BP Exploration Operating Company Ltd v Kvaerner Oilfield Products Ltd & Anor

This is a trial of preliminary issues which arises out of a claim by BP that certain equipment supplied to it as part of the facilities for recovering oil from the Schiehallion and Loyal fields, west of the Shetland Islands, was defective. The equipment supplied consisted of subsea control modules (SCM) and directional control valves. Hydraulic control equipment ultimately controls the flow of production and other fluids into and out of the oil wells by means of the SCM and the directional control valves mounted on the Xmas tree which is located on the sea bed on top of the well head. The electrical equipment forms part of an umbilical system consisting of sub sea cables carrying electrical signals out of the units in which those cables terminate. This equipment is tied back to a Floating Production Storage and Offloading facility which consists of a large vessel with a substantial processing and storage capacity. The product is carried ashore by tankers.

Kvaerner supplied the SCM and directional control valves under a series of contracts with BP as Operator on behalf of itself and so-called Co-Venturers, numbered 101259 dated 5^th February 1997.

The Xmas tree was supplied by Cooper Cameron (UK) Ltd. (“CCL”) to BP under a series of contracts numbered 101260 dated 30^th October 1996.

Both the Kvaerner contract and the CCL contract consisted of three separate but inter-related contracts. There were the main contracts numbered 101259 (Kvaerner) and 101260 (CCL) and in relation to each there was a Front Engineering Design (FEED) Contract, numbered 101259A (Kvaerner) and 101260A (CCL) and a Development Contract numbered 101259B (Kvaerner) and 101260A (CCL). I usually refer to these contracts by their numbers in this judgment. In both cases the FEED contract, as its name suggests, was to apply to the earlier phase of the relationship between the supplier and BP, namely the design, engineering and procurement services necessary for the provision of the equipment, development in conjunction with BP and the necessary statutory bodies of the safety case for the equipment and certification of the CSM. Its application was to be followed in point of time by the Development Contract and that provided for provision of the Development Services which included administration, management and control services as required to manage the execution and timely completion of the Development Services, provision of specialist engineering support to the oil field management team in Aberdeen, the provision of all direct and indirect labour or subcontractual services inclusive of tools and all necessary consumables and the provision of all resources, materials and equipment necessary to undertake the Development Services. For these purposes the contractors undertook to provide a project team led by a project manager who was to be responsible for management of the Development services. It was expressly provided that in both cases these three contracts were to form a single transaction.

The FEED phase began in December 1996. Kvaerner completed the manufacture of the first SCM in the spring of 1997 and the first installation on to the Xmas tree supplied by CCL was made in November of that year. Oil production began in July 1998. In January 1999 it was observed that there was excessive consumption of hydraulic fluid. The SCMs were retrieved from the seabed and it was found that their design or manufacture was allegedly defective. In the course of 1999 it was alleged that 18 SCMs were defective and of these 14 had already been installed subsea. Further, the directional control valves were said not to be sufficiently clear or free from contaminants. These entered the valves due to corrosion and erosion and/or were present during manufacture. The contaminants led to leakage of the valves. This corrosion was said to be partly due to the fact that the valve components were made out of unsuitable material. The umbilicals were also said to be defective due to the use of unsuitable or defective materials, poor workmanship and bad design and it is alleged that in consequence seawater gained entry and damaged the ability of the communication system to operate properly or at all.

The essential point about these allegations for present purposes is that in as much as physical loss or damage to sound equipment was allegedly caused by defects in parts of the equipment provided by Kvaerner such loss or damage was sustained at a point of time after completion of installation of the equipment and its connection to the other equipment on the seabed.

It is alleged that, in consequence of these various defects and physical loss and damage, BP has suffered a total loss of over £13.5 million, including the cost of retrieving the equipment from the seabed, of repairing or replacing damaged or defective equipment of testing equipment and of re-installation on the seabed.

The claim against Kvaerner is advanced on the basis of damages for breach of contract and as the cost of or associated with making good defects which Kvaerner were obliged to bear under the warranty clause in Development Contract 101259B.

BP did not, however, claim judgment for the full amount of its loss against Kvaerner. Instead, it limited the claim by indicating that it would not seek to have judgment entered for a sum exceeding what was paid by its insurers under the applicable Construction All Risks Insurance Policy, namely £7,076,976.

Although BP’s original claim form joined CCL as co-defendants on the basis that as suppliers of the Xmas Trees they supplied defective equipment which caused some or all of the damage to the equipment, BP never served CCL and by an order of Moore-Bick J. dated 9^th July 2003 CLL was removed from the main action. However, Kvaerner joined CCL as Part 20 defendant by a Contribution Notice under the Civil Liability (Contribution ) Act 1978 and a Part 20 claim form. The substance of this Part 20 claim for contribution was that the cause of contaminants entering the control fluid was the incorporation of unsuitable materials into the Xmas trees. This provision of unsuitable materials rendered CCL liable to BP for breach of contract (101260B) or negligence. Accordingly it is alleged that CCL is liable to make contribution for the damage sustained by BP which was caused or contributed to by CCL’s breach of contract or duty to BP. In these proceedings, therefore, BP assert that their whole loss and damage was caused by breaches by Kvaerner of their contract with BP, whereas Kvaerner deny this and assert against CCL that BP’s loss and damage were caused or contributed to by CCL’s breaches of contract or negligence.

BP’s claim is being pursued by their insurers who exercise their rights of subrogation.

Kvaerner has pleaded as a defence to BP’s claim that Kvaerner was covered by the same policy in respect of the same loss and damage and that insurers have waived their rights of subrogation in relation to these claims. It is common ground that the wording of the Construction All Risks policy is potentially wide enough to cover Kvaerner, as a contractor of BP, for its respective rights and interests, but only to the extent which the contract between BP and Kvaerner provides for BP to effect cover for the benefit of Kvaerner. In accordance with the judgment in National Oilwells (UK) Ltd. v. Davy Offshore Ltd. [1993] 2 Lloyd’s Rep. 582 it is also common ground that the waiver of subrogation would be co-extensive with the cover to be effected by BP for the benefit of Kvaerner under the terms of this contract.

As for CCL, their position as Part 20 defendants to a claim for contribution depends upon (i) whether Kvaerner is entitled to the protection of the insurers’ waiver of subrogation and, if it is not, (ii) whether CCL is liable in respect of the same damage sustained by BP as that for which Kvaerner is liable to the effect that, by operation of section 1(1) of the Civil Liability (Contribution) Act 1978, CCL is liable to make contribution for such loss and damage.

On 4 November 2003 Gross J. made an order by consent including an order that there should be a trial of preliminary issues as follows:

“(1)

Does Kvaerner enjoy the benefit of rights of subrogation contained in the Construction All Risks Policy No. S631836 (“the Policy”) – as it alleges it does at paragraphs 1.19.1, 2.5, 2.37 and 2.38 of the Defence (and relied upon by Cooper Cameron at paragraphs 4.2 and 4.16 of the Part 20 Defence) – or are BP’s insurers free to bring this claim against Kvaerner in BP’s name using rights of subrogation – as alleged at paragraphs 7 to 15 of the Reply?

(2)

If Issue 1 is resolved against Kvaerner, does Cooper Cameron enjoy the benefit of rights of subrogation contained in the Policy such that Kvaerner cannot claim a contribution from Cooper Cameron in respect of the loss and damage about which BP and their insurers complain as Cooper Cameron alleges in paragraphs 3.3 and 3.4 of the Part 20 Defence?”

A third issue, which raised the question whether insurers were precluded from bringing a subrogated claim if they had paid a claim for which they were not in fact liable or whether the right to make a subrogated claim arose simply if they paid a claim in good faith, was abandoned.

In summary, therefore, the essential issues which now fall to be determined are whether BP under its contract with Kvaerner undertook to procure insurance cover for Kvaerner which was sufficiently extensive in scope to cover the loss and damage claimed by BP against Kvaerner and whether BP under its contract with CCL undertook to procure insurance cover for CCL which was sufficiently extensive in scope to cover the same loss and damage if CCL were liable for it. If there were a waiver of subrogation in favour of CCL it could not be liable to BP and could not therefore be liable for contribution.

Before considering the submissions of the parties it is necessary to identify the key provisions of the policy and the contracts entered into by BP with Kvaerner and CCL.

The policy identified the Assured thus:

“BP Exploration, Co-Venturers and Project Managers and/or parent and/or associated and/or affiliated and/or subsidiary and/or interrelated companies as they now exist or may hereafter be constituted and their Directors, Officers and employees as Principal Assureds and/or contractors and/or sub-contractors of the above and as per wording, for their respective rights and interests.”

The period of insurance was defined as follows:

“From the date of letting the first contract or 1^st January 1996 whichever the earlier to completion of each part of the project, being the point at which separate operating insurances would attach and until project completion, expected to be 30^th September 1999, or held covered at agreed rates, plus up to 24 months maintenance as per full policy wording, 24 months discovery period concurrent with maintenance period.

Including liabilities from time of signing of contracts or letters of intent until expiry of Policy and/or as per full Policy Wording and subject to notice provisions as per full Policy Wording.”

Section I insured against “all risks of physical loss or damage as per specification” and Section II insured against third party legal and/or contractual liability, both sections being expressed by reference to the following operations:

“Procurement, fabrication, transits, storage, construction, installation, tie-in, hook-up, testing, commissioning, existence and maintenance etc. and associated operations of the Loyal and associated Fields Development Project and associated equipment.”

The Assureds were divided into two groups by General Condition 2, namely Principal Assureds and Other Assureds. The Principal Assureds were defined as:

The following provisions defined and applied to Other Assureds:

As regards the period of cover applicable to Other Assureds, General Condition 4 provided:

“The interest of the “Other Assured(s)” shall be covered throughout the entire Policy period (irrespective of contract period(s)) subject to full coverage as herein, unless specific contract(s) contain provisions to the contrary, in which event, insurance hereunder for such specific contract(s) only, shall at the Principal Assureds’ option be limited accordingly. The foregoing shall not operate to increase the limit(s) of liability contained herein.”

The Scope of Insurance was defined to include the following:

“This insurance covers the works executed in the performance of all contracts relating to this entire project including temporary works (except as excluded in C below) and all materials, components, parts, machinery, fixtures, equipment or any other property destined to become a part of the completed project, complete with all plant, equipment, machinery, materials, outfit and all property associated therewith whether intended to form a permanent part of the works or not. Including site preparatory work, being included in the Final Contract Value insured herein.

For the purpose of this Policy, the contracts represent the entire project as scheduled herein together with all its appurtenances and supporting equipment and structures…..

(iv)

Property and/or Equipment owned or leased by Contractors/Sub-Contractors unless separately scheduled hereunder prior to loss at premium to be agreed (or otherwise Declared to Insurers hereon).”

General Condition 6 dealt with Subrogation as follows:

“Insurers agree to waive rights of subrogation against any Assured and any person, Company, Firm or Corporation whose interests are covered by this Policy and against any employee, agent or contractor of the Principal assured(s) or any individual, agent, firm or affiliate or corporation for whom the Principal Assured(s) may have agreed prior to any loss to waive subrogation, including but not limited to helicopters, supply boats, etc., existing installation(s) and tugs and/or other vessels and craft and their owners and/or charterers and/or insurers. The foregoing shall not apply in respect of operations not connected with the project.”

The policy excess was £50,000 any one accident or occurrence.

The Section I Conditions provide by clause 21:

“This Section insures against all risks of physical loss and/or damage to the property covered hereunder, except as hereinafter mentioned, including the cost of repairing, replacing or renewing any defective part condemned solely in consequence of the discovery therein during the period of this insurance of a latent defect.”

In respect of loss or damage occurring during the maintenance period clause 31 provided:

“Notwithstanding the provisions of this Maintenance Clause the cover provided hereunder shall be no wider than that contained elsewhere in Section I of this Policy. Coverage under this Section I continues during the Maintenance period(s) but not beyond a period of 24 months from expiry date of this Policy or as specified in the “Period” Section of this Policy and is limited to physical loss, damage or expense resulting from or attributable to:

(i)

Faulty or defective workmanship, construction, material or design and/or damage repair arising from a cause occurring prior to the commencement of the maintenance period.

(ii)

Operations carried out by “Other Assureds” during the maintenance period(s), for the purpose of complying with their obligations in respect of maintenance or the making good of defects as may be referred to in the conditions of contract, or by any other visits to the site necessarily incurred to comply with qualifications to the acceptance certificate.”

Finally, clause 42 provided:

“It is understood and agreed that physical loss and/or damage to the subject matter insured during the period of the Policy caused by faulty design, faulty or defective materials, faulty or defective workmanship (including welding) including physical loss and/or defect or damage to the faulty part shall be covered hereunder even though the fault in design and/or defect may have occurred prior to the attachment date of this policy.

However, there shall be no liability under this clause for rectification, repair or replacement of any part of the property insured which arises in the absence of physical loss or physical damage and is solely due to such part failing to achieve its design specification or being unfit for its intended purpose.

It is further agreed with respect to physical loss or damage to pipelines, any rupture, twisting, holing, bending, buckling, breakage or other deformation of any kind shall be deemed to be damaged covered hereunder whether or not caused by or contributed to by faulty or defective workmanship, or faulty or defective material, or faulty or defective construction.”

It is common ground that the only provisions directly relating to procurement of insurance cover by BP are to be found in the Development Contract. However, before coming to its terms, it is important to note that the Main Contract No. 101259 made express provision for the approach to be taken to construction in the event of ambiguity, conflict or discrepancy with each of the FEED contract and the Development Contract. By clause 3.2 it was provided, in so far as is relevant, that in relation to the Development Contract the “order of precedence” for construction purposes should be the Main Contract No.101259 followed by the Development Contract itself, the Main Contract General Conditions, then Appendix 3 to the Development Contract consisting of the Specific Conditions of Contract. Clause 4.2 provided:

“The terms and conditions contained within the Contract constitute the entire agreement between the parties and supersede all previous communications, representations, or agreements, either oral or written, between the parties hereto with respect to the subject matter hereof, and no agreement or understanding varying or extending the same will be binding upon either party hereto unless in writing, signed by a duly authorized officer or representative thereof in which writing this Contract shall be specifically referred to.”

By Clause 6.1 of Contract 101259 it was provided that on the basis of the Contractor’s tender proposals of 21^st August 1995 as amended and developed in the period until 7^th December 1995 BP confirmed that the Contractor had been selected as the contractor for provision of the Services.

The only provision in the Development Contract which imposes on BP an obligation to insure for the benefit of the contractor is to be found in clause 10 of the Special Conditions of Contract. This clause also deals with indemnities between the parties under clause 10.1. Thus the Contractor undertakes to indemnify BP Group, amongst other matters, in respect of costs and liabilities for loss and damage to the Contractor’s equipment and for death, illness or injury to any member of the Contractor Group, even if caused by negligence or breach of statutory duty of the BP Group. Under Clause 10.2 BP undertook to indemnify the Contractor Group amongst other matters in respect of loss or damage to BP Group’s equipment and/or property, but not the Works, insofar as such equipment was related to or used in connection with the Development Contract, as well as losses, damages, costs, expenses, claims, demands or causes of action arising out of or in any way connected with such loss or damage to property, even if caused by negligence or breach of duty of the Contractor Group. The Works are defined as “material and equipment to be provided by the Contractor for incorporation into the Facilities” which in turn are defined as:

“’Facilities’ means the floating production, storage and offloading vessel including its mooring system, the subsea production system including, the xmas trees, manifolds, flowlines, jumpers, control systems, umbilicals and subsea riser system for the Schiehallion Development.”

Then in clause 10.3 BP provides an indemnity to the Contractor Group “with respect to the performance of the Development Services downhole below the rotary table” in respect of all loss, damages, costs, expenses and causes of action arising from or consequent upon a series of four eventualities involving oil pollution and contamination.

Clause 10.4 imposes an insurance obligation on the Contractor in these terms:

“Without prejudice to the liability and indemnity provisions contained in clauses 10 and 11 the Contractor shall effect and maintain adequate insurance for its liabilities under the Development Contract subject to the provisions of sub-clause 10.5 hereunder for the duration of the Development Contract. The Contractor shall also effect and maintain insurance in connection with the Development Contract as may be required by applicable laws.

The Contractor shall if requested produce to BP before actual commencement of the Development Services evidence of the above insurance and evidence of the currency and amount of the insurance. In respect of such insurance the Contractor shall obtain and maintain a waiver of all rights of subrogation from its insurers in favour of the BP Group.”

Clause 10.5 is the key provision as to which the parties are in dispute. It provides as follows:

“Notwithstanding the provisions of clauses 8 and 10 herein the following provisions shall apply to the performance of the Development Services under this Development Contract subsequent to the manufacture and delivery of equipment by the Contractor to BP with respect to any attendance by any member of the Contractor Group as may be required under the Development Contract in connection with the installation, assembly, testing, commissioning and start up of such delivered equipment or the carrying out of remedial work pursuant to clause 8 at BP’s work locations onshore and/or offshore.”

(a)

The Contractor Group shall assume all liability for and shall defend, indemnify and hold harmless the BP Group from and against all losses, damages, claims, demands or causes of action resulting therefrom, in respect of damage to the Facilities arising out of the performance of the Development Services where such liability arises out of any negligent act or omission on the part of the Contract Group.

(b)

Without prejudice to the Contractor’s liabilities and obligations BP shall (at BP’s cost) take out and maintain from the commencement of this Development Contract an insurance policy which will give subject to its terms and conditions, as outlined in Attachment 1 (Notes on Insurance), protection against risk of physical loss or damage and against general third party liability arising from the performance of the Development Services. The Contractor, Sub-Contractors and other contractors engaged in the installation of the Schiehallion Facilities will be covered under the policy as “Other Assureds” and therefore will have similar benefits under the policy to BP.”

The Development Services are defined thus:

“..the works and services to be provided by the Contractor in accordance with the Development Contract.”

The Notes on Insurance include the following provisions. The opening words are:

“These notes on insurance are given as a guide only and should not be construed as overriding any policy wording. Copies of the policy wordings will be made available on request.”

The Notes go on at paragraph 1 to define the Basis of Insurance as follows:

“The basis of the Construction All Risks (CAR) Insurance (Insurance) to be provided by BP in accordance with sub-clause 10.5(b) of the Specific Conditions of Contract to this Development Contract will be as follows:

(a)

The Facilities including the materials and equipment for incorporation therein will be insured against all risks of physical loss or damage for the full value from the time of their acceptance by the Contractor and its Sub-contractors, or delivery or receipt of items of plant and equipment etc., for incorporation in the Facilities and such insurance shall continue in force until completion of the project presently scheduled to 31^st March 1998.

There is then a statement of the various deductibles which are to apply under BP’s policy.

At paragraph 1(b) there is the following provision:

“The Contractor and its Sub-Contractors will be insured in respect of their legal liabilities to third parties for property damage and personal injury arising out of the performance of their Schiehallion contracts. This cover will carry a deductible of £50,000 for each and every loss and will have a limit of £50 million any one accident or occurrence.”

Paragraph 2 provides:

“2.1

The insurance will be subject to the terms and conditions of policies to be issued by Lloyds Underwriters and first class companies, and copies of the policy wording will be made available on request.

2.2

Contractors and sub-contractors engaged in Schiehallion Development will be carried under the Insurance as ‘other assureds’ and therefore will have similar benefits under the Insurance to BP. The Insurance will incorporate a cross liability clause.

2.3

The insurance to be provided by BP will commence from movement of materials for incorporation into the permanent works and continue in force until completion of the project presently scheduled to 31^st March 1998. Provision will be made for the defects liability period.

2.8

The Insurance provides cover for a maintenance period being 24 months from expiry of the insurance period for operations carried out by ‘other assureds’ in respect of complying with their obligations for maintenance and the making good of defects in the Works as required under the terms of their contracts.”

By clause 10.8 it is provided as follows:

“For the avoidance of doubt the Contractor shall be liable for loss or damage to the Works however caused until delivery to BP when the risk shall pass to BP.”

The dispute between BP and Kvaerner turns on the meaning of clause 10.5.

In summary, it is submitted by Mr. Mc Master, on behalf of BP, that the opening words of clause 10.5 restrict the cover which BP is obliged to procure for Kvaerner under clause 10.5(b) to that in respect of physical loss or damage and general third party liability arising from such part of the performance of the Development Services by the Contractor Group as takes place after manufacture and delivery of equipment by the Contractor to BP with respect to any attendance by any member of the Contractor Group as may be required under the Development Contract in connection with the installation, assembly, testing, commissioning and start up of such delivered equipment or the carrying out of remedial work pursuant to clause 8 (the contractual warranty clause under Contract 101259B) at BP’s work locations onshore and/or offshore. This construction is founded on the basis that the opening words of clause 10.5 – “the following provisions shall apply to the performance of the Development Services …..” govern clause 10.5(b), thereby limiting BP’s obligation to insure that the cover to be obtained is against the risk of physical loss or damage or third party liability arising from such parts of the performance of the Development Services as are defined in the opening words of 10.5.

It will at once be seen that, if this is the meaning of the clause, its effect is to limit quite substantially the cover to be provided for the Contractor by comparison with the scope of the cover identified in clause 10.5(b), taken in isolation and in conjunction with paragraphs 1(a) and 2.2 and 2.3 of the Notes on Insurance. Thus, if the cover to be procured were defined as in 10(b) and the Notes, unrestricted by the opening words of clause 10.5, it would protect Kvaerner against, for example, liability for physical damage to BP’s pipelines caused by other defective equipment supplied by Kvaerner where that damage occurs subsequent to manufacture and delivery to BP and is unrelated to the presence on site of anyone from the Contractor Group. It is submitted on behalf of BP that the apparently broad scope of the wording of 10.5(b) is a description of the insurance policy to be taken out by BP for the benefit of Kvaerner rather than a precise definition of the scope of the cover to be provided under that policy. Thus, the policy is to be effected and maintained as from the commencement of the Development Contract. Further, whereas the policy is to give protection against risk of physical loss or damage and general third party liability arising from the performance of the Development services, that protection is only to be applicable to such parts of those Development Services as are identified in the opening words of clause 10.5, namely performance after manufacture and delivery by Kvaerner of equipment to BP and with respect to any attendance by any member of the Contactor Group as may be required under the Development Contract in connection with those operations defined in 10.5(a). Where clause 10.5(b) refers to the contractor, sub-contractors and other contractors as being covered under the policy as “Other Assureds” and therefore as having “similar benefits”, it is not stating that the cover afforded to the contractor under the Construction Policy will be co-extensive in all respects with that given to BP, but merely that the Contractor will be as fully entitled to be indemnified by insurers as BP in respect of those risks as to which they are respectively protected. Further, the reference to the terms and conditions of the policy being as “outlined” in the Notes on Insurance is a reference to Appendix 3 which has the function of describing the policy to be effected by BP in general terms rather than defining the precise extent of the cover to be provided. It is therefore governed by clause 10.5 opening words whose narrower ambit defines the scope of cover applicable within the broader description of the policy under the Notes.

It is submitted by Mr Stuart Catchpole QC on behalf of Kvaerner that on the proper construction of the contract as a whole, including the main contract 101259, as well as the Development Contract 101259B, Clause 10.5(b) must be read separately from the opening words of clause 10.5 because there are strong indications in that clause and in the contracts as a whole that it was the mutual intention of the parties to provide that BP should procure insurance cover for Kvaerner which was of the scope defined in clause 1(a) of the Notes on Insurance set out above.

Kvaerner supports this submission by reliance on a substantial body of matrix evidence by way of explanation of the contract wording in accordance with the approach in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1WLR 896. This approach is set out in the opinion of Lord Hoffmann at pages 912-913 in the following passage:

“(1)

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)

The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)

The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4)

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749.

(5)

The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v. Salen Rederierna AB [1985] AC 191, 201:

‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense’.”

In Mannai Investments Co Ltd v. Eagle Star Life Assurance [1997] AC 749 Lord Steyn observed at p771:

“In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.”

In substance, Mr Catchpole submits that both parties to these contracts must have understood clause 10.5(b) as identifying a free-standing obligation unrestricted by the opening words of clause 10.5.

This submission is founded on the following main bases.

(i) The contracts were based on the Invitation to Tender from BP (“ITT”) and the Tender by Kvaerner. The ITT included the following at paragraph 4.4.

“The Cost Estimate produced should include the following cost elements:

Project Management: To include Alliance project management costs other than those identified under Detail Design. It is recognized that this area will be jointly staffed by an Integrated Project Management Team comprising BP and Alliance staff and as such cannot be fully completed without further discussion between all parties. Also to be included are Third party costs, facilities construction. Provision of additional services such as CAR (Contractors All Risk insurance) are normally provided by BP. However, if the tenderer feels that he can add value to the Project by packaging these services instead of BP, then he is at liberty to do so.”

The Tender from Kvaerner submitted on 21 August 1995 replied to that suggestion as follows at para 4.4:

“CAPEX COST ELEMENTS:

Capex costs exclude those items mentioned in 4.1.2 above. Additionally, no allowance has been made for the following:

Project specific insurance.”

In other words, Kvaerner’s price did not take account of the cost of construction risks insurance specifically taken out to cover that project. That, according to Mr Trett of Kvaerner, who was the person responsible in Kvaerner’s management for the negotiation of the three contracts and who gave evidence before me, reflected Kvaerner’s understanding up to and including the finalisation of the three contracts namely that it was to be BP and not Kvaerner that took out construction All Risk insurance. Had Kvaerner at any stage been given to understand that the major part of Kvaerner’s involvement in the project was not going to be insured under BP’s CAR they would have taken steps to effect their own insurance and would have discussed with BP the impact on the contract price of the cost of the premium that would have been payable.

The ITT, the Tender and all the subsequent negotiations were founded on a commercial philosophy and methodology, then promoted by BP for use with its contracts, known as “the Alliance”. This concept is defined in Kvaerner’s CPR Part 18 Replies as follows:

“8.1

It is a mechanism under which the parties recognize (by way of mutual commitments) that:

8.1.1

their interests are best served in the long term by contributing to the achievement of a successful project as opposed to protecting their own narrow interests; and

8.1.2

in circumstances where various parts of the project are being brought together from different sources, the project should be performed within an environment of trust, commitment and honest communication with the aim of achieving mutually agreed objectives and avoiding claims and litigation (particularly preventing disputes before they surface) and consistent with the allocation of commercial risks to neutral third parties such as insurance.

8.2

In the context of the BP Schiehallion Subsea and Wells Alliance, the parties expressly recognized that (amongst other things);

8.2.1

the mutually agreed objectives included (amongst other things) achieving First Oil significantly before the planned date and at materially below the Target Cost;

8.2.2

the parties should work together in a spirit of openness and co-operation in which the achievement of overall benefit to the subsea and wells facilities was the prime consideration; and

8.2.3

they were to strive constantly for continuous improvement in all areas, through the application of effective business management, excellent engineering and integration with each other.”

Part of the Alliance concept was the sharing of the financial benefits derived from the application of the commercial principles amongst the members of the Alliance, namely BP and its contractors for that project under what was known as the “gainshare” arrangement. The Alliance was a tangible entity in so far as it involved an Alliance Board of all the participants, including Kvaerner and CCL. It is submitted on behalf of Kvaerner that the Alliance philosophy was consistent only with a single project CAR policy giving full benefits to all members of the Alliance referable to that project with waiver by insurers of their subrogated rights, thereby minimising the cost of insurance and maximizing the financial benefits to the advantage of all participants in the Alliance. When it came to the Tender, Kvaerner expressly assented to the Alliance philosophy. The gainshare was a key feature of the Alliance.

It is to be noted that BP assert that the Alliance had been abandoned by BP by the end of October 1996. Kvaerner draw attention to the fact that its Managing Director, Mr Anson, attended an Alliance Board Meeting as late as 20 January 1997. However, on 18 February 1997, less than two weeks after the Development contract was finalized, BP was already informing its brokers, Sedgwick, that the CAR policy should not refer to the Alliance because there was “no longer an alliance agreement in place”. Mr Graeme Hall, who was the member of BP’s management responsible for negotiating the contracts, stated in his witness statement that BP abandoned the Alliance in its original form following replacement of its project team in August 1996. After that, the parties continued to discuss the gainshare element in the Alliance until just after the Kvaerner contracts had been concluded.

I interpose that on the evidence before me, in so far as it is relevant at all, which I discuss later in this judgment, the Alliance was, in so far as Kvaerner was aware, still a live matter for negotiation at the time when the Kvaerner contracts were entered into. However, whatever the probabilities of such negotiations succeeding, there could be no certainty in Kvaerner’s reasonable perception that the gainshare element or the Alliance concept as a whole would become in any sense binding as between it and BP at any time before or during the currency of the project. It was the evidence of Mr Trett, who was called by Kvaerner, having been responsible for negotiating the FEED and Development Contracts on behalf of Kvaerner, that if agreement on the terms of the gainshare agreement and the Alliance were reached, some of the terms of the Development Contract would have to be replaced. In the meantime, from the date when all the terms of the FEED and Development Contract had been agreed on 5 February 1997, the parties proceeded on the basis of those conventional contracts.

Kvaerner further rely on the scheme of the passing of property and risk under the Development Contract. In particular they submit that the effect of clause 21.4 of Contract 101259 was to cause title to the SCM, including materials covered by invoices submitted by Kvaerner to BP in respect of services executed under the contract which BP had paid, was to pass to BP as soon as such materials had been allocated to the contract or had been prepared or incorporated into or used for the subsea production systems or had been paid for by BP. Further clause 4.8 of the Development Contract provided as follows:

“The Contractor shall be responsible for the care of BP Provided Items whilst in the Contractor’s custody. If any loss or damage occurs during this period the Contractor shall, at its own cost (subject to insurance provisions), repair or replace the same.

By clause 4.9 it was provided:

“BP provided Items shall be deemed to be in the custody of the Contractor at all times after the same are delivered to the Contractor until redelivery to BP.”

Clause 10.8 of the Development contract (see (42) above) expressly provided that the contractor would be liable for loss of or damage to the works however caused until delivered to BP whereupon the risk would pass to BP.

On the basis of these provisions Mr Catchpole submitted on behalf of Kvaerner that, since the contractor bore the risk of materials whilst in its custody before delivery to BP, the inference must be that the common intention was that BP’s obligation was to procure cover which extended from the time when the contractor accepted the materials or at latest from delivery or receipt of items of plant or equipment as indicated in the Notes on Insurance paragraph 1(a) (set out at (38) above) rather than to confine its obligation to procure cover for a period which did not commence until delivery of equipment to BP and attendance by a member of the Contractor Group for one or more of the stated purposes.

It is further argued on behalf of Kvaerner that at the time when the policy was entered into in about June 1996 the Notes on Insurance had already been brought into existence. Clause 10.5 of the Development Contract had not yet been agreed. However, the Invitation to Tender of 4 July 1995 and the subsequent tender proposal by Kvaerner of 21 August 1995, in particular paragraph 4.4 set out at (51 ) above, had the effect that Kvaerner gave BP authority to effect CAR insurance for Kvaerner by reference to the scope of cover identified in the Invitation to Tender and the Notes on Insurance. Accordingly, at the time when the risk was placed with underwriters on behalf of BP, the latter intended that Kvaerner should have the benefit of cover in respect of the whole of the project and not the much more limited scope which BP’s construction of the Development Contract would provide for.

The terms of BP’s contract with CCL differ slightly from those under the Development Contract with Kvaerner. The clause numbering is also different. Thus clause 11.5 in the CCL Development Contract is mainly equivalent to clause 10.5 of the Kvaerner contract.

However, CCL’s 11.5(a) differs from Kvaerner’s 10.5(a) in as much as the CCL Contractor Group provides an indemnity covering “third party liabilities”. Further, the CCL contract does not include any provision equivalent to clause 10.8 of the Kvaerner contract as to the passing of risk.

Mr Stephen Cogley, while adopting on behalf of CCL the submissions advanced on behalf of Kvaerner, argues that the natural and ordinary meaning of CCL’s clause 11.5 does not involve the scope of cover to be provided in accordance with (b) being limited by the opening words of the clause. He submits that there is a clear indication in (b) that the mutual intention was not so to limit it. In particular (b) contains no words which refer back to the opening of the clause. This contrasts with (a) which refers back to the opening by the words “all losses, damages, claims, demands or causes of action resulting therefrom” (emphasis added) where the word “therefrom” refers back to the conduct of the Contractor Group in performance of the Development Services in the opening words. Further, the use of the phrase in (b) “and therefore will have similar benefits under the policy to BP” must mean that CCL will have co-extensive benefits under the policy in relation to its performance of the works. If this were not so, the Notes on Insurance which expressly identify “the basis” of the CAR policy which is to be provided by BP would have been bound to contain words which reflected the limit of cover attributable to the opening words of clause 11. Thus, having regard to the absence of substantive linkage between (b) and the opening, in contrast to the linkage between (a) and the opening, as well as the lack of any similar limit on scope provided under the Notes on Insurance, clause 11(b) should be construed as a free-standing provision not governed by the opening words of clause 11. Moreover, in as much clause 11.6 (equivalent to Kvaerner 10.6) defined the contractor’s exposure to deductible by reference to the Notes on Insurance, it was correct to construe the reference in 11.5(b) to those Notes as calling for definition of the scope of cover to be obtained by reference to those Notes. They contained no limitation on the scope by reference to the opening words.

Mr Catchpole QC on behalf of Kvaerner also adopted Mr Cogley’s submission.

Both defendants relied on the expert evidence, as to which there was no real dispute, that it was normal in the energy industry for the Principal Assured under a Construction All Risks policy to assume an obligation to a head contractor under a construction contract to take out insurance cover to protect a contractor in relation to property damage and third party liability arising out of the carrying out of the Construction Contract.

In this connection it is to be observed that there was disagreement between the expert witnesses – Mr Paul Riches called by BP and Mr Paul King called by Kvaerner – as to the normal practice in the offshore energy construction industry with regard to the taking out of construction all risks cover by the field operator for the benefit of its contractors which was co-extensive with the cover provided to the field Operator.

Mr Riches had some thirty years experience as a global energy insurance broker at Lloyd’s and in the London and international companies markets. As such, although he had never worked in-house for an oil company or a contractor and had not been directly involved in negotiations between an operator and a contractor, he had on many occasions discussed and advised operators on “contract issues” and had discussed them with contractors and oil company operators. He expressly agreed that principal controlled policies such as that in the present case were commonly used for North Sea work in 1996-1997. He stated that:

“The Principal Controlled Policy approach has been adopted by many energy companies for a variety of reasons, which, in various combinations, can include the approach facilitating: lower premium costs, flexibility of contracting arrangements, breadth of insurance coverage, elimination of the possibility of overlapping coverages, avoidance of gaps between the coverages otherwise arranged by different entities, consistency of insurance coverage available for different phases of the project, control of the selection and vetting of insurers, effective utilisation of the underwriting capacity of the global insurance markets and ease of administration.”

Although he accepted that there could often be strong economic benefits from extending cover under a principal controlled policy to main contractors and that in general operators would try to avoid increasing charges under a main construction contract for separate insurance cover for the main contractors, his evidence was that there was no common practice in 1996-7 to extend the benefit of such a policy to the full scope of a main contractor’s possible loss, damage or liability. It was, however, usual to provide at least some cover in respect of physical loss and damage under the operator’s policy. The position varied from case to case. Some operators had the philosophy of requiring main contractors to carry their own insurance so as to encourage the contractor to provide more careful standards of work and housekeeping, although it was in some respects easier to have the same policy covering both the operator and the main contractors in relation to the same property. Further, some operators would not extend the benefit of their policy to a contractor in relation to those risks for which the contractor was likely to have his own insurance cover.

Mr Riches further said in evidence that he had seen in other cases clauses with features similar to those of clause 10.5 in the Development Contract in this case.

Paul King, the Defendants’ expert, had long experience in the insurance industry as an in-house insurance adviser to such oil and gas operators and co-venturers as Mobil and Enterprise Oil. As such he was familiar with Construction All Risks Contracts between operators and main contractors.

His evidence was in substance that, whereas he was in agreement with Mr Riches that typically contactors were not given the benefit of CAR cover in respect of third party liability, in his experience it would only be on very rare occasions when the benefit of the cover on the property damage section of the policy was not fully extended to the main contactor. In particular, he stated that the following passage in the standard reference work, David W Sharp, Offshore Oil and Gas Insurance, did not accord with his experience, at least regards cover in respect of property damage:

“The second provision acknowledges that the Operator may have passed the benefit of the policy to an “Other Assured”. As previously explained, for damages relating to the contract works this would invariably be the case. In such circumstances the benefits of the policy which have been passed to a contractor will only be those expressly provided by the contract. Thus reference will be needed to the contract to determine the breadth, level of period of cover which the Operator intended to make available to the contractor. Very often the Operator will only make the policy available at a level higher than the existing policy deductible, which means that a contractor pursuing a claim directly against underwriters would only recover amounts above this level.”

From this expert evidence I conclude that it was a widespread practice in the field of oil and gas Construction All Risks Contracts for provision to be made for main contractors to have the benefit of cover for property damage under the Operator’s policy which corresponded to that given to the Principal Insured. However, this was by no means an invariable practice. A particular operator might have particular commercial reasons for wishing to provide a main contractor with less than co-extensive cover.

Discussion

In referring to the main issue between the parties I shall refer to the key provisions of Kvaerner’s contracts except where different wording in the CCL contracts becomes relevant.

In clause 10.5 the syntax and layout together point towards the meaning that provisions (a) and (b) are both included in the “following provisions” which by the opening words are to “apply to the performance of the Development Services” under the Development Contract. The words “subsequent to the manufacture and delivery of equipment by the Contractor to BP” on the face of it are intended to identify the period of time of performance of the Development Services to which “the following provisions” are to apply. The words “with respect to any attendance by any member of the Contractor Group as may be required under the Development Contract in connection with the installation, assembly, testing, commissioning and start-up of such delivered equipment or the carrying out of remedial work pursuant to clause 8 at BP’s work locations onshore and/or offshore” on the face of it are intended to specify those aspects of performance to which “the following provisions” are to apply.

The question that then arises is what is intended to be covered by “the following provisions”?

The layout of the words that follow the colon after “offshore” strongly suggests, by their indentation and division two sub-sub-clauses (a) and (b), that both those sub-sub-clauses comprise “the following provisions”, albeit that sub-clause (a) concludes with a full stop and not a semi-colon.

The possibility that sub-sub-clause (b) should be read in isolation from the rest of clause 10.5 notwithstanding the strong indications derived from the layout and the use of the phrase “the following provisions” in the plural can, however, be supported by the following considerations:

The opening words of clause 10.5 – “Notwithstanding the provisions of clauses 8 and 10” contain a saving for the obligations of the Contractor under the clause 8 warranties as to performance of the Development Services in a good and workmanlike manner and in accordance with sound engineering practices and the terms of the Development Contract and that the Development Services will be free from defects. The saving in respect of clause 10 relates to the Contractor’s indemnities under clause 10.1 and BP’s indemnities to the Contractor Group under clauses 10.2 and 10.3. The opening words of sub-sub-clause 10.5(b), however, also provide for a saving but of a much wider scope – “without prejudice to the Contractor’s liabilities and obligations” – which is clearly wide enough to cover the ambit of the saving in so far as it relates to the Contractor’s obligations in the opening words of 10.5. This could suggest that 10.5(b) has an existence independent of the rest of clause 10.5.

A further pointer towards such independent existence is the wording of sub-sub-clause (b) which describes the policy to be taken out and maintained by BP – “an insurance policy which will give subject to its terms and conditions, as outlined in Attachment 1 (Notes on Insurance), protection against risk of physical loss or damage and against general third party liability arising from the performance of the Development Services.” Although the opening words of sub-clause 10.5 indicate that the following provisions are to apply only to such part of the performance of the Development Services as occurs after manufacture and delivery of equipment and which involves attendance by any member of the Contractor Group as may be required under the Development Contract for any of the specified purposes, sub-sub-clause (b) refers in general terms to “protection against the risk of physical loss or damage and against general third party liability arising from the performance of the Development Services” without any words which reflect the limitation on the scope and nature of the Development Services referred to in the opening words, for example, the inclusion of the word “such” in front of either or both of “performance” or “Development Services”.

Further, the policy to be taken out by BP which is described in sub-sub-clause (b) is to have the terms and conditions outlined in Attachment 1 (Notes on Insurance). Paragraph 1 of those Notes (set out at (38) above having referred back to sub-clause 10.5(b) then describes the scope of cover in (a) and the deductibles in (b). As to (a) the property damage cover is expressed to commence at a time which may precede the delivery of the equipment by the Contractor to BP and the attendance by any member of the Contractor Group for any of the purposes set out in the opening words of sub-clause 10.5. Further, paragraph 1(2) includes a list of deductibles some of which could not be applicable if the cover to be procured were as limited as the opening words of 10(a) might suggest. Thus, for example, 1(a)(i) refers to:

“£25,000 any one occurrence in respect of all onshore activities, including design, engineering, site preparation, procurement of materials.”

Paragraph 1(b) of the Notes set out at (40) above also refers, without limitation on scope which matches that in 10.5, to “the performance of their Schiehallion Contracts”.

Paragraph 2.2 of the Notes set out above at (41) refers to the contractors having “similar benefits” under the CAR policy to be taken out by BP. Taken in isolation, this suggests that the Contractors are to have the benefit of co-extensive cover.

Paragraph 2.3 also indicates that cover “to be provided by BP” will commence at a moment of time which precedes that prescribed by clause 10.5.

If, as submitted on behalf of BP, these provisions in the Notes do no more than describe the terms of the policy to be effected by BP regardless of whether the whole scope of the cover so described is to be made available to Kvaerner, this would be a strangely misleading way of describing BP’s obligation under sub-clause 10.5(b). The Notes refer to the “basis of the …. Insurance … to be provided by BP in accordance with sub-clause 10.5(b)”. This is the language of description of the obligation to provide cover, rather than description of the terms of the policy which BP will take out and which will be wider than is necessary to perform the clause 10.5 obligation.

The reference in 10.5(b), last sentence, to the Contractors being covered under the policy to be taken out as “Other Assured” and therefore having “similar benefits” under the policy to BP is a further pointer towards the co-extensiveness of cover.

There is then a feature of the layout which could be significant. Sub-clause 10.6 refers back to the Notes in these terms:

“It is hereby confirmed that the Contractor’s exposure to deductibles arising out of the insurance policy to be taken out by BP are as stated in Attachment 1 (Notes on Insurance) to these Specific Conditions of Contract.”

This reference to deductibles under the policy to be provided under 10.5(b) appears not as part of the insurance provisions of that sub-sub-clause (b) where it would logically be included but as a separate sub-clause. This suggests that the contract layout relating to insurance is not necessarily a reliable guide to the mutually intended meaning.

Finally, as appears from the submissions on behalf of Kvaerner set out at (57-59) above, the risk of loss of or damage to the property of others would be borne by Kvaerner before delivering of materials and before any personnel might enter the project. There would consequently be a significant risk of liability for damage to property before cover commenced under 10.5(b) under BP’s construction.

In approaching the issue of construction now before the court, it is important not to lose sight of the following key considerations.

Approaching the construction issue in this case with regard to these principles, I reach the following conclusions.

I conclude that something has indeed “gone wrong” with the layout of clause 10.5 and that sub-sub-clause 10.5(b) is to be read as a free-standing provision not qualified or controlled by the opening words of clause 10.5. It is perfectly true that those concerned with the contract wording at Kvaerner had ample opportunity over a period of many months of reviewing the wording of Clause 10.5 in draft and specifically gave their approval. It is also true that those concerned were well experienced in construction contracts. That, however, is not conclusive. Misunderstandings of complex contract wording often occur in such a sophisticated environment. I am not persuaded that this circumstance adds determinative weight to the case for BP’s construction of Sub-clause 10.5. Nor am I persuaded that the on-going discussions about the Alliance and about the gainshare agreement lend weight to Kvaerner’s construction of sub-clause 10.5.

BP’s obligation was therefore to provide the Contractor with the benefit of a CAR policy co-extensive, in so far as the performance of the Contractor’s obligations were concerned, with that available to BP as Principal Assured.

I have considered in some detail whether the differences in wording of sub-clause 11.5 of the CCL Development Contract lead to any different inference. In my judgment, they do not. All the material features of the Kvaerner contract are present in the CCL contract. I therefore conclude that BP was equally under an obligation to provide CCL with the benefit of a CAR policy co-extensive, in so far as the performance of CCL’s obligations were concerned, with that available to BP as Principal Assured.

The argument advanced on behalf of Kvaerner and set out at paragraph (62) above arises only if, contrary to this judgment, Kvaerner are wrong on their main submission on construction. In that event, the submission involves Kvaerner being entitled to the benefit of the contract of insurance, notwithstanding BP was never under a contractual obligation to procure cover beyond that identified in clause 10.5 as so construed.

In my judgment, that argument would have failed. Since National Oilwell v. Davy Offshore, supra, it is settled law and was when the CAR policy was underwritten that in order for a contractor not identified as a principal co-assured in a CAR policy to be entitled to the benefit of cover as an other assured under such policy, the insured operator must have assumed a contractual obligation to such contractor to procure the benefit of cover for him. A mere intention to do so in the future is insufficient. Consequently, when an underwriter insures under a CAR policy a Principal Assured and an unidentified Other Assured the cover to which he agrees extends only to that which is given by the policy to the Principal Assured and to those Other Assured with whom the Principal Assured has contracted and will contract to procure cover and only to the extent to which such cover is by the terms of the contract to be procured.

It follows that both Kvaerner and CCL are entitled to the benefit of cover under BP’s policy which is co-extensive with that available to BP and of which the scope is not subject to limitations attributable to the opening words of sub-clause 10.5 of the Development Contract.