FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President
Lord Sutherland
Lord Coulsfield
Lord Gill
0/1261/5/1990
OPINION OF THE LORD PRESIDENT
in
RECLAIMING MOTIONS
in the causes
CALEDONIA NORTH SEA LIMITED
Pursuers and Reclaimers;
against
1.
2.
3.
4.
5.
6.
7.
LONDON BRIDGE
ENGINEERING LIMITED;
PICKUP NO. 7 LIMITED (formerly
NORTHERN INDUSTRIAL &
MARINE SERVICES COMPANY
LIMITED);
BRITISH
TELECOMMUNICATIONS plc;
WOOD GROUP ENGINEERING
CONTRACTORS LIMITED;
NORTON (NO. 2) LIMITED (In
liquidation)(formerly EASTMAN
CHRISTENSEN LIMITED) and
DAVID JOHN PALLEN, Chartered
Accountant, the Liquidator thereof;
KELVIN INTERNATIONAL
SERVICES LIMITED (formerly
KELVIN CATERING LIMITED);
and
COFLEXIP STENA OFFSHORE
LIMITED (formerly STENA
OFFSHORE LIMITED)
Defenders and Respondents:
_______
Act: MacAulay, Q.C., Batchelor, Q.C., Hofford; Paull & Williamsons
Alt: Currie, Q.C., Keen, Q.C., Wolffe; Simpson & Marwick, W.S.
17 December 1999
2
We have before us reclaiming motions in seven test actions arising out of the
explosion on the Piper Alpha platform on 6 July 1988. There are in fact 146 such actions
before the court and in all of them the pursuers are Caledonia North Sea Limited who are
the successors of the owners of the platform at the time of the disaster. The precise
position as to the responsibilities at that time is somewhat complex but, since it has no
relevance to the issues in this reclaiming motion, for convenience, I shall simply refer to
“the pursuers” without distinguishing among the entities involved. The defenders in the
actions are contractors who had employees working on the platform at the time of the
disaster. As the instances in the actions show, all but one of them have undergone
changes of name over the intervening years. For the sake of simplicity, I refer to them by
the names which they had at the time of the disaster. Employees of the contractors were
injured and killed in the disaster and the pursuers paid damages either to the victims or to
their relatives (“the claimants”). Each of the contractors was engaged to work on the
platform in terms of a contract between it and the pursuers; all the contracts contained
indemnity clauses in favour of the pursuers. In the present actions, which are founded on
those clauses, the pursuers are seeking to be indemnified by the respective contractors
for the sums that were paid in damages to the claimants.
A proof before answer was allowed and the hearing lasted a total of 391 days
spread over the period from 3 March 1993 until 31 October 1996. The Lord Ordinary
issued his opinion on 2 September 1997 and, though not reported, it is being published on
the Internet, under the name Elf Caledonia Limited v. London Bridge Engineering
Limited and Others. In the result the Lord Ordinary was satisfied that the pursuers had
3
established that the explosion had been caused by a leak of condensate from a blind
flange which had been placed on pipework where a pressure safety valve (PSV 504) had
been removed for routine maintenance and had not been replaced. He was satisfied also
that the flange had not been fitted properly by an employee of Score (U.K.) Ltd., a
contractor which had been employed to inspect and maintain valves on the platform.
That being so, in the Lord Ordinary’s view the pursuers had established the factual basis
upon which they would have been entitled to recover under the indemnities.
In fact, however, except in a few cases, all the damages had been paid to the
claimants not by the pursuers themselves but by their insurers acting under contracts of
insurance covering the risk in question. Though brought in the name of the company, the
present actions were actually raised on behalf of the insurers in order to recover from the
contractors the sums which they had spent in indemnifying the pursuers against the
claims brought against them. In the exceptional cases, of which the action against Stena
Offshore Ltd. is an example, the pursuers had not had full insurance to cover the claims
brought against them and they themselves had therefore paid the uninsured element of the
claims. The gap in the insurance cover of the pursuers came to be known as the “Oxy
Gap” and the cases where this point arises were referred to as “the Oxy Gap cases”.
At almost the very end of the proof the defenders advanced an argument that all
the test cases, except the case involving Stena Offshore Ltd., were irrelevant. I deal with
this argument in Part 1 of the opinion but, put shortly, it was to the effect that the
pursuers had been indemnified by the insurers and therefore were not entitled to be
indemnified again under the indemnity clauses in the contracts with the defenders. Since
the pursuers could not recover in an action based on the indemnity clauses, the insurers
4
could not do so either: there was no surviving right of action to which they could be
subrogated. The insurers’ only possible remedy would have been by an action of relief
brought in their own name against the various contractors. The same argument applied to
the Oxy Gap cases in so far as the pursuers sought to recover any sums paid out by the
insurers.
In the event the Lord Ordinary gave effect to the defenders’ argument on
relevancy. In the Oxy Gap case against Stena Offshore Ltd. he granted decree only for
the amounts which represented the sums paid by the pursuers themselves abated to the
Scottish level of damages. In all the other six cases the Lord Ordinary assoilzied the
defenders. The pursuers reclaimed on the relevancy point and also on the Lord
Ordinary’s decision that he would in any event have restricted the sum to be recovered
under the indemnities to an amount which would have represented the value of the claims
under Scots law. The pursuers had sought indemnity for the larger sums which they had
actually paid to settle the claims because of advice which they had been given that the
claimants might have been able to establish jurisdiction against them in Texas. The
pursuers also reclaimed on an issue arising out of their tax liability. The defenders crossappealed on various issues, but principally challenged the Lord Ordinary’s interpretation
of the indemnities and his view that the pursuers had established the necessary factual
basis to succeed in the actions based on the indemnities.
The first volume of the Lord Ordinary’s opinion contains a very detailed account
of the basic facts which form the background to the actions. By a joint minute the parties
have agreed that, with some minor corrections and excisions, the Lord Ordinary’s
account is accurate. We have arranged for that amended version to be reproduced as an
5
appendix to our opinions and, with due gratitude to the Lord Ordinary, I refer to that
appendix for an account of those matters.
The opinion of Lord Coulsfield contains not only an account of many of the
relevant background facts but also an extensive narrative of the various arguments which
were presented by counsel in the hearing before this court. He has also set out the terms
of the various contracts which are the basis of the actions. That immense labour relieves
me of any need to recite the arguments or to reproduce all the terms of the contracts.
In this opinion I deal, first, in Part 1 with the pursuers’ reclaiming motions on the
point of relevancy (“The Contribution Point”) on which the Lord Ordinary ruled against
the pursuers. After that, in Part 2 I turn to the cross-appeals on the “Construction of the
Indemnities”, followed in Part 3 by the pursuers’ reclaiming motions on “Consequential
Loss”, relating to the Lord Ordinary’s decision to restrict the sum which could be
recovered under the indemnities. Further arguments on whether the pursuers can recover
for anything other than Scottish damages appear in the defenders’ cross-appeals on “The
Scottish Level of Damages” in Part 4 and on the “Governing Law” in Part 5. After that I
come on to “The Tax Issue” in Part 6 and to a question relating to “Interest” paid to the
pursuers by the Inland Revenue in Part 7. Having had the privilege of considering the
opinions of the other members of the court on the factual issues, I agree with their
conclusions. In Part 8 (“The Lord Ordinary’s Decision on the Facts”) I therefore
comment only on a number of specific issues. In Part 9 (“Novus Actus Interveniens”) I
deal with a legal argument arising out of the Lord Ordinary’s decision that the explosion
was caused by a combination of, first, negligence by the late Mr. Terence Sutton in fitting
the blind flange to the pipework and, secondly, the subsequent act of the late Mr. Robert
6
Vernon who negligently pressurised pump A and so introduced condensate under
pressure into that section of pipework. Finally, in Part 10 (“Summary and Disposal”) I
summarise the conclusions which I have reached and the matters to be considered at the
By Order hearing which counsel asked us to hold before we formulated our interlocutors.
I start with the defenders’ argument on relevancy for which I adopt the title used
at the hearing and in the papers, even though it does not really do justice to the range of
contentions advanced by counsel.
7
1. THE CONTRIBUTION POINT
Although the present litigations were raised and have been fought in the name of
the pursuers, counsel for the pursuers accept that their insurers are in fact using the
pursuers’ name by virtue of subrogation. In other words, having indemnified the
pursuers, the insurers are standing in their shoes and are using their name to bring
proceedings to enforce the obligations contained in the indemnity clauses in the various
contracts between the pursuers and the defenders. Counsel for the defenders took no
point about this until Day 381 of the proof, the very last day of the main body of their
submissions in the Outer House, when they launched on the unsuspecting pursuers an
entirely novel argument to the effect that the pursuers’ case, in all but the Stena Offshore
action, was entirely irrelevant and, in the Stena Offshore action where the pursuers
themselves had paid a relatively small portion of the claims brought against them, was
relevant only in respect of that portion. In due course the Lord Ordinary gave devastating
effect to this argument by granting decree for only the small portion of the pursuers’
claim in the Stena Offshore action and assoilzieing the defenders in all the other actions.
The pursuers reclaimed against this decision and we heard exceedingly full submissions
on the point. A detailed account of the argument for both parties is to be found in Part
4(a) of Lord Coulsfield’s opinion.
The starting point of the defenders’ argument is that a contract of insurance is a
contract of indemnity. Although the details of the insurance arrangements of the pursuers
were complex, there is no doubt whatever that, subject to the “Oxy Gap”, they had
contracts of insurance with insurance companies which covered their losses from having
8
to pay damages to the claimants. The exact nature of those insurance arrangements (for
example, whether different insurers covered different levels of loss) was not explored
before the Lord Ordinary or before this court. The argument proceeded essentially on the
basis that we should treat the pursuers as having a single contract of insurance with their
insurers which covered the losses in question. It is common ground that the contracts of
insurance are contracts of indemnity. After the disaster occurred, the pursuers contacted
the insurers who were subsequently involved in the negotiations leading to the claims of
the relatives and the injured men being settled. What actually happened, as I explain
more fully in Part 4 below, was that, in the usual way, the insurers took the lead and,
when the claims were eventually settled, the payments to the claimants were made by
cheques drawn on the account of the insurers, rather than of the pursuers. It follows that,
except in the Oxy Gap cases, the pursuers themselves did not actually pay out any money
to the claimants.
If one turns to the relationship between the pursuers and the defenders, the basic
position is again not in dispute. At the relevant time the pursuers were in contractual
relations with the defenders and in the contracts were clauses of indemnity which, leaving
aside the various qualifications in those clauses, made the defenders liable to indemnify
the pursuers against claims or losses arising out of the death of, or injury to, the
defenders’ employees. Indeed, as I have explained, all the actions which form the subject
of these proceedings are based on those indemnity clauses.
As Mr. Wolffe said, the defenders’ basic argument was simple. The pursuers had
been indemnified by their insurers. The pursuers now sought to be further indemnified
by the defenders under the various indemnity clauses in their service contracts. But,
9
having been fully indemnified by their insurers, the pursuers were not entitled to seek any
further indemnity from the defenders, since this would mean that they were being more
than fully indemnified, contrary to the basic principle of the law of indemnity as
enunciated once for all in the classic exposition of Brett L.J. in Castellain v. Preston
(1883) 11 Q.B.D. 380 at p. 386. The present actions would accordingly be irrelevant if
brought by the pursuers and they must equally be irrelevant when raised by the insurers
using the pursuers’ name.
In attacking that argument Mr. Batchelor, Q.C., advanced an equally simple point
of view on behalf of the pursuers. He did not call into question the principle that an
assured is not entitled to be more than fully indemnified. But, he said, payments made by
insurers to indemnify an assured were res inter alios acta so far as any third party was
concerned. That was a general principle which applied in any case where an insurer
raised proceedings in the name of the assured. It therefore applied in the present cases
where the proceedings were based on a right under a contract of indemnity. The actions
were accordingly relevant. Although counsel placed both the “simple” argument for the
defenders and the pursuers’ attack on it in a wider context relating to the law on
contribution and relief, I find it convenient to deal with the “simple” argument first.
1.1 Lack of Specific Notice in the Defenders’ Pleadings
Before turning to the defenders’ “simple” argument, however, I should record that
counsel for the pursuers submitted that the Lord Ordinary had been wrong to deal with
the defenders’ argument at all since it was not focused in a specific plea-in-law nor
10
otherwise foreshadowed in the defenders’ pleadings. Had it been, the pursuers might
well have wished to debate the point in procedure roll since, if correct, it was a complete
answer to most of the actions and proof in those actions had therefore been unnecessary.
It is fair to say that counsel for the pursuers did not advance the argument unduly
strenuously and by the time senior counsel came to address us it had been reduced to the
status of “a grumble”.
It may well be that it would have been preferable for the defenders to focus their
argument in a specific plea-in-law. It may well be also that it would have been preferable
if the point had been debated in procedure roll. But we do not know when exactly the
particular argument occurred to counsel for the defenders - it may, for instance, have
come to mind only during the proof and even at a late stage in the proof. The reasons for
the lack of a specific plea or for the defenders’ not having taken the point in procedure
roll would obviously be factors in any question of expenses.
What the Lord Ordinary had to decide, however, was whether it was open to the
defenders to take this fundamental point under their general plea to the relevancy of the
pursuers’ case. He decided that it was and I agree with him: the defenders’ argument
is indeed directed to the relevancy of the pursuers’ case as a whole and can therefore be
dealt with under such a general plea. Moreover, if an argument can properly be advanced
under a general plea to the relevancy, then it can properly be advanced on that basis even
if it occurred to counsel only at a very late stage in the proceedings, long after the plea
itself was tabled. That having been said, it could have been that the pursuers were
prejudiced by the lack of notice of the particular argument - if, for instance, they might
have wished to lead evidence to counter some aspect of the argument. But in this case
11
counsel for the pursuers made no motion to the Lord Ordinary to be allowed to lead
additional evidence and, before us, they confirmed that they would not have wished to do
so. They were also given time to prepare their reply to the defenders’ argument. In that
situation I can detect no real prejudice which the pursuers suffered in the conduct of these
proceedings from the sudden appearance of the defenders’ fundamental argument. If the
Lord Ordinary had rejected the defenders’ argument, its sudden emergence would have
made no difference. Since the pursuers were given time to prepare their response and did
not wish to lead further evidence, they would apparently have fared no better, and the
Lord Ordinary would still have accepted the defenders’ argument, even if it had been
signalled from the outset. As the mounds of authorities assembled for the reclaiming
motion proclaimed, the once-novel point has certainly been fully researched by now. In
those circumstances I am satisfied not only that the Lord Ordinary was correct to consider
the defenders’ argument but that it is proper for us to do so too.
1.2 Subrogation to Rights under an Indemnity - The Defenders’ “Simple”
Argument
In presenting their argument that the payment by the insurers had the effect of
extinguishing the contractors’ liability under the indemnity clauses, counsel for the
defenders accepted, of course, that payments by an insurer are not generally regarded as
having the effect of extinguishing a third party’s liability to the assured. To take only the
most obvious example, it has long been settled that a wrongdoer’s liability to pay
damages is not affected by the fact that the victim may have been indemnified for his loss
12
under a contract of insurance. See, for instance, Bradburn v. Great Western Railway
(1874) L.R. 10 Ex. 1. Counsel argued, however, that a clause or contract of indemnity
was different. Under such a contract the person to be indemnified is entitled to be
indemnified for his loss but is entitled to nothing more. Therefore, it was said, in a case
where the person seeking to be indemnified had already been indemnified by his insurers,
he no longer had any loss for which he could be indemnified under the contract or clause
of indemnity.
I do not find the supposed distinction compelling. In a case where an owner’s
property is damaged by the wrongful act of a third party, the third party’s liability is to
pay damages which will compensate the owner for the loss which he has suffered as a
result of the third party’s act. The liability arises only where there is loss. In a particular
case, of course, the owner may have been insured and so may receive a full indemnity
from his insurers. In those circumstances he will no longer be suffering any actual loss as
a result of the damage to his property. Nevertheless, as between the owner and the third
party, he is regarded as still suffering a loss, at least for the purpose of allowing
proceedings to be brought in his name to recover that loss from the third party. Were the
law not to treat him as continuing to suffer a loss for these purposes, there would be no
loss for which the third party would remain liable to compensate him; he would have no
remaining right to damages from the third party and so there would be no right which the
insurers could enforce by raising proceedings in his name. In other words subrogation
could not operate. Indeed precisely such an argument, that there could be no subrogation
because the claim had already been extinguished, was long ago advanced before, and
13
rejected by, the Privy Council in an appeal from Lower Canada, Quebec Fire Insurance
v. St. Louis (1851) 7 Moo. P.C. 286.
So, it is critical to the entire approach of the law to many routine claims for
damages which are brought before our courts that the pursuer is regarded as continuing to
suffer loss even though he has been indemnified for his loss by his insurer. In all these
cases any payment by the insurer to the assured - indeed the very existence of a contract
of insurance - is said to be res inter alios acta. For that reason, when considering
whether an assured’s right to be indemnified is to be treated as remaining in existence,
even after the assured has been indemnified by his insurer, I do not find the answer
simply in the fact that the indemnifier’s obligation is to indemnify for loss. Equally, a
wrongdoer’s liability is to compensate for loss. In both cases, the question is whether, as
between the assured and the third party, the law regards the assured as continuing to
suffer loss even though he has been indemnified by his insurer. We know that in the case
of a wrongdoer the law does indeed treat the assured as continuing to suffer loss in those
circumstances and so allows an action to be brought in his name. For my part I can see
no real distinction, for present purposes, between that kind of case and the case of an
indemnity clause or contract; nor do I perceive any reason in principle why the approach
of the law should be different in the two cases.
What counsel for the defenders were really arguing was that the question should
be decided by focusing on the contract or clause of indemnity and its characteristics. In
my view that is to look at the matter from the wrong end. Subrogation is a remedy which
is available to the insurer under the contract of insurance and its purpose is to give effect
to that contract as one of indemnity. As will be seen in more detail in Part 1.4 below,
14
subrogation works by giving the insurer who indemnifies the assured the right to raise
proceedings in his name and, by the very nature of the circumstances in which it comes
into play, the proceedings by the insurer must necessarily be to recover sums which have
already been paid to the assured or paid on behalf of the assured. The remedy could not
exist unless, in insurance as in other cases of indemnity, our law took the view that
payments made by the indemnifier fall to be ignored in proceedings raised by him in the
name of the assured against a third party. Those payments are ignored in all cases where
subrogation applies, whatever may be the basis of the action which is raised in the name
of the assured after he has been indemnified by the insurer.
Examples make this clear. Payments by an insurer are ignored where grain stored
in a granary is insured by the owner and, the grain having been destroyed in a fire, the
owner is indemnified by the insurer. Even though the owner is no longer suffering any
loss, the insurer is entitled to stand in his place and sue the wharfinger for breach of duty,
“whether it is a breach of duty, or of custom, which is a local law, or whether it is a duty
imposed by the general law, or a duty imposed by the contract of carefully keeping the
goods”: North British and Mercantile Insurance Company v. London, Liverpool, and
Globe Insurance Company (1877) 5 Ch. D. 569 at p. 576 per Jessel M.R.; at pp. 581 582 per James L.J.; at pp. 584 - 585 per Mellish L.J.; at p. 587 per Baggallay J.A. The
court rejected the argument that a distinction should be drawn between such a case and
one where the third party’s liability is based on tort. Similarly, where a cargo owner’s
cargo is sacrificed to avoid a common peril and he is indemnified by his insurer for loss,
the payments to the owner are ignored and the insurer is subrogated to the owner’s claim
for general average to recover the sum which he paid to the owner: Dickenson v. Jardine
15
(1868) L.R. 3 C.P. 639. Equally, where a house is destroyed by fire, the insurer who has
indemnified the owner can recover the amount of the indemnity by raising proceedings in
the name of the owner against the tenant on a covenant to repair, there being no question
of fault on the part of the tenant. Again, the fact that the owner has been paid is ignored:
Darrell v. Tibbitts (1880) 5 Q.B.D. 560 at p. 563, per Brett L.J.; at p. 564, per Cotton
L.J.; at pp. 566 - 567 per Thesiger L.J.: Andrews v. The Patriotic Assurance Company
of Ireland (1886) 18 L.R. Ir. 355 at p. 365 per Palles C.B.
In all these cases the law has chosen to disregard the payments made by the
insurer to the assured and to permit the insurer to raise an action in the assured’s name.
This is not a standpoint which is compelled by legal logic alone: if nothing but legal
logic had been in play, the law could equally well have taken the opposite view. It could
have regarded the payments made by the insurer as having the effect of indemnifying the
assured and so as extinguishing the loss. But the law has consistently taken the opposite
view and, as a matter of substance, this can only be because the policy underlying the law
of insurance is that the insurer should not bear the ultimate responsibility for
indemnifying the assured in these cases. Instead, the third party who is under an
enforceable legal obligation to pay the assured is made to bear the ultimate responsibility.
In North British and Mercantile Insurance the liability of the wharfingers to the
merchants was described as “the primary liability” as opposed to the liability of the
insurance company to indemnify the merchants by virtue of their contract of insurance: 5
Ch. D. at p. 587 per Baggallay J.A.; cf. at p. 578 per Sir George Jessel M.R. and at p.
582 per James L.J. This distinction has been followed in subsequent cases, for example,
by Lord Low in Sickness and Accident Assurance Association Ltd. v. General Accident
16
Assurance Corporation Ltd. (1892) 19 R. 977 at p. 980 where he referred to the decision
of the House of Lords in Simpson & Co. v. Thomson (1877) 5 R. (H.L.) 40 as
exemplifying
“the doctrine that where the insured has a primary right against third
parties who have been the authors of the loss, the insurers on making good
the loss are entitled to be put in his place, and to enforce the remedies
which he would have had against these third parties.”
On the basis of the authorities the doctrine could perhaps be stated in a more general
form to the effect that where the assured has a primary right against a third party which
goes to reduce his loss, whether the right be based on a delict or on a contract, an insurer
on making good the loss is entitled to be put in his place and to enforce the remedies
which he would have had against the third party.
Counsel for the defenders sought to distinguish the present cases from other cases
involving a liability on a third party by pointing out that they involve two sets of
companies, the insurers and the contractors, both of which undertook, for a consideration,
to indemnify the pursuers in the events which occurred. Counsel suggested that, since
both had undertaken the obligation to indemnify as a commercial transaction, there was
no obvious reason why the contractors rather than the insurers should bear the ultimate
liability to indemnify the pursuers. The answer to counsel’s suggestion must be that the
pursuers are regarded as having a primary right against the contractors and a secondary
right against the insurers. The primary right derived from the agreement under which the
contractor in question carried out its role on the platform. The contractor’s indemnity
was just one element in the complex of relationships which were put in place to allow the
17
platform to be operated. The insurers were not a part of that complex of relationships but
were external to it, owing an obligation to the pursuers by reason of a contract which was
concerned only with insuring the pursuers against losses suffered by them as a result of
the operation of the platform. More particularly, in the absence of any indication to the
contrary, it can be assumed that the pursuers took out and paid for the policy of
insurance, partly at least, to protect themselves against any loss which they might suffer
as a result of any failure by the contractors to fulfil their contractual obligations to
indemnify the pursuers against the claims and losses specified in the respective
indemnities. The insurance policy was intended to benefit the pursuers. If the defenders’
argument were correct, by paying for the insurance policy, the pursuers would have
benefited not themselves but the defenders, who would be relieved pro tanto of their
contractual obligation to indemnify the pursuers against the relevant claims and losses.
That is inconsistent with the nature of a contract of insurance. The perception that a
contract of insurance is intended to benefit the assured rather than a third party,
expounded long ago by Bramwell B. in Bradburn v. Great Western Railway Co., applies
as much in the present situation as in any other.
I therefore see no reason in principle why the law should adopt a different
approach and exclude the possibility of a subrogated action in the case of a clause of
indemnity. Such a clause of indemnity, however absolute its terms, is just an undertaking
by the indemnifier to pay to the creditor the amount of the loss which he has suffered. In
essence that obligation is no different from the absolute obligation of the wharfinger to
make good the loss suffered by the owner of grain stored in his warehouse and destroyed
by fire (North British and Mercantile Insurance); or the obligation of a tenant under a
18
lease to repair the landlord’s house if it is destroyed by fire (Darrell v. Tibbitts). In these
cases the insurers can raise subrogated proceedings against the wharfinger or tenant and
recover the loss, even though the owner has been indemnified. If the law does not
impose the ultimate liability to indemnify on the insurers in these cases, there can be no
reason of legal policy to make the insurers bear the ultimate liability in a case like the
present. They should therefore be entitled to raise proceedings in the pursuers’ name
based on the indemnity clauses.
I have reached that view by looking at the issue in the broad context of the law of
insurance and subrogation. What is perhaps most surprising about the defenders’
argument is the paucity of authority specifically dealing with it. At the same time, there
is nothing in the general authorities on subrogation which would suggest that contracts of
indemnity fall into a distinct category, subject to an entirely different rule. On the
contrary, the law on the availability of subrogation tends to be stated so broadly as to
leave little or no room for an exception of the kind envisaged by the defenders. For
instance, one of the classical descriptions of subrogation, by Brett L.J. in Castellain v.
Preston, 11 Q.B.D. at pp. 388 - 389, is in these terms:
“... as between the underwriter and the assured the underwriter is entitled
to 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, which can be, or has been
exercised or has accrued, and whether such right could or could not be
enforced by the insurer in the name of the assured, by the exercise or
19
acquiring of which right or condition the loss against which the assured is
insured, can be, or has been diminished.”
It is hard to see how Brett L.J. could have stated the principle in broader terms and
equally hard to imagine that he did not intend it to be comprehensive. Certainly, I find it
impossible to say that he intended to exclude the right of an assured who is the creditor
under an indemnity clause or contract, since such a right is undoubtedly one “by the
exercise of ... which” any relevant loss of the assured “can be ... diminished.” This
passage from Brett L.J.’s opinion was quoted with approval by Lord Jauncey in the
House of Lords in Esso Petroleum Co. Ltd. v. Hall Russell & Co. Ltd. 1988 S.L.T. 874 at
p. 882 D – F; [1989] A.C. 643 at pp. 671 H – 672 C.
Although they combed the British law reports, counsel were unable to turn up any
case dealing squarely with the right of insurers to sue in the name of their assured on the
basis of an obligation of indemnity. The lack of any reported decision does not persuade
me that such an action would be legally impossible; rather, it may tend to suggest that
the competency and relevancy of such an action, which must have been potentially open
for argument on countless occasions, have long been regarded as established. In that
connexion it is of some significance that, in Larrinaga Steamship Co. v. The King [1945]
A.C. 246 at pp. 256 and 261, Lord Wright and Lord Porter assumed that marine risks
insurers would have been subrogated to the shipowners’ rights under the indemnity from
the charterer which forms part of the employment clause in a time charter. Counsel for
the defenders pointed out, quite correctly, that their Lordships’ views were obiter. But
the striking point for present purposes is, surely, that these giants of commercial law took
the point for granted. Counsel’s only other submission was that, however eminent the
20
source, the views were ill-founded. It was not suggested, however, that their Lordships’
views had been criticised by the courts or by the profession in the intervening halfcentury. This is important when it is recalled that the comments of Lord Wright and Lord
Porter were directed not to an ad hoc term but to an indemnity in a standard clause,
discussed, for instance, in Scrutton on Charterparties (20th edition, 1996), pp. 366 - 368
and Carver on Carriage by Sea (13th edition, 1982), pp. 484 - 486. I note moreover that
in Whistler International Ltd. v. Kawasaki Kisen Kaisha Ltd. [1999] 3 W.L.R. 724 at pp.
739 E – 740 B Potter L.J., with whom the other members of the Court of Appeal
concurred, quoted the passage from Lord Wright’s speech without giving any sign that he
considered that it contained an anomaly.
The search by counsel for the pursuers for authority on this matter did not stop,
however, at the shores of the United Kingdom. They pursued their quest among the
many jurisdictions of the United States and there they were rewarded with a number of
discoveries. In total they cited seven cases. Rather than examine them all, I select two
which counsel for the defenders accepted were directly in point.
The first is a decision of the Supreme Court of Washington, Consolidated
Freightways, Inc. v. Moore 38 Wash. 2d 427, 229 P. 2d 882 (1951). Understanding the
facts is not made any easier by a slip in the first sentence of the judgment of Mallery J.
where the parties are transposed. Contrary to what is said there, the defendant (Moore)
leased a truck from the plaintiff (Consolidated) for a return journey from Portland to
Seattle. The lease provided that
“Lessor agrees to indemnify and save Consolidated harmless in case of
any and all injury or damage to persons or property (including damage to
21
the equipment leased hereunder or loss or damage to cargo carried
thereon) resulting from the operation of the said equipment during the
period of this lease ....”
On the return journey the defendant collided with the vehicle of a third party who
recovered a judgment for personal injuries and property damages against the plaintiff and
defendant, jointly and severally. The judgment was paid by the plaintiff with money
provided for that purpose by its insurers. In terms of an agreement with its insurers, the
plaintiff raised an action against the defendant to recover the sum which the insurers had
paid, based on the indemnity in the lease agreement. The plaintiff succeeded at first
instance and the defendant appealed. The relevant part of the Supreme Court’s decision
is in these terms (38 Wash. 2d at pp. 430 - 431; 229 P. 2d at pp. 884 - 885):
“As to his contract liability the appellant contends that the insurance
company, not respondent, paid the third party judgment; that it is the real
party in interest, is not privy to the contract of indemnity, and has no right
of subrogation by reason of its primary liability; that it should, therefore,
not be permitted to make itself whole at the expense of the appellant.
We can agree that the insurance company is not privy to the contract and
that the insurance company paid the loss. But, the ultimate question here
presented is whether or not the insurance company is subrogated to
respondent’s contractual right of indemnity.
It is a well settled rule in tort actions that a party has a cause of action
notwithstanding the payment of his loss by an insurance company.... The
22
purpose of this rule is to implement the insurance company’s right of
subrogation, and not to afford the respondent a double recovery.
‘It [subrogation] is a device adopted by equity to compel the ultimate
discharge of an obligation by him who in good conscience ought to pay it.’
50 Am. Jur. 678.
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 [sic sed quaere respondent’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.”
The judgment shows that the court regarded the doctrine of subrogation as a tool with
which to ensure that the proper person ultimately bears the responsibility for the cost of
indemnifying the assured. Given that general approach, the court saw no reason to
distinguish between the situation where an insurer was subrogated to an action in tort and
the situation where the insurer was subrogated to an action on a contract of indemnity. In
each case the remedy was available in order to ensure that the appropriate person bore the
ultimate liability.
23
The second case is North Central Airlines, Inc. v. The City of Aberdeen, South
Dakota 370 F. 2d 129 (8th Cir. 1966). The action arose out of an accident in which a
lady was injured in a fall in the entrance to the terminal building of Aberdeen Airport in
South Dakota. Under a lease from Aberdeen, North Central had the exclusive use of
certain parts of the building and shared use of all public space in and around the terminal
building. In terms of Article X of the lease
“The Lessee agrees to indemnify and hold the Lessor harmless from and
against all liabilities, Judgments, cost, damages and expense which may
accrue against, be charged to or recovered from Lessor by reason or on
account of ... injury to or the death of any person arising from the Lessee’s
use and occupancy of and operations at the airport under any
circumstances except when caused by the Lessor’s sole negligence or by
the joint negligence of Lessor and any person other than the Lessee.”
The injured lady sued Aberdeen for damages but lost her action. Aberdeen then sought to
recover their costs from North Central under the terms of the indemnity. The court at
first instance upheld Aberdeen’s claim for their costs and North Central appealed on
various grounds. One of their arguments was that Aberdeen were not entitled to recover
attorney fees and expenses since they had been insured for these. The Eighth Circuit of
the United States Court of Appeals rejected that argument (370 F. 2d at p. 134):
“The duty to indemnify, North Central contends, must be founded upon
the specific liability or obligation of Aberdeen and not that of its insurance
carrier. We reject North Central’s argument and hold that Aberdeen’s
insurance coverage in no way affects the underlying obligation of North
24
Central to indemnify. The fact that Aberdeen had contracted with an
insurance carrier to protect itself from the same risk of loss as
comprehended by North Central’s indemnity obligation should not
exonerate North Central from its duty to indemnify according to
agreement. Case law, we feel, squarely bears out this proposition.
In Safway Rental & Sales Co. v. Albina Engine & Machine Works, Inc.,
343 F. 2d 129 (10th Cir. 1965) the Tenth Circuit similarly faced the
question of recovery of attorney fees and other litigation expenses incurred
by an insurer of the indemnitee (the Albina Company). The indemnitor,
Safway, argued that the expenses and attorney fees were obligations of
Albina’s insurer and not of Albina itself, and that therefore no right of
subrogation to Albina’s right of indemnity against Safway existed in
behalf of the insurance company. While realizing that Albina was only
‘technically liable’ for defending the action or paying any judgment, the
Tenth Circuit nevertheless concluded that a cause of action under the
implied indemnity agreement existed in favor of Albina and held that
Albina’s insurer was subrogated to Albina’s right to recover any expenses
incurred in defense of the suit. As to Safway’s argument that Albina
would never be individually liable for any expenses or any judgments
rendered, the court merely reiterated the proposition that:
‘the fact the insured (Albina) carried a liability policy should not relieve
the negligent party of its obligation to indemnify the insured for the
25
judgment or for fees and expenses arising from the original claim.’ 343 F.
2d at 134.”
The court went on to examine a further decision to the same effect. This case confirms
the view that the liability of the debtor under an indemnity is not affected by the fact that
the creditor may have been paid the sum in question by an insurer. (I observe in passing
that, so far as I am aware, it has never been suggested that under our law a successful
party who has insurance covering its legal expenses is for that reason debarred from
seeking those expenses against his opponent.)
Although, as counsel for the defenders pointed out, in F. H. Vahlsing, Inc., v.
Hartford Fire Ins. Co. 108 S.W. (2d) 947 (1937) the situation was slightly different,
since the insurers had taken an assignation of the assured’s rights under an indemnity, the
decision of the Court of Appeals of Texas does none the less show that, even though the
assured had been indemnified by the insurers, the assured’s rights under the indemnity
subsisted, at least to the extent of allowing them to be used by the insurers in order to
place the ultimate responsibility on the party bound by the indemnity. It therefore
supports the pursuers’ argument. Indeed only one of the American cases, Patent
Scaffolding Co. v. William Simpson Construction Company 256 Cal. App. 2d 506, 64
Cal. Rptr. 187 (1967), was against the pursuers. Counsel for the defenders recognised,
however, that it had been decided in the context of a doctrine of “equitable subrogation”
which appears to be substantially different from the legal principles applied in the
established case law in this country. In these circumstances I did not find the case of
assistance.
26
The American authorities which I have quoted provide support for the view that,
contrary to the submission of the defenders, for the purposes of subrogation an obligation
of indemnity owed by a third party is not to be treated differently from other obligations
owed by a third party. An insurer who indemnifies an assured should be entitled to bring
an action in the assured’s name to enforce an obligation of indemnity owed by a third
party to the assured, just as the insurer can bring such an action to enforce a right to
damages for breach of contract or for delict. The purpose of the action, as with any other
subrogated action brought by an insurer, is to ensure that the third party rather than the
insurer bears the ultimate liability to indemnify the assured. The same legal policy which
justifies subrogation by an insurer in the case of loss caused by breach of contract or by
delict justifies subrogation to enforce an obligation of indemnity.
For these reasons I reject the defenders’ “simple” argument. But counsel for the
defenders supplemented that argument with a much wider submission to the effect that
the insurers’ rights, if any, against the defenders are not rights to pursue a subrogated
action in the name of the pursuers but rights to seek contribution in an action of relief.
From the terms of his opinion it appears that the Lord Ordinary was considerably
influenced by this aspect of the argument which raises certain very fundamental matters.
1.3 The Defenders’ Wider Argument
Counsel for the defenders put their argument in this way. The insurers had
entered into a contract of indemnity with the pursuers; the defenders had entered into
contracts with the pursuers and all those contracts contained indemnity clauses.
27
Although the risks covered by the insurance contract were not, of course, identical with
the events giving rise to the obligations of indemnity under the contracts for services, in
fact in each case the insurers and the defenders had contracted to indemnify the pursuers
in the events which had occurred. In that situation the law regarded the insurers and the
defenders as co-obligants, each liable in solidum to the common creditor. Where, as
here, one of the co-obligants had indemnified the common creditor, the right of the other
co-obligant was limited to a right of contribution, enforceable in an action of relief. That
right of contribution arose precisely because the payment by one co-obligant discharged
the obligation of the other: to prevent the second co-obligant being unjustly enriched in
this way, the law allowed the first co-obligant to recover one-half of the sum which he
had paid to the common creditor, so that in the end each of the co-obligants would bear a
pro rata share of the debt. It was not, therefore, anomalous that the insurers should not
be entitled to bring the present proceedings against the defenders; they could not do so
because their payment to the pursuers had discharged the defenders’ liability under the
indemnity and had thereby given the insurers a new right to sue the defenders for
contribution in an action of relief. The insurers might have lost that new right by reason
of prescription, but, if so, that was merely because they had analysed their legal position
incorrectly and had raised the wrong kind of proceedings. These last matters were
peculiar to the facts of this particular case and did not affect the position in principle.
For the pursuers Mr. Batchelor submitted that the defenders’ argument
presupposed that the payment by the defenders had indeed extinguished the defenders’
obligation to the pursuers. If, as he had argued, the payment by the insurers was truly res
inter alios acta and did not extinguish the defenders’ obligation under the indemnity
28
clauses in their contracts, then on the defenders’ own argument no obligation of
contribution could arise between the defenders and the insurers. In any event it was
wrong to regard the insurers and defenders as being co-obligants for these purposes. The
primary or ultimate obligation to indemnify rested on the defenders and any obligation of
the insurers was secondary to that obligation. Accordingly, where the insurers had fully
indemnified the pursuers, they were entitled to raise proceedings in the pursuers’ name in
order to recover from the defenders the sum which they had paid to the pursuers. In this
way the primary or ultimate liability would rest on the defenders. Since the insurers were
entitled to recover the whole of their outlay and not simply a contribution of one-half, an
action of relief would have been irrelevant.
In dealing with the defenders’ “simple” argument I have held that the contractors
should bear the ultimate responsibility for indemnifying the pursuers. In the terms used
in North British and Mercantile, the contractors have “the primary liability” to indemnify
the pursuers. That being so, the insurers, who have paid on behalf of the pursuers, should
be able to recover their expenditure from the contractors. How the law brings that about
may be more a matter of machinery than of principle, but it is an important matter,
nonetheless. One possible mechanism would be by subrogation, allowing the insurers to
stand in the shoes of the pursuers and sue on the indemnity clauses. Another possible
mechanism would be by an action of relief. Counsel for both parties assumed that these
two mechanisms were necessarily mutually inconsistent. In my view, in Scots law at
least, that assumption is misconceived and tends to distort the legal picture, thereby
introducing unnecessary complications and untenable distinctions. In addressing this
matter I begin by looking more closely at the nature of subrogation in Scots law.
29
1.4 The Nature of Subrogation in Scots Law
Although the term “subrogation” is rarely encountered nowadays except as a legal
term of art, the word itself was at one time used more generally to refer to the substitution
of one person for another (Oxford English Dictionary s.v. subrogation, 1). In modern
Scots law at least, we usually think of subrogation in relation to the position of an insurer
which has indemnified its assured, but it has long been recognised that this is just one
particular application of a concept which operates more widely. Speaking of the situation
of underwriters who had indemnified a shipowner for the loss of a vessel, Lord Cairns
L.C. observed in Simpson & Co. v. Thomson 5 R. (H.L.) at p. 42:
“I know of no foundation for the right of underwriters except the well
known principle of law that where one person has agreed to indemnify
another, he will, on making good the indemnity, be entitled to succeed to
all the ways and means by which the person indemnified might have
protected himself against or reimbursed himself for the loss.”
Similarly, in Esso Petroleum Co. Ltd. v. Hall Russell & Co. Ltd. 1988 S.L.T. at p. 882 G
– H; [1989] A.C. at p. 672 E – F Lord Jauncey noted that subrogation:
“undoubtedly extends to other contracts of indemnity and to cautionary
obligations such as guarantees given to a creditor on behalf of a debtor,
although in the former case the indemnifier is subrogated to the rights and
remedies of the assured or other person indemnified whereas in the latter
he is subrogated to the rights of the creditor. What is, however, absolutely
30
clear from the authorities is that the rights and remedies to which the
indemnifier is subrogated are those which were vested in the person to
whom payment has been made, no more and no less, and that rights and
liabilities of third parties unconnected with the contract are not affected.”
I draw particular attention to Lord Jauncey’s observation that subrogation is to be seen at
work in the case of cautionary obligations where the cautioner has paid the creditor.
Lord Chancellor Cairns speaks of indemnifiers “being entitled to succeed to” all
the ways and means by which the person indemnified might have protected himself
against, or reimbursed himself for, the loss. Sometimes it is said that the indemnifier
stands in the shoes of the person whom he has indemnified. Images of the indemnifier
being put in the place of, or standing in the shoes of, the person indemnified are
consistent with the basic idea that one person is “substituted” for the other. They may
also be apt if they conjure up a picture of the indemnifier succeeding to or using the rights
of the person indemnified rather than of the person indemnified transferring those rights
to the indemnifier, as would happen in the case of assignation as usually understood
nowadays in our law. The courts have often made clear that there is a distinction
between subrogation and that kind of assignation. Lord President Emslie reaffirmed this
in Esso Petroleum 1988 S.L.T. at p. 43 D -E:
“Subrogation, however, is not a species of assignation. To take an
example from the circumstances of this case an assignation by the crofters
in favour of the pursuers would divest the crofters, for all time, of all their
rights to claim reparation from the first named defenders and others.
Subrogation does not have this effect. It merely gives to the pursuers, who
31
have compensated these crofters under Tovalop, the opportunity to take
advantage of any means available to these crofters to extinguish or
diminish the loss for which they may be or have been indemnified, and to
have the crofters account for any duplication of compensation.”
The Lord President emphasises that subrogation does not involve the assured divesting
himself of his rights in favour of the insurer; rather, the insurer can take advantage of the
assured’s rights against third parties. This point is perhaps most dramatically illustrated
by the decision of the Court of Appeal that, even after he has been indemnified, though
not completely, the assured can raise proceedings against a third party, despite the
objections of the insurer: Morley v. Moore [1936] 2 K.B. 359. Similarly, it is because
the rights remain the rights of the assured that, when by virtue of subrogation the insurer
raises proceedings against any third party, the proceedings run in the name of the assured.
Only if the assured actually assigns his rights to the insurer can the insurer raise an action
in its own name: Esso Petroleum 1988 S.L.T. at p 878 H; [1989] A.C. at p. 663 F per
Lord Goff citing the decision of Roskill J. in Compania Colombiana de Seguros v.
Pacific Steam Navigation Co. [1965] 1 Q.B. 101.
Subrogation is therefore properly to be distinguished from assignation as that term
is nowadays generally understood and as it is used by Lord Emslie in the passage in Esso
Petroleum. At first sight, at least, it may therefore seem surprising that Lord Jauncey
should have given, as an example of subrogation, the right of a cautioner who pays the
debt to take over the rights of the creditor under his agreement with the principal debtor
and with any co-cautioner. After all, the general understanding is that the cautioner
32
“is entitled to demand from the creditor an assignation of the debt itself,
of any available diligence or remedy, and of all securities for the debt,
which are in the hands of the creditor” (W. M. Gloag and J. M. Irvine,
Law of Rights in Security (1897), p. 804, emphasis added).
In other words, instead of simply putting the cautioner in a position where he can exercise
the creditor’s rights, the law provides that the cautioner has a right to obtain an
assignation of those rights from the creditor. Superficially at least, this right of the
cautioner to require an assignation does not appear to conform to the idea of subrogation
as explained in the other cases. At a more fundamental level, however, Lord Jauncey’s
comments reveal that the approach of the law in insurance and cautionry is the same:
what has happened is that the law and practice relating to the assignation of rights have
changed.
Nowadays we think of the cedent transferring rights to the assignee. That causes
us no difficulty since modern legal systems tend to recognise that rights are transferable.
At an early stage in its history, however, Scots law regarded contractual rights as being,
of their very nature, personal to the creditor and as therefore not capable of being
transferred to other people. One device, which was adopted to avoid the resulting
practical problems and to give the effects of a transfer, was for the creditor to agree that
the other party could take proceedings to enforce the right, using the creditor’s name but
keeping any sum which was recovered. In other words the creditor made the other party a
procurator in rem suam. See, for example, Stair, Institutions 3.1.3; Bell’s Principles,
para. 1459. As Lord President Inglis remarked, a procuratory in rem suam “is just one of
the definitions of an assignation”: British Linen Bank Co. v. Carruthers and Ferguson
33
(1883) 10 R. 923 at p. 926. Signs of that approach to assignation survive today in the
rule that an assignee may sue either in his own name or in the name of the cedent: Fraser
v. Duguid (1838) 16 S. 1130.
Even after the law came to accept that rights could be transferred, assignations
could still be either direct or indirect. The direct assignation was the form of assignation,
familiar to us today, in which the cedent transfers his right to the assignee. The indirect
form of assignation, which could still be used after the Transmission of Moveable
Property (Scotland) Act 1862, involved the cedent constituting the assignee his lawful
cessioner and assignee. The style was:
“I have made and constituted, as I hereby MAKE, CONSTITUTE and
APPOINT the said C, his executors and assignees, my lawful irrevocable
CESSIONERS and ASSIGNEES, ... in and to [the subject matter] ...
SURROGATING and SUBSTITUTING the said C and his foresaids in
my full right and place of the premises ...” (Juridical Styles (5th edition,
1883) Vol. II, pp. 672 - 673).
This clause is sometimes referred to as the “clause of surrogation” or the “clause of
assignation and surrogation”. See, for instance, W. Ross, Lectures on the History and
Practice of the Law of Scotland, relative to Conveyancing and Legal Diligence (first
edition, 1792, second edition, 1822), p. 192 and J. Craigie, Scottish Law of Conveyancing
Moveable Rights (1894), p. 237.
The verb “to surrogate” is a variant form of the verb “to subrogate” and has the
same essential meaning of “to substitute” (Oxford English Dictionary, s.v. surrogate, as a
verb, giving a variety of usages). In these indirect assignations the verb was used to refer
34
to the cedent putting the assignee into his place as creditor of the various rights.
Whatever may be the precise effects of substitution in the two contexts, the basic idea of
“surrogation” or substitution in indirect assignations is similar to the idea of
“subrogation” or substitution in our law today. So, although it is correct to say that the
idea of subrogation differs from the modern idea of assignation, subrogation was actually
one of the techniques which was used to effect an assignation under our older practice.
For that reason there is nothing anomalous in describing the right of the cautioner as one
of subrogation: subrogation and assignation, as nowadays understood, are just different
techniques which the law uses to achieve the purpose of putting one person into the place
of another so that he can exercise particular rights.
This analysis is confirmed by Pothier, Coutumes des Duché, Baillliage et Prévôté
d’Orléans 20.5.1 where he says that subrogation can come about in different ways,
whether by force of law, by virtue of a requirement which is made of the creditor, by
agreement with the creditor or by agreement with the debtor. In 20.5.2 he gives the cases
of a co-obligant and a surety as examples of the second category where the subrogation
comes about by reason of a requirement made of the creditor. When they pay, coobligants and sureties have the right
“d’exiger que le créancier les subroge en tous ses droits, actions,
privileges & hypotheques: ils sont en droit de lui dire: Ou déchargeznous, ou subrogez-nous.”
Pothier adds that the same rule of charity which obliges us to love our neighbour as
ourselves, and therefore to aid him as much as we can without prejudicing ourselves,
means that the creditor cannot refuse this subrogation. He goes on (20.5. n. 680) to
35
analyse the position of the party who pays the debt in terms of a procuratory in rem suam:
“le subrogé, de même que le cessionaire, sont seulement faits procureurs in
rem suam du créancier pour exercer tous les droits, actions, hypotheques &
privileges du créancier, de meme que le créancier l’auroit pu faire luimême.”
Reference may also be made to Pothier, Traité des Obligations 2.6.4 and 3.1.6.2.
Pothier’s work had a profound influence on the compilers of the French Code
Civil. Scarcely surprising then can be the language of Article 1251 al. 3 dealing generally
with the position of a co-obligant who pays the common debtor:
“La subrogation a lieu de plein droit:
...
3 Au profit de celui qui, étant tenu avec d’autres ou pour d’autres au
payement de la dette, avait intérêt de l’acquitter....”
Equally unsurprising is the language of Article 2029 on the position of a surety who pays
the common creditor:
“La caution qui a payé la dette est subrogée à tous les droits qu’avait le
créancier contre le débiteur.”
Since the Code does not form part of the law of Quebec, however, it was the analysis of
Pothier and other older French writers which formed the basis of the reasoning of the
Privy Council in Quebec Fire Assurance Company v. St. Louis 7 Moo. P.C. at pp. 316 –
317.
Whatever disputes there may be about its basis and origins in our law, one aspect
at least of subrogation, as it applies to insurance, is now settled beyond all doubt: where
36
the insurer is subrogated to the rights of the assured, it must raise any action in the name
of the assured. As Lord Goff explained in his speech in Esso Petroleum 1988 S.L.T. at
p. 878 F – H; [1989] A.C. at p. 663 E – F, the payment by the insurer indemnifying the
assured does not have the effect of transferring the assured’s rights to the insurer and so
the insurer cannot simply go ahead and itself raise actions based on those rights. None
the less, because the insurer has indemnified the assured, the law gives it the right to
insist that the assured should authorise it to use the assured’s name in proceedings against
third parties. If need be, the insurer can take proceedings to compel the assured to grant
the necessary authority - although in practice the matter is often regulated by a letter of
subrogation which the assured signs at the time of payment, authorising the insurer to
proceed in his name. See also Lord Goff’s remarks in Lord Napier and Ettrick v. R. F.
Kershaw [1993] A.C. 713 at p. 741 C - G. The position is therefore similar to that
envisaged by Pothier in the second of his categories of subrogation.
This basic idea of the assured authorising the insurer to raise proceedings in his
name fits easily into the overall scheme of Scots law which has always recognised that
the creditor in an obligation can constitute another as his procurator in rem suam entitled to raise proceedings in the creditor’s name, but also entitled to keep for himself
any sum which he obtains in those proceedings. The procurator in rem suam may not cut
such a figure on our legal scene as once he did but, even after two thousand years, he
remains waiting patiently in the wings, ready to act his part whenever, as here, occasion
may demand. On that analysis, the insurer which has indemnified the assured is in effect
entitled to insist that the assured constitute it as his procurator in rem suam for the
purpose of raising proceedings against the third party. It is consistent with this overall
37
approach that the insurer raises the proceedings in the name of the assured but keeps the
proceeds in order to recoup its expenditure in indemnifying the assured.
1.5 Relief
The parallel which Lord Jauncey draws between the position of an insurer and the
position of a cautioner is helpful also in considering the defenders’ argument that in this
case the insurers should have brought an action of relief against the defenders and that the
present proceedings are incompetent.
The liability of a cautioner is accessory to the liability of the principal debtor.
Among other things this means that it is the principal debtor who is intended to bear the
primary or ultimate liability for the debt. From this essential characteristic of the
relationship flows the right of a cautioner, who pays the debt, to relief and
indemnification from the principal debtor. See Gloag and Irvine, Law of Rights in
Security, pp. 796 - 797:
“Cautioners, on making payment of the debt, or of any portion of the debt,
have a right to relief and indemnification against the principal debtor, to
the full extent to which they have been made answerable for him. This
right of relief on the part of a cautioner against the principal debtor, on
whose account he has made payment, arises de jure without any formal
assignation by the creditor.”
The obligation of relief and indemnification arises de iure - out of the fact that the
law regards the principal debtor as having been unjustly enriched by the cautioner paying
38
the debt which he owed to the creditor. In the same way, an obligation of relief based on
unjust enrichment arises among co-cautioners and other co-obligants in a joint and
several obligation, but the obligation is one of contribution of the co-obligant’s pro rata
share. The availability of this right of relief was disputed among Civil Law scholars for
centuries – since in paying the creditor the cautioner had merely been performing his
contractual obligation and any resulting enrichment of the co-obligant was therefore, so
ran the argument, not unjust. Cf. Pothier, Traité des Obligations 2.2.7.4. But the law
seems to have been settled in Scotland since the time of Stair. See Stair, Institutions
1.8.9 and Stirling v. Forrester (1821) 3 Bligh 575 at p. 596 per Lord Eldon L.C.
Although the basis of the obligation of relief is similar in each case (unjust enrichment),
the extent of that obligation differs in the two situations, the principal debtor being
obliged to relieve the cautioner entirely, a co-cautioner being obliged to relieve him only
pro rata. The difference in the extent of the obligation of relief depends on the much
broader question of how the law views the relationship between the parties in question.
Where, as in the case of the principal debtor and cautioner, the law considers that one
party should ultimately bear the whole burden of the debt to the creditor, then that party
must relieve the other to the full extent. Where on the other hand, as in the case of cocautioners, the law considers that the burden of paying the debt should be shared, then a
party who pays the whole debt will be entitled to relief in the form of a pro rata
contribution from the others.
Counsel for the defenders argued that in all cases where there was a right to
contribution, it must work in both directions - in other words, if one obligant has a right
of relief against the other, that second obligant must have a similar right against the first.
39
That will indeed be so where the nature of the relationship is such that each is to bear a
pro rata share of the burden of the debt and the right is, accordingly, properly described
as a right to contribution. It will not, however, be the case where, as with a cautioner and
principal debtor, one of the obligants has the primary or ultimate obligation to the
creditor and the other has a secondary obligation. In that situation, while the cautioner
who pays the debt is entitled not merely to a contribution but to total relief from the
principal debtor, the principal debtor has no corresponding right to any contribution or
relief from the cautioner - for the simple reason that the principal debtor is the person
who is to bear the final responsibility of paying the debt to the creditor.
It follows that, even if we approach the matter in the present case on the footing
that, as the defenders argue, the insurers and the defenders are under parallel obligations
to indemnify the pursuers, that does not in itself tell us anything about the extent of the
rights of relief which arise if the insurers indemnify the pursuers. The extent of those
rights of relief depends on the nature of the overall relationship among the parties.
If the insurers and the defenders were properly to be regarded as co-obligants on
an equal footing in a joint and several obligation to indemnify the pursuers, the insurers
would indeed have a right to relief to the extent of a contribution of their pro rata share
from the defenders. That is the position which the law has adopted in respect of double
insurance where two insurers are liable to indemnify the assured in the events which have
happened. Reflecting the commercial reality and the practical understanding of insurers,
the law treats the matter as if there were really only one insurance and the insurers are
seen as co-obligants, each liable to bear a one-half share of the liability. Accordingly, if
one of two insurers indemnifies the assured, it is entitled to recover a contribution of one-
40
half from the other in an action of relief. See, for instance, Sickness and Accident
Assurance Association Ltd. v. General Accident Assurance Corporation Ltd. 19 R. at p.
980 per Lord Low.
On the other hand if, as I have held, both the insurers and the defenders in the
present cases are under an obligation to indemnify the pursuers but, as between the
defenders and the insurers, the defenders should bear the ultimate liability, then the
insurers have a right to total relief from the defenders. It follows that the defenders have
no corresponding right of relief against the insurers. In other words, the insurers are like
the cautioner who can bring an action of relief to recover the whole of his expenditure
from the principal debtor but is not subject to any obligation of relief towards the
principal debtor.
In Glasgow Provident Investment Society v. Westminster Fire Office (1887) 14 R.
947 at p. 992 Lord Young, dissenting, drew a similar distinction between the situation
where a party is entitled to total relief and the situation where he is entitled to a
contribution only. The kind of distinction which Lord Young drew is valid, even though
his dissenting opinion was not ultimately to prevail: Westminster Fire Office v. Glasgow
Provident Investment Society (1888) 15 R. (H.L.) 89. I should add that I do not consider
that Kitto J. intended to say anything inconsistent with this analysis in Albion Insurance
Co. Ltd. v. Government Insurance Office of New South Wales (1969) 121 C.L.R. 342 at
p. 352. If he did, then I should respectfully disagree with his view.
In summary: an insurer which pays an assured should in principle be entitled by
virtue of subrogation to bring proceedings in the name of the assured to recover its
expenditure in indemnifying the assured; similarly, an insurer which pays an assured
41
should in principle be entitled to a right of relief against another indemnifier to recover its
expenditure in indemnifying the assured, where, as here, the law holds that the other
indemnifier should bear the primary or ultimate responsibility for indemnifying the
assured.
1.6 The Supposed Inconsistency between Subrogation and Relief
The defenders argued, however, that, if the insurers’ right against the defenders
was properly to be analysed as one of relief, the present action was necessarily irrelevant,
since the insurers should have brought an action of relief in their own names against the
defenders, rather than a subrogated action in the name of the pursuers. I reject that
argument.
As the passage which I have quoted from Gloag and Irvine on Rights in Security,
pp. 796 - 797 makes clear, a cautioner who pays has a right of total relief from the
principal debtor as well as a right of relief in the form of a pro rata contribution from his
co-cautioners, if any. It is well settled that, for the purposes of working out these rights
against the principal debtor and the co-cautioners, the cautioner has the beneficium
cedendarum actionum which entitles him to demand from the creditor in exchange for
payment “an assignation of the debt, any security held for it, and any diligence done upon
it, so as to enable him to enforce his right of relief against the principal debtor, or against
co-cautioners”: W. M. Gloag and R. C. Henderson, The Law of Scotland (10th edition,
1995), para. 20.15. Bell, Principles, para. 255 states in part:
42
“Relief is a right on the part of the cautioner to indemnification against the
principal debtor. It rests on two grounds: an equitable right to require the
creditor to communicate the full benefit of his contract; and an obligation
ex mandato of the principal debtor, for whose benefit the cautioner has
engaged. By the former, the cautioner is entitled to an assignation of the
debt and diligence; and on satisfying the creditor comes into his place,
and may proceed as principal creditor.”
The last sentence is vouched by a tract of authority stretching back beyond the time of
Stair.
The position as set out in these texts is that, where the cautioner has a right of
total relief against the principal debtor and is therefore entitled to recover the full amount
of the debt which he paid to the creditor, he can seek to recover the sum due to him by
virtue of his right of relief by taking an assignation of the creditor’s rights against the
principal debtor and proceeding on the basis of the principal creditor’s rights. Indeed,
given that an assignee can sue in the name of his cedent, there is no reason why he should
not raise any necessary proceedings in the name of the creditor - and this is indeed what
Bell seems to envisage in the last sentence of the passage which I have quoted. In the
same way Bell, Principles, para. 268 notes that, so far as the position of co-cautioners is
concerned, at one time it was held that the beneficium cedendarum actionum was
unnecessary in our law and “that an assignation could not be demanded. But it is now
settled that an assignation may be demanded” (emphasis as in the original).
It is recognised, for instance by Lord President Emslie and Lord Jauncey in Esso
Petroleum, that the same principles of the law of indemnity underlie both the law of
43
cautionry and the law of insurance. The principles which have been worked out in
cautionry may therefore afford guidance on this aspect of the law of insurance.
Consistently with those principles, an insurer may raise proceedings in the name of the
assured when the assured has authorised it to do so and, as a procurator in rem suam, the
insurer is in the same position as an assignee under the old form of assignation. More
particularly, the insurer may raise such proceedings where the assured has a primary right
against a third party under a contract of indemnity and the purpose of the proceedings is
for the insurer to recover the sum which it paid to the assured and in respect of which it is
entitled to total relief from the third party. A subrogated action against a third party is a
recognised and perfectly proper way of working out a right of relief against that third
party. Moreover, the defenders, who have all along been well aware that the present test
actions - with the partial exception of the Stena Offshore action - have been brought by
the insurers to recover sums expended by them, have never suggested that, as defenders,
they have thereby been prejudiced, e.g. by not being in a position to obtain a discharge
from the insurers. Had they raised any such difficulty, the matter could have been
resolved, for instance, by allowing the insurers to be sisted as pursuers. Cf. Fraser v.
Dunbar (1839) 1 D. 882. For this reason, I would reject the defenders’ argument that the
present actions by the insurers, even though raised in the name of the pursuers and with
their consent, would be irrelevant if the correct analysis were that the insurers had a right
of total relief against the defenders. Equally, even on the defenders’ assumption - which I
reject - that the insurers were entitled to relief only to the extent of a pro rata
contribution, it appears to me that the present actions would be competent on the basis
that the insurers had a claim of relief against the defenders and were authorised to raise
44
the proceedings in the name of the pursuers. The actions would be relevant, however,
only to the extent of the pro rata contribution due from the defenders.
I emphasise that the approach which I have outlined would not apply, of course,
to cases of double insurance. As Lord Low stressed in Sickness and Accident Assurance
19 R. at p. 980, double insurance has been treated in a somewhat special manner by the
law. The various policies taken out by the assured are treated as truly one insurance and
an assured who has been indemnified by one of the insurers cannot recover any more
from another insurer. Lord Low’s approach was adopted by Barwick C.J. in Albion
Insurance 121 C.L.R. at p. 347. Having explained the particular analysis which applies
in cases of double insurance, Lord Low goes on to distinguish the situation in double
insurance from the situation where an assured has a primary right against a third party. In
double insurance the assured has no such primary right against any third party and so
there is no right which an insurer can use to enforce its right to a pro rata contribution
from any other insurer. In cases of double insurance, therefore, the insurer’s only way to
enforce its right to the appropriate contribution is by means of an action of relief. See
also the decision of the High Court of Australia in Sydney Turf Club v. Crowley (1972)
126 C.L.R. 420.
Counsel for the defenders attached considerable importance to one particular
argument: that a right of relief or contribution between the insurers and the defenders
was necessarily inconsistent with a subrogated claim by the insurers, since a subrogated
claim presupposed the continuing existence of a right of action by the pursuers against
the defenders, whereas a right of relief presupposed that the right of action by the
pursuers had been extinguished. Indeed the right of relief, it was said, would arise only
45
because the defenders had been enriched by the pursuers’ right of action being
extinguished when they were indemnified by the insurers. Counsel referred to a passage
from the speech of Lord Goff in Esso Petroleum 1988 S.L.T. at p. 878 B - E; [1989]
A.C. at pp. 662 G – 663 B. To a considerable extent counsel for the pursuers seemed to
accept and to endorse that line of argument, although they sought to turn it back against
the defenders: because the insurers had a subrogated claim against the defenders, there
could be no question of a right of relief between the insurers and the defenders.
However logical such an argument may be, it does not represent the law. The life
of the Civil Law, no less than of the Common Law, “has not been logic: it has been
experience.” Countless generations of experience in many lands have taught that it is
useful for sureties (Scotice cautioners) and co-obligants who have a right of relief to be
able to enforce it by using the rights of the creditors whom they have paid. Hence the law
has given them the right both to obtain assignations of the creditors’ rights against the
principal debtors or co-obligants and to exercise the rights thus acquired. Those
assignations would be at best pointless, if the payments to the creditors had the effect of
extinguishing the creditors’ rights altogether. So the law proceeds on the basis that the
sureties or cautioners and co-obligants can exercise the creditors’ rights and, to that
extent at least, those rights survive the payment to the creditors.
Mr. Wolffe described this aspect of the law as “a conundrum”, but it is a
conundrum which has been exercising lawyers across Europe and beyond since the
beneficium cedendarum actionum first made its appearance in the law of ancient Rome.
In D.46.1.36, Paul 14 ad Plautium, Paul overcomes essentially the same objection as the
defenders’ by arguing that, when a surety pays a debt, the payment to the creditor is not
46
made in order to pay off the debt owed by the principal debtor but “in a certain way” to
buy it. This ingenious, if somewhat tortured, reasoning is significant precisely because it
shows that, when Paul was writing in the early third century A.D., the law was already
settled and he had no option but to try to rationalise it - a comparatively early example of
legal pragmatism, perhaps. About a millennium-and-a-half later, Pothier, Coutumes des
Duché, Baillliage et Prévôté d’Orléans 20.5 n. 67 follows Paul’s line of reasoning:
“le paiement, quoique fait avec subrogation, est un vrai paiement, & ce
n’est que par une fiction que celui qui est subrogé au créancier, est censé
avoir plutôt acheté de lui sa créance, que l’avoir payé; magis emisse
nomen quam solvisse intelligitur; laquelle fiction ne doit profiter qu’à
lui.”
It is noteworthy that Pothier sees the fiction that the payment has been made to buy the
debt as being designed purely for the benefit of the party who has paid the creditor – as
between the creditor and the debtor, the payment has the effect of extinguishing the debt.
Building on that tradition, the Dalloz commentary on Articles 1252 and 2029 of the
French Code Civil summarises the position in this way:
“Le paiement avec subrogation s’il a pour effet d’éteindre la créance à
l’égard du créancier, la laisse subsister au profit du subrogé qui dispose de
toutes les actions qui appartenaient au créancier et qui se rattachaient à
cette créance immédiatement avant le paiement.”
Similarly, under the German Bürgerliches Gesetzbuch the creditor’s rights against the
principal debtor (Article 774) and co-sureties (Article 426 II) survive and pass to the
surety who has paid the debt. Under Article 426 II the same applies generally where one
47
co-obligant pays the common debtor. For Scots law Bell, Principles, para. 558, dealing
not only with cautioners but with co-obligants, formulated the same ancient paradox
perhaps as elegantly as may be:
“Payment made by one interested in the debt (as co-obligant or surety) will
take away the right of the creditor, but will not extinguish the debt of the
principal obligant. The person so paying is entitled to an assignation, to
the effect of operating his relief.”
The observations of Lord Goff in Esso Petroleum are not inconsistent with what
is said by Bell. Lord Goff was concerned with the situation where crofters had suffered
damage due to an oil spill for which Hall Russell were said to be responsible. The
crofters would have had a right to sue Hall Russell in delict. In fact, however, Esso
indemnified the crofters for their loss - as they were required to do by an agreement
among tanker owners, though not under any agreement with the crofters. Esso then
sought to bring an action in their own name against Hall Russell, to recover the sums
which Esso had paid to the crofters. The House of Lords rejected that claim as irrelevant.
Lord Goff explained the position in this way (1988 S.L.T. at p. 878 A – F; [1989] A.C. at
pp. 662 F – 663 D):
“I take the example of the crofters’ claims, since these were the claims
concentrated upon in argument ... The primary submission of counsel was
that Esso was entitled to be subrogated to the crofters’ claims in tort
against Hall Russell, and further that Esso was entitled to pursue such
claims against Hall Russell in its own name. In my opinion, this
submission is not well founded.
48
In considering this submission, I proceed on the basis (which appears to
have been common ground throughout the case) that there is for present
purposes no material distinction between Scots law and English law.
Now, let it be assumed that the effect of Esso’s payment to the crofters
was to indemnify the crofters in respect of loss or damage suffered by
them by reason of the wrongdoing of Hall Russell. If such a payment was
made under a contract of indemnity between Esso and the crofters, there
can be no doubt that Esso would upon payment be subrogated to the
crofters’ claims against Hall Russell. This would enable Esso to proceed
against Hall Russell in the names of the crofters; but it would not enable
Esso to proceed, without more, to enforce the crofters’ claims by an action
in its own name against Hall Russell.
The reason for this is plain. It is that Esso’s payment to the crofters does
not have the effect of discharging Hall Russell’s liability to them. That
being so, I do not see how Esso can have a direct claim against Hall
Russell in respect of its payment. I put on one side Esso’s claim against
Hall Russell in negligence: that I will consider in a moment. There can of
course be no direct claim by Esso against Hall Russell in restitution, if
only because Esso has not by its payment discharged the liability of Hall
Russell, and so has not enriched Hall Russell; if anybody has been
enriched, it is the crofters, to the extent that they have been indemnified by
Esso and yet continue to have vested in them rights of action against Hall
Russell in respect of the loss or damage which was the subject matter of
49
Esso’s payment to them. All that is left is the fact that the crofters’ rights
of action against Hall Russell continued to exist (until the expiry of the
relevant limitation period), and that it might have been inequitable to deny
Esso the opportunity to take advantage of them - which is the classic basis
of the doctrine of subrogation in the case of contracts of indemnity (see
Castellain v. Preston).”
There is a certain difficulty in drawing guidance from the passage for present
purposes, since Lord Goff was proceeding on the basis of the concession that the law of
Scotland was the same as the law of England and so, understandably, he used the
terminology of English law. The actual matter which he had to decide was whether Esso
could bring an action in their own name to enforce the crofters’ claims in delict against
Hall Russell on the basis of subrogation. Lord Goff held that they could not, since an
action brought by an indemnifier on the basis of subrogation would have to be raised in
the name of the party indemnified. That issue does not, of course, arise in the present
case.
The actual situation considered by Lord Goff differed in two respects from the
situations contemplated by Bell. In the first place, Lord Goff was considering the effect
of the payment by Esso to the crofters on Hall Russell’s liability to them in delict. Bell,
on the other hand, was considering the effect, on the principal debtor’s contractual
liability, of a payment to the creditor by a surety or a co-obligant. Secondly, Esso were
under no contractual liability to make the payment to the crofters. By contrast, in the
cases considered by Bell, the surety or co-obligant pays the creditor because he is obliged
to do so in terms of his contract with the creditor. Although Lord Goff did not spell this
50
out, the fact that Esso were under no obligation to the crofters or to Hall Russell to make
the payment was undoubtedly of significance for his approach. In English law terms,
Esso were “volunteers” and payment by a volunteer does not discharge the debt unless
and until the debtor adopts the payment. See Lord Goff and G. Jones, The Law of
Restitution (fifth edition, 1998), pp. 127-128; P. Birks and J. Beatson “Unrequested
Payment of Another’s Debt” in J. Beatson, The Use and Abuse of Unjust Enrichment
(1991), p. 177, including p. 201 n. 6 in the Postscript; and G. Virgo, The Principles of
the Law of Restitution (1999), pp. 236 - 238. It is not altogether clear whether the same
rule applies in Scots law to payments made by someone who is under no obligation to
make them. See, for instance “Obligations” in Stair Memorial Encyclopaedia Vol. 15
(1996), para. 97 (N.R. Whitty). But there is no need to explore the matter since, in so far
as Lord Goff is contemplating that type of case, his comments are not directed at the kind
of situation with which we are concerned.
Lord Goff’s remark that, because the payments to the crofters did not discharge
Hall Russell’s liability to them, he could not see how Esso could have a direct claim
against Hall Russell in respect of their payment to them, was the passage on which
counsel relied for saying that the possibility of subrogation is inconsistent with the
existence of a right of relief. For the reasons already given, however, the situation in
respect of which Lord Goff made that comment is distinguishable from the situation upon
which Bell was commenting and which arises in the present case. Bell does not deal with
the case of a payment made to the creditor in a delictal obligation, but, at least in the
context of payments by a surety or a co-obligant, he contemplates that the payment “will
take away” the creditor’s right against the principal debtor, with the result that the surety
51
or co-obligant obtains a right of relief against the principal debtor. At the same time, he
holds that the payment “will not extinguish” the debt of the principal debtor which is
therefore available to the surety or co-obligant to whom it is assigned in order to operate
his relief.
The present case is analogous to the cases contemplated by Bell since the insurers
indemnified the pursuers by virtue of their obligation under their contract with them. For
these purposes we may consider the matter on the basis suggested by counsel for the
defenders: the insurers and the defenders are looked upon as contractual co-obligants,
one of whom has paid the common creditor but is entitled to relief from the other. On
Bell’s approach, the payment may have taken away the pursuers’ own right as creditors to
sue the defenders on the indemnity clauses, but it has not extinguished the liability of the
defenders under the indemnities for the purposes of an action brought by the insurers in
the name of the pursuers and with their authority. That action is a means by which the
insurers can enforce their right to relief against the defenders.
1.7 Conclusion
On the basis of the authorities which I have discussed, in Scots law at least, there
is no inconsistency in holding that an insurer which indemnifies the assured has in theory
two methods of recovering its expenditure from another indemnifier who is meant to bear
the ultimate liability for indemnifying the assured. The insurer can rely on its right of
total relief from the indemnifier and raise an action of relief in its own name.
Alternatively, it can seek in substance to work out its right of relief by bringing
52
proceedings in the name of the assured against the indemnifier on the basis of the
contract or clause of indemnity. That is what the insurers have done in this case and
nothing in the authorities which I have examined suggests that the action is other than
competent and relevant.
For these reasons I am satisfied that the Lord Ordinary - who, of course, heard a
much more limited argument on the point than we did - was wrong to sustain the
defenders’ general pleas to the relevancy.
53
2. CONSTRUCTION OF THE INDEMNITIES
The pursuers’ case against the defenders depends on the indemnity provisions in
the various contracts. Issues relating to the construction of the indemnities lie at the heart
of the case. An account of the arguments to which we listened is to be found in Part 3(a)
of Lord Coulsfield’s opinion. When dealing with them in this part of the opinion I shall,
for the most part, adopt the terminology of the indemnities except that, in order to
simplify matters, I shall refer to the Company and the others entitled to benefit from the
indemnities collectively as “the operators”. It was common ground that, in interpreting
the indemnities, the court required to take account of the statutory régime which applies
to work in the North Sea. Less happily, counsel were not agreed on precisely what
conclusions we should draw from the existence of that system.
2.1 The Statutory Régime in the North Sea
The foundation statute is the Mineral Workings (Offshore Installations) Act 1971
(“the 1971 Act”). Section 6 of the Act gives the Secretary of State power to make
regulations for the safety, health and welfare of persons on offshore installations. By
virtue of Section 11(1) and (2) any breach of a duty imposed by any provision of the 1971
Act or by any provision of regulations made under the Act which expressly applies the
provisions of Section 11 is to be actionable so far, and only so far, as it causes personal
injury as defined in subsection (7).
54
For present purposes the important regulations are to be found in The Offshore
Installations (Operational Safety, Health and Welfare) Regulations 1976 (No. 1019)(“the
1976 Regulations”). Regulation 32(1) imposes a far-reaching duty on various persons:
“It shall be the duty of the installation manager, and of the owner of the
installation and of the concession owner, to ensure that the provisions of
these Regulations are complied with in respect of any offshore
installation.”
Regulation 32(2) and (3) go on to provide inter alia:
“(2) It shall be the duty of the employer of an employee employed by him
for work on or near an offshore installation to ensure that the employee
complies with any provision of these Regulations imposing a duty on him
or expressly prohibiting him from doing a specified act.
(3) It shall be the duty of every person while on or near an offshore
installation (a) not to do anything likely to endanger the safety or health of himself or
other persons on or near the installation or to render unsafe any equipment
used on or near it....”
Regulation 33 provides that the provisions of Section 11 of the 1971 Act are to apply to
the duties imposed on any person by the Regulations. It follows that breaches of the
Regulations give rise to civil liability for personal injury caused by the breach. Although
Regulation 34(4) gives a defence to a person who is prosecuted for a breach of the
Regulations, if he can show that he exercised all due diligence to prevent the commission
of the offence and that the relevant contravention was committed without his consent,
55
connivance or wilful default, those defences are not available to a defender in civil
proceedings.
The effect of these Regulations was not in dispute. If an employee of the
operators did anything which was likely to endanger the safety or health of himself or
other persons, then he himself would be in breach of Regulation 32(3), and the operators
would be in breach of Regulation 32(1). No contractor would be liable. If, on the other
hand, an employee of a contractor did anything which was likely to endanger the safety or
health of himself or other persons, then he himself would again be in breach of
Regulation 32(3), and the operators would be in breach of Regulation 32(1), but in
addition the contractor who employed him would be in breach of Regulation 32(2).
Each of the test cases involves a different contractor and a different contract. Part
2(b) of Lord Coulsfield’s opinion gives a full account of the contracts. For present
purposes I note that all the contracts contain indemnities, of course, but the terms of the
indemnities are not identical. In broad terms the contracts fall into two groups: those
where the indemnities are to be found in a clause comprising a single paragraph and those
where the indemnity clause is divided into two paragraphs, the first containing a
provision in rather general terms and the second containing more specific provisions.
The London Bridge, Northern Industrial Marine and Stena Offshore contracts fall into the
first group, as does the British Telecom contract - even though its terms are rather
different from those found in the other contracts. The second group comprises the
Eastman Christensen, Kelvin Catering and Wood Group contracts. Again there are
certain differences in their wording. I find it convenient to begin with the first group and,
like counsel, I use the London Bridge contract as the example.
56
2.2 The London Bridge Contract
In the London Bridge contract the Contractor’s indemnities are to be found in
Article 17 which provides inter alia:
“17.1 CONTRACTOR’S INDEMNITIES
The Contractor shall indemnify, hold harmless and defend the Company
and its parent, subsidiary and affiliate corporations and Participants, and
their respective officers, employees, agents and representatives from and
against any claim, demand, cause of action, loss, expense or liability
(including but not limited to the costs of litigation) arising (whether before
or after completion of the Work hereunder) by reason of:a. Non-compliance with Laws
Claims by governmental authorities or others of any actual or asserted
failure of the Contractor to comply with any law, ordinance, regulation,
rule or order of any governmental or judicial body; and
b. Intellectual Property Infringement
(Including Patents and Copyrights)
Actual or asserted infringement or improper appropriation or use by the
Company, Participants or Contractor of trade secrets, proprietary
information, know-how, copyright rights (both statutory and nonstatutory), or patented or unpatent [sic] inventions or for actual or alleged
unauthorised imitation of the work of others, arising out of the use of
57
methods, processes, designs, information or other things originating with
the Contractor, its employees, agents, vendors or sub-contractors, and
furnished or communicated to the Company by the Contractor or used by
the Contractor in connection with performance of the Work and which
have not been specified by the Company; and
c. Injury to Employees and Damage to Property of Contractor
Injury to or death of persons employed by or damage to or loss or
destruction of property of the Contractor or its parent, subsidiary or
affiliate corporations, or the Contractor’s agents, sub-contractors or
suppliers, 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 which would otherwise be indemnified; and
d. Third Party Injury and Property Damage
Injury, death, or property damage, loss or destruction (up to a limit of Five
Hundred Thousand Pounds Sterling (£500,000) in respect of performance
of this contract at an onshore location and up to a limit of One Million
Pounds (£1,000,000) in respect of performance at an offshore location)
other than such as is described in Articles 17.1 (c) and 17.2 (a) and (b),
and arising directly or indirectly out of the acts or omissions of the
Contractor or its sub-contractors, suppliers or their respective employees
or agents, irrespective of any contributory negligence, whether active or
passive, of the party to be indemnified, unless such injury, death, damage,
58
loss or destruction was caused by the sole negligence or wilful misconduct
of the party which would otherwise be indemnified; and
e. Pollution
Waste, debris, rubbish, liquid or non-liquid discharge or pollution of
whatever nature which is dropped, seeped, discharged, spilled, blown out
or leaked from equipment, apparatus, machinery, facilities or other
property of the Contractor or its sub-contractors, suppliers, employees or
agents, irrespective or [sic] any contributory negligence, whether active or
passive, of the party to be indemnified except to the extent that the
foregoing was caused by the sole negligence or wilful misconduct of the
party which would otherwise be indemnified.”
In this contract where the specific indemnities are not preceded by any general
provision, the defenders argued, on the basis of the terms of indemnity (c) itself, that the
indemnity was intended to apply only where the injury to, or death of, the Contractor’s
employee had been due to the negligence or breach of statutory duty of the Contractor.
Indemnity (c) makes no express mention of the Contractor’s negligence or breach of
statutory duty, of course, but counsel argued that one could legitimately infer that this
was what the parties had intended from the use of the phrase “irrespective of any
contributory negligence ... of the party to be indemnified”. The use of the word
“contributory” immediately prompted the question “Contributory to what?” and the
appropriate answer was “contributory to the negligence or breach of statutory duty of the
Contractor” since the Article was concerned with regulating the relationship between the
operators and the Contractor. Counsel for the defenders acknowledged that, in theory at
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least, the answer to the question “Contributory to what?” might be “contributory to any
contractor’s negligence or breach of statutory duty”, but they submitted that such a
construction ignored the commercial realities. It would make no sense for the Contractor
to stipulate that it should not be liable if the injury or damage was due to the negligence
of the operators alone, but accept liability if, in addition to the operators, some other
contractor had been negligent, even to the very smallest extent. Moreover, in interpreting
the phrase “sole negligence”, one had to read it in the context of the contract to which
there were only two parties: so it should be interpreted as referring to the situation where
the loss, injury or damage had been caused exclusively by the negligence or wilful
misconduct of the operators and not to any extent by the negligence or breach of statutory
duty of the Contractor. It therefore referred to the sole negligence of the party to be
indemnified as opposed to negligence by the operators concurring with negligence or
breach of statutory duty by the other party to the contract, viz. the Contractor.
The defenders’ argument depends on implying words into the clause which would
define the injury, death or damage to property as having been “caused by the negligence
or breach of statutory duty of the Contractor”. The basis for implying these words is said
to be the reference to “contributory negligence” in the phrase “irrespective of any
contributory negligence ... of the party to be indemnified”. To any lawyer, at least, the
words “contributory negligence” immediately call to mind the negligence of, say, a
pursuer who has suffered injury in an accident which has occurred partly as the result of
the negligence of the defender and partly as a result of her own negligence and whose
damages may be reduced in terms of the Law Reform (Contributory Negligence) Act
1945 to reflect the extent of her negligence. In that context, of course, especially in a
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simple case involving only one defender, the appropriate way to unpack the meaning of
“contributory” is to say that the negligence of the pursuer has played its part, along with
negligence or other fault on the part of the defender, in causing the injury to the pursuer.
It is natural in that situation to see “contributory” as pointing to some corresponding
negligence or fault on the part of the defender. It is plain, however, that this is not the
meaning of “contributory negligence” in the indemnity, since the words are used to
describe not negligence on the part of the employee who has been injured or killed, or of
the owner of the damaged property, but negligence on the part of the operators who are
seeking the indemnity. The question therefore is whether, when used in that way, the
phrase carries with it the implication for which counsel for the defenders contended.
Counsel for the pursuers submitted that in this clause “contributory” was used
simply to show that the negligence of the operators had caused the death, injury or
damage for which indemnity was being sought. Undoubtedly, the clause does envisage a
situation where the operators’ negligence has played a part in causing the death, injury or
damage, but it seems to me that in construing the words “contributory negligence” a court
requires to bear in mind the other words, “the sole negligence ... of the party which would
otherwise be indemnified”. There is a contrast between the two: where there has been
“contributory negligence” on the part of the operators, they may still recover under the
indemnity, but where the death, injury or damage was caused by “the sole negligence” of
the operators, they cannot recover. In that overall context the phrase “irrespective of any
contributory negligence ... of the party to be indemnified” means that the Contractor is to
indemnify the operators even if the operators’ negligence has contributed, along with
some other negligence or fault, to the happening of the death, injury or damage. The
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phrase describes a situation where the operators have been negligent and others have also
been negligent or otherwise at fault. By contrast, the indemnity is not to be available to
the operators where the death, injury or damage has been due exclusively to negligence or
wilful misconduct on the part of the operators. Strictly speaking, as Lord Coulsfield
pointed out in the course of the debate, on this approach the word “contributory” is de
trop since the later reference to “the sole negligence” of the operators would necessarily
imply that the earlier reference was to the negligence of the operators and someone else.
If that is the way in which the phrase “contributory negligence” is used in this
clause, the question comes to be whether the use of that phrase justifies the implication
that the indemnity is to apply only where the Contractor has been negligent or in breach
of statutory duty. That interpretation does indeed appear to me to be open to the
objection which was pointed out by counsel for the pursuers: on the defenders’ approach
it is superfluous to provide that the indemnity will not apply where the death, injury or
damage is caused by “the sole negligence” of the operators, since, if the death, injury or
damage is caused exclusively by the negligence of the operators, ipso facto it cannot have
arisen out of the negligence or breach of statutory duty of the Contractor - so the
indemnity would not apply even if the reference to sole negligence were omitted. By
contrast the words can be given content, if the clause is interpreted as meaning that the
indemnity applies, irrespective of whether the Contractor was in any way at fault or not.
On that approach the references to “negligence” make it clear that the operators can
recover even though their negligence was a cause of the event, providing that it was not
the sole cause. That argument is one to which I attach some weight, though the fact that,
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even on the pursuers’ interpretation, the clause contains a superfluous element suggests
that it is not an argument which in itself could be conclusive.
The defenders’ interpretation depends on implying elements into the clause which
are not spelled out. In itself the mere fact that the interpretation depends on an element of
implication is not a fatal criticism, since all counsel agreed that some of the elements in
the clause are expressed in a shorthand form. Inevitably therefore, when construing the
clause, the reader has to expand somewhat on the words which the draftsman has used.
To that extent, it is necessary to spell out elements which are implied by the language of
the clause. The real difference between the parties is not as to whether some elements
need to be implied but as to the nature of any such elements.
It is obvious that the qualification which the defenders say is implied into the
clause is extremely significant and would greatly cut down the scope of the indemnity. It
would, in my view, be somewhat surprising if the parties had left such a vital
qualification to be imported by mere implication. It would be all the more surprising, I
believe, if that implication were to rest on words which are intended, not to narrow the
basis of the Contractor’s liability, but to make it clear that the indemnity extends to
certain cases where the operators have been negligent - thus extending the scope of the
indemnity beyond the range which it would have in the absence of some such words.
2.3 General Approach to Interpretation of Indemnities
In advancing their argument that the indemnity should be read as being subject to
a qualification of this kind, the defenders relied on what they said was the approach to the
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interpretation of indemnities which has been established by authorities applying in Scots
law as well as in English law. The cases to which we were referred are well known.
Much of the discussion in them concerns the question of whether an indemnity is to be
interpreted as applying where the person to be indemnified has been negligent. That
particular problem does not arise in the present cases since in all of them the indemnity is
expressly said to apply even where there has been “contributory negligence” on the part
of the operators. But the defenders relied on the cases for the indications which they
were said to contain as to the general approach which courts should take to the
construction of indemnities.
In view of the complications which readily enter into any consideration of such
clauses, it is as well to remember that in Smith v. U.M.B. Chrysler 1978 S.C. (H.L.) 1 at
p. 16 Lord Keith of Kinkel said that the task of a court which has to construe an
indemnity clause
“is essentially one of ascertaining the intention of the contracting parties
from the language they have used, considered in the light of the
surrounding circumstances which must be taken to have been within their
knowledge.”
Put in that way, the task of the court is no different from its task in construing any
contractual provision. As Lord Keith goes on to explain, however, the advice of the
Privy Council in Canada Steamship Lines Ltd. v. The King [1952] A.C. 192 contains
“certain guidelines of assistance” in construing exemption and indemnity clauses. The
application of these guidelines is not, however, an end in itself; they are applied by the
courts because they are thought to be of practical assistance in discovering what the
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parties actually intended the clause to mean. For that reason Lord Keith is at pains to
stress (1978 S.C. (H.L.) at pp. 16 - 17) that the guidelines
“do not represent rules of law, but simply particular applications of wider
general principles of construction, the rule that express language must
receive due effect and the rule omnia praesumuntur contra proferentem.”
Lord Keith sees the rules of construction applying to exemption and indemnity clauses as
being nothing more than particular applications of the general principle that one must
give due effect to the express language of an agreement and that a contract is construed
against the person who relies on it. Indeed, when the three rules in Canada Steamship are
examined, they can be seen to meet the description given by Lord Keith: the first relies
on giving effect to the express language of the contract; the second depends again on
examining the language used by the parties to see whether it is capable of covering
liability arising out of the negligence of the party relying on the indemnity; while the
third proceeds on the basis that, where the language used is capable of more than one
interpretation, the court should interpret it against the party who seeks to rely on it.
It is the contra proferentem rule which is of interest in this case. It appears that
the rule is applied in a strict fashion in the case of indemnity clauses because the courts
have taken the view that it is prima facie unlikely that one party will agree to indemnify
another for losses which are due to that party’s negligence. That being so, an indemnity
clause will not be construed as applying to that situation unless the language is
sufficiently clear. So, in Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd. [1973]
Q.B. 400 at p. 419 Buckley L.J. said that it is
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“a fundamental consideration in the construction of contracts of this kind
that it is inherently improbable that one party to the contract should intend
to absolve the other party from the consequences of the latter’s own
negligence.”
Picking up that theme in Smith, Viscount Dilhorne remarked (1978 S.C. (H.L.) at p. 7)
that
“While an indemnity clause may be regarded as the obverse of an
exemption clause, when considering the meaning of such a clause one
must, I think, regard it as even more inherently improbable that one party
should agree to discharge the liability of the other party for acts for which
he is responsible. In my opinion it is the case that the imposition by the
proferens on the other party of liability to indemnify him against the
consequences of his own negligence must be imposed by very clear
words”
In much the same way in the same case Lord Keith remarks (1978 S.C. (H.L.) at p. 17)
that while the particular applications of the general rules of construction
“apply to the construction both of a clause bearing to exempt from certain
liabilities a party who has undertaken to carry out contractual work and of
a clause whereby such a party has agreed to indemnify the other party
against liabilities which would ordinarily fall upon him, they apply a
fortiori in the latter case, since it represents a less usual and more extreme
situation.”
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It is apparent that both Viscount Dilhorne and Lord Keith perceived that the
argument for applying the relevant rules of strict construction was even more cogent in
the case of an indemnity clause than in the case of an exemption clause since the
indemnity clause goes further than an exemption clause and actually involves the other
party taking on the first party’s liability. A party is even less likely to take on the other
party’s liability for negligence than he is to exempt the other party from liability for
negligence. Even so, I very much doubt whether, as counsel for the defenders suggested,
their Lordships intended to go further and to deduce from this that a still stricter form of
the relevant rules of construction is to be applied in the case of indemnity clauses than in
the case of exemption clauses. There is no indication in subsequent guidance from the
House of Lords that this was what was intended. In Ailsa Craig Fishing Co. Ltd. v.
Malvern Fishing Co. Ltd. 1982 S.C. (H.L.) 14 at p. 61 Lord Fraser contrasted the
“specially exacting standards which are applied to exclusion and indemnity clauses” with
the standard to be applied to limitation clauses - thus apparently making no distinction
between indemnity and exemption clauses. Similarly in Bovis Construction (Scotland)
Ltd. v. Whatlings Construction Ltd. 1995 S.C. (H.L.) 19 at p. 23 Lord Jauncey, citing
Ailsa Craig, indicated that limitation clauses were not to be construed with the same
strictness as “an exclusion or indemnity clause”.
Counsel for the defenders accepted, of course, that the particular issue of
construction which arose in Canada Steamships and Smith does not arise here, but they
submitted that the general approach was relevant. Although the Contractor had
undertaken to indemnify the operators where they were negligent (but not solely
negligent), that was such an unusual liability for the Contractor to undertake that, where
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more than one interpretation was possible, we should interpret the clause in such a way as
to restrict the scope of that liability. In particular, we should interpret the indemnity so as
to restrict it to situations where the Contractor had been negligent or acted in breach of
statutory duty.
For my part I am satisfied on the basis of the cases which I have mentioned that
our task is to interpret the language of the indemnity in the circumstances known to the
parties, but that where that language is ambiguous it should be interpreted against the
operators who rely on the indemnity. I would also accept that we should measure the
extent of the indemnity by what we can deduce from “very clear words” (Canada
Steamships per Lord Morton [1952] A.C. at p. 211 applied by Viscount Dilhorne in Smith
1978 S.C. (H.L.) at p. 7). On the other hand I find in the speeches which I have examined
no warrant for saying that a court should more readily imply into a clause of indemnity
additional words restricting the scope of the indemnity.
2.4 Clause (c) in the Context of the other Indmenities in Article 17.1 of the London
Bridge Contract
Although we are concerned in particular with the interpretation of Article 17.1 (c),
when considering whether it is appropriate to imply the words suggested by the
defenders, the court must have regard to the terms of the Article as a whole. If the
various clauses are examined, perhaps the first point which strikes a reader is that clause
(d) contains an express limitation (“arising ... out of the acts or omissions of the
Contractor or its sub-contractors, suppliers or their respective employees or agents”) of
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very much the kind which the defenders ask the court to hold is implied in (c). Hoping to
turn this to their advantage, counsel for the defenders in effect argued that the express
limitation in (d) indicated the scope which the parties had intended that the indemnity
under (c) should have. In my view, however, the fact that the limitation is found
expressly stated in (d) would make any court hesitate before implying a similar limitation
into (c). The obvious objection is that in interpreting any of the clauses in the Article the
court must have regard to the terms of the Article as a whole and, where one finds that
the parties have inserted a limitation in one part and not in another, the court should
readily assume that the difference between the two provisions is deliberate. The court
should not seek to assimilate them by implying words which the parties have not used not, at least, unless the provision would make no sense without the words.
In essence counsel for the defenders submitted that the Article would not make
commercial sense unless the indemnity were restricted to the situation where the
Contractor was negligent or in breach of statutory duty. In gauging the strength of that
argument, I find it helpful to examine the other clauses in Article 17.1. The Article itself
provides for an identical indemnity, stated in the opening words of the Article, to be
given by the Contractor in respect of any claim, demand, cause of action, loss, expense or
liability arising by reason of a number of matters which are then set out in the various
clauses (a) to (e) of the Article. Those clauses are all different and all define different
circumstances in which the Contractor is to indemnify the operator, as can be seen even
from a cursory examination of the various heads of indemnity.
Under (a) the Contractor is to indemnify the operators, say, for any loss of the
operators which arises by reason of some government or other authority claiming that the
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Contractor has failed to comply with a particular regulation or with a governmental or
judicial order. During the hearing before us, it was suggested that this might, for
instance, cover the case where the operators suffered loss due to delay arising from the
Contractor requiring to redo work which was said to have been done in contravention of a
relevant regulation or order from a Department of Energy inspector. The indemnity
would apply even if there had been no actual failure by the Contractor, but the relevant
inspector asserted that there had been a failure. It follows, of course, that the indemnity
would cover a situation in which there had been no fault of any kind on the part of the
Contractor.
Under (b) the Contractor is to indemnify the operators for loss etc. arising out of
actual or asserted infringement or improper appropriation or use by the company, the
participants or Contractor of intellectual property of various kinds “originating with the
Contractor, its employees, agents, vendors or sub-contractors and furnished or
communicated to the Company by the Contractor or used by the Contractor in connection
with performance of the Work”, where the company had not specified the particular
intellectual property. Various contingencies are covered, including the situation where,
say, some third party brings proceedings against the operators, alleging that they have
infringed copyright, and the allegation arises out of the use of a design furnished to the
company by the Contractor in connexion with the performance of the work. Here the
basis for the Contractor giving the indemnity is that it has furnished the design. Nothing
is said about fault of any kind on the part of the Contractor. Again it is clear that there
need have been none, since the operators are entitled to be indemnified inter alia against
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any costs due to litigation over an “asserted infringement” - which may turn out to have
been no infringement at all.
Clause (c) can be left on one side for the moment. Clause (d) does, of course,
refer to the acts or omissions of the Contractor or of its sub-contractors or suppliers and
their respective employees or agents. That is hardly surprising, since, unless there were
some such connexion between the Contractor and the injury, death or property damage to
a third party, there would be no perceivable basis upon which the operators could
sensibly require the Contractor to indemnify them.
Clause (e) concerns pollution of any kind which emanates in various ways from
equipment, apparatus, machinery, facilities or other property of the Contractor or its subcontractors, suppliers, employees or agents. Again there is no reference to negligence or
breach of statutory duty by the Contractor, but, since the clause refers to the “contributory
negligence” of the operators, counsel for the defenders argued that in this case also one
should imply a limitation to the situation where the emanation was due to negligence or
breach of statutory duty on the part of the Contractor. It is difficult to see why any such
limitation should be implied. It is no more surprising that the Contractor should agree to
indemnify the operators for claims arising out of pollution emanating from the
Contractor’s equipment than that it should agree to indemnify the operators for claims
arising out of infringement of copyright due to the operators’ use of a design furnished by
the Contractor. In the one case the “connecting factor” is the furnishing of the design by
the Contractor, while in the other it is the emanation of the pollution from the
Contractor’s equipment. If claims are brought against the operators in either event, these
factors are in themselves enough, without the need to introduce any question of fault on
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the part of the Contractor, to justify a contractual arrangement whereby the Contractor
agrees to indemnify the operators against the claims.
In summary, when the terms of Article 17.1 (a), (b), (d) and (e) are considered as
a whole, it is apparent that they provide for the Contractor to give an indemnity to the
operators to cover various contingencies, only one of which, (d), involves the act or
omission of the Contractor as being the immediate event giving rise to the claim. Since
the contingencies in the clauses are all distinct, one cannot determine the appropriate
construction of any particular clause by reference to the language of any other clause. In
particular there is no basis for saying that, simply because a limitation is found in (d), the
parties must have intended to imply the same limitation into (c). Moreover, having noted
the various other contingencies in which the Contractor is to indemnify the operators
even although the Contractor is not at fault, I see no reason to suppose that the Contractor
would not have agreed to give an indemnity in a case where, even although the claim
against the operators does not arise out of any act or omission by the Contractor, either
the employees who are injured or killed are the Contractor’s employees or else the
property which is damaged belongs to the Contractor. In the scheme of the Article as a
whole those factors would in themselves provide a sufficient justification for the
Contractor’s agreeing to indemnify the operator.
On the other hand the court should not adopt that construction of the indemnity
unless it is “very clear” from the language used that this is indeed what the parties agreed
in Article 17.1 (c). In the end this must be a matter of impression, but in my view that
interpretation does emerge very clearly from the actual language of the provision,
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especially when its terms are considered in the context of the terms of Article 17.1 as a
whole.
For these reasons, having regard to the terms of the Article alone, I see no proper
basis for implying into clause (c) any restriction of the indemnity to the situation where
the claim arises out of negligence or breach of statutory duty on the part of the
Contractor.
2.5 The Background Context of the Indemnities
That conclusion is fortified when one looks at the general surrounding
circumstances of which all the parties are likely to have been aware. The underlying
basis of the defenders’ argument was that it was implausible to think that the parties
would have intended the Contractor to indemnify the operators for claims by reason of
the death or injury to its employees or damage to its property unless the Contractor had
been negligent or in breach of its statutory duty. If one knew nothing whatever about the
environment in which this contract was intended to operate, that argument might carry
weight. But there was evidence in the case which suggests that the environment was one
in which that assumption would be inappropriate and in which it would indeed have been
in accordance with the practice at the time for the Contractor to agree to give an
indemnity to relieve the operators of liability in the case of the death of, or injury to, the
Contractor’s employees even though the Contractor had not been at fault. The relevant
evidence came from Mr. Crain, the Vice President of Union Texas Ltd. and himself a
lawyer. Speaking of the situation following the disaster, Mr. Crain said:
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“Occidental paid for all their own employees, and normally, in fact
consistently, we expected the Contractors to pay for their employees. That
is the fundamental economics of the business: you take on your
employees and you take the risk for them no matter what happens, and the
Contractors take on their employees and they build into their rates the
insurance associated with that and you pay based on these rates. So we
expected Occidental in this instance to pay for their employees, and they
stepped up and did it; and we expected the Contractors to step up and pay
for their employees and they chose not to, and I guess that is why we are
here today” (Evidence 10/1732 - 1733).
Since it is not disputed that most of the contractors - and all of the contractors who are
concerned in the present proceedings - were not in any way responsible for the disaster
and that no question of their negligence or breach of statutory duty arose, it is plain that
Mr. Crain was indicating that it was fundamental to the economics of the North Sea
operation that the operators were to bear the risk of any claims due to the death of, or
injury to, their employees, while the contractors were to bear the equivalent risk for their
employees, irrespective of whether the contractors were at fault or not.
This evidence is borne out by T. Daintith and G. Willoughby, United Kingdom
Oil and Gas Law (edited by A. Hill, 1998), para. 1-845 where, after referring to insurance
practice, the authors say:
“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
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property ..., regardless of any negligence or default on the part of the other
party or its employees, agents or sub-contractors.”
The indemnity clauses in the present case appear to me to fall within the general pattern
described by the authors, even although the particular version differs in that the
indemnity does not apply where the casualty is caused by the sole negligence or wilful
misconduct of the operators.
Similarly in D. W. Sharp, Offshore Oil and Gas Insurance (1994), p. 108, under
the heading “Injury or Death of Employees”, the author says:
“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 [sic] of the deceased who
may have been the sole breadwinner. The employer therefore accepts a
responsibility 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.”
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Even were the “simple reason” for the phenomenon incorrect, that would not affect the
author’s statement of the phenomenon which he is attempting to explain, viz. that in the
North Sea oil industry the position in respect of employers’ liability for injury or death of
their employees is “invariably” dealt with by the exchange of mutual indemnities. The
argument which then follows is clearly intended to explain why the indemnity is one
under which the employer accepts full responsibility for his employees and generally
gives the party with whom he is contracting a full indemnity in respect of any suit or
action brought against that other party.
We were also referred to the decision of the United States Court of Appeals, Fifth
Circuit, in Fontenot v. Mesa Petroleum Co. 791 F. 2d 1207 (5th Cir. 1986) which
concerned a claim by an employee for injuries which he sustained when he fell while
disembarking from a helicopter during a refuelling stop on an oil rig off the coast of
Louisiana. Brown, Circuit Judge, gave the decision of the court in a colourful judgment
in which he began (at p. 1209) by describing the situation facing the court:
“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.”
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He went on to characterise the case as a “multiparty donnybrook”. The facts are
complex, but the important point for present purposes is that the Fifth Circuit supported
the result which they reached on the effect of a particular indemnity by reference to a
policy analysis which they expounded in these terms (791 F. 2d at p. 1216):
“The purpose of the reciprocal indemnity agreement in the MesaRowandrill 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.”
In support of that view the court cited a previous decision of their own and certain
amendments made in 1984 to the federal Longshoremen’s and Harbor Workers’
Compensation Act.
While the circumstances in the present case can obviously be distinguished from
those in Fontenot, the passage is useful as an indication that an appellate court in the
United States has recognised that indemnities in regard to the death of, or injury to,
employees in the context of the oil industry have to be interpreted against the background
of a practice of regulating matters in such a way that the injured person’s employer
shoulders the liability even though he is not at fault. The fact that Fontenot also shows
that these arrangements do not actually put an end to disputes does not detract in any way
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from the fact that the practice is followed - to the benefit of the plaintiff, at least, in that
case.
This decision, the passage from Mr. Crain’s evidence and the excerpts from the
textbooks all demonstrate that there is nothing whatever surprising in the fact that in the
London Bridge contract the Contractor has given an indemnity which, on a
straightforward reading of its terms, is not limited to the situation where it is negligent or
in breach of statutory duty. On the contrary, if interpreted according to its terms, the
indemnity falls into the general pattern which is to be found in this particular industry.
The defenders are therefore asking the court to read into the indemnity clause a
qualification which would mean that in this particular case the parties had adopted a form
of indemnity which was disconform to the normal pattern. In my view the court should
not adopt that construction, but should prefer the construction of the Article which, on the
evidence, parties involved in the oil industry would have intended it to bear.
Although their terms are not exactly the same as those of the London Bridge
contract, there is nothing in the terms of the Northern Industrial Marine, Stena Offshore
or British Telecom contracts which would lead me to reach a different conclusion as to
the proper construction of their indemnity provisions. The terms of the British Telecom
contract were not stipulated by the pursuers – which, on one view, might be thought to
weaken the argument for construing it against them.
2.6 The Eastman Christensen Contract
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The Eastman Christensen, Wood Group and Kelvin Catering contracts differ
significantly from the contracts which I have examined so far, since in these three the
indemnity clause is divided into two parts. There are certain differences among the three
contracts but, like counsel, I find it convenient to concentrate on Article 15 of the
Eastman Christensen contract:
“15.1 CONTRACTOR’S INDEMNITIES
Contractor shall indemnify, hold harmless and defend the Company and
its parent, subsidiary and affiliate corporations and Participants, and their
respective officers, employees, agents and representatives from and
against any and 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
whether arising before or after completion of the Work hereunder and in
any manner directly or indirectly caused, occasioned or contributed to in
whole or in part, by reason of omission of [sic] 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 One Million Pounds Sterling
(£1,000,000) per occurrence.
Without prejudice to the foregoing generality, the Contractor shall
indemnify, hold harmless and defend the Company and its parent,
subsidiary and affiliate corporations and Participants, and their respective
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officers, employees, agents and representatives from and against any
claim, demand, cause of action, loss, expense or liability (including but
not limited to the costs of litigation) arising (whether before or after
completion of the Work hereunder) by reason of:a. Non-compliance with Laws
Claims by governmental authorities or others of any actual or asserted
failure of the Contractor to comply with any law, ordinance, regulation,
rule or order of any governmental or judicial body; and
b. Intellectual Property Infringement
(Including Patents and Copyrights)
Actual or asserted infringement or improper appropriation or use by the
Company, Participants or Contractor of trade secrets, proprietary
information, know-how, copyright rights (both statutory and nonstatutory), or patented or unpatent [sic] inventions or for actual or alleged
unauthorised imitation of the work of others, arising out of the use of
methods, processes, designs, information or other things originating with
the Contractor, its employees, agents, vendors or sub-contractors, and
furnished or communicated to the Company by the Contractor or used by
the Contractor in connection with performance of the Work and which
have not been specified by the Company; and
c. Injury to Employees and Damage to Property of Contractor
Injury to or death of persons employed by or damage to or loss or
destruction of property of the Contractor or its parent, subsidiary or
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affiliate corporations, or the Contractor’s agents, sub-contractors or
suppliers, 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 which would otherwise be indemnified; and
d. Third Party Injury and Property Damage
Injury, death, or property damage, loss or destruction other than such as is
described in Articles 15.1 (c) and 15.2 (a) and (b), and arising directly or
indirectly out of the acts or omissions of the Contractor or its subcontractors, suppliers or their respective employees or agents, 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 which
would otherwise be indemnified; and
e. Pollution
Waste, debris, rubbish, liquid or non-liquid discharge or pollution of
whatever nature which is dropped, seeped, discharged, spilled, blown out
or leaked from equipment, apparatus, machinery, facilities or other
property of the Contractor or its sub-contractors, suppliers, employees or
agents, irrespective or [sic] any contributory negligence, whether active or
passive, of the party to be indemnified except to the extent that the
foregoing was caused by the sole negligence or wilful misconduct of the
party which would otherwise be indemnified.”
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The most significant point about this Article is indeed that the indemnity clause comes in
two parts. The first has no equivalent in the London Bridge contract, but the second part
is in identical terms to the indemnity in the London Bridge case, except that there is no
limit on the amount of the indemnity in respect of liability to third parties.
The argument for the defenders was that the two parts of the indemnity should be
interpreted together. More particularly, the first paragraph, which the defenders
described as “the preamble”, should be seen as governing and defining the scope of the
indemnities in the second part of the Article. This meant that the qualifications to be
found in the first part were inherent in the indemnities set out in the second part. Two
results in particular followed. First, the indemnities in the second part were subject to the
£1,000,000 limit set out in the proviso at the end of the first part. Secondly, the
indemnities in the second part applied only where the death, injury or damage was caused
or contributed to “by reason of omission or negligence whether active or passive of the
Contractor”. In the context in which it was used in the first paragraph, the term
“omission” could not properly be construed as simply a negligent omission and should,
rather, be construed as referring to a breach of statutory duty by the Contractor. In
summary, the indemnities in the Article were to apply only where the death, injury or
damage was due to breach of statutory duty or negligence on the part of the Contractor.
It is a curiosity - and hence, perhaps, a weakness - of this approach that, if the
defenders’ construction of the indemnity in Article 17.1(c) of the London Bridge contract
is correct and the reference to the contractor’s negligence or breach of statutory duty is
implied into the terms of the indemnity by the reference to the “contributory negligence”
of the party to be indemnified, then in the Eastman Christensen contract there is no need
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to use the terms of the first paragraph to imply those words into clause (c) of the second
paragraph. The argument might, of course, be reversed. Moreover, as I have just
explained, the defenders’ interpretation involves reading the words “by reason of
omission o[r] negligence whether active or passive of Contractor” as being intended to
include a breach of statutory duty by the Contractor. While some breaches of statutory
duty might be easily characterised as omissions, others are of a more positive character
which one would not readily classify in this way. The interpretation therefore appears
somewhat forced, at the margins at least.
On the defenders’ interpretation, the first paragraph of the Article is not a freestanding indemnity provision, but a provision which sets out qualifications that are to be
imported into the indemnities which follow. Consistently with this approach, counsel for
the defenders were meticulous in always describing this first paragraph as the “preamble”
to what followed. That term, of course, presupposes that the function of the first
paragraph is the one assigned to it by the defenders and, for that reason, I have not
adopted their preferred term and shall use neutral terminology instead.
Article 15.1 is headed up “Contractor’s Indemnities”: the draftsman is
anticipating that more than one indemnity will follow. It is noticeable, however, that
Article 15.2 is headed up “Company’s Indemnities” and is followed by only two clauses
which are equivalent to clauses (c) and (e) under “Contractor’s Indemnities”. The
draftsman must therefore regard the second paragraph of Article 15.1 as itself containing
a number of indemnities - and indeed that is consistent with the way in which I analysed
the equivalent paragraph in Article 17.1 of the London Bridge contract. It follows that
one cannot deduce from the heading of Article 15.1 whether the draftsman regards the
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first paragraph as itself containing an indemnity or merely as a provision defining the
scope of the indemnities in the following paragraph.
On the other hand the proviso to the first paragraph says that the Contractor’s total
liability “pursuant to this indemnity” is not to exceed £1,000,000. The phrase suggests
that, contrary to the defenders’ submission, the draftsman does regard the first paragraph
as itself constituting an indemnity, but one which is limited to £1,000,000.
In advancing their construction, counsel for the defenders placed considerable
weight on the words “Without prejudice to the foregoing generality” which introduce the
second paragraph. Those words tended to suggest, they argued, that what had gone
before in the first paragraph was a generality and that what followed in the second
paragraph was encompassed within, and subject to, that overall generality. The words
also suggested that what followed was not to prejudice what had gone before. The effect
therefore was that the indemnities in the second paragraph were subject to the provisions
of the first paragraph.
I do not consider that the words “Without prejudice to the foregoing generality”
will bear the weight which the defenders seek to place upon them. I accept that the words
suggest that the first paragraph contains a generality and that what follows is not to
prejudice that generality. I do not, however, see any basis for equating the phrase
“Without prejudice to the foregoing generality”, which is what the draftsman actually
inserted in the contract, with another phrase, “Subject to the foregoing generality”, which
the draftsman might have chosen, but did not. Indeed I find nothing in the actual phrase
which points to the particularised indemnities in the second paragraph being made
subject to, and hence being cut down by, the more general provision in the first
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paragraph. The natural reading of the phrase, it appears to me, is that it provides a link
between the paragraphs and indicates that the first paragraph contains a general indemnity
which is not itself to be prejudiced or cut down by the additional, more particular,
indemnities which follow in the second paragraph. On the construction which I prefer,
those particular indemnities do not prejudice the general indemnity: they leave the
operators’ rights under the general indemnity intact but give the operators additional
rights. Moreover, legitimately or not, my conviction that this is how the phrase ought to
be construed in the Eastman Christensen contract is certainly not weakened when I notice
that in the equivalent position in Clause 15.1 of the Wood Group contract the phrase is
“In addition and without prejudice to the foregoing generality”. When interpreted in the
manner which I prefer, the phrase in the Eastman Christensen contract not only does not
support, but actually undermines, the defenders’ argument on the interpretation of the
clause as a whole.
I am conscious, of course, of the difficulties which present themselves if the
paragraphs are read as being quite distinct.
Counsel for the defenders pointed out that, on that approach, the Contractor has
an unlimited liability to indemnify the operators where any of the Contractor’s employees
is injured or killed or where its property is damaged, but has no obligation under Article
16 to maintain insurance cover for that liability. On the approach which they advocated,
the Contractor is liable to indemnify the operators for the injury to, or death of, its
employees only where there has been an omission or negligence on the part of the
Contractor. Counsel pointed out that under Article 16.2 (i) the Contractor must maintain
Employer’s Liability and Workers’ Compensation Insurance which would cover that
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contingency. Similarly, they said that the Contractor’s liability to indemnify the
operators for claims and losses arising out of third party injury or property damage would
be covered by the General Public Liability Insurance which the Contractor is obliged to
maintain under Article 16.2 (ii). The scope of the insurance provisions could therefore
provide a useful indication of the scope of the indemnity provisions.
The force of the defenders’ argument is substantially weakened by the fact that
there is no direct correspondence between the £1,000,000 limit per occurrence in Article
15.1 and the obligation to maintain a minimum cover of $5,000,000 for each incident
under Article 16.2. I am, moreover, uncertain whether the General Public Liability
Insurance would cover the Contractor for liability arising in all the ways (e.g. by the
negligence of someone acting under the Contractor’s direction) envisaged in Article 15.1.
In any event the correlation between the insurance provisions and the scope of the
indemnities in Article 15.2, as construed by the defenders, is not so close as to persuade
me that the insurance provisions are intended to shadow the indemnity provisions
exactly. For that reason I do not find in them any compelling indication that the
indemnity in clause (c) of the second paragraph of Article 15.1 should be qualified in the
manner proposed by the defenders.
The other point which counsel for the defenders emphasised is in some ways
more formidable. On the pursuers’ construction of Article 15, if an employee of the
Contractor were injured due to the negligence of the Contractor but in circumstances
where the employee could bring a claim against the operators, both the indemnity in the
first paragraph and the indemnity in clause (c) of the second paragraph would apply. Yet
the indemnity under the first paragraph would be subject to a limit of £1,000,000 while
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the indemnity under clause (c) of the second paragraph would be subject to no such
limitation. I confess that this is the point which has given me the greatest difficulty. That
difficulty cannot, however, induce me in the end to read into clause (c) in the second
paragraph words which are not there and which are not, I am persuaded, intended to be
there. That being so, I must interpret the provisions as meaning that, where a particular
claim or loss falls within the scope of one of the clauses in the second paragraph, the
Contractor is obliged to indemnify the operators to an unlimited extent; where, on the
other hand, the claim or loss does not fall within any of the clauses in the second
paragraph, but is covered by the first paragraph, the Contractor is obliged to indemnify
the operators, but only up to a maximum of £1,000,000.
That interpretation can, of course, be criticised on the grounds that it reduces the
first paragraph to the status of a sweep-up provision and it is somewhat unusual to find a
sweep-up provision placed ahead of the provisions to which it provides the back-up.
Moreover, the range of the indemnities in the second paragraph is so extensive as
apparently to leave little room for the indemnity in the first paragraph to operate. If the
construction of the clause which I have adopted is correct, these must just be accepted as
possible criticisms of its drafting. The draftsmanship of the contract as a whole is not so
surpassingly perfect as to convince me, at least, that criticism of that kind could never be
merited and that the construction must therefore be incorrect. More positively, perhaps,
the scheme of the indemnities so interpreted may appear rational and even commercially
sensible: unlimited indemnities against claims and losses which the parties can identify
with some precision, coupled with a capped indemnity for claims and losses which they
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cannot so specify and the potential extent of which may also, therefore, be hard to
identify and predict.
For all these reasons I reject the defenders’ arguments as to the construction of
Clause 15.1 of the Eastman Christensen contract. The Kelvin Catering and Wood Group
contracts, though not in all respects identical with the Eastman Christensen contract, both
have the two-paragraph structure. I therefore interpret them in the same way as the
Eastman Christensen contract - indeed, as I have pointed out, the linking phrase in the
Wood Group contract strengthens the case for that interpretation.
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3. CONSEQUENTIAL LOSSES
In the present actions the pursuers call upon the defenders to indemnify them
against the claims, or more exactly the losses arising from the claims, which were
brought against them in respect of the employees of the various defenders who had been
either killed or injured in the disaster. The pursuers settled the claims at a level which
was higher than would have been appropriate if the claims had been considered purely
within a Scottish or United Kingdom context. This was because, having taken advice,
the pursuers concluded that they were potentially vulnerable to the jurisdiction of the
courts of Texas where any claims would have been heard by a jury. The Lord Ordinary
who heard a large amount of evidence on the point concluded that the pursuers were
“very vulnerable to litigation in Texas” (Opinion 6/1297). In reaching this view the Lord
Ordinary attached particular importance to the fact that, for several years, the pursuers
had been “selling the whole of their [oil] production through and under the control of
agents in Texas” (Opinion 4/1295). The agents, OCSI, were “the nerve centre of
OPCAL’s crude oil sales and OPCAL made the choice to sell all their oil” through them
(Opinion 4/1296). The pursuers did not ask us to review these findings of the Lord
Ordinary.
Having concluded that the pursuers would have been very vulnerable to litigation
in Texas, the Lord Ordinary went on to consider the settlements which the pursuers had
reached with the agents acting for the claimants. He expressed his view in this way:
“A detailed consideration of the circumstance of this case has convinced
me that the settlement arrangements were reasonable. Put at the very
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lowest I think it was not seriously contested that there was some risk that
the plaintiffs could have secured the jurisdiction of the Texas Court, that
an eventual award of damages was likely and that the sums awarded
would have been somewhere above Scottish values” (Opinion 6/1420).
In this reclaiming motion the defenders have not challenged the Lord Ordinary’s finding
that the settlements were reasonable and we are accordingly entitled to proceed on the
basis that they were. But, although he was satisfied that the settlements were reasonable,
the Lord Ordinary nevertheless went on to hold that, even if the pursuers had been
entitled to be indemnified by the defenders, the indemnity would have been limited to the
amount of the losses which would have been recoverable under Scots law. In other
words he held that they would not have been entitled to be indemnified for the additional
sums which they paid to the claimants because of the risk of proceedings in Texas.
The Lord Ordinary reached this view on the basis of his interpretation of the terms
of the consequential loss provision, a version of which is to be found in all the contracts
between the pursuers and the defenders, except in the Stena Offshore contract. For the
sake of consistency I have selected Article 20 of the London Bridge contract which is in
these terms:
“CONSEQUENTIAL LOSS
Notwithstanding any provision herein to the contrary, 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.”
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The Lord Ordinary held that this provision meant that the defenders’ obligation to
indemnify the pursuers was limited: they were not liable to indemnify them for “any
indirect or consequential losses” which the pursuers suffered. The Lord Ordinary was
addressed at length on the construction of this phrase and he expressed his conclusion in
this way:
“The terms indirect and consequential loss are almost terms of art. Since
at least Koufos they have a clear meaning in relation to damages for breach
of contract. There are at least a number of cases where judges have gone
to breach of contract cases to acquire a meaning for the expression being
considered even in cases which are not themselves damages cases for
breach of contract. The views of Mr. Justice Megaw in Wraight Ltd
illustrate such an approach. Thus to put it no higher if at least there is a
possibility from the terms of the Contracts that the parties were using the
phrase ‘indirect and consequential loss’ as its meaning was developed in
cases such as Koufos then the defenders would be entitled to the benefit of
that construction. I think that the phrase we are considering is open to the
construction in question. Indeed it is difficult to find a construction more
apt in relation to the terms of the contracts” (Opinion 5/1069 - 1070).
What the Lord Ordinary did in this passage was to interpret the phrase “indirect and
consequential loss”. As counsel for the pursuers pointed out in the course of the
reclaiming motion, that particular phrase occurs only in the B.T. contract; in the other
contracts the phrase is “indirect and consequential losses”. Be that as it may, the Lord
Ordinary in effect accepted the argument which the defenders advanced before him to the
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effect that the words “indirect and consequential losses” have acquired a special,
technical meaning. The argument was that those words were to be interpreted as
referring to losses which would be regarded as indirect or consequential under the rules in
Hadley v. Baxendale (1854) 9 Exch. 341 and subsequent cases, including the decision of
the House of Lords in Koufos v. Czarnikow Ltd. [1969] 1 A.C. 350. In particular the
Lord Ordinary attached importance to Lord Reid’s view in Koufos that loss would be
recoverable only if it would “have appeared to the defendant, had he thought about it, to
have a very substantial degree of probability” ([1969] 1 A.C. at p. 388 F - G).
The Lord Ordinary examined the basis on which jurisdiction might have been
established against the pursuers in Texas and held that he
“could confidently conclude that the Contractors would not be aware of
OPCAL’s sales arrangements in Texas. This does not seem to have been
something that they broadcast. Even their attorney Mr. Silva who had
acted for them for years only found out about the sales’ arrangements
some time into the settlement negotiations. Thus I think the loss involved
in Texas enhancement of damages is of a type well beyond what the
Contractors were thinking about when they entered into their Contracts”
(Opinion 5/1072 - 1073).
In summary his conclusion was that
“if the pursuers other than i[n] Stena Offshore were successful in proving
their right to recover under the Contractors’ Indemnity I would award
them only Scottish levels of loss. This is because I consider that it [was]
an unusual and very material circumstance unlikely to be [ ]known to the
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relevant Contractors that not only do OPCAL conduct their business
operation in the North Sea but that they control all their oil sales through
Texas. That OPCAL should purchase goods in Texas and have
contractual arrangements there is perfectly predictable in the oil world but
that they should actually conduct part of their business there is much less
foreseeable” (Opinion 5/1074).
The Lord Ordinary’s decision on this point is ultimately based on his view that
under Article 20 the contractors are obliged to indemnify the pursuers only for losses
which would, in the words of Lord Reid, have been within their contemplation as “having
a very substantial degree of probability” of occurring. Before us, counsel for the pursuers
argued that this approach was mistaken and that, if entitled to recover under the
indemnities, the pursuers are entitled to recover the whole amount which they paid to
effect a reasonable settlement with the claimants.
I did not understand counsel for the pursuers to dispute that Article 20 did indeed
apply to the indemnities in Article 17.1. What they disputed was the interpretation of
Article 20 which the Lord Ordinary had adopted and the effect which he had given to that
interpretation. In so far as Article 20 applies to the indemnities in Article 17.1, it must
operate within the framework of the indemnities contained in that Article - in particular,
for present purposes, the indemnity in paragraph (c). I therefore find it useful to recall the
relevant words of that provision:
“The Contractor shall indemnify, hold harmless and defend the Company
... from and against any claim demand, cause of action, loss, expense or
liability (including but not limited to the costs of litigation) arising ... by
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reason of ... (c) Injury to or death of persons employed by ... the
Contractor ...”
Two points stand out.
The first is that the indemnity against legal claims and against losses arising from
such claims falls squarely within the terms of the provision. Moreover, the parties have
not agreed - as they might have, of course - to confine the indemnity to claims of any
particular type or to claims arising in any particular jurisdiction or group of jurisdictions;
it applies to “any claim”.
Secondly, while the Contractor is obliged to indemnify the operators against
“loss” and against loss which the operators incur as a result of a claim, the obligation is
actually wider than that. The Contractor is obliged to defend the operators against any
claim arising out of injury to, or death of, the Contractor’s employees. That obligation
means what it says: the operators when faced with a claim can call on the Contractor to
defend the operators against it. Since that obligation is not confined to any particular
class of claims, it applies generally. Therefore, if the pursuers had been sued in respect of
injuries to the contractors’ employees in the courts in Texas, they could have called upon
the contractors to defend them against those claims and the contractors would have been
obliged to do so. That obligation to defend the pursuers against the claims would have
applied, irrespective of whether the plaintiffs established jurisdiction in Texas on the
basis of the pursuers’ oil sales through OCSI there or on any other basis and irrespective
of the amount of damages which the plaintiffs sought in the Texas actions. There is
nothing in the wording of the indemnity which would give the contractors any basis for
arguing, say, that their obligation to defend the pursuers against a claim extended no
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further than an obligation to defend them against the claim up to a value quantified on a
Scottish as opposed to a Texan basis. Nor indeed can I see any basis upon which the
contractors could seek to introduce that qualification since the argument that their
liability is limited depends on the terms of Article 20 which refers only to “loss” and
cannot be read as applying to the separate obligation under the indemnity to defend the
operators against a claim.
I therefore construe the indemnity as involving an unqualified obligation by the
contractors to defend the pursuers against claims arising out of injury to, or death of, the
contractors’ employees. The structure of the Article suggests moreover that the
obligation to defend and the obligations to indemnify and to hold harmless are different
aspects of the same obligation. The Article envisages that the operators, if faced with a
claim, can call upon the Contractor to defend them against the claim and, if the
Contractor is successful in that defence, it has thereby fulfilled its obligation under the
contract. If on the other hand the Contractor undertakes the defence of the operators but
fails and they are found liable in the action, then the Contractor must indemnify the
operators against the loss which they incur as a result of that liability. The argument for
the defenders implies, however, that the obligation to defend against a claim is potentially
wider than the obligation to indemnify against the loss incurred by reason of a claim. In
other words, the unqualified obligation to defend any claim would be matched by a
qualified obligation to indemnify the operators only against the amount of loss from that
claim which the Contractor could have contemplated as having “a very substantial degree
of probability” (Lord Reid in Koufos [1969] 1 A.C. at p. 388 F - G). I can see no rational
basis upon which the parties should have intended to impose on the Contractor an
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obligation to defend the operators against claims in respect of which the Contractor was
not also obliged to indemnify them if they had to pay the claim. Since that is the
implausible result of the construction of Article 20 adopted by the defenders, for that
reason alone I would reject that construction.
The defenders’ argument must be examined more closely, however. As I have
explained, it starts from the proposition that by using the phrase “indirect or
consequential losses” the parties have imported into Article 20 a reference to the test in
Hadley v. Baxendale and subsequent cases. In its original setting that test is supposed to
reflect the intention of the parties to a contract as to the liability in damages which a party
in breach of the contract should owe to the party who suffers loss as a result of that
breach. As the cases show, the test is not always easy to apply even in that context. In
drawing up the provisions in the service contracts with which we are concerned, and in
particular Articles 17.1 and 20 of those contracts, the parties were not seeking, however,
to regulate their liability in the event of a breach of the contracts. Rather, they were
seeking to define the scope of the strict contractual liability of the contractors to
indemnify the operators in certain eventualities. For my part I should find it a priori
somewhat surprising if the parties had chosen to define the scope of that obligation by
importing a test designed to deal with a completely different situation, where a party in
breach has to make good the loss caused by that breach.
In any event the argument for the defenders depends critically on the court
concluding that the parties intended the phrase “indirect or consequential losses” to be
interpreted in a particular way. The interpretation was said to have been established by
the courts in a number of cases to which we were referred: Millar’s Machinery Co. Ltd.
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v. David Way & Son (1934) 40 Com. Cas. 204; Saint Line Ltd. v. Richardsons,
Westgarth & Company Ltd. [1940] 2 K.B. 99; Croudace Construction Ltd. v. Cawoods
Concrete Products Ltd. [1978] 2 Lloyd’s Rep. 55 and British Sugar plc v. N E I Power
Projects Ltd. (1997) 87 B.L.R. 42. I accept, of course, that, where a particular phrase has
been interpreted by the courts and is subsequently used in a commercial document, it will
often be proper to apply the earlier interpretation - on the basis that the parties and their
advisers will have chosen the phrase, conscious of the authoritative interpretation which
has already been placed upon it. That principle of interpretation is amply illustrated by
the cases to which we were referred. And if the words in those cases had been used in
Article 20 and had been used in a context which cast no light on their intended meaning,
there might have been much to be said for applying the settled interpretation to the
Article. But, in fact, those cases are not concerned with the exact phrase which we are
called on to interpret in this case: the phrase in Millar’s Machinery was “consequential
damages”, in Saint Line “indirect or consequential damages”, in Croudace “indirect or
consequential damage” and in British Sugar “consequential loss”. More importantly, the
phrases did not occur in the same type of context as is found in Article 20.
It is trite that words and phrases used in a contract must be interpreted in their
particular context. That context may provide a key to the interpretation of the word or
phrase and show that, whatever meaning it might bear elsewhere, in the provision in
question it bears a particular meaning which can be derived from its context. Since I
have formed the view that the meaning of the phrase “indirect or consequential losses” is
best ascertained from the terms of Article 20 itself, I have not found it either necessary or
helpful to analyse the cases on remoteness of damage in contract to which we were
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referred by counsel. I concentrate instead on the terms of Article 20 and their application
in the present circumstances.
In Article 20 the phrase “indirect or consequential losses” does not stand alone
but in conjunction with examples of the kinds of losses to the operators which it is said to
include and which therefore must fall within its scope. Since we are concerned to
discover how Article 20 affects the operation of the indemnity in Article 17.1, the two
provisions must be considered together. In that context, all the losses enumerated in
Article 20 are losses which the operators suffer as a result of the injury to, or death of,
the Contractor’s employees or as a result of damage to, or loss or destruction of, the
Contractor’s property. In that sense they are all examples of a situation where A suffers
losses because of injury or damage to B: the losses which A suffers in such
circumstances are indirect or consequential. The genus “indirect or consequential losses”
in Article 20 therefore comprises losses suffered by the operators because of the injuries
to, or deaths of, the Contractor’s employees or because of damage to, or loss or
destruction of, the Contractor’s property: the losses enumerated in the Article are simply
species of loss falling within that genus.
In this respect the operators are like the master in Allan v. Barclay (1864) 2 M.
873 whose servant was injured by the defender. As a result of the servant being injured,
he was unable to work and the master lost his services. Lord Kinloch held that, in a
delictal action, the master could not recover his loss because it had not arisen “naturally
and directly” out of the wrong done. In much the same way, the operators’ loss of use,
loss of profits, loss of production or business interruption does not arise naturally and
directly out of the injury to, or death of, the Contractor’s employee or out of the damage
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to, or loss or destruction of, the Contractor’s property. Rather, the operators’ loss is
secondary or indirect, a “knock-on” loss, arising out of the consequences which flow to
them due to their relationship with the Contractor affected. For instance, the death of an
employee of a Contractor may mean that equipment cannot be brought into service and
the operators may suffer loss of oil production. This is an indirect loss to the operators
arising out of the death of the Contractor’s employee.
By contrast – turning to the actual facts of this case - the loss which the pursuers
suffer if they are sued or have to pay damages because of their statutory or common law
liability for the death of, or injury to, an employee of any particular contractor is a direct
loss to the pursuers themselves rather than an indirect or consequential loss flowing from
a loss experienced by anyone else. That remains the character of the pursuers’ loss,
whatever the quantification of the claim may turn out to be. In no sense was the Texas
enhancement element in the claims against the pursuers an indirect or consequential loss
to them within the meaning of Article 20.
For these reasons I am satisfied that Article 20 does not have the effect of limiting
the defenders’ liability under the indemnity so as to exclude from its scope the reasonable
sums which the pursuers paid over and above the Scottish level of damages. I should
therefore allow the pursuers’ reclaiming motion on this point.
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4. SCOTTISH LEVEL OF DAMAGES
The defenders advanced a further short argument based on the steps taken to
complete the settlement of the claims which the victims and their relatives had brought
against the pursuers. There was really no dispute about what had happened. A general
account of the events which followed the disaster can be found in the “Summary and
Background” at the start of Lord Coulsfield’s opinion. He gives an account of the
submissions of the parties on the present point in Part 6(a).
In presenting the defenders’ argument, Mr. Currie, Q.C., took as his example the
case of the late Mr. Robert Carroll, an employee of London Bridge Engineering Ltd.
Very shortly after the disaster the claimants, including Mr. Carroll’s widow, both as an
individual and on behalf of their daugher, Ashleigh, sought legal advice. The solicitors
representing many of the claimants joined together to form “The Piper Alpha Disaster
Group”. The pursuers’ lawyers entered into negotiations with them, the first meeting
being held on 21 July 1988. A series of meetings followed - on 22 July, 24 August and
16 September. On 16 September information was provided about 30 claimants. In those
discussions the Disaster Group claimed that the pursuers were liable to pay damages to
the claimants and indicated that they would seek to found jurisdiction in the state of
Texas where, they said, the level of damages would be considerably higher than any
awards made by a Scottish court. The pursuers accepted the advice that it was likely that
they would be found liable, if sued in England or Scotland. They were also advised that
there was a material risk of jurisdiction being established against them in Texas. They
therefore accepted the advice that they were likely to be found liable to the claimants and
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as to the risk of jurisdiction being established in Texas. The pursuers therefore took steps
to settle the claims on a basis which allowed for the possibility of jurisdiction being
established in Texas.
The pursuers’ advisers kept the contractors and their representatives informed of
the progress of negotiations. The first letter from the agents for any of the contractors
was dated 10 October 1988. It came from Simpson & Marwick W.S., acting as agents for
Stena Offshore (Northern Coasters) Ltd. The letter was addressed to Mr. David of
Occidental Petroleum (Caledonia) Limited and in it Simpson & Marwick indicated that
their clients understood the pursuers’ desire to achieve settlement without recourse to
litigation. They added:
“It is further recognised that the level of settlement that can realistically be
achieved will exceed the level of damages likely to be awarded in a
Scottish Court and accordingly that the settlement should reflect a
premium on that level.
In those circumstances our clients have no objection to you proceeding to
negotiate settlement of the various claims on such a basis and further are
willing to consider the level of settlement proposed in each case with a
view to confirming whether or not it is reasonable. No guarantee is given
that such confirmation will be forthcoming. Any settlement should be
accompanied by a worldwide discharge and a Statutory Declaration of
Satisfaction to provide full protection for this company in a form which
has been approved by us...
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This letter is written without prejudice to our client’s right to contest any
claim for relief that you may subsequently make in contract or otherwise
which is expressly reserved, nor should it be interpreted as agreeing that
any such claim exists.”
Three days later the same agents wrote to Messrs. Ince & Co., the London agents
for the pursuers, on behalf of the Piper Alpha Insurers Committee, following a meeting
with Ince & Co. on 12 October 1988. In the letter they said inter alia:
“The Committee has considered Occidental’s proposals to settle the
claims of relatives and dependents [sic] on the basis of a multiplier of 2.5
on the dependency element and a multiplier of 12 on the solatium element
both over the basic Scottish levels.
After consideration is given to the exposure to U.S. litigation, its awards
and penalties and the risks and commercial pressures to which Occidental
find themselves subject it is recognised that the settlement proposals are
reasonable for Occidental. However, the same exposure, risks and
pressures do not, in the Committee’s view, apply to the contractors.
Accordingly the Committee cannot give you the reassurance that you seek
that quantum will not be a matter of future dispute.”
Thereafter by letter dated 18 October 1988 Paull & Williamsons made an initial
offer to settle to the agents acting for Mrs. Carroll and Ashleigh. The offer, in a revised
form, was renewed in a letter of 2 May 1989. In its revised form the offer was to pay a
total sum of £683,853.72, with interest from 17 April 1989. The sum was to be
apportioned between Mrs. Carroll and her daughter in accordance with a procedure set
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out in a Memorandum annexed to the letter. Mrs. Carroll accepted the offer, as an
individual and as tutrix of Ashleigh, on 30 May 1989.
On 9 August 1989 Mrs. Carroll, again as an individual and as tutrix to her
daughter, signed an elaborate document whose title gives an indication of its far-reaching
effect:
“Full Release of all Claims and Demands
Assignment, Covenant not to Sue and Indemnification
Agreement in Favour of Released Parties”.
In broad terms the effect of the document was that, in return for the sum agreed to settle
the claims, Mrs. Carroll, as an individual and tutrix, released the pursuers from all claims,
including claims in other jurisdictions. She undertook that
“As and for the same consideration referred to herein, the Claimants
consent and direct their Solicitors / Attorneys to institute proceedings in
the Court of Session in Edinburgh which will result in an entry of a decree
for payment, it being understood that this equates to a dismissal with
prejudice of all claims and actions which may have been brought on their
individual or collective behalf in any court, anywhere, arising out of the
Accident, personal injury and death of the Decedent.”
She further agreed that the release could be pleaded
“as an absolute and final bar to any and all suits which may hereafter be
brought and maintained by him or her, or anyone claiming by or through
him or her.”
She went on to agree to indemnify the pursuers against any claims etc.
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“accruing to or on behalf of him or her or anyone claiming by or through
him or her, arising out of the accident, personal injury and death of the
Decedent.”
In accordance with the procedure envisaged in this document, on 21 September
1989 the agents acting on behalf of Mrs. Carroll and her daughter signetted a summons in
an action of reparation against the pursuers in the Court of Session. The summons
contained two conclusions for £683,853.72, one for payment to Mrs. Carroll as an
individual and the other for payment to Mrs. Carroll as tutrix of her daughter. Actions of
this kind were referred to in the proceedings before us as “confirming actions” and they
were raised to meet the demands of the pursuers’ American legal advisers who
considered them to be a necessary step in protecting the pursuers from the risk that any of
the claimants, having settled their claims against the pursuers in Scotland, might try to
raise proceedings elsewhere, in particular in courts in the United States. In cases, such as
the Carroll case, where one of the claimants was a pupil or minor, another purpose of
raising the action was to have a curator ad litem appointed by the court to look after the
interests of the child and to consider the terms of any proposed settlement from that point
of view. This procedure protected not only the child but also the pursuers since it was
designed to ensure that any discharge of the pursuers’ liability on behalf of the child
would be final and not liable to be re-opened. Once the curator was appointed, the case
was sisted to await the outcome of an arbitration to determine the appropriate
apportionment of the sum of damages to be awarded to Mrs. Carroll as an individual and
as tutrix for her daughter. The terms of the confirming actions were approved by the
pursuers’ legal advisers and the actions were not defended.
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In due course, once the apportionment had been finalised, a Joint Minute was
lodged, the signatories being the counsel representing Mrs. Carroll, the curator ad litem
and the pursuers. The terms of the Joint Minute gave effect to the arbiter’s
apportionment of the award of damages between Mrs. Carroll and her daughter: Mrs.
Carroll was to be paid £517,853.72 and her daughter was to be paid £166,000, with
interest from 17 April 1989. On 18 April 1990 decree was pronounced in terms of the
Joint Minute and the decree was extracted on 26 April 1990.
On 2 May 1990 the underwriters sent two cheques to the pursuers’ agents, Paull
& Williamsons, for distribution to Mrs. Carroll’s agents. One of the cheques covered the
agents’ fees and the other was for £781,944.57, which represented the principal sum of
£683,853.72 with the accrued interest. By letter dated 3 May 1990 Paull & Williamsons
forwarded the cheques to the Carrolls’ agents, thus giving effect to the settlement.
In presenting the argument for the defenders, Mr. Currie drew attention once more
to the terms of the indemnity provision. The example which he took was Article 17.1 in
the London Bridge contract which begins:
“The Contractor shall indemnify, hold harmless and defend the Company,
and its parent, subsidiary and affiliate corporations and Participants, and
their respective officers, employees, agents and representatives from and
against any claim, demand, cause of action, loss, expense or liability
(including but not limited to the costs of litigation) arising”
out of the event in question.
Mr. Currie argued that the pursuers had to identify the head under which they
sought indemnity. In the course of submissions before the Lord Ordinary, he said, Mr.
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MacAulay, Q.C., had indicated that the pursuers were seeking indemnity from and
against the “claims” brought against them by the claimants. But that submission
overlooked the fact that, for what might have been good reasons, the pursuers had chosen
to settle the claims in a particular way. That particular way had involved, as one of its
essential components, the claimants raising proceedings in the Court of Session and
decree being pronounced against the pursuers in those proceedings. The effect of that
decree was to supersede and extinguish any of the claimants’ claims on which the
relevant action in the Court of Session had been based. It followed that the pursuers
could not thereafter seek indemnity for loss due to any such claims, since they had all
been extinguished. Following the Court of Session decree, the only basis upon which the
pursuers could seek indemnity was in respect of their “liability” under that decree which
was governed by Scots law. A decree of a Scottish court could only be in respect of
damages which fell to be awarded in terms of Scots law. Ex hypothesi any element in the
settlement of the claimants’ claims which was referable to possible exposure to liability
in Texas was not an element to which the claimants would be entitled under Scots law.
The pursuers should accordingly be entitled to recover nothing more under the indemnity
than the amount which they would have been liable to pay as damages calculated
according to Scots law and without reference to any possible exposure to claims in other
jurisdictions.
Despite the elegant manner in which Mr. Currie presented his argument, it failed
to persuade me. I accept his submission as to the effect of the decree of the Court of
Session on the underlying claims. Before the final decree was pronounced on 18 April
1990, the claimants had illiquid delictal and other claims against the pursuers. In so far
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as those claims were the subject of the proceedings in the Court of Session, the final
decree extinguished those rights and transformed the claimants’ rights into rights to
payment of the ascertained and liquid debts constituted by the Court of Session decree.
See Freeman v. Lockyer (1877) 4 R. (H.L.) 32 at p. 40 per Lord Selborne and Comex
Houlder Diving Co. Ltd. v. Colne Fishing Co. Ltd. 1987 S.C. (H.L.) 85 at p. 121 per Lord
Keith of Kinkel.
Even so, it does not seem to me to follow that, if the pursuers seek to recover
from the contractors under the indemnity the sum for which they (the pursuers) were
found liable to the claimants in the decree and which they duly paid in terms of the
decree, they are confined in the manner suggested by Mr. Currie. In my view, by paying
the sum for which they were found liable in the action arising out of the death of
Mr. Carroll in the disaster, the pursuers suffered a loss “arising ... by reason of ... injury to
or death of [a person] employed by ... the Contractor ....” Other things being equal,
therefore, the pursuers are entitled to an indemnity for that loss from the contractors who
employed Mr. Carroll. In much the same way, it appears to me that, even though decree
has been pronounced in respect of the claimants’ claim and the claim has thereby been
extinguished, the sum paid in terms of that decree can properly be thought of as a sum
paid in respect of the claim. Accordingly, the pursuers can seek indemnity for that sum
as a sum which they have paid in respect of a claim “arising ... by reason of ... injury to or
death of [a person] employed by the Contractor ....” I therefore reject the basic premise
of the respondents’ argument, that the pursuers can seek indemnity only for their
“liability” as established by the decree against them.
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For the sake of examining the argument fully, however, I assume that I am wrong
to reject the premise of the defenders’ argument. I therefore start from the basis that the
pursuers are seeking indemnity simply by reference to their “liability” under the Court of
Session decree. The defenders then argue that they are entitled to challenge the quantum
of the pursuers’ right to be indemnified. They accordingly submit that, because the
defenders’ alleged obligation to indemnify arises out of the pursuers’ liability under a
decree pronounced by a Scottish court, we should go behind that decree, examine it to
discover what proportion of the sum awarded would have been awarded by reference to
Scots law only, and then declare that any amount over that sum is excessive. In this way
we would confine the defenders’ liability under the indemnity to the Scottish level of
damages only and exclude the Texas enhancement. This stage of the argument appears to
me to be as difficult as the first.
We know that the actions raised by the claimants in all these cases were
“confirming actions”. They were not contested and a Joint Minute was lodged, in terms
of which decree was pronounced. In that situation the judge pronouncing decree will not
have gone behind the terms of the Joint Minute and will have pronounced decree in terms
of the Joint Minute. Provided that the sum for which he is asked to pronounce decree is
within the ambit of the conclusion or conclusions - as was the case here - neither the
judge nor any other element in the court system will scrutinise the matter further before
decree is pronounced. That being so, it appears to me to be wholly artificial to say that,
just because the decree was pronounced by a Scottish court, it could only properly be for
a sum which the court would have awarded by the application of Scots law to the case. In
actual fact many decrees must be pronounced for sums which the judge would not have
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awarded under Scots law if the case had been fought to a finish. That is in the very
nature of settlements, which parties may reach for a variety of reasons - whether because
of the desire of employers to be generous to an outstanding employee who has been
injured, or because of a desire to avoid unwelcome scrutiny of working practices, or
because of a desire to avoid publicity, or because of a deal done by insurers and trade
unions to settle a number of cases on a particular basis. In any of these situations the
decree following on the Joint Minute is a perfectly valid decree of the Scottish court,
whatever the motives for the settlement may have been. Among the many pressures on
the pursuers to settle the claims arising out of the Piper Alpha disaster was the risk that
they would be exposed to proceedings in Texas or some other American jurisdiction with
higher levels of damages. That risk was undoubtedly a factor which influenced the
pursuers, their insurers and their advisers and its effect was to increase the bargaining
power of the claimants and their representatives. Since a decree of a Scottish court was a
necessary part of the pursuers’ strategy to avoid the risk of American proceedings, the
result was an increase in the potential settlement value of the claimants’ Scottish claims.
In these circumstances the claimants and the pursuers eventually settled the claims at a
figure which reflected the enhanced value of those claims. The claimants’
representatives then raised actions which were so framed as to allow the Court of Session
to pronounce decree for those sums. As it was entitled - and indeed bound - under Scots
law to do, the court pronounced decree for the agreed sums in terms of the Joint Minute
of the parties. In that situation I can see no basis for saying that, just because the decree
pronounced by the Court of Session was for a sum which was higher than the Scottish
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court would have awarded if the case had gone to proof, the decree should be regarded as
being ipso facto excessive.
Before the Lord Ordinary the pursuers appear, for the most part, to have accepted
that they could not recover what they had paid to the claimants unless the sums were
reasonable. That was also, as I understood the submissions advanced by Mr. Hofford,
their position before this court. As they said in their written response to the written
submissions of the contractors, “The true Question for the Court was whether the
settlements were reasonable in the circumstances”. On the other hand, the Lord Ordinary
(Opinion 5/979 - 982) records and deals with a submission which the pursuers advanced
before him based on Halsbury’s Laws of England (4th edition), para. 354 and certain
cases cited there. These cases might tend to suggest that, where, as here, an indemnifier
is notified of claims or proceedings against the party to be indemnified and does not
defend them, he is thereafter estopped or personally barred from denying the
reasonableness of any settlement of those claims or proceedings. In a considered obiter
passage in Ben Shipping Co. Ltd. (Pte) v. An Board Bainne [1986] 2 Lloyd’s (“The
C. Joyce”) Rep. 285, Bingham J. cast doubt on the application of that estoppel, at least in
a case where there was no express indemnity clause. On one view, in the present case the
personal bar argument might have played an exceedingly important role. If the
contractors had indeed been personally barred from challenging the reasonableness of the
settlements as between the pursuers and the claimants and of the resulting decrees, then
that might have limited the scope of the arguments which the contractors could have
advanced in defence of a claim by the pursuers to be indemnified for the sums which
were paid to meet the pursuers’ liabilities under those decrees. Plainly, of course, issues
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of fact would have a bearing on any such argument. Since, however, counsel for the
pursuers advanced no submission along those lines before this court, the question does
not arise for decision and I express no view on it.
In summary, I hold that the fact that a Court of Session decree passed against the
pursuers in actions relating to the claimants’ claims is not in itself a reason for saying that
the measure of any liability of the contractors to indemnify the pursuers is restricted to
the amount for which the pursuers would have been found liable in damages by a Scottish
court. Despite the existence of the Court of Session decree, the pursuers are entitled to
recover the amount at which they settled the claims, being the amount for which decree
was granted, if the settlement was reasonable in the circumstances.
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5. GOVERNING LAW CLAUSE
Mr. Currie advanced a further argument, summarised in Part 6(b) of Lord
Coulsfield’s opinion, based this time on the terms of the Governing Law clause which is
the same in all of the contracts. Article 5 of the London Bridge contract may serve as an
example:
“GOVERNING LAW
This Contract shall be governed by, construed and interpreted exclusively
according to Scots Law. The parties agree to submission to the
jurisdiction of the Courts of Scotland to the exclusion of the Laws and
Courts of any other country.”
Mr. Currie submitted that, in view of the terms of this Article, as a matter of general law,
et separatim as a matter of the proper construction of the contract, the pursuers were
entitled to recover only Scottish levels of damages under the indemnity. This argument
complemented the arguments which the defenders had advanced under reference to the
Consequential Loss provisions in the contracts and under reference to the decrees which
had been pronounced by the Court of Session. I have dealt with those arguments in Parts
3 and 4 of this opinion.
Mr. Currie drew attention to the fact that, in terms of Article 5 and the equivalent
articles in the other contracts, the jurisdiction of the Scottish courts was exclusive. This
meant that the only courts which were competent to decide any issue relating to the
contractors’ liability to indemnify the pursuers under their contracts were the Scottish
courts. So, even if claimants had sued the pursuers, say, in the courts in Texas, the
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pursuers would have been unable to convene the contractors as third parties in those
proceedings in Texas. In his submission, this was very significant since it meant that the
quantification of any amount for which the contractors would be liable to indemnify the
pursuers was reserved to the Scottish courts. In quantifying that liability the Scottish
courts could apply only their own law, the lex fori. In support of this proposition Mr.
Currie referred generally to A. E. Anton, Private International Law (2nd ed., 1990), pp.
749 et seq. This meant that the pursuers could not come to a Scottish court and ask it to
hold that the contractors were liable to indemnify the pursuers because they had been
found liable to pay a sum which could be regarded as reasonable only if it were judged by
reference to foreign law, viz. the law of Texas.
The Lord Ordinary had been asked to carry out an exercise which no Scottish
judge had ever before been asked to perform: to decide what a foreign court would have
awarded as damages for the injuries suffered by the injured employees or for the deaths
of the claimants’ relatives. Not only did this involve the Lord Ordinary reaching a view
on various imponderable points, but the effect of the exercise was that the Lord Ordinary
came to quantify the contractors’ liability under the indemnity not by reference to the lex
fori, but by reference to foreign law. The Lord Ordinary had thereby adopted a wholly
misguided approach: the terms of Article 5 required him “to close his eyes” to what the
claimants might have recovered under Texas law. Approaching the matter as Article 5
required, the Lord Ordinary should have considered only what the appropriate damages
would have been according to Scots law; anything beyond that was not reasonable and
could not be recovered under the indemnity.
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I reject that argument. Under the contract the only courts with jurisdiction are the
Scottish courts and undoubtedly they must interpret the contract according to Scots law.
The contract provides that the contractors are to indemnify the pursuers against “any
claim, cause of action, loss, expense or liability ... by reason of ... injury to or death of
persons employed by ... the Contractor ....” If the pursuers can show that they have
suffered loss by reason of an injury to, or the death of, an employee of the indemnifying
contractor, then they are entitled to be indemnified. If the contractor disputes liability
and the matter therefore comes before a Scottish court for decision, it will be for the
pursuers to prove both that they have suffered loss by reason of the death or injury of an
employee of the contractor and the amount of that loss. The proceedings will be for
payment of a sum allegedly due under the indemnity. That sum will be determined by
reference to a loss which the pursuers will prove that they have suffered.
Where, as here, the claimants’ claims against the pursuers have already been
determined, in any proceedings on the indemnity the court is not being asked to award
damages for the pursuers’ delict against the claimants. So no question arises of the court
requiring to apply the lex fori to the quantification of damages. Rather, the court will
have to determine, as a matter of fact, what “loss” the pursuers actually suffered. In
determining that question of fact, the Scottish court will use its own prescribed
procedures and laws of evidence. If the loss occurred abroad, then the court will hear
evidence about what happened abroad to show what the loss was. In particular, if the
pursuers had suffered loss because an injured employee had successfully obtained
damages against the pursuers in proceedings in Texas, then the Scottish court would have
114
required to hear evidence as to what had happened in those proceedings in Texas in order
to ascertain the pursuers’ loss.
Equally clearly, if the pursuers say that they settled the claims because of their
perception of the value which would be put on those claims in proceedings in Texas, then
in deciding whether the settlement figure was reasonable, the Scottish court requires to
consider two questions of fact. First, what value would be put on those claims in
proceedings in Texas? Secondly, did the pursuers take that matter into account in settling
the claims at a particular level? In order to decide these questions the Scottish court is
entitled to hear evidence. In relation to them, as on any other disputed question of fact,
the court may require to resolve a number of issues on which the evidence is conflicting.
Having considered the evidence and resolved any such disputed issues, the court will
decide what value the claims would have had in proceedings in Texas and whether the
pursuers took that matter into account in settling the claims. On the basis of the facts so
determined, the court will decide whether the settlement figures were reasonable and
hence whether they represent losses which the pursuers are entitled to recover under the
indemnity.
In his opinion the Lord Ordinary explained his approach in this way:
“The court is not being asked to decide precisely what a Texas Court
would have awarded, but rather to evaluate the degree of risk if the claims
had gone to a Texas Court. Of course the distinction between the
situations I have referred to may be narrow but it is a distinction
nevertheless. In order to assess the reasonableness of the settlement I have
to consider the kind of figures that Texas Law and procedures may have
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thrown up but I do not need to apply Texas procedural rules but simply
assess the evidence of experts as to the kind of decision a Texas Court
may have arrived at” (Opinion 5/1022 - 1023).
In my view the Lord Ordinary properly understood the difference between applying
Texas law - which would have been impermissible - and hearing evidence about the way
in which a claim would have been handled and evaluated under Texas law. Having heard
conflicting evidence on that matter in accordance with Scots law, the Lord Ordinary
formed a view of the factual situation which he then used in deciding whether the
settlements reached by the pursuers with the claimants were reasonable. In approaching
the matter in this way, the Lord Ordinary infringed neither the letter nor the spirit of the
Governing Law clause.
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6. THE TAX ISSUE
A further distinct issue arises in the Stena Offshore case in which the pursuers
seek indemnity in respect of the claim arising out of the injuries to Mr. Andrew Murray
Carroll. In all the other test cases the Lord Ordinary assoilzied the defenders on the basis
of the contribution argument. In the Stena Offshore case, as I have explained, the
position was different because it was an Oxy Gap case: although much of the claim by
Mr. Carroll was paid by the pursuers’ insurers, the pursuers were uninsured for a certain
amount of his claim. Since the pursuers had themselves paid the sums in question to the
claimants, their claim, so far as designed to recover those sums, was a claim to recover
sums which they had themselves paid out. The present issue arises out of the effect of
those payments on the pursuers’ tax position. The Lord Ordinary goes into the matter in
considerable detail, but before us both parties presented the issue in a more general way.
I have proceeded simply on these more general arguments.
Much of the detail was agreed by the parties in a Joint Minute (No. 135 of
Process) and again, of course, I have proceeded on the basis of the agreed figures. The
pursuers themselves paid Mr. Carroll a total of £15,330 of his damages in four stages.
The pursuers had a liability to pay both Petroleum Revenue Tax and Corporation Tax.
Their liability to Petroleum Revenue Tax was based on their profits from oil production
and their liability to Corporation Tax on their profits generally. When the pursuers paid
the sum of £15,330 to Mr. Carroll, they claimed relief in respect of this amount for both
Petroleum Revenue Tax and Corporation Tax. At the time when the reliefs were
allowed, the rate of Petroleum Revenue Tax stood at 75% while the rate of Corporation
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Tax stood at 35%. By the time of the proof the rates of these taxes had fallen to 50% and
33% respectively.
Since the pursuers were able to claim relief from the two taxes, their loss from
having to pay out this element of the damages to Mr. Carroll was accompanied by a
benefit in the form of a reduction in the amount of tax which they required to pay. In
Appendix V to the Joint Minute, the parties quantify this tax benefit to the pursuers as
£13,223.65. On the other hand, if the pursuers recover their payments to Mr. Carroll
from the defenders under the indemnity and are liable to pay tax on them, they will
require to pay the tax at the rate prevailing in the year of recovery. Of course, if the rates
of tax happened to be the same at the time when the pursuers obtained their reliefs and at
the time when they eventually recover the sum due to them from Stena under their
indemnity, the pursuers’ liability to pay the tax on the sum recovered would match the
reliefs which they obtained. In fact, however, as I have explained, by the time of the
proof, the rates of tax had fallen. So, if those lower rates of tax remained in force at the
time of any payment to the pursuers under the indemnity, their liability to pay tax on the
sums received from Stena would be less than the reliefs which they obtained under the
higher rate of taxation. Paragraph 25 of the Joint Minute shows that the amount of tax
which they would require to pay if the current lower rates applied would be £10,579.23.
The position would therefore be that, even though the pursuers had received reliefs for
their payments to Mr. Carroll amounting in total to £13,223.65, they would have to pay
tax of only £10,579.23 on those payments. In other words in this respect they would be
£2,644.42 better off than they would have been if Mr. Carroll had not been injured and
they had required to pay taxes at the original higher rate.
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Before the Lord Ordinary the defenders submitted that, if the court held that the
pursuers were entitled to recover the Oxy gap payments under the indemnity, then their
entitlement to recover should be reduced by £2,644.42 to take account of their lesser
liability to tax. The pursuers submitted that the court should ignore the matter of tax
altogether. Alternatively, the court should not make the reduction sought, at this stage at
least, since the appropriate reduction, if any, would depend on the tax rates prevailing at
the time of any payment by the defenders to the pursuers under the indemnity. By that
time the tax rates might have returned to their previous levels or might indeed have been
raised to still higher levels.
The Lord Ordinary rejected the pursuers’ argument that the court should ignore
the effects of taxation. In the hearing before us counsel for the pursuers did not argue
that he had been wrong to do so. They accepted that we were dealing with the
application of an indemnity clause. As counsel for the defenders instructed us so well,
such a clause is governed by the principles enunciated by Brett L.J. in Castellain v.
Preston and in particular by the principle (11 Q.B.D. at p. 386) that the creditor
“shall be fully indemnified, but shall never be more than fully
indemnified. That is the fundamental principle of insurance, and if ever a
proposition is brought forward which is at variance with it, that is to say,
which either will prevent the assured from obtaining a full indemnity, or
which will give to the assured more than a full indemnity, that proposition
must certainly be wrong.”
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In light of that approach counsel for the pursuers accepted that account should be taken of
the effect of taxation. Mr. Batchelor contended, however, that the Lord Ordinary had
erred in the way in which he had given effect to that approach.
The Lord Ordinary accepted the defenders’ submission that he should deduct from
the sum (£15,330) which would otherwise be recovered from the defenders under the
indemnity the sum of £2,644.42 - representing the amount by which the pursuers would
gain if, at the time of payment under any decree, the tax rates remained the same as at the
date of the proof. This appears to me to be wrong in principle since, in the event of the
rates of tax being increased in the meantime and the pursuers therefore having to pay
more than £10,579.23 in tax on the sum recovered under the indemnity, the effect would
be that the pursuers would not be fully indemnified by the defenders - in contravention of
the self-same fundamental principle laid down by Brett L.J.
Until the pursuers recover under the indemnity and become liable to a charge to
tax, they continue to enjoy a tax benefit of £13,223.45. But, for the defenders, Mr. Currie
specifically accepted that they did not ask for that benefit to be taken into account at this
stage since the pursuers would be required to pay tax if they recovered under the
indemnity. On that approach the advantage, if any, to the pursuers comes into existence
only at the time when they recover under the indemnity and have to pay tax at a lower
rate than was in effect when they obtained the reliefs in question. In these circumstances,
for the reasons which I have given, I consider that it was inappropriate for the Lord
Ordinary to reduce the sum which would otherwise be recoverable under the indemnity
by £2,644.42. Of course, we cannot tell what the rates of tax or the pursuers’ trading
position will be when the defenders pay the pursuers this part of their claim under the
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indemnity. For that reason, as not infrequently happens in other contexts, the court
cannot calculate the sum which the defenders will eventually have to pay. But the court
can pronounce a decree which determines how that sum should be calculated. The exact
form of any such interlocutor can be discussed at the By Order hearing. It seems to me,
however, that sufficient specification might be given by an interlocutor finding the
pursuers entitled to payment of £15,330 less the amount, if any, by which £13,223.65
exceeds the total of the charges to Petroleum Revenue Tax and to Corporation Tax to
which the pursuers will become liable on payment. As the Joint Minute demonstrates,
the parties’ advisers were able to do the appropriate calculations based on the rates of tax
prevailing at the date of the proof and I see no reason to anticipate any significant
difficulty in reworking the calculation if the rates of tax have changed by the time when
the defenders come to pay.
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7. INTEREST
Before the Lord Ordinary there was another dispute as to whether the sum
recoverable under the indemnity in the Stena Offshore case should be further reduced to
take account of a payment of interest which the pursuers received from the Inland
Revenue. The point arises because of the way in which the tax reliefs operated. Putting
the matter shortly, the pursuers had been assessed and charged to tax for certain periods.
When they successfully claimed relief in respect of the Oxy Gap payments, the effect was
to reduce the sums on which they had been charged to tax for particular periods and so an
amount of tax became repayable. Under Section 1 of, and paragraph 16 of Schedule 2 to,
the Oil Taxation Act 1975 the amount of tax which became repayable carried interest at a
particular rate. So, in respect of the Oxy Gap payments to Mr. Carroll, not only was the
charge to tax on the pursuers’ earnings reduced, but they also received from the Inland
Revenue interest, agreed as £894.50, to make up for the fact that they had in effect been
required to pay a charge to tax which was not due.
The defenders argued that essentially the interest should be treated in the same
way as the reliefs. There was nothing in the evidence to suggest that, when the pursuers
eventually paid tax on the Oxy Gap payments recovered under the indemnity, they would
also require to repay the interest which had been paid to them under paragraph 16 of
Schedule 2 to the Oil Taxation Act 1975. In that situation the amount of interest should
be deducted from the sum due under the indemnity since otherwise in this respect also the
pursuers would end up being more than fully indemnified for their loss.
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The Lord Ordinary rejected that argument and in my view he was right to do so.
The position is that, unless and until the defenders pay the pursuers the amount due to
them under the indemnity, the pursuers have incurred expenditure in making the Oxy Gap
payments. Under the rules governing the administration of the relevant taxes the effect of
those payments was to reduce the amount of tax for which the pursuers should have been
assessed for the relevant periods. The pursuers had originally been assessed for a larger
sum and, when the excess was repaid by the Inland Revenue, the Revenue required to pay
to the pursuers interest under paragraph 16 to compensate them for being deprived of the
use of their funds. At present therefore the position is in equilibrium. If and when the
pursuers are indemnified by the defenders for their Oxy Gap payments to Mr. Carroll,
depending upon their trading position, they will then become subject to a charge to tax in
respect of that payment in the chargeable period when it is made. The charge will be a
charge to tax which arises at the time of payment; there is no question of re-opening or
correcting the assessment of tax for the past periods in respect of which the reliefs were
granted. So far as those periods are concerned, the position will remain as at present, in
equilibrium.
It is true that, even if the pursuers eventually have to pay tax on the sum recovered
under the indemnity at the same rates as those which prevailed when the reliefs were
granted, they will benefit by only having to pay the tax then rather than, say, in 1989 or
1990. But that is not in itself any reason to require the pursuers to give credit for the
interest payment made to them under paragraph 16. The import of a finding by the court
that the defenders are liable to indemnify the pursuers in respect of the Oxy Gap
payments is that the defenders have been in breach of their obligation to indemnify the
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pursuers since the times when the relevant payments were made to Mr. Carroll. If the
defenders had indemnified the pursuers promptly, the pursuers would have been equally
promptly assessed to tax in respect of those payments. Therefore, any benefit which the
pursuers may be perceived as deriving from the lapse of time before this liability to tax
arises is a direct consequence of the defenders’ own wrongful refusal to indemnify the
pursuers at an earlier stage. For these reasons the sum of interest paid to the pursuers by
the Inland Revenue under paragraph 16 of Schedule 2 to the Oil Taxation Act 1975
should not be deducted from the sum due by the defenders to the pursuers under the
indemnity.
It is unnecessary at this stage to do more than indicate the way in which these
issues relating to taxation and interest should be resolved. The appropriate form of
interlocutor can be determined in the light of the discussion at the By Order hearing.
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8. THE LORD ORDINARY’S DECISION ON THE FACTS
As I explained at the start of this opinion, I have considered the opinions of the
other members of the court which deal with the appeal against the Lord Ordinary’s
decision on matters of fact. I agree with those opinions and, for the reasons expressed in
them, I would not interfere with the Lord Ordinary’s decision in this respect. That being
so, it would serve no useful purpose for me to repeat the same views at length in different
words. I therefore propose to limit myself to commenting on some of the issues.
8.1 Onus of Proof
The pursuers led evidence in order to establish the necessary factual basis for their
case that the defenders were liable on the indemnities. The first issue that has to be
considered is where the burden of proof lay.
The Lord Ordinary explained the position by saying that, to bring themselves
within the indemnity provisions, the pursuers “clearly had to prove that an accident had
occurred that justified them in paying damages to the claimants and I think they accepted
that this involved requiring to prove what had caused the accident” (Opinion 2/199).
Although the point was not explored at length before this court, I think it is worth
spending just a moment exploring exactly why the Lord Ordinary came to describe the
position in this way.
The pursuers accept - and this is obvious - that the initial onus is upon them to
establish that the claims brought against them by the persons injured and by the relatives
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of the deceased were claims arising by reason of injury to, or death of, persons employed
by the defenders, which had “a reasonable prospect of success” or had “some prospect or
a significant chance of success”: Comyn Ching Co. Ltd. v. Oriental Tube Co. Ltd.
(1981) 17 B.L.R. 47, per Goff L.J. at p. 80 and per Brandon L.J. at p. 92 respectively. If
the pursuers prove that much, then they bring themselves within the scope of the
indemnity “unless such injury, death ... was caused by the sole negligence or wilful
misconduct of the party which would otherwise be indemnified”. As the reference to
“the party which would otherwise be indemnified” makes clear, the “unless” clause
works as an exception which comes into play only where the creditor in the indemnity
obligation has already fulfilled the other conditions of the indemnity clause. In that
situation the party would fall to be indemnified if the exception did not apply. Given that
the clause works as an exception, I am satisfied that the exception will not apply unless it
is positively established that the claim against the company is one arising by reason of
death or injury caused by the sole negligence or wilful misconduct of the company.
So far as establishing that the claims against them would have a reasonable
prospect of success is concerned, the pursuers really had little difficulty. As I have
explained above in Part 2.1 of the opinion, it is common ground that at the relevant time
the 1976 Regulations applied to the platform and that, if men on it were killed or injured
owing to a breach of the Regulations, then an action for damages could be brought on the
basis of that breach.
As counsel for the defenders pointed out, the effect of Regulation 32(1) was
sweeping since it imposed on the pursuers a duty to ensure that all of the regulations were
complied with; consequently, if any of the regulations was not complied with by anyone
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on the platform, the pursuers were ipso facto in breach of Regulation 32(1) and hence
liable in damages for death or injury resulting from that breach. It cannot be disputed
that, if an oil production platform is operated properly, it will not normally blow up. In
the absence of any other explanation, the very happening of the explosion therefore
allows the inference to be drawn that someone on the platform had done something
which was likely to endanger the safety and health of himself and other persons on the
platform or to render some equipment on the platform unsafe. That being so, merely by
proving that the explosion occurred on the platform, the claimants would establish
liability on the part of the company for breach of Regulation 32(1). Here the pursuers
established that the explosion occurred on the day in question and that the horrific deaths
and injuries occurred as a result. That being so, they established that the claimants had,
at the least, a reasonable prospect of success. The pursuers thereby brought themselves
within the scope of the indemnities, subject, of course, to the exception contained in the
“unless” clause.
The other basis for any claim against the pursuers would be negligence. So far as
that aspect was concerned, the Lord Ordinary held that, because the pursuers were in
control of the platform, the res ipsa loquitur rule would apply. In other words, since the
disaster would not have occurred in the ordinary course of things if the management had
used proper care, in the absence of explanation by the pursuers, proof that the disaster
occurred would be reasonable evidence that it arose from want of care on the part of the
pursuers. Cf. Scott v. The London and St. Katherine Docks Co. (1865) 3 H. & C. 596,
per Erle C.J. at p. 601 as applied in Devine v. Colvilles Ltd. 1969 S.C. (H.L.) 67.
Although in the Outer House the pursuers contested the applicability of the rule, they did
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not re-open that point in the hearing before this court. In a passage at the end of the
section of his opinion dealing with res ipsa loquitur the Lord Ordinary sets out his
conclusion in this way (Opinion 5/961):
“The position therefore is that in my view the pursuers would inevitably
be held negligent in respect of the accident. They have advanced no
explanation for the accident which could exonerate them. The only
explanation that they have advanced for the accident accepts that they had
a measure of blame for it. Thus unless they can prove a cause of the
accident which supports their case that Score were also to blame for the
accident the inference would have to be that they and they alone were at
fault. In that situation the exclusion in the indemnity in respect of sole
negligence would obviously apply. Therefore as the defenders argue it is
critical to the pursuers’ case that they have proved that the accident
happened in the general way that they have averred.”
In the first three sentences the Lord Ordinary explains that, since the pursuers have led no
evidence which would exonerate them and the evidence which has been led accepts “that
they had a measure of blame for it”, they would inevitably be found liable in negligence.
He then goes on to say that “unless they can prove a cause of the accident which supports
their case that Score were also to blame for the accident the inference would have to be
that they and they alone were at fault” (emphasis added). The Lord Ordinary proceeds on
the basis that, because the application of res ipsa loquitur allows the court to conclude
that the pursuers would be liable to the claimants on the basis of negligence, this will in
itself allow the court to infer that they alone were at fault, unless they can prove a cause
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of the accident to support their case that Score were also to blame. Somewhat similar
formulations are to be found elsewhere in the Lord Ordinary’s opinion (5/1080 and 1120
- 1121).
At first sight the Lord Ordinary’s reasoning appears to involve a logical jump
from a conclusion that the pursuers were negligent to a conclusion that they alone were
negligent and that theirs was “sole negligence” in terms of the indemnity clause. None
the less, I am satisfied that, in the circumstances of this particular case, the Lord Ordinary
was fully justified in adopting that approach.
Mr. Batchelor explained the approach which the pursuers took to this matter.
From the outset they had accepted that it could be proved that there had been an
explosion on the platform. Moreover, they had satisfied the Lord Ordinary that the
explosion had been caused by an accumulation of condensate being ignited in Module C.
At the proof the defenders had disputed this, but they now accepted it and they had not
re-opened that issue before this court. In that situation res ipsa loquitur would
demonstrate that the pursuers had been negligent in their management of the platform, in
particular by allowing an explosion to occur in Module C. But, in addition, the pursuers
accepted that Score were the only contractors who were entirely independent of the
pursuers and who were working in Module C at the relevant time. For that reason the
pursuers accepted that Score were the only persons - apart from the pursuers themselves whose negligence could have caused the explosion in Module C. It followed that, unless
the pursuers established that Score had been negligent, the only conclusion properly open
to the Lord Ordinary was that only the pursuers had been negligent. If the pursuers failed
to prove negligence on the part of Score, the defenders would therefore be entitled to the
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benefit of the exclusion in the indemnity without having to lead evidence positively
excluding the possibility of negligence on the part of some other party. In that situation
the pursuers had been content before the Lord Ordinary, and were content before this
court, to proceed on the basis that, unless they could show that Score were negligent, the
court must conclude that only the pursuers themselves had been negligent and that the
defenders were entitled to the protection of the exclusion clause in the indemnities.
Counsel for the defenders confirmed that the approach outlined by counsel for the
pursuers had been common ground before the Lord Ordinary and remained common
ground. So, if the court reached the view that the pursuers had failed to establish that
Score had been negligent, we should hold not simply that the pursuers had been negligent
and that it had not been proved that anyone else had been negligent but, more positively,
that the disaster had been due to the negligence of the pursuers and of no-one else. The
proper conclusion would be that the deaths and injuries had been caused by the sole
negligence of the pursuers and that the defenders were therefore not liable under the
indemnities.
8.2 Reviewing the Decision on Fact in this Particular Case
The approach which an appellate court should take when asked to review a
decision on fact made by a first instance judge who saw and heard witnesses has been
discussed in many cases. In an evergreen passage in Thomas v. Thomas 1947 S.C. (H.L.)
45 at p. 54 Lord Thankerton formulated three propositions:
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“(1) Where a question of fact has been tried by a Judge without a jury,
and there is no question of misdirection of himself by the Judge, an
appellate Court which is disposed to come to a different conclusion on the
printed evidence should not do so unless it is satisfied that any advantage
enjoyed by the trial Judge by reason of having seen and heard the
witnesses could not be sufficient to explain or justify the trial Judge’s
conclusion. (2) The appellate Court may take the view that, without
having seen or heard the witnesses, it is not in a position to come to any
satisfactory conclusion on the printed evidence. (3) The appellate Court,
either because the reasons given by the trial Judge are not satisfactory, or
because it unmistakably so appears from the evidence, may be satisfied
that he has not taken proper advantage of his having seen and heard the
witnesses, and the matter will then become at large for the appellate Court.
It is obvious that the value and importance of having seen and heard the
witnesses will vary according to the class of case, and it may be, the
individual case in question.”
Counsel for the defenders did not challenge these propositions as general
statements of the proper approach. They submitted, rather, that this was a somewhat
unusual case where the Lord Ordinary’s opinion contains very few comments on the
credibility of the witnesses. For that reason they argued that we were not constrained, as
usually we would be, to defer to the Lord Ordinary’s decisions to accept, reject or give a
particular weight to parts of the evidence. This court could therefore more readily assess
the evidence for itself and, where appropriate, draw fresh conclusions and reject findings
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in fact made by the Lord Ordinary. We could also find different facts established. Indeed
defenders’ counsel invited us to make a large number of such fresh findings in fact.
It is true that in his opinion the Lord Ordinary has for the most part refrained from
criticising the credibility of the witnesses. That fact does not in itself mean that this court
is free to substitute its view of the facts for the Lord Ordinary’s. Lord Shaw of
Dunfermline dealt with this matter in Clarke v. Edinburgh and District Tramways Co.
1919 S.C. (H.L.) 35 at pp. 36 - 37. The passage is worth quoting in full:
“When a Judge hears and sees witnesses and makes a conclusion or
inference with regard to what is the weight on balance of their evidence,
that judgment is entitled to great respect, and that quite irrespective of
whether the Judge makes any observation with regard to credibility or not.
I can of course quite understand a Court of appeal that says that it will not
interfere in a case in which the Judge has announced as part of his
judgment that he believes one set of witnesses, having seen them and
heard them, and does not believe another. But that is not the ordinary case
of a cause in a Court of justice. In Courts of justice in the ordinary case
things are much more evenly divided; witnesses without any conscious
bias towards a conclusion may have in their demeanour, in their manner,
in their hesitation, in the nuance of their expressions, in even the turns of
the eyelid, left an impression upon the man who saw and heard them
which can never be reproduced in the printed page. What in such
circumstances, thus psychologically put, is the duty of an appellate Court?
In my opinion, the duty of an appellate Court in those circumstances is for
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each Judge of it to put to himself, as I now do in this case, the question,
Am I - who sit here without those advantages, sometimes broad and
sometimes subtle, which are the privilege of the Judge who heard and tried
the case - in a position, not having those privileges, to come to a clear
conclusion that the Judge who had them was plainly wrong? If I cannot be
satisfied in my own mind that the Judge with those privileges was plainly
wrong, then it appears to me to be my duty to defer to his judgment.”
At the start of the passage Lord Shaw stresses that a judge’s conclusion or inference with
regard to the weight and balance of the evidence is entitled to great respect “and that
quite irrespective of whether the Judge makes any observation with regard to credibility
or not.” So, the mere absence of comment on credibility would not, even in a normal
case, diminish the deference which the appeal court should pay to the first instance
judge’s assessment of the weight and balance of the evidence. The present is not,
however, by any means a normal case and the factors which make it abnormal also
suggest that we should be particularly cautious about disturbing the Lord Ordinary’s
assessment of the evidence.
The critical witnesses to fact who gave evidence at the proof had all survived an
appalling and terrifying disaster. For the rest of their lives they will have to live with the
memories of that evening and with the loss of so many friends and colleagues. The
explosion and its aftermath will undoubtedly have affected the recollection of the
witnesses, to a greater or lesser degree. Moreover, the survivors would have a very
human and understandable reluctance to say anything which might be used to criticise
those who died and who cannot defend themselves. The Lord Ordinary specifically
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recognises this, for instance, when he remarks that claims by Vernon’s “former
workmates that he was exceptionally conscientious must of course be viewed cautiously”
(Opinion 4/763). In these circumstances the Lord Ordinary’s task in assessing the
evidence of the survivors was of unusual difficulty and delicacy. In addition, he would
himself be anxious not to risk increasing the burden on the survivors who assisted the
court with their evidence by putting on to the face of his opinion reservations or
criticisms which he felt about their evidence. In my judgment, therefore, so far from this
being a case where an appellate court could feel comparatively free to interfere with the
Lord Ordinary’s assessment of the weight and balance of the evidence, it is in fact a case
where we should be particularly restrained in doing so.
8.3 The Lord Ordinary’s Overall Approach
Many of the people who could have given important evidence about the
circumstances giving rise to the explosion died in the disaster. Indeed in the proof no
witness spoke to Sutton’s actings in fitting the blind flange to the pipework from which
PSV 504 had been removed. Nor did any witness speak directly to Vernon repressurising
the pump. The Lord Ordinary’s conclusion that the explosion had resulted from the
faulty fitting of the blind flange and the subsequent repressurising of pump A is therefore
built on circumstantial evidence. As in many cases built on circumstantial evidence,
there are, of course, points to be made against that conclusion and they were, very
properly, advanced by counsel for the defenders both in the Outer House and before us.
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None the less, having made due allowance for those criticisms, I am unable to say that the
Lord Ordinary was not entitled to reach the conclusion which he did.
At first sight it seems surprising that, with so much of the evidence destroyed or
unavailable at the bottom of the North Sea, the Lord Ordinary could reach any conclusion
at all as to the cause of the accident. He himself was conscious of the fact that evidence
was missing and was conscious also of the need for care before attributing blame to
persons who had been killed in the disaster and who could not speak for themselves.
And indeed defenders’ counsel had urged upon the Lord Ordinary that the available
evidence was so flimsy that he should hold that the cause of the accident had not been
proved. While acknowledging the problems, the Lord Ordinary nevertheless took the
view that he had available to him a “huge array” of evidence (Opinion 4/855), individual
pieces of which, though each in itself inconclusive, “when viewed together paint such a
clear picture that only one conclusion is possible” (Opinion 4/856). Elsewhere, the Lord
Ordinary said that, having reviewed the evidence carefully, he was
“led to the view that there is a marked probability that this accident was
caused because Mr Vernon proceeded to introduce hydrocarbon to the
pump at a time when this should have been avoided - that is to say at a
time when PSV 504 was not in place” (Opinion 6/1443).
I shall look in a moment at the evidence upon which the Lord Ordinary came to
that conclusion. The terms of the conclusion are, however, important because the
defenders placed considerable reliance on the approach of the House of Lords in Rhesa
Shipping Co. S.A. v. Edmunds (The “Popi M”) [1985] 1 W.L.R. 948. The issue before
the Commercial Court in that case was whether the owners had proved that the ship had
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been lost by perils of the sea. Bingham J., as he then was, held that they had proved this
([1983] 2 Lloyd’s Rep. 235). More particularly, he held that the ship had sunk due to a
collision with a submarine - though no submarine had been sighted. He reached that
view because he rejected the theory put forward by the underwriters that the vessel had
sunk due to wear and tear. More importantly, he concluded that the vessel had collided
with the submarine even though he had already said ([1983] 2 Lloyd’s Rep. at p. 246 col.
1) that, while it would be going too far to describe a collision with a submarine “as
impossible”,
“it seems to me to be so improbable that, if I am to accept the plaintiffs’
invitation to treat it as the likely cause of the casualty, I (like the plaintiffs’
experts) must be satisfied that any other explanation of the casualty can be
effectively ruled out.”
In reversing the decision of the Court of Appeal, upholding the decision of
Bingham J., the House of Lords criticised his reasoning, particularly in the context of a
case where much of the evidence was unavailable. Lord Brandon stressed that, even
when faced with two competing explanations, a judge can reject both and hold that he
cannot make up his mind one way or the other. In that situation by reason of the burden
of proof the plaintiff’s action will fail. The Lord Ordinary was alert to these
considerations and to the possibility of reaching a conclusion that the case had not been
proved; in his view the court had to be “careful to avoid deciding the case simply on the
most attractive hypothesis if this does not amount to a clear probability” (Opinion 2/214
– 215). Lord Brandon also emphasised that a trial judge required to use common sense in
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applying the legal concept of proof on the balance of probabilities. He continued ([1985]
1 W.L.R at p. 956 C - D):
“If such a judge concludes, on a whole series of cogent grounds, that the
occurrence of an event is extremely improbable, a finding by him that it is
nevertheless more likely to have occurred than not, does not accord with
common sense. This is especially so when it is open to the judge to say
simply that the evidence leaves him in doubt whether the event occurred
or not, and that the party on whom the burden of proving that the event
occurred lies has therefore failed to discharge such burden.”
The present case shares one particular characteristic with Rhesa Shipping: in both
not all the relevant facts were known to the first instance judge. But the cases differ in
another vital respect. In Rhesa Shipping the commercial judge made a series of detailed
findings on matters of fact on the basis of which he was able to say that it was
“improbable” that the vessel had collided with a submarine. Yet he went on to hold, on
the balance of probabilities, that the very thing which was “improbable” had occurred. In
this case, by contrast, the Lord Ordinary made a series of findings on which he was able
to say that there was “a marked probability” that the accident had occurred due to Vernon
introducing condensate into the pipework from which PSV 504 had been removed. That
in turn implied that there had been a leak from that area and “the most likely cause of the
leak” was that Sutton had failed to tighten the bolts properly (Opinion 6/1443 - 1444).
Since the Lord Ordinary was satisfied that there was “a marked probability” that the
disaster occurred in this way, the decision of the House of Lords in Rhesa Shipping is
distinguishable. A court which has found a marked probability that an accident happened
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in a particular way and has rejected the competing explanation offered by the defenders is
entitled to hold that the accident did indeed happen in the way which it regarded as a
marked probability. In particular there is no reason why the court should hold that the
cause of the accident has not been proved. For that reason I reject the defenders’
criticism of the Lord Ordinary’s decision based on Rhesa Shipping.
Of course, the mere fact that the Lord Ordinary says that there is a marked
probability that the accident happened in a particular way does not make his conclusion
immune from review if there is no basis upon which he could properly have reached that
conclusion. In my view, however, in this case the Lord Ordinary has set out a number of
circumstances which entitled him, if so advised, to reach the conclusion that the accident
occurred due to the faulty fitting of the blind flange to the pipework from which PSV 504
had been removed.
At the outset, it is worth remembering that at the proof the defenders’ main attack
on the pursuers’ case was based on the contention that the initial explosion had occurred
in Module B rather than in Module C. A very great deal of the scientific evidence which
the Lord Ordinary heard, on the strength of the firewalls and so forth, was devoted to this
issue which the Lord Ordinary resolved in favour of the pursuers. In the reclaiming
motion the defenders did not challenge that finding of the Lord Ordinary. It follows that
he was entitled to start from the secure position that the initial explosion occurred in
Module C. Indeed the defenders accepted that the explosion occurred in the southeastern quadrant of Module C.
It was not, of course, disputed by the defenders that the mere happening of the
explosion in the south-eastern area of Module C showed that something had gone wrong
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in that area. It might be thought that, when the platform was producing oil, there would
be many opportunities at any time for those working in Module C to operate the
equipment in such a way as might, if it went wrong, produce an explosion. But, in fact,
as the agreed account of the operation in Module C demonstrates (Appendix, pp. 46 – 53
and 102 - 115), that is not so. When the equipment in Module C was working properly, it
operated by itself. Those on duty were there essentially to keep an eye on the equipment,
to service it and to which repair it when it broke down. Moreover, the permit to work
system which is described in Part 4.2.1 and 2 of the Appendix - even if not always
operated to perfection - meant that officials on the platform would be aware if work was
being done on the equipment. It is for this reason inter alia that we can be certain that,
on the 68-foot level, condensate injection pump A was taken out of service and
depressurised during the course of 6 July and that, in Module C, Score employees
removed and did not replace PSV 504. The Lord Ordinary was also entitled to be
satisfied, on the basis of Mr. Alexander Rankin’s evidence, that no other valve had been
removed for testing in that area on that day. It will be recalled also that, as I mentioned in
Part 8.1, the parties proceeded on the basis that Score were the only independent
contractors working in Module C.
The removal of PSV 504 is important because it involved a breach in the integrity
of the pipework carrying condensate. It was common ground that the explosion had been
caused by the ignition of gas from condensate which had leaked into the atmosphere. It
was also agreed that, in order to cause the explosion, there required to have been a fairly
large volume of condensate. There was pipework in Module C which carried condensate
in sufficient quantity to cause the explosion if it was ignited, but there is nothing in the
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evidence to suggest any reason why a leak should have occurred at another point in the
pipework in the Module - and, for the reason which I have given, one cannot simply
assume that on the evening in question someone or other might have been carrying out an
operation which would have breached the integrity of some other part of the pipework in
the south-eastern quadrant of Module C. The defenders accepted that, if pump A had
been pressurised, this could have given rise to a leak of the necessary quantity of
condensate from the area of the blind flange on the pipework from which PSV 504 had
been removed - although they pointed out that it would have involved introducing
condensate into the pump for some seconds after the chest was full. On the other hand
Mr. Keen argued that, if a leak from the area of PSV 504 could have provided enough
condensate, then the same could be said of the area of PSV 505. That is, of course,
strictly correct but, to judge from the evidence, at the relevant time PSV 505 must have
been in position (since pump B had been in operation) and there is nothing in the
evidence to suggest that it was leaking. The evidence that PSV 504 had been removed
and not replaced, combined with the evidence that the initial explosion occurred in the
south-eastern quadrant of Module C, would in itself go some way to pointing to the area
of PSV 504 as the source of the leak which caused the explosion.
The case for drawing that inference is strengthened by the evidence of Mr. Erland
Grieve, who was on the 68-foot level. He spoke to seeing a fireball apparently hanging in
the roof space immediately above the area in between the two condensate injection
pumps. It was right up under the deck of Module C. This was immediately after the
explosion (Evidence 62/9323 - 9328). The defenders did not cross-examine Grieve on
this point. I consider that the Lord Ordinary was entitled to regard it as significant that
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this fireball should have been burning quite close to the site of PSV 504 (Opinion 4/864).
It was open to him to conclude that this localised phenomenon tended to point to the leak
having occurred in the area of PSV 504, although the actual ignition could, of course,
have occurred at another point in Module C.
The removal of PSV 504 would not in itself have given rise to an escape of
condensate and an explosion. An explosion would require the introduction of condensate
in sufficient quantity into the relief line. It was common ground that the necessary
quantity could not have reached the relief line merely by reason, for example, of one of
the GOVs on pump A allowing condensate to pass. It would have required pump A to be
pressurised. There was evidence from both Mr. Geoffrey Bollands and Mr. Alex Clark
which pointed very clearly to Vernon’s intention, in the period before the explosion, to
try to restart pump A. The pump could not have been restarted without first being
pressurised. So, evidence of an intention to restart pump A is, by implication, evidence
of an intention to repressurise it. Of course, no-one saw Vernon actually jagging the
pump - and he could have changed his mind and have decided not to do so. But, when
the Lord Ordinary had clear evidence that Vernon was intending to restart pump A a few
minutes before the explosion, he was entitled, in the absence of evidence to the contrary,
to infer that Vernon had acted on that intention and had pressurised pump A. Moreover,
the theory that pump A was jagged in two stages provides a possible explanation for the
undoubted fact that there was a period of approximately two or three minutes between the
low gas alarm on C centrifugal compressor and the flurry of low gas alarms and a high
gas alarm just before the explosion. That being so, the Lord Ordinary was also entitled to
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hold, first, that Vernon repressurised the relief line at a time when PSV 504 had been
removed and, secondly, that as a result a leak of condensate occurred in that area.
No leak would have occurred in that area merely because pump A was
repressurised and condensate under pressure was thereby introduced into the relief line.
At the proof the defenders accepted, however, that, if a leak did indeed occur from the
pipework in the area of PSV 504, the Lord Ordinary would be entitled to conclude that
this had been because the necessary blind flange had not been fitted properly to the
pipework. Before us, counsel for the defenders came to qualify that concession slightly,
but only to the effect that there might have been some fault in the blind flange itself
which Sutton or other employees of Score failed to detect. I consider that we must
proceed on the basis adopted by the defenders in the proof. The Lord Ordinary notes that
there was no evidence that the ring seal relating to the flange was faulty – and he was
therefore able to exclude that possibility (Opinion 4/789). Similarly, there was no
evidence to suggest that the flange itself might have contained a flaw which could not be
detected. It would in my view be prejudicial to the pursuers to allow the defenders to
introduce that theory at this stage. Had the defenders advanced such an argument in the
court below, the pursuers might have led evidence to counter it. For these reasons, I am
satisfied that, having concluded that a leak occurred in the vicinity of PSV 504, the Lord
Ordinary was entitled to draw the inference that the blind flange had not been fitted
properly.
Counsel for the defenders submitted that there was nothing in the evidence which
made it probable that Sutton would have failed to fit the blind flange properly and that
the Lord Ordinary had therefore erred in drawing that inference. The inference is based,
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of course, on the chain of reasoning from the available circumstantial evidence. Counsel
for the pursuers argued that there were in any event elements in the evidence relating to
the work on PSV 504 which could provide support for the view that Sutton might have
failed to fit the flange properly. They pointed out that it was anticipated that the valve
would be replaced the same day. So, if it was to be out of position for only a
comparatively short time, Sutton might have thought that it was sufficient to put on the
blind flange – and so prevent anything getting into the pipework – without tightening it
up fully. The witness Bagnall gave evidence which, though open to criticism, suggested
that the actual process of fitting the flange and tightening up the bolts would have been
more difficult than usual for one man to perform because of the position of this particular
valve (Evidence 71/10617 – 10620). That evidence does in my view provide a basis for
the Lord Ordinary’s conclusion (Opinion 4/786) that Sutton is likely to have had some
trouble in fitting the flange properly and, if he thought that the work was only for a short
time, he might have been tempted to do the tightening half-heartedly. Although that
conclusion does not, in itself, take the matter very far, it does take the edge off the
defenders’ criticism that it is unlikely that Sutton would have acted in this way.
The Lord Ordinary’s conclusion that the disaster occurred because condensate
escaped from the blind flange depends on attributing fault to both Mr. Sutton who fitted
the blind flange and to Mr. Vernon who jagged the pump when the PSV was not in place.
The conclusion that these men had been at fault was one to which the Lord Ordinary was
led by his process of reasoning on the evidence. Since that was his conclusion, the Lord
Ordinary required to state it, as he did. I emphasise this because, after the Lord
Ordinary’s opinion was issued, he was criticised in some sections of the media for
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attributing fault to Mr. Sutton and Mr. Vernon, who had not survived the disaster and
who could not defend themselves. In his opinion the Lord Ordinary said expressly that
he was well aware how unfortunate it was that he had to blame Mr. Vernon and Mr.
Sutton in these circumstances (Opinion 6/1444 - 1445). But, unpalatable though he
found this aspect of his duty, the Lord Ordinary performed it. A judge who performs an
unpalatable but necessary duty does not deserve to be criticised.
8.4 The Approaches of the Parties in the Outer House: the Evidence of Bollands
and Clark
In order to establish their case that the defenders were obliged to indemnify the
pursuers against their loss from the payments made to the defenders’ employees and their
relatives, the pursuers had to establish that they would have been liable to those
employees and relatives. It was not difficult for the pursuers to aver (in Article 4 of
Condescendence in the London Bridge action, for example), and indeed to show, that
they would have been liable on the basis of Regulations 32 and 33 of the 1976
Regulations and Section 11(2) of the 1971 Act. In Article 4 the pursuers averred inter
alia that they were liable to compensate the victims and relatives in respect of the fault
and negligence of Vernon for which they would be vicariously liable. In particular they
averred that in terms of the permit to work procedure Vernon had been under a duty to
check the PSV 504 worksite and that he had not done so by the time of the explosion. At
the same time as blaming Vernon, the pursuers had, of course, to avoid painting his fault
so strongly that it would amount to “wilful misconduct”, since that would have brought
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the case within one of the exceptions in the indemnities. In Answer 4 the defenders
denied the pursuers’ averments about Vernon’s fault and negligence, their position, as set
out in Answer 3, being that the damage to the platform was consistent with an explosion
in Module B. On 11 December 1995, just before Day 288 of the proof, the defenders
lodged a minute of admissions, admitting the duty on Vernon to check the worksite and
admitting that, if he had done so, he would have become aware that PSV 504 had been
removed and not replaced (Opinion 4/731).
In order to establish their case against the defenders the pursuers had to go further,
however. As I explained in Part 8.1, to avoid the exclusion in the indemnities for cases
where the deaths and injuries had been caused by the sole fault of the pursuers, the
pursuers had to establish that the fault of some other person had contributed to those
deaths and injuries. In Article 5 of Condescendence, accordingly, the pursuers averred
that Sutton and Rankin, both employees of Score, had been negligent - the former in
fitting the blind flange to the pipework from which PSV 504 had been removed; the
latter in failing to check that the flange had been fitted securely and to check that the
work site was in a safe condition. In Answer 5 the defenders denied those averments. In
addition the defenders averred that the permit to work system had not been followed
properly on the platform and that, had the pursuers implemented that system, “then
Robert Vernon would have been aware at the material time that PSV 504 had been
removed and not replaced.”
In short, when the proof began, according to the pleadings, the pursuers were
blaming Vernon for failing to check the PSV 504 worksite, while the defenders were
averring that on the evening of the explosion Vernon had not been aware that PSV 504
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had been removed and not replaced. Even though counsel for the defenders had clearly
altered their stance by the time that they amended their pleadings, they must have still
been adhering to that position when Bollands, the control room operator, gave evidence
which suggested that, in the period immediately before the explosion, Vernon had acted
in a manner which was consistent with his not being aware that PSV 504 had been
removed. For counsel for the defenders did not cross-examine Bollands on the events in
the control room before the explosion.
Among other things, Bollands was “very certain” (Opinion 4/738) that when
Vernon came into the control room he took a pink (hot work) permit from the 68-foot
level box. The inference was that this was a permit for the maintenance work on
condensate injection pump A since any permit to work relating to the maintenance of
PSV 504 would have been a blue (cold work) permit. Moreover, if the permit had been
suspended, it would not have been in the permit box in the control room. Indeed
Bollands said in evidence that earlier that evening, when looking through the permits to
work, he had seen a pink permit relating to the planned maintenance on condensate
injection pump A. He also said that work had been done on the pump. In addition
Bollands spoke to Vernon and Clark having met and having had a conversation in the
control room and he said that, when Vernon left the control room to go back to the 68foot level, he left the permit with Clark.
On the other hand, Clark gave evidence to the effect that no work had been started
on condensate injection pump A and that no permit to work had been issued for it. He
also said that he had not met Vernon in the control room but had spoken to him on the
telephone. More importantly, he was “positive” (Evidence 67/10014 and 10015) that he
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had not seen any permit. When he had gone into the control room he had seen the
electrical isolation tags lying on the Lead Operator’s desk and had picked them up and
looked to see whether Vernon had signed them.
The Lord Ordinary was faced with an extremely difficult task in assessing the
evidence of these two witnesses on these matters. It has to be borne in mind in particular
that Bollands was a reluctant witness who stated in the course of his evidence that he had
spent five years trying to put the incident behind him and that he had come to court under
protest (Evidence 62/9458). Moreover, he was not cross-examined on the matters which
became of vital importance and on which defenders’ counsel ultimately criticised his
evidence. Despite the problems with his evidence, the Lord Ordinary records that “As
between Mr Bollands and Mr. Clark I formed the view that Mr Bollands had in general
been the more accurate observer but it would be remarkable if any witness could be taken
as totally reliable in all matters of detail and this must include Mr Bollands” (Opinion
4/766). Later (Opinion 4/767) he says that there are parts of Bollands’ evidence where it
is possible that his memory is not accurate, but that there are certain details which are
more likely to be accurate than others. On the other hand the Lord Ordinary indicates
that “Mr Clark’s evidence has to be read with a certain caution and is not in all respects
convincing”, although he was not in a position to suggest that Clark was consciously
misleading the court (Opinion 4/766). The Lord Ordinary observes that both Bollands
and Clark had suffered frightening experiences when the accident occurred and that Clark
had been blown across the control room and injured. “With such a shock” he says, “it
would perhaps be expecting too much for Mr Clark in particular to have a reliable
recollection of detail some years after the accident” (Opinion 4/766).
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In their submissions to this court counsel for the defenders invited us to make
various specific findings which would be based on accepting Clark’s evidence and
rejecting parts of Bollands’ evidence. For instance, they invited us to find that the
conversation between Vernon and Clark had taken place by telephone and hence that,
contrary to Bollands’ evidence, Clark and Vernon had not met in the control room. In
itself the question of whether they spoke on the telephone or in the control room would
not matter, but that evidence really forms part of Bollands’ whole account of what
Vernon - and indeed Clark - did in the crucial few minutes before the explosion. The
Lord Ordinary made no specific finding on the point and, by inviting us to make a
positive finding, counsel for the defenders were really asking us positively to reject a not
insignificant part of Bollands’ account.
Even more importantly, counsel for the defenders invited the court to make
findings that the permit to work for the planned maintenance on condensate injection
pump A was not issued on either the day or night shifts of 6 July. In doing so, they
invited the court to accept Clark’s evidence on that matter. Of course, they could point to
other evidence which could be construed as supporting Clark’s evidence on the point.
But, crucially, their submission depended on the court rejecting Bollands’ evidence that
he had seen a live permit for work on pump A and that Vernon picked up a pink permit
from the 68-foot level box.
The Lord Ordinary anxiously examined the competing bodies of testimony on this
matter (Opinion 4/767 - 769) and did not reject Bollands’ evidence despite the various
difficulties which he acknowledged. Given the conflict between the two witnesses and
the Lord Ordinary’s expressed view that Bollands had been the more accurate observer, I
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am satisfied that it would be quite wrong for this court to reject the Lord Ordinary’s
assessment of the evidence on this point. Moreover, the Lord Ordinary draws attention
(Opinion 4/772) to the evidence that Clark knew (67/9991) that Vernon asked him “if we
could get the pump back, if we had started working on it”. As the Lord Ordinary
remarks, this would be an odd question for a Lead Production Operator to ask unless he
thought that a permit to work on pump A had been issued, since no work could have been
done without a permit. This would tend to undermine Clark’s evidence that no such
permit had been issued for work on pump A and to support Bollands’ evidence that he
had seen a permit for work on that pump and that he had seen Vernon with a pink permit
in his hand.
Indeed, going further, I can find no proper basis for differing from the Lord
Ordinary’s assessment on other points where the evidence of the two witnesses cannot be
reconciled. On all these matters, applying Lord Shaw’s test in Clarke, I cannot come to a
clear conclusion that the Lord Ordinary who had the advantages of seeing and hearing the
witnesses was “plainly wrong”. In particular, having studied the transcript of the
evidence of Bollands and Clark, I see no proper basis for substituting any view which I
might form for the Lord Ordinary’s view of Bollands’ evidence about the events in the
control room. In saying this, I am influenced in part by the fact that his evidence was not
tested in cross-examination so that it is particularly difficult for anyone reading the
transcript alone to gauge the strength of Bollands’ evidence on particular points where he
differs from Clark. Conversely, the Lord Ordinary’s express warning that some of
Clark’s evidence had to be viewed with caution makes it that much more difficult for this
court to decide to accept portions of his evidence which the Lord Ordinary did not.
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8.5 Vernon’s Knowledge of the Absence of PSV 504
A key aspect of the Lord Ordinary’s decision and a central area of debate before
us was the issue of whether, shortly before 10 p.m., at the time when he was intending to
restart pump A, Vernon knew that PSV 504 had been removed and had not been
replaced. This was important for two reasons. First, it could be said that, if Vernon had
known that PSV 504 was not in place, he would not have restarted the pump. So, if the
correct conclusion on the evidence was that he did know, then the correct conclusion
would equally be that he did not repressurise pump A - and so the whole basis of the
pursuers’ case would collapse. Alternatively, if Vernon did know that PSV 504 was
missing and none the less repressurised pump A, then he was guilty of wilful misconduct
and so the exception in the indemnities would apply and the defenders would not be
liable. The two lines of argument do not always run easily together but at the heart of
both lies the same issue of Vernon’s knowledge.
As is obvious, the Lord Ordinary accepted the evidence - which I regard as
satisfactory - that shortly before the explosion Vernon was intending to start pump A. He
proceeded to set out and to analyse the evidence and contentions of the parties as to
Vernon’s knowledge (Opinion 4/718 - 763), including the evidence of Bollands that,
when he met Vernon shortly after the explosion, “he was asking me what had happened”
(Evidence 63/9523) – suggesting that Vernon had made no connexion between his
activity in trying to restart pump A and the explosion. After considering the evidence, the
Lord Ordinary gives his conclusions on the point (Opinion 4/763 - 779). At the end of
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that discussion he sums up his position in a passage, the wording of which I regard as of
considerable importance:
“The situation on the platform could admit of many circumstances which
might explain how Mr Vernon came to forget about the PSV or not to
know that it was not in position. The problem for the defenders is that
there is in my view fairly clear eyewitness evidence from which it can be
inferred that in the final period before the accident Mr Vernon was not
aware that the PSV was absent. On the other hand the evidence of what
might have taken place to produce that situation is vague and leads to no
convincing conclusion. Many of the possibilities remain totally
speculative and we shall never know what happened at and following on
the handover. Among the various possibilities the likeliest is that at some
stage in the evening Mr Vernon had suspended or at least seen the PSV
permit but that either in the whole circumstances surrounding the planned
work on the pump it had failed to register in his mind that the stage of the
valve had any significance or if it did so register it had slipped his mind
later” (Opinion 4/778).
In my view the Lord Ordinary could have regarded the evidence of Bollands,
Clark and Grieve, for instance, as providing a basis for saying that in the minutes before
the disaster Vernon was not acting in a way which suggested that he was aware that PSV
504 had been removed and that there was any risk involved in restarting pump A. In this
respect the Lord Ordinary was entitled, as he did, to have regard to
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“the evidence that all the Lead Production Operators and the ordinary
Operators were well aware that it was bad practice to run a pump without
a PSV in place. Indeed there was no suggestion from the considerable
number of qualified workmen who gave evidence that such a thing has
ever been done previously. There is of course always a first time but one
would have to ask why Mr Vernon would have taken a risk” (Opinion
4/763 - 764).
When he refers to the evidence about practice, the Lord Ordinary has in mind the
evidence of a number of witnesses, all with relevant experience.
Perhaps the weakest statement comes from Grieve, who said that he had never
seen a condensate injection pump being run without its relief valve being in position and
that he did not believe that it would have been operating practice to do so (Evidence
62/9354).
The control room operator, Bollands, said that a decision by Vernon to start the
pump knowing that PSV 504 was missing would have been “a drastic step” and he did
not think that Vernon would have done it (Evidence 63/9480). Bollands considered that,
in any event, if Vernon had contemplated using the pump without a PSV, he would not
have made the decision by himself and, though he would not have required to tell
Bollands, Bollands thought that Vernon would have valued his opinion and so would
have mentioned it to him. Moreover, Vernon would not have made the decision himself
when there were senior production personnel and O.I.M.s on the platform to whom he
could have passed the buck (Evidence 63/9564 - 9566). There was, of course, nothing in
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the evidence to suggest that Vernon had consulted anyone about such a proposed course
of action.
Mr. Thomas Henderson was of the view that running a condensate injection pump
without its PSV “just would not be done” and Vernon would not do it: rather than do it,
he would have shut the gas plant down, even if there had been loss of production
(Evidence 79/11817). In cross-examination Henderson was, if anything, even clearer: he
was “positive” that equipment would never be run with a PSV isolated or removed and
that he could conceive no circumstances whatever in which such a thing would have been
done, nor would it have been contemplated by those in charge of the platform. When
asked about a paragraph in the General Safety Procedures manual which seemed to
contemplate the running of equipment where relief valves were isolated by maintenance,
but alternative means of rapid pressure relief were available, Henderson said that the
honest answer was that no system would ever be run without a PSV and he could only
tell the cross-examiner under oath that “no-one on that platform that I knew would run
the system without a pressure safety valve.” He confirmed that this applied to all the
Lead Production Operators (80/11880 - 11886).
Mr. Joseph Murray also said that at no time would he consider running a
condensate injection pump without its PSV and with a blind flange on the pipework.
While not able to express a view on Vernon’s part, he would assume that a pump would
be run without a PSV only in some dire circumstances and under the approval of the
O.I.M. (Evidence 105/15143 - 15144).
That is a powerful and relatively coherent body of testimony which the Lord
Ordinary was entitled to accept, as he did. Taking that evidence along with the evidence
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that Vernon was taking steps to start pump A, without asking anyone about the
advisability of doing so without a PSV in place and without consulting any more senior
person, the Lord Ordinary was also entitled to reach the view that Vernon was not aware,
in the period shortly before the explosion, that PSV 504 was missing.
In reaching that view, he required, of course, to consider the evidence upon which
the defenders relied as the basis of their argument (in the Outer House) that Vernon
would have known that the PSV was missing and so would not have repressurised the
pump. There is no doubt whatever, from the terms of his opinion, that the Lord Ordinary
had that evidence firmly in mind and was well aware of its significance. What the Lord
Ordinary had to do was to decide what weight he gave to the evidence which pointed to
the conclusion that Vernon did not know that PSV 504 was missing, as opposed to the
evidence which pointed to the conclusion that he would have known. In the end the Lord
Ordinary attached greater weight to the former and, given the body of evidence which I
have quoted, I consider that he was at least entitled to do so. Having accepted the
evidence that, shortly before the disaster, Vernon did not know that the PSV was missing,
the Lord Ordinary none the less quite rightly did not profess to be able to explain on the
evidence why this was so. He said that the evidence of what might have taken place to
produce that situation was vague and led to no convincing conclusion (Opinion 4/778).
He had earlier said that the precise cause of Vernon’s ignorance at the critical time must
be at best somewhat conjectural (Opinion 4/751). Again, I see no reason to criticise these
conclusions. Since the evidence was of this nature, at best it could point to “various
possibilities”. At different points in his opinion the Lord Ordinary contemplates a
number of these possibilities.
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He includes the possibility that Rankin went to the control room but, having been
told that there was no crane available to lift PSV 504, went away with it and neglected to
return with the permit to have it suspended (Opinion 4/750 - 751). As the Lord Ordinary
himself recognises, if this had happened, someone should have noticed that the live
permit had not been cancelled, extended or suspended. In particular, as Lord Sutherland
pointed out during the hearing, after the six o’clock round of extensions and suspensions,
a copy of the permit would have remained on the Lead Production Operator’s desk and it
would have been obvious that it had not been dealt with. The position would surely have
been investigated. Not surprisingly, therefore, the Lord Ordinary does not appear to
attach much weight to this particular possibility and, for my part, I would tend to rule it
out.
The Lord Ordinary selects as “the likeliest” the possibility that, though Vernon
had known about the matter earlier, it had slipped his mind shortly before ten o’clock.
He does so because he tends to the view that Rankin went to the control room at about 6
p.m. and that, at that time, Vernon would have taken over as Lead Production Operator.
If, therefore, Rankin had had the permit to work for PSV 504 suspended, it would have
been Vernon who suspended it. That being so, Vernon would have been aware of the
permit at about 6 p.m. and must therefore have forgotten it by 9.45 p.m. Of course, it is
somewhat difficult to rank what are admittedly no more than possibilities and one cannot
say that the Lord Ordinary was wrong to prefer this possibility. I should, myself,
however, tend to prefer another possibility: that it was Flook rather than Vernon who
suspended the permit for PSV 504.
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In saying that, I have in mind four aspects of the evidence. First, according to
Rankin, at the time when he visited the control room, the only person whom he saw was
the person who dealt with his permit. The evidence suggests, however, that, since there
was a good deal of work going on in the Gas Conservation Module, there would therefore
have been quite a number of permits to be dealt with at about 6 p.m.; there would have
been a correspondingly large number of men in the control room to present the permits at
that time. In general, it is fair to say that the Lord Ordinary had difficulty with a number
of aspects of Rankin’s evidence. In particular he found that Rankin’s “rather confused
version about what took place in the control room is not consistent with what might have
been expected” (Opinion 4/751). Secondly, for what it is worth, Mr. James McDonald
gave evidence which suggested that, by “the back of five-ish” or “about half-past five,
something like that, half-five-ish”, either Sutton or Mr. Jimmy Rutherford had said to
him in the Gas Conservation Module that “the valve was ready, but it wasn’t going in”
(Evidence 76/11324 - 11325). If that is correct, then Rankin must already have been to
the control room by that time. There is, of course, an obvious question mark over
McDonald’s evidence on timings since he appears to be wrong on the time when the
work on PSV 504 actually began earlier that day. Nevertheless, he ties his recollection of
this particular matter to his recollection of Rutherford waiting to go on the helicopter to
the Tharos at the end of the shift. McDonald was not cross-examined on this point.
Thirdly, while Rankin could definitely have been expected to go to the control room at
about 6 p.m., if his specific purpose had been to suspend the PSV 504 permit at the end
of his shift, he in fact went to see whether he could have the services of a crane that
evening. One would expect him to do that as soon as he knew that the valve was ready to
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be replaced. So, there is nothing inconsistent with the general evidence in the idea that
he should have been to the control room quite some time before 6 o’clock. Fourthly,
while there was a good deal of evidence about the length of time which a handover from
one Lead Production Operator to another would take, it is obvious that in practice it must
have varied to some degree at least, depending on what was happening on any particular
day. It is therefore not possible to say precisely when Vernon would have taken over
from Flook. For these reasons, I consider that it is at least possible that the Lead
Production Officer whom Rankin saw and who suspended the permit for PSV 504 was
Flook rather than Vernon. On that basis Vernon would not have come to know about the
permit through suspending it. Of course, there are points to be made against this
possibility. In particular the defenders point out that Flook would have issued the permit
for PSV 504 earlier in the day but Rankin said that he did not know the man to whom he
spoke about the crane. Rankin was in general new to these procedures, however, and I
doubt whether he would necessarily have registered the appearance of the person with
whom he had dealt on the earlier occasion - after all, he would have had no particular
reason to do so.
In stating that I tend to prefer the possibility that Vernon did not suspend the
permit for PSV 504, I am conscious, as was the Lord Ordinary, that I am simply dealing
with one of a number of conjectures. We can never know. The important thing is that,
just as there are a number of possible reasons why one would, arguably, have expected
Vernon to know of the work on the valve, there are also a number of possible reasons
why, arguably, he would not have done so. That being so, there is nothing in the
evidence which required the Lord Ordinary to hold that shortly before the explosion
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Vernon must have known that the valve was missing. It was therefore open to the Lord
Ordinary, having taken all the evidence into account, to accept those elements which
pointed to the conclusion that shortly before the explosion, when he was taking steps to
restart pump A, Vernon did not know that PSV 504 was missing. In those circumstances
I am satisfied that there is no proper basis upon which this court could interfere with that
conclusion.
8.6 Failure by Counsel to Clarify Aspects of Grieve’s Evidence
Shortly before the explosion Grieve, who was in the Gas Conservation Module,
heard that pump B had tripped and decided to go down to the 68-foot level to see whether
he could help to restart it. At the proof he gave a fairly detailed account of his progress
through the 68-foot level and past the control panel where there was the button for
resetting the GOVs on the pump. He proceeded towards pump B and at some point he
saw Vernon and Richard to one side of that pump, apparently on a walkway. In some
way he was told that Vernon and Mr. Bob Richard were going to have another go at
restarting pump B and he accordingly went to the point on the side of that pump where
the start button was situated. When operating the button Grieve would have had his back
towards the area where Vernon and Richard were. It appears therefore that, in order to
see them, Grieve would have had to look back and to his left. The pump failed to start
and Grieve said that he then went round to the other side of the pump to reach the speed
controller. At that point the explosion occurred.
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The defenders’ basic argument was that, correctly interpreted, Grieve’s evidence
showed that Vernon had not jagged pump A. If so, then the pursuers’ entire case
collapsed since it depended on the court being able to draw an inference from the proved
facts that Vernon had pressurised the pump. If he had not done so, the condensate would
not have reached the blind flange and there would have been no explosion. In effect, they
said, if Vernon jagged pump A, he must have done so during the time when Grieve was
on the 68-foot level. Grieve did not give evidence of having seen Vernon jagging the
pump and Grieve was not asked by counsel for the pursuers whether he had seen Vernon
doing so. Counsel for the defenders argued that the failure by pursuers’ counsel,
Mr. MacAulay, to ask Grieve whether he had seen Vernon doing this was damaging to
the pursuers’ case since the court could draw the inference that counsel had not asked this
question because he knew that the answer would be damaging. In support of this
submission the defenders relied on various authorities on the nature of circumstantial
evidence and in particular on the passage in W. G. Dickson, A Treatise on the Law of
Evidence in Scotland (third edition, 1887), para. 108(7):
“The conclusiveness of a circumstantial proof is not a sufficient reason for
non-production of attainable direct evidence; and as a party is not likely
to trust the decision of his case to an inference, when he could prove it
directly, the withholding of the testimony of eye-witnesses impairs the
probative value of a merely circumstantial proof adduced by him.”
The defenders’ junior counsel went so far as to suggest that the failure by counsel
for the pursuers to question Grieve directly on whether Vernon jagged the pump while
Grieve was there made it impossible, as a matter of law, for the Lord Ordinary to hold on
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the basis of the available circumstantial evidence that Vernon had jagged the pump.
When he was asked whether this meant that, if the trial had been before a jury, the judge
would have required to direct the jury that they could not find for the pursuers, Mr.
Wolffe qualified his view somewhat. In due course his senior, Mr. Keen, accepted that
he could not go so far as to say that, as a matter of law, the Lord Ordinary could not find
for the pursuers because this particular question had not been put to Grieve. None the
less the failure to put the question impaired the pursuers’ case.
I am satisfied that this submission by the defenders is without merit. The passage
in Dickson’s textbook refers to the situation where a party deliberately withholds the
testimony of eye witnesses. Here nothing like that took place. The pursuers led Grieve
in evidence and questioned him about what he had seen and done on the 68-foot level. In
particular he was asked about the situation when he first saw Vernon and Richard. He
replied (Evidence 61/9290):
“Well, it is a difficult thing to say, if you see people going about functions
that are done routinely, you don’t .... I can’t say I was aware of exactly
what was being done at the time. I can only say that the impression that I
got, followed up by what we actually did, was that they were in the
vicinity of B Pump and the decision was made to have another go at
starting B Pump as the GOV’s for B Pump were re-latched at that period.
I mean, the only thing I can add, somewhere during that period of time
Bob Richard was called away.”
Grieve was then asked about his communication with Vernon and Richard about trying to
restart pump B and, after that, Mr. MacAulay asked him whether he had seen either
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Vernon or Richard while he was working with the start button. His reply as recorded in
the notes of evidence was (Evidence 61/9293):
“As I said, I was aware of Bob Vernon being called away and going up
into C Module.”
It is agreed that the witness was referring to Richard. The impression which Grieve’s
evidence gives is that he was preoccupied with trying to start pump B - which had been
his purpose in coming down to the 68-foot level - and that the only other thing which he
remembered about that time was that Richard had been called away and had gone up to
Module C. His evidence leaves an impression that he could not remember anything
more.
That being Grieve’s position, Mr. MacAulay was entitled to leave the matter
there, presumably on the view - which I consider was justified - that there was nothing in
Grieve’s evidence which was necessarily inconsistent with an inference that Vernon had
jagged pump A while Grieve was on the 68-foot level and concentrating on pump B.
There is no obligation, legal or professional, on a counsel, who considers that he can
establish his case on the basis of the evidence which has already been properly elicited
from a witness, to go further and ask questions to clarify the position. Nor can any
inference be drawn from his failure to ask those additional questions. On the contrary,
the witness is available for cross-examination by the other side and they may, if they
wish, put the additional questions needed to clarify the point. Here, for instance, counsel
for the defenders could have asked Grieve directly, by means of a leading question if
necessary, whether he saw Vernon jagging pump A or in any position where he could
have been doing so. Doubtless both deliberately and wisely, Mr. Currie chose not to ask
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those questions. In argument before us Mr. Keen repudiated any suggestion that the court
would be entitled to draw any inference, from Mr. Currie’s failure to put such questions,
that the answers would have been damaging to the defenders’ case. But such an
inference would be just as legitimate as the inference which Mr. Keen asked us to draw
from Mr. MacAulay’s failure to put the additional questions. In truth, no inferences as to
what Grieve would have said can properly be drawn either way from the fact that both
counsel chose not to question him further in an attempt to clarify his evidence.
8.7 The Scaffolding Platform
The Lord Ordinary’s ultimate decision on the facts of the case as a whole
depended on a combination of conclusions on various separate chapters of evidence,
much of it highly technical. In the reclaiming motion a large number of those
conclusions were accepted by the defenders - in particular his conclusion that the
explosion was caused by the ignition of a quantity of gas from condensate which had
escaped in the east end of Module C. Because this was disputed at the proof but not in
the reclaiming motion, the Lord Ordinary heard a vast amount of evidence which we, of
course, did not have to consider. In particular he heard evidence from one of the
scientific witnesses, Dr. Davies, over a period of four weeks. In the hearing before us
counsel for the defenders selected two matters on which Dr. Davies had given evidence
and invited us to differ from the Lord Ordinary’s decision on them. One of these issues
was the question of the possible effect of a scaffolding platform in the vicinity of PSV
504 on the dispersal of any condensate leaking from the site of that valve.
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There is no doubt that the presence of the scaffolding platform in the vicinity of
PSV 504 was a factor which the Lord Ordinary required to take into account when
considering the evidence relating to the dispersal of the gas and the sequence in which the
alarms would have been activated. His opinion shows that the Lord Ordinary was aware
of the argument that Dr. Davies had failed to take adequate account of the presence of the
platform when reaching his conclusions. This was, of course, only one of many areas
where the expert scientific evidence could be criticised. Indeed, the Lord Ordinary says
specifically that, in forming his own views, he found the evidence relating to the actual
events on the evening of the explosion more important and more useful than the expert
evidence, precisely because he found the technical evidence somewhat speculative and
often disputed (Opinion 4/856). I therefore see no reason to believe that the Lord
Ordinary overlooked the possible criticisms of Dr. Davies’s opinion or that he failed to
consider those criticisms.
Without going into Dr. Davies’s evidence in detail, I wish to make one, more
general, observation on the position of this court when asked to assess any possible
criticisms of that evidence. A judge’s assessment of individual aspects of an expert
witness’s evidence will inevitably depend, in part at least, on his overall impression of
the care with which the witness has investigated the matters in question, designed
experiments, considered the issues and presented the evidence. Particularly where, as
here, such a witness gives evidence and is examined and cross-examined over many days,
the judge is bound to form general impressions which he will then apply in deciding what
weight to give to particular parts of the evidence and to criticisms of particular passages
in the evidence. In the case of Dr. Davies, for instance, the Lord Ordinary remarks that
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he was “highly experienced in the behaviour of gas”. That was clearly a factor which the
Lord Ordinary took into account - and was entitled to take into account - when
considering whether Dr. Davies had been mistaken in proceeding on the basis that the
leak of condensate would behave in a particular way (Opinion 3/474). I have little doubt
also that the fact that defenders’ counsel attacked him on a particular technical matter but
did not support their criticisms with evidence (Opinion 3/463) would be liable to
influence the Lord Ordinary’s assessment both of Dr. Davies as an expert witness and of
the weight to be attached to other criticisms of his evidence where the defenders chose to
lead no expert evidence of their own. One of the many other matters on which they did
not lead expert evidence was the possible effect of the scaffolding platform on gas
dispersion.
In that situation, it appears to me that it would be particularly invidious for this
court to conclude, as we were invited by counsel for the defenders to conclude, that Dr.
Davies had in effect failed to take proper account of the presence of the scaffolding and
that, had he done so, he would have acknowledged that the results of his experiments
showed that a release of the kind envisaged by the pursuers would have triggered a
different pattern of gas alarms. The Lord Ordinary plainly took the view that Dr. Davies
had been aware of the existence of the scaffolding platform but had found it difficult to
model it satisfactorily in his wind tunnel experiments. It was for this reason - and not
because he wished to skew his results or overlooked the possible significance of the
platform - that Dr. Davies had not included anything to represent the platform in most of
his experiments. The Lord Ordinary records that Dr. Davies had kept an open mind on
the point (Opinion 3/560). I have no doubt that, in reaching his view on this particular
164
aspect of Dr. Davies’s evidence and in deciding what conclusions he should draw from it,
the Lord Ordinary would have assessed the criticism of Dr. Davies’s approach on this
particular matter in the context of his overall assessment of Dr. Davies as an expert
witness. That is not an exercise which this court, which was asked to consider only
isolated passages in his evidence, could undertake for itself. For that reason we must
acknowledge that the Lord Ordinary was in a better position than we are to decide the
value to be attached both to his evidence as a whole and to individual parts of his
evidence. Moreover, it has to be remembered that the Lord Ordinary found (Opinion
2/236 – 237) that G101/1, the critical gas alarm, was in fact positioned rather higher (at
about 20 feet above the deck) than Dr. Davies had assumed (about 12 feet) when
designing the model which he used in his experiments. For that reason, it would be
wrong to attach undue weight to the detailed results of those experiments, at least so far
as the triggering of G1/101 is concerned.
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9. NOVUS ACTUS INTERVENIENS
In common with the rest of the court I am satisfied that the Lord Ordinary was
entitled to hold that Sutton failed to fit the blind flange properly and that Vernon, being
unaware that PSV 504 had been removed, introduced condensate into pump A with the
result that it escaped from the improperly fitted flange. In that situation the pursuers have
established that Sutton was negligent and, since he was employed by Score (U.K.) Ltd.,
Score would be liable for the consequences of his negligence. On that basis it might
seem that, since the deaths and injuries would not be due to “the sole negligence” of the
pursuers, they would be entitled to recover under the indemnities. In fact, however, the
defenders say that the pursuers are not entitled to recover under the indemnities because
they have not established that the injury to, or death of, the contractors’ employees was
“caused by” Sutton’s negligence in failing to fit the flange properly. Again, although I
have used the heading “Novus Actus Interveniens” which was the title given by counsel to
this segment of their submissions, the ambit of the arguments was somewhat wider. An
account of those submissions is to be found in Part 9 of Lord Coulsfield’s opinion.
It appears to me that the precise question for the court is whether, in terms of the
exception in the indemnity clauses, the injury or death of the contractors’ employees is
properly regarded as having been “caused by” Sutton’s negligence. The argument before
us proceeded, however, on the basis that the pursuers would not be able to recover under
the indemnities unless Score would have been held liable in the law of delict for the
injury and death of the employees. In other words, it was not suggested that the
negligence of Score’s employee could be regarded as “the cause”, within the meaning of
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the indemnity clause, of the injury to, or death of, the employees in circumstances where
Score would not be liable for those injuries and deaths under the law of delict. In effect,
therefore, the defenders’ argument was that, under the law of delict, Score would not
have been held liable for the deaths and injuries since they occurred only because Vernon
subsequently pressurised pump A. This was not a contingency which Sutton could have
been expected to foresee and to guard against; it could properly be regarded as a novus
actus interveniens breaking the chain of causation between any negligence on the part of
Sutton and the deaths and injuries which followed from the explosion.
The framework of this argument must be noted.
First, as Mr. Wolffe explained, the defenders advanced it only in regard to the
situation where the court regarded Vernon as having pressurised the pump when not
aware that PSV 504 was missing. In other words, Vernon had been acting either in
blameless ignorance or, at worst, in ignorance arising out of negligence on his part. If
Vernon had pressurised the pump when he knew that the PSV was missing or had
pressurised it recklessly, then he would have been guilty of “wilful misconduct” and, for
that reason alone, the pursuers would not have been entitled to recover under the
indemnity.
The second point to notice is that before us counsel for the defenders expressly
accepted that there was evidence (for instance, from the Occidental technician, Mr. Ian
Ferguson (Evidence 171/25046)) on which the Lord Ordinary was entitled to conclude
that hydrocarbon could leak past the suction GOVs on condensate injection pump A and
move through the pump and so reach the blind flange. An employee in the position of
Sutton could therefore have reasonably foreseen that, if the flange were not fitted
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properly, hydrocarbon could escape into the atmosphere with a possible risk of injury.
Indeed one at least of the reasons for fitting blind flanges to pipework and tightening
them was to prevent such escapes. Again, this was in line with the evidence (for
example, Mr. Alistair Pirie (Evidence 209/30337) and Mr. Brian Reid (Evidence
107/15495)). The defenders therefore accepted that Sutton had been under a duty of care
to fit the flange properly and that, if death or injury had occurred as a result of
hydrocarbon passing a GOV and escaping at the flange, Score would have been liable in
damages.
Finally, it should be noted that the pursuers did not suggest that an employee in
the position of Sutton could reasonably have foreseen that anyone would try to start pump
A while PSV 504 was away for maintenance.
The argument for the defenders draws a fine line between the kind of case where,
they admit, Score would be liable and the present case. That is not, of course, in itself a
criticism of the argument since fine lines may have an important role to play in particular
aspects of the law. I am, however, satisfied that the defenders’ argument is unsound.
It is well known that, in giving the advice of the Privy Council in The Wagon
Mound [1961] A.C. 388 at p. 425, Viscount Simonds indicated that a wrongdoer’s
“liability (culpability) depends on the reasonable foreseeability of the consequent
damage” and that this liability is to be determined by the foreseeability of the damage
which in fact happened. That test was successfully invoked by the defender when he was
assoilzied in the Court of Session in Hughes v. The Lord Advocate 1961 S.C. 310 at p.
323 but the House of Lords allowed the pursuer’s appeal and held the defender liable:
1963 S.C. (H.L.) 31.
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The defender in Hughes was the Lord Advocate representing the Postmaster
General and the action arose out of an accident involving Post Office workmen. They
had uncovered a manhole in a road and had erected a canvas shelter over it. They were
working in the space below the road which could be reached by going down a ladder
inside the manhole. The men went away for a tea-break, having closed the flap of the
canvas shelter and having pulled up the ladder which they left on the ground outside the
shelter. Red warning lamps fuelled, as was usual at that period, by paraffin were placed
round the shelter and equipment. In the absence of the workmen, the pursuer and another
boy came upon the site and went into the shelter to explore. They took with them the
ladder and one of the paraffin lamps, which they swung on the end of a rope. It appears
that the boys went down into the manhole and that, when they emerged, the lamp was
either knocked or dropped into the manhole, whereupon a violent explosion took place
which caused the pursuer to fall into the manhole. He suffered severe burning injuries in
the explosion. In the words of Lord Reid (1963 S.C. (H.L.) at p. 38), the explanation of
the accident was “that, when the lamp fell down the manhole and was broken, some
paraffin escaped, and enough was vaporised to create an explosive mixture which was
detonated by the naked light of the lamp”.
The Lord Ordinary held that lighted red lamps, unattended on a public street, were
just the kind of things which attract young children. He also considered that the open
manhole with the canvas shelter would constitute an allurement to children. He therefore
held (1961 S.C. at p. 321) that “the normal dangers of such children falling into the
manhole or being in some way injured by a lamp, particularly if it fell or broke, were
such that a reasonable man would not have ignored them.” The Lord Ordinary accepted
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the expert evidence that the degree of improbability of an explosion of paraffin vapour of
this order as a result of a paraffin lamp being dislodged into the hole was “very high”. He
therefore held that the danger of the pursuer being blown into the manhole and sustaining
burning injuries as a result of the explosion was not one which ought reasonably to have
been foreseen. Under reference to The Wagon Mound, the Lord Ordinary rejected the
pursuer’s claim, saying (1961 S.C. at p. 323) that
“Even if the ordinary dangers of a child playing with a lamp and falling
into an open manhole should have been reasonably foreseen, I do not
consider that injuries resulting from an explosion, such as occurred, could
have been reasonably foreseen.”
This Division, Lord Carmont dissenting, refused the pursuer’s reclaiming motion
on the ground that, since the pursuer suffered his injuries as a result of an explosion
which was in itself unforeseeable, the type of accident was not one which should have
been foreseen by the Post Office workmen.
The House of Lords unanimously rejected such a strict approach to the
requirement of foreseeability. Lord Reid held that “The cause of this accident was a
known source of danger, the lamp, but it behaved in an unpredictable way” (1963 S.C.
(H.L.) at p. 38) and concluded (at p. 40) that
“This accident was caused by a known source of danger, but caused in a
way which could not have been foreseen, and, in my judgment that affords
no defence.”
Similarly Lord Morris of Borth-y-Gest held (1963 S.C. (H.L.) at p. 44):
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“The fact that the features or developments of an accident may not
reasonably have been foreseen does not mean that the accident itself was
not foreseeable. The pursuer was, in my view, injured as a result of the
type or kind of accident or occurrence that could reasonably have been
foreseen. In agreement with Lord Carmont, I consider that the defenders
do not avoid liability because they could not have foretold the exact way
in which the pursuer would play with the alluring objects that had been
left to attract him or the exact way in which in so doing he might get hurt.”
He summarised his position in this way (1963 S.C. (H.L.) at pp. 44 - 45):
“In my view, there was a duty owed by the defenders to safeguard the
pursuer against the type or kind of occurrence which in fact happened and
which resulted in his injuries, and the defenders are not absolved from
liability because they did not envisage ‘the precise concatenation of
circumstances which led up to the accident.’”
Similarly, Lord Guest held (1963 S.C. (H.L.) at pp. 46 - 47):
“In order to establish a coherent chain of causation it is not necessary that
the precise details leading up to the accident should have been reasonably
foreseeable: it is sufficient if the accident which occurred is of a type
which should have been foreseeable by a reasonably careful person Miller v. South of Scotland Electricity Board, 1958 S.C. (H.L.) 20, at p.
34, Lord Keith of Avonholm; Harvey v. Singer Manufacturing Co., 1960
S.C. 155, at p. 168, Lord Patrick - or as Lord Mackintosh expressed it in
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the Harvey case, at p. 172, the precise concatenation of circumstances
need not be envisaged.”
Finally, Lord Pearce (1963 S.C. (H.L.) at p. 48) described the accident as “but a variant of
the foreseeable” and as “an unexpected manifestation of the apprehended physical
dangers”.
I note that in Jolley v. Sutton London Borough Council [1998] 1 W.L.R. 1546 at
p. 1552 Lord Woolf M.R. has confessed to having difficulty in reconciling certain of the
observations of Lord Reid in Hughes with the approach in The Wagon Mound.
Presumably, however, both Lord Reid and Lord Morris, who had been members of the
Board in The Wagon Mound, saw themselves as applying the approach laid down by the
Privy Council to the particular facts of Hughes. In any event, in so far as there might be
any difference in emphasis between the cases, we in this court must be guided by what
was said by the House of Lords in Hughes since their decision is binding on us.
As I have explained, counsel for the defenders accepted that it was reasonably
foreseeable that, if the blind flange were not fitted properly to the pipework, hydrocarbon
might escape and cause injury. They also accepted that it was reasonably foreseeable that
hydrocarbon might pass a GOV and so reach the area of the blind flange. On the other
hand, they argued that it was not reasonably foreseeable that hydrocarbon would reach
the blind flange as a result of human intervention. In particular, it was not reasonably
foreseeable that anyone would try to start the pump while PSV 504 was missing. So, it
was not reasonably foreseeable that hydrocarbon would reach the area of the blind flange
as a result of someone pressurising the pump while attempting to start it. In other words
what actually happened was not reasonably foreseeable. The defenders argued that this
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made all the difference since the fitting of the flange was not intended to prevent the
leakage of hydrocarbon under pressure and so there had been no duty on Sutton to take
steps which would prevent such a leakage: his only duty had been to take steps to
prevent a leak of hydrocarbon due to a valve passing.
As counsel for the pursuers pointed out, however, the Lord Ordinary was fully
entitled to reject such an argument. There was evidence that the flange to be fitted had a
rating of 900 lbs. (Opinion 4/786). Sutton had to flog up the bolts or tighten them with
combination spanners. If fitted properly, the flange would have been able to withstand a
pressure of 2,250 p.s.i.a. The process of repressurising or jagging the pump would have
been intended to produce a much lower pressure (not exceeding 670 p.s.i.a.) within the
pump. If, therefore, jagging caused condensate under pressure to pass into the relief
piping and to leak from the flange, this was something which a fitter in Sutton’s position
could reasonably have foreseen.
This appears to me to be a case where the accident occurred due to a known
source of danger - hydrocarbon escaping because of an improperly fitted flange - but in a
way which could not have been foreseen. The employees were injured in the type of
accident or occurrence - an explosion due to escaping hydrocarbon - which could
reasonably have been foreseen. In these circumstances, if the tests laid down by their
Lordships in Hughes had been applied in any proceedings against Score, then - even
although the precise concatenation of circumstances leading up to the accident could not
have been envisaged - Score would have been liable for the deaths and injuries. In the
words of Lord Pearce, the accident which occurred was “but a variant of the foreseeable”
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and “an unexpected manifestation of the apprehended physical dangers” (1963 S.C.
(H.L.) at p. 48).
Of course, it may well be that the scale of the disaster which occurred was beyond
anything which a reasonable workman in Sutton’s position might have foreseen, but that
does not affect the matter. He could reasonably have foreseen that death and injury
would be liable to result if hydrocarbon escaped from the pipework and gas was ignited.
Which was what happened - though to an appalling degree. In the words of Lord Reid in
Hughes (1963 S.C. (H.L.) at p. 38),
“a defender is liable, although the damage may be a good deal greater in
extent than was foreseeable. He can only escape liability if the damage
can be regarded as differing in kind from what was foreseeable.”
For these reasons I reject the defenders’ first argument.
The other argument advanced on behalf of the defenders was based on the
doctrine of novus actus interveniens. Since this is essentially just another way of looking
at the same problem, it is not surprising that I find myself unpersuaded by this part of the
defenders’ argument also.
We were referred to a number of well-known authorities, most of them dealing
with situations which were rather different from the present case. In particular, several of
them dealt with actings which had been prompted as a response to the defendants’ initial
acts of negligence. See, for instance, Haynes v. Harwood [1935] K.B. 146; The Oropesa
[1942] P. 140 and Knightley v. Johns [1982] 1 W.L.R. 349. I do not find it helpful to
analyse those authorities in detail since the present is a rather different kind of case. On
the defenders’ argument, the novus actus consisted in Vernon’s pressurising pump A.
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But Vernon did not pressurise the pump in response to Sutton’s initial act of failing to
secure the blind flange properly; rather, he pressurised the pump - negligently, as the
Lord Ordinary has held - at a time when not merely was he unaware that a blind flange
had been improperly fitted to the end of the pipe, but he was also unaware that PSV 504
had been removed. It was this combination of the failure of Sutton to fit the flange
properly and of Vernon’s subsequent pressurising of the pump which caused the
hydrocarbon to escape and the disaster to occur. Mr. Batchelor summarised the matter by
saying that in these circumstances the issue was one of contribution between wrongdoers.
It was, of course, not in dispute that, by repressurising the pump when PSV 504
was missing, Vernon had done something which was likely to endanger the safety or
health of himself and other persons on the platform. Both he and the pursuers were
therefore in breach of Regulation 32 of the 1976 Regulations. For that reason, by virtue
of Regulation 33, actions for damages for the deaths and injuries to the contractors’
employees could have been brought against the pursuers, as the employers of Vernon.
The Lord Ordinary has also found that Vernon was negligent. To escape liability under
the indemnities, the defenders have to show that actions for those self-same deaths and
injuries could not have been brought successfully against Score, even though one of
Score’s employees had negligently failed to fit the blind flange properly and the gas
leaked through the resulting gap. In other words, they have to show that, if actions of
damages had been raised against the pursuers and Score jointly and severally, Score could
have escaped liability simply on the basis that, even although Sutton had been negligent
in failing to secure the flange properly, the explosion would not have occurred if the
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pursuers’ employee, Vernon, had not repressurised the pump, negligently and in breach
of Regulation 32 of the 1976 Regulations.
In my opinion, the defenders cannot show this. Although counsel did not refer us
to it, authoritative guidance on the approach to such questions is to be found in the
speech of Lord du Parcq in Grant v. Sun Shipping Co. 1948 S.C. (H.L.) 73, at pp. 94 - 95:
“If the negligence or breach of duty of one person is the cause of injury to
another, the wrongdoer cannot in all circumstances escape liability by
proving that, though he was to blame, yet but for the negligence of a third
person the injured man would not have suffered the damage of which he
complains. There is abundant authority for the proposition that the mere
fact that a subsequent act of negligence has been the immediate cause of
disaster does not exonerate the original offender. In the well-known case
of Burrows v. March Gas and Coke Co. (1872) L. R. 7 Ex. 96, the
defendant company broke a contract with the plaintiff by supplying him
with a defective pipe, but the immediate cause of an explosion which
caused damage to the plaintiff was the negligence of a third party, a
gasfitter, who, having been called in to look for the source of an escape of
gas, searched for it with a lighted candle. The company was held liable....
In ... The ‘Bernina’ (1887) 12 P.D. 58, at p. 61, Lord Esher, M.R., in the
Court of Appeal, discussed the question ‘what is the law applicable to a
transaction in which a plaintiff has been injured by negligence, and in the
course of which transaction there have been negligent acts or omissions by
more than one person?’ The learned Master of the Rolls said that upon
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many points as to such a transaction the common law was clear, and stated
the first of these points in these words: - ‘If no fault can be attributed to
the plaintiff, and there is negligence by the defendant and also by another
independent person, both negligences partly directly causing the accident,
the plaintiff can maintain an action for all the damages occasioned to him
against either defendant or the other wrongdoer.’”
See also Miller v. South of Scotland Electricity Board 1958 S.C. (H.L.) 20 at p. 39 per
Lord Denning and H. L. A. Hart and T. Honoré, Causation in the Law (2nd edition,
1985), pp. 205 - 206.
I see no reason to doubt that the approach laid down by Lord du Parcq would fall
to be applied in the present case. On that basis I consider that Score could not have
escaped any liability arising out of the negligence of Sutton by pointing to the undoubted
fact that, even though they were themselves to blame, but for the fault of the pursuers’
employee, Vernon, the contractors’ employees would not have been killed and injured.
The true position is that, in any action for damages brought by the claimants on the basis
of these facts, Score and the pursuers would have been held liable jointly and severally or
severally to the claimants.
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10. SUMMARY AND DISPOSAL
For the reasons given by the other members of the court and for those which I
have indicated in Part 8, I am satisfied that we have no proper basis for interfering with
the Lord Ordinary’s decision on the facts. It follows that I agree with your Lordships that
the defenders’ cross-appeals on the facts should be refused in all of the test cases. In Part
9 I have held that the defenders’ cross-appeals on the particular matter of novus actus
interveniens should also be refused.
Since I accept the Lord Ordinary’s findings as to the cause of the explosion, I
proceed on the basis of those findings. For the reasons given in Part 2 I would refuse the
defenders’ cross-appeals on the construction of the indemnities. It follows that I am
satisfied that the pursuers have established facts which would be apt to bring them within
the scope of the indemnities. The Lord Ordinary was similarly satisfied, but accepted the
defenders’ argument to the effect that, because the pursuers had been indemnified by
their insurers, six of the test actions were entirely irrelevant, while the action against
Stena Offshore Limited was relevant only in respect of the payments which the pursuers
had themselves made to the claimants. As I explain in Part 1 of the opinion, I consider
that the Lord Ordinary was wrong to accept the defenders’ argument. He was therefore
wrong to sustain the defenders’ (third) general plea to the relevancy in each of the
actions. For that reason I would allow the reclaiming motions insofar as they seek the
recall of the interlocutors assoilzieing the defenders in six of the cases. In the Stena
Offshore case I would recall the Lord Ordinary’s interlocutor to the extent that it restricts
the sum to be awarded to the amount of the pursuers’ own payments to the claimants.
178
I am satisfied also, for the reasons given in Part 3 on Consequential Loss, that the
Lord Ordinary erred in holding that the pursuers would not have been entitled to recover
the so-called Texas enhancement, i.e. the amount of the payments made to the claimants
by reason of the risk that the pursuers would have been vulnerable to the jurisdiction of
the Texas courts. I would allow the pursuers’ reclaiming motions on this point. On the
other hand, as I explain in Parts 4 and 5, I would reject the defenders’ cross-appeals in
which they sought to argue that the court could award only damages which would be
awarded for the claims under Scots law. It follows that I would find the defenders liable
to indemnify the pursuers for the sums which were paid, whether by themselves or by
their insurers, under the settlements reached with the claimants.
Two points concern the Oxy Gap cases only, of which the Stena Offshore case is
an example. The Lord Ordinary reduced the sum which the pursuers were entitled to
recover under the indemnity by an amount representing the benefit which they would
enjoy if, having been given tax relief on the payments made to the claimants, they were
required to pay tax at a lower rate on the sum eventually paid to them under the
indemnities. As I explain in Part 6, I should favour allowing the reclaiming motion to the
extent of indicating that the sum to be paid by the defenders should be under deduction of
an appropriate sum representing any benefit enjoyed by the pursuers as a result of the tax
rates prevailing at the time of payment. On the other hand, in Part 7 I have rejected the
defenders’ argument that the sum to be recovered should be reduced to take account of
the interest payment made to the pursuers by the Inland Revenue under paragraph 16 of
Schedule 2 to the Oil Taxation Act 1975.
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The precise form of the interlocutors in the various cases is a matter upon which
counsel asked to be heard. The calculation of the sums involved, and the precise nature
of the interlocutor in the Stena Offshore case in particular, will require careful
consideration. I therefore move your Lordships to put the case out By Order for the
purpose of hearing counsel’s submissions and of formulating the appropriate
interlocutors in the light of those submissions.
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11. EPILOGUE
It would be wholly wrong to part from these cases without expressing the
gratitude of the court for the assistance which we obtained from the counsel and solicitors
for both parties, first, in the preparation for the hearing of the reclaiming motion and,
later, during the hearing. Inevitably, we were faced with large numbers of documents and
with many authorities. All these were prepared meticulously and presented to the court at
the appropriate time and in an easily assimilable form. The arguments of counsel were
well constructed and well presented. Our clerk and macer prevented us from being
submerged under the volumes of paper. The result of all this effort was that the
reclaiming motion, though it took many days, was conducted in an efficient manner
which did much to alleviate the burden on the court.