January 2007

Commercial Contracts Update

Efficacy of a contractor's liability cap

against third party losses
Drafting an effective liability cap against third
party losses can be problematic, as has been
demonstrated in the recently decided case of
Westerngeco Ltd -v- ATP Oil & Gas (UK) Ltd.1
While this case arose in the context of a contract for the
provision of offshore seismic survey work under the LOGIC
CRINE standard terms for the UK oil and gas industry, it
raises important issues of general application which are
particularly relevant to anyone dealing with the provision
of services by contractors, including for example, in the
context of PFI/PPP projects and/or where a party to a
contract takes a contractual responsibility for third party
losses.
Broadly, the case demonstrates that where a contractor
agrees with a company that it will accept liability for third
party losses up to a specified amount then, unless the
company agrees to indemnify the contractor for losses in
excess of that cap, the contractor will be unable to recover
such losses should the third party sue the contractor direct.
By contrast, the limit on liability will be effective to limit
the contractor's liability should the third party sue the
company. The case also provides a useful insight into the
court's approach to construing contractual terms.

Facts
In March 2004, ATP Oil & Gas (UK), a company engaged in
offshore oil and gas development and production activities
(the company) entered into a contract with Westerngeco
(the contractor) for the provision by the latter of seismic
survey work. The contract was based on the LOGIC CRINE
standard terms for the UK offshore oil and gas industry,
with some amendments.
Under the standard provisions of the contract, the
contractor was responsible for third party losses (i.e.
personal injury or property damage) arising from the
performance of the contract to the extent that such losses
were caused by its negligence, and was also obliged to
indemnify the company for losses arising in this way.

The contract also followed the standard LOGIC CRINE

"knock-for-knock" liability framework, whereby each party
was responsible for, and had to indemnify the other in
respect of, any damage to its own property, the
injury/death of its own employees, pollution emanating
from its own property/equipment/reservoir and its own
consequential losses, regardless of fault.
Crucially, the parties specifically negotiated and inserted
into the contract a clause seeking to cap the contractor's
liability, under which the "Contractor's liability under this
Contract" was not to exceed the aggregate amount of
payments received by it for the work done and the
company was to indemnify the contractor for any amounts
in excess thereof.
During the course of carrying out its work, the contractor
damaged a wellhead marker buoy belonging to Total E & P
UK Plc (Total), a third party. It was common ground that the
damage was caused by the contractor's negligence.
Total brought a claim against the contractor and the
contractor sought a declaration that in accordance with the
contractor's liability cap clause, the company was liable to
indemnify the contractor for the amount of the contractor's
liability to Total which was in excess of the aggregate
amount of payments received by the contractor for the
work it performed.
The issue before the court was whether the meaning of the
phrase "liability under this Contract" within the contractor's
liability cap clause was wide enough to extend to the
contractor's liability to Total.

Held
In giving his judgment, Aikens J adopted the approach to
construing contracts set out in BCCI -v- Ali2, namely that the
objective of the court is to give effect to the parties'
intentions and that in order to ascertain the parties'
intentions, the court will:

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read the terms of the contract as a whole;

give the words used their natural and ordinary meaning
in the context of the agreement; and
consider the parties' relationship and all the other
relevant facts surrounding the transaction so far as
known to the parties at the time it was made.

The court does not enquire into the parties' subjective

states of mind but makes an objective judgment based on
the issues identified above.
Interestingly, Aikens J specifically noted the fact that both
parties were sophisticated market players in an industry
where legal advice was usually taken over contracts which
were subsequently drafted with great care. This was an
important element in ascertaining the parties' intentions. It
was clear how responsibility was to be divided; the parties
had obviously allocated the various risks (and duties to
insure against them) very carefully between them.
Although the clause in question was specifically negotiated
for that particular contract, it must be construed in this
light.
In applying the above principles, it was held that the
natural meaning of "liability under this Contract" was, first,
a legal (as opposed to some moral or non-legal) liability.
Secondly, the phrase had to mean a legal liability to the
counterparty (i.e. the company) as opposed to someone
who is not a party to the contract or who could not take the
benefit of its terms. Thirdly, the phrase contemplated a
liability to pay over money.
Given that the terms of the contract stipulated that, as
between the contractor and the company, the contractor
was responsible for third party losses arising from its
negligence, there was no legal liability on the contractor to
pay anything over to the company in respect of such losses.
That being so, there was nothing in respect of which the
company was obliged to indemnify the contractor if there
was an excess above the aggregate payments received by
the contractor for the work done under the contract.
Therefore, the contractor was not entitled to the
declaration sought, nor to an indemnity from the company.

Comment
The case shows the difficulty in limiting a contractor's
liability against third party claims. To do so effectively in
circumstances where the contractor takes the responsibility
for third party claims arising from its own negligence, clear
words are required to provide the contractor with an

indemnity from the company in respect of the amounts

that the contractor may have to pay to the third party as a
result of the negligent acts of the contractor.3
Failing to use clear words to this effect would mean that
the operation of the liability cap will depend on the
external decision of a third party as to whether to sue the
company or the contractor. If the third party chooses to sue
the company and the company incurs financial loss by
having to pay the third party claim, then the contractor will
be protected by the liability cap. This is because the
obligation of the contractor to indemnify the company in
respect of such losses will constitute a "contractual liability"
as opposed to a mere "responsibility". By contrast, if the
third party chooses to sue the contractor, the contractor will
not be able to rely on its liability cap in the absence of an
express contractual counter-indemnity from the company.
Arguably, the same analysis could be adopted in respect of
"knock-for-knock" liabilities where, for example, the
contractor's employees bring a claim against the contractor
and not the company. In line with the above analysis (and
putting aside any employee insurance issues), the
contractor would not be able to rely on its liability cap
unless a counter-indemnity from the company is expressly
included in the contract.
The reference to the sophistication of the parties reinforces
the general approach of the courts that the more
commercially and legally experienced the parties are, the
more emphasis will be given to the precise words of the
contract and all the subtleties those chosen words entail.
Notes:
1 [2006] EWHC 1164.
2 [2002] 1 AC 251.
3 This reflects the principle stated in Brown -v- Drake International Ltd and
Southampton Container Terminals [2004] EWCA Civ 1629 that an
indemnity will not readily be given to a party against a loss caused by its
own negligence.

Contacts
Geoffrey Picton-Turbervill
Head of Global Energy
T: +44 (0)20 7859 1209
E: geoffrey.picton-turbervill@ashurst.com
Ruth Jaun
Professional Development Lawyer
T: +44 (0)20 7859 1166
E: ruth.jaun@ashurst.com

This update is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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