve issues which remained for decision at the conclusion of the trial. Of those, this appeal is concerned only with a single group of issues relating to the construction of the contract. It is convenient, therefore, to say a little more about the contract and the judge’s findings at this stage. The contract[8]The IDDCO form deals with various aspects of the relationship between the parties in a series of Articles, each of which is broken down into paragraphs. The version used by the parties was the 1989 edition, at least one previous version having been published in 1974. Within Article V paragraphs 501 to 510 contain various provisions relating to the contractor’s performance of operations. Two of these, 501 and 502 are of particular importance. They provide as follows:
“501. Contractor’s Standard of Performance Contractor shall carry out all operations hereunder on a daywork basis. For purposes hereof the term “daywork basis” means Contractor shall furnish equipment, labor, and perform services as herein provided, for a specified sum per day under the direction and supervision of Operator . . . When operating on a daywork basis, Contractor shall be fully paid at the applicable rates of payment and assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis, including results and all other risks or liabilities incurred in or incident to such operations, notwithstanding any breach of representation or warranty, either expressed or implied, or the negligence or fault of Contractor, its employees, agents or servants, including sole, concurrent or gross negligence, either active or passive, latent defects or unseaworthiness of vessels (whether or not pre-existing) and any liability based on any theory of tort, breach of contract or strict liability, including defect or ruin of premises, either latent or patent. 502. Operation of Drilling Unit Subject to Paragraph 606, Contractor shall be responsible for the operation of the Drilling Unit . . . ”
Contractor shall carry out all operations hereunder on a daywork basis. For purposes hereof the term “daywork basis” means Contractor shall furnish equipment, labor, and perform services as herein provided, for a specified sum per day under the direction and supervision of Operator . . . When operating on a daywork basis, Contractor shall be fully paid at the applicable rates of payment and assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis, including results and all other risks or liabilities incurred in or incident to such operations, notwithstanding any breach of representation or warranty, either expressed or implied, or the negligence or fault of Contractor, its employees, agents or servants, including sole, concurrent or gross negligence, either active or passive, latent defects or unseaworthiness of vessels (whether or not pre-existing) and any liability based on any theory of tort, breach of contract or strict liability, including defect or ruin of premises, either latent or patent. Subject to Paragraph 606, Contractor shall be responsible for the operation of the Drilling Unit . . . ”[9]Article IX contains various provisions which allocate responsibility for loss and damage to one or other party, generally using for that purpose the expression “be responsible for and hold harmless and indemnify [the other] against”, or very similar words. Paragraph 910(a) explains what that means in the following terms:
“910. Indemnity Obligation (a) The parties intend and agree that the phrase “be responsible for and hold harmless and indemnify” in Paragraphs 606, 608 and 901 through 909 hereof mean that the indemnifying party shall release, indemnify, hold harmless and defend (including payment of reasonable attorney’s fees and costs of litigation) the indemnified party from and against any and all claims, demands, causes of action, damages, judgements and awards of any kind or character, without limit and without regard to the cause or causes thereof, including pre-existing conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels, breach of representation or warranty (express or implied), strict liability, tort, breach of contract, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross, or any other theory of legal liability.”
[10]Paragraph 911 provides as follows:
“911.General Intent The parties recognise that the performance of well drilling, workover, and associated activities such as those to be performed under this Contract have resulted in bodily injury, death, damage or loss of property, well loss or damage, pollution, loss of well control, reservoir damage and other losses and liabilities. It is the intention of the parties hereto that the provisions of this Article IX and Paragraphs 606, 608 and 1310 shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause (as more particularly specified in Paragraph 910) it being acknowledged that the compensation payable to Contractor as specified herein has been based on the express understanding that risks and liabilities shall be determined in accordance with the provisions of this Contract.”
[11]Finally, it is necessary to refer to paragraph 606. This forms part of Article VI which contains various provisions imposing obligations on the operator. It provides as follows:
“606. Drilling Site and Access Operator will be responsible for providing access to the drilling site, as well as selecting, marking, and clearing drilling locations, for providing proper and sufficient certificates, including, without limitation, permits or permission necessary to enter upon and operate on the drilling site, and for notifying Contractor of any impediments or hazards to operations at each drilling location or within the anchor pattern, including any pipelines, cables, boulders, mud filled depressions or faulty bottom conditions in the area. Operator will also provide Contractor with soil and sea bottom condition surveys at each drilling location hereunder adequate to satisfy Contractor’s Marine Surveyor. Notwithstanding any other provision of this Contract, should there be obstructions at or within the area of the drill site, including the anchor pattern, or faulty bottom conditions and these obstructions or faulty bottom conditions damage Contractor’s Items, or Contractor’s Items damage these obstructions, or if seabed conditions prove unsatisfactory to properly support or moor the Drilling Unit during operations hereunder, Operator will be responsible for and hold harmless and indemnify Contractor for all resulting damage, including payment of Standby Rate during required repairs, but Operator will receive credit for any physical damage insurance proceeds received by the Contractor as a result of any damage to the Drilling Unit.”
The judge’s findings Operator will be responsible for providing access to the drilling site, as well as selecting, marking, and clearing drilling locations, for providing proper and sufficient certificates, including, without limitation, permits or permission necessary to enter upon and operate on the drilling site, and for notifying Contractor of any impediments or hazards to operations at each drilling location or within the anchor pattern, including any pipelines, cables, boulders, mud filled depressions or faulty bottom conditions in the area. Operator will also provide Contractor with soil and sea bottom condition surveys at each drilling location hereunder adequate to satisfy Contractor’s Marine Surveyor. Notwithstanding any other provision of this Contract, should there be obstructions at or within the area of the drill site, including the anchor pattern, or faulty bottom conditions and these obstructions or faulty bottom conditions damage Contractor’s Items, or Contractor’s Items damage these obstructions, or if seabed conditions prove unsatisfactory to properly support or moor the Drilling Unit during operations hereunder, Operator will be responsible for and hold harmless and indemnify Contractor for all resulting damage, including payment of Standby Rate during required repairs, but Operator will receive credit for any physical damage insurance proceeds received by the Contractor as a result of any damage to the Drilling Unit.”[12]It was originally Seadrill’s case that the load-bearing capacity of the sub-soil at the drilling site did not increase at a steady rate in accordance with the depth of penetration, but became weaker at a depth of between 33 and 36 metres, thereby giving rise to the risk of sudden uncontrolled penetration when the legs reached that level. However, that case was eventually abandoned and the judge found that the sub-soil behaved exactly as all the geotechnical data had indicated that it would, increasing in strength with depth on a linear basis.[13]The judge’s main findings about the cause of the casualty are to be found in paragraphs 58-59 of his judgment. He said: “58. It seems that during the preloading operation, the Master paid no heed to the operations manual, but pursued the “Captain Alex” procedure as he had done before. However, at least by the time that the stage 4 loading recommenced on the afternoon of 8 January 2006, it should have been apparent to the Master that the rig was in trouble. This emerges from a graphic piece of evidence in the statement of Mr Fernandez, the marine warranty surveyor, who observed that the racks of the stern starboard leg forward chord were experiencing severe damage to the guides which he described thus: “shaving off the guides like machining. The wear seemed excessive when compared to the other plates on other legs. It was apparent that the legs were not going vertical because there were scrapings on the plates. I was not used to seeing so much metal being shaved off.... I considered that the sounds made by the starboard leg forward chord were not very usual on the day before the incident . . . 59. He reported this to the Master who told him that there was no problem and did not even investigate, which seems to be a staggeringly complacent attitude in the face of tell-tale signs that something potentially serious was amiss with the preloading operation. However, far from paying heed to those tell-tale signs, the Master did not seek to dump ballast and level the Rig at 0200 hours on 9 January 2006. Rather he continued taking on ballast, with the trim to the stern and the list to starboard increasing continuously, reaching 1 degree by 0300 hours, 1.15 degrees by 0400 hours and 1.4 degrees by 0500 hours. Between 0500 hours and 0600 hours, the list increased to 2.4 degrees, by which time the legs were “bound”, in other words there was excessive friction between the leg chords and the leg guide. The continued preloading after 0200 hours had created a horizontal load in addition to the vertical load which alone should have been applied, which caused the Rig to topple by reducing the soil bearing capacity beneath the legs.” “shaving off the guides like machining. The wear seemed excessive when compared to the other plates on other legs. It was apparent that the legs were not going vertical because there were scrapings on the plates. I was not used to seeing so much metal being shaved off.... I considered that the sounds made by the starboard leg forward chord were not very usual on the day before the incident . . .[14]Mr. Jacobs Q.C. submitted, as he had before the judge, that Gazprom was responsible for bearing any loss caused by the casualty, notwithstanding that it was entirely due to the negligence of the master and crew, because the parties had agreed in paragraphs 501, 910 and 911 that losses of that kind should be borne by the operator and because in the event the seabed conditions did not prove satisfactory to support the rig properly within the meaning of paragraph 606. Mr. Rainey Q.C. submitted that the scope of those paragraphs was more limited than Seadrill was prepared to accept and did not undermine the obligation to carry out the work with reasonable skill and care that arose out of paragraph 502. He argued that the case did not fall within paragraph 606, which is to be understood as dealing with defects of one kind or another in the physical condition of the drilling site. Here there were none: the sub-soil of the sea bed behaved exactly as had been predicted and did not contribute to the casualty in any way.[15]The judge preferred the submissions of Mr. Rainey on all these issues. He was unable to accept that paragraph 911 amounted to an exclusive code of risk allocation which precluded any liability on the part of the contractor for breaches of obligations set out in the contract and he held that the express obligation to be responsible for the operation of the rig carried with it an obligation to exercise reasonable skill and care. In the light of his findings of fact he rejected Mr. Jacobs’ submission that the seabed conditions had proved unsatisfactory properly to support the rig. The structure of the contract[16]Mr. Jacobs began his argument before this court by submitting that the contract, viewed overall, reflected a desire on the part of the industry as a whole, and of these parties in particular, to avoid all legal wrangling by allocating responsibility for any loss and damage arising in the course of operations in accordance with well defined rules. To that end he contended that the following words in paragraph 501: “Contractor . . . assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties . . . notwithstanding . . . the negligence or fault of Contractor, its employees, agents or servants . . . ,” were intended to make it clear that, save to the extent specifically set out in the contract, the operator is to bear any losses arising in the course of the work, even if caused by the contractor’s negligence. He sought to support that submission by drawing attention to differences between the 1974 version of the IDDCO contract and the 1989 version used by the parties and by reference to the passage in paragraph 911 which states that it is the intention of the parties that the provisions of Article IX and paragraphs 606, 608 and 1310 should exclusively govern the allocation of risks and liabilities “without regard to cause”.[17]The parties and the judge were content to treat the history and development of the IDDCO form as part of the commercial background to the contract. In cases where it is possible to identify with a degree of confidence the reason for a particular amendment to a standard form, for example, where a change has been made to respond to the effect of a particular decision of the courts, a change in legislation or a widely publicised event, that may be appropriate. Such cases are usually well-known within the industry and are often documented in the trade press. Both parties are therefore likely to be aware of them. I am doubtful, however, whether it is legitimate simply to compare the earlier and later versions of the contract form on the assumption that the parties consciously intended to achieve a particular result by adopting the later version. Such an exercise is not wholly removed from that of referring to drafts produced during the course of negotiations, which are not a proper aid to construction. The earlier version does, of course, serve as an example of how the contract could have been worded differently, but in that respect it has no greater persuasive force than a text created for the purposes of the trial. The fact is that in the present case we have no evidence of why specific changes were made, nor any evidence that the parties turned their minds to the differences between the two forms and there must be a real likelihood that they simply reached for the current form without any consideration of the earlier version. In any event, times have moved on and one cannot assume that the commercial background has not moved with them. In my view the right course when seeking to ascertain the intention of the parties is to consider this contract on its own terms against the commercial background as it existed at the time it was made.[18]I also have some reservations about having regard to what were said to be attitudes generally prevailing in the offshore drilling industry towards risk allocation and the means of providing for it. It is a truism that commercial parties seek certainty, both in the general law and in their contracts, but there are many different ways of achieving it and of failing to do so. The traditional approach has been to identify with precision the scope of the parties’ respective obligations, leaving it to the general principles of law to allocate loss. In such cases a breach of contract usually attracts liability for loss caused as a result, but that may be varied by the operation of exclusion and limitation clauses. Risk allocation clauses, by which loss and damage is borne by one or other party and which operate regardless of negligence or other kind of fault, have become common in some areas of activity, in particular, in construction contracts and, it may be, offshore drilling contracts. However, they rarely purport to supplant entirely the basic contractual obligations undertaken by each party and in each case the precise scope of the clause has to be identified in the context of the remainder of the contract. I do not accept, therefore, that one can properly approach a contract of this kind on the assumption that the parties were seeking to allocate the burdens of loss and damage occurring in the course of operations solely by means of risk allocation provisions rather than by defining the scope of their respective obligations. The likelihood is that they were making use of both techniques, but that can be determined only by examining the terms of the contract.[19]I think it is helpful at this stage to consider the overall structure of the contract. The most important terms for present purposes are contained in the following Articles:(i) Article II, which deals with the duration of the contract, including matters such as extension and termination;(ii) Article III, which imposes on the contractor responsibility for its employees and sub-contractors and gives the operator the right in certain circumstances to require the contractor to employ additional personnel and to replace employees if there are reasonable grounds for doing so;(iii) Article IV, which deals with the provision by the contractor of personnel and equipment as specified in appendices to the contract and also obliges the contractor to carry out any necessary maintenance and to provide spare parts;(iv) Article V, which imposes various obligations on the contractor of a general kind in relation to the work. In addition to paragraphs 501 and 502 they include an obligation to comply with the operator’s instructions (paragraph 503), to decide in consultation with the operator when to take measures to safeguard the well and the rig in the face of impending adverse weather conditions (paragraph 504), to take reasonable care to follow the operator’s instructions with respect to the operator’s drilling fluid and casing program (paragraph 505), to preserve and mark cuttings and cores and to provide the operator with a record of the work carried out and the formations drilled (paragraphs 506 and 507) and to use all reasonable means to control and prevent fires and blowouts (paragraph 509);(v) Article VI, which imposes various obligations on the operator, including an obligation to provide certain items and personnel (paragraph 601), to put a senior representative on board the rig who is authorised to take day-to-day decisions (paragraph 603), to designate an ‘Operator’s Representative’ to resolve all other day-to-day matters calling for decision (paragraph 605), to provide access to the drilling site, select and mark the drilling location and obtain all necessary permits and notify the contractor of any hazards (paragraph 606) and to bear all relevant taxes (paragraphs 607 and 608);(vi) Article VII, which contains the operator’s obligation to pay for the operations and includes an obligation to pay hire at different rates under different circumstances, as well as mobilisation and demobilisation fees, and to make additional payments under certain circumstances;(vii) Article VIII, which provides for the manner of invoicing and payment;(viii) Article IX, which contains various indemnities; and(ix) Article X, which obliges the contractor to maintain insurance covering the liabilities which it specifically assumes under the contract, proceeds on the assumption that the operator will be insured in respect of liabilities it assumes, and provides for mutual waivers of subrogation and the nomination of each party by the other as an additional insured on its policies, where possible. Paragraphs 501 & 502[20]The casualty in the present case was caused by the negligence of the master and crew. Mr. Jacobs submitted that it is not at all unusual in maritime contracts for shipowners to be relieved from the consequences of crew negligence. Clauses excluding liability for negligence of master and crew, he submitted, were a common feature of many contracts of carriage before the principle was adopted internationally as Article IV, rule 2(a) of the Hague Rules in the early part of the last century. That is, of course, entirely correct, but it does not really bear upon the real thrust of his submissions, namely, that in this case the parties have chosen not to rely at all on their respective obligations in order to determine who is responsible for loss and damage, if and when it occurs (save in the case of a complete failure to perform), but have allocated liability for such loss and damage in positive terms which do not depend on the need to establish a breach of contract. Under a regime of that kind obligations, and therefore limitation and exclusion clauses, have a very limited role to play. No doubt such a contract could be constructed, but that does not at first sight appear to be the scheme of this contract, as the brief summary of its terms given above indicates. Moreover, I think it would be surprising if parties were to enter into a contract of the present kind, which contains many obligations on the part of the operator and contractor, if their intention had been to allocate the risks of loss and damage without any regard to them and without making it clear that what they had chosen to express as obligations were intended to do no more than identify their respective roles in the adventure.[21]Gazprom’s case is that paragraph 502 of the present contract imposes on Seadrill an implied obligation to carry out the work with reasonable skill and care. Seadrill’s case is that, taken together, paragraphs 501, 910 and 911 impose responsibility for losses occurring in the course of operations on Gazprom, except as otherwise expressly provided, regardless of cause, which necessarily excludes any obligation on its part to carry out the work with reasonable skill and care.[22]Before the judge Mr. Jacobs put paragraph 911 at the forefront of his argument, but before this court he relied primarily on paragraph 501. In each case, however, the thrust of the submission was the same, namely, that an implied term that the contractor will carry out the work with reasonable skill and care is inconsistent with the express terms of the contract, in particular with the fourth sentence of paragraph 501, which limits the contractor’s liability to the obligations and liabilities specifically assumed by him, notwithstanding any principle of law that would otherwise render him liable. The width of the exclusory phrase in that sentence lends a certain force to the submission, but the argument fails to take account of the third sentence and in particular of the words “and assumes only the obligations and liabilities stated herein”. To what obligations do they refer? Mr. Jacobs’ argument appears to assume that they refer to the obligations and liabilities to which paragraph 501 itself refers, which he said extend to the operations mentioned in the first sentence and to the furnishing of equipment and labour and the performance of the services mentioned in the second sentence. Mr. Rainey, on the other hand, submitted that they refer to the obligations assumed under the various provisions of the contract.[23]Before turning to consider these competing arguments it is necessary to refer briefly to two matters. The first is paragraph 701, the material parts of which provide as follows:
“Operator shall pay to Contractor during the term of this Contract the amounts from time to time due calculated to the nearest hour according to the rates of payment herein set forth . . . notwithstanding any breach of representation or warranty, either expressed or implied, or the negligence or fault of Contractor . . . ”
[24]Mr. Jacobs submitted that that provision reflects the parties’ intention to insulate liability for hire from negligence on the part of the contractor and so reinforces the conclusion that there is no implied obligation on the contractor to carry out operations with reasonable skill and care. It will be necessary to return to this a little later.[25]The second is a paper on the IADC Offshore Drilling Contract written by an American lawyer, William W. Pugh, and published by the Rocky Mountain Mineral Law Foundation, in which the author draws attention to the burdensome nature of paragraph 501 of the IDDCO contract and makes various suggestions for its modification in the interests of operators. However, it is necessary to bear in mind that the purpose of the paper is not so much to provide an analysis of the contract but to draw the attention of operators and those who advise them to potential dangers inherent in using the IDDCO form and to suggest ways of avoiding them. His comment that paragraph 501 allows the drilling contractor to take the position that all losses not specifically addressed by the contract are the sole responsibility of the operator (on which Mr. Jacobs placed some reliance) is a case in point. Mr. Pugh is no doubt right to draw attention to the kind of argument based on paragraph 501 that might be put forward by a contractor, but he does not purport to offer a detailed analysis of its effect in the context of the contract as a whole. For that reason I do not think that his paper provides a great deal of assistance on the points we have to decide.[26]In my view Mr. Rainey’s construction of paragraphs 501 and 502 is to be preferred. The function of the first two sentences of paragraph 501 is not to impose obligations on the contractor but to determine the basis of its remuneration: the contractor is to be paid for all operations on a daywork basis, as defined in the second sentence. One must look elsewhere in the contract for provisions that identify what the contractor’s obligations are. The function of the third sentence is to emphasise that the daywork rates represent full remuneration for all that the contractor is obliged to do and to emphasise that the obligations and liabilities he has undertaken (and in respect of which he is to be paid at those rates) are limited to those set out in the contract. The first three sentences of paragraph 501 provide an important part of the context in which to construe the fourth sentence, which provides that, except for those obligations and liabilities assumed by the contractor, the operator is to be responsible for all consequences of the operations while the contractor is employed on a day work basis. I think it clear that the purpose of that sentence is to emphasise yet again that daywork rates are full remuneration for what the contractor has agreed to do and the liabilities he has agreed to bear, but nothing more; and that all other expenses and losses, however they occur, are to be borne by the operator. In context it makes no sense to construe the words “the obligations and liabilities stated herein” as referring to paragraph 501 itself. On the face of it therefore, I do not think that paragraph 501 has the effect for which Mr. Jacobs contended and that makes it necessary to consider what obligations and liabilities the contractor has “specifically assumed” and whether the parties have agreed elsewhere that the operator should bear the consequences of any breach on the contractor’s part.[27]The primary obligation of importance for present purposes is that contained in paragraph 502, under which the contractor undertakes responsibility for the operation of the rig. It was common ground that under that paragraph the contractor specifically assumes an obligation to operate the rig in order to perform the services provided for by the contract, but Mr. Rainey submitted that, unless the contract otherwise provides, it also assumes an obligation to carry out the work with reasonable skill and care, since that is an incident of any obligation of that kind, originally imposed by the common law and now by section 13 of the Supply of Goods and Services Act 1982.[28]The judge accepted Mr. Rainey’s submission and in my view he was right to do so. When paragraph 501 refers to obligations and liabilities which the contractor has “specifically assumed” it must naturally refer to the obligations which arise out of the express terms of the contract with all the incidents which the law ordinarily attaches to them, since those incidents are inherent in them. It may, of course, be possible for the parties to agree otherwise, but unless they have done so, they can only be presumed to have accepted that the ordinary incidents apply. To proceed on any other basis would make commercial life impossible. To say, therefore, that under this form of contract the contractor specifically assumes an obligation to operate the rig but does not specifically assume an obligation to do so carefully is to approach the question from the wrong end. Prima facie it assumes the obligation as expressed and all that the law attaches to it, unless there is agreement to the contrary.[29]The judge’s conclusion on this point led him to ask himself, following the observation of Lord Diplock in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Limited [1974] A.C. 689, whether the language of paragraphs 911 or 501 demonstrates with sufficient clarity that the parties do intend the operator to give up rights to which he would otherwise be entitled under the general law. Mr. Jacobs criticised the judge for approaching the contract in that way, but for the reasons just given I think it was inevitable that he should do so. Moreover, the principle encapsulated in Lord Diplock’s dictum is, with respect, essentially one of common sense; parties do not normally give up valuable rights without making it clear that they intend to do so. The flaw in Mr. Jacobs’ argument is that it requires one to approach the question of construction making the contrary assumption, namely, that the parties did intend to give up their rights in favour of a set of comprehensive risk allocation provisions. However, for the reasons given earlier, I do not think that one can properly start from that point when analysing the contract.[30]For these reasons I agree with the judge that paragraph 501 is not inconsistent with the existence of an obligation on the part of the contractor to operate the rig with reasonable skill and care. Moreover, I do not think that paragraph 701 provides the support for his argument that Mr. Jacobs sought to obtain from it. The judge held that it was a variant of a type of clause, well-known in construction contracts and other contracts for services, the purpose of which is to ensure that during the currency of the contract the party providing the services in question continues to receive the funds necessary to enable him to so, but which is not intended to prevent the other party from recovering the payments as damages for breach of contract in the ordinary way at a later date. In my view he was right about that. The language of paragraph 701 is very elaborate, but in its essentials it simply obliges the operator during the term of the contract to pay hire notwithstanding any actionable wrong on the part of the contractor. The important words are “during the term of this contract”. The language of this contract form as a whole is elaborate and demonstrates that the parties were able to provide in explicit terms for contingencies of all kinds. If they had intended that the operator should be unable to recover hire under any circumstances, it would not have been difficult to make that clear, but they have not done so. Paragraph 911[31]This brings me to paragraph 911, which forms part of an extended set of provisions allocating liability for particular kinds of losses to the operator and the contractor respectively. Thus, for example, subject to certain exceptions, each party accepted responsibility for, and agreed to indemnify the other against, damage to or loss of its own or its sub-contractors’ equipment (paragraph 901). Similarly, each party accepted responsibility for, and agreed to indemnify the other against, claims made by its own employees in respect of bodily injury, death or damage to property (paragraphs 903 and 904). Paragraphs 902 and 905 to 909 contain broadly similar kinds of provisions relating to the well itself, pollution, the removal of debris, damage to undersea strata and mineral deposits and liability for patent infringements.[32]Paragraph 910 contains ancillary provisions defining the nature and scope of the allocation of responsibility provided for in the earlier paragraphs by defining the meaning of the expression “be responsible for and hold harmless and indemnify” used in paragraphs 901 to 909 (and also paragraphs 606 and 608) and by identifying the range of persons falling within the scope of the indemnity. Mr. Jacobs relied in particular on that part of paragraph 910(a) which provides that the indemnity is to operate “without regard to the cause or causes” of the loss in question, but that does not of itself add to the scope of the provisions; it merely emphasises that if a loss falls within one or other of those paragraphs it is allocated to the relevant party regardless of how it was caused. The purpose of paragraph 911 appears to be to explain in commercial terms the reason for the adoption of loss allocation provisions and to emphasise that the parties intend them to operate to the exclusion of other provisions of the contract and regardless of cause. However, it is doubtful whether it adds anything of substance to what is to be found in paragraphs 606, 608 and 901 to 909 themselves. The attempt to read the reference to “other losses and liabilities” in the first sentence and the words “ . . . the provisions of this Article IX and Paragraphs 606, 608 and 1310 shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause . . . ” 33. Louisiana Land[33]In support of his submission that paragraph 911 contains or reflects a wide-ranging regime intended to allocate all losses between the parties regardless of cause Mr. Jacobs drew our attention to the decision of the United States District Court for the Eastern District of Louisiana in The Louisiana Land and Exploration Co. v Offshore Tugs Inc. (1993) WL 732429 (E.D.La). In that case Louisiana Land engaged a drilling contractor, Rowandrill Inc., under the IDDCO form to drill a well in the Gulf of Mexico. While the rig was being positioned at the drilling site it struck a wellhead owned by Louisiana Land, which made a claim in respect of the physical damage and financial loss suffered as a result. The contractor sought summary judgment against the operator relying on paragraphs 910, 911 and 606 of the IDDCO form. The court held that paragraph 606 allocated liability for a collision with an obstruction within the drill site to the operator and that the contractor’s responsibility under paragraph 502 for positioning the rig was expressly subject to paragraph 606. In that context “responsibility” merely identified which party was to carry out that operation (or as the court put it, “as used in this context responsibility encompasses a task assignment only”). In addition the court held that the same result followed from paragraph 901 which imposed on the operator the risk of damage to its own property. The decision was later upheld by the Court of Appeals for the 5th Circuit (23 F.3d 967).[34]Mr. Jacobs submitted that in Louisiana Land the court proceeded on the footing that paragraph 502 tells one nothing about liability for accidents which is governed entirely by paragraphs 501 and 911, so that any loss sustained by either party that cannot be brought within the scope of Article VI, IX or XIII is irrecoverable. In my view, however, that is not correct. All that the court decided was that the contractor’s obligation under paragraph 502 to position the rig was subject to the provisions of paragraph 606 dealing with liability for losses occurring in certain circumstances during that operation. The important words in the short passage mentioned earlier are “as used in this context”. The court emphasised that it was construing the word “responsibility” in the context of the reference to the overriding operation of paragraph 606. It did not hold that in all circumstances clause 502 is concerned only with task allocation and imposes no obligation on the contractor capable of sounding in damages; nor did it hold that paragraph 502 is incapable of supporting an obligation to carry out the work with reasonable skill and care. I do not think that the decision takes the matter any farther as far as the present appeal is concerned.[35]What is important for present purposes, however, is that Article IX as a whole, and paragraphs 910 and 911 in particular, apply to specific classes of loss and damage and are not inconsistent with the existence of an obligation to operate the rig with reasonable skill and care. The loss which is the subject of the dispute in the present case is the hire payable under paragraph 701 in respect of the period in which the rig was out of action as a result of the casualty. That is not a loss which falls within any of the provisions of Article IX and therefore, subject to paragraph 606, it is to be allocated in the ordinary way in accordance with the general principles of the law of contract. If it has been caused by a breach of contract on the part of Seadrill, Gazprom is entitled to recover damages in respect of it. Paragraph 606[36]This brings me to paragraph 606. Mr. Jacobs submitted that since the rig had come to rest during the pre-loading operation in an attitude that caused it to suffer damage, the seabed conditions did not support the rig in the proper manner and had therefore proved unsatisfactory properly to support the rig within the meaning of paragraph 606. He approached the clause in that way because, he said, it was intended to reflect the parties’ general approach to loss and damage, namely, that it should be allocated to one or other of them regardless of cause. It followed, in his submission, that the operator was liable to pay hire at the standby rate during the period in which the rig was undergoing repairs. Mr. Rainey, on the other hand, pointed out that under paragraph 901 damage to the rig is allocated to the contractor, subject to any specific provision to the contrary. He submitted that, since paragraph 606 is such a provision and since it involves an exception to the general rule, the burden is on the contractor to bring himself within its terms. In order to do that he must show that the loss was caused by, or at any rate was directly related to, one of the three conditions to which that paragraph refers. I did not understand Mr. Jacobs to dispute that part of Mr. Rainey’s argument, but he submitted that the expression “if seabed conditions prove unsatisfactory to properly support [the rig]” directs attention to the eventual outcome, which in this case was that the rig was not properly supported.[37]The judge rejected Mr. Jacobs’ argument. He held that the overall purpose of paragraph 606 is to indemnify the contractor against damage to the rig occurring during pre-loading as a result of a defect of some kind in the sub-soil. In my view he was right so to hold. The first section of paragraph 606, which requires the operator to notify the contractor of any impediments or hazards at the drilling location and to provide soil and sea bottom condition surveys, as well as the earlier references in the second section to obstructions and faulty bottom conditions, indicate that the paragraph as a whole is concerned with potentially hazardous features of the drilling site that are liable to interfere with operations under the contract. In that context one would naturally expect the reference to seabed conditions also to refer to some potentially hazardous characteristic. I agree that read as a whole paragraph 606 is clearly intended to be what the judge called a “sound location” provision. It provides an exception to the general rule in paragraph 901 that the contractor is responsible for damage to the rig and in order to take advantage of it the contractor must first establish the existence of one or more of the circumstances to which it relates.[38]The judge found that the sub-soil at the drilling site was not hazardous or defective in any way. Although I agree with Mr. Jacobs that the expression “prove unsatisfactory” in paragraph 606 means no more than “turns out to be unsatisfactory” and so looks to the condition of the seabed at the time of operations, I am unable to accept that it is apt to include a situation in which the sub-soil was capable of providing the rig with stable support and behaved entirely as predicted, but in which the rig adopted a dangerous attitude as a result of mishandling. In paragraph 59 of his judgment the judge found that the continuation of pre-loading after 0200 hours on 9th January 2006 had created a horizontal load in addition to the vertical load, which caused the rig to topple by reducing the soil bearing capacity beneath the legs. Mr. Jacobs sought to argue that that amounted to a finding that the soil had given way, so that the crew lost control and the rig suffered damage as a result. In my view, however, when read in the context of the judgment as a whole, that is not what the judge meant. It will not surprise anyone who has walked over open country that the load bearing properties of the sub-soil varied depending on whether the load was applied vertically or horizontally. The casualty was an entirely predictable result of the crew’s action in ballasting the vessel unevenly and it is clear from the judge’s findings that the sole cause of the casualty in this case was the negligence of the master and crew. “Topple” was an expression that had been used in one of the expert reports and meant nothing more than that the rig’s centre of gravity moved and that when pre-loading was halted the rig was trimmed by the stern with a list of 2.4 degrees to starboard. The fact is that the sub-soil was satisfactory to support the vessel properly (in the sense of providing it with stable and predictable support) in whatever attitude the actions of the master and crew caused it to adopt.[39]That is sufficient to dispose of this part of the case, but in my view Mr. Rainey was right in saying that in order to invoke paragraph 606 the contractor must be able to establish a direct link between one or more of the circumstances to which paragraph 606 refers and the damage in respect of which it seeks to be indemnified, in the sense it must show that the loss was a direct consequence of the circumstances in question (although after that, as paragraph 911 makes clear, all questions of causation are irrelevant). That seems to me to be the natural meaning of the words used. In the context of the rest of the contract, in particular paragraph 901, nothing less than a direct causative link between the conditions at the drilling site and the loss could justify transferring responsibility for damage to the rig from the contractor to the operator. No such link existed in this case . Mr Jacobs’ argument confuses the ability of the sub-soil to provide proper support to the rig with the failure of the master and crew to ensure that the rig was properly supported, i.e., supported in a proper attitude.[40]For these reasons I would dismiss the appeal.[41]I agree.[42]I also agree.

Cited in 22 later judgments

and 13 more of the most senior